TIME: Almanac 1993/TIME Almanac 1993.iso/time/charts/corp/fort.stk

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                                                                                FORTUNE Magazine

1990 Investor's Guide Stocks that seem Chancy 

By Ronald Henkoff



How often does someone tell you what not to invest in?
Probably about as often as Hugh Hefner gets married or the Cubs
win the pennant.  Some 83,000 stockbrokers, 3,100 equity and
bond analysts, 23,000 certified financial planners, and 500
newsletter writers are all eager to tell you what to buy.  But
do they tell you what to sell?  Rarely, and even then they're
likely to use euphemisms like "swap" or "source of funds"
instead.

Of course picking future losers isn't easy, especially when the
market is going up.  But to hear some brokers talk, you'd think
there was good reason to invest in even the most unprofitable,
indebted, and mismanaged companies.  You know the drill:  Sure,
XYZ Suspender is up to its shoulders in junk bonds, but it has
great restructuring potential.  Yes, the suspender market is
overrun by foreign competition, but XYZ is a prime takeover
candidate.  Bet on it.

Not likely.  Granted, in the kind of bull market we've had this
year--fueled by buyouts, buybacks, and bidding wars--lots of
lousy companies have been carried along with the herd,
wrong-footing analysts and squeezing shortsellers along the way.
"In today's world of takeovers, it's often the worst companies
that get bought up," says Eric Miller, chief investment officer
at Donaldson Lufkin & Jenrette.  However, as uncertainty about
the economy mounts, as more junk-bond issuers flirt with
default, and as lawmakers move to curb tax breaks for LBOs,
investors are likely to start looking at stocks the
old-fashioned way--by tracking earnings, debt, management,
competition, and market share.

"At some point, people will have to get back to fundamentals,"
declares Tom Barton, a partner at Feshbach Brothers, a leading
firm of shortsellers.  When that happens, it will pay to be wary
of stocks that have flown too high on hype and hope.  You won't
find unanimity on this subject, but what follows is a partial
list of stocks that some analysts consider bad bets for 1990:

Don a parachute if you plan to invest in airline stocks.
Collectively their prices appreciated a remarkable 95% in the
first eight months of 1989, pumped up by the purchase of NWA
(the parent of Northwest) and the impending employee buyout of
UAL (the parent of United).  But Mark Daugherty, an airline
analyst at Dean Witter Reynolds, thinks the industry is headed
for turbulence.  Passenger demand, already soft, will continue
to weaken just as the airlines are adding new jets to their
fleets--and new debt to their balance sheets.  Moreover,
Daugherty warns, "the takeover environment will cool down
because of economic conditions or government intervention, or
because there is nothing left to take over."  He's especially
bearish on Pan Am and Texas Air (which owns Continental and
strike-plagued Eastern).  "They have excessive amounts of debt
and gigantic annual interest payments," he says.

If you like to gamble, head for Vegas or Atlantic City, but
don't put your money on some of the big-name hotel and gaming
stocks.  That's the advice of Marvin B. Roffman, an industry
analyst at Janney Montgomery Scott, a Philadelphia investment
firm.  By the end of last summer, house winnings at Atlantic
City casinos were up a paltry 3.9%, the lowest increase ever.
Las Vegas has had a good year, but casino operators will at
11,000 hotel rooms by the end of 1990. Roffman thinks the
expansion will glut the market and trigger a price war.  "I see
indigestion," he says.  "If companies have heavy debt service
they could get themselves into trouble."  He gives poor odds to
Golden Nugget, which he says will lose money this year and
which borrowed heavily to finance the Mirage, an extravagant
$620 million casino-resort opening in Las Vegas in November.

Another sucker bet, says Merrill Lynch metals analyst Charles
Bradford, is the steel industry.  Once complacent, inefficient,
and overmanned, Big Steel has reformed itself into a leaner,
meaner, and smarter bunch of competitors.  But Bradford argues
that they remain vulnerable to the ills of a cyclical
downturn--rising costs, falling prices, and excess capacity.
"We've got sell recommendations on most of our steel stocks,"
says Bradford, who thinks the industry will slide into a slump
next year.  Bethlehem Steel's stock may look cheap at its recent
price of $21.50 a share.  That's only 4.8 times projected 1989
earnings of $4.50 a share, not counting some one-time write-offs
for plants that are being shut down.  But don't be fooled. Next
year, Bradford predicts, "earnings will go to hell," falling to
about $2.50 a share and swelling the multiple on 1990 earnings
to 8.6.  Bradford is also sour on Inland Steel, USX, and
National Intergroup.  One word of caution:  "The key is the
economy.  If the economy doesn't slow down, I'll be wrong."

A further industry facing problems:  chemicals.  The product
mix looks particularly unappetizing at Union Carbide and
Quantum Chemical, cautions Paul Leming, a chemicals analyst at
Morgan Stanley.  Both companies produce a lot of polyethylene,
the stuff used to make plastic bags.  Polyethylene-making
capacity in the U.S. will increase 17% over the next three
years--too much for an already weakening market to absorb, says
Leming.  Quantum plans to ramp up its capacity to make not only
polyethylene but also ethylene, from which polyethylene is made.
The company is highly leveraged, making it especially risky,
Leming adds.  His advice is unequivocal:  "I'd avoid these
stocks until they've hit bottom in another nine to 12 months."

One business already in the basement is homebuilding, which has
suffered three consecutive years of declining housing starts.
The industry is showing signs of recovery, but this will fade
if interest rates rise next year, as FORTUNE says they will.
"Stay away from U.S. Home," says Lawrence Horan, a building
analyst at Prudential-Bache Securities.  Because it was heavily
exposed in the troubled Southwest, the company performed
"abysmally" in the past several years, Horan says.  He thinks
its large inventory of undeveloped land will be a drag on
earnings.  Barbara Allen of Kidder Peabody suggests avoiding MDC
Holdings of Denver for similar reasons.

Some market watchers are shooting down defense stocks.  Says
Michael Murphy, editor of the Overpriced Stock Service, a
shortsellers' newsletter:  "Avoid prime contractors who make the
big weapons systems that are likely to be bargained away to the
Soviets or stretched out for budgetary reasons."  Murphy's hit
list, which includes McDonnell Douglas and Grumman, is headed
by Northrop, maker of the B-2 bomber.  Appalled that the price
tag for Stealth has escalated to $70 billion for 132 airplanes,
Congress will probably clip the black bird's wings.  Although
no one knows how deep the cuts will go.  Lawrence Harris, an
analyst at Bateman Eichler Hill Richards, a Los Angeles
investment bank, warns:  "This is a company that all but
speculative investors should avoid at this point."  By Harris's
estimate, Northrop gets nearly half its $5.8 billion in annual
revenues from the B-2.

Finally, if you want to invest in computer stocks, don't punch
up Digital Equipment Corp., advises Robert Herwick, an analyst
at Hambrecht & Quist, a San Francisco investment bank.  DEC, a
potent force just two years ago, is struggling with declining
U.S. sales and increasingly nimble competitors, including newly
aggressive IBM and Hewlett-Packard.  To regain momentum DEC has
cut costs, frozen wages, and revamped its minicomputer line.
Even so, Herwick predicts, investors will be disappointed with
the degree of recovery.  Sure, DEC has boosters.  They say that
the company is cooking up powerful new products and a winning
organizational structure.

Now, what were we saying about that suspender company?

Reporter Associate Edward C. Baig.

Source:FORTUNE Magazine.