Four Pros Make Their Picks And Two Take Their LumpsGeoffrey Smith
Finding a red-hot stock in today's market is not easy. But Joe Scott-Plummer, an investment manager from Scotland, did just that. He identified a Peruvian telephone company whose shares are up a stellar 77.6% so far this year. None of his other stock picks worked nearly as well, but the Peruvian investment puts Plummer at the head of the pack of four investment pros participating in BUSINESS WEEK's annual stock-picking contest. Last December, we asked four experts to invest a hypothetical $10,000 in each of 10 stocks. At midyear, Plummer's portfolio of foreign stocks is up 5.7%. His picks are beating the Standard & Poor's 500-stock index, which has fallen 1.5% over the same period.
The other three investors focused their investments on U.S. stocks and bought near the peak of the market, which began slumping in February. All the portfolios lost money, although one stayed a hair ahead of the S&P. But the remaining two turned in abysmal performances--double-digit negative returns, largely due to their positions in the hard-hit technology and biotech sectors.
SAVVY MOVE. Runner-up is Peter C. Bennett, chief investment officer of State Street Research & Management Co. in Boston. He correctly picked two technology stocks that were big winners, but they weren't enough to offset the effect of one stock--IDB Communications--which crashed on June 1. He finished down 1.3%. Small-stock specialist Elizabeth B. Dater, who runs the Emerging Growth Fund at Warburg Pincus Counsellors Inc., chose a portfolio of stocks that is down 12.2%, chiefly because of bum investments in high-tech companies and a biotech firm. Technology specialist Michael Murphy, editor of the Overpriced Stocks newsletter and California Technology Stock Letter, was down 16.3%. His loss was mitigated by a savvy decision to sell one stock, Waterhouse Investor Services Inc., short, a move that produced a 41.6% gain.
All the investors are optimistic that at least some of their stocks will bounce back in the second half. They each took advantage of the opportunity BUSINESS WEEK allows in this contest to sell one stock and buy something else.
Plummer, who is chief investment officer for Martin Currie Investment Management Ltd. in Edinburgh, describes himself as a "growth manager with value" who invests primarily in emerging markets. Compaa Peruana de Telefonos, his best pick, behaved more like a highflier, gaining 77.6% after considering the effect of exchange rates. The company is an example of "what can happen to telecommunication stocks when people take steps to move into the modern world," says Plummer. CPT remains his top pick for the next six months.
To bolster his portfolio for the second half, Plummer wants to sell one of his losers: Hongkong Shanghai Banking Corp., down 10.3%. He wants to buy a stock on the Thailand Exchange, Bangkok Bank Public Co., which is trading at $8.40 a share in U.S. dollars, and which Plummer says will have loan growth of 18% to 20% a year.
Bennett would have beaten the S&P handily had it not been for one unfortunate investment. On June 1, shares in IDB Communications tanked by 57% after the company disclosed a dispute with its accountant. IDB's shares have recovered somewhat but are still down 47% since Bennett bought them.
The rest of Bennett's portfolio includes two big winners: Millipore Corp., a biotech and semiconductor industry supplier recovering from tough times, is up 49.7%. And Sybase Inc., a hot software concern, is up 40.9%. Bennett is less enthusiastic about his other software pick, Cisco Systems Inc., which is down 16.5%. He wants to sell Cisco and buy Chubb Corp., which he sees as benefiting from higher premiums.
Dater's diversified portfolio was designed with an economic recovery in mind. She was right on the economy, but even so, most of the losers in her portfolio lost big. Her biggest loser: Gensia Pharmaceuticals, down 47% in tandem with the rest of the biotech sector. Meanwhile, her best performer, Methode Electronics, was up just 22%.
For her midyear switch, Dater wants to dump Auspex Systems Inc. and buy Commerce Clearing House Inc. She thinks new management at Commerce, a publisher of tax information for corporations, will produce annual earnings growth of 20% to 25%.
Murphy's experience clearly shows the risks in narrowly concentrated portfolios. All but two of his stocks are in technology and biotech, and all but two of those are down at least 9%.
UPSIDE SURPRISE? Murphy sold two stocks short and came out with a gain of 13.9% on those picks. Waterhouse shares dropped, but Wells Fargo & Co. shares rose, producing a loss of 27.8%. Murphy, who always covers short positions when his loss reaches 25%, wants to abandon Wells Fargo and use the proceeds to sell another stock short: Micron Technology Inc. The company makes computer chips called DRAMs (dynamic random-access memories) used in PCs. Murphy thinks DRAM prices are headed down and that Micron's shares will follow.
The three U.S.-based stock pros each have varying degrees of pessimism about the outlook for the stock market for the second half. Bennett is concerned about the prospect of interest rate increases, and he worries about speculative investing by hedge funds. He thinks the Dow Jones industrial average could fall 5% or 10% by the end of the year. Dater expects a flat to down market until the fourth quarter, when she's hoping for an upside surprise "as investors realize we're not in a hyperinflationary market," she says. Murphy is the most bearish, citing concerns about rising rates and the weak dollar. Plummer's favorite stocks remain those in emerging markets. He thinks many of those markets may recover in the second half because the fundamental prospects for most of these stocks have not changed.
As the pros' mixed performance suggests, there are home runs to be found. But a narrow focus on a few industries can prove disappointing--and costly.
TABLE: HOW THEY FARED JOE SCOTT-PLUMMER PETER C. BENNETT ELIZABETH B. DATER Percent UPDOWN DOWN DOWN Change 5.7% -1.3% -12.2% Dec. 13, 1993 To June 6, 1994 Biggest CO. PERUANA DE MILLIPORE METHODE Winner TELEFONOS 49.7% ELECTRONICS 77.6% 22.0% Biggest AOYAMA IDB GENSIA Loser TRADING COMMUNICATIONS PHARMACEUTICALS -46.5% -47.0% -47.0% Second CO. PERUANA DE EQUITABLE COS. INFINITY BROADCASTING Half's TELEFONOS Top Pick HOW THEY FARED Percent MICHAEL MURPHY Change DOWN Dec. 13, 1993 -16.3% To June 6, 1994 Biggest WATERHOUSE Winner INVESTOR SVCS. 41.6% Biggest WEITEK Loser -52.9% Second WEITEK Half's Top Pick