... and what for an encore? Is the stampede still on, or is the bull market soon to be corralled?

Is the stampede still on, or is the bull market soon to be controlled?

We've All Got Questions about the stock market in 1957. As two good years have piled gains upon gains, investors are scratching their heads, wondering if the good times might soon end.

We at BLACK ENTERPRISE had an opportunity to ponder just what's in store at our annual Investment Roundtable, on January 16. Just as we gathered five experts from all ends of the financial industry the market was in an odd place. Many analysts were arguing that stocks were overvalued, with the S&P 500 trading close to 20 times earnings. Equities nonetheless seemed to rise on helium. A Dow of 6400 had long been left in the dust and, with the index pushing 7000, the whispers predicting a correction--a downturn in stocks--were gaining volume.

Our expert panel feels a drop is likely this year, with any correction likely to be triggered by a slowdown in corporate profits. On a more heartening note, however, our experts said good stock picking could still provide gains. They also pointed out opportunities in fixed income instruments, such as Treasury bonds and international equities.

Our panel included two portfolio managers: Stephon Jackson of Durham, North Carolina-based NCM Capital Management Group, the largest minority-owned money management firm in the U.S. with $4 billion in assets. Jackson, director of equity research and a portfolio manager of the Third Century Fund, a Dreyfus Fund, which gained 24.33% versus 23% by the S&P 500. C. Kim Goodwin is senior vice president and portfolio manager for Boston-based Putnam Investments. Among her duties, she co-manages the highly successful Putnam Vista Fund which invests in mid-cap equities and has $2.7 billion in assets.

For advice on fixed income, we turned to Charles Self, a senior vice president and chief investment officer for LaSalle Street Capital Management of Chicago, an asset manager with $5 billion. Deborah Frazier is an assistant vice president and senior financial consultant at Merrill Lynch, one of the largest investment and financial services firms in the world. Christopher Williams, CEO of The Williams Capital Group, a broker dealer firm that has a research department, operates in New York.

BE: After two good years, should we expect 1997 to be as smooth?

DEBORAH FRAZIER: One of the biggest concerns we have is whether individual investors are really prepared for a market in which you can't make money as easily as the past two years.

BE: What are the chances higher inflation and interest rates might sap the market?

CHARLES SELF: We think the economy will continue to grow moderately in 1997.

Federal Reserve policy will be steady again this year. Alan Greenspan now has the bond market doing his work for him. Whenever it looks like the economy is getting strong, interest rates go up. Inflation is well behaved and growth is moderate.

BE: So you think the Fed is going to tiptoe around raising rates this year?

SELF: Whatever they do will be moderate one-time events. If the economy looks stronger than expected in the first half, they will raise rates once. That will likely slow the economy down. But by the end of the year, if the economy is too sluggish, they could decide to lower rates just to avoid a recession.

BE: What does that spell for the markets?

STEPHON JACKSON: Charels and I are in complete agreement. Almost everyone has a benign view, but my biggest concern is that the market hasn't had a shock in the recent past. And as we know, generally the longer you go without a shock, the more likely you are to get one--and bull markets never die of old age, they have heart attacks.

I think corporations not meeting earnings expectations could affect the market. I'm never comfortable saying there's going to be a violent move, but I think that it does put a damper on prospects this year. Then on the flip side, with so much money pouring into our stock market from abroad as well as for retirement funds, it would be tough to be too bearish.

BE: How much of a shortfall in corporate profits do you see?

JACKSON: I expect corporate earnings to increase on the order of 8%-12%. That's less than the 12%-15% or even 10%-15% that people had seen the last two years.

BE: How do you think that is going to play into the psyche of investors?

C. KIM GOODWIN: What's important though is what the market expects. If there is a shortfall relative to that, then we have a serious problem.

CHRISTOPHER WILLIAMS: People have become so accustomed to positive earnings surprises. Intel came in with very strong earnings but if they had disappointed investors, the stock would have taken a pretty significant hit.

BE: So the market is in for a bumpy ride?

GOODWIN: The market was up roughly 37% in '95, and 23% in '96. There have been only four times in history where you've had that kind of back-to-back performance. In each case the market underperformed for the next two years.

Still, I think this will be a stock-picker's market, and we're confident we'll make money for investors.

One other factor. Historically, the market does not outperform in the second term of the administration. One difference, though, is that Democratic administrations tend to help smaller stocks, because their initiatives focus on the domestic economy.

