If investors ever needed solid advice, they need it now. As the stock market careens toward a possible fourth consecutive year of negative returns, the responsibility of averting or diminishing further losses to your 401(k) statements and other investments rests squarely on you.
It’s time to fix your finances NOW. Time to assess the damage that recession; the Enron, WorldCom, and Global Crossing scandals; and the uncertainty of war have inflicted on your retirement account and your dreams for the future. It’s time to create a new strategy to help you survive a market that has been in a slumber with no end in sight. In these unpredictable times, BLACK ENTERPRISE is providing you with insight from some of the best independent financial advisors from across the country. They are ready to share the same advice they regularly give to their clients.
BE invited Dale Bryant, portfolio manager of The Bryant Group in New York City; Walt Clark, president and CEO of Clark Capital Financial in Columbia, Maryland; Cheryl Creuzot, president and CEO of Wealth Development Strategies L.P. in Houston; Pierre Dunagan, president of The Dunagan Group in Chicago; Michael M. Smith, a certified financial planner at the Phoenix-based ProFocus Inc.; and Kathleen Williams, CEO of Williams Financial Services Group in Oklahoma City. We engaged these men and women in a discussion about how investors can get their financial houses in order. Here’s what they had to say:
BLACK ENTERPRISE: What advice have you been giving your clients over the last year?
CREUZOT: My clients are asking when is it going to be over. There are market indicators that would lead most of us to believe we are at or near bottom. More than likely, we’ll just continue to move sideways, which is what we have been doing for a while now. A lot of the analysts who we rely on think that 2003 will be up slightly, and that’s about as detailed as they are willing to get.
I think the hard part for us right now is being disciplined and focused. It’s very difficult to not let our clients’ emotions get us off course.
SMITH: We see indications that the economy is up, but the stock market is down. All my retired clients, or my clients who are dependent upon unearned income, are very concerned because their accounts are their sole source of revenue. My clients who are working and generating income continue to put money away.
I think the biggest impact on this economy has been accounting scandals, which cost investors trillions of dollars and harmed the integrity of the market. A lot of people just flat out don’t trust the market right now. I think we need a slow and steady increase in the market to restore confidence.
BRYANT: My clients haven’t been too shaken. Whenever I interview a client, we have an understanding that it’s for the long-term. Sometimes they come in to get a little hand-holding. The more money you have, the more hand-holding you need. My clients with less than $25,000 are OK with a little volatility in their returns. My clients with more than $500,000 need some reassurance from time to time.
As far as the market goes, I’m cautiously pessimistic. I think it’s easy to want to reach out and grab on to some unrealistic hope. After the second half of 2000, the experts on Wall Street were saying we’ll have a quick rebound in 2001. After another bad year in 2001, they said it would come back in 2002. Now here we are, three years in, and everyone is hoping for another rebound. I say wait and see.
I haven’t added any new money to equities in the last year and a half. I have been putting money in REITs and preferred securities. I’m in a wait-and-see mode. I don’t think it’s important to be the first one in when the market recovers.
DUNAGAN: We’ve gone back to the basics of asset allocation to make sure our clients are not overly weighted in stocks or bonds. Another thing we’ve done is to diversify our clients’ [portfolios] into income-oriented real estate. With all of the foreclosures that are going on out there, it presents an opportunity.
WILLIAMS: Many of our clients are retirees. We do a lot of lump-sum distribution business. We also do quite a bit of business with women, recent widows. Right now, the recently retired group is feeling scared. They are focusing on what would happen if there is a war. We are somewhat optimistic about what the market will do toward the end of the year, but we’re sitting on the sidelines trying to figure out what is going to happen.
CLARK: I’ve been trying to let people know that things are going to get better sooner rather than later. Back in 1991, when we had a recession, people wondered how we were going to get through it, were stocks ever going to come back, and was the economy ever going to pick up. Our forecast was that in three to five years, we should look pretty good, and we went on to have an eight-year bull market, which I don’t think anyone could have predicted.
So today we feel cautiously optimistic. I think Sept. 11 set the economic recovery back between 12 to 16 months. We look forward to better times.
B.E.: Is there anything else about the current economy that investors should consider right now?
