The highest price-earnings ratio recorded at any stock market bottom was 14-to-1, according to Sy Harding's Street Smart Report (16 Daniel Webster Highway, Meredith, NH 03253). "That was in 1962. The average has been 11 times earnings. A market bottom with the S&P 500 still selling at well above 20 times earnings, and with those earnings declining, seems highly unlikely."
Curtis Jensen of Third Avenue Small-Cap Value Fund likes what he calls "safe and cheap" stocks. That means somewhat obscure companies with strong balance sheets and shares selling at 50 percent or below what Jensen figures they're really worth. Jensen has recently found enough such issues to enable his fund to appreciate 17.2 percent last year and another 5.4 percent this year. Current favorites: Bel Fuse, Electro Scientific Industries, Kemet, MBIA, MONY Group, Nissan Fire and Marine Insurance, Trinity Industries, TimberWest.
The purchase of Anchor Gaming by International Game Technology underscores the allure of the gambling industry in a sluggish economy. The slot-machine makers operate, writes Charles LaLoggia, author of "Superstock Investor" (McGraw Hill, $29.95) in an industry that grows "no matter what the general economy is doing." LaLoggia expects more states to approve slots to offset tax-revenue losses during this slowdown. He's particularly high on the stocks of two slot makers: Mikohn Gaming and WMS Industries.
Sometimes a stock doesn't do well because few Wall Street analysts cover it. When they finally start, the stock often takes off. Here, according to Thomson Financial/IBES, are nine companies followed by no more than three analysts. All have market values between $200 million and $1.2 billion, expectations of higher profits this year, and recent price-earnings ratios averaging just 12-to-1: CVB Financial, EDO, GenCorp, Handleman, LNR Property, Park National Corp., Triumph Group, Vital Signs, Winnebago Industries.
Look for favorable conversion features when shopping for a closed-end fund, advises Dow Theory Forecasts newsletter (7412 Calumet Avenue, Hammond, IN 46324). "Closed-ends that trade at excessive discounts to their net asset values may be forced to convert to open-end status by their charters. Typically, conversions are a boon to holders since they lift the share price to the NAV. Some funds have built-in conversion provisions if the market drops as little as 5 percent below NAV."
Robert Rodriguez, who's never had a down year in his 17 years of managing FPA New Income Fund, believes that inflation, and lower bond prices, could return as early as spring. "It's now politically acceptable to spend," he says. "With government outlays increasing, the second half of 2002 will be much stronger. It would not surprise me to see the historically low Fed funds rate begin rising by April."
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.