Finding value in a sky-high market.Bargains can be found in out-of-favor industries When it comes to investing, one of the rules of thumb is to buy low and sell high. Then why have so many flocked to growth companies with astronomically high P/Es? "Several factors played a role," says Russ Kinnel of Morningstar, the Chicago-based mutual fund tracking company. "Interest rates fell in 1998. Mathematically, that makes future earnings more valuable, which benefits growth stocks. At the same time, a worldwide economic slowdown depressed commodity prices, which hurt the prices of the energy, paper, aluminum and steel companies held by many value funds." From 1992 to 1997, value funds held their own with growth funds, because the former include bank stocks, which were top performers. In 1998, though, bank stocks stumbled as fears of foreign loan defaults mounted. Market leadership passed to tech stocks. Roger DeBard, who manages the Hotchkis and Wiley Balanced Fund Balanced Fund A mutual fund that invests its assets into the money market, bonds, preferred stock, and common stock with the intention to provide both growth and income. Also known as an asset allocation fund. , believes that value will triumph in the long haul Long distance. Long haul implies traversing a state or a country. Contrast with short haul. . "While the average stock is priced at 28.1 times projected 1999 earnings, we're 16.1 times earnings," he says. Even though you are buying stocks relatively cheap, the pickings are usually among out-of-favor industries or small cap companies with less liquidity. Investors then must be able to hold on to a stock that may not realize a healthy return until a much later date. At the top of one value manager's list: Electro Scientific Industries (Nasdaq: ESIO ESIO Earth Sciences Information Office (Environmental Institute; University of Massachusetts) ) and Silicon Valley Group (Nasdaq: SVGI SVGI Silicon Valley Group, Inc. (stock symbol) SVGI Sequential Vapour Gas Injection ). He's also high on such real estate firms as Tejon Ranch (AMEX AMEX See: American Stock Exchange : TRC TRC Noun (in South Africa) Truth and Reconciliation Commission: a commission which encourages people who committed human rights abuses or acts of terror during the apartheid era to reveal the truth about their crimes in return for immunity from prosecution ) and Alexander & Baldwin (Nasdaq: ALEX). DeBard, on the other hand, likes such commodity plays as copper producer Phelps Dodge (NYSE NYSE See: New York Stock Exchange : PD). He's also bullish on aerospace companies ("increased defense spending is likely") and utilities ("yields are attractive, as well as prospective consolidation within the industry"), recommending Northrop Grumman (NYSE: NOC (Network Operations Center) A central or regional location for monitoring a large network. Also called a "network management center" (NMC), "service management center" (SMC) or "network control center" (NCC), a NOC may be used to manage a large enterprise network, ) and Texas Utilities (NYSE: TXU TXU Texas Utilities (Electric and Gas Company) TXU Transmitter Unit ).
Value Buys In An Overpriced Market
52-Week
Company Exchange: Symbol High Low
Electro Scientific Nasdaq: ESIO $47.38 $13.13
Silicon Valley Nasdaq: SVGI 26.50 6.63
Tejon Ranch Amex: TRC 31.13 17.06
Alexander & Baldwin Nasdaq: ALEX 31.13 18.81
Phelps Dodge NYSE: PD 71.75 41.88
Northrop Grumman NYSE: HOC 137.63 56.63
Texas Utilities NYSE: TXU 48.06 38.38
Est. 5-Yr.
Current Annual EPS
Company Price(*) P/E Growth
Electro Scientific $41.25 25.0 19.8
Silicon Valley N/A 18.9
Tejon Ranch 17.38 0.3 N/A
Alexander & Baldwin 19.88 34.1 10.5
Phelps Dodge 48.00 30.9 9.5
Northrop Grumman 62.44 11.3 8.2
Texas Utilities 41.94 15.6 5.1
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