Investing: 1st National Out Front and Bullish in 1976

Conventional wisdom suggests that the best bank money managers in America are New York-based bankers handling the giant pension funds. But if a Pension & Investments Magazine survey is correct, then a handful of banks in the hinterlands is doing far better than the New York banks, and one of the best track records belongs to First National Bank in Dallas.

The survey reveals that among 68 major United States banks, First in Dallas rates sixth best in common stock investment performance during the five years, ending March 31, 1976. First’s performance outdistanced such New York giants as Morgan Trust (24th), Citibank (36th), Manufacturers Hanover (50th) and the nation’s largest bank, California’s Bank of America (53rd).

President of First National’s investment advisory arm, First International Investment Management, is Dan Forrestal. Forrestal sat down recently to talk about what his analysts see ahead, which is a strong stock market for at least 18 months, and continued economic rebound, barring a resurgence of inflation. Forrestal says he expects a 25 to 30 percent increase in corporate earnings this year, and an additional 10 to 15 percent increase in 1977. Dividends should be up dramatically, he says, covered by some very high quality earnings, much better than those of the past couple of years, which were accelerated artificially by inflation and inventory profits.

Forrestal is particularly bullish on several groups of stocks, especially the basics. “Steels, chemicals and aluminums continue to look good,” he said. “Their sales should improve with the capital expansion which is currently underway, and their profit margins should improve with some price increases. I’d add office equipment manufacturers to that group for the same reasons.” His other favorites include:

Retailing-“I think the second echelon of retailers, just behind the big three (Sears, J.C. Penney and Kresge) looks particularly good right now. Earnings may be flat for the next couple of quarters, but the market probably has already reacted to that. We’re thinking about taking a more aggressive stance in this area.”

Banking-“We’re quite positive here. I think the worst loan losses are past and by year end loan demand will be up. Two of our favorites are Citicorp and Northwest Bancorp.” (First International can’t buy its own stock.)

Insurance-“Like the banks, I think the worst is over for this industry. Insurance issues could move up.”

Aerospace-“We’re bullish, with defense spending up and also the possibility of a new round of commercial aircraft orders.”

Energy-“We’re neutral on the big international oil companies, but there may be some value left in the small producers, especially in natural gas, because the political climate is turning toward deregulating the price of interstate gas. We’re also fairly positive about some of the contract drillers, such as SEDCO.”

Autos-“We’re bullish here, even when many people aren’t. The 1977 model year looks very good, and there could be some hefty dividend increases at General Motors and Ford.”

Utilities-“We look to buy selectively. The best buys are in the utility companies which are just beginning to enjoy favorable regulatory climates. As a whole, the utilities are not as attractive as some other groups.”

Airlines-“With the economic rebound and increased air travel, I personally like this group, but most of them don’t meet certain criteria we need before buying them for trust accounts>”

First International’s investment policy must be rather conservative, For-restal says, because his group is advising First National Bank’s pension fund accounts, and also its individual trust accounts ($50,000 + ), which are managed much the same as the pension funds. “We won’t buy a common stock unless we anticipate that it will bring a return at least three percentage points better than corporate bonds. It’s just not worth the risk.”

Forrestal talked a while about changes in investors’ philosophy, and said he thinks there will be a marked shift toward buyer awareness of what a company is really worth, instead of merely how much money it is making in a given quarter. “With a change in accounting practices to report the replacement costs of buildings, inventory and so forth, I think investors will begin to see the advantage of buying on fundamentals. Obviously it’s a lot cheaper to buy an existing plant than to build a new one. I think we’ll see more corporations looking for a chance to acquire new assets by acquiring the common stock of another corporation, which is selling well below book value. In the last year we’ve seen how well investors have done in natural gas stocks, when high-priced tender offers came out for stocks like Aztec Oil & Gas. I think in the next few years we’re going to see much more of this kind of action.”

The key to First International’s success over the last five years was its adroit recognition of the coming bear market of 1973-74, and quick alteration of its portfolios from 80 percent stock and 20 percent bonds, to 40 percent stock, 40 percent bonds and 20 percent cash. Thus First International’s portfolios didn’t suffer the tremendous paper losses which dampened the five-year performances of most bank-managed accounts. Perhaps the point is underscored best by the Pension & Investments survey, which reports that during the last five years, only 12 of 68 surveyed banks beat the Standard & Poor’s 500 Average.


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