Before I recommend a security, it is necessary for me to establish a few assumptions about the nature of my investment perspective. I am 22 years of age and therefore am less averse to risk. Therefore, my investment time horizon is very long due to my age.
My first stock pick is based upon the previous assumptions and also the following one; Economic activity proceeds at a brisk rate as in 1999. Since this would indicate a bull market, I would choose a stock in the technology sector. I choose Gateway, ticker symbol (GTW). In the months to come, this company will start flooding the market with what is known as Internet Appliances, or IA’s. These are inexpensive network computers with the network being the Internet. They will cater to consumers who want Web access but don’t want the cost, technical problems, and maintenance that comes with a PC. However. That doesn’t necessarily mean PC’s are going away in the foreseeable future Gateway plans on making profit from these IA’s by signing deals with communications giants like America Online to be ISP’s.
GTW recently traded at $56 a share, with a P/E of 30.6. This equals an EPS of $1.83.
In my next stock-pick, I still presume the assumptions in the first paragraph, and also I need to make a different assumption; Continued economic growth leads to an inflationary environment in 2000. For these economic conditions, I feel United Technologies Corporation, symbol (UTX), is an appropriate stock. One of the 30 stocks on the Dow Jones Industrials, United Technologies Corporation, based in Hartford, Connecticut, provides a broad range of high technology products and support services to the building systems and aerospace industries. Those products include Pratt & Whitney aircraft engines, space propulsion systems and industrial gas turbines; Carrier heating, air conditioning and refrigeration; Otis elevator, escalator and people movers; Hamilton Sundstrand aerospace and industrial products; Sikorsky helicopters and International Fuel Cells power systems.
In the news May 3, 2000, “ Otis Elevator Co. landed a contract Tuesday worth more than $8 million to supply 31 elevators to the Hearst Tower building in Charlotte, N.C.” This is indicative of the activity this company will have into the future time horizon of the next few months. Thus being a blue-chip stock, it has been relatively stable the past few years as compared to the S&P 500. In fact it has outperformed it consistently the past 5 years. The following graph indicates this point.
As of April 28, 2000, UTX was trading at $62.19. In April of 1990, UTX was trading at around $13.65 a share. So by judging from the stability of this company one would expect, and rightfully so, this company to pay dividends. The last quarter ( Q 1 2000) will pay a dividend of $.20. In times of recession, a stock paying a regular dividend will appreciate in price. With UTX being at its 52-week low about a month ago at $46.50, the capital gains could at least be expected in the next couple of weeks. Interestingly enough, its 52-week high was almost exactly 52 weeks ago on May 11, 1999, at $75.97. Its P/E was 20.06 on April 28, 2000. This translates into an EPS of $3.10. UTX had a 17 percent increase in first quarter diluted earnings per share to $0.74 versus $0.63 in the prior year. Diluted earnings per share means all convertible securities and warrants are assumed to be exercised when they are reported in the companies’ financial statements. At the end of quarter 1, 2000, net income was $377 million, 22 percent above the $308 million reported in 1999. Revenues for the quarter were $6.4 billion, 17 percent higher than the prior year. Debt to capital ended the quarter at 38 percent, unchanged from the end of 1999. This is a favorable indicator, since increasing this ratio naturally indicates increased debt.
I feel UTX is a generally wise purchase all around if you are looking for a generally safe stock. Its beta is .94, which means it is less volatile than the market and less subject to dramatic price fluctuations. I had the opportunity to have a tour of Sikorsky Aircraft located in Stratford, CT, as my Uncle is employed there. Sikorsky, which is a division of UTX, is a defense contractor. During periods of inflation, a period of recession is sure to follow. Defense stocks are desirable to have in one’s portfolio during recessions, and the time to buy them would be before a recession, hence purchase during inflation
My final stock pick once again assumes the aforementioned circumstances in the first paragraph and one other: Year 2000 computer problems lead to a deep recession in 2000. If it is in fact the middle of a deep recession, you are probably most concerned about meeting those expenses necessary for sustenance. If, however, a stock were needed to be purchased now in anticipation of a deep recession, I would buy any blue-chip stock. Since I must pick one, I think Enron ( symbol ENE) is a relatively stable choice. Enron is in the natural gas and power market. Since the recent rise in prices of petroleum products, natural gas is looking more and more attractive. They also happen to be building a 20,000 mile fiber optic communication system with Sun Microsystems. As of January 28, 2000. Its price was $64.88 with a P/E of 43.6. Those numbers rose to $76 and a P/E of 62 on May 3, 2000. That is already a substantial increase in the first quarter of 2000. However, I feel the stock is undervalued. Fiber optics will be increasing in demand in the next few years once broadband width is increased. With a head start ENE has in size and reach, this stock will be one to hold onto, even if a recession is to hit. Since it is in natural gas already, with a growth rate of 17% per year, those numbers are in fact only based on that sector of industry. Where it will emerge as a real winner will be in fiber optics as I already mentioned. I feel the price does not reflect that too accurately.