Which way's up?

Business, North Carolina, Jan 01, 1999 by Frew, Alex

The 30-largest Tar Heel stocks by market cap lagged the Dow a little, gaining 0.6% despite the pummeling textiles and banks took. BankAmerica Corp. and First Citizens BancShares Inc. both lost value -- 12.2% and 16.2%, respectively. The Southeast regional banks, such as BB&T Corp. and CCB Financial Corp., took hits then rallied in mid-October, ending up with gains of 11% to 16% for the 12 months.

Smith, who had the second-highest return among panelists, saw her bank pick of First Union Corp. perform decently, gaining 12.0%, like the S&P 500. She says financial stocks are under pressure as recession fears seep in. The one exception is traditionally conservative Wachovia Corp., which tends to attract investors when times get tough. It gained 14.3%. Its strong profitability and credit quality are attractive because investors are concerned that banks' consumer loans and credit-card debt will go bad in a recession. Smith is annoyed, though, that investors don't discriminate much between banks with a lot of foreign exposure, such as the newly merged BankAmerica, and those without.

All but two of the 14 public textile stocks in this state lost at least 15% in the last year. Their median loss was an astonishing 32%. That's why, according to Bobby Edgerton, president of Capital Investment Counsel Inc. and another first-time picker, it's a good time to buy. Two of his three picks are in textiles -- Unifi Inc. and Cone Mills Corp. He follows a contrarian strategy, looking for companies that are rich in cash and real estate and are relatively debt-free. "Anytime the textile cycle is down you can buy Burlington, Unifi, Guilford Mills. The good ones in the long run are probably going to make money."

Patton with Mimosa Investment is also a contrarian. For next year he favors two out-of-favor industrial companies -- Nucor Corp. and United Dominion Industries Ltd. -- and a high-tech company fallen on hard times, Glenayre Technologies Inc. No way, though, would he touch textiles, mainly because of foreign competition. "You can only move production offshore one time," he says. "It's like trying to hit a moving target. You move to Mexico and start production, and someone else figures that now Asia has gone through this crisis, they can produce it over there for one-tenth of what you're making it for in Mexico."

Picking stocks by industry isn't always the best safeguard. "When the market goes down, there's no place to hide," says Davis at BT Alex. Brown. The state's investor-owned utilities had the steadiest gains among Tar Heel stocks, though only Davis and Smith picked one, Duke Energy Corp. Duke grew 28.4%, and Carolina Power & Light Co., 23.9%. The state's natural-gas utilities, North Carolina Natural Gas Corp. and the Public Service Company of North Carolina Inc., gained 19.3% and 4.3%, respectively. Those solid gains show that investors are looking for safety in stocks that, for now, have regulated returns and pay decent dividends.

That caution is understandable. Jeff O'Quinn, a vice president in Raleigh for Scott & Stringfellow Financial Inc., would up with the worst return among last year's panelists, a loss of 33.2%, due to the poor performance of two risky small-cap stocks, Broadway & Seymour Inc. and McRae Industries Inc. "I bet on a couple of small companies that I thought would turn around and lost. It wasn't the year for small companies."