Creating a Clinton portfolio: our experts forecast which companies and industries will deliver the best returns under the new administration.

Our experts forecast which companies and industries will deliver the best returns under the new administration.

Small stock suitors are still smiling about 1992, and with good reason. Last year's best performers were in the NASDAQ small stock index, which grew 15.5%. This was the second year of such growth, after 12 years of large stock appreciation. By contrast, the Dow Jones Industrial average gained only 4.2%, and the S&P stock index gained only 7.6%.

Will 1993 be a replay? To give our readers an edge, last January the BLACK ENTERPRISE Investment Roundtable convened a quartet of the nation's savviest money managers and stock pickers. The group included: Barbara Bowles, president of the Kenwood Group Inc.; Eddie C. Brown, president of Brown Capital Management Inc.; Peggy Woodford Forbes, president of Woodford Capital Management Inc.; and Louis A. Holland, managing partner and chief investment officer of Holland Capital Management. We asked the group, which controls portfolios as large as $400 million for individual and institutional investors, to give us their sectoral and individual stock selections and insight into picking a profitable Clinton portfolio.

BE: How did your firm's investments do in 1992?

Eddie C. Brown: Better than expected. Our privately managed equity portfolios increased 11.8%. During the first half of the year, we were actually lagging. But we made a complete turnaround in the second half.

Barbara Bowles: We were very fortunate to have grown our composite portfolio 18.5% last year. We compare our performance with the Russell Price Driven index, which was up 13.9%.

Louis A. Holland: We had a very good year, up about 13%.

Peggy Woodford Forbes: 1992 was our kind of year. We were up 17.7%. You had to be in the right place at the right time.

BE: What business sectors should investors watch during President Clinton's first year in office?

Forbes: Technology is really way beyond any other sector. People need to network and exchange as much information as possible. And companies that have the power to keep their products in the forefront such as semiconductor maker Intel or software giant Microsoft, are going to do tremendously well.

BE: Does this mean that you're really looking at personal computer and software manufacturers and systems integration companies, not the IBMs?

Forbes: Yes. And also the chip-makers. The United States is the world's No. 1 manufacturer of microprocessors, and we are the leaders in software. And although we're seeing IBM downsized, other U.S. companies are coming in and taking over.

Bowles: I echo everything Peggy says about technology companies. It's really a fun industry to look at because there's so much going on. Additionally, health care containment is going to continue to be very important. Health costs are going through the roof, and companies that find ways to contain those costs will be successful in the '90s.

Holland: I agree with the others about technology being a very attractive area. However, when we look at our stocks in '93, we should be careful not to focus on companies that conduct a significant portion of their business outside of the United States. Most of the world is still in recession. It's wonderful to look at these technology companies, but we're scared to death because of the European recession. This problem will overshadow the long-term interest in technology. And the same can be said of big consumer nondurable companies, such as Philip Morris, which have significant portions of their business coming from overseas.

BE: The company that seems to run counter to that is Toys 'R Us, which is booming overseas.

Holland: And Nike.

BE: What are your feelings about manufacturing as a sector?

Bowles: We all had great hopes about manufacturing early in 1991. But the real truth is that it did not grow in 1991 or 1992. And I think there's great fear that there is not going to be real growth. Consequently, many of us will steer away from some of these manufacturing groups.

Forbes: In that arena I like Dover. It's an integrated company that makes hydraulic elevators and a variety of manufacturing products. I think it's going to be the IBM of the manufacturing arena. Although we haven't seen the gains that we anticipated, it's fairly well-run and coming out of a long problematic turn.

Holland: I would share Barbara Bowles' concern that top-line sales growth is in question now. Plus these companies are most affected by health care cost increases.

In terms of the industrial area, we've bought W.W. Granger, a high-quality distributor of electric motors and power tools, which came through the recession pretty much unscathed. While we like a couple of other companies in the industrial area, generally speaking, we don't buy a lot of manufacturing stocks.

BE: Some analysts say there is going to be an upswing in timber, oil and energy stocks. What do you think?

Forbes: I think America has become a low-cost producer, certainly in paper and forest products. However, with construction at a low ebb, I don't think it will be as fast or as good as one might think. And in terms of energy, I like some of the big oil companies.

BE: Why?

Forbes: Because you don't create oil; it's a natural resource. And I look at it as an important part of my portfolio.

Brown: I just don't see opportunities for growth-oriented investors in timber, oil and energy. If I was forced to put money to work, it would be in energy service companies as opposed to basic oil companies.

