Working The Numbers
You can buy stocks on little more than a hot tip, and maybe you'll get lucky. But you'll be less dependent on fate if you first back up investment decisions with some scrutiny of the company's financial performance. That's how the Investment Outlook Scoreboard can help you. Made up of 900 stocks drawn from the U.S. markets, the scoreboard, is where you can do a quick reality check on that tip, or better yet, discover your own leads. Still, investing by the numbers goes only so far. You also need to follow up with some kick-the-tires research on a company's products, markets, and management before buying shares.
For each stock in the scoreboard, we have a trove of data such as price-to-earnings, price-to-sales, and price-to-cash-flow ratios; past and projected earnings growth rates; dividend yields; and Standard & Poor's (MHP ) Equity Ranking, a letter-grade measure of a company's financial performance. The stocks are also grouped by industry, making it easier to compare, say, computer makers with each other and against an industry average. You can find an interactive version of the scoreboard at BusinessWeek.com.
Where do you start when you have 900 companies and more than 14,000 pieces of information? We've started sorting the data for you, creating eight stock screens that organize the numbers in useful ways. Value investors will appreciate screens that use p-e ratios, price-book value, and dividends to find prospects; growth-oriented investors should find opportunities in the screens based on earnings growth.
The stocks that popped up in the same screens we ran this time last year appreciated 18.8% on average (Dec. 31, 2005, through Nov. 30, 2006). The comparable numbers for the Dow Jones industrial average, Standard & Poor's 500-stock index, and the NASDAQ Composite Index, were 15.8%, 14.2%, and 9.8%, respectively. In 2004 and 2005, the screens beat the indexes, too. The coming year will be challenging because the market is starting at a higher level, and the economy has slowed.
One of our best performers in 2006 was the "Big Caps to Watch" list, which zooms in on companies with market capitalizations greater than $5 billion and whose earnings are projected to soar next year. This year the list has such stalwarts as Boeing Co. (BA ), where orders of the company's new 747-8 jet should keep profits aloft, and Eastman Kodak Co. (EK ), which has redefined itself for the age of digital photography. Not long ago, Wall Street considered Boeing and Eastman Kodak to be flawed companies, but perceptions are changing under new CEOs.
The stocks worth watching aren't always household names. Celgene Corp. (CELG ), a biotechnology outfit, is one. The consensus forecast of Wall Street analysts who follow the company is for earnings to more than double in 2007. Celgene has two patented cancer drugs, and others in the pipeline. Video-game developer Electronic Arts Inc. (ERTS ), whose games include Tiger Woods PGA Tour '07 and Fifa '07, also pops up on the list. EA's shares performed poorly in 2006, but analysts believe the release of the hot new Sony (SNE ) PlayStation 3 platform will spark sales as gamers buy new software, leading to a near doubling in earnings per share.
WE LOOK AT TECH stocks in a couple of ways: the stocks expected to have the greatest earnings gains in 2007, and those expected to have the most growth in the next three to five years. Apple Computer (AAPL ) shows up for the third year in a row in the longer-term category, thanks to its brilliant consumer marketing and the irresistible appeal of the iPod and the iTunes music service. Next year may be when the long-rumored Apple cell phone finally makes its debut. Apple followers on Wall Street are forecasting 20% a year profit growth during the next three to five years.
What's more surprising in this screen is that Yahoo! Inc. (YHOO ) is beating Apple in earnings growth, up 25%. Shares in the Internet portal, which has been beset by competition from Google Inc. (GOOG ) all year and, more recently, by a shake-up in senior management, dropped 33% this year (through Dec. 8). But Yahoo remains a powerful brand on the Web, and analysts point to the company's "Project Panama," which many believe is key to revitalizing its search and advertising businesses, to explain their bullishness. Google, for the record, is projected to have a 33% earnings growth rate.
Another good list is "Head of the Pack," which focuses on those companies whose earnings growth rates and return on equity beat those of their peers. Last year, the pack leaders returned 16.5%. This year's list includes familiar names Caterpillar (CAT ), Avon Products (AVP ), Amazon.com (AMZN ), Harley- Davidson (HOG ), and Kellogg (K ).
One unfamiliar name is Southern Copper Corp. (PCU ), which mines the red metal in Latin America. Shares trade at about eight times next year's expected earnings, and it throws off a dividend of almost 10%. Even if global growth moderates in 2007, copper supplies should remain tight, and there is little new supply coming on line. In fact, recent merger activity suggests more companies are digging for metal on Wall Street than in the ground.
Buying stocks just for their dividends can be tricky. Often, the yield is high because investors won't buy the stock, fearing the payout is unsustainable and management will cut the dividend. That's why we run a "Quality Yield" screen through the data base. We're looking for the highest-yielding companies that also merit an S&P rating of at least A-, the third-highest ranking for financial strength. Many of the names on the list are banks, with dividends above 4%. Not surprising, several are utilities. At 4.64%, the Midwestern utility Ameren (AEE ) has a higher yield than the 10-year Treasury bond.
For those who like bargains, we've chosen some stocks that sell at prices that are low relative to their book value. A second list combines low price-to-book values with low p-e's. Both are so dominated by homebuilders you could put a "For Sale" sign on top of them.
The housing sector's woes have been well-documented, and much bad news has already been reflected in share prices. To buy these, you're making a contrarian play, betting any good news for builders will send shares aloft.
These screens won't catch all the winners. This time last year, for example, the stocks which turned out to have the best returns of the 900--Allegheny Technologies (ATI ), Charter Communications (CHTR ), and General Cable (BGC )--were not at the top of our lists. You have lots more ways to slice and dice the Scoreboard data. Sharpen your knives.
By Robert Rosenberg