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Wall Street Beat the Market in Third Quarter

November 8, 1995

Most big brokerage houses beat the market with their stock picks during the third quarter, according to a continuing study by The Wall Street Journal and Zacks Investment Research Inc. of Chicago. Now the folks who pick stocks for a living are bracing for the next challenge: how to select winning shares even as corporate earnings seem to be slowing.

Investors will be ``quicker to pull the plug where there’s a shadow of uncertainty,″ says David Henwood, director of research at Raymond James & Co., the long-term leader in the study.

The Journal-Zacks study, published quarterly, tracks the official recommended list at each of 15 major brokerage houses. It estimates how an investor would fare by holding every stock on the list. Dividends are included, and a hypothetical 1 percent commission is assessed when a stock is bought or sold.

The performance differences among firms loom large. For the 12 months through Sept. 30, investors who followed PaineWebber’s ``Performance Portfolio″ achieved returns of nearly 50 percent. By contrast, the ``Equity Opportunity List″ at bottom-ranked Everen Securities Inc. (formerly Kemper Securities) was up only 7 percent. Returns for the 13 other firms ranged from 17 percent to 35 percent. The market, as gauged by the Standard & Poor’s 500-Stock Index, was up nearly 30 percent.

Only five of the 15 brokerage houses beat the S&P for the 12-month period. However, 10 of the 15 beat the market in the third quarter. And all nine firms for which the study has five years of data beat the S&P for the five years ended Sept. 30.

Here is what stock pickers at some leading firms are saying now:

PaineWebber: PaineWebber Group Inc.’s PaineWebber Inc. unit was tops in stock picking for the second-consecutive quarter. It also led 12-month standings, a perch it has occupied three times in a row.

The New York firm reaped a 47 percent return in Staples Inc. last quarter, 38 percent in Heart Technology Inc. (a takeover) and 32 percent in Glendale Federal Bank.

Ann Knight, director of research, and her analysts are looking for companies that can churn out earnings increases, through unit-sales growth or by cost-cutting. ``Corporate profits are slowing,″ she says. ``And we’ve got low interest rates. All of that supports growth stocks, from where we sit.″

As examples, she cites Medtronic Inc., a maker of pacemakers and defibrillators that has launched new products; Zale Corp., a jewelry retailer that should benefit from the bulge in the 45-54 age group (the biggest buyers of jewelry); and Viacom Inc., an entertainment conglomerate that PaineWebber figures can grow about 18 percent a year. Mobil Corp. also gets a nod, mostly for its cost-cutting program.

Raymond James: Though it finished third for the quarter, the St. Petersburg, Fla., firm expanded its commanding lead in the five-year standings. That is because the third quarter of 1990 (the Saddam Hussein bear market) no longer counts. In that quarter, Raymond James _ which typically picks small-company stocks and often is bruised worse than its competitors in market declines _ took a hideous 28.7 percent hit. But with that unhappy time a distant memory, the Florida firm basks in the warmth of a 662 percent return for five years.

Recently, the firm added Oracle Systems Corp. to its Focus List, when the highflying database stock slipped a bit. Raymond James estimates Oracle’s earnings growth at close to 40 percent a year.

The firm is sticking with two big winners _ Datastream Systems Inc., which makes software to guide maintenance programs, and Continental Waste Industries Inc., a small solid-waste company that has grown through what Mr. Henwood calls well-executed acquisitions.

Morgan Stanley: Second in the 12-month standings, up 35 percent, was Morgan Stanley & Co. Its big gains were 152 percent in Cisco Systems Inc., 128 percent in Applied Materials Inc. and 117 percent in McDonnell Douglas Corp. For the year it had 93 winners and 24 losers.

Byron Wien, U.S. equity strategist, says the stock market has exceeded his expectations even though he was ``one of the most bullish people on Wall Street″ early this year. ``The likelihood of its continuing to roar ahead is pretty small.″ But he thinks that the market is good for 10 percent over the coming year, and that certain stocks _ semiconductor and bank issues, for instance _ can do better.

Merrill Lynch: Giant Merrill Lynch & Co. came in third for the 12 months with a 33 percent return. Most of its big winners were technology stocks, such as Microsoft Corp. (up 92 percent), Kemet Electronics Corp. (up 91 percent) and Intel Corp. (up 75 percent).

``Low inflation, interest rates below 6 percent, and the government reducing its deficit _ what’s wrong with that?″ asks Andrew Melnick, Merrill’s director of research. He says the average stock could trade for 18 times annual earnings or more (up from 16 recently), and that leadership may shift to smaller, more-speculative stocks. He likes technology, capital-goods, and financial stocks, but would go easy on autos.

Everen Securities: The Chicago brokerage house Everen Securities Inc., a unit of Everen Capital Corp., was second for the latest quarter, but last for the 12 months. A bounceback by laggard issues such as Rexall Sundown Inc. and Casino Data Systems Inc. helped Everen in the latest quarter.

The firm had been hurt by defections and disarray during a period when it was unclear what its ownership structure would be. Lacking a research director for most of the past year, Everen recently appointed Ed Dunleavy _ formerly a media analyst with Merrill Lynch and Salomon Brothers Inc. _ to the post.

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