Mutual Fund Managers Like Health Care, Insurance Gold, Perennial Contrarian Pick, More So Than Ever For 1996

Last year’s incredible rise in technology stocks made some rich and others jealous, but it has also placed a new pressure on money managers: To guess the next miracle sector.

Will it be biotechnology? Health care? Insurance? Banks?

Investors’ expectatio

Investors expectatnions may have been unrealistically raised by the 50 percent rise in many tech stocks in 1995, analysts and managers say, and with them, assumptions about how certain parts of the economy behave. Stocks within a particular industry don’t normally all jump up in value together, say money managers, and 1996 could be the year investors learn that lesson.

“I think it’s going to really be a stock-pickers’ year, and a tough one,” says Robert Doll, director of equity investing at Oppenheimer & Co., which runs almost 20 mutual funds.

It is unlikely that a single industry area will emerge the way semiconductors and technology did last year, he and others say, carrying nearly every stock in the category along with it. Indeed, many money managers say they expect a modest rise in the markets as a whole, say 10 percent, but within that, great variation.

Nevertheless, portfolio managers and investment strategists confessed to having some favorite sectors of the economy. They range from technology to health care to gold, and even take in strange niches like mobile home construction and temporary employment companies.

And yes, some are even betting on retail to make a comeback.

At AIM Capital Management, health care also looks good, says Scott G. Lucas, chief equity officer.

Health care stocks were beat up in the third quarter, he says, and they also make sense from a demographic point of view.

“We are getting ‘less young,”’ he notes of the Baby Boomers.

Health care stocks also look good to William C. McVail, portfolio manager for PNC Bank Corp.’s Small Cap Growth Fund.

The national debate over Medicare has made many of the them cheaper than normal. Among his favorites are kidney dialysis stocks, home healthcare, and home rehabilitation companies.

McVail has also found a few niches in which to take refuge from overpriced stocks, he says. He likes companies that make pre-fab homes, pollution control devices, and provide temporary help. Indeed, out-sourcing firms seem to be a popular pick among several money managers; the industry fits in well with the changing economy, they say, as businesses try to save money by outsourcing everything from payroll to accounting, plus hire temporary workers for whom they don’t have to provide health insurance. McVail likes Accustaff and Robert Half.

At Value Line Inc. and Alex. Brown & Co., among others, technology still reigns king.

“I generally continue to like technology. There’s been an enormous correction in the past few months,” says William Paternotte, managing director and chairman of Alex. Brown’s investment committee.

Some semiconductor stocks have fallen 50 percent, he said, even as their earnings have remained more or less stable.

Other favorites are in telecommunications, such as Bay Networks Inc., which makes networking gear.

The firm also likes health care, he adds, and has been recommending small firms making devices and home healthcare stocks such as Genesis, which operates nursing homes.

Meanwhile at Value Line Inc., a research firm which puts out detailed reports on 1,700 different companies, technology also still reigns.

A week ago, the firm listed its 10 favorite sectors; topping the list were semiconductors, telecommunications, and health care information.

Among their favorite issues: Intel Corp., Analog Devices, and HBO & Co., a medical information systems company whose stock has shot up 119 percent last year, and has a price/ earnings ratio of 54.

Then there are the insurance company boosters. Insurance stocks could be in for a profitable year of merging and consolidating, just as banks had last year, says John W. Church Jr., chief investment officer for Glenmeade Trust. Also, after several hard years, insurance companies seem to be in the rich part of their very cyclical business, some maintain.

John Connolly, a partner at Miller Anderson & Sherrerd, is among those who think insurance companies look affordable and promising. But his firm is also placing bets on auto stocks, such as Chrysler and Ford, and on retail.

Retail?

“We are biased toward value investing,” he says, and right now, retail is a bargain. Also, he says, “these stocks tend to do well in January, after Christmas is out of the way.”

The firm hasn’t bought in heavily yet, though, fearing the stock may have further to fall. “At some point we’ll have to make a decision as to what we’re going to do. The question is, are expectations low enough, or are they just going to go lower still?”

That’s the usual question for contrarians, who look for bargains and shunned stocks. To contrarians, health care stocks look expensive. Tech stocks are beginning to look reasonable, with their drop of the last few months. Last year’s losers look best of all. They figure that the sectors that will do best are those that have been overlooked.

John Reckenthaler, the publisher of Morningstar Inc., which rates mutual funds, is a contrarian. He suggests using mutual funds to focus on sectors which are down and out.

Reckenthaler says a contrarian stance now would suggest buying utilities and natural resources. “Most people will say ‘ick’ when you say that. They want something with a better recent track record, like technology or health care.” But if you truly believe in “buy low,” you’ll be buying things like Vanguard Specialized Portfolios Energy, which only returned a little over 7 percent per year for the last five years, he says.

The same thing goes for emerging markets funds, which invest in countries ranging from Chile to Malaysia, and have performed badly last year, he and others say.

To some, gold is the ultimate contrarian pick.

“Gold has been one of the longestrunning disappointments in the history of speculation,” says Jim Grant, editor of “Grant’s Interest Rate Observer”, and a perennial gold optimist. “It’s been like a misanthrope who loses all of its friends.

“Last year I thought it was the ultimate contrary play. This year, it’s even more so.”

Gold has had exactly one good year since 1982, he says.

But Grant and a few other gold experts maintain this could finally be the year - as Grant admits he’s been maintaining for awhile.

Gold expert Mark DeFranco, who is an analyst at Pomboy Capital in Connecticut, which specializes in gold, says he expects a rise in the price of gold to $450 an ounce because demand for it as a commodity is outpacing production. He suggests buying gold mining stocks, not coins or bullion, because mining companies adjust their production to prices, so they can exploit a price rise.