The Outside Portfolio
Stocks

By Nelson D. Schwartz

THE OUTSIDE PORTFOLIO:
When the Giant Sequoia Talks, People Listen
Stocks
Mutual Funds

It's a mantra among the pros, and it should be yours too: diversification. While all the companies highlighted here obviously share at least one characteristic — concern for the world around us — they've been carefully chosen to provide a portfolio with a broad range of businesses, from recycling and outdoor equipage to retailing, technology, and health care. Of course, the selections do have another key commonality: Each should return 15 to 40 percent on your investment over the next 12 to 18 months.

CARAUSTAR INDUSTRIES
(Ticker Symbol: CSAR)
CURRENT PRICE: $345/8*
P-E RATIO: 15
GROWTH RATE: 15 percent
DIVIDEND YIELD: 1.8 percent
EQUITY TYPE: Small Cap
TARGET PRICE: $40
Ever feel like you ought to be paid for schlepping that gut-buster Sunday Times off to the recycling center? Well, perhaps that's reason enough to own Caraustar. CSAR is a dominant player in the market for postconsumer paper, a lovely phrase that translates as turning your smudgy throwaways into paperboard for new houses and cartons for packaged food (without, needless to say, the addition of chlorine). And Caraustar is as stalwart financially as it is environmentally, generating 15 to 20 percent earnings growth per year while following a deliberate acquisition strategy, buying up smaller competitors to consolidate what historically has been a fragmented — and none too profitable — industry.

HEWLETT-PACKARD (HWP)
CURRENT PRICE: $621/2
P-E RATIO: 16
GROWTH RATE: 18 percent
DIVIDEND YIELD: 0.9 percent
EQUITY TYPE: Large Cap
TARGET PRICE: $70
Granted, Hewlett-Packard might seem like an odd choice for outdoor-oriented investors, but since every portfolio should have a good tech stock, you might as well go with a company whose vision extends beyond fingernail-size circuitry. Indeed, with little fanfare, HP has donated $4 million to U.S. environmental causes since 1991 and keeps three million pounds of recyclables out of landfills each month — perhaps not surprising, given that company founder William Hewlett, a lifelong skier and mountaineer, has made the quashing of development around Lake Tahoe his personal crusade. Thankfully, such no-return-on-investment outlays aren't likely to slow the rise of HP shares: Profits should jump nearly 20 percent in 1998, making this stock one of the few remaining tech-sector bargains.

AIR PRODUCTS & CHEMICALS (APD)
CURRENT PRICE: $847/8
P-E RATIO: 18
GROWTH RATE: 12 percent
DIVIDEND YIELD: 1.6 percent
EQUITY TYPE: Large Cap
TARGET PRICE: $100
You heard it here first: Industrial gas and sludge treatment isn't a sexy business. What it is is a growth industry. For instance, APD's sales of hydrogen, used by oil refiners to produce cleaner-burning fuels, are increasing at a 20-plus percent annual clip. As long as government regulation continues to force pollution-intensive industries to clean up their acts, holders of APD stock should reap the rewards.

THE NORTH FACE (TNFI)
CURRENT PRICE: $261/2
P-E RATIO: 22
GROWTH RATE: 25 percent
DIVIDEND YIELD: None
EQUITY TYPE: Small Cap
TARGET PRICE: $37
Shares of The North Face have been booming following a great Christmas season and should keep climbing thanks to a powerful combination of new products, strong sales, and smart management. In 1997, earnings jumped more than 50 percent — boosted, no doubt, by a burgeoning popularity among teenage urbanites who don't know the Eiger from a hot fudge sundae. This year looks just as plummy, as sales of TNF's new high-end Tekware line are on a tear. Finally, The North Face is becoming nearly as de rigueur on Wall Street as it is on the Karakoram Highway, which should help cushion the stock from any unforeseen earnings weakness.

U.S. FILTER (USF)
CURRENT PRICE: $321/2
P-E RATIO: 24
GROWTH RATE: 30 percent
DIVIDEND YIELD: None
EQUITY TYPE: Mid Cap
TARGET PRICE: $45
"We're not just filtration anymore!" USF has boldly declared, bringing one-stop shopping to the clean-water business through a series of timely acquisitions. Now selling everything from wastewater treatment equipment to bottled H2O, USF's sales have grown, in just the last five years, from $27 million to upward of $5 billion. And the end is nowhere in sight: As the world's emerging nations look to disavow their we-wash-in-it, we-bathe-in-it, and-we-drink-it-too ways, USF's business should keep on chugging, with earnings estimated to grow another 60 percent in 1998 alone.

MERCK & CO. (MRK)
CURRENT PRICE: $1171/2
P-E RATIO: 26
GROWTH RATE: 16 percent
DIVIDEND YIELD: 1.5 percent
EQUITY TYPE: Large Cap
TARGET PRICE: $140
While drugmakers aren't usually thought of as model corporate citizens, market insiders have long dubbed the nation's largest "Saint Merck." The company is working diligently to protect large swaths of Costa Rican rainforest — though it's certainly motivated as much by the potential for future drug discoveries as it is by any regard for furry woodland creatures — and even gives away Mectizan, its drug for river blindness, to underfunded hospitals throughout Africa. Of course, Wall Street being Wall Street, Merck's sanctification may simply be the result of its many years of too-good-to-be-true profit growth. With a pipeline full of promising drugs to treat problems ranging from baldness to arthritis to migraines, there's no reason this winning streak shouldn't continue.

