BUSINESSWEEK ONLINE : MARCH 27, 2000 ISSUE
COVER STORY Sifting for Clues Close study of how a company performs and how it ranks among its peers can help you fatten your stock portfolio These are strange times for investors. The Standard & Poor's 500-stock index recorded its fifth straight year of 20%-plus growth in 1999, then went into a swoon in January and February, falling 7%. Meanwhile, the technology stocks that made up a third of the S&P 500 rose nearly 22% during the first two months of the year. The only other industry category that's up in that time? Utilities. ''The environment has been very risky,'' concludes John S. Cone, a manager of the Vanguard Growth & Income Fund. Investors trying to pick their way through the minefield can find some help in BUSINESS WEEK's fourth annual ranking of the companies in the S&P 500. Taken together, our Performance Rankings and our Industry Rankings can help you take stock of the companies in your portfolio, while also pointing you to new names that may fit your investment style. This year, for the first time, you can get even more help dissecting the numbers. Once you've picked the stocks that interest you, click on the BUSINESS WEEK Investor section of businessweek.com for links to company profiles, recent company filings, and to search for BUSINESS WEEK stories and other data to help you get the lowdown on target companies. Plus, we've indexed our all-star roster and will track its stock performance in BUSINESS WEEK and on our Web site. To get started, flip to the Performance Rankings, which begin on page 141. There you will find our report card of eight key performance measures. To determine the grades for each measure, companies were divided into quintiles. The top fifth received A's, the next fifth B's, then C's, D's, and F's. This gives you a quick snapshot of how each company stacks up, and a reminder of just how torrid growth was last year for some companies. Microsoft Corp. (MSFT), ranked No. 1 on our list, generated a total return of 19%--handsome, but not good enough to earn an A. Only stocks with at least a 24% gain garnered top honors in that category. A CUT ABOVE. But before dialing up your broker or logging on to E*Trade (EGRP), take the time to study the Industry Rankings, starting on page 167. There, you can research the companies that caught your eye in even richer detail. These tables provide the numbers each company posted in 19 important areas, from earnings and sales growth to internal growth measures such as return on invested capital, to valuation tools such as price-earnings ratios. Here, companies are ranked within their industries, allowing you to compare each with its peers, and to judge whether it's an outperformer or an also-ran. How you mine the data depends on what gems you're seeking. Someone with a low risk tolerance may be comfortable looking only at companies with straight A's in earnings and sales growth. On the other hand, an investor willing to take a chance on a turnaround may accept a lower grade on three-year growth if it comes with a top grade for the past year. If it's growth you're after, the BW 50 is a good place to start. These companies have already shown themselves to be a cut above. Ten of the 50 companies on our list get top grades in sales and profit growth over the past year and the past three years. That means sales were up close to 20% over the past year, and at least 21% on average each of the past three years. Earnings growth had to meet or beat 48% last year and exceed 27% per year over the past three years. Cisco Systems (CSCO) and EMC (EMC) pulled that off, as did financial-services all-star Charles Schwab (SCH). But this is an equal-opportunity ranking: Old Economy titan General Dynamics Corp. (GD) also made the list. There are a lot of reasons why each company earned a high grade. Now, it's time to dig into the Industry Rankings to get those details. Look at the trend in sales and earnings growth for each company, and the picture begins to fill out. For instance, you can see that General Dynamics' growth is slowing, with one-year numbers for both sales and earnings trailing the aerospace company's three-year average. That's a red flag. Indeed, of the 10 companies with straight A's in earnings and sales growth, only four also had increasing growth rates for these measures: Cisco, Solectron (SLR), Schwab, and Time Warner (TWX). HIGH YIELDS. Sales growth is especially important now since for many, it's the only real way to boost earnings. Most companies are finding it hard to raise prices in today's marketplace. And after years of belt-tightening and restructuring, it's a lot tougher to squeeze out higher profits by cutting costs. So managers who can increase revenue are doing something right, says David A. Tillson, a U.S. Trust Co. managing director. If margins are rising at the same time--as they are at Cisco, Solectron, Schwab, and Time Warner--so much the better. But beware of a company that way outperforms its peers or has a sudden burst of good fortune. Such companies require further study. For instance, Time Warner's sizzling 87% sales