Stocks worth buying now.
What to do now, you ask? Well, our roundtable participants have plenty of suggestions for investors looking for value and performance in the markets. Meeting in the New York headquarters of BE were: Barbara Bowles, The Kenwood Group (Chicago); James E. Francis, Beal Investment Co. (New York); Alexander P. Middleton, Merrill Lynch & Co. Inc. (New York) and Steven L. Sanders, Hunt & Sanders Investment Advisors (Philadelphia). The session was moderated by BE contributing Editor Frank McCoy. Generally, the group of experts expressed cautious optimism about the national economy, and expected that global economies would pick up the slack of any decline in domestic growth. The sectors the group found attractive: technology, health care, apparel, banking and the environment. Businesses with an international presence, and those driven by consumer-friendly technology or the growing service sector, also received high marks. We asked the pros to give us their best stock picks as the year comes to a close.
BE: Historically, quite a few of our readers have been interested in investing in socially responsible funds because they didn't want to invest in companies with interests in South Africa. As companies now move back into the South Africa of President Nelson Mandela--some more quickly than others--are socially responsible funds still attractive to the average investor?
BARBARA BOWLES: We try to invest in companies that are "multinational." Investing in multinational corporations helps to diversify your portfolio, particularly as the economies around the world are becoming more global in their thinking, their scope and the way they act.
As a portfolio manager who handles several church accounts, I understand that social investing has a place. However, I have found that the definition of social investing can vary among potential clients. Most of us invest in what we find comfortable.
For instance, the Kenwood Group, interestingly enough, is now considered a social investor. It does not have a social investing portfolio per se, but we have not found it exciting to invest in either casinos or tobacco companies. We have no desire to invest in those, and usually that's good enough for my clients who are interested in "social investing." Over time, statistics will show that there is a very slight difference between the performance of the regular index funds and the socially invested funds. So you're not really giving up a lot of performance when you invest in a socially responsible fund.
STEVEN L. SANDERS: When Mandela said get rid of the sanctions against South Africa, it changed that entire segment of investing because one of the big components of socially responsible investing was not investing in companies that were in South Africa. Now, it's probably going to be driven more by environmental issues. The interesting thing is the number of South African funds that are coming out within the next 12 to 18 months.
BE: Let's look at some of the specific stocks and why you think they are the ones to buy.
BOWLES: The first one that I wanted to talk about is H.F. Ahmanson, the leading savings and loan company in the United States. It's an attractive financial services company because it has benefited from a period of low interest rates, and it's a service entity as well as a mortgage lender. Ahmanson has improved its performance in the last year, particularly as interest rates came down. And we have not seen all of the benefits of the decline in interest rates for banks and for mortgage entities like Ahmanson.
The second company I want to highlight is a technology company, Adobe Systems. Adobe is a leader in printing-related software. It's also a leading producer of graphics software products. It has become attractive primarily because of an announcement of its planned acquisition of one of its competitors, Aldus Corp. Whether that acquisition takes place or not, I think this is an attractive company.
Caremark International is the leading marketer of home health care and prescription drug benefit services. Its stock sells at a discount to the industry and to the market, primarily because there have been some legal questions surrounding its marketing to doctors. We tend to like companies that have a cloud hanging over them--[stocks] that are cheap for what we consider to be a temporary reason. Caremark is a really good example of that. I think this company will grow at a rate of 15% to 17%, and it even pays dividends.
Finally, I would just like to briefly mention First Chicago Corp., the largest bank in Chicago. Not only have I liked this company for some time and made a lot of money with it, I have an historical attachment to First Chicago since I worked there for 13 years. The bank has a dividend yield of over 4% and excellent growth prospects. It is extremely well managed. I want to see it remain independent, but there is a possibility that it will be taken over at some point.
SANDERS: We're looking for the undiscovered or forgotten companies that are improving and changing the way we live, learn, enjoy leisure and do business. The first one is a company that we hear very little of but it has had an excellent track record and is poised to do really well in the future: Safeguard Scientific. What's interesting about buying Safeguard is that it's almost like purchasing a small mutual fund.
Safeguard is a publicly traded venture capital firm with direct investments in high technology companies. Safeguard invests in publicly and nonpublicly traded companies. It incubates there companies by providing capital, senior management support and administrative infrastructure. Its strategy is to invest in entrepreneurs who provide specialized skills and capabilities that serve underdeveloped yet potentially lucrative market niches. Safeguard has worked with such companies as Novelle Software, Cambridge Technology Partners and Laser Communications.
