Where to Invest in 1998 -- The Scoreboard: U.S. EARNINGS OUTLOOK
KEEPING SCORE IS GETTING TRICKIER
The expected earnings slowdown makes picking winners tougher than last year
Profits will grow more slowly in 1998. Earnings for the Standard & Poor's 500 should rise by 6% in 1998, down from the 11% expected in 1997. That will make picking potential winners far harder than last year.
So BUSINESS WEEK's Investment Outlook Scoreboard should be more useful than ever. Standard & Poor's Compustat provides a variety of historical data and performance ratios on 900 companies, from book value to dividend yield. I/B/E/S International Inc., a Primark company, gives us the 1997 and 1998 earnings estimates, based on its survey of 3,298 analysts.
The data can help you in a variety of ways. It depends on what you're looking for. Earnings growth? Undervalued companies? Companies that pay a high dividend? We have provided six data screens that slice up the information by different investment criteria. Because of the projected slowdown in profits, this year's tables put more emphasis on earnings growth. We've also arranged the earnings growth tables by the market value of the companies covered (the company's share price multiplied by the number of shares it has outstanding).
TAKEOVER TARGET? Among the largest U.S. companies, with a market value of $5 billion or more, aerospace and defense giant Boeing Co. jumps out. It looks like an earnings-growth winner despite the warning the company issued on Dec. 8 that, because of the ongoing financial crisis in Asia, airlines in Asia may delay taking delivery of up to 60 Boeing jetliners. It appears still that the aerospace company's earnings could grow from $0.73 per share to $2.45 per share in 1998--a 236% increase in earnings per share. Earnings in 1997 have been reduced by charges caused by production delays. So in fact, Boeing's recent problems could present a stock-buying opportunity.
Golden State Bancorp is an intriguing possibility among companies with a market capitalization of at least $1 billion, but less than $5 billion. Earnings at the California-based savings and loan should increase from $0.62 to $1.78, a 187% rise, in 1998. Golden State Bancorp has also been acquiring other California S&Ls. Given the recent consolidations in the banking and thrift industries, Golden State could find itself a takeover target in the near future. If that happens, the stock price could really take off.
In the small-cap category, where market values are less than $1 billion, Dominick's Supermarkets Inc. could be a winner with earnings expected to rise 94% in 1998. The Chicago-area grocery chain's earnings growth in 1998 will be helped by a $61 million aftertax charge taken in 1997 as the company converts 17 Omni discount supermarkets over to Dominick's Fresh Stores, a move that is likely to increase earnings in 1998 and beyond.
Another possible strategy for investors is to look for companies with low price-earnings ratios and that have improving earnings prospects. Stocks with low p-e ratios often reflect past bad news, and Green Tree Financial Corp. is a good example. Best known for financing manufactured homes, the St. Paul (Minn.)-based company's stock dropped from over $40 per share to below $30 after it announced it would increase reserves by more than $100 million dollars. Green Tree's projected 1998 p-e ratio of 8.5 is considerably below the 900-company average of 17.9%. And with earnings projected to grow 44% in 1998, perhaps the company will look attractive to other investors once again.
Some investors like to look at price momentum, on the theory that what goes up keeps going up. Take Dell Computer Corp. From the end of 1996 to the end of November, Dell's stock rose 217%. Since the end of 1994, the computer maker's stock has risen on average over 160% per year. It's hard to believe that Dell's stock can continue to grow at such a prodigious pace, especially considering the hammering that technology stocks take so frequently. But it seemed that way at the end of 1996, too.
The stocks we have highlighted look like they have solid prospects. But when looking at this data, remember that large and small ratios and growth rates can result from unusual events unlikely to recur. Thoroughly research any company you're thinking of investing in, and don't take a risk that you aren't comfortable with. If you can do that, your portfolio could have many happy total returns in 1998.By Frederick F. Jespersen, with Robert J. Rosenberg, in New YorkReturn to top