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Stocks: the reign of value?
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November 1, 2000: 6:02 a.m. ET
After a good run, the cheap stocks may still have gas in the tank
By Staff Writer Jake Ulick
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New York (CNNfn) - Everybody loves a bargain. Or at least they did in October, when investors piled into Wall Street's cheapest, hardest-hit stocks.
International Paper, off 24 percent in the last year, jumped 29 percent in October. And Alcoa, lower by 6 percent over the last 52 weeks, gained 13 percent on the month.
But money fled tech stocks even amid weekly markdowns. Cisco Systems tumbled 9 percent in October while JDS Uniphase lost 14 percent. Still, Cisco gained 40 percent over the last 12 months, a period when JDS Uniphase's market value more than doubled.
 No wonder John Forelli, senior vice president at Independence Investment Advisors, calls this a Robin Hood market.
"You are robbing from the rich tech guys and giving to the poor," Forelli said.
But can this wealth transfer continue? Put another way, will October's best-performing sectors -- basic materials, transportation and consumer staples stocks -- keep out-distancing the technology shares that fueled the bull market through March?
Some analysts say yes. They note that tech stocks, though down, still cost plenty. And value shares, though higher, can hardly be dubbed expensive.
Consider JDS Uniphase (JDSU: Research, Estimates). At $81, the suppler of fiber optic equipment trades at more than 100 times next year's earnings estimates of 80 cents a share, a figure compiled by First Call Corp., which tracks Wall Street profit forecasts.
 At $36 a share, International Paper (IP: Research, Estimates) trades at 15 times 2001 earnings.
"To call this a buying opportunity in these (tech) names seems kind of silly," said William Nygren, a value fund manager whose Oakmark Select Fund and Oakmark Fund are up 18.5 percent and 2.8 percent, respectively, this year. The S&P 500 is off 2.9 percent in 2000.
October's best performing sector, basic materials, which includes stocks like International Paper and Alcoa, gained 8.6 percent on the month, according to Standard & Poor's. The month's worst sector, technology, lost 23 percent.
But Sam Stovall, Standard & Poor's stock market strategist, says that while basic materials stocks hold an average price-to-earnings ratio of 13, the average tech stock still trades at a P/E of 23.
"Not all tech stocks are cheap," said Stovall. "The question is how far down can the Nasdaq go."
Independence Investment Advisor's Forelli sees the tech index bouncing around the low 3,000-level in the months ahead as investors show further unwillingness to pay for even high-growth prospects offered by technology.
And what growth prospects they are. If analysts are right, and JDS Uniphase earns 80 cents a share next year, that would be 95 percent above this year's forecasts of 42 cents per share. Profits at International Paper are seen rising a more modest 27 percent.
But if the economy slows, as economists agree it should, cheap stocks like International Paper generally hold up better.
"The low P/E end of the market still looks pretty good," Forelli said. "I think this is the kind of trend that could last for a year or two."
Trend is a good word because valuing stocks has a lot to do with timing.
Irrational exuberance?
Nearly four years ago, in December,1996, Federal Reserve Chairman Alan Greenspan, feeling stock levels had risen beyond reason used the term 'irrational exuberance' to describe those lofty levels. Those words sent stocks plunging – briefly.
The Nasdaq, which gained 22.7 percent in 1996, more than tripled since Greenspan spoke. And not without reason.
In the last four years economic growth surged while inflation stayed largely contained. This so-called Goldilocks economy was perfect for growth stock investors, who show little regard for price and pay for fast-growing companies, betting upon continued surges in revenue and earnings.
The strategy bore fruit. The Nasdaq surged 86 percent in 1999 and set 17 record highs during the first three months of this year.
But after six Federal Reserve interest rate hikes since the summer of 1999, the economy is slowing. The nation's gross domestic product cooled in the third quarter to a 2.7 percent annual growth rate, the slowest pace since the spring of 1999, the government said last week.
The Nasdaq, home to JDS Uniphase and Cisco Systems, has lost 18 percent of its value this year. But the Dow, the domain of Alcoa and International Paper, is down just 4.5 percent.
The Dow's out-performance comes as investors shift into drug and consumer staples stocks, defensive issues considered less affected by the economy. Vanguard's Healthcare Fund, one of the nation's largest specialty stocks funds, has returned 48 percent year-to-date.
The road ahead
What if the economy spins into a recession? Standard & Poor's has some ideas. During the last six recessions, gold mining, tobacco, household non–durables and foods stocks held up best.
But truck parts makers, airlines, automobile manufacturers, aluminum companies and diverse machinery makers suffered the most.
But Independence Investment Advisors' Forelli doesn't see a recession. He forecasts a Federal Reserve holding rates steady and valuations, so out-of-whack until early this year, returning to historical norms.
And Oakmark's Nygran has found opportunities within some of the market's vicious sell-offs. He says he bought AT&T (T: Research, Estimates), EDS (EDS: Research, Estimates), the technology consultant, and Office Depot (ODP: Research, Estimates) after their stocks fell following earnings warnings.
Those stocks, well off their 52-week highs, had gotten cheap enough for the most frugal of value investors. 
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