EARN A LUSH 15% ON YOUR MONEY NOW Here are a dozen stocks and funds, suitable for different investing styles, that figure to achieve that worthy goal over the next 12 months.
(MONEY Magazine) – Let's face it. In recent years, many small investors have found it easy to make 15% a year -- or better -- as did cheerful Gregg Rudy (at left) and the others profiled in this story. Both stocks and long-term bonds produced average annual returns in the 15% range over the past decade, thanks to the raging bull market and a seven-percentage-point slide in interest rates. But now, with the average price-to-earnings ratio of Standard & Poor's 500 stocks at a discomfiting 20 or so and interest rates starting to ratchet up, the overall stock market may be topping out. That, however, doesn't mean your portfolio must go bust. On the pages that follow are 12 choices -- five stocks and seven mutual funds -- that could handily return 15% or more during the next 12 months, not counting taxes or sales fees. Our aim in assembling this list, distilled from the recommendations of more than 30 analysts and fund managers, was not only to find investments that could exceed the 15% hurdle but also to show that there is more than one way to reach that goal. Thus we divided the choices into four categories to help you identify the approach that most closely suits your own investing style. Cautious investors, for example, who want to earn dividend income while en route to their 15% may favor the choices in our total-return category. In fact, Gregg Rudy, 39, of Sherman Oaks, Calif., credit manager for a construction hardware supplier, already has a stake in one of our picks: Oppenheimer Main Street Income & Growth Fund, which has returned a stellar 44% a year on average since 1991. But you might prefer our other categories: classic growth stocks and funds, international investments or funds that employ special strategies -- investing in natural resources and global telecommunications. The dozen possibilities appear below, stocks first and funds second within each category. A word about risk: Since we chose only investments that seem likely to beat the overall market, they are generally riskier than, say, an S&P 500 index fund. So if you don't mind some volatility on your way to higher reward, fasten your seat belts for 12 rides to potential returns of 15%.
TOTAL RETURN The most conservative way to invest in the stock market is through a stock or mutual fund that pays a comparatively high dividend and yet offers the possibility of price appreciation. The dividend will give you a head start toward reaching the 15% goal, since a stock that yields 3% needs only a 12% gain to get you there. Moreover, when the market tumbles, high-dividend investments tend to suffer less and recover faster than those with wimpier payouts. One top total-return stock is $2.2 billion McGraw-Hill (ticker symbol: MHP; recently traded on the New York Stock Exchange at $70.50). This New York City- based publishing and data-services giant, now paying a 3.3% dividend, has proved it can adapt nimbly to changing market conditions. For example, as advertising revenues softened in the late 1980s for its business and trade magazines (like Business Week and Aviation Week & Space Technology), the company built up its financial data divisions, which include the highly profitable Standard & Poor's rating service. As a result, while its magazine sales have shrunk from 43% of operating revenues in 1988 to 35%, data sales grew from 25% to 33%. Now the recent uptick in consumer spending could presage better days for magazines, according to analyst Bruce Thorp of PNC Bank in Philadelphia. He predicts the stock will rise as high as $80 by April 1995 for a total return -- including dividend -- of nearly 17%. For another investment that should benefit from a strengthening economy, consider USX Convertible Preferred Series A (XA; NYSE, $55.50), issued by USX's U.S. Steel group. Convertible preferred stocks, which can be exchanged at any time for a fixed number of the issuer's common shares, have two appealing features. First, they tend to pay a high dividend: This one's 5.8% yield, for example, beats the top rates now being paid on five-year bank certificates of deposit and is nearly twice as high as the average S&P 500 dividend. Moreover, since its shares can be swapped for common stock, you have a chance at capital gains if the price of either the common or the preferred issue increases (they usually move in the same direction, but the preferred shares change price more slowly). And $5.6 billion U.S. Steel, based in Pittsburgh, seems poised for gains. After closing older plants and spending $4 billion to modernize others, the nation's largest steelmaker has cut the number of hours of labor that is required to produce a ton of steel from nine to only three. With steel demand likely to pick up as the economy improves, analysts at Merrill Lynch expect the preferred stock to rise to $71.50 over the next 12 months and the