Tough times are here, but these are the times the stock market typically offers great value. In a recent round-table discussion, TIME senior writer Daniel Kadlec questioned four top value-oriented stock-mutual fund managers: Wally Weitz of Weitz Value, Susan Schottenfeld of TCW Galileo Opportunity, Eric Miller of Heartland Value and Lois Roman of Scudder Large Company Value.
TIME: With stocks down so much from their highs, is the market cheap?
WEITZ: We had a 25-year bull market where stocks got systematically inflated, and we've had only a year and a half of squeezing that out. I don't think they're especially cheap. If you had to buy today and hold for five years, it might turn out O.K. But I don't think you automatically get 10%-a-year returns from here.
SCHOTTENFELD: This terrorism thing you can't quantify. But barring that, I think we're really in the economic sweet spot for stocks. You've got a lot of stimulus: government spending, tax cuts, a concerted effort globally to reduce interest rates. Bull markets never look good when they begin. I'm not saying this is going to be a blowout, but we have all the pieces in place to make a case for buying stocks now.
TIME: Price-earnings ratios are still in the 20s. Price to replacement value is way above 1. Doesn't the market look expensive by a lot of measures?
SCHOTTENFELD: Bull markets have started in the past at high P/E multiples because the earnings are depressed. And with bond yields so low, an S&P 500 at 23 times earnings isn't outrageous.
MILLER: This is self-serving, but I think it's going to be a great spot for active managers to beat the indexes over the next few years.
WEITZ: Finally!
MILLER: Yes. The S&P remains overvalued relative to the rest of the market. I'd be especially wary of big tech. But there are pockets of value.
TIME: How far forward are you willing to estimate earnings?
MILLER: We'll go out three years. Beyond that, who the heck knows?
TIME: Sounds like a lot of guesswork when you look out even three years.
WEITZ: It is. But what you're really trying to do is think about probabilities, what a company will be worth over 10 or 20 years. In that context, it doesn't really matter whether the recession troughs in the second quarter or fourth quarter. What you're thinking is, When the economy gets back to where it was, will that company do about as well as it had been doing? If there haven't been any new hotels built and people are traveling again, the odds are pretty high that a high-end hotel will prosper. If it's in telecom, where wireless may have substituted for wire line, things will have changed.
TIME: Value-fund managers have outperformed growth-fund managers for the past year or so. Will that continue?
ROMAN: Value significantly underperformed growth as recently as 1999, which was the widest return differential in many decades. So last year was just the start of a needed adjustment. In an economic decline with declining gdp and falling interest rates, value stocks are going to continue to do better.
TIME: In a recovery, is it better to own stocks of small companies or larger ones?