12/28/98 MAY THE BEST STOCKPICKER WIN

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MAY THE BEST STOCKPICKER WIN
Where would four top money managers invest $100,000 in the coming year?
Each year, BUSINESS WEEK asks four money managers to hypothetically invest $100,000 in 10 stocks. A year later, the one with the highest return wins.
1998 proved a tough year. All four stockpickers trailed the 17.6% rise, as of Dec. 14, in the Standard & Poor's 500-stock index--by a lot. In fact, only one earned a positive return. Winner Brian Posner runs Warburg Pincus Growth & Income Fund. His 10 stocks were up 3.8% thanks to two big winners, Gulfstream Aerospace Corp., up 71.5%, and Trigon Healthcare Inc., up 36%. But Polaroid and mortgage insurer PMI Group dragged him down. His fund was up 5.8% this year. Posner, a value investor, says his style was out of favor: ''It was one of the worst years for value [investing] relative to growth [investing].''
Finishing second was David Herro, who manages Oakmark International Fund, down 9.3%. His picks were down 0.9% because of economic turmoil overseas. But Herro says his results would be positive if dividends were included. ''I would have been up another 3.5% to 4%,'' he says. Herro's best bets were Danzas Holdings, a Swiss trucker and New Zealand agrochemical company Fernz Corp.
Christine M. Baxter's specialty is small-cap growth stocks. This mutual-fund category dipped 5%. But Baxter's 10 stocks were down 23.5%, despite her efforts to avoid tech stocks with Asian exposure and target companies that helped U.S. companies manage their technology. Three of the latter--Aris, ABR Information Services, and DAVOX-- plummeted an average of 55% each. At least her PBHG Emerging Growth Fund was down only 11.4%.
Bringing up the rear was David W. Tice, who runs the Prudent Bear Fund. He was down 45.2%. Of the eight stocks he sold short, only two declined. Tice thought tech stocks were poised for a fall, so he sold Yahoo! Inc. short. It soared 231%, while Intel Corp. was up 52%. Tice's only big win was shorting United Companies Financial, which makes second mortgages. It fell 73%. Meanwhile, his Prudent Bear Fund is down 26.1%. Tice still believes tech stocks are overvalued: ''We think it is irrational exuberance at its finest.''
Will this year's contestants do better?

BUYING CHEAP BUT READY FOR TAKEOFF
Filling Michael F. Price's shoes is a tall order. Price sold the Mutual Shares fund group, based in Short Hills, N.J., to Franklin in 1996 and stepped down as portfolio manager this November. Five managers have replaced Price, including Larry Sondike, a co-portfolio manager of the Mutual Shares and Mutual Beacon Funds. Sondike, 41, is a 15-year Mutual Shares veteran who co-manages $14.5 billion in the two funds. They have a solid long-term record, but 1998 was poor: Both funds were down less than 5%. Sondike says that's because value investing overall did poorly in 1998.
Yet Price's legacy of value investing is going strong. Sondike picks companies that are unusually cheap, especially those that are poised to benefit from a spin-off, takeover, or stock buyback. ''These stocks have cheap valuations, and many have catalysts to help realize that value,'' says Sondike. He has owned some of his picks for a few years.
A new pick is Payless ShoeSource Inc., the largest seller of discount shoes, with an average pair going for just $11. The stock cratered from 75 to 43 because of strong performance by rivals, including Wal-Mart Stores Inc. and Target Stores Inc. But Sondike says Payless' business is stable and cash-rich, with $3 of cash per share on its balance sheet. He thinks the company will use this cash to carry out an already authorized buyback of one-third of its shares, which would boost the price.
Other potential buybacks on his top 10 list are US Industries, a diversified home-products company, and United Asset Management Corp., an institutional fund manager. He is looking for RJR Reynolds Tobacco Co. to spin off Nabisco to shareholders. Telephone Data Systems DS, a diversified telecommunications company, and Lear, the world's largest maker of car interiors, have stumbled, but both are restructuring in ways that Sondike believes will pay off. He even likes a stock from the out-of-favor oil-services sector, Cooper Cameron Corp., because it's a strong company that is down 70%.
Abroad, Sondike likes Investor, a Swedish holding company controlled by the Wallenberg family that owns blocks of Astra, L.M. Ericsson, and ABB Asea Brown Boveri. It trades at a 25% discount to its asset value, says Sondike. Tele Centro Su is one of three fixed-line phone companies in Brazil that were part of Telebras. And Richemont, which trades in Zurich and Johannesburg, is a luxury-goods company that owns Cartier and most of cigarette maker Rothman's International.

