Investment letters are optimistic

March 09, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Take rising interest rates. Add a failed communications merger. Stir vigorously for stock market volatility.

This may seem to be a sour recipe, but editors of the nation's best-performing investment letters believe the dish will be quite tasty once the improved earnings of U.S. companies are tossed in.

"Some stocks are overvalued, but economic conditions are good, with industries improving and interest rates still relatively low," observed George Putnam III, editor of the Turnaround Letter, whose portfolio recommendations provided a 57.5 percent average annual return over the past three years to lead the newsletter pack.

"Rising interest rates hurt all stocks, but I don't expect to see a rapid increase."

Shares of Trans World Airlines Inc., recently out of bankruptcy, will benefit from an improving economy and a better picture for the airline industry, Mr. Putnam predicts. Koger Equity, an embattled real estate investment trust that develops office parks, should revive. A. T. Cross, suffering from depressed demand for pens and pencils, will get help from economic improvement here and in Europe. The Carter Hawley Hale retail chain has seen big-time investor Sam Zell put a lot of money into it since it emerged from bankruptcy, a good sign.

"We're getting a little market correction right now, but small-company growth stocks will have a three- to five-year growth rate of 23 percent annually based on some very good prospects," advised James Collins, editor of OTC Insight, which had a 47.8 percent average annual return over three years.

"The price-earnings ratios on smaller stocks will go up in the second half of the year, and only an increase in the three-month Treasury bill beyond 3.75 percent could cause trouble."

Mr. Collins trimmed his portfolio to 25 stocks from 33, placing heavier bets on those in which he has more confidence. Favorites include BMC West, a lumber retailer, and Laser Master Technologies, whose high-performance hardware and software enhance desktop laser printers. Others are TNT Freightways, a custom carrier that promises overnight and second-day delivery of items smaller than a truckload, and Automotive Holdings Inc.

"I'm still optimistic about the market, though it's switching from an interest-rate-driven to an earnings-driven market," said Gordon Anderson, editor of the Individual Investor Special Situations Report, up an average of 47.5 percent the past three years.

"Long-term interest rates are likely to stay below 7 percent and economic news will be good, with the only real concern the potential for the government's health-care plan placing too heavy a burden on business."

Stock of Adaptec Inc., maker of computer data flow systems, is undervalued, he believes. So is Psychemedics Corp., which provides drug testing through analysis of a strand of the test subject's hair. Cheyenne Software makes sure network data isn't lost, while Casino Data Systems provides management system software and hardware for gambling.

" 'Bumpy-as-she-goes' is the attitude, with higher earnings offsetting slightly higher rates," said Al Frank, editor of the Prudent Speculator, up an annual average of 46.9 percent over three years.

"I don't think we're going into a bear market this year, but we may have a 'rolling' 10 percent correction, and it will continue to be difficult picking over the remains of undervalued stocks."

He likes Bell Fuse Inc., an electronic parts manufacturer that's selling at 88 percent of its book value; Gainsco Inc., a Texas insurance firm with earnings growth of better than 20 percent; Sea Containers, a marine cargo container maker selling at 41 percent of sales; and Digital Equipment, selling at 82 percent of its book value.

Model portfolio rankings used in this column were computed by the Alexandria, Va.-based Hulbert Financial Digest.

The top four investment letters all publish monthly. An annual subscription to the Turnaround Letter, 225 Friend St., Suite 801, Boston, Mass. 02114, costs $195; OTC Insight, 1656 N. California Blvd., Walnut Creek, Calif. 94596, charges $295; Individual Investors Special Situations Report, 38 E. 29th St., 4th floor, New York, N.Y. 10016, is $165; and the Prudent Speculator, P.O. Box 1767, Santa Monica, Calif. 90406, costs $175.

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