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'World-Class' Picks of 1990 Are Doing Well Despite War

MARKET BEAT

August 05, 1991|TOM PETRUNO

Here's a great come-on that ought to get any investor's attention: "Twelve World-Class Growth Stocks for the '90s."

A year ago, the 12 names were published in a report by Paine Webber investment strategist Edward Kerschner. They represented some of his favorite bets for investors who wanted to own blue-chip companies with strong global franchises.

The idea: If trade barriers continue to fall in the '90s, the companies best-positioned for fast growth will be those American giants that already know how to do business overseas.

The concept seemed flawless--at least, until Saddam Hussein and his former army invaded Kuwait, knocking much of the world into recession.

So how are Kerschner's global dynamic dozen faring one year later? Surprisingly well, taken as a group. While Kerschner never represented the list as a model diversified portfolio for the long haul, it turns out to be a pretty good collection of stocks, all things considered.

As you might expect, the industrial and technology names on the list have been slammed by the recession that gripped the U.S. economy from last fall through spring. But their declines have been outweighed by sharp gains in the consumer growth stocks whose products enjoy strong demand in any type of economy.

The result:

* Assuming you put $1,000 into each stock on July 12, 1990 (when Kerschner's list appeared in this column), your original $12,000 portfolio would be worth $12,720 today, a gain of 6%.

* That was just about on par with the market benchmark, the Standard & Poor's 500 index, up 6% in the same period.

* Dividend income from either Kerschner's portfolio or the S&P 500 would have been in the neighborhood of 3%.

* In all, your return on the 12-stock portfolio was around 9%, better than most money market or bank CD alternatives, and a little better or a little worse than bonds, depending on the type you might have picked.

(None of these returns factor in commissions or other expenses, of course, and the $1,000-per-stock figure is used as an example--not to suggest that's what Kerschner recommends.)

How does he feel about the stocks today? The 38-year-old Kerschner admits that he advised short-term traders to exit many of the industrial names in the aftermath of the Kuwait invasion last year, when it became clear that a recession was beginning. In July, 1990, "no one thought there'd be an Iraq-Kuwait crisis," he notes.

Even now, he says, "I still think it's early for a trading-oriented portfolio to be in the growth-cyclicals"--his term for industrial firms such as IBM, Motorola and Dow Chemical, which are long-term growth bets but which remain subject to cyclical swings in the broad economy.

Europe's economy is weak, German interest rates are on the rise and the U.S. economy's recovery from recession is likely to be slow, Kerschner figures. That won't provide a lot of \o7 oomph \f7 for global industrial companies in the near-term, he says.

But he still believes that most of the growth-cyclicals on his list will be great stocks in the long run. The only one that he sounds much less enthused about is Halliburton, the oil field services company that is suffering from yet another decline in the oil and gas exploration business. "The fundamentals couldn't be worse right now," Kerschner says, and no turnaround is on the horizon.

If you've got money to invest, he says, the stocks to buy now are the global consumer growth companies that continue to show excellent earnings potential despite the weak economy.

For investors who are deterred by those stocks' prices--the leaders such as Sara Lee, Coca-Cola and drug giant Merck now sell for 20 to 30 times their most recent 12 months' earnings per share--Kerschner notes that many people made the same argument about "high prices" a year ago. The naysayers sacrificed 30% to 50% gains by avoiding the stocks, Kerschner says.

He believes strongly that interest rates are going to drop significantly over the next few years as inflation stays under control and that, by 1996, the long-term Treasury bond will yield just 6%, versus 8.25% now.

It's a basic Wall Street truth that when interest rates drop, investors are willing to pay more for stocks--because bonds offer less competition and because companies' interest costs fall, boosting earnings.

Thus, Kerschner believes that price-to-earnings ratios on the consumer growth stocks will continue to rise in the years ahead as investors chase them in a declining interest rate environment.

Forget bank stocks or other traditional havens in a period of falling rates. "My interest rate plays are growth stocks," Kerschner says.

Here are his current capsule comments on some of the original 12 world-class growth picks:

* Sara Lee: "They've built a great stable of world brands," Kerschner says, from Jimmy Dean sausage in America to coffee brands in Northern Europe and baby food in Southern Europe. Earnings will continue to grow in the mid-teens, he predicts.

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