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‘Safe’ stocks no longer safe harbors

Folks who like to buy a stock and forget it face rude awakening

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George Gleghorn has long preferred safe stocks. So what, he figured, could be better than the shares of electric utilities, which pay regular dividends and typically go up modestly each year — so steadily that they're known as stocks for widows and orphans?

Over three decades, he and his family in Rancho Palos Verdes, Calif., invested in PG&E Corp. and Edison International, two solid California utilities. They looked "big, bureaucratic and safe," the 73-year-old says, and he planned to leave the shares to his heirs someday.

Then came California's power crisis, and a bitter lesson for Gleghorn and investors of his bent: There really aren't many widows-and-orphans safe harbors anymore.

Since September, his utility stocks have plunged more than 50 percent each as a deregulation plan frayed and the companies ran up giant deficits. To make matters worse, both suspended the dividends they had paid since the early 1900s.

Gleghorn has watched the value of his PG&E shares dive $9,500 and his Edison stock fall $7,500. All told, the holders of these two seemingly low-risk stocks are down $10.4 billion in four months. And it is chiefly small investors feeling the sting: 92 percent of PG&E's shareholders are individuals rather than institutions, as are more than 55 percent of Edison's.

"All of a sudden, whammo, it drops in half in a couple of weeks like a Russian bond," laments Gleghorn, a retired spacecraft engineer who also saw AT&T Corp., another blue chip in his portfolio, fade 66 percent last year. "One doesn't know where to go for a conservative stock these days."

The stock market has been a rewarding place for the past two decades, and especially in the second half of the 1990s, when annual gains in the 25 percent range were common. But for those who invest by one traditional method — buying just a few well-chosen blue chips to hold for the long term — it has been a much bumpier ride.

Big, industry-leading companies are being rocked by everything from deregulation to cutthroat competition to fast-changing technology that can shift an industry's balance overnight. The speed of change today is turning the concept of a few safe stocks, which you can just buy and sock away, into almost an investment relic.

Among the 50 largest stocks in the Standard & Poor's 500, almost half lost 20 percent of their value last year; and while 2000 was a year of tech carnage, even in 1999's bull market 10 of these top 50 stocks fell by that much, says Boston money manager Grantham, Mayo, Van Otterloo & Co. By contrast, since 1963 just five of these top-tier stocks have lost that much in a year, on average.

Ten of the 50 biggest stocks lost 20 percent in a single day last year, almost 11 times the historic average. Among the stocks getting hit in the past two years is a virtual who's who of corporate America, including Xerox Corp., AT&T, Lucent Technologies Inc. and General Motors Corp.

The approach of just buying a solid stock and forgetting it was never a sure thing. A century ago, the Pennsylvania Railroad was a Wall Street darling and the biggest employer in the world — but it took the wrong track, merged and was bankrupt by the 1970s. And bear markets, such as that of 1973-74, take a toll on many favorites. From 1973 through 1977, blue chips Chrysler and Sears, Roebuck & Co. each lost more than 50 percent of their value.

"There have always been (blue-chip) stocks that came unglued," says Peter Lynch, vice chairman of Fidelity Management & Research Co. and a former manager of the Magellan fund. "The Ozzie and Harriet decade was never as good as in the Ozzie and Harriet show. But," he adds, "stocks are definitely more volatile today. You're going to be tested more, and you can't just buy stocks and put them away."

Few favorites are giving conservative investors more nightmares than AT&T. The former American Telephone & Telegraph was the first issue widely described as a widows-and-orphans stock, after it paid dividends right through the Depression, says financial historian Richard Sylla of New York University.

Now, long bereft of its regulated near-monopoly in long distance, to say nothing of local service, AT&T faces fierce competition on all fronts. It recently slashed its dividend 83 percent, to a paltry yield of 0.64 percent.

That dismayed investors like Wayne Denny of Torrance, Calif., a 72-year-old who had been living off $35,000 of annual dividends from companies like AT&T, Edison International and J.C. Penney Co. — until each either cut or suspended its dividend in the past year. "I bought these stocks and put them in a safety-deposit box and said, 'The hell with it, I don't buy and sell,' " he says. "Now I'm very disappointed."

Day-to-day changes — so long as they don't suggest something fundamentally wrong — are less of a concern to a true long-term investor. But such investors seem to be getting more scarce. The average individual investor holds a stock now for just 10 months, compared with five years in 1975, according to a study by Sanford C. Bernstein & Co.

The trading sparked by this shorter focus adds to volatility, some analysts believe, as does small investors' increased access to financial information through television and computers.

Lack of investor interest in safe stocks to buy for the duration has prompted S&P to discontinue its index of "high-grade" companies. "It became an annoyance to keep track of. No one cared," says David Blitzer, chairman of S&P's index committee.