Investment Derby: Can three pros pick winners?

April 25, 2003

Can anyone do well in the stock market today? These experts think they can.

 

COVER STORY

Investment Derby: Can three pros pick winners?

By Leslie Kane
Senior Editor

Can anyone do well in the stock market today? These experts think they can.

Sitting on the investment sidelines has become a national pastime. These days, even professional money managers approach the market cautiously. But we found some who think they know where the winning stocks are hidden and are willing to bet that they can beat the market.

We challenged three such experts to create model three- to five-year stock portfolios using a hypothetical $100,000—the amount that many money managers believe is the minimum you'd need to construct a diversified portfolio of individuals stocks. The resulting selections reflect each expert's unique investment philosophy.

Michael Goldston, a broker and investment adviser from Brentwood, TN, selected 13 stocks, including several that are currently in a slump but that he believes have the potential for a strong rebound. Joe Duarte, an investment adviser from Dallas, chose 10 stocks that he's convinced can propel a portfolio. Ram Kolluri, a financial planner and money manager with offices in Princeton, NJ, and New York City, picked 45 stocks in nine industry sectors, to capture broad diversification. Only two stocks—Amgen, a biotechnology company, and GE—appear on more than one manager's list.

The managers will be permitted to make changes to their portfolios only on the last trading day of each month, and dividends and interest will be held as cash if they're not used to purchase new shares. We'll publish the portfolio returns every three months for a year and see which choices work out best.

Think you can outpick the pros? We challenge three physicians to make a similar series of picks and we'll track them, too. For details on the physicians' competition, see "Can you beat the pros?".

Michael Goldston

Cambridge Equity Advisors • Brentwood, TN

Michael Goldston has been an investment professional for 25 years, including a stint as a portfolio manager at PaineWebber. He established his own brokerage firm, Cambridge Way, in 1987 and founded the investment advisory firm Cambridge Equity Advisors two years later. Goldston has served on the National Association of Securities Dealers (NASD) Dispute Resolution Board since 1989, and he's a member of the Nashville Society of Financial Analysts and the Association for Investment Management and Research (AIMR).

"I look for long-term business trends, then work backward and locate stocks and industries that will benefit from that direction," says Goldston. "For example, I was an early investor in Wal-Mart Stores, The Home Depot, Amgen, and America Online. I saw them as forerunners of groundswells in different areas of our society. Now I'm keeping cash ready for opportunities that will emerge after a three-year bear market."

His $100,000 stock portfolio includes a range of risk. "I've invested 25 percent of the portfolio aggressively, going for home runs; 50 percent in moderate-risk equities; and 25 percent conservative ones," he says. "My overall investment themes include technology, consumer goods, and media. This mix provides diversity while concentrating in areas that I expect to outpace others."

Goldston's aggressive picks include Gilead Sciences, JDS Uniphase, and Lucent Technologies. Gilead Sciences, a pharmaceutical company, specializes in developing treatments for viral and infectious diseases, including HIV and the flu. It has marketing alliances with several major drug firms. "Sales are way up, and prospects for additional gains are strong," says Goldston. "The company's share price has risen consistently for the past eight years.

"JDS Uniphase, a former tech darling, has restructured and is beginning to turn around. It specializes in fiberoptic equipment and will take a while to recover, but it could return to the double digits," he says. That's not much comfort to investors who paid $153 per share in 2000 and now see the stock selling for less than 3. Still, Goldston believes the company's size and market position will enable it to thrive.

"Lucent, a telecommunications company, was up to $84 in 1999, and has been as low as 55 cents," he says. "The industry still has some problems, but this company will be a survivor."

Goldston's also optimistic about one of his moderate picks, Concord EFS. The company provides electronic funds transaction processing and transfer services nationwide. It operates a network of ATMs and services credit card and debit card usage in retail outlets. "I think it's a steal at its current price of 9 a share."

As a conservative pick, Goldston likes Lockheed Martin. "It's one of the premier defense stocks, with its hand in every facet of the industry. I expect defense spending to increase, war or not, and this company will benefit," he says.