Holland: I think the slow global economy is negative for energy. The only problem with energy stocks is that the market doesn't ring the bell when it's time to buy them. So you have to buy them when no one else wants them. So our philosophy has been similar to Eddie's. We like to buy energy manufacturers and service companies, such as Schlumberger and Dresser Industries, that meet our growth test. We've bought Enron, and used Valero Energy Corp. But clearly there are few energy stocks in our portfolio. We like Waste Management which is a major holding. It's a long-term growth stock with high return on equity. Its growth rate has decreased somewhat, but it meets most of our terms.

Forbes: And with Vice President Al Gore's pro-environment stance, the pollution control companies will do fairly well. I would look at steel, coal and pollution as a kind of triad. And even though we're in a time of peace, we still have to make bullets. Clinton has said something about protecting the steel industry. Although steel has underperformed for a long time, we're beginning to buy some of the steel companies and attendant coal and waste companies.

Bowles: We haven't bought much in oil and manufacturing. But one company we own, Phillips Petroleum Co., takes a step from both of those categories. It's an integrated oil company that manufactures chemicals.

BE: There is a fair amount of optimism about chemical companies and their future. Any comments?

Holland: Well, we have a considerable interest in what we call growth chemical companies that rode right through the recession in terms of their earnings. One is Great Lakes Chemicals; another is Lawter International. We also are involved in Nalco Chemical. Their stocks have held up and done relatively well in this environment.

BE: What specific sort of chemicals do they make?

Holland: These are all specialty chemical companies. One of the areas we look for is cost containment. And all the companies we're talking about can control their prices. We don't have any of the petrochemical companies such as Dow Chemical or Du Pont.

Bowles: How about retail? I would say that's one area where we will continue to get decent top-line gains. We like Dayton-Hudson, which owns department and upscale discount stores. Most specialized retailers have seen great gains, but as a group, I don't feel they are going to outperform this year.

Brown: I feel we are "over-malled" and -over-stored." And except for a few retailers, it's going to be a very tough environment. One company that will still do well is Wal-Mart. Even though it's kind of expensive, it's worth it. They're still not in every state. And they have a great opportunity with their wholesale club. I used to own specialty retailers, such as The Gap and The Limited, but I guess I'm convinced that it's going to be very, very tough [for them].

Holland: I'm inclined to agree with Eddie. I would reduce my exposure to retailing. However, I do own Dillard Department Stores, which has annual sales of more than $4 billion.

Bowles: What's interesting about that is all three of us named a nonspecialty retailer.

Forbes: I've been reduced to specialty retail. I like Kmart. But I love Eddie's overstored, over-malled theory.

Holland: Albertson's in California and parts west is a wonderful food retailing chain. It's a little high priced, but outstanding.

BE: Are the airlines grounded right now?

Brown: We have the view that two clear survivors will be American and United Airlines. But because there are some heart-rending price movements, I'm not interested in that arena long term.

Bowles: We have just the opposite view. We think the airlines will be good places to be longer term. But for the short term, there's little consolidation. The bankrupt and semi-bankrupt airlines are still flying. As long as we have that problem, we're going to have pricing issues.

Forbes: We have no airlines in our portfolio.

Holland: I think the airlines are the ultimate cyclical stock. I don't own any at the moment, but if I were to buy any, I would buy American or Southwest Airlines.

BE: A lot is happening in entertainment, travel and media companies; is there any reason to look at them?

Bowles: We have for a long time owned Time Warner because we think that is a good asset play. Their assets are worth far more than the current stock price. Eventually, they will benefit from all of the technological changes that are taking place in telecommunications. We don't have many stocks in the industry because most of them are overpriced, but you can still get Time Warner stock at a cheap price.

Holland: A very exciting stock is Carnival Cruise. It's a solid grower. I also like media stock. One is Grupo Televisa, which is traded on the Bolsa, the Mexican Stock Exchange. It is the leading Hispanic programmer in North America and maybe the world. It's a company that will be probably growing at 20% or more over the next three to five years.

BE: It seems like you're all making a seamless transition from sectoral picks into individual stock picks. So why don't we go straight into stocks you'd include in a Clinton portfolio.

Holland: My stock picks are not really influenced by a Clinton administration. One of my favorite stocks is in the finance area, Sallie Mae, the old student loan marketing corporation. It's a top company, with a growth rate of 20% expected over the next several years. Sallie Mae has a very high return on equity and sells at a discount in the market relative to its growth rate.

We should be overweighted in finances. I like Trans Atlantic Holdings, a property holding company. One of my core holdings is AIG, the nation's largest industrial insurer. I do like some of the bank stocks. I'm sticking with the larger bank stocks, such as Wachovia, Banc One and Northwest. And I also like MBIA, the municipal bonds insurance company.

In the technology area I like four companies: Motorola, Automatic Data Processing, Intel and Scitex, which is an Israeli computer graphics company.