common stock to zoom from its recent $40.50 to perhaps $60. "A convertible is an ideal way to own U.S. Steel," says Wayne Nelson, author of The Best Kept Secret on Wall Street: How to Invest in Convertible Securities Like the Pros (Dearborn, $24.95). "Even while you're waiting for the price to go up, you're earning 5.8%." Louis Taylor, an analyst at Prudential Securities, offers another approach to earning 15%: real estate investment trusts like Manufactured Home Communities (mhc; NYSE, $43.50), a Chicago-based REIT that pays a 4.9% dividend. MHC owns and operates developments of prefabricated homes, which are considered a good investment because their annual turnover rate is generally < less than 10%, vs. 50% to 60% for apartment buildings. In addition, MHC has strong management -- prominent real estate investor Sam Zell is co-chairman of the board -- and debt equal to only 19% of its capital, vs. 25% to 30% for similar REITs. Though the stock is up 69% from its $25.75 initial public offering in February 1993, Taylor and Burland East, a senior vice president at Kemper Securities, expect another 10% to 15% gain by April '95. With the dividend, that would mean a total return of between 15% and 20%. Although its 1.1% yield doesn't match the other picks in this section, $386 million Oppenheimer Main Street Income & Growth (5.75% load; 800-525-7048) could still be a good bet to jump the 15% hurdle. Just ask any of its investors who saw the fund gain an astonishing 247% over the past five years. In contrast to conventional total-return funds, which seek income by putting as much as 25% to 30% of their portfolios in bonds, manager John Wallace, 40, limits the fund's bondholdings to no more than 15% of assets. Instead, he invests in a mix of utilities and high-dividend stocks for income, then adds small to medium-size stocks that could double within three years for growth. "Though 1994 will be a tough year overall," says Wallace, "I believe small stocks should outperform large ones over the next 12 months." His current favorites include Compuware (CPWR; traded over the counter at $36.50), a utility-software firm, and Millicom (MICCF; OTC, $24.25), which operates cellular-phone networks around the world. Wallace has a pretty good nose for winners: Since he took over in '91, the fund's performance has placed it in the top 1% of all 4,181 funds.
GROWTH For investors who don't mind taking a bit more risk, like Minneapolis sales representative Deborah Cole (profiled on page 76), growth stocks and the funds that invest in them offer the potential for gains that can go well beyond our 15% target. Cole's portfolio, for instance, gained 56% last year, mainly because 70% of it was invested in shares of smaller companies that boast hot products in fast-growing fields. One firm she didn't buy but might want to consider today is Recognition International (REC; NYSE, $12.25), a $230 million Dallas outfit whose business is teaching computers to read. Currently, Recognition derives about 85% of its revenue from selling and servicing hardware like its Trace 1000 machine, which interprets the computer-coded numbers on bank checks. But Mike Schmidt, a senior analyst at Prudential Securities, expects future growth to come from the firm's Plexus software, which performs a more difficult job: reading conventional typewritten documents and interpreting the information they contain in order to route it to the proper destination. Recognition's stock was down about 15% in the first two months of 1994 after a disappointing earnings report late last year. "But the company's fundamentals and finances remain strong," says Schmidt, "and it has a backlog of orders that should boost future earnings." Marketing experts say worldwide sales of work-flow software, as such programs are called, could nearly double to $3.1 billion by 1995. If that happens, Schmidt says, Recognition's price would reach $20 within 12 months, a 63% gain. Rather than betting on one promising company, however, you could invest in a growth-oriented mutual fund and let the manager choose a diversified portfolio of stocks for you. Here's how to get a great manager on the cheap: Buy $187 million Harbor Growth (no load; 800-422-1050). Its main stock picker, John Marshall, 36, added Harbor to his list of responsibilities last year after steering the Nicholas-Applegate Growth Equity Fund to an average annual gain of 22% over the past five years. Now that Marshall is guiding both funds, about 75% of their holdings are identical. The key difference: Harbor doesn't impose an up-front sales fee, while Nicholas-Applegate charges 5.25%. Says San Francisco investment adviser Kurt Brouwer: "This is the first opportunity to get in with the highly respected Nicholas-Applegate management team without having to pay an entry fee." Marshall's current favorites include Tyco International (TYC; NYSE, $52.25), a fire-protection and electronics firm, and Tandy (tan; NYSE, $41.75), the parent of the Radio Shack electronics chain.
