Investors Go on the Defensive, Buying Up ‘Deep Value’ Stocks

Amid a continuing meltdown in many technology shares, more investors appear to be hunting for--and buying--�deep value� stocks.

Strength in those value issues is what’s cushioning broad market indexes, which on Tuesday held up far better than the Nasdaq composite index.

The New York Stock Exchange composite index, for example, eased 0.7% on Tuesday while Nasdaq plummeted 5.9%. Among NYSE shares, shoemaker Reebok International, insurance firm Progressive and toy maker Mattel--all big losers last year--were among the day’s biggest winners.

In the last month, as tech stocks have tanked, investors have made money in numerous names that they wouldn’t go near in 1999, including Nabisco Group Holdings, up 67% since April 21; Progressive, up 52%; and retailer J.C. Penney, up 36%.

How dramatically has this market shifted? Those stocks each lost about half their value last year.

Likewise, drug stocks, considered relatively immune to higher interest rates and swings in the economy, have been in demand again as many investors look to play “defense� in this market--that is, own companies less likely to surprise with bad news.

Schering-Plough, up $1.69 to $45.50 on Tuesday, has rallied 13% in the last month, and Merck and Pfizer have gained more than 5%.

Other classic defensive sectors such as insurance, banks, tobacco, food and utilities have held up well amid the broad market drubbing, as investors have focused on their generally cheap stock valuations relative to many tech stocks, along with other factors.

In the property and casualty insurance group, signs of an end to recent price wars have caught the eye of analysts. “The belief by the top managements of the major underwriters that market share is second to underwriting profits is the final link to improved profitability� over the next two to three years, analysts at Prudential Securities wrote in a recent report.

American International Group, Marsh & McLennan and XL Capital were among the stocks they recommended.

In the food sector, merger speculation has helped fuel the recent rally. Nabisco put itself up for sale, under pressure from corporate raider Carl Icahn. Meanwhile, Bestfoods is trying to fend off a hostile bid from Unilever while talking about a deal with Diageo.

Bestfoods, down $1.25 to $62 on Tuesday, has surged from $46 at the beginning of April.

Among food issues rising Tuesday were Kellogg, up $1.13 to $30.44; Quaker Oats, up $1.69 to $72; and Hershey Foods, up $1.25 to $51.88.

But buying so-called defensive issues is no sure thing. Gillette on Tuesday tumbled $2.56 to $35.19 after the maker of razors and other consumer products said this quarter’s sales will barely beat last year’s second quarter because of the weak euro.

Currency weakness has hurt Gillette in recent years, and the stock has lost nearly a third of its value over the last 12 months. It had rallied from $30 in mid-March to $39 recently, before Tuesday’s announcement.

Even as many value stocks rise while tech stocks slide, many mutual fund companies say small investors still are more interested in funds that buy growth stocks than value stocks.

Fund companies say many investors still see the tech sector’s ongoing sell-off as a chance to buy in for the long haul at more reasonable prices.

At the Denver-based Invesco Funds group, spokeswoman Molly Cisneros said Tuesday, “We’re still seeing positive money flows this month across the product line, including tech and telecom� funds.

At Baltimore-based T. Rowe Price Associates, spokesman Steve Norwitz said, “It’s amazing--with all the volatility, we haven’t really seen much of a change.� The firm’s Science & Technology fund “got 60% of the money invested in our U.S. equity funds last month, and it’s still getting the highest inflows in May.�

He added: “Chip Morris, the Sci/Tech fund’s manager, tells me he’s more comfortable holding this portfolio than any he’s had since October 1998,� now that stock valuations have come down from the stratosphere. “And fund investors seem to agree.�

But Carl Wittnebert, research director at Santa Rosa, Calif.-based data tracker TrimTabs.com, said signs of a shift among fund investors are emerging. “It’s starting to happen,� he said. “The growth-and-income funds we track [which tend to be more value-oriented] took in $1.9 billion this month through the 18th, and although aggressive growth was in the lead with $8 billion, that’s a tighter spread than we’ve seen, and a big change from March.

