There would be a good deal of poetic justice in the notion that this week's rally in the
Dow Jones Industrial Average
represented a resurgence of fundamentals. Value investors have suffered long enough at the hands of the cruel momentum crowd. Surely it's time for a little comeuppance.
But traders don't care much for poetry. The general feeling on desks around Wall Street is that this week's action had more to do with momentum than with valuations.
"They don't care," says Sam Ginzburg, managing director of equity trading at
, of most traders' attitudes toward fundamentals. "It's whatever's going to make them money. It's just people going from one sector to another. It's Atlantic City. The craps table's full, so now you're gonna go play some blackjack."
Value managers usually cringe at that sort of statement. The nomadic pursuit of performance has forced a lot of money out of their funds during the
incredible run-up. But the reanimation of a wide range of beaten-down stocks has made for some strange bedfellows this week.
"We're buying a lot of stuff," says Marty Whitman, a wily veteran who manages $1.45 billion for the
Third Avenue value fund. "Things are pretty fantastic."
Right now, Whitman's hot on clinical research organizations, which perform research on contract for drug and biotechnology firms. "All these stocks are down from 40 to 10," he says. "We're maybe paying 8 to 12 times current earnings. There ain't no way biotech will realize its potential unless these things undergo testing and, unlike the big pharmaceutical companies, biotechs don't have the ability to do the testing on their own. So they hire these companies."
Better Be Nimble. Better Be Quick!
Value fund managers aren't an especially nimble bunch. But Whitman is more mobile than most. He moved into semiconductors when the group was extremely cheap in the fall of 1998, and technology made up about 38.6% of his holdings at the end of last year, according to
Still, he hasn't been chasing any sectors recently: "We're building on our existing positions because it's so cheap. You don't have to spend time looking for new stuff."
Robert Sanborn, manager of the $2.7 billion
Oakmark Fund, claims he's unmoved by this week's events, and remains as selective as ever.
"Our philosophy never changes," he says. "We look for stocks trading at 60% of their underlying value, or what a rational businessperson would pay to own the business."
Sanborn cites the case of two consumer products stocks,
, both of which he likes to call "6-9-12ers" -- that is, possessing at least 6% revenue growth, 9% EBIT (earnings before interest and taxes) growth and 12% earnings-per-share growth. The difference is that Colgate trades at more than 30 times forward earnings, while Fortune's multiple is around 10. To Sanborn, that's the clincher.
Not to traders, though. "I can hear a value guy talk like that," says Ginzburg. "Once I see a stock getting some momentum, we'll jump in."
It was high-multiple Colgate that caught the bigger "mo" this week, picking up 16.8% to Fortune's 7%. That performance gap suggests the degree to which hot money, and not a renewed interest in fundamentals, has been behind the recent action in Old Economy stocks.
"It's a commodity game," says Michael Clark, managing director of equity trading at
Credit Suisse First Boston
"You want to get into a certain space. How much is available? The less available, the more it goes up. The more you want to get in, the more it goes up.
"It's not about discounting future streams of earnings," Clark says. "That's what makes it fairly emotional."
That's also what could make all the positive sentiment surrounding the Dow seem a distant memory should the market suffer some mood swings ahead the
Federal Open Market Committee's
meeting on Tuesday.