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WALL STREET REPORT:
'Rodney Dangerfield' Stocks Deserve
More Attention
by Andrew Leckey
They
get no respect. A host of companies that are potential takeovers, turnaround
situations or simply overlooked by Wall Street are the Rodney Dangerfields
of today's investment world.
The
eyes of millions of investors and would-be investors are glued to computer
screens displaying similar data and stock picks these days. But patient
folks can sometimes find success in the special situation stocks the crowd
misses.
Some
recent examples:
Takeover
bids for pharmaceutical developer Sugen Inc., water company Aquarion Co.,
telecommunications firm Frontier Corp. and security services firm Pinkerton's
Inc. led to big gains for the recommended portfolio of The Special Situation
Investor newsletter. It sells such stocks as soon as offers are made and
the stock price rises, since not every announced deal goes through.
The
resurgence of Britain's Imperial Chemical Industries, available in this
country as an American Depositary Receipt, has been a positive for The Turnaround
Letter's recommended list. Imperial sold off unwanted businesses and has
basked in the recent comeback of the energy field.
The
takeover of Moviefone by America Online and the lucrative deals of toy company
Jakks Pacific to produce World Wrestling Federation figurines and Indianapolis
500 die-cast cars gave a boost to the recommended portfolio of The ValueLine
Special Situations Service.
Utilities?
Energy? Toys? None elicit the instant excitement of trendy groups such as
the Internet stocks, so it's easy to see why their potential was missed
altogether by large investment houses demanding more immediate results.
"We're
looking for an overlooked stock whose price could be forced higher due to
some specific catalyst Wall Street is overlooking, with our biggest emphasis
on takeover possibilities," explained Charles LaLoggia, editor of the
monthly Special Situation Investor, 7811 Montrose Rd., Potomac, Md. 20854-3394
(800-301-8974), which costs $395 annually.
Willing
to wait up to three years to see results, LaLoggia buys shares of companies
that are selling at a discount in rapidly consolidating industries. They
must have characteristics similar to other companies being acquired, which
means they are usually small- to medium-size players capable of being swallowed
up by larger competitors. For example, he held Sugen for three years and
there was no return the first two years as it hovered around $10 a share,
but it was then snapped up in a $31 a share takeover bid.
LaLoggia's
recommended stocks that could be future takeover targets are Long's Drug
Stores; specialty brewer Redhook Ale Brewery, which is already partially
owned by Anheuser Busch; energy services firm Hanover compressor; supermarket
chain Smart & Final, partially owned by the French Groupe Casino chain;
and Swiss Army Brands, one-third of which is already owned by Swiss manufacturer
Victorinox.
"Turnaround
situations are an efficient niche in the market that is not widely followed
because mainstream analytical tools such as price/earnings ratios aren't
useful in evaluating them," said George Putnam, editor of The Turnaround
Letter, Suite 801, 225 Friend St., Boston, MA 02114 (800-468-3810), published
monthly; $195 annually.
A
major Putnam consideration is whether a firm has a solid core business around
which it can rebuild. He's also concerned about whether cash flows can be
brought back into line, whether there is new management in place that wants
change and whether there's a big, knowledgeable shareholder likely to put
pressure on management. He tries to buy when the stock hits the absolute
bottom and he's willing to hold on for one to three years.
Oil
driller Halliburton Co. is a safe turnaround prospect with little downside,
Putnam believes. He also likes greeting card company Gibson Greetings; electronic
game manufacturer 3DO; and British Steel Plc., a conservative stock with
a dividend yield over 7 percent that should do especially well when Asian
economies rebound and steel demand grows.
"Our
focus has been on undiscovered companies that have some potential to really
take off, but because these are increasingly difficult to find, we've broadened
that to include some down-and-out companies as well," pointed out Gary
Shafer, executive editor of the ValueLine Special Situations Service, 220
East 42nd St., New York, NY 10017 (800-535-8760), published twice a month
and costing $495 annually.
His
three- to five-year horizon for a stock is "three to five years longer
than a lot of people hold," according to Shafer, though a number of
his recommendations meet their price targets long before that time elapses.
He believes small-caps are undervalued and ready to take off. Earnings potential,
solid management and strong finances in a relatively unknown firm can eventually
lead to strong resultsonce Wall Street eventually catches on to a firm's
real merit.
Shares
of Arthrocare, which is involved in the development, manufacturing and marketing
of surgical instruments based on a technology that seals small bleeding
vessels, is a strong Shafer recommendation.
How
many shares of these Rodney Dangerfield stocks are appropriate? LaLoggia
recommends a portfolio of at least five stocks, and preferably 15. Putnam
says the personality of the investor determines how many turnarounds should
be held, since there may be extended periods when that style is out of favor.
Shafer believes 15 to 20 stocks are required to be fully diversified.
Q. I have held shares of Walt Disney Co. for the past 10 years. I'm wondering if I should continue to hold them, or sell and reinvest in another company. C.G., Santa Rosa, CA
A. Perhaps the strong initial box office results and rave reviews
for its film "Tarzan" may help this famous entertainment company
slash its way out of the financial jungle.
