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Backing the Brokers

With the market on the ropes, Wall Street is feeling investors' ire--in part because of the unprecedented probe of dubious dealings between analysts and investment bankers. For brokerage stocks in particular, it has been doom and gloom lately. But not everyone is down on the Street: "We've been buying Merrill Lynch (MER), Goldman Sachs (GS), and Morgan Stanley (MWD) shares because they've become compelling value plays," says Bob Olstein of Olstein Financial Alert Fund, who looks way behind the numbers. He warned of trouble at Lucent in 1999, when the stock was trading at 60. With regard to the three brokers, he says they have "tremendous earning power." He adds that they have assets, too, whose value has been enhanced by layoffs and cost-cutting--and steady income from interest, advisory, and management fees. Since January, Merrill has tumbled from 60 to 42, trading at 12 times estimated 2002 earnings of $3.50 a share. Goldman has fallen from 98 to 79, or 16.6 times $4.75. And Morgan has dived from 60 to 48, or 16 times $3. The average price-earnings ratio for the Standard & Poor's 500-stock index is 25. Olstein figures that in 2003--with the recovery in gear--Merrill will earn $4.50 a share, Goldman $6, and Morgan $4.25. "You've got to buy in the eye of the hurricane to get these valuable franchises at bargain prices." He figures the probes will cost $1 billion to $2 billion industrywide: "We've adjusted for this in our valuations," says Olstein.

Jim Mitchell of Putnam Lovell Securities has upgraded Merrill and Morgan Stanley from "hold" to "buy," and Reilly Tierney of Fox-Pitt Kelton has upped Goldman to "attractive." By Gene G. Marcial

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