The stock market hit a number of record highs this year, thanks mostly to strong earnings performance. And it looks as if profits will keep rising in 1994, buoyed by continued corporate restructurings and an improving economy. "It will be a good earnings environment, and that is a positive factor in the equity market outlook," says Richard D. Rippe, chief economist at Prudential Securities Inc. Rippe predicts that earnings will rise 16% to 17% next year. That would compare with 1993's expected earnings gain (adjusted for write-offs) for the Standard & Poor's 500-stock index of 15%.
Yet some economists and portfolio analysts are worried that the market is overvalued, with increased speculation. While most experts agree that 1994 will be a good year for the market, they feel gains will be spotty, with many stock groups not participating in the upward movement. "The upside potential for the overall market is limited, so you can't afford to make any mistakes," says Hugh A. Johnson, chief investment officer at First Albany. To help you find the winners, BUSINESS WEEK has compiled its annual Investment Outlook Scoreboard.
STRENGTH IN STEEL. The following pages contain a wide array of financial data on 900 publicly traded companies put together by Standard & Poor's Compu-stat, a division of McGraw-Hill Inc. The Scoreboard is divided into 24 industries, from aerospace to utilities. To make stock evaluations easier, it provides historical data and investment ratios, such as dividend yield and book value per share.
The Scoreboard also helps investors track the performance of individual stocks and stock groups using I/B/E/S Inc., a unit of Citicorp that surveys the opinions of 2,500 securities analysts and provides annual earnings forecasts for each company. They predict a 26% earnings increase in 1994 vs. 1993's 29%. Analysts say the steel industry is likely to show the biggest earnings improvement. The biggest disappointments, according to the survey, could come in the printing and advertising industry group.
Since many investors are interested in specific company information, BUSINESS WEEK has sifted through piles of statistics to select stocks that satisfy the requirements of six popular investment strategies (tables, page 144). One key approach: Target companies most likely to have big increases in earnings per share.
For the 900 companies, the largest profit increase in 1994--517%--is forecast for Lafarge Corp., a Virginia-based construction-materials company that is benefiting from rising cement prices. It's a good idea for investors to peek behind the per-share gains because the number of outstanding shares for any given company can change from quarter to quarter.
High yields are another useful mea-sure. But investors should be careful because yield, which measures the dividend as a percent of the stock price, can be deceptively high if a company's share price has fallen dramatically. Investors should also be aware of other quirks. For instance, Manville Corp., a Denver-based holding company, is expected to show the highest yield in 1993. But that's based on a special dividend, and Manville's dividend policy in 1994 is unclear.
Stockpickers sometimes find great deals in stocks selling way below their per-share book value--the difference between assets and liabilities divided by the number of shares outstanding. But it's important to determine whether or not these companies are merely overlooked or are in serious financial trouble. For example, Glendale Federal Bank tops the list, but the California-based thrift is beset by a slew of bad loans.
Price-earnings ratios can be another helpful tool when searching for places to invest. A low p-e multiple might signify that a company is struggling with short-term bad news and could reward patient investors when the trouble passes. But it's not so easy to pinpoint which companies may actually turn the corner. America West Airlines Inc. is expected to have the lowest p-e ratio next year. But the company is in Chapter 11. Analysts say that although the airline's performance has improved greatly, the stock is risky because the shares are likely to be worthless when the company reorganizes.
The Scoreboard offers basic guidelines to help investors, but that's only a starting point. After that, smart stockpickers will need to dig deeper--and hope for a bit of luck.
