| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| WHERE TO INVEST -- STRATEGIES FOR STOCKS
What These Pros Saw, What They See Our pros picked well in '99. A new bunch looks at 2000 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. 1999 was a great year for actively managed money. Three of our four stockpickers beat the Standard & Poor's 500-stock index and the Dow Jones Industrial Average, which advanced 15.3% and 22.3% through Dec. 10 respectively. And two of them even beat the Nasdaq Composite Index which gained an amazing 65%. Our winner, Tracy P. Stouffer, former manager of the Federated International Small Fund, who now manages Founders Passport Fund, posted a 104% gain. Two hits: Kamps, a German bakery company, up over 300%; and Ideal, a Greek telecom provider, up 277%. Only two stocks disappointed, coming in flat: Do & Co., an Austrian airline catering outfit and Banpo, a Thai coal-mining concern. Raging tech bull Roger McNamee at Integral Capital Partners in Menlo Park, Calif., came in second. His picks gained 61%, with his biggest winners, PMC-Sierra and Genesys Telelabs, up 274% and 133% respectively. Lawrence N. Sondike, portfolio co-manager of Mutual Shares and Mutual Beacon Funds, followed, with his picks posting 28%--not bad for a value manager in a year when growth players took top billing. Best performers: Telephone & Data Systems, up 179%, and Tele Centro, the Brazilian telecom company, up 86%. Bringing up the rear were L. Roy and Rosellen C. Papp, co-managers of the Papp America-Abroad Fund, with their picks down 4.15%. The Papps did well with Interpublic Group, the advertising conglomerate, up 40%. But losers like Office Depot and Steiner Leisure, which provides spa services to cruise ships, dragged them down. Good luck to this year's participants... The Small-Cap ''Stealth Market'' Mary Lisanti, manager of the Pilgrim Small-Cap Opportunities fund, would like to shout this from a mountaintop: ''Most small-cap stocks are not performing as dismally as they seem!'' In fact, Lisanti, whose fund invests in small-cap growth companies, holds that there is a ''stealth bull market'' in small-cap stocks, especially in tech, biotech, health care, and retailing. ''Earnings growth in a lot of these stocks is up over 50%,'' she says. ''In my mind, that's a bull market.'' Indeed, fourth-quarter earnings for the Russell 2000, an index used to measure the performance of small companies, is up 36% over last year. And next year, small-cap earnings are estimated to grow 42%, with large-cap earnings growing only 17%, according to First Call Corp., an earnings research firm. And while the Russell 2000 has returned 12% year-to-date, the Russell 2000 growth index, which measures the Russell 2000 companies with higher price-to-book ratios and higher forecasted growth, is up 27%. ''As we go back to looking at fundamentals, the market will play to picking individual stocks. Small-caps will benefit from that,'' she says. Lisanti's remarks should not be taken lightly. Her fund, which has $53 million in assets, is up 119.4% year to date. ''Last year we hit bottom in many of these stocks, and they've been coming back,'' she says. ''BRICKS AND CLICKS.'' For the coming year, Lisanti likes fast-growing tech companies as well as traditional companies that are using technology to gain a competitive edge--''bricks and clicks,'' as she calls them. She also looks for outfits with a unique niche. For example, Lisanti calls TMP Worldwide Inc. (TMPW), a temporary-staffing company based in New York, the ''New Age Kelly services.'' The company runs Monster.com, a leading Internet job-recruitment site. Its traditional businesses include one of the largest recruitment advertising agencies and an executive and middle-management search firm. CompuCredit Corp. (CCRT), another ''bricks and clicks,'' uses sophisticated software and database analytics to target subprime customers, who are less of a credit risk for card companies. The company's earnings are poised to grow some 70% next year. Lisanti also likes the burgeoning business-to-business e-commerce industry. ''It's a hot area just beginning to take off,'' she says. Both Whittman-Hart Inc. (WHIT) and Open Market Inc. (OMKT) specialize in e-business solutions such as Internet strategies and tools for building Web sites. In terms of pure technology plays, Lisanti is a fan of semiconductor equipment companies LAM Research Corp. (LRCX) and PRI Automation Inc. (PRIA) ''They're relatively cheap and have products coming out that will render smaller and smaller chips,'' she says. The remainder of Lisanti's picks center around niche companies that are taking advantage of growing trends. She likes Pacific Sunwear of California Inc. (PSUN), a clothing company that makes trendy teen gear. And playing off the pharmaceutical company consolidation theme, King Pharmaceuticals Inc. (KING) purchases, markets, and sells smaller product lines from giant drug companies that are too big to bother with them. Finally, she likes Abgenix Inc. (ABGX), a biotech company that manufactures human antibodies. ''Antibodies are becoming like