Chernobyl broke, investors froze; now bargain hunters watch

Yesterday, it was terrorism. Today, speculation seizing on the Soviet Union's nuclear disaster. Details on Chernobyl were scarce. But that seldom stops Wall Street -- that ready barometer of collective human thinking -- from leaping to conclusions.

Those conclusions prompted more diving for cover than leaping last week.

The Dow Jones industrial average sank nearly 42 points on Wednesday (a 2.3 percent decline). On a percentage basis, that's the eighth biggest single-day fall ever. (The largest percentage drop, 12.8 percent, occurred Oct. 28, 1929, when the Dow lost 38.33 points.) By Friday, the Dow had given up 60.89 points. It closed the week at 1,774.68.

The cause of the tumble? A growing consensus that interest rates may have bottomed. Of course, there was also the uncertainty caused by the Chernobyl nuclear disaster, which provided a convenient excuse for a sell-off that many technical analysts said was overdue.

The brunt of the selling hit electric utility stocks -- both nuclear and nonnuclear companies. That suggests to Dean Witter Reynolds analyst Nancy Fertig that worry over rising interest rates figured prominently in the profit taking. Most utilities carry a hefty debt load, so ``they're vulnerable now to a rate backup.''

Mrs. Fertig says the price drops could present a ``selective buying opportunity.'' But not quite yet. `I don't think we've heard the end of this [the Chernobyl disaster].''

But Henry M. Greenleaf Jr. detects a window of opportunity. ``I think this thing has been exaggerated by the media; the `second meltdown' was a rumor treated as fact,'' says Mr. Greenleaf, chief investment officer of HT Investors, a Rhode Island-based firm actively managing $1 billion in pension and endowment funds.

He has been buying smaller utilities on the assumption that merger mania will strike this group next. Many major utilities have finished their construction projects, so their cash flow is increasing. But state regulators are unlikely to allow these utilities to become ``excessively'' profitable at the expense of consumers.

So Greenleaf figures the extra cash will be used to acquire smaller utilities. ``The rate boards are fairly sympathetic to this, because in the long run it gives large firms economies of scale that will allow them to drop their rates.''

With few outstanding shares, utility stocks have had limited availability to institutional investors. Now, with the current weakness, says Greenleaf, ``You bet we're stepping in.''

Indicative of the merger trend: Centerior Energy Corporation in Cleveland. Centerior is the result of a union, agreed to last week, between Cleveland Electric Illuminating Company and Toledo Edison.

``You're going to see a lot more mergers like CEI and Toledo Edison,'' says Robert G. Hildreth Jr. of Merrill Lynch Capital Markets. ``We're talking to a number of them [utility companies] now.''

Greenleaf has been prospecting for takeover candidates by first pinpointing the big cash producers. Then he picks out the best among the second-tier utilities operating in a larger company's shadow. For instance, Greenleaf thinks Duke Power in North and South Carolina may gobble up Savannah Electric & Power in Georgia or SCANA Corporation in South Carolina.

But analysts disagree over whether utility mergers are going to be profitable for equity investors.

``It's more interesting from an operating standpoint than an investment standpoint,'' says Mrs. Fertig. She thinks regulators will not allow the majors to buy these smaller companies at high enough prices to make it a worthwhile investment.

Jamison G. Graf agrees: ``I doubt it's going to be profitable. Utilities have regulatory requirements that make it difficult for them to pay substantial premiums for companies.'' Utility stocks account for 25 percent of the income-oriented trust fund of $56 million that Mr. Graf manages for One Federal Asset Management, a subsidiary of Shawmut Corporation in Boston.

But he concedes the Soviet mishap does present a buying opportunity. He likes Commonwealth Edison, which has fallen to $30 to $31 from a recent high of $35. Graf acknowledges the risk of owning a nuclear power plant in this charged atmosphere, but he says he's attracted by a current yield of almost 10 percent.

Along with utilities, the food processing sector of the stock market rode the speculative wave set in motion by the Chernobyl meltdown. The possibility that Ukrainian crops or water supplies have been ruined by radiation sent the prices of US farm commodity futures soaring.

The US has the largest food surplus in the world and prices are at depressed levels, so this would be a likely market for the Soviet Union to turn to.

Rising commodity prices pushed down the stocks of food companies with major domestic markets. If the cost of wheat, meat, eggs, etc., rise, then such companies as McDonald's, Pillsbury, and Borden may find their profit margins shrinking. At the same time, the Soviet tragedy gave a jolt of hope to farmers, agricultural exporters, and transporters. So stocks of companies such as Deere & Co. and ConAgra were bolstered.

Still, investing in farm- or food-related companies based on possible damage to the Soviet breadbasket is ``highly speculative,'' warns Graf at One Federal. ``I don't think anybody knows the extent of the problem yet.''

Indeed, the commodities and stocks affected by the disaster partly retraced their steps late in the week as investors realized it may be quite some time, if ever, before the West knows the severity of Chernobyl.