Like most investment managers, Ed Walczak is dismayed by just how much the stock market has become hostage to the economy. Most stocks, he laments, have plunged simply because investors are worried sick about the prolonged slack in economic activity. But that hasn't discouraged Walczak from scouting for "irresistible values" in the soggy market.

"Great buying opportunities abound among the soft-cyclicals, or nonindustrial companies, that are as sensitive to economic swings as the manufacturing sector," says Walczak, chief investment officer in the U. S. for the Swiss bank Vontobel, whose assets under management total some $16 billion. Walczak's staying away from hard-core cyclicals such as autos because an economic rebound may not be enough to rev up their recovery, he says.

High on this pro's buy list of soft-cyclicals: Longs Drug Stores, a major drugstore chain whose stock has been steadily declining since July, when it was trading at 44 a share. Now down to 34, Longs is selling at a price-earnings ratio of 11.5 -- not far from its 10-year low of 10.9, notes Walczak.

He thinks the stock is worth at least 48, so he has been adding to his position as it has continued to fall. "Every day that it comes down is one more day of buying opportunity in the stock," argues Walczak, whose faith in Longs is based mainly on its strong fundamentals in the face of recession.

BUYBACK? While earnings for the year ending Jan. 30, 1992, are expected only to match fiscal 1991's $2.94 a share (vs. fiscal 1990's $3.01), Walczak sees net bouncing up in 1993, to $3.40. Revenues have been rising, but competitive pricing stemming from the recession -- mainly in California, where 226 of its 266 stores are located -- has trimmed margins. New costs from installing scanning systems to keep track of inventories, pricing, and purchasing have cut into earnings. Some 21% of sales are from prescription drugs; the rest is from health care, cosmetics, and photo products and services.

The company, notes Walczak, has a record of solid growth in sales, earnings, and dividends over the past 15 years -- plus a return on equity of 14% to 18%. Moreover, Longs' balance sheet is strong, with debt of just 5% of total capitalization. Cash flow has allowed Longs to finance its own expansion.

Walczak also sees a stock buyback, which will trigger a sharp jump in the share price. He's betting that with the stock way down, management will repurchase shares, as it did in past years. Chairman and CEO Robert Long and the Long family control 30%; 17% is held by the company's ESOP.

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