What to Sell, What to Keep If You’re Becoming Antsy

The stock market has been unable to find its feet for the last two weeks, in the wake of the Federal Reserve’s high-stakes decision to tighten credit for the first time since 1989.

With every wobbly session, market pros and novices alike are forced to face the questions they most despise: When do I sell? And what do I sell?

The agony may be most acute for small investors who have owned individual stocks or funds for years and are sitting on large profits. Few investors want to believe that a bear market could be in the wings, after all. And even those who have convinced themselves that they’re in stocks for the long haul--and so don’t need to ponder the sell question--still feel pressure at times like this.

So let’s say you have that antsy feeling that it’s time to take some money off the table, now that short-term interest rates are on the rise. If the broad market goes down from here--in a classic “correction” of 10% or so, or a deeper drop--which stocks are most, and least, vulnerable?

Perhaps surprisingly, many money managers say they wouldn’t sell the industrial stocks that have been the market’s leaders over the past year. Although a large number of these issues, including Chrysler, Caterpillar, Deere and General Electric, have racked up hefty price gains, institutional investors seem particularly reluctant to take those profits and exit the stocks.

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There’s good reason for that attitude: These companies continue to surprise Wall Street with their earnings recoveries as the economy expands. Take farm equipment giant Deere. On Tuesday, it reported earnings of $87 million in its first quarter ended Jan. 31. Analysts had expected Deere to earn about half that. Stunned, investors pushed the stock up $5.25 to $82.50 on Tuesday. It’s now almost double its ’93 low of $42.375.

“I think that’s the trend longer-term for these (industrials); people don’t understand the earnings leverage in these companies” as the economy grows, argues Charles Mayer, manager of the Invesco Industrial Income stock fund in Denver.

Kelly Kelly, principal at Spectrum Asset Management in Newport Beach, agrees with Mayer. People are nervous because the industrial stocks’ prices have zoomed, he says. But as Kelly calculates the companies’ earnings potential in a recovery, their rate of return on capital and their stock prices relative to interest rates, he finds many still are good values.

GE, at $108 a share, has risen 34% from its 1993 low. But Kelly calculates that a bear market low price for GE would be $70, while its bull market peak should be around $190. With that much potential upside left, Kelly sees no reason to sell.

Of course, there could be a lot of wishful groupthink going on here. It’s hard to say “goodby” to a winner, after all. And while fundamental investors may not sell the industrials if trouble hits, the short-term traders in these stocks could cause plenty of damage if they bail.

Still, the central point of the industrial stocks’ fans is logical: If the economy continues to grow, these firms will sell more, and years of cost-cutting will send added revenue directly to the bottom line. Even if interest rates rise, investors should find the industrials’ big earnings gains hard to ignore in ’94 and perhaps ’95.

Then what do you sell at this stage of the bull market? Some ideas:

* Financial stocks. Technically, the banks, the brokerages and the mortgage lenders are cheap stocks, after their ’93 selloffs. And it’s true that a gradual rise in interest rates shouldn’t do extreme damage to financial companies’ earnings. But psychologically, every notch up in rates is likely to slam these stocks, some pros say. If you have a profit, take it and find a better idea, they suggest.

Mike Wolf, executive vice president at IDS Advisory Corp. in Minneapolis, has sold out his stakes in Merrill Lynch and insurer General Re. At Wedge Capital Management in Charlotte, N.C., research chief Michael Kucera says his firm recently let go of Federal National Mortgage after owning it for nearly four years.

* Electric and phone utilities. Like the financials, utilities have been badly battered by the turn in interest rates. Is it too late to sell? No, says Invesco’s Mayer. Especially in the case of the electric utilities, he says, “I just don’t see the growth potential” longer-term.

Mayer notes that regulation and competition are squeezing many utilities’ earnings. Without strong earnings, there won’t be strong dividend growth. So he has been culling Niagara Mohawk and Illinois Power, among others, from his fund.

Michael Mahoney, manager of the GT Global Telecommunications stock fund in San Francisco, has been dumping phone utilities US West and Pacific Telesis. PacTel, by recently spinning off its fastest-growing businesses (such as cellular), has left itself with meager growth prospects, Mahoney says. “My feeling is that it’s not a terrible dog but that we can do better,” he says.

* Consumer stocks. Drug, food and tobacco stocks have been slumping for two years. They rally periodically, but IDS’ Wolf believes any rally is a good opportunity to sell these stars of the ‘80s. Why? Wolf sees no sign that the companies’ profit margins are improving; if anything, they’re likely to get worse, he says, pressured on one end by rising commodity prices and on the other by heated competition for consumers’ dollars.

Time to Trim?

Here are stocks that some money managers believe are ripe for continued profit taking if the market weakens further.

2-year range: 2-year range :Tues. Stock Low High close Amer. Intl. Group 54 5/8 100 1/4 88 7/8 Chase Manhattan 17 1/4 38 33 3/4 Federal National Mtg. 55 1/8 89 1/2 85 1/8 General Re 77 1/2 133 3/8 108 7/8 Hong Kong Tele. 30 67 7/8 58 Illinois Power 19 1/4 25 7/8 21 1/8 Merrill Lynch 22 1/4 51 1/8 41 3/8 Natl. Health Invstrs 21 1/2 29 5/8 27 5/8 Pacific Telesis 36 7/8 59 1/4 55 3/8 US West 32 7/8 50 3/4 40 1/8