If you haven’t noticed, individual investors are traversing uncharted territory these days. With interest rates at historic lows, a falling national unemployment rate, and high consumer spending, one would think that the economic outlook for the country would be positive. But look a little deeper, and there are a number of issues that make this one of the most uncertain times for investors.
Increasing energy costs are driving the price of goods higher, placing pressure on consumers. Moreover, concerns about higher interest rates threaten to stall business expansion, inflated property values are causing worries about a housing bubble, and growing fears about terrorism have many investors spooked about placing money into the market.
While all of these variables could negatively affect the financial markets in the short term, over the long term the stock market represents the best opportunity for you to expand your portfolio at rates that outpace inflation. But with so many new challenges for the economy, how can an investor reap major gains in the future?
We assembled four of the nation’s finest financial professionals to discuss their approaches to long-term investing and to get their insight on which industries are most likely to have the highest growth rates from now until 2010. The members of our roundtable are Charles Payne, founder and principal analyst of Wall Street Strategies, a New York-based independent stock market research firm; Jeffrey Phelps, senior vice president and director of equity investments with Houston-based Smith Graham & Co., ranked No. 10 on the BE ASSET MANAGERS list with $1.9 billion in assets under management; Dawn Alston Paige, senior vice president and co-founder of Piedmont Investment Advisors L.L.C., a Durham, North Carolina-based firm with $750 million in assets under management; and Ken Johnson, vice president and client portfolio manager at Loomis Sayles & Co., a $60 billion asset management company in Chicago.
BLACK ENTERPRISE: How do you believe the market will perform for the rest of this year and next year?
Payne: I’m excited about where the economy is right now. I think that we have very steady, non-inflationary growth that definitely could fuel a real strong stock market in the year to come.
Alston Paige: We feel very good about the market. While we may hit a slow period, the Federal Reserve Board will probably be out of the market by the end of the year. Following that, we expect the market to do quite well for the next two to three years into the end of the decade.
Johnson: In terms of our outlook for the economy, I expect short rates to continue to rise. First-quarter gross domestic product was revised up to 3.8% and at that level of growth, the Fed has to continue to move toward a neutral policy, which they have indicated is in the three- to five-year range. So, for the balance of 2005, I think we are a little bit more optimistic, in terms of economic growth for the market, but more bearish in terms of Fed policy and yields.
Phelps: I’m optimistic about the market. If you look at the large- cap indices, the Dow Jones Industrial Average, and others, they’ve done OK. But if you look at small caps, midcaps, and some of the isolated industries, like energy, home building, things like that, those have been roaring bull markets.
The industries that everybody watches all of the time are going to struggle the rest of this year. Interest rates will struggle, too. We think some of the mega-cap companies are going to have a tough time growing. When a company makes $3 billion in revenues, 10% is $30 million. It’s hard to do 10% when you get that big. That’s why we’re looking at growth companies. The rest of the market could probably be positive the rest of the year.
BE: You all say the market is going to do well, but where specifically is the growth coming from, and what are possible dangers?
Alston Paige: I run our small-cap value product. That market index, the Russell 2000, has been very strong for the last three years, and I still feel pretty constructive about it. Even though it’s a much riskier segment of the market, the returns have been big. I would encourage investors to take a look at some of the smaller caps and mutual funds, where they can get small-cap exposure in the total portfolio of their investments. Over time, history has shown that small caps outperform large-cap indices.
Phelps: Capital spending is starting to contribute to growth, as companies will have to meet growing demand and start to replace obsolete equipment. Then, I would expect that outside of the U.S., as our major trading partners’ economies start to improve, export growth will also.
I do have concerns about growth. The consumer has been driving large segments of the growth. The real risk for the economy is the consumer. Once you start raising 10-year bond rates, mortgage rates start to go up and, suddenly, people can’t afford the houses they were able to afford last year. The appreciation isn’t there anymore. Consumers don’t mind spending because they feel in the back of their minds that money is there, and the equity is in their homes. The
reality is you can’t spend your house. When people sense that things are starting to diminish, in terms of available home buyers and affordable refinancing rates, that will be a major risk for the economy.Payne: But the problem is trying to predict when the consumers are going to stop spending. That prediction has been out there for a long time. Americans love to spend money.
