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) - Get Report
Vanguard Windsor II), David Dreman (
(KDHAX) - Get Report
Scudder-Dreman High Return) and Michael Sandler (
(CFIMX) - Get Report
Clipper).
It's not great news for the legions of investors thinking fallen-angel tech stocks such as
Cisco Systems
(CSCO) - Get Report
, 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) - Get Report
-- 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)
and
Freddie Mac
(FRE)
.
"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) - Get Report
or
General Electric
(GE) - Get Report
."
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) - Get Report
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)
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.
Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
imcdonald@thestreet.com, but he cannot give specific financial advice.