Commentary: Colorado prime ground for solid investment

Over the last 18 months, Colorado investors have been subjected to a barrage of discouraging economic news. However, at this point in the economic cycle, experienced investors are starting to focus on potential opportunities. Colorado investors could be sitting in front-row seats to some of the best investment opportunities in the country.

Stock-market strategists often say that a new bull market has to climb “a wall of worry.” In the early stages of a new economic cycle, investors must deal with lagging indicators from the last cycle. Usually, unemployment and credit problems are rising even as the new economic cycle begins. This cycle has been particularly tough since we have just gone through the worst profit cycle since World War II and a huge addition of junk debt to corporate balance sheets in the 1998-2000 period.

The recent economic downturn also hit Colorado hard. An American Electronics Association study in 2000 showed that Colorado had more technology workers per thousand than any other state in the country. However, the slowdown in Colorado is an opportunity for strategic planners to reassert quality controls to maintain the quality of life for the intermediate to longer term.

A strategic look at Colorado suggests that the state provides a top-tier environment for entrepreneurial activity. First, in the 2000 census, Colorado ranked No. 3 out of all 50 states in terms of population growth for the previous 10 years.

Companies and venture capitalists have also taken note. In the last peak year of venture-capital spending — 2000 — Colorado ranked No. 3 out of all states in terms of money received.

Colorado also stands to benefit from the currently declining dollar. During periods when the dollar has declined, natural-resource companies have often done well. On Jan. 2, the Wall Street Journal identified Newmont Mining, headquartered in Denver, as the best-performing large-capitalization stock (over $5 billion) in the United States during 2002. The stock was up 51.9 percent. A number of the Denver-based energy companies are also well-positioned to benefit from the tightening supply-demand balance for natural gas.

Value Line recently recognized several Colorado companies in terms of biggest free cash-flow generators. MDC Holdings, First Data and CSG Systems all made the top 75 list out of the 1,700 large companies Value Line covers. Generating excess cash flow is often a positive since the cash can be put toward enhancing value for shareholders by buying back shares, making acquisitions or increasing dividends.

For investors who are interested in “investing in their own back yard,” they should first consult with their financial advisers. Before investing in individual stocks, investors should generally have six months of expenses in cash, some investments in fixed income and some exposure to an equity index fund to give them diversification. Individual circumstances always determine the game plan. Investors should not consider equities unless they have a five-year time horizon.

Beginning investors may want to adopt a “growth-at-a-reasonable-price” methodology. Investors can look for companies that produce growth in their earnings and compare the price-earnings ratio with the growth rate of the company. Companies that have a price-earnings ratio that is equal or less than the earnings growth rate of the company often represent a reasonably valued investment. Investors can then participate in the ongoing earnings growth of the company.

Barbara S. Walchli, CFA, is portfolio manager for the Aquila Rocky Mountain Equity Fund, a mutual fund that invests in eight Rocky Mountain states, including Colorado. Walchli formerly was co-manager for Banc One Investment Advisors’ Large Company Growth and Income Equity Funds and has also served as director of equity research for First Interstate Capital Management and Valley Capital Management. She can be reached at (800) 437-1020.

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