CREUZOT: I think we’ve seen a lot of do-it-yourselfers saying, “This is really hard, and I need some help with investing.” Because they’re coming to us, one of the keys is managing client expectations. If you educate people on the front end so they understand that even though we have gone through this eight-year bull cycle, [and that] there are going to be difficult times ahead, then they can clearly understand what to expect from various investments.
We give clients a risk-tolerance questionnaire, which helps us get a feel for what they expect in terms of return, what their time horizons are for the money they are investing, if they have a need for income, and what they can tolerate. There are a lot of people who thought they were aggressive but found that their stomachs really couldn’t take this turbulent market. [The questionnaire] also gave us an opportunity to go back and reassess their situation. Maybe they are not as risk tolerant as they thought.
WILLIAMS: I think this turbulent time period is allowing investors to look at their situations again and not be so interested in trying to get the huge, unrealistic rates of return. This time period may have been needed in order to adjust the investor’s way of thinking.
The underlying economic indicators are sound, and growth will be here soon. It’s the uncertainty of what is getting ready to happen that is creating problems. Last year we were dealing with Enron; now we are wondering what is going to happen with a war.
BRYANT: I also think it’s important to acknowledge that an economy in recovery doesn’t always translate into higher stock prices. It’s dangerous to look at numbers only; we saw positive data right after the depression-recession of the 1970s, but things traded flatly and sideways for many years.
This time last year we started out with a big bang, only to be disappointed 11 months later. Earlier this year we started up 6% or 7%, only to give it all back by late January.
B.E.: The war, corporate scandals, and the idea of trusting the market itself seem to have investors stymied. Why should they trust this market?
CLARK: One of the best things to come out of the scandals was the infamous certification, back in August, when CEOs and CFOs had to sign off and be accountable for their books. That hasn’t been talked about enough. While a certification obviously doesn’t fix everything, I think the trust factor is building. The idea that most companies are now saying we’ve certified our books and we’re being held accountable, I think, makes everyone—from the top brass down—more cautious about what they are saying and how they are reporting. That’s going to help the market overall.
BRYANT: Investing for the long-
term doesn’t mean you have to have 100% stock participation at all times. You’ve got other choices like corporate bonds, preferred securities, real estate investment trusts, and I-bonds. People need to understand that what’s more important than what stocks you are in or what funds you have is making sure you are investing every month and spreading things around in the proper asset allocation.
Why trust this market? The stock markets are the only game in town for the long-term. You’re getting less than 1% interest through your bank; money markets give less than 2%. Bonds, after inflation, yield real returns of 1% or 2%. The stock market, as volatile as it has been over the last three years, is the only long-term game in town. The trick is to find an advisor who can talk to you about uncertainty, and then work with that person going forward.
B.E.: With the rise in corporate scandals, what kind of information, such as earnings reports, are you looking at to trust that a company is worth investing in?
SMITH: When I look at a company, I make sure it is a dominant player in its market. Then I make sure it is not getting away from its focus. A lot of companies try to diversify but wind up abandoning what their original corporate strategy was.
When it comes to analyzing a company, I look for full disclosure, and I also look at what the analyst, under a particular broker’s firm, is saying about the stock, compared to its competitors. Since the analyst and the underwriter are often working for the same person, there is an inherent conflict.
I tend to take a more macro view when picking stocks. When I look at one stock, I’m actually looking at maybe another 10 or 11 to see how they are going to complement each other.
BLACK ENTERPRISE / blackenterprise.com / APRIL 2003
DUNAGAN: I look at stocks in the big picture. The good thing is that sources available to your readers—Value Line and Standard & Poor’s—are putting information in their reports about whether a company’s pension plan is underfunded and other liabilities it may have. So readers can go to the library and get the information inexpensively.
The other thing I’m looking at is what exactly does this company do? What are the price-to-earnings ratios? How is it going to benefit from what is going on in the economy right now, not the benefits over the next three months, but what is going to happen over the next three to five years because clients may not have $10,000 or $20,000 to invest in a company now, but they can build that position over the next year or so.
People who pick individual stocks should be suspicious of companies that are reporting good earnings per share growth, but less than perfect revenue growth. Those companies are cost-cutting, looking for ways to squeeze out good earnings per share from efficiency strategies. But, eventually, they’ll either have to charge more money or sell more to increase revenues. So that’s something to be concerned about.
