Stock Selection: How the Pros are Betting to Win
The thousands of investors who attended The Times’ third annual Investment Strategies Conference over the weekend at the Los Angeles Convention Center had the opportunity to hear from some of the nation’s top financial advisors and money managers.
Here are some of the themes, and individual stock ideas, that emerged from several of the stock-related panels:
Much of what portfolio managers had to say about their stock-picking strategies in the current market could fit within one of three broad themes:
* They’re looking for “first-mover advantage” in companies with novel business plans or new ways to use the Internet.
* Even in this pricey market, bargains can be found. And the traditional summer pullback on Wall Street--if it happens--could present even juicier long-term buying opportunities, especially in the volatile tech sector.
* Long term, it’s still hard to go wrong investing in leading companies with proven management.
At Saturday’s “Growth Stocks for the New Decade” session, panelists mentioned several top names in the health-care sector as appealing at current prices.
The drug industry’s structure favors big companies with the experience and wherewithal to launch products, said John Schroer of the Invesco Health Sciences Fund.
He argued that many of the leading names, such as Pfizer Inc. and Merck & Co., could be long-term buys now that they are off their highs. He also pointed to Guidant Corp., a leader in medical devices.
Schroer cited a few smaller companies as having good growth prospects. Among them: Visx, with its laser-surgery equipment to correct vision; and Gilead Sciences, a biotech firm.
Garrett Van Wagoner of Van Wagoner Funds pointed to OnHealth Network Co. as an innovator in health care and the Internet.
“They have proprietary content, while other Web sites are scanning in magazine articles,” he said.
Van Wagoner also said he likes NorthPoint Communications Group Inc., which specializes in the key technology of high-speed Net access and recently came public.
Ron Ognar of Strong Growth Fund singled out networking giant Cisco Systems Inc., “long on its way to becoming the leader in building the infrastructure for the Internet.”
Cisco already gets 70% of its sales online, which keeps costs low, he added. The company plows 15% of its revenue back into research and development, which could help it maintain its edge.
At Saturday’s “Picking Technology Stocks” panel, Volpe Brown Whelan analyst Andrea Williams talked about America Online’s huge subscriber base of 19 million households. “It’s the most significant brand out there,” she said. “Nobody else comes close.”
Being a “first mover,” as AOL was, is particularly advantageous in electronic commerce, she said.
In their brewing online battle, for example, “EToys will crush Toys R Us,” Williams predicted, pointing to the example of innovator and leading Web bookseller Amazon.com versus Barnesandnoble.com. “Barnes & Noble has been on the Net for three years now and the gap is widening--not shrinking.”
Dennis McKechnie of Pimco Innovation Fund said EMC Corp. looks like a bargain at recent prices, more than 20% off the stock’s high. “They’re a leader in their space: network data storage,” he said. “Web sites will be buying a lot of EMC products to store their data.”
He also praised first-mover EBay in the Internet auction field. “They have defined a new space,” he said.
But Michael Murphy of California Technology Stock Letter said not all first movers make great investments. Scoffing at Amazon.com’s still-massive losses, he suggested a name change to “Amazon.org.”
Murphy also took a contrarian view on some battered tech stocks, saying enterprise software maker Oracle already looks like a bargain and suggesting that investors look to scoop up other tech leaders if a summer slump occurs.
In the risky biotech sector, he suggested sticking with companies such as Isis Pharmaceuticals Inc., Ligand Pharmaceuticals Inc. and Cephalon Inc., whose products have been approved by regulators. “They are going to turn profitable,” he said.
The panelists agreed that business-to-business stocks can be a lucrative way to play the Internet.
“Portal [Software] is well-positioned,” Murphy said. Its software helps companies provide quick service and easily bill for downloads.
McKechnie cited Siebel Systems Inc., whose software helps companies track customer feedback, and Inktomi, whose software is part of the e-commerce infrastructure.
Williams pointed to VerticalNet Inc., which helps companies in industries such as plumbing quickly establish a Web presence and links.
At Sunday’s “Picking Blue-Chip Stocks” session, panelists weren’t terribly concerned that growth-stock leaders have stumbled recently, after propelling the market since 1995, while momentum has shifted a bit toward “value” stocks.
