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To: Bill Harmond who wrote (22985)	10/26/1998 8:12:00 AM
From: Glenn D. Rudolph	Respond to of 164684

Stock Prices May Still Not Be Cheap ---------------------------------------------------------------------------- ---- A.P. INDEXES: TOP STORIES \| NEWS \| SPORTS \| BUSINESS \| TECHNOLOGY \| ENTERTAINMENT ---------------------------------------------------------------------------- ---- Filed at 2:08 p.m. EST By The Associated Press NEW YORK (AP) -- Buyers have crowded back into the stock market in recent days, but whether they are getting good bargains for their money remains a subject of much debate. Obviously, participants in the market's mid-October rally have been able to acquire shares for much less than the peak prices that stocks commanded at midyear, before the Great Correction of '98. Even at those lower levels, however, many analysts argue that stocks still aren't cheap. ''The market slide has already erased more than a quarter of the value of the average New York Stock Exchange stock -- somewhat more for small-cap issues, and somewhat less for the blue chips,'' says Norman Fosback in the investment letter Market Logic. ''What has not yet been accomplished, what is indeed still far from being accomplished, is to bring prices down to even reasonably valued, much less bargain levels,'' Fosback says. ''Conditions are improving, but, overall, this market needs more correction time.'' In simplest terms, analysts like Fosback contend, price-to-earnings ratios of stocks and other basic measures of valuation may have come down somewhat from their extreme highs, but are still well above what has historically been considered cheap territory. The P-E of the Dow Jones average of 30 industrials has lately hovered a bit above 20 to 1, and the multiple of Standard & Poor's 500-stock composite remains above 25. Both are down two or three points from where they stood in July. At the same time, though, another key variable in the stock market equation -- interest rates -- has moved strongly in what many optimists regard as the stock market's favor. L. Roy Papp, a money manager in Phoenix, notes that, with Treasury-bond yields around 5 percent, near their lowest levels in some 30 years, buyers must pay the equivalent of 20 times earnings for T-bonds, which unlike stocks offer no hope of growth. ''Stocks are selling at approximately the same P-E,'' Papp says. ''Therefore, it would appear that stocks are a much better value to purchase today.'' Of course, meaures like P-Es aren't uniform throughout the stock market, but vary widely from one stock to the next. Many bargain hunters are drawn especially to small stocks, which have suffered much more severely than big stocks at the hands of the bears. ''Small stocks have never been as deeply oversold and undervalued as now,'' declares L. Keith Mullins, emerging-growth analyst at the brokerage firm of Salomon Smith Barney Inc. By Mullins's reckoning, the stocks in the T. Rowe Price New Horizons Fund -- a common proxy used by many Wall Streeters to represent small stocks as a class -- recently traded at a price-earnings ratio 15 percent BELOW that of the S&P 500. The historical range of this indicator over the past 35-plus years has been between parity and twice the S&P 500 P-E, reflecting the fact that small stocks as a group tend to record faster earnings growth than big stocks over time. ''There are only two other occasions where the fund sold at any discount whatsoever to the P-E on the S&P 500 -- in 1977 and in 1990,'' Mullins says. ''Subsequent to both events, the New Horizons fund sharply beat the returns posted by the S&P 500 over a one-year, three-year and five-year horizon. ''Following the 1990 low, small growth stocks advanced 91 percent over the next 18 months, as strong earnings growth and expanding valuations combined to fuel a powerful rally.''