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This article originally appeared in the May 7, 1999 issue of The Rochester Business
Journal. It is reprinted here in it's entirety.
Most pundits contend that we are still in the longest bull market in history. I'd say
we are in a bear market, and have been for some time. Granted, the indices seem to say
bull - but bear it is. The Dow Jones Industrial Average (the Dow) has been up four years
in a row (1995 - 1998) and we have watched it move up over the 10,000 mark in 1999, but we
are in a bear market (have been since the second quarter of 1998), and buying
opportunities abound.
Why bear? The Dow is made up of only 30 stocks. Today the S&P 500 index which
contains 500 stocks is driven by only about five stocks. What has happened to the rest of
the market? Well, many companies in the market, including several blue-chip companies,
have hit five, ten, and even twenty year lows. If you believe Microsoft, Intel, Cisco, and
AOL will grow your food, generate your electricity, build your farm equipment and
underwrite your insurance in the next five to ten years - then put down your newspaper and
call your broker. But, if you believe these companies (whose current stock prices indicate
they will do all these things and more) aren't necessarily the be-all and end-all, that
Asia will recover, that a company should have earnings (and maybe even assets), and you
remember "the nifty fifty," then read on.
In 1998 the S&P was driven by the 20 largest companies (Microsoft, Cisco, Dell,
Intel, etc.). Forty percent of the stocks in the index were actually down for the year.
For statistics buffs, the median return was 7% while the mean was 16%. This indicates a
significant skewing of results.
In the first quarter of 1999 the S&P 500 index was up 5.45% . However, the 21
largest stocks accounted for all of the increase. Two stocks: Microsoft and AOL,
accounted for one-third of the gain. Again, this is hardly a measure of "the
market." There are many more companies in the S&P 500 and the broader market that
have hit 52 week lows or have dropped a significant amount. But all one hears about in the
popular press is the "advancing bull market" driven by these few stocks.
High flyer Microsoft sells at a PE (price to earnings ratio) of 68. A PE like this
says, in effect, that the company will increase earnings 3 to 4 times the average company
for the next 30 to 50 years. Implicit in this valuation is that Microsoft will take over
most, if not all functions in the global economy. They will mine copper, perform funerals,
manufacture farm equipment, and own and manage apartment buildings. This is, of course,
ridiculous. The same analysis can be made for some other companies driving the current
market.
In reality, a broad part of the market is and has been down, depressed and undervalued.
Companies like 3Com (COMS), Fleetwood Enterprises (FLE), and Chubb Insurance (CB) are down
by huge amounts. The best-kept secret these days is that there are unprecedented buying
opportunities out there. One colleague recently remarked that the lower you go on the
corporate capitalization scale, the more values one finds. Not since the 1970s have there
been so many undervalued companies out there.
If you think you have missed the investing bandwagon because you didn’t invest in
Intel, Microsoft, or AOL, think again. A wise man I know, my father, once said, if you
miss one street car, there is always another coming down the track. And he is right. Today
the tracks are packed. If you subscribe to the "buy low, sell high" theory of
investing and if you don’t subscribe to the "greater fool" theory of
investing (no matter how overvalued a stock is, I will buy it because there is always a
greater fool out there to buy it from me at a higher price), then take a look at some of
the stocks in the raw materials, the REIT (real estate investment trust), and the heavy
equipment areas. Oil and electric utilities are also interesting.
These stocks may not be as glamorous as corp-dot-com, but these are the companies that
drive strong economies. These are companies that provide the basic goods and services that
vibrant economies, of not just the US but countries around the world, use every day. The
Internet is certainly a powerful force. But the way to play the Internet is to recognize
that many of these undervalued companies will benefit greatly by using the net to
streamline their businesses and to provide a better service to their customers.
These are exciting times for investors, and the secret bear market has created an
opportunity to buy excellent companies with solid long term business prospects at bargain
basement prices.
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