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Market in for a correction, investment chief says

A question-and-answer session with Kenneth Corba

Kenneth W. Corba is the new chief investment officer of Eagle Asset Management Inc., a subsidiary of Raymond James Financial Inc. that manages $1.7-billion for clients. He came to St. Petersburg from Chicago, where he managed two mutual funds for Stein Roe & Farnham _ the Growth Stock Fund and the Young Investor Fund. Corba chatted with Times reporter Helen Huntley about the stock market.

Q Do you think the market is still healthy, or is it getting a little dangerous because it has moved so far so fast?

A The market is clearly due for a correction. It probably would be healthy to have a 5 to 10 percent correction because it's really been a steady, inexorable rise since the beginning of February.

I'm not concerned that the market is overvalued. I think the market is appropriately valued. The P-E (price-earnings) multiple, which is the basic measure of valuation for the stock market, long term ranges between 12 and 18. Today on '96 earnings, it's about 15.

I certainly don't think we're headed for a 1987 kind of huge correction. I remember in 1987, the first nine months of that year my portfolios were up about 30 percent, and that was after two great years. This year an average equity portfolio is up 12 to 15 percent after two poor years.

We have nowhere near the sense of euphoria we had in 1987. There is a tremendous amount of skepticism and caution. A lot of investors are still on the sidelines saying, "I hope we get a correction so that I can get invested." That's a classic kind of environment in which the stock market goes up. I'm pretty constructive and positive on the market for the rest of the year.

Q But what about the low dividend yield on stocks?

A I think the dividend yield has become increasingly less relevant because corporate dividend policies have changed. Ten to 15 years ago, if a company was flush, it raised the dividend. Today, if a company is flush, it buys back stock.

Q Doesn't the slowing of the economy represent a threat to earnings and therefore to the P-E?

A For the kinds of companies that I invest in, a slower economy is better. I invest in stable, consistent growth companies, such as Coca-Cola, which is growing at 18 percent. It really doesn't matter if we head into a recession. People will still drink Coca-Cola. Companies that are really impacted are Chrysler and Ford, the chemicals, the cyclical companies that are very dependent on the economy. They will tend to lose market value.

I don't want to see a recession, but I'd like to see low interest rates, low inflationary fears. A mildly slowing, soft-landing kind of economy is perfect for me.

The other thing I'm looking for and I'd be very excited about is if we could get a capital gains tax reduction out of Congress. That would be very positive for the stock market.

Q Can the market go any further without a cut in interest rates?

A The stock market is very interest-rate sensitive. To a great extent this rally has been driven by lower interest rates. If the Federal Reserve started tightening again, that would certainly give me pause, but the dialogue has totally shifted. For 15 months, the dialogue was "When are they going to tighten? How much are they going to tighten?" Now it's "Are they going to loosen or are they going to leave it the way that it is?" That's a huge rhetorical shift.

But personally, the way I invest money, I try not to pay too much attention to politics, to the economy, to the Federal Reserve, to Alan Greenspan. I believe that with great companies that have good businesses with good earnings prospects, with sustainable competitive advantages, you'll make money over time, and all the rest is noise.

Q Do you stay fully invested all the time?

A Yes. The money clients give me is for growth equities, and it's to be fully invested. If they want to be in cash, they put that money somewhere else.

Q What kind of good companies are you buying into now? Are there any sectors that you consider more attractive?

A There are two that I'd make note of. One is what I call multinational U.S. companies creating a domestic global portfolio _ Coca-Cola, Procter & Gamble, Gillette, Motorola, Microsoft, AT&T, McDonald's. These kinds of companies have great international franchises and are not totally dependent on the United States and our economy.

The second area I focus on is telecommunications _ Motorola, Ericsson, Nokia, AT&T, Microsoft. These are great companies with very fast growth rates as the whole world builds out communications networks.

Q Fast-growth stocks are the most susceptible to earnings disappointments. How do you handle those? Are you one of those people who sells everything as soon as a company announces that earnings will be a penny below expectations?

A No, but I sure do prefer when they are a penny above. I don't have a real trigger finger, but I do ask myself, "Is there something fundamentally changing?"

Home Depot came in 3 cents light (on quarterly earnings), and I still own it. I think fundamentally they're a great company. However, you can get a company like Waste Management, which for many years was a great growth company _ until there was a fundamental change in the profitability of their business. We try to avoid that.

Q Do you ever buy stocks when they go down on bad news?

A As a growth manager, I tend to buy stocks that are acting relatively well. If I know a stock very well and it has a momentary glitch, I might buy it. For instance, I'd love to get a little bad news on Microsoft so it would come back and I could buy it. It's run away from me. But a lot of times, bad news is like the cockroach theory. You see one, and you know there's a million others.

Q Do you think the market is still a place for individual investors to be buying stocks, or do you think it has become such an institutional market that the individual should stay out?

A I think the individual can do very well, relative to the institutions, if they buy about 10 stocks and keep a couple of things in mind: Don't make it too complicated, and buy good companies and hold them. Then all the odds are in their favor that they'll be successful.

It's the fast turnover, buying "whisper" stocks and buying concepts that hurt individuals. Just buy good companies, companies you've heard of, companies you feel good about. A lot of it is common sense. People sometimes think you have to have all the bells and whistles, all the computers and trading floors and everything. Buy good companies, stick with it and you'll make money.