REVENGE Of The Value Investors.With surgical precision, conservative fund managers have carved out the best stocks from the body financial. IMAGINE THE HIGH SCHOOL CHESS WHIZ TRIPPING UP the football team's brawny brawn·y adj. 1. Strong and muscular. 2. Hardened; calloused. captain. Or picture the conservative, buttoned-down accountant winning the girl over the burly bur·ly adj. bur·li·er, bur·li·est Heavy, strong, and muscular; husky. See Synonyms at muscular. [Middle English burlich, from Old English *borlic, excellent; see motorcycle mechanic. You'd need to conjure up or make visible, as a spirit, by magic arts; hence, to invent; as, to conjure up a story; to conjure up alarms s>. See also: Conjure images of just that sort of "revenge of the nerds" scenario to understand just how value investors felt this past spring. After three years--1996, 1997 and 1998--of watching investors in flashy, revved-up growth stocks kick sand in their face, value managers finally had reason to gloat as their kind of stocks started to realize some impressive gains. Suddenly, the stock market had tired of the Intels, the Lucents and the like, and instead began to shower its affections on such cyclicals as oil, retail or transportation stocks, helping shares in those groups rise. Needless to say, this was quite an about-face. A stampede stam·pede n. 1. A sudden frenzied rush of panic-stricken animals. 2. A sudden headlong rush or flight of a crowd of people. 3. by technology shares at the end of last year had a lot of gurus talking about a growth market--a stock market ruled by corporations whose earnings or profits were climbing at a rapid rate. Instead, with the price-to-earnings ratio Noun 1. price-to-earnings ratio - (stock market) the price of a stock divided by its earnings P/E ratio securities market, stock exchange, stock market - an exchange where security trading is conducted by professional stockbrokers of the Standard & Poor's 500 index--the gauge for the broader market--in the 30s, its highest level ever, it seemed that investors were finally backing more reasonably priced shares. It looked as if it were value investing's turn to shine. Take the investments of President and Chief Portfolio Manager Randall Eley of the Edgar Lomax Co., for instance. As of May 31, Eley's mutual fund and institutional accounts, stocked with Adj. 1. stocked with - furnished with more than enough; "rivers well stocked with fish"; "a well-stocked store" stocked furnished, equipped - provided with whatever is necessary for a purpose (as furniture or equipment or authority); "a furnished apartment"; companies like Sears (NYSE NYSE See: New York Stock Exchange : S), DuPont (NYSE: DD) and Minnesota Mining & Manufacturing (NYSE: MMM MMM Myeloid metaplasia with myelofibrosis, see there ), were up 12.2%. By comparison, the S&P 500 was up 6.4%. "We in value investing Value Investing The strategy of selecting stocks that trade for less than their intrinsic value. Value investors actively seek stocks of companies with sound financial statements that they believe the market has undervalued. have learned to be patient," says Eley. "There are times when growth stocks outperform the companies we like, but in the long run things even out." To appreciate how significant this reversal in stock leadership has been, consider that according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Morningstar, the Chicago firm that tracks the mutual fund industry, the average largecap growth fund posted a total return of 35.45% last year. The average large-cap value portfolio mustered only a paltry 12.61% gain. The moral of the story? Different stock-picking styles excel at Verb 1. excel at - be good at; "She shines at math" shine at excel, surpass, stand out - distinguish oneself; "She excelled in math" different times. Growth stocks, shares of companies that are reeling in earnings faster than the majority of corporations, tend to do well when the economy is expanding and business booming. When the economy hits the skids, however, growth stocks often drop in price. Value shares, meanwhile, tend to do best at the end of a recession, when investors are looking for Looking for In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. ways to put their money to work. During economic slowdowns, value shares tend to weather any rough periods in the stock market with less of a loss in value than growth shares. In this story, you'll find tips from some of the best value stock pickers around. We've tailored this article for a variety of investors. Perhaps you're learning the ins and outs ins and outs pl.n. 1. The intricate details of a situation, decision, or process. 