Which way's up?

• Author: McMillan, Alex Frew
• Position: Includes related article - Experts believe North Carolina companies' stocks are improving - Cover Story

While the market keeps changing direction, our experts point out some Tar Heel stocks headed the right way.

This time last year, even after some shudders, the stock market seemed to know only one direction. That had made easy pickings for stock jockeys the previous three years. They couldn't miss, it seemed.

But giving investment advice got a lot tougher this year, as BUSINESS NORTH CAROLINA'S stock-picking panelists found out, scrambling for a 5.9% gain on the selections they made for '98. That average was well below last year's 17.6%. "You should title this one, 'Oops,'" says John Lynch, a new panelist this year and director of investment research for Interstate/Johnson Lane Inc.

In mid-October, when the picks for '99 came in, words were being whispered that hadn't been heard in almost a decade. Recession. Bear market. With Russia, Asia and Brazil in collapse, and the International Monetary Fund warning that economies worldwide would eke out 2% growth in 1999, all of a sudden the ballyhooed global market didn't seem like such a good idea anymore. And investors in equities were heading for the exits, jumping ship for short-term Treasuries, cash, CDs - anything but stocks.

"This is such a crazy business," says Chuck Patton, principal at Mimosa Investment Management LLC. "Emotionally it's tough for people to make good investment decisions. At the very time they ought to put more money in, their natural instinct is to pull out."

Stock optimists will tell you that sell-off panic leaves some good buys. But finding that elusive "quality" company to put money in has turned trickier, and investors have gotten more skittish. Gerry Smith, vice president of investments with Salomon Smith Barney Inc., says this is the most volatile the market has been in the 19 years she has been a broker.

Perhaps because skeptics worry good times can't last forever, perhaps because there are more inexperienced investors in the game, there's blanket panic selling, regardless of companies' underlying merits, followed by a buyback, followed by selling again. Even the professionals aren't immune to the hysteria. "One would hope they are," Smith says. "But a large percentage of the mutual-fund managers in this country have never been in anything but good markets." Now they have a chance to prove their mettle.

As investors look for safety, stocks with a large market capitalization fared much better than small-cap companies. But they were winners only by default. For the 12 months BNC tracked its panel's picks, October to October, the Dow Jones industrial average showed a modest gain of 7.5%. The S&P 500 outdid that, rising 12.0%, buoyed mostly by a handful of growth stocks such as Dell Computer Corp., WalMart Stores Inc. and Microsoft Corp. By comparison, the Russell 2000, a measure of small-cap performance, saw virtual annihilation, dropping 20.7%. The joke, says John Davis, managing director of BT Alex. Brown Inc.'s Winston-Salem office, is that small caps "are going to be no caps."

HOW LAST YEAR'S PANELISTS FARED Picker Avg. return Daniel Cole 45.0% Centura Banks Inc. Gerry Smith 28.4 Salomon Smith Barney Inc. John W. Davis III 5.9 BT Alex. Brown Inc. Jim Green 4.8 SunBelt Capital Management Norwood Thomas 1.6 Wilbanks, Smith & Thomas Asset Management Inc. Dick Austin (2.3) J.C. Bradford & Co. Chuck Patton (2.9) Mimosa Investment Management LLC Jeff O'Quinn (33.2) Scott & Stringfellow Financial Inc. Panel average 5.9 Associated Investors of Charlotte Investment club (13.9) S&P 500 12.0 The market is so choppy that the top picker on last year's panel, Daniel Cole, decided to quit while he was ahead. Cole, portfolio manager for Centura Banks Inc.'s small-cap-oriented Southeast Equity Fund, declined to make picks this year. "I don't have any clue which way the market is going to go," he says, though his selections last year gained, on average, 45.0%. "I feel like I would embarrass myself." That can't be comforting to investors in his fund.

One reason Cole is jittery is that banks are starting to feel some credit crunch, and small-cap companies are the first risks they rein in. Still, he says, the small-cap market could rise 30% or more in six months if confidence in it returns. He is searching for companies with enough cash flow to fund their own expansion. "But the market is not that discriminating. They're selling everything."

Cole's impressive return came largely from GoodMark Foods Inc., maker of Slim Jims and other snacks, which sold out to ConAgra Inc. in July. Shareholders got ConAgra stock, now worth about $31 a share, giving them a 99.1% gain over last year, by far the best among the panel's picks. When serious talks started in April, GoodMark's stock was in the low $20s. ConAgra offered a premium after GoodMark's strong third quarter and promising projections convinced it that the company had sorted out two years of production and pricing problems.

But most North Carolina stocks took a beating, which intensified in early October as many mutual-fund managers sold off poorly performing stocks to keep their portfolios looking good at year-end. The market rebounded slightly later in the month, and the Southeast's strong economy insulated some Tar Heel stocks to a degree. But because of some large losses in high- and health-tech stocks such as BroadBand Technologies Inc., Intercardia Inc. and CPhone Corp. (all of which lost more than 75% of their value in the year), North Carolina-based small-cap stocks underperformed the Russell 2000 by two and a half percentage points, losing 23.2%.

It would have been worse if not for the steady performance of small banking stocks such as FNB Corp., Carolina First Bancshares Inc. and First Bancorp. Not heavily traded, they don't fluctuate much, attract a constant base of local, long-term investors and have a bit of merger speculation built in. They probably seemed like a safe haven to investors, says Jim Green, president of SunBelt Capital Management.

The 30-largest Tar Heel stocks by market cap lagged the Dow a little, gaining 0.6% despite the pummeling textiles and banks took. BankAmerica Corp. and First Citizens BancShares...