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Stock picks by the pros
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August 16, 2000: 4:35 p.m. ET
Talking about Goldman Sachs, Morgan Stanley, EMC, The Gap and Nortel rate
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(CNNfn) - NEW YORKMoney managers and analysts took a look at stocks in the financial, technology, pharmaceutical, retail and Internet Service Provider sectors and discussed what makes their picks worth-while. Bristol-Myers Squibb, EarthLink and AOL, which has an agreement to acquire Time Warner, parent company of CNNfn, were among the top draws.
While the markets moved in divergent directions in Wednesday trading, recent guests on CNNfn commented on the stocks they are buying and why.
 Alan Ackerman, market strategist, Fahnestock & Co., describes the current market conditions as akin to "chasing a wet football on a muddy field, watching it bounce all around and not being able to get a handle on it.
"Don't try to buy what someone tells you is in vogue or in fashion," he said. "But try to stay with the strong companies that have done well during periods of difficulty. And at the same time look for ones such as Ocean Energy (OEI: Research, Estimates) that could very well become discovered and move to higher levels over the next year or two.
"[They have] bright management, they are cost conscious, they're lowering the costs all the time. They want to be able to survive in between cycles. They're in what would be a very significant well, could be a billion barrel prospect within the next couple of months. My feeling is that the company will do much better as Wall Street gets to know it," Ackerman said.
He continued, "I like Citigroup (C: Research, Estimates) very much. That stock holds near its high. I think fundamentals for interest rates indicate that we'll see a flattening in interest rates and perhaps they will make work lower. And I think it will do much better.
"EMC (EMC: Research, Estimates) is the 800-pound gorilla in data storage," Ackerman said. "The company has got a technological lead on everybody else in the industry. My sense is they'll keep that lead. This is a company that I think is selling at a bit of a premium, price wise, but it's well to pay for the premium. They're compounding at almost 30 percent a year."
 "I think what we are seeing in retailing are certain sectors doing better than others. In general, the department stores have not been performing well," said Dorothy Lakner, retail analyst, CIBC World Markets. The big chains have not been doing well. Specialty retailers, again, not all of them have done well but some have done extraordinarily well. Tiffany is certainly a great example.
"Tiffany (TIF: Research, Estimates) has one of the most consistent performances in specialty retailing - double-digit comps for over the last 21 quarters, in 15 of those quarters in the U.S., 17 quarters in Japan, in what's been a terrible economy there. The U.S. business continues to be very strong. So it is difficult when you talk about Tiffany to talk about comparisons," Lakner said. "They just seem to do it time and time again. I think the company is benefiting not only from its expansion, but from a greater level of internal manufacturing. That should help gross margins to grow. So I see more room for appreciation in Tiffany's stock over the next six months."
Lakner's second pick is the Gap (GPS: Research, Estimates). "I think right now, at around 26, the stock is at a very compelling valuation. It is at the lowest valuation we have seen on a relative basis in the last five years. We think that the company's Gap brand -- both Gap and Gap Kids -- is very well positioned after about a year of under-performance. And Old Navy's problems, we think, can be fixed over the short term. We don't think they are of a long-lasting nature. So this looks like a really good entry point in this stock."
She also said that she likes Guess (GES: Research, Estimates). "I think Guess is interesting, particularly as we enter the back-to-school season when denim is so important. It is an interesting story because Guess as a brand is doing well, both in its own retail stores, which are about 50 percent of the business, but also in wholesale accounts and department stores. It is really the one hot brand that department stores have today. Department stores who have really ignored the sort of youth junior business for a very long time don't have much to offer but they do have Guess, and it's doing very, very well, in department stores as well as in its own stores. I think the company is a great innovator of denim product and this was a company that was founded in the '80s, and grew up at that time, but it has been on a tear really over the last year or so, led by its innovative products," Lakner said.
 "We've seen a very volatile stock market since February. Different styles and sectors, like technology or financials, coming in and out of favor with no clear direction. There's nothing really wrong with techs. They are certainly somewhat highly valued by any historic measure, but probably not as highly valued as they were in February. We think, actually, come the fall, we could see a big tech rally, and that would probably be related to the fact that the IPO calendars are really building at the big underwriting firms, the big broker dealers," said Timothy Ghriskey, senior equity portfolio manager at Dreyfus.
