It’s Value Fans vs. <i> Bigger </i> Value Fans in Today’s Debate

Wall Street kicks off the third quarter today as divided as at any time in recent memory: Most money pros are solidly in one of two camps, and both are adamant that their stocks represent the best picks for the rest of ’92.

The classic market argument--growth stocks versus value stocks--has turned into a value versus bigger value fight. Everyone seems convinced that his or her particular issues are the only cheap stocks today.

Fans of stocks that have been strong this year, such as many industrial issues, argue that those stocks remain attractive because their earnings will look surprisingly good in the second half.

Meanwhile, proponents of stocks that have sunk this year--such as drug issues--argue that prices of those issues have gotten absurdly low.

The “quest for the truly cheap” has taken on a new urgency after the stock market’s overall rocky performance in the first half. Though the Dow Jones industrial average rose 2.6% in the second quarter and is up 4.7% for the year to date, most market indexes either stalled or fell in the quarter, and are off 2% to 5% for the half.

Given the uncertainty about the economy and the election, most stock pros are reluctant to take big chances now. So they’re hunting for stocks that they believe offer the best possible returns at the lowest risk in the second half.

A. C. Moore, strategist at Argus Investment Management in Santa Barbara, argues that the market leaders will remain the industrial stocks that starred in the first half. Even if you believe in a slow recovery at best, he says, the fact is that “when the economy is making a turn, the companies that are leveraged to that turn are likely to have the wind at their backs.”

He cites high-tech company Motorola as an example. Its semiconductor and cellular communications businesses will benefit from even a small pickup in economic growth, Moore says. The stock, at $76.625 Tuesday, sells for 16 times the $4.65 a share it’s expected to earn this year. For a company whose earnings are growing 15% to 20% a year, that’s cheap, he says.

More important, says Moore, is that many investors will continue to be lured to industrial issues for the chance that earnings will be better than expected down the road. By contrast, the drug, food and other old-line growth stocks can only offer stable growth at best, he says.

“You have to have a tinge of greed to move stocks,” Moore says, and greed now plays best with industrial issues.

In New York, Shearson Lehman Bros. analyst Elaine Garzarelli, who has argued all year that industrial and financial stocks are the place to be, also says she’s sticking with those issues in the second half.

Her favorites include technology issues such as IBM and Apple Computer, auto companies such as GM and Chrysler and banks such as Chase Manhattan and Chemical Banking.

All of those companies benefit from an improving economy--albeit slow--and continuing low interest rates, Garzarelli notes. She sees stocks such as those driving the Dow industrial average, now 3,318.52, to between 3,800 and 4,000 in six to 12 months. What about the growth stocks? “It’s too early,” she says. Her target for buying those issues is in six to nine months, after the industrial stocks have run far higher.

You can’t sell that viewpoint to Eugene Sit though. His Minneapolis-based money management firm handles $4 billion, and much of that is in classic growth stocks such as Wal-Mart, Home Depot, Philip Morris and Merck.

He sees investors running back to his stocks in the second half.

Why? The industrial stocks “have a lot of expectations built into them now,” he says. But he figures that many of those expectations will go unfulfilled in a slow economy. Meanwhile, investors’ flight from such old favorites as Philip Morris has knocked those stocks to prices Sit contends are bargains.

Despite worries about a new round of cigarette lawsuits, “at 11 times earnings, Morris stock discounts an awful lot,” he says.

Louis Navellier, a money manager in Incline Village, Nev.--and like Sit a growth-stock player--also believes that the tide will turn in his favor in the second half.

While he concedes that many growth stocks were trashed in April and May despite good first-quarter earnings reports, he calls that “an aberration” that will be corrected when second-quarter earnings are released in July.

Within his growth-stock universe, he says, “if there’s ever been a better time to get in, I don’t know where it was.”

Second Quarter’s Best and Worst Stock Groups

Here are the 10 best- and 10 worst-performing stock industry groups in the second quarter, through Monday. The broad market, measured by the S&P; 500 index, rose 1.1% in the quarter. Also included is each group’s year-to-date change.

Biggest Gainers

2nd Year Industry group qtr. to date Automobiles +19.2% +58.6% Metals (misc.) +15.4% +19.0% Toys +13.7% +7.3% Broadcasters +13.7% +11.7% Oil services +12.6% +2.0% Restaurants +12.3% +19.7% Life insurance +11.9% +7.4% Intl. oil cos. +11.6% +0.1% Gold mining +11.0% -2.0% Big N.Y.C. banks +10.6% +21.0%

Biggest Losers

2nd Year Industry group qtr. to date Manufactured housing -33.4% -16.5% Home building -19.7% -12.0% Machine tools -18.7% +12.7% Specialty retail -17.7% -21.9% Housewares -16.8% -22.6% Commun. equipment -16.4% -16.5% Airlines -16.0% -14.0% Shoes -14.0% -20.5% Hardware/tools -12.6% +6.0% Furniture/appliances -12.1% +2.2%

Source: Smith Barney, Harris Upham & Co., using S&P; indexes