As of early November, the Dow Jones Industrial Average and the Standard & Poor's 500 had risen 19.15% and 26.63%, respectively, and the Russell 2000 Index of small-cap stocks was up 22.12%. Closer to home, the Bloomberg Florida Large Cap Index returned 28.89% and the Bloomberg Florida Small Cap Index, 33.60%.
For insight on what to look for in 1998, we turned to nine of the financial pros featured in Florida Trend's money manager profiles. Some expect another strong year for the small-cap sector. Generally, they say that technology and medical stocks present some of the best opportunities. Several point to likely winners among companies based in Florida or with major operations in the state. The majority anticipate slower growth in the Dow and S&P.
Our experts' consensus is that astute stock-picking, rather than the mid-1990s trend of betting on major indices will be the key to championship caliber returns. Here are their recommendations for building winning portfolios.
Follow The Money
Richard Angelotti and Edward Rosenberg [FT, May 1997]
Titles
Principals in the Angelotti/Rosenberg Financial Group, Sarasota, a partnership within PaineWebber
Track Record
Former bank presidents and money managers for firms in southwest Florida. Each joined PaineWebber in first half of 1990s and in 1995 formed partnership, which manages $350 million for institutions and high-net worth individuals. Picks based mainly on Rosenberg's 20-year models and research by Edward Kerschner, PaineWebber chief equity strategist in New York City. Focus is on growth stocks: companies with sales and earnings potential that exceeds industry competitors or the overall market. Of five May 1997 picks, four stocks - Microsoft, Mobile, Procter & Gamble and Schering-Plough - exceeded year-end 1997 targets by October.
1998 Outlook
Partners think Dow could go as high as 9100 amid continued economic growth. Favorite sectors are banking/finance, technology and healthcare. Angelotti notes that continuing wave of mergers will enable acquiring banks to cut costs and boost earnings, while making potential acquirees attractive. Rosenberg cites U.S. computer firms' international opportunities: "The emerging markets are going from the agricultural to the computer age, missing the industrial revolution." He adds that the "graying of America" makes the healthcare sector attractive in the short and long terms. Be wary, partners add, of tech and health companies whose rivals appear ripe to come out with new products or services. Also, some regional phone companies and utilities are facing new competition and could encounter problems, they warn.
Stocks to Watch
Microsoft, Intel and Cisco Systems should be in every portfolio. Other favorites: Loral Space & Communications, a service provider to wireless companies, and takeover candidate First Essex Bancorp, based in Massachusetts.
A New Paradigm
Charles Ganz [FT, April 1997]
Title
President, Mellon Trust of Florida, Aventura
Track Record
President of Ganz Capital Management until May 1997 sale to Mellon Bank Corp. of Pittsburgh. Heads Florida operations for fast-growing Mellon Private Asset Management. Combines methodologies he and his late father, Charles Ganz, used for 26 years at Ganz Capital with the strategies of Mellon's national research team. Holds view that U.S. economy has moved beyond old cycles. Feels that low inflation, globalization of business and spread of technology will be long-term trends in new cycle. "We are now in an elongated bull market that has to do with an elongated business cycle." Among his picks last April in Florida Trend, General Electric shares rose 35% and Warner-Lambert, 59% over seven months.
1998 Outlook
"Not be surprised if Dow reaches 9000 sometime in 1998," but says, "Some of the big stocks have gotten ahead of themselves, and earnings could slow partly due to the (1997) rise of the dollar." Some of the best opportunities will be in medium size and smaller companies that have been underperforming in recent years. Spread of "elongated cycle" should lead to growth in '98 and beyond in many foreign stock markets. Already sees better inventory management and enhanced use of technology at many European companies.
The Big Picture
Elaine Garzarelli [FT, February 1996]
Title
President, Garzarelli Capital, New York City and Boca Raton
Track Record
Founded firm in 1995, after 10 years as partner and chief quantitative strategist at Lehman Brothers in New York City. Gained national prominence in summer 1987 when she issued warning to clients that stock market would suffer a severe downturn that fall. Since calling the October 1987 crash, her forecasts have been featured in national press and on TV. Uses earnings models and research on macro data, such as inflation and interest rates, in managing money for institutions and wealthy individuals and in her newsletter, The Sector Analysis Monthly Monitor. Stock portfolios of her Garzarelli Investment Management subsidiary returned 29.7% for first nine months of 1997.