We’re like 5% of the world’s population, but we propel the entire world economy. I don’t know when we are going to stop spending money. If people start making more money at work and the value of their homes starts to plateau a little bit, they may still continue to spend at the same rate.
Alston Paige: We think the wild card is energy. That’s what could derail the current economic recovery. If oil prices continue to rise, that has the greatest impact on the lower end of the consumer spectrum where people make less money. That’s where the risk lies. The Fed will just continue to tighten, as we believe, until the end of the year. It is the rising energy costs that will then contribute to the reduced spending of the consumer overall.
While everyone is saying there is a housing bubble, it’s on a more localized basis. It’s here in New York. It’s in the bigger cities. It’s not in middle America. Local housing bubbles come and go. Nationally, we don’t believe that there is a housing bubble. We think that housing is going to be solid going forward.
Payne: Energy is definitely a threat. When it first broke out of its historic trading range, it was because there was a terrorist premium involved. Then, of course, it was because demand from India and China started driving it. There is some validity to that, but there is also a big game being played. Historically, when crude oil gets to a certain price, people stop buying it. The supply and demand balance always shifts, so I think $60 is a magical number, but it’s a number that bothers me. If oil stays above $60 for three to six months or longer, it becomes much more of a speed bump.
Phelps: Everybody keeps expecting rates to go higher but they haven’t. I think a lot of that is due to global liquidity. It’s obvious that 4% interest looks pretty good to a lot of people around the world, so they are buying it.
Johnson: Global liquidity conditions are very loose, and most countries, the notable exceptions being the U.S., the U.K., Canada, Australia, and New Zealand, need a place to invest their dollars. So foreign purchases have certainly been contributing to low interest rates.
At the same time, under the leadership of Alan Greenspan, the Federal Reserve has increased investor confidence. So, the inflation premium that we are used to seeing as investor demands on long bonds increase just isn’t there because people believe the Fed is goi
ng to be much more effective in achieving its two main objectives: promoting economic growth and price stability.
We believe, however, as we go into 2006 and Greenspan’s term expires, the new Fed chairman will be the wild card. I don’t know if he or she will be as effective as Greenspan.
BE: Are there any triggers that might signal the economy might move forward or slip back?
Johnson: Investors should pay attention to the Fed and interest rates. Interest rates have always been a key indicator for economic activity. If rates start to increase, we become a little bit more defensive by shortening up the duration of the average maturity in our portfolios. In addition, we’re reducing the credit risk in our portfolio. Going forward, in the bond and equity portfolios, the key to generating good results is going to be security selection—buying good, solid companies.
BE: So, should investors with bond mutual funds start to scale back their allocation in bonds and move more into stocks if interest rates are rising? Or should they be more selective with the type of bond funds and stocks they choose?
Johnson: A little bit of both. I recommend reducing your risk profile, and to do that, you need to build some diversification into your portfolio. When you think of bond returns, there are two components: price appreciation and income. The market conditions that we are going into will see income as the more important component of your total return. So, as an individual investor, you want to build more income and have more diversification and more exposure to various sectors in your portfolio, and I would include international exposure.
Phelps: Any significant move in the 10-year Treasury bill, upward to 4.75% or 5%, will have a big impact on the consumer. I believe such a move will have an impact on mortgages at some point. If that happens, and I’m not saying it is going to happen, be wary.
One other thing to watch for is if we start seeing large-scale, negative pre-announcements of company earnings coming through on a consistent basis, not just in one quarter, but in consecutive quarters. That may be a sign of market deterioration.
