Think long, think right: Charles Payne's shrewd analysis pays dividends in difficult markets

Black Enterprise, May, 2005 by Philana Patterson

Charles Payne, founder, CEO, and chief analyst of Wall Street Strategies in New York, focused on the fundamentals and selected a portfolio of stocks that handily beat the market. Although one of his selections suffered a big decline, the portfolio he chose exclusively for BLACK ENTERPRISE scored a 10.84% gain from Jan. 23, 2004, to Jan. 21, 2005. Over that same time, the Dow Jones Industrial Average fell 1.66% and the Standard & Poor's 500 gained 2.3%.

Payne's independent stock market research firm uses a three-tiered approach to analyzing stocks. He starts with a fundamental analysis of a company's value, which focuses on the firm's ability to innovate, cut costs, and deliver market share. Next comes a technical analysis of the company's historic trading patterns, and finally a behavioral analysis--how Payne thinks the rest of the Wall Street community will react to a particular stock.

Last year, Payne says investors didn't react well to the market's tendency to trend lower, shoot up, then drop to lower lows. "People who lost faith during the downturns lost out," he says, noting that 2004 "was the perfect proxy for understanding that the stock market doesn't go straight up or down. It has its moments."

Payne's one pick that investors lost faith in was Bristol-Myers Squibb Co. (NYSE: BMY). Shares of the company that produces anti-heart attack and stroke drugs such as Plavix slid 14.35% from $28.22 to $24.17. "The pipeline [for new drugs] doesn't seem as robust as it once did," Payne explains. Bristol-Myers is also suffering due to negative news about other drug makers such as Merck & Co. (NYSE: MRK), which pulled its arthritis medication, Vioxx, from the market after data showed that it increased the risk of heart attack and stroke. "[Bristol-Myers] has come under pressure for the sins of its competition. A lot of investors are taking a wait-and-see approach."

Payne had better results with another healthcare pick Johnson & Johnson (NYSE: JNJ). The $45 billion maker of healthcare-related products including contact lenses, bandages, over-the-counter medications, and medical devices climbed 18.99% from $51.98 to $61.85. "They benefited from being a well-balanced company," says Payne. J&J announced in December that it would buy medical device maker Guidant Corp., a move Payne says could pay off, "[Guidant's] implantable defibrillators have high growth potential around the globe." he says.

Payne correctly predicted that rising demand for oil would help Weatherford International Ltd. (NYSE: WFT), a provider of equipment and services used in the drilling and production of oil and natural gas wells. Last year, demand for oil in rapidly developing countries, such as India and China, helped crude oil prices spike to more than $50 a barrel. Weatherford jumped 27.24%, from $41.59 to $52.92. Payne points out that "international oil demand is growing tremendously," but given the stock's rise, he only recommends buying it if it falls back below $50 a share.

And Payne made a good call in technology with Harmonic Inc. (Nasdaq: HLIT). The maker of fiber optic and wireless network transmission products saw an increase in demand from cable companies as they continued to add digital capabilities to their networks. Harmonic's shares rose 11.47% from $9.85 to $10.98. "Everyone talked about telecom equipment being the last area to rebound," says Payne. "The rebound has begun." Payne says the stock could reach $15 per share, but it could also drop dramatically. "It's not for the faint of heart," he cautions.

NYSE BMV

TOTAL RETURN: -14.35% CURRENT VALUE OF $1000 INVESTMENT: $856.48

NASDAQ HLIT

TOTAL RETURN: 11.47% CURRENT VALUE OF $1000 INVESTMENT: $1,114.72

NYSE JNJ

TOTAL RETURN: 18.99% CURRENT VALUE OF $1000 INVESTMENT: $1,189.88

NYSE WFT

TOTAL RETURN: 27.24% CURRENT VALUE OF $1000 INVESTMENT: $1,272.42

TOTAL RETURN REFLECTS STOCK APPRECIATION AND INCLUDES STOCK SPLITS AND DIVIDENDS SOURCE: CHARLES PAYNE, WALL STREET STRATEGIES; YAHOO FINANCE