1998 Outlook
Looks for Dow between 7000 and 8500, barring any major interest rate increases. Feels it "could go to 9000" if bond traders accept her view that inflation will stay in the 1.5% to 2.5% range: "The trend in manufacturing and labor costs is lower" and the federal budget apparently will be balanced. If bond pros reach her conclusion, yield on 30-year U.S. Treasury bonds could fall from October's 6.4% range to about 5.8%, "where they really should be now," by late 1998 - producing the environment for a 9000 Dow. Bullish, but says U.S. economy is in stage of cycle where S&P companies will post 1998 earnings growth of between 2% and 5%, compared with 15% to 20% in recent years. Favorite sectors are technology, healthcare and hotels, where, she says, many firms still are selling at relatively low price-earnings ratios and will grow their earnings more than 5% in 1998. Looks for firms in industries where income is "tied to inflation" to experience flat or lower earnings. Puts aluminum, steel, chemical, paper and gold stocks in that category.
Stocks to Watch
Texas Instruments, Hilton Hotels, Dell Computer and pharmaceutical giant Merck & Co.
Consumer Friendly
Anthony R. Gray [FT, March 1997]
Title
Chairman, CEO and chief investment officer, STI Capital Management, Orlando
Track Record
Head of SunTrust Banks' subsidiary and its STI mutual funds, which have $7.6 billion in total assets. In 1980s, his Corporate Equity Fund, available to pension clients, ranked in first percentile among U.S. trust and mutual funds. Manages several mutual funds, including $1.3 billion-asset STI Classic Capital Growth Fund. Focuses on blue-chip stocks with products that "people can understand." His 1995 book, "A Thousand Miles From Wall Street," explains his investment style. STI Capital Growth Fund returned 27.8% for first nine months of 1997.
1998 Outlook
Finds it "hard to imagine" that combination of positive earnings surprises for big-name companies, low interest rates and low inflation will continue at 1997 pace. Anticipates that rises in Dow and S&P indices will be smaller. Feels bargains can be found among several U.S.-based multinationals whose prices were stagnant during 1997's third quarter due to flat earnings. Offers caveat for longer term: "We have had 15 years of unparalleled gains, and almost everyone thinks it is normal. We have to keep in mind that for the 16 prior years (the overall trend) was down."
Stocks to Watch
Multinational favorites include Avon Products and United Technologies. Notes they were among big-name stocks that lagged the overall market in mid 1997. Says the two companies' earnings growth rates are relatively strong and anticipates ongoing strength in foreign sales, which are primarily outside the Far East.
The Long Term
William Inskeep [FT, September 1997]
Title
President, Wm. A. Inskeep & Co., Fort Myers
Track Record
Founded company in 1983; previously chief investment officer for Northern Trust Bank of Florida; firm manages $50 million for high-net worth clients; majority of holdings are in high-tech, medical and banking/financial stocks; looks for companies with "the ability to keep coming out with new products and to control pricing as best it can;" generally selects stocks based on five-year revenue and income projections; for first nine months of 1997, Inskeep stock portfolios had dollar-weighted average return of 28.60%.
1998 Outlook
Sees possibility of "a slight slowing in the economy," thus adding to attractiveness of companies that can still keep showing growth in revenues and profits. Feels that many companies in his three favorite categories have that potential. "On balance, the technology and healthcare sectors should have good revenue growth. The financial sector is still consolidating, with more room for improvement in productivity." Says that if economy grows at a slower pace, many of the S&P 500 stocks might have difficulty maintaining 1996-1997 growth in profits and thus "could find it difficult to show marginal improvement" in stock prices. Declines forecast on major stock indices, but says outlook for U.S. stocks "is very positive over a period of five years, providing superior rates of return relative to other alternatives."
Stocks to Watch
Elan Corp., which develops drug delivery systems; Medtronic, a maker of cardiac devices; Synovus Financial Corp., Georgia-based bank with strong northern Florida franchise.
