Farrell: 'You'd be Very Happy Over the Next Couple of Years' to Buy Intel
DAVID HAFFENREFFER, CNN ANCHOR: And back with us at this hour to give us his take on the market, not to mention some stock picks as well, on this Wednesday morning, is Vince Farrell, chairman and chief investment officer of Spears, Benzak, Salomon & Farrell. What do you make of that story, there. Are value stocks really out?</s>VINCE FARRELL, CHIEF INVESTMENT OFFICER, SPEARS, BENZAK, SALOMON & FARRELL: Oh, they definitely are, David, but I like the definitions they gave and I'd like to refine the definition. Value stocks are stocks in mature industries: well, not necessarily. Value is in the price relative to the growth rate, and technology stocks, of course, have led the market, and Christine from Morningstar said it's technology versus value. Well, gosh, there's a bigger world than that. If you define value as a stock or company where the price to earnings ratio is within at least a short distance visit of its growth rate, you could have some very good value. For example, three tech stocks that we like would be Intel, IBM and EDS. Now, they're not classic value stocks by any stretch of the imagination, but if you take the three together, the average growth rate we're expecting would be about 20 percent for the next couple of years, and the average multiple is 25, 27 times. Now you're not saying 25-7 times is a value multiple, but it is a market multiple and it's within a visit of its growth rate; it's not two or three times its growth rate where there's significant vulnerability if they were to disappoint.</s>HAFFENREFFER: So you're comparing the price to future growth expectations for the company going out?</s>FARRELL: Exactly, yes.</s>HAFFENREFFER: Let's talk about some of those picks, you mentioned some of them. How about Intel?</s>FARRELL: Well, Intel, I think -- the thing I like about both Intel and IBM is they kind of had their announcements of some difficulties already. With Intel, the introduction of the new 18- micron chip, with IBM it's the Y2K issue in the fourth quarter. But Intel going forward is probably going to grow its earnings well north of 20 percent. Now, right now the multiple of 30 times expected earnings, maybe even a little north of 30, is certainly rich enough for us to pause in buying it but not so rich that we're going to sell what we have, except maybe trimming it if it gets too big a portion of a portfolio. But if Intel, being a volatile technology stock -- almost by definition there's volatility in all technology -- if that stock were to dip down into a multiple of the high 20s, I think if you could buy Intel with a 20-percent visible growth rate, with a new product flow coming at you, you'd be very happy over the next couple of years.</s>HAFFENREFFER: OK, that's Intel and IBM. The next up on the list is Ross Perot's spoiled (ph) company, Electronic Data Systems?</s>FARRELL: Well, that really has had a remarkable turnaround with the new CEO, Brown, that's come in, and he's trimmed operations, he's refocused it, and I think the growth rate is going to be significantly higher than Wall Street expectations right now. But Wall Street is expecting very high teenage growth. Brown's objective is to get operating margins up ever so slightly. But if you do that, if he's successful with that, the growth rate's going to approach 25 percent, which is what the multiple is right now. Twenty-five times, which is the market multiple and equal to the growth rate, to me that constitutes value. Now, deep, deep, value would be something like a steel stock or a paper stock or something like that, and they're all fine and good, but let's not lose sight that value is the price relative to the growth expectations.</s>HAFFENREFFER: OK, I do want to touch on Fannie Mae before we run out of time. What do you like about that stock?</s>FARRELL: The stock's trading right now at 13 times expected earnings, and Fannie Mae is allegedly interest sensitive. But last year, when interest rates backed up 200 basis points, Fannie Mae grew its earnings 13 percent, which is exactly the average that they've grown for the past 10, 12 years. So, even though it's allegedly interest sensitive, they've been able to push their earnings forward. So, the multiple and the growth rate are the same and it's half the market multiple, so I think this one is very well positioned. Political noise always comes in around election year. You know, Fannie Mae has the government subsidy, quote (ph), so to speak, so there's always a little bit of that, and that will depress the multiple relative to some other financial stocks. Big, liquid, high- quality, 13-times earnings with a 13-percent growth rate, I think it's an especially-attractive investment right now.</s>HAFFENREFFER: Well, while we don't have time to cover it, we do want to mention that you also like American Home Products.</s>FARRELL: Which is trading at only 20 times, and in the drug industry it's very cheap.</s>HAFFENREFFER: Vince, good to see you again.</s>FARRELL: Thanks, David. Good to see you.