Nortel, JDS Uniphase Become Value Stocks: Call of
Day (Correct)
By Deborah Stern
Nortel, JDS Uniphase Become Value Stocks: Call of Day (Correct)
(Corrects name of company to Nortel Networks Corp. from Nortel Networks
Inc. in first paragraph. This story originally ran on Dec. 26.)
New York, Dec. 26 (Bloomberg) -- JDS Uniphase Corp. and Nortel Networks
Corp., the highflying communications-equipment growth stocks of 1999, have
fallen so far this year that they're now considered value stocks, analysts say.
Standard & Poor's will shift the companies after exchanges close Wednesday
from its index of large growth stocks to the benchmark that tracks value
shares, according to analysts at Merrill Lynch & Co. and Prudential Securities
Inc.
The shift means investors whose performance is measured against the
S&P/Barra Value Index will have an incentive to buy JDS Uniphase and Nortel
to ensure they keep up with the index, analysts said.
``The entire value universe is changing,'' said Diane Garnick, a derivatives
strategist at Merrill Lynch & Co. who tracks index changes. The value index
``acts like the invisible hand forcing managers to buy stocks.''
Each June and December, S&P ranks the companies in the S&P 500 Index
by dividing their stock prices by book value, or corporate net worth. The
stocks with lower price-book ratios go into S&P/Barra Value while those with
higher price-book ratios are put in the S&P/Barra Growth Index.
S&P attempts to get half the total market value of the S&P 500 into each
index. According to Merrill Lynch data, 378 companies will fall into the value
range, while 122 will be in the growth category.
Giving a Look
As technology shares have slumped this year, JDS Uniphase, Nortel and
other traditional growth companies find themselves in the value camp,
analysts said.
A value manager who never previously would have considered JDS Uniphase
or Nortel -- which still sell for 50 and 42 times this year's expected earnings,
respectively -- now has to give some thought to the stocks.
Nortel will make up about 1.7 percent of the reconstituted value index, while
JDS Uniphase will be about 0.8 percent of the benchmark.
``If it goes up and we don't own it, we lose,'' said Michael Santelli, who helps
oversee $1.3 billion in value stocks at National City Investment Management
Co. in Cleveland and is benchmarked against the S&P value index. ``You have
to look at it, at least, because it's in your index.''
Still, Santelli said he probably won't buy shares of the new index members
immediately. ``These guys have been getting hit for six to nine months now,
and our economic forecast is for a little more weakness ahead,'' he said. ``The
catalyst isn't there'' for many of those stocks to go higher.
Santelli's betting that his diversified portfolio will guard against any large
losses, even if he doesn't own all the new index members. ``We get an active
management fee to take those risks and win more times than lose,'' he said.
Moving Over
Other technology stocks making the move to the value index include Texas
Instruments Inc., Lucent Technologies Inc. and Applied Materials Inc.,
according to data from Merrill Lynch.
The S&P Communications-Equipment Index has plunged 54 percent from its
March peak and now trades at 68 times recent earnings, down from its peak
of 128 in September.
JDS Uniphase has fallen 48 percent this year after surging more than eightfold
in 1999 and posting the third-largest advance in the S&P 500. Nortel has lost
38 percent in 2000, after almost tripling last year.
The rebalanced indexes won't be official until tomorrow. Still, Garnick at Merrill
Lynch said technology shares are likely to make up 12.1 percent of the value
index, up from 5.4 percent previously, while the industry's representation in the
growth index will drop to 32.8 percent from 41.4 percent.
Value fund managers may be surprised to find themselves competing against
stocks such as Qwest Communications International Inc. and Micron
Technology Inc.
The companies likely to move to the growth index from value are Procter &
Gamble Co., American Express Co. and Kimberly-Clark Corp., Garnick said.
Financials as Growth Stocks?
``With the FOMC easing rates and financial companies doing phenomenally
well'' through November, ``lots of the financial companies are moving over to
the growth index,'' Garnick said. Financial stocks typically have low
price-earnings and price-book ratios because they're subject to the rise and
fall of interest rates.
State Street Corp., Northern Trust Corp. and American International Group Inc.
are three companies that will jump to the Growth Index, she said. State Street
shares have climbed 65 percent this year, and the company's price-book ratio
was 6.28 at the end of September.
Northern Trust shares have risen 54 percent year to date, and the stock trades
at 8.1 times book value, as of the end of the third quarter. American
International Group's stock has gained 34 percent year to date, and the stock
trades at 6.1 times book value. By comparison, JDS Uniphase trades at 1.67
times book value, and Nortel trades at 4.18 times.
Financial stocks have climbed this year with falling interest rates. Lower rates
are good for financial-services companies, because it boosts demand for loans
and other services, and it lifts the value of the bonds banks hold in their
portfolios.
Growth vs. Value
David Blitzer, chief economist at Standard & Poor's, said JDS Uniphase and
Nortel's move to the value index doesn't change the companies' fundamental
characteristics, though it may alter the way investors view the companies.
``The two terms growth and value may be the world's worst terms -- no one
wants to buy a stock that won't grow, and no one wants to buy a stock that
has no value,'' he said. ``I don't know who started that, but we're stuck with it.''
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