drugs, they're applicable to a number of illnesses,'' she says. Wanted: Large Caps with Comeback Potential If you ask Eugene A. Profit, running a mutual fund is a lot like playing pro football. ''When you make a great play, everyone thinks it's easy. But they have no idea about the preparation: the grueling days in training camp, the push-ups, sit-ups. It's the same with picking the right stocks for your fund,'' he says. Profit's the right man to draw the comparison. Prior to stints as a cornerback for the New England Patriots and the Washington Redskins, he was an All-America player at Yale University, where he received a degree in economics. But since 1996, he has been coaching his own team as president and chief executive officer of Profit Funds Investment Trust in Silver Spring, Md. Profit runs the Profit Value Fund, which has $5 million in assets. The fund seeks out large-cap stocks that are trading at a discount to their intrinsic value or to their peers. It has gained 24.8% year-to-date, whereas most large-cap value funds have posted only a 4.14% gain, according to Morningstar, the mutual fund research firm. Companies Profit chooses must have a ''comeback catalyst'' that will propel them back to normal valuations. ''If you don't have one, you're investing under a prescription for mediocrity,'' he says. An example: He bought AOL in July, 1998, when it was having subscriber problems. The catalyst was AOL's unique service and loyal subscriber base. ''You couldn't lose,'' he says. More than 25% of Profit's fund is invested in megatech companies like AOL (AOL), Intel (INTC), and Cisco Systems (CSCO). ''Some people say we look like growth managers, but we bought these stocks in mid-1998, when tech was out of favor,'' he explains. Looking forward, Profit sees value in a variety of sectors. He likes pharmaceutical company Merck & Co. (MRK) because its forward price-earnings ratio is around 32, whereas the sector's p-e is around 40. Also, its drug pipeline is expanding. Profit also likes telecom stocks, in particular Covad Communications Group (COVD), which provides high-speed digital access to the Internet. ''You're either going to win with cable, like AT&T (T) is hoping, or with DSL. We pick DSL,'' he says. And he likes MCI WorldCom (WCOM) because it has 40% of the Internet service provider business and he thinks it will be the leader in Internet phone service. A purer tech play is 3Com (COMS)--mostly known as a modem and network-card manufacturer, it is now a force in handheld computers. Its Palm products claim a 65% market share. Profit calls it a ''sleeper tech stock.'' Other sleepers include Walt Disney (DIS), Host Marriott (HMT), and Tricon Global (YUM), the PepsiCo (PEP) spin-off that includes Pizza Hut, Kentucky Fried Chicken, and Taco Bell. ''These companies are the Cadillacs of their respective industries,'' he says. Finally, Warren Buffett's Berkshire Hathaway Inc. gets points because Profit expects its holdings such as Gillette and Coca-Cola Co. (KO) to benefit from the global recovery. And though broker fees are shrinking, he thinks Merrill Lynch & Co. (MER) will more than make up for it elsewhere--like in underwriting or asset management fees. A Social Conscience--And a Taste for Telecom Four years ago, when Sevgi Ipek began managing Citizens Global Equity fund, a socially responsible global fund with some $135 million in assets, she wasn't much acquainted with social issues. ''I wouldn't have been caught dead in a 'Save the Whales' t-shirt,'' she says. But since then, the fund has performed exceptionally well, plus she says she now has much more of a social conscience. ''It rubs off,'' she says. Year-to-date, the fund, which has an objective of capital appreciation, is up 59.3%, and on a five-year annualized basis the fund has posted 25% per year as of Nov. 30. It also carries a coveted five-star rating from Morningstar Inc. Although there are no official rankings for socially responsible funds, they tend to underperform funds in the broader sectors in which they are ranked, like large global or value funds. Experts say this is because stock picking is typically secondary to social screening. Indeed, one reason Ipek says her fund has posted such stellar returns: She focuses solely on stock selection while her fund's parent company, Citizens Funds, performs the social screening. ''Having to focus on performance, financials, and asset allocation is enough of a job,'' she says. Ipek has a 90-day period in which to sell a stock if it fails Citizens' annual social screening process. A recent example: She is now selling Orange PLC (ORNGY), a leading British telecom company. It is being taken over by Mannesmann (MNNSY), a German telecom company that conducts business in Burma, a country with human rights violations. A major factor influencing Ipek's picks for the coming year: She thinks the telecom industry and Internet commerce are just beginning to take off globally. She likes Grupo Televisa, the largest Mexican media company, because it is also involved in cable networking for Internet access. And JDS Uniphase Corp. (JDSU) is a