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Stock picks by the pros
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August 10, 2000: 4:52 p.m. ET
Applied Materials, KLA Tencor, Pfizer, RadiSys Corp., AOL get selected
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NEW YORK (CNNfn) - Market strategists and money managers were looking at the semiconductors, pharmaceuticals, transportation, financial, energy, telecom and the beverages sectors for their top picks Thursday. Varian Semiconductor, Novellus, Pharmacia, Southwest Airlines, StarTek, Coke, and Schwab were some of the top draws.
While the markets ended the day mixed, recent guests on CNNfn commented on the stocks they are buying, and why.
 "I think a productive economy is the main thing people should take home with them. This is a unique period in American history. I think we'll look back on it as a time you wanted to own stocks rather than trade stocks," said Phil Dow, stock market strategist, Dain Rauscher Wessels. "I think, secondarily, corporate America is showing good earnings reports. The second half of this year may be lower than the second half of last year, but they're still robust, probably in the high teens. I think if you focus on financial guide posts, that eventually will drive prices. I think you'll see the market in general do better as the year wears on."
Dow said that he likes the Williams Companies (WMB: Research, Estimates) and that he thinks they are a double play, energy and telecom. "They have the best of breed kinds of companies in two really good industries. They have a natural gas pipeline company. In addition, a fiber optic network which will be 33,000 miles. Each have the wind at their back and we think the combined businesses conservatively are worth 60. Right now the stock trades for around 45. The company just announced a way to unlock that value with a spin-off of their Williams Communications Group. So we think it's just a matter of time before that stock reaches 60," he said.
He also picked RadiSys Corp. (RSYS: Research, Estimates). "It's a company that makes embedded computer systems for communications companies," Dow said. "Big customers for Radisys are Nokia (NOK: Research, Estimates) and Lucent (LU: Research, Estimates). And these would be more on the infrastructure side than the handset side. This company had 84 wins in the last 12 months. It's going to result in, we think, earnings estimate revision's upward. Already it trades at pretty reasonable multiples, but we think this stock is headed higher. Currently at 53, we think it will go to 95 in the coming year."
 "One of the great question marks out there is the consumption of chips actually does parallel gross domestic product measures among the developing nations. None of these people dare give away business to their competitors. And what you see is, as long as demand is good, the cash flows from the semiconductor manufacturers are strong. They will spend it on next generation equipment, or they lose their competitive position. What they don't know is: what is next generation product that will keep the demand cycle going? And witness a year ago, who would have thought we'd do over 400 million handsets? So we're continually surprised by the strength of technology," said Byron Walker, semiconductor equipment analyst, UBS Warburg.
"Applied Materials (AMAT': Research, Estimates) is just a great company -- I mean, no doubt about it. There are some other companies on a valuation basis that may be more attractive to investors: KLA Tencor (KLAC: Research, Estimates) would be one, and Varian Semiconductor (VSEA: Research, Estimates) would be another one that we like. And Novellus (VNLS: Research, Estimates) is also executing very well," Walker said.
 "The semiconductors: Applied Materials is sort of like a kingpin for that whole industry -- and their earnings. It's going to be very interesting to watch the reaction. Semiconductors actually reached their highs in March. They sold off, and set lower highs in June-July. It's critical that they get through those June-July highs. And so we're going to have to watch them to make sure. They're right now at the lower part of their trading ranges. It's important to watch what happens now," said Bernadette Murphy, market analyst, Kimelman & Baird.
"And I think that investors in technology are going to tend to focus on the key companies. They're becoming more discriminating. You know, the Sun Microsystems, the Ciscos, the Oracles, that's where I think they're going to tend to focus," Murphy said.
"I think that the drugs have had a terrific run," she continued. "And they reached their lows last December. And to have a pullback here I think provides a long term buying opportunity in them. I think patents are important for the whole industry. This happens to be a company specific. And so I think it will eventually provide a good buying opportunity. The leader in the group is Pfizer (PFE: Research, Estimates) and it has the greatest weight. The second I would say would be Merck (MRK: Research, Estimates). I like Pharmacia (PHA: Research, Estimates); I think that is an attractive looking drug stock."
"Southwest Airlines (LUV: Research, Estimates), in the transportation sector is a stock I like right now. They're adding new routes, which they have been spreading around the country," she said.
