Hits and Misses Amid the Ups and Downs of Turbulent Markets

Jim: It’s time for our semiannual review, Mike, when we go back and take a look-see at our picks of the last year or so. It’s sometimes painful, but the mail indicates our readers like to see how we’ve fared.

Mike: I think what some of our readers like is the chance to see where they’ve been smarter than we are. Hey, it’s a risk for anyone who lays out their stock picks for public consumption.

Jim: Oh sure, we’re a courageous pair. The truth of the matter, as everyone knows, is that we’ve experienced a pretty wild market over the last seven months.

Mike: One in which the market’s leaders and laggards have shifted rapidly.

Jim: And the result, for the broad market, is that both the blue-chip Standard & Poor’s 500 index and the tech-heavy Nasdaq composite index are down so far this year.

However, having said that, I’m happy to point out that a number of our picks have done much, much better than the market. Of course, a number haven’t. But we’ll get to that in a minute. Is there anywhere you’d like to begin?

Mike: I would like to start, frankly, by thanking my good friends at Xerox for reminding me that sometimes in the stock-picking business, you don’t know nothin’.

Jim: Well, it turns out now that they are my good friends at Xerox, because I panned the stock.

Mike: Don’t smile too broadly, Jim, because I know where you’ve buried a few of your mistakes.

Jim: OK, I’ll parcel out my gloating as we go, because I know I’m going to have to pay for it sooner or later.

Mike: Anyway, back in September we discussed Xerox. On the principle that sometimes things can’t get any worse, I called it a buy when it was selling for $42 a share. It’s now selling for the princely sum of about $15, and my new opinion of Xerox is based on what you might call the rule of Somali governments, which is that things can always get worse.

Jim: I’m sorry for your sake that I was dead right on that one. Xerox just can’t seem to find the right strategy to get out of its rut. Recently it announced another shockingly disappointing quarter, and this is clearly a company that’s in need of some dramatic changes. And whether that should be management change--another management change--or something else, I’m not sure.

Now we might as well get to one that you got right and I got wrong, Procter & Gamble.

Mike: I called Procter & Gamble as a must-to-avoid when we talked about it in November. You saw something clean and bright, I guess, in the detergent business.

Jim: I thought their new chief executive was going to finally get that consumer-products giant turned around. Now he’s history. And Procter & Gamble is worth half of what it was when we talked about it.

But let’s pick out a couple we got right. One is Merck, the huge drug company that’s also in the Dow Jones industrial average. Back in March we both liked this company a lot because it has hot-selling drugs on the market and some good ones in the pipeline. To help matters even more, the whole drug sector picked up steam this summer. And I’m happy to say that since we recommended it in mid-March, it’s up more than 20%.

Mike: I’d point to Hughes Electronics, which has gained nearly 20% since we reviewed it in October. We saw that Hughes’ satellite communications is promising business, including its DirecTV subsidiary, which in many ways is the whole ballgame at Hughes. It’s what’s really going to drive investor sentiment.

Jim: Then there’s a stock that’s just murdered us.

Mike: You must be thinking about Krispy Kreme.

Jim: How did you guess?

Mike: We both avoided this stock--I assume on our doctors’ orders. This is, of course, the doughnut play du jour. It’s the Coors of doughnuts, a regional favorite that’s gone national and went to the public markets to get the money. But I still say that this doughnut play is a lot of baloney.

Jim: Nice mixed metaphor. Now, when we discussed this stock in April I remember predicting it would get a lift from all the publicity that the chain got during its IPO. But I have to admit I was dead wrong on how high this stock would get bid up before reality sets in. It’s up 60% since we talked about it.

There was a story in Barron’s magazine a couple of weeks ago that basically mimicked us, and that knocked several points off Krispy Kreme’s price. But, hey, let’s face it, timing’s everything. I still believe that investors will eventually come to realize that this chain has no particularly strong growth prospects. But in the meantime, I have to face up to it, you could have made a bundle.

Mike: Well, this exemplifies the adage that there’s a thin line between being wrong and being early. Look, doughnuts go stale. This is one of the principles that I believe Sir Isaac Newton identified as a true law of nature. Sooner or later, the investment community will wake up to the fact that there isn’t quite the level of growth in doughnuts that there is in, say, telecommunications equipment. Krispy Kreme has a chip-stock valuation, and I don’t mean chocolate chips. Keep your finger on the sell button.

Jim: I couldn’t agree with you more. Now there’s another story stock, in fact you happened to mention it earlier, that I’m going to point out because it was one that I thought had a good solid underpinning to it, and that’s Adolph Coors. When we reviewed this stock in early March I thought it was a good solid buy because we were seeing its barrelage, or shipments, go up. It’s got a couple of really good-selling brands. And I’m happy to say that since I recommended it, the stock has soared more than 60%. You on the other hand were a teetotaler that day.

Mike: Well, I don’t drink much beer. But turnabout is fair play. Does the name Tyco International ring a bell?

Jim: Ouch!