“It’s a subtle shift, but [the market] hasn’t come full circle� yet, he said.

Although stock funds overall have seen net redemptions in the last few days, according to TrimTabs estimates, May still could end with more than $20 billion in net cash inflows.

“That’s still an enormous amount of money--except by year-2000 standards,� Wittnebert said. In April, equity funds took in an estimated $34 billion in net new cash.

If individual investors begin to direct more cash into value funds, it could give more of a push to the value-stock rally, analysts note.

Among Tuesday’s market highlights:

* Tech losers included Intel, down $8.50 to $109.88; Apple, down $4.13 to $85.81; Oracle, down $5.19 to $62.63; and Sun Microsystems, down $8 to $71.88.

In the Internet sector, Yahoo fell $7.94 to $118.31 and Amazon.com lost $5.19 to $46.69.

* Telecom names also were dashed. Qualcomm fell $9.06 to $79.38 and JDS Uniphase dropped $6.19 to $79.13.

* Southland stocks swept up in the tech sell-off included NetZero, down $1.25 to $8; Applied Micro Circuits, off $16.75 to $85.25; Gemstar, down $6.50 to $39; and Vitesse Semiconductor, off $4.69 to $41.44.

* On the plus side, another value-stock group that saw gains was the banking sector. Citigroup rose $1 to $62.31 and Bank of America gained $2.31 to $52.56.

* Paper stocks took a hit when a Deutsche Banc Alex. Brown analyst downgraded the sector, saying high inventories and weak U.S. demand are weighing on prices. Georgia-Pacific lost $3.56 to $34.13, Mead slipped $1.69 to $32.06 and Weyerhauser skidded $3.13 to $48.75.

* What was bad for stocks was good for Treasury bonds. Yields slipped as some money exiting stocks went into bonds.

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How Bad?

How major stock market indexes fared Tuesday, and their declines so far from their record closing highs:

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Tues. Drop from Index change record high Nasdaq composite -5.9% -37.3% Nasdaq 100 -7.4 -35.7 Russell 2,000 -2.7 -24.3 Dow transports +1.3 -21.7* Wilshire 5,000 -2.2 -14.5 Dow industrials -1.1 -11.1 S&P; 500 -1.9 -10.1 S&P; mid-cap -1.7 -8.9 NYSE composite -0.7 -5.0* Dow utilities -1.6 -2.2*

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* Record high was reached in 1999. For all other indexes, records were reached this year.

Sources: Times research, Bloomberg News

Bloomberg News was used in compiling this report.

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Market Roundup, C11-12

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TECH STOCK WOES

Nasdaq index falls below mid-April lows as investors lose faith. A1

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Playing Defense

Many stocks in classic “defensive� sectors such as drugs and banking have lived up to their billing, holding up amid this year’s market beating. Defensive stocks often trade at lower valuations than the broad market based on measures such as price-to-earnings ratio, though not all fit that bill. A sampling:

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Ticker Tue. YTD % Est ’00 Est ’00 Company sym close change EPS P/E Reebok Intl. RBK $17.81 +117.6% $1.26 14 State Street STT 119.25 +63.2 3.68 32 Progressive PGR 93.44 +27.8 1.25 75 Philip Morris MO 27.25 +18.5 3.69 7 Bestfoods BFO 62.00 +18.0 2.75 23 Marsh & McLennan MMC 104.81 +9.5 4.10 26 Schering-Plough SGP 45.50 +7.4 1.64 28 XL Capital XL 55.25 +6.5 4.50 12 U.S. Bancorp USB 25.06 +5.3 2.28 11 American Intl AIG 113.56 +5.0 3.67 31 J.C. Penney JCP 18.06 -9.4 1.74 10 Sara Lee SLE 17.63 -20.1 1.34* 13 S&P; 500 index SPX 1,373.86 -6.5 57.53 24

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*Fiscal year ending in June

EPS=Earnings per share P/E=Price-to-earnings ratio based on analysts estimates

Sources: Bloomberg News, Zacks Investment Research