Finding value in a sky-high market

Bargains can be found in out-of-favor industries

When it comes to investing, one of the rules of thumb is to buy low and sell high. Then why have so many flocked to growth companies with astronomically high P/Es? “Several factors played a role,” says Russ Kinnel of Morningstar, the Chicago-based mutual fund tracking company. “Interest rates fell in 1998. Mathematically, that makes future earnings more valuable, which benefits growth stocks. At the same time, a worldwide economic slowdown depressed commodity prices, which hurt the prices of the energy, paper, aluminum and steel companies held by many value funds.”

From 1992 to 1997, value funds held their own with growth funds, because the former include bank stocks, which were top performers. In 1998, though, bank stocks stumbled as fears of foreign loan defaults mounted. Market leadership passed to tech stocks.

Roger DeBard, who manages the Hotchkis and Wiley Balanced Fund, believes that value will triumph in the long haul. “While the average stock is priced at 28.1 times projected 1999 earnings, we’re 16.1 times earnings,” he says.

Even though you are buying stocks relatively cheap, the pickings are usually among out-of-favor industries or small cap companies with less liquidity. Investors then must be able to hold on to a stock that may not realize a healthy return until a much later date.

At the top of one value manager’s list: Electro Scientific Industries (Nasdaq: ESIO) and Silicon Valley Group (Nasdaq: SVGI). He’s also high on such real estate firms as Tejon Ranch (AMEX: TRC) and Alexander & Baldwin (Nasdaq: ALEX).

DeBard, on the other hand, likes such commodity plays as copper producer Phelps Dodge (NYSE: PD). He’s also bullish on aerospace companies (“increased defense spending is likely”) and utilities (“yields are attractive, as well as prospective consolidation within the industry”), recommending Northrop Grumman (NYSE: NOC) and Texas Utilities (NYSE: TXU).

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