Time for S&P; Growth, Value Stock Shift

JDS Uniphase and Nortel Networks, the highflying communications-equipment growth stocks of 1999, have fallen so far this year that they’re now considered value stocks--at least by one measure.

After trading ends today, Standard & Poor’s Corp. will shift the companies from its index of large growth stocks to the benchmark that tracks value shares, according to analysts at Merrill Lynch & Co. and Prudential Securities.

The shift means investors whose performance is measured against the S&P;/Barra value index, a popular index of value stocks, will have an incentive to buy JDS Uniphase and Nortel to ensure they keep up with the index.

Each June and December, S&P; ranks the companies in the S&P; 500 index by dividing their stock prices by per-share book value, or corporate net worth. The stocks with lower price-to-book ratios go into the S&P;/Barra value index; those with higher price-to-book ratios go into the S&P;/Barra growth index.

S&P; attempts to get half the total market value of the S&P; 500 into each index. According to Merrill Lynch data, 378 companies now fall into the value range, while 122 will be in the growth category.

As technology shares have slumped this year, JDS Uniphase, Nortel and some other traditional growth companies now find themselves in the value camp--at least as measured by price-to-book ratios, analysts said.

A stock’s value, of course, can be measured in many different ways. Traditionally, many investors believe a value stock is one that sells for a below-average price-to-earnings ratio. By that measure, JDS Uniphase and Nortel still are growth stocks: At current prices, the stocks trade for 50 and 42 times this year’s expected earnings per share, respectively.

But because of their lower price-to-book ratios, and expected inclusion in the S&P;/Barra value index, JDS Uniphase and Nortel have to be considered by value-stock managers who previously would never have looked at the shares for their portfolios, analysts said.

“If it goes up and we don’t own it, we lose,” said Michael Santelli, who helps oversee $1.3 billion in value stocks at National City Investment Management in Cleveland. His portfolio is benchmarked against the S&P; value index.

Nortel (ticker symbol: NT) fell $1.25 to $31.13 Tuesday on the New York Stock Exchange, and has slumped 38% year to date.

JDS Uniphase (JDSU) rose 94 cents to $41.88 on Nasdaq on Tuesday but is down 48% year to date.

Still, Santelli and other value managers may not be eager to rush into fallen tech names. With the economy weakening, “The catalyst isn’t there” for many of these stocks to go higher, he said.

Other tech stocks expected to make the move to the S&P; value index include Texas Instruments (TXN), Lucent Technologies (LU) and Applied Materials (AMAT), according to Merrill Lynch.

On the flip side, the companies likely to move to the S&P; growth index from the value index include Procter & Gamble (PG), American Express (AXP) and Kimberly-Clark (KMB), Merrill Lynch said.

David Blitzer, economist at Standard & Poor’s, conceded that classifying stocks according to black-or-white investment measures can be problematic. “The two terms growth and value may be the [investment] world’s worst terms,” Blitzer said. After all, “No one wants to buy a stock that won’t grow, and no one wants to buy a stock that has no value.”

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Down Enough to Be a Value?

Shares of telecommunications equipment company JDS Uniphase are down 48% year-to-date and down 73% from their 2000 high. By at least one measure, the stock is now a “value” play.

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JDS Uniphase (ticker: JDSU), monthly closes and latest on Nasdaq

Tuesday: $41.88, up 94 cents

Source: Bloomberg News