Learning How to Select the Right Stocks
Amid Poor Profits and a Weak Economy
By E.S. Browning
June 30, 2001
Staff Reporter of The Wall Street Journal
<<Wall Street calls it "looking across the valley."
It isn't for the faint of heart.
The thinking goes like this: Corporate profits and economic performance are going to be rotten for some months to come. It could be the end of the year, or even sometime next year, before profits start looking good again.
But stocks move based on expectations, rather than on actual results. Aggressive investors jump in early, before things improve, in hopes of getting stocks when they are still cheap.
"The time to buy them, of course, is when they are beaten up, when things don't look pretty," notes Timothy Ghriskey, portfolio manager at New York mutual-fund firm Dreyfus.
The problem, as Mr. Ghriskey and others are quick to add, is that stocks could easily fall again in this uncertain economy. With more bad news looking almost inevitable, the market will have a rocky summer. So anyone buying stocks now had better be prepared to weather the storms.
"Any time you have companies prereleasing earnings negatively as dramatically as some of them have been, you are going to have stock weakness," Mr. Ghriskey acknowledges. "It means that stocks will suffer again even though it is a well-anticipated event."
Nervous Behavior
Last week's market reflected the uncertain outlook. After falling early in the week on profit warnings, stocks rebounded after the Federal Reserve's latest interest-rate cut and an appeals court's rejection of the Microsoft breakup. Stocks ended the week mixed.
The Dow Jones Industrial Average fell 1%, leaving it up 12% since its recent low on March 22 but down 2.6% for the year. The Nasdaq Composite Index jumped 6.2% for the week, leaving it up 32% since its low on April 4 but down 13% for the year.
So how to avoid getting clobbered? The most conservative investors simply are holding their money in cash, waiting for a sign that earnings truly are improving. Perhaps they will miss out on the early gains, but they also will miss any early losses.
But investment pros already have begun some selective buying, gradually picking up their favorite stocks when prices turn down.
"I think it is almost impossible to call the bottom of the market," says Dennis Ferro, chief investment officer at Evergreen Funds, First Union's mutual-fund unit. "But I think that based on expectations of somewhat higher earnings 12 months out, it does make sense to buy in here and to continue to be an acquirer of equities over the next few months."
Still, Mr. Ferro wouldn't chase stocks as they rise; he would buy stocks when they look cheap. "It is not necessarily a period of time in which you want to be an aggressive investor, but in which you can be a patient and consistent investor," he says.
Bob Bissell, president of Wells Capital Management, Wells Fargo's mutual-fund arm, says that "a good investor will use this as a time to buy things at pretty attractive prices." But the key to that is to pick attractive prices.
Mr. Bissell, for example, is still more bullish on bonds than on stocks. His firm is forecasting that the Fed will continue to cut interest rates in order to stimulate the economy, and Mr. Bissell thinks that will help bonds more than stocks.
He expects to shift some money out of bonds and into stocks between now and the end of the year. When and if he, and other professionals, do make that kind of shift, that alone will help move stocks ahead.
Stepping Lightly
In the meantime, pros recommend a strategy of cautious accumulation, rather than a sudden plunge into the market. Some of the biggest recent winners have been onetime highfliers, such as eBay . But some of the biggest recent losers also have been former highfliers, such as Corning .
E. Matthew Brown, head of stock management at Wilmington Trust, prefers defensive stocks that he thinks will hold up in the current economy. He likes health-care names such as Novartis and Medtronic , financial companies such as Freddie Mac , and Comcast , a cable-television company.
John Meara, president of Argent Capital Management in St. Louis, thinks investors will be looking ahead to a stronger economy next year. He likes Fannie Mae and some health-care stocks, as well as Citigroup , Tyco , Ingersoll-Rand and Illinois Tool Works . He is avoiding most tech stocks.
"We aren't expecting the market to be up 50% over the next six months," Mr. Meara says. "But there are a lot of reasons to think that it is going to stabilize here and that stocks are going to act pretty well over the next six to 12 months."
Mr. Ghriskey at Dreyfus believes that "when we do see that economic rebound, you should see tech earnings rebound fairly sharply."
He isn't going after Internet stocks, but he has bought the stocks of some bedrock tech names, whose prices still are off their highs and whose basic business is strong. Among them: Microsoft , Dell Computer and International Business Machines .
Edgar Peters, chief investment strategist at Boston money-management group PanAgora Asset Management, takes an entirely different view. The best performers aren't going to be any of the large, well-known stocks, he says. Instead, he is focusing on small and midsize stocks, which he thinks will do better than their larger siblings.
"The good news," he says, "is that there is time. It's not like you have to buy them now because they are going to go up next week. A really confirming rally isn't going to happen until the fourth quarter of this year or the first quarter of next year."
Adds Mr. Ferro of Evergreen, "Stocks are going through a bottoming process and I think it makes sense to try to buy through the bottoming process." But "I would agree that we probably aren't going to get a meaningful lift in stocks until later in the year when we will get a higher confidence level out of earnings.">> |
