Investing Under a New President

`Value investing,' choosing stocks by comparing price-to-earnings ratios, rises in favor with financial advisers

WITH the 1992 presidential race finally over, Wall Street is busy shopping around for the best post-election investment strategy. The tactic of "value investing" stands out, given the possibility of significant tax relief for investment and new federal programs to boost the economy under President Clinton.

"Value investing is looking very encouraging," says David Dreman, president of Dreman Value Management, an investment counseling firm.

Value investing is based on finding stocks that are low-priced in relation to company earnings. Such value stocks, in addition to having low price-to-earnings (P/E) ratios, often are low-priced relative to company book value and cash flow. Other strategies lag

Although most financial advisers caution investors not to be enamored of any one investing strategy - including value investing - it is evident that other traditional strategies are having difficulties during the global economic slowdown. The slow-growth environment, for example, doesn't help "growth stocks."

Growth stocks tend to have high P/E ratios, based on the expectation of rapid earnings growth. Buying foreign stocks also presents challenges because of the slump in much of Europe and Japan.

Meanwhile, value investing has been performing well, says Paul Lesutis, an official of Brandywine Asset Management, an investment firm in Wilmington, Del. Brandywine's portfolio has posted a return of about 30 percent during the calendar year through September, compared with a rise of about 1 percent for the Standard & Poor's 500 stock index, Mr. Lesutis says.

Brandywine, says Lesutis, likes stocks that are in the bottom 25 percent of P/E ratios and the bottom 15 percent of price ratios to book value and cash flow.

Part of the reason for a reconsideration of value investing comes from the notion that as president, Mr. Clinton will move quickly to stimulate the economy, which Lesutis says will especially help small and start-up companies.

Typical of Wall Street's thinking is this analysis by Salomon Brothers: "Our best guess about how Mr. Clinton will govern includes a mix of both left and right economic policies, but make no mistake about it - if the economy fails to respond to modest nostrums, he will move sharply to the left. In this respect, he will not be like President Carter, who remained conflicted throughout his administration, or President Kennedy, who moved to the right with a bold program for across-the-board tax cuts."

Lesutis says that many value stocks may do better under Clinton than they would have under Bush. That's not necessarily an endorsement of Mr. Clinton, he notes. In fact, a Clinton administration will have to move quickly to reassure the bond market that he is not a big-spending liberal Democrat, says Lesutis.

"Economic recovery will come" no matter who is elected, Lesutis says. Interest rates are down in the US. They are falling overseas. "Conditions are in place for expansion." Clinton's tax breaks

Clinton's commitment to tax credits for corporate investment and research and development "adds up to a lay-up," Lesutis says, using a basketball metaphor to suggest a sure-fire way to boost the economy.

Clinton's intent to return to an investment tax credit "is very good for many cyclical stocks, particularly in the small-business sector," says Mr. Dreman.

Trade will continue to expand, he predicts. Where Bush was committed to "free trade" in a somewhat absolute sense, Clinton supports more of a "fair trade, free trade" policy, Dreman says. The latter should "help a lot of value companies, such as computer companies, if they can just get a toehold abroad," Dreman says. He believes that Clinton would be more inclined to prod overseas markets into opening their borders to US firms than Bush, since Clinton will have to strike a successful relationship with th e Democratic Congress, which has protectionist leanings.

Some observers worry that too tough a policy might kick off a trade war that could hurt exports.

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