 

CompanyTicker symbolPriceSharesValue
AOL Time WarnerAOL11.66700$8,162
Apollo GroupAPOL44.461506,669
Bed Bath & BeyondBBBY33.502006,700
Concord EFSCE14.665007,330
Fox Entertainment GroupFOX27.632005,526
General ElectricGE23.143838,863
Gilead SciencesGILD34.902006,980
JDS UniphaseJDSU2.703,0008,100
Lockheed MartinLMT51.051507,658
Lucent TechnologiesLU1.865,3529,955
Motorola Equity UnitsMEU30.552507,638
Nasdaq-100 Index Tracking StockQQQ24.443007,332
StarbucksSBUX22.724009,088
Cash   1
Total   $100,000

 

Joe Duarte, MD

River Willow Capital Management • Dallas, TX

Joe Duarte, a registered investment adviser, is president of River Willow Capital Management, where he manages individual client accounts. He's also a board certified anesthesiologist and still sees patients two days a week. He's written three books: Successful Energy Sector Investing (Prima Publishing, 2002), Successful Biotech Investing (Prima Publishing, 2001), and After-Hours Trading Made Easy (Prima Publishing, 2000).

"Given the nasty state of the market, I have some trepidations," says Duarte. "But, I've identified some companies I think are likely to fare well."

Duarte's picks are heavy on stocks in the technology sector (Alcatel, Business Objects, Flextronics International, SBC Communications), and businesses that thrive in both strong and weak economies (Amgen, eBay, Iron Mountain). He chose 10 stocks, giving each equal weight.

Alcatel, a French company, is the world's leading supplier of telecommunications infrastructures. It has operations in the US, Asia, and Europe. Sales were way down in 2001 and the stock price was depressed—all the more reason the company stands to see a significant gain, says Duarte.

Business Objects develops "intelligence" information for large companies, such as analyses of profitability, marketing and sales effectiveness, and customers and vendors. Its systems help clients streamline operations and increase revenues. Nearly 90 percent of the Fortune Global 100 companies use Business Objects' services.

Flextronics International provides manufacturing services to companies in the computer, communications, and medical industries. Headquartered in Singapore, the company operates in 29 countries and makes cell phones, printers, PDAs, cameras, personal computers, and other products that sell under other companies' brand names.

Iron Mountain, a Boston-based company, stores and protects records, media, and electronic data. "Partially due to recent corporate scandals, new regulations that require increased record-keeping have been passed, and Iron Mountain stands to gain from that trend," says Duarte. "The growth of computer data and the need to back it up have also propelled this industry, and Iron Mountain's shares are considered timely."

Besides his high-tech choices, Duarte picked Sears, Roebuck and Co., a consumer retailer that has stood the test of time. The company sells clothing and home and automotive products and services, to the tune of more than $40 billion annually.

 

CompanyTicker symbolPriceSharesValue
AlcatelALA7.261,377$9,997
AmgenAMGN50.961969,988
Business ObjectsBOBJ16.056239,999
CentexCTX52.9218910,002
eBayEBAY75.161339,996
Engineered Support SystemsEASI37.002709,990
Flextronics InternationalFLEX8.071,24010,007
Iron MountainIRM31.7131610,020
SBC CommunicationsSBC24.444099,996
Sears RoebuckS26.453789,998
Cash   6
Total   $100,000

 

Ram Kolluri

GlobalValue Investors • Princeton, NJ, and New York City

Ram Kolluri is president of GlobalValue Investors, a money management firm. Kolluri, a Certified Financial Planner since 1982, specializes in portfolio management and estate planning. He's also on the editorial board of the Journal of Financial Planning. A stickler for diversifying his holdings to minimize risk, Ram Kolluri chose 45 stocks and gave each an equal weighting.

"There are now more industries and niches than existed years ago, and varied forces act on each one," he says. "Having a large number of stocks prevents one or two from dragging down the portfolio. No one should take more risk than necessary to get the returns they need. Although we selected more stocks than the other advisers, these companies have been very carefully chosen from a relatively small number of standout companies, based on historical growth, superior returns, and reasonable current valuations."

