S&P 500 up 13.5%
The Standard & Poor's 500 Index, which pushed through the 1000 level for the first time during the quarter, gained 13.5 percent to close at 1101.75.
The Nasdaq Composite Index, home to many high-tech stocks, handily outperformed the S&P and Dow despite mixed expectations for the profit prospects of member companies. Nasdaq finished the quarter up 17 percent at 1835.68.
The performance of local stocks, which include many small-capitalization issues, more closely tracked the Russell 2000 Index. The Russell 2000, which gained 10 percent during the quarter, represents small stocks with market capitalizations of $1 billion and less.
Of the 47 local stocks, 37 increased in value during the quarter, and 10 lost value.
Some of the top performers among local issues were LCA-Vision, Kendle International, Cintas Corp., Duramed, Meridian Diagnostics, Pomeroy Computer Resources, Gibson Greetings, Kroger Co. and Omnicare.
The biggest losers on a percentage basis included Cincinnati Financial, NS Group, Chiquita Brands International, Ciao Cucina and Globe Business Resources.
Procter & Gamble, by far the largest and most prominent local stock, gained 5.7 percent in the quarter.
LCA-Vision big gainer
LCA-Vision was the best local performer, with a gain of 58 percent. Despite its impressive increase, the stock of the operator of laser eye-surgery centers remains virtually unknown to Main Street investors and Wall Street analysts because it is so tiny and illiquid. The stock closed Tuesday at $1.78 a share, up for the quarter but down substantially from its 52-week high of $8.50 April 28.
Arthur Jarvis, a portfolio manager at Mench Financial, said 1997 was a turnaround year for LCA.
For example, the number of surgeries performed by LCA centers almost tripled in 1997, compared with 1996. LCA continues to report quarterly and annual losses, however.
Mr. Jarvis said a key to LCA's long-term success likely hinges on whether insurance companies start covering at least part of the cost for its corrective surgery -- about $2,000 an eye.
''Whether or not they can survive to that point is a major question,'' Mr. Jarvis said.
''They are ahead of their time,'' Mr. Jarvis added. ''That could be to their advantage. There are 150 million people who are potential candidates for the procedure.''
Kendle International, which went public less than a year ago at $14 a share, gained 39 percent in the quarter to close at $23.25. Investors have rallied behind the contract research organization because it is a fast-growing company in a fast-growing industry.
''Wall Street is really looking favorably on those companies that can grow their top lines,'' said Randy Bateman, chief investment officer at Star Bank. ''This is certainly a company and industry that can take advantage of that.''
Top-line or revenue growth is considered especially important now because so many American corporations have reorganized, downsized and otherwise cut costs about as much as possible, Mr. Bateman said. The Asian crisis also is contributing to the slowdown.
Cintas, a perennial favorite stock of local money managers, had a good run in the first quarter largely on news that it would acquire three uniform rental companies. Moreover, Cintas consistently reports strong financial results quarter after quarter, year after year, Mr. Bateman said.
''In 1988, (Cintas) was a $5.50 stock. It's now a $50 stock,'' Mr. Bateman said. ''It's gone up tenfold in a decade, and there have been very little ups and downs. It's been almost a straight-line pattern up.''
Cintas is an expensive stock, though, with a high price-earnings ratio, and the company pays a relatively paltry dividend yield, Mr. Bateman added.
Pomeroy Computer Resources is another fast-growing company whose stock increased 33 percent in the quarter. That gain more than erased Pomeroy's 28 percent loss in 1997. The stock's struggle in 1997 followed a stellar performance in 1996 in which it quadrupled in price.
''They've had strong top- and bottom-line growth,'' Ms. Flischel said. ''Market penetration seems to be increasing. They seem to be doing all the right things. But the technology area is very volatile.''
Midland Co., a property and casualty insurance firm that also has a transportation subsidiary, also moved up strongly during the quarter. A thinly traded stock, Midland jumped 26 percent between January and March. Most of that increase -- 17 percent -- occurred March 5, the day Midland announced an increase in its dividend and a 3-for-1 stock split scheduled for May 22. The company also has made some recent high-level management changes.
Duramed shares gained momentum for the first time since federal regulators in May turned down the company's hard-fought request to market a generic version of the hot-selling estrogen substitute Premarin. The stock, which gained 19 percent to close the quarter at $6.75, traded as high as $11.50 a year ago.
Investors recently have rallied behind Duramed on the hope that it will win approval for its synthetic estrogen as a new, branded drug to be called Cenestin. Duramed finished clinical trials on Cenestin last month and filed its first application for government approval last week.
Meridian Diagnostics' gain during the quarter made up for its loss in value in 1997. The maker of diagnostic test kits, which reported record first fiscal quarter revenue and profit in January, gained 26 percent to close the quarter at $12.75.
''It could very well be a diamond in the rough,'' Mr. Bateman said, adding that Meridian stands to benefit from demographic trends that show the population is aging.
