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BUSINESS WEEK ONLINE
October 25, 1999
Why "Magnet Investing" Has a Lot of Pull These Days
In a Q&A, Jordan Kimmel explains his stock-picking system and what he's buying -- and avoiding -- now
What's the market up to now? According Jordan Kimmel, president of Magnet Investing Group, it's nearly through a short-term market correction. Kimmel is putting his money where his prediction by selectively adding to his holdings. Kimmel employs a unique system that combines value and momentum principles of investing, which he dubs "magnet investing." He thinks tech stocks are a major driver of the market, but he has mainly made his money this year on nontech picks like 4KidsEntertainment.
Kimmel discussed his investing system along with his top five "magnet stock" picks for 2000, in a chat hosted by Business Week Online on America Online on Oct. 21. Here's an edited transcript of Kimmel's responses to questions from the audience and from Business Week Online moderator Jack Dierdorff. A complete version is available from BW Online on AOL, keyword: BW Talk.
Q: The stock market was off again today, by 94 points. How do you view the current trend?
A: Well, the trend is definitely still up, but we are in a short-term correction, and we are nearly through it. I am adding to quality stocks at this time without fear of further deterioration of the market.
Q: Define for us your concept of "magnet investing."
A: Magnet combines traditional value investing with a more current momentum investing, by selecting stocks in up trends that meet value criteria. We focus on companies with strong revenue growth trading at a discount to their growth rate and stocks that are trading in an upward direction. We find stocks that are attractive to three different kinds of people -- value, growth, and momentum investors. When we find one where all three characteristics exist at one time, we have a stock that will pull both institutions and individuals into it. That's what we mean by magnets.
In December, we ran two screens for stocks for our recently published book, Magnet Investing. We did both a simple and a complex search looking for magnets. As of this week, the simple search list was up 17%, and the complex search rose 49%. Only one company showed up on both searches and that was American Eagle Outfitters (AEOS), which continues to power ahead despite the softness of the retail sector.
Q: We saw Intel, IBM, and Dell preannounce bad earnings, but Microsoft and AOL come in with blowout numbers. What's happening in the PC arena, and how can investors profit from it?
A: There is a shift away from the hardware industry to the higher profit margin software and communications industries. I think IBM blaming its performance on Y2K is a copout. The real problem is that IBM lacked the sales component. What magnet is looking for are the faster growing companies with higher profit margins.
For example, we have several tech and communications companies on the focus list we do for First Montauk Securities, including Nokia and Comverse Technology (CMVT). The focus is on the industries with the margins, because even good management becomes ineffective at a company with slowing revenues and margins. I would not own any computer manufacturers like Compaq.
Q: What are your top five stock picks for 2000?
A: Nokia (NOK) is the world's second-largest wireless equipment company. It reported blowout earnings numbers today, and because it is a foreign company based in Finland, many U.S. investors haven't thought to invest in it and the institutional holdings are still quite low. It scores as one of the best magnet stocks in the communications industry. Salton (SFP) is a Midwest-based company that makes many household kitchen appliances. Its revenues are growing at triple digits and the p-e is at 13.
THQ Inc. (THQI) produces interactive video games with new titles coming out shortly that will take advantage of the wrestling phenomenon. Its continues to be the fastest growing company in this industry year after year. Loronix (LORX), which makes digital security systems, just settled a major patent-infringement lawsuit that enables it to grow at a 30% clip for the next several years. Hain (HAIN), the nation's largest distributor of health foods, is simply the single best food company to invest in now.
Q: When will AT&T get back in the saddle and start to move upward?
A: I believe AT&T bought too many puzzle parts that need to be fit together. It will take some time to achieve that task, and it may end up that they just overreached. I would personally look elsewhere unless you've owned the stock for at least a generation.
Q: What is going to happen to Walt Disney? It is not going up.
A: Disney is an example of a great company that is currently an unattractive stock. The problem is the institutions that dominate the market really have a problem with Disney's management and its recent loss of even more of its management talent. I would not expect the stock to get strong any time soon.
Q: What do you think of Pfizer?
A: I put Pfizer in the same camp with Coca-Cola and Disney -- leaders of a prior bull market. Despite its reputation and alleged deep pipeline of new products, Pfizer is valuation-rich, and I shorted the stock last year. I have covered the short but would not go long.
Q: Is Microsoft a core holding for any portfolio?
A: At this point, Microsoft represents 11% of the entire S&P, and I believe it's in an unstoppable growth trend. Wherever communication and technology goes Microsoft will be sure to lead. I have to say it is a core holding despite its high valuation. Add to it only on pullbacks, as the valuation is rich.
Q: As an investor, do you have any favorites in the Presidential race? And are there any issues that you would like to see Washington tackle that would make investors' lives easier?
A: I don't really have a political favorite. I think that the last several years have proven that the economy drives Washington, and the distinctions between Republicans and Democrats have blurred. The real issues for the stock market and the investor that need to be tackled are enhanced IRA and supplemental savings accounts, which would add further liquidity to the stock market. Eventually, I do expect to see Social Security money moved into the equity market, and that will add even more liquidity to this great market.
Q: Could you explain why EMC shares plummeted despite good earnings?
A: EMC is a great stock, but there are a lot of expectations surrounding it. A lot of tech stocks will run up prior to their earnings announcements, and even if they exceed expectations, they are likely to sell off. Get accustomed to this pattern and try to buy these stocks right after that disappointment. A great example this week was Lexmark (LXK), which gave a great entry opportunity following its earnings announcement.
Q: What do you think of @Home and Web content stocks like Infospace, especially compared to infrastructure stocks like Cisco?
A: I agree that the infrastructure has to be there, but there are other opportunities. I think Infoseek and MarketWatch are good bets. As far as infrastructure goes, JDS Uniphase (JDSU) is my favorite.
Q: What do you think of AOL?
A: I believe despite repeated institutions saying they would like to buy AOL on dips, it looks to me to be under distribution, which occurs when institutions begin talking up a stock as they are selling it. When a stock goes from strong institutional and venture-capitalist hands into public domain, you normally see the stock significantly lower two years out. I would be a seller.
Q: What do you believe accounts for the ability of fund managers to beat the S&P? Moving money into the tech sector?
A: No. I think it is stock selection because although I believe strongly in the tech sector this year I have made my bigger money on nontech stocks like 4KidsEntertainment (KIDE). So stock selection is the key, and of the five stocks that I recommended for next year, most are not technology.
EDITED BY LORI BONGIORNO
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10/24/99 8:54 PM |