BE: With corporate profits due to ease, is it a good time to look into bonds?

SELF: Yes. Ten percent has historically been the return you expect from stocks. But we're hearing today that stocks will rise maybe 8%-9%, and that makes bonds look good. You still want to have equities for growth in the long term, but you have good opportunities in bonds when you can get 6% and 6.5% for five-year Treasuries if you hold them until maturity. Inflation is up to 3%, so there's an inflation premium of 3 percentage points which is higher than an historical average of 2%.

We also have the best chance in a long time for progress on the balanced budget agreement which would reduce the supply of bonds being sold by the U.S. government at a time when baby boomers are getting older and increasing demand for fixed income securities. So we think by year-end, interest rates could be 50 basis points, to one percentage point lower than they are today. But when investing in the fixed income, you just want to pick points in the cycle where it's good to lock in the rates.

JACKSON: Charles, do you feel like the linkage between the bond and stock markets is going to be stronger or weaker, going forward?

SELF: As long as earnings growth is there, then there is a correlation. If earnings start to decline, then it doesn't matter what happens in the stock market. But there are many who believe that the Fed is the best indicator for the stock market, and as long as you have corporate earnings, that's probably the case.

GOODWIN: I'd say uncertainty is a good argument for a well-diversified portfolio. We're not just talking about domestic equities, but international markets as well. I'd also consider diversifying away from large-cap stocks, to include mid-cap names. And asset allocation involves looking more at not just equities but also fixed incomes.

BE: What about the international markets?

FRAZIER: We believe our clients should have at least 20% invested internationally in their portfolios.

JACKSON: Well first, I'd point out that a lot of folks don't realize when they buy U.S. domestic companies, they are really buying a portfolio of global involvement. Eighty percent of Coca Cola's profits come from overseas. The auto companies have upped their international exposure. With many large-cap names, you get immediate exposure abroad. Interestingly enough, you don't have to go that far off shore to get global exposure.

WILLIAMS: I wouldn't recommend an individual investor go out and try to select a specific country or fund to go into, because it can be very difficult. Many overseas companies are just not as efficient or as well run as the U.S. multi-nationals because of government involvement or government ownership. I think you should look at a fund.

BE: Some of our readers have interest in some of the African countries. What about South Africa?

JACKSON: South Africa has basically a first world infrastructure with an emerging markets-type population that is youthful, aggressive, prepared to be educated and ready to move into the 21st century.

FRAZIER: South Africa is a country that I'm very excited about. I went there in 1994, came back and bought a lot of the Alliance South Africa Fund, which is now posting about a 8% return.

BE: Let's go through customs and get back to the U. S. What are you looking for this year?

WILLIAMS: I'd avoid consumer finance companies with heavy debt levels they could be exposed to some risks, particularly if interest rates rise. I'd also be concerned with long distance carriers because there's a lot of price pressure in that market.

GOODWIN: I agree. The telephone companies are probably going to continue to lag the market this year because a lot of long-distance and local competition issues haven't been clarified. HMOs and other health-related stocks were hit last week, when Clinton made comments on Medicare reform.

JACKSON: We have a pretty negative view in general of HMOs. At some point, these guys become part of the problem rather than the cure. Before they were able to say they could provide better health care at less of a price. That's a tougher argument now. Most folks would agree that managed care does actually cut costs, but not as much as they used to.

As far as the aging of America goes, I believe Service Corp. is a good company to own. It's an operator of funeral homes and owner of cemeteries. It's morbid, but long term; they'll continue to grow from an aging population, and also through acquisitions within the U.S. and abroad. These guys are taking their business model globally to several European countries.

FRAZIER: Regional banks have done extremely well. The John Hancock Regional Bankshares Fund has been one of the best performers around. Consolidation has brought the number of banks in the U.S. from 17,000 to 12,000. By 2010, we'll probably be down to about the 4,000-5,000 range. The fund was up over 30% last year and has a 10-year average return of right around 20%.

JACKSON: A spicier theme in the medical area is Medtronic, a leading manufacturer of pacemakers. The demand is there, since heart disease is a problem for 50- to 55-year-olds. The company's long-term earnings growth rate is estimated at 20%-25%, but we think it could be higher. The stock is a bit pricey, but I think the long-term story is very much intact.

BE: Are there other things that people are concentrating on right now?

