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Turn your Nasdaq trash into cash! Dive into the Nasdaq dumpster and capture 50-100% profits in just a few days. Don't get left behind! Click here for your FREE special report: "The Next 5 Monster Stocks of the NewTech Era" http://www.changewave.com/a/11/sos27 ***************************************************************** SIVY ON STOCKS from money.com November 29, 2000 Fix your mix In volatile markets like this one, sectors behave in radically different ways. Here's what you need to know to find today's best opportunities. By Michael Sivy When the economy is purring along, most stock groups rise and fall together. But amid uncertainty and turmoil, different groups suffer at different times and rebound with varying delays. That's what's been happening this year, and investors preparing for 2001 need to examine each sector independently to find the best bargains and to minimize risk. Since January, there have been three big divergences in the market. The first has been between tech stocks and defensive groups. The second has been between issues with high P/Es and those with low P/Es. And the third has been between companies with big market capitalizations and those with small caps. After many months of leadership, tech stocks peaked in March and have declined as evidence of an economic slowdown accumulated. Technology companies began warning that their earnings might fall short in upcoming quarters, and the entire sector suffered as money managers and individual investors began reducing their exposure. By Thanksgiving, even the strongest and most popular tech stocks, including Cisco and Oracle, were down a third or more from their highs. And even at current levels the stocks aren't cheap with P/Es as high as 50. They'll be vulnerable to further declines until it's clear that the economy has completed its downswing. By contrast, consumer stocks (which are defensive because they aren't as tied to economic cycles as tech stocks are) benefited from investors' flight to safety. After having dropped by a third to less than $60 a share in March, Procter & Gamble [PG] rebounded 35 percent to $74. And Anheuser-Bush [BUD] has rallied more than 70 percent over the same period to $48. Those stocks are now trading at more than 20 times next year's earnings, so they're no longer exceptionally cheap. But such defensive issues may still be worth buying to balance a portfolio that has been overloaded in tech. Energy stocks have also benefited immensely as a defensive sector, but they were helped even more by this year's sharp runup in the price of oil. ExxonMobil [XOM], one of the most conservative international oil companies, has gained 20 percent since March to $89 a share. I doubt, however, that oil can remain above $30 a barrel for more than a year or two -- today's high prices will bring on more supply and an economic slowdown could reduce demand. As a result, I think energy stocks may have seen the best parts of their gains. While constrained supply has pushed up prices in the oil business, oversupply has done the opposite in telecommunications. Fiercely competitive phone companies have overbuilt their networks so much that they have been undercutting each other on pricing and cutting back on further equipment purchases. The result is that stocks throughout the sector -- from service providers like AT&T [T] and WorldCom [WCOM] to equipment manufacturers like Lucent [LU] -- have lost more than half their value since the spring. Statistically, I think stocks in the group are undervalued by a third, but they still may represent dead money for the next six months. These divergences among industry sectors are the most visible symptom of the roiling market, but they aren't the only one. The largest U.S. companies have average P/Es in the mid-20s, and the most popular giants have P/Es double or nearly triple historical levels. By contrast, small companies -- those with market caps of less than $3.5 billion -- have average P/Es of below 18. From all these cross-currents, two important ideas emerge. At any point there's likely to be at least one sector that's deeply undervalued. Don't try to predict the turns -- just buy one or two of the blue chips in the sector that looks cheapest. Right now, defensive stocks are still in an uptrend but they're no longer cheap, while the techs are still falling (their decline isn't over yet). You can either buy good tech values and ride out any further decline or wait until they look fully washed out. The other important idea is that high-P/E blue-chip growth stocks are way overvalued compared with everything else. Of course, those are the stocks everyone most wants to own. But be smart -- diversify with a value fund or a fund that holds mid- and small-caps with an average P/E below 20. They're out there. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ Earning Releases and Calls For the latest corporate earnings releases and online conference calls click on: http://money.ccbn.com * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! Sign up for a RISK-FREE issue of MONEY MAGAZINE at http://www.money.com/subscribe2 Or if you prefer call our toll-free number 1-800-544-4594 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * We may, from time to time, contact you with offers for Time Inc. products and services which we think may be of interest to you. If you would prefer us not to contact you in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletters, please let us know by sending us an e-mail at <no_solicit@money.com<. Additionally, from time to time we may provide your e-mail address to carefully chosen companies whose offers we think may be of interest to you. 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