What stocks to buy for '97.

The bull may be out of steam. But now's the time to grab it by the horns and hang on. Here's our expert panel's pick of the hottest stocks for the new year.

As Americans celebrated the Fourth of July with fireworks, the market experienced a different explosion. The Dow Jones industrial average dropped 115 points, and investors scurried about in a panic claiming that the sky was falling.

While the market didn't come crashing down, July did end up as the worst month of the '90s bull market. It was clear that the bull wasn't going to let the bear come out of hibernation for any length of time just yet. But investors would have to brace themselves for a little bucking as the market rose and then dropped a number of points--sometimes within a matter of days.

During the July doldrums, BLACK ENTERPRISE convened a roundtable of five investment brokers: Baunita Greer, president, Cromwell, Miller & Greer Inc.; Ron Scott, president and CEO, Nubian Asset Management; Richard Garriques, equity portfolio manager, Bond, Procope Capital Management; Lemuel Daniels, first vice president, Merrill Lynch; and Barbara Bowles, president and CEO, The Kenwood Group.

BE asked the pros to share their take on the market, and to give some specific stock picks for the long term. Despite a fascination with market timing, advisers agreed that the best strategy is to keep or put your money in stocks and ride out the market cycles.

BE: Are we going to be faced with a bear market now that the bull has retreated slightly? What can we expect with regard to inflation? Will the Fed raise interest rates?

BAUNITA GREER: No, I don't think that we'll be faced with a bear market. The market is fueled by strong companies' earnings and due to cost-containment measures, these earnings will remain up during the last half of 1996. Also, historically, a presidential election year ends with a bull market.

With respect to inflation, as recently reported, the unemployment rate is low, and generally when the unemployment rate is low, inflation rises. I think, however, that inflation will remain level because many people--though employed--have less disposable income. Some people who were unemployed for six to 12 months have accepted positions at considerably over salaries.

BARBARA BOWLES: In general, I think that since Federal Reserve Chairman Alan Greenspan has been reelected, there will be another increase in interest rates, probably in October. I expect that there will be a roughly 50 basis points rise between now and the end of 1996.

On the other hand, if you look at what the Republicans want, which includes affordability, we may not get that either. So, there are a number of crosscurrents that are taking place from an economic point of view. I think Baunita is right. The level of unemployment is not the real factor, it's the wages people are making. Their wage level has come down, although we're finally beginning to see some pickup in wages from those low levels. All of this suggests to me, once again, that we'll probably get another interest rate rise.

LEMUEL DANIELS: Historically, low inflation is about 2% or 3%. For this year alone, it's been about 4. 19%. I think we're all going through a very cautious, fine-tuning type of phase. The hourly wage figure went up 8/10% last month. The loan bond rate right now is 7. 19%. I do think the Fed is going to increase the rates. They have no choice based upon the numbers we're getting. I wouldn't be surprised if we see an inflation number which will be described as new inflation.

RICHARD GARRIQUES: What concerns me regarding the stock market is that since January we've had interest rates move up over 1%, as measured by the long-term bond rate--I'm not sure that this has been priced into the stock market. I think we may have a slight uptick in inflation. Going forward, the market is going to be very volatile. It will seem to most of us as if we spent the first six months making our money, only to spend the next six months trying to hold onto it.

BE: Is it the general belief that the market is going to be slow in the second half of the year?

BOWLES: We've had a very long bull market. Depending on how you define the bull market, it has either gone from 1980 to 1996, or it started in 1987. Either way, it's been one of the longest bull markets in history. And typically, the reason bull markets can last a long time is that you have relatively low inflation or declining inflation, relatively low unemployment or increasing employment, and good growth in the economy. We have had all of those things, some of which are coming to an end.

Up until now, the equity market has really been the only game in town. Some people still expect that it will be the only game in town, because the bond market has underperformed during the last three years. You have to question whether or not that's the market that people will move back into. Nobody is quite ready to go into real estate, and the international market hasn't been the panacea that we've all talked about. So, we may have a correction that's mild.

GREER: During the second half of the year the market will be choppy. We can expect to see a market correction after the first quarter of 1997, because earnings for that quarter will not be strong and investor confidence will fall. Revenues will be flat due to reduced individual disposable income. The market correction should be an opportunity for long-term investors to increase their portfolio by buying shares in companies that they have been following, shares which may have been overvalued previously. This will also be the time to add to existing shares of solid companies with low debt in their portfolio.