Payne: If you take your cue from the man and woman on the street, you’ll see what the economy is doing and whether it’s right to get aggressive in the stock market. A lot of that is based on job growth and job duration, and people sort of feel it. They don’t have to get information from the Department of Commerce. They know Fred is working now, Bill is working now, Bob finally got a job. People sort of have an intuitive feel about the economy.
It’s sort of like the Peter Lynch strategy—buy what you know. Instead of making it complicated, you know that there are certain types of businesses or products that you and your friends like. Start to investigate those areas, and believe it or not, you probably can put together a portfolio that could beat just about any portfolio on the street.
Johnson: Right. The consumer, which is two-thirds of the economy, knows what he likes. For instance, people know they like the Whole Foods company. They go to that supermarket and they enjoy the experience. The thing is to know that you like something and everybody else likes it. Every day, we interact with incredible investment opportunities. Bottled water is going through the roof. Instead of doing things that are steady and growing, we want to buy something that is going to revolutionize the world and make a million dollars overnight.
Alston Paige: I would counter that a little. I think most people can pick good stocks. But I think the most important thing for people who are setting up their own portfolios is diversification. You have to have representation across all sectors. That’s the only way to consistently mitigate risk. Consumers know what they use, what they buy, but if you select that way, you are going to end up with a portfolio full of very similar stocks.
Payne: I disagree. I agree with diversification but people will purchase and drink bottled water all day long, but when they invest, they will invest in an industry that they know nothing about.
Phelps: Well, I think it’s about expectations. You have to set realistic expectations. We have to realize that the ’90s was an anomaly. Investing really should be more like watching paint dry or watching grass grow. Maybe not that boring.
Alston Paige: But maybe you came in at the tail end of the ’90s and lost a lot of money. I think it’s a whole new day, and I prefer not to keep harkening back to the 1990s. So let’s talk about the future.
At Piedmont, we believe in the business cycle. We believe that we are about to enter a mid-cycle pause. We believe in a five-phase business cycle that includes two corrections. We have gone through the early phase and we are about to enter what we hope is going to be the late expansionary phase of the current business cycle. This summer, I think the GDP will probably decelerate; interest rates will continue to go up until the end of the year. And then you basically have completed what you might say is a pause that refreshes and sets up the market to take off for the next couple of years, which is what we are expecting.
Red flags to that outlook would be if the Fed continues to raise short rates going into the first of the year. If there is an absence of that negative, you could expect to position your portfolios for a multiyear market rally, and I would say that you should move away from a defensive posture. Come out of your staples and move more into the late-stage sectors, which would be technology, healthcare, and consumer stocks. You want to position yourselves for industries that typically do well at the end of the cycle and do well when rates are about to start going down.
Phelps: The only thing I would say is, for individual investors, if you have more than 10 or 12 stocks, it’s really tough to try to keep track. If you don’t have the time to do that, you really need to go to exchange-traded funds or mutual funds and diversify. You might put part of your portfolio into mutual funds and maybe five, 10, or 12 stocks that you really feel might have a chance to make you some money. For an individual investor, I think that’s a great approach.
BE: Let’s talk about long-term investing. What goes into your thinking when you’re trying to select a long-term investment for 2010?
Johnson: Our process has an emphasis on corporate bonds because that sector of the bond market has a yield advantage to treasuries and very good long-term growth prospects. We’re overweight in corporates. Within our allocation, I think consumer cyclicals make sense because of the resilience of consumers. We also like the finance sector, although it’s interest-rate sensitive. Finance companies across industries have better product diversification and are in a much better position than they were 10 years ago, so we think that sector has good long-term prospects. Utilities have always been sort of a staple, but deregulation concerns are diminishing, so we think it too has good long-term prospects.
Phelps: I think you have to be exposed to energy, no matter what. The demand is there and there is certainly a speculation premium in there. You want to be exposed, at least in the near term, to companies that have refining capabilities.
Invest in anything related to infrastructure and to emerging economies, like India and China. Growth is going to be there. They’re going to keep building buildings. A small fraction of Chinese people have cars; they haven’t scratched the surface of where that demand is going. And, ultimately, China is going to start exporting.