You also have to be able to look at the balance sheets. Increased inventories and increased receivables are not good for cash flow, no matter what you’re recording in earnings per share.
Finally, I think individuals have to really understand their own limitations. So, for example, let’s say that you own Bank of New York stock, and the company reported a 7% drop in fourth-quarter profits because it has a lot of loans out to the distressed airline companies. If you were smart enough to avoid the airlines, but didn’t realize that your Bank of New York stock is conflicting with your avoidance of the airlines, then you don’t really understand how your stocks are interrelated. If you can make those connections, invest in stocks. If you can’t make those connections, stick to mutual funds.
B.E.: How should investors pick mutual funds?
WILLIAMS: When picking mutual funds, tax efficiency and the tenure of the fund manager are very important to keeping costs as low as possible. Look at the type of stocks a manager has picked, and decide if you are comfortable with them.
SMITH: Look at the size of the funds. The smaller the fund, the higher the expenses you are probably going to incur. The larger the fund, the overall expense ratio may be lower. And if you are investing for growth and choose a growth fund, understand that the fund will follow a growth philosophy.
WILLIAMS: Investors should have an investment policy statement that says they will only deal with funds that have three-, five-, or ten-year returns, which will keep them from jumping into a new fund with a 100% return in one year and then tomorrow it’s gone.
B.E.: What do you tell investors, when talking about the war, to earn their trust so they will keep investing?
CLARK: If we go to war, the fact is that it has already been discounted into the market, and the anxiety investors have will be relieved. If we don’t go to war, I think that’s going to be an overwhelming relief factor that will cause the markets to do better because it has been discounted so much into the picture.
Just as the Persian Gulf War helped corporate America retrench and cut layers of fat by laying off workers, cost-cutting, and refinancing the tremendous amount of debt, this war is going to help firms better their bottom line. I think what is going to happen with the war for the long-term will have a positive effect.
CREUZOT: I try to get our clients not to focus on the short-term issues. Despite the wars and the turmoil this country has been through, there has been a steady incline in the market. I think you have to keep people focused on the long-term.
WILLIAMS:
I think the war has to be very quick. If it’s a short war and we get it over with, I think the economy will benefit, and it will be positive for the stock market. If it’s long and drags on, however, I think it will have somewhat of a devastating effect.
B.E.: One of the biggest trends over the last 20 years is the individual taking more responsibility for what happens to his or her retirement money. Our readers have to be more responsible with their finances. Lay down some rules so they can get their houses in order.
SMITH: I have a lot of clients who have gotten laid off. When my clients come to me, and they think that a pink slip is coming down the road, I tell them to go get a line of credit because no one will lend you money without a job.
CREUZOT: The first thing we have clients do is organize themselves. We do that by gathering data to help us solidify what their assets and liabilities look like, and then we have them do a budget to see what their cash outflows are.
The next thing is to establish some written short-term and long-term financial goals. That gives us the platform to design a prudent financial plan.
DUNAGAN: After the carnage of the last three years, people should sit down with their advisors, find out where they are, and reassess their strategy. So, if they were saving $100 or $200 a month in their 529 plan for
their children’s college education and it took some hits, is that amount enough? Investors should look at their stock portfolios, instead of holding on to investments and waiting for them to come back. Decide where you can get the most value right now.BRYANT: The first thing is to understand that gone are the days where you could buy a stock or a mutual fund and hold it forever because it would perform nicely. It’s also important to rebalance your portfolio quarterly to get your asset allocation back to normal.
Second, I think before you ever buy a mutual fund or a stock, you should know what your exit strategy is, a strategy that is comfortable for you in terms of taking some profit.
CREUZOT: You shouldn’t invest in anything if you don’t understand it. You’ve got to take some responsibility, do some reading, and learn on your own.
WILLIAMS: Investors should also re-evaluate
how much debt they are in. If they have an exorbitant amount of debt, then I don’t think they should be investing until the debt has been reduced.
Also, they need to evaluate how much liquid assets they have for emergencies. If there isn’t at least three-to-six-months worth of emergency money sitting in an account, then they’re just shooting themselves in the foot. People need to look at their disability coverage. What would happen to them in the event that they are injured? Many people think that they have coverage at work and they don’t. These things are paramount and should be considered before a person decides to invest.
B.E: Are there any tax strategies related to the current tax proposal by President George W. Bush that you are recommending to your clients?
