Market experts wary but eager

Portfolio managers may be dizzy after the recent gymnastics in a market that’s had an unhappy new year.

That hasn’t stopped a few from dumpster diving. The Federal Reserve’s big interest-rate cut last week put a shine on at least a few tarnished financial stocks, and selected tech issues are getting some love. “You make your best investments at the worst times, and there’s certainly lots of indiscriminate panic right now,” said Jeffrey Bronchick, chief investment officer at Reed Conner & Birdwell in Los Angeles. “The worse you feel in your stomach, the more you should be looking for stocks to buy.”

Many investors are feeling pretty bad at the moment. Stock markets around the globe have been almost in free fall since Jan. 1 as the housing meltdown and the sub-prime lending crisis have pushed the U.S. economy to the brink of recession.

How tough has it been? Despite having just notched their first weekly gains of the year, the Dow Jones industrials are down 8% in 2008, and the Standard & Poor’s 500 index is off 9.4%. The technology-heavy Nasdaq composite has plunged 12.3%; even investor favorites of recent years such as Google Inc. and Apple Inc. have been flamed, suffering respective year-to-date declines of 18% and 34%.

Overseas markets are also taking on water. A key index of European stocks is down 14%, and the Chinese market -- one of 2007’s big winners -- has slumped 9% so far this year.

Some U.S. stock indexes are down more than 20% from their recent peaks, the standard definition of a bear market.

“If we’re not in a bear market, we’re darn close to one,” said Richard Weiss, chief investment officer of City National Bank in Beverly Hills. “If it’s not a fully mature bear, it’s certainly a bear cub.”

The combination of a weak economy and slumping markets has many investment pros turning to less economically sensitive stocks, such as healthcare issues. But others are sifting through the debris, looking for discarded gems.

“This is a high-opportunity market for us: a lot of instability, a lot of volatility, a lot of fright,” said David Herro, head of international investing at Harris Associates in Chicago. “We’re able to [buy stock in] good, quality businesses at prices you normally don’t see.”

Herro’s attention has been drawn to financial stocks, the worst-performing sector in the S&P 500 last year. Although the credit crunch is still on, the Fed’s rate-easing campaign has lured bargain hunters to shares of banks and other financial service companies, which rank second this year behind consumer discretionary stocks such as retailers. (The Fed’s Open Market Committee meets Tuesday and Wednesday.)

Weiss said the bounce in those two sectors was an encouraging sign that investors already were looking beyond the economy’s current woes toward an eventual rebound. For further evidence, he points to the leadership last year of energy and utility stocks, which typically do their best at the end of an economic cycle.

“It’s a very positive sign that the leading-edge sector of the market may have reached a bottom,” he said.

Swiss banking giants UBS and Credit Suisse are among the financial stocks Herro is bullish on.

The world’s two leading managers of private wealth have seen their shares torpedoed by credit concerns.

“These are franchises you just can’t replicate,” Herro said. “The next year or so may be tough, but look at the price I’m paying.”

Of course, that kind of thinking got investors in trouble during the tech meltdown at the beginning of the decade. Former highfliers looked like bargains when they were down 30% to 40%.

But most still had a long way to fall and many haven’t recovered.

Some pros contend that buying now in the beaten-down financial sector poses less risk because the stocks aren’t as richly valued as tech shares were at the end of the dot-com boom.

The same can’t be said for housing stocks, which have plunged almost 60% from their July 2005 peak, according to a Bloomberg News index of home builder shares. Although the group has rebounded a bit in recent weeks and is down less than 1% this year, none of the money managers interviewed last week thought it was time to venture into that minefield.

“The whole housing thing has longer to go before it totally unwinds and gets us to a position of stability,” said Sally Anderson, president and senior strategist at Kopp Investment Advisors in Edina, Minn. I think ’08 is going to be tough in the housing sector, and it will be well into ’09 before we see things stabilize there.”

Technology stocks are a more difficult call, Anderson said. The shares of many smaller tech companies “still look woefully undervalued,” she said. But small-company stocks fell out of favor last year and could face further tough sledding until the economy shows definite signs of a turnaround.

Still, Anderson is buying small information technology companies such as Extreme Networks Inc. and Harmonic Inc.

Ted Bridges, president of Bridges Investment Management in Omaha, is also combing the tech sector, but he’s intrigued by bigger names such as Apple, which was hammered last week after it released a tepid profit forecast for the current quarter.

The stock could fall further, he warned. But buying at the absolute bottom is rarely possible, and he likes the chances of a “premier franchise type of company” that should enjoy healthy growth in the next few years.

“You could be sorry for six months,” Bridges said. “But you’ll probably be happy two years from now that you put money to work.”

martin.zimmerman

@latimes.com