The median estimated three-to-five-year appreciation potential of the stock market is at an all-time low of 30 percent, according to Value Line Mutual Fund Survey (220 E. 42nd St., New York, NY 10017-5891). Historically, Value Line projections have been extremely accurate, if you subtract about 60 percent. That means that stocks have a good chance of being 30 percent lower three to five years from now.
- Warburg Pincus Emerging Growth Fund concentrates on two specific stock-picking criteria. It likes companies that generate strong cash flow. And it prefers managements that hold a big stake in their stock. Over the past three years it's found enough equities that combine both characteristics to have generated 27.1 percent average annual returns. Recent favorite stocks: PeopleSoft, Robert Half International, Transactions Systems Architects, Outdoor Systems, Herman Miller, Allmerica Financial.- Higher consumer confidence and rising wages have combined with falling interest rates and cheaper building-materials costs to produce one of the best housing markets in years, observes Personal Finance newsletter (P.O. Box 3808, McLean, VA 22103; 800-832-2330). "It has also led to rising product demand and improving profit margins for building stocks. Yet many such stocks still sell at 50 percent discounts to the general market. Our favorites: American Woodmark (home furnishings), Crossman Communities (entry-level, single-family housing in the Midwest), Toll Brothers (the leading big-ticket U.S. home-builder)."
- Rising labor costs and competition from cheap Asian imports could pinch U.S profit margins later this year. But Standard & Poor's Outlook (25 Broadway, New York, NY 10004) recently found a dozen publicly traded companies whose margins it expects to widen due to lower costs, restructuring, refocusing on more profitable businesses or pricing power. All 12 carry The Outlook's highest five-star rating for safety and performance: AccuStaff, Alcatel Alsthom, Armco, ECI Telecom, EMC, Health Management Associates, Office Max, Owens-Illinois, Proffitt's, Quorum Health Group, Staples, Yellow Freight.
- By stuffing their portfolios with floating-rate corporate loans, prime-rate funds avoid the interest-rate volatility of conventional bond funds while producing yields of 6 percent to 8 percent. Despite some credit risk and high expenses, prime-rate funds are like "turbo-charged money-market funds," says Morningstar Mutuals (225 W. Wacker Drive, Chicago, IL 60606). Of the handful of prime-rate funds available, only closed-end Pilgrim America Prime Rate (14.4 percent average annual three-year return) is publicly traded.
- Mid-cap stocks have more stability than smaller growth stocks. They also have more room to grow than larger blue chips. United & Babson Investment Report (101 Prescott St., Wellesley Hills, MA 02181) recently recommended six mid-cap mutual funds with above-average performance and below-average expenses: T. Rowe Price New America (30.6 percent average annual three-year gain), Neuberger & Berman Partners (30.0 percent), Vanguard Primecap (28.7 percent), Fidelity Contrafund (27.9 percent), Oakmark (26.9 percent), American Century Equity-Income (25.0 percent).
- Most overseas stock markets are now better values than the U.S. market. However, many are thin and even illiquid. This would be a big problem in a bear market, according to Dow Theory Letters (Box 1759, La Jolla, CA 92308). "If the U.S. market turns down, we believe all the world's markets will turn down. We'll get a sad lesson only hinted at by the recent Asian crisis. It will be called: `What Happens to Illiquid Markets When the Going Gets Tough.' "