The stock market has exhibited distinct themes over the last three years. Investors will need
to pick their battles
in ’02, experts sayMany expect an economic
Local experts' picks
rebound will only take place
in specific industriesBy Dave Segal
dsegal@starbulletin.comIn 1999 it was the countdown to Y2K and the meteoric rise in the Nasdaq.
Two years ago, it was the technology meltdown and the inventory glut.
These past 12 months, it's been the buildup of the recession and the economic fallout from the Sept. 11 terrorist attacks.
So what will 2002 ring in for investors?
Many of Hawaii's financial experts, while acknowledging that the economy probably will recover sometime during the year, don't think the rebound will happen across the board. Rather, the majority of those responding to a Star-Bulletin survey think investors will have to pick their spots in what could be another challenging year.
"It should be a special-situation market with some industries benefiting and others not," said Richard Dole, chief executive of Honolulu-based Dole Capital LLC. "Inflation pressures will pick up with slow overall (economic) growth. Risk premiums will rise with the uncertain economic outlook, limiting stock performance."
Perhaps the best indicator of what 2002 will bring is the fact that there were no duplications among the 41 combined stocks and funds selected by the seven experts (15 were asked) who responded to the survey. The financial experts, who included local analysts, financial consultants and investment club representatives, were asked to select their top three stocks, their top equity fund and their best income-producer. In some cases, the experts, who may have a personal or client stake in their selections, made more picks than requested. Their selections were based on the merits of the stock or fund and not to fit any particular investor's financial situation.
Among the stock picks, sectors singled out were technology, insurance, health care, defense, retail, industrial and airlines. Fund selections included small cap, convertible securities and country funds, while the respondents' income-producing picks were heavily weighted toward real estate investment trusts, also commonly known as REITs, which pay out most of their earnings in dividends.
Only one Hawaii-based company made the list: Hawaiian Airlines Inc. Its pending merger with rival and privately held Aloha Airlines caught Dole's attention.
"Hawaiian Airlines has a proportion of fixed costs," Dole said. "Once it passes the break-even point, profits can accelerate rapidly. If the merger is successful, it can consolidate costs, reduce fixed overhead and bring more to the bottom line. It also will have more freedom because it won't be competing for market share. That changes the whole scenario. Hawaiian Airlines could do quite well if the merger (which is expected to close in the first half of 2002) goes through."
Dole's picks also were noteworthy from another standpoint. One of his selections was the Nasdaq, which as a private company has explored the possibility of going public later this year.
Perhaps the most defensive in the group of experts was Mike Corcoran, a National Association of Investors Corp. member who runs InvestMentoring, a service that teaches clients how to make good investment decisions. Corcoran, a former director and the founder of the Computer Users Group who also has Chartered Financial Consultant and Chartered Life Underwriter designations, geared his picks toward the medical and aerospacedefense sectors.
"The stock market is high risk right now," Corcoran said. "Investors should continue to focus on higher-quality stocks with the U.S. markets and other developed markets."
Among Corcoran's investment ideas were HCA Inc., a hospital management company which he said should grow at 15 percent to 17 percent over the next five years, and defense companies such as General Dynamics Corp., Lockheed Martin Corp. and Raytheon Co.
His best income-producing pick was a convertible preferred stock, Duke Energy Corp. (ticker: DKE). Its dividend yielded 7.8 percent at the year-end stock price of $26.35, and in 2004 each 100 shares converts to 61 shares of Duke Energy's common stock (ticker: DUK).
"The S&P 500 index currently is priced at (greater than) 40 times trailing 12-month earnings," Corcoran said. "This is a record-high valuation, and it does not seem to leave much room for disappointment. The economy is expected to recover by the second quarter of 2002. For 2002 the profits of companies, though improving, will probably not be much higher than 2001. The stock market will improve in 2002, but not substantially. However, 2003 should be a great improvement."
REITs, which enable investors to pool their capital and share the benefits of real estate investment and financing, are the staple of portfolio manager Barry Hyman's selections. Hyman, a vice president of Financial & Investment Management Group Ltd. in Wailuku, Maui, said his selections are "securities which we feel have the best risk-adjusted attributes rather than those with simply the maximum upside potential."
