Investment strategists are hoping for higher oil prices, lucrative energy competition and improved hair dryer sales as they bet on which stocks will help make 1999 another year in the longest-running bull market the nation has seen.
The 16-year-old bull seemed to be turning into a bear in August, September and October when an economic meltdown in Russia and Asia and the near collapse of a mammoth hedge fund sent stock prices reeling.
In six weeks, the Dow dropped nearly 20 percent from its July 17 high. By Oct. 8, the technology-driven Nasdaq composite index had lost nearly 30 percent from its July peak.
But Federal Reserve Chairman Alan Greenspan engineered a series of interest rate cuts that not only stabilized the market, but allowed major indexes to post double-digit gains for the year and start 1999 on a strong upbeat. But January is usually a strong month as investors and money managers look to reinvest money from year-end bonuses and stock gains.
Investment advisers say investors will need to work harder for profit this year. The economic slowdowns abroad are beginning to have an impact on U.S. corporate profit, consumers could rein in their spending and there's always the question of whether too many stocks are overvalued.
"My thinking is it's going to be unusual to have yet another 20 percent year; we're hoping for a 6- [percent] to 12-percent gain," said James D. Hardesty, president of Baltimore-based Hardesty Capital Management. "Returns in stock over the century have been in the 10- to 12-percent range on average. And at best, we will have an average year, maybe a tad below average."
Investment managers say even the favored sectors this year -- technology, financial services and health care -- will have their soft spots, and it pays to make picks based not solely on a popular area but on a company's particulars.
"The economy is going to grow, but at a reduced pace," said Alfred Goldman, chief market strategist at A. G. Edwards & Sons Inc. "It's critical to focus on those companies that have good earnings prospects."
Of 10 market strategists surveyed for their top stock pick of 1999, none picked Internet companies, which have racked up spectacular gains.
Internet stock purchases "are all based on the hope that there'll be somebody to sell it to at a higher price, rather than any fundamental reasoning," said David Straus, senior portfolio manager at J. L. Capital Management Inc. "If you look at earnings and growth, the valua- tions are just too unrealistic at this point to say you've got to buy them."
Here's what the experts did like:
* Joseph V. Battipaglia, chief investment strategist, Gruntal & Co. LLC:
"My top pick is going to be Merck. It's nothing too exciting at first pass, but it has consistent earnings potential, and its new COX-2 inhibitor, an anti-inflammatory arthritis drug, is a successful new addition to a bevy of products that could liven up its stock price.
"Monsanto [Co.] will be the first one out with the product [a COX-2 inhibitor] through Searle, but it's a big category that has plenty of room for at least two competitors. Merck is a classic growth company in a very dynamic sector."
* J. Patrick Bradley, chief economist, Mercantile Bankshares Corp.:
"Technology stocks are having quite a run. 3Com is the second-largest networking company behind Cisco Systems. Its products go to consumers, small businesses and large companies. We think there's a good amount of growth potential there. Its claim to fame is that it produces the Palm Pilot, a neat little product that's fairly popular.
"3Com also acquired U.S. Robotics Corp., a modem company. It's growing through acquisitions. Our guys think it'll see a 20 percent earnings-per-share growth next year. Technology as a sector is relatively expensive, but earnings growth prospects are pretty good."
* Rob Brown, chief market strategist, Ferris, Baker Watts Inc.: "We're always looking for the classic [investment guru] Ben Graham play of getting a dollar for 50 cents. One of the values in the market, despite all the hoopla, is oil. I like a stock called Amerada Hess. [Oil's current low price per barrel] poses a precarious political predicament for Saudi Arabia, Russia, Venezuela and Indonesia I've got to believe the powers that be will engineer oil prices higher.
"Mention oil to any big [investment] institution and they say there's plenty of time to look at it. But once it bottoms out and moves, you can get left behind. You've got to be early."
