STAR-BULLETIN SURVEY OF BEST INVESTMENT IDEAS
Bullish Melton trouncing field with 18.3% gain
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Investment experts detailed performance
STORY SUMMARY »
Investment expert Dwight Melton still sees some running room left for stocks despite a five-year bull market that's getting a little long in the tooth.
Thanks to an accommodating Federal Reserve, investors have been given a temporary reprieve from the nation's worst housing slump in 16 years.
The Fed already has cut rates one-half of a percent and may cut them again Wednesday at the end of its two-day meeting.
Melton, co-founder of the Hawaii Stocks and Options Group, has capitalized on the bull market to take a commanding lead in the Star-Bulletin's sixth annual survey of best investment ideas.
The two-time champion has run away from the other experts in this year's contest with an 18.3 percent gain through the first three quarters to boost his hypothetical $20,000 portfolio to $23,662.69.
Richard Dole, chief executive of Honolulu investment adviser Dole Capital LLC, was the only other expert with a gain as he had a nine-month return of 4.7 percent to $20,934.71.
Norm Caris, a Kauai resident and managing director-institutional sales for Caris and Co., was third with a 3.5 percent loss to $19,305.01.
Defending champion and value investor Barry Hyman, vice president-management team for the Maui branch of Michigan-based FIM Group Ltd., was last with a 19.7 percent loss to $16,064.46.
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The stock market is entering what is historically its three best months of the year and local investment expert Dwight Melton still sees some running room left for the bulls.
Despite the worst U.S. housing slump in 16 years, he's heartened by an accommodating Federal Reserve that already has lowered interest rates by half a percentage point and may cut rates again Wednesday at the end of its two-day meeting.
"This impressive rally has been fueled by optimism that prospective interest rate cuts by the Federal Reserve will keep the economy on an upward path and allow corporate earnings to post additional growth," said Melton, co-founder of the Hawaii Stocks and Options Group.
Melton, a two-time champion in the Star-Bulletin's sixth annual survey of best investment ideas, has run away from the other experts in this year's contest with an 18.3 percent gain through the first three quarters of 2007. His momentum style of investing has allowed him to increase his hypothetical $20,000 portfolio to $23,662.69.
"I think the stock market's optimism is reasonable," Melton said. "In fact, I expect stocks to generally trend higher through early next year (with November, December and January being the strongest three-month period for the market).
"However, I will also note that stocks have come a long way in a short span of time, and therefore some profit taking may well lie ahead in the short term."
In a year where the major indexes are poised to post double-digit gains, the other three experts in the Star-Bulletin contest have struggled to keep pace.
Richard Dole, chief executive of Honolulu investment adviser Dole Capital LLC, was the only other expert in the contest with a gain as he had a nine-month return of 4.7 percent to $20,934.71.
Norm Caris, a Kauai resident and managing director-institutional sales for Caris and Co., was third with a 3.5 percent loss to $19,305.01.
Defending champion and value investor Barry Hyman, vice president-management team for the Maui branch of Michigan-based FIM Group Ltd., was last with a 19.7 percent loss to $16,064.46.
Melton's portfolio has been heavy with country index funds this year with holdings, at one time or another, in Singapore, Mexico, Malaysia and China. After exiting China after the first quarter, he re-purchased the index fund for the fourth quarter while also adding a Brazil index fund.
"China has benefited from a weakening dollar," Melton said. "iShares China is up over 121 percent (as of Sept. 30) in the last 12 months. It will remain a good investment until global growth cools, particularly in China, India, southeast Asia and the U.S."
So far, growth in China is showing no signs of slowing despite moves by the government to cool the boom. China reported last week that its economy surged 11.5 percent in the third quarter.
As for Brazil, Melton said that Latin America is a resource-based economy riding the wave of higher commodity prices. iShares Brazil has nearly doubled over the last 12 months and Melton said the fund will reward investors until worldwide growth slows and demand for raw material lessens.
Melton's top pick this year has been apparel manufacturer Guess, which had a total return of 55.2 percent through nine months during a period in which it split its shares 2 for 1.
Of his country index holdings at the end of the third quarter, iShares Singapore was up 19.8 percent, iShares Mexico ahead 14.7 percent and iShares Malaysia up 9.8 percent.