His favorite picks included two REITs and one tracking stock. Hyman's two top REITs were Apex Mortgage Capital Inc. and Annaly Mortgage Management Inc. Hyman said that Apex, like a bank, is in the business of borrowing money at one rate and lending it out at a higher rate. Its business has thrived in this low interest-rate environment, and its dividend at year-end was paying out a lofty 16 percent.
"Apex Mortgage is taking no credit risk because it invests only in government-backed securities," Hyman said.
Among his other two picks, Annaly Mortgage, which owns and manages mortgage-backed securities, was paying a hefty dividend of 15 percent at year-end, while WorldCom-MCI Group, which tracks WorldCom's long-distance and Internet service for consumers and small companies, was providing an 18.9 percent dividend. Some analysts have questioned, however, whether debt-strapped MCI Group will be able to maintain its $2.40 a share annual dividend.
"Our portfolios have had tremendous gains despite a year when the returns of most indexes worldwide have been negative," Hyman said. "We have achieved our results by employing a disciplined, common sense, forward-looking value approach to selecting investments one at a time, each on its own risk-adjusted merit."
While Hawaiian Airlines was the only Hawaii-based individual stock selected by respondents, Hyman gave a local nod to Prospect Japan Fund, a small-cap growth fund based in Hawaii Kai. "The manager of this fund (Curtis Freeze) has the best track record in the universe of small-company Japan managers," Hyman said.
Gordon Ching, president of the NAIC Aloha Hawaii Chapter, had a couple of small-cap picks among his selections.
SFBC International Inc., which conducts clinical research and provides drug development services for clients in the pharmaceutical and biotech industries, has a market cap of 91 million, a price-earnings ratio of 25 and soared 375.4 percent last year.
"It has strong revenue and earnings growth," Ching said. "It's strong financially and its valuation is reasonable."
His top equity fund pick, Buffalo Small Cap, has a five-star rating from Morningstar and increased 31.2 percent last year after gains of 33.7 percent in 2000 and 34.8 percent in 1999. Its top holding as of the end of the third quarter was Argosy Gaming Co., which occupied 4.5 percent of the portfolio.
"The fund will do even better as investors shift from value investing to growth investing as we come out of the recession in 2002," said Ching, who probably was the most bullish of the respondents.
"I believe stocks will outperform bonds in 2002," Ching added. "All the ingredients are in place for this to happen -- low interest rates, low inflation, low oil prices, economic stimulus package (which is now being held up in Congress), $4.2 trillion in cash and short-term savings on the sideline, world event uncertainties are becoming clearer, earnings visibility is in sight, and market lows were probably hit on Sept. 21. The negatives, high unemployment and low consumer confidence, will subside as companies begin to show better profitability."
Richard Behnke, president of broker-dealer Abel-Behnke Corp. Securities, turned over a few rocks to find his selections.
"To find opportunity -- that's where you're going to have to go," said Behnke, who has seen biometrics company Drexler Technology Corp. nearly double since recommending it to Star-Bulletin readers earlier this year. "You're not going to find it on the S&P, where institutions have to buy and push up the price. You find it in obscure places."
Hence, it's no surprise that Behnke recommends three sub-$4 stocks. He likes life insurer Southern Security Life Insurance Co. and life insurerdeath care provider Security National Financial Corp. Both trade at less than half their book value, or worth of the company.
Among his other picks is highly speculative Simtek Corp., which provides high-performance nonvolatile memory and logic integrated circuits and trades on the Over the Counter Bulletin Board. It traded at just 42 cents at year-end, well off its March 9, 2000, high of $4.41. Both its third-quarter revenues of $4.1 million and its net loss of $425,000, which included one-time expenses, were improved from year-earlier levels.
Behnke's best income-producing pick, World Wide Ltd., is a Cayman Islands-based real estate investment trust that trades on the Over the Counter market as an American Depositary Receipt and is expected to return a dividend near 10 percent this year. The company, which rents out office space, owns two buildings and part of a third in the Cayman Islands.
