A Wall Street Trend: Find Quality Stocks
QUALITY is again the name of the game for Wall Street. ``The leading edge of this market is now `quality,' and that means blue chip, big-capitalized, key companies, such as Walt Disney Company, Coca Cola, General Mills, McDonald's,'' says Gene Jay Seagle, director of technical research for Gruntal & Company, an investment house.Skip to next paragraph
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As a market technician - that is, a specialist in daily flow charts and intricate technical graphs that pinpoint the internal workings of the market, Mr. Seagle believes that what the stock market is now saying is essentially two-fold:
The economy may well continue to slow somewhat, but there will be ``a soft landing rather than a recession.''
The political liberalization in Eastern Europe has opened up a broad range of economic possibilities for many United States consumer-related firms.
``The political situation in Eastern Europe is an extremely positive development for the stock market,'' Seagle says. Companies benefiting will be the ``better known US companies, the reliable, highly capitalized firms that are known for their quality and excellence.'' Case in point: General Mills. The giant Swiss-owned Nestl'e Company will soon distribute General Mills cereal products in Europe, Seagle notes. Cereal sales in Europe could expand dramatically, from an industry that is now valued at about $1 billion there, to some $6 billion or more ``in just a few years.'' Other companies that could benefit from political liberalization: Warner-Lambert and Gillette, which make consumer care products.
In assessing Wall Street's preoccupation with quality, it is well to remember that the term is not just synonymous with highly publicized companies, but overall performance, based on such factors as price appreciation and earnings gains.
``We now see a soft-landing for the economy,'' says C. Michael Carty, president of the highly regarded Value Line Centurion Fund. Using a ranking system that looks for the top 100 or so stocks, the Centurian Fund is in effect geared to finding ``uncommon values,'' Mr. Carty notes. That does not mean that each of the 85 or so of the individual stocks in the Centurion portfolio is a major blue chip growth stock, although each could be. Rather, stocks are selected with a screening system that looks at such criteria as relative earnings history rank, relative price history rank, and relative price momentum, earnings surprises, and earnings momentum.
An economist, Carty also uses several analytical overlays based on how well the economy - and various subsectors within the economy - are doing. Thus, Carty notes that such areas as shoes, toys, school supplies, and health care services and products, have been performing very well lately.
Much of the recent play in the market has tended to revolve around well-known firms, such as oil stocks (Atlantic Richfield, Amoco, Exxon, Mobil, and Royal Dutch Shell), giant consumer companies (Procter & Gamble) and possible corporate restructurings (UAL Inc., the parent of United Air Lines).
But what about ``hidden quality'' - companies that are little known but show unusual promise over time?
James C. Kedersha is a ``new opportunity specialist'' for One Federal Asset Management, a Boston-based subsidiary of Shawmut Bank. One Federal manages some $2 billion in assets.
Mr. Kedersha's entire job is to play detective and find ``four or five very good [investment] ideas a year.'' He looks for stocks with ``long-term growth and short-term problems.'' The challenge, he says, is to look where a stock's price will be ``two years from now,'' irrespective of what happens to the US or world economy.
Some of the companies that Kedersha has recommended to One Federal are relatively well-known companies (Archer-Daniels, Lotus Development, and Emerson Electric). But some are more unknown (Carpenter Technology and Computer Associates). What such firms have in common, he says, is that they are innovative and well-managed companies with defined objectives, yet objectives that are not overly sensitive to day-to-day economic gyrations. No matter how you gauge it, that spells market ``quality.''