The rewards of patience

Donald Saltz

March 13, 1992|By Donald Saltz

When the stock market averages go down in big chunks, as they did a few trading sessions ago, it seems natural to think of Charles Allmon, a man who's been waiting patiently for years for that great stock buying opportunity.

Mr. Allmon, whose base is Montgomery County, is not some kind of oddball character. He has a long record of building fortunes for private investors, often by uncovering stocks that are little known but are on the launching pad of growth.

About six years ago he started a closed-end investment trust that now bears his name. Trust shares sold initially for $10, and they're still in that range in New York Stock Exchange trading. On that day back in October 1987 when the Dow Jones industrial average fell a phenomenal 500-plus points, or more than 22 percent, the Growth Stock Outlook trust, as it was then called, actually rose in price.

However, the Allmon Trust is nearly three-quarters in short-term U.S. government debt securities and only about one-quarter in stocks. Mr. Allmon is waiting for the bargains, meanwhile dipping occasionally into the market for a selective few stocks.

His private accounts, worth several hundred million dollars, and the $125 million trust own shares of nationally known companies such as Bristol-Myers Squibb and Consumers Water. Favorites among the up-and-coming group include Medicine Shoppe International, a franchiser of pharmacies and provider of prescriptions to senior citizens, and the Geodynamics Corp., which offers systems engineering and software to support government intelligence and military programs. The trust also owns stock in Mercantile Bankshares of Baltimore, one of the most conservative lenders in the banking industry.

Mr. Allmon goes for stocks that are likely to increase their dividends consistently and at good rates. He is strong on utilities, and a favorite in this group is Potomac Electric Power Co. of Washington, the main supplier of electricity to users in Montgomery and Prince George's counties. Pepco, yielding jTC about 7 percent and increasing its payout regularly, is the kind of stock Mr. Allmon seeks.

On the other hand, he's pleased with growth stocks that provide a 3 percent or 3 1/2 percent yield at the same time, with Bristol-Myers Squibb a good example.

It is interest-sensitive utilities, though, that now trouble Mr. Allmon. "The utility average is down more than 11 percent, and I think that's telling us we're going to have much higher interest rates by the end of 1992 or early '93," he says. He expects the prime rate to jump from between 6 percent and 6 1/2 percent to 7 1/2 percent or 8 percent.

Mr. Allmon is also concerned that, even though the 30-component Dow Jones industrial average has reached peaks, the broader Standard & Poor's 500 and New York Stock Exchange indexes have declined moderately. He is worried about the high price-earnings ratio for Dow industrial stocks, a P-E of about 57.

As is the rule with most closed-end trusts, Allmon's sells for less than its asset value -- 6 percent to 7 percent less -- and since three-quarters of it is primarily cash, the Allmon Trust owner gets a good deal on the stocks in the trust, buying them for a 25 percent discount.

While the economy might warm up and spur an upward move in interest rates, it should also benefit corporate earnings. Will Mr. Allmon still wait? Based on what he's done for the past six years, he'll probably continue to dole out his investment funds sparingly.

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