Avoid a Cash Strategy for Long Term
The year is half over. Have you made any money?
If you dig through your portfolio, you might be surprised at what you find. Despite the turmoil in financial markets in the first six months of this year--as investors struggled with alternating inflation/deflation fears--it has actually been tough to lose money, on the average.
* The typical growth-stock mutual fund, for example, gained 4.2% from Dec. 31 to last Friday, as a strong second quarter made up for a weak first quarter.
* A second-quarter rebound also helped push junk bonds to a 2.1% average return for the half, as the bonds’ high yields compensated at least somewhat for the decline in their principal value.
* The only real losers this year among the most popular investments: gold and silver, down 11.1% and 6.1%, respectively. But for most people, those are minor components in the investment mix, and they’re typically there only for insurance, anyway.
Hold on a sec, though. If you just left your money sitting in a one-year bank certificate of deposit, you earned about 4.2% in the first six months (half the 8%-plus typical annual yield). That was a no-risk return, yet it was better than what most stock or bond investments earned.
When a CD’s return beats the competition like that, a lot of investors start asking a basic question: Why risk bothering with stocks and/or bonds when I can do as well or better in plain old “cash” investments?
The simple answer to that question is that you may be right in the short term. Continuing economic worries might make the second half of this year a rerun of the first half.
But the mistake that plenty of investors made in the 1980s was to think of cash investments as long-term growth vehicles. They aren’t. Over time, stocks and bonds are going to deliver higher returns. If they didn’t, some basic capitalist maxims would be invalidated.
Where your long-term investing plan is concerned, cash should be thought of only as a temporary parking place. From there, you can play the game any way you choose. But your eye should always be on putting that money to work in long-term investments just as soon as you’re comfortable with the markets.
Right now, Richard Carney of L.A.-based money manager Cramblit & Carney isn’t comfortable with stocks. His firm, which handles more than $900 million, has only about 40% of that in stocks--”about as low as we’ve ever gone,” he says. The rest is in cash and bonds.
In a slow economy, Carney doesn’t see the corporate earnings outlook for the rest of 1990 justifying many stocks’ current prices. As an example, he says, “we own a lot of Bristol-Myers Squibb. But I don’t want to walk out now and buy a lot more at 22 times earnings,” which is where the stock is trading versus 1990 earnings estimates.
Stocks don’t necessarily have to go down from here. But they could stall until earnings come back strong, perhaps in 1991. Which means a bank CD might be a fine investment for six more months.
But Roger Engemann, who runs the Pasadena Growth Fund and other investment funds (total: $800 million), believes the first-half performance of stocks was just a prelude. Many high-quality companies continue to post healthy earnings despite the economy, he notes. What investors showed in the first half of the year is that they’re willing to pay for growth, Engemann says--which was reflected in the chart-busting performance of high-tech stocks.
Engemann favors such longtime growth stocks as Philip Morris, Wal-Mart and Eli Lilly. “Our stock list trades for an average of 17 times this year’s earnings (per share),” he says. He’s betting that those price-to-earnings multiples are going to expand dramatically in the 1990s, as investors disdain slumping real estate and other investments for stocks. People who wait to buy stocks will lose, Engemann says.
The worriers “will be (doing) that for the next five years as stocks go higher and higher,” he says.
Days of Less Thunder: When Azusa-based Optical Radiation Corp. introduced its new theater sound system in May, Hollywood went wild. The system--Cinema Digital Sound, or CDS--brings compact disc-quality sound to the theater via a digital encoding of sound on the film itself. The system has the potential to be a gold mine in the 1990s for Optical Radiation, whose other businesses now generate annual revenue of about $125 million.
But Paramount Pictures, which rushed to get its “Days of Thunder” film in CDS format for select 70-millimeter theaters in L.A. (such as Mann’s National Theatre in Westwood), last week replaced those prints with conventional-sound prints.
Paramount spokeswoman Deborah Rosen said the company ran into “sufficient problems” with the new technology to warrant pulling back.
What happened? Gary Patten, Optical Radiation’s vice president for finance, says last week’s heat wave caused a problem. The projection room at the National got so hot that it caused a malfunction in part of the high-tech equipment that makes CDS work, Patten said. “The problem was easily fixed,” he said, by changing the air flow on the equipment.