Melton unloaded Bolt Technology, an oil and gas equipment company, after it gave back a 28.4 percent gain it had recorded when he owned it in the second and third quarters. He took a 4.8 percent loss on his shares but, as is the life of a momentum investor, the stock has risen more than 36 percent since he sold it.
Dole, who has held onto his same picks for the entire year, had three solid performers as PowerShares QQQ, which tracks the Nasdaq-100 index, jumped 19.3 percent; defense contractor Lockheed Martin rose 19.1 percent; and Alexander & Baldwin, parent company of Matson Navigation Co., gained 14.8 percent. His portfolio was hurt by pharmaceutical giant Pfizer, down 2.5 percent, and Newport, a supplier of scientific and technical instruments, which fell 27.3 percent.
He said the stock market seems to have been positively influenced by rising commodity prices, such as from oil and copper, and a decline in the value of the dollar.
"Multinational companies that are in the market indexes have benefited from both events," Dole said. "The dollar's decline has made hard assets worth more because at the present time, companies owning these assets have pricing power."
Dole said if the market's liquidity crisis is eased without higher long-term interest rates, he could see the market going higher.
"However, if high volatility continues, I could see a major correction," he said.
Caris' patience with Hawaiian Holdings, parent of Hawaiian Airlines, paid off as the stock soared 21 percent through the first nine months. He could get another boost in the stock depending how federal Bankruptcy Judge Robert Faris rules in Hawaiian's lawsuit against Mesa Air Group, the parent of interisland carrier go!
Faris took the matter under advisement on Oct. 4 following a trial in which Hawaiian sought $173 million in damages from Mesa, as well as an injunction to prevent go! from selling tickets for one year.
Hawaiian claims Mesa allegedly used confidential information to enter the Hawaii market with information obtained as a potential investor during Hawaiian's bankruptcy.
The stock that Caris is pounding the table on now is footwear retailer Collective Brands, which changed its name on Aug. 20 from Payless ShoeSource. Even though Caris saw Collective Brands plummet 30.1 percent after adding the stock to his portfolio after the second quarter, he bought 200 more shares following the third quarter.
"Synergies with the Stride-Rite acquisition, management initiatives to streamline business, and the recent decline in stock price from $37 to $22 ($18.38 as of Friday) make this a very attractive name," Caris said. "They will become a dominant name in children's shoes."
Caris said the company recently held its first analyst meeting and received a positive reaction from investors. He also noted that management is comprised of former heavyweights from footwear and accessory designers Nike and Cole Haan.
"In addition to that, a lot of estimates are still around $2 in earnings for next year, so it still has a lot of earning power," Caris said. "There are a lot of reasons to be a buyer of this company here."
In picking up more shares of Collective Brands, Caris sold Titanium Metals after picking up a 5.2 percent gain in the one quarter he held the stock. He also sold Alon USA Energy after a 6.5 percent loss over two quarters, calling the shares "dead money."
For his remaining holding, Caris had a 14.9 percent loss in semiconductor equipment maker Novellus Systems.
"The stock market is still the only game in town," Caris said. "Money is coming out of real estate and into stocks, and that will continue for the next couple of years. The real estate debacle is getting worse by the day and it is on its way to Hawaii, particularly for Kauai and Maui."
Hyman, who posted a 19.5 percent gain last year in winning the contest, has been the inverse of that so far this year with a 19.7 percent loss caused by three significant losers.
His worst performer has been Premier Wealth Management, which changed its name from Tally-Ho Ventures on Oct. 10, 2007. Premier Wealth, a low-priced European niche financial services firm, was off 30.2 percent through nine months. Mitsubishi UFJ Financial Group, a Japanese megabank, tumbled 26.8 percent while Ultrashort QQQ ProShares, a double-inverse Nasdaq-100 index fund, slumped 26.7 percent.
Hyman's only winner was iShares Lehman 1-3 Year Treasury Bond Fund, which gained 4.6 percent.
A longtime pessimist regarding the U.S. stock market, Hyman said it's best to remain defensive.
"Whether it continues to rise or not (between now and the end of the year), speculators who are ignoring the economic headwinds will likely suffer the same fate speculators normally do," Hyman said. "Prudent investors who patiently stay a defensive course until lower risk opportunities abound will ultimately be better off."