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Stock Analyst Update

First Quarter in Stocks

It was a wild and woolly ride in the market.

This was a great quarter to be in the stock market--if you like roller coasters. The volatility that has characterized the market over the past few years only increased in the first quarter of 2000, with all the major indexes hitting new highs, as well as undergoing gut-wrenching swoons. Amid all the ups and downs of the general market, the past three months have seen some major events involving individual stocks, in addition to some significant industry trends. Here's a look at some of the most important stock stories of the quarter.

Early in the quarter, the financial world was stunned by the January 10 announcement of the biggest merger in history, a deal between America Online  and Time Warner  worth about $150 billion. The deal had a ripple effect across Internet and media stocks, as analysts hailed the marriage of old and new media while speculating on which mergers might be on the horizon.

Elsewhere, the consolidation of the pharmaceutical industry continued, as Pfizer (PFE) agreed to acquire Warner Lambert  in January after a bruising takeover battle with American Home Products . The saga took a bizarre twist when Procter & Gamble (PG) tried to buy both Warner Lambert and American Home before backing down. The big loser was American Home, which is increasingly dwarfed by its competition after two years of unsuccessfully seeking a partner.

Initial public offerings continued at a brisk pace this quarter. 3Com's (COMS) spinoff of its Palm  unit in early March created a big splash, trading as high as $165 on its first day before returning to the $50 range. Business-to-business facilitator WebMethods  rose 508% on its first day of trading in February, and it has stayed above that level since then.

But some IPOs in formerly hot industries were disappointments. The lukewarm performance of Caldera Systems  showed that the market for Linux-related stocks has cooled considerably since last fall, when VA Linux Systems  had the biggest first-day gain ever for an IPO. Similarly, the middling debuts of  and eMachines , both of which were once expected to be hot IPOs, showed that investors aren't as excited as they used to be about Internet grocers and sellers of cheap computers.

What would a quarter be without a few big companies imploding? Lucent got the ball rolling in early January by announcing that its earnings would be far lower than expected, causing its market value to plummet 30%. Later in the month, Coca-Cola (KO) added to its problems of the past couple of years when it announced massive layoffs and its first quarterly loss in years. Procter & Gamble (PG) got punished by the market in early March when it unexpectedly announced a big earnings shortfall. And perhaps most spectacular of all, software maker MicroStrategy (MSTR) plunged 65% in a single day after it restated its revenues for the past year, magically turning a healthy profit into a substantial loss.

Biotech Madness
Biotechnology stocks took investors on a wild ride this quarter. In February, stocks such as Celera Genomics , Protein Design Labs , Genentech , Medarex , and Human Genome Sciences  went on eye-popping runups. In March, these same stocks dropped like stones as speculators bailed out, leaving prices right about where they were at the beginning of the quarter. But even though this speculative bubble has popped, many biotech stocks are still up substantially over the previous year.

The Cisco Kid
It was a busy quarter for the telecommunication-equipment leaders, as Cisco Systems (CSCO), Lucent Technologies , and Nortel Networks  all made strategic acquisitions in an effort to gain the upper hand in hot new networking technologies. Investors continued to pour money into the industry, the importance of which was symbolically illustrated when Cisco passed Microsoft (MSFT) in late March for the title of largest market cap (at least temporarily).

B2B or Not to Be
Internet business-to-business stocks such as Commerce One , Ariba , i2 , VerticalNet , and Freemarkets  were in the spotlight this quarter after a blistering runup in late 1999. After extending their gains into the new year, most of these stocks fell to earth late in the quarter, as investors began to temper some of the wild optimism that had driven prices skyward. High-profile contracts involving the auto, airline, and medical-supply industries showed that business-to-business systems are indeed transforming big business, but some people now believe that the business-to-business companies themselves may not benefit as much from these changes as previously thought.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.