Big Hopes For Small Caps
Gerald Perritt [FT, January 1997]
Title
President, Perritt Capital Management, Largo
Track Record
Former University of Miami finance professor; founded company in 1988; manages Perritt Capital Growth Fund, which has $35 million in assets and invests in small-cap stocks, by his definition, those with market capitalization less than $300 million. For 12 months ended Sept. 30, 1997, fund's total return was 47.9%, compared with a 29.8% average for small-cap funds tracked by Lipper Analytical Services. Winners among January 1997 picks include health foods marketer Worthington Foods, which rose from $12.50 in December 1996 to $23.00 in November.
1998 Outlook
"Three trends that have unfurled over the last half-decade likely will continue into 1998 and well into the 21st century." Those trends, which spurred the bull market, are ongoing technological revolution, the worldwide move toward free markets and the privatization of retirement funds. The third trend is "less visible," he says, but will create "a huge class of investors" in U.S. and around the world. Looks for many of the "Nifty 50" Dow and S&P stocks to be relatively flat in 1998, due to growing sentiment that they are overvalued. Predicts those two indices will be "plus or minus 5%" at year-end 1998, but that universe of micro-cap stocks, under $300 million in market cap, will rise between 25% to 50%. Several Federal Reserve rate hikes of .25% are possible, but they "will be non-events, other than shaking things up for a week."
Stocks to Watch
Recommends mutual funds because "individual investors are better off with a diversified portfolio than individual bets." In addition to Perritt Capital Growth Fund, he favors Oberweis Emerging Growth. Other favorites: T. Rowe Price Science & Technology Fund, "a tame vehicle" in a volatile market; American Century Global Gold Fund, due to increasing demand for precious metals; and Fidelity Select Energy Services, to take advantage of world energy demand.
Global Approach
Peter Spano [FT, August 1997]
Title
General Partner, Mercator Asset Management, Fort Lauderdale
Track Record
One of four partners who started Mercator in 1985. Previously chairman of investment management committee for Templeton Investment Counsel. Manages $400-million asset Prudential World Fund/International Stock Series, launched in 1992 and distributed by Prudential Asset Management, a limited partner in Mercator. Fund requires minimum investment of $1,000 and invests only in non-U.S. stocks. "Bottoms-up" manager, Spano looks at price-to-earnings and other key ratios of companies. Does not have favorite countries or industries. Each year, identifies approximately 50 stocks that are undervalued with strong earnings and growth prospects. Sees increasing number of non-U.S. firms emphasizing the 1990s trend of new technologies and products, cost-cutting and a move toward global markets. "Often we see a company in a particular country or industry make a big splash, and others follow that trend. It can lead to a snowball effect." Total return for his fund was 16.5% for first nine months of 1997.
1998 Outlook
Fund's holdings are heavy in Europe, with 14% in Britain and 45% in continent-based companies, as of October. Expects that numerous European firms, particularly in financial sector, will keep cutting costs, upgrading technologies and boosting earnings - thus remaining on buy list. Says Britain's National Westminster Bank and Swiss pharmaceutical firm Novartis are among those setting the pace. Japan, where "it has been very difficult to identify bargains" comprises only about 5% of fund's assets and remainder of Pacific Rim has about 17%.
Regions to Watch
"In the next 12 months, I anticipate that we will see fewer opportunities in Europe and more in Asia, including Japan. We probably will have more opportunities to put money to work in the Pacific Basin, where we will be able to find more bargains."
Positioned To Win
William Welch [FT, June 1997]
Title
President, Oaktree Asset Management, Boca Raton
Track Record
Founded company in 1989 as Welch Capital Management. Changed name to Oaktree in 1994. Former director of trust investments for several banks in Virginia. Clients are individuals who can place at least $250,000 under management and institutions. Looks for companies that present a "barrier to competitor entry" due to a unique product or marketing, along with strong five-year growth potential. Nelson Publications' "World's Best Money Managers" rated the firm in the top 20 nationally among U.S. Equity Growth & Value money managers for 1997's second quarter. Stock portfolios return was 33.3% for first nine months of 1997. Picks for June 1997 included Cisco Systems, which rose from mid $50s in early April to mid $80s in November - exceeding Welch's 1998 target range.
