Risks and Rewards
Don’t worry if you missed the first genuine buy-on-the-dips rally Tuesday in the stock market’s seven-week downturn. There are still plenty of bargains, money managers say.
On Tuesday, the Dow Jones industrial average leaped more than 288 points on record volume as investors pounced on stocks that had been beaten down in Monday’s 512-point free fall.
But even with the rebound, technology stocks are 23% off their 52-week high, bank shares are down 35% and oil issues have fallen 20.5%. Those numbers are based on the leading indexes for each industry--many individual stocks have fallen much farther.
Only the most ardent bulls proclaim the sell-off to be complete and the recovery to be underway. Many other Wall Streeters say the market hasn’t seen the last of the selling.
Yet, even the most cautious managers say there are good buys in today’s market.
“There’s this huge sale in a lot of stocks,” said Kevin Landis, manager of the Firsthand Technology Leaders fund. “We had this bounce-back rally, but let’s face it. We didn’t bounce back all the way.”
To identify promising stocks, the chart accompanying this story lists companies whose projected earnings are high compared with the projected price-to-earnings ratios of their stocks. Many have fallen hard since the market peak in mid-July, but most still sport five-year projected earnings growth rates in the double digits.
For individual investors looking to pick up quality technology companies, Landis recommends two groups.
First, he likes big-name tech stocks. They’re likely to rebound quickly in an upturn as investors seize upon the well-known names first, he said. That was demonstrated Tuesday as companies such as Microsoft (ticker symbol: MSFT) and Cisco Systems (CSCO) rallied strongly.
Landis also likes smaller companies that make semiconductors for the networking and communications industries. Many of their products form the “guts of the Internet,” he said.
Critics say frothy Internet stocks helped instigate the sell-off. But Landis says his companies have strong prospects and demand for their products that will surge as Internet use inevitably grows.
He likes PMC-Sierra (PMCS), whose chips are used in so-called wide-area networking. It sells to large communications-equipment companies such as Cisco and Lucent Technologies (LU).
Among other specialized chip companies, Landis likes Vitesse Semiconductor (VTSS) in Camarillo, Applied Micro Circuits (AMCC) and Level One Communications (LEVL).
Another bloodied sector is banking and financial services. Investors fear that large money-center banks such as Citicorp (CCI) and J.P. Morgan (JPM) are vulnerable to the financial meltdown in Russia. Banks such as BankAmerica and Republic New York already have divulged Russia-related problems.
Despite their recent trouncing, it’s too soon to buy other large banks until they reveal the extent of their exposure to Russia, said Tom Finucane, co-manager of the John Hancock Financial Industries fund.
So why have smaller regional banks been pummeled? They’ve sold off on fear of a recession, which would cut demand for loans and increase loan losses.
Finucane likes Wells Fargo (WFC) and Norwest (NOB), which he expects to show strong growth when they complete their planned merger. And if a downturn occurs, the banks are likely to suffer less than their rivals because they’re smart lenders.
“They know how to lend money and get it back,” he said.
Finucane also likes First Tennessee National (FTEN) and Progressive Corp., which sells automobile and property-casualty insurance.
With falling oil prices, few sectors have been hit harder than oil. Many of the small- and mid-cap stocks in the chart are oil companies.
Nevertheless, Dan Rice, manager of the State Street Research Global Resources fund, believes the selling has been overdone. Historically, when investors are their most bearish, oil stocks sell for an average of five times cash flow (six to eight times when the sector is in favor). Stocks in the sector change hands these days for around three times cash flow and trade as though oil prices will remain depressed for years, he said.
He likes Andarko Petroleum (APC), Ranger Oil (RGO) and Seagull Energy (SGO).
“You should be able to make money in 12 to 18 months,” he said.
But he offered one caveat: “The only hesitation I have is there’s no historical bounce point [to signal a likely recovery]. They’ve gone through all the bounce points.”
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Times staff writer Walter Hamilton can be reached at walter.hamilton@latimes.com.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Amid Soaring Volume . . .
