Houston money manager Hamilton Lewis doesn’t necessarily advocate going with the crowd. Instead, he prefers to see what the majority of investors are doing and then to take an opposite tactic. The 19-year veteran of the markets, who started as a stockbroker for Merrill Lynch and later launched his own firm, Hamilton Lewis Capital Management, in 1991, says, “I like to pay attention to where the market is, and what direction it’s taking. That alone accounts for about 30% of my success.” Next, he scans industry groups to see which sectors have fallen from favor. Choosing industries that will rebound well, he estimates, accounts for another 50% of his success.
Lewis, 43, who invests some $25 million for his high-net-worth clientele, often focuses on downtrodden industries. “I like to come in on the low end of a stock’s cycle, when buyers are depressed, and news reports for the company are ugly,” he says. “That gives us the potential for greater upside.”
To measure the mood of the market, Lewis turns to the CBOE Volatility Index (VIX), which is compiled by the Chicago Board of Exchange. It gauges how optimistic institutional investors feel about the market by their purchases of options contracts. Typically the VIX has drifted, ranging from 18 on the low end (an indication that investors feel quite optimistic about stocks) to 50 at the high end (at times when a pessimistic mood looms over the market). Lewis says individual investors can track the CBOE by going online to www.cboe.com and clicking on a heading titled “market quotes.”
As of mid-January, the CBOE was 26 to 27, a sign that investors felt relatively good about their prospects, even with war and a dragging economy making headlines. Lewis believes the optimism might be inflated, a signal that the market might be primed for a fall.
Early in January, Lewis had his sights on retail stocks, which were reeling from the weak economy. Consequently, his first two Private Screening picks are Home Depot (NYSE: HD) and Best Buy (NYSE: BBY). Home Depot still has a commanding presence in the fix-it-up market, even after reporting lackluster earnings. Lewis expects the stock to bounce back from about $20 a share to $35 a share in the next 12 to 18 months. Electronics seller Best Buy, meanwhile, also suffered with its retail peers, dropping from $50 a share to a little less than $20 during 2002. Lewis thinks the company remains sound and will quite possibly return to $45 a share in the next 12 to 18 months.
Generic pharmaceuticals maker Barr Laboratories (NYSE: BRL) is another of Lewis’ rebound candidates. After languishing in 2002, new drugs in the company’s pipeline should boost revenues and return its stock to $120 a share.
Lucent Technologies (NYSE: LU), a stock that has fallen from the top tier of technology firms to below $1.00 a share, could also recover slightly. Lewis says the company’s cost-cutting and attention to margins could send its stock up to $1.75 a share in the next 12