Your Final Answer on the Biggest Stocks? Let's Poll the Fund Manager Audience

In a way, one of the best investment lessons of 2000 comes from the world of Regis Philbin.

A while back, James Surowiecki said in the New Yorker that the slack-jawed audience of Who Wants to be a Millionaire? comes up with the right answer more often than the moms, dads and drinking buddies the contestants call. Now, picture yourself in the hot seat, but instead of naming the author of Gone With the Wind, you're question is: What's the prognosis for the stocks you own? And to get the best answer, instead of hearing from just one fund manager, you should poll an audience comprised of every growth fund manager in the country.

Let's do that.

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We're going to check out which of the 20 most widely held large-cap stocks in Merrill Lynch accounts have been gaining and losing favor among large-cap growth fund managers. This list includes Cisco Systems(CSCO), Microsoft(MSFT), AT&T(T), Johnson & Johnson(JNJ) and General Electric(GE). (Click here to check out this roster and how they've fared over the past year.)

After a lousy year, 15 of these stocks are in the red and 13 have been losing fans among the growth-fund pros. Here's why we care what these folks -- the "smart money"-- think: Growth managers' paychecks are tied to their quarterly and annual returns, so typically they don't bother hanging onto a stock if they don't think it's going to go up. Since these stocks are also in the S&P 500, a benchmark for many big-cap growth funds, not owning them can be a significant bet against a fund's benchmark.

The upshot: If you own a stock and growth fund managers are piling out of it, you might want to make sure the reasons you bought in the first place still hold true.

Another reason these folks' tastes matter is that they manage $439 billion -- more than any other stock fund category. When they pile into a stock they can boost its share price in a big way, but they can do the opposite when they pile out.

All right, let's see what they like and what they're less thrilled about, starting with individual investors favorite tech stocks.

After a year when the tech-laden Nasdaq Composite Index lost nearly 40% and these nine tech stocks fell more than 20%, on average, you might have expected slipping fund ownership across the board. But that's not the case.

Instead, it seems we're seeing more evidence of growth managers moving away from old tech companies that rely on maturing PC sales and toward new tech companies that rely on growing use of the Internet.

For example, the percentage of growth funds owning shares of old tech shops like IBM(IBM) and Microsoft dropped sharply. The percentage of funds owning shares of chip titan Intel(INTC) fell as well. In looking for stocks of companies with rosier prospects, disinterested pros might have helped each of these stocks finish the year in the red.

On the other hand, more growth funds built positions in new tech shops like data storage concern EMC(EMC), server king Sun Microsystems(SUNW) and database software writer Oracle(ORCL). Given that the percentage of growth funds owning shares of Oracle about doubled last year, maybe it's no surprise that the stock managed to gain more than 20% over the past year.

Networking giant Cisco Systems' modest dip appears negligible since it's still in more than eight out of 10 growth funds. The same probably can't be said for fellow new tech shops like networking gear maker Lucent Technologies (LU) and Net/media concern America Online(AOL). (Lucent? New tech? OK, its incessant bumbling may show its AT&T DNA, but it at least straddles the new tech/old tech line.)

In Lucent's case, no doubt managers are rankled by the firm's seemingly endless string of disappointing earnings results. It's hard to imagine the firm's fleeting following among fund managers and its stocks' 64% drop over the past year are unrelated.

As for AOL, it's reasonable to figure some fund managers didn't want to hold the stock while regulators picked over its merger with Time Warner(TWX). Some also might wonder if AOL, down more than 22% over the past year, merits a hefty valuation after the merger. For comparison, the percentage of big-cap growth funds owning Time Warner dipped from about 48% at the start of last year to some 40% at the start of this year.

After a brutal year for telecom stocks, the average communications fund lost more than 30% in 2000, it's not too surprising that growth funds ramped down their exposure to most of these stocks.

You'd probably be hard-pressed to find a growth manager who's excited about AT&T, which lost more than half its value last year. The company has seen its core long-distance telephone business sag, but hasn't become enough of a player in higher growth areas, leading many growth fund managers to pull up stakes.

SBC Communications(SBC), up 20.5% over the past year, and Verizon Communications(VZ), down 4.5% over the past year, both lost ground in big-cap growth funds in 2000. The most intriguing development might be growth managers' support for Finnish wireless shop Nokia(NOK). Janus managers love this company which helped its stock gain more than 200% gains in 1998 and 1999. Growth concerns hurt the stock last year, when it lost 8.7%, but more funds bought shares. That implies a bullish outlook and might buoy your spirits a bit if you're holding shares.

Investors' three favorite health care stocks all finished last year in the black, but it looks like growth managers might have seen some trouble on the horizon.

The percentage of growth funds owning shares of Johnson & Johnson(JNJ) and Merck(MRK) dipped sharply last year, though health care was far and away the market's leader. In both cases the stocks went from being in about half of all big-cap growth funds to less than 40%.

On the other hand, more funds bought shares of Pfizer(PFE), which recently completed its merger with fellow pharmaceutical giant Warner-Lambert. This would appear to be a sign that growth managers like the maker of Viagra best among this trio of giants. All three of these stocks are down more than 10% so far this year.

All four of these faves are down over the past 12 months, but they're hardly in the same boat.

All year spiteful growth managers bemoaned their colleagues' spineless move into the generally sleepy energy sector as commodity prices rocketed up. But it looks like the percentage of growth funds holding bellwether energy titan ExxonMobil(XOM) barely budged and stayed below 20%.

Many managers also dumped their stakes in sagging retailers Home Depot(HD) and Wal-Mart(WMT), down 25% and 16.5% over the past 12 months. That said, it might not be surprising if some are buying again because retailers often get a boost from falling interest rates, which free up more cash for consumers to spend.

And if you're wondering if it's worth it to hang on to those shares of General Electric, it looks like many growth managers still see it as a core holding. The stock is down a little less than 7% over the past year, but chief executive Jack Welch is hanging around a little longer as the company swallows Honeywell. Other companies in the same situation might see some skittishness among the pros, but fund managers are famous for saying, "You won't get fired for owning GE," and they're hanging on.

If you're holding shares, it might be smart for you to follow suit.

The Junk Pile

Last Friday, we walked through the dangerous game of picking through last year's battered sectors to find this year's winners. The bottom line was that it doesn't work, but we noted that Morningstar's approach -- highlighting fund categories that got the lowest net in-flows -- has often uncovered fund categories that beat the average stock fund over the next three years. Today, the Chicago fund-tracker announced last year's least loved categories were all different flavors of Asia funds.

As we said a week ago, this approach may work or it may not. Either way, it rarely unearths a category worthy of more than 5% of your portfolio.

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