Intel Corp., Cisco Systems Inc. and Johnson & Johnson, perennial favorites of money managers seeking U.S. stocks with the fastest profit growth, are becoming staples for so-called value investors.
Shares of growth companies in the Standard & Poor's 500 Index trade at an average 16.3 times estimated earnings, while value stocks, those priced at a discount to the market or their historical average, trade at 14 times profits. The gap between them, now 2.3 points, has narrowed from 25.5 at the beginning of the decade, data compiled by Bloomberg show.
Stock valuations are converging as markets tumble worldwide, turning technology and health-care companies, whose shares haven't kept up with profit gains this decade, into relative bargains.
``I've never thought I'd have a chance to buy Intel in my life, and all of the sudden, it's in my portfolio,'' said Kevin Rendino, who runs the $8.62 billion BlackRock Basic Value Fund from Plainsboro, New Jersey. ``It's almost as if everything is trading at the same PE ratio,'' he said. ``A lot of those old growth stocks are value stocks now.''
Rendino is buying shares of Intel, International Business Machines Corp., Johnson & Johnson and Wyeth, and is ``overweight'' shares of drugmakers for the first time since 1994. New York-based BlackRock Inc. is the largest publicly traded U.S. money manager.
Global Rout
The S&P 500/Citigroup Growth Index's 2007 performance trailed the S&P 500/Citigroup Value Index until last month, when banks, brokerages and homebuilders led a global decline that wiped out $2.1 trillion in a week. On Aug. 3, as the S&P 500 completed its steepest three-week retreat since 2003, the value index erased its gains for the year.
The price-to-earnings ratio for Santa Clara, California- based Intel, the world's largest computer-chip maker, has fallen to 21.7 from 51.5 in September 2003, Bloomberg data show. IBM, the biggest provider of computer services and located in Armonk, New York, now trades at 16.1 times estimated profit, while Madison, New Jersey-based Wyeth, the world's largest maker of female hormones, has a ratio of 13.7.
Shares of San Jose, California-based Cisco, the biggest maker of computer networking equipment, traded at 193 times earnings in March 2000 when the Internet bubble burst. Now, the stock is at 22.2 times estimated profit.
Horsham, Pennsylvania-based Toll Brothers Inc., the largest U.S. luxury homebuilder, is a typical value stock and its shares trade at 22.8 times estimated profit.
Great, OK, Lousy
Altogether, 239 companies in the S&P 500 have traded within 20 percent of the benchmark's median price-to-earnings ratio on average this year, the most since at least 1995, data compiled by Bloomberg show. That compares with 111 at the end of 1999, the last year growth stocks outperformed value shares.
Wachovia Securities LLC's Doug Sandler favors Cisco because its shares became 48 percent cheaper relative to earnings since July 2002 while annual profit has increased an average 35 percent.
``Great companies, OK companies, and lousy companies are all priced around the same level right now,'' said Sandler, who helps oversee $282 billion as chief equity strategist in Richmond, Virginia, for Wachovia. ``I can actually go out there and buy really fast growers at not much of a premium to the market, where historically the premium has been significant.''
Sandler is also buying Dallas-based Texas Instruments Inc., the world's biggest maker of chips that run mobile phones; Micron Technology Inc., the largest U.S. maker of computer- memory chips, located in Boise, Idaho; Milpitas, California- based Linear Technology Corp., whose chips are used by Cisco; and EMC Corp., the world's largest maker of data-storage computers and software. EMC is based in Hopkinton, Massachusetts.
Trend Reversal
The S&P 500/Citigroup Growth Index beat the S&P 500/Citigroup Value Index for six straight years starting in 1994 as technology stocks surged. The growth index quadrupled from 1994 through the end of the decade, while the value gauge more than doubled.
That trend reversed after the S&P 500 began tumbling seven years ago. A 52 percent slump in computer-related shares dragged down the growth gauge 25 percent this decade.
