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Fidelity still high on brokerage stocks


Jeffrey N. Vinik's passion for technology stocks is well known. Fidelity Investments' Magellan Fund, which he manages, so dominates these shares that warning flags have been raised about market disruptions if this gorilla of a fund has a change of heart.

But Mr. Vinik also has a big, though less-publicized, appetite for securities firms, so maybe the red flags should go up here, too.

Over the last year, Magellan and several other Fidelity funds have been among the biggest buyers of brokerage stocks, according to Michael Flanagan of the Lipper Analytical Services Corp.

And Mr. Flanagan and others wonder if this shopping spree has propelled brokerage stocks higher than they should be. At the end of August, 13 percent of Magellan's $53 billion in assets were invested in financial-sector stocks -- brokerages, banks and insurers.

Magellan's technology stock holdings were at 42 percent.

This year Fidelity has become the biggest shareholder of Merrill Lynch, Charles Schwab and Bear, Stearns, and it holds big stakes in other financial companies.

But small investors, Mr. Flanagan warned, should "keep in mind that Fidelity has very astute traders and can be out of a position before remaining investors know what hit them."

Securities analysts remember when brokerage stocks dived after Fidelity soured on them in 1992.

But Michael S. Gordon, manager of Fidelity's $7 billion Blue Chip Growth fund, said he's in no rush to get rid of his brokerage holdings. "I'm still optimistic," he said. The stocks are "clearly less attractive than a year ago, but the earnings outlook continues to be very favorable."

Financial stocks made up 21 percent of Blue Chip's investments at the end of August, and Merrill and Morgan Stanley are among its top 10 holdings.

Mr. Gordon bought 16 percent of those shares late last year or early this year, and since then some have more than doubled the price. And while he thinks these stocks are getting a little expensive, Mr. Gordon said the fundamentals bode well for the industry.

But others fear that Fidelity's holdings are so big that it is the market -- that if it pulls out, the market would collapse.

Many analysts believe Fidelity's efforts to unwind its vast technology holdings have roiled that sector. There are far fewer brokerage stocks, meaning that when Fidelity loses its appetite for them, its departure is likely to be more pronounced.

Many also fear that the price of brokerage stocks has outpaced the factors that drive the business -- such as interest rates, stock market activity and the pace of corporate borrowing and acquisition -- particularly in the short term, since the fourth quarter is typically the slowest time of the year for securities firms.

Perrin H. Long Jr., a longtime industry analyst at Brown Brothers Harriman, has advised his clients to reduce their holdings to lock in profits.

He pointed out that shares of Alex. Brown, widely regarded as one of the most cost-efficient securities firms around, have slid more than 20 percent from a 52-week high last month of $60.625. It closed Friday at $47.625.

Schwab's stock reached a high of $29 on Sept. 29, nearly 2 1/2 times its price at the beginning of the year. And Quick & Reilly's share price has risen almost as much.

"We're seeing a peaking here," Mr. Long said, but he's not sure how long it will last.

Mr. Flanagan said that shares of several firms were trading at twice their book value, or more. "Historically, two times book has been the ceiling for brokerage stocks, although I'm beginning to feel that maybe the ceiling is creeping up," he said.

Alison A. Deans, a Smith Barney analyst, agreed that at least in the short term, prices of Wall Street stocks were running ahead of what the fundamentals would dictate. But she said she is still advising clients to buy a few of the "brand-name" brokerages, like Merrill Lynch and Morgan Stanley.

"We've been recommending these stocks even at these expensive prices largely because we believe the value of their franchises will buoy them through the good and the bad times," she said.

Ms. Deans also said there is at least one bargain to be had. Shares of Bear, Stearns have risen only 39 percent this year because of a spate of bad publicity over the departure of several senior managing directors in its mortgage-backed securities group and its asset-management business.

Ms. Deans and other analysts regard Bear, Stearns as one of the best-managed firms on Wall Street. "It's very cheap for a high-quality name and also offers a nice dividend yield," Ms. Deans said.

Salomon Inc., parent of Salomon Brothers, is also cheap, trading at slightly over its book value.

But the recent sell-off of Salomon stock by two high-profile, longtime investors -- Warren E. Buffett and the Dart family -- is a good reflection of market sentiment about the firm.

Guess what? Fidelity is the largest institutional shareholder of Bear, Stearns, as well as a big client. So is Mr. Gordon concerned that some analysts are down on brokerages?

Not at all. In fact, Fidelity bought almost half of its stake in Salomon in the second quarter of the year, well after its fund managers had generally slowed their purchases of Wall Street stocks. "One reason I bought them in the first place," Mr. Gordon said, is that they were out of favor.

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