Desert Island Keepers - stocks favored by mutual fund managers

Kiplinger's Personal Finance Magazine, July, 2000 by William Patalon, III

STOCKS | Fund managers reveal the ONE STOCK they love the most.

DON'T EVEN think about concentrating all your investments in a single stock: Recent events demonstrate how lack of diversification can be dangerous to your wealth. But in the pursuit of excellent ideas, we've asked a select group of mutual fund managers to be naughty--to imagine that they had joined Gilligan and the Skipper on a three-hour tour and become stranded on a desert island for a couple of years. What single stock would they want to own all that time?

Of course, this is another way of asking which stock they think has the most potential to grow over time. And from these seven professional investors come seven excellent investing ideas for you. (Unless otherwise stated, all earnings estimates are courtesy of First Call/Thomson Financial and all companies trade on the New York Stock Exchange.)

Cruisin' on

RALPH WANGER, who captains Acorn fund, got into the desert-island spirit with Carnival. The cruise operator runs the Carnival Cruise, Cunard and Windstar lines, and its stock has been a castaway of late. Says Wanger: "It runs a lot of ships past desert islands." He points out that Carnival is the largest company in the business and has a dominant market share in each sector of the industry. "It has excellent management and high profit margins, and its stock is cheap," Wanger says.

To be sure, Carnival's stock price has seen better days. It traded for $54 last year, but was recently hovering around $25. In March the company warned that its earnings in the second quarter would fall short of year-earlier results because of higher fuel costs and lower ticket prices. That finished off the stock, even though Carnival said results should pick up in the second half of the year.

Carnival (symbol CCL) anticipates that fiscal 2000 earnings will be 8% to 10% higher than a year ago, when it earned $1.66 per share on revenues of $3.5 billion. That means the stock is trading at about 14 times its projected 2000 earnings. Analysts forecast a long-term earnings-growth rate of 17%. At that rate, it carries a modest price-earnings ratio. Wanger thinks the company's stock could return to the $50 range in the next couple of years.

All lit up

KAREN REIDY, who runs Janus Equity Income and Janus Balanced funds, would take General Electric into island exile. The company (GE, $51) makes everything from light bulbs to locomotives. Its huge GE Capital unit is one of the largest and most innovative financial-services businesses in the world. On top of that, the company is almost as well known for the quality of its management as for what it sells. In Reidy's view, GE is a diversified economy in miniature--an ideal candidate for an investment you can live with for years. Says Reidy: "There will be enough growth in earnings and in cash flow to be the catalyst" for a higher stock price over time.

At $51 a share, GE trades for 41 times this year's earnings of $1.25 per share, as estimated by Reidy. So this isn't a cheap stock. But it almost never is. Like Reidy, many analysts and investors see a chance for profit growth to surge. The reason: GE has embraced the Internet in a big way. Productivity-enhancing effects of the Web are reaching into every part of the organization: Order taking, inventory management and vendor relationships are all key processes that are being committed to the Web.

Revenue has grown at a 10% annual clip and should accelerate, says Reidy, who estimates that GE will earn $1.46 next year and $1.69 in 2002.

In praise of Big Blue

HOWARD WARD'S companion under the palms would be an IBM share certificate. If you believe in the Internet, says the manager of Gabelli Growth fund, you have to believe in Big Blue (IBM, $104). Ward considers the stock inexpensive at 24 times this year's expected earnings. "It's a low-risk way to participate in the new economy, in a stock of virtually unparalleled financial strength," he says.

IBM navigated some rough waters in the late 1980s and early 1990s but has reinvented itself. Now it is positioned as Home Depot to the Internet: If you need software, hardware or service, IBM will provide it, even if you're a rival like Dell Computer. IBM has announced some major vendor deals, including a multibillion-dollar one with Dell a year ago. The company sells large and small computers, mass-storage devices such as those made by rival EMC Corp., software such as Lotus SmartSuite, and a slew of services customers need to embark on e-commerce operations.

Analysts expect the company to earn $4.37 per share this year and $5 next year. They also predict earnings will grow at a 15% annual rate over the next three to five years. Ward thinks that now is a good time to buy. IBM shares are down from a high of $139; the company is once again a consistent earnings producer; and owning Big Blue is a much less volatile way to play the technology sector than the dot-com stocks.

Finland calling

IF YOU S TRAND Frederick Reynolds on an uncharted Pacific island, he'd like to bring a phone--specifically, a Nokia phone. The manager of Reynolds Blue Chip Growth fund is a big fan of the Finnish cellular-phone giant.