Will it be a trick or treat?
Pensions & Investments asked three managers to reveal examples of stocks they knowingly bought with higher-than-average risk, in hopes of getting higher-than-average returns.
Pathogenesis Corp., a biotechnology company in the portfolio of Rainier Investment Management Inc., Seattle.
3Com Corp., a high-tech stock owned by Jurika & Voyles, Oakland, Calif.
Forte Software, held by Van Kasper Advisors, San Francisco.
Jim Margard, Rainier's chief equity strategist, noted his firm is "pretty conservative," so purchasing Pathogenesis is "a little unusual for us."
Rainier is one of the company's 10 largest shareholders; it owns 380,000 shares.
Like a number of biotech stocks, Pathogenesis has a product - TOBI - that has passed through the third phase of the three-phase Food & Drug Administration approval process. TOBI is expected to go before an FDA panel next month and should be approved no later than next spring.
TOBI "is an inhaled version of the current medicine Tobermycin used for treatment of cystic fibrosis, as well as other acute respiratory ailments," Mr. Margard said.
"We expect that by about the year 2000 sales of this product could reach $175 million, which is very large for a small biotech firm."
He said the consensus earnings estimate is negative for next year, but that he expects Pathogenesis to earn 15 cents a share.
"They won't make money this year, and will be around break-even next year. However, the impact and acceleration on a small company's earnings and stock that a product like TOBI will have justifies having a significant holding," Mr. Margard said.
Ignoring the naysayers
Paul Meeks, vice president at Jurika & Voyles, said his firm owns about 4 million shares of 3Com, "a stock that some might view with trepidation but that we feel very confident about."
Some investors, he said, were worried when 3Com it would purchase U.S. Robotics (the deal closed in June).
Mr. Meeks said Jurika & Voyles executives didn't agree with the perception that because 3Com already had a significant exposure to commodity products within the networking industry, the purchase of a company that makes another commodity - modems - would drag down the stock.
Analysts were focusing too much on U.S. Robotics' modem business, he said, when it also had "a systems business which was really the crown jewel of the company." This merger, he added, was a classic example of analysts rushing to judgment; given the current stock value, Mr. Meeks is confident his firm made the right call.
"We purchased the stock at about $30 and it's now at around $53," he noted.
Jurika & Voyles has set a near-term target price of $65, but Mr. Meeks believes over time, "the stock could easily reach the mid-70s."
Waiting for the turnaround
Richard Slinn, associate director at Van Kasper, noted the firm bought Forte at $12 "after it had declined to as low as $8." Forte went public in 1996, then soared to $81 a share before the decline began.
"The company had a sales-related problem back in 1996 and when Wall Street became aware of it they killed the stock. Momentum managers just dumped it, and with those guys out of the way we waited for the turnaround and that's what it's become - a classic turnaround story."
Today, Forte has revamped its sales force, hired some people from the competition, and now "everything is clicking," he said.
Forte develops and sells application development tools for corporate information technology managers. "It's pretty cool stuff, and they're by far the leading vendor of this type of thing," Mr. Slinn said.
"Given what's probably 50% industry growth, and their leading position, we think they can keep their share if not expand it."
Van Kasper is calculating at least 50% earnings per share growth for Forte over the next three years.
The stock is currently trading at about 30 to 35 times next year's earnings, which Mr. Slinn characterized as "not really cheap, but cheap for a stock that can grow this quickly".
"Over the next six to 12 months we expect to see the stock rise to at least $18 from its current $13 to $14 range," he said.
He declined to say how many shares Van Kasper owns.