Search for Value: Has It Arrived at Tech Stocks Yet?
It’s a depressed stock market, and that usually means there are values around for the brave, the insightful and the patient.
But where to shop? If you’re the brave, insightful and patient billionaire/investment legend Warren Buffett, you apparently ignore the ongoing carnage in Nasdaq’s premier technology stocks, and instead you dabble in . . . penny stocks and Over-the-Counter Bulletin Board stocks.
Last week, Buffett revealed that he has acquired 5.1% of the stock of little Bell Industries, an El Segundo company that provides other companies with computer-integration services. Bell’s shares, trading for about $2 a piece before Buffett’s announcement, zoomed 63% for the week thanks to him, ending Friday at $3.25 on the American Stock Exchange.
Meanwhile, Buffett’s investment company, Berkshire Hathaway, on Wednesday said it would pay $1 billion in cash for paint maker Benjamin Moore & Co. The deal, worth $37.82 a share, was a 51% premium to Moore’s stock price on Wednesday.
But don’t feel silly that you missed this one. Moore’s name may be well known, but its stock was on few radar screens on Wall Street: It lists on the Bulletin Board, Nasdaq’s marketplace for mostly little-known, thinly traded and (usually) very high-risk, speculative shares.
As for Bell Industries, beware the temptation to piggy-back on Buffett’s bet. He has been in the stock before, and he didn’t stay. In fact, he dumped the stock a month after revealing his stake in December 1999--a revelation that sent Bell briefly soaring from $5 to $8.38.
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In a sinking stock market, it’s nice to think you’re in smart company if you’re on the buying side. But with technology stocks’ latest plunge--which took the Nasdaq composite index down 12.2% last week to 3,028.99 by Friday, the lowest close in more than a year--the buyers certainly must be facing nagging concerns about the company they’re keeping.
Could this really be the bottom for tech stocks, or is the Nasdaq index on the verge of a plunge through the 3,000 mark, and a final, calamitous selling wave that ends who knows where?
Are tech buyers today in the mold of the Traditional Buffett, meaning long-term investors who figure prices are low enough to assure a healthy payoff in the next few years, if not in the next few weeks?
Or are many of today’s buyers in the mold of the Trading Buffett, the investor looking for a quick pop and a fast buck?
No doubt what many devastated tech-stock owners would love to see is a herd of cash-laden, Traditional Buffetts stepping up right now and declaring that the technology sector is finally too cheap, or at least cheap enough.
And yet, there’s Warren Buffett himself, finding value in such companies as Bell Industries and Benjamin Moore--businesses that are the antithesis of the premier “new-economy” names such as Dell Computer, Intel and Nokia, whose stocks have been so severely beaten down this year.
This week, another man who knows something about value gets a chance to send a message of a different sort regarding the stock market.
When the Federal Reserve’s policymaking committee meets on Wednesday, members are almost universally expected to leave the Fed’s key short-term interest rate unchanged at 6.5%, which is where it has been since May after six increases starting in June 1999.
As the accompanying story on this page notes, the drama surrounding this meeting is centered on what the Fed does with its “bias”--its mood statement that indicates whether it believes another interest rate increase may eventually be necessary because of inflation risks, or whether it believes its next rate move could well be a cut.
Chairman Alan Greenspan, of course, must be feeling quite pleased with himself. The economy has begun to slow noticeably in recent months, exactly what the Fed wanted.
Perhaps more important, the technology stock bubble has deflated significantly, with Nasdaq down 40% from its March all-time high, and the Interactive Week index of 50 Internet-related stocks down 43% from its March peak.
Yet the economy and consumer confidence have largely weathered the massive destruction of paper wealth in the tech sector so far.
Greenspan, remember, was peppered repeatedly with questions in the spring as to the dangers of the tech-stock bubble, and what might happen in the big picture if the bubble were to burst.
Well, here we are--and the republic is still standing, even if it still doesn’t know who its next president will be.
It’s probably fair to assume that Alan Greenspan isn’t shedding too many tears over the recent demise of Pets.com, Furniture.com, Mortgage.com and other former “can’t-miss” Internet ventures, even if he has been generally supportive of the idea that competition from such start-ups has a depressive effect on price inflation, and thus is good for the economy as a whole.