Walt
Disney's theme parks, resorts, ESPN sports network and Disney Channel, are
delivering excellent results. However, this firm, founded in 1923, has suffered
through a decline in sales of consumer merchandise and home videos due to
the lack of a new blockbuster product and lingering Asian economic woes.
Yet,
while a boost from "Tarzan" products could help sales and lead
to new theme park attractions, it isn't a complete solution to the company's
woes.
Michael
Eisner, Disney's chairman and chief executive officer, while disappointed
with current performance, remains bullish about the power of the Disney
franchise. He is assessing the company's cost structure in order to make
its businesses more efficient, increase cash flow and position it to better
capitalize on the long-term growth potential of its brands.
The
consensus recommendation on shares of Walt Disney is currently a rather
tepid "hold," according to the Boston-based First Call Corp. research
firm. That includes one strong buy, 10 buys and eight holds.
A
23 percent decline in Disney earnings is expected for this year, to be followed
by a 22 percent gain next year. The company's projected five-year annualized
earnings growth rate is 15 percent.
Disney
has entered into discussions with Internet company Infoseek Corp., which
this year launched the Go Network (Go.com) Web portal, regarding Disney
acquiring the outstanding Infoseek common stock that it does not already
own. There have also been reports that Disney may spin-off some of its Internet-related
operations.
On
a positive note for its television properties, Disney's ABC Inc. and the
National Association of Broadcast Employees and Technicians recently reached
a tentative agreement on a contract with five bargaining units that rejected
ABC's contract in February.
Q. Please
give me your assessment of the Vanguard Windsor II Fund. C.B., Carlisle, PA
A.
The nation's seventh-largest stock
fund is a heavyweight contender that still packs a punch.
The
$34 billion Vanguard Windsor II Fund gained 15.50 percent over the past
12 months to rank in the top half of all large-capitalization stock funds
that blend growth and value. It's three-year annualized return of 15 percent
puts it in the top 11 percent of its peers.
"Jim
Barrow, the fund's portfolio manager since 1985, does an excellent job of
investing in larger companies," observed Daniel Wiener, editor of The
Independent Advisor for Vanguard Investors, 7811 Montrose Road, Potomac,
MD 20854 (800-211-7641), a monthly that costs $149.95 annually. "He
may put all of his eggs in one basket, but he watches that basket really
carefully and gives us his best thinking.
Vanguard
Windsor II is well-suited to being a core holding, Wiener added, for it
has lower risk than the Standard & Poor's 500, yet has produced nearly
the same return over long periods of time. Its biggest current sectors are
financial services, utilities and consumer discretionary products.
This
"no-load" (no sales charge) fund, based in Valley Forge, PA, requires
a $3,000 minimum initial investment and has a low annual expense ratio of
0.41 percent.
While
the original value-oriented $16.5 billion Vanguard Windsor Fund recently
re-opened to investors after being closed for a decade, Wiener personally
believes that namesake Windsor II is the superior choice due to Barrow's
skills. He notes that Barrow now also manages Vanguard Selected Value Fund,
a mid-cap fund geared to growth-oriented investors who have a higher tolerance
for risk. He recommends investors who share that goal give it a close look.
Q. I
have a substantial number of shares of Mobil Corp. My broker keeps advising
me to diversify. What do you think? C.T.,
Norridge, IL
A.
No one can knock the concept of
diversifying, though a lot depends on how many shares you actually have
and what other investments are in your portfolio. Whichever eggs you decide
to keep in your basket should be chosen to function somewhat differently
from one another in various economic and market scenarios.
Keep
in mind that a factor beyond Mobil's control, namely a worldwide drop in
crude oil prices, negatively affected operations. Its first-quarter net
dropped 35 percent, though it still managed to beat analyst estimates.
Most
of the attention Mobil is getting these days involves its dramatic $86.8
billion buyout by Exxon Corp. to create Exxon Mobil Corp., the largest publicly-traded
oil company. Approved by shareholders of both firms, the deal still requires
regulatory approval in the U.S. and Europe, which is expected at the end
of the third quarter. Mobile shareholders receive stock in the new company
in the transaction.
The
companies say they needed to get bigger in order to compete better worldwide
and plan to cut 9,000 jobs from their combined 120,000 work force to cut
costs.
In
the meantime, stock of Mobil receives a rating midway between a "buy"
and "hold." That includes three "strong buys," nine
"buys" and 12 "holds" from the analysts who track it.
There's
been a general upgrading of earnings estimates for the entire oil industry
in recent weeks thanks to improved oil price prospects. A 7 percent earnings
increase is expected this year and a 23 percent gain forecast for 2000,
according to the Boston-based First Call corp. research firm. that follows
last year's precipitous 35 percent decline due to low oil prices. The expected
five-year earnings growth rate is 8 percent.
Q.
I am soon going to be a first-time homeowner, and a friend suggested that
I get my credit report to make sure there are no mistakes before I apply
for a mortgage. How do you do this? F.H.,
Northridge, CA
A.
It often makes sense to check your
credit record every couple of years, even if you aren't making a major purchase,
since some of the more than 800 million credit reports issued each year
have inaccuracies.
