How to Invest in a Bull Market
National, regional and Boutique firms offer their investment strategies

Photos by Lee Thomas

In light of the performance of the Dow and other indices, The Lane Report submitted a series of questions to brokerage houses in Louisville and Lexington to get their opinions on investment strategies in the current market. The firms represented in this Editor's Survey include Merrill Lynch, Hilliard Lyons and two boutique firms, Financial Asset Management, based in Lexington and Todd Investment Advisors, based in Louisville. believe that this list affords our readers broad-based strategies from firms that are regional, national and local in scope.

Merrill Lynch

What is the best investment strategy for owning stocks today?

An individual investor's investment strategy should take a number of items into consideration. There is no "one-size-fits-all" strategy. The individual needs to identify for what purpose they are investing their assets and how long the funds can be tied up. This might be retirement, college educations, a legacy for their heirs or a charity, a new home, etc. They then need to understand their own risk tolerance and what tax issues may affect the decision on how funds are invested. A comprehensive financial plan is the best approach to gathering all of this information in one place and addressing the greatest depth of issues as they may apply to a family and their decisions regarding an overall investment strategy.

What significant changes in the stock brokerage business does your firm foresee during e next five years?

Our world and industry is being changed from one driven by labor and capital to one driven by information and ideas. The technology boom of the last several years is moving faster than ever. In light of this, we expect that there will be discounted Internet trading sources and global full-service financial providers like Merrill Lynch. There is a tremendous amount of information available to the individual investor if they have the time to explore and use it. However, there is not enough said about the experience and depth of knowledge, that comes along with a full-service firm. We believe that along with the Internet providers there will he very large global firms that provide extensive product lines, knowledge and creativity to the expanding affluent generation that we are seeing come of age. The work done with the clients will be based on long-term, well-founded relationships that will continue through generations.

Identify and briefly describe five stocks that your firm is currently recommending.

The following issues represent timely investment value and are chosen from Merrill Lynch's buy (1) rated stocks. Each week a new selection is added based on our current economic investment strategy and market analysis or on unusual mental and/or investment developments. As you will notice, each of these issues is in a different industry. It is important that the individual investor consider diversification as well as their own risk tolerance and long-term objectives.

DST Systems is the leader in mutual fund processing with 30 percent market share and a blue chip client list. Though the bulk of DST's recent fund-holder account growth his been from existing mutual fund clients, new contract prospects may be stimulated by fund companies' Year 2000 reprogramining pressures. Value is enhanced by ownership of CSC and STT shares equal to some $700 million or $14 per share. Retirement plan recordkeeping is on the rise and international operations are expected to reach profitability in 1998. Finances are strong with high cash flow and recurring revenue.

Lennar Corp. is the largest homebuilder in Florida. The company also builds homes in metropolitan Phoenix and Texas, and has recently established a major position in California. It operates a mortgage banking operation as well. Lennar spun off its' commercial investment activities to shareholders at the end of fiscal year 1997.

News Corp. is the industry leader in developing global distribution platforms, particularly in the U.K., Asia and Latin America. Its rich tradition in English-language publishing provides stable and valuable cash flows for reinvesting in rapidly developing satellite platforms and programming. News Corp.'s chairman and CEO, Rupert Murdoch, is viewed as a visionary who is unafraid to challenge existing paradigms, such as Fox Broadcasting Company, the very valuable fourth domestic broadcast network.

Volkswagen Group is Europe's largest vehicle manufacturer, with a 17.4 percent European market share in the first four months of 1998. VW also has market leading positions in Brazil, Mexico and China and is the fourth largest vehicle manufacturer in the world, producing 4.29 million vehicles in 1997. The group comprises four brands: VW, Audi, Seat and Skoda. 1997 turnover increased 13 percent, while EPS increased 47 percent. ADRs are subject to currency fluctuations.

MGIC is the largest provider of private-mortgage insurance (paid by borrower to cover defaults on Ioans with low down payments. The primary market is first-time home buyers who tend to be relatively resilient and less rate-sensitive than the rest of the mortgage market. Housing affordability is key. The biggest risk is real estate recession. The company has a strong balance sheet and good management.

What is the best investment strategy for owning stocks today?

