The Long, Lonely Walk Back to Value

When the apocalypse comes and tech stocks fall, these value devotees will be ready.
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The Alternative

SAN FRANCISCO -- You love tech stocks. You revel in 'em. You send the best-performing ones flowers on the anniversary of the day you bought them (you remembered, didn't you?). And the devotion has been, for the most part, richly rewarding.

Such was the case again

today. After the

Federal Reserve

essentially

admitted it is more afraid of Y2K than either rapid economic or stock-market growth, the

Nasdaq Composite

soared 3.4%, notching its biggest-ever point gain and yet another record.

But let's just say, for the sake of saying it, that while your long-term faith in technology is unshaken (and unshakable), you've got a nagging sense your portfolio is just a pinch overweighted and fear the sector may be just a tad overextended.

So what to do? Believe it or not, there's a growing body of people on Wall Street voicing their advocacy of (

gasp

) value stocks, particularly cyclicals. You're forgiven if you haven't heard, as the noise made by the likes of

Juno Online Services

(JWEB)

, up 130% today, has drowned out everything else. (The issue of how giving your product away

for free

came to be a "good" thing will have to wait.)

The thinking goes like this: Techs will continue to rule short term because few investors are willing to garner capital gains in the current tax year. But after Jan. 1, some savvy players will take profits. Given the pace of economic growth here and abroad, some will put money to work in economically sensitive names.

Richard Bernstein, chief quantitative strategist

Merrill Lynch

, said some so-called smart money players have already begun the long (and lonely) walk back to value, but he acknowledged that it's difficult to generalize their practices. Still, Bernstein encouraged investors (of all pedigrees) to shift their focus from tech to areas such as energy and basic materials because that's "where fundamentals are improving," vs. tech, "where they are not."

That may sound heretical, but the quant strategist noted that earnings estimates for technology have been falling, although "nobody cares."

Chuck Hill, director of research at

First Call/Thomson Financial

, confirmed the veracity of that statement but noted there's a "big asterisk." For the fourth quarter, tech-sector earnings are currently expected to rise 12% over 1998 results vs. 35% in the third quarter and 41% in the first half. But the group enjoyed "easy comparisons" in the first half, Hill recalled, attributing much of the second-half slowdown to Y2K. For all of 1999, tech earnings are expected to rise about 30% vs. 17% for the

S&P 500

, he said; tech earnings are projected to climb 28% in 2000.

Currently projected to rise 11% in 1999, energy sector earnings are expected to gain 39% next year, Hill reported, while basic-materials company earnings are expected to climb 39% in 2000 vs. a 5% gain this year.

Bernstein argued the catalysts for a value stock advance -- namely rising interest rates and accelerating earnings -- have been "ignored" thus far. Assuming the U.S. equity market "does once again price stocks based on fundamentals" (a bold assumption), value will outperform growth in the coming year, he forecast in a report published today.

The current environment is "very unhealthy," he said in a phone interview, predicting 2000 "is going to be a much messier year in tech and Internet

stocks than people think."

The Picks

Less apocalyptic about tech, but nonetheless in agreement about the rising prospects for value is Brian Belski, chief investment strategist at

George K. Baum

in Kansas City, Mo.

"There's a huge disparity between growth and value," he said in a recent interview. "When you see such an obscene disparity, typically you get a bounce in value," which is likely to occur "in the early part of the first quarter."

Belski's recommendations include basic-materials names such as

DuPont

(DD) - Get Report

,

International Paper

(IP) - Get Report

and

Weyerhaeuser

(WY) - Get Report

; capital-goods players such as

Deere

(DE) - Get Report

and

Caterpillar

(CAT) - Get Report

; and energy names such as

Schlumberger

(SLB) - Get Report

,

Halliburton

(HAL) - Get Report

and

BP Amoco

(BPA)

.

Belski's firm has done no underwriting for the aforementioned.

Finally, we turn to Dwight Anderson, who runs about $150 million at

Tudor Investments

and focuses exclusively on industrials (so thus isn't burden by choice).

AK Steel

(AKS) - Get Report

continues to be Anderson's top pick and largest holding, notwithstanding the fact it is down 28.1% since he first mentioned it here on

Aug. 11.

"It's an affordable company, cheap on any valuation metric" and has the "best management in the industry," Anderson said.

At today's close of 16 5/8, AK Steel is trading at a price-to-earnings ratio of 6.9 times its projected 2000 earnings of $2.42 per share.

Anderson's other recommendations (and holdings) include

Fort James

(FJ)

,

Bowater

(BOW)

and

Alliance Forest Products

, which trades on the

Toronto Stock Exchange

.

While optimistic, "my expectation for what sort of return you should expect is 30%," Anderson acknowledged. "Seventy-percent gains in Nasdaq aren't realistic on a sustainable basis, especially not in my sector."

Silly hedge fund manager, 70% (-plus) gains are for kids (who invest in tech stocks).

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com.