When we last saw Don Hays in the fall, the stock market was suffering from a split personality. The big, well-known stocks were doing fine. The smaller, emerging growth stocks were sinking out of sight. Analysts talked darkly about the market's "bad breadth," their quaint way of saying blue-chips were outrunning smaller stocks.
Despite rampant pessimism on Wall Street at the time, Hays was bullish. It was not the first time that the top market strategist for Wheat, First Securities in Richmond had gone against the crowd.
During October, Hays wrote, "We expect a resumption of the mighty bull market." And in November, he added, "The potential buying power for stocks is huge." Finally, as 1987 dawned, Hays urged investors to take advantage of "this opportunity of a lifetime."
Shortly thereafter, the stock market took off and ran up astonishing gains. In the high-risk business of market forecasting, Hays had taken a stand and had been proven right.
We saw Don Hays again last week and we can report that he is more bullish than ever. In fact, he has dubbed 1987 the "Feel Good Year" and has developed what he calls "The Feel Good Stock Market Accelerator," a chart that explains a happy sequence of events Hays believes will drive the market still higher.
As Hays describes the "accelerator," there will be a shift in the trade balance that will cause a sharp increase in corporate earnings. That, in turn, will increase federal tax receipts and result in an unexpected improvement in the budget deficit. And that will be followed by currency stabilization and a rising market.
Hays, who has a vast collection of statistics to support his views, predicts that typical stock prices will be 25 to 30 percent higher by the end of the year. "There will be another rally that will be just as dynamic as the one we saw in the first quarter," he said.
Hays' ideas rest on the belief that inflation is well under control because, among other reasons, wage increases continue to be moderate. He expects interest rates to be fairly static, staying in the 7 percent to 9 percent range for the next 12 to 24 months.
Despite his faith in the long-term bull market scenario, Hays admitted that he did bend briefly to market worries about the economy recently by "pruning" his portfolios. That meant selling some stocks he wanted to get rid of and going up to 20 percent cash. But the cautious period won't last long, and he will be fully invested again within a few days, he predicted.
Hays acknowledges that his whole scenario could be derailed if the Federal Reserve were to tighten the money supply to the point of killing the U.S. economic recovery. But he sees no chance of that happening, he said.
Does Hays worry about being so bullish when so many of his colleagues are so fretful?
"Well, you worry all the time," mused the 47-year-old former engineer. "But I've been in the fire for a pretty good while now."
The winners for the first half of 1987 are official. Here's how the 10 top gainers finished:
A.H. Robins of Richmond. Up 253.8 percent. A drug manufacturer, Robins saw its stock drop 31 percent in 1986 when the firm sought protection in bankruptcy from Dalkon Shield claimants. Robins' stock opened the year at $7.88 and jumped when the firm became the object of merger talks. Although the fate of the Dalkon Shield litigants remains unresolved, Robins stock has continued to move higher, closing the first half at $27.88. Entre Computer Centers of Vienna. Up 139.5 percent. Caught in the computer retailing shakeout, Entre stock fell sharply in 1985 and 1986. Entre began the year at $2.56 and ended the first half at $6.13. Analysts attribute the turnaround to new management and improved industry conditions. QuesTech of McLean. Up 123.8 percent. A high-tech company that specializes in electronic warfare, QuesTech has a new management team that is trying to improve the company's profit levels. Questech opened the year at $5.25 and closed the first half at $11.75. Biotech Research Laboratories of Rockville. Up 106.6 percent. BRL shares have doubled on the strength of interest in AIDS-related products. BRL produces antibody screening tests for blood banks and has won two Army research contracts. BRL shares opened at $5.75 and closed the half at $11.88. Versar Inc. of Springfield. Up 95.3 percent. Versar is in the environmental cleanup business and benefits from increased government spending in this field. Versar opened the year at $8.13 and ended the half at $15.88. Danaher Corp. of Washington. Up 90.8 percent. Danaher is owned by brothers Steven and Mitchell Rales of Washington, who specialize in acquiring and reorganizing industrial companies. Danaher stock opened the year at $12.38 and closed the first half at $23.63. Avemco Corp. of Frederick, Md. Up 90.4 percent. A general aviation insurer, Avemco recently was licensed in Canada and has begun to write marine insurance. The stock was strong in 1985 but flat in 1986. Avemco opened the year at $13.13, adjusted for a 2-for-1 split, and closed the half at $25. Reynolds Metals Co. of Richmond. Up 89.4 percent. Rising demand for aluminum and cost reductions helped Reynolds post higher profits. Reynolds opened at $40 and has seen its stock move to $75.75 in the second half. American Management Systems of Arlington. Up 84.4 percent. AMS installs and operates computer software systems for clients in business and government. Its stock was a strong performer in 1985 and in 1986. So far this year, the stock has moved from $9.63, adjusted for a 2-for-1 split, to $17.75. Media General of Richmond. Up 82.9 percent. Stocks in the media field have been hot as profits rise and as investors move to sectors with improving prospects. Media General opened at $21.25, adjusted for a 2-for-1 split, and closed the half at $38.88. Fairfield Homes of Woodbridge, Va., headed by John V. Neill Jr., had planned to change its status from that of a corporation to a master limited partnership (MLP) and to sell 2.5 million units at $10 to $12 each. But after Fairfield filed its plan with the SEC, the company and its underwriters began to have second thoughts.
For one thing, interest in homebuilding stocks has softened considerably because of the upward movement in interest rates, said Wayne R. Janzik, Fairfield's treasurer. For another thing, Congress has been holding hearings on the question of whether master limited partnerships should be taxed as corporations. Currently, the MLPs do not have to pay federal taxes if they distribute most of their income to unitholders.
However, the activity on the Hill has made the underwriters -- Wheat, First Securities and Tucker Anthony & R.L. Day -- wary of taking the Fairfield deal to market at this time. Eventually, the deal could be postponed or turned into a straight common stock offering.
Dominion Federal Savings & Loan Association of McLean, one of the area's most aggressive thrift institutions, is planning to make an acquisition in Maryland, President William L. Walde told members of Washington's investment community last week.
Dominion currently is expanding its operations in Florida where it has four loan processing offices. Dominion's purchase of Bayside Federal Savings & Loan in Port Charlotte for $1.5 million will allow Dominion to take deposits throughout Florida. When the Florida endeavor is complete, Walde said, he expects to move onto Maryland, where he already has six loan offices.
Dominion, which has assets of $1.7 billion, is the thrift that got caught in 1985 with millions of dollars of residential mortgage loans purchased from EPIC, a local real estate and mortgage company. The episode continues to depress Dominion's stock, selling for $14.75. Walde owns a big chunk of the thinly traded stock. But Dominion is expected to seek new financing soon by selling additional shares. Such a sale would widen the market for the stock. But it may have to wait until the climate for financial stocks improves.