Wall Street Cools to Picking Hot Growth Stocks
Wanted: A decent stock market theme.
Wall Street, an industry that relishes the safety that often derives from group-think in stock picking, is suffering from a troubling lack of consensus on what to buy today.
Nothing gets portfolio managers’ motors running--and stock prices flying--like the declaration that a particular business is a “hot growth industry.” But the list of industries whose earnings-growth prospects can cause heart palpitations among big investors has dwindled dramatically over the past year.
Some Wall Streeters now argue that the only broad hot-growth theme remaining is technology. And even that sector has hit rough going in recent weeks, as investors have begun to fear that the economy is slowing, and with it computer orders.
One measure of tech stocks’ slippage: Technology stock mutual funds, the best- performing U.S. fund category last year (up 10.6%), are down 1.3% on average so far this year, according to Lipper Analytical Services.
Timothy Miller, manager of the Invesco Dynamics growth fund in Denver, admits that in the search for fresh hot-growth themes, “Right now I don’t have any.” He had heavily tilted his portfolio toward tech stocks last year, including personal-computer makers, software firms and semiconductor producers. With the second-half rally in those stocks, that tech investment pulled his fund up from an 8% loss at midyear to end 1994 with a full-year decline of 2%.
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But Miller says the tech theme “has played itself out” as the stocks have jumped and the industry’s outlook has grown more clouded. Without another clear, broad growth theme to replace the 20% to 40% of their portfolios now dedicated to tech, however, fund managers like Miller face a substitution dilemma.
David Ryan, manager of the Los Angeles-based New USA Fund, another fund that seeks out high-growth stocks yet is down 4.5% so far this year, concurs. “If I sell a lot of these tech issues, what do I go to?” he asks rhetorically.
What happened to all the great growth stocks? In part, rising interest rates last year dashed the perceived earnings prospects of many industries by threatening higher financing costs and/or an eventually slower economy. Those two worries washed out a broad spectrum of established and “emerging” stocks--from auto-related issues to banks to retailers--as investors continued to mark down the prices they were willing to pay.
Meanwhile, though some drug and medical-supply stocks have been rebounding after being crushed in 1992 and 1993 by federal health-care reform fears, many portfolio managers remain suspicious of that group’s staying-power.
L. Keith Mullins, growth-stock specialist at Smith Barney in New York, says many hot-growth investors had since 1990 come to focus their portfolios on five themes: Computer hardware, software, biotech, health care and retailing. “When not one of those groups is running, people tend not to look below the market surface,” Mullins says; rather, they despair about the market overall.
Mullins thinks that’s a mistake. Broad themes may not work anymore, but there are plenty of hot growth stocks out there if you’re willing to hunt, he says. He likes Altera, for example, a maker of custom computer chips; and Medaphis, a provider of health-care records-management services.
Looking deeper in the market for new growth ideas also has led New USA’s Ryan to firms such as grocery chain Safeway and Canandaigua Wine, both of which are posting hefty earnings gains.
But some pros say there’s a message in growth managers’ queasy feeling about the lack of new themes and about paying up for the remaining few “hot” stocks. The message is: Change your approach, says Jim Crabbe, whose Crabbe-Huson Special fund in Portland, Ore. gained 12% in ’94.
In a dangerous and unforgiving market, the winning formula is to buy good businesses when their stock prices are way down , not way up, Crabbe argues. Hence, he has been adding names like Oregon Steel, Airborne Freight and Asarco to his portfolio. This strategy requires patience, Crabbe allows. But at the very least, he doesn’t face the scarcity problem of hot-stock chasers today. “I’m finding more opportunities than ever,” he says.
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What to Buy?
In an uncertain market, the debate for many stock fund managers today is whether to buy what’s still hot, or what’s out of favor. Some ideas from both camps:
HOT STOCKS
52-week 52-week Thurs. Stock (market) high low close Altera Corp. (O) 48 1/8 21 5/8 47 1/2 Safeway Inc. (N) 33 19 1/4 32 1/8 Baby Superstores (O) 56 3/4 31 1/4 59 Medaphis Corp. (O) 53 23 1/2 52 Broderbund (O) 53 3/4 15 3/4 48 Canandaigua Wine (O) 40 1/2 20 1/4 37 1/8
COLD STOCKS
52-week 52-week Thurs. Stock (market) high low close Oregon Steel (N) 27 3/8 14 1/8 15 7/8 Morrison-Knudsen (N) 29 7/8 9 9 1/8 Airborne Freight (N) 39 7/8 18 22 1/4 Giddings & Lewis (O) 28 13 3/4 15 7/8 Asarco Inc. (N) 34 7/8 21 3/8 26 7/8
Markets: N=NYSE; O=Nasdaq
