Strategies for small investors

Nation's Business, March, 1988 by Ray Brady

Strategies For Small Investors

"Perhaps it's a boring investment," says Michael Metz of the Wall Street firm Oppenheimer & Company. "But at least it's safe."

Metz is talking about Southwestern Public Service.

As the name implies, Southwestern is a public utility. It has no nuclear facilities, so the investor need not worry about investing in another Public Service of New Hampshire, which filed for bankruptcy because of its problems with the Seabrook nuclear power plant.

"The yield on Southwestern," Metz goes on, "is about 8 percent, and the company should grow at an annual rate of 4 to 5 percent. So, basically, you should get a total return of about 12 or 13 percent a year."

Metz is engaging in Wall Street's newest guessing game: Which stocks should small investors be encouraged to buy? During the slump of last October --Black Monday and the days around it--thousands of those investors tried to call their brokers and give them orders to sell. But many investors got only a busy signal.

Now Wall Street is beginning to worry about small investors.

Millions of them have been reading about the Brady Commission report on how computers pounded down stock prices, and there must be thousands who remember those unanswered telephones. So what can be investment community offer to lure small investors back?

Some professionals--Mike Metz among them--say that takeover stocks will be the hot play again this year. Takeover stories already fill the financial pages. After all, billions of investment dollars are still floating around the financial community, looking for a home, and the stock prices of potential takeover companies are way below what they were before the crash.

To my mind, though, it can be fruitless for the individual investor to try to pick potential takeover targets. You can keep your money in a moribund company for months and not see any action in the stock.

That leaves "safe" stocks for the individual investor. "It all depends," says Metz, "on your degree of risk tolerance."

For those like this writer, whose risk tolerance is now running remarkably low, Metz recommends--again--looking at utilities.

"Stay away from those with nuclear plants," he advises, "and you can still find a combination of growth and dividends that will give you a return of around 14 percent a year."

And, Black Monday notwithstanding, there are still stock prices that are rising. Bill LeFevre of the investment firm Advest looked over his charts recently and found that in roughly the first four weeks of the year, the Dow Jones Industrial Average rose 9.48 percent. But if you look at some of the individual stocks among the 30 that make up that average, you get a sharply different picture. Ten of them were up 17 percent, and one surprising winner in the group was Bethlehem Steel, which was up a rousing 50 percent.

The action in Bethlehem Steel is indicative of a major change: The Rust Belt is beginning to take on a shine. The low-priced American dollar is enabling a lot of heavy industrial companies to hold their own--and then some--against foreign competitors.

The paper industry was never in the straits of the steel business. Nevertheless, paper has been a major beneficiary of the lower-priced dollar. Says Metz: "We like I-Paper"--which is Wall Street shorthand for International Paper.

The attraction: No huge new capacity is due to come on-stream in the paper industry for quite a while yet, so paper prices seem destined to continue rising. And because of its extensive woodlands, the United States is one of the lowest-cost paper producers in the world.

Other professionals advise taking a look at some of the oils. They may not be as safe as utilities, but the prices of many of them have now been pounded down to reasonably attractive levels. Some professionals point to Chevron, which is paying a dividend that amounts to 5 1/2 percent of its stock price.

Still, it must be remembered that this is an unforgiving stock market. IBM reported a 52 percent gain in fourth-quarter earnings, and its stock got pummeled. Security analysts are marking down the profits they expect to be reported by a whole host of industries --autos, specialty retailers, home builders, money center banks.

So, as you go looking for values, perhaps it's best to keep a cautionary thought in mind. It comes from Robert Gordon, president of Twenty-First Securities, a New York firm that manages $1 billion in assets.

Gordon's blunt advice: If you can't afford to lose, you should not be in this market.

Photo: All across American on Oct. 19, 1987, small investors gathered at brokerage houses to watch in stunned silence as stock prices took a record dive. Now those investors must decide which stocks--if any--they should buy with what's left of their money.