The case for low inflation and, hence, lower interest rates, is strong, says Bob Carlson's Retirement Watch newsletter (12704 Fantasia Drive, Herndon, VA 20170). "Commodity prices remain at recession levels. Oil prices, adjusted for inflation, are below where they were in the '70s. The dollar is strong. Productivity remains high because of technological innovation, restructuring and mergers. And businesses are having a lot of trouble pushing through price increases. All this bodes well for higher stock prices."First Eagle Fund of America has produced 25.2 percent average annual returns over the past five years by emphasizing change. It buys the stocks of companies that are changing their management, buying or selling a division, or finishing a major spending program. To locate the best values, it emphasizes cash flow rather than earnings. Recent favorite stocks: Gulfstream Aerospace, Amgen, General Instrument, Nextel, First Data, Bank Boston.
If interest rates do fall, utility stocks will benefit immediately. Dow Theory Forecasts newsletter (7412 Calumet Ave., Hammond, IN 46324) regularly rates all the major utility issues based on financial strength, competitive advantages, track records and profit prospects. Its top scorers now: CLECO, Duke Energy, FPL Group, IPALCO, Montana Power, New Century Energies, Northern States Power, SCANA, SIGCORP, TECO Energy.
Standard & Poor's Outlook (55 Water St., New York, NY 10041) recently designed a six-stock portfolio for young married couples. "Despite their new responsibilities, young couples can still tolerate some price volatility in pursuit of significant appreciation," says The Outlook. Its selections for this starter portfolio emphasize above-average earnings growth prospects, yet entail less risk than stocks recommended for single people: Cisco Systems, ECI Telecom, Harley-Davidson, Lilly, Lexmark International, Sterling Software.
Zero-coupon bonds are one of the best hedges around today, says Personal Finance newsletter. "They pay a return guaranteed by the U.S. government and will soar if interest rates decline or the stock market nosedives. Zeros sell at deep discounts to their face value and accrue interest until maturity. That makes them highly sensitive to interest rates and economic conditions. Within the current investment universe, they're one of the strongest plays on non-inflationary economic growth."
There are now more than 130 funds of funds, notes Money magazine. "These vehicles combine several mutual funds in one portfolio. Unfortunately, in addition to the fees for the individual funds in the portfolio, they usually charge a fee to manage the fund of funds itself. That double layer of fees can easily add up to 2 percent annually. And investors aren't compensated by outstanding performance. The average diversified U.S. stock fund has outperformed the average fund of funds for several years running."
High-yielding stocks tend to outperform the market on the downside. They also do better overall, according to a study by the Dreman Foundation in Jersey City, N.J. Dreman divided the 1,500 stocks in the Compustat database into five equal groups based on dividend yield, then measured their annual performance from 1970 to 1996. The fat-yielders won easily. The two higher-yielding categories returned 16.1 percent and 17.5 percent respectively, followed by the three lower-yielders: 15.1 percent, 13.8 percent and 12.2 percent.
Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.