By Eric Martin and Daniel Hauck
Sept. 4 (Bloomberg) -- U.S. investors are returning from summer vacation to the cheapest stock market in almost 12 years, and some of the biggest fund managers say they're ready to load up on shares of technology, energy and industrial companies.
Software makers in the Standard & Poor's 500 Index last week were valued at an average 20.8 times estimated profit, the lowest since at least 1995, according to data compiled by Bloomberg. Industrial companies traded at 18.4 times earnings, lower than their average of 23.4 this decade. Oilfield-services provider BJ Services Co. last month was the cheapest in almost six years.
While the benchmark for American equity tumbled 9.4 percent between July 19 and Aug. 15 on concern the worst housing slump in 16 years would slow economic growth, the index gained in August for the first time since May. President George W. Bush and Federal Reserve Chairman Ben S. Bernanke reassured investors last week that they would prevent losses in credit markets from ending the six year expansion.
``The market's probably seen the worst of it,'' said Fritz Meyer, the Denver-based senior investment officer for AIM Investments, which oversees $160 billion. ``The Fed ultimately will ride to the rescue.''
Stocks are ``on sale'' and managers are ``finding opportunity everywhere,'' Meyer said. The S&P 500's average price-to-earnings ratio of 16.8 for August was the lowest since November 1995, according to monthly data compiled by Bloomberg.
The slump, the steepest since March 2003, wiped out $1.41 trillion in market value. The S&P 500 rebounded 4.8 percent after the Fed on Aug. 17 unexpectedly lowered the interest it charges banks and the index ended the month 1.3 percent higher.
Investors returning from vacation today snapped up technology and energy shares, spurring a rally in U.S. stocks on speculation prices haven't caught up with earnings growth. The S&P 500 added 1.1 percent to 1,489.42.
Bernanke, speaking Aug. 31 at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, said central bankers will ``act as needed'' to buoy the economy hampered by the abrupt rise in the cost of credit resulting from defaults in subprime mortgages. Bush said the same day that he will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates.
The index ended last week at 1473.99, up 3.9 percent in 2007. It may reach 1,600 this year should the Fed cut the benchmark overnight lending rate between banks at its remaining three meetings in 2007, said David Darst, New York-based chief investment strategist for Morgan Stanley Global Wealth Management. Fed funds futures contracts show traders expect the central bank to lower its target rate for overnight loans between banks at least once to 5 percent from 5.25 percent at its next meeting on Sept. 18.
The slump in stocks was ``driven by psychology rather than by fundamentals or valuations,'' said Darst, who oversees $728 billion. ``The bull market can continue.''
Morgan Stanley is optimistic about shares of energy producers such as Houston-based Weatherford International Ltd., the world's fourth-largest oilfield-services provider by market value, Darst said. He also likes Redmond, Washington-based Microsoft Corp., the world's largest software maker, and San Jose, California-based Cisco Systems Inc., the biggest provider of computer-networking equipment, because of their overseas profits.
Microsoft, which got 39 percent of its sales from outside the U.S. in the year ended in June, last week traded at 16.6 times estimated profit. Cisco was valued at 20.5 times forecast earnings and received 45 percent of its revenue from abroad in the year ended in July 2006.
Houston-based BJ Services on Aug. 6 traded at 8.79 times profit, the cheapest since October 2001. International sales provided 40 percent of revenue for the world's sixth-largest oilfield-services provider in the year ended September 2006.
Estimated profits at companies in the S&P 500 last week represented a yield of 6.46 percent of share prices, or 1.93 percentage points more than the yield on 10-year Treasuries, Bloomberg data show.
All 10 industry groups in the S&P 500 were valued at a discount to their historical average over the last 10 years, according to data compiled by Bloomberg. Technology shares cost 74 percent less than the average, the cheapest of the 10 groups.
Valuations for many stocks aren't attractive enough to go ``bottom-fishing,'' said Patricia Edwards, who helps manage $11.9 billion at Wentworth, Hauser & Violich in Seattle. The slump caused by defaults on mortgages to people with poor or limited credit has hurt the profit outlook for companies such as homebuilders and financial firms.
``Catching falling knives is a dangerous art and not one I have perfected,'' said Edwards, the firm's managing director. ``They're only cheap if the earnings hold up, and there's not a lot of confidence with the E portion of their P/E ratios.''
Fort Worth, Texas-based D.R. Horton Inc., the second-largest U.S. homebuilder, has tumbled 42 percent this year and traded at 1.96 times earnings on Aug. 28, the lowest since at least 1992. The S&P 500 Diversified Financials Index last month was valued at 10.6 times earnings, the cheapest since at least 1995, according to Bloomberg data.
Jeffrey Kleintop of LPL Financial Services recommends buying industrial and technology companies that are more dependent on the international economy than on U.S. consumers.
The Washington-based International Monetary Fund trimmed its 2007 economic growth forecast for the U.S. in July to 2 percent from 2.2 percent, while increasing its estimate for the global economy to 5.2 percent from 4.9 percent.
Technology shares have climbed 7.5 percent since the S&P 500 started to recover on Aug. 15, while a gauge of industrial companies including General Electric Co. has added 5.6 percent. Fairfield, Connecticut-based GE, which last year got 46 percent of its sales from outside the U.S., rose 5.8 percent.
``The storm has passed its peak,'' said Kleintop, who helps oversee $165 billion as chief market strategist at LPL in Boston. Technology and industrial shares are ``going to be the leaders as we emerge and retrace our way back to new highs.''
Last Updated: September 4, 2007 17:11 EDT