Lots of inexpensive stocks exist for long-term investor

Downturn leaves bargains for patient, managers find

Dollars & Sense

April 20, 2003|By Christopher Davis | Christopher Davis,MORNINGSTAR.COM

It has been said that investors waffle between greed and fear. We saw plenty of the former in the great bull market of the late 1990s, when tech, Internet and telecom shares were pushed to spectacular and unsustainable heights. After three years of steep stock market losses, it's safe to say that fear looms large in the minds of many investors.

That's just the kind of environment patient bargain-hunters love. After all, just as investors misjudged the potential of new technology in the late 1990s, it's possible that they also may have overreacted to fears over war, terrorism and the economy. Even with continued short-term volatility likely, many value managers tell us they have been finding plenty of inexpensive stocks worth holding for the long haul. You'll find a sampling of them below.

Toray (TORYX) founder Doug Toray and co-manager Doug Eby have built a terrific record focusing on high-quality businesses with sustainable competitive advantages selling at fire-sale prices. A favorite lately has been Automatic Data Processing (ADP). Eby comments that, despite near-term earnings disappointments, the firm's core payroll-outsourcing business is in fine shape, and company management is using some of the firm's massive free cash flow to expand its services to spur future growth and maintain competitiveness.

Moreover, a good portion of ADP's revenues are cyclically vulnerable: Low interest rates hurt returns on its multibillion-dollar float, and a steep decline in stock-market trading volume hurts its brokerage business. But both rates and volume will rise again eventually and should help the stock. Toray and Eby have aggressively increased the fund's weighting in ADP.

Among deep-value managers, Third Avenue Value's (TAVFX) Marty Whitman is among the best. He employs a strict valuation discipline, requiring his picks to trade at a big discount to their fair values or at very low price multiples relative to their peak earnings. One such name is Sun Microsystems (SUNW), a company trading at six times peak earnings, and which Whitman says has enough cash on its books to cover its liabilities. He also points to a favorable U.S. District Court ruling in antitrust proceedings against software giant Microsoft (MSFT), arguing the decision could be a boon to Sun's software business if upheld.

Whitman also likes bond insurer MBIA (MBI). He says the company is well financed and well entrenched in its industry and trades at a significant discount to the value of its net assets.

T. Rowe Price Small-Cap Value's (PRSVX) Preston Athey has enjoyed much success fishing for bargains in small-cap territory. He recently scooped up Bedford Property Investors (BED), a California-based real estate investment trust (REIT) that invests in suburban office and industrial buildings. Athey says half the company's properties were leased to technology firms, which has hurt in recent years.

However, he notes the company has avoided many of the industry's biggest tech-related blowups and has managed its business well in the tough market environment. Athey also points to its solid balance sheet, which he says has much less debt than most REITs. He's making a fairly sizable bet on Bedford - 8 percent of the firm's shares are owned by the fund and the separate accounts Athey manages.

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