What stocks to buy for '97

Black Enterprise, Oct, 1996 by Caroline M. Brown

GREER: Health care is definitely an area we need to look at, particularly the HMOs. We're moving more from traditional companies to the HMOs, which will basically dominate in the 21st century. There are some good companies out there for investors.

BOWLES: Can I piggyback on the HMO point for a minute? We are bottom-up stock pickers, but that's an industry that keeps raising our antennae as being very attractive. Because of all of the bad publicity, people are not understanding what the HMO way of life will be like, and hospital consolidation has really not yet begun. We have found ourselves owning more than one HMO at the Kenwood Group, because they are very undervalued right now. There has been a tendency for people to put their health care money in drug stocks and also in hospital stocks. We actually believe that in the long run HMOs may grab up the hospitals rather than the other way around.

Some of us in this room are bottom-up stock pickers. You can have the best stock, but if it's in the wrong industry it will not do well for a period of time. Biotech stocks tend to move as a group. So, even if one is the best in that whole category, it's hard to outperform if the rest of the group is falling. So, that's where your question about industry versus stock dynamics comes in. At our company, we've found that we just do a better job picking the stock irrespective of the industry. But what we do is take a hard look at the industry to make sure it doesn't have any negative momentum at the time we are buying.

BE: Are there any other industries you would advise our readership to stay away from?

BOWLES: If I find an individual stock that I like, nine times out of ten, I'm going to find more than one in that industry. We are slightly overweighed in the HMOs, because there were two stocks that we found that we really liked.

Another category is energy, which actually has about a 10% weighting in the overall S&P. But up until very recently, we were overweighed in energy.

I'm not in the paper industry, because I made all my money in paper stocks last year. So far this year, I haven't seen any that are attractive to me. I'm way underweighted in utilities, but that may change, because I'm beginning to like utility stocks. But up until recently, I felt the stocks we had our eye on were overvalued relative to what we thought would happen with interest rates rising. Now I think we're getting closer to the top of the interest rate curve, and I may like utilities again if they yield over 6%.

We're overweighted in financials because I just love banks. I have a preference for banks and insurance companies, primarily because I think there's going to be greater consolidation in both these industries. When banks consolidate, people get laid off. These are not your low-level laborers, and so consequently, these institutions can make more money in the long term. But in the short term, there are some concerns [in the marketplace] about how interest rates will affect them.

DANIELS: I want to talk about the aging of the population, the baby boomers. I think that fits into the health care industry in a way. I also personally think it fits into entertainment/ leisure time, because you have more people who have accumulated a little wealth and want to enjoy themselves. I think that's one reason some of the casino stocks are doing better in Las Vegas.