Tuesday was the busiest trading day ever on the New York Stock Exchange and the second-busiest on Nasdaq. The five heaviest-volume days for each market:
NYSE
Date: Volume (billions)
Sept. 1, 1998: 1,205
Oct. 28, 1997: 1,201
Aug. 27, 1998: 0.935
Aug. 31, 1998: 0.915
Aug. 5, 1998: 0.850
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Nasdaq
Date: Volume (billions)
Oct. 28, 1997: 1,354
Sept. 1, 1998: 1,259
April 22, 1998: 1,026
Aug. 31, 1998: 1,004
Oct. 1, 1997: 0.971
. . . Stocks Rise Across the Board . . .
Percentage gains in major indexes on Tuesday and year-to-date:
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Index Tues. change YTD change Morgan Stanley tech +7.3% -15.1% Nasdaq composite +5.1 +0.3 Morgan Stan. consumer +4.6 +4.1 S&P; 500 +3.9 +2.5 Dow industrials +3.8 -1.0 Keefe Bruyette bank +3.4 -12.2 NYSE composite +3.2 -3.0 Amex oil +3.1 -11.4 Russell 2,000 +3.0 -20.3 Morgan Stan. cyclical +2.1 -14.5
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. . . And Lots of Cash Still Waits
Month-end assets of money market mutual funds, and latest (Aug. 25), in trillions:
August 25: $1.23
Source: IBC Financial Data
Scouring for Value
At The Times’ request, Telescan Inc. screened for strong companies with potentially undervalued stocks. As shown by the “company growth ratio,” expected earnings growth rates exceed projected price-to-earnings ratios. The growth ratio is figured by dividing the five-year growth rate by the projected P/E for the coming fiscal year.
Large Capitalization
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Company Pct. decline Ticker Tuesday growth over last 6 wks. Company symbol price ratio (since July 21) Philips Electronics PHG $63.31 3.3 -32.40% Starwood Hotels HOT 35.38 3.1 -23.40 Republic Industries RII 17.19 2.6 -31.90 AES AES 27.50 2.4 -45.50 Conseco CNC 29.88 2.4 -44.90 Network Associates NETA 32.06 2.2 -40.50 Cendant CD 11.63 2.2 -31.40 SLM Holding SLM 38.19 2.0 -24.70 3Com COMS 25.50 2.0 -17.30 Cadence Design CDN 20.69 1.9 -32.20
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Medium Capitalization
*--*
Company Pct. decline Ticker Tuesday growth over last 6 wks. Company symbol price ratio (since July 21) Noble Drilling NE $11.69 6.7 -49.50% Transocean Offshore RIG 24.63 5.6 -43.00 Santa Fe International SDC 14.13 5.4 -45.60 ICN Pharmaceuticals ICN 16.06 5.0 -55.20 EVI Weatherford EVI 16.31 4.8 -54.90 Diamond Offshore DO 21.38 4.3 -40.50 Nabors Industries NBR 12.75 4.2 -36.70 AccuStaff ASI 13.50 4.0 -61.70 Ensco International ESV 11.19 3.9 -33.40 Cooper Cameron RON 22.44 3.8 -48.90
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Small Capitalization
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Company Pct. decline Ticker Tuesday growth over last 6 wks. Company symbol price ratio (since July 21) Standard Pacific SPF $12.75 8.9 -28.50% Rowan RDC 9.81 6.7 -40.60 CellStar CLST 7.25 6.5 -57.60 Amresco AMMB 15.13 6.2 -48.60 Pride International PDE 8.00 5.6 -37.90 Varco International VRC 8.00 5.2 -53.20 Veritas DGC VTS 16.31 5.1 -50.60 Marine Drilling MRL 8.13 5.0 -38.00 Firstplus Financial FP 27.19 5.0 -40.30 Prime Hospitality PDQ 8.63 4.5 -49.10
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NOTE: In addition to the growth ratio, other screening criteria include minimum earnings growth rates between 10% and 20% varying by market capitalization, minimum $5 stock price, minimum five-year earnings consistency and average daily volume of at least 20,000 shares.
Source: Telescan
