Good prospects for slow times

Donald Saltz

July 24, 1992|By Donald Saltz

When Ross Perot was an apparent presidential candidate, the direction of the stock market was especially uncertain, which translated to, at best, a drift in the market.

With Mr. Perot out and Bill Clinton riding high in the polls, the market will continue to drift, or decline, because Mr. Clinton is viewed as less favorable to business than is President Bush.

It is unlikely that stock prices will do anything meaningful until the general election in November, unless President Bush grabs a lead before the election.

However, a stock should not be bought for its performance in the next several weeks or months. It should be bought for the longer term, and the next few months might well be a good time for buying.

Companies whose earnings have been suffering because of large debt or recession-intensified competition within their industries are not attractive now. However, shares in businesses that have thrived through the recession are appealing.

Many area banking companies are still burdened with heaps of troubled real estate loans, but Mercantile Bankshares Corp. of Baltimore is as solid as they come. Mercantile recently reported a moderate increase in earnings, continuing a trend that has produced profit increases for a number of years.

Mercantile shares, selling this week for about 31 -- that's 13 times earnings, a reasonable price-earnings ratio -- has a strong balance sheet and a record of moderate but steady growth in the price of the shares, which are trading in all-time-high territory. The dividend provides a yield of about 2.7 percent.

The shares of Washington Real Estate Investment Trust (WRIT) of Bethesda are trading at about 17, a little more than a point below the all-time high adjusted for stock splits. This equity real estate trust has been around for three decades and has the best record in the industry.

WRIT has come through difficult real estate times with flags flying.

Its quarterly earnings are regularly ahead in double digits, and WRIT has substantial cash from the sale of new shares, which is being used to buy quality properties at discounts.

The dividend yield is about 5 percent and the payout rises annually.

Baltimore-based investment firms are doing well, but two of them -- Legg Mason and T. Rowe Price Associates -- have the stronger records in recent years.

Both firms are taking advantage of lower interest rates, which cause investors to seek alternatives to basic bank and savings ++ and loan accounts.

T. Rowe Price shares are at the peak of their earnings; profit in the first quarter this year was up more than 25 percent, and there's been only one down year since the firm went public in 1986.

The stock is selling for about 40 with a dividend yield of less than 2 percent.

Legg Mason's dividend yield is also under 2 percent but earnings have been strong and consistent.

McCormick & Co., based in Sparks, has the consistent earnings that are so appealing.

Those earnings, primarily from the sale of spices and flavorings, have been so good over recent years that the share price has gained tremendously, doubling in 1 1/2 years.

McCormick's dividend has been boosted every six months for 4 1/2 years.

The stock sold this week for 26, giving it a P-E ratio of about 25, which makes it vulnerable, though earnings are expected to continue to grow sharply.

Manor Care, headquartered in Silver Spring, has been consistent with its earnings growth.

The company owns and franchises motels and hotels but the real profit is from another business -- a chain of nursing homes.

Manor Care's earnings have been strong through the recession and the shares, at 19, are near the all-time high that was set this year.

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