Hits and Misses in This Year’s Stock Predictions
If you own stocks, you’re probably glad 1990 is almost over. It was a tough year to make money, even before Saddam Hussein helped bring on a full-fledged bear market.
But people did score some big hits in the market this year--perhaps even a surprising number, given that broad market indexes will finish 1990 with losses ranging from 5% to 15%. Despite the year’s roller coaster, good companies that managed solid earnings growth generally saw their stocks advance.
That’s the way the market should work, of course, and it shows that despite the advent of the first bear cycle since 1982, you can still count on a basic market tenet: Earnings will be rewarded.
This column, a forum for stock pickers of all types and disciplines, had its share of hits and misses in 1990. But neither the winners nor the losers should be viewed solely in this short-term vacuum. One theme stressed constantly here during 1990 was that the only smart way to buy a stock was with a two- to three-year time horizon. The short term was, and is, too dangerous and unpredictable, as Iraq handily demonstrated.
But if nothing else, the year’s hits and misses helped reveal important market trends and reinforced old lessons. Here’s a look at what worked, and what didn’t, as detailed in this column:
* EARNINGS WERE KEY: The bear market wasn’t so indiscriminate as some investors think. Almost all of the winning stocks share one attribute: They produced consistent profit growth.
Meanwhile, most of the big losers had severe earnings problems--such as Los Angeles-based computer firm Teradata Corp., which was blindsided by the sinking economy after Iraq invaded Kuwait.
On the winning side, Pasadena-based Jacobs Engineering was a firm with a great earnings trend all year. The stock ebbed and flowed, but now it’s once again trading near its all-time high of $27.25. Jacobs’ rival in the engineering and construction business, Irvine-based Fluor Corp., had a flat quarter at midyear, which has restrained investor enthusiasm for that stock.
But John Simon, analyst at Seidler Amdec Securities in Los Angeles, sees continued double-digit earnings growth for both companies in 1991. Around the globe, big companies and national governments have begun a major new cycle of capital expenditures for roads, plants and other mega-projects. Jacobs and Fluor are two of the key U.S.-based designers of those projects.
A recession may slow such projects, but Simon notes that these capital spending cycles generally are resistant to short-term economic trends.
Strong earnings up-trends also were evident in 1990 at such companies as Pinkerton’s, the Van Nuys-based security services firm; Dreyer’s Grand Ice Cream, which has carved a highly profitable niche in the premium ice cream market nationwide, and Hancock Fabrics, a fabric retailer with a long history of healthy profit growth.
* PAYING UP FOR GOOD EARNINGS WAS OK: Many investors are reluctant to buy stocks with high price-to-earnings multiples. Your risk is greater with such stocks, of course. But if the company consistently delivers the growth that investors expect, the stock will almost certainly rise over time.
That was demonstrated by SynOptics Communications, a young Mountain View-based company that designs computer networking systems for companies. Bill D’Alonzo, who runs the Brandywine stock mutual fund in Wilmington, Del., was a big fan of SynOptics last May, when the stock was trading for $16.75 a share, or about 20 times estimated 1990 earnings per share. The market average P/E was around 15.
Since then, SynOptics has turned in earnings that were far better than expected, which has driven the stock to $36.50, up 118%.
To D’Alonzo, the mission for 1991 is the same as it was for 1990, despite the impending recession: “We just try to find companies with strong fundamentals that won’t be affected by the economy,” he says. You have to do your homework, but those stocks exist, he says.
If you can find earnings potential and a low P/E in the same stock, all the better. That is what has sent shares of Irvine-based personal computer maker AST Research rocketing in recent weeks.
* AVOID BEING TOO EARLY: More than a few market strategists were calling for a revival of industrial stocks early in the year. And a host of analysts also thought that beaten-up financial and real estate stocks had become bargains by last spring. Both calls were dead wrong.
The industrial companies, such as machinery maker Caterpillar Inc., never had the strong product demand that would justify a turnaround in the stocks, even before the Iraqi crisis started the recession ball rolling.
The financial stocks, meanwhile, had slumped severely by midyear, but that turned out to be just the start of a banking shakeout that could last well into 1991.
True, many stocks in these groups are likely to be fantastic winners when the bear market finally ends. But in retrospect, the timing was off last spring. When the trend is running against you--as it clearly was running against industrial and financial stocks early in the year--it’s generally better to wait for a clear sign that things have changed, or that prices are nearing rock bottom.
Eli Lustgarten, analyst at Paine Webber Group in New York, didn’t want to pay $62 a share for Caterpillar last March. But at $48.125 now, he feels confident buying the stock in advance of the economic recovery he expects in 1992. Cat’s earnings will be just $1.25 a share in 1991, Lustgarten figures, but a recovery in machinery demand should produce earnings of $5 a share in 1992, he says. He’s comfortable paying about $48 now, because at some point in 1991 the stock is likely to rocket, anticipating a better 1992.
* KNOW WHEN TO EXIT: Sometimes, not investing--or selling--is the most important decision you can make. In June, this column suggested it was time to exit S&L; stocks, because the risks far outweighed the potential rewards. Most of the stocks have collapsed since then.
When an investor group grabbed a stake in retailer Pic ‘N’ Save last April and threatened a takeover, the stock ran up to $14. But the takeover threat looked like a sure loser to some analysts quoted here. In fact, the group failed, and the stock now is at $8.125.
A column in March suggested that cable TV stocks appeared to be ready for a dive, because investors no longer were willing to view the firms’ asset values as justification for the high stock prices. Indeed, analysts who saw the fall coming were on target: Most cable stocks have plunged.
Of course, nobody has a lock on good investment advice. In any market, you’re going to win some and lose some. To come out on top over the long term, three things help: Use common sense, keep a well-diversified portfolio, and before you buy any investment, set goals for it and know exactly how long you’re willing to hold on for those goals.
In any market, bull or bear, those are still your best tools for success.
SOME IDEAS THAT WORKED . . . A sampling of some of the stocks that analysts and money managers recommended in this column in 1990, and how the issues have fared:
Date mentioned Thurs. Pct. Stock and price close chng. Syncor Intl. 03/07 $6 7/8 $9 7/8 +44% Gap Inc. 03/09 29 5/8 35 1/2 +20% Hancock Fabrics 03/16 32 5/8 38 +16% Dreyer’s Grand 05/07 17 3/8 22 1/4 +28% SynOptics Commun. 05/18 16 3/4 36 1/2 +118% Jacobs Engineering 06/22 21 1/8 26 +23% AST Research 08/06 20 33 7/8 +69% Pinkerton’s 09/03 18 3/4 22 1/2 +20% Mattel 09/07 18 5/8 21 1/8 +13% Caesars World 10/17 13 5/8 16 7/8 +24%
. . . AND SOME THAT DIDN’T
Date mentioned Thurs. Pct. Stock and price close chng. Fluor 02/07 $40 1/2 $38 1/8 -6% Caterpillar 03/05 62 1/8 48 1/8 -23% Western Digital 04/02 11 1/4 4 1/2 -60% Xerox Corp. 04/13 55 1/8 35 3/8 -36% J.C. Penney 04/25 65 1/8 43 3/8 -33% Optical Radiation 05/11 31 3/4 28 -12% Del Webb Corp. 05/21 9 7/8 5 1/2 -44% Marshall Industries 07/11 28 7/8 21 -27% Teradata Corp. 07/27 24 3/4 13 1/4 -46% General Motors 08/27 37 3/8 34 7/8 -7%
