SDLI recommended:
BOSTON (Dow Jones)--A passive investment style based on riding well-known,
large-cap stocks and index funds to gains is passe, and actively managed
portfolios comprised of mid-cap growth stocks are now in vogue, according to one
investment manager.
Joseph Battipaglia, chairman of investment policy at the investment advisory
firm Gruntal & Co., predicts that over the next five years, investment returns
will be more in line with the historic norm in an environment that will favor
active portfolio managers who ferret out reasonably priced stocks with the
potential for solid earnings growth.
Battipaglia told Dow Jones Newswires that the market is currently made up of
three "tiers," and the best opportunities lie in one and possibly two of them.
One tier is made up of large-cap, high-valuation internationally recognized
companies, including the so-called "nifty 50" companies. It includes Microsoft
Corp. (MSFT), Gillette Co. (G) and General Electric Co. (GE).
Their price movement can be viewed as "barometers" of overall market
sentiment, as investors move in and out of them based more on market perspective
than on changes in a company's underlying values, he said.
He advises remaining cautious on that group due to the high valuations.
The second tier is made up of growth stocks, the prime hunting ground of
active investment managers. It currently includes the technology,
pharmaceutical, consumer goods and financial services industries, Battipaglia
said.
"These stocks have more reasonable valuations," with price-to-earnings ratios
in the high teens to the low 20s. Many are posting better-than-expected third
quarter earnings that indicate the potential for future growth and share-price
appreciation, he said.
Battipaglia said buying select companies that supply components or services to
the "technology backbone of the Internet" is one of the best ways to play that
tier.
Among his picks are several large-cap stocks that might fit into the first
tier, but have the potential for continued, significant growth as the Internet
expands. Battipaglia's choices are Cisco Systems Inc. (CSCO), MCI WorldCom Inc.
(WCOM) and Intel Corp. (INTC).
Intel in particular looks like a good value, he said. "and it's a mystery to
me why it's off so badly."
Intel was trading around 72 last week, off a high of 89 1/2 Sept. 3, and was
at 78 Monday morning.
Two smaller-cap stocks he favors in that sector are two fiber-optic companies,
JDS Uniphase Corp. (JDSU) and SDL Inc. (SDLI). "They have relatively modest
market caps and should show double-digit growth," he said.
Technology stocks he would eschew for now include Amazon.com Inc. (AMZN) and
E-bay Inc. (EBAY), because the Internet-commerce models the companies represent
still haven't shown they can make the transition from "an e-business to a real
business" in terms of profits, Battipaglia said.
Another sector that should put in a strong performance next year after a so-so
1999 is the pharmaceutical industry, Battipaglia said.
Demographics indicate that aging baby boomers will drive the demand for new
drugs, and international demand will continue to rise as the rest of the world
catches up to the U.S. appetite for pharmaceuticals.
Among those Battipaglia recommends are Johnson and Johnson (JNJ), Merck & Co.
(MRK) , and a sleeper in Andrx Corp. (ADRX), which just reported third-quarter
earnings per share of $2.27 compared with 7 cents last year.
Andrx creates and sells controlled-release oral pharmaceuticals. Its shares
were as low as 18 1/2 one year ago, rose to 78 on June 30 and and were at 47
9/16 Monday.
The financial services sector is a quandary for many investors, Battipaglia
said, because of questions over how some companies will meet the challenges of
the Internet.
But he thinks Merrill Lynch & Co. (MER) stands out as a unique franchise with
world-recognized brand value. "This is truly a global financial services company
being challenged to respond to the Internet."
Electronic newcomers such as E*Trade Group Inc. (EGRP) and Ameritrade Holding
(AMTD) have been challengers, but they spend as much as $500 in advertising and
service costs to gain one new account, a fraction of what Merrill Lynch does.
And when customers' account balance and service demands increase, they tend to
move to a full-service shop such as Merrill Lynch rather than continue to trade
with an on-line discounter, he said.
The third market tier, which is essentially the balance of companies that
don't fit into the first two, Battipaglia identifies as a relatively tougher
place to pick a winner. It includes about 4,000 companies, but is dominated by
commodity stocks, such as metals, mining, oil and services such as restaurants.
The commodities sector in particular is very competitive right now with low
profit margins, and is seeing a consolidation phase, he said.
But he expects oil prices - which have been on the rise - to stabilize at
reasonable levels.
And if that thesis is right the transportation sector, including airlines,
railroads and freight forwarders, will benefit, he said.
Some of Battipaglia's picks include Southwest Airlines Co. (LUV) for its
management and cost controls; and Northwest Airlines Corp. (NWAC), because 30%
of its revenue comes from Asian routes, and as that region's economy improves,
so should air traffic.
Railroad stocks, which have been punished over the last year or so, should
also see renewed strength if Asian export demand rises. Among the winners could
be Burlington Northern Sante Fe Corp. (BNI), Norfolk Southern Corp. (NSC) and
Canadian Pacific Railway Co. (CPF), he said.
In consumer goods, Battipaglia said he expects favorable personal income and
spending trends to continue at the very least through Christmas, which should
benefit retailers including Wal-mart Stores Inc. (WMI), Nordstrom Inc. (JWN),
Limited Inc. (LTD) and Gap Inc. (GPS), he said.
"But I don't think Sears, Roebuck & Co. (S) can keep up," he said, and it has
also been slow to develop an Internet presence.
-Frank Byrt, Dow Jones Newswires; 617-654-6742 |
