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NETWORK Portfolio A local stock market expert updates NETWORK's fantasy stock portfolio |
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| by Adam Samuels Isn’t
October supposed to be a scary month in the stock market? Could this really be the upturn we’ve been waiting for? According to Phil Skelly, senior vice president and head of the investment group at Northern Trust Bank, it certainly looks that way. “Our view is that this economy is clearly strengthening and as a result, we think corporate profits are going to continue to look good. So we think equity values will move in a positive way,” he says. Skelly notes that the recently announced third quarter GDP was more than seven percent, which is incredibly strong. “Fourth quarter may come back to four percent, but that will still mean that corporate profits will be up 10 to 15 percent in this calendar year.” With another 10 to 15 percent gain on the horizon for 2004, expenditures for plant and equipment are likely to go up. Along with that, corporations will need to make greater investments in people as well. So, what moves would Skelly make in order to take advantage of this? We turned to our own NETWORK Portfolio, which we have already loaded with cyclical stocks –traditionally the beneficiaries of a fast-growth economy. “We do think that with the economy growing some of the cyclical issues will do better, but we’re not excited about Boeing,” he says. “It is struggling because it is not in a good commercial cycle.” The combination of competition from companies such as Airbus, which is subsidized by European governments, the fact that commercial airlines are searching for ways to cut back – not add – to their current investment, and significant pension issues facing the company due to stock market weakness over the past three years make this an unattractive stock. Removing a second stock from Portfolio was tough, because we are pretty well positioned, but Skelly settled on Hilton (HIA), even though its growth is cyclical in nature and the hotel industry should benefit from recent positive reports. But because we have managed to weed out all technology from our current holdings, he felt we needed to add at least one. Skelly’s favorite technology stock is Dell, which was a longtime holding of ours in years past. “We like Dell because it delivers to consumers and its cost to do so is less than its competitors like Gateway, Hewlett Packard and Compaq,” he says. “It has higher margins and is taking market share away from the others.” While it is not cyclical, it will benefit from a recovery. “It’s a company whose earnings we think will grow at a rate of 15 to 16 percent over the next three to five years.” One of the criticisms of Dell we heard over the years was that everyone who needed a “box on the desk,” so to speak, already had one. So where is the demand? Skelly feels that because corporations update computers every three to four years, Dell is hitting the replacement cycle. Additionally, it is getting involved in portable equipment such as notebooks, which are becoming more popular. The
final change Skelly is making to Portfolio is to add a new name
for us in the health care industry, Guidant (GDT), which makes
medical devices related to the heart, such as stints, balloon
dilation catheters for cardiovascular surgery, defibrillator systems
and pacemaker systems. “It has shown solid earnings, with
the third quarter being better than expected,” he says.
With good revenue, margins, and a reasonable P/E of 21 times this
year and 22 times next year, this looks like a high quality stock
to be in right now.
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“Our view is that this economy is clearly strengthening and as a result, we think corporate profits are going to continue to look good." Phil
Skelly , senior vice-president and |
