The Good, The Bad, And The Average

A record number of folks jumped on the investment bandwagon in 1996 in search of '95's lofty gains. Last year was nearly as good, but '97 might prove to be a letdown.

we would have saved a lot of heartache,” quips Alger.

Still, Alger says he is bullish about such tech companies as Ascend Communications Inc., which makes the switching boxes used to connect modems to phone lines for handling Internet traffic, and Micron Technology Inc., which makes DRAM memory chips for personal computers. “PC demand is very strong, so is the demand for greater memory capacity,” explains Alger. “The whole industry is in a transition from four- to 16-megabyte memory chips.”

A stellar-performing fund, Flag Investors Value Builders posted a 24.6% gain last year. This $297.9 million balanced fund holds about 66 stocks and approximately 40 fixed-income assets. Its portfolio mix is about 68% in stocks, 25% in bonds (intermediate-term), 4% in convertible bonds and 3% in cash.

The fund’s largest holding–at 6%–is Conseco, a provider of insurance and annuity products. Conseco has made several acquisitions in recent years, including American Travelers Corp., all of which have added to the bottom line. It has a history of increasing earnings per share at an annual rate of over 20%. Other winners have been MBNA, a credit card company; Citicorp; American Express; Key Corp. bank; Johnson & Johnson; McDonnell Douglas; Monsanto and IBM.

Flag Investor mirrors the gains made by financial services companies. “We buy individual stocks, not sectors, however,” says fund manager, Hoby Buppert, a vice president at Alex. Brown Investment Management. “We own a fair amount of financial companies, because we found a number of them that had very good investment value.

Financial stocks performed substantially better
than the market even though interest rates were rising, which is rare. Many sell at a reasonable discount to the market.”

Buppert’s flexible value approach has served him well. In addition to looking for inexpensive stocks, he identifies well-managed, financiallysound companies that are experiencing positive change. “We like management that has a history of repurchasing shares and investing the money in growing the business in a manner that provides an adequate return on capital,” he adds.

SHOWDOWN IN ’97: BIG VS. SMALL CAPS
Since 1990, the Dow Jones industrial average–the blue chip stock index-has pushed through four 1,000 point-barriers on its way to 6,500. The longest riding bull market in history, it has not suffered a 10% decline in six years. Corporate earnings were up 19.2% in 1995.

Now industry pundits say corporate earnings will grow about 8% in 1997. And a 10% correction is right around the corner. Earlier in 1996, growth funds were beating value funds, but that reversed by the end of the year. Equally, large cap stock funds, which invest in the big corporations like GM, AT&T and IBM, were big winners in 1996, but may trail small cap funds this year.

“I am very optimistic about the outlook for small cap stocks going into 1997,” says Christine Baxter, the lead fund manager of PBHG: Emerging Growth Fund. “A lot of these small companies are growing regardless of the economy, because they are providing a needed service or introducing new products to the market. The average company m my portfolio

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