Wall Street: Shocked Circuits

In bullish 1965, the No. 1 glamour stock was Fairchild Camera and Instrument, which soared from a low of 27 ¼ to a high of 165 ¼, the biggest percentage gain of the year. The company owed its gargantuan gain to its pinpoint-tiny microcircuits—the new electronic marvels that bond and fuse complete, complex electrical circuits onto a sliver of silicon. In early 1966, Fairchild stock continued to rocket, finally hit 2161, a hefty 65 times earnings, before it began to recede. Last week it went into a big fall, and took other electronics stocks down with it.

On the day before Fairchild’s precipitous downturn, the Argus Research Corp. reported gloomily on the future of electronics stocks to 75 brokers and institutional investors. Not only were shares overpriced, but Argus reported that there was a hint of over-inventory. Advancing technology had cut the cost of making microcircuits, but the savings had not yet been passed along to customers; for weeks there had been suspicions of an impending price slash, which presumably would be reflected in lower earnings. Morning after the Argus report, a big mutual fund, with its own pessimistic conclusions about Fairchild, offered a block of 100,000 shares; almost immediately, a second fund came in with another 100,000. Now everyone seemed to be selling Fairchild—and Texas Instruments and Motorola into the bargain. The M. J. Meehan Co., the Street’s respected Fairchild specialist, valiantly tried to buy, but could not absorb all the available shares, lost a rumored $500,000. Fairchild itself dropped 191 points by the closing; Texas Instruments was down 151, Motorola 101. Next day, although Texas Instruments rallied, Fairchild fell to 1021, a two-day loss of 231, and Motorola was down to 981, a loss of 17.

After the fall, Fairchild Chairman John Carter admitted that fourth-quarter earnings will be down. He insisted that “there will not be any price cuts”—a statement that many observers openly doubted. In fact, just as the 1961 drop in transistor prices was more than offset by increased demand, a microcircuitry price cut might be healthy. So why did Fairchild take such a beating? “Well,” explained one trader,”there is one thing to understand. Even though brokers may know better, buying breeds buying and selling breeds selling. Panic here is exaggerated.” Fairchild now understands—both ways.