Conference Notebook, Part II: No Room at the Value Fund Inn for Tech

CHICAGO -- Tech stocks might be a lot cheaper than they were a year ago, but that doesn't make them values.

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No Room at the Value Fund Inn for Tech

That's the verdict from three veteran value-fund skippers speaking at the 2001 Morningstar Investment Conference here: James Barrow ((VWNFX Quote)Vanguard Windsor II), David Dreman ((KDHAX Quote)Scudder-Dreman High Return) and Michael Sandler ((CFIMX Quote)Clipper).

It's not great news for the legions of investors thinking fallen-angel tech stocks such as Cisco Systems(CSCO Quote), down 71% over the past year, are a bargain.

There's reason to listen to these folks. Dreman's and Sandler's funds beat the S&P 500 and at least 90% of their peers over the past one-, three-, five- and 10-year periods. Barrow's fund, a giant with some $27 billion in its coffers, beats its peers over those stretches, too.

"I haven't done anything with [tech stocks]," said Barrow.

Each bargain-hunter said short product cycles make it tough to forecast tech shops' earnings over the next few years and, in turn, to determine if they're a value.

"We've looked at quite a few of them," said Sandler, who won the 2000 Morningstar Manager of the Year award with his co-managers. "The fact that tech stock prices have fallen sharply doesn't mean they're cheap. It just means a lot of people lost a lot of money on them." He added: "They're not a value right now."

Predictably, all three were more excited about more traditional value havens like Philip Morris(MO Quote) -- up 78% over the past year despite the perennial litigation cloud -- and some financial-services stocks.

"We're pretty high on [Philip Morris] and over time we see the stock doubling. But it's not for the faint of heart," said Dreman.

His reason: Pricing power. Dreman calculates the cost of the last tobacco class-action settlement at about 20 cents per pack, noting that cigarette prices have risen more than that.

He's not alone in his affection.

"Just about every global consumer company has had to revise [their earnings] down, but not Philip Morris," said Sandler, whose fund has held shares in the tobacco shop for some 20 years. He sees the stock as attractive below $50; in late trading Wednesday it hovered around $47.

Each manager's fund had between a quarter and 35% of its money in financial stocks. The faves across the board: Mortgage lenders Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote).

"Fannie Mae has had 15% or better earnings growth for years and trades at 18 times earnings," said Dreman. "You're buying predictable growth at a third of the [price-to-earnings multiple] of stocks like Merck(MRK Quote) or General Electric(GE Quote)."

Though these three pros aren't thrilled with fallen growth stocks, they aren't necessarily finding bountiful value opportunities either, now that the average financial-services fund is up more than 27% over the past year and the average value fund is in the black, too, according to Morningstar.

"We're having trouble finding opportunities for our portfolio," said Sandler. His fund's cash stake is currently north of 30%, compared with 5.5% for the average stock fund, according to the Investment Company Institute, the fund industry's largest trade group.

Bleak Outlook

Just a day after bond guru Bill Gross predicted stock and bond market returns of just 5% in coming years, another bondnik threw some water on stock investors' remaining optimism.

While most stock-fund managers, including value maven Bill Miller, see the current interest-rate cuts spurring economic growth, as well as corporate profits and share prices over the next few quarters, Bob Rodriguez disagrees.

"We think expectations for economic growth and [corporate] profitability are too high not just for 2001 but also for 2002," said the manager of the (FPNIX Quote)FPA New Income fund.

Rodriguez, who manages both stock and bond portfolios, won Morningstar's Manager of the Year Award in 1994. His fund beats at least 85% of its peers over the past one-, three-, five- and 10-year periods.

Look Who's Talking

And in the already overstuffed "What a Difference a Year Makes" bin, add this anecdote. When Janus' stock funds rode fat tech bets to an average gain of more than 80% in 1999, the firm's close-lipped managers kept to themselves. Now that they've cratered, they're not such wallflowers.

This year John Schreiber, manager of the (JTWOX Quote)Janus 2 fund, and Jason Yee, set to manage the Janus Global Value fund when it launches on Friday, came to the Morningstar conference. They're not here to speak on any panels, but rather to talk with advisers who might want to know when or how they plan to get back on track.