Foolish Four Bargains
Value stocks have been the darlings of the market for the last couple of weeks, and the Foolish Four Portfolio stocks have benefited. Newer Foolish Four stocks, for portfolios starting now, are not being swept up in the rush to value stocks, but that's reasonable -- Foolish Four stocks are supposed to be out of favor with the market when you buy them.
By Ann Coleman (TMF AnnC)
November 3, 2000
The Foolish Four Portfolio had a good week -- at least through Thursday, it was beating the S&P 500, the Dow, and the Nasdaq. Are our downtrodden, out-of-favor dogs of the Dow starting to howl again?
All week the media has been talking about the switch to the old economy stocks -- value stocks, blue chips, etc. The Dow rose 2.86% through yesterday, and the Foolish Four's bargain quartet rose 4.58%, following a rise of 9.12% last week. While we are a long way from our high and still trailing the market for both this year and the life of the portfolio, the market's behavior over this very short time period is bearing out the theory that when the market turns away from growth stocks and looks for value, the Foolish Four stocks are the place to be.
Is this The Big One? Are we seeing a major shift to value investing that will last long enough to actually make some money? I have no idea. We've seen the market flirt with value like this twice so far this year, only to see it sidle back over to those sexy growth stocks. I'm not making any market calls here, but I am feeling more and more comfortable with the idea that when the shift to value happens, Foolish Four stocks are good ones to be in.
Let's take a look at the stocks in the portfolio now, and those that one would buy if starting a Foolish Four portfolio now.
Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> has risen almost 14% since it announced earnings on October 17. The numbers weren't exactly rip-roaring, but the company did show a 1% increase in revenues and a modest increase of 2% in earnings per share. The company is expecting slight increases in sales and revenues next year, and a modest increase in profits.
You wouldn't think numbers like those would send the price up 13.9% in two weeks, but that's the beauty of value stocks. "Value" means that they are underpriced relative to their intrinsic value, so even modest good news and an investing climate favorable toward value companies can send investors knocking on their doors.
Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>, too, has seen a sharp rise since the middle of the month. It's up 24% on news that the company plans to restructure its business. Personally, I think the PalmPix, a 1.6 oz. digital camera add-on for the PalmPilot, might have been responsible for a lot of that rise. How cool can you get?
General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> has risen modestly since the middle of the month but, like Caterpillar, is still well below its early October price. It dropped yesterday, the only Foolish Four stock to do so. The news was good. GM posted the largest gain in market share of all car manufacturers, a very healthy 2.3%. Ford Motor Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> and DaimlerChrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DCX)") else Response.Write("(NYSE: DCX)") end if %> both lost 1.1%. (Both showed modest price gains. Go figure.)
GM has dropped off the Foolish Four list, having risen to seventh place in the RP rankings. In this case, that's not because GM has done well, but because other stocks have dropped so much that their high-yield/low-price ratio is now better than GM's.
J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> has also dropped off the Foolish Four list, due to its sharp price rise this year. It started off around $126 per share and is up 30% for the year, having dropped as low as $134.25 on October 18. Now up to around $165 per share, it's still well below the high that it hit right after announcing its merger with Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>. Both banks are being sued by Sumitomo Corp. for breach of fiduciary duty and negligence in connection with losses incurred by Sumitomo's former chief copper trader. At least they can consolidate their legal costs.
If one were to buy the Foolish Four today, both Caterpillar and Kodak would still be on the list, but GM and J.P. Morgan would be replaced by AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %>. What a couple of stinkers! AT&T, in particular, is about as low as a blue chip can get. It's selling 65% below its high for this year. Gag. Even worse, it dropped over the last two weeks as value stocks and blue chips rose all around it. With a P/E of 12 and a yield of more than 4%, just how much lower can this baby go? The company has management problems and apparently the market wasn't impressed by its plan to split into four companies.
Just for fun, let's compare AT&T with another major communications infrastructure company, Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. Cisco has a market cap of $392 billion, AT&T's market cap is $81 billion. With 7 billion shares outstanding, Cisco Systems is earning $0.36 per share and sports a P/E ratio of 155. AT&T has about half as many shares outstanding and is earning $1.75 per share.
In rough terms, that means that AT&T is earning more than twice as much cash this year as Cisco. AT&T's P/E is 12. The difference is that AT&T's earnings are shrinking and Cisco's are growing at an enviable rate. Still, AT&T isn't about to shrink away to nothing, and Cisco will successfully wire the entire world one day and slow down, too.
AT&T looks like one heck of a bargain to me.
Dupont is looking rather sad these days, as a Foolish Four stock usually does. Declining earnings and stagnent sales have put the chemical giant into a slide that has taken 40% off the price this year alone, but it's been sliding fairly steadily for over two years. Tom Jacobs' take on DuPont explains why it's out of favor. Will it turn around?
There you go. Six value stocks, five bargains (excluding J.P. Morgan from the bargain list), and five pretty good opportunities for value investors if the return to value is real this time -- or the next.
Fool on and prosper!
