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Welcome To The $100,000 Challenge


Investing in 1994: THE PROS

WELCOME TO THE $100,000 CHALLENGE

How often does someone hand you $100,000 and let you go spend it all in one place--say, the stock market? That, in effect, is what BUSINESS WEEK does once a year when we ask a group of investment professionals to create a portfolio for the coming year by picking their 10 favorite stocks.

The four pros who participated last year all made money, though some significantly more than others. While the Standard & Poor's 500-stock index was up 7.7% for the 12 months ending on Dec. 13, three of the pros beat it handily.

This year's winner hails far from Wall Street. Mark W. Millsap of Meridian Management Co. is from President Bill Clinton's hometown, Little Rock. Millsap assembled a phantom portfolio of industrial and gold stocks that turned his $100,000 into $141,454, almost a 41.5% gain. That performance was largely a result of five blockbuster stocks that each rose more than 50%. His only loser: Occidental Petroleum, down 4.1%. The runner-up was British investor John Carrington, managing director of Carrington & Co. in London. His portfolio was up 18.6%. Carrington's big winner was Finland's Nokia, which teamed up with watchmaker Swatch to design cellular phones. Nokia's gain: 169%.

Coming in third was S&P's special-situations expert Robert S. Natale. His portfolio was up 16.5%, boosted by three picks that soared 50% or more: warrants in Britain's Hanson PLC, conglomerate Triarc Cos. (formerly DWG), and the Malaysia Fund. On the other hand, Bernadette Murphy and Sheila Baird of M. Kimmelman & Co. in New York chose a conservative portfolio. Their picks were up only 1.6%.

The new crop of pros for 1994 faces a formidable challenge. The stock market, now at record levels, is entering the fourth year of a bull market, and to many experts, big gains will be hard to come by. Still, this year's investment pros are undaunted. Three think there are good prospects in the U.S., while one, based in Scotland, has chosen only foreign securities. The diversity of their picks illustrates just how far the experts are going to find value.

'THIS IS A PLAY ON

ECONOMIC RECOVERY'

ELIZABETH B. DATER. At Warburg Pincus Counsellors Inc., a New York venture-capital and investment-management firm, Dater manages $800 million, including the firm's $200 million Emerging Growth fund. She describes her strategy as "long-term investing in young companies for growth." She looks for stocks with high ownership by management, low ownership by institutions, unique products, and at least 20% annual earnings-growth potential. "The [market] sentiment is bearish, and I view that as an opportunity," she says. "I think we're in an ongoing period of moderate economic growth, so my stocks are tending to move into growth cyclicals," she says.

In that vein, she has selected Infinity Broadcasting, Methode Electronics, and American Freightways. Infinity Broadcasting Corp., the nation's largest radio station owner, is poised to benefit from improved advertising as well as an investment in Westwood One Inc., which supplies radio programming. Methode makes electronic components for the auto, computer, and telecommunications industries. "This is a play on an economic recovery," Dater says. In computers, Methode makes a key connector for memory cards used in the surging portable computer market. American Freightways is a trucking company in the Southwest that has thrived even during the recession. Dater says the company is nonunion and is well positioned to capitalize on an economic recovery.

In health care, Dater picks Gensia Pharmaceuticals Inc. and Integrated Health Services Inc. Gensia has three compounds in the late stages of human testing, including a potential blockbuster that prevents tissue damage during heart surgery. Integrated, the nation's leading provider of off-site subacute care, is a play on health-care reform and should benefit from the trend toward shorter hospital stays, Dater says. In technology, Dater has chosen Nextel, which makes mobile radios, and Auspex Systems Inc., a software supplier that should do well in the multimedia market.

Her final picks are in retailing. Nutramax Products Inc. makes private-label personal-care products and next year is launching two personal-hygiene products with big growth potential, Dater says. Catalina Marketing Corp. specializes in computerized marketing strategies for supermarkets and has new technologies for distributing coupons at the checkout counter. Catherines Stores Corp. in Memphis sells large-size women's apparel, and Dater thinks it has better merchandising strategies than its competitors going into 1994.

LOOKING TO HIGH TECH

FOR LOTS OF GROWTH

PETER C. BENNETT. As chief investment officer of one of Boston's oldest investment-management firms, State Street Research & Management Co., Bennett manages several mutual funds, with total assets of about $1 billion. A veteran of 30 years in the business, he describes his investment approach as "traditional bottoms-up stock-picking." He prefers well-managed companies with strong earnings growth. Bennett's portfolio is counting on the economic recovery to keep going next year, and he looks for continued fast growth in high tech. He has chosen a mix of cyclicals and high- and steady-growth stocks.