The investment emphasis of our firm is Precision Market Timing, a proprietary market timing account for not only our firm's clients, but for any investor who wants exceptional returns in both up and down markets. Unprecedented, highly-valued fundamentals of stocks warrant caution. This investment allows investors to potentially profit in any market climate with a minimum investment of $15,000.

What significant changes in the stock brokerage business does your firm foresee during the next five years?

Technology and the Internet will early change the investment business in the next few years. With the massive amount of investment money the baby boomers will have available, the need for investment management and individual portfolio structuring will become the backbone of our industry.

Identify and briefly describe five stocks that your firm is currently recommending.

Our current long-term view is towards undervalued companies and the tremendous baby-boomer growth area.

We are currently recommending Kansas City Southern Industries. We have been establishing positions for seven years in this company and still consider it to be undervalued. What most people think of when they hear the name is the Kansas City Southern Railroad, but the transportation division only comprises 50 percent of their operating business; the other 50 percent is made up of the Financial Services Division, which includes The Janus Funds, The Berger funds and 41 percent of DST, Inc. (the world's largest mutual fund servicing company). The Transportation Division also owns 50 percent of the Mexican National Railroad, which they purchased last year and offers great promise. This company is in the process of spinning off their Financial Services division to the shareholders in order to more fully realize the true value of the company.

Saville Systems, Inc. is a fast-growing telecommunications service company with a strong balance skeet and no long-term debt. Saville is the world's No. 1 designer of convergent billing systems for integrated global telecommunications systems companies. As communications become more integrated, there is a greater need for providers to maintain billing systems that reflect charges from all services in all countries. Saville's customers are the world's largest communications providers. This company's volatile stock has increased in value and is high relative to traditional growth companies, but may be worth a small investment.

Pulte Corp. is the nation's largest homebuilder and is expanding into Mexico with a goal to be the largest in that country. Pulte should benefit from secularly lower interest rates, its large presence in the warmer climates and the movement of retired baby-boomers to those coastal areas.

LG&E Energy Corp. just purchased the highly efficient KU Energy and are themselves ripe for a takeover. This undervalued company is a low-risk investment for potentially well above average returns in the next one to two years. The current dividend yield of 4.4 percent intake makes this company even easier to hold for the long term.

As the population ages, the need for Stryker's high-tech surgical instruments and high-tech hospital beds will increase dramatically. This company has had an uninterrupted 20-year growth rate of 20 percent-plus per year. With low debt, a strong cash position and exceptional growth record, Stryker's stock will continue to provide our investors well above average returns.

What is the best investment strategy for owning stocks today?

While the Dow and other major indices have performed quite well, there are many stocks that have not kept up such a torrid pace. In fact, a full 32 percent of the S&P 500 and 47 percent of the Russell 2000 stocks are down year-to-date. Therefore, with proper expertise, one can hopefully identify individual stocks that represent value today. In our opinion, the best strategy is always to buy high quality companies at attractive prices and maintain a long-term investment horizon.

What significant changes in the stock brokerage business does your firm foresee during the next five years?

Investors will benefit as the securities industry evolves. Extensive consolidation, along with rapidly evolving technology, present new challenges for the securities industry.

Deregulation and securities industry prosperity have attracted additional capital and participation. This larger financial commitment, combined with increasing competition, should only raise the level of service and number of choices available to investors. The role of technology will continue to expand as both investors and securities firms pursue greater efficiency.

Ballantyne of Omaha, Inc. manufactures and distributes equipment for the movie theatre and live entertainment industries. Principal products include motion picture projection equipment, spotlights and high intensity search-lights. We recommend purchase of BTN to investors seeking above average capital appreciation potential.

SBC Communications is a global leader in the telecommunications industry with nearly 34 million access lines and over 5.6 million wireless customers across the U.S., as well as investments in telecommunicaions businesses in other countries. SBC provides telecommunications services through two main subsidiaries, Southwestern Bell and Pacific Bell. Southwestern Bell accounts for 48 percent of the company's access lines (Pacific Bell accounts for 52 percent of access lines). SBC also owns 9.6 percent of Telmex, which provides local and long distance telephone service in Mexico. We regard SBC Communications as a strong core holding in the telecom area and recommend it for long-term growth investors.

