Sunday, January 4, 2004

Happy days here again

Many local stocks rode a late-year rally as low interest rates and a rebounding economy restored bullish confidence. But in a crucial presidential election year, will the bear return to spoil the celebration?

By John Byczkowski
The Cincinnati Enquirer

The last shall be first. Greater Cincinnati's star performers in 2003 were by and large the very same stocks that did terribly during the 2000-02 bear market - stocks in small companies, in companies that had gotten beaten up during the dot.bomb crash.

img In a year when low interest rates lit a fire under an economic rebound and the stock market overall rose more than 20 percent, there were few local losers. Most of the underperforming stocks still rose in value - blue chips like Procter & Gamble, for instance - and only 14 stocks in the Enquirer 80 declined during the year.

"The market's been led by small-cap and mid-cap stocks, and lower quality," said Don Keller, president and chief investment officer at Haberer Registered Investment Advisers in Cincinnati. "The lower-quality stocks have been the driving force behind the market in 2003. We've left behind the larger-cap, higher-quality names. Not that they haven't gone up, but they haven't gone up as much as the smaller-cap, low-quality issues have."

The local winners in 2003 were all stocks that had hit rock bottom, particularly in industries "that really got crushed in three-year bear market," said Chuck Stutenroth, senior portfolio manager at Fort Washington Investment Advisors in Cincinnati.

Meridian Biosciences fell to $2.31 in 2001 amid quality problems and an FDA inquiry, but bounced back above $10 in 2003. Federated Department Stores shook off the effects of its disastrous acquisition of the Fingerhut catalogs to climb back above $50 in November before slipping back a bit. The soft economy drove LCA-Vision stock below $2 a share, but it also drove two competitors out of business, and today LCA's stock is in the $21 range. Cincinnati Bell put its Broadwing phase behind it, to climbing to above $5 a share from a low in 2002 of $1.15.

Cincinnati's blue-chip stocks - such as P&G, Cintas, Fifth Third, Cincinnati Financial, Cinergy and Kroger - "all under-performed the general market," said Scott Rodes, director of research at investment managers Bahl & Gaynor in Cincinnati.

"It was not due to any fundamental weakness with any of those companies," he said. "P&G has had tremendous results all through the year, and so has Cincinnati Financial. It's just been more (about) what types of companies had been in favor, and larger companies have not performed as well as smaller companies" in the 2003 stock market.

This kind of performance is standard for the early stage of a bull market. The current bull market began Oct. 9, 2002, according to Standard & Poor's, so 2003 was its first full year.

And in a bull market's typical first year, the best stocks are small cap stocks and NASDAQ stocks. Why? Sam Stovall, Standard & Poor's chief investment strategist, explained it's driven by investors trying to make up the ground they lost in the bear market.

"You've got investors saying 'I gotta play catch-up. And so I'm going to throw caution to the wind'," he said. "I'm going to put my money in high-beta areas, maybe even a lot of low-quality stocks, because they're the ones that are likely to bounce back the fastest.

"That's why in the first year of a bull market, you'll find a lot of investors' sell recommendations do better than their buy recommendations, because the fundamentals are lousy but investors don't care. They figure (those stocks have) the greatest upside potential. It's weird, but that's what happens."

But that changes in the second year of a bull market, so for 2004 investors will have different expectations, Stovall said. They figure "the easy money has been made," and they refocus on companies that have good fundamentals.

"There's a renewed interest in higher-quality issues and also those that are economically sensitive," he said. With the economy improving, investors will key on stocks in companies that earn solid profits, he said.

In a bull market's second year, it gets harder to make big money. In every bull market since 1970, the average second-year return for the S&P 500 is 13 percent, compared to 9 percent for the NASDAQ and 5 percent for small-cap stocks, Stovall said. The good news is that the S&P 500 has never declined in a bull market's second year.

Fort Washington's Stutenroth agreed that 2004 will be "a show-me year, and investors are going to increasingly be looking for confirmation (of high stock values) in company performance. If it's not there, these valuations won't hold."

Local investment managers expect stocks like P&G, Cincinnati Financial and Fifth Third to do well. "We see a return to quality names, we see a return to larger companies of lasting value who are capable of growing earnings and dividends in moderate growth economies," Stutenroth said. "That was clearly not in favor this year, but we think it'll shine again this next year, as we do return to more of a normalized environment."


CompanyDec. 31


4th Qtr.

% Change


% Change

LCA-Vision Inc. $21.17 +55.3 +828.5
Humana Inc. $22.85 +26.6 +128.5
General Cable Corp. $8.15 +2.4 +114.5
Alderwoods Group $9.42 +20.8 +98.7
Armor Holdings $26.31 +57.1 +91.1
Gtech Holdings $49.49 +15.5 +77.6
Barr Laboratories $76.95 +12.8 +77.3
Cummins Inc. $48.94 +10.2 +74.0
Ford Motor Co. $16.00+48.6 +72.0
Chiquita Brands International $22.53 +27.3 +69.9


CompanyDec. 31


4th Qtr.

% Change


% Change

AK Steel Holding $5.10 +155 -36.3
Milacron Inc. $4.17 +81.3


Kendle International $6.34 +15.4 -28.0
Huffy Corp. $5.25 -13.9 -12.1
Ceco Environmental $1.65 -7.8 -10.8
Quebecor World $20.59 +10.5 -7.8
Standard Register $16.83 +1.4 -6.5
Great American Financial Resources$16.22 +12.0 -5.5
Johnson and Johnson $51.66 +4.3 -3.8
Reed Elsevier PLC $33.70 +6.6 -3.8
Source: Enquirer research, Bloomberg News



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