Melton only local expert to post gain amid market selloff
The first-quarter selloff is history.
But whether a mini-crash in China and a subprime-loan meltdown was enough to wring the excess out of U.S. stocks is another matter.
Dwight Melton, the only local stock expert to post a profitable first quarter in the Star-Bulletin survey of best investment ideas, said the market still seems to be looking for its footing.
"Stock investors are nervously watching and waiting," said Melton, whose 6.3 percent gain beat out three other local experts and boosted his hypothetical $20,000 portfolio to $21,269.61.
Going from worst to first, Melton rebounded from a last-place finish in 2006 to take the first-quarter lead and put him in position to regain the winning form he had in 2004 and 2005 when he captured the stock-picking contest.
"The stock market has tried, but thus far failed, to steady itself after its recent slide," said Melton, co-founder of the Hawaii Stocks and Options Group. "I think more time is needed before investor confidence is restored."
Melton, whose momentum-investing style backfired into a negative 19.9 percent return in 2006, said he thinks stocks will end 2007 "somewhat higher" than they are now -- largely on the belief that a recession will be avoided this year.
The other three local experts in the sixth annual contest all finished slightly underwater in the first quarter. Richard Dole, chief executive of Honolulu investment adviser Dole Capital LLC, was second with a 0.3 percent loss to $19,947.77. Norm Caris, who lives on Kauai and is managing director-institutional sales for Caris and Co., was next with a 3.3 percent drop to $19,339.00. And defending champion Barry Hyman, vice president-management team for the Maui branch of Michigan-based FIM Group Ltd., was last with a 3.6 percent decline to $19,271.89.
"I don't think the subprime lender blowups is an isolated event," said Hyman, who had a 19.5 percent gain last year in topping Melton by 39.4 percentage points.
"I've been concerned with the rapid growth of credit in general, not just the irresponsible subprime lending (to those with a poor or limited credit history) that's taken place for some time now. I don't think the U.S. is out of the woods yet with the housing market likely to be weak for an extended period."
Melton, who usually is the most active of the contest's stock pickers, shuffled his five-stock portfolio after March as is allowed by the contest rules after each quarter. However, he held onto his top pick, apparel manufacturer Guess, which split its stock 2-for-1 en route to racking up a 27.8 percent gain in the first quarter.
He also stuck with his second-best performer, iShares Mexico, an exchange-traded fund that rose 6.1 percent.
Melton, though, unloaded energy play Core Laboratories after locking in a 3.5 percent gain and got rid of Immucor, a medical diagnostic equipment manufacturer that eked out a 0.7 percent rise. He also dumped the iShares China 25 index, which fell 8.1 percent amid the overall slump in China stocks.
In their stead, Melton picked up two foreign country exchange funds -- one for Malaysia and one for Singapore -- as well as Bolt Technology, which operates geophysical equipment and industrial products. All three of his new picks were big gainers in the first quarter -- before he owned them -- as Bolt Technology jumped 53.8 percent, iShares Malaysia rose 19 percent and iShares Singapore gained 10.4 percent.
Dole, who is sticking with the same picks he had all throughout 2006, was rewarded by Alexander & Baldwin, which rose 14.3 percent. On the other end, though, Newport, a supplier of scientific and technical instruments, gave back 21.9 percent after soaring 54.7 percent in 2006.
Among his other picks, defense giant Lockheed Martin rose 5.8 percent, the Nasdaq 100 tracking index edged up 0.9 percent and pharmaceutical behemoth Pfizer slipped 1.4 percent.
"I continue to favor seasoned companies in technology, health care, defense and consumer staples, for now," Dole said. "Technological improvement is necessary to drive down the core rate of inflation. Commodities are potentially volatile and risky, and the market is likely to move away from these areas."
Caris, who left more than 41 percent of his portfolio in cash during the first quarter, opened his wallet in the second quarter by picking up Alon USA Energy, a refiner and marketer of petroleum products; and semiconductor equipment maker Novellus Systems, a repeat from his 2006 portfolio. The additions came after Alon rose 37.8 percent in the first quarter and Novellus slipped 6.9 percent.