American Capital Strategies, Ltd. provides capital to small companies for them to grow their operations. ACAS provides companies with subordinated loans equity participation in return (usually warrants or convertibility). The company also offers advisory services to companies, generating, steady fee income. We believe that for the growth and income investor, a purchase of ACAS offers a good blend of the earnings growth and dividends provided by SIR, with a considerably lower risk profile.

Healthcare Recoveries, Inc. provides subrogation services for private healthcare payors. Subrogation involves recovering accident-related health care benefits for clients when a third party is responsible for these claims. Clients include managed care organizations, indemnity health insurers, self-funded health plans, and companies providing claims administration and other services to self-funded plans. We. believe a recent price decline presents a buying opportunity in what we consider to be a high quality company.

Republic Bancshares, Inc. (FL) is a $1.8 billion asset bank and the largest independent bank headquartered in Florida. Management has taken advantage of consolidation within the banking industry, and has positioned itself in Florida's strongest markets. New business is being generated from a strong local economy and from customers seeking the localized service that REPB provides. We recommend purchase of this stock up to $33.

What is the best investment strategy for owning stocks today?

Year in and year out, bull market or bear market, high valuation or low valuation, investors should maintain adequate diversification in their portfolios. Owning 10 Internet stocks, while momentarily enjoyable, does not constitute a diversified portfolio if Internet stocks are all you own. Diversification across industry groups is essential. The most important advice we can give investors at this juncture is to make sure they know where their asset allocation is. If they believe having 50 percent of their assets in stocks is appropriate to their circumstances, and the bull market has carried their portfolio value up to 70 percent of their total assets, they should seriously consider cutting back. Investors do not need to adjust their asset allocation monthly or even quarterly, but after an eight-year bull market, investors could wake up to a rude surprise in the event of a nasty bear market.

What significant change in stock brokerage does your firm foresee in the next 5 years?

Certain trends are already in motion, such as transaction settlements, which have been shortened from five days to three days and are eventually going to one day. The quality of statements continues to improve, and that is certainly encouraging. More trading will be done over the Internet, and security will continue to improve there as well. We would also expect to see more mergers in the industry, not unlike the rest of the financial services industry.

Identify and briefly describe 5 stocks that your firm is recommending.

Allied Signal, Banc One, Phillip Morris, Delta Air Lines and H&R Block are five large capitalization value stocks widely owned in our portfolios.

Allied Signal is an extremely well-managed, diversified manufacturer of aerospace and automotive products and engineered materials that are marketed in the U.S. and overseas. Under new management, ALD has achieved earnings gains of 13-17 percent over each of the last six years. If you like GE, which also happens to be one of our favorites, you should love ALD, which is growing faster, but carries a much lower valuation.

Banc One is the largest and most profitable of all the Midwestern batiks. However, an unpleasant derivatives venture in 1994 chastened this bank and caused it to refocus on its historic strengths, its disciplined lending process, and cost controls. ONE is aggressively working to streamline and consolidate its operations, and the results so far are encouraging. The recent pullback in the stock provides an excellent entry point.

Delta Air Lines. Traveled on a commercial airline in the last two years? Then you know why we like Delta, the largest domestic airline. The happy convergence of a strong economy, limited capacity additions, low oil prices and the stable labor relations likes helped boost earnings to record levels. Also, new management's dedication to improving customer service has already shown dramatic results. In the last six months, the company's on-time industry ranking rose from 11^th to fourth.

H & R Block provides tax return preparation and electronic-filing services through approximately 9,900 offices in the U.S. and abroad. The company recently sold its money-losing CompuServe division to WorldCom, leaving HRB with $14 per share in cash on its balance sheet and a great deal of flexibility. Congress' recent bill to abolish the tax system is likely to have little long-term effect.

Philip Morris is the leading domestic tobacco company and No. 2 in foreign markets. MO is trading at about $40, but the value of its Kraft and Miller business combined is about $40 a share plus $10 for international tobacco. This means that because of all the litigation, domestic tobacco is valued at -$10 a share, an extremely unrealistic valuation and one that should delight contrarians. With a dividend yield of 4 percent and a growth rate in excess of 10 percent, this stock offers outstanding offensive and defensive characteristics.

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