The Best Offense Is A Good Defense

Portfolio manager Randall R. Eley keys on value to help weather the market

Value investors often shine when the market is gloomy. Case in point: Randall R. Eley, a portfolio chief who manages over $1.5 billion for institutional clients such as the city of Detroit and Northrup Grumman for The Edgar Lomax Co. in Springfield, Virginia. At the onset of 2002–a time when Enron and a sluggish economy had stocks reeling–Eley was in flight. His fund of was up 8.4% as of March 8, compared to the 1.7% the Standard & Poor’s 500 managed during the same period.

Eley says value is the way to go in 2002. The money manager says low interest rates will keep investors piling into stocks in order to seek the highest returns possible by the end of the year. Beyond that, he thinks any gains in the market won’t last long, however. He reasons that the Federal Reserve is bound to get antsy over any sign of inflation this year, especially if oil prices rise. With that in mind, Eley thinks the Fed is bound to lift rates late in 2002, a move that will cause stocks’ momentum to sag and possibly trigger a bear market in 2003.

As a result, Eley has stocked his portfolio with companies cheap enough to avoid a big bruising. He’s also focused on healthy dividend yields to help provide income over the next year. Currently, Eley says he looks for a stock that trades at a price no more than 2.533 times its tangible book value or the worth of its factories, buildings, and other assets. Book value represents a rock-bottom price for the concrete things a company owns, and Eley sees that as a good value gauge. Another yardstick is a stock’s price-to-earnings-multiple (p/e). While the current market commands a grossly inflated p/e of 28 based on profits or earnings companies have reported in the previous year, Eley prefers stocks that fetch a p/e of no more than 17, although he has had to reach as high as the low-20s recently. Finally, Eley is keen on yield, a measure of a stock’s dividend divided by its stock price. Currently, Eley favors stocks with a dividend yield of 2.8% or so, quite a bit higher than the 1.2% the Standard & Poor’s 500 averaged in early March.

Two of Eley’s picks are oil giants: ChevronTexaco (NYSE: CVX) and ExxonMobil (NYSE: XOM). “Oil is a basic business that makes money, no matter what the economic environment,” he explains. It helps, too that both companies are trading at large discounts to the market’s average p/e and their dividend yields are both above 2%.

Eley also has his eye on Dow Chemical (NYSE: DOW), which has a yield of close to 4%. He feels the company should report solid earnings gains now that it has fully digested a 2001 merger with Union Carbide. Despite a downturn for automakers, Eley believes GM (NYSE: GM) will post surprisingly solid results this year, and with a minimum of $20 billion in cash reserves, “they’re able to weather any economic [slump],”

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