1998 Outlook
Expects the overall market to be "back to a more reasonable growth rate" as economic growth slows and some major consumer-oriented stocks report disappointing earnings. Looks for Dow and S&P to rise between 12% and 15%, creating a market more for "stock-pickers" than money managers who focus on stocks in the major indices. As a "thematic growth manager," sees opportunities in travel & leisure and healthcare industries because they are geared to "aging baby boomers."
Stocks to Watch
Says Boeing and Coca-Cola will rebound after third quarter 1997 price declines that stemmed from production problems and slower sales growth, respectively.
Less Is More
Max Zavanelli [FT, July 1997]
Title
President, ZPR Investment Management, Orange City
Track Record
Formed company in 1979 after serving as an investment strategist at American National Bank in Chicago. Moved to Volusia County in 1992. Chess master who specializes in small-cap stocks, which he defines as those with less than $200 million in market cap. Disciplined, uses mathematical models to find overlooked, undervalued stocks. ZPR small-cap portfolios rose 25.4%, after fees, through first three quarters of 1997. Picks for July 1997 included Refac Technology which rose from $7 range in May to $14 range in November - far ahead of June 1998 target of $11.
1998 Outlook
Looks for Russell 2000 to rise about 10% in a volatile year while Dow and S&P finish "essentially unchanged." Says many investors will join him in feeling that many big-name stocks are overpriced and small-cap bargains abound. Advises extra scrutiny in small-cap tech sector, where prices surged in 1997. Expects many large-cap multinationals will have stagnant earnings due to continued strength of dollar and weak export markets in Asia - two factors that won't impact smaller companies expanding in regional U.S. markets.
Stocks to Watch
Finds "incredible situation" for growth in Refac, which holds patent licenses for investors and coordinates legal actions in cases of infringement. Says "cheapest stock on the planet" is TransPro, a manufacturer of air conditioner condensers that traded at $8.00 in early November.
Some Florida Favorites
Banking on Florida
William Inskeep says Stuart-based Seacoast Banking (Nasdaq-SBCF), the parent of First National Bank & Trust Company of Florida's Treasure Coast, has a "dominant market share in Martin County, an area that is wealthy and growing." Even though the bank's management has stressed its plans to remain independent, he says takeover fever should help the stock.
Richard Angelotti and Edward Rosenberg list AmSouth Bancorp (NYSE-ASO) and SouthTrust Corp. (Nasdaq-SOTR) among the nation's most attractive takeover candidates. The two Birmingham, Alabama-based companies have Florida's fifth and sixth largest commercial banking operations, respectively.
Cruising and Dining
William Welch likes Miami-based cruise industry leaders Carnival Corp. (NYSE-CCL) and Royal Caribbean Cruises (NYSE-RCL). He says, "Travel and leisure will be one of the strongest areas in the world" amid a growing economy. Anthony Gray also is bullish on Carnival, saying, "How do you play ?the aging of America?' Cruising fits into that scenario. It (Carnival) is extremely well positioned."
Welch also favors Tampa-based Shells (Nasdaq-SHLL). "It's one of the few seafood concepts among franchised restaurants, and surveys show the average American eats seafood only when out."
Thinking Small
Max Zavanelli points to three Florida-based small-cap stocks, with the caveat that investors should always get a second opinion. He says World Fuel Services of Miami (NYSE-INT), which pumps gas at airports, has a record of strong earnings and is underpriced only "because its executives won't talk with shareholders and analysts." He looks for Jacksonville-based Florida Rock Industries (AMEX-FRK), a cement provider, to benefit from an ongoing construction boom. Prospects also are strong for Equinox Systems (Nasdaq-EQNX) of Sunrise, which makes network servers for Hewlett Packard and other computer companies.
Mickey and Wayne
Charles Ganz says shares of Walt Disney Co. (NYSE-DIS) are starting to wake up and are outperforming much of the market after lagging for most of 1997. "I think the company will take steps to reaccelerate growth through asset sales and (stock) repurchases."
Republic Industries (NYSE-RII), H. Wayne Huizenga's auto-driven conglomerate, should continue the rebound it began in September after settling disputes with Toyota and Nissan over Republic's plans to purchase dealerships, according to Welch. During 1998, he expects to see Republic's AutoNation chain of used car dealerships post stronger sales and overcome some of Wall Street's skepticism.