PATIENT investing – reasons for chosing blue-chip growth stocks

Lieutenant Commander Larry Benzel is getting rich the old-fashioned way: by investing mainly in high-quality, blue-chip growth stocks and holding on for the ride. And what a ride it’s been. Working with an A.G. Edwards broker since 1986, Benzel, a 38-year-old naval supply officer in Fort Worth, Tex., has filled his own portfolio, plus those of his wife and his two young sons, with the likes of drug giants Bristol-Myers Squibb, Merck & Co. and Pfizer; retailers Home Depot and Wal-Mart Stores; and several smaller yet substantial companies. All told, their investments of more than $100,000 have more than tripled.

There’s nothing especially fancy about Benzel’s strategy, but it makes all the sense in the world: “I try to buy good companies with good managements that increase their dividends, and I try to buy them when the market is kind of weak. But I don’t try to time the market, and I reinvest my dividends.”

Benzel notes, for instance, that he started investing in the drug stocks during the early Clinton administration when they were getting whacked by fears of health care reform. “We have the best pharmaceutical companies in the world, and for me it was a no-brainer,” he says.

Benzel’s approach is reflected in the patient portfolio on the facing page. All of our choices are large, substantial companies that are likely to be around for many, many years. Most of them are steady growers. But for diversification purposes, we throw into the mix a couple of stocks, namely General Motors and Schlumberger, whose fates are tied more closely to the overall health of the economy. Also for diversification, we include Sony, a well-known foreign company that does business around the globe. As with many of the names in the aggressive portfolio, some of these stocks, such as Microsoft and Pfizer, are richly valued. They would be more attractive if you could buy them for lower prices, particularly during a general market decline.

THE STOCKS

AMERICAN INTERNATIONAL GROUP

(symbol AIG, New York Stock Exchange, recent price $120). AIG is more than an insurance giant. Though it is a major player in both property-and-casualty and life insurance, financial services now account for 15% of its pretax earnings. Moreover, the recent acquisition of SunAmerica puts AIG into asset management, too. Analyst Weston Hicks of J.P. Morgan says AIG has “exceptionally strong strategic positions in virtually all of its businesses.” About one-third of AIG’s general insurance business is overseas. Estimated long-term earnings growth: 14% per year.

CITIGROUP

(C, NYSE, $72). The product of the merger of Citicorp and Travelers Group is “arguably the preeminent financial-services firm in the world,” says T. Rowe Price fund manager Larry Puglia. In addition to Citibank (the nation’s largest bank in terms of total assets and the world’s largest issuer of credit cards) and its Travelers Insurance unit, Citigroup owns Salomon Smith Barney, a leading full-service broker. Cross-selling opportunities could fuel long-term profit growth of 14% per year.

WALT DISNEY CO.

(DIS, NYSE, $33). One of the world’s most recognizable brand names, Disney is no Mickey Mouse operation. The company is a major player in animated and live films, broadcasting (through its ownership of the ABC and ESPN television networks) and theme parks. Disney, which owns 43% of Infoseek, a Web-search service, is also making its presence felt on the Internet through its GO network. Analysts see long-term earnings growth of 15% a year.

GENERAL MOTORS

(GM, NYSE, $88). The inclusion of the world’s biggest automaker adds a more economically sensitive stock to this portfolio. But this isn’t a bet on U.S. car sales remaining vibrant. Rather, as analysts Rod Lache and Anthony Sterling of Deutsche Bank Securities put it, recent initiatives “represent some of the most profound changes at the company in nearly 75 years.” Managers now have more incentive to take risks, and compensation is more closely tied to achieving earnings targets. Also, an impressive line of new vehicles lies down the road.

INTEL

(INTC, Nasdaq, $57). The dominant supplier of microprocessors–the brains of personal computers–Intel should benefit from continued strong demand for PCs. Analysts see long-term profit growth of 20% per year. Growth this year is being fueled by the introduction of the Pentium III microprocessor, and a more advanced chip is slated for 2000. Intel recently announced a deal to buy Level One Communications, an indication, says BancBoston Robertson Stephens analyst Daniel Niles, that the company is intent on becoming a serious player in the market for communications chips.

MCI WORLDCOM

(WCOM, Nasdaq, $85). The combination of what were once considered two long distance upstarts, MCI and WorldCom, has created a formidable competitor to AT&T. Analysts say MCI WorldCom is positioned to cash in on the fastest-growing segments of the telecommunications business, namely Internet, data and international services. They see earnings more than doubling this year and climbing nearly 50% next year.

MEDTRONIC

(MDT, NYSE, $69). A leading medical-devices company, with a concentration in heart-related products, Medtronic is a “must-own” stock for growth investors, says PaineWebber analyst David Lothson. A flurry of recent acquisitions, particularly of Arterial Vascular Engineering, a leading maker of stents (used in angioplasty) and Sofamor Danek (a maker of devices used in spinal surgery), enhances prospects for long-term earnings growth of 19% a year.

MICROSOFT

(MSFT, Nasdaq, $87). Normally, we’d hesitate to include a stock selling at 63 times estimated 1999 profits in this portfolio. We make an exception for Microsoft because of its overwhelming dominance of personal-computer operating-system software and the nature of that business, from which Microsoft collects royalties for virtually every PC sold. Microsoft is also a formidable player in applications software and the Internet. Over the next few years, analysts see earnings growing 25% a year.

PFIZER

(PFE, NYSE, $127). The stock sells at more than 50 times estimated 1999 earnings, making Pfizer’s shares the most expensive among all the major drug companies. For that price, you get ownership of a research-and-development powerhouse with what most experts consider the best and broadest collection of present and future products in the industry. In addition to impotence drug Viagra, Pfizer also sells such blockbusters as Norvasc, Zithromax and Zoloft, and co-markets the hot-selling antiarthritis drug Celebrex. A 3-for-1 stock split is in the offing.

PROCTER & GAMBLE

(PG, NYSE, $98). This is the prototypical defensive investment, the kind of company that sells things people buy no matter what the economic environment. P&G owns a marvelous stable of well-known brand names-Tide, Pampers, Charmin and Folgers are just a few. Moreover, notes Dave Fowler, co-manager of Vanguard U.S. Growth, investors tend to forget about P&G’s $500-million-a-year-plus pharmaceuticals business. P&G has raised its dividend 45 years in a row.

SCHLUMBERGER

(SLB, NYSE, $61). As with General Motors, this leading oil-services company lends a different flavor to the portfolio because the share price tends to move with the price of oil. Oil prices have moved up recently, and Schlumberger–which, among other things, sells geophysical, testing and drill services–“is the leading company in the world at what it does,” says Salomon Smith Barney’s A. Marshall Acuff.

SONY

(SNE, NYSE, $100). Whether or not the recent revival of Japan’s stock market signifies the end of its decade-long slumber, an investment in this multinational entertainment-and-electronics giant can stand on its own merits. Morgan Stanley Dean Witter analyst Takatoshi Yamamoto says Sony’s “virtually unmatched brand name, global presence and wealth of digital technology,” along with its music and motion-picture divisions, make it a core holding. With the assistance of a restructuring program that includes layoffs, earnings should start to rebound in 2000.

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