My next choice is Cintas Corp., which basically cleans and rents uniforms to the services industry. The company has grown mainly through acquisitions and controls something like 13% of a $3.5 billion market. Its earnings, over the next 12 months to the next five years, have a growth potential somewhere between 15% and 20%. As the service sector continues to grow, Cintas is going to do well, and most indications are that the service sector will continue to grow.
Next is Envirotest Systems Corp., which made the BE INDUSTRIAL/SERVICE 100 list [see June 1994 issue]. I really like Envirotest. It continues to win contracts around the country to test automobiles for emissions standards. As environmental testing becomes a higher priority, Envirotest is a great stock to own now before somebody else decides to buy them out.
I like Fiserve because it's in the financial services industry and is also driven by technology. It provides specialty data processing services to banks, thrifts and credit unions. Basically, Fiserve does a lot of the outsourcing that banks, thrifts and credit unions need to keep track of their customers and client base, including how often, how and where the ATMs are used. Fiserve has bought about 47 companies over the last couple of years, which gives it a large market presence. We anticipate growth of about 15% over the next couple of years.
My last pick is a software company called Broderbund Software. It was supposed to be acquired and the deal did not go through, which means it's still a great takeover buy. It's the largest software maker in the "edutainment" industry, and the leading developer and publisher of personal computer software for the home, school and small business markets.
ALEXANDER P. MIDDLETON: I like US Healthcare, the largest provider of health care in the business. It has no debt. It does business primarily in the New York/New Jersey/Connecticut area. It just moved into Delaware, Pennsylvania and Maryland. Whatever the health care legislation provides us, it's going to be a tremendous growth vehicle for health care companies.
Secondly, I like Nike, the largest provider of athletic apparel and footwear in the country. Its overseas business is dominant right now. The 1996 Atlanta Olympics is just going to propel the company to do better and better.
I also like Campbell Soup, over the long term. Sooner or later, we're going to see a consolidation of name brand food companies. I think that Nestles, as well as a few competitors in Europe are looking to buy a food company here.
Another stock I like is a company called Cisco Systems Inc., a networking company. It dominates market share by more than 60%, with no debt.
BE: Whenever anyone says "no debt," I see Barbara pick up her pen.
JAMES E. FRANCIS: I've got a few of those. I have two stocks in the engineering and construction areas. Fluor is the second largest engineering and construction company in the world--I think the best managed. Fluor is into mining, utilities and manufacturing [materials to rebuild] infrastructure. It is always a good value, but I think right now it is especially good.
Another firm that will benefit from similar advantages but has some other unique characteristics is Grupo Tribasa, the second largest construction company in Mexico. It won concessions from the Mexican government to build toll roads, which the firm will then own for 25 years. Tribasa is also slated to help build the country's expanding infrastructure. Grupo Tribasa is now seeking government concessions to build or expand power plants, water treatment systems, airports and ship ports. Because of its track record and financial stability, Grupo Tribasa will have a competitive advantage over other firms that want to compete for those contracts.
I also like Kenneth Cole Productions. Kenneth Cole designs shoes, primarily for men--you might have some in your closet. The interesting thing about this firm is that it has only five stores in the whole world. Its brand recognition is much greater than its actual representation in the market. It resisted licensing agreements that would have just put the Kenneth Cole name everywhere. So you've got strong brand recognition and extremely selective distribution, and now it's taking in money. Kenneth Cole has no debt and it's going to use the additional money to expand from five stores to 22 by 1996.
Another company in the technology area is Syntellect Inc., a developer and marketer of interactive voice response systems. It has over 10,000 systems installed worldwide. Recently, it made an installation for the largest pay-per-view provider in the country, so now, when you call to buy a pay-per-view event you're using a Syntellect system. When you check your bank account over the phone, you're using this type of system.
I would take a look at Eastman Kodak. The company has languished under poor management for 10 years. Kodak has recently brought in a new CEO as well as other key team members to turn the company around. Now it will focus on imaging, which is good because the company had become too diversified. Kodak had product areas that just weren't performing over the last 10 years, and it had an ineffective management unwilling to cut head count.
Now the company is reducing head count in two ways: by simply getting rid of some folks; and by spinning off all of its nonimaging businesses, which it has already started to do. Kodak is already in the process of selling its health care company. It was such a mismanaged company that I believe it can double its earnings per share just through efficiencies, without any increase in sales.
