Defense cleans up
in 1st 6 months

2 Star-Bulletin stock forecasters
posted returns greater than 20%

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By Dave Segal
dsegal@starbulletin.com

Technology stocks may be more glamorous, but defense has been an investor's best offense in the stock market this year.

Hawaii financial consultant Mike Corcoran, who relied exclusively on defense when picking stocks for the Star-Bulletin's 2002 survey of best investment ideas, posted an average total return of 22.9 percent through the first six months to outshine five of six other local market experts.

Only broker-dealer Richard Behnke (see related story,), who died May 28 of a heart attack, fared better. He had a total average return of 29.9 percent and had the best individual performing stock in Security National Financial Corp., which soared 169.4 percent.

"The market is like the sum of all fears," Corcoran said. "There's the war between Israel and Palestine, terrorist problems, (Warren) Buffett's prediction of a nuclear terrorist act sooner than later, corporate governance problems, accounting problems and the summer doldrums.

"All we have are sellers. There are rather few buyers. If we ever get another attack like Sept. 11, the market is going to go down in half. There's really a big threat hanging over it."

Corcoran, who still sees defense as the best game plan for the second half of this year, concentrated five of his six stock choices on health care and aerospace defense, with a utility representing his other pick. His best-performing selection, defense company Lockheed Martin Corp., had a total return, which counts reinvested dividends, of 49.5 percent. His others choices, defense contractors General Dynamics Corp. (34.5 percent) and Raytheon Co. (26.2 percent) and hospital operators HCA Inc. (23.4 percent) and Universal Health Services Inc. (14.5 percent) all posted double-digit gains. His only loss came from Duke Energy Corp.'s preferred stock, which offers a 9.2 percent dividend yield but which overall fell 11 percent.

Corcoran said he never held out much hope at the beginning of the year for a tech rebound.

"I felt that we were in a recession and I didn't believe all the stuff about techs going to come back," he said. "If you're going to be in the market, you've got to be defensive -- everybody gets sick and we're in a war."

4 win, 3 lose

Corcoran, a member of the National Association of Investors Corp. Aloha Hawaii chapter, was one of four local experts to show gains over the first six months. The NAIC is a nonprofit investment education organization.

Dwight Melton, president of the Patience and Discipline Investment Club and an NAIC member, focused on the retail sector and saw his stock selections rise 7.6 percent. Barry Hyman, portfolio manager and vice president of Financial & Investment Management Group Ltd. in Wailuku, Maui, emphasized value investing and dividends and saw his picks gain 6.3 percent.

Those stock pickers ending the first half in the red were Richard Dole, chief executive of Dole Capital LLC, down 3.7 percent; Cindi John, investment representative for financial-services firm Edward Jones, off 18.7 percent; and Gordon Ching, president of the NAIC's Hawaii chapter, down 22.2 percent.

Overall, the seven stock pickers had a combined total return of 3.2 percent to easily beat the broad-based Standard & Poor's 500 index, which was off 13.8 percent.

Time to get in

Meanwhile, Corcoran, who said he would still hold on to his stock picks but not add to his positions due to their higher valuations, sees other attractive areas for the second half of the year.

Corcoran singled out home builders such as D.R. Horton Inc. (parent of Honolulu-based Schuler Homes) and Pulte Homes Inc., Internet giant eBay Inc., coffee retailer Starbucks Corp. ("we all drink coffee, most of us anyway"), kids' retailer Children's Place Retail Stores Inc. and Bed Bath and Beyond Inc. ("it's like the Home Depot of linens and towels").

"Next year I think the S&P will be up about 20 percent," Corcoran said. "But we have to get through this year first. People should be in the market and be invested because when the turnaround comes, it will come in, like, four days. It won't be 50 points either. It'll go up 200, 400, 600 points and be a quick turnaround. It will keep going up because everybody will be trying to get back in."

Smart shopper

Melton scored hits with two of his three retailers. Chico's FAS Inc., a women's casual clothing company which split its stock 3-for-2 in January, had a total return of 37.2 percent while Michaels Stores Inc., which offers arts and crafts, gained 18.4 percent. His lone laggard retailer was home-improvement chain Lowe's Companies Inc., which slipped 2.1 percent.

Among Melton's mutual fund picks, the Vanguard GNMA Fund rose 4.2 percent while the Dreyfus Small Capital Value Fund fell 19.9 percent.

"I'm really surprised at the performance of Lowe's, especially with the boom in the housing sector. But we still have six months to go before year-end. Lowe's is expected to report earnings on Aug. 19. I expect it to report strong earnings, which should give the stock price a boost."

He said he still likes his three retail picks for the second half of the year. In addition, Melton is fond of Career Education Corp., a for-profit secondary education company, and FTI Consulting Inc., which provides litigation and claims management consulting to corporations, law firms and insurance companies.

"I believe an investor's ability to pick winning stocks depends on his or her skills in selecting winning indicators and recognizing the characteristics of winning stocks," Melton said. "If these skills are mastered, an investor's stock screening and selection process will ensure that only superior stocks, which can be expected to outperform significantly, get picked."

Less risk

Hyman, who posted the fourth-best performance among Hawaii's experts, was happy to show a gain in this dismal market environment.

"Given that the indexes are all down and the average of the stocks I chose were up about 6 percent through June, I feel they have performed very well," Hyman said. "Also, given that we did not expose our clients to stock market-like risk and got such favorable returns, I feel we actually have done very well."

