A widely watched stock-market indicator known as the Federal Reserve Valuation Model, which was outlined in the Fed's report to Congress in July 1997, is now signaling that the stock market is undervalued on a fundamental basis, according to the Blue Chip Growth newsletter www.bluechipgrowth.com. "This model is derived by dividing the projected earnings for the S&P 500 by the yield on the 10-year Treasury bond. It is signaling that the S&P 500 is now approximately 6 percent undervalued relative to bonds."
Schroder Ultra Investor Fund's spectacular 101.9 percent average annual gain over the past three years is more than double the return of its nearest competitor in the small-growth stock fund universe. Schroder, which is currently closed to new investors, behaves much like a hedge fund, using put options and shorting stocks to increase its gains. Recent largest holdings: D&K Healthcare, Universal Compression, Sybron Dental, Bank of Bermuda, Movie Gallery, Gart Sports, Axcan Pharmaceuticals.
A.G. Edwards auto-stock analyst Mark Johnson, whose picks rose an average 40 percent annually for the year ending last April, is looking for three things in automotive stocks now: (1) companies whose customers have hit bottom; (2) companies that can increase revenue internally without acquisitions; (3) companies already poised for a turnaround. His favorite recent examples: Cummins, Gentex, Monaco Coach, Winnebago.
Using a short-cut version of Benjamin Graham's famous value principles, Paul Sturm of Smart Money magazine (1755 Broadway, New York, NY 10019) recently identified eight stocks with market values of more than $500 million, earnings yields at least twice the long-term bond rate, ratios of equity to total assets of at least 0.5, and return on equity of at least 8 percent. The eight super bargains: ADC Telecom, Apache, AVX, Iomega, Kemet, Newfield Exploration, Prime Hospitality, Vishay Intertechnology.
Series I savings bonds make great additions to any investment portfolio, says Money magazine. "They guarantee real fixed rates of return above inflation for the life of the bond (up to 30 years). The current I-bond guarantees 3 percent above inflation. You can never lose principal, earnings are exempt from state and local taxes, and federal taxes are deferred until redemption. Plus, there are no fees. I-bonds are sold in denominations of $50 to $10,000 at most banks and online at www.savingsbonds.gov."
There are only three reasons to buy a closed-end mutual fund rather than an open-end fund, says Forbes. "(1) If the closed-end has a good performance history and its current discount to net asset value (NAV) is a high multiple of its annual expense ratio. (2) If the closed-end is the best available way to enter an illiquid market. (3) If the closed-end sells at a high discount to NAV and you believe it could be subject to an open-end raid."
Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.