Guess Who's Coming to Value Funds?

Growth managers have tossed out a slew of cratering tech stocks this year. Value managers are quietly scoffing up those castaways.

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Value funds are bargain hunters. Traditionally they focus on cheap stocks of companies with consistent, if unremarkable, growth. Growth funds, on the other hand, typically focus on the expensive stocks of companies growing earnings faster than their peers and the overall market. Consequently, the average big-cap value fund has just 13.3% of its money invested in tech stocks, while the average big-cap growth fund has a 43.3% stake, according to Morningstar. Tech stocks make up some 27% of the S&P 500, the benchmark for many large-cap funds.

But the times they are a changin'. With the tech-laden Nasdaq Composite Index down more than 45% since its March 10 peak, value managers have been buying fallen tech and telecom angels. For fund investors, the upshot is that maturing tech stocks like Microsoft(MSFT) and IBM (IBM) might become staples of usually tech-light value funds. And the bottom line for stock investors is that their sagging tech picks might be bargains at today's prices. After all, value funds' buy-and-hold approach is probably closer to many investors' stock-picking styles than gunslinging growth funds.

Big Values? Between the start of the year and this month, the percentage of big-cap value funds owning tech/telecom shops' shares has been on the rise.
Stock	Nov. 1	Jan. 1	YTD Return
IBM(IBM)	61.3%	57.3%	-8.3%
Hewlett-Packard(HWP)	46.3	41.6	-19.3
Compaq(CPQ)	43.6	25.1	-8.1
Intel (INTC)	42.3	35.1	6.9
Microsoft(MSFT)	30.7	12.2	-32.2
Lucent Technologies(LU)	27.3	12.9	-76.1
Cisco Systems(CSCO)	23.0	11.5	-4.3
Nortel Networks(NT)	18.7	13.3	-22.2
Dell(DELL)	16.6	6.8	-52.1
AT&T Liberty Media Group(LMG.A)	15.0	7.2	-47.0
Qualcomm(QCOM)	7.7	3.9	-49.2
Source: Morningstar. Holdings as of most recent portfolio reports through Oct. 31. Performance through Nov. 27.

In many ways what we're seeing is reversal of the Old Tech vs. New Tech battle raging in tech funds and growth funds. Old Tech shops rely on the maturing PC market for much of their earnings growth, while the New Tech crowd depend on the growth of the Internet for the lion's share of their earnings growth.

Across the board growth fund managers have been dumping Old Tech in favor of New Tech. All this selling, no doubt bolstered by fund managers tax-loss selling this year, has driven down Old Tech stocks. Value managers have been buying.

This is illustrated by value managers rising appetite for software titan Microsoft, chip shop Intel(INTC) and PC makers like Hewlett-Packard(HWP), IBM, Compaq(CPQ) and Dell(DELL). On average, these companies have a 27.3 price-to-earnings multiple, not too much higher than the S&P 500's 23.6, according to Baseline. All but Intel are down for the year.

"A lot of these stocks they're buying are PC-related, and that makes sense. The business risk is still there, but the price risk is diminished with these stocks, so more value funds are willing to look at them," says Pat Dorsey, who heads stock analysis at Morningstar. "It's a comment on where tech is now vs. where it was years ago. Now it's broad enough that some of these companies are mature enough for value funds to own them."

And surprisingly it looks like tumbling New Tech stocks have slipped on to value managers radar screens too -- even those that are still pricey. The percentage of value funds owning networkers like Lucent Technologies(LU) and Cisco Systems(CSCO), for instance, has doubled from Jan. 1 to Nov. 1, according to Morningstar.

This is understandable in Lucent's case. The bumbling shop has repeatedly missed product cycles and analysts earnings estimates -- recently having to make an embarrassing restatement -- and is in the midst of a management shuffle. So far this year the percentage of large-cap growth funds owning Lucent has dropped from 65% to 35%, while the percentage of value funds owning the stock has more than doubled, standing at 27% on Oct. 31.

"Value funds buying Lucent is probably a shot in the arm if you're a long-suffering shareholder," says Dorsey.

Given its depressed stock price -- it's current P/E multiple is 15.9 -- it makes sense that some value folks might see it as an intriguing if dicey turnaround situation. (TAGRX)John Hancock Large Cap Value fund manager Tim Quinlisk told us why he likes the battered stock in a recent 10 Questions interview and more recently value specialist Bill Nygren told us why he passed on Lucent.

But a value fund owning Cisco is harder to figure. The bellwether stock, down just 4.3% this year, is currently trading at an 86.4 P/E multiple. Big-cap value funds like (VQNPX)Vanguard Growth & Income, (VFQAX)Chase Vista Focus, (DREVX)Dreyfus fund and (NEFQX)Nvest Growth & Income had more than 3.5% of their assets invested in Cisco, according to their most recent portfolio reports.

The percentage of value fund managers owning shares of Nortel Networks(NT) and media shop AT&T Liberty Media Group(LMG.A) have also risen this year. The two stocks, both well down for the year, boast P/Es of 53.4 and a whopping 217, respectively, according to Baseline.

Even pricey and beat-up wireless shop Qualcomm(QCOM) -- last year's undisputed darling with a 2,619% gain -- is winning some value fund managers' hearts. The stock, down a bit more than 49% since Jan. 1, is now in more than 7% of large-cap value funds despite its 81 P/E multiple.

This isn't to say that value funds are indiscriminately buying sagging tech or telecom stocks. Consider that both value and growth managers are dumping AT&T, which has lost more than half its value this year and trades at a modest 9.1 P/E.

Off the Hook Both growth and value managers have soured on AT&T's prospects. The stock is down nearly 55% this year.
Large-Cap Value Funds Owning Shares
	Oct. 31	Jan. 1
AT&T(T)	21.8%	58.4%
Large-Cap Growth Funds Owning Shares
AT&T(T)	7.4%	29.8%
Source: Morningstar. Holdings as of most recent portfolio reports through Oct. 31. Performance through Nov. 27.

When a growth manager sells a stock it usually means he or she doesn't see growth in the next few quarters, and when a value manager dumps a stock it often means he or she doesn't see good returns over the long term. No matter how you slice it, the pros aren't liking Ma Bell.

The Junk Pile

In the fund world, all that glitters is actually pretty lousy. You probably know gold funds have been a loser's game, but you might not grasp exactly how bad things have been. Over the past 10 years, the precious metals funds lost 6.3% each year on average, according to Morningstar. A $10,000 investment in the average gold fund 10 years ago would be worth $4,528 through Oct. 31, according to Morningstar. The same investment in the Vanguard 500 fund, which tracks the S&P 500, would've grown to more than $50,000.

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