by Adam Samuels

"We’re enthused about stocks," says Ken Crawford, portfolio manager for Argent Capital Management. This sentiment echoes the tone of the last six months of Portfolio. "Third quarter earnings were strong across the board, and, because growth is accelerating, we think 2004 will be strong-not as strong as 03, perhaps, but strong." Crawford thinks this is due to the continued strength in the Asian economies, including Japan, which is recovering, and China, which continues to be, as he puts it, "a juggernaut." With Europe and Latin America also improving, he does not think the Federal Reserve will choke off recovery because inflation seems to be in check.

For bondholders, Crawford’s advice is to "stay with short maturities because we’re worried that at some point Greenspan will raise rates.We’ve seen bond prices falling this year and investors have seen that those prices do fall as well as rise. Hold bonds as a store of value instead of a speculative investment." Along those lines, Crawford reiterated what we have heard at least since July of this year: equities are not overvalued and offer greater reward relative to fixed income.

Turning to Portfolio, Crawford knew exactly what he wanted to do to fix it. The first addition he made was J. C. Penney. (JCP). His reasoning is that, number one, "its core department store profits are improving and we think it has room to continue for the next couple of years. Secondarily, they own the Eckerd’s Drug Store chain, which has been woeful." Because JCP’s management has committed to doing something with the chain by year’s end, Crawford is hopeful that means it will sell it to reduce debt and buy back shares.This stock is an intriguing pick, then, as department store chains struggle with their unwieldy format.What is this company doing that seems to have eluded others? Crawford believes it’s a "three pronged approach. Penney’s has the department stores, online business, and the J.C. Penney catalog, the only retailer with this thrust." The message is that if it’s not here, we’ll get it for you. With improvement as a fashion entity and cost saving measures including eliminating regional buying offices and non-performing units, Crawford’s feels this is a great addition to Portfolio.

The second addition to Portfolio is Novellus (NVLS), a semi-conductor equipment company which makes the machines that make the chips for Intel. "It’s a play on economic recovery because more semiconductors are used as capacity utilization increases," says Crawford. With orders improving by 25 percent this quarter, which was greater than expected, and Novellus’ being on the leading edge of technology, this is a new cyclical name which should benefit from a strong economy.

To make room for these new names, two must now be removed. Crawford’s first choice for elimination is Royal Dutch—for two reasons. The first one is that in a portfolio of 10 stocks, we’ve got three energy names. Hmm. I guess he’s right. "With oil at $30 per barrel and gas at $5 per MCF, that is historically very high," he says, adding, "If you believe in any normalization, energy is going to fall." The second stock we’re removing is Cardinal Health, primarily because Merck (MRK) is no longer going to allow inventory pre-buys from direct distributors in front of price increases. Because that is half of Cardinal’s profits, Crawford feels it should be removed.

BACK TO NETWORK HOME

 

 

 

 

 

 

 

 

---

---