Dreman - The time to buy
David Dreman, 09.02.02, 12:00 AM ET
Bear market or no, there are superb opportunities too enticing to pass up. While a recovery is likely far off, the current carnage has left fine stocks undervalued.
Buy stocks when blood flows in the streets. That old maxim is still true--up to a point. You must also pay attention to valuations. This summer we're awash in gore. The tech-loaded Nasdaq 100 is down 45% this year and 81% from its March 2000 high, about what the Dow dropped from its 1929 high to its 1932 low. The S&P 500 has lost 23% in 2002 and 44% since March 2000. This year's second quarter was the second worst (after 2001's third quarter) since the bear market bottom in the July-September quarter of 1990. The way things are going, the current quarter could make them all look tame. This bear market has evaporated $7 trillion in U.S. equity values. Note that the 1987 crash cost investors only $1 trillion.
Accounting scandals, conflict-ridden analysts, weak economic statistics and rotten earnings aren't exactly laying the foundation for a turnaround soon. The decline in investor savings has a double-barreled effect. It restricts the flow of funds going into equities, and it reduces consumer spending as awareness spreads that the great bubble stocks of the late 1990s aren't coming back quickly.
Now look at the valuations. Stocks are a lot cheaper than they used to be, but they're not exactly cheap. Companies in the S&P 500 index are supposed to earn a composite $34 per index unit this year (after writeoffs), making the forward price/earnings ratio equal to 25. That's high, relative to past market P/Es. The Nasdaq 100, built on recklessly optimistic forecasts, has an estimated P/E for 2002 of 35, nearly a bubble multiple, with no sign that tech spending is increasing and that the 45% earnings gains forecast for next year will materialize.
What many investors and Wall Streeters forget is that the bubble, particularly in tech stocks, was the largest in market history. The broad averages will quite possibly go nowhere for several years, as companies struggle to get "real" earnings back to their 2000 levels.
This market reminds me a lot of the period from the mid-1970s to 1982. Back then stocks trailed gold, diamonds, collectibles, stamps, bonds and even U.S. Treasury bills. But as bleak as the picture was, value stocks thrived, as investors returned to such fundamentals as good earnings growth, strong balance sheets, high dividend yields, low P/Es and trustworthy accounting. |
