Keith,

The article I mentioned.


Vince

***********************************************


rashed By Tax Selling

                  But are there bargains among the discards?


                  By Michael Santoli


                  Here it is more than six months since even the most 
intransigent last-minute
                  filers wrote checks to the IRS to render to the government 
its due for their
                  financial good fortune in 1999. By rights, this should be a 
season relatively
                  free of concerns about taxes, notwithstanding the 
presidential candidates'
                  parrying over whose tax-cut math features more fuzz.

                  And yet, for anyone with a dollar in the stock market 
(which in recent weeks
                  has likely been reduced to loose change), the looming 
demands of this year's
                  levies on capital gains have helped to make this month yet 
another taxing
                  October for investors.

                                                 The jump-and-stumble course 
the
                                                 major stock indexes have 
taken this
                                                 year is being blamed for a
                                                 particularly intense effort 
among
                                                 mutual-fund managers and 
other big
                                                 investors to sell their 
losers. The
                                                 steep ramp-up in stocks that
                                                 persisted from the fall of 
1999
                                                 through the first quarter of 
this year
                                                 -- led by the technology
                                                 must-haves -- left funds 
with ripe
                                                 profit-taking opportunities 
when the
                                                 Nasdaq surge flagged in 
April. This
                  sell-high activity generated heavy capital gains in many 
portfolios -- tax
                  liabilities that managers have been rushing to offset with 
realized losses by
                  selling stocks that have cratered.

                  The fact that so many funds are enduring a flat-to-down 
year in this difficult
                  market has only added to the urgency. Investors aren't fond 
of getting stuck
                  with taxable distributions in even the most flush years of 
a bull market. So
                  managers are now trading in fear of how their shareholders 
will react to funds'
                  kicking off gains distributions in a year when the value of 
their holdings fails to
                  appreciate or, worse, falls outright. With the majority of 
funds operating on an
                  October 31 fiscal year end, and given a trend toward 
letting investors know
                  their estimated tax hit well before year's end, much of 
this selling has been
                  concentrated in a brief period of weeks.

                  One fund executive attending a Fidelity mutual-fund 
conference last week
                  reported that, oddly, some managers have resolved to be 
contrary and
                  "overdo it" in selling even their winners. The theory, he 
reports, is that if
                  they're going to have a capital-gains distribution anyway, 
the most skittish
                  shareholders will sell the fund to avoid the payout and its 
tax liability, whether
                  it's, say, either 10% or 12% of net asset value. So the 
idea is to take profits
                  and "reload" for the benefit of those investors who will 
stick around.

                  Now, with the Nasdaq off 22.7% since Labor Day and 8% so 
far in
                  October, much talk is bubbling about suggesting that the 
assault is ending.
                  This line of reasoning counsels that it's time to peek out 
of the foxhole and
                  survey the wreckage for some badly damaged stocks to pick 
up in
                  expectation of a late-year rally.

                  Not so fast. While it's true that in past years, these 
hard-hit tax-selling victims
                  tend to recover in the early part of November, the move 
often proves fleeting.
                  Like a ball being held under water, these stocks jump when 
the downward
                  pressure is released, but that doesn't mean they escape 
gravity's pull for long.
                  Soon enough, they're hit by a secondary wave of selling by 
investors who tidy
                  up their tax situation closer to the end of the year.

                  The quantitative equity research team at Lehman Brothers 
has studied recent
                  market history in search of patterns in tax-driven selling. 
In the process, the
                  analysts came up with a list of 131 stocks that look 
vulnerable to persistent
                  weakness through most of the fourth quarter. The study 
scanned the Russell
                  3000 index -- basically the 3,000 largest U.S. stocks -- 
for those that had
                  fallen at least 40% this year through September, and had 
lost at least 10% in
                  the prior six months. They also plucked only those stocks 
that had seen rising
                  trading volume over that period. The idea was to find only 
those names that
                  seem to be in the throes of a selling crescendo. In 1997, 
there were just eight
                  such stocks. In 1998, there were 202 and last year 101, on 
a par with this
                  year's tired crop.

                  Murali Ramaswami of Lehman says, "There's both a tax-loss 
story and a
                  momentum story. Losers continue to be losers." At least 
through the fourth
                  quarter they do.

                                       The negative momentum of these stocks 
tends to
                                       gather speed from the first week of 
November to
                  Christmas. In this period, from 1997 through last year, the 
Losers Portfolio
                  dropped an average of 20% more than did the Russell 3000 
index.
                  Bottom-fishers, beware.

                  The resulting list, which Lehman billed to its 
institutional clients as a menu for
                  hungry short-sellers, features numerous stocks caught in 
the major downside
                  themes of the year. Name a major telecom-services provider 
and the odds
                  are good it's in this bunch, the result of a stampede away 
from the group. Big
                  retailers also dot the down-on-their-luck roster, as the 
slowing economy has
                  ravaged shares of Circuit City, Dillards, Saks and others. 
And of course there
                  are plenty of dot.com names experiencing the ugly side of a 
mania undone, in
                  a reversal that has made some mere flyspecks on the 
market's windshield.
                  Witness Barnesandnoble.com and Razorfish.