RON SCOTT: I think that newer investors' expectations are very short-term-oriented. I've never seen it like this before and I have 12 years experience in the business. A lot of people will ask: 'Can I make my money in three months?' If you don't have a time horizon of two-five years, you're going to miss the big gains, especially when you're talking technology and some of the other issues. If you're watching this market every day like it's the racetrack, you're going to confuse yourself. You'll probably get out of the market and not know when to get back in. There are just too many other variables. I would say for the benefit of the typical BE reader, if his time horizon is three-five years and not three-five months, they will be a lot better off.

GARRIQUES: Over the long term, the fundamentals play in your favor. But just to add to what Ron was saying, investors' expectations are just too high. The strength of the market over the past few years has led many people to have very high expectations. So, they've been conditioned to look for 40% a year. In some cases, the technology stocks they buy today double in two months. So, people have gotten accustomed to that. Now they are going to have to learn to temper their expectations.

BE: Barbara, I was hoping you could talk about investing in mutual funds, and yours in particular.

BOWLES: If you can't fully diversify your portfolio--and statistics actually show that you need 25-30 [different investments in your portfolio]--then maybe the best way for you to invest is in mutual funds. Once you decide that you want to invest in a mutual fund, you need to ask the whole risk question all over again. Some of them [investments] are technology-oriented, which are high-risk mutual funds. The Kenwood Fund is a well-diversified mutual fund with a risk level similar to, although slightly below, the S&P 500. Our minimum initial investment is $2,000.

BE: At this point, let's talk about particular sectors. Last year, the hot sectors were technology, financial services and health care. Which ones do you think will be hot in '97?

SCOTT: I continue to be a technology bull. It's treated our clients very well. We have seen a lot of premier companies get beaten down since last November. I have a list of stocks that are either in a turnaround situation or shouldn't have been as high as they were in the first place, at that period in time. Now, they can recover and go forward.

We are very bullish because of our position on the Internet. We feel that's going to bring a whole new investment landscape going forward. We feel that the Net is now a game of content and application. The real money is not going to be designing your Web page; you can do that yourself. The real money is going to be in the guys that are processing transactions over the Internet; those who are doing the advertising to bring in the consumers. So, we have found value in a couple of names. Don't get me wrong. This is a stock picker's market; it's a selective market. To go out and buy everything right now across-the-board, we don't think is prudent. And I will say this again: technology is a risky side of the market but you're compensated for that risk if you have the right stocks.

GARRIQUES: I particularly like the telecom equipment area. When you look at places like India, the Far East and certain countries in Africa, there is this drive to upgrade their infrastructure or to put in infrastructure where there was none to begin with. That's all driving the communications area. So, I think stocks in that sector are going to do extremely well.

BE: A lot of the tech companies have been the right stock for all the wrong reasons. Many of the fundamentals don't really apply to them. So, what are you supposed to look for when choosing stock?

GARRIQUES: One thing you have to understand is that Wall Street always overdoes things on the upside and on the downside. As an investor, you have to sit back and ask yourself, What is this stock really worth? Should a company that's growing at 30% be selling for a P/E [price/earnings] ratio of 200? Does that really make sense? So, yes, in many cases, the fundamentals do come into play. It might not come into play in the short term. I'm not trying to beat up on Prestek, but it's a stock that I've seen go from about $20 to more than $200. All of this happened in the span of little more than a year. You have a lot of good companies that move up based on fundamentals. However, the market tends to overshoot them some times, so you have to figure out whether you want to stay with them or take some profits, and revisit them at more attractive valuations. But the only way you can do that is if you understand what's driving the stock.

I also like health care; I'm not just a technology guy. Based on demographics, people are living longer; that's positive, and they want to have more active lives. People in their 70s are exercising more, trying to take better care of their bodies. Unfortunately, in many cases, that requires increased use of medication, pain relievers for muscle spasms or whatever. So, that plays well into the health care area.

BE: Are you talking about health care services as well or just pharmaceuticals?

