More Than Instinct Alone

A methodical Hamilton Lewis checks out the market before investing

new areas, are what piques Lewis’ interest these days. “The stocks I tend to buy don’t usually pay dividends and often enough, their price-to-earnings multiples are a little higher than blue chips,” he says. “But I have my limits; I won’t buy a stock whose P/E ratio is much more than 10%-20% above the industry average.”

Currently, Lewis likes Apex PC Solutions (Nasdaq: APEX), a company that builds cabinets for multiple computers. “Everyone is looking for ways to save on space, especially now that computers have invaded the workplace,” says Lewis who thinks Apex can grow earnings between 25% and 50% annually. He anticipates a 2-for-1 split, another favorable sign, and thinks the $39.25 stock can reach $80 in 12-18 months.

Another favorite is C-Cube Microsystems (Nasdaq: CUBE), a company that is a leading force in digital video disks. “This stock reached $75 a year ago, and crashed only because IBM scared the market by saying it was interested in competing in the same business,” he notes. Since then the IBM threat has subsided, leading Lewis to think that C-Cube–now $29.13 a share–can soon return to the $70 a share level in a year or so.

Last year, DSC Communications (Nasdaq: DIGI), a Texas company that makes fiber optic equipment, was downgraded by several Wall Street firms because of weak earnings. As a result, the stock dropped from $32 to $13 a share, then rebounded to its current price of $27.75. Lewis is convinced the trouble is now behind the company, and believes that demand will grow for DSC’s fiber optic devices. He sees the stock rebounding to $60 a share in the next 12-18 months.

Demographic trends lead Lewis to pick United Healthcare (NYSE: UNH), an HMO that fell from $90 to $30 a share a couple of years ago when President Clinton made a push to boost government regulation of the healthcare industry. Since then, Lewis says, HMOs are coming back with a vengeance, as reflected by the increasing amount of money industry players have contributed to political campaigns. He sees United Healthcare returning to $80 a share in the next year to 18 months.

Finally, Lewis likes Best Buy Co. (NYSE: BBY), a consumer electronics retailer. “People are buying more and more gadgets, and a good sign was Best Buy’s move to own more of its outlets rather than rent space,” says Lewis. He thinks that demand for computers will help push Best Buy up from a current $23.63 a share to $45 in 12-18 months.

Sizing Up the Prospects Lewis favors stocks that have fallen out of favor, but offer potential
Company

Exchange: Symbol

Stock Price*

Est. Current Fiscal Year EPS

Est. 5-Yr. EPS Growth

Apex PC Solutions

Nasdaq: APEX

$39.25

$0.69

37.50%

C-Cube Microsystems

Nasdaq: CUBE

29.13

1.05

25.00

DSC Cummunications

Nasdaq: DIGI

27.75

0.9

21.33

United Healthcare

NYSE: UNH

51.38

2.29

19.37

Best Buy Co.

NYSE: BBY

23.63

0.72

14.50

*As of 9/24/97
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