DUNAGAN: One of the things people should take advantage of is the catch-up rule for 401(k)s. [The government has] increased the amount people over 50 can contribute over time, and I think it’s a good thing to contribute more if you haven’t fully funded your tax-deferred retirement plan yet.
CREUZOT: People should consider increasing the amounts they place into tax-deferred accounts. Even those who are under 50 should look at their deferral percentages to make sure they keep pace with the additional monies that they can legally defer due to changes in tax law.
CLARK: With the possible elimination of the tax on dividends, investors may want to adjust their portfolios to include companies that are offering dividends, particularly if they are conservative investors.
WILLIAMS: And as it applies to single individuals who earn incomes of less than $25,000, they can get a return of contribution credit for elective deferrals and their IRAs. That’s very important for those individuals who do not join a 401(k) plan because they believe they can’t afford it. This allows them to receive some type of tax credit—anywhere from 5% to 10%, depending on their income—from the contributions they have elected to defer to an IRA, up to $2,000. A lot of people forget about this tax credit, and I think it can help. It’s an elective for lower income and single individuals who make under $25,000 and for married individuals or heads of households who make less than $37,500.
B.E.: Is there any tax advice for small businesses owners?
SMITH: For small businesses, the government just increased the capital expenditures rules, like section 179, from $25,000 to $75,000. That’s huge because if you have a vehicle that weighs over 6,000 pounds, you can use section 179 for that. So if you buy a Yukon or an Escalade through your business, you can write the whole thing off as long as it costs less than $75,000. I think that’s a tremendous benefit for small business owners because they can take advantage of it going
Michael Smith ProFocus Inc.
I’m recommending stocks and mutual funds that have had consistent earnings growth over the last two years.
eBay has a terrific business model. It was an online auction company, but it has transformed into a business-to-consumer marketing and distribution network. It’s expanding globally, and its earnings growth is consistent.
Health Management Association manages about 40 hospitals in most of the southern states. It is very cost-conscious, and with its distribution network, it is really driving down the cost of hospital equipment and pharmaceutical services, which has led to consistent earnings growth.
Royce Special Equities Mutual Fund has a great model when it comes to picking small value holdings. It’s one of few fund groups that has had a flat or positive return over the past two to three years. Going forward, it has positioned itself for a market upswing. msmith@profocus.com
| Company (Exchange: Ticker) | Price at Recommendation* |
5-Year Estimated EPS Growth Rate |
| eBay Inc. (Nasdaq: EBAY) | $75.28 | 45.4% |
| Health Mgt. Assoc. (NYSE: HMA) | 18.34 | 15.7 |
| Mutual Fund (Ticker) | Fund Category |
3-Year Trailing Returns** |
| Royce Special Equity (RYSEX) | Small-cap Value | 18.01% |
| *AS OF JAN. 24, 2003 **AS OF FEB. 7, 2003 SOURCES: MORNINGSTAR INC.; YAHOO! FINANCE; ZACKS INVESTMENT RESEARCH |
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Cheryl Creuzot Wealth Development Strategies L.P.
My selections are primarily based upon performance vs. style-specific benchmarks, management tenure, and the funds’ buy-sell discipline. I stress the proper asset allocation for investors and suggest the following portfolio breakdown using mutual funds in today’s market. This portfolio is appropriate for the moderately aggressive investor with a 10-year time horizon.
Cheryl_Creuzot@wealthdevelopmentstrategies.com
| Fund Category |
Percentage of Portfolio |
Mutual Fund (Ticker) | 3-Year Trailing Return* |
| Large Growth | 22% | Bramwell Growth (BRGRX) | -14.55% |
| Large Value | 25 | Ameristock (AMSTX) | 0.15 |
| Mid Growth | 6 | Navellier Mid-cap Growth (NPMDX) | -21.80 |
| Mid Value | 7 | Berger Mid-cap Value (BEMVX) | 8.81 |
| Small Value | 10 | Ariel (ARGFX) | 12.60 |
| Foreign Stock | 10 | American Century International (TWIEX) | -22.89 |
| Short-term Fixed Income | 13 | Strong Government Securities (STVSX) | 10.30 |
| High-Yield Bond | 5 | Columbia High-Yield Z (CMHYX) | 4.64 |
| Cash | 2 | Â | Â |
| *AS OF FEB. 7, 2003 SOURCE: MORNINGSTAR INC. |
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Walt Clark Clark Capital Financial
I recommend the depressed technology market, the pharmaceutical market, and the transportation market. I tend to be contrary and go to the notion that you want to buy low and sell high. These are sectors
SBC Communications is a very attractive stock because not only does it have potential for very attractive growth, but it also has a very good dividend.