A
study by the U.S. Public Interest Research Group found that as many as 70
percent of credit reports contain some sort of faulty information, with
29 percent including errors serious enough to result in denial of credit.
You
can order a copy of your credit report from the three major agencies by
contacting Equifax Credit Information Services, P.O. Box 105873, Atlanta,
GA 30348, 800-685-1111; Experian, P.O. Box 104, Allen, TX 73013-2104, 800-682-7654,;
and TransUnion Consumer Relations, P.O. Box 390, Springfield, PA 19064-0390,
800-888-4213. A credit report, which costs $8, should provide a special
number for reaching someone to discuss its contents.
Adverse
information must be removed from your report after seven years, though some
bureaus leave bankruptcies on credit reports for 10 years. If you find a
negative item older than seven years, write to the credit bureau and ask
that it be removed.
If
you're denied a loan or any type of credit due to negative information supplied
by a credit reporting agency, you have the right to view a free copy of
that report, so long as you make your request within 60 days. Once you've
determined there are inaccuracies, write to the credit reporting agency
indicating what you consider to be false.
"If
a consumer sends an inquiry or complaint to a credit bureau questioning
anything in the report, the credit bureau has 30 days to determine whether
the consumer is right or wrong and must respond back," explained Norman
Magnuson, vice president of public affairs for the Associated Credit Bureaus
trade group in Washington, DC. "If whoever gave the credit reporting
agency the information in question doesn't send a response in time, the
item must be deleted from the report because it can't be verified."
Keep
in mind that an error in one agency's report most likely means it appears
in the reports of the other two major agencies as well, Magnuson added,
since the same lenders report to all three agencies.
Q. I'm
writing about my son's stock in Compaq Computer Corp. I keep telling him
to sell because it keeps going down, but he claims it's a good stock that
will come back again. Should he sell and lose money, or wait to see if it
goes up again? B.P., Oak Lawn,
IL
A.
Even Wall Street has mixed emotions
about this former high flier. While it remains the world's largest personal-computer
maker, Compaq Computer has suffered through a series of misadventures that
are still not resolved.
First,
it encountered severe inventory problems following last year's ambitious
$8.55 billion acquisition of Digital Equipment Corp. Next came a badly handled
launch of a line of computers via the Internet late last year.
The
company announced in April of this year that it would badly miss its first-quarter
earnings estimates, which led to the forced resignation of CEO Eckhard Pfeiffer
just a week later.
Chairman
Benjamin Rosen has been serving as acting CEO and a search is being conducted
for a permanent executive. Most recently, Continental Airlines President
Gregory Brenneman withdrew his name from consideration, five days after
being selected by Compaq's board.
The
company expects a loss for the second quarter of up to 15 cents a share.
It has begun layoffs and other cost-cutting moves that will require a large
third-quarter charge, all of which have served to further pummel the company's
shares.
In
a move that will permit Compaq to spend more time focusing on its problems,
CMGI Inc. recently announced plans to buy 83 percent of Compaq's Alta Vista
business (which was developed by Digital Equipment) and related properties
for $2.3 billion in stock. CMGI will integrate the Alta Vista search engine
into its network of 40 Internet operating companies.
Amid
this seeming chaos, the consensus on the shares of Compaq Computer is teetering
between a "buy" and a "hold," according to the I/B/E/S
International research firm. That includes five "strong buys,"
14 "buys" and 19 "holds." Most of the downgrades by
analysts occurred in March or April, and, most recently, Merrill Lynch upgraded
its "hold" to a "buy."
"Compaq's
real problem isn't personal computer demand, but rather trying to integrate
its acquisition, not having a permanent CEO in place, not having a plan
and not successfully changing its business model to an Internet-based business,"
explained Joseph Abbott, equity strategist with I/B/E/S.
Company
earnings are expected to decline 39 percent this year, versus a 19 percent
gain for the computer industry. On the bright side, next year's projected
291 percent earnings gain dwarfs the expected 28 percent increase industrywide.
While
your pessimism is in line with many Wall Street analysts, your son's optimism
is echoed by others and is therefore not an uninformed decision. The final
tiebreaker is the fact that it is, after all, your son's money and not yours.
Q.
With stock prices so high right now, I have a 33 percent profit in my account.
I've heard that the typical profit percentage is 10 percent at the end of
your stock portfolio's life. Is this a good time to sell my stock, since
the only time you really make money on stock is when you sell? C.M., via the Internet
A. If you sell based on price, you become a market timer, which is
a wildly inexact science. The reason to sell is that the rationale that
led you to buy the stock has changed, there is new information that dictates
better alternatives elsewhere, or there are capital gains considerations
that encourage the sale.
"It
is a mistake to sell a stock on no other information than price change,"
warned John Markese, president of the Chicago-based American Association
of Individual Investors. "Most individual investors tend to sell winners
too soon and should realize that a price runup is not a signal to sell."
By
the same token, do not sell simply because a stock's price has gone down
either, he concluded.
Editor's Note: Andrew Leckey answers questions only through the column.
Address inquires to Andrew Leckey, "Successful Investing," 98
Henry St., Dept. 183, Brooklyn, NY 11201, or by e-mail at successinv@aol.com.
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