Economy punished 2002 players

With stock prices waning, the brokers touted high dividends as a way to offset some of the losses.
By CYNTHIA VINARSKY
VINDICATOR BUSINESS WRITER
It was a dismal year on Wall Street in 2002 -- all three major stock indicators finished in the red for the third year running -- and participants in The Vindicator's annual stock-picking contest fared no better.
The five local stockbrokers who stepped up to the challenge of picking stocks for the contest all produced losing portfolios, with values dropping between 24 percent and 53 percent over the year.
Ralph Fajack of McDonald Investments had the best results for 2002, and his hypothetical $10,000 portfolio had diminished to $7,595.
Likes his picks
Fajack said he still likes his three choices -- General Electric, Exxon Mobile and Oracle, a system software producer -- even though they all dropped in value.
"GE is the type of stock that you buy for your grandkids when they're little and they'll have money when it's time for college. It's a strong company, and it pays a dividend of almost 3 percent annually," he said. "If it was recommended at $40, it's even more recommended at $20-something."
Exxon is also paying a good dividend of 2.5 percent, Fajack said, and he expects its business to grow as the U.S. conflicts in the Mideast escalate. "I still love it," he said.
Fajack believes that Oracle, too, will pick up in value when the economy picks up and companies start spending on information technology upgrades again.
NBTY, Capstone Turbine
Only two brokers managed to pick a winning stock this time around.
Roger Faubel of Dow Financial Services in Boardman had the biggest gainer with NBTY, a maker of vitamins and herbal supplements. Its share price grew more than a 50 percent, but Faubel doesn't expect much more of an increase.
"We're there. I don't expect it to go much higher," he said. "People are still taking vitamins, but at this point it's almost a defensive stock. You look for anything that people consume, anything rather than technology."
Faubel also picked the biggest loser in the stock pick contest, Capstone Turbine Corp., maker of turbine engines to produce electricity with natural gas. He had expected to see the share price triple by year's end, but instead it fell 83 percent.
He said Capstone's fortunes probably won't improve unless the supply of oil from Mideastern countries is cut off, so he wouldn't recommend buying it now.
He feels more bullish about his third pick, Ariba, a software company that manages online commerce between businesses. Faubel said he's still looking for Ariba's stock value to pick up as the economy revives, and he thinks it's a good buy.
Washington Mutual
Brent Nelson of WRP Investments in Liberty picked the other gainer in the contest with Washington Mutual, a diverse financial service company. The home mortgage refinancing trend has helped boost profits and its stock value increased 6 percent over the year.
Dividends ranging from 3 to 5 percent are another advantage Washington Mutual stock offers, Nelson said, adding that the shares are still trading at a discount compared to its industry peers.
Nelson is sticking by his other choices, America Online and General Electric, even though their stocks were down at year's end.
AOL is a "good deal" at its current low price, he said. "I always look at a stock in terms of a floor and a ceiling, and I think AOL is close to its floor."
GE is still making healthy profits and paying good dividends, Nelson said, "Nothing has changed. It's still a good company," he said. "Even the strongest stocks sometimes get caught up in undercurrents."
Dow prediction
Flannoya Franklin, a representative for Edward Jones in Liberty, was closest in his prediction of the Dow Jones Industrial average for 2002. He guessed the indicator would close at 10,700, the most conservative number of the five participants, but it went even lower, dropping 17 percent to close at 8,341.
All the others guessed a Dow close of 11,200 or higher.
Franklin's stock choices included NVIDIA, a designer of three-dimensional graphics for video games and another big loser, with a value drop of 82.8 percent.
Fortunately, Franklin said, he and his clients who bought the stock at $35 were able to sell it for a profit in February at $53.
"None of my clients lost money on it. We believe in buy and hold, but that doesn't mean buy and forget about it," he said. "You can't fall in love with a stock. If something changes, you have to know when to sell."
In NVIDIA's case, Franklin said, the company's stock prices started to drop when it failed to land an important contract and analysts began saying its earnings projections were unreasonably high.
He's sticking to his recommendation of Advance PCS, which serves the health care industry with prescription management, online prescription sales and other streamlining programs.
"They're gaining ground, even though it may not show in their stock price," Franklin said. "I think it will come around."
Home Depot
Franklin and Scott Schulick of Butler Wick in Youngstown both picked Home Depot, a major retailer that disappointed shareholders with a 53 percent price drop. Both brokers said the chain is making improvements in its stores and they're not giving up on Home Depot stock.
"Generally, it's at its low point, down more than 50 percent from its high point last year," Schulick said. "We could view this as an excellent opportunity to buy stock from an excellent retailer that's fallen on hard times."
Schulick was surprised and disappointed with results of his J.P. Morgan Chase & amp; Co. pick. The company is one of the three largest financial institutions in the country, but it was hurt by several factors, including exposure to Enron and Kmart bankruptcies and other banking problems around the world.
He said it's still paying a very high dividend of 4.89 percent, and the stock price is rising slowly, so he still recommends it for long term growth.
Schulick also picked Scholastic Corp., a publishing company that has publishing and distribution rights for the popular Harry Potter books. He still likes the stock, even though it dropped 29 percent in value, and believes literacy spending in 2003 will help turn it around.
vinarsky@vindy.com