The stock market ``will be a struggle'' in the second half of 1996, Bill Priest says. The CEO and co-head of equity investing at BEA Associates, which manages $28 billion in assets, expects the market will soften: Earnings may not be as good as in the first six months, and the Fed may nudge up interest rates. So Priest has been scouting for companies that are underpriced relative to their cash flow and intrinsic value.

Priest doesn't restrict himself to blue chip issues. Two picks he has bought recently are by no means Street favorites: GTECH Holdings (GTK), the world's top supplier of computerized lottery products and services, and McKesson (MCK), a distributor of drugs, bottled water, and health and beauty aids. Both stocks have yet to sizzle. But Priest expects they will do so before long.

GTECH, at 26 a share--not far off its 52-week low of 23--is an attractive buyout candidate, notes Priest. The company runs online systems for 28 lottery authorities in the U.S. and in 49 foreign markets. It has an 80% share of government-run lottery contracts worldwide. ``I am not privy to any inside stuff,'' says Priest. ``But I think GTECH would be a good fit with financial companies such as GE Capital, NationsBank, or Citicorp.'' As Priest sees it, GTECH needs to link up with a big financial name because of the regulatory hurdles it has to clear in every state or country in which it operates. In particular, Priest says, NationsBank's Hugh McColl is the ``imaginative and innovative kind of CEO'' who would see the advantage of what GTECH can offer. Priest thinks GTECH is cheap and will eventually be worth 40 to 45 a share. BEA Associates owns about 1 million shares, or 2.3% of the stock outstanding. ``One big smart investor in GTECH,'' says Priest, is Tiger Management, with 15%.

McKesson is another gem, says Priest. CEO Alan Seelenfreund and new President Mark Pulido are ``very shareholder-oriented,'' says Priest. He thinks Pulido will raise profit margins in McKesson's core businesses and then divest noncore operations, such as its 55% stake in Armor All Products, a marketer of car-care goods. McKesson has sold off assets and holds about $475 million in cash and marketable securities. Priest thinks Pulido will continue buying back shares. Priest figures McKesson, now at 43, is worth 65 to 70.



Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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