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Delaware's Weighty 80

Are the publicly traded stocks of big players in the regional economy primed for another liftoff? We spoke with several area investment pros who offered wise counsel. Herein lies their analysis. Also, study our at-a-glance profile of 80 stocks of companies that play a major role in Delaware's economy.

Illustration by Dav Bordeleau
www.davbordeleau.com

Delaware's Weighty 80
Are the publicly traded stocks of big players in the regional economy primed for another liftoff? Read on.

When this story was taking shape during the late August heat wave, the stock market was waging its own scorched-earth rampage. Rather than curl up in a patch of shade to weather summer's dog days, the market plummeted like the thunderous roller coaster at Blue Diamond Park. Investors everywhere regurgitated profits.

But if hearts, stomachs and wallets seemed to hang in the balance, those steeled by patience and a sound game plan figured to withstand the turmoil and emerge on solid footing. Portfolios intact.

Herein lie clues to that composure and savvy. While many folks were staking out a better mattress or floorboard to conceal their cash, we spoke with several area investment pros who offered sobriety and wise counsel.

We also compiled an at-a-glance profile of 80 stocks of companies that play a major role in Delaware's economy by virtue of employment, consumption or general visibility. The roster is more barometer than census. Delaware, of course, is the state of choice for incorporation (more than half of the Fortune 500), but about 90 percent of the companies incorporated here do not have a significant business presence here, according to the state Division of Corporations.

For investors inclined to place bets on companies they know best, our chart is a handy reference. Following are thoughts on some of the listed stocks from those who manage money for a living.

A Sampling of the Weighty 80
Banks, brokerages and mortgage companies led the summer decline, as they scrambled to cover their losses in sub-prime loans and other faltering assets. Analysts, though, stress the fundamental value of financial industry leaders. For example, Tom Neale, an equity analyst at Wilmington Trust, cites the "tremendous long-term competitive strength" of American International Group, saying it was the first U.S. insurer to enter emerging markets. "The stock price has stagnated," Neale says, "but new management has bared all, and we expect that valuation will increase."

Bank of America, which acquired MBNA in June 2006, has also seen its stock price languish despite a low price-earnings ratio, an attractive dividend and big buybacks. The lack of movement in the stock probably reflects a slowing growth rate in the wake of large acquisitions, according to Wilmington Trust analyst Jim Bitter. With its "national footprint" and "decent valuation," however, B of A is "well-positioned" to move up from here, says Dan Morris of Morris Capital Management in Malvern, Pennsylvania.

Both Morris and Bitter see Commerce Bank as a potential takeover target, though they agree it's already priced at a premium. Bitter pays homage to the Orange Lion: "The direct ‘piece' of ING is a wonderful business model," he says, "with a redeployment of deposits in plain-vanilla mortgages, not low-doc or no-doc." He calls Morgan Stanley "the best and cleanest" of the brokers. Morris has Citigroup in his company's portfolio, but says the bank's far-flung operations have led to problems in execution.

As for the granddaddy of Delaware companies, DuPont normally sells at a premium and is somewhat expensive, in Morris' view. But Bitter says the chemical giant is counting on its biomaterials business to make the company less cyclical as it challenges the Monsantos of the world in developing alternative fuels.

Morris labels the DuPont spin-off Incyte "hard to value" and urges caution, while Chip Cruice of Greenville Capital Management in Rockland says the speculative biotech is expected to lose a dollar per share this year—reason enough for him to exclude it from his small-cap growth fund. (Cruice looks for a minimum of 20 percent annual earnings growth.) The shortfall hasn't deterred First Call analysts, though, who recommend the low-priced stock. (See chart.)

A biotech both Neale and Morris find potential in is Cephalon, which, in addition to its own research and development, has been successfully licensing products from other companies and marketing them more effectively. Cephalon develops drugs that control pain and are not "mind-numbing," says Neale, who adds that the stock has "taken a beating unfairly. There's a strong record of growth." Morris says that the company is equally adept at the research, review and marketing phases for new products.

Another healthcare company specializing in pain products is Endo Pharmaceuticals, which faces—as many of its competitors do—the thorny road to approval for new products and the challenge from generic drug companies, say Cruice and Morris. For those reasons and as a valuation call, Morris is cautious on drug-maker AstraZeneca.

A company known for making portfolios healthy is Altria, but the stock price slumped after the tobacco giant spun off its Kraft foods division. Bitter, though, regards Altria as a value-oriented holding. Among other big names, Morris likes Boeing ("a stock is not necessarily expensive because its price is high"), Occidental ("oil prices are likely to stay in the $70 range"), and Valero ("refining is at a premium").

Direct-marketer Avon, he says, "does well in a tough environment." Tough, as in a slowing economy, volatile financial markets, and investors nervously eyeing their monthly statements. Without a pill currently available, prudence and optimism make the best antidote for that kind of pain.