* Alfred Goldman, chief market strategist, A. G. Edwards & Sons Inc.:
"I'd pick [contract driller] Transocean Offshore when you look out 12 months and weigh the risk and the reward. It was a pariah in '98 because the price of crude oil was so low, but we think the fund remains strong, and the market will reassess its prospects. It's selling at a deflated price, it's in a dynamic growth area and it's a well-managed company.
"The focus will be on those sectors that can grow their earnings despite an economy that isn't growing -- health care, banking, insurance, technology, selected consumer, and deep-water offshore drilling."
* James D. Hardesty, president of Hardesty Capital Management: "DuPont is making great progress transforming itself from a basic chemical company to a specialty chemical company and medically oriented company.
"Probably DuPont is our favorite. This is a company that's divesting itself of Conoco [oil unit]), it's aggressively trying to expand its representation in the pharmaceutical area, which has a higher growth rate than chemicals. DuPont is unique in that over many years they've adapted themselves to the changing nature of the American economy."
* Hugh A. Johnson, chief investment officer, First Albany Corp.: "I would pick OfficeMax, because there are three criteria we look for. One is that the stock can- not be overvalued. The second is that it has to have a reasonably good record of consistent growth in earnings -- better than the S&P; 500. But the most important and difficult thing to find is stock that's reasonably priced. OfficeMax meets all three criteria.
"What makes it interesting, perhaps speculative, is that some time in 1999 we're going to see the long-anticipated shift away from large cap to small- to midsized caps."
* Judith A. Jones, senior managing director, Key Asset Management: "The top stock we like is Duke Energy. It's one of the companies that have benefited from the convergence of natural gas and electric companies. I'd almost characterize it as a conglomerate in the electric arena. We think highly of the management and the direction they've gone. They made some acquisitions a couple of years ago, and they're a pretty significant utility now.
"It's a classic value stock. We think it will outperform the market."
* Gil Knight, principal at Allied Investment Advisors Inc.: "Our top pick is Windmere Durable Holdings. They manufacture hair care products, and they bought the consumer appliance division of Black & Decker. The company is trying to integrate the purchase from Black & Decker, and it's fallen on some tough times -- the sales level of the Black & Decker products was not what they thought.
"We think they are getting costs down and once the investment community sees the turnaround, some time in the second half, their price will be substantially higher. It's sort of a turnaround value play."
* Douglas G. Ober, chairman and chief executive, Adams Express Co.:
"My top pick is Pall, a manufacturer of filtration systems with three major markets -- health care, aeropower and fluid processing in semiconductor plants. Over the past several years, half the countries in Europe said they need to eliminate all leukocytes in the blood supply that spread viruses, like mad cow disease. Pall filters are the only ones that can do that at this point.
"The [Food and Drug Administration's] Blood Products Advisory Committee recently voted unanimously to recommend to the FDA that the U.S. blood supply also be totally filtered, so there will be huge growth in that division of the company in the next several years."
* David Straus, senior portfolio manager, J. L. Capital Management Inc.:
"We chose DuPont. We're value managers, so we're looking for areas that had a correction but are still solid companies with upside potential. DuPont had a 40 percent correction in '98. Concerns were the decline in oil prices because of the Conoco [oil] unit, and with the strong dollar they were less competitive overseas, and there was weak demand in Asia because of its economic problems.
But now they're getting rid of Conoco, and the dollar has been really weak since this summer, and the worst is behind us in Asia. It's got good upside potential without the risk you've got in other areas of the market that are strong right now."
Picks to click
Investment managers predict which companies will flourish in 1999.
Merck & Co.
Current Price: $153.8125
Joseph V. Battipaglia
Current Price: $46.375
Projected: low $70s
J. Patrick Bradley
Current Price: $52.3125
Current Price: $59.50
James D. Hardesty
Current price: $10.375
Hugh A. Johnson
Tranocean Offshore Inc.
Current price: $30.375
Duke Energy Corp.
Current price: $64.00
Judith A. Jones
Current price: $7.4375
Current price: $25.4375
Douglas G. Ober
Current Price: $59.50
Pub Date: 1/10/99