Bouncing back.

Barbara Bowles offers strategies on rebuilding after a market downturn

Wall Street's portfolio managers spent the third quarter of 1998 grimly watching their swan-like portfolios turn into ugly ducklings. Troubled by the woes in foreign markets, the prospect of a slowing U.S. economy and flagging corporate profits, investors dumped their stocks, causing one of the worst sell-offs in a decade.

Barbara Bowles, president and chief investment officer of the Kenwood Group Inc., earned average annual returns of 10%-15% on a regular basis on her portfolio. But for the first time in the nine years since she founded her Chicago-based institutional investment firm, she lost money. The Kenwood Group manages $450 million in assets and runs a mutual fund that specializes in mid-cap value stocks (The Kenwood Growth & Income Fund).

"A lot of investors got very nervous and wanted to sell, but we told them that they had to stay fully invested," says Bowles who boasts more than 25 years of experience overseeing pension fund money for corporations and public funds.

"We anticipated the downturn because earlier in the year the stock prices, price-to-earnings ratios and dividends were at an all-time high," she adds. "But we knew we would live through it. We don't change our investment strategy because of short-term problems."

Bowles adheres to the principles of value investing--she only buys companies that have low stock prices, robust business operations and strong earnings growth potential. She invests in companies with market capitalizations between $200 million and $65 billion.

The Kenwood Group has positions in 42 companies covering a broad range of industries and takes a two- to three-year investment time frame. Bowles' portfolio suffered because some of her companies had exposure to foreign businesses. But as she explains, firms that operate overseas are likely to grow faster than those that do not. She also believes public worries about a slowing economy have been "overblown."

"There's nothing wrong with an economy that slows. We're more concerned if it speeds up," she explains. "We invest in companies that generate cash flow whether the economy is good or bad."

Bowles likes companies that trade at a discount to the S&P Mid-Cap 400. Already many of her favorite picks are rebounding.

American Greetings Corp. (NYSE: AM) fell to a low of $35.62 on September 3 and then rose to $42.31 by December 1. The No. 2 greeting card company has only one major competitor, No. 1 Hallmark Cards Inc. American Greetings, based in Cleveland, is strengthening its earnings growth potential by entering into a joint venture with Internet provider America Online to offer custom-made greetings cards online.

Avnet Inc. (NYSE: AVT): The Great Neck, New York-based electronics parts distributor was sold off substantially but recouped most of its losses during the fourth quarter. Bowles says computer sales are picking up and the company offers a dividend, a rallying point in a slowing economy.

The Limited Inc. (NYSE: LTD) is a shopping mall mainstay catering to women of all ages and sizes with its Lerner New York, Lane Bryant and Express stores. The company also owns 83% of Intimate Brands, operator of Victoria's Secret lingerie stores and catalog, as well as Bath & Body Works. The Limited, based in Columbus, Ohio, has well-located stores and is adept at building up companies and spinning them off, adds Bowles.

San Antonio oil refiner Ultramar Diamond Shamrock (NYSE: UDS) has about 6,300 gas stations and operates petrochemical, home heating oil, natural gas liquids and convenience store businesses across the country. Bowles says the profit margins of Ultramar are likely to benefit from the decline in oil prices.

Colonial BancGroup Inc. (NYSE: CNB), in Montgomery, Alabama, is the holding company for Colonial Bank in Alabama, Florida, Georgia, Tennessee and Nevada. The $7 billion asset bank offers a dividend, has a strong balance sheet and is an aggressive acquirer, says Bowles.

Bowles' Best Bets

                            Exchange:   Current         52-Week
Company                     Symbol      Price(*)    High      Low

American Greetings Corp.    NYSE: AM     $42.31    $53.75    $34.25
Avnet Inc.                  NYSE: AVT     58.19     74.50     34.94
Colonial BancGroup Inc.     NYSE: CNB     12.38     18.97     10.06
The Limited Inc.            NYSE: LTD     28.94     35.88     20.50
Untramar Diamond Shamrock   NYSE: UDS     25.63     36.25     21.81

                                         Est. 5-Yr.
                                         Annual EPS
Company                          P/E       Growth

American Greetings Corp.        17.17       10.7%
Avnet Inc.                      16.39       14.0
Colonial BancGroup Inc.          9.75       11.9
The Limited Inc.                 3.72       13.3
Untramar Diamond Shamrock       14.51       10.1

(*) As of 12/1/98; EPS growth rates from Zacks Investment Research.