banks’ books very long anymore. Banks sell it to institutional investors, so it’s not a problem that really affects them like it used to.
CARTER: I like capital goods companies like John Deere, Caterpillar and Boeing. Deere and Caterpillar are benefiting from rising farm incomes and growing grain demand, which means they are going to need to make more capital investments and tractors and combines. Boeing is just now dominating the world airplane market through the purchase of McDonnell Douglas.
BOWLES: We are not really sector oriented, but we have more stocks in railroads and telecommunications. In transportation we still like railroads, airlines and Federal Express. We like Kansas City Southern primarily because of its railroad and money management business.
Which stocks look good now?
BOWLES: I like Pittston Brinks (NYSE: PZB), a company that makes alarms and provides security at ATM locations. It’s a small company, with $1 billion in revenues, but it’s growing earnings at about 15% a year. The security industry is going to grow at that rate for some time. There are 40 million homes wired for protection now, and that slice of the market is still very strong. In terms of P/E, the company is selling at a significant discount to the overall market, with a P/E of 16 on 1998 earnings. We think its price could double.
Next, I like Illinois Central (NYSE: IC), a railroad. It’s selling at 14 times earnings, a 50% discount to the market multiple of 22. It’s growing at about 10% a year and has a yield of 2.5%, compared to 1.6% for the market. I think it’s one of the most efficient operations around. It could well be taken over. We think the management is very strong. a It’s true that railroads tend to trade at a P/E that’s 20% lower than the market, but this one is especially cheap.
Finally, I like Medpartners (NYSE: MDM), which is a physicians practice management company, as well as a pharmacy benefits management company. It’s growing in excess of 20%, yet with a P/E of 18 times earnings, trades at a modest discount to the S&P. It’s under performed the market so far in 1997, primarily because they paid a lot for acquisitions. They also foolishly gave top management options at a price below the market price. Institutional investors like myself really disliked that, and we took it out on the stock. The stock price came down, and it appears that management has seen the error of its ways and promises never to do that again.
CARTER: One contrarian pick I’ll give you is also one favorite: Kmart (NYSE: KM), which has gone through quite a bit of turmoil. We like Kmart’s management now. CEO Floyd Hall, comes out of Dayton Hudson, a premier retailer. He is doing things to make the company more profitable, like changing the merchandising mix. The stock doesn’t have much in the way of earnings, but we think it can go from $12.50 a share to $20 a share. And after getting