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Stock picks by the pros
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August 9, 2000: 4:19 p.m. ET
Bed, Bath & Beyond, Home Depot, Fannie Mae, Pharmacia, Aether Systems rate
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NEW YORK (CNNfn) - Market strategists and sector analysts Wednesday favored the retail, financial, technology, health care, wireless and airline sectors for their top picks, which included Phone.com, Linens'n Things, Rowan Companies, America Online, Genentech, Lucent, United and Southwest Airlines.
While the markets continued to bounce around in choppy waters, recent guests on CNNfn commented on the stocks they are buying, and why.
 "I think that the wireless data space is a huge investment opportunity for investors, and we're talking about a multiyear opportunity. I really do like it to investing in AOL (AOL: Research, Estimates) in '92 and '93. It was one of the first lead players and they really identified an enormous market opportunity and created a defensible niche for themselves," said Marianne Wolk, wireless and telecom analyst, Robertson Stephens.
"That's really what Phone.com (PHCM: Research, Estimates) is doing: they are the leading provider of infrastructure software that enables carriers to deliver data services today. And just to give investors and potential investors a feel for that, they have already signed with 77 carriers representing 50 percent of the world's subscribers, and that's before adding the carrier leverage they get with the Software.com (SWCM: Research, Estimates) acquisition today. So, there is substantial reach," she said. "They're one of the few players we know is going to be around and be very viable and very instrumental in developing this market longer term. And to give you another sense, there are going to be more wireless phones in a few years than television sets, PCs, notebooks, et cetera, so this is the largest Internet opportunity around."
"We've been recommending Aether (AETH: Research, Estimates) very aggressively. We think that today, in particular, it is a great opportunity to buy this stock. They are having an analyst meeting on Monday where they're going to really walk through their enterprise strategy for the wireless data market. And to give investors a feel, they are a leader in the provision of wireless data application software for several major vertical sectors, like financial services, like health care, like logistics and transportation and supply chain automation, and basically what they have been doing is taking their wireless expertise and joining in with leaders in each of these sectors. We think they will continue to go through each of these major vertical markets and establish leadership positions, and roll out services," Wolk said.
Wolk's final pick is Portal Software (PRSF: Research, Estimates). "It's an interesting one in the group. We also think that that is a terrific play on wireless data services because they have quietly been building up an arena of customers that are buying their billing software, which is real-time billing software, to allow them to build for these wireless data services," she said. "They've signed contracts with Sonera (SNRA: Research, Estimates) already in Finland, and they're working with a lot of other major players in the wireless data arena, and it's a great opportunity to invest in a super high-growth company. They are one of the leaders in the Internet space. They've been growing 30 percent sequentially each quarter. And they'll report earnings later this month, and we think there's going to be substantial upside to those numbers."
 Charles White, president, Avatar Associates, said that he likes PE Biosystems (PEB: Research, Estimates). "It's a company that makes a lot of the testing equipment for the genetic engineering products that are going on. It's a tracking stock out of PerkinElmer (PKI: Research, Estimates) corporation. The other is, I believe, was Celera Genomics (CRA: Research, Estimates). So, this company is one that has had a tremendous run late last year. Corrected very abruptly and violently with the rest of the biotech world. Great market share. The company's selling a lot of the testing equipment to all the folks who will be doing all this testing. They have got some very advanced equipment. They have a big piece of market share. And the stock has corrected dramatically. It's a very good entry point here."
His second pick is Devon Energy (DVN: Research, Estimates). "It's a play on exploration and production in the natural gas area. This stock is very leveraged in that area, but you could turn to names like EOG (EOG: Research, Estimates) and Apache (APA: Research, Estimates) if you wanted to go outside of that. But it's an energy play and we think in the area of natural gas, that should do very, very well in the second half of this year," White said.
"It's been beaten about pretty solidly here. But, Home Depot (HD: Research, Estimates), we think, is still meeting some - most of its growth expectations. The outlook is still there. This is a very dominant retailer," said White. "The housing market has slowed a bit, but I don't think you can call it dead. The economy is too healthy here. And I think this is one of these opportunities where retail stocks, in general, have been under pressure. It's probably a good opportunity to be accumulating the quality ones, like a Wal*Mart (WMT: Research, Estimates), like a Home Depot, into this weakness, keeping in mind that you don't want them to be a real dominant part of your portfolio, but you should have them there for some of the diversity."
