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Many leisure industry stocks on a roll

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Hot fun in the summertime. It's the time of year when families pamper themselves with trips, games and gadgets, and a good time is hopefully had by all.

The only fly in the ointment is the stubborn economy. Ask yourself whether economic weakness is curtailing any of your own plans. Your response will be as good a litmus test as any for the prospects in leisure spending.

Wall Street is vitally interested because the wide-ranging leisure industry can be an enormously profitable one. A vacation at a casino hotel, a romantic cruise on the high seas or the purchase of a shiny new boat or motorcycle means major bucks for companies providing them. That in turn translates into rising stock prices.

Each U.S. family has a few hundred extra dollars to spend, courtesy of the federal tax rebate. In addition, Baby Boomers are reaching their peak spending age, with many basics such as housing and children's educations taken care of and more disposable income freed up for pure enjoyment.

"Tax rebates and Federal Reserve rate easing are two very powerful tools, and people who wait for proof will miss the rally," declared Craig Callahan, chief investment officer of the Icon Funds, whose Icon Leisure & Consumer Staples Fund (ICLEX) in Englewood, Colo., is up 13.03 percent this year.

Those sitting on the sidelines have already missed some of the gains, he noted.

"The leisure industry will get its fair share of the tax rebate money, since it's just the sort of 'found' money that people like to do special things with," said Michelle Russo, leisure analyst with Deutsche Banc Alex. Brown in New York. "For example, the timing is really great for the ski industry, since people are just starting to think about their ski vacations."

Russo's stock recommendations include resort firms Vail Resorts (MTN), Intrawest Corp. (IDR) and American Skiing Co. (SKI).

The problem with picking leisure industry stocks is that judgment is sometimes clouded, rather than enhanced, by personal experience.

"With leisure industry stocks, people have a tendency to say they really enjoy what a certain company does and then want to buy its stock, without considering the valuation part of the discussion," warned Mark Greenberg, portfolio manager with Invesco Leisure (FLISX) in Denver, up 7.26 percent in 2001.

For example, many people enjoy Disney movies and theme parks, but what matters to the investor is what the firm is doing with its capital, the state of its cash flow and how earnings are growing.

"You must pay a lot more attention to the consumer when investing in the leisure industry, since a lot of this stuff is discretionary and you don't really have to go on a cruise or buy a $50 video game," explained Felicia Kantor, leisure analyst with Lehman Brothers in New York. "Also, look closely at exactly how companies tighten their belts in tough economic times."

Economic difficulties are sometimes a windfall for consumers.

"This is definitely the time for a consumer to take a cruise, with the best prices of the past 25 years because of aggressive industry pricing environment," observed Tim Conder, senior leisure analyst with A.G. Edwards & Sons in St. Louis. "The cruise industry's decision to bring on more ships wasn't necessarily bad, but coupled with the weakness in the economy, there is a problem."

These five leisure stocks are well positioned to succeed:

Carnival Corp. (CCL), which operates cruise lines such as Carnival, Holland America and Cunard, is suggested by Conder and Kantor. In a period of deep discount pricing, it was actually able to increase the prices it charges travelers by 1.8 percent in the first quarter and is holding up better under economic strain than its competitors.

Harrah's Entertainment (HET), operator of casino hotels in five U.S. gaming markets, is favored by Callahan and is the biggest holding in Greenberg's fund portfolio. It boasts strong earnings growth and a 12 percent increase in stock price this year, with the likelihood of good performance over the next 12 months. It is also involved in horse racing.

Harley-Davidson (HDI), the famous manufacturer of premium-priced large motorcycles, is recommended by Conder and Kantor because it appears impervious to the economy. Demand still exceeds supply, with image and lifestyle its primary appeal. Its stock has already risen 33 percent this year.

Brunswick (BC), which manufactures products such as outboard engines, boats and fitness equipment in addition to operating its bowling centers, is a pick of both Callahan and Conder. Its greatest vulnerability to the weak economy involves the sales of its boats and engines.

Mattel (MAT), the once-struggling toy giant that is turning itself around, is a choice of Greenberg and Kantor. It is cutting costs and increasing profitability, which has resulted in a 29 percent increase in stock price this year. In the second half of the year, it should benefit from holding the license for a number of toys associated with the upcoming Harry Potter movie. Best of all, toy companies traditionally aren't subject to economic downturns because of the willingness of parents to sacrifice for their children.

Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," 98 Henry St., Dept. 183, Brooklyn, NY 11201, or by e-mail at successinv@aol.com