Mike: I liked, you hated. The issue there, if you remember, was whether accusations of accounting irregularities at Tyco were serious enough to warrant the heavy sell-off the stock had experienced. I said they were overblown and that the stock would recover smartly. I think you were taking sort of the Cendant investor’s point of view, which was that where there’s smoke there is not only a smoke-making machine but also a fire.

Jim: You’re right, Mike, I was dead wrong on Tyco, which is a big manufacturing company that makes all sorts of unsexy but good-selling industrial and medical and commercial products.

Mike: And it has come through the furnace . . .

Jim: . . . gaining a stellar 58% since we talked about it in January. I have to hand it to you on that one. Any others you’d like to claim?

Mike: All right. I’ll claim Schlumberger.

Jim: Yeah, go ahead, because I got that one all wrong, too.

Mike: Schlumberger is the oil-services company that we talked about in December, just at the outset of what’s become an extended run-up in oil prices. And of course, when oil prices run up, or they’re anticipated to run up, the oil-drilling service companies run up. And that’s what I saw.

Jim: Yeah, sure. That’s just dumb luck. OPEC just happened to go your way and drove oil prices higher. Anyway, now I’m going to hurt you again.

Mike: This is like water torture.

Jim: Now this one I think is particularly pertinent, given the tech wreck in March and the demise of the “dot-coms.” And that is Yahoo. Back in October, I voted to buy the stock and you didn’t. I felt that eventually the smart money was going to flow to the handful of dot-coms that clearly are innovative, profitable and are going to survive. Like Yahoo.

Mike: I was skeptical, although in my own defense I would ask you now, can you point to another dot-com company like Yahoo that you think will make it?

Jim: No.

Mike: OK. One of the things the dot-com crash is teaching us is that there isn’t much sympathy in the market for people who make mistakes. Yahoo is possibly the only company in this space that has parlayed its first-mover position into a profitable business. The other great first-mover company on the Internet, of course, is Amazon.com, which is still a work in progress to say the least.

Jim: Now I’m just going to mention one more that I’m really proud of.

Mike: Uh-oh. I hear the engines coming down the track . . .

Jim: You got it. International Speedway. We just did this stock in May, but what I feared might occur to this company materialized precisely as I expected. This is the operator of big auto-racing tracks nationwide and, as much as I like racing, this stock should have been black-flagged because it was so richly priced that if anything went wrong, you’d hit the wall. And that’s just what happened last month, when the company warned of disappointing earnings and the stock plunged.

Mike: Well, I live in hope that the International Speedway people will now sponsor a race that will really bring the audience in, and that’s a race between the leading stock-car drivers and Lance Armstrong.

Jim: Sort of like John Henry and the locomotive. Well, in closing, I think we’ve made enough right calls in the last few months that we’ll keep trying to find good stocks that our readers might consider, and steering them away from the losers.

Mike: And just as a reminder, we’re not actually proposing a model portfolio with the stocks we review. As always, we’re just thinking out loud and showing the kinds of considerations that should go into evaluating companies and stocks.

Jim: Right. We hope we give people a place to start investigating a stock themselves, so they can decide whether to buy it.

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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

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You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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A Sampling of Stock Exchange Picks and Pans

Here’s how some of the stocks reviewed in Stock Exchange over the past several months have performed since being discussed. The stocks on which Peltz and Hiltzik agreed are in bold. Prices are adjusted for any splits after being reviewed. Year to date, the Standard & Poor’s 500 index is down 2.6%, and the Nasdaq composite index is down 7.4%.

Ticker Peltz’s Hiltzik’s Date of Price on Mon. % Stock Symbol call call column column day close change Xerox XRX Don’t buy Buy 9/27/99 $ 42.00 $ 15.06 --64 % Motorola MOT Buy Buy 10/11/99 32.21 33.25 + 3 Yahoo! YHOO Buy Don’t buy 10/18/99 85.19 128.69 +51 Hughes Electronics GMH Buy Buy 10/18/99 21.79 25.88 +19 Procter & Gamble PG Buy Don’t buy 11/01/99 108.00 56.88 --47 Check Point Software CHKP Buy Buy 11/08/99 32.13 116.00 +261 Schlumberger SLB Don’t buy Buy 12/06/99 53.07 73.92 +39 Costco COST Don’t buy Don’t buy 12/20/99 44.16 32.56 --26 Tyco Int’l TYC Don’t buy Buy 1/11/00 34.13 53.81 +58 American Express AXP Buy Buy 1/18/00 50.52 56.69 +12 Beringer Wine BERW Don’t buy Buy 2/15/00 38.84 36.75 -- 5 Colgate-Palmolive CL Buy Buy 2/29/00 52.19 55.56 + 7 Coors (Adolph) RKY Buy Don’t buy 3/07/00 38.81 63.00 +62 Palm PALM Don’t buy Don’t buy 3/21/00 48.38 39.00 --19 Krispy Kreme KREM Don’t buy Don’t buy 4/25/00 42.50 68.00 +60 Int’l Speedway ISCA Don’t buy Buy 5/16/00 43.19 31.81 --26 Source: Times research, Bloomberg News