Funds Wary of Bargain-Price Stocks
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Sunday July 7, 5:38 pm Eastern Time
Reuters Business Report
Funds Wary of Bargain-Price Stocks
By James Paton
NEW YORK (Reuters) - You would think the battered stock market would look inviting. But mutual fund managers, jittery about corporate misdeeds and bleak profit forecasts, are hardly diving into a sea of cheap shares.
Uncertainty about what lurks ahead, whether it is another accounting scandal or a terror attack, has rattled investors, and portfolio managers say it is tough to predict when the fear will give way to faith.
"I am still nervous," said Richard Calvert, manager of the $550 million AmSouth Value Fund (Nasdaq:AOEQX - News). "I was salivating heavily about a month ago, and then I started saying, 'This doesn't make sense. This is not a rational market."'
Shares of solid, steady companies such as General Electric Co. (NYSE:GE - News) and Microsoft Corp. (NasdaqNM:MSFT - News), which have long served as corporate beacons, have dropped to levels that should make investors' eyes pop out of their heads. GE sat at roughly $27 in Wednesday trading, a low unseen since October 1998. Software behemoth Microsoft, meanwhile, was trading at about $51, down from around $100 three years ago.
But even growth fund skippers, who are aggressive by nature, have persistent doubts about stocks, as the benchmark Standard & Poor's 500 Index (CBOE:^SPX - News) languished this week at a depressed level it has not touched for 4-1/2 years.
Angela Kohler, who sits at the helm of the $360 million Federated Investors' Large Cap Growth Fund (Nasdaq:FLGAX - News), said she is reluctant to march back into the market, despite the lows, because of possible "headline risks."
Accounting shenanigans and other evidence of corporate malfeasance have dragged shares lower, and they could remain a thorn in the stock market's side, she said.
"Harvey Pitt is not finished yet," she said, referring to the chairman of the U.S. Securities and Exchange Commission, which recently charged telecommunications company WorldCom Inc. (NasdaqNM:WCOME - News) with accounting fraud.
Big investors like Kohler say they are waiting for second-quarter earnings results before they take action.
"It's hard to be a buyer right now ahead of a lot of uncertainty," she said. "If the second quarter comes in well, a lot of investors will return, because you can't deny you have both the economy and corporate earnings coming back."
CLOSE TO THE BOTTOM?
Fund managers cannot help but do some buying. AmSouth's Calvert, for instance, said he is nibbling at media giant AOL Time Warner Inc. (NYSE:AOL - News), while Federated's Kohler has built up a bigger stake of retailer Gap Inc. (NYSE:GPS - News).
Those stocks have fallen so hard in recent years they now look compelling to some investors.
Someone who purchased $100,000 of AOL stock exactly three years ago -- and held on -- would be left holding an investment worth just $22,000 today. A $100,000 holding of Gap would have a price tag of $28,000.
"This is the time you should probably be looking at stocks as an opportunity, and you should look at those that have suffered the most damage," said Ned Riley, Chief Investment Strategist for State Street Global Advisors.
Riley argued that the broad decline in stock prices indicated a generalized "giving up" and that the market could be poised for a rebound.
"When the defensive strategy stops working, that's usually a sign that you're getting close to a bottom in the market," he said. "We're reaching that kind of period right now."
Stocks such as soft drink maker Coca-Cola Co. (NYSE:KO - News), Dell Computer Corp. (NasdaqNM:DELL - News) and financial services giant Citigroup Inc. (NYSE:C - News), are good bets, Riley said, because of their industry dominance.
But if some professionals are getting up their nerve to buy stocks again, individual investors are still feeling battered by recent years' losses.
"I try not to look," said Wendy Bruse, a 48-year-old legal secretary at a Manhattan law firm, standing beneath the giant Nasdaq sign in New York's Time Square as it flashed the index hitting a grim five-year low.
Bruse acknowledged rather sheepishly that she has held on to stakes of WorldCom and AOL Time Warner.
"We've taken a beating," she said. Bruse said she and her husband, a retired fireman, have watched the value of their stock and mutual fund holdings plunge from $500,000 at the market's peak in early 2000 to about $100,000 today.
Still nursing such losses, investors are having trouble committing to new purchases. Calvert of AmSouth in Birmingham, Alabama, has watched his fund decline more than 20 percent this year with big holdings of utilities, including power producer Mirant Corp. (NYSE:MIR - News).
He added that stocks historically are not dirt cheap in relations to earnings, a fact that has fueled some of the reluctance.
"I've been buying," he said, "But I'm hardly going out and buying big time." |
