Riding the bull
Reifman, Shlomo Z.
01/01/96
Forbes
Page 248
(COPYRIGHT 1996 Forbes, Inc.) Copyright 1996 Information Access
Company. All rights reserved.
THEY'RE BACK--a panel of money men we ask to name one favorite
stock to buy or to short for the New Year.
Last year's speculators did a so-so job. It being the kind of runaway bull
market it was, the recommended buys comfortably outperformed the
recommended sells. Our bulls made 31%, but that was disappointing in a
market that climbed 35%.
One short-seller from 1995 had a real winner. William Lambos, editor of
the BIG newsletter, advised investors to short Epitope, a maker of an oral
test for HIV.
Among last year's bulls, the smartest was Van Brady , a partner at
Presidio Management in San Francisco. Could he be the next Peter
Lynch? He's beaten the market seven years in a row. His 1995 pick,
Cambridge Technology Partners, a computer consulting firm, climbed
155%.
Last year's contestants and their results are shown in the table (see p.
249). Those who made money were given a chance to play again.
In a way our bears had the better showing last year--by dint of finding
stocks that trailed the market by 41 points--so let's give them first billing.
John Rogers Jr. is president of Chicago-based Ariel Capital Management,
which manages $1.5 billion in pension and other accounts. Rogers says
investors should short Cabletron Systems, a maker of cables and switches
for computer networks. Cabletron has been a winner for years, climbing
twentyfold since 1990.
Next bear: Bradford Ebner of Salus Capital Management in Los Angeles.
He recommends shorting Netscape Communications, the newly public
software company with the leading program for navigating the Internet.
The early Netscape skeptics have egg all over their faces. The stock came
out at a seemingly lofty 28. The shares shot to 461/4 and generated lots of
snickering.
Enough already, says Ebner. At this price Netscape was valued on Wall
Street at $6.4 billion, or 100 times the revenues it has garnered to date in
its entire history, and 489 times the 33 cents per share it's expected to
earn in 1996. "Mania ends in disaster," says Ebner.
Short Chesapeake Energy is the advice of Alan Gaines, of Gaines Berland
in New York. Chesapeake produces oil and gas. Its ratio of long-term
debt to equity is a frightening 324%. Gaines predicts the steep leverage,
coupled with weak operating income, will push the stock down by
two-thirds by the end of the year.
Michael Murphy, editor of the Overpriced Stock Service newsletter in
Half Moon Bay, Calif., is bearish on America Online. Increased
competition from the Internet is reducing the value of America Online's
service, says Murphy. For the 12 months ended in September, America
Online lost $45 million on revenue of $538 million. For this, Wall Street
rewards it with a market capitalization of $3.
Our last bear is Malcolm Lowenthal with Schroder Wertheim in New
York. His short recommendation: Organogenesis, a small biotechnology
firm pinning its future on federal approval of a skin replacement called
Grafskin. This product is supposed to treat patients with skin ulcers
caused by poor circulation. Organogenesis was projected to lose $1.24
per share in 1995 and another $1 in 1996. Lowenthal says that even with
Food & Drug Administration approval, Grafskin faces big competition
from less expensive wound-healing agents already on the market.
Want to bet, instead, on another good year in the stock market? Here are
our bulls.
Going for an eighth winner, Van Brady urges purchase of San
Diego-based FPA Medical Management, which keeps a lid on costs run
up by a network of primary care physicians associated with HMOs.
Brady expects earnings of 13 cents per share in 1995 and 40-cents-plus
in 1996.
Brett Sneed, a portfolio manager at Bull & Bear Group, a smallish fund
sponsor in New York, finished a strong second in 1995 with System
Software Associates, up 143%. This time he likes AmeriCredit, a firm that
provides financing for car buyers with below-average credit ratings. Sneed
is impresssed with the company's loan approval system and its ability to
limit loan losses. At its recent close, AmeriCredit goes for 2.
Gruntal & Co.'s veteran drug industry analyst, David Saks, did well in his
first appearance, with a 54% gain in IVAX. His new favorite is Royce
Laboratories, a Miami-based generic drug maker. With 11 generic drugs
awaiting FDA approval and another 20 in development, Saks expects
profits of at least 90 cents a share in 1996.
Lesa Sroufe, director of research at brokerage Ragen MacKenzie in
Seattle, gained 36% with Washington Energy. Not bad for a sleepy gas
utility stock. Her 1996 pick: Dress Barn, a women's clothing retailer selling
for just 1.2 times book value and 11.9 times trailing earnings. Unlike most
retailers these days, Dress Barn has a strong balance sheet: Long-term
debt is a tiny 2% of equity.
Philip Smith of Deerfield, Ill.-based Alphi Investment Management Co. is
a new player. He would buy IVF America, a Purchase, N.Y.-based
manager of infertility clinics (seven open and another seven scheduled to
open this year). For the first time since going public three years ago, IVF
showed a slight profit in the second quarter. Smith is impressed by IVF's
new chief executive, Gerardo Canet, and expects the company to earn 15
cents a share from operations in 1996.