2. The windings of a road or path. of the market. Maybe you're trying to work with a financial planner Financial Planner A qualified investment professional who assists individuals and corporations meet their long-term financial objectives by analyzing the client's status and setting a program to achieve these goals. to select a few stocks to hold on to for the long run. You might even belong to an investment club and be looking for ways to win other members over with your stock picks. Whatever your angle, we've got one thing in mind: we want to show you how investment experts screen for stocks and give you the tools to pick companies on your own. To start working with the stats and tips here, we'll refer you to "Screening for Investment Gold" (October 1998). There, we listed spots on the World Wide Web where investors could sift through the nearly 10,000 publicly traded stocks to find the picks that fit their goals. In this article, too, we'll mention some Websites to help you get started. MORE THAN A BARGAIN While there are other stock investing schools, the two most prevalent ones are "value" and "growth." On Wall Street, the two represent opposing philosophies. First, there's value. Portrayed as the more conservative and staid staid adj. 1. Characterized by sedate dignity and often a strait-laced sense of propriety; sober. See Synonyms at serious. 2. of the approaches, value stock picking hinges on finding companies mired mire n. 1. An area of wet, soggy, muddy ground; a bog. 2. Deep slimy soil or mud. 3. A disadvantageous or difficult condition or situation: the mire of poverty. v. at a price below their true worth. A value portfolio manager will then buy the underappreciated shares, confident that the market will one day realize that it has overlooked a good deal. At that point other investors will bid up the price of the value stock, while those who bought the shares at bargain-basement levels will realize a greater profit. The growth school, on the other hand, targets companies whose profits are booming. Growth managers will tell you that a company that can increase its earnings faster than the market will attract investors, who will in turn pump up the price of the growth stock in question. "I'd say growth investing Growth Investing A strategy whereby an investor seeks out stocks with what they deem good growth potential. In most cases a growth stock is defined as a company whose earnings are expected to grow at an above-average rate than its industry or the overall market. , or betting that a given company will continue to grow earnings at a 50% rate year after year, is a lot like driving your car down the street at 150 miles per hour," says David J David J. Haskins (b. April 24, 1957, in Northampton, England) is a British alternative rock musician. He was the bassist for the seminal gothic rock band Bauhaus. Life and work . Braverman, a senior investment officer with Standard & Poor's in New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of "If you're sober, chances are you won't be killed, but your luck might run out one day. "Value is driving your car at 40 miles per hour," he adds. A value fan, Braverman says that value investing, while a slower path to profits, has the potential to lead to similar gains over time. "Perhaps a little more boring, but ultimately a safer way to get to your destination." If you read books on investing or leaf through articles in the financial press, you'll find that value stock picking is typically compared to bargain hunting of a sort. First, value managers and analysts will look for cheap stocks. To help gauge what a company's shares should fetch, value managers will look at its price-to-earnings multiple or P/E P/E See: Price/earnings ratio , a figure calculated by dividing a company's share price by its earnings per share. Their thinking is that by buying companies at a P/E below that of the S&P 500, they're digging up cheap stocks that will more likely cash in when the rest of the stock market realizes that value shares are worth more than their current price. There's more to value than a low price-to-earnings multiple, however. Dawn Alston Paige, a portfolio manager with Loomis Sayles in Bloomfield Hills, Michigan Bloomfield Hills is a city in Oakland County of the U.S. state of Michigan. It is located in the Metro Detroit area, nearly completely surrounded by Bloomfield Township; it also borders the city of Birmingham. As of the 2000 census, the city population was 3,940. , says she looks for "fallen angels"--companies the market has abandoned or ignored, provided there's some reason for the stock to turn around and make money (see "Scavenger Hunt scavenger hunt n. A game in which individuals or teams try to locate and bring back miscellaneous items on a list. ," Moneywise, June 1999). If management can increase earnings, along with a cheap P/E, she's likely to give the shares a second look. "We're always looking for cheap stocks, but we're also looking for something that will ultimately help the shares gain value," Alston Paige points out. "Value investing rules help us choose stocks, but we're also looking for a catalyst to help get things going." Then there's Eley, who is looking to cushion his investments