Stock trek: enterprising investors take a voyage to value investing

Entrepreneur, July, 1998 by Lorayne Fiorillo

6. Above all, think for yourself and be patient.

THE NEXT GENERATION

So where do you go to find value? You don't have to graduate from Starfleet Academy or survive the wrath of Khan to find good stocks at attractive prices. In larger company stocks, Jackson likes paper products, tobacco companies and financial services companies, including banks, insurance companies and brokers. Warren Spitz, a portfolio manager with Prudential Investments, suggests that investors looking for values in the mid-cap sector check out financial services companies, real estate investment trusts, consumer cyclicals and industrial materials companies (such as aluminum and steel). On the small-cap level, Jay Kaplan, also a Prudential Investments portfolio manager, suggests that investors focus on cash flow instead of earnings. "Cash pays bills; earnings don't," says Kaplan. He likes companies involved in textiles, apparel, auto parts, restaurants, energy exploration and production, and suppliers to aircraft manufacturers.

Does selecting stocks have you so baffled you're thinking of using your disrupter? Relax. You don't have to do it all on your own. Transport to your nearest Morningstar report for a list of value funds in each sector. Whether you're looking for large-cap, mid-cap or small-cap funds, there are plenty to choose from - and you don't have to leave the neutral zone to do it. Just consult your financial advisor and read the prospectus and annual report before you invest.

KLING-ON TO YOUR PROFITS

To make the most of their investment dollars, value investors buy when stocks are out of favor and prices are low. Experts are used to a buy-and-hold strategy, sometimes holding and holding and holding, while it seems like the momentum investors are having all the fun. For some value investors, it's almost a point of honor, like not leaving the field of battle until you've won. So when do you sell? There's an old adage on the street of dreams: Buy on the bad news and sell on the good. For value investors, this adage should become a mantra, though many lack the nerve to do more than chant it. Jackson notes that if you can identify a cheap stock, you should be able to verify appreciated value. "If you're buying stocks at 50 cents on the dollar, when [the stock's value] gets to dollar-for-dollar, sell," he says.

Are the principles of value investing alien to you? No one is suggesting the value style should be the only one determining your portfolio. Like a good starship crew, diversity breeds satisfaction. What kind of investor are you? Kirk Kazanjian, author of Wall Street's Picks for 1998 (Dearborn Financial Publishing), says: "You can spot a value investor a mile away buying what everyone else is trying to sell. They look for stocks making new lows instead of those making new highs. Value permeates their lives - they don't spend a lot on cars, houses or clothes." If this describes your lifestyle, maybe value investing is right for you.

Nonetheless, where the market is headed is anyone's guess. Falling interest rates, slowing economic growth and lower corporate profits are conditions that generally favor growth over value. Big earnings increases and economic expansion generally favor value over growth. Not sure what the world is coming to? Don't choose sides: Diversify between sectors and styles. In the long run, you may save yourself a lot of headaches.