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Wall street wizards.

Nothing ventured, nothing gained. Truly, those investors who had the foresight and fortitude to put their money in stocks made a bundle in 1991. In addition to the rally in the stock market, the returns on mutual funds were lofty, particularly for small-cap issues (stocks of companies with values between $50 million and $1 billion). Thanks to low interest rates and low inflation, the nation's recovering economy is expected to generate further gains.

To solicit tips of the trade, this past December BLACK ENTERPRISE convened a roundtable of four of the country's most astute stock pickers. the group included Alan Bond, president and Chief investment officer of Bond, Procope Capital Management Inc., New Yorl; Eddie C. Brown, president, Brown Capital Management Inc., baltimore; Peggy Woodford Forbes, president and chief investment officer, Woodford Capital Management Inc., New York; Maceo K. Sloan, president, CEO and cheif investment officer of NCM Capital Management Group Inc., Durham, N.C. The pros gave their comments on the conomy and its impact on the financial market as well as their picks in sectoral and individual stocks.

BLACK ENTERPRISE: This is a question for the group. What is your view of the economy?

Eddie C. Brown: I think we will remain in a very sluggish economic environment. The thing that's different coming out of this recession is that policymakers don't have very many options. If they try to inflate their way out by increasing spending, that won't work. I think what's not commonly known is that debt levels have been coming down dramatically, both at the household level and in corporate America. And this is all good. But it will be a very sluggish period.

Maceo K. Sloan: I agree with Eddie. Ican't see the country actually coming out of this recession until mid-1992. that has dire implications for the market. There could be a norma type of correction, which would take us down to the [Dow Jones] 2700 range. The market needs to back up and breathe some before people get the feeling that it's going to go up. And yet by the end of the year we expect the market to be higher than it is at this time.

BE: Do you think a double-dip recession could bring the market down further?

Sloan: Well, when you actually look at the numbers, it doesn't really make much difference if the economy is down 3/10 of 1% or up 3/10 of 1%. We have been in an economic slowdown of some severity for more than a year-and-a-half now, because the economy grows a tiny bit in some quarter, and in other quarter's, it's down a little bit. When we talk about making a tremendous difference as to whether we're in a negative growth mode or a slightly positive growth mode, it then becomes semantics.

Peggy Woodford Forbes: For the past year-and-a-half the Federal Reserve System has been fighting the recession by lowering interest rates precipitously in order to boost the economy. As the election comes closer, the political pressure from the incumbernt administration will ehlp the recovery stay on course.

Even though debt has been coming down, it's not nearly enough. It's very high compared to other syclical troughs. So where do we go from here? We will see a shift toward higher interest rates. The Fed cannot let the dollar fall to zero. Also, capacity utilization has not reached levels low enough for a recovery to emerge and accelerate without a threat of inflation. So, our outlook for 1992 is a breather in the economy.

In terms of the Dow Jones Industrial Average, we think that it will go to 3300 or 3400. We see it peaking in the summer.

Alan Bond: I agree that we're going to have a sluggish economy in '92. In 1991, consumer debt at the house-hold level came down. And with lower interest and mortgage rates, I think the consumer will have more disposable income. On the other hand if there is fiscal intertention into the markets, and inflationary problem will arise that may cause problems.

So we could have a pretty [unsettled]--I won't use the word volatile--period over the first nine months. I think we will continue to see interest rates ratchet lower, although there is some concern that this has not been enough or won't be enough to drive the market higher. I would suggest that there are a lot of blue chips that haven't had very bad problems this yera. ther have been the ones that are very economically sensitive, names like Deere & Co., IBM Corp. and General Motors Corp. But, you have stocks, such as Merck & Co. Inc. and Coca-cola Co. doing extremely well.

There is a great deal of interest in investing in the equities market, simply because alternative investments are not generating the type of rtun that investors are looking for. But overall, I think we will continue to see a meandering economy, one that is searching for some lever of growth.

BE: Eddie, would you talk a little bit more about the economy's impact on the equities market?

Brown: I'm positive about the equities market in 1992. I don't think we will see the huge gains [of 1991]. The way I look at the market it, as interest rates come down, they raise the level that investors are willing to pay for companies--the price/earning ratio [price of the stock divided by its earning per share. Also known as the multiple]. I think inflation will be low in 1992. And that has postive implications for the equities market.

I think that we [will have witnessed] corporate earnings, overall, rising maybe 10%, 15% over calendar '92. And I think the recovery will continue into '93. Companies will continue to do better in '93. So, it's not a raving bullish outlook, but it;s not a doomed one, either.

BE: How are you portfolios shaping up sectorally?

Forbes: Our largest holdings are in Micrsoft Corp. and American Home Products Corp. And we rarely exceed 15% in any industry, so we're at maximum now. In the cyclical growth area, we like foods and beverages, drugs, some specialty retail and special situations like Staples Inc. We like autos. Ford Motor Co. and GM Corp. are very, very cheap. We like airlines, chemicals and railroads. And then on the interest-sensitive or high-yield side, we like the electric utilities, banks and regionals, usually not in the Northeast or California. We like some insurance companies.

