If there's an avid Dow watcher, it's William LeFevre, who has been more right than wrong in forecasting where the index is headed. His stock picks scored a heady 43% gain in the first half of 1995, beating the Dow's 20%. His strong showing, he says, was mainly due to bets on three big Dow-average components: Coca-Cola, Gillette, and Philip Morris. But as the Dow tops 4700, is he joining skeptics who see it riding for a fall?
Not a chance, says LeFevre, who writes a weekly letter, Monday Morning Market Memo, at Ehrenkrantz King Nussbaum in New York. He thinks the Dow is headed higher, driven by falling interest rates and climbing earnings. "This rise, which has broken many a bear's heart, is starting to confound even the bulls," he says. "Only a week ago, I was forecasting a 4800 Dow before 1996, but now 5000 could be hit before the end of 1995." The Federal Reserve's quarter-point cut in the federal-funds rate, to 5 3/4%, "gives this bull market a new lease on life."
LeFevre says the stocks to play for the rest of the year are Dow components AT&T (T), Philip Morris (MO), and Woolworth (Z).
Why AT&T? LeFevre points out that AT&T has yet to participate in the Dow's surge. AT&T, now at 54 5/8, hasn't budged much from its 52-week low of 47 1/4. The stock hit 64 3/4 in July, 1993. He thinks 60 is an easy target. Investor fears over a phone price war has it spooked. But LeFevre thinks investors will see that AT&T will be the hot player in this competitive business. Telecommunications is becoming more complicated and global, and "AT&T is the safest and best bet in it," he says.
Philip Morris' controversial cigarette operations continue to spew out large amounts of cash, which are poured into food and beverage units, notes LeFevre. Given its strong profit growth, the stock remains cheap, trading at a price-earnings ratio of 13, vs. the Dow's p-e of 16. He sees Philip Morris rising to a 15 p-e in 1995, which implies a stock price in the high 80s.
Woolworth is another Dow laggard: Now at 14 5/8, the shares are not far from their low of 13 1/2. "Talk about bargains--Woolworth is definitely a hell of a buy," says LeFevre. He says the giant retailer "will catch up with the Dow's mighty upward trek mighty soon." The economy can't have its recovery, he says, without consumers participating in it--and without retailers catching the bulk of that move. So LeFevre sees Woolworth rising to the mid-20s.