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  •   Stagnant Area Stock Prices Reflect Market's True Trend

    By Jerry Knight
    Washington Post Staff Writer
    Monday, April 26, 1999

    By just above every measure in this year's census of the Top 200 companies in the Washington region, business is booming.

    Revenues are rallying, profits are growing, payrolls are expanding and successful entrepreneurial firms are evolving into public companies.

    All the numbers are looking up, but one – stock prices.

    While the Dow Jones industrial average gives investors the impression that the bull market is still charging, it's a different story in the Washington area, where it has not been a great year to be an investor in the stocks of local companies.

    The stocks of only 18 of the 50 largest companies in the region have risen since the beginning of the year. Only one of the top 50 companies, America Online Inc., is an Internet stock – Wall Street's current craze.

    The market performance of those stocks over the past 12 months is not significantly better, and the picture improves only marginally when considering a larger sample of companies in the District, Maryland and Virginia.

    "This is not the time to be piling into big-cap stocks. It probably means you should buy good stocks with good fundamentals at good multiples," according to Russell Ramsey, a founder of Arlington investment banking firm Friedman, Billings, Ramsey Group Inc.

    Of the 224 companies in The Washington Post-Bloomberg regional stock index, just 83 – 37 percent – are up for the year; only 59 of the stocks are selling for more than they were a year ago.

    As of Friday, the regional index stood almost exactly where it was at the end of last year. It was at 169.04 on Dec. 31 and closed Friday at 169.80, up 0.48 percent. Over the past 12 months the index is down a little more than 3.5 percent, and it is 6 percent below its high of 181 last July 17.

    Though the Dow and the Standard & Poor's 500-stock index hit record highs last week and the Nasdaq composite index peaked the week before, what's happening to Washington stocks is more in line with the market's reality, said Richard Cripps, chief market strategist for Legg Mason Inc. in Baltimore.

    "You're seeing a trend," Cripps said. "On a year-to-date basis, most stocks are down."

    One indicator that professional market watchers use to gauge the breadth of the market gains is the ratio of stock advancers to decliners in a specific period, Cripps said. The advance-decline ratio peaked last April.

    Other indicators that suggest Washington stocks are not out of line with the overall market are the performance of the average stock mutual fund, which gained just 1 percent in the first quarter, Cripps said, and the Value Line index, which includes 1,700 stocks. The Value Line index is off 8 percent from its high for the year.

    For the past few months, stocks of bigger companies have been doing better than those of small ones, and that pattern certainly holds true in the Washington region. The stocks of 12 of the 25 largest companies are up for the year, but gains have been scored by only seven of the next 25 companies, ranked on revenue.

    Ramsey makes the same point.

    "The only stocks that are going up are the 100 to 200 biggest companies," Ramsey said in an interview Friday. "If you look at the Russell 5,000 index and take out the top companies and the Internet and technology stocks, year over year the rest of those stocks are down about 15 percent."

    "If you adjust it that way, this would be the worst bear market since 1974," he said.

    Ramsey added that "people who own individual stocks know that." With small stocks slumping, he said, investors keep putting their money in blue-chip stocks, which makes the stocks of large companies continue to rise even though the overall market is headed down.

    Neither Ramsey nor Cripps thinks this divergence between large- and small-cap stocks can continue.

    "Most people would say that the stock market is a leading economic indicator," Cripps said. If that's the case, he said, the present pattern "would be a leading indicator that the market would turn down, perhaps starting to reflect conditions that aren't going to be favorable."

    Historically, stocks of big companies trade at a price-earnings multiple about equivalent to their growth rate, Ramsey said. If a company is growing 15 percent a year, its stock will sell for about 15 times earnings. But today, the stocks of large companies are selling for twice their growth rate.

    "Either they're going to have to double their growth rate, or their multiple will come down," he said.

    To Ramsey, that means "this is not the time to be piling into the big-cap stocks. It probably means you should buy good stocks with good fundamentals at good multiples."

    That ought to bode well for stocks of smaller Washington companies that have been out of favor recently. "In the smaller-cap stocks, the values are just very compelling," he said.

    Cripps offers a similar assessment. "I think that with its very strong technology bent, the Washington area is setting itself up for a volatile, but ultimately positive resolution."

    © Copyright 1999 The Washington Post Company

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