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DJ SmartMoney: Growth Spurt: Racing Ahead, Our Growth Manager Cuts Loose A Disappointing Stock; And Our Value Manager Does Some Selling Of Her Own
Dow Jones Newswires
This story appears in the June issue of SmartMoney magazine.
By John A. Prestbo
Growth stocks continue to swagger through the market, giving the elbow to value. No wonder that in this second month of our money-manager marathon Robert Turner's growth portfolio aggressively widened its lead over Susan Byrne's group of value stocks.
But Turner isn't sitting back on his 12.8 percent gain this month. When one of his growth stocks does stumble, he quickly cuts it loose and moves on to the next prospect. He's pared stocks this way twice in as many months, this time with one of the better- known members of the 1960s Nifty Fifty list.
Byrne's 5 percent advance suits her slow-and- steady style. Nonetheless, she too parted company with a stock, albeit at a plump profit, to replace it with one she thinks has brighter prospects. And Byrne spent practically all of her cash fattening up a position in one of her original picks.
VALUE
Excited by E-Commerce
Susan Byrne: Westwood Management
I'm encouraged by the market. I see new sectors starting to take leadership roles. At this stage of the year, we're at the peak of cash inflows, so the flood of money will stop driving stock prices. The balance of this year is the "show me" part, where investors want to see on-target gains in sales and earnings.
This month I sold my PNC Bank (PNC) holding, taking a 16 percent profit. Nothing is wrong with PNC, but I had my eye on another stock that was very attractive, and I had to make room for it.
That stock is CNF Transportation. CNF has operations in regional trucking, international air freight, contract logistics, air transportation for the U.S. Postal Service, ocean forwarding and customs brokerage. Sales and earnings were up 16 percent last year, and I look for repeats of that magnitude or better.
What makes the stock exciting? CNF is the East Coast backbone of the Postal Service's Priority Mail assault on Federal Express. Catalog and e-commerce merchants can't bill customers unless they get signed receipts on delivery. For years FedEx owned that market, but now, just as e-commerce takes off, the Postal Service is coming on strong, and CNF is right in the thick of it by providing air service.
I think Regency Realty still looks very good despite the stock's performance. I like it so much, in fact, that I spent as much cash as I could to bring in more shares. Regency is a real estate investment trust with an excellent strategy. It buys down-at-the- heels shopping centers, then persuades a mainstream supermarket chain -- say, Safeway -- to move in and serve as anchor. Then it remodels the center. This fixer-upper strategy produces modest growth but good returns. Regency recently acquired a privately held company for stock, and some of those shareholders are taking advantage of their first opportunity to convert their holdings into cash. That's depressing the price, but it will be over soon. Meanwhile, the yield on Regency is a juicy 9 percent annually.
Among my other underperformers, I marvel at how the market keeps ignoring International Home Foods, which has so many well-known brands. Its earnings keep surprising analysts on the upside, and it's attractively priced. I'm stumped. The only thing I can imagine keeping it back is that the company, with a $1 billionmarket cap, is lumped in with small- cap stocks, which have been down for so long.
Sterling Software is being hurt by the market's concern over software makers. The fear is that Y2K problems will impede business for the next six to nine months. But management says business is on track. Maybe after its second fiscal quarter the gloom-and-doomers will be assuaged.
Alcoa surprised analysts with first-quarter earnings that were 11 percent better than had been predicted. Yet the stock jumped just 6 percent on the news. I guess in these days of Internet mania, aluminum is a little stodgy for big runups.
Finally, ABN Amro has gone nowhere, but its time will come. It's a low-risk, high-quality way to play a turnaround in emerging markets, particularly in Asia.
GROWTH
Gillette Loses Its Edge
Robert Turner: Turner Funds
The first disappointment in this portfolio, you'll recall, was Compaq (CPQ), which flagged analysts about slowing sales and plunging profits. I sold the stock on Mar. 1 for a 23 percent loss. Good timing: Now it's down 44 percent, and the CEO just lost his job.
Then disappointment No. 2 came along, and with Compaq fresh in mind, I haven't wasted any time reacting. This time it's Gillette (G), a Nifty Fifty relic, which I bought on Mar. 19 at $62 a share. The company did nothing to steer analysts away from its earnings projections, then it came out and said sales growth was slower than expected and that the problem wouldn't get fixed for a while. So I dumped Gillette on Apr. 6 at a 19 percent loss.
In both cases, I fell back on my experience with growth stocks: that the first piece of bad news is followed by more bad news. I also think Gillette's recent actions show a management credibility problem.
To replace it, I bought Citigroup. Financial services are doing much better this year, with interest rates down, and I think this company is making headway on melding the Travelers and Citicorp operations.
I'm keeping an eye on America Online. I originally put it into this portfolio with one of the lightest weightings because I thought it was about fairly valued at the time. The stock has almost doubled since then, and it now has one of this portfolio's heavier weightings. AOL undoubtedly is very fairly valued now, but I don't want to give up my exposure to the Internet stock phenomenon. So I'll keep close tabs on it.
I'm comfortable with the rest of the stocks in this portfolio. Motorola, in particular, remains a terrific stock. Its downtrodden semiconductor business is reviving ahead of schedule, and its digital wireless phones are in hot demand.
Fortunately, EMC, Sun Microsystems and Cisco aren't experiencing the sales slowdown that is plaguing Compaq, because these companies aren't out there in the retail trenches. Rather, they provide things like servers and data storage, which are critical for the way all computers work.
Merck is hanging in there awaiting approval by the Food and Drug Administration of its new arthritis drug, Vioxx. Wall Street thinks the drug will pass muster and become a hit. We'll know the FDA's decision by the time you pick up this issue.
Tyco International, maker of medical supplies and industrial equipment, just completed taking over AMP, which makes connectors, cables and panel assemblies. Get ready for Tyco stock to start moving. I've found that when a major acquisition is pending, the stock of the surviving company tends not to do much. I don't know if investors are bothered by that last shred of uncertainty or what, but the field just went wide open for Tyco shares.
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