5 safe sectors in a stormy market
In times like these, it can be wise to follow the contrarians. Here are some key stock groups you may want to consider as Wall Street awaits better times.
Tech as a contrarian play. Early in the bubble days, analysts at Rocker Partners were among the most vocal in criticizing a market gone mad. Now they are picking up some of the former tech high fliers at prices they think are cheap. Could they be too early, as with their skepticism of the market bubble? You bet.
But when the dust settles and business spending comes back, they expect decent gains from Powerwave Technologies (PWAV, news, msgs), which makes power amps used in telecom; Interwoven (IWOV, news, msgs), a software company, and Cree (CREE, news, msgs), in the semiconductor space, among others. "We are skeptical sorts, but we have been buying some of this stuff," says Marc Cohodes, of Rocker Partners. All three have clean balance sheets, a decent amount of cash and good management, says Cohodes.
Ben Nahum, a small-cap value manager at the New York-based David J Greene, has been buying shares in software companies Tibco Software (TIBX, news, msgs), E.piphany (EPNY, news, msgs) and Ascential Software (ASCL, news, msgs), as well as Keynote Systems (KEYN, news, msgs), a company that tests Web performance. "I think investing in companies like these can pay enormous dividends over the next 12 months," says Nahum.
Faraz Farzam, of the FMI Focus Fund (FMIOX), agrees some of the most compelling values are among software companies. "Historically, they trade at two times sales when they are broken," he says. Now, many are trading below that. "These stocks are trading at levels where you don’t need to get much spending for things to work." His fund has recently added J.D. Edwards (JDEC, news, msgs) and JDA Software Group (JDAS, news, msgs).
Mark Petrie, a portfolio manager of Hokanson Capital in Solana Beach, Calif., warns anyone fishing in these waters that many tech companies might be trading down so much because the market thinks they are going to disappear. "Only about 10% of the tech companies from the early 1990s still exist. Many tech companies can simply go away because of changes in trends."
And despite the recent market damage, stocks across the board still look overvalued because fundamentals have fallen even more than stock prices, says value manager Robert Rodriguez of First Pacific Advisors, which has beaten the indices so far this year. That makes cash a good option because stocks are going even lower later in the year, before they rebound on better economic news in 2003, he thinks.
"This is the grittiest speculative blow-off in the history of man," says Rodriguez. "Before this stock market malaise is over, you will have to have many, many months of liquidations by investors from mutual funds. It is going to take time. You have to be very patient."
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