MANAGING YOUR MONEY / Earning More, Keeping More : FORWARD INTO THE PAST : <i> Instead of buying into Wall Street’s always-glorious view of the future, look at yesterday’s models. They may hold the key to picking growth stocks.</i>
In the search for tomorrow’s great growth stocks, a visit to yesterday’s models can be highly instructive--and plenty sobering.
Modtech Inc., for example, looked for all the world to have spectacular growth potential when it made its initial stock offering in July, 1990.
The Perris, Calif.-based firm built modular classrooms for sale to California school districts. Demand for such relocatable classrooms was expected to boom in the ‘90s as the state’s school population mushroomed. Modtech billed itself as a low-cost producer in an expanding market--the perfect growth stock pitch.
But as California’s deepening recession in 1991 withered school funding, orders for new classrooms quickly dried up. Modtech’s sales collapsed.
Its stock--$10 in its 1990 offering--now sells for about 50 cents, a 95% loss to the original investors.
As the bull market rages on, disasters such as Modtech get relatively little publicity. Which is too bad, because their stories could keep many people from committing one of the most grievous investment sins: getting too caught up in Wall Street’s perpetually glorious view of the future.
The search for great growth stocks is what investing is ultimately all about, and never more so than today. Aging baby boomers, staring ahead a decade or two to retirement, see stocks as the only investment capable of growing fast enough to provide a comfortable nest egg for later life.
In turn, the boomers’ embrace of the “long-term investing” concept has encouraged Wall Street to feed the beast by turning up the hype.
We are told, for example, that the coming “information highway” will be a boon to cable TV and telecommunications stocks, that the continuing spread of technology worldwide assures an endless market for semiconductor makers, and that the boom in legalized gambling makes casino stocks sure winners for the ‘90s.
As this 3-year-old bull market pushes forward, rarely is it mentioned that either a) many of the so-called ‘90s investment themes simply won’t work out as planned or b) even among the successful themes, there will probably be more losers than winners.
Anyone who recalls the glut of new stock issues from personal computer makers in the early 1980s, for instance, would probably think twice about putting their life savings into a fledgling interactive TV equipment stock today. PC makers such as Kaypro, Osborne, Eagle and Tandon all held great promise a decade ago; most are memories now.
Certainly, investors should strive to find the industries that have the greatest growth potential. The alternative--investing in shrinking industries--rarely makes sense.
But after 36 months of a bull market, and with share prices at or near record highs, it’s reasonable to assume that many of the good things that could happen in the economy over the next few years are already reflected in share values.
Especially in the case of stock investors whose time horizon is in the five-to-10-year range rather than 20 to 30 years, it’s crucial now to improve the odds of success.
What follows are some tips on how to do that, while still playing the themes that Wall Street likes best for the ‘90s:
* Invest in what you understand. Legendary stock picker Peter Lynch insists that his best investment ideas are always the simplest--companies whose products or services he uses personally.
When a business’ product makes you happy and you go back for more, you’re contributing to the company’s success. When millions of people do the same, a growth stock often is born.
Michael Haines, Founders Frontier fund manager in Denver, notes that two up-and-coming stocks this year--Cott Corp. and Perrigo Co.--would be familiar to many who are trying to save money when shopping for food and other necessities.
Cott makes store-brand beverages that compete with pricey national brands, while Perrigo makes low-priced drugs.
Thus, they represent an intriguing way to play what experts see as a ‘90s trend, Haines says: the dominance of the frugal consumer over the conspicuous consumer.
Likewise, he suggests that investors measure their personal wants and needs when judging how to invest in the coming information highway. “The consumer, at the household level, is going to define what’s going to be out there in terms of product,” Haines notes.
While investing intelligently in telecommunications hardware makers is a complex task even for market pros, Haines says the companies that produce educational or entertainment software --such as Broderbund Software or Electronic Arts--are investments that small investors can evaluate and relate to as consumers.
Mario Gabelli, a New York fund manager who has made millions investing in media stocks in recent years, calls the information highway “the delivery system for copyright and creativity.” It’s the suppliers of that copyright and creativity--software generators such as Disney and Time Warner--that are most worth owning, he says.
* Invest where the numbers are big and unassailable. For the many American investors now chasing the hot markets of Latin America and Asia, Germany’s experience in 1990 should be a painful reminder that euphoria is often fleeting.
Germany’s reunification in 1990 quickly turned sour--and with it the 1990 German stock boom that had been based on the premise that democracy’s spread was good for investment and growth worldwide.
Last month October, German stocks finally rallied back to (and topped) their 1990 peaks.
The lesson is that international investing, which again appears so promising, is likely to be a harrowing road between here and 2000.