J.P. Morgan Chase & Co. is a company that has a tremendous financial position to make it through the tough times. It also has the option to give you a dividend in the 5% range that can help you wait patiently for the company to return to pro
fitability.
Southwest Airlines has demonstrated over the years that it has an excellent management team to manage its assets, to manage its profits, and its company. It has done exceptionally well during one the worst times in the airline industry’s history, and once the war issue is over and oil prices trickle back down to $25 to $28 a barrel, that’s going to be very beneficial to its bottom line. wclark@clarkcapital.net.
| Company (Exchange: Ticker) | Price at Recommendation* |
5-Year Estimated EPS Growth Rate |
| SBC Communications (NYSE: SBC) | $24.54 | 6.0% |
| J.P. Morgan Chase & Co.(NYSE: JPM) | 23.81 | 10.5 |
| Southwest Airlines (NYSE: LUV) | 13.02 | 13.7 |
| *AS OF JAN. 24, 2003 SOURCES: YAHOO! FINANCE; ZACKS INVESTMENT RESEARCH |
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Pierre Dunagan The Dunagan Group
I believe there is going to be an economic recovery once the uncertainty of war ends and we have recovering corporate spending. My picks will benefit from this trend.
Dell Computer has practiced just-in-time management, or just-in-time manufacturing. Its financials are strong right now. It has been implementing cost-cutting measures, and it is selling more high-end laptops and servers. It will benefit strongly from a business recovery.
Walgreens is one of the largest drug store chains in the U.S. that should benefit from demographics. As the baby boomer generation gets older, and they’re health begins to decline, you’re going to see an increase in prescription drug use. And Walgreens should be the beneficiary.
 Harley Davidson, another baby boom play, has been doing well despite what is going on in the economy. It is also selling well internationally in Europe and Japan. It has really put more emphasis on quality, which was part of the company’s turnaround. The Dunagan Group, 312-930-0856
| Company (Exchange: Ticker) | Price at Recommendation* |
5-Year Estimated EPS Growth Rate |
| Dell Computer (Nasdaq: DELL) | $24.38 | 14.8 |
| Walgreen Co. (NYSE: WAG) | 30.27 | 16.7 |
| Harley-Davidson (NYSE: HDI) | 41.47 | 18.7 |
| *AS OF JAN. 24, 2003 SOURCES: YAHOO! FINANCE; ZACKS INVESTMENT RESEARCH |
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Kathleen Williams Williams Financial Services Group
Since most clients coming to me now are conservative, I’m recommending mutual funds that are low cost, have managers who have handled the account for at least five years, and where the returns have been consistent. I will hold five to six different funds to assure the right type of asset allocation between stocks and bonds, sometimes adding a small amount of certain sector funds depending on the client.
Clipper Value Mutual Fund (CFIMX) meets my requirements for low cost, long-time management, and consistent returns, and it also does not drift from its value style.
American Century Long Term Government Bond Fund (BTFTX) is a solid fund that allows investors to be conservative with their portfolio. I believe in asset allocation, so every portfolio should have a percentage of bonds.
Jensen (JENSX) is very particular about choosing their stocks. I like Jensen because of its no-style drift. If a stock doesn’t perform over time, it’s eliminated from the portfolio. ask_kathywilliams@hotmail.com
| Mutual Fund (Ticker) | Fund Category |
3-Year Trailing Returns* |
| Clipper (CFIMX) | Large-cap Value | 10.71% |
| American Century Target Mat 2015 Inv (BTFTX) | Long-term Government Bond | 15.65 |
| Jensen (JENSX) | Large-cap Growth | -0.29 |
| *AS OF FEB. 7, 2003 SOURCE: MORNINGSTAR INC. |
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Dale Bryant The Bryant Group
I recommend some subsections of the healthcare sector, consumer staples, and the financial sector. But the important thing is to make selections within these sectors that have been able to generate consistent earnings; have been able to generate solid revenue increases over the year; and in some cases, have the ability to control pricing power in their industry, which is important.
