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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 lastminute.com 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


Wal-Mart.


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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