Infrastructure stocks will benefit as a result of Clinton. Jacobs Engineering Group is a company I like. However infrastructure companies are currently overweighted because the market has bid them up with great expectation. Another stock, Telefonos De Mexico, the Mexican telephone company, is also expected to grow 20% it is not overpriced, and will benefit from the North American free trade agreement. I also like another foreign stock, an Irish drug manufacturer called Elan Corp.

Bowles: I'm going to highlight three stocks. It's an eclectic group, but they have four things in common. Their revenues are under $1.5 billion. They are leaders in their industry, have pricing flexibility and are considered innovators. They should all benefit from moderate improvement in the U.S. economy. The first one is Cadence Design Systems, a specialized software company that provides circuit board designs. The company has about 20% of that market and its stock is fairly inexpensive. The next company is Fleming, a growing wholesale food distributor. It's a very inexpensive stock, 10 times earnings and has a yield in excess of 3.5% with sales of about $13 billion. It's interesting to come across a company like this one, which has been overlooked for such a long time.

Finally, I would like to mention $1.4 billion Caremark International, an alternate health care product company, which fits right in with health care cost containment. It is a spin off of Baxter International. They primarily provide health care products for the home and for alternate sites. This is a company that should grow about 15% in the upcoming year. It has a market capitalization of about a billion dollars. And it sells at a low price.

(Michele J. Hooper, one of the "40 Most Powerful Black Executives" in our February 1993 cover story, is president of Caremark's international business group.)

Forbes: I like Motorola, again another chip-maker. And in telecommunications and cellular, I like Sun MicroSystems because of networking. I like other peripheral manufacturer stocks, such as Seagate and Quantum Technology.

BE: Many of our readers probably hold IBM. Should they hold them or fold them?

Forbes: It depends on where they bought it, I suppose. But I would not want to hold IBM right now. I think it's a shrinking industry that made terrible mistakes in terms of vision. It's a dinosaur, which can't recognize what is happening. But they still have money and power. They could buy a lot of companies. They could do all kinds of things. On the other hand, Digital Equipment might be a possibility because they've taken some serious efforts in turning that company around, and the price has gotten pretty cheap.

Brown: IBM, I think, is a troubled company and will be for a while longer. So I would not be a buyer, not even at the $50-level. And I think the dividend is definitely at risk.

Forbes: in terms of banks, I would stick with Bankers Trust, J.P. Morgan. I think of Morgan Stanley Group in terms of brokerage financial services. I also like Merrill Lynch. I think that the financial services, the asset management companies, the custodians, all the banks that have kind of wholesale ability are going to do very well. I look at regional banks such as Northwest Corp., MBD, Banc One. There's going to be tremendous merging in this sector.

I'm looking at steel also. I think many of these companies have been beaten down. I'm looking at Bethlehem Steel. I think a retailing company that is interesting is Cohen Mills, which makes blue jeans and denim.

Brown: I think one way to play Clinton's infrastructural program, the rebuilding of roads, is not to go through the major steel companies, but through some of the mini mills. We've decided to make some investment in Birmingham Steel or NuCor. They take scrap metal and produce steel bars that will be used in much of this infrastructure rebuilding. But they have a cost advantage over the major steel producers such as Bethlehem Steel.

In terms of telecommunications, I guess MCI is our favorite. We also own a foreign company Lou mentioned, Telefonos De Mexico.

The health care cost containment area will be a winner of the Clinton era. One company that we used for many years, and increased our position in since the Clinton victory, is Medco Cost Containment Services. It sells mail-order prescription drugs. It's a small- to medium-sized company, but it is dominant in that arena. It has done extremely well. Another area that will benefit from this will be the HMOs. The two that I'm most interested in at this point are U.S. Health Care, which operates primarily in the Philadelphia marketplace and in New York, and the only national HMO that I know of, Health Care Compare.

The other general area I will talk about is banking. One of our most successful banks last year, you think it would still be good this year, was MNC Financial, the largest bank in Maryland. It went from 4 1/2 to 12 3/4. In a few years they've made a turnaround. The other one in the financial services arena would be Fannie Mae. Because of fairly modest mortgage rates and job creation, more people will be able to buy homes, and Fannie Mae will benefit from this. From an investment standpoint, it's good to buy a package of Riggs National and Washington Crest Star Bank and Cignet Banking as the only two remaining independents in the state of Virginia.

BE: Three BE 100s firms (BET, Johnson Products and Granite Broadcasting) are publicly traded. How do you view them?

Bowles: I wish I owned BET and Johnson Products. Unfortunately, both of them are too small for the stocks that we cover. However, I think Johnson Products is probably a perfect buyout. I know that there are lots of cosmetic and hair firms looking at the company. I'm not sure what the right price is, but I still offer the stock. I haven't sold any of mine. In the case of BET, I think they have a lot of opportunity in the communications industry over the long term, and I would consider buying more.

