Fund Manager’s Outlook : Gap Between Stock Market Losers and Winners Seen Growing Wider
Richard S. Strong has called on 167 companies around the country so far this year, looking for stock market winners.
Strong is chairman of a Milwaukee-based concern that manages five mutual funds with about $1 billion in securities and fixed-income investments.
The mutual funds have had more than average success: Two of them placed in the top 3% of all mutual funds over the past year. A new fund specializing in speculative companies with large growth potential is ranked in the top 10 so far this year.
Where the money goes in 1987 and the years that follow depends on how Strong, his partner William Corneliuson and their colleagues size up the impact of trade, interest rates, competition and taxes on the economy.
Widening Gap
In Strong’s view, the gap separating winning and losing companies is growing. The domestic and foreign pressures bearing down on the economy are making it harder and harder for companies to muddle along in midstream.
There is no mystery about where he finds the losers. By his reckoning, the trade debate that preoccupies Washington has already been decided. It is clear to him that in most cases, American manufacturers that face foreign competition cannot win.
“I come from Milwaukee, which is one of the major manufacturing centers in the world, and it’s recession-depression in that city. They can’t compete with the Far East. Absolutely impossible,” he said.
A few U.S. companies will win despite foreign competition because their research or technology puts them in an invulnerable niche, such as a drug company with a strongly protected proprietary medicine, Strong said. But, he added, it will be hard to find those niches and defend them, because American technology is now so rapidly copied and exported.
No Contest
“We do our best not to invest in any company that’s taking on a Far Eastern interest,” Strong said. “It isn’t even a contest.
“You’re not going to win, because they’re willing to work 12- to 14-hour days, and the average American is only going to work eight hours a day, and they’re going to work Saturdays. Their kids go to school on Saturdays. How are you going to beat them? You’re a loser.”
What America still has is the biggest, richest, most dynamic market in the world, and the goal for investors is to find winners here, he said.
“You’ve got to invest in a company that has something really, really special--a powerful trade name, such as Coca-Cola or Kellogg’s. Or General Mills--we’re one of the biggest shareholders. They have such fabulous trade names: Wheaties, Betty Crocker, Red Lobster,” Strong said.
General Mills is an example of a large group of companies that will enjoy a rich windfall thanks to the recently enacted tax reform legislation. As a consumer-goods producer, it has not had to invest capital on the same scale as manufacturing firms.
Thus, it couldn’t tap into the lucrative investment tax benefits that Congress enacted for manufacturers in 1981--and reduced this year.
A corporate taxpayer that had paid close to the highest rate, General Mills will benefit from the sharp reduction in maximum corporate rates provided by the new bill.
He is also expecting a continuing stream of newcomers smart enough to create an original product, service or marketing strategy. The Strong Opportunity Fund, one of the five, struck it rich with Home Shopping Network, a new venture that sells discounted consumer products nationwide over a live cable television show.
Strong believes there will be enough winners to push the overall path of the stock market upward over the next five years. The Dow Jones industrial average should hit 3,000 by 1990, assuming that there is a gradual reduction of the federal budget deficit.
“If we can get (the budget deficit) under semi-control, the stock market is going to roll again, and you’re going to see prosperity in this country like you haven’t seen in a long time,” Strong said.
“I think corporate America is better managed today and more efficiently operated than it has been in the 20 years I’ve been in the business. And the reason is that it’s so competitive out there. You either run it right or you hang Chapter 11 on the front door,” Strong said.
But the price of that future prosperity will be more Chapter 11 bankruptcy filings, more failures for uncompetitive companies and more violent fluctuation on the stock market.
Contraction of Economy
“We’re going to see more and more volatility” in the short run. A one-day, 100-point plunge in the Dow would not surprise him.
The fluctuations in the market are part of a convulsive contraction of the economy that he says is necessary to make it efficient and competitive once again, domestically if not internationally.
Now, manufacturers are feeling it, but it won’t stop there, he said.
“It will get to all of us. It will get to the white-collar workers. It may take another year or three years, but there will be a stock market collapse.
“It will be a huge correction, and bingo, 50% of the people will be out of work in our business, and the rest will work for a lot less than they do now.” he said. “It will be pretty much all-pervasive when it’s done. We’re going to be forced to be competitive.”
