With the stock market up by around 20 percent since its September lows, and in the spirit of good cheer that should surround us at Christmas, I thought I’d set out some more ideas for “Bear Food,” companies that look likely to take a tumble in 2002 and beyond.

First, a look back. In my original “Bear Food” article in January this year, I set out three companies which I expected to provide good ursine nourishment in the recession then beginning and still by no means at an end. My then definition of Bear Food was an extreme one: it was companies which would at some stage within 24-36 months trade 80 percent below their price on the day I wrote the recommendation.

My Bear Food recommendations as of Jan. 16, when the S&P 500 Index was trading at about 1,350, were Marriott Inc., Goldman Sachs & Co. and Cisco Systems Inc.

Damn, I missed Enron! How COULD I have been so remiss?

Of the “Bear Food” companies, Marriott was then trading at $46. Recently, it closed at $38.87, down 16 percent, compared with a 15 percent drop in the S&P 500 Index.

Goldman Sachs was trading at $105, and is now trading at $94.41, down only 10 percent. Cisco was trading at $34 and is now at $19.35, down a much more satisfactory 44 percent. More interestingly, Cisco was at one stage close to Bear Food by January’s definition, bottoming out at $11.04, down 68 percent. Average drop of the three, 23 percent, compared with a 15 percent drop in the S&P 500 Index, which as an (bear-side) investment manager I’ll take, but I haven’t yet provided anybody with Bear Food, which is what I set out to do.

So, since the recession, and presumably the bear market, are not yet over, do any of these three companies seem likely to provide Bear Food, based on the price last January?

Cisco, yes. The company has had a $2.5 billion write-off, is talking about an upturn in the equipment business which is far from apparent, is close to breakeven at best, even without factoring out the exercise cost of stock options, and still today has a market capitalization of $142 billion, now more than eight times sales. I stick to my prediction: Bear Food, from my original recommendation, in other words, at some stage before January 2004 trading below $6.80. Maybe even Bear Food from today’s price, which would require it to trade below $3.87 by December 2004.

About Goldman Sachs I’m not so sure. The company is likely to benefit hugely from Enron’s demise, because it has a top-class trading capability and a AA credit rating. Hence it is likely to pick up a substantial portion of the energy trading business, even without buying Enron or one of its staggering competitors.

Its relative position in the investment banking pecking order, already extremely strong, has been bolstered by the hapless attempt by two of its competitors, Citigroup and J.P. Morgan Chase, to bail out Enron, at the cost of over $1 billion each in additional Enron exposure. Goldman Sachs reported earnings of $4.26 per share for the year to November 2001, down 29 percent from 2000.

Since investment banks are leveraged with respect to the market, another poor year like 2001, with stock market indices declining by 10-15 percent, is likely to see a much greater fall in Goldman Sachs’ stock price (also, 2001 has been a good year for bonds, which I do not expect to repeat.)

Whether the price will drop to $21, however, given the likelihood of the company picking up market share from competitors, is doubtful. It depends just how bad the investment banking business gets; a real holocaust will see Goldman Sachs affected too, even if it is one of the few firms left standing. A 50 percent drop from the present price, to $47.20 at the bottom, without much doubt, but maybe not quite true Bear Food.

Unlike Goldman Sachs, Marriott has had the market running in its favor, at least until Sept. 11, with consumer spending at record levels and interest rates, crucial to a real estate based business of this type, dropping sharply. Nevertheless, earnings this year are expected to come in around $1.60 per share, down slightly from last year’s record level.

On the whole I stick to my January forecast of bear market earnings, battered by lower consumer spending, continued fears about travel and probably higher interest rates, bottoming at $0.60 per share, and the stock price bottoming around $9. Because of 2001’s tsunami of loose credit, however, this might happen during 2003-4 and so the Bear Food might miss the January 2004 cutoff date.

I turn now to my new Bear Food recommendations, where I will again pick three stocks.

This time I pick companies all involved in the business of selling things to consumers. Consumer spending has been even more distortedly high in 2001 than it was in 2000, and in my view a sharp drop-off in consumer spending, likely in early 2002, will trigger the next down-leg of this recession, both economically and in the stock market.

