Callaway Golf made Glassman's list of stocks to own in '98.
10 Intriguing Stocks to Consider for '98
By James K. Glassman
Washington Post Staff Writer
Sunday, January 18, 1998; Page H01
Over the past three years, the average stock has more than doubled. Can this record-breaking string continue? We can only try.
In 1995, I started compiling an annual list of 10 stocks to ponder for the year ahead, culling selections from the choices of folks whose opinions I valued. Over the past three years, the lists have returned roughly what the broad market has - an annual average of 29.4 percent, vs. 30.2 percent for the Standard & Poor's 500-stock index.
Last year's results reflected the volatility of shares in general. Four of the 10 stocks gained 50 percent or more, but three fell in price - in one case (Computervision Corp.) by a sickening 41.7 percent. The biggest winner, up 81 percent, was Sea Containers Ltd., which operates ferries, ports, hotels and trains, including the famous Orient Express.
The list teaches a good lesson: You need some diversification, but not a lot. A 10-stock portfolio can usually come close to duplicating the market's record, as long as you choose companies in different businesses.
Here's my 1998 list (in alphabetical order), with the usual warnings: First, I don't believe in owning stocks for only a year, so the shares should be considered long-term holdings. Second, these stocks are the selections of other analysts. They're not mine - under The Washington Post's conflict-of-interest rules, I don't buy individual stocks. But they do reflect my bias for "value" stocks - that is, companies that seem to be unreasonably shunned (or even detested) by investors. Third, don't run out and buy the whole portfolio; instead, use these little blurbs as a starting point, not an ending, for your own research. Fourth, no guarantees.
Anchor Gaming (symbol: SLOT; price, as of Friday, $61.62 1/2). Charles Allmon, the delightful curmudgeon who edits the Growth Stock Outlook newsletter (301-654-5205), is a poor market timer but a great stock picker. His model portfolio comprises only six companies, the largest holding being Anchor, a Las Vegas firm that operates gaming machines in space leased from stores and bars and runs a couple of casinos.
Anchor, like many gambling stocks, has been clobbered lately - off 35 percent since October. But the company's earnings for the past 12 months are up 70 percent, and its price-to-earnings ratio is just 14. And, typically for a company beloved of Allmon, its balance sheet is strong, with a good deal of cash and almost no debt.
Archer Daniels Midland Co. (ADM, $21.68 3/4). According to the Hulbert Financial Digest, which tracks the performance of newsletters, Investment Quality Trends (619-459-3818) is one of only five (of 59) that, over the past 10 years, has scored above-average ratings in both up and down markets. Since 1998 could be a tough year, that's reassurance. The editor, Gregory Weiss, recently alerted readers to ADM, the giant agribusiness company that pleaded guilty in a famous 1996 price-fixing case.
"Nowadays," says Weiss, "investor concerns have shifted from the courthouse to the marketplace." Market conditions are difficult, he adds, but the stock's price has been dead in the water, leading the editor to conclude that the downside is only about 10 percent while the upside is more than 100 percent.
Atlantic Richfield Co. (ARC, $78.50). Like most integrated petroleum companies, Arco's stock has been falling lately as the price of oil has dropped on the bad news in Asia and the broad decline in commodity prices. That's exactly why New Jersey money manager David Dreman, author of "The New Contrarian Investment Strategy," likes it. Dreman, who is also a columnist for Forbes and the founder of some of the best value funds in the business, believes that earnings estimates for most stocks, especially technology shares, are too high.
But Arco trades at a modest P/E ratio of 13 and carries a dividend yield of 3.7 percent, compared with the average S&P stock's P/E of 24 and yield of 1.6 percent. It's doubtful Arco will be a big winner - its shares aren't that volatile - but it may be just right for investors who prefer a smoother ride.
Callaway Golf Co. (ELY, $28.87 1/2). This stock is one of the great mysteries of the market. It makes superb products - notably those Big Bertha oversized metal woods. Year after year, it churns out profits at fabulous margins. It has no long-term debt, a return on equity of 42 percent and earnings that grow at 20 percent-plus. Yet the stock has fallen 25 percent in the past six months and trades at a P/E ratio of 12, based on 1998 earnings estimates.
The worries, as usual, seem to be competition, which never quite materializes, and the possibility of saturation, which hasn't happened either. Callaway is one of the 10 stocks on the focus list (a recommended purchase) of Dow Theory Forecasts (219-931-6480), one of my favorite newsletters. Someday the market will price it right.
Compaq Computer Corp. (CPQ, $59.12 1/2). By the numbers, William Miller may be the best mutual fund manager in America. Over the past three years, his Legg Mason Value Trust (1-800-577-8589) has the No. 1 record among all the funds tracked by Lipper Analytical Services Inc., returning an annual average of 37.6 percent, compared with 29 percent for the S&P 500. As a classic bargain hunter, he looks for undervalued stocks and holds on to them for a long time.
