January 4, 2001
Heard on the Street
Time for Offense
Or More Defense?
By KEN BROWN and AARON LUCCHETTI
Staff Reporters of THE WALL STREET JOURNAL
Did the airbag deploy in time or is the economy still headed toward the
windshield?
That is the crucial question being asked by investors as they try to figure
out where to put their money as the economy careens uncertainly into the
new year.
Wednesday's rate cut by the Federal Reserve sent the market soaring, a
sign that a huge number of investors feel Fed Chairman Alan Greenspan is
on the way to saving the day. Those in this camp were off to the races,
scooping up stocks that they believe will rise faster than the overall market,
everything from tech shares such as Compaq to traditional fast-growing
retailers such as Home Depot and Gap.
But even as the Nasdaq Composite Index jumped, caution could still be
found on trading floors. Many investors say they intend to remain hunkered
in defensive stocks for the time being: health-care companies, food makers
and other industries that do just fine even as the economy sinks. They are
uncertain whether a hard landing will be averted -- and if it is, how soon
corporate America will shake off the damage and post the sort of renewed
growth that warrants being in more aggressive stocks.
"Over the course of the year, you're probably going to want to get more
aggressive rather than less," says Rick White, a co-manager of Neuberger
Berman Guardian Fund who has been buying more aggressive names
recently as they have been crushed by the market. His theory is that, in the
next few months, the extent of the economic damage will be clearer and
the remedies will at least be partially in place. Among the names he has
added are Compaq, Carnival, Gap, KLA-Tencor, Lear, AT&T and
WorldCom, all of which were up Wednesday.
But while he sees the rate cuts as a good first start in remedying the
market's problems, he is holding on to his defensive picks for now, he
adds.
The hard-landing crowd, who saw the Fed action as a move of
desperation -- a catch-up move that comes dangerously late -- includes
John Schneider, manager of Pimco Renaissance Fund and Pimco Value
Fund. "Obviously, he's fearful of something," Mr. Schneider says of Mr.
Greenspan. "He would have loved to have a soft landing. This action tells
you he believes he's not achieving that and he has to act faster. Personally,
I think we're going to have a recession."
Mr. Schneider's funds, which were up better than 30% last year, are full of
hospitals, health-maintenance organizations, insurers and food makers, all
of which are relatively immune to a slowing economy. "I've been defensive,
and I remain defensive," he says.
Alan Levensen, chief economist at T. Rowe Price, takes a
middle-of-the-road approach, saying that the Fed's action makes it a
mistake to go on the defensive right now, but it is probably too early to go
on a buying spree. Until Wednesday, he says, the stock market was facing
nothing but negatives: a slowing economy, weak earnings and a generally
bad attitude on the part of investors. Now, the market has a big positive to
hang on to, but that doesn't eliminate the negatives, he says: "The fact that
the Fed cut rates on Jan. 3 will not boost earnings on Jan. 4."
But for investors -- especially individual ones -- making any big portfolio
changes now would probably hurt more than help. For those who stayed in
tech shares as the Nasdaq tumbled in the past nine months, "you don't
want to run for the exits just when the Fed is buying. It's too late to sell if
you haven't. But if you've put yourself in a defensive posture, I don't think it
makes sense to rush to buy [aggressive stocks] before things clear up."
For portfolio managers, deciding how to play the economic slowdown and
any subsequent recovery could make or break their year, just as the
decision to buy or sell tech stocks in 1999 and 2000 created big winners
and losers. If the recession believers prove right, the defensive stocks they
own will continue to rise as investors search for safety, and everything else
will fall or stagnate. But if the economy holds firm, these fund managers
risk being left behind.
Consider research by Lehman Brothers strategist Jeffrey Applegate, who
analyzed the performance of industries in the Standard & Poor's
500-stock index during market corrections that occurred when there was
no recession. In the six months after the market bottom, tech stocks led the
way, rising 13% more than the market, followed by financial stocks. The
worst performers? Consumer staples and food stocks, the very names that
defensive fund managers have loaded up on.
Robert Turner, the aggressive manager of Turner Technology Fund and
Turner Top 20 Fund, is never one to get caught on the defensive. He was
boosting his tech holdings Wednesday before the Fed acted, in part
because he expected a rate cut and believes it will likely help technology
companies' growth rates.
Wednesday morning, Mr. Turner sold some shares of El Paso Energy to
make room for newly purchased, beaten-down tech and telecom stocks
such as Ciena, Cisco Systems, JDS Uniphase and Qualcomm. "I was
figuring they had strong fundamentals, and it seemed they couldn't go down
a lot more, and they'd be the first to go up in a rate cut," he says. Indeed,
all four stocks rallied more than 10% yesterday, with JDS Uniphase, for
instance, up a stunning 37%.
Lisa Rapuano, director of research for Legg Mason mutual funds, also has
been acting aggressively. In the past few months she sold safe-haven
names that had gone up, such as UnitedHealth Group, the HMO, and
financial-services concern Fannie Mae, and bought beaten-down stocks
including tech names Gateway Computer and Amazon.com. "And we've
been paying for it every day until" yesterday, she says.
In the long term, that strategy usually pays off regardless of the economy,
she maintains. "We didn't think we were wrong to be buying cheap and
selling high. There's a chance you will take a short-term
relative-performance penalty," she says. "I'll take a short-term performance
penalty to get good long-term returns every day."
"The issue is: Will the market look beyond the valley?" adds Tim Miller,
lead portfolio manager at Invesco Dynamics Fund, who bullishly bulked up
yesterday on shares of retailer Kohl's, as well as telecom companies
McLeodUSA and XO Communications, all big gainers.
"The economic call is tough, but the odds of [the Fed] preventing a hard
landing are pretty good, and we're acting" on that, he says. "Everyone
knows [that] first-quarter earnings ... will be disappointing for a lot of
companies. But with the correction, and with this rate cut, do we look
beyond that to the second half? That's the point of view we're taking."
Mr. Miller adds that he will be reducing his fund's cash position to less than
5% in the next week from about 7.5%, as a result of the Fed easing.
Bruce Bartlett, who manages the $1.7 billion-in-assets Oppenheimer
MidCap Fund, is taking a wait-and-see approach, with no immediate plans
to reduce the fund's high 33% cash level.
"This is a market environment in which valuation has become more
important, and the market is looking for companies where growth rates
aren't deteriorating," he says. "Historically, it has been" a good time to buy
stocks when the Fed starts cutting rates, but "growth is continuing to slow
at the moment. ... A cut in rates will have a short-term impact, but I don't
think we've seen an end to the difficulty," he says.
While confident about the stock market's prospects long term, he foresees
more pain in the next three months.
Write to Ken Brown at ken.brown@wsj.com and Aaron Lucchetti at
aaron.lucchetti@wsj.com |
