La Salle St. vet makes picks for drab market

June 26, 2005

BY DAVID ROEDER SUN-TIMES COLUMNIST

Carl Birkelbach, who's been around the investment block a few times, has comforting words for anybody who wonders when stocks will shake off their torpor and rise. The head of La Salle Street's Birkelbach Management, with $200 million in assets, believes we're in a bull market, but one with lengthy periods that are flat or down.

A devoted chart-watcher, Birkelbach argues stocks will take off if the major indexes can just top the highs they set last March: 10,984 for the Dow, 2,191 for the Nasdaq and 1,229 for the S&P. Why? "Probably because the alternatives still are not terrific. Money-market rates are low. Also, people are getting more confidence in the market because of the recent stability of prices," he said.

Investors needn't be passive, he said, suggesting several stocks he believes are poised for takeoff regardless of the overall market. Among his favorites: credit-card issuer MBNA (KRB), which could benefit from new bankruptcy laws that don't let people ignore credit-card debts; long-time disappointment Lucent Technologies (LU), which is cutting costs and snagging new orders, and Aluminum Corp. of China (ACH), trading at only about seven times earnings but with a dividend yield close to 4 percent.

Rather than hold cash, he favors closed-end funds such as two Nuveen offerings, JPS for high-grade debt securities and NEA for tax-free income, both of which are trading below net asset values.

Birkelbach's mantra: "All setbacks are buying opportunities."

OUCH OF THE WEEK: The honor goes to DiamondCluster International (DTPI), the computer consulting firm that slashed its earnings forecast a month after affirming that everything was peachy. The Chicago-based company said its current quarter will end in a loss of 3 to 5 cents a share, compared with an old forecast of a 9-to-10-cent-a-share profit.

The disclosure took all the air out of a stock that's gained 60 percent this year. DTPI shed $4.37 Thursday and stayed in the doldrums Friday, closing at $10.49.

"Decisions on two large proposals for work in North America were pushed into the September quarter, and we lost one proposal in spite of very strong buying signs from the client," said CEO Mel Bergstein. That's the kind of mistake that can ruin careers; Wall Street, once burned, is twice shy.

NEW OFFERINGS: This is either a visionary move, or a case of index investing run amok. The Chicago Board Options Exchange said it will launch futures and options trading on 12 sector indexes, creating a family it calls PowerPacks. Each will contain 25 stocks that are the largest and most actively traded in the following industries: banks, biotechnology, gold, Internet, iron and steel, oil, oil services, pharmaceuticals, retail, semiconductor, technology and telecom. Trading will start July 8.

The CBOE wants to expand its products beyond its signature S&P indexes. Its No. 2 competitor, the International Securities Exchange, has challenged the exclusive licensing arrangement that limits those options contracts to the CBOE floor.

Meanwhile, Oakbrook Terrace-based Van Kampen Investments has launched a mutual fund, the Van Kampen American Franchise Fund (VAFAX). It is expected to have 20 to 40 core stocks in U.S.-based issuers deemed to have strong competitive positions, as measured by brand names, patents or other hard-to-replicate factors. Hassan Elmasry, with 20 years in the business, is the manager. New funds are not something Van Kampen does lightly. This is its first in four years.

THANKS, NO THANKS: A report from Charles Schwab analysts Liz Ann Sonders and David Kastner purports to offer good advice on stocks. It said investors have an antiquated notion of buying stocks on fundamentals, when the biggest daily driver in prices is changes in expectations. "Consequently, the key element to any market-beating stock selection strategy is surprise anticipation," the report advises. "Ultimately, an investor's goal should be to identify stocks that perform better than the expectations embedded in their prices at the time of purchase." Schwab has tools to predict surprises, it adds.

In other words, trust us, roll the dice and good luck, sucker!

MONKEY BUSINESS: Remember to check in next week for our half-year update on our Monkey Business stock-picking contest that will reveal the leaders and check on the portfolio progress of our street-beating primate, Mr. Adam Monk.

CLOSING QUOTE: "Stocks have not reflected the strength of corporate earnings, with the result that valuations have contracted even as earnings have expanded. That trend has been especially noticeable in the past two years, and it is now at the point where the S&P 500 is trading at a multiple of 16.5x on this year's earnings and 15.5x on very low estimates of next year's earnings. That is cheap, cheap, cheap when the 10-year Treasury is yielding barely 4 percent and inflation is hovering below 2.5 percent." -- Dan Chung, Fred Alger Management