The value index has climbed 25 percent since 2000 as rising profits convinced investors they didn't have to pay a premium for faster earnings. Profits at S&P 500 companies on average have increased by at least 10 percent for 19 straight quarters, according to data compiled by Bloomberg.
`Actively Whacked'
``Growth has gotten actively whacked for the last six years,'' said Stephen Wood, who helps manage $221 billion as portfolio strategist at Russell Investment Group in New York. ``So it's gotten really cheap in a time when their businesses have improved dramatically, but investors didn't want it.''
Wood expects shares of the fastest-growing companies to outperform as the U.S. economy and profits slow. The S&P 500/Citigroup Growth Index has added 2.2 percent in 2007, compared with a 0.1 percent drop for the value gauge and 1 percent gain for the S&P 500.
Lawrence Creatura of Clover Capital Management Inc. says value shares may continue to beat growth because the U.S. economy will weather the subprime mortgage debacle that is roiling credit markets, while companies will keep increasing earnings.
Almost 67 percent of the 414 S&P 500 companies that reported second-quarter profits beat analysts' estimates, according to data compiled by Bloomberg.
`Pretty Brave Soul'
``I've heard for four consecutive years'' that value shares will be overtaken, said Creatura, who helps manage $2.6 billion at Clover in Rochester, New York. ``It takes a pretty brave soul to make that forecast right now.''
Growth stocks won last month, amid growing concern that subprime-mortgage losses would curb the earnings of banks, brokerages and homebuilders and spill over into other parts of the economy by pushing up borrowing costs.
Financial stocks led the S&P 500's retreat last month, sliding 8 percent. New York-based Citigroup Inc., which has the third-largest weighting of the 349 shares in the S&P 500/Citigroup Value Index, has dropped 18 percent this year. Charlotte, North Carolina-based Bank of America Corp., which has the fourth-biggest weighting in the value gauge, lost 12 percent in 2007.
For Harris Private Bank's Jack Ablin, the turmoil in credit markets and the possibility of a U.S. economic slowdown are two more reasons to turn to growth shares.
Housing Slump
``Growth has been cheap anyway, so we've kind of been waiting for that shoe to drop,'' said Ablin, who oversees $52 billion as chief investment officer at Harris in Chicago. ``Generally, technology and health-care should be insulated.''
The increase in U.S. profits has been cut by more than two- thirds because of the housing slump, according to David Rosenberg, chief North America economist at New York-based Merrill Lynch & Co. Earnings gains at S&P 500 companies will slow to 5.2 percent this quarter from an estimated 9.1 percent in the April-to-June period, according to analysts' estimates compiled by Bloomberg.
The International Monetary Fund last month trimmed its growth forecast for 2007 for the U.S. economy to 2 percent from 2.2 percent. The Washington-based IMF at the same time increased its estimate for the global economy to 5.2 percent from 4.9 percent for this year and next.
Economic expansion in Europe, Japan and emerging markets has proven stronger than the fund expected in April, compensating for weakness in the U.S.
`Theme With Legs'
Greg Woodard, a strategist at Manning & Napier Advisors Inc., says that's one reason he's loading up on shares like J&J, based in New Brunswick, New Jersey.
Overseas sales accounted for about 44 percent of J&J's total revenue in 2006, according to data compiled by Bloomberg. The stock trades at 14.9 times expected earnings, compared with a monthly average of 23.1 times actual earnings this decade.
``We've tried to find some areas where the growth drivers are not tied to a slowing economy,'' said Woodard, who helps manage $17 billion in Fairport, New York. ``A lot of these names have significant exposure to growth outside the U.S.''
Growth shares account for about 70 percent of Woodard's portfolio. That's close to the highest weighting ever, he said.
For Russ Koesterich of Barclays Global Investors, these stocks are still bargains even if the domestic economy and earnings accelerate. He expects the shares may get an added boost should higher financing costs slow the expansion.
``You'd expect growth to outperform when you have expectations for a slower economy,'' said Koesterich, who helps manage about $1.9 trillion in San Francisco. ``This could be a theme with legs.''
source:www.bloomberg.com
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment