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Our expert talks about where stocks might be headed?and where opportunities may lie.
Our expert talks about where stocks might be headedand where opportunities may lie.
People ask me how long it'll be before the market comes out of its doldrums. The answer probably has less to do with sales growth and profits than with productivity.
During the 1990s, when the bull market was in full swing, productivity was very strong. Wages rose and corporate profits increased.
Today, however, many companies are reporting lower-than-anticipated earnings, and some are laying off workers. The "R" word is hanging in the air. Although the bulls believe that the technological advances of recent years will continue to bolster productivity and lift the economy, the bears aren't so impressed. They think productivity will remain sluggish for a while.
I lean closer to the bears' thinking. I've told many of my clients that they're wrong to assume that tech stocks are bargains right now. The typical price-earnings multiple for these companies is still well above that of the overall stock market. Technology isn't likely to outperform until the thundering herd of average investors shifts out of tech stocks and funds.
What does this mean for you as an investor? Unfortunately, the supercharged market of the 1990s isn't likely to return anytime soon. It could take the Nasdaq years to bounce back from the severe drop it has suffered, and it wouldn't surprise me to see a slew of stocks and mutual funds finish the year with negative returns.
When corporate profits begin to climb again, probably in 2002, the growth rate will most likely top out at 5 to 10 percent annually, which is in line with historical norms. Since many stocks remain overvaluedyes, even after the big declinesabout the best we can hope for is overall equity gains in the same 5 to 10 percent range.
Yet, there will always be opportunities for market-beating returns.
I think small and midsize companies will outperform large-caps over the next 18 months. They can react to a weaker economy faster than big companies, by trimming inventory, cutting prices, and quickly taking advantage of new situations. Corporate behemoths seem to require several focus groups and a dozen signatures before they do anything.
Two no-load mutual funds that invest in small and midsize companies are especially well positioned to thrive in the new market. Longleaf Partners Fund (800-445-9469), the older of the two, has earned a five-star rating from Morningstar for both its overall and 10-year performance. It returned an average of 18.5 percent annually over 10 years.* I won't go into detail on Longleaf, because I discussed it in a previous column ("Value stocks will rise again. Be ready!" July 24, 2000). Suffice it to say that I'm still as enthusiastic about this mid-cap value fund as I was a year ago.
I also like Delafield Fund (800-221-3079), whose 12-month return of 29.9 percent places it in the top 15 percent of its small-cap value category. Its $106 million asset base is small enough to allow managers Dennis Delafield and Vincent Sellecchia to build strong positions in micro-cap stocks. These tiny companies have made up 14 to 25 percent of the portfolio in recent years. However, it'll be more difficult for the managers to build meaningful positions in these companies if the fund's assets grow too quickly, which could happen after investors get wind of strong recent returns.
By now, you may have guessed that I also believe value stocksthose trading at a discount to their true worthwill continue to outperform growth stocks in the near term. That trend began last year, as evidenced by comparisons of various growth and value indexes' returns. For instance, the Russell 2000 Growth Index sank more than 22 percent in 2000, while the Russell 2000 Value Index rose almost 23 percent.
If, after a slowdown or mild recession, the economy moves into a moderate growth phase, the more cyclical, value-oriented companies will do best. However, should the ground beneath Wall Street continue to shake, it's better to see your stocks fall from the first floor, where value companies tend to reside, rather than from the penthouse, where many growth stocks temporarily rent space.
What are some good vehicles for investing in value stocks? In addition to the funds I've already mentioned, I'd recommend Oakmark Fund (800-625-6275) and Neuberger Berman Partners FundInvestor Class (800-877-9700).
Oakmark Fund, which invests in mid-caps, underwent a big, widely reported change last year when Robert Sanborn stepped down as manager after two consecutive disappointing years. His successor, Bill Nygren, built a tremendous record at another value fund, Oakmark Select.
In addition to Nygren's prowess as a stock picker, Oakmark Fund is attractive because of its current tax situation. According to Morningstar, as of Sept. 30 the fund had realized losses of $359 million in 2000, which it can use to offset gains. That means it could be a while before the fund has to make a taxable capital gains distribution to its shareholders.
I'm optimistic about Neuberger Berman Partners Fund for several reasons. First and foremost, Basu Mullick has replaced Robert Gendelman as lead portfolio manager. Under Gendelman, the fund underperformed its benchmark, the Russell Top 200 Value Index, in each of the past four years. I think Mullick, however, has the smarts to improve upon its respectablethough not spectacularlong-term average annualized returns.
A couple of other reasons to consider Neuberger Berman Partners Fund: Its annual expenses are significantly below the large-cap category average; and assets total about $2.3 billion, a very manageable amount for a fund that invests in big companies.
*Unless otherwise noted, all performance figures in this column are through April 20.
Lewis Altfest. Investment Consult: Funds worth buying in todays shaken market. Medical Economics 2001;10:33.