increase last year--in an industry that averaged approximately a third of that--actually reflects an unusual accounting change that required the media giant to begin booking revenues from a cable partner. Cisco and Schwab, however, have enjoyed more consistent growth. You'll have little trouble finding fast growth on the BW 50, but you may have to balance it against a high price. As of Feb. 29, our cutoff date for the prices in our tables, Cisco commanded a price that was a lofty 147 times the company's trailing 12-month earnings. That means bargain hunters need to do even more digging. Low price-earnings ratios are a good place to start, but you can't stop there. Some of these laggards have been beaten down for a reason. Just take a look at No. 111 Carnival Corp. (CCL) Its F for total return to shareholders seems odd given that the company hasn't scored below a B in any other category. Is it an innocent victim of a capricious market? Not really. A search through businessweek.com and other online links shows that the cruise line has been swamped with bad news. Twice in the past three months, Carnival's ships have suffered troubles at sea. Fuel prices and competition are up, and analysts are concerned that bookings for summer cruises may be slow, as vacationers pull back spending on luxuries in the face of rising interest rates. If the company's image continues to take a drubbing and customers stay away, that could put pressure on prices and torpedo Carnival's future marks for earnings and margins. But extra research can also unearth some good news for value hunters. Take Ford Motor Co. (F), which earned a D in three categories--one-year shareholder returns, three-year sales growth, and margins--and an F for one-year earnings gains. Ford tumbled from No. 26 last year to No. 196 this year. Why? A big reason is the spin-off of Ford's Associates First Capital unit in 1998, which boosted net income by $16 billion that year, ensuring that the '99 net would pale in comparison. Meanwhile, Ford's return on equity, a measure of how successfully it invested its money, was strong compared with its peers. Its 26.2% ROE even outshone Microsoft. Ford's high 4.8% yield--reflecting its stock dividend divided by stock price--is also encouraging. ''Yield is an indication of value,'' says Tillson. ''And it's not such a bad thing to be paid to wait.'' A look at the yield column in our industry tables shows other big-name companies with strong dividend payouts and low stock prices. Utilities as a group boast an average dividend yield of 5.8%; Bank of America's (BAC) is up to 4.4%, and retailer J.C. Penney Co.'s (JCP) is 7.3%. By venturing down a ways in the rankings, bargain hunters can identify companies that are outperforming their otherwise depressed industries. These stocks may be ripe for a rebound. As a group, for instance, food companies have offered little to savor this year. But Sysco Corp. (SYY) seems to buck that trend. The company, which distributes food and provides services to institutions such as hotels and hospitals, meets a number of the criteria that investors look for. Sales and earnings growth are both expanding. Internal performance measured by ROE outstrips its industry average. True, the company has slim margins next to some of the foodmakers in the group, like Ralston Purina (RAL) or Wm. Wrigley Jr. Co. (WWY) But they compare favorably to supermarket companies such as Winn-Dixie Stores (WIN). With even blue-chip stock prices gyrating wildly on the slightest news these days, queasy investors may place a higher premium on safety and stability. You may be willing to give up A-grade sales and earnings growth for industry leaders that have a strong franchise, for instance. Of course, no mountain of data can protect against all the vagaries of the stock market. Investors today are making judgments that will no doubt knock some of this year's stars right off next year's BW 50. But if you read the numbers right, you just might find the next crop of winners. By Nanette Byrnes in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The 50 Best Performers COVER IMAGE: The BW 50: The Best Performers TABLE: The 50 Best Performers TABLE: Total Return TABLE: Sales TABLE: Net Margin TABLE: Earnings Decline TABLE: Earnings Growth CHART: The Fast-Changing BW 50: A Breakdown by Industry TABLE: Return on Equity Follow the Leaders CHART: Beating the Indexes--Again Great Performances, and How to Spot Them Sifting for Clues TABLE: How to Pan for Gold TABLE: Business Week's Performance Rankings of the S&P 500 (.pdf) TABLE: Business Week's Industry Rankings of the S&P 500 (.pdf) TABLE: Alphabetical Index (.pdf) ONLINE ORIGINAL: Q&A with Biogen's Jim Vincent ONLINE ORIGINAL: Q&A with AOL's Steve Case ONLINE ORIGINAL: Q&A with General Dynamics' Nicholas Chabraja ONLINE ORIGINAL: Q&A with MBNA's Charles Cawley ONLINE ORIGINAL: Q&A with Pfizer's William Steere ONLINE ORIGINAL: Q&A with Kansas City Southern's Landon Rowland ONLINE ORIGINAL: Q&A with Omnicom Group's John Wren INTERACT E-Mail to Business Week Online

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