My first Bear Food recommendation is Wal-Mart, currently trading around $57, on a price-earnings ratio of 39 and a market capitalization above $250 billion.

Wal-Mart has benefited in 2001 from an increase in spending at its stores, even as spending in department stores has declined. This appears to be because the drop-off in consumer income has so far been at the high end (stock options, share portfolios, etc) and the lower income consumer has been less affected.

This is about to change. Unemployment is rising sharply, credit card debt is at record levels, there are no more “stimulus packages” to put money into consumers’ pockets, and refinancing mortgages, which enable middle income consumers to take out spending money, have dropped sharply from their record levels in earlier autumn.

Hence Wal-Mart, with its customers cutting back on spending, could see a sharp drop-off in its sales per square foot, even as its store expansion plan continues aggressively. Add to this problem the likelihood of difficulties in Wal-Mart’s very substantial international operations (cross-border transfer of retail know-how is NEVER easy) and you’re talking, at the bottom of a bear cycle, of a company whose base earnings have maybe halved, to $0.75 per share, with in addition substantial write-offs arising from the international mistakes that will inevitably surface.

Apply a 15 times price-earnings ratio to Wal-Mart’s base earnings, still at the high end of where retailers have traditionally sold, and you get a stock price of $11.25, down 80 percent from current levels (but still capitalizing Wal-Mart above $50 billion, about 25 percent of sales, again reasonable in a bear market).

Home Depot, next, is Bear Food because it is dependent on two vulnerable factors, consumer spending and the housing market. It’s currently trading at around $50, or 42 times earnings, with a market capitalization of $118 billion.

Home Dept has benefited from two trends in 2001, both of which are likely to go into reverse next year. First, middle-income consumers have been overspending their income, and are likely to feel at least a tremor of fear about their job prospects. Second, house prices have been rising, mortgage financing has been getting cheaper, and re-mortgages, often used for remodeling, are running at record levels.

Like Wal-Mart, but to an even greater extent, Home Depot is due for a sharp downdraft, though it doesn’t have Wal-Mart’s huge international operations to worry about. Wall Street is projecting earnings of $1.27 per share in the year to January 2002 and $1.50 in the year to January 2003; the latter figure, in particular, is pure cuckoo-land.

Assume in a downturn earnings drop to around their 1997-98 level of 50 cents per share (which already benefited from much of the 90’s boom), then at a 20 times price/earnings ratio the stock will trade at $10, down 80 percent. Market capitalization would still be around 60 percent of sales, quite a high valuation.

Finding Bear Food among tech companies is like shooting fish in a barrel; by the nature of the tech business, in which one huge winner pays for several losers, a Bear Food seeker is more likely to be right than wrong.

Of course, most of the dot-com successes of 1999-2000 are no longer with us, and speculating on bankruptcy of a company whose stock price is already down 90 percent is not very interesting. Consider instead a stock which has risen substantially in 2001, e-Bay, currently around $65 per share, up from $30 in January, with a market capitalization of $17.8 billion and a price-earnings ratio of 202 times last 4 quarters trailing earnings.

This is not your normal dot-com; it actually has both a viable business model and earnings, and $17.8 billion is not by New Economy standards an extravagant valuation. Nevertheless, revenue growth is slowing in each succeeding quarter, and is now down to around 25 percent per annum, while earnings in the latest quarter were lower than in either of the preceding two quarters.

If we assume that revenue doubles with increasing market penetration, but that growth slows to normal retail levels, with the stock trading then at 15 times earnings, then forecast earnings in say 2003-4 would be around 65 cents a share and share price around $10, down 85 percent from current levels.

The Bear Food portfolio for December 2001, which I expect to trade at less than 20 percent of its current stock price at some time before December 2004, is thus Wal-Mart, Home Depot and e-Bay. You should also keep an eye on Cisco, Marriott and (with reservations) Goldman Sachs, all of which I still expect to trade at less than one-fifth of their January 2001 value at some point before January 2004.

Happy Christmas, Hanukkah, Kwanzaa or Eid!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.