Hedging Bets: With the economy still dicey, most of our stock pickers make safe companies their odds-on favorites this year.

• Author: Murray, Arthur O.
• Position: Feature

That the market tumbled over the past 12 months came as no surprise to veteran stock pickers. Even before the Sept. 11 attacks on New York and Washington, a stagnant economy teetering on the edge of recession worried consumers and investors alike, pushing many stock buyers and sellers into defensive crouches.

So it was with last year's BUSINESS NORTH CAROLINA panel of professional stock pickers. Each selected three Tar Heel stocks he thought would rise over 12 months, and most hunkered down, taking stocks trading near their 52-week lows. It was good strategy, considering that when BNC's stock-picking year ended Oct. 19, the Dow Jones industrial average was down 10% -- and the S&P 500, 23.2% -- from the previous year.

And though it's a cliche, good defense turned out to be the best offense. Five of the eight pickers finished in the black, and 10 of the 15 stocks selected by the panel gained in value. The pickers averaged a 1.6% gain, compared with a 13.5% loss in 2000. Big gainers were a trucking company that was sold, hardware -- hammers and nails, not keyboards and monitors -- and discount retail. Meanwhile, some of the panel's high-tech and drug selections crashed.

North Wilkesboro-based home-improvement retailer Lowe's Companies Inc., which ended the year up 67.3%, was the cornerstone of the portfolio of George Shipp of Scott & Stringfellow Inc., a subsidiary of Winston-Salem-based BB&T Corp. Shipp, director of private-client research, led 2001 pickers with an average return of 36.6%.

His other picks were Raleigh-based Highwoods Properties Inc. and Charlotte-based Bank of America Corp. "Bank of America had just taken giant loan-loss reserves, so Wall Street had puked out the institution with more deposits than anyone else," Shipp says. "Tech was down a lot, but by no means was it cheap, so we consciously avoided what was then the most popular sector. Conversely, investors were shunning real-estate investment trusts such as Highwoods Properties, even though it carried a very attractive 10% yield at the time. I didn't see how Highwoods was going to lose money for us." It didn't, finishing the year up 12%, while Bank of America was up 30.4%.

Two other pickers also went three for three. John Lynch, director of investment strategy for Charlotte-based Wachovia Securities Inc., was one of two panelists to zero in on Matthews-based Family Dollar Stores Inc., which closed the year up 62.2%, the third-largest gainer on our list. He also picked Bank of America and would have won the contest but for the meager 1% gain of his third pick, CommScope Inc.

The other picker with three winners, Jim Green, executive vice president at Ellington Smith LLC of Charlotte, had the most consistent selections. Bank of America, Nucor Corp. and Embrex Inc. increased between 20.2% and 30.4%.

At the other end of the standings were Alan Mann, first vice president of investments in the Raleigh office of Marion Bass Securities Inc., and Wes Sutton, vice president in the Winston-Salem office of Deutsche Banc Alex. Brown Inc. They gambled -- and lost -- with drug and high-tech companies.

Mann went with Durham-based Cree Inc., which makes light-emitting diodes and semiconductors, and Durham-based Red Hat Inc., which sells and offers technical support for the Linux computer-operating system. The stocks lost 64.1% and 71.6%, respectively. Cree's net income for the year ending June 30 dropped nearly 9%, to $27.8 million, and its first-quarter net income for the 2002 fiscal year was down nearly 49% from the year before. Red Hat's losses for the year ending Feb. 28 totaled $86.7 million, more than double the previous year. And it had lost nearly that much in the first six months of the current fiscal year. Triangle Pharmaceuticals Inc., also based in Durham, lost ground as well. More delays in getting FDA approval for its anti-HIV drug, Coviracil, hurt the stock, which lost 55% of its value.

Sutton did pick one winner, Greensboro-based RF Micro Devices Inc. The company, which makes integrated circuits for cellphones, showed a 23.7% gain. But his drug-company selection, Durham-based Inspire Pharmaceuticals Inc., saw its stock drop 44.9%. Inspire is developing drugs to treat respiratory and eye diseases, but none has been approved by the FDA. Sutton's other pick was Cary-based SpectraSite Holdings Inc., which builds and manages cellphone towers. SpectraSite posted the largest decline of the 2001 selections, losing 84.2% of its value as analysts fretted over its debt and continued losses.

The biggest gainer among the 2001 picks was Kenan Transport Co., a Chapel Hill-based trucking company, which was acquired in April by Canton, Ohio-based Advantage Management Group Inc. The purchase price was $35 a share, a 72.8% premium over Kenan's price in October 2000. Unfortunately for the man who picked it, Bobby Edgerton of Capital Investment Counsel Inc. in Raleigh, that gain was almost wiped out by another of his picks: Red Hat.

For the coming year, panelists are again favoring safety over sex appeal. Three picked Duke Energy Corp., while two went for Bank of America. Green went for Bank of America and Duke. "A bank as large as Bank of America is a good place to have your money. They can take a credit hit of $300 million or more and still move forward. The California thing has hurt Duke a little, but it's a really quality company, and we always need energy."

Sutton, burned by high-tech stocks in 2001, is sticking with them. "Perhaps I'm a glutton for punishment," he says. "But here's a trivia question: What was the best performing stock in the S&P 500 for the year 2000? Philip Morris. At the beginning of 2000, pundits predicted the end of tobacco. Today it's the end of technology and...