Ken Fisher's Beautiful Market

09/05/2002 12:00 am EST


Ken Fisher

Founder, Executive Chairman, and Co-Chief Investment Officer, Fisher Investments

At the recent San Francisco Money Show, money manager Ken Fisher presented one of the most intelligent and well-crafted investment speeches I have ever heard. His focus on behavioral psychology and market history was alone worth attending the conference. While many are turning away from the current market in fear, Ken Fisher thinks its time for investors to embrace this "beautiful market."  Here are comments that appeared in his speech as well as being featured in his latest column in Forbes:

"This market is sheer beauty - the most stunning I've ever seen clearly. Maybe not as beautiful as 1974, but perhaps as a young man I didn't see that right. Of course, beauty is in the eyes of the beholder, but I think most of you will never see a market this gorgeous again, ever. Or if you do, you won't see many.

How beautiful? Count the ways. First, big is beautiful. Big bear markets are followed by big rallies. There are no exceptions. This bear, with a 48% decline in the S&P 500 at its worst point this summer, falls in the middle of the range of the seven big bear markets of the last century. With the exception of the Great Crash, which took the Dow down 89% between 1929 and 1932, big bear markets have sliced stock prices 42% to 55%. But if you think this is like 1929-32 you are delusional: absent are the 1930s' massive global trade barriers, the massive worldwide destruction of the quantity of money, and the massive economic dislocations. Following all the big market drops came 12-month advances, ranging from 29% to 65%, with a 50% average. That's big. And beautiful.

Meanwhile, the more people protest that things are horrible, the more persuaded I am that it's not different this time. Fear is beautiful. All this hostility to corporate leaders - does that mean more trouble ahead for stocks? No, this is already priced in. Today's anti-business emotion parallels that of the 1903 bear market, known as the Rich Man's Panic. Then Teddy Roosevelt, as trustbuster, played the role now being played by congressmen who, with perverse irony, lecture business on integrity.

The bears today bemoan falling profits. What they overlook is that operating income is rising. Operating income is the spread between sales and direct costs. (It is also known as earnings before depreciation, interest, taxes, and nonrecurring items.) The operating margin is the most basic efficiency ratio for a company. Without write-offs, earnings would rise nicely now. Profits are about the past. Operating margins are about the future.

And despite what everyone wants to believe, the market's overall price/earnings ratios tell you simply nothing about where the market is headed. But within the market, there is a tug-of-war between growth stocks (generally, those with high P/Es) and value stocks (low P/Es). This is a time when value stocks are winning the tug-of-war. Here are four I like:

Very cheap relative to its peers, Marathon Oil (MRO NYSE), which was carved out from US Steel this January, should get acquired by a larger oil firm sometime in the next few years. This vertically integrated global firm is not in the top tier in size and for that reason sells for only $7.4 billion, a fourth of its $30 billion in annual revenue. It also sells for just 2.8 times cash flow (in the sense of earnings and depreciation) and for 1.6 times book value. It has a 3.7% dividend yield. Somehow, this will make money.


Antique pricing is beautiful. Boise Cascade (BCC NYSE), selling below its late 1980s bull-market levels, remains a leading paper and forest products company. Its 2.4 million acres of real estate are worth a lot - perhaps $1,300 an acre. By that measure the land alone is worth, after due allowance for other assets and debt, $21 a share - so the rest of the operations cost you just $7. The company is dirt cheap in another way: it is selling at 20% of annual revenue and 4.5 times cash flow, with a 2.2% dividend yield. After 15 years of the company's going nowhere, folks wonder how to make money here. Simple. Buy the stock.


Despite the Internet, Borders Group (BGP NYSE) remains America's number one shopping-mall book retailer. You also know it as Waldenbooks. The recent economic weakness stalled growth, but growth will resume in the years ahead. Meanwhile, Borders is very cheap at 40% of annual revenue, 12 times earnings and five times cash flow.

And if the market pops, so will financial powerhouse Credit Suisse (CSR NYSE). It sells at exactly book value - and at 50% of annual revenue, nine times earnings, and a price that gives you a 5% yield. Foreign stock prices are depressed; the Morgan Stanley Europe, Australia and Far East index is trading (in both dollar and local currency terms) at 1989 levels. Foreign markets will recover, which will help foreign brokers and thus should help Credit Suisse."


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