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Value Managers Eye Credit Card, Drug, Supermarket and Aerospace Stocks

These stocks are cheap enough to overcome fears of interest-rate sensitivity.

It didn't take long for the behemoths of the

Nasdaq Composite Index

to reassert themselves Wednesday after a few days of slippage. But beyond the Nasdaq's seemingly perpetual record-setting pace, most of the market continues to hemorrhage, and that includes the


, down 10% this year.

With the

Federal Reserve's

aggressive stance to head off inflation (some would say attacking growth) unlikely to change until the economy shows definitive signs of slowing, the market's been a minefield all year.

Money managers aren't exactly pessimistic - after all, they've got the weight of a nearly two-decade bull market behind them, and consumers are spending at a record rate. But the muddled interest-rate environment has them concerned enough to get a little defensive.

That could lead them to rediscover some of the value sectors they've ignored for the past couple of years. Heaven knows there are plenty of beaten-down sectors that look cheap. But which are values?


polled money managers Wednesday about promising sectors and stocks they liked in each. Here are their picks:

Financial Services

Whenever interest rates head north, investors "take financials out and shoot them,'' says Rick Lawson, manager of

(WEHIX) - Get Weitz Hickory Fund Report

Weitz Hickory, a closed mid-cap value fund. Investors are holding the smoking gun - the

Standard & Poor's

TheStreet Recommends

banking and insurance indexes are both down more than 20% over the past two years, through Wednesday's close.

But Lawson and others say financial stocks' earnings aren't as vulnerable to rising rates as they were. Also, baby boomers' rising retirement investments, and last year's removal of Depression-era barriers between banks, brokers and insurers could lead to higher profits and lucrative consolidation.

Lawson holds credit card company

Capital One

(COF) - Get Capital One Financial Corporation Report

in his fund, and Kevin Rendino holds another credit card concern,

Associates First Capital


, in his

(MABAX) - Get BlackRock Basic Value I Report

Merrill Lynch Basic Value fund.

Both stocks are selling near their 52-week lows and are solid growers, according to the managers. Associates' price-to-earnings ratio of 8.8 is about half that of its peers. Yes, the stocks are interest-rate sensitive, but they'll hit the gas when rates eventually stop heading up, the managers say.

Lawson believes similarly about

Countywide Credit Industries

(CCR) - Get CONSOL Coal Resources LP Report

, another holding in his fund. The mortgage company is trading at its 52-week low, with a price-to-earnings ratio less than 7. "This is not a great interest-rate environment for this stock, but buying it now is buying a cyclical stock at its bottom,'' says Lawson, whose fund has beaten the

S&P 500

index each calendar year since 1995.


While biotech stocks have taken off, expiring drug patents and fears of cost-capping health care legislation have driven these traditional growth stocks onto value investors' radar screens.

Over the past year, the

American Stock Exchange Pharmaceutical

index is down 16%.

Chuck Carlson, manager of the


Strong Dow 30 Value fund, believes


(MRK) - Get Merck & Co., Inc. (MRK) Report


Johnson & Johnson

(JNJ) - Get Johnson & Johnson (JNJ) Report

are great values and owns both in his fund.

"Historically, pharmaceuticals have been a great area to invest when they pull back. Demographic trends still point to increased drug demand, and new product development will help these companies weather patent expirations,'' he says.

Wall Street is punishing Merck's stock because patents on lucrative drugs are expiring, says Carlson. But the company's new drug pipeline, double-digit earnings growth, and a $10 billion buyback program make it a good investment, he says. The stock is 27% below its 52-week high, and its price-to-earnings ratio is lower than that of its peers.

In Johnson & Johsnon, Carlson sees a firm with solid brand names, and the recent acquisition of biotech star



will make its current price - more than 28% off its high - look like a deal down the road, he says.

Another way to play the drug sector is by buying shares of drugstore chains such as


(CVS) - Get CVS Health Corporation Report

, says Jeff Van Harte, manager of


Transamerica Premier Equity. This stock lets you invest in rising consumer demand without betting on one firm's drugs succeeding.

CVS is making solid acquisitions and has successfully fended off online competitors such as





, says Van Harte. "CVS is a fantastic company. It's growing around 20% over the next five years and sells at 20 times earnings." The stock trades more than 30% below its 52-week high.


Van Harte also likes supermarkets, which makes him a pretty brave soul. He admits they're "terribly out of favor." Still, his fund owns


(KR) - Get Kroger Co. (KR) Report

, down more than 50% over the past year. He says Kroger and



, down more than 30% over the past year, are well-run businesses that are cutting costs and boosting profits through economies of scale. He also believes online grocers such as



won't pose a significant threat.

Van Harte isn't the only one of the supermarket bandwagon. Bill Miller, vaunted manager of

(LMVTX) - Get ClearBridge Value C Report

Legg Mason Value Trust, has added



to his portfolio. The stock is down more than 51% over the past year.


Strong's Carlson likes aerospace stocks, but warns they're only for investors willing to wait a couple of years. Demand for aircraft is way down and won't be up again until after 2001, when rising rates and oil prices won't be such a hindrance, he says. They've sent stocks like


(BA) - Get Boeing Company Report


But Carlson believes management's significant cost-cutting makes the company a star in the making. Three years ago, the company's profit margin was about 1%, and at the end of 1999, it was four times that, he says. The stock is currently more than 23% below its high and should start heading north as demand eventually ticks up.

Carlson also likes

United Technologies

(UTX) - Get United Technologies Corporation Report



(HON) - Get Honeywell International Inc. (HON) Report

, less-pure aerospace plays, which also have taken a beating while continuing to grow their businesses.

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