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SIVY ON STOCKS from money.com
November 29, 2000

Fix your mix

In volatile markets like this one, sectors behave in radically different
ways. Here's what you need to know to find today's best opportunities.

By Michael Sivy

When the economy is purring along, most stock groups rise and fall
together. But amid uncertainty and turmoil, different groups suffer at
different times and rebound with varying delays. That's what's been
happening this year, and investors preparing for 2001 need to examine each
sector independently to find the best bargains and to minimize risk.

Since January, there have been three big divergences in the market. The
first has been between tech stocks and defensive groups. The second has
been between issues with high P/Es and those with low P/Es. And the third
has been between companies with big market capitalizations and those with
small caps.

After many months of leadership, tech stocks peaked in March and have
declined as evidence of an economic slowdown accumulated. Technology
companies began warning that their earnings might fall short in upcoming
quarters, and the entire sector suffered as money managers and individual
investors began reducing their exposure. By Thanksgiving, even the
strongest and most popular tech stocks, including Cisco and Oracle, were
down a third or more from their highs. And even at current levels the
stocks aren't cheap with P/Es as high as 50. They'll be vulnerable to
further declines until it's clear that the economy has completed its 
downswing.

By contrast, consumer stocks (which are defensive because they aren't as
tied to economic cycles as tech stocks are) benefited from investors'
flight to safety. After having dropped by a third to less than $60 a share
in March, Procter & Gamble [PG] rebounded 35 percent to $74. And
Anheuser-Bush [BUD] has rallied more than 70 percent over the same period
to $48. Those stocks are now trading at more than 20 times next year's
earnings, so they're no longer exceptionally cheap. But such defensive
issues may still be worth buying to balance a portfolio that has been
overloaded in tech.

Energy stocks have also benefited immensely as a defensive sector, but they
were helped even more by this year's sharp runup in the price of oil.
ExxonMobil [XOM], one of the most conservative international oil companies,
has gained 20 percent since March to $89 a share. I doubt, however, that
oil can remain above $30 a barrel for more than a year or two -- today's
high prices will bring on more supply and an economic slowdown could reduce
demand. As a result, I think energy stocks may have seen the best parts of
their gains.

While constrained supply has pushed up prices in the oil business,
oversupply has done the opposite in telecommunications. Fiercely
competitive phone companies have overbuilt their networks so much that they
have been undercutting each other on pricing and cutting back on further
equipment purchases. The result is that stocks throughout the sector --
from service providers like AT&T [T] and WorldCom [WCOM] to equipment
manufacturers like Lucent [LU] -- have lost more than half their value
since the spring. Statistically, I think stocks in the group are
undervalued by a third, but they still may represent dead money for the
next six months.

These divergences among industry sectors are the most visible symptom of
the roiling market, but they aren't the only one. The largest U.S.
companies have average P/Es in the mid-20s, and the most popular giants
have P/Es double or nearly triple historical levels. By contrast, small
companies -- those with market caps of less than $3.5 billion -- have
average P/Es of below 18.

 From all these cross-currents, two important ideas emerge. At any point
there's likely to be at least one sector that's deeply undervalued. Don't
try to predict the turns -- just buy one or two of the blue chips in the
sector that looks cheapest. Right now, defensive stocks are still in an
uptrend but they're no longer cheap, while the techs are still falling
(their decline isn't over yet). You can either buy good tech values and
ride out any further decline or wait until they look fully washed out. The
other important idea is that high-P/E blue-chip growth stocks are way
overvalued compared with everything else. Of course, those are the stocks
everyone most wants to own. But be smart -- diversify with a value fund or
a fund that holds mid- and small-caps with an average P/E below 20. They're
out there.


###

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