"Alon Energy is our favorite name in the refining space," Caris said. "The company is beginning to reap the benefits of higher-than-expected margins, partially due to a series of strategic acquisitions in California."
Caris added that this is also "a great time of the year" to buy refiners, as gas prices tend to move higher ahead of the summer driving season.
As for Novellus, Caris said several new product initiatives should increase both revenue and profitability at the company. He said Novellus is leveraged to an uptick in prices of NAND flash, which goes into a host of new, memory intensive devices that are set to come on the market over the next couple of quarters.
Caris' holdover picks turned in a mixed performance as semiconductor equipment maker LSI Logic rose 16 percent, optical supplier Oakley edged up 0.4 percent and Hawaiian Holdings, parent of Hawaiian Airlines, slumped 35.7 percent after missing fourth-quarter earnings forecasts and announcing that its first-quarter passenger yield would be off about 12 percent from the year-earlier quarter.
"The market still has some work to do before it can reassume an upward trajectory," said Caris, citing as hurdles the subprime collaspe, slowing growth and "an inflation rate that is higher than the Federal Reserve's comfort level."
Caris sees better times ahead in the second half of the year due to the gradual adoption of Microsoft's Vista operating system, companies working through semiconductor chip inventories and new high-tech gadget introductions, such as the new iPhone from Apple.
Hyman, like Dole, kept his picks the same for the second quarter after seeing three of his four selections post losses. Hyman's best performer was the iShares Lehman 1-3 Year Treasury Bond Fund, which rose 1.3 percent. The Ultrashort QQQ ProShares, a double inverse Nasdaq-100 index exchange-traded fund, slipped 0.7 percent; and Mitsubishi UFJ Financial Group, a Japanese megabank, dropped 9.6 percent.
Tally-Ho Ventures, a low-priced European niche financial services company that was trading at just $1.06 when it was selected by Hyman, delayed its 10-K financial report after the company's Brussels, Belgium-based auditor resigned due to unfamiliarity with the United States' generally accepted accounting principles, or GAAP, as it is commonly called. Tally-Ho fell 5.7 percent to $1 after trading as high as $1.90 during the quarter,
Hyman doesn't rule out a market correction in the United States to bring prices more in line to historical levels.
"I feel the U.S. economy is at the peak of the current earnings cycle," he said. "With the S&P 500 index stocks selling at around 16 times earnings and yielding only around 1.8 percent, such valuations are more appropriate for the midpoint of a cycle than a peak. I believe at current prices, expected returns over the next five years for the broad U.S. stock market should be only around 5 percent. Returns that low don't warrant the implied risk of owning stocks."
Hyman said sectors he likes now are those where fears are overblown and have resulted in undervalued share prices, such as natural gas producers and Canadian income trusts.
"For the more adventurous, both Thailand and Japan offer some excellent risk-adjusted investment opportunities," he said. "I think the worst sectors to be in now are the financials and consumer discretionary sectors as stock prices in these areas do not seem to adequately discount the likelihood for further credit tightening and consumer retrenchment."
