Still Searching For Bargains

Howard Morris' focus on value couldn't fend off the bear market

Conventional wisdom dictates that investors should buy low and sell high. As the co-chief investment officer for Lakefront Capital Investors in Dearborn, Michigan, Howard Morris earnestly sticks to that philosophy, employing a “play-it-safe” approach when choosing stocks for his pension fund clients. Morris uses the price-to-book ratio, a measure of a stock’s value in comparison to the worth of a company’s hard assets, to separate the winners from the losers. “We’re looking for companies that are trading at a 40% discount to what we feel they’re worth,” says Morris, 42, who manages some $80 million in assets.

Last year’s Private Screening netted some big-name players that tried to hold on under the weight of an uncertain economy and, at the time, an impending war with Iraq. To calculate the total return for this Private Screening, first we assessed all of the picks up until the time when AT&T, one of his picks, spun off its Broadband

unit to Comcast Corp. The stocks lost 11.29% from March 25, 2002, to Nov. 18, 2002. Next, we tracked the four remaining stocks on a 52-week basis from March 25, 2002, to March 24, 2003; they lost 12.62%. (See chart for individual performance of these stocks.) By comparison, the Standard & Poor’s 500 index fell 23.65%, and the Dow Jones industrial average fell 20.10% during the same period.

Powerhouse OfficeMax (NYSE: OMX), which owns and operates nearly 1,000 superstores in 49 states, was a favorite of Morris because it traded at a 40% discount to its book value. Although analyst estimates show OfficeMax, which is based in Shaker Heights, Ohio, has reduced charges by streamlining its operations, the company struggled, losing 16.72%, going from $5.74 to $4.78 since recommendation.

According to Morris, Xerox (NYSE: XRX) was poised for a turnaround. He felt strong that efforts to pay down debt and streamline operations would benefit the document management company based in Stamford, Connecticut. The jury is in: Xerox lost 16.16%, going from $10.46 to $8.77. Its revenues also fell 7% for the fiscal year ended Dec. 31, 2002.

IMS Health (NYSE: RX), a provider of information solutions to healthcare and pharmaceuticals industries based in Fairfield, Connecticut, lost 30.18%, going from

$21.34 to $14.90. Morris thought new management would provide a conservative approach to reporting financial figures and lead the company to growth.

Seattle, Washington-based Washington Mutual (NYSE: WM) was Morris’ lone winner among his picks. Its acquisition of New York’s Dime Bank helped boost its prospects, and as a result, it gained 12.57%, going from $31.59 to $35.56. The company, which provides consumer, commercial, and mortgage banking, also benefited from the strong market for mortgage refinances.

And finally, AT&T (NYSE: T), based in Bedminster, New Jersey, which Morris called an undervalued player in telecommunications, fell 10.63% going from $64.90 to $58 after selling AT&T Broadband to Comcast Corp. AT&T shareowners received .3235 of a share of Comcast Class A stock for each share of AT&T they owned at market close on Nov. 15, 2002.

ACROSS THE WEB