Tuesday November 6, 3:19 pm Eastern Time
SmartMoney.com - Common Sense
Time to Buy -- Already?
By James B. Stewart
ONE CONSEQUENCE of the terrorist attacks of Sept. 11 is that the market has been extremely volatile, rising on news of rate cuts and good earnings, and plunging on the latest anthrax scare, terror warning or weak economic report. After hitting my selling target of 1775 Thursday, representing a 25% gain from its September low, the Nasdaq dropped 69 points on Monday, or 4%, and another 34 points on Tuesday, which means it's time to start thinking about buying again even before you've gotten the brokerage statements on last week's sales.
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Like most people, I don't especially like volatility. I'm accustomed to hitting buying and selling targets only two or three times a year at most; this year they've come nearly every month, and sometimes more often. I don't want to stay glued to my portfolio. Indeed, my system is designed for people like me who have other careers and aren't investment professionals. Last Thursday, for example, I was attending a board meeting in the Midwest during the approximately 24 hours the Nasdaq stayed above my selling target.
To put this in perspective, the historical median Nasdaq advance, which I define as any sustained gain of 25% or more, has lasted nearly a year. The median bear market, a decline of 20% or more, has lasted 7 1/2 months. Yet so far in 2001 we've already experienced two advances and two bear markets, with a third possibly in the offing. The last advance, which appears to have ended Thursday, held on barely six weeks. In no other period have we experienced two bear markets in such close proximity; the closest comparison is January 1997 to October 1998, a nearly two-year period in which there were four advances, three corrections and one bear market.
But I don't mean to complain. This is the world we now live in, and we might as well adapt to it. The fact is that some investors live for volatility, because that's how they make their money. Just look at options prices over the past few weeks and you'll see the opportunities for huge gains if your timing is adroit. I don't advocate speculating in options or trying to capitalize on volatility for its own sake, but I have been pleased that so far this year, my disciplined system of selling into rallies and buying on declines has served me extremely well.
So after two weeks of talking about selling in this column, it's time to look again at the buy side of the equation. The new buying target is 1600 (roughly 10% below last week's interim high). Fortunately, I don't think you have to look far for excellent candidates. I detect two themes emerging in recent investor choices: value, now back in favor after years of exile; and market leadership, meaning companies with dominant market share likely not only to survive a recession, but to be in a stronger position when the economy recovers. (This was the subject of last week's Ahead of the Curve column on this site.) Neither trend is brand new, but they have intensified since Sept. 11, and these investing preferences tend to persist, often for years.
General Electric (NYSE:GE - news), previously recommended in this column, embodies these trends. So, to varying degrees, do a number of major companies that coincidentally reported strong earnings during the past few weeks: Microsoft (NASDAQ:MSFT - news), IBM (NYSE:IBM - news), Intel (NASDAQ:INTC - news), Citigroup (NYSE:C - news) and Tyco International (NYSE:TYC - news). Yet their stocks have since declined in the recent sell-off.
In deciding what sectors to buy, I tend to reverse the process I use in deciding what to sell, concentrating on the weak sectors rather than the strong. At the moment, however, the market has experienced such a broad-based drop that there are very few strong sectors. The only areas I would avoid at the moment are restaurants, grocery chains and consumer products, which are among the top-performing sectors. With interest rates so low, I especially like the financial sector, including insurance (American International Group (NYSE:AIG - news)) and banks (Citigroup). At times like these, it isn't necessary to bottom-fish in the worst performing sectors, which are telecommunications equipment and Internet services. Still, there are numerous bargains there among the dominant companies that do meet the tests of value and market leadership, and I believe patient investors will be disproportionately rewarded. Among companies I've previously recommended, I'm eyeing Verizon Communications (NYSE:VZ - news), WorldCom (NASDAQ:WCOM - news), Qwest Communications (NYSE:Q - news) in telecommunications; Cisco Systems (NASDAQ:CSCO - news) in networking; Sun Microsystems (NASDAQ:SUNW - news) in servers; and for the truly adventurous, EMC (NYSE:EMC - news) in data storage, and Ciena (NASDAQ:CIEN - news) and JDS Uniphase (NASDAQ:JDSU - news) in telecommunications equipment.
I'd love to be able to recommend Enron (NYSE:ENE - news), the much-battered energy-trading and pipeline concern that was once a New Economy darling. As of this week, the stock was trading at just over $11 a share, a stunning drop from its yearly high of nearly $85. Battered by accounting charges related to complicated partnership arrangements, a Securities and Exchange Commission investigation into alleged conflicts of interest and possible fraud, and the sudden resignation of its chief financial officer, Enron has the makings of a potential turnaround that could reward risk-tolerant investors. After all, Enron hasn't been found guilty of anything and still has a promising business model. The situation reminds me a little of the allegations against Tyco that caused the stock price to plunge but turned out to be unwarranted. Is Enron, like Tyco then, a buy?
In my judgment, no. Tyco's top management was a model of full and candid disclosure, reassuring investors it had nothing to hide. By contrast, Enron has repeatedly obfuscated. When its president resigned months ago, it said only that the reasons were vaguely personal. It has refused so far to spell out details of the partnership arrangements. It ducked questions in last week's conference call. When an employee raised critical questions about the partnerships, he was banished from the executive suite. Enron management, in my view, has shown that it can't be trusted. I am sad to reach such a conclusion, since so much of the damage to Enron seems to be self-inflicted.
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