Buying Stocks in a Slowing Economy.

How to make smart moves in today's market

BETTY AND REGINALD PARKER LIKE TO GAMBLE ON SUCH equities as technology stocks, because they have an appetite for big returns. The Columbia, South Carolina, couple figures that even with the sizzling hot economy beginning to cool, and the stock market performing bearishly in recent months, they have no reason to change their investment strategy. Moreover, the pair will continue to carefully research companies and not make rash decisions before tapping their pocketbooks to buy stocks.

The Parkers may be typical of millions of African Americans who are turning, albeit cautiously, to stocks for retirement or income-building purposes. Reginald Parker, 43, is a family doctor, and Betty Parker is a 35-year-old sales representative for Serono Laboratories Inc., one of the nation's largest producers of infertility drugs.

"Though the economy is tending to slow, we haven't changed our investment habits that much," Betty Parker said. "We still like risky investments.... We feel we're young enough to take that kind of risk."

Enter the world of investing in stocks with the economy growth cooling off. After enjoying the longest peacetime expansion in decades, the nation's economy is not as resilient as in previous years. Much of that deceleration this year has to do with the Federal Reserve raising interest rates six times since June 1999.

By raising rates--keeping inflation under control--and taking some steam out of such key economic indicators as consumer spending and home sales in recent months, the Fed achieved what's known as a soft landing for the economy.

That action may also be contributing to lower-than-expected quarterly profits for numerous major U.S. companies in several industries, resulting in declining stock values. The Standard & Poor's 500 Stock Index grew about 2.2% this year from January through early September, vs. about 9.9% in the same period in 1999.

A number of stock experts, as well as novice and experienced African American investors around the country, are delivering the same message: Don't panic or get distracted by the hype. Signs of a weakening economy should not necessarily entice you to change your investment plans or rush to dump your portfolio.

Instead, consider using the slowing economy as a spark to fetch bargains and invest in major blue-chip corporations with lower stock prices, up-and-coming smaller companies with strong earnings, or so-called noncyclical stocks that typically deliver solid returns despite stock market or economic conditions, experts say.

They also contend that if you're investing for the long term, as many African Americans are, for purposes such as retirement, children's college tuition, or steady income for living and leisure expenses, be confident this economic cycle will likely pass sooner than later.

Bruce Dobbs, president and chief executive of the Malachi Group Inc., an Atlanta-based investment banking firm, says some 15 years in the business, four of which were with the Malachi Group, have shown him that the best way to make money in the market--regardless of economic conditions--is to "stay invested in good-quality stocks over a long period."

Dobbs says that settling on one investment strategy and sticking with it may not be such a good idea. Your needs and goals may change and your investment strategy would have to change accordingly.

"One strategy," he offers, is to "take a look at the returns of a company you are considering. If the company has an annual growth rate of 10%, 15%, or 20%, and there's no logical reason other than market risk that the company will not continue growing at that pace, then consider the company as a stock candidate."

But he also recommends an individual portfolio of no more than 10 to 12 stocks. His stock picks in various industries are: Home Depot Inc. (NYSE: HD), Sun Microsystems Inc. (Nasdaq: SUNW), Sonic Wall Inc. (Nasdaq: (SNWL), Checkfree Corp. (Nasdaq: CKFR), Broadcom Corp. (Nasdaq: BRCM), United Parcel Service Inc. (NYSE: UPS), Cisco Systems Inc. (Nasdaq: CSCO), Sapient Corp. (Nasdaq: SAPE), Comverse Technology Inc. (Nasdaq: CMVT), General Electric Co. (NYSE: GE), Ford Motor Co. (NYSE: F) and Southern Energy Inc. (NYSE: SOE).

"It's been my experience that when the market is off, the good-quality stocks usually come back," Dobbs said. "Investing is not rocket science. It's common sense. So don't put all your eggs in one basket."