Dwight Melton, president of the Patience and Discipline Investment Club and a director of the NAIC Aloha Hawaii Chapter, is banking on a rebound in consumer spending in 2002 and selected retailers Chico's FAS Inc. (apparel), Lowe's Companies Inc. (building products) and Michaels Stores (arts and crafts) for his top picks.
"Each of these stocks are ranked No. 1 by Value Line for timeliness (expected performance over the next six to 12 months)," Melton said. "These stocks are currently trading above their 50-day and 200-day moving averages."
He also stuck with an old reliable for his best-income-producing pick, singling out the Vanguard GNMA Fund.
"This fund has been my favorite fixed-income selection for years," Melton said. "It currently has a 6.1 percent yield (it ended 2001 at 5.9 percent) even in this low interest-rated environment. This yield is much better than those received on bank CDs and Treasury securities. It is also backed by the U.S. government, which makes it very attractive as a risk-free investment."
Vanguard, however, currently has a warning on its Web site advising investors that the yield is unlikely to continue. "Investors should be cautious in evaluating the GNMA Fund's current SEC yield," the warning states. "This yield, while accurate, could well decline significantly because of the high level of mortgage refinancing activity that is occurring due to recent declines in interest rates. As homeowners refinance, they prepay their old loans, resulting in principal being returned to the fund, which will reinvest this money in mortgage-backed securities whose yields are likely to be lower."
Cindi John, an investment representative for brokerage Edward Jones, said to consider buying stocks that are well positioned to benefit from the likely economic rebound. Among her favorites are retailers such as Target Corp. and Home Depot Inc., industrial companies such as Emerson Electric Co. and tech firms like Sun Microsystems Inc., Oracle Corp. and Dell Computer Corp.
Her best income-producing pick is Equity Office Properties Trust, which offered a 6.7 percent dividend at year-end, and in October became the first REIT to gain entry into the Standard & Poor's 500 index. Real estate magnate Sam Zell is the chairman of the company.
But John warns that REITs may not be for everybody.
"The three primary factors that can affect REITs are rising interest rates, a slowing economy and overbuilding in one particular market," she said.
Richard Behnke, president, Abel-Behnke Corp. Securities
Company/name Ticker Sector 2001
Close2001 %
gain/lossDiv. yield Comment Stocks Drexler Technology Corp. DRXR Computers-biometrics $23.77 +72.1% None Smart ID cards are multifaceted Southern Security Life Insurance Co. SSLI Life insurance $3.15 -10.0% None Also owns valuable Florida real estate Security National Financial Corp. SNFCA Life/health insurance $2.65 +14.7% 5% Offers near 10% growth, 5% dividend Simtek Corp. SRAM.OB Electronic components-semiconductors $.42 -20.0% None High risk, trades on OTC Bulletin Board Income World Wide Ltd. WOWEY REIT-office properties $11.88 18.8% 10% Cayman Islands corporation pays no taxes
Gordon Ching, president, National Association of Investors Corp. Aloha Hawaii Chapter
Company/name Ticker Sector 2001
Close2001 %
gain/lossDiv. yield Comment Stocks SFBC International Inc. SFCC Drug/biotech research $20.50 +375.4% None Small cap with strong revenue/earnings growth Nokia Oyj NOK Telecom equipment +24.53 -43.6% 1% Dominates wireless phone market Intel Corp. INTC Electric components-semiconductors $31.45 +4.6% .25% Dominant semiconductor company Equity fund Buffalo Small Cap Fund BUFSX Small-cap growth $19.96 +31.2% NA Strong track record last 3 years Income Philip Morris Cos. MO Tobacco $45.85 +4.2% 5.1% Good dividend yield
Mike Corcoran, financial consultant, InvestMentoring; NAIC member
Company/name Ticker Sector 2001
Close2001 %
gain/lossDiv. yield Comment Stocks HCA Inc. HCA Medical-hospitals $38.54 -12.4% 0.2% Should grow 15-17% over next 5 years Universal Health Services Inc. UHS Medical-hospitals $42.78 -23.4% None Held up during recent downturn General Dynamics Corp. GD Aerospace/defense $79.64 +2.1% 1.4% Defense spending increasing Lockheed Martin Corp. LMT Aerospace/defense $46.67 +37.5% 0.9% Beneficiary from war on terrorism Raytheon Co. RTN Aerospace/defense $32.47 +4.5% 2.5% Leader in intelligence gathering Income Duke Energy Corp. DKE Electricity/natural gas $26.35 +6.5% 7.8% Convertible preferred stock offers income, growth
Richard Dole, chief executive, Dole Capital LLC
Company/name Ticker Sector 2001
Close2001 %
gain/lossDiv. yield Comment Stocks Newport Corp. NEWP Telecom equipment-fiber optics $19.28 -75.4% 0.1% A key player in its sector Hawaiian Airlines Inc. HA Airlines $4.00 +120.7% None Merger could make stock fly Nasdaq stock market NA Tech-weighted market NA NA NA Private company should do well if it has IPO in 2002 Income ISTAR Financial Inc. SFI REIT-diversified $24.95 +26.7% 9.8% Has growing cash flow
Barry Hyman, portfolio manager, vice president, Wailuku, Maui, Financial & Investment Management Group Ltd.