Ever since last August, when the Chicago Morningstar mutual fund research firm gave tiny Schafer Value (no load; 800-343-0481) a coveted five-star rating for its 18.5% average annual performance since 1988, the phones have been ringing steadily at the fund's New York office. "For years, only my father used our 800 number -- because he was cheap," jokes manager David Schafer, 55, who founded the $31 million fund in 1985. Frugality runs in the family. Schafer the younger hunts for investment values in cheap stocks (currently those with P/E ratios, based on projected '94 earnings, of less than 16) with significant earnings growth and dividends of at least 3%. Moreover, he rarely holds more than about 40 issues, compared with the average fund's 75 to 100. He says that helps him keep a closer watch over his picks -- like drugmaker American Home Products (AHP; NYSE, $59.75) and Anheuser-Busch (BUD; NYSE, $49.50). That approach wins praise from many fund watchers. Says Michael Stolper, publisher of the San Diego newsletter Mutual Fund Monthly: "I have difficulty believing you can love 100 stocks as much as you can 40, and this fund is clearly devoted to the stocks it holds."
INTERNATIONAL With Europe starting to show signs of emerging from a three-year recession --for example, German plant machinery orders are up 2% this year -- and many Asian and Latin American economies growing at twice the rate of the U.S. economy, investors are increasingly turning their eyes abroad in search of 15%-plus gains. Among them: Bruce and Donna Johnson of Hershey, Pa. (profiled on page 78), who earned 32% on their international mutual funds last year. In order to give your portfolio blue-chip wings, you might take a flier with London-based British Airways (BAB; NYSE, $65.25), Europe's largest airline, which trades here as an American Depositary Receipt -- essentially a dollar- denominated proxy for the British stock. Like nearly every carrier, $9.5 billion BA got clobbered by the fare wars that broke out in the late 1980s after airlines ended up with too many planes. Now that traffic is catching up with capacity, however, BA appears ready to take off, says Conrad Metz of Bailard Biehl & Kaiser in San Mateo, Calif. It has flown about 10% more passengers each year since 1991, roughly twice the industry average, and many are high-margin business- and first-class travelers. Just as important for the bottom line: Its expenses remain earthbound. "The difference between British Airways and its European counterparts is that it has been successful at controlling costs," says Mark McVicar, a transportation analyst at NatWest Securities in London. He expects the firm's earnings to grow 20% a year for the next three or four years -- enough to support annual total returns in the 15%-to-20% range. If you would prefer to do your globe hopping in the company of an interpreter, check out $284 million Tweedy Browne Global Value (no load; 800-432-4789). This is the first fund to be offered by the New York City investment house, which is best known for managing private capital to average annual gains of 19% over the past 19 years. Now Tweedy Browne is applying the same value approach to foreign investing, seeking out-of-favor stocks that are cheap, as measured by both earnings and assets. Currently, manager John Spears, 45, and his three partners have two-thirds of their holdings in European stocks such as Banco di Napoli of Italy and Spanish air-conditioner maker Interclisa, which are both trading at P/E ratios below 10, compared with the European average of 19. Moreover, Spears and his group have their own money on the line: They've invested a total of $5 million in the fund. Some of the most popular stocks today are in emerging markets -- fledgling exchanges like those in Asia and Latin America that were up 73% on average last year. We recently reported on the best equity funds in these markets (see Fund Watch, MONEY, March). But another way to invest is through an emerging- market bond fund, such as Fidelity New Markets Income (no load; 