Nasdaq Stock Market Is Risky, Analysts Say

The Nasdaq market, the bastion of small-company stocks, has been on an upward roll in 1996, and no major slump is yet in sight. While that is good news for investors in younger companies, often in the technology sector, it makes some analysts in conservative investment houses nervous. The Nasdaq has long been a center of financial speculation, with share prices moving up and down with greater volatility than America's other major stock exchanges.

Since mid-January, the Nasdaq, which tracks more than 6,000 stocks, is up about 20 percent. It has been buoyed by stronger-than-expected US economic growth, which gives a boost to smaller companies - and by investor demand for high-tech issues. By contrast, the broader Standard & Poor's index of 500 leading American industrial companies rose about 9 percent during the same period. Through Wednesday of last week, the red-hot Nasdaq composite index set records on 10 consecutive days, until stopped momentarily on Thursday amid inflation concerns and rising interest rates. On Friday May 3, the index closed up 6.27 points, at 1,184.60. The blue-chip Dow Jones industrial average, meanwhile, closed down 20.24 points, at 5,478.03 points.

Nasdaq is the second-largest stock market in the United States, in terms of trading volume, behind the New York Stock Exchange. In terms of listed companies, it is No. 1. Nasdaq stocks are usually identified in newspaper listings as "over-the-counter" (OTC) stocks, or just "Nasdaq" stocks.

Most major US technology firms, including Microsoft Corp. and Intel Corp., are Nasdaq stocks.

The upward movement in the Nasdaq market is "an indication of increasing speculation in the market," says Leah Modigliani, a stock strategist at Morgan Stanley & Co., an investment house. Nasdaq companies are smaller, less capitalized, sometimes slightly more risky as investments, she says.

In part because of higher speculation and rising interest rates, Byron Wien, Morgan Stanley's chief investment strategist, raised the cash portion of his model stock portfolio early in April to 15 percent, from 2 percent.

"We're selling [some stock issues] in a rising market," says Ms. Modigliani. "The risk-reward ratio is not as good as it was earlier this year." Still, Morgan Stanley continues to recommend many companies in the Nasdaq market. "We're slightly overweighted on the technology side, such as with semiconductor stocks, and we're holding on to them," she says.

"The Nasdaq market will continue to climb right through the year, although there could be a [modest] correction along the way," says Carl Bhathena, assistant vice president of Everen Securities Inc., a Chicago investment house. "Technology stocks cooled off sharply in the last half of 1995," which makes them more attractively valued now.

Mr. Bhathena likes smaller capital-goods firms, in part because the European economy is slowly improving, and thus is likely to import more from capital-goods firms. He also likes technology firms that have special uniqueness. "We look for companies that add value to the technology process, rather than just turn out chips or hardware. These are firms that provide some sort of service."

While favoring small-capitalization firms and the high-tech sector, Everen Securities is wary what it sees as a somewhat speculative market environment. Everen has boosted its cash position on model portfolios. It recently raised its cash holdings from 15 to 30 percent in its balanced portfolio (stocks/bonds/cash).

What should small investors oriented to high-tech stocks do to avoid the risk of the Nasdaq market suddenly dipping?

Some analysts recommend eschewing individual stocks for a position in an aggressive-growth mutual fund, which looks for diversified smaller-company issues. Indeed, money has been pouring into these funds.