It became fashionable over the winter to shun the Old Economy stocks that make up the Dow Jones Industrial Average and go after the hottest of the New Economy stocks, those that invest in the Internet.
So fashionable, in fact, that
Munder NetNet, a mutual fund that invests in Internet companies, was forced to close to new investors last month because money was pouring in faster than it could be put to work.
But suddenly in the last couple of weeks, the Old Economy stocks started rising like the other side of a seesaw, topped off last week when the
plummeted 350 points on Monday and another 74 on Tuesday after one of the most incredible one-day swings in history. As investors looked for a safe haven from the blowup in the New Economy, Old Economy stocks like
looked mighty good.
Is 'Old Vs. New' Oversimplified?
Technology will be back. What I'm wondering, though, is whether the Old Economy and New Economy labels oversimplify something that is more complex. These Old Economy companies aren't going to just roll over and die. I'll bet some of them might try to get a toehold in the New Economy. That's what I would do if I found myself riding a dinosaur. And in this column, I'm going to mention a few Old Economy stocks that I think are nimble enough to thrive in this New Economy and may be worth investigating for your portfolio.
Indeed, some of the Old Economy stocks have new interests already embedded in them. Others are noteworthy because they have not been fully recognized for their New Economy punch. The best of them get some New Economy gains, yet hold up when technology sags, too.
I think here of
, a stock I bought last fall because I think it's a strong company in a good business. The market overly discounts IBM because it doesn't understand the extent to which Big Blue has changed and become plugged into the Internet and the business-to-business sector.
Perhaps I have a different slant because I live in New York's Hudson Valley, which is IBM country. The Hudson Valley was hard hit in the early 1990s when IBM fell on difficult times. But Big Blue is back, and I think it's worth 20% to 40% more than it sells for, although, as I write this, a run-up has begun.
IBM held onto gains during the Nasdaq slump last week, too, and was one of the few stocks in my portfolio showing a gain, thanks partly to an announcement that it had developed a new process for making high-speed chips used in communication.
Another nice example of a transformed company is
, previously called Thompson Ramo Woolrich, which is an old-line defense contractor and maker of auto parts. TRW was an innovator that developed oddball products in defense work. It was the biggest maker of air bags, and it started a company that later became
RF Micro Devices
. At one time, it also owned the TRW that issues credit reports. In other words, this company has a lot of assets that are not apparent on its balance sheet.
But we're talking about the New Economy, and here TRW developed the technology for using gallium arsenide (GaAs). Instead of making chips from silicon, which is made from sand, some manufacturers now make them out of GaAs, which is lead-based. These chips are much better for use in wireless telecommunications, for example, and have helped RFMD become a hot stock. So here's an old dinosaur company that makes auto parts, but still may not be relegated to the scrap heap.
And what about
? Corning invented fiber-optic technology, although for years it was better known for the white casserole dishes with the blue flower on the side. Fiber optics were only a sidelight (at least as far as consumers were concerned). The fiber-optics business has now probably been fully priced. Corning also paid a steep price during the recent market meltdown, but unlike many New Economy stocks, Corning has real revenue with real profits.
Merging Old and New
Another one that's merged the old and new is
. Here's a company that transformed itself from a natural-gas pipeline business to a communications and trading firm. Enron buys and sells contracts to supply electricity, natural gas and BTUs, and builds plants to provide back-up power.
The U.S. has deregulated electricity so that you don't have to buy from your local provider anymore. Just as I can buy phone service from
, which is my local phone company, I can buy electricity from Enron rather than
Central Hudson Power
I bought Enron on the strength of its transformation last winter. I don't think the New Economy element has been recognized fully in the price yet, although it still took a tumble last week with the other techs. News stories suggested that was due to its New Economy coat. So the sword cuts both ways.
AT&T, on the other hand, is a stock that's often mentioned in the same breath with the New Economy, and I'm not sure why. It's not clear how AT&T will make money going forward. This company is vulnerable to a lot of other trends, including the collapse of long-distance rates. I wouldn't put my money there.
But what about
? Here is one tough company. When a Wal-Mart opened in my part of the country, it put everybody else out of business. I think we can count on this company to go online and make it work. The other day, I ordered a bunch of health-care products from
. The prices looked pretty good. So I compared them to Wal-Mart's. Wal-Mart is cheaper. I wouldn't bet against this category killer in the New Economy.
Playing the Trend
But how are we going to play this? All hell breaks loose at the smallest hint of a company's Internet connection. That's what happened last month after the rumor that
was mounting a hostile bid for General Motors.
The scenario, as reported in
The Wall Street Journal
, was that Murdoch's
would buy GM to get
satellite-television unit and then dump the automaker. GM shares jumped on the news, unlikely as it is that the automaker could be unloaded.
One of the most interesting parts of the story is that Hughes accounts for nearly 80% of the market value of GM, which means you get the car business at a discount. That makes that Old Economy company worth a look, just as the company is looking at innovative ways to purchase parts through an online consortium with rival carmakers like
Last week's rout brought some rationality back to stock prices. So let's not get on the dot-com seesaw again. I think we should be more careful to look under the rug for some old-fashioned value from companies that are making the transition from old to new.
Follow Mary's Start Investing Portfolio at MoneyCentral.
Mary Rowland is the Start Investing columnist for MSN MoneyCentral. At time of publication, she was long Enron and IBM, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She welcomes your feedback at
Rowland's Start Investing Portfolio