February 3, 2000
Stock Pickers Ponder Moves
Following Double-Digit Gains
By GEORGETTE JASEN
Staff Reporter of THE WALL STREET JOURNAL
What now?
The pros are asking, too, after 13 of 15 big
brokerage firms in this column's quarterly
stock-picking survey posted double-digit
returns for last year's fourth quarter. Ten of
the firms beat or tied the 14.9% return, including dividends, on the
Standard & Poor's 500-stock index for the quarter.
"The world feels a little different now," says Michael Shea, director of
research at Prudential Securities in New York. "Last year you could buy
an idea and you didn't have to worry about the details. That's over."
Prudential, a unit of Prudential Insurance Co.
of America, led the 15 firms with a 31.8%
return on its Select Portfolio for the
October-December period. The portfolio
posted a 51.2% return, including dividends,
for all of 1999, one of nine to exceed the 21% on the S&P 500 for the
year.
Not surprisingly, the firms that did best had a heavy concentration of
technology stocks in their portfolios. Prudential's five top-performing
stocks in the fourth quarter were tech stocks, including two that more than
doubled in three months. Oracle soared 146.3%, and STMicroelectronics
jumped 104.5%.
"We made a conscious effort to overweight technology, and it paid off,"
says Al Jackson, director of research for second-place finisher, Credit
Suisse Group's Credit Suisse First Boston. Three of the names on its
Focus List-all tech stocks -- more than doubled in the quarter: Broadcom,
Nokia and Intuit.
Merrill Lynch & Co. attributes its improved performance in part to
stronger technology research. "We have more technology analysts, and
we're more confident of the technology names we have" on the list, says
Mason Rees, director of research for private clients. The firm moved into
fourth place in the latest quarter with a 20.5% return on its Focus One list
after posting a negative 5% return for a sixth-place finish in the previous
three months. Nokia, Merrill's top performer in the quarter and one of its
best performers for the year, was added to the list in October.
"Technology stocks are the growth stocks of our era. Period," says Jeffrey
Applegate, chief investment strategist at Lehman Brothers Holdings Inc.'s
Lehman Brothers, which placed third for the quarter with a 20.8% return
and third for the year with 42.9%. It is in first place for the latest five-year
period with a cumulative total return of nearly 325%. The firm's list of Ten
Uncommon Values includes six technology or telecommunications
companies, including KLA-Tencor, America Online and Microsoft. The
list also now includes Motorola, replacing General Instrument, which
Motorola acquired early this year.
But high valuations and rising interest rates leave many firms trying to
rejigger their portfolios to cope with what they see as a changing
environment. "Some of these stocks have come so far in such a short
period of time, we're questioning our weighting in technology," says Mr.
Jackson of Credit Suisse First Boston. The firm is looking for stocks in
other sectors to add, he says, although Intel was put on the list just a few
days ago.
"Even in technology and telecommunications ... the market is going to
gravitate to proven performers," says Prudential's Mr. Shea. "We're a little
more selective than we have been." In December, Prudential dropped
Gateway from its list and at the end of January it removed Compuware. It
added Compaq and Microsoft. The firm also trimmed its exposure to
retailing stocks, Mr. Shea says, and added oil-field services firm Baker
Hughes.
Few individuals would buy a firm's entire recommended list in one gulp, but
The Wall Street Journal's quarterly survey is intended to give investors an
idea of how they might do if they used the lists as a menu from which to
choose stocks. Calculations in the survey, done by Zacks Investment
Research in Chicago, take into account capital gains or losses, dividends
and theoretical trading commissions of 1% on each trade.
It was hard for brokerage firms to do well in the latest survey without
technology. "If you didn't own those eight or nine tech stocks that carried
the market, you didn't look too good," says David Otto, research director
for Edward Jones in St. Louis, which underperformed the S&P in both the
quarter and the year. Just 16% of his firm's portfolio is in tech stocks, he
says, compared with 30% for the benchmark S&P. But he says his firm is
sticking with its balanced, diversified portfolio, which he predicts will do
better once the market broadens a bit. "The prices ... are so high that it's
not wise to be putting too much new money into technology," he adds.
"There are some great industries and great companies out there that are a
lot cheaper."
But others say those companies are hard to find. "It's a lot easier to make a
decision about what to take off [the list] than to decide what to put on,"
says David Henwood, director of research for Raymond James Financial
Inc. in St. Petersburg, Fla. "Momentum has taken valuations to levels
where valuations have never been." The firm deleted four names from its
Focus List at the end of January without making any additions, although it
added Scientific-Atlanta, Plexus and Quanta Services earlier in the month.
Mr. Henwood is among those who expects the overall market to decline
over the coming months as investors focus on the Federal Reserve's moves
to increase interest rates. "To say right now that we have a really coherent
view of which stocks to recommend in the short term would be an
incorrect statement," he says.
Write to Georgette Jasen at georgette.jasen@wsj.com
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