Street Wise: Profit warnings head for record

With the end of the first quarter just around the corner, companies appear to be in a mad dash to get the bad news out of the way as early as possible. Either that or there is just a lot of bad news coming.

According to First Call Corp. in Boston, 518 companies have already warned that their first-quarter earnings will be below expectations. That represents a 43% increase over the number of earnings warnings that had come in by this point in the record-setting fourth quarter of last year.

“This is looking like a disaster even before we’re really into the peak [announcement] weeks,” says Chuck Hill, First Call’s director of research.

At the current pace, the total number of earnings warnings for the first quarter will likely break the record set during the fourth quarter, when 794 companies pre-announced that their earnings would be lower than expected.

Before that, the most warnings in a single quarter had been 554 – during the third quarter of 1998.

Mr. Hill points out that the warnings are weighted toward the technology sector, which is responsible for 129 warnings, up from 63 warnings at this point in the fourth quarter.

That’s an increase of more than 100% compared with 31% for non-technology companies.

short-sales heaven

There is nothing quite like a veteran short-seller to guide the weary investor in times like these.

Ted Kellogg posted gains of 60% last year and nearly 16% year-to-date for his Boston Partners Long/Short Equity Fund by keeping the portfolio non-correlated to the stock market.

“This is a target-rich environment for shorting,” says Mr. Kellogg, who mirrors the mutual fund portfolio with his hedge fund.

“There was supposed to be this New Economy, but it turns out it was just like the Old Economy – it’s cyclical,” he says.

The fund turns every dollar invested into 90 cents worth of long exposure and 80 cents worth of short exposure. And the positions are spread over 100 stocks on the long side and 200 on the short side.

Mr. Kellogg says that despite market conditions, there are still opportunities on the long side, and he particularly likes the energy sector right now.

But on the short side, he looks for companies that are “theoretical in nature,” and his bets are spread thinly across a universe of struggling companies.

Launched in November 1998 with an objective of gaining 15% a year regardless of the market, the mutual fund wasn’t even officially marketed until late last year.

Over the past 12 months, the assets in the fund have grown to $15 million, from $1 million.

Like most hybrid-style mutual funds that hedge and use leverage to perform independent of the broad market indexes, the fund does not come cheap.

The management fee is at least 2.75%, with the possibility of rising above 3% depending on the dividends in the short positions.

Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected].