Picking stocks in an overvalued market

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I mostly left the stock market around April-May 1999. I bought back in right around rollover. The hard part about buying equities is this market is finding decent values. In my opinion, the best strategy is "bottom-feeding" for stocks that have taken an unfair beating by the market pundits. In my opinion, when everybody "loves" a stock, it's too late to buy.

In October 1998, I picked up an out-of-favor fiber optic company called, "Ciena." Ciena had great technology, but had just blown a merger with Tellabs. "Everybody" hated the stock and I bought at 13. In less than six months, the stock had tripled in value. It's current value is 100 per share... after a rocket ride to 189.

No, I didn't sell at 189... but I did make enough to comfortably pick a time and place to buy back into the market. I bought Ciena because I thought the stock had fallen below its reasonable market value, particularly given its technology and the ever increasing demand for bandwidth.

My current project is the venerable "Xerox." I went shopping early this year and found the blue chip beaten down to around $20 per share. Yikes! Now, the usual naysayers can find much to dislike in Xerox including a heavy debt load. Unlike most dot.coms, however, Xerox has earnings. Unlike most stocks, it pays dividends. In fact, the dividends are excellent when you consider the share price.

I suppose making copies isn't very sexy in the Internet world. Xerox, however, is still the number one "document" company in the world and they wisely bought the best color laser printer division, Tektronix. I expect a few more lean quarters before Xerox really turns the corner. Since it closed at close to 26 today, I'm up around 30%... even with the recent market correction.

Even in a good market, decent companies sometimes take a bad rap. It takes a little chutzpah to buy individual companies instead of mutual funds. Truth be told, however, most mutual funds do not outperform the market. If you are satisfied with just meeting the S&P 500, it's more efficient to buy an index fund (and enjoy lower management fees).

For me, I have a natural affinity for the "underdog." It's fun picking an out-of-favor company and watching the stock value rise. And I only worry about picking one or two stocks a year. And if I can't find a company I like... the money just sits in T's.

Oh, to address the usual suspects... this is not investment advice! Act like an adult and make your own decisions... and don't blame me if you buy Xerox and their copiers suddenly become intelligent life forms demanding equal rights. I'm simply suggesting when you do your own investment research, you might want look at out-of-favor firms.

Buy on the cannon; sell on the trumpets....

-- Ken Decker (kcdecker@worldnet.att.net), April 19, 2000


The number of geniuses increase exponentially in a bull market.

-- - (x@xxx.com), April 19, 2000.


Get in the shower make it nice and warm

Turn the massage on pulse

Turn around backwards

spread your buttocks

let the pulse hit your anus

oh yeah!

it'll make you stand on your

tip toes!!!

-- (gonn@haunt.u), April 19, 2000.

Thanks for the tip, Ken. My employer had occasion to deal with Xerox on a serious business level many years back, and during the course of "due diligence" I was frankly amazed by the sheer size of the company. I have to think that this contributed to their subsequent slide. They do seem to have righted the ship somewhat, or at least to a far greater degree than their stock price reflects.

Looking for under-valued companies is certainly the time-honored approach and it's clear that simply buying "blue chips" provides no safe haven. Bristol-Myers got hammered by over 30% today on news that their next big drug offering is in trouble. When nice, safe, recession-resistant BMY gets whacked, you know you're in a dangerous market.

-- DeeEmBee (macbeth1@pacbell.net), April 19, 2000.

Who's next....CISCO and when they go, the market will collapse. This market is ready for ............................... YOU FILL IN THE BLANKS

There is so few companies holding up this market I can count them on my toes.

-- I KNOW (i@know.its.true), April 19, 2000.


I agree. Size matters, but it makes performance more difficult. (There's an entendre for the rabble.) Xerox has outstanding brand recognition and good diversity outside the U.S. market. They invest well in R&D and have been strong in the digital copying technology. With all the ecommerce, we still live in a paper-based world. I don't see anyone selling the office copier any time soon. Until Xerox starting getting hammered, I wasn't really interested. At $20 a share, it seemed like a good bargain. The p/e is still around 12. In this market, that is very attractive. Furthermore, as the dot.coms start to shake out, I see a flight to quality. With luck, I'll sell Xerox at 40 after a positive 2Q earnings report in 2001. Then, we start all over again...

-- Ken Decker (kcdecker@worldnet.att.net), April 19, 2000.

Did you buy more than 5 shares Kenny, or are you now ready to retire from your busy life of researching tamper proof toilets and approving Dunkin Donut kiosks?

-- Who wants to be a Kenny ($1,000,000@greed.good), April 19, 2000.

I see Rite-Aid as one of these beaten down companies that will rise. They have attracted new financing and made some key hires. I am watching them.