from as much risk as possible. Eley says a low P/E is nice, but he's also looking for a sizable dividend yield and a low price-to-book value to signal a good time to buy shares. "When we look at stocks, we first like to ignore earnings growth," he says. "That way, we're choosing a company that will make us money even if its profits don't increase. Then, if earnings increase, we get a nice extra boost for our investment." VALUE HUNTING In all, value managers will likely look at four important figures to help decide whether they should invest in a stock and when they should take a stake. They are, in order of importance, price-to-book value, price-to-earnings ratio, return on equity and dividend yield. * Price-to-book value: a measure of a company's rock-bottom worth. Look for a price to book of 4 or under. Eley and Alston Paige say that the price-to-book ratio is one of the most important things they'll look at when mulling mulling (mul´ing), n the final step of mixing dental amalgam; a kneading of the triturated mass to complete the amalgamation. over a stock. Simply put, it's a good measure of a company's barebones value in relation to its current stock price. By calculating it, professionals know how much the stock market values a company's assets--how much cash its buildings, factories and office equipment could be expected to bring if operations were shuttered and everything sold off. Historically, the S&P 500 has ranged between a price-to-book of 2 and 3.5; in today's inflated market, the index's average is now a bloated 7 to 8. As a value investor, Eley says he'll normally shoot for a 33% discount to the market, or a price-to-book of 1.5 to 2.5. These days, though, with stock prices climbing ever higher, Eley's portfolio has followed suit, and now has risen to an average price-to-book of 3.5 to 3.7. That figure is high by his standards, but nevertheless is at a steeper discount to the market than usual. Using this criteria, hydraulics hydraulics, branch of engineering concerned mainly with moving liquids. The term is applied commonly to the study of the mechanical properties of water, other liquids, and even gases when the effects of compressibility are small. concern Lafarge Corp. (NYSE: LAF LAF Lance Armstrong Foundation (non-profit cancer organization) LAF Look and Feel LAF Laugh LAF Lebanese Armed Forces LAF Liquidity Adjustment Facility LAF Lost And Found LAF Laminar Air Flow ) has a book-to-value ratio of 1.92, definitely a bargain compared with the market. Price-to-book value figures can be found on the Web at sites such as Zacks Investment Research Zacks Investment Research A firm that compiles earnings estimates and brokerage firm investment recommendations for thousands of publicly traded firms. (www.zacks.com). Most screening sites, such as DailyStocks (www.dailystocks .com) and Marketplayer (www .marketplayer.com), will also allow you to plug in figures to set your price-to-book limits. * Price-to-earnings ratio: One of the most basic guides to a company's worth. Look for companies whose stocks trade at 19 times projected earnings or less. It seems you can't open the business section of your local newspaper without seeing some mention of P/Es. The reason: it's a simple measure to come by, and one that's relatively easy to remember. To find out a company's P/E, all you have to do is divide its share price by either its earnings for a full year as reported to the public or by Wall Street projections, figures you can find on Zacks. As convenient as P/Es are, there's a catch in using them, Alston Paige says that companies often can reconfigure earnings in a number of different ways, according to how they report items like the depreciation of assets. For that reason, we've placed P/Es down a bit on our list of screening criteria. As with price-to-book value figures, we suggest that you aim for two-thirds of the market's going rate. Currently, with the S&P 500 trading at 28 times projected 1999 earnings, look for stocks in the neighborhood of 19 times earnings or less. Some stocks fitting the bill include mortgage banker Mortgage Banker A company, individual or institution that originates, sells and services mortgage loans. Notes: Don't confuse a mortgage banker with a mortgage broker. Doral Financial Corp. (Nasdaq: DORL DORL Direcção da Organização Regional de Lisboa do Partido Comunista Português (Direction of the Lisbon Local Organization of the Portuguese Communist Party) DORL Demands Of Real Life ), with a P/E of 10.8, and savings bank savings bank, financial institution that, until recently, performed only the following functions: receiving savings deposits of individuals, investing them, and providing a modest return to its depositors in the form of interest. Peoples Bancshares Inc. (Nasdaq: PBKB PBKB Planned Blue Kill Box ), trading at 7.2 times forward earnings. * Return on equity: Used to separate the cheap stocks from the duds, ROE shows how efficient management is