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You have to look carefully to separate the earnings trailblazers from the laggards

In 1996, the Dow Jones industrial average broke the 5500, 6000, and 6500 barriers. And with the likelihood of continued low inflation, steady interest rates, and healthy economic growth, next year could see more records shattered.

There are, however, worries. The price-earnings ratio for the Standard & Poor's 500-stock index is 20, far above the historical average, and dividend yields are a slim 2%, down for the second year in a row. But that's for the overall market. What about specific industries and individual stocks? How do they stack up? That's where the Investment Outlook Scoreboard comes in. Data from Standard & Poor's Compustat show the historical performance and key ratios for 900 publicly traded companies. The companies are divided into 24 industries so that they can be directly compared with their competitors. I/B/E/S International, a Primark Corp. company, provides 1996 and 1997 earnings estimates, based on its survey of 2,912 analysts.

YIELD CURVE. To help you sort through the numbers, the companies were screened by six different investment criteria. Be careful when looking at the eye-popping numbers some companies feature. Large increases may mean a company could really turn things around but can just as easily mean that a company had horrible results in the base period. Take the case of Florida-based Sunbeam Corp. Earnings in 1997 are forecast to rise a stunning 923%, to $1.33 a share. What's behind the big jump? CEO Albert J. Dunlap announced a major restructuring of the home-products maker. Noncore units (such as furniture and decorative bedding) will be divested, divisional and regional headquarters will be consolidated, and excess production capacity will be eliminated. There will also be 6,000 fewer employees. The goal is to double revenues through a stream of new products and to triple international sales. The price tag for this ambitious plan is an estimated $300 million charge to 1996 earnings, expected to come in at 13 cents a share, down 79% from 1995. Much of the expected earnings growth may already be factored into the current share price. Sunbeam's stock is up 93% since Dunlap joined the company in July.

Many investors are on the lookout for companies that pay a large dividend in relation to its stock price. The problem with hunting high yields is that often the yield is going up because the stock price is going down. Take Connecticut-based Northeast Utilities: Its 8.4% yield is very attractive, but the stock price has fallen from 24 1/4 at the beginning of the year to 12 1/8, and the quarterly dividend was cut from 44 cents to 25 cents. Likewise, PECO Energy has seen its stock price drop from 30 1/8 at the end of 1995 to 25.

To value-oriented investors, companies with low p-e ratios are quite appealing. Projecting ahead to 1997, Chrysler's p-e of 7.4 is half the p-e of 14.8 projected for all the companies in the Scoreboard, and slightly less than Ford (8.1) and General Motors (7.8). While 1995 was a bit of a disappointment for the smallest of the Big Three auto makers, Chrysler Corp. has been running on all cylinders this year, racking up big sales for its minivans, pickups, and sport-utility vehicles. Will 1997 be another record-setting year? It depends on whether interest rates stay at current levels, whether the yen weakens against the dollar, and whether Chrysler faces stiffer competition in its key lines, information that the Scoreboard can't answer.

Companies unnoticed by institutional investors can provide a handsome payoff when they finally get some attention. But also look at the number of institutions holding stock. If there are too few, the price could be adversely affected if one decides to sell. With 123 different institutional stockholders, Arco Chemical is widely held for a company with only 7% institutional holdings.

To be a successful investor, you need a plan. Going with your gut increases the chances that you'll end up with indigestion. Analyze the data, look into the companies you plan to invest in, and only take on as much risk as you feel comfortable with. Do that, and 1997 could be a rewarding year.

By Frederick F. Jespersen in New York


TABLE: Industry Group Winners And Losers

TABLE: A Menu of Investment Opportunities

SCOREBOARD: 1997 Investment Outlook (.pdf)

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Updated June 13, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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