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A strange thing happened to growth stocks this spring. Shares of companies that had been burning up the market-Lucent Technologies (NYSE: LU) and Merck (NYSE: MRK), to name a couple-stalled. In their place, it seemed that an unlikely cast of chemical companies, basic materials makers and retailers had stood up to take their turn in the spotlight.
All of which came as no great surprise to veteran money manager Maceo Sloan of NCM Capital Management. “Look over the really big gains, and you’ll see that most of the upswing was concentrated on a very few companies, perhaps the market’s 30 largest names,” points out Sloan, who currently oversees $5 billion in assets. “That couldn’t last forever.”
But for Sloan, a growth manager, this was no time to start tinkering with his formula for choosing stocks. Those tried and true methods, in fact, have helped him propel the portfolio of the Dreyfus Third Century Fund (Nasdaq: DRTHX), which his firm manages, to average annual total returns of 24.32% over the last three years and 23.38% over five, 2 percentage points off the Standard & Poor’s 500 index. In 1998, the fund posted a total return of 30.17%, beating the S&P 500 by 1.6 percentage points.
In fact, Sloan has held fast to some of the basic tenets of the “growth-at-a-reasonable-price” school. First, Sloan is willing to pay a premium to the market, that is a price-to-earnings multiple that as of press time exceeded the S&P 500’s multiple of 28 times 1999 earnings. As a counterbalance, however, Sloan says a company’s growth rate is going to have to come awfully close to that outsized P/E to get his money.
Secondly, Sloan says he likes to see a company that consistently increases earnings, typically over a five- to 10-year time frame. Finally, Sloan says he likes to spot earnings “surprises,” instances where a company exceeds Wall Street analysts’ expectations for its profits.
That said, one of Sloan’s favorite picks, America Online (NYSE: AOL), doesn’t quite fit his criteria. There’s a good reason. Sloan says the company’s dominant position on the Internet makes it hard to topple. Despite falling from $150 a share to $111.75 as of press time, Sloan says the stock could rocket off to $250 a share in the next year.
Meanwhile, another Sloan pick, casino operator Circus Circus Enterprises-now trading under the new name Mandalay Resort Group (NYSE: MBG)-has languished as Wall Street has cast doubts on a recent construction boom on Las Vegas’ famed Strip. Sloan thinks the company will bounce back with a vengeance, however, from the $20-a-share range to the $50s in the next 12 months.
Sloan’s remaining picks are conventional growth plays. ICN Pharmaceuticals (NYSE: ICN) should benefit from its position in Eastern Europe as well as an effective Hepatitis C treatment. Media firm Infinity Broadcasting (NYSE: INF) is enjoying solid profit growth in its lucrative radio franchises as well as its outdoor advertising arm. Finally, global electric utility operator AES Corp. (NYSE: AES) stands to benefit from a rebound in economies