GuruVision Returns

Welcome to the return edition of GuruVision, our regular update of the most recent filings by Wall Street's top strategists, whose message this week seems to be: "It's always darkest before the dawn ... which is approaching. Really it is. We swear."

After another rough session Monday -- while the Dow Industrials managed to rise 0.5%, the Nasdaq Composite fell 2.8% -- it must be getting incredibly gloomy out there for some investors. One trader today even reported hearing the specter of margin calls rattling some chains in the retail arm of his firm's shop, which shall remain nameless.

The same source reported many of his biggest institutional clients -- accounts of more than $100 million -- are basically giving him the cold shoulder these days. That is, they don't want to hear about new ideas or even how cheap the "old" ideas have become: They're content to sit with heavy cash positions and wait until targeted stocks reach even lower levels.

If those tidbits of (admittedly) very circumstantial evidence prove prescient, then the darkest hours yet lie ahead. Still, at least two of the Street's top gurus feel otherwise.

"If the peak in oil prices is behind us; if the worst is over for the euro; if most of the bad earnings news is out -- then the U.S. stock market could very well have a decent fourth quarter," writes Jeffrey Applegate, chief investment strategist at Lehman Brothers. "We think that it will."

Applegate's longstanding bullishness on the market in general and tech in particular has not wavered. As a result, his performance has "suffered accordingly," he concedes, offering a flippant "good riddance" to the third quarter.

Despite the self-flagellation, Applegate has outperformed (albeit not by the mind-blowing degree as in recent years). For the year through Friday's close, his portfolio is up 7.6% vs. a decline of 2.2% for the S&P 500. In the third quarter, Applegate's portfolio rose 4.6% vs. a decline of 1.2% for the index.

The strategist maintains a long-held overweight position in technology, currently at 47% of the portfolio vs. 31% in the S&P 500. He's also overweight capital goods (11% vs. 8%), communication services (9% vs. 6%), energy (9% vs. 6%) and utilities (5% vs. 3%). Applegate is underweight basic materials (0% vs. 2%), consumer cyclicals (2% vs. 7%), consumer staples (1% vs. 10%), financials (8% vs. 15%), healthcare (8% vs. 11%), and transportation (0% vs. 1%).

Thomas Galvin, chief investment officer at Donaldson Lufkin & Jenrette, has a view similar to Applegate's -- at least in terms of his overall market outlook.

In addition to the big three macro factors cited by Applegate as a rationale for a rally, Galvin notes the fourth quarter has been the best period for stocks since 1995, with average gains of 10% for the S&P 500 and 15% for the Nasdaq.

"In essence, the January effect has actually been gamed into a fourth-quarter rally," he wrote. "Late summer paper cuts turn into autumnal tricks and treats."

Mixed metaphors notwithstanding, Galvin concedes a few key events must occur before a rally can "arise from the ashes."

First, there must be a reversal in consensus among market players regarding the Federal Reserve's next move, he wrote, reiterating a forecast the Fed will begin easing interest rates by early 2001. The strategist cited a recent poll by Reuters, which reported 59% of government bond dealers expect the Fed's next move will be another rate hike, although the overwhelming consensus is the Fed will leave rates unchanged at Tuesday's gathering.

In addition to an about-face vis a vis the Fed, the strategist said investors need an attitude adjustment regarding earnings and valuations, particularly regarding technology stocks.

Following Monday's dip, the S&P 500 now trades at a price-to-earnings ratio of 24.6 times, based on Galvin's expectation of profits of $58.50 for 2000. The P/E drops to 21.1, based on his 2001 projected earnings of $68.

Similarly, technology stocks are now trading at about 47 times 2001 IBES International earning estimates for 2001 vs. 70 times for 2000, he observed, calling the 2001 multiple "a more compelling 30% premium to anticipated growth rates."

In addition to an overall bullishness on tech, Galvin foresees potential rebounds in the coming months for names in the S&P 500 most off their 52-week highs. Sort of a "Dogs of the S&P 500" portfolio. As of this morning, the S&P 500's top five bow-wows of 2000 are Owens Corning (OWC), Citrix Systems (CTXS), Compuware (CPWR), BMC Software (BMCS), and Novell (NOVL). (It couldn't be determined as of this writing whether DLJ has done underwriting for the aforementioned.)

Bullish views from the likes of Applegate and Galvin shouldn't surprise anyone familiar with their work. What's interesting is these longstanding growth advocates are now starting to talk about the relative values represented by technology stocks.

But "relative" is the operative word. For all the talk about bargains in the tech sector, investors still seem unable -- or unwilling -- to take the bait; Monday's session being the latest example.

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