Balance Sheet: First Half Review of 2008 Stocks

By Seattle Business Magazine August 21, 2008

As I write this column late in July, the stock market is in the midst of a severe summer meltdown. I suppose we can take solace in the fact that some of the regions top stockbrokers had predicted a rough patch for Wall Street. But no one had expected the nations housing problems to get quite as bad as they have.

The band of brokers that gathered last January for this years annual Guess the Dow event to prognosticate Wall Streets 12-month direction had correctly predicted that the Dow Jones Industrial Average would be flat to negative in the first half of the year.
Now, the question remains whether they were right about that second-half rally they expected. Of course, they hadnt quite planned on the Dow taking a major downturn. The consensus among the nine panelists was that the Dow (which had hit 13,273 points at the end of 2007) would rally and end the year up slightly at 14,432. As of late July, that prediction was looking kind of shaky. The Dow was at 11,349 and the economy was still flirting with falling into a recession.

The panels choices about which local stocks to follow have also proven questionable.

For instance, Joel Ferrell, a senior vice president at Smith Barney, had courageously named Washington Mutual as one of his local stocks to watch for this year. His theory was that the bank was too big to disappear anytime soon and that segments of the institutions operations were still relatively strong. Now, that prediction is looking a might foolhardy. Since Januarys meeting, WaMu has fallen from about $17 a share to about $4 a share by July 24. All of Wall Street appears to be wondering whether the savings-and-loan giant has the money to cover its bad loans and survive the year.

The most popular stock among the panelists was Starbucks, which earned votes from five of the brokers. With chairman Howard Schultz back in charge of the coffee company, what could possibly go wrong?

It turns out just about everything. The slow economy, saturation of stores and increased competition is hurting the companys sales and battering its image. Earnings are in trouble, same-store sales arent so hot and investors are dumping the stock. The share price has fallen from $20 in January to $14 and change in late July. Some online stock pickers have nothing but bad things to say about the company. Todd Sullivan, writing on the website, expects Starbucks to bottom out at $10 a share later this year before it rallies.
Picks that earned two votes included Alaska Airlines. Considering that the airline industry is suffering more than most, thanks to high fuel prices and the general economic malaise, Alaskas shares are doing better than one might expect. The companys share price has fallen from about $23 in January to $17 in late July. Nordstrom, another two-vote winner, is also hanging on better than many might have predicted. After peaking at just under $40 a share in early February, the high-end retailer has suffered a choppy slide down to about $29 a share in late July.

But not all the choices have been duds. A bright spot on the list of Puget Sound investments was F5 Networks. The maker of internet network traffic management products has shown remarkable strength this year, with revenues climbing to $165.6 million during the three-month period that ended June 30. This represents a jump of 25 percent from the same period a year ago.

Unfortunately, higher operating expenses ate up the increased revenues. As a result, F5 registered a drop in the earnings per share for its third quarter. Still, the results beat Wall Streets projections, and the price responded. As of late July, F5 shares were up about 50 percent so far this year, at $32.30.

We can only hope our panelists were right and the worst of the stock markets woes are behind it for this year.

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