Steven Abernathy, director of the Private Client Group at broker Cowen
& Co., is bullish on Value Health. This firm handles administrative chores
for drug addiction treatment programs and mental health clinics.
At a recent 28 1/2, the stock is off a third from its February high. Reason
for the decline: a bad acquisition in July of mail-order pharmacy
Diagnostek. Abernathy says that mistake is behind Value Health now:
Revenues will grow 21% in 1996 from 1995's estimated $1.
Hirsch International, a distributor of commercial embroidery machinery, is
the choice of Andrew Abrams of Abrams Investment Partners in New
York City. Hirsch has new software that enables embroidery machines to
be programmed from a scanned picture, thereby saving hours of
production and setup time. Abrams thinks the stock will trade at 15 times
estimated 1996 earnings of $1.
Lawrence Auriana, comanager of the $2.3 billion Kaufmann Fund, makes
a bet on Neopath, a firm developing an automated Pap-smear reader. For
now, Neopath's machine has been approved for quality control purposes.
Auriana expects the FDA to allow Neopath to lease its machine as a
primary screening device.
Michael Price, whose Mutual Series funds have appeared on the Forbes
honor roll for the past three years, thinks the best play of the new year is
U S West Media Group. This is a recent spinoff from U S West, the
regional phone company. Price values the company's assets, which include
cable TV, wireless telephone licenses and a minority stake in Time
Warner, at half again the stock price.
The well-known mutual fund manager Mario Gabelli joins our contest with
Nortek, a maker of ventilation systems and other building products. At a
recent 9 7/8, Nortek is priced at just seven times trailing earnings and
slightly less than book value.
Last year's two international stock pickers fared poorly, as did the pool
they were fishing in. Measured in U.S. dollars, the Morgan Stanley EAFE
international index is up just 5.8% over the last 12 months.
James Bogin, a portfolio manager at GT Global in San Francisco, likes Sri
Lankan conglomerate John Keells Holdings. In the past 12 months this
nation's tiny market slumped 39% in U.S. dollars. But Bogin predicts the
political climate will improve and Keells' hotels and food and beverage
operations will benefit.
Aladdin Knowledge Systems, an Israeli software company, is the pick of
Manchester Capital Management's Edward Cronin Jr. He cites growing
demand for Aladdin's computer piracy protection software and potential
from several new products.
No guarantees, but ideas aplenty for the venturesome investor.
The bulls like these stocks.
Name/affiliation Stock Ticker Recent
symbol price
Steven Abernathy/Cowen & Co Value Health VH 28 1/2
Andrew Abrams/Abrams Investment Partners
Hirsch International HRSH 14
Lawrence Auriana/Kaufmann Fund Neopath NPTH 21 3/4
James Bogin/GT Global John Keells Holdings JKH 3
Van Brady /Presidio Management FPA Medical FPAM 6
Management
Edward Cronin Jr/Manchester Capital Management
Aladdin Knowledge Systems ALDNF 8 5/8
Mario Gabelli/Gabelli Asset Management
Nortek NTK 9 7/8
Michael Price/Heine Securities
U S West Media Group UMG 19 1/4
David Saks/Gruntal & Co Royce Laboratories RLAB 8 7/8
Philip Smith/Alphi Investment Management
IVF America IVFA 2 1/2
Brett Sneed/Bull & Bear Group AmeriCredit ACF 12 3/8
Lesa Sroufe/Ragen MacKenzie Dress Barn DBRN 9 5/8
Last year's results
The bulls were embarrassed.
Name/affiliation Stock %
change
Van Brady /Presidio Management
Cambridge Tech Partners 155
Brett Sneed/Bull & Bear Group
System Software Associates 143
David Saks/Gruntal & Co Ivax 54
Lesa Sroufe/Ragen MacKenzie Washington Energy 36
Alison Bisno/Stephens Capital Management Citation 25
Michael Kassen/Neuberger & Berman Progressive 25
Gregory Weiss/Investment Quality Trends Chemed 16
Paul Stephens/Robertson Stephens Contrarian Fund
McMoRan Oil & Gas 7
Madelynn Matlock/Bartlett & Co
Instituto Mobiliare (ADR) -1
Theodore Rosenberg/Burney Co MicroAge -16
Leopoldo Guzman/Guzman & Co Grupo Televisa (ADR) -33
Kurt Kammerer/Unterberg Harris
Professional Sports Care Mgmt -38
. . . the bears were vindicated
William Lambos/BIG newsletter Epitope -55
Ranjan Tandon/Libra Advisors IP Timberlands, LP -7
Robert Lang/Lang Asset Management Hilton Hotels -4
William Lyons/Short On Value Nextel Communications 3
Evan Sturza/Sturza's Medical Investment Letter
Glaxo Wellcome (ADR) 35 |
