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Roy Papp: "Dow -- 11,000" by Yearend

The stock market may have touched bottom on Thursday, Mar. 22. At least, that's the opinion of L. Roy Papp, founder and partner at investment firm L. Roy Papp & Associates in Phoenix. He's also co-portfolio manager of the Papp funds. Papp expects the market to be higher in six months, by which time technology stocks will turn around, too.

Papp is doing some buying for his funds, and he looks especially for stocks that have dropped for "foolish or emotional reasons." He considers Intel one of those stocks, as well as Interpublic Group, which he sees as benefiting from the desire of companies to do one-stop shopping for marketing all over the world.

The biggest holding in his funds is State Street Corp. For investors keen on the hot area of biotech, he suggests investing in major pharmaceutical names instead, on the thesis that the best biotech names will end up either partnering with or being bought by the big players. In that sector, he names Merck as a favorite stock.

These were among Papp's comments as a guest in a chat presented Mar. 29 by BusinessWeek Online on America Online. He was responding to questions from the audience and from Jack Dierdorff of BW Online. Following are edited excerpts from the chat. A full transcript is available from BusinessWeek Online on AOL, keyword: BW Talk.

Q: Thanks so much for being with us from Arizona, Roy. Does the market look any better from Phoenix than it does from closer to Wall Street?

A: Yes, the market looks better from here because we're not in the middle of all the rumors, fears -- and perhaps opportunities.

Q: So, what's your short-term outlook? Say, six months?

A: I think the market will be higher in six months than now. It probably won't be a lot higher, but I think we may have crossed the bottom last Thursday.... [Also, tech stocks] should begin improving within six months.

Q: What do you think about Xerox (XRX)? Is it a buy or a stay-away?

A: Xerox was the best-situated company in 1970. They were the most forward-looking, they had all the technology. But then somewhere down the line, the management blew it. Now I have questions about the company, and I would rather own companies that do not have their track record and their currrent situation.

Q: Are you buying anything for your funds now? And if so, what?

A: We're willing to buy some now. We prefer stocks that don't have a lot of damage or debt.... If we can find one that's dropped in price for foolish or emotional reasons, all the better. Our biggest holding is State Street Corp. (STT). The company is showing a gain in income, and the stock has dropped, due to market volatility. We think it's a good buy now. In techs, we're convinced Intel (INTC) will be one of the big winners in the long run.

Q: Any example of a company that has dropped for foolish or emotional reasons and you've bought?

A: Intel would be something of an example, since it has dropped a lot. It's nonsense that the company is going out of business. Interpublic (IPG), which is an advertising company, operates in more than 100 countries. There's a trend for marketers to look for one company to do everything, so I think this is a good pick for the long term as well. Don't get me wrong, I'm not suggesting this is going to be a winner this year.

Q: What do you think of Oracle (ORCL)?

A: It's a good company, and it will also do well. But I think Microsoft's (MSFT) fundamentals make it an even better buy.

Q: Do you like utilities? My favorite is American Water Works (AWK) -- your comments?

A: Generally, I would stay away from utilities, but I think water companies will prosper over the next few years and beyond. People don't think public water works are as safe as they once were.

Q: What about health-care stocks?

A: Health-care stocks are fundamentally attractive. They've been the premier growth stocks ever. Even though the government may get involved in health care, I think the pharmaceutical companies will still do well. I don't know of anyone who stops buying medicine for the family just because the economy is bad.

Q: Will my Coke stock (KO) ever come back to life? Should I sell?

A: Yes, it will come back to life, but I don't think it will ever go back to what it was two years ago. I don't see it going back there for a long time. But I would hold it if it was a low-cost stock when I bought it.

Q: How about Citigroup (C)?

A: Banks and insurance companies are not where you want to be. Therefore, I wouldn't be anxious to buy it.

Q: You've ruled out utilities, banks, and insurance companies. What areas would you favor right now?

A: Advertising firms are a good place to be. I think the nonbank banks, such as GE and State Street, are also good bets. I also think pharmaceuticals are attractive, and, obviously, I think some of the tech stocks will do well over the next few years.

Q: As the market has sagged, how have your funds held up? More redemptions?

A: We've seen fewer redemptions in the last few months than we did a year ago. Some of the funds have had net increases, but most have had redemptions.

Q: Any thoughts on Texas Instruments (TXN)?

A: It's a very good company. Semiconductors have been under pressure for months, but there are signs the sector is improving. I would definitely hold on to it, but it's a little gutsy to buy right now.

Q: Anything in the energy sector you hold and/or would recommend?

A: The price of oil has been declining recently. It's actually lower than it was a year ago. Given that fact, I think I'd rather not be buying into the top of the market now.... If we have a slowdown in the economy -- and I think we will -- energy stocks will come down some. So now is not the time to buy.

Q: Give me your opinion of IBM -- is it a buy?

A: IBM (IBM) still has a problem because it still sells the big networking computers -- and those sales are declining. They've tried to move into other areas -- service, parts, etc. That makes me leery. The price has come down, but I think there are other companies, such as Oracle or Microsoft, that are more attractive.

Q: If you had to pick three stocks to buy now and hold for five years, which ones [would they be]?

A: Tough question. But I think I would buy State Street Financial Services, Interpublic (advertising), and Merck (MRK) in pharmaceuticals.

Q: How much of your funds is in cash now?

A: We normally don't hold cash -- less than 1%. People buy stock funds because they want to own stocks. So we buy stocks because we said we would. Plus, it's hard to be a good market timer.

Q: How's the international market now?

A: The international economies are not doing well and are starting to do worse. When the U.S. sneezes, the rest of the world gets pneumonia. I'd stay away from foreign stocks, but if I wanted to be aggressive, I'd go for the American multinationals. It's a safer way of investing abroad.

Q: Do you like anything in biotech?

A: Biotech companies, which tend to always be selling at high prices and earning very little money, will get bought by or partner with larger pharmaceutical companies, nonetheless. So the pharmaceuticals are not as explosive, concentrated, or risky. Since you'd probably end up there [in pharmaceuticals] anyway, I'd buy in now.

Q: What's your prediction for the Dow and the Nasdaq at the end of the year?

A: Dow -- 11,000. And the Nasdaq -- 2,500.

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