Morningstar.com
Fishing for Bargains in the Tech Bin
By Frank W. Stanton
Although big stakes in the technology sector have been the kiss of death for growth funds like Merrill Lynch Focus Twenty (NA: MFOCX) this year, they haven't hurt value funds like Dreyfus Small Company Value (NA: DSCVX). With a little over a quarter of its assets invested in tech, the fund is up 21.87% for the year, which not only makes it this year's best- performing value offering, but the second-best-performing domestic- equity fund overall.
Granted, many of this year's better-performing funds are run by value managers,and small-value funds are doing particularly well. Up 4.31% on average for the year, small value is this year's best- performing domestic-equity fund category. Still, the Dreyfus Small Company Value Fund isn't your average small-value fund.
For starters, manager Peter Higgins has steered almost entirely clear of the normally stodgy, but last year's sizzling, financials sector, whereas the average value fund stashes 21% of its assets there. That proved to be a huge disappointment for the fund's shareholders last year when financials soared. With the tech-heavy Nasdaq Composite index crumbling, and stocks like Golden State Bancorp (NYSE: BSB - news) shooting up 83.9%, Higgins' atypical small- value fund eked out a 5.40% return for 2000, while its average peer jumped up 17.38%.
So far this year, however, financials have fizzled. ``Oddly, many [financial stocks] seem to have run up on anticipation of Fed rate cuts, then sold off after they actually occurred,'' says Morningstar senior fund analyst Scott Cooley. Higgins thinks some of last year's rally in financials stemmed from investors' flight from the battered tech sector into more ``defensive'' areas. That might help explain why regional-bank stocks, which had performed poorly for much of 2000, rallied so hard toward the end of the last year's fourth quarter.
But underweighting financials still doesn't explain Higgins' success this year. The key is Higgins' strategy of fishing for great values in the market's bargain bin, regardless of which sector they reside in.
Take Varian Semiconductor (Nasdaq: VSEA - news), which manufactures equipment used to produce semiconductors. Like a lot of its technology peers, the stock got hammered last year--down 30.1%-- as the PC industry went into a slump and semiconductor sales slowed down worldwide. Although the stock probably deserved to get knocked down from its lofty perch--it traded as high as $73.25 a share in May last year--Higgins figured the company was ``ridiculously cheap'' once it began trading in the low $20s. Indeed, Morningstar stock analyst Jeremy Lopez pointed out in his most recent analysis that Varian has been trading at an attractive discount to the rest of the industry and most of its peers. ``At less than one times sales and six times current earnings, the shares are dirt cheap,'' Lopez says.
Apparently the market agrees. So far this year, Varian is up 35.53%, making it one of the year's best-performing semiconductor-equipment makers.
Higgins isn't the only small-value manager who has found some great bargains in the technology bin this year. John Montgomery's Bridgeway Ultra-Small Company Fund (NA: BRUSX) is up 16.1% this year, and Al Frank's Al Frank Fund (NA: VALUX) is up 13.98%. Both managers keep about a third of their assets in the tech sector. Like the Dreyfus Small Company Value Fund, however, both funds underperformed their small-value peers last year since they underweighted the financials sector. |
