From Fallen Angels to Rising Stars?


By Gene Marcial What now, Dow Jones? To old timers in the game, that's the inevitable question whenever the stock market finds itself at some kind of a crossroad. Robert Stovall is one such Wall Street veteran who has seen many bull markets that mesmerized investors -- and bears that paralyzed them.

Given the surprise rally in recent days, Stovall, now chief investment strategist at Clemente Capital Asset Management in New York, which steers some $1 billion, doesn't mince words about the market's state: "After suffering through a 49% plunge since March of 2000 -- the steepest decline since the end of World War 11 -- the market has bottomed."

Although he adds that the recovery won't display the pyrotechnics seen in the late 1990s, the market's undersold condition begs for investors to buy. "And buy they should," argues Stovall.

CHRISTMAS CELEBRATION. Still, investors should have no unreasonable illusions: "The recovery in stock prices will be somewhat slow -- similar to what happened in the mid-1950s through 1968, when the market took its time but eventually went up 600% during that period," recalls Stovall, who has been a market strategist for several major Wall Street houses, including E.F. Hutton in 1959 as research director, Dean Witter Reynolds in 1969, and Prudential Securities in 2000.

What's his forecast for the Dow Jones industrial average this time? Stovall believes that the Dow, now at 8,417 in midday trading on Tuesday, Oct. 22, will close above 9000 by yearend.

Why so skimpy a jump? "The bears will [dominate] the Thanksgiving period, while the bulls will celebrate Christmas," figures Stovall. "So we see quite a choppy market for a while." But what's more reassuring, he adds, is that November and December are usually strong months for the market during years when local elections are held (see BW Online, 10/15/02, "Midterm Elections as Market Fuel").

What stocks should Christmas-celebration shoppers be looking for? "The gigantic losers of this bear market should be the ones that will become the next bull market's winners," says Stovall. The hefty losers that he suggests investors snap up now:

Cisco Systems (CSCO), which has been battered from its high of $80 a share on Mar. 27, 2000, to a miserable low of $8.60 on Oct. 8, 2002. It's now at $10.95.

Intel (INTC), which has gotten hammered from its high of $74.87 a share on Aug. 31, 2000, to an unbelievable low of $12.95 on Oct. 9, 2002. It's now trading at $15.45.

Microsoft (MSFT), this high-flier has been shot down as well, cascading all the way from $119.12 a share on Dec. 12, 1999, to a low of $42.42 on July 24, 2002. It's now trading at $52.51.

AOL Time Warner (AOL) has been pummeled almost to a pulp from a high of $56.60 a share on May 21, 2001, to a mere $9.64 on July 25, 2002. It's now selling at $13.05.

And General Electric (GE), everybody's darling until the market's roof caved in, reached a high of $60 a share on Aug. 28, 2000, only to skid steadily to a low of $21.40 by Oct. 10, 2002. It's now trading at $26.72.

Note that of these once-upon-a-time big guns, only Intel and GE continue to pay cash dividends.

These are the stocks, predicts Stovall, where the big, smart money will flow -- once institutional investors recognize that the market has bottomed. All the bad news and the worries have been adequately reflected in these stocks, he says.

PARADE LEADERS. If investors buy a basket of them during the market's current bottoming process, they'll be amply rewarded over the next year or two, Stovall says. Never mind that the market has displayed timidity if not fear toward these large-cap losers. Stovall argues that they'll be the first to bounce back and lead the parade on the upside.

He thinks the big caps are where investors should be in this stage of the game. But not just big caps: Stovall says investors should be in the well-known fallen angels because their stars will inevitably shine again -- when the bull market finally becomes ascendant. Marcial is BusinessWeek's Inside Wall Street columnist


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