The Bw 50: Still The Cream Of The Crop

These companies live up to their promise, yielding top-notch gains

When BUSINESS WEEK unveiled the BW 50 six months ago, we called our rankings of the companies in the Standard & Poor's 500-stock index "a wide-ranging report card on corporate performance." Instead of looking for the biggest, we set out to uncover the best in Corporate America. By zeroing in on companies that had outpaced the competition in sales and earnings growth and other measures, we sought to identify those with the best shot of outperforming their peers in the future. The elite of that group formed the BW 50.

So how did we do? Would investors have been wise to put their money in a basket of BW 50 stocks--or would they have been better off buying a mutual fund that tracks a stock index?

So far, the BW 50 has more than lived up to its billing. Had investors bought one share of each company on Mar. 14, when the BW 50 debuted, their portfolios would have grown 24.7% in market value for the six months ended Sept. 12. That's well above the 16.5% investors would have earned had they put their money in an index fund tracking the S&P 500. (Standard & Poor's Corp. is owned by The McGraw-Hill Companies, which also owns BUSINESS WEEK.) Led by triple-digit gains at Dell Computer Corp. and Compaq Computer Corp., 31 of the BW 50's Class of 1997 managed to beat the S&P's price gain, while eight stocks fell in price. As a group, the BW 50 saw sales grow about 17% for the six month stretch, double the rate for the S&P. Earnings rose close to 17%, compared to 11% or so for the S&P.

The BW 50's performance also tops the 11.6% gained by the Dow Jones industrial average for the same period, as well as the 21.9% gain of the small-cap Russell 2000. The tech-heavy NASDAQ Composite, however, beat the BW 50 with its 27.6% price gain.

Of course, the BW 50 is not an index. The rankings will be rejiggered next spring as new leaders emerge. And unlike the S&P 500 and the Russell 2000, the group isn't weighted by the market capitalization of its stocks, so the recent poor showing of large stocks such as Coca-Cola Co. and Johnson & Johnson did not hurt the BW 50 as much as the S&P. "The top 53 stocks in the S&P 500 constitute 50% of the market-cap weight of the index," notes James Branscome, head of Standard & Poor's retail information services.

The BW 50 were chosen by a set of growth-oriented measures, including sales and earnings growth and total return. Factored in were net margins and return on equity. To weed out short-term spurts, most measures were examined on a one-year and three-year basis.

The top stock market performer in the BW 50 over the past six months: Dell, which ranked No.3 on our March list. By Sept. 12, its stock had climbed 148%. In Dell's last quarter, ended Aug. 3, sales hit $2.8 billion, up 67% from the same period a year ago, and earnings nearly doubled, to $214 million. Dell, which sells personal computers to the high-margin corporate market, is gobbling up market share. Also charging ahead is Compaq, which won the silver with its 115% price gain. Dell and Compaq were the heavy lifters of the group. Without them, the price gain for the BW 50 would have been 19.5%.

TECH TIDE. The red-hot market for tech stocks over the past few months gave our BW 50 a big boost. Eight of the top 10 performers were in the computer and software business, including Java software inventor Sun Microsystems, EMC, which makes computer-storage devices, and networking giant Cisco Systems. Equipment maker Northern Telecom turned in a 42% gain, while medical technology company Medtronic rose 40%.

Other industries contributed to the group's performance. Take nonbank financial issues. Merrill Lynch & Co., ranked No.24 in March, rode the bull to a 38% gain. Private-mortgage insurer MGIC Investment Corp., originally No.40, racked up a 33.4% gain, just below hot chipmaker Intel Corp.

Conversely, some of the biggest BW 50 losers included once-glamorous consumer-products giants that investors have shunned of late. Nike Inc., No.7 in the March ranking, saw its stock fall 17%, while shares of Coca-Cola Co., No.25, sank 4%, landing them near the bottom of the class. Gillette Co.'s stock closed the period back where it started, around 81.

Alas, there were even bigger duds on the list. Andrew Corp., which was ranked No.18 in March, saw its stock fall 31%, making it the BW 50's next-to-worst performer. The supplier of equipment to the nascent personal communications services industry got socked in the last quarter. "There has been a somewhat slower than expected rollout in the U.S. for PCS infrastructure, which is Andrew's bread and butter," says Charles Pradilla, chief investment strategist for Cowen & Co.

But the worst-performing stock of the bunch was Columbia/HCA Healthcare Corp., which has been wracked by investigations into allegations of fraud and mismanagement. For the six-month period, shares in the giant hospital chain dropped 34%.

REAL TEST. Can the BW 50 keep up its market-beating streak? A slowdown of technology stocks would certainly take some of the wind out of its sails. And if the recent market shift to small-cap stocks continues, investors may move money away from the big-cap stocks in the S&P 500, from which the BW 50 is culled. However, perhaps a bigger risk than poor performance by any one company or industry is how this high-octane, high-priced group would be affected by an earnings slowdown. With a price-earnings ratio of 27 compared with 23 for the S&P, the BW 50 could fall further and faster than other stocks.

The long-term effectiveness of the BW performance ranking can't be judged on the basis of six months, especially in a bull market. The BW 50 have certainly been fast out of the starting gate. The real test will be if they can go the distance in a less exuberant market.