BE: As for those banks, you're going to be looking at a limited universe right there?

Forbes: We want banks that don't have heavy real estate exposure or, of course, foreign debt.

BE: A hybrid bank like Bankers Trust Co. is attractive to you?

Forbes: Absolutely.

BE: Maceo, I'm wondering if the trasnpostation sector still looks as attractive to you???

Sloan: That's good point. We like autos. We like the airline stocks. We like railroads. We are also looking at consumer cyclicals, which we think will be more beneficial if the gneral public begins to feel that the end of the recession is near. And auto and transportation stocks fall within cyclical stocks. As long as people feel that the economy is shaky, they tend to pull in their travel plans.

BE: What about consumer nondurables?

Bond: The consumer-nondurable area is one where we've been overweighted. And we've been about 18% to 19% in that group for most of 1991. I don't feel the real conviction to change from drugs, foods, the beverage and tobacco stocks. On the other hand, we've been overweighted in the retail area. I think there are select names that will do well, even in a very difficult retail climate.

BE: Maceo, you have also invested in the consumer and health care industries.

Sloan: The stocks that we've had in those sectors have done very, very well. We have backed away from the health care industry to a certain extent because it has done so well. Our system of investing is somewhat computer-driven. It has peeled us out of a lot of the health care stocks that we were in before, becuase they ran so far so fast.

BE: If a stock looks too good, you don't say invested in it?

Sloan: We have a system that is bases on low price/earnings ratios, both absolute and relative. And when a don't want ot have more than twice the market weighting.

BE: What do you mean?

Brown: Let's say consumer growth staples in the Standard & Poor's 500 economic sector breakdown equals around 20% [of the total 500 stocks]. I believe we're not goind to be more than two times that, or 40% [invested in consumer growth staples]. Right now we're about 30% in that sector, which is one of our largest sector weightings, but it's not by design; it's due to looking for attractively valued securities, stock by stock. Traditionally, we have not had very much in electric utilities.

We don't think that you will see the traditional recovery of the cyclical stocks. But we do find a couple of the airlines attractive. And the reason is because [the airline industry] is a consolidating industry, and the survivors will do very well as the economy slowly recorevers. In particular, we think United Airlines Corp. and American Airlines Inc. are attractive.

BE: Recently, a black-owned company, Black Entertainment Television (BET), made a very successful initial public offering (IPO). Now Granite Broadcasting Corp. (No. 18 on the BE INDUSTRIAL/SERVICE 100s list) is thinking about following suit and TLC Beatrice International Holdings Inc. (No.1 on the BE INDUSTRIAL/SERVICE 100s list) considered and then back away from an IPO. Do you think we will see more BE 100s companies moving into the equities market?

Bond: I think it depends on the investment climate for IPOs. I mean, at the time that Reginald F. Lewis [CEO of TLC Beatrice] was considering doing his transaction, the appetite for IPOs was just not as strong as it was for the BET offering.

Brown: I saw Bob Johnson [BET's CEO] and he was very impressive. As Alan mentioned, it [BET] has everything right. You know, it has been in business for around 10 years. It has earnings and sales growth each year. So, it can tell a good story. And it has what I'd like to see as in investor and that's a renewable earnings stream. A good portion of the business can be regenerated next by adding a built-in contractural price increase to the cable systems. The only questionable area is advertising. Will BET be able to attract as many new advertisers as new cable subscribers?

I think the oppurtunity is there. Companies should look at the equity market because it's not just a source of capital, but also a way to liquefy personal wealth.

BE: Alan, I think I'd like to start with you in picking individual stocks. Primarily because I'd like to revisit some of your old friends, such as U>S> Surgical Corp. and your home-building stocks.

Bond: Okay. United States Surgical Corp. has been a fantastic stock for us. I get a lot of questions on that one because that stock trades at about 60 times its earnings. It was up 150% in 1991. The company has grown earnaings beyond what anyone imagined and deserves the lofty multople. In fact, their major competitor, which is Johnson & Johnson, is actually losing market share to them in the surgical suture business. So, we will stick with it. And if it were to fall back to 90, we'd be a buyer again.

In the case of te home-building stock, Home Depot Inc. has been very good to us. What it does is draw in the first-time home buyer who has purchased an existing home, and who wants to take an small projects.

BE: Okay. Who's new?

Bond: We would have to mention. The Stride Rite Corp. of course. Never names that I would add to the list are companies that don't have the lofty multiples. Names like the CML Group Inc., which makes the Nordic Track. We see orders for their exercise equipment increasing at a rate of about 60%. And I think they're probably goind to exceed most analysts' expectations in the coming year. Both CML and Stride Rite are selling at below-market multiples, which is new for me.

Forbes: We still like Microsoft, in spite of the fact that its P/E [price/earnings ratio] is very high. It seems as if it could be recession-proof. We also have a very strong drug component, American Home Products and Merck & Co. In terms of valuation plays, I'll mention Ford and GM; we're also seeing lower lows that previous recessions. Again, we like the banks.