Also long term, I like selected healthcare, not big pharmaceuticals. Big pharma is literally going to buy biotech. Since they’re too big to grow, they will buy the smaller companies. Then there’s the aging population. Anything in healthcare systems, assisted living, things like that, is going to expand. Those are areas
that you definitely want to be exposed to.
Payne: There are some obvious industries. Energy is one. Home building is another. One thing about home builders is that there is not a lot of supply out there and the supply that is there is being hoarded and gobbled up. You could have 10 big home builders that have really dominated over the years, they have learned how to manipulate that whole thing. So long term I like industries with limited competition. Another industry, for instance, is railroads. There are four class-A railroads. You have an expanding economy. We’ve got growing exports from China. When they get here, the rails have to pick them up. So the rails are just an incredible opportunity.
I like the big financials. We’ve had a buy on Goldman Sachs, for instance. Same sort of deal. You’ve got a lot of consolidation in financials, and at the end of the day you only have a few key players who are pulling the strings.
As far as looking at individual companies long term, one thing we look at is quality companies where the top line is growing, where there is organic growth, ones that are not just acquiring that growth.
Phelps: Two things I’d like to add. One is the whole play on world hunger; Monsanto is the only real domestic story there. It’s going to address genetically modified food, which I think is going to play a big role down the road as we try to address this world hunger issue.
The other is wireless communications, which is still a growth area. Some of these emerging countries are not going to build lines and wires and poles like we did here. They are just taking cell phones and a few towers here and there.
Alston Paige: Long term, we believe that you first have to have a diversified portfolio because it’s the lack of diversification that created the bubble of the late ’90s. Everyone had over 30% to 50% of their portfolio in technology stocks, so if everyone was a believer in the diversification, not as many people would have gotten hurt.
Outside of that, we believe the business cycle tells us exactly which sectors we should be in every three years. We have research going back more than 20 years that shows us over and over again which sectors and which industries within those sectors we should be in. Then we focus on our stock-picking abilities. We want to buy companies where things are getting better, where the estimates are going up, where they are beating the consensus estimates, and where analysts are increasing their estimates. We want to sell companies where things are getting worse. We also buy companies where things have stopped getting bad and possibly will get a little better. Very simple.
BE: Is there any final advice for our readers about investing in the current environment and long-term investing, overall?
Johnson: For individual investors, over the next 12 to 18 months, it’s most important to be patient and stick to your investment discipline. It’s important, too, from a bond perspective, to be more defensive in this environment and to build more yield into your portfolio. Overall, just be consistent, set objectives, stick to those objectives, and diversify your portfolio to gain access to various sectors of the market.
Phelps: When you’re looking at stocks, you want to see two years of revenue growth and two years of earnings growth. We suggest a strategy of choosing eight to 12 stocks and then place the rest of your portfolio in ETFs or mutual funds. Don’t ignore what the smart money is doing, and pay attention. Be disciplined, and be ready to sell when you need to sell. All your stocks don’t need to be winners. You just need a few that really take off. Don’t let the losers kill you.
Payne: I’ll borrow a line from Nike and say just do it. I know a lot of people read BLACK ENTERPRISE every month and they still haven’t done it. Sometimes, they see the market down and they say, ‘Well, I’m glad I didn’t do it yet.’ They justify that in their minds. But you have to pull the trigger and you have to do it with a realistic set of expectations.
The markets give an 8% return, on average, year over year. Sometimes you’re going to make 20% but, understand that last year the Dow was up 3%. The point is, you have to invest with a set of realistic expectations and you have to be committed.
Alston Paige: We think the outlook for stocks, over the next 12 to 18 months, is good. Over the next five years, it is also good. The main thing investors want to do is maintain a diversified portfolio and, for the period ahead of us, we would recommend emphasizing technology, healthcare, and consumer stocks. We would hedge with energy, and/or staples, although staples would be hurt by a stronger dollar because of the repatriation of funds back to this country. We would de-emphasize interest rate-sensitive stocks.
