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Buy Now -- Or Kick Yourself Later?

A year from now, investors will be sorry if they didn't buy stocks in the current market. That's among the frank opinions of Mary Lehman MacLachlan, president and chief investment officer of She thinks the market is in the process of turning around, in a jagged line, which means it could get worse before it gets better.

MacLachlan believes in investing in three kinds of companies: world-class players such as Citicorp (C) and EMC (EMC), innovators such as Qualcomm (QCOM) and Amgen (AMGN), and good offbeat businesses such as McCormick (MKC) in spices. She is outspoken about voting for her beliefs with her money -- and thus would not buy Philip Morris (MO).

Among her other strong opinions is that new technologies may render the chip and satellite industries as they are now known irrelevant -- and that computer makers such as Compaq Computer (CPQ) and Dell Computer (DELL) need to reinvent themselves, because the business they led is now over.

These were some of the answers MacLachlan gave in a chat presented Apr. 12 by BusinessWeek Online on America Online. She was responding to questions from the online audience and from BW Associate Editor Toddi Gutner and Jack Dierdorff of BW Online. Edited excerpts from this chat follow. A complete transcript is available from BusinessWeek Online on AOL at keyword BW Talk.

Q: Mary, the stock market keeps raising our hopes (as it did most of this week) but then dashing them again. What's your outlook for investors as the year evolves?

A: The market is going to get worse before it gets better. Investors are going to take deep breaths and hold on. If you have cash, this is the time to put it to work.

Q: When you say that you should put your cash to work, what do you mean?

A: I think the market is turning around now. I think the climb up will be slow and not steady. We can expect a jagged line, but the market is about as low as it is going to go.

Q: Does that mean you recommend investors put cash into the market now?

A: Right now, I think they should look at the old solid faithful business of America -- health care, the consumer, energy, and financials not dependent on the stock market. The technology stocks were the ones that led us down into the abyss, and they will not be the first ones to lead us out.... There is so much that is either at the bottom or close to the bottom.... I like Citicorp and AIG

(American International Group). In health care, I like HealthSouth (HRC) and Universal Health Services (UHS). In energy, I like Enron (ENE). In computers, I like Dell.

Q: Would you be a buyer of large-cap tech stocks at these levels?

A: Yes. I would buy the proven global players. Some examples are Microsoft (MSFT), Intel (INTC), EMC


Q: Can you describe your stock-selection parameters?

A: Broadly speaking, I like three kinds of stocks. No. 1 are world-class, best-of-breed dominant players like Citicorp and EMC. They have outstanding market positions. If you overpay, it's not fatal. In the second category are interesting, innovative companies doing something unique or new in the marketplace. Examples of that would be wireless technology. Biotech would also be an example. The third category would be really cheap, off-the-radar-screen, good and exciting businesses. An example of that would be Forest Labs (FRX) in generic drugs. Another one would be McCormick, which makes spices.

Q: What are some examples of companies you like in your second category in wireless and biotech?

A: In wireless, I have always liked Qualcomm, and I still do. I think it is a very well-managed company seeking global dominance and acting locally in different markets. I think that biotech is the biggest revolution that I will ever see in my lifetime, and I have no real idea how to make money out of it yet. But I would put my money in those companies that seem to lead the pack, such as Amgen, Genentech (DNA), Celera (CRA). Celera's price is very depressed right now.

Q: Mary, Do you concern yourself with technical analysis in your stock selection?

A: Absolutely not. Technical analysis is for people who invest according to stock market action. I invest in businesses that I want to own and hope that they will do well, regardless of technical analysis of the market...

Q: What about AMZN (

A: I am a fan of Amazon. I think it is a long haul. I think they are the closest to getting online commerce right. Personally, I find the Amazon buying experience to be a unique experience that goes beyond what happens when you walk into a bookstore in terms of its ability to inspire consumers to buy more products. Another online commerce company I think is outstanding is eBay (EBAY). They have not only discovered a proven way to make money in retail, with no inventory costs, but they have also created a very obsessive community -- even close to addicted.

Q: What do you think of Philip Morris?

A: I don't own tobacco stocks. I believe in voting for my beliefs with my money. It is one of the advantages of capitalism.

