Desert Island Keepers - stocks favored by mutual fund managers

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

Nokia (NOK, $49) emerged from almost nowhere to become the world's leading maker of cellular handsets. It also possesses key technology for telecommunications networks and even Internet telephony. Earnings are rising about 30% a year, and Reynolds believes Nokia can maintain that pace for some time. "That basically makes the return 30%," he says, "if the company keeps the same P/E ratio."

Shares of this stock could hardly be called cheap. A consensus of analysts says Nokia will earn 78 cents per share this year, making its P/E ratio a hair-raising 63. The consensus for next year, $1.01, represents a 29% jump.

Upstart from Canada

HAROLD SHARON, a portfolio manager for Warburg Pincus International Equity fund, would head to sea holding OCI Communications (OCC.B, Toronto Stock Exchange, $9 U.S.), a Canadian provider of telecommunications services. OCI is a competitive local exchange carrier, known in telecom parlance as a CLEC (pronounced see-leck). Sharon hopes to give investors the chance to profit from telecom deregulation in Canada just as they profited from deregulation in the U.S.

OCI provides phone service to small and medium-size businesses. It's one of only ten CLECs that have been granted a license in Canada to compete against established telecom companies, and it is undervalued relative to some of its peers, says Sharon. Of those ten CLECs, only three have built up operations enough to have any real chance of succeeding, he believes.

OCI is a newly minted public company: It went public in November at $8 a share (we've converted OCI's key financial figures to U.S. dollars; prices of Canadian stocks are available at www.tse.com). Sharon thinks the shares could hit $40 within two years.

Valuing a company like OCI is tricky, because as a fast-growing start-up it makes no money and isn't expected to for some time. Indeed, cash flow (earnings before depreciation) isn't expected to turn positive until 2003. But Sharon says that the company moved early and aggressively, has $260 million in cash from financing activities to fund operations, and could ultimately end up as a takeover target because of its position.

Financial enabler

LARRY PUGLIA of T. Rowe Price thought long and hard about which stock he'd want as his wealth preserver on a desert island. The winner: State Street (STT, $104), the venerable Boston company that manages money and sells lucrative pricing, custody and accounting services to institutional investors and mutual fund companies.

Revenues are rising about 15%, reports Puglia, who runs T. Rowe's Blue Chip Growth and Financial Services funds. That revenue should only rise as State Street adds to irs offerings and diversifies abroad, where investors thirst for the financial offerings Americans enjoy at home. What's more, State Street has always embraced technology--crucial in a niche where you're serving other financial-services firms. The use of technology is increasing as the company looks for ways to boost efficiency.

With stronger revenues and a newly toned operation, Puglia sees a bulked-up bottom line. He estimates that profits could reach $4.20 per share next year (versus $2.99 in 1999) and perhaps $5.00 in 2002. Says Puglia: "I'm looking at $150 in 18 months."