Kolluri's choices cover nine industries and slightly favor the financial, health care, industrial, and consumer discretionary product sectors.

Aflac, the world's largest underwriter of supplemental cancer insurance, also sells life, accident, and long-term convalescent care policies. The company takes in close to 76 percent of its revenues in Japan, where the aging population and new product introductions should keep sales strong.

Amgen has the potential to go gangbusters, says Kolluri. Revenues are expected to increase by about 30 percent in 2003. The company, which uses biotechnology to develop pharmaceutical products, has launched several well-received medications. Its key products are used to treat anemia and rheumatoid arthritis.

Kolluri also likes Graco, which manufactures fluid handling equipment for automotive and industrial equipment, because "the business's fundamentals are solid, and the stock price has held up despite the sinking market," he says. Continued strong sales and the company's expansion into the Chinese market should continue to boost the company's earnings.

Although not a household name, Landauer, an Illinois company, has been steadily gaining ground since mid-2000, notes Kolluri. It provides services to determine people's exposure to occupational and environmental radiation hazards, and it's also a leader in radon gas detection.

 

CompanyTicker symbolPriceSharesValue
Abbott LaboratoriesABT38.1250$1,906
Abercrombie & FitchANF27.84722,004
AflacAFL32.39622,008
AlltelAT46.87432,015
AmgenAMGN50.96391,987
Applebee’s InternationalAPPB26.00772,002
BandagBDG37.14542,006
Bank of AmericaBAC70.05292,031
Bard (C.R.)BCR56.68351,984
BemisBMS43.62462,007
BiometBMET27.94722,012
CH Robinson WorldwideCHRW28.02711,989
CitigroupC34.38581,994
The Clorox Co.CLX38.22521,987
Colgate-PalmoliveCL50.91391,985
ConAgra FoodsCAG24.53822,011
Dell ComputerDELL23.86842,004
ExxonMobilXOM34.15592,015
General ElectricGE23.14861,990
GracoGGG26.62751,997
Hudson United BancorpHU31.40642,010
International Business MachinesIBM78.20262,033
IntelINTC15.701271,994
International Flavors & FragrancesIFF31.77632,002
International Game TechnologyIGT78.87251,972
ITT Educational ServicesESI27.98711,987
Johnson & JohnsonJNJ53.61371,984
LandauerLDR34.63582,009
Marsh & McLennanMMC42.63472,004
MBNAKRB16.831192,003
The McGraw-Hill CompaniesMHP59.22342,013
MicrosoftMSFT47.46421,993
Mylan LaboratoriesMYL26.72752,004
The New York Times Co.NYT48.84412,002
Old Republic InternationalORI27.14742,008
OracleORCL12.031661,997
PactivPTV20.41982,000
PepsiCoPEP40.48491,984
PfizerPFE30.36662,004
QualcommQCOMM37.66531,996
SyscoSYY29.37681,997
Tyco InternationalTYC16.011221,953
United TechnologiesUTX63.58311,971
Wal-Mart StoresWMT47.80422,008
WyethWYE39.03511,991
Cash   10,147
Total   $100,000

Can you beat the pros?

Because it's always more fun watching a derby if you've got a horse in the race, we invite you to create your own $100,000 portfolio and track its performance against the performance of the pros' portfolios. What's more, we'll choose, at random, three physicians' portfolios from all those sent in and track them in the pages of the magazine, right along with the pros' picks.

If you want to be one of those three doctors, print and fill out this grid with your picks.* We'll phone the winners and give you a chance to verify those stocks. Names and picks will be published in the July 25 issue, with the first update on our pro derby.

 

*Please note: To view and print the grid, you must have Adobe Acrobat Reader installed on your system. If you do not have this program, click on the icon below to link to the Adobe download page.

 

 

 



Leslie Kane. Investment Derby: Can three pros pick winners?.

Medical Economics

Apr. 25, 2003;80:87.