Small Stocks Sizzle Before Warnings

Small-company stocks rose sharply again on Monday while blue-chips fizzled, but two key technology companies’ downbeat earnings warnings, issued after the market closed, could make for rough sailing today.

While profit takers clipped the Dow Jones industrial average 41.64 points to 7,289.40 on Monday, the Russell 2,000 index of smaller shares gained 2.76 points, or 0.7%, to a record 383.52.

The Nasdaq composite index, heavy with tech shares, rose 4.47 points to 1,404.79.

But after the market closed, computer disk drive maker Seagate Technology and computer networker Cabletron Systems, in separate announcements, said near-term earnings will be below expectations.

Those announcements came on the heels of computer chip leader Intel’s announcement Friday that weak sales in Europe will depress this quarter’s results.

That news caused tech stocks to plummet initially Friday, although most recovered by day’s end. The Nasdaq composite ended down just 2.72 points, after falling 50 points initially. Intel lost nearly 13 points on Friday, to 151 1/2. It eased 1 3/4 to 149 3/4 on Monday.

Seagate on Monday said that weaker-than-anticipated demand, particularly for its higher-performance products, is expected to cause revenue levels for the quarter ending June 27 to be 6% to 10% below last quarter’s levels. The company said earnings “may be less” than the $1.01 a share earned last quarter.

Cabletron said it expects sales in the quarter ended Friday to be below expectations and earnings to just meet or slightly exceed the 37 cents a share of the year-ago quarter. Analysts had been expecting about 50 cents.

Cabletron said it does not yet have details to fully explain the weak results, but it said demand appears to have been strong for its newer high-end switching products and softer for its traditional shared-media products and some other mature products.

In regular trading, Seagate rose 1 3/4 to 42 3/8 and Cabletron gained 1 3/4 to 45 3/4. The stocks could lead another sell-off in tech shares today, analysts warned.

Meanwhile on Monday, mixed economic signals caused bonds to give back midday gains, and the 30-year Treasury bond yield closed unchanged at 6.90%.

One analyst said a report on greater-than-expected strength in the manufacturing sector in May “did throw some cold water on the markets” by suggesting that the Federal Reserve Board could be compelled to tighten credit again at its early-July meeting.

Still, breadth was strong: Winners topped losers by 15 to 10 on the New York Stock Exchange and by 21 to 18 on Nasdaq.

Among Monday’s highlights:

* Procter & Gamble fell 4 1/4 to 133 5/8, accounting for a third of the Dow’s loss, after brokerage Smith Barney downgraded the shares to “outperform” from “buy.”

* PepsiCo rose 1 to 37 3/4 after the company confirmed it will reorganize its North American beverage business, creating a separate unit for its capital-intensive bottling operations.

* Energy stocks showed strength on more news of industry restructuring. Exxon rose 3/4 to 60, Phillips gained 1 1/4 to 43 3/4, Halliburton jumped 3 1/8 to 80 1/4 and Noble Affiliates added 1 to 43 1/8.

* G&K; Services fell 2 to 30 3/4 after the company said it will acquire the uniform-rental business of National Service Industries for about $287 million. National Service slipped 5/8 to 43 1/4.

* Southland-based restaurant chain Sizzler added 1/4 to 2 5/8 after the firm emerged from bankruptcy.

In commodity trading, coffee fell sharply for the second straight day as nervous speculators cashed in profits from a five-month rally.

At the Coffee Sugar and Cocoa Exchange in New York, July futures closed down 22.45 cents at $2.54 a pound--down 20% from Thursday’s high of $3.18, the highest price for coffee since 1977.

“The bull market [in coffee] is not dead, but it’s got a couple of swords in its back,” said Jim Cordier, an analyst at Allendale Inc.

“We may have topped out, but the fundamentals are still bullish. Coffee is still in tight supply,” he said. Coffee stockpiles, now near 20-year lows in both consuming and producing countries, look to remain at low levels, especially for high-quality washed arabica beans, until the next Central American harvests this autumn.

Worries that cold weather could damage coffee trees in Brazil during that country’s June-August winter season also will remain an unpredictable element in coming weeks.

Market Roundup, D18