WHAT THE ANALYSTS EXPECT: INDUSTRY GROUP WINNERS AND LOSERS 1993'S STRONGEST... Earnings change from 1992 APPLIANCES 155% CONGLOMERATES 130 SEMICONDUCTORS 110 TEXTILES 100 TELECOMMUNICATIONS SERVICES 94 OIL & GAS 86 AUTO PARTS & EQUIPMENT 80 APPAREL 79 SPECIAL MACHINERY 75 INSTRUMENTS 73 ...AND WEAKEST SAVINGS & LOANS -88% PAPER CONTAINERS -79 COAL -35 MISCELLANEOUS LEISURE -33 TOBACCO -22 RETAILING -11 AEROSPACE & DEFENSE -11 GLASS CONTAINERS -10 CHEMICALS -4 PERSONAL CARE -3 1994'S STRONGEST... Earnings change from 1993 STEEL 844% PAPER CONTAINERS 406 CARS & TRUCKS 256 FOREST PRODUCTS 171 MISCELLANEOUS LEISURE 122 PAPER 109 COAL 61 EATING PLACES 58 NONFERROUS METALS 55 SPECIAL MACHINERY 49 ...AND WEAKEST PRINTING & ADVERTISING 2% ELECTRIC UTILITIES 3 BANKS--MIDWEST 7 TELEPHONE COMPANIES 8 DRUGS & RESEARCH 10 FINANCIAL SERVICES 10 GAS UTILITIES 12 BANKS--SOUTH & SOUTHEAST 12 BANKS--EAST 12 CONSTRUCTION & ENGINEERING 12 Because of actual or estimated losses in 1992, 1993, or 1994, earnings gains or losses cannot be meaningfully calculated on a percentage basis for airlines, aluminum producers, auto makers, computer manufacturers, forest products companies, nonferrous metal manufacturers, and steelmakers DATA: I/B/E/S INC., STANDARD & POOR'S COMPUSTATA MENU OF INVESTMENT OPPORTUNITIES But be careful. Though the numbers below may seem enticing, unusually high or low percentages may be a sign of trouble. HIGH HOPES FOR EARNINGS PER SHARE Looking at the bottom line? These companies' earnings are forecast to move smartly in 1994. Percent change 1993-94 LAFARGE 517% ADVO 381 OCCIDENTAL PETROLEUM 350 CROWN CENTRAL PETROLEUM 326 GEON 320 CNA FINANCIAL 319 GEORGIA-PACIFIC 315 RAYCHEM 305 LYONDELL PETROCHEMICAL 300 RIVERWOOD INTERNATIONAL 284 TRAVELERS 264 PERKIN-ELMER 256 STOCKS SELLING WAY BELOW BOOK VALUE Bargain hunters take note. The stock price of these companies as a percentage of book is at the bottom. Percent GLENDALE FEDERAL BANK 32% CALIFORNIA FEDERAL BANK 35 CROWN CENTRAL PETROLEUM 43 GM HUGHES ELECTRONICS 46 SEQUA 50 IMO INDUSTRIES 54 ACTAVA GROUP 57 ASARCO 61 COAST SAVINGS FINANCIAL 62 OSHKOSH TRUCK 64 FIGGIE INTERNATIONAL 65 INTERGRAPH 67 COMPANIES WITH THE HIGHEST YIELD If the goal is income, these companies pay among the highest annual dividends as a percentage of stock price. Percent MANVILLE 12.6% CENTERIOR ENERGY 11.3 OKLAHOMA GAS & ELECTRIC 7.7 NORTHEAST UTILITIES 7.5 LONG ISLAND LIGHTING 7.5 NEW YORK STATE ELECTRIC & GAS 7.3 FREEPORT-McMORAN 7.3 TEXAS UTILITIES 7.2 SCECORP 7.0 OHIO EDISON 6.7 PUBLIC SERVICE CO. OF COLORADO 6.7 FPL GROUP 6.7 STOCKS THE INSTITUTIONS RARELY HOLD Unpopular--or just overlooked? Either way, if the institutions suddenly take notice, prices could rise. Number of Percent of shares institutions held by institutions holding CONTINENTAL AIRLINES 0.1% 7 MARRIOTT INTERNATIONAL 1 9 AT&T CAPITAL 2 14 AMERICA WEST AIRLINES 2 15 FOOD LION 4 65 U.S. HOME 5 19 FOXMEYER 7 31 VIACOM 7 116 ARCO CHEMICAL 8 96 KAISER ALUMINUM 9 27 SPIEGEL 9 65 MITCHELL ENERGY & DEVELOP. 9 74 AVERAGE OF 900 COMPANIES 56% 276 THE LOWEST PRICE- EARNINGS RATIOS Prices of these stocks compared with 1994 forecast for earnings per share suggest unrecognized values. Negative earnings-per- share estimates excluded. Ratio AMERICA WEST AIRLINES 0.7 ALLIANT TECHSYSTEMS 5.5 ADVANCED MICRO DEVICES 6.3 FIRST AMERICAN FINANCIAL 6.4 MIDLANTIC 6.7 HOOK-SUPERX 6.8 FLEET MORTGAGE GROUP 6.8 CONTINENTAL BANK 6.9 BANK OF BOSTON 6.9 MICRON TECHNOLOGY 7.0 BEAR STEARNS 7.1 STANDARD FEDERAL BANK 7.3 FORECASTERS AGREE LEAST ABOUT THESE COMPANIES Uncertainty could spell opportunity. The 1994 earnings-per-share estimates are all over the lot for these stocks. Example: Estimates for Champion International range from a profit of 49 to a loss of 53 . Consensus for 1994 Variation Cents per share in forecasts CHAMPION INTERNATIONAL -2 2,550% TIME WARNER -1 2,400 ASARCO -12 1,383 AMDAHL 2 950 MAXTOR 11 818 IMC FERTILIZER GROUP 16 556 DATA GENERAL 12 442 FLAGSTAR -18 372 KAISER ALUMINUM -26 285 ZENITH ELECTRONICS -50 282 DELTA AIR LINES 81 267 McCAW CELLULAR COMMUNS. 30 217 DATA: AS OF NOV. 30, I/B/E/S, STANDARD & POOR'S COMPUSTAT