Investors are weary about
stocks but pros think it is
time to buy

The economy and profits matter
more than the so-called January
barometer, experts say

NEW YORK » Any investors who read their January financial statements might be feeling a little too shell-shocked to go back into the market. Put your trepidation aside, professional investors say, because there are plenty of reasons to be buying.

While stocks have recovered somewhat from their poor performance last month, the Standard & Poor's 500 remains stubbornly negative for the year, leaving investors with little motivation to buy. And while money is making its way back into stocks -- TrimTabs Investment Research estimates $7.5 billion has flowed into domestic equity funds since Jan. 27, compared to outflows up to that point -- the lack of enthusiasm for equities is palpable.

Amid the gloom that's hanging over the market, however, a quiet bullishness prevails among professional investors, who point to a robust economy, relatively low interest rates, tame inflation, strong corporate profits and positive earnings growth.

In a quarterly letter sent to shareholders earlier this month, Bill Miller, portfolio manager of the highly regarded Legg Mason Value Trust said he's optimistic about 2005. After a 29 percent increase in the S&P 500 in 2003 and an almost 11 percent increase in 2004, companies are still setting records in terms of profits, cash flow, returns on equity and levels of cash as a percentage of assets, Miller said, yet skepticism reigns.

"I have seen investors more bearish than they are now, but I have never seen more angst amidst such opportunity as there is today," Miller wrote. "Valuations are not demanding, especially in a world of low inflation and low nominal interest rates. Mergers and acquisitions should boom this year, providing windfalls for the shareholders of takeover targets."

Moreover, Miller said, "I would expect corporate share buybacks to accelerate and dividend growth to remain strong. High returns on equity and low nominal growth means lots of excess cash is available to be used for shareholders' benefit."

Failing to take advantage of such opportunities because of a sense of foreboding or a fear of loss would be a great mistake, argues Miller, a widely respected value investor who has earned a reputation for his market savvy -- he's outperformed the S&P 500 for 14 straight years, a feat unmatched by any other mutual fund manager. But he's far from alone in his belief that opportunities abound in equities.

"The bull market is in its fourth year, but it can go on a lot longer. The trends and the economy and the market are still positive," said Alfred E. Goldman, chief market strategist with A.G. Edwards & Sons Inc. in St. Louis, who is forecasting returns of up to 8 percent this year. "And there are a lot of bears around. That's bullish. The reason investors should think about being a buyer is that the economy remains healthy."

Yet the market remains persistently glum. Many investors remain fixated on January's dismal performance, and some are still distracted by the January barometer, which suggests the first month foreshadows trading for the rest of the year. Goldman, noting that a down January has predicted a down year precisely half the time since 1970, considers the barometer a hoax, and blames the market's recent lull on the dramatic rally that began in October.

"We were cruising for a bruising and we got one," he said.

Of course, it's harder to make money in a more mature bull market. It's more challenging for companies to increase their earnings. Larger, higher-quality stocks, particularly defensive growth stocks with steady revenues, such as consumer products companies, pharmaceuticals and food stocks, may be better positioned than small-caps and riskier issues. Dividends are attractive. And when every percentage point of total return counts, buying low becomes more important than ever. Down days present buying opportunities.

"The best time to buy stocks is when you're most uncomfortable buying stocks," Goldman said. "The worst time to buy them is when it's easy to buy them, emotionally."