Overall, this is a great time to enter the market. The financial markets seem pretty stable. You should have some exposure to energy in your portfolio, no matter what your strategy. Invest in companies where things are getting better and sell companies where things are getting worse, and I think you’ll do just fine over the long term.
CHARLES PAYNE WALL STREET STRATEGIES
| STOCK (Exchange: Ticker) | Price at Recommendation* | 18-Month Price Target |
| CSX (NYSE: CSX) | $44.75 | $54.00 |
| Univision (NYSE: UVN) | 27.09 | 36.00 |
| Wild Oats Markets (Nasdaq: OATS) | 12.37 | 17.00 |
CSX: This railroad company has a national footprint that allows it to take advantage of imports from ports on the West Coast and in the Gulf of Mexico. They will make money handling the capacity truckers can’t and because the industry has limited competition.
 Univision: The Latin population is expanding and watching more Latin television, while major U.S. networks are struggling. The company is overcoming some internal problems, which makes it attractively cheap.
 Wild Oats: Similar to Whole Foods Supermarkets. Long-term growth potential for this organic supermarket chain is outrageous because it is only in a few states now. People don’t mind paying extra for organic foods.
*As of july 15, 2005
source: yahoo! Finance, charles payne
 JEFFREY PHELPS SMITH GRAHAM & CO.
| STOCK (Exchange: Ticker) | Price at Recommendation* | 18-Month Price Target |
| Conoco Phillips (NYSE: COP) | $59.05 | $70.00 |
| Constellation Brands (NYSE: STZ) | 28.66 | 34.00 |
| Qualcomm (Nasdaq: QCOM) | 35.58 | 44.00 |
Conoco Phillips: This oil company has a refining capability that gives you exposure in the U.K., the United States, and South America. Demand for oil doesn’t appear to be on the decline.
 Constellation Brands: This company is capitalizing on a shift in demographics—there is a shift from beer consumption to wine and spirits. They recently acquired Mondavi Wines, so they have a great portfolio that will continue to take [market] share from the beer makers.
 Qualcomm: The dominant players in the 3G, CDMA, and CD technologies. They’ve expanded into China and India. Growth will be driven by technologies that deliver television and camera capabilities over the cell phone. Qualcomm has key intellectual pr
operty rights.
*As of july 15, 2005
source: yahoo! Finance, jeffrey phelps
DAWN ALSTON PAIGE PIEDMONT INVESTMENT ADVISORS L.L.C.
| STOCK (Exchange: Ticker) | Price at Recommendation* | 18-Month Price Target |
| Federated Department Stores (NYSE: FD) | $73.79 | $85.00 |
| TiVo (Nasdaq: TIVO) | 7.20 | 10.50 |
| Amgen (Nasdaq: AMGN) | 70.63 | 75.00 |
Federated Department Stores: Recently acquired May Department Stores. Federated has a very strong private label brand and they actually make a higher profit from their own brands as opposed to other national brands they sell. We think they take in May Department Stores, revamp their private label business, and add to profits.
TiVo: They have a new distribution deal with Comcast that allows them to make selling the TiVo hardware a smaller portion of their revenue mix. They are basically selling their service, and with big distribution, large profits should be right on the horizon. The long-term future growth rate is 35%.
 Amgen: One of the largest biotech companies that specializes in anti-anemia drugs. Has a new drug coming out, Nucogen, which increases the white blood cell count in cancer and AIDS patients. Growth has slowed, but will still earn 20% annually
*As of july 15, 2005
source: yahoo! Finance, dawn Alston Paige
KEN JOHNSON LOOMIS SAYLES & CO.
| FUND (Ticker) | Price at Recommendation* | Five YearAnnualized Return |
| Loomis Sayles Bond (LSBRX) | $13.69 | 11.08% |
| Â | Â | Â |
| Vanguard Short-Term Bond Index (VBISX) | 10.02 | 5.05 |
| Harbor Bond Fund (HRBDX) | 11.86 | 5.95** |
I have three funds that I expect to do well in a rising interest rate environment. One is the Loomis Sayles Bond Fund. It’s a multi-sector fund so it gives you exposure across each sector of the bond market, particularly the global bond market, and it’s got a good long-term track record. A more conservative play on rising interest rates would be the Vanguard Short-Term Bond fund. It has an above average historical return and a rock bottom expense ratio. It’s a very attractive fund for an individual investor looking to establish a position in a bond portfolio going into a rising interest rate environment.
