Good Time to Buy When Blue Chips Down
Nobody would dispute that Merrill Lynch & Co. is one of the world’s premier financial services companies. Though earnings are likely to dip this year because of trading hits and other problems amid global financial turmoil, the company will still turn a profit.
And perhaps most important, it continues to grab market share overseas as weaker players fall away.
So does the stock deserve to have plunged 60% from its July peak, to $43.88 on Monday on the New York Stock Exchange?
The New York-based brokerage giant is but one of many big-name stocks whose prices have fallen harder than many people thought possible just a month or two ago.
And, some money managers say, it’s one of several large-capitalization names that are good buys at these levels.
In fact, for patient individual investors with time horizons of at least two to three years, now may be an excellent time to shop for stocks like Merrill: players that are sure not just to be standing when the clouds over the world economy dissipate, but that might emerge stronger at the expense of rivals--a boost to long-term growth prospects.
The risks are still high, of course. The spreading overseas financial crisis and a clearly slowing U.S. economy are posing challenges for even some of the country’s premier blue-chip firms.
But the wholesale disgorging of some of these stocks--especially in the first half of last week--was overdone, some experts say. At their worst moments, some leading technology stocks were 40% or more off their highs of two weeks earlier.
“The market has been pricing some of these stocks like they’re going out of business or as though we’re going into a real recession,” said Mark Stoeckle, manager of the Colonial U.S. Growth & Income fund in Boston. “I think we’re going to look back a year from now and say these were wonderful opportunities to get into these stocks.”
Pete Trinque, lead manager of the Phoenix Growth fund in Hartford, Conn., has lately been picking up shares of General Electric. The stock, at $74.06 on Monday, is down 24% from its 1998 peak, a deeper decline than the 16% drop in the Standard & Poor’s 500 index.
Investors have been worried that GE, a player in industrial products, financial services and consumer products and services worldwide, would be hurt by global woes. But GE last Thursday delivered the 13% third-quarter earnings growth that Wall Street expected, and Trinque believes GE’s diversification across varied business lines will help it stay on track.
Bob Bissell, chief investment officer of Wells Capital Management in Los Angeles, also likes GE because it generally stays only in businesses in which it can be No. 1 or No. 2 in the field.
Trinque also likes Waste Management, the garbage collection company acquired by USA Waste Services in a $25 billion deal in July. (USA Waste then took the Waste Management name.)
The shares are off 30% from their 1998 peak, and fell 17% on Wednesday alone, after two analysts slightly trimmed earnings expectations--even though they remained positive on the stock.
The downgrades prompted the company to say Thursday that it expects to meet profit estimates for the second half of the year and for 1999. Earnings are expected to climb 57% this year and 46% in 1999, according to estimates compiled by IBES International Inc.
Waste Management said overseas growth prospects had dimmed because of Asia’s turmoil, but added that only 13% of revenue and less than 5% of profit come from international operations.
Still, garbage-industry stocks once were thought to be recession-proof, but that was proved false in the last recession. So some investors have been selling on U.S. slowdown worries.
Another worry: Troubled “hedge fund” Long-Term Capital Management is believed to be an investor in Waste Management. Fear that the fund might dump its shares also has weighed on the stock price lately.
Still, Trinque is confident about the company’s longer-term growth prospects. What’s more, the merger creates major cost-cutting opportunities, he said.
Not every stock favored by bargain-hunting pros has been decimated. Computer chip leader Intel Corp., for example, has rallied back to $85.44, and is off just 11% from its 1998 peak.
Many investors, including Colonial’s Stoeckle, expect Intel to announce strong third-quarter earnings after markets close today.
Officially, Intel is expected to report third-quarter earnings of 80 cents a share, according to First Call Corp., an earnings tracker. That’s less than the 88 cents Intel earned in the third quarter of 1997, but it would be a vast improvement from earlier projections.
The personal computer market has remained fairly robust even amid global turmoil. Intel has already signaled that third-quarter sales will be up about 10% over the second quarter.
To be sure, though many of these premier-name stocks have gotten more affordable, they still aren’t cheap. In many cases, their price-to-earnings ratios still far exceed their annual growth rates, a gauge some experts use to judge the value of a stock.
Intel’s P/E on estimated 1998 earnings, for example, is about 27. That’s above the 19% average annual earnings growth analysts expect during the next five years.
But if the economic climate--and corporate earnings in general--are getting more iffy, analysts note that true growth stocks are certain to keep selling for premium prices.
For true bargains, meanwhile, some portfolio managers say the best place to shop is in the financials services field.
Stoeckle is high on Citigroup, the entity created by the merger of banking titan Citicorp and brokerage Travelers Group.
Like shares of many banks and financial services companies, Citigroup’s stock has been pummeled over worries about trading losses in emerging markets, a decline in securities underwriting activity and the potential for loan losses in a weaker economy.
Last week, Citigroup said losses in global markets would cut third-quarter earnings by 67%, to about $700 million, from the $2.1 billion in operating profit the two entities earned a year ago.
But analysts note that Sanford Weill, Citigroup’s CEO, has a great track record at integrating acquisitions and whacking costs. Weill has said he will reduce both risks and expenses at Citigroup.
Tom Goggins, co-manager of the John Hancock Financial Industries fund in Boston, likes Citigroup and Merrill Lynch as well.
Recently, Merrill has taken heat as a member of the consortium that has provided a cash infusion to prop up Long-Term Capital Management.
But the global financial problems that precipitated Long-Term’s woes have a potential silver lining looking out a couple of years, Goggins notes: Merrill has been able to scoop up financial companies in Japan and other countries, thus gaining market share for the future.
Merrill bought a large independent Canadian brokerage firm in June. In February, it picked up 33 branches of Yamaichi Securities of Japan. Last November, it acquired London-based money manager Mercury Asset Management for $5.3 billion.
Merrill also reportedly is preparing to pare its work force by as much as 5%, or 2,000 jobs--a sign the company will do what it must to satisfy Wall Street earnings growth targets, Goggins said.
While many experts say an investment today in a stock such as Citigroup or Merrill should pay off quite well within two years, Goggins is even more optimistic: “I don’t even think you have to wait a couple of years,” he said.
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Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.
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Premier Names, on Sale?
Investors hunting for bargains in the current dicey market environment ought to first make sure they’re buying survivors--industry leaders that are likely to be thriving again once the global economic clouds clear, even if that is a couple of years off. Some ideas:
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Intel INTC $95.63 $85.44 --11% 27 General Electric GE 96.88 74.06 --24 26 Amer. Intl. Group AIG 102.31 74.19 --27 21 Waste Management WMI 58.19 40.50 --30 20 Washington Mutual WAMU 51.63 33.56 --35 11 Gillette G 62.63 40.50 --35 31 Mattel MAT 46.56 28.81 --38 15 Citigroup CCI 73.50 34.94 --52 12 Merrill Lynch MER 109.13 43.88 --60 10 S&P; 500 1,186.75 997.71 --16 22
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* Stock price-to-earnings ratio based on analysts’ consensus 1998 earnings-per-share estimates, as compiled by Zacks Investment Research
Source: Bloomberg News
