Sure, the stock market had a horrid year, and to many it still looks pretty scary. But remember that the stock market is just a market of stocks, and there are opportunities in many of them. So even during 2001, some companies, and even whole industries, made money for investors. CarMax Group (KMX ), which sells new and used cars, more than quintupled (through Nov. 30), and Service Corp. International (SRV ), the funeral-home chain, gained 235%.
Of course, what worked in the past has passed. For 2002, investors need to go back to their sources to uncover new prospects. That's where BusinessWeek's Investment Outlook Scoreboard can help you. Encompassing 900 companies that are grouped into 24 industries, the Scoreboard presents information on the largest U.S. companies by sales. Standard & Poor's COMPUSTAT Data provided such data as price-earnings ratios and dividend yields. Thomson Financial/First Call delivered the earnings estimates and projected long-term growth rates based on its survey of 6,500 analysts.
We've also screened our broader list to provide a starting point in searching for good investment ideas. Last year, our screens, which were based on various investment approaches, returned 2.3% on average, compared with -7.1% for the Dow Jones industrial average, -12.6% for the Standard & Poor's 500-stock index, and -21.6% for the Nasdaq Composite Index (through Nov. 30). This year, we've continued to fine-tune our old approaches and added a new one.
We're still looking for companies with earnings momentum (table), because strong earnings growth often leads to higher stock prices. For instance, analysts are projecting chemical companies' earnings to increase 57% in 2002. Profits among nonferrous metals companies are projected to jump 500%. Well, that's what the analysts say.
That's why we also screen for value stocks. In general, these stocks don't depend solely on an earnings forecast. They may be rich in assets or pay bountiful dividends. Our bargain-stock screen, for instance, looks for companies selling with low p-e ratios and low price-to-book-value ratios. Last year's bargain list gained 36%.
Be careful. Stocks are usually cheap for a reason. Providian Financial Corp. (PVN ), which tops this year's list of bargain stocks, has lost 95% of its market value as investors questioned the quality of the credit-card issuer's receivables. In fact, regulators recently barred Providian from issuing new cards to people with poor credit histories. Is it a bad stock? If the economy continues to tank, it can't be good. But if the economy recovers--and credit worries recede--the stock could be a steal. Dura Automotive Systems Inc. (DRRA ), a repeat from last year, still trades at a discount to book value, even after appreciating 75%.
If the slowdown drags on and the market trades in a narrow range, our large-cap, high-yielding list should work well. It includes the tobacco stocks--R.J. Reynolds Tobacco (RJR ), Philip Morris (MO ), and UST. They offer protection against a general market downturn, and their dividend yields approach the yield on 10-year Treasury bonds.
There's even a dividend play in technology. Lighting-parts maker Hubbell Inc. (HUB.A ) yields a bright 4.9%, and earnings are growing at 10% a year. What will catch your eye on that table is MCI Group (MCIT ), a carve-out from WorldCom Inc., with an 18.3% yield. That's not a typo. But whenever you see something so far from the pack, you have to question it. In this case, the company has paid only one quarter's worth of dividends and declared two more. The annualized rate of that dividend comes out to 18.3%. What's the market saying here? Either there's doubt about whether MCI can continue to pay, or the company is so far below investors' radar that they haven't noticed. In that case, the stock could be a steal.
Finally, some strategists believe buying fast-growing tech stocks is still the best play. The thinking: The stocks are down so far they can only go up. So we created a screen of tech stocks with high earnings expectations. But we also added the S&P rankings as a reality check. So the companies on the list, which starts with Linear Technology Corp. (LLTC ), have at least 20% long-term growth prospects, and the worst of them are rated B+ by S&P.
Our screens are just starting points. So dive into our Scoreboard. The market will reward your efforts.
By Robert J. Rosenberg