03/24/97 MAKING THE MOST OF A MOUNTAIN OF DATA

Return to main story

MAKING THE MOST OF A MOUNTAIN OF DATA

Whether you're seeking stocks with high-octane growth, prefer steady, predictable earners, or simply want to see how your stocks stack up next to their peers, BUSINESS WEEK's all-new Performance Ranking are a valuable launching pad for research.
The best place to start is at the overall ranking of the Standard & Poor's 500-stock index companies in the tables that begin on page 91. Momentum investors may want to focus on the top of the list, host to the fastest-growing companies--many of them high-risk, high-reward technology companies. The more cautious may want to stick to the top-ranked manufacturers or consumer and health-care giants among the BUSINESS WEEK 50, such as Merck (No. 6) or General Electric Co. (No. 42).
CLUES. For other companies with solid franchises that are more defensive plays, investors might venture deeper into the ranking. They'll find the likes of Campbell Soup Co. (No.183) or Hershey Foods Corp. (No.267), ''predictable, mature, good companies,'' says Gordon Fines, manager of the IDS New Dimensions A Fund. ''They're not going to double overnight, but they also won't get cut in half.''
Whatever your goals, a company's grades in the Performance Ranking provide many clues on whether it's headed up or down. Start by comparing the grades for three-year growth rates with those for one year. If the one-year grades are much higher than the three-year, investors may want to consider if a company is rebounding.
Profitability comparisons are a good place to begin. No.192-ranked Boeing Co., for example, earned an F for three-year profits growth but an A over the past year. A sign of much improved performance, that could mean the stock may still rise. But investors will want to check grades for total return to see if the stock price already reflects the improvement. For more on Boeing's operating performance, check the numerical data in the industry ranking tables (page 119). These contain the growth rates on which grades are based. And in the columns to the far right, Boeing's 12-month high, as well as the recent share price and the I/B/E/S Inc. 1997 earnings-per-share forecast, offer potent clues as to whether its gains already are factored into its stock.
Those earning estimates, however, should be viewed in context. The 1997 estimate for Cisco Systems (No.4) is for a 36% gain, for example. But while Cisco earned an A for total returns over three years, it got just a C for one year. Why? Turn to the profitability data in the industry ranking tables, and you'll see Cisco's profits growth starting to slow. And a look at the far right side of the page shows that Cisco is trading well off its 12-month high. ''The fact that the [stock] valuation has come down so much suggests that the market does not have a high degree of confidence that Cisco will meet its earnings expectations,'' says Howard F. Ward, portfolio manager for the Gabelli Growth Fund.
STARTING POINT. To figure how well a company is using its money, investors also can compare a company's return on equity (ROE) to its peers' and the industry average. But a high ROE can disguise a heavy debt load, so use it only as a starting point.
Indeed, don't view any measure in isolation. Sales growth isn't relevant alone, either. ''Certain companies could have very high sales growth and make no money,'' Ward warns. Quick test: Contrast sales and profitability growth rates over comparable time periods to see if they match. Also recall that companies with torrid growth may be coming off a growth spurt, and high gains may be leveraging off a low base.
Just as you wouldn't judge a stock by just one measure, the Performance Ranking shouldn't be the sole basis for buying or selling. But armed with information from the tables, investors have a solid platform from which to launch a stock search.
By Suzanne Woolley in New York

Return to main story