JACKSON: One company we like is AES Corp., which builds power generation plants worlwide. The P/E on the stock is high but it could post good long-term earnings growth.

BE: What about technology?

GOODWIN: The sectors that out-performed the market last year were tech, financials, capital goods in industry and then utilities and communication services, specifically telephone and cable companies, underperfomed the S&P dramatically.

For the first half of 1997, you could still see good performance in some of the semiconductors and components companies.

Another thing that helps technology stocks is the fact that corporations still have a large percentage of PCs--something like two-thirds of the corporate base--that run on 486 chips. They'll be busy upgrading to pentium machines, which should help semiconductor makers.

We also see that all the multimedia applications are increasing the need for storage. So there is an opportunity to see continued appreciation in storage and PC peripherals.

I'm really enthusiastic about Cisco, which we own in the Putnam Investors Fund; it has found that clients want an end-to-end solution. We hear from some competitors and suppliers that Cisco wins the business now because of that. They are the safe choice, just as IBM use to be.

FRAZIER: We like Intel for similar reasons. We have a two-year target of $200 a share on Intel and our analyst is still recommending it at $140. A little over a year ago, couldn't give the stock away. Now, it's at $147 and everyone has to own it.

WILLIAMS: Its difficult to bet against the technology bellwethers because of their dominance. You look at Microsoft on software. You might even call them predatory because they are constantly fighting with regulators. I think they are so aggressive that it's really hard to bid against them.

JACKSON: I would play a little devil's advocate on technology. We've had very exciting times but it's difficult to make calls in the sector. One has to be very long-term oriented. We think the best strategy is to focus on quality management and products tat you believe in, because technology changes so rapidly.

BE: We've talked about this being a stock-picker's market. What are some of the criteria you're using now?

GOODWIN: Well, in Visa, we have a minimum forward five-years earning growth rate of 12%. Then we look at earnings revisions and opportunities for earnings surprises. One is probably not enough to help a stock look better, but if several analysts are raising earnings estimates we're interested. We do pay attention to price/sales ratios. And in each of these cases, we're looking ar companies in the top 20%. Then we go out and talk to management and visit companies.

JACKSON: We like to focus in on a company's price/earnings ratio to growth rates, sector by sector. We simply look at a series of earnings expectations, and also trailing earnings numbers because the P/E is really a snapshot at one point in time and we want a smoother number. The growth rate we look at is what's expected long term. We focus in on earnings surprises because we think companies that surprises on the upside or beat the street continue to do so.

There are three things you look at: direction, duration and magnitude. Is the direction positive? Clearly, that is the definition of a positive surprise. Is the duration long enough? Thirdly, magnitude--how bug of a surprises was it and what were the factors that contributed to it? Are they cutting costs? Are they poorly run or an inefficient company where there is more opportunity to cut costs to make these guys more competitive?

BE: What sectors are you buying into right now?

GOODWIN: Vista remains over-weighed to some extent in technology. We moved away from some software and networking stocks that had posted triple-digit gains last year and moved into some of the semiconductor and component names that I mentioned before.

While department stores haven't been doing well at all, one name we still like within the retail area is TJX, which owns the TJ Maxx and Marshalls stores. TJX is in the off-price category and benefits because there has been a shift in society away from the luxury end of retail toward value.

JACKSON: A similar name we like is Consolidated Stores, which is a niche opportunity in the off-price area.

One name we like is Philip Morris, which we hold but not in the socially conscious funds. Despite having very exciting earnings-growth prospects of 17% and a 4% yield, it's still a cheap stock selling at about 13 times versus the market that is selling at 19% or almost 20%. I think the long-term growth rate for Philip Morris is 15%-plus. For the first time this year, their international tobacco operations will contribute more than domestic, which reduces a great deal of the litigation risk that concerns investors.

BE: Let's now wrap up with specific investment advice.

SELF: I'd advise your readers to use the fixed-income side to anchor a portfolio with conservative investments. Current yields are attractive. The strategy here is to buy them in a laddered structure. Buy Treasury bonds due to mature every year from two years to five years. If you have $20,000, pUt $5,000 in two-, three-, four- and five-year Treasury bonds. As the first bond matures, you go out and buy another with the same maturity so that you are constantly rebuilding the ladder. That way, if interest rates go up, you are able to take advantage by buying the longer securities. If interest rates go down, you still have four, five years or so on some of the older, higher yield bonds.