"More supply should create a lot more trading, a lot more volume, which should actually also help the brokerage stocks themselves. And we like, you know, Goldman Sachs (GS: Research, Estimates), Morgan Stanley (MWD: Research, Estimates) - in particular, they're probably the biggest beneficiaries of that," Ghriskey said.
"I think we like all the tobacco stocks, but Philip Morris (MO: Research, Estimates) in particular," he continued. "And why? Because it is a high-growth stock. It's repurchasing a significant amount of its shares every year. It's growing earnings every year, and it's increasing its dividend every year. And it has a dividend yield higher than long-term interest rates. So it's a great bond substitute as well.
"We think we've seen the height of the litigation concerns here. We think we're on a down track here," Ghriskey said. "This Florida case is likely to be appealed. There was some good news this week. The case was put into federal court. We're not sure it's actually going to stay there. But that helped boost the stocks a little bit this week. But as long-term holdings, we think this is a great time to invest in these companies if you can ethically stomach investing in tobacco.
"Taxol is the big issue with Bristol-Myers Squibb (BMY: Research, Estimates). And it was in the news yesterday where a little small California company is claiming patent infringement, by Bristol-Myers, on Taxol. And paradoxically, this could really extend the patent, extend the Bristol-Myers' patent on Taxol," he said. "And keep the generics from moving into this space. So, this is actually, right now, the cheapest of the major pharmaceutical companies because of this Taxol issue. We think it's a great bet. This tends to be the most consistent of the major pharmas."
"Optics, that's the future," Ghriskey asserted. "NorTel (NT: Research, Estimates) has really taken a commanding lead here. They pushed Lucent (LU: Research, Estimates) off to the side. Lucent has some problems - that's their main competitor in this space. But we love NorTel. You know, obviously it's an expensively priced stock, so you have to stomach some volatility here. But a great company - a Canadian company, actually, and - but we think it's going to continue to do well, despite the high multiple."
 "You are seeing a bit of a stalling in the growth of the dial-up market. It is still growing, but at a much less vigorous pace than last year. Subscribers are beginning to convert over to DSL, or cable modems, and that's eating into some of the incremental growth of the existing Internet Service Providers (ISPs). But I think the ISPs have a real opportunity to convert their existing dial-up subscribers into broadband subscribers. In fact, they have a better opportunity than any other players out there; but, in order to recapture Wall Street attention, they have to begin to make that happen in a meaningful fashion," said Frederick Moran, head of Internet Media and Communications Research at Jefferies & Co.
"Two companies will be able to do it successfully in the ISP space: AOL (AOL: Research, Estimates) and EarthLink (ELNK: Research, Estimates). And it's simple. Those companies have brand names; they have size and scale; and they have powerful balance sheets, each with over a billion dollars of cash, which they can use for marketing and promotion. The other players - Juno (JWEB: Research, Estimates), Prodigy (PRGY: Research, Estimates), et cetera are really struggling in the cash position. They have basically run out of financing, and therefore, it will be difficult for them to get their share of new subscriber growth," Moran said.
"We're seeing some consolidation. Recently, EarthLink bought OneMain.com (ONEM: Research, Estimates), one of the top 10 ISPs out there, because OneMain was running low on cash and couldn't quite keep up with the marketing. We expect you'll see a lot more of that," Moran pointed out. "But, for companies that don't get taken over, they could go out of business and then their subscriber base would roll into the bigger players. So I still think the bigger players are well positioned; certainly AOL is very well positioned." AOL is merging with Time Warner (TWX: Research, Estimates), the parent company of CNNfn.
"EarthLink can certainly continue to grow nicely. They can also look to continue with acquisitions, including OneMain, which they will complete very soon, which they bought half with cash - $150 million of that was cash. So as players have difficulty, they can roll them into EarthLink, and embellish the EarthLink opportunity," Moran said.
-- compiled by Lucy Banduci and Alexandra Twin
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