My comments in the third quarter 2001 Shareholder Report accented relative value.
Looking back to early 2001, this theme was already evident. For 12 months, the value
theme unfolded — sometimes fragmented by a rally in growth stocks such as happened
in the fourth quarter of 2001 — but this is a new year when we catch our breath and
reassess the markets. Value was favored all year while growth underperformed; however,
as the fourth quarter ended we were back to where we started. So the question is, will
value prevail again, or will growth rally?
Consider the market like you do a precision machine. Despite losing over a trillion dollars
in market capitalization in 2001, the U.S. market is still the most liquid (well-oiled)
and largest (powerful) engine of the world economy. Complementing its size and influence
is the fact that it remains a discounting mechanism of future value. Investors must
look forward rather than backwards, but they must do so on the basis of a verifiable value
rather than on speculation of market conditions.
Changing market conditions can bring up the question of market timing, to which astute
investors answer that the market is noisy, volatile and sometimes ignorant of underlying
value. Of course the market fluctuates and sectors rotate, but value can be found in the
recognition of the underlying fundamentals.
Since September 11, 2001, only two sectors of the S&P 500 have exceeded the market
— information technology and consumer discretion — and they did so by large margins,
and trading at historically risky, high PEs. These sectors could also signify a return to
growth and improving economic conditions.
The earnings rankings for 2001 suggest that consumer staples and healthcare may lead,
with materials, technology and consumer discretion lagging. For 2002, the rankings forecast
leadership coming from predominately value-oriented sectors: materials, financials,
industrials and healthcare — which benefit from lower interest rates, lower energy prices,
and/or cyclical recoveries in manufacturing. Based on forecasted earnings, the
laggards in earnings for 2002 are projected to be technology and telecommunications.
This new year begins with caution, because earnings are negative and economic foresight
is clouded. As the next quarter unfolds, it will be crucial to watch for incremental
improvements in corporate profitability and other fundamentals such as higher cash flow,
inventory control, inventory build rates, capacity utilization, industrial production and
corporate/consumer debt burdens.
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Investment Professionals 