 "I think retail is going to be a very tough place to make money. What's worrying the market now is -- if the Fed is successful in slowing the economy, what does it mean for profits going forward? And that is apparent - that's more clearly an issue in retail than anyplace else. But it is an issue in the market itself that you're going into a period here where profit growth may decelerate; in fact, could flatten out as you have volume gains decelerate in a slowing economy, but cost increases embedded in from the period when you had a strong economy; and that's not exactly a great prescription for profits, and I think that's troubling the stock market," said James Awad, money manager, Awad Asset Management.
"I think what you have in technology is it's becoming a stock-by-stock issue," Awad said. "The momentum in the technology market is over, and you do have an overhang of people who have losses who have bought the stocks over the last several months, and people who kept putting money into those mutual funds. But I think what'll happen is people are trying to understand which of the technology companies have unit growth, where they can sail right through a slowdown. There are going to be big winners and big losers, but you can't just buy the group anymore on momentum, and expect to make money.
"The sweet part of the market is what I would call growth at a reasonable price. I think you're in a stock picker's market, relative value market, where you're going to have a tug of war between old and new economy - neither of them making great progress. But if you find a good stock with good growth at a reasonable price, it'll be an environment where you'll be able to make money," Awad said.
"I like a stock called StarTek (SRT: Research, Estimates) an awful lot," he continued. "It sells at about $40 a share. And they are a process management outsourcer for technology companies. What I mean by that is, they have driven their costs so low that companies like Hewlett-Packard (HWP: Research, Estimates), AOL (AOL: Research, Estimates), Microsoft (MSFT: Research, Estimates) outsource many services to them. When Microsoft introduces a new product, StarTek actually introduces it and services it. Also, Gentex (GNTX: Research, Estimates), they make the smart mirrors in cars. And two things are happening -- smart mirrors are going into lower and lower-priced cars, so more mirrors are being sold, and they're putting more electronics on the mirror."
 "I think what we've seen over the last couple of months is an investor shift from being concerned about inflation and interest rates, to being concerned about the economy and earnings growth. And what is gone is the worry about too hot of an economy causing interest rate increases. Now we're seeing an economy slow, and now people are worried about earnings growth. So it's out of the frying pan, into the fire, if you will. We don't believe inflation is a problem," said John Zimmerman, director of growth strategies, Banc of America Capital Management.
"With Wal*Mart (WMT: Research, Estimates), the fundamentals haven't changed. What they said yesterday was that they were going to take the layaway accounting basically and recognize it when the consumer walks out of the door with the product as opposed to when they put it into layaway. It's going to cost them a couple of pennies 3Q and add back a couple of pennies 4Q. No change in earnings estimates. It's well positioned. Its international growth remains well over 100 percent annualized. The supercenter concept is great. It's the best executor in the retail segment. And the stock is $4 cheaper, so it's a great opportunity," Zimmerman said.
"The beverage companies have had a great summer," he observed. "We've seen Coke (KO: Research, Estimates), Pepsi (PEP: Research, Estimates) and Anheuser-Busch (BUD: Research, Estimates) do very well. As investors look for traditional growth, they're looking for top-line growth; and that's what they're getting out of these companies. When you look at Anheuser-Busch, they have got a couple of things going for them. Growth in the 21-to-27-year-old demographic segment is starting to accelerate for the first time in 15 years."
"Schwab (SCH: Research, Estimates) just acquired U.S. Trust so they have products in every class - not just online discount brokerage, but they have the advisory network, they have now trust services, they have advisory services. This is a really one-stop shopping place vehicle for people who need asset management services. That's a growth market. The stock has come back in valuation a little bit and we believe it's a great time for Schwab," Zimmerman said.
"When you look at decelerating earnings growth, which we believe is happening - again, this quarter, next quarter, into 2001 - it's difficult to build a dramatic bold case against decelerating earnings growth," he said. "Having said that, we do believe we're going to see continued positive earnings growth. So we will see some upward appreciation in the market. But we're moving into a stock picker's market where there will be opportunities to buy companies like Wal*Mart or Eli Lilly on bad news, when the fundamentals really haven't changed that much, although the whole market as a whole will remain basically flat."
-- compiled by Parija Bhatnagar and Alexandra Twin
* Disclaimer 
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