Heading his list of economically sensitive stocks is General Motors Corp. Although GM is lagging behind Ford Motor Co. and Chrysler Corp., Bennett sees

a quicker-than-expected turnaround. "Most people don't really believe the major restructuring has really caught on," he says. Bennett does, because the economy is improving, consumer confidence is up, there's a bulge of people in their mid-20s who are prime buyers of GM cars, and Japanese cars are too pricey.

The three remaining cyclicals are Rowan, an offshore driller; Millipore, a biotech and semiconductor industry supplier; and Equitable Life Assurance Society, the insurance company. Bennett says Rowan Cos. is his most speculative pick because its stock has gone nowhere for several years and its prospects depend on strength in natural-gas prices and increased drilling activity in the Gulf of Mexico. Millipore Corp.'s stock has also been in the dumps lately. But Bennett says he's counting on rising demand for its filtration systems and a potential boost to earnings from the possible sale next year of a major division. In Equitable, Bennett is expecting the company's turnaround to continue more rapidly than most expect next year.

In the steady growth category, Bennett picks Fannie Mae. Earnings are growing at 15% a year, while the stock is selling at a low multiple of 10 times earnings. He also likes Procter & Gamble Co., which he says "has a new lease on life" thanks to cost-cutting and a low-pricing policy.

Bennett's high-growth picks include a gaming company and three technology stocks. Promus Cos., which specializes in riverboats and has a casino in New Orleans, is expected to get approval for several new riverboats in 1994, boosting its cash flow, Bennett says. IDB Communications Group Inc. is starting up an international phone network and is "a mirror of the MCI story," says Bennett. It's a small player, but its cable system is operating at 60% of capacity, he says.

His remaining two picks are in software. Cisco Systems Inc., which makes programs that link networks of computers, is growing at a breakneck pace. Sybase Inc. is the No.2 data-base company behind Oracle Systems Corp., but Bennett claims that Sybase "probably has the best technology."

STICKING WITH THE BASICS

MICHAEL MURPHY. For the past 25 years, Murphy has been tracking high-tech companies and overpriced stocks and publishing his findings in two newsletters, Overpriced Stocks and California Technology Stock Letter. He also manages the new, $2 million Monitrend Technology mutual fund. He calls himself a fundamental investor, picking stocks based on their underlying financial strength. But he also looks for two specific types of stocks. One is high-tech companies whose spending on research and development is rising compared with its market capitalization. The other is "high p-e stocks where economic damage has occurred but still hasn't gotten into the stock price yet."

Murphy, a longtime short-seller, favors this strategy for two picks: Wells Fargo & Co. and Waterhouse Securities Inc. Wells Fargo has a large portion of its loan portfolio in California real estate, which is still declining in value. Murphy expects to see big write-offs next year. Its shares recently traded at 122 1/2, up from a 52-week low of 74, and Murphy thinks it will drop back down to the 70 level when the bad news hits. Similarly, Waterhouse Securities, a deep-discount broker, has "overexpanded" and will be hit hard in a bear market, Murphy says. The stock is trading at 26 1/8, up from a 52-week low of 9.5, and will fall to about 13, Murphy predicts.

The rest of his portfolio is in two volatile markets: computers and biotech. His first pick is Emulex Corp., a networking software and disk-drive maker that is about to split into two companies. It's now trading at about 6. Murphy says the disk-drive business, which Emulex will soon spin off into a separate public company, is worth at least 10 a share. Combined, the two companies will be worth from 12 to 15. He also likes Network Computing Devices Inc., which makes low-cost terminals that substitute for expensive workstations, a market Murphy thinks will explode.

Another technology stock is software developer Ross Systems Inc. The company's software for accounting, human resources, and the factory floor is growing at about 80% a year, but the stock is trading at half its 52-week high of 15. He also likes disk-drive maker Seagate Technology Inc. Although caught in a vicious price war, Seagate is the low-cost maker and remains profitable. It should benefit if smaller rivals exit the market, as Murphy expects. He also likes Weitek Corp. It recently developed a chip that doubles the speed of the processor in Sun Microsystem Inc.'s Sparc workstations.

He adds a little diversity to the mix with three biotech stocks. Telios Pharmaceuticals Inc. has a product awaiting Food & Drug Administration approval that treats diabetic foot ulcers. Vical Inc., Murphy says, has the edge in the growing field of gene therapy. And Cygnus Therapeutic Systems makes transdermal patches that may soon be used to treat osteoporosis and heart disease.

AN EXOTIC MIX

OF FOREIGN STOCKS

JOE SCOTT-PLUMMER. As chief investment officer for Martin Currie Investment Management Ltd. in Edinburgh, Scotland, Joe Scott-Plummer manages some $5 billion for mutual-fund companies, pension funds, and endowments around the globe. He describes himself as a "growth manager with value" who invests primarily in emerging markets. He uses a geographic asset-allocation policy that can change monthly.

