INVESTMENT OUTLOOK: HOW TO GET AHEAD : INVESTMENT STRATEGIES : THIS IS A <i> GREAT</i> TIME TO INVEST : Oil Stocks Appear Ready to Bounce Back and Bush Hopes to Cut Capital Gains Tax
Why should anyone be foolish enough to invest in stocks?
- George Bush wants to slash the capital gains tax to 15% from 28%.
- Between 1926 and 1987, stocks averaged a total annual return of 9.9% a year.
- Historically, investors have done best when swimming against the tide. And there’s no doubt that small investors have jumped ship. Since last year’s stock market crash, another $21 billion has been dumped into money market funds.
- A host of solid utility stocks now pay 5% to 7% dividends.
- The median price-earnings ratio of stocks is about 12, down from a peak of 22 in August, 1987. And with all the recent takeovers and mergers, there are about 12% fewer shares of stock for sale than in 1984. Legendary mutual fund manager John Templeton argues that “shortage” makes stocks intrinsically more valuable.
Norman Fosback, president of the Institute for Econometric Research in Florida, which puts out several investment newsletters, offers up another reason to invest. His research shows corporate insiders, who usually know best how their company will perform, have been heavy buyers of their own stocks this year.
Fosback looks for the economy to hold its course next year and he predicts a 15% rise in the Standard & Poor’s 500 index. What of the trade and budget deficits? He said there’s no reason to think that either will impede the market now, adding: “Both have been on the scene for 10 years.”
Another relatively bullish observer is John Oppenheim, branch manager for the Dean Witter Reynolds office in Woodland Hills. In his 16 years as a stockbroker, he’s ridden through the great bull market, one crash, and two recessions. Oppenheim is less interested in how the overall market performs than in finding undervalued stocks. He doesn’t parrot the recommendations of Dean Witter’s financial analysts, he prospects for his own nuggets.
This year he’s been steering clients into an industry that’s been trampled since 1981: oil.
“First of all, the oil group stocks pay generous dividends. The companies have substantial cash flow, so the dividends are well protected,” he said. Oppenheim likens the oil industry to “the same role Rust Bowl America was in. Now the Chryslers and Fords have come out of it.” He figures oil is next. The oil companies have gotten “very lean, very clean to stay in business,” he said. Oppenheim isn’t predicting OPEC’s next move, but he notes that “Atlantic Richfield will make more at $15 a barrel than it did when oil was at $38.”
Along with Arco, Oppenheim especially likes Chevron, Unocal and Exxon, plus oil equipment suppliers Schlumberger and Baker Hughes. “History tells us that when investor sentiment is negative, it’s a good time to invest,” he said.
Those looking for more secure stocks might listen to Joseph Doyle, a beverages and restaurant analyst with the investment firm Smith Barney. Two hardy perennials on his buy list are McDonald’s and Coca-Cola. For years now, people have been warning that McDonald’s would run out of gas; surely every decent street corner in America has golden arches hanging over it.
But McDonald’s sales have more than tripled in the past decade and its likely $640-million profit this year will nearly quadruple that of 10 years ago. Doyle says the growth isn’t over. “The most important thing is that 30% of the company’s sales and profits now come from outside the U.S.,” he said. With customers in Canada, Japan, the United Kingdom, Germany and Australia wolfing down McDonald’s burgers, the company’s foreign business is growing 20% a year, double the U.S. rate.
Another American company doing its bit to balance the trade deficit is Coca-Cola. This year, for the first time, the company ought to crack the $1-billion mark in profits, with about 75% of it coming from overseas. Coke’s sales will grow in double digits this year in Japan, Korea and Thailand. Indeed, Value Line figures Coke outearns Pepsi 15-to-1 overseas.
Doyle expects both McDonald’s and Coca-Cola to post 13% earnings growth for each of the next five years.
Utility stocks appear to be another safe haven. Utility analyst Daniel Rudakas, who follows the industry for Duff & Phelps in Chicago, says, “If you’re thinking the market could be soft and we have a recession coming sooner or later, you’re better off with defensive industries like utilities that have dividend support.”
