If It’s a Brand and a Bargain You Want . . .
Bargain hunters may be having a strong sense of deja vu right about now.
The last two months have seen many shares tumble. With last week’s deep sell-off, the blue-chip Standard & Poor’s 500 index is down nearly 10% from its July 16 record high.
A year ago at this time, the market also was in a sharp downtrend. But that sell-off ended last October--and many stocks rocketed through fall and winter.
Will history repeat? There’s no guarantee, of course. But many investors know that when popular stocks lose 25% or more of their value, it’s time to at least begin nosing around for bargains.
On Sept. 17, 1998, The Times profiled seven stocks in a “Brand Names on Sale” portfolio. What they had in common was that their brands were well known to U.S. consumers--and their stocks were off at least 25% from their 1998 peak prices.
One year later, those seven shares as a group are up nearly 30%, handily beating the S&P; 500’s 22.7% rise.
Only three of the seven--trendy shoe and handbag company Kenneth Cole, retailer Intimate Brands (which owns the Victoria’s Secret and Bath & Body Works chains) and American Express--have beaten the S&P.; But their gains were so large they offset the other four.
Two of those four--bookseller Borders Group and mortgage financier Countrywide Credit Industries--have become, uh, even bigger “bargains.”
That shows the risks of buying just one or two stocks when you’re shopping for depressed issues. A diversified portfolio is the way to go.
So here we go again: In the accompanying chart we list a new portfolio of beaten-down brand-name stocks.
Our list was culled by screening the Bloomberg News database for premier brand-name companies whose shares were marked down 25% or more from their 52-week highs.
As we did last year, we tried to find companies with reasonable price-to-earnings ratios, at least in comparison with their rates of projected earnings growth.
Investors should always do their own research before plunking down money, of course. For what they’re worth, here’s a look at the stocks we picked:
* Its revenue growth has been slowing in traditional long-distance, but AT&T; Corp. expects continuing gains in two key businesses: wireless communications and high-speed data services for business customers.
The stock has been slashed nearly 32% from its 52-week high. Its price-to-earnings ratio now is about 20 based on analysts’ consensus earnings-per-share estimate for 1999--compared with about 26 for the average blue-chip stock.
* Berkshire Hathaway Inc. isn’t exactly a penny stock. But its Class B shares hit a 52-week low of $1,905 on Monday and are now down 30% from their 52-week peak.
The holding company for billionaire investor Warren Buffett has stumbled on several fronts: Earnings have slumped at its insurance units, and its holdings in stocks such as Coca-Cola Co. and Gillette Co. have suffered with slowing sales and earnings at those blue-chip giants.
Ironically, Buffett--who made his name and fortune by buying and holding brand-name stocks--acknowledged making a “very big mistake” when he sold most of his stake in McDonald’s Corp., a stock that has risen more than 50% in 1999. But he still has more money than you do, and he has recovered from previous missteps. There are worse money managers to bet on.
* Consumer electronics retailer Best Buy Inc. has been hammered on concern that the 333-store chain won’t maintain the double-digit sales growth of recent years. Analysts also warn that the company’s Internet sales expansion has been slow, which might hurt results in the pivotal fourth quarter.
But retailing is always a volatile business, and this company, which recently said it will step up its share-repurchase program, is still considered to have keen management. Long-term investors might be rewarded for showing faith, though the stock’s P/E still isn’t exactly cheap.
* OK, those singing slacker commercials may be a tad annoying, but Gap Inc. still sells great clothes--and its August sales at stores open at least one year were up a strong 8%.
Wall Street, as usual, wanted more. But for investors who can take a longer-term view, Gap is busy expanding overseas. And with GapKids, Banana Republic and Old Navy stores as well as the flagship chain, it has its fingers in seemingly every corner of the casual apparel market.
* Gap has had it easy in the stock market compared with Saks Inc., which operates Saks Fifth Avenue, Carson Pirie Scott and other department-store chains. The stock has plunged about 61% from its peak, hammered after the company said in August that its sales and earnings targets for 1999 were overly aggressive.
But several insiders have been scooping up the shares recently. And though its clothes aren’t cheap, the stock might be of interest to hard-core value-oriented investors: The company is still expected to earn $1.83 a share this year, which means the stock’s P/E ratio is about 8.
Wall Street still expects the company to post annualized earnings growth of about 20% over the next five years.
* Staples Inc. is the No. 1 office-supply retailer, but it has been tarred by slower projected earnings growth at rival Office Depot Inc. The market has taken Staples shares down nearly 41% from their peak.
Wall Street still thinks Staples can earn 68 cents a share this year and 88 cents next year. If the 2000 estimate is right, the stock’s P/E on that figure is about 24--which may look cheap to long-term investors.
* Starbucks Corp. takes brand loyalty to the extreme. “The average customer purchases its products 18 times a month,” said Goldman Sachs analyst Brandy Shin, who last week upgraded the stock to “top pick.”
“This is an addictive product of high quality sold at a high frequency,” Shin says.
But Wall Street is far less addicted to the stock these days. The price is down 43% from its peak, hurt by management’s botched Internet-investing strategy and because the 2,400-store chain missed earnings estimates in June.
If you believe the company’s decision to refocus on its core coffee business will bring back investors, the stock may have decent upside.
Times staff writer Josh Friedman can be reached by e-mail at josh.friedman@latimes.com.
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Buying the Names You Know
Amid the stock market’s plunge one year ago this month, Times financial editors selected seven depressed brand-name stocks as potential bargains. One year later, the portfolio has beaten the Standard & Poor’s 500 index, despite two big duds. Here’s a look at last year’s portfolio--and a new list of beaten-down brand-name stocks:
Last Year’s Portfolio
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Stock Stock Ticker price: price: Pct. Company symbol 9/16/98 Mon. chng. Kenneth Cole KCP $15.88 $36.88 +132.3% Intimate Brands IBI 21.63 38.88 +79.8 American Express AXP 87.06 135.00 +55.1 Fortune Brands FO 28.75 33.63 +17.0 T. Rowe Price TROW 29.19 28.94 -0.9 Countrywide Credit CCR 41.69 32.50 -22.0 Borders Group BGP 27.88 13.44 -51.8 Portfolio average +29.9 S&P; 500 index 1,045.48 1,283.31 +22.7
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New Portfolio
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Ticker 52-week Mon. Decline Company symbol high close from high AT&T; T $64.06 $43.63 -31.9% Berkshire Hathaway BRK/B 2,713.00 1,905.00 -29.8 Best Buy BBY 80.50 58.25 -27.6 Gap GPS 52.69 32.19 -38.9 Saks SKS 39.50 15.31 -61.2 Staples SPLS 35.94 21.31 -40.7 Starbucks SBUX 41.00 23.38 -43.0 Portfolio average -39.0 S&P; 500 index 1,418.78 1,283.31 -9.5
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Sources: Times research, Bloomberg News
