Two of the three major U.S. stock indexes are flirting with all-time highs, and the economy is showing signs of improvement.

But have investors sitting on the sidelines missed capitalizing on the market’s multiyear rise?

Not at all, says local stock expert Dwight Melton, whose 32.4 percent first-quarter return trumped three other experts in the Star-Advertiser’s 12th annual investment contest.

Melton, a four-time contest winner and co-founder of the Hawaii Stocks and Options Group, said the bulls still have plenty of room to run.

"The stock market has already more than doubled since the dark days of 2009," said Melton, who won last year’s contest with a 49.9 percent return.

"Records are being set, and most indexes have risen nearly every week so far this year," added Melton, whose hypothetical $20,000 portfolio increased to $26,474.43 at the end of last quarter. "The Fed and other central banks have been driving the market, and there’s no sign that’s going to stop. There is still a lot of money sitting on the sidelines."

It was a blockbuster quarter for the local experts as they all posted double-digit returns to outpace the 10.6 percent return of the broader Standard & Poor’s 500 index, which along with the Dow Jones industrial average (11.9 percent) has hovered around record levels.

Norm Caris, a Kauai resident and managing director of Los Angeles-based investment bank B. Riley Caris, saw his portfolio jump 27.2 percent to $25,436. Barry Hyman, vice president, private client group, for the Maui branch of FIM Group Ltd., was up 11.2 percent to $22,236.99. And Richard Dole, chief executive of Hono­lulu-based investment bank Dole Capital LLC, gained 11 percent to $22,203.01.

THE aggressive Melton, who has been picking sector indexes that triple the performance of the industry or stocks that they track, overhauled his portfolio for the second quarter. He selected indexes that track retail, health care, real estate and the Dow and dropped index funds that track financials, the Nasdaq 100, the S&P 500 and small-cap stocks. In the first quarter his small cap (39.1 percent), financial (37.8 percent) and S&P 500 (32.7 percent) index selections all achieved returns of at least 30 percent.

"As long as the Fed keeps its foot on the gas and as long as we stay out of a recession, I think there’s a good chance this market will continue," Melton said.

Caris hit the jackpot in the first quarter with his pick of Netflix, the subscription video-streaming service, which more than doubled with a 104.4 percent return. He also had a strong performer in Deckers Outdoor, a designer and marketer of footwear and accessories, which returned 38.3 percent.

He took profits at the start of the second quarter from Netflix, and also sold nutrition and dietary supplement provider Herbalife (up 14.5 percent). In their place he picked up shares of Hawaiian Airlines’ parent company and semiconductor manufacturer LSI Logic.

"There are cheap stocks out there, specifically names like Ford (a 2.3 percent gainer for Caris), which has a great balance sheet, best-in-class management and strong potential growth in China as well as a turnaround opportunity in Europe," Caris said. "The gold miners are also very compelling."

Hyman cautions investors against buying "overly diversified baskets" of index or sector stocks and says investors instead should focus on buying individual companies — if investors have a portfolio of sufficient size — or actively managed funds with skilled managers.

<$t-7>"Timing the market shouldn’t be a consideration," Hyman said. "Timing individual investments, or more accurately pricing individual investments, is instead what investors should be concerned with. There are always some well-priced companies for sale regardless of the arbitrary level of market indexes or the overvalued levels of other investments."

Hyman is holding on to Gaiam (up 32.9 percent), a provider of health and fitness products, but is replacing Microsoft (up 8 percent) with Vodafone "because I believe recent developments in global telecom will benefit" the company. He said Microsoft had appreciated to a price at which it was no longer as compelling a value as Vodafone.

He also is subbing out Singaporean-based Hutchison Port Holdings Trust (up 17.1 percent) with its corporate parent, Hutchison Whampoa, because he said the latter is more of a bargain.

Hyman said a stock market correction is "overdue" and that at some point interest rates must be allowed to float to their natural level rather than being artificially suppressed by the Fed and government purchases.

"Keep in mind that markets are predictive rather than reactive," Hyman said. "So when the tea leaves indicate to the ‘smart money’ (such as institutional investors) that rates are likely to rise, it is probable that (institutional investors) will react in advance by reducing their equity exposure. For investors who are in the market via (index, sector or exchange traded funds), they could see declines, some of it permanent, if they own overvalued investments. For investors who own undervalued individual companies, any such decline in prices of their investments will likely be temporary."

Dole, whose best performer in the first quarter was scientific and technical instrument supplier Newport (up 25.8 percent), added a second Hawaii stock to his portfolio in the second quarter to go along with first-quarter holdover Territorial Bancorp (up 4.6 percent), the parent of Territorial Savings Bank. Dole sold General Electric (up 11.1 percent) and used the funds to purchase Hono­lulu-based ocean shipper Matson, the state’s largest ocean shipper, which spun off from Alexander & Baldwin last year.

"Matson should have comparatively strong first-quarter earnings against depressed first-quarter earnings last year," Dole said. "Construction is picking up in Hawaii, which I think will boost earnings over the course of the year. However, all bets are off if Hawaii slides into a new recession."

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