A rising tide, it is said, raises all boats. That may be true in the Chesapeake Bay. But it is not always true in the stock market. While the 30 blue-chip stocks known as the Dow Jones industrial average are soaring, many smaller stocks are trailing far behind the IBMs, the GEs and the Mercks.
The performance gap between the blue-chips and the smaller stocks has been translated into a Wall Street story about an investor who met a friend on the street. The friend was enthusiastic about the booming market. "I hear the Dow is up another 45 points," he gushed. "Your stocks must be really zooming."
"Not mine," replied the investor.
The creation of a whole class of "not-mine stocks" is reflected in the way Washington area stocks, as a group, have lagged the sizzling power of the blue chips.
The Dow stocks are up 43 percent since the beginning of the year and the Standard & Poor's 500 is up about 39 percent.
But one of the strongest indexes of Washington area stocks -- the Johnston, Lemon list of 30 leading area stocks -- has gained only 26 percent.
The same story is told in the performance of the three mutual funds that specialize in Washington area stocks.
The Growth Fund of Washington has gained about 28 percent, the Washington Area Growth Fund about 22 percent and the Southeastern Growth Fund about 24 percent.
The Washington experience is confirmed in the performance of the Nasdaq over-the-counter composite index, home to most of the nation's smaller stocks. That index is up 29 percent.
Why have blue-chips generally done so much better than smaller stocks? A key reason, market analysts say, is that foreign investors, who have increased their purchases of U.S. stocks, favor the shares of the large, well-known companies. The foreign investors prefer names that are familiar to them and appear to offer a margin of safety and dependability.
And knowing that, many U.S. investors have found it profitable to do some "front-running," by buying the same stocks in the expectation that foreign purchases will boost prices.
As for smaller stocks, there are occasional signs that they are rallying, but the rallies don't last long. Investors who watch the smaller stocks closely say they fail to see any real trend in that direction yet.
Iverson Technology Corp. of McLean is a company that specializes in Tempest technology, a government term for protecting federal computers from electronic espionage. Iverson's stock has had nice ride, rising from $9.33 in January, adjusted for a 3-for-2 split, to $20 on Friday, a gain of 114 percent.
After the stock split in March, Iverson stock slid from about $18 to about $13. But it bounced up again after the company announced on July 10 that it won a $135 million government contract to build computers for the FBI over a five-year period.
The stock then rose from about $16 to $20 in six weeks.
However, the good news about the FBI contract was followed by bad news when two other bidders filed protests with the General Services Administration. The protesters were Unisys Corp. and Falcon Systems Inc. of Bethesda, according to Richard McCarthy, Iverson's vice president and general counsel.
The Iverson contract was suspended for 29 days while the appeals process was under way. However, last week, Unisys and Falcon Systems withdrew their challenges, McCarthy said.
The outcome brought a collective sigh of relief from both Iverson officials and stockholders.
Dart Drug Stores' common stock began trading in the over-the-counter market last week, opening at $2 bid, $2.50 asked, and closing the week at $2.25 bid, $2.50 asked. "Bid" is the price at which you can sell a share, "asked" is the price at which you can buy a share.
The listing on Nasdaq followed the refinancing of Dart Drug's massive debt -- a move that steered Dart Drug away from the threat of bankruptcy by reducing its annual interest payments from $28 million to $13 million.
The refinancing package gave holders of the old $1,000 Dart Drug bonds, which paid 12.7 percent interest, a new package of securities. The exchange package included a $500 bond that pays 6 percent now and will increase 1.1 percent semiannually in 1990; 40 shares of preferred stock, each convertible to 1.3 shares of common; and 24 shares of common.
The common stock, using the symbol DDRG, is trading on Nasdaq, but the new preferred stock is trading on the "pink sheets," a price locator for stocks not listed on exchanges. The bonds are listed in the "yellow sheets," a similar reference for bonds.
The old $1,000 bond apparently could have been sold for about $350.
The new package seems to be worth about $506 currently.
The package adds up this way:
On Friday, the $500 bond was quoted at about $335 bid; the common stock, at $2.25 bid, was worth about $54; the preferred stock, at 1.3 times the common, was worth about $117. Total about $506.
Last week, Nasdaq listed four market-makers in the Dart Drug shares. They included Goldman, Sachs & Co., of New York; L.F. Rothschild & Co. of New York; Herzog, Heine, Geduld, Inc. of New York; and Los Angeles Securities of Encino, Calif.
A market-maker is a broker or dealer who accepts buy and sell orders from customers, using the firm's accounts or inventory to facilitate trading and stabilize prices.
Although Dart Drug is a local company, there doesn't seem to be much of a rush among local brokerage houses to become market makers in the stock.
Ferris & Co., of Washington, was approached about becoming a market maker but declined to do so at this time. Eliot H. Benson, Ferris' research director, said that he would like to see signs of improvement in Dart Drug's sales and profit margins before his firm considers that step.
At Johnston, Lemon & Co., another Washington firm that makes a market in local stocks, President Terry Wallace said he had not heard any suggestion that his firm trade Dart Drug shares, but, if he did, he would first have to decide whether there was much interest in the stock.
Verdix Corp. of Chantilly has completed a tempestuous round of negotiations with a group of investors who held a batch of warrants due to expire last Thursday. The warrants were convertible to stock on a 1-to-1 basis for $1.25 a share. That would have been a good deal if the shares were selling at $7, as they were early last year. But the stock is now selling at about $1.25, reflecting the company's difficulties in carving out a road to profitability.
The warrant holders alleged that they had lost millions of dollars because the company had delayed registering certain shares of stock at the proper time, denying them an opportunity to convert when the value of the shares was higher. Although the company disagreed, it settled the case. The warrant holders then converted about 790,000 warrants to stock at $1.25 each, paying the company about $990,000 and getting back a refund of $650,000, for a net cost to the warrant holders of $340,000.
Verdix wrote off the $650,000 in its first quarter, saying that if not for the problem, it would have had a operating profit of $117,418, compared with a loss of $593,000 in the same quarter a year earlier.
Verdix specializes in developing Ada language software for government and industry. In recent months, E. Gary Clark has taken over more and more of the company's management from founder George Cowan.
Uslico Corp., a diversified insurance and financial services company headquartered in Arlington, has approved a stock buyback program. The directors of Uslico, which has assets of $2 billion, approved the repurchase of up to 10 percent of the 11.2 million publicly held shares. The purchases can be made in the open market or through private negotiation.