How to deploy your money now A bear favors bonds, small caps, utilities, and isn't ignoring Asia

Investing

June 28, 1998|By Bill Atkinson

THE STOCK market is far more frightening for investors than it was a year ago.

Many blue chips, high-techs and small-company stocks have been beaten up so badly in recent weeks that certificates of deposits are looking like attractive investment options.

Consider these numbers put out by Legg Mason Wood Walker Inc.: Last week, more than 60 percent of the stocks on the Standard & Poor's 500 index were trading 10 percent below their 52-week highs.

The results are worse for small-company stocks on the S&P 600 small-cap index, where 80.67 percent have fallen 10 percent below their 52-week highs, and more than a quarter have plunged so far that they are considered to be in a bear market.

"Visibility is fading," said Michael Metz, chief portfolio strategist with New York-based Oppenheimer & Co.

The view was much clearer on July 16, 1997, when the Dow Jones industrial average shot up to 8,038.89, five months after it had stormed past 7,000.

But since May 13, when the Dow hit a high of 9,211.23, the stock market has bounced violently lower, including a 207-point drop on June 15, on fears that the U.S. economy was in trouble because of problems in Japan and other Asian countries.

Where should investors turn to see the light?

Metz, who has been a bear for several years, favors bonds, small-company stocks and utilities.

Utilities, he says, pay hefty dividends and their earnings are steady. On the bond side, he likes treasuries that mature in two and three years.

"Short-term bonds are really very attractive because they offer no capital risk," he said. "You are absolutely sure to get your money back."

Metz, however, would put some "mad money" in Asia.

The easiest way for investors to tap the overseas market is through mutual funds, and many of them focusing on Asia have taken a beating, so there are good deals out there, particularly in closed-end funds, he said.

Templeton's well-known Dragon Fund, for example, is trading at an 11 percent discount to the assets it holds in the fund, while Scudder's New Asia Fund is trading at a discount of 18 percent.

Asian countries such as Japan are "not going to disappear," Metz said.

"Here you have some extremely low valuations and going-out-of-business sales. The risks are in the stocks [prices] already."

Small-company stocks are also a good place to invest because they have fallen so low that the chances of a rebound are greater, Metz said.

"Some of these blue chips are a more speculative vehicle than a lot of the small, less well-known names," he said. "They are speculative in the sense they incorporate extraordinary optimism, and there is no room for error."

Gordon Croft, a fund manager at Baltimore-based Croft-Leominster Inc., contends that gems can be found among small and large stocks alike.

He says investors should consider picking up promising, quality companies that have fallen 20 percent from their highs.

"That is what we have done," said Croft, who manages about $500 million. "We didn't go overboard, we just stuck our toe in."

Two weeks ago, Croft scooped up several companies involved in energy production, including Oryx Energy Co. and Santa Fe Energy Resources Inc., because he believes that they are undervalued and that crude prices will rise, making their shares more valuable.

There are other ways to reduce risk.

Marvin McIntyre, senior managing director of Legg Mason's high net worth group, likes real estate investment trusts, such as Brandywine Realty Trust, because they pay large dividends.

Brandywine's dividend yield is 6.8 percent, compared with the 1.42 percent average yield paid by S&P 500 companies.

McIntyre, however, wouldn't rush into Asia for bargains because funds focusing on a single country or region are too risky, he said.

Instead, an investor should consider buying a mutual fund that invests in companies that operate around the world. That way, the investor benefits from the strength of European markets, despite Asia's weakness.

"If Asia goes down and you have an international fund, you are not going to get singed too badly," he said.

There is no sin in having a cash reserve, either, the experts said.

"The mistakes people are making is they are putting all of their money into equities," Metz said.

"The problem in my opinion is that today the U.S. savings rates are not going up. People are depending on the stock market to do their savings for them. I wonder what people are going to do with Junior's college money when it is not rising."

Pub Date: 6/28/98

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