GARRIQUES: Pharmaceuticals and some service companies. I like the idea of consolidating the hospitals. There are several companies--one is Columbia/ HCA Healthcare Corp.--that have done well. They are buying up hospitals and putting them together so they can squeeze some cost out of them. They make a lot of money doing that. I prefer the smaller ones though, such as Health Management Associates. Because of Columbia's huge base, its growth rate will begin to decline.

GREER: Health care is definitely an area we need to look at, particularly the HMOs. We're moving more from traditional companies to the HMOs, which will basically dominate in the 21st century. There are some good companies out there for investors.

BOWLES: Can I piggyback on the HMO point for a minute? We are bottom-up stock pickers, but that's an industry that keeps raising our antennae as being very attractive. Because of all of the bad publicity, people are not understanding what the HMO way of life will be like, and hospital consolidation has really not yet begun. We have found ourselves owning more than one HMO at the Kenwood Group, because they are very undervalued right now. There has been a tendency for people to put their health care money in drug stocks and also in hospital stocks. We actually believe that in the long run HMOs may grab up the hospitals rather than the other way around.

Some of us in this room are bottom-up stock pickers. You can have the best stock, but if it's in the wrong industry it will not do well for a period of time. Biotech stocks tend to move as a group. So, even if one is the best in that whole category, it's hard to outperform if the rest of the group is falling. So, that's where your question about industry versus stock dynamics comes in. At our company, we've found that we just do a better job picking the stock irrespective of the industry. But what we do is take a hard look at the industry to make sure it doesn't have any negative momentum at the time we are buying.

BE: Are there any other industries you would advise our readership to stay away from?

BOWLES: If I find an individual stock that I like, nine times out of ten, I'm going to find more than one in that industry. We are slightly overweighed in the HMOs, because there were two stocks that we found that we really liked.

Another category is energy, which actually has about a 10% weighting in the overall S&P. But up until very recently, we were overweighed in energy.

I'm not in the paper industry, because I made all my money in paper stocks last year. So far this year, I haven't seen any that are attractive to me. I'm way underweighted in utilities, but that may change, because I'm beginning to like utility stocks. But up until recently, I felt the stocks we had our eye on were overvalued relative to what we thought would happen with interest rates rising. Now I think we're getting closer to the top of the interest rate curve, and I may like utilities again if they yield over 6%.

We're overweighted in financials because I just love banks. I have a preference for banks and insurance companies, primarily because I think there's going to be greater consolidation in both these industries. When banks consolidate, people get laid off. These are not your low-level laborers, and so consequently, these institutions can make more money in the long term. But in the short term, there are some concerns [in the marketplace] about how interest rates will affect them.

DANIELS: I want to talk about the aging of the population, the baby boomers. I think that fits into the health care industry in a way. I also personally think it fits into entertainment/ leisure time, because you have more people who have accumulated a little wealth and want to enjoy themselves. I think that's one reason some of the casino stocks are doing better in Las Vegas.

I also like many of the telephone companies that are beginning to turn into small-growth companies. They're now beginning to get involved in cable, c e 11 u I a r phones and the like. That's a whole new industry that's growing especially in some of the developing countries, because the infrastructure makes it a lot cheaper to hook up cellular phones than it is to lay cables and wires.

GARRIQUES: When you say telephone companies, are you talking about the core of plain old telephone companies? Or regional Bells? Because I have some concerns about those since the passage of the Telecom Bill. Going forward, a lot of the services that we use now are going to become cheaper because of the competition. I think that's going to hurt some of these companies.

DANIELS: It creates opportunities, too.

GARRIQUES: It creates opportunities, but I don't know if it's going to hurt the local companies more or the long-distance ones--but it's going to hurt somebody. You can't have prices going down because of more competition, and companies not experiencing margin pressures. It just doesn't work. It's going to benefit consumers, not investors.

BOWLES: Some of the regional Bells have been very fat and happy for many years with labor; that's a very labor-intensive business. Certainly the one in our neighborhood, Ameritech, is laying off people left and right. I think it's because they're trying to prepare themselves for a lower growth margin.

DANIELS: But that's my point. They're going through a change. It creates opportunities for some of those companies to become very astute at marketing. Several of the telephone utility companies will develop into smallgrowth companies, because they are getting into a new market. And some of them still pay nice dividends.

