PROS’ TIPS FOR ’93

Here’s how four Wall Street investment pros are advising their high-powered clients on stocks and bonds for 1993. All individual stocks mentioned are listed on the New York Stock Exchange unless otherwise noted.

Stocks Poised for Another Good Year: Abby Cohen, investment strategist at Goldman, Sachs & Co., takes a highly pragmatic view of financial markets in 1993, and comes up with a bullish case for stocks. While she agrees that interest rates and inflation will eventually rise with a strengthening economy, “I don’t think 1993 will be the year in which those things takes place,” she says.

In the meantime, she expects steadily improving corporate earnings. Excluding one-time write-offs, Cohen believes that profits of the typical blue chip company will advance 12% this year--enough to keep investors interested, she says. Overall, she believes that investors can expect to earn 12% to 15% from a diversified portfolio of stocks this year (price appreciation plus dividends), which would be better than the 7% to 8% returns typical of 1992.

But because U.S. economic growth will be moderate, Cohen says, “you want to stay with companies that are sensitive to the early and intermediate stages of the recovery,” rather than reach for heavy-industry firms that boom near the end of an expansion.

Some of her favorites include retailers Limited ($27 as of Friday) and Federated Department Stores ($19 3/4); technology firms such as Compaq ($48 3/4), Motorola ($104 1/2) and Advanced Micro Devices ($18 1/8), and financial firms such as NationsBank ($51 3/8) and PNC Financial ($28 1/2).

Restoring Growth Is a Global Mandate: Greg Smith, chief strategist at Prudential Securities, hammers on one central theme in his annual “Fearless Forecast” for clients: Reviving economic growth is becoming the central issue in every major country of the world, just as it was the central issue in the U.S. election.

“Politicians who want to keep their jobs are focusing their governments on how to stimulate economic growth again to create jobs for others,” Smith says. With almost every major nation embarking on that approach, he figures that the chances of success are substantial over the next few years.

“On balance, (investors) should be thinking about how to benefit from an eventual pickup in world economic growth--not about how to profit from further declines in inflation and interest rates,” he says. That means stocks will have an edge over bonds, probably for some time to come, Smith says.

As for 1993, he believes that the first half could be rough for the stock market because he assumes investors’ expectations of corporate profit growth are ahead of reality. But by mid-year investors should begin to focus on “a very positive 1994 economic environment,” Smith says, leading to another rally in stocks.

He also believes that small-company stocks will beat blue chips in 1993, as they did in 1992. But because small stocks have enjoyed such a strong run since October, Smith believes that they are vulnerable to the same cycle as 1992: A rally into January and perhaps February, followed by a significant pullback as reality collides with overblown optimism, followed by another powerful rally in the fourth quarter.

Why Long-Term Bonds Still Look Good: As chief bond guru at giant money manager Pacific Investment Management in Newport Beach, William Gross’ forecasts get a lot of attention on Wall Street. This year, as he did a year ago, Gross has issued a bullish call on long-term Treasury bonds--despite the misgivings of many of his peers.

Investors have generally been squeamish about buying Treasury bonds in the 10-year to 30-year range, in spite of their reasonably attractive yields of 6.70% to 7.40%. Instead, the majority of investors have remained in so-called intermediate-term bonds, such as five-year Treasuries, which now yield about 6%. In an uncertain world, the crowd sees safety in a shorter-term maturity.

But Gross prevailed in 1992: Long-term bond yields bounced around during the year, but ended almost exactly where they started--which means you ultimately made more money by taking the risk with longer-term bonds than by staying in the lower-yielding intermediate sector.

“The economy strengthened throughout the year, which is a negative for bonds, but at the same time domestic inflation moved lower, a decided positive,” Gross notes. “The two dynamics, it seems, canceled each other out,” leaving long-term Treasury owners with total returns of 7% or better--a great return, considering that inflation was just 3% for the year, he says.

In 1993, Gross still believes that if you’re going to own bonds, they should be the highest-yielding issues, which means very long-term bonds. His thinking is influenced in part by some rumblings from the Clinton camp: There has been talk that the Treasury under Clinton might cut back on sales of new 30-year bonds, shifting more of the borrowing to the intermediate term.

In so doing, the Treasury could save on interest expenses, given that intermediate-term rates are lower than 30-year rates. Meantime, the net effect would be to make 30-year bonds scarcer--which would in theory make their value go up and their yields come down, Gross notes.

Even without a cutback in long-term bond sales, Gross says, low inflation and a moderately growing economy mean there’s no upward pressure on long-term interest rates. So he figures that long-term Treasuries will once again handily beat returns on short-term “cash” investments in 1993.

‘Safer’ Stocks Still Make Good Sense: David Shulman, investment strategist at Salomon Bros., is far less sanguine about the 1993 outlook for the economy and corporate earnings than many of his peers. In particular, he believes that the earnings-optimists are overlooking the long-term negative effects of so-called FAS 106--an accounting rule change that forces companies to recognize in current earnings the future costs of providing post-retirement health benefits to employees.

Many major companies announced large one-time charges in the fourth quarter to reflect FAS 106, and investors shrugged at most of them. But Shulman points out that those one-time charges were merely “catch-up.” What hasn’t been much discussed is that the rule change will have an ongoing depressive effect on earnings, because companies can no longer hide their post-retirement health liabilities, he notes.

Investors are ignoring FAS 106 because “it’s too big and too complicated. But this is going to bite people,” Shulman says.

To avoid disappointment, he recommends staying in stocks likely to perform well in a modestly growing economy. His list includes MCI Communications ($39 5/8, NASDAQ) as a play on healthy long-distance communications growth; Northern Telecom ($43), “a big winner in the telecommunications capital spending boom,” and Comcast ($19 3/8, NASDAQ), “a company uniquely positioned at the crossroads of cable TV and cellular telephone services.”