Returning
To Value
by Dr. Hans Black, editor,
Interinvest Review & Outlook
"Having been quite negative on the markets for the past two years, we are at last seeing some very real bargains. They should become even more plentiful as we move into the middle of 2001."
As
numerous publications, such as Barron's, Time magazine, and many
others, are now revealing the existence of a stock market smash,
is their newly discovered "insight" a telling sign
that things are about to change or just an indication of more
problems to come? In last month's essay I illustrated the extraordinary
decline many well-known blue chips had suffered. Since then,
in the past four weeks, many, many others have joined the list
(even as some of the earlier casualties have retraced some of
their losses). Again, the main culprit is either the lack of
sufficient earnings or general disappointments. The lofty P/Es
seen earlier this year could no longer be supported merely by
hot air. The slightest disappointment in such companies as Intel,
or more recently, Northern Telecom has produced cascades of selling,
resulting in enormous losses over a very short period. In cases
such as Xerox and others, where the news simply kept getting
worse, the stock prices have simply collapsed.
An interesting aspect
of the decline over the past two years, and particularly in the
past six months, has to do with rotation among groups. This,
combined with a lack of "pricing continuity," makes
for a somewhat unique experience, certainly within the past thirty
years. Stocks no longer open a mere 5 or 10 percent below their
previous night's close; they now routinely trade 25, 35 and even
50 percent below their previous price. Such movements will sometimes
take place as a result of only the very slimmest of changes in
perception. Over-valued companies one day become less over-valued
the next. There are now hundreds and hundreds of stocks down
over 90 percent from their peaks earlier this year. The question
one must ask is this: If all these companies as so bad, why did
they get so high in the first place? The second part of this
question is, of course, easier to answer. Many observers, ourselves
included, have pointed out that stock markets have experienced
what might be called a once-in-a-lifetime mania. How else to
explain that grown men and women with good education have been
paying 300, 400, or 500 times earnings for any kind of commercial
enterprise?
Readers will undoubtedly
remember the prevalence of last winter's so-called "new
era" thinking in which earnings were no longer important,
and where nothing else mattered but market share. Those of us
who didn't follow the new party line were accused of old ways
of thinking. Well, lo and behold, the smash is here with a vengeance.
In conversations with many friends and contacts in North America,
one horror story after another emerges. Some people have been
wiped out by margin calls, others have lost their homes, and
companies in particular the dotcom companies without the cash
flow to cover either their payrolls or rent have been forced
to lay off workers.
The upshot of all of this is that we seem to be returning to a much more sane and considered environment. A growing number of investors are paying close attention to fundamentals. Having been quite negative on the markets for the past two years, we are at last seeing some very real bargains. They should become even more plentiful as we move into the middle of 2001.
Editor's Note: Dr. Hans Black is editor if Interinvest Review & Outlook, P.O. Box 1585, Boston, MA 02104, 1 year, 12 issues, $125. Interinvest is a global money management firm. Visit the Web site at www.interinvest.com.