Brown: We don't currently own BET, but I think it's an interesting idea. The problem BET had early on as a publicly held company was that its first two quarters were disappointing. Many institutional players dumped the stock and caused a lot of price pressure. What's intriguing is that if you compare the number of households that BET has versus the potential market, you see a lot of growth opportunity. The risk is that MTV will be coming out with a similar situation. That's the main reason we're not in the stock. We just want to see how things shake out competitively.

KENWOOD GROUP INC.

The Kenwood Group Inc. had an excellent year in 1992, when its investments grew 18.5%. By contrast, the Russell Price Driven index, which corresponds to Kenwood in size and type of portfolio, grew 13.9%. This pleases Barbara L. Bowles, president of the Chicago-based registered investment advisory firm (312-368-1666), whose straightforward investment philosophy is paying off.

Bowles usually keeps 85% to 90% invested in value-oriented companies, with a market capitalization of between $200 million and $6 billion. The former Kraft Inc. corporate vice president makes her decisions based on fundamental analysis. But she considers the company's management style key in deciding how it will prosper.

So far, the Nashville native, who holds an honors degree in mathematics from Fisk University as well as an MBA in finance from the University of Chicago, has demonstrated that her switch from employee to employer was wise. The Kenwood Group has a total of $50 million under management and invests millions on behalf of The Quaker Oats Co., The Washington State Investment Board, Alpha Kappa Alpha Sorority, US West Inc., Woolworth Corp. and the City of Atlanta General Employees Pension Fund.

BROWN CAPITAL MANAGEMENT

Eddie C. Brown is used to investing for either institutions or wealthy clients who clearly appreciate his profitable insight. Brown's philosophy of "relative value," or paying reasonable prices for growing companies, had a total 1992 return of 12%. But he recently expanded his vision.

His Baltimore-based Brown Capital Management Inc. (410-837-3234) has unveiled three mutual funds geared to please both the wealthy and the not-so. The minimum investment for each fund is $10,000, but the funds can also be used for IRAs, Keogh and 401(k) plans, with a $2,000 minimum.

Maximizing total return and capital appreciation is the ultimate aim of the funds. The Brown Capital Management Balance Fund focuses on equity, fixed income securities and money-market instruments.

The Brown Capital Management Equity Fund focuses on investments in equity securities, such as common and preferred stocks and securities convertible into common stocks. The Brown Capital Management Small Company Fund handles companies with operating revenues of $250 million or less. The funds are diversified, open-end series of the Nottingham investment Trust II, a registered management investment company.

WOODFORD CAPITAL MANAGEMENT INC.

Since late 1990, Peggy Forbes has been making money for a more select group of investors. That was when the 10-year Merrill Lynch & Co. and E.F. Hutton Inc. veteran left the corporate world to open Woodford Capital Management Inc. (212-758-2205), her own independent investment advisory firm. Forbes, a Columbia University MBA graduate, is president and chief investment officer.

Woodford Capital has about $80 million under management and specializes in a bottom-up assessment of large capitalization companies. Last year was an excellent one for the company. While the S&P 500 was up 7.6%, Woodford Capital sped ahead with a 17.7% return on investments. Most of its investors are wealthy individuals, but the firm is beginning to attract private banks, large foundations, small corporations and public and private pension funds. A major investor is San Francisco-based Progress Investment Management, which represents many Fortune 500 companies.

Woodford Capital takes a multidisciplinary approach to investment, using its proprietary Strategic Asset Allocation System to integrate quantitative, economic and fundamental indicators.

HOLLAND CAPITAL MANAGEMENT L.P.

Louis A. Holland is a public television investment all-star. The former British Columbia Lion and the Chicago Bear halfback was the first African-American investment analyst to appear on Wall Street Week with Louis Rukeyser. in 1992, Holland ranked 5th among the 28 guest stock pickers; his total return was 26.7%

But top flight performance is the norm. Since 1968, Holland has made financial rather than athletic decisions. Presently, Chicago-based Holland Capital Management (312-553-1000) has $150 million in total assets under management, and its high-quality growth equity portfolio grew 12.6% in 1992. The S&P 500 grew 7.6%, the Lipper Growth Fund index grew 7.8%, and the Russell Earnings Growth index grew 5%.

Holland is managing partner and chief investment officer of Holland Capital, which provides clients with investment services in three areas: equity, fixed income and balanced management.

The former Rose Bowl player says there is no mystery to his approach. He uses fundamental analysis to search for bargains among quality growth companies. Prior to starting his own firm, Holland was a partner in an investment advisory firm.