Holding out for growth.

Maceo Sloan says he's not fazed by the latest growth stock sell-off

A Strange thing happened to growth stocks this spring. Shares of companies that had been burning up he market--Lucent Technologies (NYSE: LU) and Merck (NYSE: MRK), to name a couple--stalled. In their place, it seemed that an unlikely cast of chemical companies, basic materials makers and retailers had stood up to take their turn in the spotlight.

All of which came as no great surprise to veteran money manager Maceo Sloan of NCM Capital Management. "Look over the really big gains, and you'll see that most of the upswing was concentrated on a very few companies, perhaps the market's 30 largest names," points out Sloan, who currently oversees $5 billion in assets. "That couldn't last forever."

But for Sloan, a growth manager, this was no time to start tinkering with his formula for choosing stocks. Those tried and true methods, in fact, have helped him propel the portfolio of the Dreyfus Third Century Fund (Nasdaq: DRTHX), which his firm manages, to average annual total returns of 24.32% over the last three years and 23.38% over five, 2 percentage points off the Standard & Poor's 500 index. In 1998, the fund posted a total return of 30.17%, beating the S&P 500 by 1.6 percentage points.

In fact, Sloan has held fast to some of the basic tenets of the "growth-at-a-reasonable-price" school. First, Sloan is willing to pay a premium to the market, that is a price-to-earnings multiple that as of press time exceeded the S&P 500's multiple of 28 times 1999 earnings. As a counterbalance, however, Sloan says a company's growth rate is going to have to come awfully close to that outsized P/E to get his money.

Secondly, Sloan says he likes to see a company that consistently increases earnings, typically over a five- to 10-year time frame. Finally, Sloan says he likes to spot earnings "surprises," instances where a company exceeds Wall Street analysts' expectations for its profits.

That said, one of Sloan's favorite picks, America Online (NYSE: AOL), doesn't quite fit his criteria. There's a good reason. Sloan says the company's dominant position on the Internet makes it hard to topple. Despite falling from $150 a share to $111.75 as of press time, Sloan says the stock could rocket off to $250 a share in the next year.

Meanwhile, another Sloan pick, casino operator Circus Circus Enterprises--now trading under the new name Mandalay Resort Group (NYSE: MBG)--has languished as Wall Street has cast doubts on a recent construction boom on Las Vegas' famed Strip. Sloan thinks the company will bounce back with a vengeance, however, from the $20-a-share range to the $50s in the next 12 months.

Sloan's remaining picks are conventional growth plays. ICN Pharmaceuticals (NYSE: ICN) should benefit from its position in Eastern Europe as well as an effective Hepatitis C treatment. Media firm Infinity Broadcasting (NYSE: INF) is enjoying solid profit growth in its lucrative radio franchises as well as its outdoor advertising arm. Finally, global electric utility operator AES Corp. (NYSE: AES) stands to benefit from a rebound in economies overseas.

Sloan Is Sticking With Growth

                                                      Est. 5-Yr.
                                                      Annual EPS
Company                 Exchange: Symbol   Price(*)     Growth

America Online             NYSE: AOL       $111.75       50.5%
Mandalay Resort Group      NYSE: MBG         22.50       14.3
Infinity Broadcasting      NYSE: INF         26.27       22.5
ICN Pharmaceuticals        NYSE: ICN         33.50       25.0
AES Corp.                  NYSE: AES         58.88       25.5

Company                 P/E      Why Stock Will Outperform

America Online          328.67   * 50% annual revenue growth could
                                   propel shares of the Net's
                                   dominant player to $250 in 12
                                   months.
Mandalay Resort Group    25      * Casino operator should tap into
                                   the boom in gambling nationwide
                                   and should bounce back with an
                                   upswing on the  Las Vegas strip.
                                   Stock could reach the mid-50s.
Infinity Broadcasting    46.91   * The cream of large-cap radio
                                   stocks will get a boost from
                                   its presence in the nation's
                                   largest markets as well as its
                                   profitable billboard operations.
                                   Shares could rise to $32.
ICN Pharmaceuticals      17.24   * Generic drug maker stands to
                                   benefit from the success of its
                                   hepatitis treatment. Stock
                                   trades at a discount  to its
                                   peers and could reach $42.
AES Corp.                30.66   * Global utility firm is building
                                   power plants worldwide. With
                                   75 plants in 12 countries, a
                                   global recovery  could boost
                                   shares to the mid-80s.

(*) As of 6/22/99

Source: Zacks Investment Research3