Give us your "Best Picks for '86," we asked a group of Washington area brokers, analysts and traders. They did, and here they are:
Patrick C. Ryan, chief trader at Johnston, Lemon & Co. is a specialist in the stocks of banks and savings and loans. For 1986, he likes Second National Building & Loan of Annapolis, now trading at $11.50 a share. Ryan believes it could go to $21 by the end of the year. His reasoning: Thrift industry stocks sell for six to seven times their yearly earnings. In a low-interest-rate climate, that could grow to eight times earnings. Second National is expected to earn $2.65 a share for 1986. Eight times $2.65 is $21.20.
Ryan's other pick is Washington Bancorporation, holding company for National Bank of Washington. The United Mine Workers recently sold its controlling interest to a group of senior managers and investors, which now owns 80 percent of the stock, leaving 20 percent for trading. The shares are at $74 and Ryan thinks they could rise to $110.
In an era when most Washington banks are involved in interstate mergers or being eyed as merger candidates, it is not unusual for banks to be acquired for at least twice the banks' book value per share. NBW's book value is about $60 a share, Ryan said, and twice book value would be $120. But at $74 a share, NBW shares are selling at only about 23 percent above book value. Even without any merger activity, Ryan said, the stock could be influenced by the merger scene and trade near a merger-type price.
May Graves O'Leary, analyst for Scott & Stringfellow in Richmond, chose two stocks she watches for her firm's Beltway Technology Index. One is Atlantic Research of Alexandria, whose share prices softened when Prudential-Bache analysts recently dropped their 1986 earnings estimate to $2.25 from $2.50 because of flat sales in the data-communications area and lower prospective Defense Department funding for research and development. O'Leary, however, doesn't think Atlantic Research's business is in any danger and believes the rocket maker's earnings will be strong. O'Leary estimates $2.30 a share for 1986. Atlantic Research sells at $24 a share.
O'Leary's other choice is Veridix, a Chantilly, Va., computer company whose specialty is the "Ada" language favored by the Defense Department. Verdix stock rose 206.8 percent in 1985 and is now at $5.13 a share. Verdix shares will continue to show strength, O'Leary said, because the "Ada" language market for Verdix products will grow.
Eliot H. Benson, research director at Ferris & Co., Washington, is also a strong supporter of Atlantic Research and he regards the recent slide in the stock price, from about $28 several weeks ago to $24 this week, as a buying opportunity. Because of the company's strong position in military and commercial markets, Benson believes the firm will make its goal of 20 percent annual growth in earnings and forsees a share price of about $30 within the coming year. Another Benson favorite is Merry-Go-Round Enterprises, a chain of clothing stores for young men and women. Merry-Go-Round earnings for the fiscal year ending Jan. 31 were $1.55 a share, and Benson expects earnings for the 1986 fiscal year to drop to about $1.35. But earnings will improve in 1987, he believes, to $1.60, thanks to an expansion program that could send the stock to the mid-$20s.
At Wachtel & Co., in Washington, where the traders invest in small companies with large potential, Bonnie Wachtel, vice president, likes Data Measurement Corp., of Gaithersburg, trading at $8.50. The firm manufactures computerized measurement systems for producers of metals, paper, plastic and rubber. Sales were up 25 percent in 1985 and Data Measurement's backlog, which stood at $2.7 million in March, has risen to $4 million. Wachtel said she believes the stock, on the basis of increased earnings, could appreciate 50 percent in the coming year and trade in a $15 to $20 range.
Wachtel also favors Industrial Training Corp. of Rockville, a company that specializes in video training films, especially for utilities. Trading at $6, ITC stock should appreciate as its earnings rise, Watchel believes.
John E. Montgomery, vice president of Tucker Anthony & R. L. Day, Inc. in Washington, is banking on Allied Capital Corp. of Washington, a venture-capital firm that invests in young, fast-growing companies. Allied shares are selling at $22.25, about where they have been for two years, but Montgomery thinks they will move into the upper $20s, perhaps as high as $29. His thought: Allied has interests in a variety of small companies that haven't yet participated in the new bull market -- but will benefit as the rally spreads to secondary issues. He also looks for improved earnings performance by Allied.
Montgomery also is taking a flier on USAir Group, which he thinks is well-managed, has a strong balance sheet, up-to-date fleet and a firm position in the Pittsburgh hub. He doesn't think USAir will get hurt in the current fare wars and if there is consolidation in the airline industry, he said, USAir could wind up as an acquirer. Selling at $35.50, the stock will go back to the high $30s or low $40s, Montgomery predicted.
Leslie J. Silverstone, manager of one of Dean Witter's Washington offices, said his firm has recommended MCI Communications, citing its "long-term appeal." MCI closed Friday at $11. "By 1987," the Dean Witter report states, "MCI should start to reap the benefits of a massive capital spending program that will have built the second-largest communications network in the United States." The report also says "the potential for market share gains is provided by MCI's partnership with IBM to market products and services to large business customers."
Reina M. DuVal, a broker with Thomson McKinnon in Washington, favors Washington Real Estate Investment Trust (WRIT) of Bethesda for steady growth and improving dividends. "It's a nice consistent company and it won't give you a whole lot of heartburn," she said. WRIT sells at $18.88 and yields 6.8 percent. WRIT has shopping centers, apartment houses and office buildings.
Billy N. Joyner, portfolio manager for the Growth Fund of Washington, likes PHH Group of Hunt Valley, Md., a firm that serves corporations by managing their fleets of cars, helping relocate their employes and flying their executives' planes. Joyner says that he expects PHH, selling at $38.63, to improve its earnings by at least 15 percent next year and to benefit from expanded business with the federal government.
Charles T. Akre Jr., research director of Johnston, Lemon & Co., favors Kay Jewelers of Alexandria, whose stock was sold to the public last May at $11.50 a share and recently moved up over $14 on heavy volume, closing Friday at $16.50. The company expects 1985 profits to be up over 1984. Akre said the company would earn $1.35 a share for 1985 and $1.65 a share for 1986, a 22 percent growth in earnings. At 12 times earnings, Akre thinks Kay Jewelers could be a $20 stock. Akre also thinks one of his favorite stocks, Geico Corp., continues to be attractive. At $86.50, Geico is selling at a price 20 times earnings. Although Geico earnings flattened recently because of competition and higher-than expected claims, rate increases are expected to help the bottom line. Akre anticipates strong earnings growth in 1986 and 1987. Geico's per share earnings also are being helped by the company's program to buy back about 3 million of its own shares.
Joseph A. Clorety II, portfolio manager for the Washington Area Growth Fund, remains bullish on Fannie Mae (Federal National Mortgage Association), which forms a secondary market for residential mortgages by buying loans from primary lenders such as thrift institutions. Fannie Mae shares are trading at $25.13. Fannie Mae, Clorety said, is no longer just a proxy for the interest-rate scenario. The company, which was in the red last year, has done much to cure mismatches between the maturities of its assets and liabilities, has boosted fee income and has hedged its investments. In a couple years, Clorety believes, Fannie Mae could earn $7 or $8 a share.