If you are in the 31% or above tax bracket, you could follow the same producer with municipal bonds, sticking to Triple A rated munies. If you are under a 31% tax bracket or you are investing for an IRA or a tax-advantaged account, Treasuries make more sense.

If you have 10 years or more, or you have some specific goal that you arc trying to save for, or if you are in a relatively low tax bracket, Treasury strips look attractive. These are zero coupon Treasury securities that they make out of Treasury notes and bonds. Right now, 10-year strips are at about the 6.6%, and I don't think it's that likely that we are going to see inflation anywhere close to that over a whole 10-year period.

BE: You talked about Treasuries; what about regular savings bonds?

SELF: Treasuries offer a better yield. All you need for the two- and three-year Treasury notes is a $5,000 minimum. For five- and 10-year securities you could even buy them for as low as $1,000. If you don't have that much, start with the Double E series Treasury.

BE: Kim?

GOODWIN: In the Vista Fund, we like Parametric Technology, a leader in mechanical computer-aided design. They provide software tO engineers who are doing design for Fortune 500 companies. In 1997, the company is looking to get a better foothold in the automotive market, which IBM currently dominates. The company is growing earnings at a 30%-plus clip.

TJX, in terms of the statistics, is at $39.88, a price that is 16.5 times its 1997 earnings.

Washington Mutual, trading at $51.25 a share, is a 1996 holding. Our analysts feel that this is really the best run Northwestern bank. They quadrupled their size in the last nine years and have a very strong beachhead in California, which is turning around economically. Its P/E is trading at 12.9 times its fiscal 1997 earnings.

U.S. Filter, a water filtration company, is one of the top 10 holdings in the Vista Fund. Water ranks among the most critical resources. U.S. Filter is the No. I manufacturer of water treatment systems. U.S. Filter is $35.75 [and] had a great last quarter earnings surprise. It was 11% ahead of expectations. Even though it looks like it's growing at 22%, with a P/E of 27 times earnings, I really think that this one is going to continue to surprise on the upside.

Estee Lauder is a leader in cosmetics with brands like Estee Lauder itself, Clinique, Origins and Aramis. They have very strong brand loyalty and are increasing global penetration. Currently the stock is at $48.38. It should grow earnings at 18%.

FRAZIER: I'd recommend the Merrill Lynch Growth Fund and the Merrill Lynch Global Allocation Fund. The Global Allocation Fund has returned 10%-15% on average.

The John Hancock Small Caps Fund is an aggressive growth fund I like. They're averaging 10%-15%. We think small caps, along with internationals, will resume their pickup later in the year.

Another fund I like is the Aim Constellation Fund. They're averaging 15%-20% as a rate of return.

At Putnam, besides your Vista Fund, Kim, we like Voyager and the New Opportunities Fund, which has posted returns in the 16%-20% range.

Three of those stocks I would recommend are: Intel, Oracle and Chase Manhattan. Chase has a P/E of 12.4%. It's up to about $91.75 a share right now and we feel that it still has another 40% to go. So, we have a 12-18-month price target of $125.

The second one is Oracle, which is a leading database management system. Right now it's at $41.25. We have a 12-month target of $65 a share. Lastly, Intel--which our technology analyst said he'd never seen--has a P/E of 15 times earnings. Our 12- 18-month price target is $200 a share. Right now, it's at $140-$145.

JACKSON: First we like Citicorp. The stock is cheap and the bank has reinstated its dividend. They're great at building a global consumer franchise. Yes, I'm worried about the credit card business, but I think consumers aren't as strapped as some numbers might reflect.

I think Citicorp can earn $8.80 a share in '97, and is selling at about 12 times that figure. I think the long-term growth rate is 14%.

Dover Corp. has got some very, very diverse businesses. The ones folks know most are probably the Dover Elevator Business and some other capital goods areas that have a small technology component. I expect them to earn $3 in '96 and about $3.20 next year, but the stock has traded about 15 times now and I think the longer-term growth rate is a conservative 12%.

WILLIAMS: We like HFS; Management seems to be astute enough to pick companies that truly do add value to the bottom line quickly. They are at about $66.75 right now. We would see the stock rising to the low-to-mid $70s over the next year.

Another one is Chrysler; the company has large cash reserves that will help tide them over any down period comes about. We like their product lines, design, performance and quality. They're in the $35.50 stock price right now and the stock should bring about a 20% total return over the next year.