A similar strategy has worked for Betty Parker, who got started with an investment club four years ago. The value of her club's portfolio is about $64,000, providing a 70% return so far this year and a 51% return since it started. The club's largest holdings include Cisco Systems, Home Depot, and Immunex Corp. (Nasdaq: IMNX). Reginald Parker has been investing for 16 years and he has earned 71% on his personal investments. "My portfolio is more diversified than my wife's, but I favor technology stocks, also."

Betty Parker, who started investing on her husband's advice, is an experienced investor who takes high risks. With stocks worth about $10,000, and three months' salary saved in an emergency money market fund, along with a six-figure 401(k), Parker says the market has taught her much about economics and economic power. "It gives me hope for the future, because no matter how crazy the market goes, over the long haul, I'll still make out better than having my money in a bank savings account or depending on Social Security."

Volatile economic conditions will not change the investment philosophy of Roger Bruce, a 47-year-old human resources manager who continues to rely on his broker, Dobbs, for advice. An Atlanta resident, Bruce is an active investor who can be aggressive, moderate, and conservative but is always income-driven. His largest holdings are Home Depot, Coca-Cola (NYSE: KO), and (MCI) Worldcom Inc. (Nasdaq: WCOM). Having been an investor for more than 15 years, Bruce has averaged yearly returns of about 25% to 30%.

Typically buying stocks for the long term and preferring those with sustained value for long periods, Bruce has built a diversified mutual fund portfolio that represents all levels of risk "By doing this I have been able to benefit when the market is up and minimize losses when it's down," Bruce said.

What started out as fun has become serious business. Happily married for 15 years, with three children and a grandson, Bruce is now starting to invest for retirement and the college education of his children. "The reality is though the motives for investing have changed, the methods have not," he says.

Even if the economy continues to slow, Carolyn Robinson, a 34-year-old Richmond, Virginia, resident, remains unperturbed. Robinson thoroughly researches stocks before investing in them. And because she has a long-term investment horizon, she figures she'll be able to recover even if the economy continues to cool.

Robinson's philosophy: "Examine a company's fundamentals--their core management style, how the company is run--and how consistently they've grown sales and profits. With those elements intact, there's no reason to become alarmed." If anything, these elements give her greater confidence in her stocks. "If the price should happen to decline, I consider it a welcome opportunity to buy more," Robinson said.

Robinson has been a stock investor for about seven years. The current value of her portfolio, approximately $150,000, is comprised of mutual fund holdings in the Vanguard Balanced Index Fund (VBINX) and the T. Rowe Price Growth Stock Fund (PRGFX). Her largest individual stock holdings include: Intel Corp. (Nasdaq: INTC), Colgate-Palmolive Co. (NYSE: CL), and Pfizer Inc. (NYSE: PFE).

Robinson suggests remaining disciplined and investing consistently. "This is the best time in many years to be in the market or to get in [the market] if you're not already there. It's a great buying opportunity for the long-term investor to buy good-quality stocks, particularly at current [price] levels."

Peter Johnson, a registered investment advisor in Sunnyvale, California, says, "There are stocks that offer considerably lower risks for investors who want to initially buy stocks or those that want to expand their portfolio in a slowing economy." Johnson is the founder and chief vision holder of greenjungle.com, an educational Website for investors.

Some of those equities are known as noncyclical stocks because they represent companies with businesses that are less affected by economic cycles. Consumer staples such as food, personal care, and cleaning products are included in that stock category, as well as companies involved with healthcare, entertainment, gas, and energy.

Olivia Barbee, a senior analyst at Morningstar Inc., a Chicago-based provider of financial information, agrees. "Companies that deliver inexpensive or necessary products do well when the economy slows. Cyclical stocks--those that are highly sensitive to economic cycles--are the ones to be cautious of," says Barbee. "These stocks include automakers, publishers, and paper manufacturers. High-yield bond funds can also be risky in such an environment," Barbee adds.

"There are two other sectors that might offer excellent picks: energy and technology stocks," says Chuck Hill, director of research at First Call, a Boston-based research and consulting firm. First Call analyzes the earnings performance of most major U.S. companies in numerous industries.

