Saturday, June 08, 2002

Panelists maintain faith in markets

By Amy Higgins,
The Cincinnati Enquirer

        Scandalous headlines and bear markets may have broken investors' trust in Wall Street - but not shattered it, say members of the Enquirer's Portfolio Panel.

        And when this crisis in confidence ends, U.S. investors will be left with a cleaner and more trustworthy marketplace than before the accusations of analysts conflicts, questionable accounting and management betrayal.

        “Everything like this passes,” said Madelynn Matlock, vice president and director of international investments at Huntington National Bank.

        “But no set of rules promulgated by the government or anyone else is going to make that happen.”

        Instead, most panelists predicted the companies themselves will address investor fears by issuing better and more transparent earnings reports — trying to woo investing dollars back to their stocks.

        But so far, investors haven't been convinced. Despite good news about productivity gains, new orders increasing, and growing optimism from Federal Reserve Chairman Alan Greenspan, broad market indexes are down 11 percent from the middle of March and 18 percent from a year ago.

        The market is off about 30 percent from two years ago, when the Enquirer first convened the Portfolio Panel. The group of investment advisers and market analysts from across Greater Cincinnati comes together four times a year to examine investment issues in the hope that their discussions can help readers better manage their portfolios.

        That's been a tough task recently — as the first recession in 10 years followed an unpleasant end to a technology-dominated bull market and has made investors seriously doubt the safety of the stock market for the first time in years.

        “If you look back to the tech bubble, people loved stocks too much then, didn't question enough then, and now I think we're getting to the other end of the spectrum,” said Greg Weirich, vice president of PNC Advisors. “Now we're just having intense scrutiny of everybody.”

        Investors' suspicions, ignited by the first bear market in a generation, were further compounded since autumn, when questions about Enron's fraudulent accounting practices sent shock waves through Wall Street. Just the debate about legal but “aggressive” accounting and the overuse of pro forma results has fed fears.

        Disagreeing with fellow panelists, Miami University economics professor Dan Seiver doesn't see the cloudy environment cleaning itself up without government intervention.

        “Self-regulation does not always work,” he said. “The current mess is a perfect example. New rules must be put in place to eliminate conflicts of interest for accountants and greater punishments for fraud.”

        While Mr. Seiver said the industry may need pressure or new laws to restore confidence, Sunil Reddy of Fifth Third Bank said more government regulation is not the answer.

        “This, too, shall pass — I think we've got a pretty efficient market out there,” said Mr. Reddy, an equity analyst and portfolio manager for the Fifth Third Technology Fund.

        But under that “market heal thyself” philosophy, change is more an evolution than a quick-fix, Mr. Weirich said.

        Still, panelists said they already are seeing many companies divulge more details of their business and accounting practices so they are clearer to investors — even at the risk of divulging too much to competitors.

        “Company management is more aware of the quality of earnings they need to put out,” Ms. Matlock said.

        Also resulting from the current scandals and confusion may be more independent boards of directors and more shareholder activism, said Denise Ingersoll, vice president of investments at Robert W. Baird Private Investment Management Group in Dayton.

        Panelists hope the fears, doubts and suspicions have taught novice investors solid financial lessons: Buy a stock for at least five years out, not to make a quick killing. Buy a stock that makes sense in your portfolio, not because it made sense to a pundit on TV. And buy a stock that will add diversity to your holdings.

        “That's how people can get over this fear of the market, is to go back to the basics,” said Fred Brink, equity analyst at Johnson Investment Counsel. “Asset allocation, figure out what you want, what you desire out of your portfolio, do the appropriate asset allocation, look long-term.”

Portfolio Panel picks

        What the experts picked this quarter — and how their long-term picks from a year ago have performed so far (returns reported from May 17, 2001, the date of recommendation, to Friday, accounting for splits and reinvested dividends). The Standard & Poor's 500 Index was down 19 percent during the same period.

Fred Brink

        • Title: equity analyst, Johnson Investment Counsel

        • Pick 1: Omnicom Group (OMC), global advertising agency

        • Why: “Ad spending is greatly influenced, dependent on economic activity. ... As the economy picks up, spending in this area will increase.”

        • Pick 2: Intel Corp. (INTC), computer chip maker

        • Why: “Semiconductors typically are one of the first beneficiaries of resumptions in spending. Intel is the bellwether of semiconductors.”

        • May 2001 pick: Best Buy Co. Inc. (BBY), up 21.2 percent

Denise Ingersoll

        • Title: vice president of investments, Robert W. Baird Private Investment Management Group

        • Pick: Electronic Data Systems Corp.

        • Why: “We really like the underlying stock, and for income accounts, there is a convertible preferred out there with a mandatory conversion in '04. It's a current yield of 8.22 (percent). ... EDS has a pretty strong balance sheet, not a lot of debt. They have an ongoing stream of new contracts coming in so their revenue appears to be strong.”

        • May 2001 pick: Kimberly-Clark Corp. (KMB), up 10.3 percent

Madelynn Matlock

        • Title: Vice president and director of international investments, Huntington National Bank

        • Pick 1: Tesco Plc. (TSCDY), British hypermarket chain

        • Why: “They're really doing a really good job in the less developed markets in Eastern Europe and in Asia, where the hypermarket concept is new. Unlike in the U.S. and developed Europe, there's a lot of growth there.”

        • Pick 2: Secom Co. Ltd. (SOMLY), Japanese security firm

        • Why: “It's one of those steady 8 to 9 percent growers every year, a well-financed company, one of the highest returns on capital that you'll see in Japan.”

        • May 2001 pick: Axa SA (AXA-ADR), down 37.4 percent (mostly all in the wake of Sept. 11)

Sunil Reddy

        • Title: Equity analyst and portfolio manager, Fifth Third Bank

        • Pick 1: Analog Devices Inc. (ADI), semiconductor

        • Why: “The good thing about the analog industry is that they have proprietary products and their margins are high. ... ADI has very good management, a very good balance sheet.”

        • Pick 2: BEA Systems Inc. (BEAS)

        • Why: “Investments in the software industry go in waves. The next wave we see is in what I call the Internet-based computing ... (BEA Systems) provides the tools to enable companies to open their internal systems to the outside world. ... I expect it to take advantage of this potential investment in infrastructure software.”

        • No 2001 pick

Dan Seiver

        • Title: professor of economics, Miami University

        • Pick: Cytyc Corp. (CYTC), medical diagnostic kits

        • Why: “Well-positioned in women's health, especially after merger goes through with Digene. Stock sold off sharply after delays in merger closing. Earnings in sharp uptrend, has excellent potential for the long-term investor.”

        • May 2001 pick: Microchip Technology Inc. (MCHP), up 65.2 percent

Greg Weirich

        • Title: vice president, PNC Advisors

        • Picks: Lowe's (LOW), home improvement retailer, and Washington Mutual (WM), mortgage provider

        • Why: “Both are dependent upon the home industry and refinancings. If there's one thing that seems to be working well in this market is that people seem to be paying attention to their homes. ... We'll probably have some refinancings again. They've both done real well, and they'll continue to do well for the same reasons.”

        • May 2001 pick: Pfizer Inc. (PFE), down 22 percent (Mr. Weirich said he would stick with Pfizer as a long-term investment, despite its short-term struggles through the national debate on drug prices.)


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