Europe: the Fast Track

If there’s money to be made off the powerful force of globalization, somebody like Ivo St. Kovachev ought to be able to make it. The 45-year-old Bulgarian has degrees in technology and business from schools in the Czech Republic and England. He was a Fulbright Scholar in the U.S., speaks five languages and once headed up the foreign investment division of Bulgaria’s state privatization agency. He even fitted in a year in Japan, working for the United Nations. Today he’s based in the Czech capital, Prague, where he picks stocks for Chicago’s Driehaus Capital Management, which he joined in 1996.

Kovachev is one of the three managers of Driehaus International Discovery, a $258 million growth fund that goes after small and medium-size stocks abroad. The other two managers do Asia and emerging markets; Kovachev handles the half of the portfolio invested in Europe.

Among Kovachev’s current favorites is Tele2, a fixed-line, Internet and mobile communications outfit based in Stockholm that operates in 22 countries,including Portugal and Russia. Its revenues, $4.8 billion for its latest 12 months, have grown at a 49% annualized clip for the past five years.

The company–not so medium-size anymore–and its shares, listed in the U.S. as American Depositary Receipts, have more than doubled in the past 12 months. They sell for 1.7 times sales and 50 times trailing earnings, versus equivalent multiples of 0.4 and 8.2 for AT&T. Kovachev isn’t deterred. “Internet penetration in Europe is on average lower than the U.S.,” he says, “so this is a secular growth story, and it should continue to do well.”

Full story at Forbes.com

Growth Stocks With A Story

Before she got her M.B.A., money manager Maureen Cullinane took undergraduate and master’s degrees in French literature. Cullinane, who tends to $1.2 billion as lead manager of Evergreen Investment’s Omega Fund, says the literature stuff still comes in handy in the investment world.

“Everyone comes into this field with different specialties,” she explains. “For those of us with the liberal arts background, it’s trying to find a good story, even more than the numbers.”

These days Cullinane, who started with Evergreen in 1974, sees a particularly compelling story in Baby Boomer demographics, particularly the growing demand for healthcare as the generation ages.

This is a tale oft-told on Wall Street. Is it overplayed? Cullinane doesn’t think so. On healthcare, for example, she points out the wide variety of sub-sectors–medical devices, managed care, pharmaceuticals, and so on–that are constantly falling in and out of favor. “There are so many healthcare ideas out there,” she says, “there’s always something you can invest in.”

Full story at Forbes.com

Just One Stock

If you could have a single stock in your portfolio for the next year, which would it be? That’s the question we put to 17 investment pros each autumn. Five give us short picks, the rest go long, and anyone who beats the market is asked back for another year.

The bulls ended the 2002-03 contest with a collective 30% gain, versus 19% for the S&P 500 index. But propelled skyward by a pair of rebounding microchip stocks–Intel and KLA-Tencor–our bears selected stocks that rose anaverage 44%, no fun for a short-seller.

Richard Driehaus headed our bulls with a 114% increase on Nextel but declined our return invitation. Not sofor Joseph Zock, who took the silver medal with Cendant’s 78% surge. Zock, president of Capital ManagementAssociates, re-ups with shipper CNF. Reason: An improving economy means more stuff to haul.

The only bear to survive the last round is Bernie G. Schaeffer, who runs a research firm in Cincinnati. He foresaw trouble for Pfizer last year; the stock shed 1% over the course of the contest. For the year ahead, Schaeffer tags Johnson & Johnson for a short sale; he sees trouble in both the Procrit anemia drug and stent businesses.

Full story at Forbes.com

Useful Metric: Accounts Receivable

As you sift through the financials of investment prospects, keep an eye on accounts receivable. This item, found just below “cash and equivalents” on the balance sheet, indicates the money owed a company by its customers.

Looked at in the context of sales performance, accounts receivable can suggest how quickly customers are paying their bills. Naturally, the sooner they cough up, the better. The company can then plough that cash back into the business, pay its expenses, reward stockholders with dividend payments, eliminate debt, or do any of the other good things that cash flow enables. Also, it’s a sad truth of business that the older a receivable is, the less likely it will be paid off at all.

