Time for Straw Hats?

Recent weakness presents an attractive opportunity for long-term investors

By Joseph Lisanti

There's an old Wall Street adage: "buy straw hats in the winter." Few people on Wall Street today wear hats, but in the early part of the 20th century, summer fashion for men included the ubiquitous straw hat. Since nobody wore the lightweight headgear in winter, straw hats sold for less when snow covered the ground.

We are in winter now, literally and figuratively. Although we know that summer will arrive in this hemisphere on June 21, when summer will appear on Wall Street remains unknown. The stock market's summer could be delayed by the impasse over Iraq. Or, if war comes, it could be postponed because of the potential problems posed by the fighting or its aftermath.

But the advice contained in the old straw hats adage, "buy when nobody else wants to buy," still remains valid today. Some skeptics say that in order to correct for the huge rise in share prices that occurred in the last half of the 1990s (the S&P 500 rose 148% from the end of 1995 to the peak in March 2000), we must have an equal move down. While that works in physics, the stock market is a different beast. Most of the time, it rises. In the years since the end of World War II, the average bull market has lasted about 3.5 times as long as the average bear market.

As a result, we don't need an equal move down to compensate for the bubble of a few years ago. The "500" now trades about where it did in the spring of 1997. At that time, the price-to-earnings ratio of the index was about 18 on projected earnings for the same year. Today's p-e on expected 2003 earnings is only about 15.

Markets do fluctuate. We may not have seen the low for this year. But we are closer to a low than many people think. And straw hats won't be on sale forever.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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