Shunning the sizzle for value's long haul

INVESTING

Internet stocks ride a precarious bubble, money manager says

February 14, 1999|By Bill Atkinson

DAVID N. DREMAN is a highly respected money manager. He's written four books on investing, manages $7.5 billion in assets, and his largest fund, the Kemper- Dreman High Return Equity Portfolio, gets rave reviews.

You'd think those credentials would hold sway with Dreman's 23-year-old physical therapist. But the other day while Dreman, 62, was receiving treatment for an injured knee, his therapist dashed away for the office computer. He wasn't hunting for literature on treating bum knees -- he went online to buy an Internet stock, something Dreman would have never recommended.

"It was either Yahoo! or Amazon," Dreman recalled. "These kids, you talk to them and it is kind of interesting how they are absolutely sure they are going to make money."

Dreman wouldn't touch Internet stocks because they run contrary to his investment philosophy. He's a "value" investor who buys depressed stocks, such as oil, health care companies and tobacco companies, in the hope that they will rise.

But Dreman's strategy is about as exciting as investing in farmland. Investors want sizzle, pop, bang, and that's what they've been getting with America Online Inc., Amazon.com Inc., Dell Computer Corp. and Cisco Systems Inc.

"It is fast action. It is all going their way," Dreman said.

Dreman has done quite well over the years, however. His Kemper-Dreman High Return, which has about $5 billion in assets under management, has returned an average 18.42 percent since it opened in 1988, according to CDA/Wiesenberger, a Rockville-based mutual fund tracking service. But last year, the fund slipped, returning 9.71 percent.

"Value is just getting hauled out and shot," said Dreman, who is chairman and chief investment officer of Jersey City, N.J.-based Dreman Value Management LLC.

But he is certain that value investing will have its day, and he warns that Internet stocks are heading for a crash.

"This is a bubble," he said. "It defies reality, but this is the current reality. There is no valuation here. Yahoo! was overvalued a year ago, and it has gone up 10-fold."

'60s computer craze

It is not the first bubble Dreman has seen in his 43-year career. He was a Wall Street analyst in the mid-1960s when he was sucked into the craze of the day, computer companies.

"They had wonderful sweeping concepts," Dreman said. "We'd buy at $2 and they would go up to $200."

University Computing was a favorite. It was billed as the next IBM, a stock that could make people rich. But University Computing plummeted as quickly as it rose.

"We thought all of these guys over 40 who said it was a bubble were crazy," Dreman said. "Did we get blown out. When the market dropped and University Computing went from $200 to $150 in a matter of days, I thought I had an ulcer. I didn't have one, but it was the only time in my life that I thought I had an ulcer. The bottom line was that most of these concept companies blew up."

He argues that the Internet bubble is even more dangerous.

"There are more people involved than back in the '60s," he said. "With the Internet, there are 5 million or 6 million brokerage accounts, and they are trading in a blink of an eye. They are convinced the stocks only go up."

Dreman won't predict when the bubble will pop, but when it does he expects his style to storm back and outperform the market. So he looks for deals. He likes beaten-up health care companies, such as Humana Inc. and Columbia HCA, both trading for about $17, well off their 52-week highs.

He also favors tobacco companies such as RJR Nabisco Corp. and British American Tobacco, whose stock prices have sunk because of lawsuits, large jury awards for smokers and negative press.

International growth

"These are companies that the growth business is international," he said. "Even with these [cigarette] price hikes, the volume is not going to go down so much."

Deep-water oil drillers and oil field services companies are another Dreman pick. He likes Slumberger Limited, which trades around $51, about 40 percent off its 52-week high; Diamond Offshore Drilling Inc., which trades around $23, down about 57 percent from its high; and Transocean Offshore Inc., which trades for about $24, down 59 percent.

"They have terrific financial strength," Dreman said. "Any rise in [gasoline] prices, it is easy to see these stocks double and triple. I think there is a good chance that they could double in the next 12 months."

In the meantime, Dreman will have to be patient. He might also have to swallow his pride if his physical therapist gets rich, and decides he no longer has time to work on Dreman's knee.

Dreman doesn't think that will happen. In the 1960s, all of his friends got wiped out playing computer stocks.

"I think history is repeating itself," he said. "Every generation has to learn from its own experience."

Pub Date: 2/14/99

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