Great names, great returns

Walt Pearson's growth picks soar

Back in May of 1999, when Alliance Capital’s Walt Pearson recommended stocks that had been some of his best performers, he worried that their greatest growth was behind them and that the price-to-earnings ratios that made them so attractive had climbed too stratospherically for individual investors. He advised keeping an eye on the market, and when the stocks dipped to a more reasonable price, pouncing on them.

Pearson’s worry was for naught, and readers who took his advice were well-rewarded this past year: his portfolio boasts a 51.52% overall return. It was powered by what is probably the least-known of his recommendations: Amgen (Nasdaq: AMGN), a global biotech firm that specializes in human therapeutics, with kidney dialysis treatment as one of its most profitable channels. Amgen returned a whopping 86.82% year to date. “There probably won’t be as much growth going forward,” says Pearson, “but [there] will still be strong growth because Amgen has new products in the works.”

The next-best performer was heavy-hitter tech stock Cisco Systems (Nasdaq: CSCO), which returned slightly less than Amgen at 86.23%. “I still like it a lot,” he says, “because it’s the actual piping of the Internet. I see [a] 20% upside potential in the future.”

From cyberspace to bricks and mortar, Home Depot (NYSE: HD) yielded a hefty 38.28% return. “I love the stores, I’m in them all the time,” laughs Pearson. He says the housing cycle will continue to boom, although the specter of rising interest rates could be a stumbling block. “[The potential of] rising rates don’t actually hurt stocks as much as people think they will,” he says, “but there’s a psychology behind it. For example, Home Depot performed poorly in the last two months of the year because of [rising] interest rate fears.”

With AOL (NYSE: AOL), which returned a solid 34.06% for the year, poised to become AOL Time Warner, what does Pearson make of its future prospects? “I’m lukewarm on it,” he says. “The growth rate [of a stock] always slows down with a two-company synergy, and it’s hard to execute [a smooth transition] with two different cultures.”

Finally, the underperformer of the group was Microsoft (Nasdaq: MSFT), with a 12.29% return. “It’s because of the litigation,” he explains. Microsoft last year was sued by the U.S. Justice Department in a closely watched anti-trust case. The government contends the software giant enjoys a monopoly in the industry. “But the release of Microsoft Windows 2000 [software] should help boost performance.” And the possibility of a federally ordained breakup of the company? “That’s definitely a cloud over it,” he says. “But they should negotiate a settlement, and mergers like that of AOL with Time Warner set the stage for that.”

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