U.S. manufacturer of fiber optic networks and components for telecom and media companies. BELL BASHER? Pure telecom plays are COLT Telecom Group PLC, a British telecom service provider that is expanding aggressively into 13 countries and 26 cities in Europe, and McLeodUSA Inc., an Iowa-based company servicing the Midwest that, she says, is ''a competitive local exchange carrier threatening the Baby Bells and AT&T.'' She also likes NTT Mobile Communications Network, the largest cellular wireless operator in Japan which, says Ipek, is destined to become ''one of the leading telecom operators in the world.'' The company recently signed a joint agreement with another of Ipek's picks, Hutchison Whampoa Ltd. (HUWHY), a diversified industrial company based in Hong Kong with holdings in telecommunications, ports and shipping, energy, and finance. Both companies will benefit greatly from China's opening trade policy, she says. Two global Internet plays are Icon MediaLab International (ICON), a Swedish Internet consulting company, and Softbank Corp., a Tokyo-based Internet holding company that has a 30% stake in U.S. companies E*Trade Group Inc. (EGRP) and Yahoo! Inc. (YHOO) Ipek's remaining picks: Total Fina (TOT), one of France's largest oil companies, is taking over competitor Elf Aquitaine (ELF) and becoming ''one of the largest, most powerful oil companies in the world,'' she says. Finally, Seven-Eleven Japan (SVELY), the largest convenience store chain in Japan, should perform well because it is increasing its types of offerings. For instance, the stores now have ATM machines and facilities where customers can pay for and pick up items ordered over the Internet. Smoothing Out Real Estate's Rough Ride You might say that Michael H. Winer, manager of the Third Avenue Real Estate Value Fund, is the Charlie Brown of fund managers, at least when it comes to his sector's stocks. ''Nobody cares about real estate stocks these days. If they had a dot.com after their name, everyone would be rushing to buy them,'' he says. Indeed, real estate stocks haven't been the perkiest of stocks over the past two years. They've not only been eclipsed by sexier technology and telecom stocks, but they've even been edged out by decidedly less-than-glamorous areas like energy and utilities. Funds that invest in real estate had a return of negative 9.74% through Dec. 10, according to Morningstar. ''Real estate stocks have had a miserable ride,'' says Winer. ''But these stocks are cheap, and the underlying fundamentals and holdings of these companies are still strong.'' Despite Winer's whining, his fund is up 9% since its inception in September, 1998. It is also the fourth-ranked real estate fund in terms of year-to-date total return as of Nov. 30, according to Morningstar. Winer credits that to the primary investment themes that he, along with his co-manager, Martin J. Whitman, incorporate in their strategy. First, 50% of the fund is invested in real estate operating companies (REOCs) that are trading at a discount relative to the underlying value of their assets. ''REOCs are good growth vehicles because, unlike REITs, they aren't required to pay all profits out as dividends. They can use their cash flow to reinvest in new developments, make acquisitions, and improve properties,'' says Winer. Second, the team buys REITs only if they pay high dividends, are trading at a substantial discount to their net asset value, or are candidates for a takeover, liquidation, or privatization. ''REITs were never intended to be growth stocks, but to provide income and limited capital appreciation,'' he says. Some picks for the coming year: Catellus Development Corp. (CDX), a San Francisco company that originally was the real estate arm of the Santa Fe Pacific Railroad, is now the second-largest property holder in California. The company owns, leases, and operates office, industrial, and retail buildings as well as single-family communities. Its crown jewel is the Mission Bay project, a biotech enclave near the University of California at San Francisco that will be in development for several years. GULF DREAM. Like Catellus, another company unlocking the value of its land is St. Joe Co. (JOE), says Winer. It is the largest landholder in Florida with more than 40 miles of coastline along the Gulf of Mexico, which it is starting to develop. Another Florida-based company, Avatar Holdings Inc. (AVTR), is a favorite because it owns some 55,000 acres of land in Florida, Arizona, and California, where it is developing active adult communities. Winer also likes outfits that buy distressed real estate, fix it up, and resell it. Two companies that fit the bill: LNR Property Corp. (LNR) and Wellsford Real Properties Inc. And two takeover candidates are among his picks: Echelon International Corp. (EIN) and Prime Group Realty Trust (PGI). By MARCIA VICKERS _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS What These Pros Saw, What They See TABLE: Mary Lisanti's Picks TABLE: Eugene Profit's Picks TABLE: Sevgi Ipek's Picks TABLE: Michael Winer's Picks INTERACT E-Mail to Business Week Online | |||
