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2,000 on Dow horizon -- for IBM-watchers it's not so rosy

Fortified by the belief that interest rates and oil prices were continuing to fall, investors pumped up the widely watched Dow Jones industrial average xx.xx points last week, with yet more record highs. The tally by Friday's closing clang: 1,840.40. Is a Dow 2,000 on the way?

``We're going to a high of 1,950 to 2,050 -- probably in the next 12 weeks,'' says Joseph Barthel, director of technical strategy at Butcher & Singer Inc. in Philadelphia.

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But not quite yet.

Mr. Barthel predicts that investors will catch their breath and the Dow will linger in the 1,840-to-1,870 range. Then the buying will resume. ``I think we'll see 6 to 11 percent appreciation in the S&P [500], New York [Stock Exchange] composite, and Dow,'' Barthel says. He expects bigger gains in the over-the-counter stocks: A ``20 to 25 percent appreciation is possible over the next three or four months.''

This past week, while the Dow moved in fits and starts, the NASDAQ composite index showed continuous strength. Barthel tracks the strength of the NASDAQ index relative to Standard & Poor's 500. He says his research shows that secondary stocks are moving to the fore of this rally.

But he cautions that for the longer term his technical analysis shows that the small-capitalization issues are still in a bear market.

Meanwhile, many shareholders and market-watchers of International Business Machines have been wondering whether their stock has entered its own private bear phase.

IBM spent most of the first-quarter backsliding (down 2.6 percent), while the Dow had a 14 percent run-up. It would be easier for the Dow to reach 2,000 if IBM carried its own weight.

The computer conglomerate constitutes about one-quarter of the value of the 30 stocks in the Dow. With its $90 billion market capitalization, IBM alone equals 6 percent of the total value of the S&P 500.

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Last week, the price of IBM bounced up and down, but remained well below its high of $161. Technically, IBM may be ready to move. Barthel says the stock has broken out of a short-term consolidation period.

``The real test comes at $159 and $161,'' he says. ``It stalled at $159 in December and $161 in February. If it can break that, it can make an intermediate upside at $175.

``My gut feeling is that it's going to $175.''

Fundamentally, IBM still has some obstacles to overcome. The primary hurdles: a sluggish economy and competition.

The company had a modest 3.1 percent earnings gain on a 3.7 percent rise in sales during the first quarter. But sales have been weak in the United States. H. Donald Haback, a Smith Barney, Harris Upham analyst, points out that the revenue strength is coming from the international, not the domestic, side of the business. The drop in the dollar has been, and should continue to be, beneficial.

IBM has helped itself by cutting costs, analysts say. Pension & Investment Age magazine reports that IBM's adoption of more liberal accounting practices has also helped tone up the earnings picture.

But company officials and analysts say that as long as the US economy is lethargic, IBM will not post impressive gains.

The Commerce Department's preliminary GNP report last week, showing output growing at a 3.2 percent the first quarter, could be taken as an indication the economy is already strengthening. But the report was greeted with skepticism on Wall Street. Other economic statistics released recently don't jibe with this robust GNP figure.

Whatever the state of the economy, it hasn't seemed to put a damper on Digital Equipment Corporation. Last week Digital reported its fiscal third-quarter earnings were up a resounding 87 percent on a 14 percent sales increase. The minicomputer is IBM's soft spot and Digital's forte. The No. 2 computermaker has flourished by introducing a host of new, highly competitive midrange products during the year.

In sharp contrast to IBM, Digital's stock has been soaring -- up more than 75 points in the last six months. It's now trading at about $177 a share. Some analysts are saying $200 is achievable by year-end.

But IBM still has a fair share of fans on Wall Street. Most base their optimism on an improvement in the economy by the third and fourth quarters.

``[IBM's] business will be modestly better in the second quarter and gaining as the year goes on,'' says Peter Labe, who follows IBM for Drexel Burnham Lambert.

Mr. Labe is ``very strongly'' recommending the stock to clients. In contrarian vein he says, ``You buy stocks when they're out of favor and people have low expectations. At the end of the year, people will wonder why they were so pessimistic.''

By next year, the high-margin Sierra mainframe computer should be adding significantly to IBM's earnings. There should be some benefits, too, from the recently introduced laptop computer, from ``token ring'' networking links, and from another PC product, expected next year.

Mr. Haback at Smith Barney also advises purchasing IBM. He expects continued buoyancy in sales from the less mature overseas market, which contributes to just over 40 percent of revenue.

In the US, Haback believes data-processing managers have held off purchases for a year or two, waiting for the IBM Sierra. Now, he says, they are reaching their ``computer horsepower'' capacity.

``Sometime in the first half of 1986, the demand and supply curve should meet. Data-processing managers will buy more computing power. If that happens in conjunction with an increase in capital spending, then the US large computer sales should increase on the order of 15 percent, in dollar terms.''

Salomon Brothers, however, contends that a purchase of IBM now may be premature, on grounds that cuts in capital spending by the oil industry will hurt the mainframe business. By one estimate, oil companies bought 10 percent of the computers sold last year.

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