-- FutureShock (gray@matter.think), April 19, 2000.

Mr. Decker,

Is that your ego you're stroking?... or something else...

-- Decker (is@a.dick), April 19, 2000.


I really don't know much about Rite-Aid, but I'll take a look. What can you tell me about your analysis?

-- Ken Decker (kcdecker@worldnet.att.net), April 19, 2000.

The company is beaten down. They have extended maturities on old debt and incurred new debt. They are facing suits from shareholders for the price being driven down so quickly in 1999. They were close to bankruptcy before this new round of debt financing.

Doesn't sound good, right? My hunch is they are such an established brand name, and have such an existing infrastructure, that they will be a prime candidate for a buyout/merger. Their PCS pharmacy plan division WILL eventually be sold, and with that a large influx in cash-this deal has been stalled due to poor management.

I just do not see this ship completely sinking. It is at around $5 now and I think it will double by the end of they year. I am no financial wizard; I just typically look for companies with houshold names that are beaten down. One company I did well with last year was Cendant-they were a huge entertainment conglomerate which was sued by their sharholders for burning their books. They brought a new management team in and the price has gone from 6 early last year to a high of around 23, and finished today at around 15. Still almost 3 times higher than it's low.

-- FutureShock (gray@matter.think), April 20, 2000.

Ah, c'mon, guys. Who are we kidding? No one actually does this kind of research anymore. It's sooooo last millenium. You're supposed to chase any tech stock with a P/E of three digits because your best friend's mother-in-law heard on CNBC that it was going to get traded "in SIZE". That's the current form of due diligence. 8-}

Rite-Aid, eh? Agree about the brand name. Lots of dead money there at present and certainly an opportunity to right the ship using that $1B snr secured credit facility. Moody's did drop the rating of RAD's debt to B1, but that's to be expected after the restructure. Has the SEC finished its investigation into RAD's particular flavor of "creative accounting"?

-- DeeEmBee (macbeth1@pacbell.net), April 20, 2000.

I invested in a few start up companies but my crystal ball wasn't that good. Ended up losing. I find that others pick better than I so I go with a good fund manager, and let it sit. So far my retirement funds have increased tenfold.

Who wants to be a Kenny, why do you sound so bitter? Why should you be upset that someone makes money in the market?

-- Maria (anon@ymous.com), April 20, 2000.


On Rite Aid, I'm not sold. The financials look pretty weak, even with the injection of capital. Of greater concern, I'm not sure Rite Aid can compete with the "big box" commercial outlets who offer pharmacies and sundries. Wal-Mart and the usual suspects have an increasing presence. The warehouse wholesaler Costco often has pharmacies. I think the Internet pharmacies are over hyped... but it's hard to see Rite Aid having a real niche.

This said, it's probably worth more than $5 a share if it can at least hold some market share and show some decent numbers.

I checked the stock on my favorite bagel shop.. Einstein's (ENBX). It's languishing at .25 a share. The stock is cheaper than the bagels! If I can find enough research material I might just buy some shares on the off chance the bagel business booms.

-- Ken Decker (kcdecker@worldnet.att.net), April 20, 2000.

Check out Phillip Morris and Goodyear.

-- Nose.....er stock picker I mean (Ridemhigh@market.falls), April 20, 2000.


You may be rite!

I am going to keep an eye on this. I looked at msn financial for that bagel company-boy, I thought I had problems! They do not look to good, dude.

Have a good afternoon.

-- FutureShock (gray@matter.think), April 20, 2000.

Does anyone here know which currency performed best last year? I am thinking of this snippet I read in a recent edition (4/8) of The Economist:

"Starting in 1990 she invested each year in the currency that had performed best in the previous year. By 1999 she had...earned a 52% return."

Any thoughts about the wisdom of investing in currencies?

-- Celia Thaxter (celiathaxter@yahoo.com), April 20, 2000.

Ken and Future,

Something to consider: If the current debat over carbs being bad for you goes in favor of protein, bagels will plummet.

-- Maria (anon@ymous.com), April 20, 2000.


ENBX is getting killed, I just happen to like their bagels and cafe mochas. My local shop is always busy, but I'm not sure how well managed they are. I'll stay with Xerox and go shopping next year.


I don't like currencies for the same reason I don't like metals... unproductive assets. And you are getting in the pond with some big fish.

-- Ken Decker (kcdecker@worldnet.att.net), April 20, 2000.

My long-term "Internet" stock pick is STMP which allows printing of postage on personal printers. It's been up as high as $98 but is currently trading at 15 and change, getting hammered by the secondary stock release after lockup. Only putting a few dollars in to it, but looking down the road. Also think XRX is a good value, and for blue-chips, you can't beat PG.

-- liu (lookitup@dictionary.com), April 20, 2000.

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