A Happy Return To Equities

Money manager Derek Batts of Union Heritage relied on price-to-earnings ratios to defeat market volatility

“W e did really well in a rough, rough market,” boasts portfolio manager Derek Batts who manages $200 million for Union Heritage Capital Management in Detroit. The exclusive portfolio he put together for BLACK ENTERPRISE last year earned a tremendous 29.96% on a $5,000 investment over the 52-week period from December 6, 2002 to December 5, 2003. By comparison, the S&P 500 grew by 3.26% and the Dow Jones Industrial Average gained 14.08% over the same period. Here’s how Batts’ selections performed:

Batts says Abbott Laboratories (NYSE: ABT) continues to be a “buy” because the $17 billion company, which produces pharmaceuticals and hospital products, “has a sustainable growth of 20% and a return on equity rate of 32%.” The stock rose 4.70% from $42.94 to $44.96. “It’s a strong company–not sexy, but solid,” reinforces Batts.

Barr Laboratories Inc. (NYSE: BRL), maker of nearly 100 generic and proprietary drugs, is also “a definite ‘buy’ primarily because it is not threatened by drugs coming off patent like its competition,” explains Batts. The company jumped 24.81% in one year.

Batts says he would sell General Motors Corp. (NYSE: GM), the world’s No. 1 maker of cars and trucks. Why? “Its risk-adjusted return is 13.4%, way below our threshold.” Although GM grew 23.62% from $37.25 to $46.05 and has a nifty 5% dividend, Batts says, “I advise investors to take their money and reinvest it into Garmin Ltd. (Nasdaq: GRMN) a fundamentally sound satellite business. It’s a good tech play.”

Plantronics Inc. (NYSE: PLT), which makes lightweight communications headsets, had a fantastic run, climbing some 73.90% from $17.51 to $30.45. Since the stock spiked so quickly, Batts reasons, “It’s not a ‘buy,’ but it may be worth holding with some caution. It is close to being reasonably valued.” He says Plantronics might climb another four or five points in another 12 months.

And finally, National City Corp. (NYSE: NCC), the bank holding company that operates more than 1,100 bank branches in Illinois, Indiana, Kentucky, Michigan, Ohio, and Pennsylvania, shot up 22.76% from $27.72 to $34.03. Batts says the $8.7 billion bank was helped by its 85% ownership of the National Processing Company, which earns fees from processing merchant credit card transactions. He rates National City Corp. a “buy” because “loan losses are low and it benefited from current low interest rates,” adding that, “It has superior return on equity relative to its peers and outperformed 78% of the 6,000 companies we watch from an earnings momentum standpoint.”

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