Money pro Charles Lemonides isn't averse to buying shares of out-of-favor companies. Of particular allure are those with short-term woes whose assets he sees growing in value. "We buy value stocks at depressed multiples and sell at growth prices--when their price-earnings ratios are flying," says the chief investment officer of ValueWorks@M&R Capital Management. In 2000, ValueWorks' portfolio gained 6.3%, following a 39% gain in 1999. (The Nasdaq fell 39% in 2000 but gained 86% in 1999.)
Two value stocks that Lemonides thinks have strong growth prospects: Apple Computer (AAPL
) and EarthLink (ELNK
), the No. 2 U.S. Internet service provider. Their shares have fallen off a cliff: Apple dropped from 75 a year ago to 21 on Mar. 7, and EarthLink from 25 to 10.
Lemonides argues that Apple is a bargain and figures it's worth 45. He values Apple's operating assets at $30 a share and its cash and marketable securities at nearly $15. He thinks Apple will break even in 2001 ending Sept. 30 and earn $1.50 a share in 2002, as the economy stabilizes and new products kick in. Apple has done well with new products in recent years, says Lemonides, but the PC sales slump hurt earnings.
EarthLink is a value play--and a takeover target--now that it has amended a three-year pact with Sprint, which owns 27% of EarthLink. The revised pact scraps Sprint's right to acquire EarthLink and opens the door for other EarthLink mergers. Analyst Frederick Moran of investment firm Jefferies thinks EarthLink is attractive to an outfit seeking to bulk up its Internet operations to compete with AOL Time Warner. Microsoft's MSN unit is a likely buyer, says Moran, who values EarthLink at 15 based on its some 5 million subscribers. EarthLink declined comment.
By Gene G. Marcial
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Copyright 2001, Bloomberg L.P.
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