Searching for value among downtrodden stocks sometimes results in a mixed bag of returns-illustrating the importance of picking stocks in diverse industries. Take the portfolio recommended last year by Quinn R. Stills, a senior portfolio manager for The Boston Co. Asset Management L.L.C. in Los Angeles (see “Low Expectations-Big Gains,” Moneywise, December 1998). Stills shuns companies with high price-to-earnings and price-to-book ratios in favor of those that have been beaten up a bit but are nearing a turn for the better.
Thanks to an 87% jump in Chase Manhattan (NYSE: CMB), which was trading at a mere $41.06 when he recommended it, Stills’ five picks gained 16% over the past 12 months. But results were dragged down by the 33% decline in greeting-card maker American Greetings (NYSE: AM), whose shares were punished when earnings fell short of Wall Street estimates. Stills says he’s “not so sanguine” about the stock and doesn’t recommend buying more of it.
Stills’ overall record is still impressive. His 100-stock Dynamic Equity fund is up 27.9% for the 12-month period through September, significantly ahead of the Russell 1000 Value index’s return of 18.7%. Stills says his five picks for black enterprise highlight the power and importance of portfolio diversification. “At any given time you’ll have some big winners and some disappointments,” he says. “Your goal is to have the net [result] of your investments show a positive gain.”
Despite Chase Manhattan’s big gain, Stills continues to see room for it to climb, though after its recovery from the Asian crisis, the money center bank’s shares are no longer “on sale”. Shares rose as high as $91.13 during the year. “Chase is executing well on all fronts,” Stills says. “We think the outlook continues to remain bright.” But some investors are skeptical of the firm’s plan to acquire San Francisco investment bank Hambrecht & Quist Group. The stock has fallen a bit since the merger was announced in late September.
He continues to hold shares of oil-refiner Tosco (NYSE: TOS), which gained 16%. Stills sees the company making acquisitions that could add to the bottom line within the next six to 18 months, expects its refining margins will improve and recommends buying more Tosco shares if they weaken. Meanwhile, Columbia Energy (NYSE: CG), a natural-gas transmission and distribution company, is the target of a hostile takeover bid by NiSource (NYSE: NI) for $68 in cash per share, a 16% premium over $58.81 when Stills recommended it.
The “Force” wasn’t with toy maker Hasbro (AMEX: HAS), however. Stills had expected the Star Wars: Episode I, The Phantom Menace prequel to propel Hasbro shares. The stock rose as high as $37, up from $19.25 when Stills picked it, but since then they have sold off. The stock recently closed at $24.44. With the absence of an intermediate-term catalyst to get the shares moving, Stills says, “I would sell those shares.”