A good way to see whether a company is staying on top of its accounts receivable is to measure “accounts receivable turnover,” defined as total credit sales for a particular accounting period divided by the average value of the accounts receivable during that period.

Full story at Forbes.com

Salvage Operation

David J. Williams is a former Navy pilot. He has the stomach for flying close to the edge. The fund he comanages, Excelsior Value & Restructuring, invests mostly in companies trying to avoid a nosedive into oblivion.

Williams’ fund, one of the Excelsior funds advised by U.S. Trust, has 60% of its holdings in firms that are restructuring their balance sheets, selling divisions, laying off employees and the like. Another 20% are likely acquisition targets in consolidating industries. The rest are stocks that just look cheap.

In the ten-plus years since its founding, this no-load fund has grown to $1.6 billion in assets. Of late, performance has been fair: For the 12 months through June it gained 2%, against a 0.3% advance for the S&P 500. Williams admits he cleaned house in 2002, hitting the eject button on stocks like energy traders Calpine and Dynegy. “I had too much crap in the portfolio,” he confesses.

Nevertheless, the fund has a 15% annualized return over the past decade versus 10% for the S&P. FORBES grades it B for long-term performance in both up and down markets.

Williams, 61, got his start in the business at the tail end of the 1973-74 crash, joining T. Rowe Price as a portfolio manager following a post-Navy M.B.A. from Harvard. In 1987, when an ascendant Japan Inc. appeared to be eclipsing America as the world’s economic superpower, he signed on with U.S. Trust (now a subsidiary of Charles Schwab & Co.). There he concluded that American business would be forced to restructure in order to stay competitive in the global economy. This spurred the launch of Williams’ fund at the end of 1992.

One of its first bets was on a beaten-up IBM , then cutting deeply into its work force and posting breathtaking net losses: $6.9 billion in 1992 and $8 billion the year after. On a split-adjusted basis, IBM’s stock traded in the low teens, half its level five years prior. Williams bought. By July 1999 IBM shares were changing hands at $139. Williams has reduced his position in IBM since then but still owns it, along with a handful of other tech outfits. “The fundamentals really haven’t changed much for the better yet,” he muses, but “when they do, those stocks are going to fly.”

Full story (reg. required) at Forbes.com

Water Utilities’ Financial Thirst

You don’t have to look far to find statistics suggesting the United States’ water and sewage systems are in sorry shape. At the homepage of the Environmental Protection Agency’s Office of Water, for example, a report suggests the current pace of spending on drinking-water infrastructure falls $263 billion short of what’s needed over the next two decades.

Those kinds of numbers haven’t been lost on Congress, or, for that matter, stock investors who have taken a strong interest in companies working in the water business. Many of the stocks on the table below trade within a stone’s throw of their 52-week highs and carry price-to-earnings ratios above their five-year averages.

Among water sector winners: investor-owned water utilities. These include outfits like Philadelphia Suburban and SJW . The former company, the largest of its kind in the U.S., provides water and wastewater services to two million customers in Pennsylvania, Ohio, Illinois, New Jersey, Maine and North Carolina. SJW owns San Jose Water, a utility supplying drinking water to a million people in Silicon Valley.

So why would Wall Street get so worked up about boring old water utilities? Mergers and acquisitions, for one. Not only has there been heavy consolidation among domestic players, but big foreign companies like France’s Veolia Environnement and Germany’s RWE AG have also gotten involved, paying significant premiums to buy U.S. utilities.

Another plus: The water utility business could well benefit from the outsourcing trend now evident in other government areas like defense and information technology. “The United States is probably the most attractive market from a privatization point of view,” says Phillipe Rohner, who co-manages the Pictet Global Water Fund, a portfolio devoted to companies in the water business.

Rohner notes that U.S. water utilities going private have the advantage of “the most advanced capital markets in the world” when it comes time to raise the funds necessary for infrastructure improvements.