BOWLES: We've had two overarching strategies since we've been in business. One is that we wanted to be in companies that benefited from the graying of America, and that's health care--and we've talked about that. The other overarching strategy is that we wanted to be in companies that were international in their thinking and scope. We haven't talked much about this issue, but in general we like multinationals. We think that they're going to take a little bit of a beating this year because of what's happened to the dollar. But for the most part, we like companies that can grow beyond the U.S. borders.

BE: Give us some stock recommendations, and explain why you think they are going to be particularly hot performers.

BOWLES: I want to highlight Century Telephone [Century Telephone Enterprises Inc.], a small telecommunications company. They are actually in two businesses. One is a local telephone business in the southern region, primarily Louisiana, and secondly, there is a cellular business. So, you get two plays: telephony and wireless communications. Century is another inexpensive company. It's selling about $31.00 a share. In 1997, it should earn $2.55. So, you can see it's a fairly inexpensive company. It sells at a multiple significantly lower than that of the market, and it's yielding about 1.1%.

The next company is a little larger than the kind of companies that we own. A bank stock, it's First Chicago NBD [First Chicago NBD Corp.]. It was a typical size for us until First Chicago merged with NBD. It's our history to continue owning companies that we like, even though they move out of our capitalization range. It's about a $13 billion dollar company, and has a very nice yield of about 3.6%. We expect the company to earn around $4.80 next year. The stock is selling at $39.00 a share, so it's selling at seven times the earnings. Most banks sell at discounts to the market. The market has been concerned about the reserve requirements for credit cards, and because of that, this stock has come down. What we like the most--particularly if we think that the fundamentals are intact--is a company with good growth prospects, that is, growth rates higher than the market.

SCOTT: Well, it's no secret that my picks are in technology. We believe at Nubian that there is a paradigm shift going on in technology, a virtual sea change. The stocks that I am going to present to you are new purchases by us, with a two-five-year time frame. There's no secret that we are heavy technology investors--that's been my success.

We do other industries, but they are a smaller part of what we do. We're technology players on the long and the short end, and I intend to grow the firm along those lines. My first pick is Sun Micro [Sun Microsystems Inc.]. Its Java language [Web programming language] is extraordinarily huge. People will be able to get software off the Internet, no matter what type of platform they use. Sun has made some very key alliances. I want to be in the right business at the right time, and I think that Sun is a definite buy, with the JAVA and now the LATA coming out--the latter is basically JAVA II.

We've made capital commitments to CyberCash. It went public in February at $17, and ran up to $64. It's now back at $46. We like them because they're players in the transaction processing game. The president of Verifone, who invented credit card processing, is now the president of CyberCash. Intel is a 5% owner, Softbank Holdings owns 13% and Verifone, 13%. We feel that commercialization of the Net is before us. And if there's going to be commercialization of the Net and people start buying things, CyberCash will be by far the fastest and the best position to capitalize on this trend. This is a company that we project will make $25 million in '97, and more than double that amount by the following year.

My last pick is Netscape, to which everyone always says 'oh.' Many people really don't understand this company, probably because they don't spend five to six hours every day surfing the Net like I do. If you surf the Net, you use a browser. If you use a browser, you use Netscape. It has an 80% market share, and it has been forecasted that by 1988 about 125 million people will be using the Net. As Internet's usage grows, you re going to see the demand; you'll have that software package and it's going to be Netscape. They are so far ahead of Microsoft, and there's no catching up. On the flip side, Netscape is down from $87 to $57. If you really believe that the Net is going to go away after billions of dollars have been spent putting the infrastructure in place, and after every firm out there has a Web page, then don't buy any of these stocks. But when you look at a two-five-year time horizon and you really believe that commercialization of the Net is going to be going forward in a big way, then these are the names that you probably want to be in.

GARRIQUES: We're large- and mid cap growth investors. We focus on picking stocks as opposed to selecting industries. I like Hospitality Franchise Systems (HFS). I'm sure everyone has heard of them. They recently bought Avis. It's a play on the whole consolidation theme. These guys are extremely talented. They don't really own the real estate, but they get a small fee for everything that passes through their franchises. For example, let's take Ramada Inn and Holiday Inn. HFS owns the name but not the buildings, so they have none of the underlying burden. They also do "preferred vendor agreements," which generates a tremendous amount of cash flow. I like the fact that management owns a significant amount of stocks. Their net worth is tied to the company's performance. HSF is now selling at about $64.

