Investors’ Dilemma: What Stocks to Trust

With once-reliable technology stocks in the tank, a key issue facing the Women’s Investment Team--and many other investment clubs and individuals--is what they should consider a “core” portfolio holding these days.

What stocks can you trust as keepers for the next few years, regardless of how dicey the short-term outlook may be? Do the tech giants still qualify?

Here is what three money managers known for their buy-and-hold style say about the names they now regard as core stocks:

* Fritz Reynolds, whose large-cap Reynolds Blue Chip Growth fund returned an annualized 28.3% in the trailing three years through last week, said he finds core holdings by looking for industry leaders with strong management and proprietary products--and by steering clear of slow-growing sectors.

“In real estate . . . they say, ‘Location, location, location.’ Well, with stocks, you need to look for quality, quality, quality,” he said.

Like many managers, Reynolds believes technology has to be a core holding, despite this year’s plunge. He recommends a mix of established tech blue chips and newer names that may be riskier but also are faster growing.

Among the tech and telecom stocks he likes: Cisco Systems (ticker symbol: CSCO), Microsoft (MSFT), Yahoo (YHOO), IBM (IBM), America Online (AOL), Nokia (NOK), Nortel Networks (NT), Siebel Systems (SEBL), Veritas Software (VRTS), Juniper Networks (JNPR), JDS Uniphase (JDSU), Ciena (CIEN), Broadcom (BRCM) and Check Point Software Technologies (CHKP).

In other industries, he likes these companies for their ability to market to the masses: in drugs and health care, Merck (MRK), Pfizer (PFE) and Johnson & Johnson (JNJ); in retail, Wal-Mart (WMT) and Home Depot (HD); in leisure spending, Walt Disney (DIS) and Time Warner (TWX) (which is merging with AOL); in financial services, Charles Schwab (SCH), American Express (AXP), Citigroup (C) and General Electric (GE); in household products, Procter & Gamble (PG); and in beverages, Coca-Cola (KO).

Investors need to regularly monitor their core holdings to make sure the companies still have their edge, Reynolds said. Digital Equipment, for example, was a core holding for many in the 1980s--until the world moved away from the mini-computer and to the PC.

Likewise, AT&T; (T) and WorldCom (WCOM) appear shaky now as core holdings, he said. “They are selling commodity minutes. Where are the proprietary products?”

But when the long-term outlook remains strong, it can pay to add to one’s position in a slumping core holding, Reynolds notes.

“I was buying Disney around $25 even though the short-term fundamentals looked a little iffy,” Reynolds said. “Is the world really not going to go to theme parks, watch sporting events and go to the movies anymore?”

* Robert Bender, a Pasadena-based money manager who helps his son Reed Bender run Bender Growth--a mid-cap fund that returned an annualized 56.3% in the last three years--defines a core holding as a company that can consistently grow cash flow and earnings by more than 20% a year without relying on acquisitions.

“We’ve owned Cisco for 11 years now,” he said. “For any investor, a core position is a company that continues to meet your criteria on a fundamental basis.” Cisco still does, he said.

Like Reynolds, Bender also looks for leading companies in industries where the global economy points to robust growth.

In database management, he likes Oracle (ORCL); in Internet security, Check Point Software; in data filing, Network Appliance (NTAP); in document transmission, VeriSign (VRSN); in online advertising, DoubleClick (DCLK).

In retail, Bender likes Starbucks (SBUX), discount clothing seller Kohl’s (KSS) and home furnishings seller Bed Bath & Beyond (BBBY); in “clean power,” Camarillo-based Power-One (PWER); and in payroll and accounting services, Paychex (PAYX).

* William Nygren, whose mid-cap value Oakmark Select fund has gained an annualized 20.3% in the last three years, takes a bottom-up approach that has left him light in tech.

“We want a company that’s selling at a large discount to the economic value of the business, and we’ll keep it until it’s fully valued,” he said.

That usually means hanging onto a stock for a few years. Indeed, a core holding, by definition, often requires that you be patient with it.

“I’d love it if I could buy something and then wake up the next day and see that its price has shot up to what we think it’s worth. But the market doesn’t work that way,” he said.

Like Reynolds and Bender, Nygren looks for companies with a leading position in their business.

Washington Mutual (WM), for example, is the biggest savings and loan and it has been gaining market share, he said. Though the stock has rallied smartly this year, WaMu’s price-to-earnings ratio remains reasonable compared with its earnings-growth prospects, Nygren said.

Energizer Holdings (ENR), the battery maker spun off from Ralston Purina Group, has expanded its product line and stemmed its loss of market share, he said. The growth of cell phones and other “electronic toys” has been a boon for the whole battery market, he said, and Energizer has seen a lot of insider buying in the seven months it has been public.

Tricon Global Restaurants (YUM), the 1997 spinoff from PepsiCo (PEP), owns the three leading fast-food franchises outside the hamburger field: KFC, Pizza Hut and Taco Bell. “Fast-food demand has not been, and shouldn’t be, sensitive to a slowing economy,” Nygren said. “If anything, some of the growth that has gone to casual dining will switch back to less-expensive fast food.”

Visteon (VC), the auto parts company spun off from Ford in June, looks dirt cheap to Nygren, selling for about four times his estimate of next year’s per-share profit. The company is a leader in “telematics,” the industry buzzword for high-tech products delivered through the dashboard, such as location finders and Internet radios. He says the stock is being valued like a traditional auto parts firm even though telematics, with more proprietary content, generates higher profit margins.

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Josh Friedman can be reached at [email protected].