Foreign investors, whose ownership of U.S. stocks grew to about 15 percent of the total over the past decade, are now finding better choices elsewhere, making any significant rebound in the U.S. market more unlikely, says Brett Gallagher, head of U.S. equities at Julius Baer and money manager for many European clients. "With the Enron and WorldCom fraud, investors in France and Germany are saying, 'I no longer need to buy U.S. equities.' "
T. Rowe Price Small-Cap Fund emphasizes three lows: low risk, low turnover and low expenses. But its returns are high, an average 11.32 percent annually over the past decade. The fund looks for companies with strong financials, good management and significant employee stock ownership. It tries to buy them cheap compared with estimated earnings based on low price/cash flow and price-earnings ratios. Recent favorites: Harman International, SCP Pool, Chittenden, AO Smith, Iron Mountain, Westamerica Bancorp.
The price-earnings multiples of quasi-public mortgage financiers Fannie Mae and Freddie Mac have been halved since 1999 because of concerns that taxpayer exposure to their $1.4 trillion in combined debt will force Congress to limit their borrowing power or sever their government ties. Not so, says Kevin Wallace of Lehman Brothers. "Any attempt to rein them in would cause a significant hit to the capital markets." Meanwhile, both trade at 30 percent discounts to their five-year price-earnings ratios, despite 20 percent annual earnings growth.
Investors have been gravitating to the consumer staples sector because of its defensive characteristics, above-average earnings consistency and transparent balance sheets, says Standard & Poor's The Outlook (55 Water St., New York, NY 10041). "We expect the group to continue to outperform as long as a tangible recovery in overall corporate profits remains elusive. Our favorite segments include packaged foods, food distribution, alcoholic beverages, household products and personal care. Our favorite individual stocks are Dean Foods, Kraft Foods, Constellation Brands, Sysco, Clorox and Procter & Gamble."
Principal-protected securities such as MITTS and SUNS offered by Wall Street's largest investment houses promise to return every cent you put up at maturity plus a percentage of the stock market's gains. Unfortunately, notes Kiplinger's Personal Finance Magazine (1729 H St. NW, Washington, DC 20006), "they also severely limit appreciation potential, trade infrequently, and vary widely in both terms and expenses. In our view, they're a half-baked idea."
Small stocks have been outperforming big stocks for quite some time now. In fact, says Lipper Analytical, whereas the top-performing large-stock fund, Clipper, returned an average 12.8 percent to its investors over the past three years, the top five small-cap funds just about doubled that return or better. They are: Schroder Ultra (plus 88.3 percent three-year average), CGM Focus (plus 34 percent), Wasatch Micro Cap (plus 26.4 percent), Turner Micro Cap Growth (plus 25.5 percent), Bjurman Micro-Cap Growth (plus 25.2 percent).
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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.