Even so, there is good reason to believe that the global boom in capitalism will bring hefty long-term returns to Americans investing abroad. Why? Because the emerging middle class in the developing world is gigantic--and will have to be served.
Lynn Danielson, investment manager at Northern Trust Bank of California, says the number of people likely to achieve middle-class status in the developing world over the next 20 years is estimated at between 500 million and 1.5 billion. If a conservative number is 800 million, she says, that’s equal to all of the people who now live in developed countries.
As the developing world matures, it’s almost preordained which industries will profit as consumer and national wealth grows, Danielson says. “It starts out with cement and steel, then becomes homes and cars, then toothpaste . . . “
Because the numbers overseas are so compelling and the demographics powerful, Danielson recommends that clients who want maximum investment growth in the ‘90s have 20% of their stock portfolios in foreign issues--generally through diversified international mutual funds.
But if the German experience taught anything, it’s that a headlong rush into a hot foreign market is a fool’s game. The developing world’s middle class will mature slowly but steadily; investment overseas should be done the same way, experts say.
* Invest with smart people. When billionaire Warren Buffett bought a major stake in California banking giant Wells Fargo three years ago, many Wall Streeters scoffed. During the depths of California’s worst recession since the ‘30s, why would anyone invest in a bank that was so closely tied to the state’s fortunes?
Why indeed. In three years, Wells’ stock has tripled, from $40 to about $120 now, as the bank’s earnings have rebounded sharply.
Following big-money investors such as Buffett isn’t a foolproof way to invest in the future, but it can give you a leg up: Whatever homework needs to be done on a stock, you can be sure these big-money players have done it before they put their money to work. They didn’t get rich by being slouches.
Where do the wealthy have substantial stakes today? Try telecommunications company Bell Atlantic, in which cable TV kingpin John Malone will own a huge stake once he merges his Tele-Communications Inc. into Bell.
Or consider MGM Grand, a resort and gaming company now building the largest hotel and casino in Las Vegas. It’s 73%-owned by wily investor Kirk Kerkorian.
Media giant CBS is another idea. Its programming is likely to become ever more valuable in the 1990s as the information highway clamors for software (think David Letterman). The Tisch family owns a 22.5% stake in CBS.
Tracking the rich can be as simple as watching the headlines. When Buffett makes an investment, for example, it’s big news. Also get a copy of the Oct. 18 issue of Forbes, its annual list of America’s 400 richest people and how they got there.
Of course, even the rich make mistakes. Just ask the Tisches about their investment in Macy’s. Or ask Buffett about USAir.
Nonetheless, following the path of the wealthy is hardly the worst you can do in the pursuit of growth, in this or any decade.
TIPS
Investors searching for growth stocks today should consider these long-term social and market trends. As always, diversification is paramount: If you don’t have the means to own a basket of five to 10 different stocks, mutual funds would be a smarter way to go.
* Cocooning: As American families spend more time working and playing at home, demand surges for TV- and computer-based information and entertainment. The stay-at-home habit plays right into the cable tentacles of multimedia and interactive-technology companies. Give special consideration to stocks of movie studios, phone, cable and software companies that make educational games.
* Vigilant Consumerism: Hard-nosed, bargain-conscious consumers use pressure, protest and politics to shape the marketplace for goods and services. Today’s shopper is a far cry from the passive, free-spending consumer of old. Take a good look at discount retailers and manufacturers of goods that are priced low and of high quality.
* Save Our Society: Rediscovery of ethics and compassion sweeps the national consciousness. The importance of personal savings and investment is magnified, as is investing in community and “green” causes. Look at municipal bond insurance firms, companies that manage mutual funds and engineering firms.
* Small Indulgences: Stressed-out consumers seek affordable luxuries with which to reward themselves and their families from time to time. This bodes well for sporting goods manufacturers, makers of toys and motorcycles and some hotel-resort companies.
* Return of the Widget: A decade of cost-cutting and plant closings leaves many American manufacturers more competitive with the rest of the world than ever. Check out the stocks of the Big Three auto makers and makers of farm equipment and heavy machinery.
* Global Consumerism: The emergence of a middle class in the developing world fuels fresh demand for brand-name products from the United States. That’s good news for a variety of consumer stocks, such as soft drink and toiletries companies.
* China as Locomotive: China’s rising wealth is creating demand for goods and services where none existed before as its 1.2 billion people look outward. Hong Kong and Southeast Asian companies are likely to benefit in the long term.
* Productivity as Religion: The relentless drive of businesses worldwide to cut expenses and operate more efficiently spurs continuous demand for technology and equipment that saves time and money. The future is bright for many computer-networking companies, manufacturers of factory automation machinery and wireless communications firms.
Sources: Brainreserve Inc. and Times researchers.
