Saturday, May 22, 2004

Market blues high time to get green

By John Waggoner
USA Today

Ben Graham, one of the nation's most revered investors, compared the stock market to a manic-depressive business partner named Mr. Market.

When he was feeling frisky, Mr. Market would offer you an outrageously high price for your shares. When he was gloomy, he'd offer to sell his stake for a ridiculously low price.

Mr. Market has had the blues lately. This raises the question: Is he giving away stocks on the cheap now? Yes - but not a lot of them.

The stock market's depression has some understandable origins.

• Inflation. The producer price index, which measures inflation at the wholesale level, soared 0.7 percent in April. And consumers have already been hit with a big dose of inflation, in the form of rising gas prices.

• Rising interest rates. The yield on the 10-year Treasury note has risen from 3.11 percent in June 2003 to 4.86 percent recently, mainly on inflation fears.

Rising interest rates, in turn, can be bad for stocks because interest-bearing investments, such as bank CDs, become more attractive. Companies have to pay more to borrow and expand, which erodes earnings.

• War. The war in Iraq has already cost $89 billion, and the government will ask for another $50 billion soon.

What makes the current decline interesting is that many companies are reporting earnings gains and delivering upbeat forecasts.

Cisco, for example, reported record third-quarter profit last week, but the stock closed lower that day. Investors fretted about the company's inventories.

So is Mr. Market giving stocks away cheap? Sure. One company that has been thumped lately is Berkshire Hathaway, the holding company of Warren Buffett, Graham's premier disciple. Berkshire's A shares are down 8 percent the past month, compared with 3 percent for the Standard & Poor's 500-stock index.

Cheap, of course, is relative: Berkshire's A shares now cost $85,700, and its B shares are down to $2,854.

You can winnow down the list of stocks that have been beaten up the most and come up with some interesting names.

Let's start with stocks of companies that are members of the S&P 500, if only because this limits the universe to 500 of the nation's largest companies. The stocks must:

• Have positive earnings the past 12 months.

• Have an estimated earnings growth rate higher than the current growth rate.

• Have a lower price-to-earnings ratio than other stocks in their industry.

You'll usually uncover some plausible reason for a stock to be down. Family Dollar Stores, for example, fell because the company revised its earnings estimates downward this month.

If you'd prefer to let others pick stocks for you, consider a fund that looks for GAARP: growth at a reasonable price.

Three no-load GAARP funds with top records and long-term managers: Thompson Plumb Growth (800-999-0887), Matrix Advisors Value (800-366-6223) and Buffalo USA Global (800-492-8332).


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