Investment Derby

A high-tech gamble pays off

Several of our model portfolios have underperformed. But two are ahead of the market, and one of those is way ahead.

By Leslie Kane
SENIOR EDITOR

You need talent, research, and luck to create a killer portfolio. The three investment experts we introduced to you last November bring plenty of the first two factors to the table. (See "Investment Derby: Three pros pick their favorite stocks," Nov. 8, 1999.) But based on early returns, a few of their model portfolios could use a little more luck.

Last July, we asked each of our experts to select stock portfolios for two hypothetical investors, one with a three- to-five-year horizon, and one with a 10-year horizon. Each portfolio had $50,000 of "play" money, which our gurus could use to buy or sell stocks only on the last trading day of each month. All dividends had to be reinvested, all stocks had to trade on major exchanges, and the portfolios had to be ones that doctors could replicate.

The money was "invested" on July 30, 1999. From then through Nov. 30, the Standard & Poor's 500 Stock Index plodded to a 4.9 percent return. Vahan Janjigian's short-term portfolio did far better, with a return of 31.6 percent, partly because he sold fast-moving high-tech holdings and poured the proceeds into other rising stocks in that sector. James Ferrare's long-term portfolio also beat the market, with a 9.4 percent gain.

Our other model portfolios all suffered declines, but as our experts reminded us, it's not wise to base many conclusions on four months' return. That's not to say you shouldn't keep an eye on short-term performance. Sometimes stocks drop because of a negative change in a company's fundamental value—and when that's the case, the sooner you find that out, the better. But without evidence of such a change, short-term dips shouldn't be cause for alarm.

All of our money managers remain optimistic about their stocks' long-term prospects. Here's how those investments are doing so far:

James F. Ferrare
Pinnacle Associates
New York City

What happened?

The short-term portfolio went nowhere, with several holdings declining slightly. Ferrare's long-term selections did better; Chiron, a biopharmaceutical company, lifted the pack.

Still, Ferrare feels his picks for both portfolios tap into important trends. "I believe that the demand for broadband and telecommunications equipment will continue for years," he says. "I also expect global economies, including Asia's, to continue their recovery. The stocks in both portfolios stand to benefit from that growth," says Ferrare.

US West's stock could take off soon, he predicts. "The company is set to become part of Qwest Communications, creating a powerful telecommunications and fiberoptics provider," he says. "The merger will position US West for greater growth. And I'm optimistic about Citizens Utilities, which continues to sell off noncore assets and reshape itself into an asset-rich telecom provider."

Oil-drilling and services stocks, such as Tidewater, Halliburton, and Schlumberger, continue to languish. "The investments in energy have not benefited either portfolio, but I'll keep them as a hedge against inflation, which might come with a global economic pickup," says Ferrare.

"I believe all investments should be managed for tax efficiency, so I've kept turnover at zero," he adds.

Vahan Janjigian
Forbes Investors Advisory Institute
New York City

What happened?

Janjigian made three trades in the short-term portfolio. He sold all Hadco shares on Sept. 30 for $5,406, an 8.3 percent increase; all eToys shares on Sept. 30 for $4,992, a 66.6 percent profit; and half of the Ansoft shares on Oct. 30 for $4,827, a 20.7 percent gain. "The eToys stock price surged and surpassed our expectations," says Janjigian. "We felt it was no longer undervalued, and decided to take the profits. Hadco's financial results were encouraging, but we were concerned about its continuing lack of visibility, so we closed it out. We still like Ansoft, but we wanted to raise some cash to invest in more promising situations."

With the proceeds of those sales, Janjigian bought shares of Compaq Computer, VerticalNet, and Boston Scientific.

VerticalNet is the Internet's leading creator and operator of business-to-business Web sites that cater to people with similar professional interests. "We decided VerticalNet was grossly undervalued and had excellent growth potential," says Janjigian.

Boston Scientific, the world's largest medical device company dedicated to minimally invasive therapy, also looked like a bargain. "The stock price has been beaten down, because of reports about product recalls and a lawsuit involving competitors," says Janjigian. "We think investors have overreacted, and that the stock price will shoot up in coming years." The company is beefing up its effort to improve inventory management, which should boost gross margins.

Compaq Computer is lowering its operating costs and changing its distribution process, which should increase profitability in the coming year. "Compaq has a lot of room for improvement," says Janjigian. "We don't anticipate significant revenue growth, but earnings could increase significantly as the supply chain is improved and expenses are reduced."

Joseph N. Pecoraro
PVG Asset Management
Golden, CO

What happened?

The portfolio missed out on last year's fourth-quarter technology fever. The PSE (Pacific Stock Exchange) Technology 100 Index rose 21.3 percent from September through the end of November. "Investors chased technology companies and ignored more mainstream stocks selling at a good value," says Pecoraro. "While it was a shame to miss out on this frenzy, it won't last.

"I've chosen value stocks that have potential to show gains over the entire measurement period," he says. "This portfolio performed as expected, given that stock market gains were narrowly concentrated in technology. Losses in other areas offset technology stock gains. Humana, General Dynamics, Lockheed Martin, and Omega Healthcare declined from already-depressed market values. But I'm not concerned—the companies are solid, and I think they'll grow in value if market gains broaden. I'll hold for now."

Leslie Kane. Investment Derby: A high-tech gamble pays off.

Medical Economics

2000;4:140.