He also selected Nokia (NOK: Research, Estimates).
 "Right now, the economy isn't slowing enough to hurt the retailers, in terms of their sales. You certainly have had some do better than others, like women's apparel retailers, Ann Taylor and Talbot's performed very well. You certainly are seeing some home furnishings companies, like Bed, Bath & Beyond, Linens'n Things, and Pier 1 perform well. While others, like some of the off-price retailers, like Ross stores and TJX are having a little bit of a hard time," said Dana Telsey, retail analyst, Bear Stearns.
"Gap certainly is having its own issues of late, whether it's the core Gap division, which needed to be mended, and certainly some of their wear-to-work merchandise that was recently introduced is doing better. Now it's the Old Navy division that's a little bit weak," Telsey observed. "But overall, retailers have seen consumers tighten their spending wallet just a little bit, and they're needing to manage their expenses carefully in order to generate bottom line earnings growth.
"We're still seeing the high-end do well, whether it's Gucci, Tiffany, LVMH. We're seeing strong gains for the high-end retailers, and basically a lot of it is their more affordable priced merchandise. Look at the lines for those Tiffany key rings, they're quite long," Telsey said.
"Some favorites right now include Bed, Bath, & Beyond (BBBY: Research, Estimates) and Linens'n Things (LIN: Research, Estimates) with an average transaction of less than $50 and repeat purchases. They're certainly well positioned. Ann Taylor (ANN: Research, Estimates) has easier comparisons going back into the holiday season, and their merchandise for fall sees certainly right on target. We think they'll do well. We think Tiffany (TIF: Research, Estimates) will have a good holiday season. And don't count out Gap (GPS: Research, Estimates), it's down from its low, but any positive sales trends could spark an increase in the stock price," Telsey said.
 "The market is no longer as speculative as it was just a few months ago. Remember early this year when the Nasdaq was going up 3 or 4 percent it seemed like every day. There was an awful lot of fizz in the market and investors were drawn to the most effervescent stocks. Now, we're finding investors drawn to those companies that have real earnings and are going to fair reasonably well in a slowing but still healthy economy," Charles Crane, market strategist, Spears Benzak Salomon & Farrell.
"I would invest in energy stocks," Crane asserted. "There's one stock in particular that we're starting to put into our client portfolios. That's Rowan Companies (RDC: Research, Estimates). The stock is currently in the mid-20s. Earnings are going to be probably close to doubling over the course of the next 12 to 18 months. If you look at a 5-year chart, the stock has traded for as high as 45. And I think that that's a good target for where it might get over the next year or two.
"Interestingly enough, the housing stocks have been on of the strongest sectors this week. I think what's happened is that these stocks were weak prior to where we are right now in the economic cycle because of concerns about Mr. Greenspan and crew raising rates still further. Those concerns have diminished. They haven't completely gone away, but they certainly have diminished in the last few weeks as we've seen more evidence of a cooler economy. Hence, you're starting to see investors say OK, we're probably cruising in for a soft landing and housing should do well in that," Crane said.
"In the sort of interest rate sensitive group, more broadly define, we are a fan of Fannie Mae (FNM: Research, Estimates), even though it's a fairly controversial name these days," he said.
"I'm particularly intrigued with America Online (AOL: Research, Estimates). This is a company that is in the midst of working out its merger with Time Warner. AOL's stock is currently trading in the low 50s. I think that if you look at this company on a combined basis, combined with Time Warner, going forward over the next couple of years, you're going to see a company that's going to grow at 25, 30 percent, if you're measuring cash flow, somewhat faster than that if you're measuring earnings. It's trading at a very reasonable multiple. I think that Cisco is one of the bellwethers. If you own it, you've got to continue to own it. Buying it here at triple digit multiple is awfully tough for a value investor to do. But if you're a growth momentum guy, sure, go right ahead," Crane said. [Time Warner is the parent company of CNNfn.]