But that devastation in tech shares, without the feared devastation of the economy, also gives the Fed another reason not to throw a bone to investors this week by changing its bias to suggest that an interest rate cut may be in the cards in 2001.
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Here’s another reason the Fed shouldn’t feel the need to be charitable with stock investors: Many of them (us) aren’t enduring Nasdaq’s pain.
This remains a split market in which many smaller- and mid-size stocks, as well as many blue-chip shares, still are holding on to gains this year, while Nasdaq has crumbled.
In fact, Nasdaq’s crash beginning in March was exactly what turned the tide for many other market sectors, as investors began to look for companies whose shares were more reasonably priced, and whose businesses seemed to have the staying power than many tech ventures may not.
That explains why many energy, utility, financial and health-care stocks, among others, still have handsome gains for 2000--and why the blue-chip Standard & Poor’s 500 index, despite its heavy tech-stock presence, is down just 7% since Jan. 1, while Nasdaq is down 25.6%.
Consider the chart of blue-chip stocks accompanying this story. The shares listed were the “Dogs of the Dow” at the start of the year--considered the Dow Jones industrial average’s least-liked shares because their dividend yields were the highest in the 30-stock index.
An above-average dividend yield on a blue-chip stock usually means the market expects little from the share price, and thus investors are demanding a higher dividend return to compensate.
But the Dow Dogs are having the last laugh so far this year: The average gain of the 10 stocks is 13.9% since June 30, while the Dow itself is up 1.5% and Nasdaq is down 23.6% in that period. Year to date the Dow Dogs are down 3.8%, on average, far less than the Dow itself or Nasdaq.
In a market where value investing is suddenly in vogue again, the Dow Dogs are leading the way. But to have profited, you had to buy them earlier this year, when few other investors wanted them.
Now, it’s the tech sector that many investors find utterly distasteful. At some point, that is going to translate into a terrific buying opportunity. To buy today, you have to believe we’re there, or almost there. It takes guts, but big payoffs usually do.
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Tom Petruno can be reached at tom.petruno@latimes.com.
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It’s Not Over Till It’s Over
The Interactive Week index of 50 Internet-related stocks--including such names as Cisco Systems, Amazon.com, EBay, Broadcom and Sun Microsystems--fell Friday to its lowest level since late 1999, breaking through the low reached in last spring’s tech crash. Yet the index still is up 408% since early 1996.
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Monthly closes and latest for Interactive Week Net stock index
Friday: 391.20
Source: Bloomberg News
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Who’s Laughing Now?
Here are the 10 “Dogs of the Dow” stocks for 2000-the 10 issues in the 30-stock Dow Jones industrial average that had the highest dividend yields at the start of the year, and thus were among the most depressed shares. The Dogs strategy says that, historically, the 10 highest-yielding Dow stocks at the start of the year will perform better, on average, than the index itself in that year. That is certainly true in the year to date-and especially since June 30.
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Change Ticker Friday YTD since Dividend Stock symbol close change June 30 yield* J.P. Morgan JPM $157.00 +24.0% +42.6% 2.5% Philip Morris MO 36.88 +60.3 +38.9 5.7 SBC Commun. SBC 57.13 +17.2 +29.8 1.8 Intl. Paper IP 36.01 -36.1 +21.0 2.8 3M MMM 95.00 -3.0 +14.5 2.4 Exxon Mobil XOM 86.56 +11.2 +14.0 2.0 Caterpillar CAT 35.75 -24.0 +5.5 3.8 DuPont DD 42.69 -35.2 -2.4 3.3 GM GM 55.63 -23.5 -4.2 3.6 Eastman Kodak EK 47.06 -29.0 -20.9 3.7 Dogs average -3.8% +13.9% Dow industrials 10,602.95 -7.8% +1.5% Nasdaq composite 3,028.99 -25.6% -23.6%
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* Dividend yield: Annual cash dividend payment per share divided by Friday stock price.
Sources: Bloomberg News, Times research
