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THROW THOSE DARTS IN THE TRASHYou can't win by luck in this marketYou didn't have to be Warren Buffett to make money in stocks over the past three years. But this year, as the market has careened from exuberance to gloom and then swung part-way back, what once seemed like an easy way to profit has become difficult indeed. ''This is a dangerous market--one that clearly requires a lot more than putting money into an index fund or throwing darts and buying whatever they happen to hit,'' says William Meehan, chief analyst at institutional brokerage Cantor Fitzgerald. Although there is no evidence that stock-pickers beat the indexes during the market decline, actively managed mutual funds in the high-visibility large-cap arena have excelled during prior periods of turbulence--the recessions of the early 1990s and 1980s--according to Morningstar Inc. If we're now in a stock-picker's market in which not every stock that goes down pops back up, where should reformed dart throwers look? On Wall Street, opinion is split between hard-hit cyclicals, whose fortunes fluctuate with economic growth, and defensive big-cap growth issues that are safe havens in times of economic stress. There's a case for each. Your risk tolerance and willingness to bet on a stronger economy can help you decide which might work best for you. CYCLICAL SURGE. Currently, the market is rehabilitating the cyclicals: banks, computer makers, airlines, and smokestack industries. Savaged by a bear market fearful of recession, these stocks have gained between 7% and 12% since the Federal Reserve Board's surprise rate cut on Oct. 15. Still, Bear, Stearns & Co. Chief Investment Strategist Elizabeth Mackay vows cyclicals are ''some of the cheapest'' issues around. She cites Foster Wheeler (FWC), the engineering and construction firm, and cruise operator Carnival Corp. (CCL), with price-earnings ratios of 9.1 and 22.2, respectively. Some cyclicals also have history on their side. Since 1960, half of the 10 industries that have done the best in the six months following a shift to a looser Fed policy have been consumer cyclicals, including retailers and hotel companies, says Sam Stovall, senior investment strategist at Standard & Poor's Corp. A variety of sectors makes up the remainder. But not everyone thinks the economy will grow fast enough to sustain the cyclicals' current rally. With the outlook for corporate profits deteriorating, and amid concerns that the global credit crunch will persist, some see large-cap growth stocks as smarter, more defensive plays. Marshall A. Acuff, equity strategist at Salomon Smith Barney Inc., likes big-name firms that sell the medicine, food, electricity, and tobacco people won't do without, even in bad times. His picks include Philip Morris (MO), Duke Energy (DUK), and Schering-Plough (SGP). But defensive investing is not as easy as it once was. Despite a recent rally, gold shares--a traditional hedge in bad times--have lost their luster. Industry deregulation, meanwhile, means utilities face less certain earnings growth, and consumer-products makers with their consistent earnings histories, such as Coca-Cola (KO), remain costly. Whatever category you favor, the key is to stick with fundamentals. That means researching a company's product line, business strategy, competition, and growth prospects and assessing whether its stock is a good value. These days, money managers also ask whether a prospect is insulated from troubled global economies and has enough cash to survive in a credit-constrained world. ''There are pockets of opportunity,'' says Chuck Royce, manager of the Royce Total Return Fund. But it's best to look for them ''stock by stock, not industry by industry.'' Although the past is full of dashed hopes for recoveries, Royce thinks the turnaround is real this time. The Russell 2000 Index of small-company stocks is up 18% since its Oct. 8 low but still down 25% from its 1998 high. Last summer, before the Russell hit bottom, Royce who specializes in downtrodden small companies, put the fund's 20% cash cushion to work. One pick: Charming Shoppes Inc. (CHRS), a 1,160-store women's clothier. With $266 million in cash, it can improve earnings per share by making acquisitions or buying back stock. It's trading at 16 times estimated 1999 earnings of 25 cents a share. Royce thinks the $4 stock could double along with profits within three years, returning Charming to where it was in 1996. Some strategists are also bullish on regional banks. They were battered in August and September alongside their money-center brethren. But with their exposure to overseas turmoil limited, ''there's no reason why the regional banks should have been crushed,'' says Morgan Stanley Dean Witter U.S. investment strategist Peter J. Canelo. He singles out Mellon Bank (MEL), First Union (FTU), and Bank of New York (BK), which stand to gain from strong refinancing and loan demand. Previously off about 30%, ''they have come back better than the market but are still down.'' Technology stocks, meanwhile, have bounced hard off their lows, with the tech-laden NASDAQ rising nearly 20% since Oct. 8. But Philip W. Treick, manager of the Transamerica Premier Aggressive Growth fund, likes online bookseller Amazon.com (AMZN), which nearly breaks even on a cash-flow basis and, unlike many Web startups, has enough cash to underwrite expansion plans. Although Barnes & Noble Inc. (BKS) and German giant Bertelsmann have partnered up to enter the online-bookstore arena, Amazon ''has a big lead'' and loyal customers, Treick adds. COLD COMFORT. High-yielding stocks are traditional defensive plays. Take oil-service issues. Yanked downward when oil prices dropped, they stand to gain from an El Nio-linked cooling trend, which should push prices into a $15 to $18 range for the next year. Plus, ''they're cheap,'' says Canelo, who likes Baker Hughes Inc. (BHI). It's now only $5 above its 52-week low of $17.25 and has a 2.1% yield, 60 basis points above that of the S&P. Downturn-proof supermarkets are another twist on the defensive theme. Stuart T. Freeman, chief equity strategist at A.G. Edwards Inc., likes Albertson's (ABS), an 878-store chain that is cutting costs and raising earnings by merging with American Stores Inc. (ASC). While the stock is slightly more expensive than the S&P 500 based on price-earnings ratios, Freeman expects Albertson's to post earnings gains of 13% in January, 1999, trouncing the 3.6% consensus estimate for the S&P 500 index. As market volatility becomes a fact of life, those who choose stocks the old way--by getting to know them--will have the courage and faith to ride out the storm. Who knows? The stock-pickers may even start to outperform the mighty market indexes.
By Anne Tergesen in New York RELATED ITEMS
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Updated Oct. 29, 1998 by bwwebmaster
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