Buy Local?
Investing in companies in your own backyard has a certain appeal, but familiarity may not breed profits. One pitfall is to pick local favorites at the expense of diversification. (See "The Savvy Investor," page 67.) If you're mesmerized by, say, a money-center town (read Wilmington) and packed all your greenbacks into financial stocks during the recent swoon, your bottom line felt bottomless.

But staying close to the action can make you something of an insider. "If you work for a [given] company, you probably know what's going on in both that company and the sector," says Chip Cruice, president of Greenville Capital Management in Rockland. Greenville uses regional analysts to take a company's pulse. "We get to know their customers, suppliers and competitors pretty well," says Cruice.

The average investor, however, lacks such access. Investment pros discourage attachments based merely on proximity.

"Driving by a building on your way to the supermarket doesn't give you insight into what goes on behind its walls," says Bill D'Alonzo, president and CEO of Greenville-based Friess Associates, home of the Brandywine Funds. "Making an informed investment decision requires a depth of insight an investor won't get from simply living near a company's headquarters."

Wall Street, Main Street
Does the stock market reflect the relative strength of the economy, or is it a casino separate from the realities of workaday America?

In Delaware, there appears to be a parallel. Figures compiled for the most recent five-year period show a strong correlation between the state's economy and the stock performance of companies with significant business operations here.

"And our economy correlates with the U.S. economy," says Judy McKinney-Cherry, director of the Delaware Economic Development Office. "We're diversified and have [a lot of] global investment coming into the state."

Research conducted by Dr. Ishaq Saleem and Lisna Utami, both of DEDO, shows Delaware's economy moving with stock prices. The researchers sampled a number of prominent companies in each of five industries: manufacturing, utilities, financial services, retail trade and (general) services. They compared, for the years 2001 through 2006, the performance of these companies' publicly traded stocks with the state's employment and gross domestic product figures. They found that, while employment was growing from 419,000 to 436,000, and GDP from $44 billion to $60 billion, the stock prices of most of these representative firms were rising smartly, especially the financial services companies.

"The findings were not a surprise because we have such strong companies. Delaware also has a relatively large number of stockholders," says McKinney-Cherry, who adds that when the U.S. economy slumps, Delaware's dip is not as pronounced.

That's good news because last August's swoon in the financial markets seemed to dim the luster of those towers of commerce in downtown Wilmington and elsewhere. Maybe by the time you read this, the Federal Reserve's smelling salts will have revived credit lines for all of us.

The Savvy Investor
If you seek long-term appreciation and nights that do not keep you awake, solid advice follows.

Whether geared for college or retirement, the smart investment plan is built on diversification. "Spread your risk among many companies in different segments of the market," says Dr. James Kalil, founder of Wilmington-based Affinity Wealth Management.

Kalil, known for spotting bargains in undervalued stocks, says that holdings should be diversified according to size (large-cap, mid-cap, small-cap), as well as sector, and cites exchange-traded funds (ETFs, the largest being Barclays' iShares) as the individual's simplest route to the broad market. He refers stock pickers to readily available investment research services such as Morningstar and Value Line, but cautions that most people quickly find themselves in over their heads. Kalil assigns limited value to technical analysis: picking tops and bottoms on charts that trace stock performance.

Sometimes the picture is not pretty. When mortgage credit problems mushroomed last August, investors large and small scrambled to unload stocks, fearful that the overall economy was in jeopardy. But selling in panic is usually a recipe for losing money. D'Alonzo calls such conditions "inflection points" that create opportunities for investors. "An investor who can tune out short-term swings and market chatter should fare well over the long haul," he says. In other words, stay cool and stay put. Which is not to say, invest your money and pull a Rip Van Winkle.

"We don't believe in buying shares in a company and forgetting about them," says D'Alonzo. "Investors should regularly evaluate individual stock holdings to determine whether the reasons behind their initial purchase continue to hold true."

For those inclined to fine tune on the fly, stocks of companies in the consumer staples, communications and healthcare industries are "good places to hide" in the present environment, according to Jim Bitter, an equity analyst with Wilmington Trust. Cruice recommends trimming positions as their prices rise, in effect locking in profits. However, "the individual investor," he says, "needs the tools and the time."

One of those tools is the price-earnings (P-E) ratio: The higher the number, the riskier the stock, according to conventional wisdom. But investors have long been justified in bidding up the share prices of companies that demonstrate great growth prospects. And Kalil maintains that a low P-E often indicates a less than robust outlook. Dan Morris, of Morris Capital Advisors in Malvern, Pennsylvania, sees P-E as "where the stock is priced relative to its potential." A Google, then, has always been priced richly, as its potential keeps expanding. On the other end of the stocks spectrum, beaten-down shares might have an attractive valuation if earnings are poised to rebound.

From Google to gone-without-a-trace, all money managers emphasize that the individual's needs, goals and temperament should determine his investment strategy.

Click the 'Download Now' button below to study our at-a-glance profile of 80 stocks of companies that play a major role in Delaware's economy.