Feb. 5 (Bloomberg) -- How often do you see a list of stocks to avoid? Your brokerage house isn't likely to give you one. Your favorite investment newsletter probably won't either.

So I will. I call it the Nonsensical Nine.

I have written about this list each February for the past three years. My selection system -- or should I say anti- selection system -- is far from infallible, but has done pretty well.

Fourteen of the 27 stocks chosen in past years have fallen (as they were supposed to). Thirteen have risen. All three lists performed worse than the Standard & Poor's 500 Index, with an average differential of 19 percentage points.

The 2001 list fell 47 percent through Friday from when I compiled it in February of that year, while the S&P 500 declined 9.8 percent. The list from February 2002 has fallen 9.3 percent while the S&P 500 has gained 6.8 percent.

The 2003 list returned 35 percent, a disappointment for me. Still, that didn't quite match the 38 percent return for the S&P 500.

In compiling the Nonsensical Nine, I set up some statistical criteria, and then let my Bloomberg stock-screening software pick the stocks.

The starting field contains all stocks that have a market value of $1 billion or more and sell for three times book value or more. Currently there are almost 600 such stocks.

Robert Half International

From these, the screening software plucks the three that sell for the highest multiple of earnings, the three that sell for the highest multiple of sales, and the three with the highest debt-to-equity ratios.

This year the highest price-earnings ratio, 569, belongs to Robert Half International Inc. (RHI). Robert Half also had the highest P/E a year ago, 1,514. That didn't stop it from rising 54 percent.

Based in Menlo Park, California, Robert Half provides temporary and permanent staffing services. Its divisions include Accountemps, RHI Management Resources, Office Team and Robert Half.

Earnings at Robert Half increased from a penny a share in 2002 to 4 cents a share in 2003. This year analysts predict 38 cents.

Valued on what I call the ``malt shop P-E'' (stock price divided by a company's third-best annual earnings in the past decade), Half still looks expensive. The third-best year was 1998 when the company earned 69.5 cents a share. With the stock at Tuesday's close of $22.69 the malt-shop PE was 33.

Red Hat

Red Hat Inc. (RHAT) sells for the second-highest multiple of earnings, 366. It was also on the 2002 Nonsensical Nine list, but has gained 145 percent in the past two years. That is the best showing any Nonsensical Nine stock has achieved.

With headquarters in Raleigh, North Carolina, Red Hat provides companies with its version of the Linux operating system. I used to think the business was inherently flawed, since a version of Linux is available free. However, customers like the refinements and ease of use of Red Hat's version.

Even so, I would never pay 357 times earnings for a stock.

Four Biotechs

Celgene Corp. (CELG) weighs in at 298 times earnings, the third-highest multiple. My take on this Warren, New Jersey, biotech company is similar to my view of Red Hat: Good company, bad stock.

Next, let's look at the stocks selling for the highest multiple of revenue. Telik Inc. (TELK), a biotech company out of Palo Alto, California, leads the field at 1,510 times revenue.

Telik has never posted a quarterly profit and its revenue is running well under $1 million per quarter. Yet it has a market value of $1.03 billion. Its main research thrust is developing cancer drugs to treat tumors resistant to chemotherapy. A few days ago, Business Week magazine identified Telik as a likely takeover candidate for a larger biotech firm.

Onyx Pharmaceuticals (ONXX) comes in second, at 276 times revenue. The small Richmond, California, biotech company is working on genetic therapy to combat cancer.

The third most expensive by this criterion is Genta Inc. (GNTA), at 200 times revenue. It, too, is a biotech company focused on future cancer drugs. It is working with Antisense technology, Androgenics products, Gallium products and Decoy Aptamers -- techniques that I am not familiar with.

I can't judge these medical matters. I do know a little about probabilities, however. I feel fairly confident in saying that not all of these high-priced biotech companies will come up with cancer drugs of significant value.

UST, Maytag, Allied Waste

Finally, let's look at the companies with the most significant debt loads, relative to stockholders' equity. In this category, financial companies are excluded.

UST Inc. (UST), the smokeless tobacco maker based in Greenwich, Connecticut, has debt equal to about 19 times equity. Litigation over antitrust and health issues has hurt the company. Stockholders' equity has been decimated. It was $59 million at the end of 2003, compared with $581 million two years earlier.

Appliance maker Maytag Corp. (MYG), based in Newton, Iowa, was a member of the Nonsensical Nine in 2002 and 2003. Over the past two years its stock has declined about 3 percent. Maytag's debt is close to 15 times equity.

Allied Waste Industries (AW), with headquarters in Scottsdale, Arizona, is the second-largest U.S. trash hauler. Its debt is around nine times equity.

Being a member of the Nonsensical Nine is no guarantee that a stock will decline. Yet if you own a stock on the Nonsensical Nine list, you may want to take a fresh look at it to see if you truly want it in your portfolio.

To contact the writer of this column: John Dorfman in Newton Centre, Massachusetts at jdorfman@bloomberg.net

Last Updated: February 5, 2004 00:03 EST