I also like Worldcom Inc., which is the fourth largest long-distance operator in the country. They really are biting on the heels of AT&T, MCI and Sprint. They sell telephone and data management services. They have a very strong niche among mid-size businesses. The company also provides long-distance service to several regional Bell telephone companies. Recently, they signed a major agreement with GTE. They're also positioning themselves to take advantage of the Internet. They're now trading at about $25, after a two-for-one split. It's not a cheap stock multiple-wise; but as long as they keeping getting contracts, they'll do well.

DANIELS: A company I like is Health Retirement Property, which is a REIT (real estate investment trust). I've always had this stock in my portfolio, and have been buying it since it was at $9. It's up to about $17 5/8. In 1995, their revenue base grew to $100 million dollars. Their real estate holdings exceeded a billion dollars, and their equity market share is now up to over a billion dollars.

Primarily, they own hospital buildings, with the emphasis on long-term care facilities, nursing homes and retirement homes--all the things that deal with the aging of the population. Their debt is only 20% of the total market cap. Over the next year or so, with the yield and the price of stock, you probably will see a 12% return. Management is very smart; they seem to know when to buy and sell the hospitals. I also like the fact that management owns roughly about 33% of the company. The dividend is $1.40.

I also like Duracell's [Duracell International] battery business. The stock is trading at $43.50, and its projected growth is 15%. It's a brand name leader in the worldwide market. The battery business is a $20 billion industry. What makes this company very interesting is the pager market, which includes about 63 million devices. Last year, a billion batteries were used by the pager business. Duracell is expanding into China, which is a $4 billion market, and are in the process of building a plant over there. They're also expanding their product line in high-powered batteries for laptop computers, cellular phones and other like devices.

I got involved with Duracell because I noticed that I was always buying their batteries for the toys my son plays with. So, I started researching the company. In keeping with my investment strategy, I try to get companies that my clients can identify with.

                      30 HOTTEST STOCK PICKS

                              BARBARA BOWLES
Company                       Exchange/Symbol        Price(*)

Amphenol                        NYSE: APH            $20
Century Telephone               NYSE: CTL            $33 1/4
First Chicago NBD               NYSE: FCN            $40 5/8
Kansas City Southern            NYSE: KSU            $39 7/8
Mylan Labs                      NYSE: MYL            $15

                             LEMUEL DANIELS

Company                        Exchange/Symbol       Price(*)

Alliance Capital Management    NYSE: AC             $25 1/8
Disney                         NYSE: DIS            $58 3/4
Duracell                       NYSE: DR             $45 7/8
Health & Retirement Prop       NYSE: HRP            $16 3/4
Intel                          NASDAQ: INTC         $78 1/8
Merck                          NYSE: MRK            $66 5/8
Motorola                       NYSE: MOT            $55 1/4


                               RICHARD GARRIQUES

Company                         Exchange/Symbol       Price(*)

Ceridian Corp.                  NYSE: CEN            $46
HBO & Co.                       NASDAQ: HOBC         $65 1/4
Health Management Assocs.       NYSE: HMA            $22 1/2
Hospitality Franchise Systems   NYSE: HFS            $61 1/4
Merck                           NYSE: MRK            $66 5/8
Paychex                         NASDAQ: PAYX         $44 3/4
Safeway                         NYSE: SWY            $37 3/4
Telabs                          NASDAQ: TLAB         $61 5/8
Westinghouse                    NYSE: WX             $16 7/8
WorldCom                        NASDAQ: WCOM         $27

                               BAUNITA GREER

Company                        Exchange/Symbol        Price(*)

American Health Care           NYSE: UAH             $ 99 5/8
BFT Holdings(**)               NYSE: BTV             $24 1/8
Granite Broadcasting(**)       NASDAQ: GBTVK         $12
Pixar                          NASDAQ: PIXR          $13 1/2

                               RON SCOTT

Company                       Exchange/Symbol         Price(*)

Apple Computer                NASDAQ: AAPL           $21
CyberCash                     NASDAQ: CYCH           $36
Netscape                      NASDAQ: NSCP           $44 1/8
Novell                        NASDAQ: NOVL           $10 3/4
Sun Microsystems              NASDAQ: SUNW           $55 5/8