Among Miller's recent favorites stocks is Compaq, the computer maker, which he was buying heavily in the fourth quarter of last year. Disappointing earnings and worries about Asia have knocked the price down $20 since September, but the company has a ton of cash, and sales are rising at a 25 percent clip. Based on expected earnings for this year, the stock trades at a reasonable P/E ratio in mid-teens.
Electronic Data Systems Corp. (EDS, $41.75). EDS is the huge computer consulting firm that was founded by Ross Perot, bought by General Motors Corp., then spun off on its own. It has a great brand name, only two significant worldwide competitors and strong sales growth. But the company just can't seem to make much money. For those reasons, it's just the kind of stock that Robert Torray, manager of the hugely successful Torray Fund (1-800-443- 3036) in Bethesda, finds attractive.
"Very big companies that have strong positions in an industry generally make good investments," says Torray, whose fund has whipped the S&P by an average of 8 points annually. EDS just signed a big contract with the Australian government and has been solving year 2000 computer glitches around the globe.
Leucadia National Corp. (LUK, $35.18 3/4). This is no run-of-the-mill stock. Leucadia is a holding company, in the style of Warren Buffett's Berkshire Hathaway Inc., that owns an array of businesses, including some specialized insurance firms, a plastics company, the Pepsi bottler in Kazakhstan and a piece of the world's largest pulp mill. Leucadia also has loads of cash, having recently sold Colonial Penn Property and Casualty Group for $1 billion. What you're buying, then, is almost a blind pool, but not a risky one.
"You've got really smart guys allocating the capital," says Christopher Niemczewski of Marshfield Associates, an excellent Washington money-management firm with a knack for finding value. Marshfield has been enthusiastically buying Leucadia (and little else) for its clients. Leucadia is trading roughly at book value, or the net worth on the balance sheet, and roughly half of that value is cash.
MedImmune Inc. (MEDI, $41.37 1/2). With a list heavily weighted toward value stocks, we need at least one high flier. Gaithersburg-based MedImmune develops products for drugs for transplantation medicine and infectious diseases, including pneumonia. It recently signed a worldwide marketing deal with Abbott Laboratories on what appear to be very good terms. "We believe," write analysts Douglas Lind and Christopher Leonard of Morgan Stanley Dean Witter in a recent report, "MedImmune will be one of our most compelling biotechnology plays over the next 12 to 18 months, and we reiterate our Strong Buy rating on the stock." It's not cheap, having more than tripled since May, and it's still not making any profits.
Pharmacia & Upjohn Inc. (PNU, $35). A few years ago, a group of old-line Wall Street money managers with a remarkable record for picking undervalued stocks started an international mutual fund called Tweedy, Browne Global Value (1-800-432- 4789). Predictably, it's performed well in a tough market. The fund's second-largest holding is Pharmacia & Upjohn, and lately managers Will and Chris Browne and John Spears have been buying more.
"Of all the pharmaceutical companies," they recently told shareholders, "this one sells at the lowest price-to-sales ratio and ... has been the object of significant insider buying." The stock has rallied in the past few months but still trades 20 percent below its June 1996 high.
Supreme Industries Inc. (STS, $9.06 1/4). Last year, Jay Weinstein, the small-cap guru who runs Oak Forest Investment Management in Bethesda, recommended Astronics Corp., a tiny maker of electronics and packaging. It rose by two-thirds, making it the second-best on our list of 10. This year he still likes Astronics, but, pushed for a little variety, he told me he was high on Supreme, which makes specialized truck bodies and vans. Only one analyst follows the stock, and he figures that the company's profit this year will be $1.04 a share, for a P/E ratio of 9.
Weinstein says he has a high degree of confidence in that estimate, which makes Supreme "a pretty inexpensive stock." He calls the firm "a well-run outfit that should reap the rewards of the investing cycle," having recently opened plants in Honduras and Indiana.
HOW PREDICTABLE?
These are the 1997 results of the stocks recommended a year ago.
Stock Recommended by Total return*
Arrow Electronics FPA Capital Fund 8.3%
Astronics Jay Weinstein 66.7
Computervision Turnaround Letter - 41.7
Crescent Real Estate Realty Stock Review 57.1
Fiat Kenneth Fisher - 5.7
Fuji Photo Film SoGen International
Fund 34.5
McDonald's Warren Buffett** 7.1
Pep Boys Value Line - 17.5
Sea Containers Prudent Speculator 81.0
U.S. West Media Michael Price 58.6
1997 total portfolio return 24.9%
S&P 500 return 26.8
Dow Jones industrials return 17.3
*For one year ended Jan. 14, 1998. All figures include dividends reinvested in stock or index.
**Stock purchased by Berkshire Hathaway Inc., chaired by Buffett
SOURCE: Bloomberg News
Copyright c 1998 The Washington Post Company
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