Company/name Ticker Sector 2001
Close2001 %
gain/lossDiv. yield Comment Stocks TrizecHahn Corp. TZH REIT-office properties $15.70 +3.8% 2.2% Has intrinsic value of about $25 per share New Horizons Worldwide Inc. NEWH Computer schools $11.50 -17.1% None Before Sept. 11 had 20% plus annual growth Financial Industries Corp. FNIN Life/health insurance $13.55 +49.6% 3.1% Entertaining buyout offers Equity fund Lincoln National Convertible Securities Fund LNV Convertible securities $14.36 *+2.6% *15.4% Low-risk way to play stock market discount Templeton Dragon Fund TDF Country fund-China focus $7.49 *+15.5% 15.1% Good entry into non-Japanese Asian markets discount Prospect Japan Fund PJF Small-cap Japan $7.20 0 12.0% Hawaii Kai fund manager outshines rivals discount Income Apex Mortgage Capital Inc. AXM REIT-mortgages $11.25 +63.3% 16.0% Business model is thriving WorldCom-MCI Group MCIT Telecom services $12.70 -29.5% 18.9% A cash cow Annaly Mortgage Management Inc. NLY REIT-mortgages $16.00 +76.6% 15.0% Pays a hefty dividend
Cindi John, investment representative, Edward Jones
Company/name Ticker Sector 2001
Close2001 %
gain/lossDiv. yield Comment Stocks Target Corp. TGT Retail-discount $41.05 +27.3% 0.5% Well positioned to benefit from rebound Home Depot Inc. HD Retail-building products $51.01 +11.6% 0.4% A favorite of homeowners Emerson Electric Co. EMR Electric products $57.10 -27.5% 2.7% Industrial firm should do well in economic recovery Sun Microsystems Inc. SUNW Computers $12.30 -55.9% None Beaten-down tech company should recover Oracle Corp. ORCL Enterprise software $13.81 -52.5% None Should rebound as economy strengthens Dell Computer Corp. DELL Computers $27.18 +55.9% None Hardware maker fills orders quickly Income Equity Office Properties Trust EOP REIT-office properties $30.08 -7.8% 6.7% Office property operator/manager has wide reach in United States
Dwight Melton, president, Patience and Discipline Investment Club; NAIC director
Company/name Ticker Sector 2001
Close2001 %
gain/lossDiv. yield Comment Stocks Chico’s FAS Inc. CHS Retail-apparel $39.70 +185.3% None Ranked No. 1 by Value Line for timeliness Lowe’s Cos. Inc. LOW Retail-building products $46.41 +108.6% 0.2% Trades above 50-day and 200-day moving averages Michaels Stores Inc. MIK Retail-arts and crafts $32.95 +148.7% None Estimated future growth rate is over 20% Equity fund Dreyfus Small Capital Value DSCVX Value-Small cap $20.80 +28.6% NA In top 1% of peer group Income Vanguard GNMA Fund VFIIX Mortgage-backed securities $10.38 +7.4% 5.9% Yield attractive but may not be sustainable