BE: Provide a little more detail on each one.

Forbes: Well, we basically like Bankers Trust because it's got a fairly good balance sheet, even though its debt is higher than most. It still has an asset management portion that is bringing in a tremendous amount of money, impacting on the bottom line. We also like the retail specialty group, The GAP Inc. And we like Intel Corp., which is the heart and soul of the computer industry. That industry, as we know, is changing tremendously, moving from mainframes to PCs to minis to networks. And so, we're seeing a tremendous upheaval. It's an industry that we have liked very much in the past, but it's harder to find the things that we can live with. We also like Sun Microsystems Inc., which is the biggest in terms of the networking area.

BE: eddie, I know you also like Microsoft.

Brown: I still like Microsoft. Because they are really beginning to dominate the marketplace with their Windows software and with their upgraded version of DOS, the risk is not their products but rather the lawsuit with Apple Computer Inc. I don't think there will be a negative decision, but if there is, that's still a major risk for Microsfot.

I think I would scratch Waste Management Inc. from the list. They've run into some problems, and I think growth will be much, much slower, this stock has not lost money, but it has just stood still. I still would be a buyer of Office Depot Inc. It's the largest office warhouse-type of super store. A year or so ago, they bought their major competitor, Office Club Inc. So, now the two have formed a kind of national companu that is the largest in the industry. Staples is the second-largest. I like both of those companies. I think the growth will be 40% per year over the next three years.

And in the warehouse club area, of course, Sam's Wholesale Club is a major factor. But it's part of Wal-Mart Stores Inc. I think Wal-Mart is fairly rich [expensive] right now as a stock, but it's still great as a company to invest in.

My favorite, besides Microsoft in the software area, is a company called BMC Software. They are a major factor in the database market for the IBM environment. They make a lot of improvements, in terms of efficiency, on things that IBM does not provide for their system's buyers. It's also a fairly expensive stock selling at around 30 times the earnings. But again, I think the growth potential justifies it.

I would put Bristol-Myers Squibb Inc. on the list. It is a pharmaceutical company with a lot of new products on-stream. I would also throw PepsiCo Inc. in there. PepsiCo had some problems in terms of a slowdown in 1991, but I think it will be back on track this year, not only in the soft drink area but also in the snack foods and restaurant areas. I would throw in Harley-Davidson Inc. They have more demand than they can fill. I also have BET holdings on my list as a stock. I bought it on the offering; I still own it, and I would be a buyer today. In the specialty retailing area, I own The GAP. But Limited Stores Inc., on a relative basis, looks much more attractive.

BE: Are you at all attracted by an $86 IBM share?

Brown: I find IBM attractive in a perverse way. I don't and haven't owned IBM. I would look at IBM, maybe, as a substitute for a utility. I think it's much more attractive than some of the electrical utilities that might only grow earnings and dividends at maybe 3%, 5% at the most.

I try to stay away from what I consider the box type of [computer] companies, and try to go for the software side of the business. That's why I came up with Novell Inc., because there are so many boxes on the desk that have not been networked yet. Novell's networking software will dominate the low end of the marketplace, even though I think the stock is probably fully valued.

BE: Peggy, do you like Sun Microsystems?

Forbes: Well, it is the workstation of the future. They are the major player in that area. You need many more pieces of software to stick in that box that you do the boxes.

BE: So the attractiveness was not the workstation itself, but its ability to network?

Forbes: To network, yes.

Bond: Computers are really a commodity now. The business has changed. You can see it in the stock prices, where you have something like Compaq Computer Corp. that's gone from 50 to 25 [in 1991]. And the mistake that I think a lot of investors are making is they think these stocks have bottom out.

Sloan: We think that the financial services sector is going to continue to do well. And in that sector we'll be looking at NCNB Corp., a very aggressive North Carolina-based bank. Fannie Mae [Federal National Mortgage Association] is another one that we may look at.

We also happen to like utility stocks right now; they're a good defensive play. They give you a good yield. They're not going to have much depreciation in their market value, if any. Boston Edison is one of the utilities that we think is a good solid company. It's got a good yield, and we think it has some appreciation potential.

This spring, we'll look at early cyclical stocks. Liz Claiborne Inc. is one favorite of ours. We think that stock is going to do very well. It has no debt on its balance. Now, how many big retailers do you know that have no debt? It has tremendous growth potential. We expect it to look strong way into 1993.

We think the autos are going to start to recover. We are looking at Ford. They've trimmed back their expenses and their overhead. Chrysler Corp. is almost in line with Ford in terms of aggressiveness, however it doesn't have the production capabilities that Ford does. GM is getting left behind.
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Title Annotation:includes related articles on African-American securities firms
Author:McCoy, Frank
Publication:Black Enterprise
Article Type:Panel Discussion
Date:Apr 1, 1992
Previous Article:Slow and steady wins the profits.
Next Article:Picking the winners for 1992.

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