When the stock market cracked on Oct. 19, it set off a massive flight to safety. Investors dumped their stocks and began searching for anything that offered stability and dependable income. Bonds, money market funds and utility stocks were deluged with money and attention.
In the process, four Washington area utilities not only survived the market's plunge, they also more than held their own against the waves of selling that put almost every other type of stock under water.
The best showing in this volatile atmosphere was turned in by Potomac Electric Power Co. (Pepco), which, from Oct. 2 to Oct. 30, gained 5.4 percent.
Baltimore Gas & Electric (BG&E) came through with a gain of 2.7 percent. Dominion Resources, based in Richmond, was in the minus column but only by 0.6 percent.
Washington Gas Light Co. (WGL) was somewhat further off the pace, with a 6.1 percent loss for the four weeks.
These results were while other Washington area stocks were losing 40 percent to 50 percent of their value.
The rush of investors to utility stocks was a classic response to market uncertainty. Utility stocks, especially those in this region, offer regular dividend income and the expectation that those dividends will increase.
As of Oct. 30, Pepco shares yielded 5.3 percent, BG&E yielded 5.8 percent and Dominion yielded 7.3 percent. WGL had the highest yield with 7.8 percent.
An investor who studies the stock tables soon notices that yields rise as stock prices decline, while yields fall as stock prices rise.
Yield is calculated by dividing the company's annual dividend by its stock price.
Close ties exist between utility stocks and interest rates and, indeed, many investors think of utility stocks as fixed-income investments.
When interest rates fall, as they did in recent years, the yield offered by utility stocks becomes more competitive with yields available on other investments. This tends to make utility stocks more attractive, and their prices rise.
It was this scenario that sent area utility stocks substantially higher in 1985 and 1986.
For instance, Pepco shares rose 32 percent in 1985 and 40 percent in 1986. In the same two years, Dominion Resources went up 21 percent and 24 percent. BG&E rose almost 24 percent and 35.5 percent. And Washington Gas saw its stock go up 23 percent and 15 percent.
When interest rates began to move higher -- especially in the middle of this year -- the stocks flattened out.
Pepco's stock traded at the $21 to $24 level for many months until the Oct. 19 deluge cut the price to $18.38. But Pepco was back to $20 the next day. It closed last Friday at $24.13.
Much the same was true for BG&E, which traded in the $30 to $33 range until the market plunged. It dropped on Oct. 19 to $23. The next day it gained $6 and finished at $29. BG&E closed last week at $32.75.
Similarly, Dominion Resources was in the $41 to $45 area for some months but dropped to $37.38 on Oct. 19. It is back to $43.25.
For WGL, the trading range was $23 to $26 and the Oct. 19 decline took it to $19.75. But it, too, has returned and is at $22.63.
The quick revival of Washington area utility stocks may have been helped by another feature of the stock market collapse -- a drop in interest rates as investors rushed to buy bonds, sending the prices higher and the yields lower.
With major banks lowering the prime rate, as the Federal Reserve eases credit, it suggests that interest rates may fall even lower. If so, Washington area utility stocks could be embarking on another move upward.
With so many stocks down in the dumps, are there any bargains out there? Yes, say three local stock analysts.
Eliot H. Benson, research director at Ferris & Co., thinks Vie de France, the McLean restaurant and bakery company, is a buy at $4, its Friday price. The stock has traded as high as $12.13 in the past year. In the market break, the shares fell to $3. Benson says Vie de France has completed its reorganization, is opening new restaurants and plans to acquire a pastry maker called Country Epicure.
Benson predicts Vie de France will earn 40 cents a share for fiscal 1988, ending next June, compared with a much poorer showing of 3 cents a share for the 1987 fiscal year. "The trend is clear. They are on the upswing," Benson said.
But will a recession hurt business? Benson said he doesn't think so. Bread is one of the staples of life and he doesn't think that, even in an economic downtrend, people will stop eating bread. They may even eat more of it.
Charles T. Akre Jr., research director at Johnston, Lemon & Co., sees a bargain in the shares of Avemco Corp., a Frederick, Md., company that insures private planes and has moved into the boat insurance business.
Avemco, whose stock was selling at a high of $25.25 this year, fell to a low of $13 in the recent downturn. It has bounced back to $17.88. Akre estimates Avemco, which earned $1.13 a share on operations in 1986, will end this year with operating profits of $1.85 a share. In 1988, he said, he looks for $2.35 a share.
Akre believes that if Avemco gets a small percentage of the available marine insurance business, the company's size could double. In a recession, Akre said, the need to insure planes will continue, but fewer flights might mean fewer accidents and lower claims.
May G. O'Leary, analyst for Baker, Watts & Co., Baltimore, has high expectations for QuesTech of McLean, a small professional services company that does most of its work for the Defense Deparment. QuesTech has traded during the past 52 weeks in a range of $5.25 to $15.25, with the company's stock moving up in recent months.
The market's fall took the stock to about $6.50 but it closed last week at $8. QuesTech earned 13 cents a share in 1986, but O'Leary predicted the company would earn $1.05 in 1987 and $1.40 in 1988. She said she based her forecasts on recent contracts won by QuesTech, including one that will contribute $15 million in revenue in 1988.
Frank E. Williams Jr., president of Williams Industries of Falls Church, told shareholders two years ago that he wanted to boost his annual revenue to $100 million in five years. It looks like Williams is nearing that goal. The bridge-building and heavy construction firm has revenue of $88 million now, Williams told shareholders in his annual message.
Williams said he expects highway-related work to produce about half the firm's revenue. The other half will come from commercial, industrial and institutional markets.
"We have been somewhat surprised at the continued strength of the commercial construction market in the Washington metropolitan area," he said. "It has not slackened as in most other sectors of the country.
"While a slowdown is inevitable at some point in time, it is expected to be only a temporary one because of the enormous amount of commercial work already known to be in the planning stages."
Along with many investment professionals, Jay Schabacker, editor of Mutual Fund Investing in Gaithersburg, hasn't quite gotten over the events of Oct. 19. "I can't completely grapple with the drop in the stock market," he said. "It's never-never land."
The market's sudden slide complicated Schabacker's life because he was in the middle of portfolio reviews for several clients. Now some of those folks want to know why he didn't finish their reviews before the market fell. On the other hand, some investors who were hammered in the stock market have come to Schabacker and said they'd rather have him manage their money in mutual funds.
You've probably heard about the two stockbrokers who met on the street during the height of the stock market's historic plunge.
Broker Jones sadly asked his friend, "What are you telling your customers?"
"I'm telling them that we have a new investment formula," broker Smith said.
"Oh, really? Is it complicated?"
"Oh no," said Smith. "It's real easy. We're going to be 50 percent in cash, 50 percent in canned goods."endqua