I would also recommend the Harbor Bond Fund, which is managed by Bill Gross at Pimco, a top bond manager. It’s an intermediate term fund with above average historical returns and above average historical risk. All of these funds carry five-star ratings from Morningstar.
*As of july 15, 2005
**One-year annualized total return
source: yahoo! Finance, ken johnson
 UPDATE ON 2004 PICKS
RON HOLT Hansberger Global Investors
| Company (Exchange: Ticker) | Recent Price* | Price at Recommendation** | Total Return*** | Current Value of $1,000 Investment |
| Samsung Electronics Co. Ltd. (KSE: 005930.KS) | $542.30 | $401.50 | 35.07% | $1,350.69 |
| Petroleo Brasileiro (NYSE: PBR) | $51.06 | $27.12 | 88.27% | $1,882.74 |
| Kingfisher PLC. (OTC: KGFHF.PK) | $4.36 | $5.25 | -16.97% | $830.25 |
Portfolio Performance: 35.46%
Current Value of $3,000 Investment: $4,063.69
EDDIE RAMOS Brown Capital Management
| Company (Exchange: Ticker) | Recent Price* | Price at Recommendation** | Total Return*** | Current Value of $1,000 Investment |
| Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA) | $30.97 | $31.96 | -3.10% | $969.02 |
| Wal-Mart de México (OTC: WMMVY.PK) | $44.99 | $30.05 | 49.72% | $1,497.17 |
| Esprit Holdings (HKSE: 0330.HK) | $54.85 | $33.53 | 63.58% | $1,635.85 |
Portfolio Performance: 36.73%
Current Value of $3,000 Investment: $4,102.04
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THOMAS MIMS Emerging Africa Ltd.
| Company (Exchange: Ticker) | Recent Price* | Price at Recommendation** | Total Return*** | Current Value of $1,000 Investment |
| AngloGold Ashanti Ltd. (NYSE: AU) | $35.63 | $31.37 | 13.58% | $1,135.80 |
| MISR International Bank (OTC: MIBZY) | $4.24 | $3.43 | 23.45% | $1,234.50 |
| Zambia Copper Investments Ltd. (OTC: ZMBBY) | $0.65 | $0.67 | -3.45% | $965.54 |
Portfolio Performance: 11.19
Current Value of $3,000 Investment: $3,335.83
 CLIFFORD MPARE Piedmont Investment Advisors
| Company (Exchange: Ticker) | Recent Price* | Price at Recommendation** | Total Return*** | Current Value of $1,000 Investment |
| Medtronic Inc. (NYSE: MDT) | $52.92 | $49.72 | 6.44% | $1,064.36 |
| Doral Financial Corp. (NYSE: DRL) | $16.54 | $36.30 | -54.44% | $455.65 |
| Nucor Corp.†(NYSE: NUE) | $53.85 | $38.57 | 39.62% | $1,396.16 |
Portfolio Performance: -2.79%
Current Value of $3,000 Investment: $2,916.17
*AS OF JULY 20, 2005Â Â Â
**AS OF JULY 20, 2004Â Â Â
***TOTAL RETURN REFLECTS STOCK APPRECIATION AND INCLUDES STOCK SPLITS AND DIVIDENDS.
†nucor executed a 2 for 1 stock split on oct. 18, 2004
SOURCE: YAHOO! FINANCE, Big Charts, a service of Marke
tWatch, and The Bank of New York