 Watson Pharmaceuticals has EPS growth that has been flat over the last three years, but the last five quarters have shown a positive trend. Revenues have grown 24% over the last three years. It distributes branded and generic pharmaceutical products of a broad range.
Dollar Tree, a discount variety store that has shown revenue growth of 17% over the last two years straight. EPS growth for the last three years has averaged 14%. Its net income for the fourth quarter 2002 was an impressive 20%.
Golden West Financial is adding some new investment advisor services to get some additional profit out of its existing client base. It has been showing 10% revenue growth over the last three years, and 20% EPS growth over the last three years. bryantgroup@hotmail.com
| Company (Exchange: Ticker) | Price at Recommendation* |
5-Year Estimated EPS Growth Rate |
| Watson Pharmaceuticals (NYSE: WPI) | $29.67 | 11.6% |
| Dollar Tree Stores (Nasdaq: DLTR) | 22.70 | 20.2 |
| Golden West Financial (NYSE: GDW) | 72.97 | 11.9 |
| *AS OF JAN. 24, 2003 SOURCES: YAHOO! FINANCE; ZACKS INVESTMENT RESEARCH |
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B.E. Stock Update
Overcoming the third consecutive year of double-digit losses in the financial markets proved to be a difficult task for the two stock-pickers from last year’s investment roundtable. Charles Payne, founder of the New York City investment-advisory firm Wall Street Strategies and Eric McKissack, former vice president and portfolio manager for the Ariel Appreciation Fund, had little luck solving the riddle of a market plagued by uncertainty brought on by corporate accounting scandals, threats of war, and an ailing economy. Payne’s five stock selections suffered a 59.03% loss, demonstrating how a very aggressive, tech-heavy style can be punished in this bear market. And although McKissack selected well-known leaders in five different industries, only one, the Tribune Co. (NYSE: TRB), delivered positive returns. But even with Tribune’s 33.37% returns, McKissack’s portfolio saw a total return of -25.71%.
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Eric McKissack Ariel Appreciation Fund |
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| Company (Exch ange: Ticker) |
Recent Price | Price at Recommendation* |
Total Return | Current Value $1,000 Investment |
| Tribune Co. (NYSE: TRB) | $48.40 | $36.29 | 33.37% | $1,333.70 |
| Interpublic Group (NYSE: IPG) | 12.87 | 27.07 | -52.46 | 475.43 |
| MBNA Corp. (NYSE: KRB) | 16.83 | 22.18** | -24.12 | 758.79 |
| Cendant Corp. (NYSE: CD) | 11.08 | 16.05 | -30.97 | 690.34 |
| Toys R Us Corp. (NYSE: TOY) | 9.04 | 19.82 | -54.39 | 456.10 |
| Portfolio Performance | Â | Â | -25.71% | Â |
| Current Value of $5,000 Investment | Â | Â | Â | $3,714.36 |
| *AS OF JAN. 31, 2003 **PRICE ADJUSTED TO REFLECT A 3 FOR 2 STOCK SPLIT SOURCE: YAHOO! FINANCE | ||||
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Charles Payne Wall Street Strategies |
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| Company (Exchange: Ticker) | Current Price | Price at Recommendation* |
Total Return | Current Value $1,000 Investment |
| Nokia (NYSE: NOK) | $14.39 | $23.18 | -37.92% | $620.79 |
| AOL Time Warner (NYSE: AOL) | 11.66 | 26.40 | -55.83 | 441.67 |
| Applied Materials (Nasdaq: AMAT) | 11.97 | 21.58** | -44.53 | 554.68 |
| Concurrent Computer (Nasdaq: CCUR) | 3.30 | 13.12 | -74.85 | 251.52 |
| Openwave (Nasdaq: OPWV) | 1.23 | 6.68 | -81.59 | 184.13 |
| Portfolio Performance | Â | Â | -58.94% | Â |
| Current Value of $5,000 Investment | Â | Â | Â | $2,052.79 |
| Â *AS OF JAN. 31, 2003 **PRICE ADJUSTED TO REFLECT A 2 FOR 1 STOCK SPLIT SOURCE: YAHOO! FINANCE | ||||