Best investment ideas of 2007
Hawaii stock experts began the year with a $20,000 hypothetical portfolio:
DWIGHT MELTON
Hawaii Stocks and Options Group
Position: Co-founder
March 31 return: +6.3%
| COMPANY |
TICKER |
SECTOR |
SHARES |
3/31 CLOSE |
3/31 TOTAL RETURN |
3/31 VALUE |
| Guess* |
GES |
Apparel manufacturer |
134 |
$40.49 |
+27.8% |
$5,433.37 |
| iShares Mexico |
EWW |
Index fund |
75 |
$54.36 |
+6.1% |
$4,077.00 |
| Core Laboratories |
CLB |
Oil / field services |
50 |
$83.83 |
+3.5% |
$4,191.50 |
| Immucor |
BLUD |
Medical diagnostic equipment |
135 |
$29.43 |
+0.7% |
$3,973.05 |
| iShares China 25 index |
FXI |
Index fund |
35 |
$102.43 |
-8.1% |
$3,585.05 |
| Cash** |
|
|
|
|
|
$9.64 |
| Total |
|
|
|
|
|
$21,269.61 |
Changes: Buying 122 shares of Bolt Technology (BTJ) at $34.29 ($4,183.38), 366 shares of iShares Malaysia index fund (EWM) at $10.83 ($3,963.78) and 289 shares of iShares Singapore index fund (EWS) at $12.37 ($3,574.93). Selling 50 shares of Core Laboratories at $83.83 ($4,191.50), 135 shares of Immucor at $29.43 ($3,973.05) and 35 shares of iShares China index fund at $102.43 ($3,585.05)
RICHARD DOLE
Dole Capital LLC
Position: Chief executive
March 31 return: -0.3%
| COMPANY |
TICKER |
SECTOR |
SHARES |
3/31 CLOSE |
3/31 TOTAL RETURN |
3/31 VALUE |
| Alexander & Baldwin |
ALEX |
Ocean transportation / real estate |
75 |
$50.44 |
+14.3% |
$3,801.93 |
| Lockheed Martin |
LMT |
Aerospace / defense |
25 |
$97.02 |
+5.8% |
$2,434.20 |
| Nasdaq-100 Trust |
QQQQ |
Index fund |
100 |
$43.53 |
+0.9% |
$4,355.71 |
| Pfizer |
PFE |
Medical / drugs |
150 |
$25.26 |
-1.4% |
$3,830.43 |
| Newport |
NEWP |
Scientific and technical instruments |
150 |
$16.37 |
-21.9% |
$2,455.50 |
| Cash** |
|
|
|
|
|
$3,070.00 |
| Total |
|
|
|
|
|
$19,947.77 |
No changes
NORM CARIS
Caris and Co.
Position: Managing director for institutional sales
March 31 return: -3.3%
| COMPANY |
TICKER |
SECTOR |
SHARES |
3/31 CLOSE |
3/31 TOTAL RETURN |
3/31 VALUE |
| LSI Logic |
LSI |
Semiconductor equipment |
425 |
$10.44 |
+16.0% |
$4,437.00 |
| Oakley |
OO |
Optical supplies |
200 |
$20.14 |
+0.4% |
$4,028.00 |
| Hawaiian Holdings |
HA |
Airlines |
800 |
$3.15 |
-35.7% |
$2,520.00 |
| Cash** |
|
|
|
|
|
$8,354.00 |
| Total |
|
|
|
|
|
$19,339.00 |
Changes: Buying 100 shares of Alon USA Energy (ALJ) at $36.20 ($3,620.00) and 120 shares of Novellus Systems (NVLS) at $32.02 ($3,266.04)
BARRY HYMAN
FIM Group Ltd.
Position: Vice president of management team
March 31 return: -3.6%
| COMPANY |
TICKER |
SECTOR |
SHARES |
3/31 CLOSE |
3/31 TOTAL RETURN |
3/31 VALUE |
| iShares Lehman 1-3 Year |
SHY |
Index fund |
62 |
$80.46 |
+1.3% |
$5,024.24 Treasury Bond Fund |
| Ultrashort QQQ |
QID |
Double inverse Nasdaq-100 index fund |
91 |
$53.71 |
-0.7% |
$4,919.39 |
| Tally-Ho Ventures |
TLYH |
Investment management |
4,716 |
$1.00 |
-5.7% |
$4,716.00 |
| Mitsubishi UFJ Financial Group |
MTU |
Banking |
401 |
$11.26 |
-9.6% |
$4,515.26 |
| Cash** |
|
|
|
|
|
$97.00 |
| Total |
|
|
|
|
|
$19,271.89 |
No changes
* Figures adjusted for Guess's 2-for-1 stock split on March 13, 2007 ** Cash will receive the highest rate listed by Bankrate.com -- which was from AmTrust Direct (5.23%) -- at the start of the second quarter
