The Old vs. the New

Amidst the tech, the S&P 500 offers value plays

There has been much talk lately about the dichotomy of the stock market, the Old Economy vs. the New, turbocharged, tech-driven environment. The trading activity of the past few months bears out the split personality of the market, as investors have pumped billions into the technology and biotechnology sectors and virtually shunned the more conservative stocks and mutual funds.

This separation of sectors is most evident among the stocks that make up the Standard & Poor’s 500-stock index. Recently, John Rekenthaler of Morningstar, the Chicago-based fund-tracking service, wrote in his column on the concern’s Website that “in comparison with the overall stock market, the S&P 500 has become light on the pricey glamour stocks and heavy in the cheap, old-era industries like cyclicals, banks, tobacco. . . . Just like a value fund.”

In fact, others like Frank Savage, chairman of New York-based Alliance Capital Management International, indicated as early as the beginning of this year that the 18.2% rise in the S&P in 1999 “was due to its top 20 performing stocks, high-tech names such as the computer networking company Cisco Systems (Nasdaq: CSCO) and chip maker Applied Materials (Nasdaq: AMAT).”

Now, investors are more willing to pay a premium for the tech portion of the index: the average P/E is 40 times 2000 earnings, compared to 12.5 times for the Old Economy companies. The overall average for the S&P 500 is 25 times 2000 earnings. As early as 1998, the multiples of tech and nontech S&P stocks did not have such a divergence.

What does all this mean? You can buy a number of quality companies on the cheap. Compare the price performance and P/E of those stocks with such solid, nonsexy companies as Fannie Mae (NYSE:FNM), the quasi-government financial services firm, and AMR Corp. (NYSE:AMR), parent company of American Airlines. According to the research firm Baseline, for the 52-week period ending February 17, Cisco soared from $45 a share to $136 a share, with a P/E of 147, while Applied Materials rose from $48 a share to $189 a share, with a 1999 P/E of 75.7. Over the same period, the nontech companies Fannie Mae, which had a 1999 P/E of 14.3, and AMR, which had a 1999 P/E of 12.1, saw their stocks climb from $52 a share to $76.

Even though the returns may not be as mouthwatering as those in the tech sector, keep in mind that Old Economy stocks will benefit from aspects of the New Economy. For instance, analysts maintain that AMR has yet to fully gain a substantial premium for its plans to spin off Sabre Group Holdings, its airline reservation company that owns the top Internet travel agency. AMR continues to be lumped with other airline stocks, which have been grounded because of high oil prices.

In the coming months, investors will be able to profit from the value players in the S&P-and the index’s schizophrenia.

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