TICN In The Press: May 28th, 2000

"Do your homework better" by Aileen Power
Forget fancy stockbrokers charging flashy fees, fund managers or other species of market guru - small investors want to know how to choose stocks for themselves. The do-it-yourself approach is gathering pace. Investors correctly recognize that no one is more interested in making a profit for themselves that they are.

One of the Money 2000 seminars held at the RDS last weekend focused on stock market investment. Members of the audience were eager to start their own investment clubs and learn how to back their own market winners.

Some are also willing to pay hefty amounts to attend training courses for this knowledge.

Dave Murnane, a private investor and member of 'Da Northside Traders' investment club wants to learn ore about investing in the stock market. "I would like to learn how to evaluate stocks myself. The problem with stockbrokers is that you cannot be sure they are entirely unbiased. Sometimes they are paid advisers to the companies they are recommending as share 'buys'. It's also very difficult to get them on the phone - but that's where the internet comes in, he said."

Making large chunks of money on the stock market is a sexy proposition. So what are the experts advising in terms of equity selection criteria?

Professional fund managers look to buy companies with good business fundamental. These usually fall into two main categories: 'value' or 'growth' stocks.

Remember, too, that some fund (asset) managers will favour investing in one category over the other. To complicate matters further, some fund managers will argue that you need both categories to ensure good performance.

For example, if growth stocks go out of favor, the market may switch to what it considers safer, undervalued companies. This happened in the past couple of months as investors sold new economy companies that were considered overvalued. Old economy stocks were bought and rallied due to this switch in investor sentiment.

There is still a lot of price volatility among technology stocks. The obvious example is the technology, media and telecom (TMT) companies which were the market darlings for most of last year and have received a selective bettering since March this year. Take Baltimore which is down 70 per cent from its high of March this year at stg£3.99.

The most important thing to know about markets is that there is no such thing as a sure bet.

Even if you pick a good stock with sound fundamentals, the market is such a fickle creature that your company's share price can sell off for reasons unconnected to its business performance.

This could happen where bad results of another company in the same business bring the entire sector down. A market sector can also go out of favour, as has happened recently with retail stocks.

The share prices of British retailers such as Marks and Spencer and Storehouse have been hit very badly. Some investors might argue they are now trading at levels that historically make them look like value stocks. They are down 41 per cent and 63 per cent respectively.

This is because the US retailing giant Wal-Mart has entered the market and British retailers' margins are being squeezed tightly by its massive purchasing power. But this does not necessarily make retailer a good investment area at the moment.

"Retail stock prices are not expected to recover in the short term," said Eugene Kiernan, head of asset allocation with Irish Life Investment Managers (ILIM).

"It is hard to see how they can improve their margins apart from cutting costs and there is a limit to every cost-cutting exercise."

Value investors such as ILIM would look to buy this sector if they believed the business outlook was about to change.

What are value stocks?

Definitions vary but they are generally described as equities or stocks which have a lower market price than they deserve. This may be due to a competitiveness problem or the industry being out of favour with investors.

An example of the latter would be certain old economy stocks (such as food companies or building materials companies) which do not the high growth potential of internet companies.

It could also be that the industry is in decline. Brewing is believed to have very low growth potential due to declining beer-drinking populations in the developed world. However, the companies can still be profitable and well managed.

The idea with value stocks is that a fund manager believes the stock is undervalued - by 20 per cent to 30 per cent, for example - he or she will buy it and then sell it as soon as it has reached this target.

The criticism from growth investors is that this method will mean an increased level of turnover and higher costs eating into the equity portfolio's performance. The argument in favour of growth stocks is that they will not need to be sold as often.

What are growth stocks?

Growth stocks tend to deliver above the market average growth in cash flow and earnings. At the moment this would mean in excess of about 7 to 8 per annum growth for cash flow and about 13 to 16 per cent per annum growth for earnings (over a three- to five-year period). These are usually companies that are well-managed and have dominant or 'first to market' positions in high-growth areas.

The TMT grouping of companies is probably the best known high-growth sector. Growth stocks tend to trade on higher valuation levels than the market average.

Joe Mottley, head of equity strategy of Setanta Asset Management said: "There is sometimes an artificial distinction between growth and value stocks. Sometimes a stock falls into both categories which makes it doubly attractive.

Useful contacts for new investors

The Investment Club Network (TICN) is an organization that helps members who are new to stock market investment. Membership is free once you are a member of an investment club. TICN also runs training weekends for private investors (who can be non-members) which have received very positive reviews from attendees. They cost £600 and there is a money-back guarantee if by Saturday evening you are not happy with the training course. Contact: Eamonn Blaney tel: 074-58585 or www.ticn.com

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