                  An intrepid prospector surveying this list in a quest for 
next year's Comeback
                  Stock of the Year will encounter no shortage of companies 
that appear, for
                  the moment, broken and in need of an inspired strategic 
revamping, some
                  slick investor-relations work and plenty of luck. Former 
blue chips such as
                  Lucent Technologies, Bausch & Lomb and Dial seem to fall 
into that club,
                  where for investors a love of dirt-cheap stocks and a 
strong backbone is the
                  price of admission. DuPont, which recently ratcheted down 
its 2001 growth
                  forecast and is beset by high raw-materials costs, is 
arguably apt to remain in
                  the investors' time-out chair for a while as well. That its 
shares failed to sell off
                  after a limp earnings report last week is perhaps the most 
hopeful sign one can
                  seize on with regard to the chemicals giant.

                  Still, for the investor patient enough to endure what could 
be a stormy
                  November and December, a few sizable companies with 
temporary problems
                  but solid long-term growth stories are attracting some fund 
managers looking
                  to buy. As detailed in Barron's last week ("Retailers on 
Sale," October 23),
                  there is reason to expect better performance from selected 
retail chains.
                  Federated Department Stores, the parent of Macy's and 
Bloomingdale's,
                  merits attention both for its buoyant same-store sales 
growth in a retail
                  headwind and for its repair of the addled Fingerhut 
catalogue division, which
                  suffered a spike in delinquencies. The shares are off their 
trough levels in the
                  low 20s, but a recent quote of 28 still seems a 
better-than-fair price for a
                  company that some pros believe could earn more than $5 a 
share next year.

                  The advertising business this year is being given the cold 
shoulder by investors
                  after a torrid love affair through 1999. Fearing that the 
dot.com washout and
                  resultant cash drought would wither the bottom line of ad 
firms, investors
                  abandoned Interpublic, the third-largest owner of ad 
agencies after WPP and
                  Omnicom.

                  But Mark Greenberg, manager of the Invesco Leisure fund, 
saw a chance to
                  pick up a "good, solid company" inexpensively when 
Interpublic hit the low
                  30s. Now at 39, Interpublic is still fetching just 22 times 
forecast 2001
                  earnings, which are expected to grow 15%, faster than 
profits for the overall
                  market.

                  "I bought some early this year and added to it just 
recently. The bad news is
                  probably priced into the stock, and then some," he says.

                  Madison Avenue markdown

                  Interpublic, parent of McCann Erickson, among other firms, 
has always
                  suffered a bit in comparison with Omnicom, a market darling 
considered the
                  class operator in the industry. But Interpublic now trades 
at a discounted
                  valuation, and is briskly expanding its direct-marketing 
and public-relations
                  business, which are growing faster than the traditional 
Madison Avenue game.
                  Add in the fact that only a sliver of its business comes 
from dot.coms and that
                  half its revenues are collected overseas, and Interpublic 
appears well insulated
                  from crippling economic forces.

                  In a more prosaic corner of the ad business sits Valassis 
Communications, a
                  big coupon distributor, which produces the colorful inserts 
that fall out of your
                  Sunday paper. A well-loved growth stock that pleased many a 
small and
                  mid-cap fund manager in 1999, Valassis this year ran into a 
nettlesome
                  combination of higher paper prices and stiffer price 
competition in one of its
                  insert categories. Investors bailed out in droves, halving 
the stock from a high
                  above 44 to just north of 20. Now at 25, the shares are 
"absurdly cheap,"
                  says Greenberg, who also owns Valassis.

                  Another fund manager points out that the company has taken 
control of its
                  troubles, with hedged paper prices and a move to cut supply 
in products
                  where pricing declined. Even with its growth forecast 
revised downward,
                  Valassis is still expected to increase profits at a 10%-15% 
long-term rate, and
                  earnings next year should rise close to 12%, to $2.50 a 
share. That leaves the
                  stock at a mere 10 times next year's profits. And it's 
worth noting that in times
                  of slower economic growth, coupons are among the things 
that companies
                  continue to offer to bargain-hunters.

                  With a new wave of tax selling due to bear down on haggard 
stocks any
                  week now, it might feel as if the typical first-quarter 
rebound in the year's
                  losers that's been documented by Lehman Brothers is 
hopelessly distant.

                  If you're tempted nonetheless to plunge ahead and buy a 
beaten-down mutual
                  fund, check first to see if it will be among those making a 
capital-gains
                  distribution later this year. In that case, you'll be on 
the hook for the tax even
                  though you didn't participate in the gain. (You can take 
the plunge without
                  worrying about payouts if you're buying the fund for a 
tax-deferred account
                  such as a 401(k) or an IRA.)

                  But at least in selected stocks, it seems the machinations 
of tax-fearing
                  investors have created the stock market equivalent of a 
25%-off sale, and you
                  don't need to redeem a manufacturer's coupon to take 
advantage.