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Off with the new, on with the old

The new economy stocks have had a rough ride and last week&#39s legal ruling

against Microsoft sent the Nasdaq tumbling by 15 per cent in just one

morning session. The Techmark index has seen a 30 per cent fall from its

high this year while European technology stocks have also suffered from

severe volatility.

In spite of tumbling prices, yields on new economy stocks remain at paltry

levels because many companies have no earnings so falling prices are

irrelevant when trying to calculate a dividend yield.

New economy stocks present a serious problem for income-oriented

investors. With no earnings and many years of strong earnings&#39 growth

already priced in, many technology stocks are unlikely ever to provide more

than a meagre income.

This contrasts sharply with old economy stocks which have also been on an

uncomfortable ride for the year so far, but for different reasons.

The obsession with anything internet or dotcom-related seems to have run

out of steam over the past week but many high-quality UK com-panies still

trade at substantial discounts when measured against the dotcoms.

This offers some attractive opportunities for income-seeking investors.

Take Boots, for example. In the retail sector, it used to be the classic

defensive play – strong brand name, solid management and a good product

range. Moreover, unlike many retailers, Boots can rely upon steady sales

as, even in the new economy, people still need chemists. However, it does

not possess any obvious internet or dotcom characteristics and over the

past 12 months its shares have fallen by nearly 40 per cent. Due to the

slide in valuation, Boots currently offers a prospective yield for 2001 of

5.1 per cent.

Brewing has suffered a similar fate. Bass, the country&#39s leading brewer

for some years, has become so disenchanted with the stockmarket&#39s obsession

with dotcom mania that it looks as if it will offload all its UK brewing

operations to a European competitor. Whitbread, Bass&#39s old rival, is under

pressure to do the same.

Like Boots, Whitbread also offers an attractive forecast yield of 5.3 per

cent for 2001 and, as with many high-yielding blue-chips, there is also

plenty of scope for capital gains.

The problem for companies such as Boots and Whitbread has been that

investors have assumed that the old economy and new economy are mutually

exclusive. This, of course, is not, and never has been, the case.

Boots has already established an online shopping capability and, like all

companies, it can benefit from the B2B revolution which will produce huge

cost savings in purchasing and logistics.

It is the same with Whitbread. Brewing is a mature market and is never

going to produce the huge capital gains that some tech stocks have offered

but there is no reason why it could not turn itself into a fully fledged

new economy player. It already owns Marriott, one of the most successful

hotel brands in the world, which provides an online booking and

room-availability service.

There is also David Lloyd Leisure and TGI Fridays, which should benefit

from the rising consumer spending power created by the new economy. As for

brewing itself, a well-run Whitbread pub comfortably outstrips the turnover

of and probably stands a better chance of still being around

in 100 years time.

In the US, the new economy has brought real advantages – higher

productivity, lower inflation, more choice and transparent prices to name

but a few. It is interesting, however, to note that many of the most

successful US new economy are, in fact, old economy companies which have

reinvented themselves. Enron, an oil company, is a case in point, as is


Once investors realise that companies such as Whitbread can get in on the

new economy act, valuations will close and yields will return to more

sensible levels. In the meantime, high-yielding blue-chips such as these

offer compelling value so it is a case of catch the high-yielding

blue-chips while you still can.


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