Rudakas’ list of top-grade utilities sport 5% to 7% dividends and he figures the group can produce a total return--dividends plus stock appreciation--of 11% to 12% a year. He likes TECO Energy, the Florida utility often cited as one of the best-run in the country; another Southern energy generator, Florida Progress, and a tiny South Dakota utility, Black Hills Corp.
For most investors, though, picking your own stocks is risky. Rather than bet the house on one or two stocks, the odds favor those who invest in a mutual fund where you buy a package of stocks. How to pick a fund? Scan the mutual fund performance surveys in business magazines, then go a step deeper and find out how long the portfolio manager has been in charge.
Consistency and long-term performance can mean everything. Consider the performances of two rival businesses, the Dodgers and the Chicago Cubs. Over the past 35 years the Dodgers have had only two managers while appearing in 11 World Series; meanwhile the Cubs have employed 22 managers in hopes of discovering the next Casey Stengel but have yet to win a pennant.
Albert Nicholas and Ralph Wanger are mutual fund managers who have headed their funds for about 20 years. Each fund has averaged a 20% total return per year over the past decade.
Wanger runs the Acorn Fund in Chicago, with about $557 million in assets, and he’s still bullish. About 96% of Acorn is in stocks. “The secret of the game is to find some companies that do well over a longer period of time, not to guess whether the market is going to go up or down next month,” he said.
Acorn, as the name implies, invests in small companies and hopes to sprout with them. Wanger has done well with cellular phone stocks and he continues to like them, including Telephone & Data Systems in Chicago. “It’s the classic example of an industry that couldn’t have existed 10 years ago,” he said.
Wanger owns 150 stocks, mostly smaller companies, with total market capitalizations of between $100 million and $300 million each. Recently he bought Cray Research, the Minneapolis-based supercomputer company whose stock has tumbled by a third this year because of delays in shipments of a new computer and rising production costs in another. But Wanger bought in “on the theory they are not going out of business.”
Cray Research, however, isn’t an acorn. It has a market capitalization approaching $2 billion. But what about Wanger’s ironclad rule of investing only in small companies? How can he buy into a big stock like Cray and claim he follows a small-companies-only formula? “It doesn’t mean I don’t follow that. I follow it religiously. In the same way most people follow religion--a lot of times I don’t,” he said, laughing.
It’s hard to argue with the results. Through Nov. 22, the Acorn Fund was up 19% this year.
Nicholas, meanwhile, manages the Nicholas Fund in Milwaukee with about $1.1 billion in assets. Many mutual funds these days, including his own, have more clients who are cashing out of funds than putting money in. As a result, Nicholas said, the net outflow of money from his fund runs as high as $1 million a day.
But Nicholas is unfazed. He’s fully invested in stocks. Why? He remembers the six straight years after the 1974 recession when his fund had a net loss of investors, but for those who stayed in, Nicholas averaged a 20% gain per year. “I’d always rather invest when people aren’t interested. You get better prices,” he said.
Nicholas owns about 100 stocks, mostly in small companies. “We take a long, long-term view. We know these small- to medium-sized companies do better on a long-term basis than big companies.”
One stock he likes is Land’s End, the Wisconsin mail-order company. Nicholas likes the fact that the company caters to upper-middle-class customers, sells quality apparel and, as he puts it, “keeps expanding and sending out more catalogues.” Land’s End stock trades at a premium to the stock market average--that is, its price is relatively high when you take the company’s earnings into account--but Nicholas figures the firm can grow an above average 20% to 30% a year over the next several years.
He also likes tax preparer H. R. Block, which has diversified into temporary help and computer services. And he’s bet on Tyson Foods, a big supplier of chickens to McDonald’s (Chicken McNuggets), which Nicholas figures helps balance out the chicken price cycles.
Nicholas doesn’t buy the notion that the great American ship of state is taking on water. “There’s plenty of growth in our economy. Certainly plenty of growth if you pick the right companies,” he said.
As of Nov. 21, his fund had cranked out another 14.5% gain this year.