GLOBETROTTING FOR GROWTH
As manager of Federated International Small Company Fund, New York-based Tracy Stouffer has racked up so many frequent-flier miles, she'll never have to buy another plane ticket. Launched two years ago, the fund is one of the best performers in its category and is up 19.3% year to date. Stouffer buys overseas growth companies with capitalizations under $1 billion that sell at a discount to their growth rates. Seven of her picks are in Europe, her current focus. She is avoiding Latin America and moving back into Asia.
Consolidation is one of Stouffer's themes. Germany's Kamps has 22,000 stand-alone bakeries there and just 2% market share, but that's the highest share of any baker. It is buying other German bakers, aiming for a 20% share. Natsteel, a Singapore company, is another consolidation play that buys assets of other tech companies.
Stouffer also likes European Internet and telecom companies, in part because Net development in Europe lags behind the U.S. Some picks: Kudelski, a Swiss Net provider that is also in the smart-card and pay-TV businesses; and Ideal, a Greek telecom provider. In Ireland, which hopes to become Europe's Internet commerce hub, her pick is a company called Esat, a phone and Net-service provider.
A unique niche is another criterion for Stouffer. Don Quijote is a Japanese supersize convenience-store chain that caters to people who shop at night. Despite Japan's economic funk, the company is growing 50% a year. ''No one is doing the same format,'' says Stouffer, with the closest being 7-Eleven Stores in Japan. Another unusual company is Austria's Do & Co., which does high-end catering for airlines and Formula One races. It was recently hired to service New York's John F. Kennedy International Airport.
Rounding out her picks are Talentum, a Finnish publisher that is becoming a new-media company. She also likes Spain's Cofir, the owner of three- and four-star hotels; and Banpo Public Co., a depressed Thai coal-mining stock selling at a discount to book value. Stouffer thinks it will recover thanks to an ongoing recapitalization.

SNAPPING UP WALL STREET'S WHIPPING BOYS
Tech stocks are Roger B. McNamee's specialty. Once a T. Rowe Price Associates Inc. money manager, he runs a private, $700 million ''crossover'' fund that buys stock in public companies and makes venture-capital investments. McNamee's first fund's annualized returns from Dec., 1991 to Oct., 1998 were up 30.6%, he says. Based in Menlo Park, Calif., he looks for strong companies that Wall Street has unfairly slammed.
While McNamee is a big believer in the Net, he avoids what he calls the ''full-fledged mania'' of Net IPOs. Instead, he likes established companies, such as PMC-Sierra Inc. It's the leading vendor of chips used for building the Internet. Cisco Systems Inc. is a similar building-the-Net play. He likes hardware companies EMC Corp. and Dell Computer Corp. because he thinks they have better business models than their competitors.
McNamee's favorite category is enterprise software--programs that are used to run large corporations, from managing inventory to 800-number call centers. The group has gotten hammered because a few companies, notably Baan Co. and Peoplesoft Inc., underperformed. McNamee thinks good companies got swept up in their wake.
He especially likes Platinum Software Corp., a vendor of accounting software for Windows NT. McNamee thinks the markets' worries about Platinum's trouble integrating a recent acquisition are excessive. Other picks are Documentum, which sells high-end document-management systems; Concord Communications, which makes network-management software; and Genesys Telecomm Labs, which does call-center integration. He also sees opportunity at Microsoft Corp. The giant has three major product cycles beginning in 1999. And McNamee thinks the market will ultimately shrug off any antitrust problems. ''Microsoft remains the best-positioned company in the software business,'' he says.
Still, since the typical technology stock is up 25% to 30% in the past six weeks, McNamee warns that trouble could come in early January. ''We are vulnerable to a correction at the first sign of trouble on the earnings front.''

EYES ON THE WORLDLY AMERICANS
L. Roy Papp, 71, and his daughter-in-law Rose Papp, 44, have had a good run co-managing Papp America-Abroad Fund, a $328 million fund based in Phoenix. It has a top BUSINESS WEEK rating and five stars from Morningstar, even though it has slowed this year, up just 12% year to date. The team's main target is U.S. companies with big operations abroad. They think globalization and technology will continue to drive U.S. growth and that global companies will outdo rivals. Their past home runs: Gillette Co. and Coca-Cola Co. ''I believe globalization and technology are more important to our society than railroads and electricity were in their day,'' says Roy.
U.S. companies that are poised to benefit from overseas operations are State Street; Interpublic; Intel; medical supplier Medtronic; American Power Conversion, which makes batteries and surge protectors for computers; and Molex, an electrical-connector maker. Money manager and financial custodian State Street gets about a third of its income abroad and has operations in 70 countries. Its overseas operations, such as its 401(k) business, have been growing fast. ''Instead of buying a foreign stock, we like State Street because it will benefit from more overseas investing,'' says Rose.
Another pick: global ad agency Interpublic Group, a holding company for McCann-Erickson Worldwide and Amerati Puris Lintas that gets over 50% of revenues from outside the U.S. It's in 102 countries and is also an Internet play, with small investments in a number of Net ad agencies. The Papps also like Steiner Leisure, which has 80% of the business of running beauty parlors and spas on cruise ships.
By Leah Nathans Spiro in New York

RELATED ITEMS

TABLE: Larry Sondike's Picks

TABLE: Tracy Stouffer's Picks

TABLE: Roger McNamee's Picks

TABLE: Roy and Rose Papp's Picks

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