So, What Stocks for 1997?

By JAMES F. PELTZ

Jan. 2, 1997 12 AM PT

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It’s one of the tougher calls in stock picking: With the whole market bobbing near its all-time high, how does one figure out which sectors to buy now?

The complicating factor, of course, is widespread investor fear that the market has climbed so high that it’s poised for a nasty fall. And that concern only grows as the bull market keeps extending its run.

The solution is to get defensive, analysts say. Choose sectors that should hold their value in case the economy, and the market, suddenly turn south.

Indeed, economic conditions--which were optimal in 1996 and contributed to the market’s record-setting advance--are expected to worsen a bit this year. Many forecasters see inflation and interest rates edging higher and corporate earnings growth slowing.

And even if there aren’t any “shocks” that jolt the market in 1997, assume that the aging bull simply won’t generate the same returns it chalked up in 1995 (34% for the Standard & Poor’s 500) and ’96 (20%).

“Expectations must be reduced,” A.G. Edwards & Sons Inc. advises in a new report, adding that it sees the S&P; 500 gaining between 8% and 10% this year.

“Optimistic, but vigilant, is the best way to describe our investment position as we enter 1997,” said Alan F. Skrainka, chief market analyst for Edward D. Jones & Co.

So which sectors best fit the “defense-is-a-good-offense” scenario this year?

Many analysts like the “non-cyclical” stocks, which is market jargon for those companies whose fortunes tend to be less affected than others by the ups and downs of the economy. Even if the economy stumbles, these firms tend to keep churning out steady, if moderate, earnings gains.

Examples: The beverage, drug, oil, natural gas, tobacco and life-insurance stocks. Shares of household-products makers, cosmetics companies and fast-food chains also fall into this category. So do computer services firms, which are increasingly being hired by companies and government agencies that are downsizing and cutting costs.

Analysts also recommend stocks carrying attractive dividend yields. Even if the stocks’ prices decline, their issuers are usually reluctant to cut their dividends--so that their investors are still protected with above-average yields.

This category includes electric utilities, banks and real estate investment trusts.

And within those lists, here are some analysts’ picks for 1997:

Beverages

Anheuser-Busch Cos. is a top choice for Donaldson, Lufkin & Jenrette Securities Corp., not only because the brewer is a classic defensive stock, but because the St. Louis-based giant has just finished a major restructuring of its operations.

The result is “favorable pricing, stronger barrel shipments and increasing market share” being combined with “aggressive cost-reduction and share repurchase programs,” the firm says.

Coca-Cola Co., meanwhile, is one of A.G. Edwards’ picks for 1997 because Coke likewise has a proven track record of steady growth, and because its aggressive marketing effort of late has resulted in rising sales volume.

Restaurants

Though fiercely competitive, this industry also provides potential gains even if the economy slows, according to DLJ analyst Janice Meyer. “Overall cost trends should not worsen, so [profit] margins can expand for those companies that can generate sales growth,” she said in a new report.

Two operators fit that bill, she says: Cracker Barrel Old Country Store Inc. and Wendy’s International. Cracker Barrel in particular “can sustain 15% to 20% growth” in annual sales over the next five years, Meyer said.

Meanwhile, Steven Rockwell of Alex. Brown & Sons is touting Anaheim-based CKE Restaurants Inc., which runs the Carl’s Jr. chain, on grounds that its earnings per share will grow at least 30% annually through a combination of internal growth and acquisitions.

Pharmaceuticals

Just as people have to keep eating and drinking no matter how lousy the economy gets, so do they get sick and need treatment. That’s why A.G. Edwards is recommending four drug stocks for the coming year: American Home Products, Pfizer, Schering-Plough and Abbott Laboratories.

To be sure, changing health-care trends are keeping pressure on these firms to limit their price hikes, which could curb earnings growth. But the trends are also fostering drug company mergers that provide investors with handsome profits.

Energy

Oil prices might decline from their currently lofty levels, but that’s unlikely to affect the prosperity being enjoyed by many oil-drilling and energy equipment concerns, whose products remain in short supply.

As a result, the stocks have room to climb further despite being one of the best-performing sectors in 1996. Among analysts’ choices for this year: Western Atlas Inc. and Reading & Bates Corp.

Computer Services

Even if economic growth tapers, “outsourcing” demand for computer specialists is expected to keep soaring. Companies and government agencies are increasingly hiring these firms to run their computer systems, lower their operating costs and keep them in step with rapidly changing technology.

Some of the recommended players are Computer Sciences Corp., Logicon Inc. and Automatic Data Processing, which has been branching out from its payroll-processing specialty.

And how’s this for defensive: ADP’s revenue and profit have risen for 141 consecutive quarters, or 35 years.

Steel

Here’s a sector for the contrarians. Steel tends to follow the economy’s cycles, so it’s hardly known as a defensive play. But steel shares were battered even as the economy grew nicely in 1996, and now they’re due for a rebound in 1997 even if the economic output slows, some analysts say.

Kenneth Hoffman of Prudential Securities recently recommended buying USX/U.S. Steel Group, LTV Corp. and AK Steel Holding Corp. All three produce sheet steel used in auto parts and appliances. In the “long-product” sector, which includes steel used in construction, Hoffman recommends only Commercial Metals Co.

Times staff writer James F. Peltz can be reached at [email protected]

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Industries on the Move

Best-and worst-performing industry groups in 1996 in the Standard & Poor’s 500-stock index:

BEST PERFORMERS

Oil and gas drilling: +103.91%

Shoes: +65.01%

Semiconductors: +55.40%

Personal loans: +49.92%

Computer software: +48.62%

Money center banks: +45.90%

Investment banking, brokerages: +44.74%