PORTFOLIO TALK Sticking With Big-Company Stocks
By

(FORTUNE Magazine) – Peter Anderson learned the value of teamwork and discipline when he played basketball at the University of Wisconsin. Now, more than 30 years later, Anderson, 56, applies the same principles to investing. As manager of Pittsburgh's $834-million Federated Stock Trust, a mutual fund whose shares are sold primarily to bank trust departments, Anderson works patiently with analysts and computer specialists to produce results. The trust was up 267% for the five years that ended June 30, according to CDA Investment Technologies of Silver Spring, Maryland; that put it well out in front of Standard & Poor's 500-stock index. Anderson says staying ahead of the market leaves him little leisure time, though he occasionally shoots a few baskets with his son-in-law Mike Gminski, center for the New Jersey Nets. In an interview with FORTUNE's Andrew Serwer, Anderson tells how he plans to keep on running up the score.

Isn't the market getting scary? I think we're overdue for a correction of 10% or more. The market no longer has support from what was a very expansive monetary policy. If you view the market in terms of valuation, it looks the way it traditionally does before a pretty good correction. Also, we don't believe that foreigners have been buying as much as people think. Our information is that buying from abroad has been at an annual rate of only $35 billion to $40 billion. But probably the biggest negative is the fact that the yield on long-term U.S. Treasury bonds is now above 9.5%, which will make some people decide to sell stocks and buy bonds. Two kinds of correction are possible: short and sharp, maybe 15% to 20%, or deeper, as much as 30% to 50%.

Hardly any economists see a recession now. Do you? We think there's a 50% chance of one within the next 12 months. There just isn't much propelling the economy right now. The consumer has been spending heavily for the past five years and seems tapped out. Normally the Fed would keep the economy growing, but now it must protect the dollar, so it can't be expansive. This expansion, which began in November of 1982, has got to run out of gas sometime. There are some positives, like increasing exports and capital spending, but it remains to be seen whether they will offset the negatives. Since we're committed to keeping this fund fully invested in stocks, our job becomes more difficult during recessions.

Big-company stocks have had the fastest ride in 1987. Will they continue to climb? It's true that stocks in the Dow Jones industrials are high and that generally smaller stocks look cheap. But we stay with large stocks that we believe are undervalued. We primarily buy companies with large market capitalizations because they tend to be less volatile than small ones.

Name a few. The three major groups we like are office equipment, utilities, and financial services. Digital Equipment is especially attractive even though the stock has doubled in the past year. DEC's products are way ahead of the competition, and the company continues to take market share away from IBM in minicomputers. In fact, we run our own screens of stocks on a DEC system, and our computer people speak highly of it. Digital has finally got its marketing in shape. The stock sells for $190, and the company should earn $10.75 a share in fiscal 1988 and $12.75 the following year. We also like Unisys. It's not too expensive, selling for 15 times this year's estimated earnings of $2.90 per share. Next year the company should earn $3.50.

Aren't rising interest rates a threat for financial companies? Though yields on long-term bonds have moved up, I don't think they will get much higher. The stocks we like are strong enough to weather the storm. Our favorite is Chubb, a property and casualty insurer. It sells for $65, and the company should earn $8 a share this year and $9 in 1988. Wall Street doesn't think the company can sustain its recent earnings. We disagree. Chubb is a conservative, very well run company with strong reserves. Two other insurance stocks we own are Capital Holding and Travelers. Among banks, we like Citicorp, which should earn $9 next year. The stock fell from $68 to $60 after Citicorp's announcement of a new stock offering that will dilute earnings. As for savings and loan associations, we are big fans of Great Western Financial. It has a strong balance sheet and a healthy spread between what it pays for capital and what it earns on its loan portfolio. The stock sells for $21, and the company will probably earn $2.40 a share this year and $2.75 in 1988.

Will utility stocks climb out of the doghouse? We think so. They are cheaper relative to the market than at any time since World War II. My favorite is Baltimore Gas & Electric, which is expected to earn $3.15 a share this year. The stock sells at about $30 and has a 6% dividend. The company is a low-cost producer with trouble-free nuclear plants. We also own Commonwealth Edison. It has had some problems with its new nuclear facilities as it tries to bring them on line, but I don't think the dividend is in jeopardy. The stock goes for $32, and Commonwealth should earn $4.25 this year.

In telephones we favor Ameritech, the Bell operating company in the Midwest. It has a 5.4% dividend and sells for just 10.5 times estimated 1988 earnings of $8.75.

What don't you like? Stocks in the energy and minerals businesses, like Fluor, Inco, and the oil service companies, have run up quite a bit. We also think most consumer and media shares have had their day. And Deere and Caterpillar don't look so terrific on our screens.