THREE PROS, THREE STRATEGIES, TWO COUPS
If weather forecasters were this good, few of us would ever get caught in a downpour. At the end of last year, BUSINESS WEEK asked three experts how they would invest a hypothetical portfolio for 1992, putting $10,000 into each of 10 stocks. One matched the Standard & Poor's 500-stock index, which rose 7% from Dec. 17 to June 9 of this year, while the other two gurus beat the S&P by miles.
The three got their results by following completely different philosophies. Star performer Fred L. Astman, who manages First Wilshire Securities Management Inc. in Los Angeles, constructed a portfolio that appreciated a stunning 44% in the first half, packing it with tiny companies whose price-earnings ratios rarely go higher than 10. Robert E. Torray, president of his own investment firm in Bethesda, Md., gets excited about beat-up stocks that other investors can't sell fast enough--and produced a 16% average price increase. Carmine J. Grigoli, formerly head of equity analysis at First Boston Corp., times his investments to the business cycle, an approach that helped his portfolio rise 7%.
BETTER DAYS AHEAD. In the second half, they'll keep right on going their very separate ways. Far from being daunted by the decline in small-capitalization stocks over the past three months, Astman thinks his favorites will do even better as the recovery kicks into higher gear. "We're looking at a good second half for one reason," he says. "The NASDAQ topped out in the middle of February." Now, Astman thinks his niche-company stocks are an even better buy than at yearend. Astman's most stupendous pick, Herbalife International, has about tripled since mid-December, from 2 3/4 to 8, and he expects the performance to continue. He thinks sales will exceed $300 million in 1992, up from $195 million in 1991, as Herbalife's health-food products make further inroads in its 15 foreign markets. Despite the stock's run-up, "we're still buying it," Astman says.
Astman also retains his enthusiasm for CalFed, whose stock rocketed 146% in the first half. Although its holdings in savings and loan associations are shaky, CalFed's core bank business in Southern California was profitable in 1991. "They have $22 per-share book value, and the stock's at 4," he says. Astman believes CalFed's hidden assets make it a potential takeover target. And he will keep buying shares of his third-best performer, Pancho's Mexican Buffet, whose stock is up 63% since yearend but still trades at only 11 times projected 1992 earnings. "Most restaurant stocks are at much higher multiples," says Astman, who thinks Pancho's all-you-can-eat outlets in the Southwest will continue to draw crowds.
His top new pick for the second half is Ocean Bio-Chem, a maker of boat waxes and polishes that enjoyed a 29% sales rise in the first quarter--despite the new luxury tax. Astman says new cleaning products for boats and recreational vehicles will boost earnings by 100% in 1992. The stock is trading at 1 1/2. He's also bullish on patent developer REFAC Technology Development because "it's solid as a rock and has more cash than stock capitalization." At 3 1/4, REFAC shares are selling at six times projected 1992 earnings. Another kind of cleaner-upper he likes is RTI Inc., which uses cobalt radiation to zap salmonella and trichinosis bacteria out of food and medical products. "It's a unique company whose stock has been as high as 15 and is now trading below 1," says Astman. That makes RTI a bargain, in his book.
Torray is a bargain hunter, too--but his idea of a turnaround takes years, not months. "The flight into cyclicals doesn't impress me at all," he says. The portfolio he put together at the end of 1991 produced snappy results, partly on the strength of such much-maligned companies as Times Mirror (up 34%), waste hauler Laidlaw (up 37%), and American Express (up 30%).
You might expect that Torray, being a long-term investor, would stick with the companies he picked in December. But he has a new bunch of wallflowers on his list. He considers General Cinema, which controls 62% of Neiman-Marcus and bought Harcourt Brace Jovanovich last year, an "outstandingly managed company" despite second-quarter losses and a scant following among analysts. General Cinema is trading at 24 1/8--what Torray calls a "fair to low price for a very good business."
Where Torray parts company with his peers most outrageously is in the health care sector. Although Humana was the only stock in his yearend portfolio that slid--by 17%--he says that "this is where I'd buy, not sell." Torray thinks drugmakers and health care purveyors are under a cloud that hides long-term promise. For example, he has a big position in Upjohn, whose stock is close to its 52-week low, at 33. "Not one analyst likes it, but I think it's a more than credible company," he says.
In the second half, Torray believes banks and financial services companies will keep gaining ground, mainly because they were oversold last year. He would add Citicorp, Chase Manhattan, and Chemical Bank to Salomon and American Express on his buy list in this sector. But he emphasizes that he will hold them for 5 to 10 years. "I don't play on trends," says Torray--as if we hadn't noticed.
PROFIT TIME. Far more conventional, Grigoli matched the market average with his yearend stock picks. Playing the recovery, he hit pay dirt with Phelps Dodge, whose stock was up a thumping 51% so far this year. He says it's "still cheap, despite the uptick," with a p-e of just 13. Grigoli would also stick with Motorola and Intel, whose stocks have risen 35% and 14%, respectively, since January. "I don't think this portion of the investment cycle is complete for these issues," he says. At 80 and 50, he adds, these stocks "haven't reached their peak yet."
Grigoli wouldn't do a lot of swapping in his portfolio, although he says he would replace Johnson & Johnson with Alcoa, because "recovery will pose a problem for traditional growth stocks." He also thinks Waste Management is a good buy now: At 36 3/8, with a p-e of 28, "it's down significantly, selling at one of its cheapest valuations in the last decade," he says.
But Grigoli points out that the stock market as a whole typically performs poorly in the year after a Presidential election. He also says bond investors' inflation fears are putting upward pressure on long-term interest rates, which could trigger a 3% to 12% correction in the stock market before the summer is over. "So I'd consider taking profits," he says. And investors who followed these pros' advice certainly have a pocketful of profits to take.Joan Warner in New York