I also like Caterpillar because of its strong, worldwide opportunities. As these global markets continue to expand, Caterpillar should benefit from being the leader in earth-moving equipment. The international market will continue to propel growth for Caterpillar, even if the U.S. economy slows down.
Wells Fargo is worth a look now that it has initiated an aggressive buy-back program of their securities. It's going to buy up to a million shares per quarter for the next couple of years. That, coupled with attractive net interest margins, extremely good loan demand and fewer delinquencies for banks overall, will continue to drive that stock higher.
Banc One Corp. has completed a tremendous number of acquisitions between '90 and '93. It has made very good purchases, and although now the bank is kind of bloated, it's working through it with a management team that can deal with this--so I think the worst is over.
JAMES E. FRANCIS
Banc One Corp. (ONE: NYSE)
Caterpillar Inc. (CAT: NYSE)
Eastman Kodak Co. (EK: NYSE)
Fluor: (FLR: NYSE)
Grupo Tribasa: (GTR: NYSE)
Kenneth Cole Productions: (KCP: NYSE)
Syntellect Inc.: (SYNL: NASDAQ)
Wells Fargo & Co. (WFC: NYSE)
Francis, portfolio manager and president of the Beal Investment Co. in New York, believes that the performance of the auto industry sector will remain strong.
"Although there are those who don't expect much from autos," he observes, "I think there is still a lot of pent-up demand for new cars. The average car is eight years old. Interest rates on auto loans have not increased as much as other loans and it's just time for many consumers to replace their cars."
Other sectors favored by Francis include: oil (especially multinationals), technology (including producers of software, chip and local area networks), medical products and apparel.
Adobe Systems Inc.: (ADBE: NASDAQ)
Caremark International: (CK: NYSE)
First Chicago Corp.: (FNB: NYSE)
H.F. Ahmanson & Co.: (AHM: NYSE)
Bowles, of the Kenwood Group in Chicago, is attracted to the retail apparel sector because she anticipates an increase in consumer spending in that area.
"We are value managers at the Kenwood Group," she explains, "and apparel stocks are of value because they have certainly been in the doldrums for a number of years--and for good reason: Consumers have not been buying.
"I think that's about to change," she asserts. "It's time now for consumers to start replenishing their wardrobes."
Another sector favored by Bowles is health care, especially health maintenance organizations. "We think there is going to be consolidation in that industry," she says.
ALEXANDER P. MIDDLETON
Campbell Soup Co.: (CPB: NYSE)
Cisco Systems Inc.: (CSCO: NASDAQ)
Nike Inc.: (NKE: NYSE)
US Healthcare: (USHC: NASDAQ)
Middleton, of Merrill Lynch & Co. in New York, believes the environmental sector, and pollution control in particular, is a good place to look for investment value.
"The pollution control companies have been in the dumps for about three and a half years," he observes, while revealing that he anticipates a rebound. "President Clinton and Vice President Al Gore, who is a big stickler on the environment, have passed bills which favor the industry."
Middleton also likes food stocks, especially those with strong brand names. "There are some fantastic brand names out there selling at a discount value," he says. "I think that if you're a smart investor, you try to look for opportunities to buy such stocks when they are cheaper."
STEVEN L. SANDERS
Broderbund Software: (BROD: NASDAQ)
Cintas Corp.: (CTAS: NASDAQ)
Envirotest Systems Corp.: (ENVI: NYSE)
Fiserve Inc.: (FISV: NASDAQ)
Safeguard Scientific: (SFE: NYSE)
Sanders, of Hunt & Sanders Investment Advisors in Philadelphia, is "very high" on the sectors driven by technology.
"A lot of the changes in today's economy are being driven by the technology that companies in these sectors are bringing to bear," Sanders observes.
He sees the telecommunications industry, and companies that integrate systems and make the software and hardware that will form the infrastructure of the information highway, as strong performers. "The guys that make the boxes that will sit on top of the television and decipher and compress all of the information from the 500 channels will do well," he predicts.
BLACK ENTERPRISE convenes its Investment Roundtable twice a year. The next meeting will be reported in the Investment Special in the April 1995 issue.
For new stock picks each month and current investment strategies and advice, please refer to the Stock Picks section in the Moneywise department in each issue.
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|Title Annotation:||B.E. Money Management Special Section; a panel of stockbrokers discusses companies and industries|
|Article Type:||Panel Discussion|
|Date:||Oct 1, 1994|
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