Q: Opinions on the satellite business -- companies like LOR

(Loral) and NSAT


A: I think their star is dimming. Probably new technology will knock them out of orbit.

Q: Any thoughts on Yahoo! (YHOO)?

A: Yes. While they have a lot of subscribers, their business depends on an advertising model, and it looks like that model will ultimately be unsuccessful on the Internet. That's a polite way to say "sell it."

Q: How do you get your stock ideas?

A: Everywhere. I get most of them from the Internet because I have found the Internet to be the most efficient way to get generally superficial information quickly, and then I can research things more in depth if I'm interested. I am a huge consumer of the media. I read the Journal, BusinessWeek, Forbes, Fortune -- every financial publication there is. I also read three to four newspapers a day.

Q: Thoughts on CSCO

(Cisco Systems), please? Buy, strong buy?

A: Personally, I like Cisco, and I own it, and it is obviously at an interesting low. But almost everything I have read about Cisco lately has been negative, and these people know a lot more about Cisco than I do.

Q: Mary, how would you suggest an investor allocate assets now, as between cash, stocks, bonds, etc.?

A: Right now, if I were an investor who had at least a three-year horizon, I would invest substantially in stocks. By substantially, I mean 70% at least, because I really think this is the bottom.... Holding cash is not an investment. I don't own bonds.... But with people who need diversification, I would say no more than 20% to 30% bonds.

Q: Your opinion on J.C. Penney (JCP) -- buy, sell, or hold?

A: Sell JCP. They've lost their identity. There is too much competition and not enough pricing power.

Q: What stocks do you find really attractive now as a long-term investment? You've mentioned a few.

A: I think some of the drug stocks like Pfizer (PFE) and Bristol-Myers Squibb (BMY) are good long-term investments. As a long-term investment, I also like Goldman Sachs (GS) and Lehman Brothers (LEH). AOL Time Warner (AOL) is also a good one.

Q: Mary, what are your basic rules for investing?

A: Instead of worrying about specific stocks, people need to focus on at least two things: One, what are the overall goals for their investment portfolio? And two, what are the basic world trends that are going to represent growth, and how can they benefit from them? For example, an obvious one is the aging population. What opportunities and what problems does it present, and what businesses will benefit from this?

Q: Your thoughts on INTC (Intel) and the chip sector?

A: I don't know enough to give a wise opinion, but I believe that there may be new technologies that will make the chip sector as we understand it less important than it is now. I own Intel and will continue to own it for the near future because it has the dominant position in the world in the chip sector.

Q: Do you have any role models you follow when you invest?

A: Yes. My biggest role model is Warren Buffett. I always watch what Mario Gabelli (Gabelli Asset Management) is doing. I watch everybody, but those are the two main ones.

Q: But Buffett is a value player. Would you consider yourself one?

A: Yes, I do. I always like to buy low because there is more margin for error, and I've never understood the appeal of buying high in the hopes of something going higher. One of the reasons why hedge-fund managers can be so successful is that they can win by spotting when things are overvalued.

Q: Will the "box" sector -- i.e., Compaq, Dell, etc. -- ever come back?

A: I don't believe that "comeback" is the proper term. The business that they led is over. If they can reinvent themselves and adapt, they are very strong, well-managed companies.

Q: How do you feel about the Nasdaq as a whole in the next year or two?

A: I believe the Nasdaq will continue to be extremely volatile because that is the nature of the stocks that are listed there. However, probably at least 40% to 50% of your U.S. equity exposure should be on the Nasdaq because it tends to be the smaller-cap companies that can sometimes be the fastest-growing.

Q: What's your outlook for the economy, Mary? U-, V-, or L-shaped slowdown -- or recession?

A: I am a U. A V means it comes straight down and goes straight up. An L means it comes down and stays down. A U means it comes down, stays down for a period, and then goes back up. I am U because I think the going back up will start in the second half of the year.

Q: And any final investment insights you draw from that forecast?

A: Yes, absolutely. Since I believe this is the bottom or near the bottom, I also believe that a year from now, anyone who didn't put money in stocks will be kicking themselves.

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