THERMO ECOTEK (TCK)
CURRENT PRICE: $191/4
P-E RATIO: 17
GROWTH RATE: 20 percent
DIVIDEND YIELD: None
EQUITY TYPE: Small Cap
TARGET PRICE: $23
You'd be hard pressed to find a purer green play than Thermo Ecotek. Its seven "biomass" power plants, located in California and New England, generate nearly three million kilowatt-hours of electricity a day by composting wood and other agricultural refuse — thus sparing 750,000 tons of fossil fuel each year. TCK is also developing new technology, due this spring, which will allow utilities to burn coal more cleanly, bringing once-billowing smokestacks into compliance with the Clean Air Act. And not content to merely scrub our skies, Thermo Ecotek has recently branched out into environment-friendly pesticides, using compounds that not only fight crop-munching bugs with naturally occurring (and ostensibly safe-to-humans) bacteria and viruses, but that are projected to add up to 20 percent per year to the company's bottom line.

ORBITAL SCIENCES CORP. (ORBI)
CURRENT PRICE: $333/4
P-E RATIO: 45
GROWTH RATE: 25 percent
DIVIDEND YIELD: None
EQUITY TYPE: Mid Cap
TARGET PRICE: $45
The world's leading manufacturer of handheld GPS systems, Orbital is most widely known, through its Magellan brand, for helping us to navigate the backcountry. But it's also seeking to ensure that there will always be backcountry to navigate, using its satellite-imaging data to track environmental trends like rainforest destruction and global warming. Now Orbital is launching dozens of small satellites to create a low-earth-orbit communications network — a business that carries the promise of explosive growth, which could make it a big winner in the years to come.

WILD OATS (OATS)
CURRENT PRICE: $335/8
P-E RATIO: 36
GROWTH RATE: 35 percent
DIVIDEND YIELD: None
EQUITY TYPE: Small Cap
TARGET PRICE: $40
As anyone who's stopped in for some lentil-curry couscous and a quickie chair massage knows, natural-food stores have come a long way from their Birkenstocks-and-ponytails roots. Near the top of this upscale heap is Wild Oats, a Boulder-based chain that's been helped mightily by the niche's rather obscene profit margins ($3.29 a pound for organic bell peppers?). Oddly, many of us don't seem to mind: Profits at Wild Oats should jump 40 percent in 1998, and there's speculation that Dallas-based Whole Foods will soon make a lucrative bid to buy its smaller rival.

SPIRE CORP. (SPIR)
CURRENT PRICE: $15
P-E RATIO: 27
GROWTH RATE: 25-30 percent
DIVIDEND YIELD: None
EQUITY TYPE: Small Cap
TARGET PRICE: $21
You've heard it for decades: Solar power is going to be huge. Of course, had you actually plunked, say, $1,000 into the business 25 years ago, by now your investment would be worth, oh, about a Susan B. Anthony or two. So needless to say, Spire isn't for the faint of heart. A small builder of equipment used to make large arrays of photovoltaic cells, Spire's stock has ranged from less than $3 to nearly $30 in the last 12 months. But the global telecommunications boom has made solar power indispensible as a source of electricity for remote base stations and receivers located hundreds of miles from any conventional power source, and officials in states such as New Mexico and Arizona are now forcing utilities to step up to the solar plate. Says Roger Little, Spire's triathlon-running CEO, "People have been talking about the potential of this technology for years. It looks like its time has finally arrived."

IF YOU CAN'T BEAT 'EM, BUSS 'EM The case for making nice with the bad guys

If you ask me (the editors did), socially conscious investing is a useless form of protest. Like a recreational drug, it makes you feel pretty happy, but it doesn't do you any good. Here's an example: Maxxam, a company that turns precious northern California redwood forests into precious northern California redwood two-by-fours. If Maxxam's your enemy and you don't buy redwood when building your deck, you've accomplished something. You've kept a bit of cash out of Maxxam's register. But don't think you can hurt Maxxam by not owning the stock. This is where feel-good investors get bollixed. They're less than fully informed on how stocks are traded. When a company brings new shares to market (the initial public offering), it pockets the proceeds. But in the continuous buying and selling that follows, the company pockets nothing. In this sense, a share of stock is like a car. General Motors makes a profit from the initial sale of a Chevy, but not from the subsequent sales from owner to owner. A boycott of General Motors stock doesn't threaten its bottom line any more than a boycott of used Chevys would. Once in a while, you get high-minded high rollers dumping an objectionable holding all at once — the way pension funds have dumped their Philip Morris and their RJR Nabisco. Even these orchestrated campaigns have no lasting impact. As long as Philip Morris continues to sell cigarettes to eager buyers, its earnings will grow and the stock will attract its own eager buyers. A temporary setback caused by socially conscious selling becomes a buying opportunity for astute bargain hunters who don't equate the absence of Philip Morris with morality. To my mind, the most effective way to attack a polluter, strip miner, or redwood whacker is to own the stock, not disown it. As a shareholder, you can write complaining letters. You can ask embarrassing questions at annual meetings. This may not count for much, but it beats isolationism. Better yet, if the stock makes money and you own it, you can send the profits to Greenpeace or a save-the-redwoods lobby so they can fight the company with its own tainted gains. This is economic karate at its best, turning an evil enterprise back on itself.

Illustration by Jason Schneider