According to Hill, "Analysts tracking the heating oil and natural gas sectors have been behind the curve on their price estimates. Therefore, their earnings estimates for those companies have been off the mark." Estimates on the performance of these companies have not been raised fast enough by the analysts, and further increases are likely over the next few months.

"The energy companies have performed well because inventory for gasoline and heating oil is low, but demand is high," says Hill. Earnings for the energy sector rose 192% in the first quarter, 146% in the second quarter, and are expected to rise 93% in the third quarter, up from an April estimate for that quarter of 24%. "The major oil stocks are benefiting," says Hill, "as well as the stocks of the companies that explore for oil and natural gas."

Energy stocks, sectorwide, have performed well: Exxon Mobil Corp. (NYSE: XOM) and Texaco Inc. (NYSE: TX). The stocks of oil producers that have performed well include: Kerr-McGee Corp. (NYSE: KMG), Transocean Sedco Forex Inc. (NYSE: BIG), and Ensco International Inc. (NYSE: ESV).

"Gasoline gets all the publicity, but demand is just as great for heating oil and natural gas," Hill says.

Another sector Hill is bullish on is technology: "Although the valuations of the tech stocks have dropped some lately, they're getting near good valuations for the longer term." Profits for the group rose 44% in the second quarter, and are expected to rise 34% in the third quarter, 27% in the fourth quarter, and 25% in first quarter of 2001.

Among the reasons are the introduction of new technology, mainly products tied to the Internet and wireless communications. Earnings of companies that make semiconductor chips and fiber optic products should continue to do well. "Even if expectations are not met, the sector will generate above-average earnings growth," said Hill. His picks for communications and semiconductor stocks: Cisco Systems Inc. (Nasdaq: CSCO), JDS Uniphase Corp. (Nasdaq: JDSU), Texas Instruments Inc. (NYSE: TXN), Motorola Inc. (NYSE: MOT), Vitesse Semiconductor (Nasdaq: VTSS), and Triquint Semiconductor (Nasdaq: TQNT).

"Still, if the Fed's rate increases are successful and the economy experiences a soft landing, technology won't be impacted as much because new product enhancements for new applications will continue," he says.

The utilities sector is what Hill calls the "sleeper and big surprise of this year." The sector's most recent quarterly results beat analysts' estimates by 13% with a gain of 27%. Bets are that analysts' estimates could be wrong again going forward. They're predicting a 7% gain for the third quarter and 8% in the fourth quarter.

"Deregulation among utilities is making it tougher for analysts to accurately perfect future earnings," notes Hill. "And predictions can no longer be just based on expected rate increases or seasonal demand for power to gauge their profitability. This is one sector I'll be keeping my eye on."

An attractive investment option might be stocks that already have lower price-to-earnings ratios.

Johnson says, "There are many value stocks available, although much of the focus has been on existing technology and other fast-growing stocks." He also says that many stocks that pay higher dividends may also fall into the value class and offer lower volatility than the stocks of fast-growing companies. Johnson suggests investors consider some foreign stocks for their portfolio. The reason: "If the U.S. economy continues to slow, other areas of the world might be growing at a faster rate."

Johnson and other experts conclude that investors should have a diversified portfolio that includes bonds and cash (shares in money market funds, for example). "Even if stocks fall for a long period, investors are likely to have other assets that are remaining stable or performing well."

For Deirdre Ann Gilbert, a 35-year-old New York resident, building a diversified portfolio is key. But her primary goal is to make money for retirement. A financial advisor has helped to redirect her investments toward accomplishing that goal.

After beginning to invest three years ago, her portfolio, consisting of growth, income, tax-free income, and global funds, is now worth an estimated $40,000.

Gilbert admits she's learning quickly by working with her broker. "A little education never hurt anyone," says this research assistant for a New York brokerage firm and entrepreneur in the fashion industry. "We can all expect a downside in the market. The key is to study before making a decision to invest."