But Mr. Bateman cautioned that Meridian's earnings record has been erratic in the past -- a red flag that will disappear only after time and consistent profitability.
Another local health care-related company, Omnicare, pushed 28 percent higher in the quarter. Stock in the provider of pharmaceuticals to nursing homes continued to impress Wall Street with its aggressive acquisition campaign.
''The company last year alone did 17 acquisitions,'' Ms. Flischel said. ''Surprisingly, they've been able to absorb these companies well, bring them into the fold and make them profitable.''
Investors continue to push up Kroger shares as the nation's largest supermarket chain continues to improve its financial position. The stock gained 26 percent in the quarter, closing at $46.19.
It has taken Kroger a decade to show that it is emerging from a highly publicized leveraged recapitalization done to prevent a hostile takeover in 1988.
''Kroger last year had a 25 percent increase in net income on a 6 percent increase in net sales,'' Ms. Flischel said. ''The company's inventory turnover is the highest in the industry, and Kroger has one of the best private-label programs in the industry. They're doing all the right things.''
Gibson Greetings, a laggard stock for years, started to show some life in the most recent quarter. The No. 3 greeting-card maker has started to shore up its financial position and unveil a series of new products. The stock gained 26 percent in the quarter, closing at $27.63 after peaking at a 52-week high of $28.38 the same day.
''I'll step out on a cliff,'' Mr. Jarvis said. ''I like the company. I like the company a lot. Of all the local companies I looked at, this is the single best idea.''
Mr. Jarvis said he is impressed with Gibson's cost-cutting efforts. He thinks that the company can survive as an independent, but ''it would be an added bonus if it was bought out.''
That's because buyers usually pay up for a company's stock, providing shareholders a premium to the market price. Mr. Jarvis expects the stock to climb to at least $32 in the next year.
One of the weakest
One of the quarter's weakest performers -- Cincinnati Financial -- was the best performer in the final three months of 1997.
Cincinnati Financial's 11 percent drop in the first quarter came after increasing 72 percent in the fourth quarter and 117 percent for all of 1997.
Stock in the Fairfield-based insurer already was on a roll in 1997, thanks to strong earnings. Then it jumped 22 percent Dec. 17 on news that the company would be added to the S&P 500.
Cincinnati Financial has been held back since the end of the year, partly because its stock is so thinly traded. The amount of stock available to trade in the public float is expected to improve after the company splits its stock 3-for-1 May 18. The split itself won't change the company's market value, but some longtime shareholders might sell stock as a result, freeing up additional shares.
NS Group, the top-performing local stock in the third quarter of last year, continued to hover toward the bottom of the list. The stock, which closed down 15 percent at $14.63 in the first quarter, traded as high as $41.371/2 in mid-October. The stock dropped precipitously soon after peaking Oct. 13, losing 47 percent by the end of the fourth quarter.
The Newport-based tubular steel maker's efforts to bolster its stock have had little impact because investors are afraid of the industry. A glut of tubular steel, used to transport oil and gas, and falling oil prices have dampened investors' enthusiasm.
Chiquita Brands and Ciao Cucina continue to disappoint investors with an ongoing string of quarterly and annual losses. Chiquita markets fresh fruits, and Ciao operates a small chain of Italian restaurants.
Globe, a furniture rental and temporary housing company, was the worst local performer in the quarter. Globe earned that dubious distinction after doubling in price last year. The stock fell 26 percent Feb. 10, the day that the company announced its acquisition of Accommodations Plus Inc.
''Obviously, there's something going on there,'' Ms. Flischel said, adding that she couldn't tell what the problem was, based on public filings she had reviewed.
Exhilarating, but scary
The panelists said they weren't sure where the market would go from here because it continues to be stronger than they have expected the last three years.
''While it's exhilarating, it's definitely scary because we're in uncharted territory,'' Ms. Flischel said.
Ms. Flischel expects big-cap stocks to lead the market, though, because they are more defensive.
Unlike Ms. Flischel, Mr. Jarvis thinks small- and mid-cap stocks have the most potential in 1998 because those issues are relatively undervalued, have less exposure to troubled Asian markets and generally might be buyout targets by larger capitalization companies.
In any case, he wouldn't be surprised if the market has gained all the ground it's going to in 1998. From here out, he expects even more volatility.
Mr. Bateman thinks portfolios that focus on capital appreciation as opposed to dividend- or income-producing investments will fare better in 1998 because of the tax cuts Congress passed last year.
Other factors that will affect the economy, and thus the market, include the Southeast Asian crisis' implications for U.S. companies, and demographic trends, which show aging baby boomers saving and investing more.
Star will choose its investments based on those themes, Mr. Bateman said. He expects the market to perform well this year, but wouldn't quantify his forecast.
''I don't want to quantify it because the market isn't just one category. It's a wide variety categories now, each of which will carry its own degree of return and risk.''
Nasdaq has been the leader among the major stock market indexes this year and likely will remain so, he said.
