Tech-Free Friday: Value, Same as It Ever Was

Ah, it's hard to even remember those heady days when the Nasdaq first tripped across the 4000 mark.

It was late December 1999, and everybody had pretty much figured out that the turning of the millennium would not be the end of world, tech stocks were king and buying anything with a price-to-earnings ratio below 50 seemed a surefire way to lose money.

We talked to a couple of value managers, the kind of guys who would get berated whenever they showed up on CNBC for keeping the faith and, as a result, missing out on the party. They did their doom-and-gloom thing, talked about how tech stocks were in a bubble and how it reminded them of oil stocks in the early '80s and so on. It all made a lot of sense -- we'd been running a series of stories under in a package called Mad Dash to Nasdaq that suggested that the market may have gotten a little, uh, euphoric -- but at the same time one wondered how the tide could ever turn. People talked a lot about how Joe Kennedy sold everything when his shoeshine boy gave him a stock tip, but we'd been having cabbies tell us about all the money they were making in the market for over a year and yet the Nasdaq had shown little respite.

In any case, we decided to try our hand at picking value stocks and set up a stock screen with the following criteria.

• The market cap had to be over $2 billion.
• A forward PE of 16 or less.
• A five-year projected earnings growth rate of 12% or more.
• A three-year historical growth rate of 10% or more.
• A price-to-cash flow ratio of 10 or less.

We came up with 21 stocks, discarded three of them that had recently had some pretty negative news and included a table in a story. And felt pretty dumb for it for the next couple of months because, as tech kept on romping higher, they did pretty lousy.

That all changed after Mar. 10, 2000 -- the top in the Nasdaq. Pretty soon, the value stocks started climbing back, and by the end of the year they were in positive territory. Since we published our list, an equal-weighted portfolio based on our value screen would have returned 9% (while the S&P 500 dropped 20%). Since Mar. 10, 2000, it would tacked on 49%.

Given that performance, we reckoned we'd have another go. We've run the screen again, but we've added one more criteria.

Some recent research out of Morgan Stanley Dean Witter suggests that when a company's current year earnings growth estimates are well below five-year growth estimates, it's a good idea not to own the stock. To prevent getting caught in this situation, we screened for companies whose earnings are expected to grow at least 10% this year.

All told, our screen returned 28 stocks. We pulled CenturyTel (CTL) because of some recent negative news. Here are the names we came up with.

So, should investors go out an blindly buy these stocks? Of course not. Just because stocks matching a particular set of criteria happened to do well at one point in the markets history does no mean that it's going to happen again. And in any case, buying stocks that one has screened for without doing any fundamental research is a mug's game. Rather, we offer this screen as a starting point for investors looking for stocks that the market may have under-appreciated. Good luck.

A Value Screen With Some History
Company Name	Mrkt Cap (MILS) 3/14/01	Forward P/E (4 Qtrs)	Projected Growth Rate	Historical Growth Rate	Price/Cashflow	ERN %CHG 01 vs. 00
Apartment Invst/Mgmt (AIV)	3,055	7.9	12%	18%	8.9	0.13
Apache (APA)	7,718	8.9	12%	119%	6.7	0.23
Arrow Electronics(ARW)	2,651	6.5	14%	26%	6.1	0.15
Amer Standard(ASD)	3,998	11.6	15%	17%	7.9	0.14
AVX(AVX)T	3,156	7.3	16%	90%	5.2	2.70
Burlington Resources(BR)	10,285	13.1	15%	39%	7.9	0.33
Darden Restaurants(DRI)	2,734	13.8	15%	34%	8.7	0.19
Devon Energy(DVN)	7,951	9.7	15%	67%	8.2	0.17
Fannie Mae(FNM)	75,201	15.2	14%	14%	6.7	0.15
Freddie Mac(FRE)	42,630	15.5	14%	21%	3.7	0.17
Greenpoint Financial(GPT)	3,081	9.5	12%	12%	7.7	0.37
Harrah's Entertainment(HET)	3,370	13.9	15%	12%	8.6	0.39
ITT Industries(ITT)	3,526	12.2	14%	13%	8.0	0.11
Kroger(KR)	18,963	15.1	16%	18%	9.4	0.15
Lennar(LEN)	2,153	7.8	15%	16%	7.7	0.25
Liz Claiborne(LIZ)	2,420	11.6	12%	10%	9.5	0.11
Loews(LTR)	10,871	8.2	16%	12%	7.6	0.17
Manpower(MAN)	2,290	12.3	15%	10%	9.9	0.10
Miller (Herman)(MLHR)	2,036	12.4	15%	12%	9.0	0.14
Noble Affiliates(NBL)	2,582	10.3	15%	177%	5.7	0.31
NCR(NCR)	4,197	16.0	18%	56%	7.2	0.18
Philips Electronics(PHG)	40,372	13.3	12%	19%	9.0	0.17
PMI Group(PMI)	2,437	8.1	12%	22%	8.9	0.16
Radian Group(RDN)	2,803	8.4	14%	27%	8.0	0.13
ISTAR Financial(SFI)	2,082	8.2	12%	32%	9.9	0.20
Unisys(UIS)	4,536	11.4	18%	19%	7.5	0.19
Union Pacific(UNP)	13,157	12.7	12%	130%	6.7	0.16
Source: ILX

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