Roller-Coaster Ride

Black Enterprise, Oct, 2000 by Derek T. Dingle

OUR PANEL OF EXPERTS REVIEW TODAY'S VOLATILE MARKET. STRAP YOURSELF IN AND GET PREPARED FOR A BUMPY TRIP.

UP, DOWN, ALL AROUND. JUST LIKE A ROLLER COASTER. This is a fitting way to describe the stock market over the past six months. There have been heart-pounding dips and confidence-building peaks. But oftentimes, the market has been as loopy as the latest attraction at Six Flags.

Yes, investors have been taken for quite a ride: Feelings of uncontrollable exuberance have been followed by nagging uncertainty as they have tried to figure out what sectors are in or out of favor, and where to put their money in this market. It's not an easy proposition. To put things in perspective, the Dow Jones industrial average crossed the 11000 threshold in August for the first time since April on the strength of tobacco, banking, and cyclicals. The tech-driven Nasdaq, however, has been short-circuited by profit-taking and negative earnings surprises.

To help explain the ride--and help you ride it out--we assembled our roundtable of market mavens for their semiannual meeting. This time, we mixed up our panel with a growth-stock money manager, a value-oriented portfolio manager, a telecom and utilities expert, and a manager who uses what he calls a "focused equity" approach to gain the best returns. The members of our roundtable were Stephen Humphrey, portfolio manager of the $100 million Lord Abbett Large Cap Growth Fund (year-to-date performance for the nine-month-old fund: 3%), which invests in "dominant companies" with a market capitalization of $8 billion or more and double-digit earnings; Nathaniel Cartel president and chief investment officer of Lakefront Capital Investors, which manages $48 million in institutional assets, and portfolio manager of the $3 million Victory Lakefront fund (year-to-date performance: -1.09%; 1999 performance: 13.9%), which focuses on large-cap value equities; Doris Kelley-Watkins, senior vice president and portfolio manager of the $447 million Evergreen Utility Fund (year-to-date performance: 8%; 1999 performance: 33.7%), which invests in a broad spectrum of utilities, including telecommunications and power firms; and Stephen M. Coleman of Daedalus Capital (year-to-date performance: 18%; 1999 performance: 124%), who runs a $240 million multicap portfolio that limits its holdings to no fewer than 10 and no more 25 stocks.

The following are excerpts from that meeting:

BLACK ENTERPRISE: Give us your outlook on the market in the coming months.

DORIS KELLEY-WATKINS: Well, it is not uncommon that people still consider utilities a defensive instrument and, for the most part, we are. But the utility sector is changing. The [Fed] has raised rates thus far this year by about 100 basis points. Normally, that would have meant bad news for utility companies, who are very interested to pay income and so forth. But, in fact, we have been performing quite well this year, and this is because the market is performing worse. We are a sector that thrives when there is uncertainty in the general market. My management approach seeks to certainly take advantage of market fears when defensive instruments do well. But we believe that the group also provides some wonderful fundamental choices that have been able to turn in handsome returns for investors. And so we've got both of those worlds, both defensive interest and downright excellent return interest, for our group.

B.E.: Mr. Carter, what will be the performance of value stocks over the next few months?

NATHANIEL CARTER: There's definitely a role for utilities and the traditional value names within our portfolio, although we try not to limit ourselves to what people would call traditional value sectors, such as capital goods and energies, utilities, and consumer cyclicals. We believe the value is where you find it, and you can't really classify it by sectors. If you find an opportunity, tech stocks, for example, trading at a discount to [their] peer group, then that certainly would qualify, as well.

I believe there's a secular shift going on in the way we value markets and stocks. We've had, what, six interest rate increases, and the cyclicals have done well. Every time [Federal Reserve Board Chairman Alan] Greenspan raises rates, the cyclicals get a bounce, rather than what it used to be where they would get hammered. And that's largely a function of the fact that when you look at growth stocks that, conversely, were always deemed to be not very sensitive to the economy, when you see interest rates going up, now they get it, which didn't used to be the case.

Having said that, we look at a broad range of companies. Utilities are certainly a part of that. But, at the same time, we own IBM (NYSE: IBM) and Intel (Nasdaq: INTC), two companies that are trading only at slight premiums to the market, that are obviously well-defined, well-established tech names, but we think there's significant upside from here.

B.E.: Mr. Humphrey, what will be your approach to the market going forward?