There Is Still Value for Those Who Missed the Rally

The celebration is on as Wall Street hits highs not seen in a year or more. But is it too late to join the party?

Not really, say value investors, the stingy bargain-hunters who follow the investing wisdom of America's most influential stock buyer, Warren Buffett (search).

The gains have been concentrated in the technology-heavy Nasdaq, especially in rebounding favorites of the dot-com era. That means there could be values left over in bigger stocks that have been overlooked in the first half of the year.

"High dividend, steady growth stocks have underperformed -- they're like a loaded spring now," says Michael Mach, who manages large capitalization value funds for Boston-based Eaton Vance (search).

The next phase in the rally could center on more established companies that are boosting profits, and dividends, in the economic rebound, Mach said. He notes that corporate profits are on the rise, buoyed by hefty cost-cutting programs of the past few years. Economic figures have turned much more positive in the past month, though persistent high unemployment and rising interest rates have some investors worried over whether the rebound can be sustained.

"Earnings could be better than expected," says Tim Connors, chief investment office for value equities at Delaware Investments (search) in Philadelphia. "There's some additional upside operating leverage that the analytical community has underestimated."

Companies, and Wall Street analysts, have become much more conservative in the post-Enron era because they don't want to be accused of hyping their shares, Connors said.

The most likely to shine in such an environment are larger companies with cleaner balance sheets and solid cash positions, he argues. They tend to be dull-as-dishwater consumer cyclical companies, financial companies, retailers and heavy industry -- not hot stocks like tech shares.

But the conservative, value-oriented funds like Delaware's Connors and Eaton Vance's Mach haven't produced the big winners this year. The biggest gainers have been funds seeking out smaller companies that don't pay dividends.

Meanwhile, much of the trading volume on Wall Street this year has been generated by in-and-out, short-term investors, mostly professionals, including hedge funds and program traders. So the average investor can be forgiven for wondering what all the fuss is about on Wall Street.

In the three to four months since investors have started pouring cash back into the market, the major averages hardly moved at all until the past two weeks. For much of the year, fund investors have been pulling cash out of the biggest gainers, the tech and growth funds.

Indeed, the investors who have bought into large-cap value funds have been disappointed. The funds that average investors have been buying -- large-cap value and even more conservative equity-income funds -- are major laggards so far this year, according to Lipper Inc., a unit of Reuters Group Plc.

"There's a fairly strong hangover effect," said Lipper senior research analyst Don Cassidy. "The things that hurt people in a bear market -- the tech and growth stocks -- is what they're avoiding."

Value investors say individual fund investors will eventually be rewarded for avoiding the year's hottest funds. But there's still no sign they've got it right. In the past two weeks, the Nasdaq has soared 8.5 percent, while the Dow has gained just 2.5 percent. For the year, it's Nasdaq, up 33 percent, Dow up 12.5 percent.

In the latest sign of the same kind of positive tech spin that propelled stocks in the late '90s, tech stocks rallied after a price war hit the personal computer market, as Dell Computer Corp. (DELL) announced across-the-board price cuts of up to 22 percent, aimed at competitor Hewlett Packard (HPQ).

Tech investors took an upbeat view, deciding it was yet another sign that demand for low-priced PCs will get consumers back into stores buying peripherals and software. The biggest gainer, Intel, leaped nearly 10 percent on the view that the price war would spur demand for its chips.

Chris Danely of J.P. Morgan told Reuters that Intel's shares are overpriced, trading at 30 times estimated earnings per share for next year, higher than ever,

"We never really are going back to the glory years" of personal computer sales, Danely said. "We're getting really excited, but we're getting about 9 to 10 percent growth (in PC sales) this year, when it averaged over 20 percent in the 1990s."

Value investors see this all as further evidence prices for technology stocks have cranked up to ever more unrealistic levels. Even Microsoft, whose stock price has barely moved over the past two years, can't be considered a bargain at 28 times earnings, argues Delaware Investments' Connors, because of its moderating growth prospects.

"It's hard to get excited about tech in general," said Connors, citing the big gains they've already made. "You've got to wonder if there's a whole lot more upside."

The rebound in tech stocks like Yahoo Inc. (YHOO) and Inc. (AMZN), meanwhile, has been so strong some have called it the "echo bubble (search)."

And individual investors don't need to be reminded about what happens when technology stocks climb too far too fast. "They are really showing that they don't want to get burned again, by avoiding the hot growth funds," says Lipper's Cassidy.