When it comes to shares of common stock, value is in the eye of the beholder Worth determined by perceptions


April 05, 1992|By WWERNER RENBERG | WWERNER RENBERG,1992 by Werner Renberg

Beauty, they say, is in the eye of the beholder. You could say the same of the value of a share of a corporation's common stock.

Not its market value. That's the price at the moment when a lot is traded on a stock exchange. Unambiguous, it reflects implicit agreement between buyer and seller.

It's the share's intrinsic value that depends on perceptions, and they often differ between buyer and seller. A seller may believe, for one reason or another, that the market value exceeds intrinsic value and that he ought to realize it before it drops. A buyer, on the other hand, may believe that the security is undervalued by the market and, for some reason, is headed higher.

Equity mutual funds that are managed to achieve capital appreciation by investing in undervalued stocks are often referred to as value-oriented -- or just value -- funds. They are distinguished from growth-oriented funds that are concentrated in companies whose earnings and sales, or both, are growing at exceptional rates.

As growth stocks have set the pace during the strong stock market that began in 1990, growth-oriented funds have dominated the lists of top fund performers. Many value funds may have done well in absolute terms, but their relative results have often been disappointing.

While the broad market advance lost its momentum in the first quarter, when prices of many growth stocks had reached levels that many regarded as fairly reflecting their earnings prospects, the values in value funds' portfolios became increasingly recognized.

By the end of the quarter, value-oriented funds had slightly outperformed growth-oriented funds, according to Lipper Analytical Services' indexes of the two groups.

Would a value fund be right for you now?

Possibly. If you're concerned about the high levels of the broad market averages, a well-managed value fund could be appropriate for a part of your portfolio's equity allocation.

How do you find one? To get started, look at funds that have the word "value" in their names. You may identify other prospects when looking through the objective and strategy sections of prospectuses of leading performers; if they're value-oriented funds, the texts will indicate it. The table may offer some insights. It lists 15 of the 30 funds that made up Lipper's Low Priced Value Fund Index at the end of 1991. Chosen from among all general equity funds, they were at least 75 percent in equities and had portfolios with the lowest average combined ratios of share price to earnings and to book value.

Three points are immediately apparent:

* Value-oriented funds can be found in any of Lipper's five general equity fund categories.

* A number of funds with "value" in their names -- such as those of Babson, Fidelity, Merrill Lynch, and T. Rowe Price -- had above-average returns thus far in 1992, but so did some others that focus on undervalued stocks.

* Low ratios alone don't guarantee above-average performance.

Paul M. Hoffmann, who has run Merrill Lynch's Basic Value Fund for 15 years, screens stocks first for price-to-book ratios. He will not invest in a stock whose ratio is over half of the broad market's, now around 3. He prefers below-average price-earnings ratios and above-average yields, but will buy stocks that don't pay dividends if they meet other criteria.

Roland W. Whitridge, portfolio manager of Babson Value Fund, attributes his fund's recent performance to bank, forest product and retailing stocks, rebounding on the premise the recession is over.

In sizing up companies, Whitridge says he looks at absolute and relative yields as well as price-earnings and price-to-book ratios because "dividends are more certain than capital appreciation."

Brian S. Posner, manager of Fidelity Value Fund, who studies prospects in several ways, points out the danger of focusing only on P-E ratios: "If a stock has gone from 20 to 10 times earnings, you may say to yourself, 'Boy, I've got to own it.' Remember that it may be on its way to zero." His largest holding: Primerica.

As portfolio manager of T. Rowe Price Small-Cap Value Fund, Preston G. Athey is at the confluence of two positive trends: the comeback of value funds and the bull market in small company stocks. He, too, studies ratios but emphasizes other measures when relevant.

Like his peers, Athey seeks out-of-favor stocks. His current target: energy stocks, especially small energy service companies.

Value-oriented equity funds

(Ranked according to relative values or their portfolios' securities)

.. .. .. .. .. .. .. .. .. .. ..Annual rate of return.. .. 12

.. .. .. .. .. .. .. .. .. .. ..5.. .. .. 1.. .. .. .. .. mo.

Fund.. .. .. .. .. ..Type.. ..years.. ..year.. ..YTD.. ..yield

Salomon Bros.

Opportunity (NL).. ..CA.. .. .11.3%.. ..30.6%.. .1.1%.. ..1.8%

Merrill Basic Val

A. (6.5% load).. .. .G&I.. .. 10.7.. .. 27.2.. ..3.9.. .. 3.8

Lazard Special

Equity (NL).. .. .. .CA.. .. .12.6.. .. 38.0.. ..8.1.. .. 1.3

Eaton Vance

Total Ret. (4.75%).. G&I.. .. .9.3.. .. 23.6.. .(7.2).. .. 5.2

Guardian Park

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