Now Might Be a Good Time to Pick Up
Cheap Stocks, Despite Market Disillusions
By KARA SCANNELL
Staff Reporter of THE WALL STREET JOURNAL
If the presidential election doesn't dominate the conversation over Thanksgiving
dinner, then surely the rumblings in the stock market will.
With nearly six weeks left in the year, investors are bracing for what could be
the first down year for major stock indexes since 1994. That follows several
years of double-digit returns, which left many investors unprepared for this
year's market sell-off after the Internet bubble burst and the economy began
slowing.
Still, even if your mutual fund or 401(k) retirement plan has had some painful
losses, you shouldn't give up on stocks. In fact, some investment pros think
now is a good time to be wading back into the market to pick up selected
stocks on the cheap.
"You want to buy stocks when the price is down, but the business is up,"
explains Alan Skrainka, chief market strategist at Edward Jones, a St.
Louis-based brokerage firm.
Waiting It Out
You'll need some patience, though. That's because with each passing week, the
chances for a traditional year-end rally look slimmer and slimmer. With so much
recent uncertainty over the election, corporate earnings and interest rates, many
investors have been simply sitting out of the market. And it may be awhile
before they're in a buying mood again.
As a result, many analysts think the market may not rebound until the first
quarter of next year -- if then.
"People are a lot more cautious this time," says Paul Diamond, a managing
director at Deutsche Banc Alex. Brown Asset Management. He says that
because investors aren't confident in the market rallies, they are taking profits
instead of putting more money into stocks.
The primary concern for investors is how much the economy has slowed and
how much it will cut into corporate profits. Earnings expectations, while still
historically strong, have been lowered recently. And that has caused investors
to re-evaluate just how much they are willing to pay for some stocks.
"It's very difficult to pin the tail on valuation, especially in technology," says
Scott Bleier, chief investment strategist at Prime Charter, a New York-based
brokerage firm. "Any investment manager would be very hard-pressed to make
serious investment decisions right now."
A Rocky Road
So stock prices have remained volatile, as this past week showed. Though the
tech-heavy Nasdaq Composite Index ended the week down just 0.1%, there
were two days in which it had swings of 4% or more. The Nasdaq also closed
below 3000 for the first time in a year and is now down 40% since its March
10 high.
The Dow Jones Industrial Average also had an up-and-down week. It ended
up 0.3% for the week but is still down 7.5% for the year and 9.3% since its
Jan. 14 high.
Unless there's some major catalyst, the market is likely to remain volatile -- yet
trade with a fairly narrow range -- for the rest of the year, analysts say. That
could be particularly true during this holiday week, when lighter-than-usual
trading amplifies price changes.
"In the short run the stock market is driven by the emotions of fear and greed,"
says Mr. Skrainka. "Right now it's a lot of fear, a lot of uncertainty, and
concern about the slowdown in the economy and corporate profits."
With tech stocks still reeling, Mr. Skrainka recommends looking at financial
services and health-care stocks. He likes American Express, Citigroup,
Johnson & Johnson, and Pfizer.
He also thinks some tech stocks are still worth buying. He recommends Dell
Computer, Nortel Networks and Nokia, whose stocks have taken hits but still
have good earnings growth.
"In the long run, the stock market is driven by fundamentals -- earnings and the
economy," he says.
The Timing Game
Investors, however, shouldn't worry about trying to buy stocks at their lowest
point. "The market can change directions very quickly and timing it is a losing
game," Mr. Skrainka says.
Mr. Diamond at Deutsche Banc says the sell-off in tech stocks may have been
overdone. We should "see people start to rotate out of the Procter & Gambles,
pharmaceuticals, oils, and go back to some of the techs," he says.
Mr. Diamond also likes Dell, which he says has twice the earnings growth of
Coca-Cola and is trading at a lower price relative to its earnings.
Barry Hyman, chief investment strategist at Weatherly Securities, a New
York-based brokerage firm, recommends Liberty Media and medical-products
makers Guidant and Medtronics.
He warns, however, that figuring out the right valuations for tech stocks could
take more time. So that will mean more volatility. As a result, he advises
investors to "tread lightly, don't buy everything at once, and take a more
fundamental approach" to stock picking.
And if you can't decide which tech stock to buy, he suggests buying shares of
the Nasdaq 100 Trust, which trades a basket of Nasdaq large-cap shares on
the American Stock Exchange.
Hoping for a Rebound
Some pros aren't ruling out a small rebound this year. Stocks could get a boost
in late December when the Federal Reserve holds its next policy meeting on
interest rates. If the Fed signals that inflation is under control, that could open
up the possibility of an interest-rate cut early next year.
Many investors were disappointed last week when the Fed decided to leave
rates unchanged, as expected, but continued to warn that inflation remained a
danger. The Fed has raised interest rates six times in the past year and a half to
keep inflation at bay. But the resulting slowdown in the economy has taken the
wind out of the stock market.
Another bullish sign for late this year: Many mutual funds are sitting on cash,
which they may decide to put back into the market to balance out their
portfolios, analysts say.
Still, whatever happens, investors should expect the ride to remain bumpy.
"The stock market does not go up and down," says Mr. Skrainka of Edward
Jones. "It goes up, down, and up again." |