“America itself is making a new quantum growth spurt,” said Roger Engemann of Phoenix-Engemann Funds. “I’ve never seen really, really large companies growing so fast.”
Among his favorites: MCI WorldCom Inc., whose earnings have been growing 30% a year; Cisco, which “makes the Internet possible”; and Pfizer, which has recently fallen from $150 to $106. Engemann said drug stocks are down from their peaks because investors fear government interference in pricing. But similar setbacks have been rewarding buying opportunities in years past, he noted.
Robert Bissell of Wells Capital Management said that when asked for advice he’d rather avoid the temptation to give a new “hot tip” and instead talk about where his money is going. He said his firm’s top holdings are solid, if a little boring: drug company American Home Products Corp.; conglomerate General Electric Co.; and consumer lender Household International Inc.
He also said he wouldn’t bet against tarnished blue-chip Walt Disney Co., now down more than 25% from its high. “We’ve seen this pattern before, whenever the company hits an earnings plateau. But think about Disney and what it would take to replicate that. It’s one of the best franchises and one of the great opportunities for investors.”
Added Fritz Reynolds of the Reynolds Blue Chip Growth Fund: “When earnings come back, investors will be very interested.”
Bissell also cited slumping Coca-Cola Co., also down about 25% from its peak, as a premier brand name and a management team that has proven its resilience before.
Expressing concern about high stock valuations and the market’s extended bull run, Judith Jones of Key Asset Management warned: “It’s time to have a little caution.” She called her picks--including Boeing Co., Electronic Data Systems Corp., General Mills Inc. and Duke Energy Corp.--”sort of conservative.”
She said aerospace giant Boeing, which has recovered a bit this year after being battered in 1998, still looks like a good buy relative to the rest of the market.
EDS is a promising turnaround, she said, citing the company’s cost-cutting and the new management’s focus on e-commerce. Cereal maker General Mills is “getting [sales] volume increases and prices are sticking,” she said. And Jones pointed to Duke’s 3.7% dividend yield--more than twice the market’s average--and respectable 7% to 8% annual earnings growth rate.
Reynolds said he is most interested in the tech, retail and health-care sectors, which have strong growth prospects for at least the next five years.
He pointed to software king Microsoft Corp.; retailers Wal-Mart Stores Inc., Dayton Hudson Corp. and Lowe’s Cos.; and drug firms Johnson & Johnson and Abbott Laboratories, as well as Merck and Pfizer.
As a contrarian pick, he said, oil-field services giant Schlumberger Ltd.--down 28% from its recent high--is “the stock to own when energy picks up.”
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Times staff writer Josh Friedman can be reached at josh.friedman@latimes.com
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Panelists’ Picks: A Sampling
Here are some of the stocks highlighted by money managers and analysts at The Times’ Investment Strategies Conference:
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Monday % chng. Proj’d. Company Ticker close year-to-date P/E* growth** America Online AOL $119.50 +54.1 412 53% Boeing BA 44.38 +36.0 29 16 Cisco Systems CSCO 109.38 +17.9 78 30 Duke Energy DUK 59.38 -7.3 18 8 General Mills GIS 77.63 -0.2 22 10 Guidant GDT 49.56 -9.9 41 21 EToys ETYS 57.00 +185.0 NA NA EMC EMC 102.25 +20.3 63 28 MCI WorldCom WCOM 83.13 +15.9 82 30 Merck MRK 69.88 -5.3 32 13 NorthPoint Comm. NPNT 35.69 +48.7 NA NA OnHealth Network ONHN 12.38 +147.5 NA NA Oracle ORCL 24.75 -13.9 31 24 Pfizer PFE 106.25 -15.0 50 19 Portal Software PRSF 36.50 +160.7 NA NA Schlumberger SLB 58.06 +25.2 27 17 Siebel Systems SEBL 47.88 +41.1 73 46 VerticalNet VERT 75.19 +370.0 NA NA Walt Disney DIS 29.88 -0.4 41 16 S&P; 500 index SPX 1,306.65 +6.3 33 7
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* Price-to-earnings ratio based on last four quarters’ earnings per share
** Projected annual earnings per share growth rate for next five years, based on analysts’ consensus estimates
NA: not applicable or not available
Source: Bloomberg News
