Local stock experts ride bull to strong first-quarter gains

The bulls are back in town.

With the Great Recession in the rearview mirror and the broad-based Standard & Poor’s 500 index coming off its best first quarter since 1998, it could end up being a rec­ord year as two of the three major indexes close in on all-time highs.

Certainly, four local stock experts had nothing to complain about during the first three months of the year in the Star-Advertiser’s 11th annual investment contest.

"The bull is roaring and investors are smiling," said Hawaii Stocks and Options Group co-founder Dwight Melton, whose hypothetical $20,000 portfolio surged 48.6 percent to $29,728.65.

"Stocks are up strongly so far in 2012. Better economic news and optimism that the euro zone can resolve its ills are lifting the sprits on Wall Street. Keeping this upbeat news pattern in place will be needed to keep this rally going. As stocks track higher, the pressure to sustain the positive flow of news will intensify."

But beware of the presidential election, says Norm Caris, a Kauai resident and manager of institutional sales for investment bank Caris and Co.

Caris, whose portfolio increased 10.8 percent to $22,167.77, said the direction of the market overall largely will be dictated by the election.

"If President (Barack) Obama remains in office, it will be very negative for the stock market and for the business environment," he said. "That is what we are hearing from very large investors and company management."

Caris said Obama’s plan to raise taxes on capital gains and dividends, coupled with the U.S. having the highest corporate taxes in the world, will throw cold water on the stock market’s rally.

"I have been doing this for 50 years and never seen it this bad," Caris said. "Obama is by far the most anti-business president of our times."

Among the remaining two contest participants, Barry Hyman, private client group vice president for the Maui branch of FIM Group Ltd., posted a 16.1 percent increase in his portfolio to $23,221.96, while Richard Dole, CEO of investment bank Dole Capital LLC, gained 14.3 percent to $22,849.86.

All four contest participants outpaced the Dow Jones industrial average and the S&P 500 during the quarter. The Dow, which is now less than 1,000 points away from its all-time high, posted a total return of 8.8 percent. The S&P 500, a little more than 160 points off its record high, gained 12.6 percent.

The technology-heavy Nasdaq composite index jumped 19 percent.

Melton, a three-time contest champion who is coming off a last-place finish in last year’s event, is bullish about the rest of the year and singled out technology and financials as leading sectors.

"This strength is being fueled by the better economic metrics along the home front, and by signs that Europe is at least starting to address its ills," Melton said. "Stocks could have further to run assuming a better U.S. economy evolves and we enjoy comparative calm on the global front."

Melton only made three investments in his portfolio in the first quarter, and all came out big winners. The Direxion Financial Bull 3X, a financial growth fund that returns 300 percent of the performance of the Russell 1000 Financial Services Index, jumped 68.3 percent. The Direxion Large Cap Bull 3X soared 41.7 percent, and the Direxion Small Cap Bull 3X catapulted 39.2 percent.

He is keeping the Direxion Financial Bull 3X this quarter and selling the other two funds. He is replacing them with the Direxion Technology Bull 3X, the Direxion Retail Bull 3X and the Direxion Real Estate Bull 3X.

Caris also likes the technology sector for the remainder of the year.

"It is the strongest industry in the world," Caris said. "Apple is a good example of this."

He is holding on to semiconductor giant Intel this quarter. The stock was up 16.9 percent in the first three months.

However, Caris is selling digital-video recording pioneer TiVo (up 33.7 percent), Ford (up 16.4 percent), Internet radio service provider Pandora (up 2 percent) and covering his short on the SPDR S&P Retail exchange traded fund (up 16.8 percent). A short sale means the shares are borrowed and then sold, with the borrower benefiting if the stock goes down.

Besides Intel, Caris is filling out his portfolio this quarter with Marvell Technology, a semiconductor component manufacturer; NovaGold Resources, a mineral exploration company; textile manufacturer Unifi; and RDA Microelectronics, a manufacturer of semiconductors for cellular and broadcast applications.

Defending champion Dole is holding on to the same picks with which he began the year. His best pick was Newport, a supplier of scientific and technical instruments, which rose 30.2 percent. He also had double-digit percentage gainers in Hono­lulu-based Alexander & Baldwin, up 19.5 percent, and General Electric, up 13.1 percent.

"There is a lot of optimism with corporate profits increasing faster than stock prices, even with a doubling of stock prices since 2009," he said. "There could be positive economic surprises on the upside that may cause investors to be overly optimistic. Rising interest rates and measured increases in oil prices may not be negative in an improving economic environment."

But Dole said the market is vulnerable to shocks that could cause a major market correction.

"A European debt crisis would be highly negative, as would a negative shock in the Mideast that would cause oil prices to surge," he said. "The two political parties in the U.S. have very different economic solutions, and we don’t know what the outcome will be. Major tax increases on capital gains and dividends would likely be negative for the stock market."

Hyman said he wasn’t surprised that the stock market started off the year on a positive note.

"Given that interest rates are near zero for savings, money market and CDs and only at 2 to 3 percent for long-term Treasuries, and the average stock is selling at an earnings yield of 7 to 8 percent, it was just a matter of time before investors and retirees realize they are missing the boat and losing out to inflation," Hyman said.

Hyman had four double-digit percentage gainers in the first quarter with Gaiam, a lifestyle marketer that offers DVDs and workout systems, leading the way at 22.8 percent. The others were U.S. investment adviser Global Investors (up 21.3 percent), networking giant Cisco Systems (up 17.4 percent) and cellphone provider Nokia (up 13.9 percent).

Even though Hyman called Nokia’s long-term prospects "tremendous" and characterized the stock as inexpensive given its global footprint, he said it is currently out of favor in terms of investment sentiment. Therefore, he said he is selling his Nokia shares and buying United Online, a provider of consumer products and services over the Internet.

"United has a strong balance sheet, generates tremendous cash flow (20 percent), earnings (14 percent) and dividends (8.5 percent) as percentages of the current price of its shares," Hyman said. "They have several strong brands and businesses and others that are ‘cash cows.’ There is no telling when other investors will recognize that this company is tremendously undervalued, but holders get paid 8.5 percent a year in dividends while they wait."