Searching Hot Sectors For Big Gains

TIAA-CREF's Martin hunts for big players in growth industries

technology or approach that’s under no threat internally or externally,” he says. Like most portfolio managers, he’s crunching numbers and grinding out multiples and ratios. Martin subscribes to a growth investment style with a tinge of value points added in. Martin says his primary focus is on cash flow and revenue growth on the order of at least 8%-10% annually. He keeps the portfolio’s average price-to-earnings (P/E) multiple, currently 22.4 times projected 1998 earnings, close to the S&P 500′s 21.3. Average five-year earnings growth, meanwhile, is almost identical, at 14.5%.

One sure way the Growth & Income Fund stands apart from the competition is by virtue of its frugality. By looking to hold stocks as long as possible, and by having a large part of the fund’s overall portfolio anchored in the index, Martin’s fund has sheared its expense ratio (costs relative to assets) to a wee 0.43%. That’s a rate industry experts normally attribute to index funds, and a far cry from the 1.20% the average fund racks up.

If there’s one stock Martin’s high on, it’s Nokia (NYSE: NOK.A), the Finnish maker of cellular phone equipment and infrastructure. “They’re clearly the class of the field,” he says. “The company is cutting edge and more focused than rivals like Motorola.” Martin sees Nokia “conservatively” growing earnings at a 15%-20% average annual clip.

Lucent (NYSE: LU) is another favorite. Martin says the company dominates the telecommunications equipment industry. “Lucent has so many facets, it has truly become the one-stop shop for telephone companies when they want to improve infrastructure.”

While pharmaceutical stocks have become expensive over the last year, Martin says DuPont (NYSE: DD) remains a way to get in on industry growth at something of a discount. By undergoing a complete transformation, the company is focusing on the pharmaceutical and biotech industries, what Martin calls “value-added chemistry. Here’s a company that at a P/E of 20 is trading at a 10% discount to the S&P 500 but could conceivably move to a 20% premium in the future.”

WorldCom’s (Nasdaq: WCOM) aggressive CEO, Bernie Ebbers, has also caught Martin’s eye. “Here’s a company that’s shaping up a sleepy industry,” he says.

His final pick, AT&T (NYSE: T), might come as something of a surprise, but deals like Ma Bell’s proposed merger with cable television giant TCI show a change of corporate culture, Martin says. “AT&T won’t suffer much downside at this point, and it really boils down to an execution story–if management can get more aggressive in local markets and build on the strength of its franchise, these shares will go up,” he points out. “This company is no longer your grandfather’s Buick.”

CAPTAINS OF INDUSTRY

Company Exchange: Symbol Current

Price*

Est. 5-Yr.

Annual

Growth

P/E
Nokia

NYSE: NOK.A

90.50 20%

24

Lucent

NYSE: LU

94.38 21

40

AT&T

NYSE: T

60.00 12

20

WorldCom

Nasdaq: WCOM

55.06 30

26

DuPont

NYSE: DD

66.13 11

20

* As of 7/27/98
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