His picks include only one household name: Porsche. The company is bottoming out, he says, and has good growth prospects next year with two new cars. One is a low-cost roadster than will compete with Toyota's MR2 and Mazda's RX7. The other is the 964, a replacement for the classic 911. "Nobody's been looking at Porsche, but they're in remarkably good shape," he says. The company has lowered its breakeven point dramatically and expects sales to pick up.

The remaining picks are far-flung, but all are available to U.S. investors through brokers who can trade in foreign stocks. One caveat: Transaction costs may be higher.

In Poland, Scott-Plummer likes Elektrim, a trading house that imports power-generation systems. While its primary market is Poland, it has growth prospects in Russia and Turkey. He favors Compa a Peruana de Telefonis in Peru, which is making a big investment to improve its network and will see huge revenue gains from marginal increases in usage. Also in Latin America, he likes Argentine developer Inversiones y Represaciones (IRSA) in Buenos Aires. It buys state properties and redevelops them for sale or lease.

Moving to the Far East, Scott-Plummer has several picks. One is Larut in Malaysia, another property developer. The company has purchased a large plot of land near the Kuala Lumpur airport and is building an entire township. The kicker is that it has a gaming license to open casinos in China and the Philippines. In Japan, he has two picks: Aoyama Trading Co., which sells discounted men's suits, and NGK Spark Plug Co., which manufactures oxygen sensors that make car engines more efficient and which supplies a vital ceramic packaging for microchips.

In Britain, Scott-Plummer is hot on two companies. One is a cyclical: the conglomerate BTR PLC, the former British Tire & Rubber. The company makes a broad array of industrial equipment and is a play on the economic recovery in the U.S. and Britain. The other is a turnaround situation: Hongkong Shanghai Banking Corp., a British holding company that took over New York's Marine Midland Bank several years ago. He expects improved earnings at Marine Midland and a boost from its Hong Kong mortgage portfolio.

Finally, Scott-Plummer likes his own firm's Indian Opportunities Fund, a mutual fund that is traded on the Dublin stock exchange and invests in Indian companies. "It's a proxy for India," he says.

Scott-Plummer says he has nothing against U.S. stocks, but at the moment, he sees better opportunities abroad. So it's U.S. stocks vs. foreign stocks. The race is on.ELIZABETH B. DATER

Warburg Pincus Counsellors, New York

Stock Price*

AMERICAN FREIGHTWAYS 19 1/8

AUSPEX SYSTEMS 8 3/8

CATALINA MARKETING 46 3/4

CATHERINES STORES 18 5/8

GENSIA PHARMACEUTICALS 25

INFINITY BROADCASTING 29 1/8

INTEGRATED HEALTH SERVICES 29 1/4

METHODE ELECTRONICS 12 1/2

NEXTEL 36

NUTRAMAX 11 1/8

*Dec. 13, 1993

MICHAEL MURPHY

Editor, Overpriced Stocks Newsletter

and California Technology Stock Letter,

Half Moon Bay, Calif.

Stock Price*

CYGNUS THERAPEUTICS 10

EMULEX 6 1/2

NETWORK COMPUTING DEVICES 6 3/8

ROSS SYSTEMS 7 1/2

SEAGATE TECHNOLOGY 21

TELIOS PHARMACEUTICALS 5 3/4

VICAL 11

WATERHOUSE SECURITIES (SHORT) 26 1/8

WEITEK 8 3/4

WELLS FARGO (SHORT) 122 1/2

*Dec. 13, 1993

PETER C. BENNETT

State Street Research & Management,

Boston

Stock Price*

CISCO SYSTEMS 59 7/8

EQUITABLE COS. 25 3/8

FNMA 79

GENERAL MOTORS 56 1/8

IDB COMMUNICATIONS GROUP 47 1/2

MILLIPORE 36

PROCTER & GAMBLE 57

PROMUS 48 1/4

ROWAN COS. 8

SYBASE 40

*Dec. 13, 1993

JOE SCOTT-PLUMMER

Martin Currie Investment Management,

Edinburgh, Scotland

Stock Price*

AOYAMA TRADING (JAPAN) $62.94

BTR (BRITAIN) 5.33

CPT (PERU) 3.35

ELEKTRIM (POLAND) 66.00

HSBC HOLDINGS 12.50

INDIAN OPPORTUNITIES FUND 13.10

(LISTED ON DUBLIN EXCHANGE)

IRSA (ARGENTINA) 3.15

LARUE CONSOLIDATED (MALAYSIA) 1.96

NGK SPARK PLUG (JAPAN) 8.73

PORSCHE (GERMANY) 454.87

*Dec. 13, 1993 DATA: BW

Geoffrey Smith in Boston


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