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Risks and Rewards

Even Post-Rebound, Market Is Rife With Bargains, Many Pros Say

September 02, 1998|WALTER HAMILTON

Don't worry if you missed the first genuine buy-on-the-dip rally Tuesday in the stock market's seven-week downturn. There are still plenty of bargains, money managers say.

On Tuesday, the Dow Jones industrial average leaped 288.36 points, or 3.8%, to 7,827.43, on record volume as investors pounced on stocks that had been beaten down in Monday's 512-point free fall.

But even with the rebound, technology stocks are 23% off their 52-week high, bank shares are down 29% and oil issues have fallen 20.5%. Those numbers are based on the leading indexes for each industry--many individual stocks have fallen much farther.

Only the most ardent bulls proclaim the sell-off to be complete and the recovery to be underway. Many other Wall Streeters say the market hasn't seen the last of the selling.

Yet even the most cautious managers say there are good buys in today's market.

"There's this huge sale in a lot of stocks," said Kevin Landis, manager of the Firsthand Technology Leaders fund. "We had this bounce-back rally, but let's face it, we didn't bounce back all the way."

To identify promising stocks, the chart accompanying this story lists companies whose projected earnings growth is high compared with the projected price-to-earnings ratios of their stocks. Many have fallen hard since the market peak in mid-July, but all still sport five-year projected earnings growth rates in the double digits.

For individual investors looking to pick up high-quality technology companies, Landis recommends two groups.

First, he likes big-name tech stocks. They're likely to rebound quickly in an upturn as investors seize upon the well-known names first, he said. That was demonstrated Tuesday as companies such as Microsoft (ticker symbol: MSFT) and Cisco Systems (CSCO) rallied strongly.

Landis also likes smaller companies that make semiconductors for the networking and communications industries. Many of their products form the "guts of the Internet," he said.

Critics say frothy Internet stocks helped instigate the sell-off. But Landis says his companies have strong prospects and demand for their products will surge as Internet use inevitably grows.

He likes PMC-Sierra (PMCS), whose chips are used in so-called wide-area networking. It sells to large communications-equipment companies such as Cisco and Lucent Technologies (LU). PMC-Sierra's stock is down 35% from its 52-week high.

Among other specialized chip companies, Landis likes Vitesse Semiconductor (VTSS) in Camarillo, Applied Micro Circuits (AMCC) and Level One Communications (LEVL).

Another bloodied sector is banking and financial services. Investors fear that large money-center banks are vulnerable to the financial meltdown in Russia.

Despite their recent trouncing, it's too soon to buy the big banks until the full extent of their exposure to Russia is known, said Tom Finucane, co-manager of the John Hancock Financial Industries fund.

It's a different story for some of the regional banks that have been pummeled. They've sold off on fear of a recession, which would cut demand for loans and increase loan losses.

Still, Finucane likes Wells Fargo (WFC) and Norwest (NOB), which he expects to show strong growth when they complete their planned merger. And if an economic downturn occurs, the banks are likely to suffer less than their rivals because they're smart lenders, he says.

"They know how to lend money and get it back," he said.

Finucane also likes First Tennessee National (FTEN) bank, and Progressive Corp. (PGR), which sells automobile and property-casualty insurance.

With falling oil prices, few sectors have been hit harder than oil. Many of the small- and mid-cap stocks in the chart are oil-related companies.

Nevertheless, Dan Rice, manager of the State Street Research Global Resources fund, believes the selling has been overdone. Historically, when investors are their most bearish, oil stocks sell for an average of four times cash flow (six to eight times when the sector is in favor).

Yet stocks in the sector change hands these days for around three times cash flow and trade as though crude oil prices will remain depressed for years, he said.

He likes Anadarko Petroleum (APC), Ranger Oil (RGO) and Seagull Energy (SGO).

"You should be able to make money in 12 to 18 months," he said.

But he offered one caveat: "The only hesitation I have is there's no historical bounce point [to signal a likely recovery]. They've gone through all the bounce points."

*

Times staff writer Walter Hamilton can be reached at walter.hamilton@latimes.com.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Amid Soaring Volume . . .

Tuesday was the busiest trading day ever on the New York Stock Exchange and the second-busiest on Nasdaq. The five heaviest-volume days for each market:

NYSE

Date: Volume (billions)

Sept. 1, 1998: 1,205

Oct. 28, 1997: 1,201

Aug. 27, 1998: 0.935

Aug. 31, 1998: 0.915

Aug. 5, 1998: 0.850

*

Nasdaq

Date: Volume (billions)

Oct. 28, 1997: 1,354

Sept. 1, 1998: 1,259

April 22, 1998: 1,026

Aug. 31, 1998: 1,004

Oct. 1, 1997: 0.971

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