Ameritech's another. They have good management, and I think the company is stronger than a lot of the local phone companies. They are at $68.75 a share right now. We would see them in over the course of a year at approximately $70. They currently have a 15 P/E. Another big name we've mentioned already is Microsoft. They are at $ 101.13 right now. We see the stock approaching $100.

BE: Any advice on leaving?

JACKSON: You are talking about young couples putting their life savings into stocks that they know nothing about. That's disconcerting.

SELF: My piece of advice is: make sure that you balance your portfolio. If you've set an asset allocation of 50/50 stocks to bonds, after a good year where the stock market performed so much better than the bond market, you might be at 60/40. Have the discipline to get it back to 50150 and stay on the long-term track.

RELATED ARTICLE: CHARLES SELF

Self recommends building a portfolio of Treasuries with "laddered" maturities that include 2-, 3-, 4- and 5-year issues. At the cost of a little extra risk, investors can move to 10-year Treasury strips.

Bond                               Yield

2-year Treasury note               5.94%
3-year Treasury note               6.10%
4-year Treasury note               6.19%
5-year Treasury note               6.31%
10-year Treasury strip             6.56%

RELATED ARTICLE: STEPHON JACKSON

Service Corp. (NYSE: SRV, $28.38(*)). Funeral home operator is well managed; a good play on aging of America.

Philip Morris (NYSE: MO, $119.88). Tobacco maker's stock is cheap at P/E of 13; should grow over 15% and offers 4% yield.

AES Corp. (NYSE: AES, $57.13). Manufacturers power plants worldwide; stock is pricey, but growth prospects make this a good international play.

Consolidated Stores (NYSE: CNS, $33.13). Off-price retailing is booming as America tightens its purse strings.

Dover Corp. (NYSE: DOV, $49.38). The company is well run, and includes an elevator manufacturer and microchip maker.

Medtronic (NYSE: DOV, $49.38). This maker of medical devices is growing rapidly, and has investigated new markets for its cardiac equipment.

Citicrop (NYSE: CCI, $114.25). With its strong global franchise, the company has restablished its dividend; trades at a P/E of 12, below its 14% long-term growth rate.

(*) Share prices as of 1/30/97

RELATED ARTICLE: C. KIM GOODWIN

Cisco Systems (NASDAQ: CSCO, $67.50(*)). A market leader in computer networking, Cisco is a dominant player in its niche.

Washington Mutual (NASDAQ: WAMU, $51.25). Bank has aggressively expanded and is making strides in the California market.

Estee Lauder (NYSE: EL, $48.38). Cosmetics company is bringing on new products and expanding into overseas markets to feed 18% earnings growth.

TJX (NYSE: TJX, $39.88). Off-price retailer is expanding smartly and surprising Wall Street with robust earnings reports.

Parametric Technology (NASDAQ: PMTC, $57.63). Leading computer design firm is a market share leader; earnings are growing at 30%-plus.

U.S. Filter (NYSE: USF, $35.75). No. 1 maker of water treatment systems is growing earnings at over 20%.

(*) Share prices as of 1/30/97

RELATED ARTICLE: CHRISTOPHER WILLIAMS

Chrysler (NYSE: C, $35.50(*)). Automaker has plenty of cash on hand and can rely on strong design to keep consumers coming back.

HFS (NYSE: HFS, $66.75). Astute management has made good acquisitions to help grow earnings.

Microsoft (NASDAQ: MSFT, $101.13). Dominance in the computer operating systems market makes it hard to bet against this leader.

Ameritech (NYSE: AIT, $58.75) Phone companies might have a rough go in 1997, but this Midwest "Baby Bell" is stronger than its peers.

(*) Share prices as of 1/30/97

RELATED ARTICLE: DEBORAH FRAZIER

Frazier, recommends five mutual funds:

Merrill Lynch Growth

Aim Constellation Fund

Merrill Lynch Global Allocation

John Hancock Regional Bankshares

Putnam Health Sciences

She likes the following stocks, as well:

Oracle (NASDAQ: ORCL, $41.25(*)). Database management firm's stock is predicted to rise over 50% in the next year.

Intel (NASDAQ: INTC, $160.13). Sees the stock rising to $200 in 12-18 months.

Chase Manhattan (NYSE: CMB, $91.75). Mammoth New York bank could enjoy a run up to $120.

(*) Share prices as of 1/30/97