Stock picking will continue to be the secret to good investment performance for the balance of this year, top-performing money managers say.
As economies in the United States and abroad move along in their recoveries, fundamental analysis and bottom-up investment styles should provide firms with the performance edge, said some of the performance leaders in the Pensions & Investments Performance Evaluation Report (see related story on page 29).
Most stock pickers don't expect the U.S. equity market indexes to continue showing the steep increases of previous years, which should make careful stock picking a more important skill. They cite stocks' fundamentals as still the best predictor of their ultimate performance.
"The bottom line this year is it's been a real stock pickers' market. People who talk in macro terms are missing the point," said Bruce Bee, president of Bee & Associates Inc., a Denver global manager. "You can always talk about markets, but you're buying stocks."
Although most don't feel the U.S. economy is headed for another round of recession, they don't expect great increases in the equity market as a whole. The key, they say, is to continue ferreting out undervalued companies they expect to show good revenue increases in the future.
Van Whisnand, partner of Combined Capital Management Inc., Charlottesville, Va., said his quality growth portfolio, although a growth equity product, looks for companies with value qualities such as good earning streams and strong balance sheets. The basic tenet of that strategy is that, over time, the real value of a business is its earning stream, he said.
Combined Capital recently bought stock in American Power Conversion Corp., a maker of backup power units for computer systems. The stock was knocked down about 50% since February because of a large short position, said Mr. Whisnand. It was trading at $32 and it is now at $16 per share. However, Mr. Whisnand said the stock, which is selling at 16 times 1995 earnings estimates, is undervalued. The company has the main low-cost product in the market, about 35% of market for those devices. Earnings per share are growing around 50% annually, he said.
Mr. Whisnand said his largest holding now is Manpower Inc., the temporary help company. Manpower has benefited from improvements in its balance sheet that have been masked by a series of charges related to a failed takeover years ago. At the same time, the company is benefiting from the trends of corporate downsizing and economic recovery in the United States and Europe by providing temporary personnel for expanding companies.
Perhaps the only sector that has benefited across the board and is expected to continue benefiting is energy stocks, which saw oil prices bottom in early 1994. The price per barrel of West Texas Intermediate crude oil is holding stable at just under $20.
Rodney B. Mitchell, president of The Mitchell Group Inc., Houston, and manager of a portfolio of energy-related stocks, said he expects a good second half for his energy portfolio. Mr. Mitchell said energy does well even when equity markets are declining. His research indicates energy stocks tend to outperform in most bear markets.
"Investing in energy is almost the essence of value investing. You're almost constantly making judgments on the asset value underlying the security," he said.
Overseas, there are clear signs a recovery is under way in Japan, but it's in an earlier stage than the recovery in Europe, said Richard Saler, portfolio manager for international equity at Lexington Management Corp., Saddle Brook, N.J.
Japan should see strong earnings recovery in the next couple of years, said Mr. Saler. The majority of capital in the equity market during the first half has been foreign money, but once domestic Japanese money returns to the market, the recovery should step up, he said. He favors cyclical stocks, which would perform well in the recovery period.
Mexico, which had been dragging earlier this year as a result of political factors, seems to have rallied in the past three weeks, said Mr. Saler. The peso has firmed and interest rates have started to come down as the election seems to be progressing without more disruptions, he said.
If the election takes place without any further disruption, foreign investors' confidence should increase and interest rates - which are riding around 15% because of the perceived political risk - will drop, he said.
Cyclical companies, such as construction firms, should perform well, said Mr. Saler.
Bee & Associates' Mr. Bee also pointed to the political stabilization in Mexico as a good sign. He recommended the stocks of Grupo Impresario Fenix, a retailer of household appliances, and NADRO, the country's largest distributor of pharmaceutical and personal care items.
Combined Capital's Mr. Whisnand said his firm also holds stock in the telephone company Telefonos de Mexico S.A. and in Grupo Televisa, the Mexican television network - which is the largest Spanish-language television programmer in the world.
The equity market has been a stock pickers' game now for several quarters, said James Solloway, director of research at Argus Research Corp., New York. The U.S. equity market will continue to battle upward in price this year, and show some moderate gains from this point onward, he said. However, investors shouldn't expect any spectacular increases, unless there is some extraordinary event, such as a rally in the bond market.
With the improvement in the U.S. economy and continued price gains in the commodity sectors, stocks in producers of basic materials such as the chemical, paper and metal industries should perform well, said Mr. Solloway.
At the same time, there are attractive situations in less cyclical areas of the market, such as consumer non-durable goods companies, he said. He pointed out Rubbermaid Inc. as one company that has shown good earnings growth, but its stock has continued to be a poor performer. There is a high level of insider sales activity in the stock at the moment, said Mr. Solloway.
Mr. Solloway guessed the outperformance of larger capitalization stocks will continue because of fundamental economic improvement in foreign countries, where large multinational companies have market exposure.
"My preferred investment style is to be a little bit of both (value and growth), particularly in a period where there is a bit of uncertainty and interest rates are not terribly favorable," said Mr. Solloway. "It pays to spread one's bets."