But the National Association of Water Companies (NAWC), the industry group representing investor-owned utilities, complains U.S. policy still gives public utilities an edge. In a position paper, the group says that private water companies still “operate under numerous competitive disadvantages which include payment of federal, state and local taxes, and limited access to tax-exempt financing.”

Full story at Forbes.com

Freight Stocks: Riding The Rebound

WASHINGTON – With fuel prices stabilizing and manufacturing showing signs of recovery, transportation and freight companies have attracted investors. Since a mid-March low, transportation stocks in the S&P 500 have nearly kept pace with the 24% rise in the overall index.

So are there bargains left among the transports? We scanned the Multex database and found a few stocks that still look reasonable. Our criteria: price-to-sales and price-to-book multiples below five-year averages; latest 12-month sales of $400 million or greater; three-year revenue growth (annualized) in positive territory; and estimated annual earnings growth of 10% or better over the next three to five years.

Our screens snared a few passenger airlines, but we left out those more speculative bets in favor of air freight couriers, railroads and truckers. John Escario, manager of the Rydex Transportation Fund, thinks the latter group is particularly well-poised to benefit from an eventual economic recovery. “They’ve had to go through a lot of pain,” he says, noting that some 7,000 trucking outfits have gone bust since 2001. Result: less capacity, steadier prices and better cost control for the survivors.

Full story at Forbes.com

Government IT: Who’s Ready For A Deal?

Over the past year, consolidation among companies providing technology services to the federal government has been brisk, to put it mildly. “Unprecedented,” says David Heinemann, head of the Strategic Advisory Services Group at Input, a Reston, Va.-based market research firm.

In the first quarter of this year, Input tallied 18 merger or acquisition transactions among tech outfits selling expertise to the federal government. And the deals just keep coming. In late May, Fairfax, Va.-based Anteon International completed its $91 million purchase of Information Spectrum, a provider of identification card technology. Shortly thereafter, General Dynamics offered to buy Veridian, a network security engineering firm headquartered in Arlington, Va., for $1.5 billion.

All this deal-making is driven by the $45 billion that Uncle Sam spends each year on vendor-furnished information systems and services, a number expected to grow 8.5% annually over the coming five fiscal years. Input projects that by 2008, 87% of federal technology spending will get contracted out.

Both the growth prospects for the business and the consolidation frenzy have attracted investors. Anteon, for instance, trades just a hair off its 52-week high. In fact, some of these stocks have done so well, that some market watchers are nervous. For example, last month The Washington Post columnist Steven Pearlstein warned of a “Beltway Bubble About To Burst.”

Time to sell? Anteon Chief Executive Joseph Kampf, for his part, doesn’t sound alarmed. “There’s more consolidation to be had,” he says, pointing out that there are 3,000 companies in this marketplace, and even the largest players in the field hold market share numbers in the single digits.

Full story at Forbes.com

Seven Big Bets: Large-Capitalization Stocks

With the S&P 500 priced 16% below its 52-week high, mustering the courage to make an investment in a big company isn’t easy. In certain cases, however, it might be worth it.

What cases are those? Philip Tasho, portfolio manager of the ABN AMRO/TAMRO Large Cap Value fund, suggests looking for outfits with ample cash flow, healthy debt-to-capital ratios and consistent results. “Look at how the company has performed through good and bad times,” he says.

Full story at Forbes.com

Testing A New Stock-Picking Model

WASHINGTON – Anyone with a computer and data feeds can come up with an investment model. We normally don’t pay much attention to such methodologies unless they’ve been evaluated over a long period of time and with real money at stake. But we came across a relatively new idea, known as SPF, that seems worthy of being put to the test.

The inventor of this model isn’t a newcomer to the investment business. Joseph S. Kalinowski, the director of research for New York brokerage Puglisi & Co., has six years of experience, five of which were spent analyzing databases at IBES International, an aggregator of analyst estimate information. Kalinowski has been with Puglisi since May.

Kalinowski’s SPF is an acronym for “sentiment,” “persistence” and “fundamentals.” In each of these categories, he ranks stocks according to a variety of metrics. Taken together, the rankings produce an SPF profile signaling whether to buy, sell or hold.

Full story at Forbes.com