How To Scour The Scoreboard To Find The Best Buys In Stocks

There are thousands of stocks out there, but you need to own only a few -- financial economists say 20 is enough for a well-diversified portfolio -- to make a lot of money without taking on a lot of risk. But which handful of stocks will deliver the goods?

No one can say for sure, but we can say with confidence that among the 900 companies in BusinessWeek's Investment Outlook Scoreboard, there are plenty of winners. This time last year, we screened the database for such criteria as highest expected profit growth and fattest dividends. In all, we came up with six lists of 10 stocks each. In the first 11 months of 2003, the 60 gained nearly 50% on average, which left the Dow Jones industrial average and Standard & Poor's 500-stock index in the dust and even edged out the high-flying NASDAQ Composite index.

In our Scoreboard are the 900 largest U.S. publicly held companies when measured by revenue and market capitalization. They're grouped into 10 sectors, and those are further broken into industries. For each company -- and for each sector -- the Scoreboard delivers a wealth of information. Some comes from current market data, such as price-earnings ratios and dividend yields. Other information, such as return on equity and the price-to-book-value ratio, relies on corporate financial reports. And we have plenty of data on earnings, both historical and -- more important -- what Wall Street expects for 2004 and beyond. (Earnings estimates come from Thomson Financial/First Call. The other data are compiled by Standard & Poor's Compustat. S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP ).)

Last year, we designed screens looking for growth in the high-tech sector, rooting for undervalued stocks, and identifying good dividend stocks. We're sticking to the same game plan, while tweaking the criteria and adding a small and mid-cap screen. We also looked at big caps that are outperforming their peers.

Our "high-tech earners for 2004" screen consists of companies where earnings are expected to leap next year. One that stands out is Corning (GLW ) Inc., the old glassware maker. Why? LCD, or liquid crystal display. Corning is the leading maker of this high-tech material, which goes into the displays of notebook computers, cell phones, and the widening range of personal digital devices. Now, Corning is aiming at the huge TV market, where a mere 1% of sets sold are LCDs.

We also look at the tech companies with the best long-term expectations. This year's list turned up names such as gamemaker Electronic Arts (ERTS ) Inc., where growth is linked to new game boxes from hardware producers such as Sony (SNE ) Corp. and Nintendo (NTDOY ) Co. as well as gamers' near-insatiable appetites for new products. Less well-known is Iron Mountain (IRM ) Inc. -- the leader in the rapidly growing field of document storage and management. Analysts are expecting a major profit boom for Iron Mountain -- about 22.5% a year.

More hot spots

On the same list are two biotech outfits, Amgen (AMGN ) Inc. and Genentech Inc. Amgen, with $5 billion in sales, has been a sweet stock, returning average annual growth of 23% over the past five years. Now, analysts are looking for 21% earnings-per-share growth in the next three to five years, based on sales of Epogen and Neupogen, which assist in cancer treatment. What also has them bullish is the expected Food & Drug Administration approval of Cinacalcet, a new thyroid drug. Analysts have even higher hopes for Genentech: 25% annual growth. Recent FDA approvals for its asthma drug Xolair, as well as Raptiva, a psoriasis treatment, ought to fuel the increases.

Growth is fine, but don't forget about yield. Thanks to a new tax law that takes the maximum tax on dividends down to 15%, these payouts are more valuable than ever. Once again, tobacco stocks such as Altria (MO ) Group Inc. (parent to Philip Morris Cos.) and UST (UST ) Inc. dominate. Merrill Lynch (MER ) & Co. tobacco analyst Martin Feldman is bullish on Altria, where, he says, the threat of tobacco litigation is shrinking and profits are growing. Another high payer is ConAgra Foods (CAG ) Inc., which yields 4.2%. And there's a kicker: ConAgra has announced a $1 billion stock buyback, nearly 7% of its shares.

We also like cheap stocks, and we look for them in two ways. We screen for the lowest price-earnings ratios and again for those with the lowest price-book ratios. One low p-e stock is title insurer Stewart Information Sciences Corp. That should be a better business, since it's tied to home sales and mortgage refinancings. The low p-e tells you that the market is projecting the end of the real estate boom. If the crowd is wrong, Stewart is cheap. Lafarge North America Inc., on our low p-b list, makes buildings materials. The worry is that construction will tank. But if the rebound and job growth pick up, Lafarge offers good value. Utilities, plagued by the overcapacity in that industry, dominate our low price-to-book stock list. But electricity is "a volatile commodity," notes Richard Hunter, managing director in the global power group at Fitch Ratings, a credit ratings agency. A frigid winter, followed by a scorching summer, could send prices soaring.

Small and mid-cap stocks were especially strong in 2003, and our screen suggests that many still have the wind at their backs. Two companies with bright outlooks are Robert Half International (RHI ) Inc. and Kelly Services (KELYA ) Inc., both of which supply temporary workers to business. They're benefiting from the trend of companies turning to temps rather than hiring permanent workers. Analysts are calling for Robert Half's profits to spike 900% in 2004, while Kelly's are expected to jump 454%.

Another mid-cap that should get a boost from the strengthening economy is Temple-Inland (TIN ) Inc., a producer of container board, the main ingredient in corrugated boxes. This business tracks U.S. manufacturing, says Mark Wilde, who follows paper and forest-products stocks for Deutsche Bank Securities (DB ) Inc. Wall Street is expecting a 424% rise in its earnings next year. An added sweetener, says Wilde, is the fact that Temple-Inland owns banks in Texas and California. The bet here, says Wilde, is that the company will spin off the banks to shareholders or sell them outright to pay down debt.

Finally, take a look at our "head of the pack" list. It features large-cap companies with earnings and return on equity expected to outpace both their peers and the overall Scoreboard companies. Two names are familiar: American Express (AXP ) Co. and United Parcel Service (UPS ) Inc. AmEx, the subject of acquisition rumors, should continue to prosper on the improving outlook for consumer finance and the pickup in travel. UPS is expected to rack up profits as ground shipments continue to surge.

No matter what your investing style, our lists will help identify opportunities. Of course, don't buy from a list alone; you need to do further research. But in this Scoreboard, there are winners enough to build a solid portfolio.

By Robert J. Rosenberg

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