Six of Hyman's nine selections showed gains during the first six months. His best performer was Apex Mortgage Capital Inc., a real estate investment trust whose total return was 43.8 percent. Hyman's other winners were Financial Industries Corp. (35.3 percent), Annaly Mortgage Management Inc. (25.9 percent), Prospect Japan Fund (24.3 percent) Templeton Dragon Fund (23.1 percent) and Trizec Properties Inc. (7.9 percent). Trizec was called TrizecHahn Corp. before restructuring earlier this year.

Hyman's losers were Lincoln National Convertible Securities Fund (6.5 percent), New Horizons Worldwide Inc. (11.4 percent) and one bust he'd rather forget, WorldCom Inc.'s consumer long-distance tracking stock MCI Group, which fell 85.5 percent and has had trading in its stock halted.

Hyman, who originally recommended MCI at the start of the year due to its 18.9 percent dividend yield, sold his MCI shares a few weeks ago. He would have had a 17.8 percent total return on his recommended picks without the MCI blowup.

While Hyman still owns all his stock picks -- sans MCI -- for his clients, he likes several closed-end and tax-free municipal bond trusts, including Managed Municipal Portfolio Inc., and Putnam Tax Free Health, which trade on the New York Stock Exchange. Hyman favors them because they have high yields and trade at significant discounts to their net asset values, or worth of all their holdings.

"While these trusts hold bonds and not stocks, they do trade on the stock market," Hyman said. "We feel they will yield total average returns over three to five years in the high single and low double digits annually. I include these as stocks because these returns are indeed equitylike and could very well beat the returns of the large-cap stock indexes over this period."

Hyman also said he likes several stocks in Japan, including Nippon Tel, which trades as an American depositary receipt on the NYSE. Several of the other stocks he likes don't trade on U.S. exchanges but suggested investors look at one of his earlier picks, Prospect Japan Fund, which is managed in Hawaii by Curtis Freeze of Prospect Asset Management and trades on the London exchange.

"They (Prospect Asset Management) do great product and company work, understand the franchises of every stock they own, meet with management several times per year and, like us, are very value-conscious, price-matters managers," Hyman said.

In the United States, Hyman's favorite stocks include SmartForce Plc, a corporate training software company; Gemstar-TV Guide International Inc., which just lost a critical patent dispute; Palm Inc.; and Petroleum and Resources Corp.

Merger migraine

Dole had the misfortune of picking two stocks that had to call off or delay previously announced plans. His selection of Hawaiian Airlines Inc. (down 8.8 percent) backfired when the carrier in March called off its proposed merger with Aloha Airlines. In addition, the Nasdaq Stock Market, which last year announced its intention to become a publicly traded company, has yet to launch its IPO but said it is targeting the end of this year. Dole's biggest loser was fiber-optic company Newport Corp., which fell 18.8 percent amid a selloff in the telecom sector. His income pick of ISTAR Financial Corp., a real estate investment trust, had a total return of 16.6 percent, including an 8.8 percent dividend yield.

"The REIT has done fine," Dole said. "It had higher earnings and increased the dividend. Newport was tied to the tech market and nothing is going to happen with it until the fiber-optics market picks up. The Hawaiian Airlines pick was banked on that merger (with Aloha Airlines). I wouldn't have picked it without the merger. The (just-completed) tender offer, though, has given the stock price support."

Dole said that for patient investors there are some good opportunities now.

"I think investors should go longer term, pick good values and sit tight," he said. "There's some good stocks that are down substantially, and there's some opportunity there. The question is what is the time horizon of the investor. If it's five years, I think there are some great opportunities. But for the rest of this year, I think you have to go to more basic industries, like food and that sort of thing."

Blame corporate

John's stock picks, which are recommended from Edward Jones' corporate headquarters in St. Louis, struggled with Sun Microsystems Inc. (off 59.3 percent) and Oracle Corp. (down 31.4 percent) taking the biggest hits. Her only winner was Equity Office Properties Trust, a real estate investment trust which eked out a 3.4 percent gain. The rest of the losers consisted of Dell Computer Corp. (3.8 percent), Emerson Electric Co. (5 percent), Target Corp. (6.9 percent) and Home Depot Co. (27.8 percent).

"We invest for the long term," John said. "That's three to five years or more. We don't invest for the next six months. Invest long term, in quality and diversify. We can't predict what's going to happen in the short term or the long term. If you're investing for the short term, you want money market funds, not stocks."

Down, not out

Ching, who said he still likes all his picks, saw all his selections finish in the red. They were led by tobacco and food conglomerate Philip Morris Cos. (2.4 percent); Buffalo Small Cap fund (8.4 percent), which had gained more than 30 percent in each of the three previous years; SFBC International Inc. (18.2 percent), a clinical research and drug development researcher; Finland-based mobile-phone maker Nokia Oyj (40.3 percent) and computer-chip maker Intel Corp. (41.8 percent).

"Investors right now have no confidence," Ching said. "Until companies start showing they can make money on a sustained basis, I think people will stay away."

Ching said he sees consumer, retail, food and education stocks holding up in the second half of the year. Among the stocks he mentioned are Procter & Gamble Co., whose products include Pampers diapers and Tide laundry detergent; Chico's, the women's casual clothing retailer also favored by Melton; and Apollo Group Inc., whose subsidiaries include the University of Phoenix.