 "We don't see interest rates being raised for the rest of the year. So with that out of the way, really we're talking about an earnings story. So if you have all these other factors, much more muted, if you will, you have earnings continue to drive the market. So Cisco's a plus. But you also now have technical factors, supply/demand imbalances. You have a lot of IPOs coming to market this month. You have a lot of lockups expiring this month. So that's likely to keep some overhang, some weight on the technology market, through August. We'll get into September, closer to the election cycle - but again, we think investors should be focused on earnings; and even that top-line number," said Chris Wolfe, an equity strategist, J.P. Morgan.
"I think it's probably a little bit late to just put all of your money into technology stocks. We kind of have a balance between some of the high-tech names," Wolfe said. "The quality names we like: Sun Microsystems, Cisco. But also, we're looking at some of the more stayed growth companies, if you will, on the health care side - so, Pharmacia (PHA: Research, Estimates), Pfizer (PFE: Research, Estimates). And even looking at some of the biotech names. We've seen - after the mapping of the human genome - that there's a lot of opportunity there for companies to take advantage of. One of the leaders there would be Genentech (DNA: Research, Estimates).
"Lucent's (LU: Research, Estimates) had a lot of management changes recently, and we think that the restructurings announced from the spin-offs in the microelectronics division. You're seeing a lot more focus on the optics side of the business. And it's important to remember, Lucent has a couple of key divisions: they make fiber-optic cable, like Corning does," Wolfe observed.
"AIG's (AIG: Research, Estimates) pretty much globally diversified, but we're seeing strength in one particular industry, or one segment of that, and that's property and casualty insurance. So AIG, a big player there," said Wolfe. "What they're seeing is improved pricing in the U.S. We think those trends will carry globally as businesses - as some of the big insurers in Europe rationalize their businesses. And even into Japan where you have a huge growth potential. But the big deal right now is on the property and casualty side.
"With Sun Microsystems (SUNW: Research, Estimates), the phase we're in right now in the Internet is all about data and storage, and Sun sits on the king of both of those. They compete with EMC, but Sun owns the server and the storage side, we think, and they have lots of growth opportunity, particularly, as you add a server and you want storage. Sun's already in there marketing that. Marginal costs of adding that on is very cheap," Wolfe said.
 "It's a tough summer for all airlines because of continuing bad weather across most of the country and the backup with the heavy traffic, with the traffic control system. But on top of that, they are having employee relation problems. There are two major contracts that are being negotiated and this is the way the employees are showing they're unhappy with the progress being made," said Raymond Neidl, airline analyst, Furman Selz.
"In paper, United's (UAL: Research, Estimates) stock looks very cheap compared to most other airlines, but it's cheap for a reason," Neidl said. "It's cheap because of all the service problems they're having right now and the question of when they're going to be resolved -- plus the unknown with their proposed acquisition of us airways. Once they get a pilot agreement, part of the problem should be eliminated, but that's a big question mark right now.
"I'm still bullish in the industry, still remaining very, very high fuel prices. The demand is setting records. I've never seen demand like this before and there's very little discounting going on. I think the industry is doing very well," he said.
"Southwest (LUV: Research, Estimates) is reaching my target price which is 27-to-$30 a share. I still have a 'strong buy' on the company simply because it's the only passenger airline in this country that's a true growth story. They'll be growing 10 percent plus a year as far as the eye can see," said Neidl. "American Airlines, subsidiary of AMR Corp. (AMR: Research, Estimates), is starting to come back. They're up $5 from when I put a 'strong buy' on them because they were beaten up. I still think they have a way to go. The market is leery that American may make a bid for another airline. I think it's getting over that now and I think potential earnings for American is great. So I have a strong buy on American as well.
"Continental (CAL: Research, Estimates), I have a 'buy' on. Their stock has had quite a run since may. It's been up 30 percent. It did reach my target price of 55. I raised my target price because I raised my projected earnings per share as the company's aggressive and buying back its stock. So I have a buy on Continental," Neidl said. "Delta also has a lot of potential. I think the growth potential is a little bit greater than some of its competitors because it has been buying the commuter feeder airlines. Delta's (DAL: Research, Estimates) growth potential is greater than some of the other majors."
-- compiled by Parija Bhatnagar and Alexandra Twin
* Disclaimer 
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