800-544-8888), lately yielding 8.3%. Putting money into underdeveloped countries is inherently risky, of course. When the worldwide bond market sagged by just 1% from January through early March, for example, emerging-market debt took a 10% hit. But Fidelity New Markets Income manager Robert Citrone, 29, whose fund was up 39% last year before falling 8% during the sell-off, expects to make up the lost ground and more during the next 12 months. He is taking aggressive positions in Bulgaria, Ecuador, Panama and Poland, some of which may transform their defaulted bank loans into so-called Brady bonds, which are partly backed by U.S.Treasuries. "When other countries have converted to Brady bonds in the past, it has produced gains of 15% to 25%," Citrone says. In order to reduce currency risk, he has made certain that around 70% of his holdings are valued in dollars instead of foreign monies. And to limit interest-rate risk, some 40% of assets are in floating-rate bonds, which are less subject to principal loss than fixed-rate debt if rates rise.
SPECIAL STRATEGIES George Washington Plunkitt, boss of the corrupt Tammany Hall crowd that ran New York City at the turn of the century, once said: "I seen my opportunities and I took 'em." You can too -- without stooping to stealing -- by investing 10% to 15% of your portfolio in sector funds that specialize in particular market niches. Here are two excellent choices: The four-month-old Gabelli Global Telecommunications fund (no load; 800-422-3554) takes the phrase "telecommunications revolution" to worldly dimensions. It invests most of its $100 million in local phone and cable companies around the world. "As barriers to international calling decline," explains manager Salvatore Muoio, 35, "many nations in South America, Asia, Africa and the Middle East are building up their communications in order to create jobs and compete in the global economy." But Muoio, who formerly tracked such companies for Gabelli's other funds, isn't blind to opportunities at home. His largest holding -- 8% of assets -- is Pacific Telesis (PAC; NYSE, $54), the California and Nevada baby Bell now yielding 7%. He likes it, among other reasons, because it holds a majority stake in PacTel, its cellular-phone subsidiary, which will be spun off into a separate company soon, with Pacific Telesis shareholders getting stock in the new firm. He adds that he was not discouraged by the blowup of the merger between Tele-Communications Inc. and Bell Atlantic in February because "it will postpone the consolidation of cable and telephone companies -- but not for long." If you're thinking of hitching a ride with him on the information superhighway, don't delay. Gabelli is considering imposing a 4.5% sales load and raising the minimum investment from $1,000 to a steep $25,000, effective May 1. Finally, while Federal Reserve chairman Alan Greenspan may lie awake nights worrying about inflation, the thought of a rising consumer price index makes George Roche, manager of the T. Rowe Price New Era fund (no load; 800-638-5660), positively giddy. "If inflation gets rolling, it's good for natural-resource companies," says Roche, 52, who has more than 70% of his $810 million portfolio invested in energy, mining, chemical and timber stocks. Although he doubts that inflation will crank up to the 13.5% high it reached in 1980, when New Era gained 55%, Roche believes it could hit 5% sometime during the next 12 months. If it does, his fund, which returned 15.3% in 1993, could beat the 15% total-return mark by mid-'95 -- thanks in part to inflation-sensitive investments like gold-mining stock Placer Dome (PDG; NYSE, $23.75). In case inflation doesn't turn up, though, Roche keeps approximately 20% in growth stocks such as paper company Kimberly-Clark (kmb; NYSE, $55). It fell 12% last year, but Roche thinks that the maker of Kleenex is due for a rebound along with other consumer firms. And that's nothing to sneeze at.
CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: THESE 12 STOCKS AND FUNDS CAN EARN 15% OR MORE