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MARKET BEAT / TOM PETRUNO

Investors Dig Deep for the Next Market Stars

September 20, 1993|TOM PETRUNO

And then there were none?

For growth-stock investors, that's the way it feels these days. When shares of home-improvement retailing giant Home Depot plunged last week, you could almost hear the overture from "Last of the Mohicans" playing in the background.

One by one, the great consumer growth stocks of the 1980s have come undone over the past 18 months--Merck, Philip Morris, Nike, Microsoft, even Wal-Mart.

Home Depot had been one of the few holdouts, hovering just under its all-time high price of $51.50 even into August. But by last week, the same fears of rising competition and slowing earnings that had picked off the other ex-growth stars caught up with Home Depot, sending the stock as low as $35. It ended the week at $37.625.

What troubles Wall Street isn't so much that these long-time leaders have crashed, but that it seems so incredibly hard to find replacements for them.

Growth stock investors yearn for companies whose sales and earnings are likely to follow a steady upward trend for three to five years or more, thereby all but guaranteeing an upward trajectory for the stocks' prices.

The goal is to find and get on board these companies early for the long ride up--the way some lucky investors did with Microsoft in 1986 and Home Depot in 1988.

Is it really tougher to pinpoint true growth stocks today, or do the '80s just look easy in hindsight?

Some veteran stock-pickers believe that the game has indeed changed for the worse. Robust consumer spending is what allowed many of the '80s corporate stars to flourish for so long; some were able to raise product prices with near impudence in that era, experts note.

Now, with the consumer retrenching and economic growth overall lackluster, "It's a different world," says Richard Peterson, co-manager of the SteinRoe Special growth-stock fund in Chicago. "It'll be harder for (consumer-related) growth stocks to develop."

That reality has forced many Wall Streeters to hunt elsewhere for '90s market stars. While finding the "next" Home Depot remains a one-in-1,000 shot, here's how some growth-stock veterans are trying to boost their odds:

* Get away from the crowds. William Berger, whose Denver-based Berger One Hundred stock mutual fund is up 14% this year and also has a stellar 10-year record, owes much of his long-term success to stocks like Wal-Mart. But the legendary retailer is no longer in Berger's portfolio.

In the search for new growth names, Berger believes that the key to success in the '90s is to target "niche" stocks that haven't been victimized by Wall Street's herd mentality. One example is Roper Industries ($70.25 Friday, Nasdaq), a fast-growing maker of industrial controls and valves, Berger says.

While the stock has surged from $17.75 this year as earnings have exploded, Roper remains relatively obscure among big investors.

Indeed, Berger says he increasingly finds the best growth prospects among low-profile manufacturers like Roper. While these industrial names are anathema to traditional growth managers, Berger says opportunity is where you find it. "There's no such thing as a growth stock--only companies in growth periods," he reminds.

* Look for new products and a lack of competition. Wall Street may pretend to be omniscient, but it simply isn't, says Charles Adams, manager of the Greenville, Del.-based Brandywine stock fund. "Markets change much faster than analysts have the ability to perceive" in the short-term, he says.

That means stocks of emerging growth companies often play catch-up to the companies' fundamentals for long periods, as sales and earnings continually beat expectations, Adams says. A good example of that, he says, is Newbridge Networks ($64.125, Nasdaq), a Canadian company that has carved a new market linking individual businesses' communications networks worldwide.

The stock has more than doubled this year, Adams says, because "the company has surprised investors every quarter with its growth. We think that's likely to continue for a while," he adds, "because Newbridge is in a market where there just isn't a lot competition."

Other stocks in Brandywine that fit the red-hot-products mold, Adams says, include carpet-maker Shaw Industries ($47.50, NYSE), which is grabbing market share worldwide; Amtech Corp. ($27, Nasdaq), which makes electronic I.D. systems for tracking rail cars, and HBO & Co. ($34.625, Nasdaq), which supplies cost-accounting software to medical providers.

* Think globally. "We believe the most substantial growth opportunities in this decade will end up being in other parts of the world, not the U.S.," says the SteinRoe Special fund's Peterson.

Of course, many investors have heard that, but somehow feel that it's too difficult to act on it. Yet mutual funds make it easy, and at much lower risk than if you tried to pick overseas winners yourself.

In the SteinRoe fund, Peterson owns National Mutual Asia Ltd., a Hong Kong-based life insurance company that he says is growing rapidly in Hong Kong and Taiwan--and now is eyeing mainland China.

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