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Market Update

The Oracle Says Sell-Off Will Hurt Large-Cap Funds

Oracle's drop could sting funds that have let it ride on the company.

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An executive defection and ominous portents from Wall Street stock soothsayers cast a cloud over computer-software company Oracle (ORCL). The stock fell more than 13% after a Gary Bloom, vice president and potential heir apparent to Oracle's founder and chief executive Larry Ellison, left to take charge of Veritas Software (VRTS). A rash of analysts' downgrades on Oracle and other tech stocks also provoked the drop.

Oracle's drop probably will shave a bit off the net asset values of many mutual funds focused on the biggest and most liquid stocks in the market. The company, which makes software for virtually all of the computing needs of a business--from the customer service to business-to-business to back-office systems--shows up in the portfolios of more than 900 mutual funds, and 88% of them are large-growth or large-blend funds, according to Morningstar.com's database.

Some funds have made bigger bets than others on Oracle. Take, for example, MFS Emerging Growth (MEGBX) and the tiny $4 million-in-assets Sextant Growth (SSGFX), which allocate more than 19% and nearly 11% of their money, respectively, to Oracle, according to the most recent portfolio information in Morningstar.com's database.

 Funds That Believe in Oracle
 

% of Net
Assets

Total
Return YTD
( % )
Annual
Return 1999
( % )
MFS Emerging Growth B (MEGBX) 19.01 -16.80 48.92
Sextant Growth (SSGFX) 10.89 6.41 40.97
Midas Magic (MIMGX) 9.55 -17.89 70.58
UC Investment (UCIFX) 9.22 -2.77 20.69
WST Growth Instl (WSTSX) 8.89 -10.94 14.12
Touchstone Aggressive Gr A (TAGAX) 7.95 -6.61 87.37
Forum Investors Growth (FOIGX) 7.34 8.19 5.61
E*Trade E-Commerce Index (ETECX) 6.93 -23.25 N/A
Waddell & Reed Adv Vangrd A (UNVGX) 6.79 2.60 43.91
Capital Value Inv (CAPVX) 6.57 -7.72 36.35
Data as of 11-17-00.

The $9.4 billion MFS Emerging Growth is a concentrated offering whose fortunes closely track those of its top two holdings, Oracle and Cisco Systems (CSCO), which also fell 4.6% Monday after some Wall Street analysts reduced their ratings on the maker of Internet networking gear.

MFS Emerging Growth manager John Ballen devotes no more than 5% of his fund's assets each to stocks he first buys, but he lets his money ride on successful issues, and, despite Monday's sell-off, Oracle and Cisco have been very successful. Though down more than 30% and nearly 17%, respectively, over the trailing three months, Oracle and Cisco are still up about 50% and more than 19% over the last year. Both stocks also were well into the triple-digit return area in 1999. Sextant Growth is similarly concentrated, holding about 30 stocks and keeping more than a fourth of its assets in two companies, Oracle and Charles Schwab (SCH). Consequently, both Sextant and MFS Emerging Growth have been riskier than their peers.

Investors may be making more out of Bloom's departure from Oracle than it deserves, said Morningstar.com stock analyst Joseph Beaulieu. However, Oracle's stock had been trading at more than 50 times future earnings, a level that seemed to assume the company was incapable of producing bad news. Bloom's abdication, coming nearly five months after the departure of Oracle President and Chief Operating Officer Raymond Lane and amid rumors of other possible executive departures, shows Oracle can, and probably will, hit some speed bumps, Beaulieu said. Even after Monday's sell-off, Oracle is steeply priced. (For a video report see "Oracle Loses Top Executive".)

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