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EARNINGS: ON YOUR MARK, GET SET--CRUNCHHow to use the Scoreboard data and give yourself an edgeWhile stock prices were volatile in 1998--first up, then down, then up again--the profit trend was clearly one way: down. Corporate profits dipped, revenue growth slowed, and margins narrowed. At the beginning of 1998, earnings for the Standard & Poor's 500 stocks were expected to rise 13%. The latest guesstimate is that they'll decline 1.1%. Where do we go from here? Well, earnings per share for the S&P 500 are expected to increase 17.1% in 1999. But remember, analysts are often far too optimistic early in the year. BUSINESS WEEK's Investment Outlook Scoreboard can help you make informed choices in the new year. Standard & Poor's Compustat provided the historical data and performance ratios for the 900 companies listed, while I/B/E/S International Inc., a Primark Corp. company, supplied the earnings estimates and long-term earnings growth info, based on its survey of 3,757 analysts. To start you off, we've provided six tables that slice up the data in some familiar and new ways. Look in the Scoreboard for the companies with the largest price increases in 1998, and you'll agree these were great friends to have in your portfolio. Dell Computer Corp. went from 21 at the end of 1997 to 60 13/16 at the end of November, a 190% increase. Even hotter was Yahoo! Inc., which rocketed from 34 5/8 at the end of last year to 192 on Nov. 30, up 455%. The valuations for both companies are clearly stratospheric, seemingly overvalued by conventional standards. But if past performance is any indication of the future, they could still gain more altitude in 1999. Tech heavyweight Compaq Computer Corp. shows up on the list of companies expected to post big earnings-per-share gains next year. Compaq's 1998 earnings are projected to be 46 cents a share, as expenses from its merger with Digital Equipment Corp. eat up profits. In 1999, analysts expect the computer giant to recover to the tune of $1.74 a share, a 278% jump. That kind of earnings growth could well boost the stock price. KILLER COMBO. One way to zero in on value stocks is to look for companies with both a low price-earnings ratio and a low price as a percentage of book value. Companies that fit that description are often down on their luck. This year, National Steel Corp. and Case Corp. find themselves on this list of the unloved. An influx of cheaper foreign steel into U.S. markets and the General Motors Corp. strike both took their toll on National Steel, where nine-month sales were down 9% and nine-month profits dropped 62%. Case, a maker of construction and farm equipment, has been hurt by soft overseas markets for its big-ticket items, with nine-month profits down 8%. If international economies recover, and foreign pressures ease on each company, their respective stocks could break out of their current doldrums. One of the new factors this year is the price-to-sales ratio, or PSR. Companies with a low PSR are a lot like companies with a low p-e; potentially undervalued. But what if you were to find a stock with both a low PSR and a rising share price? James P. O'Shaughnessy, fund manager and author of What Works on Wall Street and How to Retire Rich, notes: ''Uniting the best growth factor with the best value factor gives you an intriguing play. Why buy just cheap stocks when you could buy cheap stocks already on the mend?'' In the Scoreboard, trucking company Landstar System Inc. and discount retailer Ames Department Stores Inc. both seem to fit the bill. Each has a PSR of less than 0.5 (considerably under the overall average of 1.7). Meanwhile, Landstar's stock was up 55% in 1998, while Ames stock rose 36%, meaning that both have been noticed. Investors can only hope the trend will continue. Remember that the information in the tables and the Scoreboard should be the starting point of your research, not the end of it. But analyze the numbers; while you might invest in a company that has a good story, it's the numbers that will ultimately determine whether that story has a happy ending.
By Frederick F. Jespersen in New York RELATED ITEMS
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Updated Dec. 17, 1998 by bwwebmaster
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