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|  | JANUARY 21, 2004
Run with the Bulls, but Watch Your Step Investment manager Michael Farr sees special opportunities in health care and financials, but warns investors that risk will rise with the market Health care and financials are the two sectors that offer the best gains to investors now, says Michael Farr, president of investment firm Farr, Miller & Washington, because they haven't done as well as others recently. Farr especially likes Pfizer (PFE ), Johnson & Johnson (JNJ ), Bank of America (BAC ), Citigroup (C ), and Travelers Insurance (TAP.A ), among others. He regards the wave of bank consolidations as a sign of management confidence in the economy and the market. As stock prices move higher, Farr urges investors to avoid the mistakes that cost so much in the last three or four years. These were a few of the points Farr made in an investing chat presented Jan. 15 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts follow. A full transcript is available on AOL at keyword: BW Talk. Q: Michael, are you running with the bulls? How strong a market do you see for 2004? A: We have been running with the bulls. I don't like the risk of being gored that the analogy might suggest, but certainly the markets are moving higher, and investors have benefited from this over the past 12 months. As the economy expands, corporate profits will, I believe, continue to grow. Stock prices are up already in anticipation of continued earnings increases. They appear very fully valued. Valuations will become more normal as earnings rise, but as [that happens], stock prices will move even higher. This is the way the dangerous cycle of momentum begins. If you're an individual investor, beware the siren's song. Don't make the mistakes that cost you so much over the past three or four years. Benefit from the lessons you've learned. Q: Can you comment on the bank consolidation going on? How do you rate J.P. Morgan Chase (JPM ) after its purchase of Bank One (ONE )? A: The bank consolidations are significant in two major ways. The first is recognizing that mergers and acquisitions are again occurring, which demonstrates a renewed optimism by corporate management about the economy and the environment. Two, the mergers that began with Citigroup's (C ) [purchase of] Travelers Insurance have shown that bigger is better and that mergers within the financial-services industry can achieve important economies of scale. The JPM/Bank One merger...seems to make more sense than the Bank of America (BAC )/Fleet merger. Having a national multimarket presence continues to prove beneficial for money-center banks with mortgage and debt exposure in regional markets. Q: Here's one that's been running up, and a favorite question in the crowd -- what's your take on Lucent (LU )? A: I think the company is still fundamentally flawed. I think the stock is moving up on the hope -- and not the promise -- of a turnaround. I think the company has been poorly managed and has been backed into a corner, strategically, from which it will be very difficult to emerge. There may be a buyer of the remaining operations and assets, but then the value comes in the form of the pieces and parts and not the operating company. And therefore, it's not an investment, it's a speculation. Q: How do you lean these days on value vs. growth? A: My style is the combination of value and growth known as GARP [growth at a reasonable price]. I think we're at an odd point in the markets in that value and growth have rather good prospects. Value outperformed growth during the three years of the bear market. The past 12 months, growth has done better, but not remarkably better. So companies with value characteristics on the balance sheet and superior earnings growth would be most compelling to me.
BW MALL
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