Paramount, however, didn’t want to take any chances with its all-important film, especially at its premiere. “They (Optical Radiation) have to assure us that it’s not going to have problems” before Paramount will restart the CDS prints, Rosen said.
Patten says the Paramount problem was compounded by Optical Radiation’s rush to get the “Days of Thunder” prints done quickly. He said Walt Disney Co. hasn’t had anything more than minor bugs in its CDS versions of “Dick Tracy.” Milton Moritz, president of Pacific Theatres Corp., confirms that a CDS version of “Dick Tracy” has been “running just beautifully” at his firm’s Crest Theatre in Westwood.
Optical Radiation’s stock hasn’t reacted to the Paramount news--and may not. Why? At $34.25 on Tuesday, the shares have rocketed from $13 in 1989. But most of that rise was pegged to the improving outlook for the company’s basic businesses: popular new plastic prescription eye wear and intraocular lenses for cataract patients.
Those businesses should produce earnings of about $2 a share in the year beginning Aug. 1. The current quarter “is shaping up about as expected,” Patten said. “We haven’t seen any general softening in our businesses,” despite the weak economy.
At $34.25, the stock trades for about 17 times next year’s projected earnings. Wall Street already knows that the real payoff from CDS isn’t supposed to begin until late 1991, as more theaters buy it. So unless Optical Radiation has to spend a lot more money refining CDS, near-term earnings shouldn’t be penalized.
Patten said the company’s talks with other theaters and studios haven’t been hampered by the Paramount move. “There are not a lot of bugs” to work out of CDS, he maintains.
Briefly: Mattel Inc. stock rebounded slightly Tuesday, finishing up 37.5 cents to $22.50 on heavy volume of 1.3 million shares.
The stock had plunged $2.25 on Monday after the Hawthorne-based toy giant announced that both second-quarter revenue and earnings should be up 16% from a year earlier.
That’s a healthy number by any measure, but Wall Street had been hoping for better. Kidder, Peabody & Co. analyst Gary Jacobson called the market’s reaction “completely overblown.”
Jim Eskridge, Mattel’s chief financial officer, said he figures the selloff just shows “that the market is very skittish” because of weakening retail sales in general, even while Mattel’s products continue to sell “very well” at retail.
Some of Mattel’s retailers are delaying new toy orders until later this summer, but that’s just smart inventory control, Jacobson said. Eskridge said the company knows what Wall Street wants: “We have to show them that we can manage the rest of the year.”
Mattel tried to repurchase 25,000 to 50,000 shares Tuesday as part of an ongoing 500,000-share buyback program. Eskridge said he isn’t sure the company was able to get any, given an apparent herd of buyers waiting in the wings.
MID-YEAR INVESTMENT ROUNDUP Here are how various investments performed in the first quarter of 1990, the second quarter, and for the first half overall. Total return measures price change plus any dividend or interest income earned.
Average total return: Investment 1st qtr. 2nd qtr. 1st half H&Q; growth/ tech stock index +3.9% +11.9% +16.2% Growth stock mutual funds -2.3% +6.8% +4.2% 1-yr. bank CD (L.A. average) +2.1% +2.1% +4.2% Money market mutual fund +1.9% +1.9% +3.9% S&P; 500 stock index -3.0% +6.2% +3.0% Intermediate-term Treasury bonds -0.2% +3.1% +2.9% Municipal bonds (20-yr. AA) -0.4% +3.2% +2.8% NASDAQ OTC composite stock index -4.0% +6.4% +2.1% Junk bonds -2.1% +4.3% +2.1% Foreign stock mutual funds -5.4% +7.4% +1.9% Long-term Treasury bonds -4.1% +4.3% +0.1% Silver -5.0% -1.2% -6.1% Gold -8.0% -3.3% -11.1%
Sources: Lipper Analytical Services (mutual fund returns); Hambrecht & Quist (growth/tech stock index); Shearson Lehman Hutton (T-bond indexes): Merrill Lynch (junk bond index, muni bond ind ex); Bank Rate Monitor (CD return); IBC/Donoghue’s (money fund return); N.Y. Commodity Exchange (metals)
