BETTING ON GLOBAL STOCKS

[The NYT list of the world's best stocks caught my eye; having been a friend of B K Dalal, a talented stock speculator, and having played stocks since I was in college, I was interested in seeing how the world's best speculators played it. This column was published in Business Standard of 4 April 2000.]

The world’s best stocks

It is common for Indian newspapers and magazines to pick the best stocks for investment. What are the world’s ten best stocks? This is the question New York Times recently asked. However, it did not select the stocks itself. It asked ten most repected investment managers and asked them to spot stocks that would do best in the next ten years. The list may not hold much interest for Indian investors, whom the government still prevents from investing abroad. But some of them may be able to get around the restrictions; others may like to take interest in the hope that the BJP government, which flaunts its liberal credentials, may remove exchange control.

Cisco Systems, chosen by Robert E Turner of Turner Investment Partners, is in data networking. In the 1990s it gave a ten-year return of 69,129 per cent. It has made 50 acquisitions in the last seven years. That shows it is continually asking itself where the opportunities lie. Its PE ratio is 123.

JDS Uniphase was the choice of Liz Ann Sonders of Campbell, Cowperthwait. It had the second highest return of 31,187 per cent since 1993 when it went public. It is in fiber optics, whose turnover is expected to rise fourfold in three years. JDS is well managed, and has the broadest range of products in the industry. Its PE ratio is 282.

Surprisingly, Zee Telefilms figures in the ten; it is the pick of Justin Thomson of T Rowe Price. The International Discovery Fund he runs mostly invests in small companies which do not survive in the long run: they collapse or get swallowed up. But he thinks it is “one of the best ways to play India as a consumer force”; Zee will benefit from the advertising in that market. It had the third highest appreciation of 14,967 per cent, and that too in six years. It is little known outside India because only FIIs can buy it, and the government’s cap of 30 per cent on the stock that can be owned by foreigners restricts the supply of its shares. It has the highest PE ratio of 361 amongst the ten. So it is remarkable that it found a place in the top ten.

Oracle was chosen by John W Ballen of MFS Emerging Growth Fund. According to him, Oracle is “morphing into the software company of the internet.” It is in databases, applications, and business-oriented web sites – just the areas needed for exploiting the explosive growth of the internet. It has given a return of 4,754 per cent in the 1990s; its PE ratio is 102.

Nokia, the Finnish manufacturer of cellphones, was the choice of Laszlo Birinyi of Deutsche Bank. It is highly innovative, and it thinks globally in a market which has grown rapidly in the industrial countries and is now spreading into emerging markets. It returned 3,622 per cent since 1994 when it went public; its PE ratio is 67.

George A Mairs 3^rd of Mairs and Power Growth Fund chose Medtronic, the manufacturer of medical instruments; it is the second largest holding of his fund, which is a long-term investor. He is impressed by its strong market position; it has been the leading supplier of implantable medical devices for 25 years. Its ten-year rate of return was 1,791 per cent, and its PE ratio is 30.

Roger McNamee is in Integral Capital Partners, a venture capital firm used to making long-term investments; he chose Flextronics International, which ICP has held ever since it went public in 1990. It is a contract manufacturer in Singapore with an excellent supply chain and management team. Flextronics returned 1,169 per cent since 1994 when it went public; it has a PE ratio of 53.

Unlike the others who went in for high-growth industries, Ralph Wanger of Acorn Fund does not believe that the high growth rates would persist; he prefers to choose “stocks with a terrific brand name in an industry that was likely to be popular for a very long time.” He chose Jones Apparel Group, which returned 649 per cent in the 1990s and has a PE ratio of just 9. At least it cannot go down much more.

An even more unusual choice is Waste Management, by Bill Miller of Legg Mason Value Trust Fund. He thinks the high returns of high technology also carry high risks which he would not take if he was investing for ten years. There is no risk in hauling garbage; there can only be more garbage to remove in ten years. There are only four major garbage companies in the US. The industry is difficult to enter, and is unlikely to attract more competition. It gave a return of –2 per cent in the 1990s, and has a PE ratio of 11.

Finally, Bill Nasgovitz of Heartland Value Fund chose Hency Schein Inc, a global distributor of dental and medical products. Its sales are $2 billion; over ten years they should quadruple as teeth all over the world need more fillings. Its return since 1995 when it made an issue has been –42 per cent; its PE ratio is 8.

These investment managers are following one or the other of two formula e– back success, or look for good companies in unglamorous industries. You can make money by running with the crowd and hoping to get out just before the market crashes. But if you got in early enough, you may still make decent returns after the market has crashed. Ten years, however, is a long time to expect industries to continue booming. So if you have to be a long-term investor, look for gems in the rubbish – especially rubbish that is likely to stay. That is why I am heavily invested in government bonds.