TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/cal/fort.stk

Text File | 1990-09-13 | 8KB | 142 lines

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.