with your investment. Look for a ROE of 15 or better. Value investing pros will tell you there's a tricky twist to their business: sometimes the cheap stocks have been discounted for a good reason. Sometimes their managements are out of touch, their businesses declining or their market share evaporating. Fortunately, there's a good way to measure if corporate executives are actually putting your invested funds to work. Return on equity, or ROE, helps show how successful a company is at its business. Investment pros will tell you that a higher ROE shows that a corporation is working to get the most out of the funds it has to invest in technology, new manufacturing processes or key personnel. Our recommendation: look for a discount to the S&P 500's current ROE of 20. We suggest that you aim for a ROE of 15 or better. A good example: surety bond surety bond An insurance fee required before a duplicate security is issued to replace one that has been lost. The fee is approximately 4% of the market value of the security to be replaced. concern CNA (Certified NetWare Administrator) See Novell certification. Surety (NYSE: SUB), with a ROE of 17.3. * Dividend yield: management's reward to the investor, a yield is a steady stream of income you can bank on. Look for a yield of 1.2% or better. A dividend yield is a company's way of sharing a portion of its profits with quarterly distributions sent to shareholders. It's a bonus payment that makes value investors feel happy and safe at the same time. For one, it's a return on an investment that anyone owning the stock can pocket. Better yet, it's a way to safeguard shares from a sudden shift in the market. Pros like Eley will tell you that when the overall market drops, shares of companies with dividends fall less than those of corporations with no distribution at all. Value investors measure a company's generosity by its yield, which is its dividend divided by its share price. Currently, S&P 500 stocks pay out an average yield of 1.2% annually, or 60 cents for every $50 share. Eley looks for his portfolio to offer a payout of roughly twice that figure, or 2.4% annually. In our screen, however, we set our sights slightly lower in order to find stocks outdoing the S&P 500. Among the few stocks in our screen beating the index's yield were specialized multinational bank Banco Latinoamericano de Exportaciones (NYSE: BLX BLX Business Line Expert BLX Basic Launch Complex BLX British Legion of Xbox (gaming clan) ), with a dividend yield of 3.34%, and auto giant Ford Motor Co. (NYSE: F), yielding 3.19%. THE INTANGIBLES While we've listed some of the most important value investing numbers to look at, experts say you should feel free to mull over mull over Verb to study or ponder: he mulled over the arrangements [probably from muddle] Verb 1. other criteria when you screen for shares, some of which can't be boiled down to pure numbers. For investors like you, it's a good idea to look at annual reports and articles written about the company in the current financial press. RELATED ARTICLE: Screening For Value Using four criteria, we came up with a list of 10 value stocks Value stocks Stocks with low price/book ratios or price/earnings ratios. Historically, value stocks have enjoyed higher average returns than growth stocks (stocks with high price/book or P/E ratios) in a variety of countries. . We searched for stocks with: price-to-book value of 4 or higher; P/E of 19 times projected earnings or less; return on equity of 15 or higher; and dividend yield of 1.2% or higher.(*)
Estimated
Company (Exchange: Ticker) Price(**) EPS
Banco Latinoamericano (NYSE: BLX) $28.75 4.58
Citigroup (NYSE: C) 43.13 4.11
CNA Surety (NYSE: SUR) 14.00 1.23
Doral Financial (Nasdaq: DORL) 16.88 1.56
Eaton (NYSE: ETN) 85.88 6.30
Elbit Systems (Nasdaq: ESLTF) 15.50 1.20
Ford Motor (NYSE: F) 57.63 5.53
General Motors (NYSE: GM) 84.88 9.52
Peoples Bancshares (Nasdaq: PBKB) 19.88 2.77
Sauer Inc. (NYSE: SHS) 10.25 1.03
Price-to-Book On
Company (Exchange: Ticker) Value P/E
Banco Latinoamericano (NYSE: BLX) 3.12 6.3
Citigroup (NYSE: C) 3.39 15.7
CNA Surety (NYSE: SUR) 1.98 11.4
Doral Financial (Nasdaq: DORL) 2.55 10.8
Eaton (NYSE: ETN) 3.03 13.6
Elbit Systems (Nasdaq: ESLTF) 2.51 12.9
Ford Motor (NYSE: F) 2.82 10.4
General Motors (NYSE: GM) 3.76 8.9
Peoples Bancshares (Nasdaq: PBKB) 2.03 7.2
Sauer Inc. (NYSE: SHS) 1.80 10.0
Return On Dividend
Company (Exchange: Ticker) Equity Yield
Banco Latinoamericano (NYSE: BLX) 49.7 3.34%
Citigroup (NYSE: C) 21.5 1.30
CNA Surety (NYSE: SUR) 17.3 2.29
Doral Financial (Nasdaq: DORL) 23.5 1.42
Eaton (NYSE: ETN) 22.2 2.05
Elbit Systems (Nasdaq: ESLTF) 19.5 2.58
Ford Motor (NYSE: F) 27.0 3.19
General Motors (NYSE: GM) 42.1 2.36
Peoples Bancshares (Nasdaq: PBKB) 28.2 4.03
Sauer Inc. (NYSE: SHS) 18.0 2.73
(*) STOCKS ARE RATED A "BUY" OR HIGHER, ACCORDING TO ZACKS INVESTMENT RESEARCH (**) AS OF MAY 26, 19993 |
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