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2001 BW 50


By Robert Barker

The Strong, Silent Type of Stocks
The best time to buy probably isn't when a company is making news -- good or bad. It's better to get in before the buzz

By Robert Barker
Robert Barker covers personal finance for BusinessWeek

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Not to be contrary for contrariness' sake, but I must offer a discouraging word: This is probably not the best moment for you to plunge your money into the stock of a BusinessWeek 50 company.

Do I mean that the BW50 comes up short as a collection of the best corporate performers? Not at all. But a very successful veteran of the investment wars, Irene Hoover of Forward Hoover Small Cap Equity Fund (FFSCX ), once told me, "I like stocks when they're quiet." What she meant was that stocks are best bought when they're not making news, good or bad. And, for better or worse, being named to the BW50 is definitely news.

Yet even as the list of BW50 companies broke this week, with Johnson & Johnson (JNJ ) finding itself on top and last year's No. 1, Tyco International (TYC ), sinking to No. 45, I was heartened by two other investment stories. First, the Shell Oil unit of Royal Dutch Petroleum (RD ) offered to buy out shareholders in Pennzoil-Quaker State (PZL ) for $22 a share -- a fat premium. Next, DuPont Canada (DUP.A ) offered to buy out shareholders in Liqui-Box (LIQB ) for $67 a share, another big premium.

BUZZ-FREE.  Why did I care? Both Pennzoil and Liqui-Box, a maker of plastic containers, are stocks that I picked when they were quiet -- and a lot cheaper. To me, they are further confirmation (I've had many over the years) that good things happen to investors who buy stocks in solid companies when no one much cares about them. The reason is two-fold: Hype-free stocks are cheaper, and the free market doesn't tolerate mistakes in valuation forever.

So if you spot a Pennzoil, as I did a year ago when it was changing hands quietly for $14 a share, you're first of all limiting your risk. There's no "buzz" around the stock and precious few exaggerated expectations inflating its price. Second, you're also buying a piece of a company that may have hidden, but valuable, assets that the market is overlooking for the time being.

Even when the stock market makes such a mistake, there usually are industry rivals who know a good deal when they see it -- as Shell Oil confirmed this week. Ditto with DuPont Canada and Liqui-Box, which I liked at $52 at the end of 1998. After a long, sleepy spell, that pick now has far outperformed the indexes, small-cap and big-cap alike.

Am I saying you should ignore the BW50 for investment ideas? By no means. But here's how I would use the list. First, peruse it for companies that appeal to you as strong, long-term performers. Any number of companies might leap out at you, particularly if you have an affinity for or special knowledge of an industry. For example, Wal-Mart (WMT ), clearly the king of retail. Or MBNA (KRB ), the credit-card maven. Or maybe Cardinal Health (CAH ), a leading drug distributor. Unless you're a trader, you might want to bypass those, such as Pulte Homes (PHM ) or KB Home (KBH ), which may be riding a temporary industry cycle.

BREATHING ROOM.  Next, put your leading-buy candidates on a watch list. See how the stocks trade and how they react to news, both good and bad. Meantime, do your fundamental research on the companies. Use the wealth of tools at BW Online, including our Interactive Scoreboards and BW50/S&P 500 Interactive Stock Screener. Also, don't forget to study the company's own reports to the Securities & Exchange Commission. They're all usually available from the "investor relations" page of a company's Web site. Satisfy yourself that the superior past performance that landed the company on the BW50 is a good bet to persist.

Finally, after you've done all of this, think about buying. Watch your prospects day by day. Wait for a quiet moment when the stock is priced below your estimate of its value. Leave yourself what the great investment thinker Benjamin Graham called a "margin of safety." That is, give your analysis some room for error. If you think MBNA is a buy below $30 a share, perhaps you should swear that you won't buy it at any price above $27.

This approach to handling investment ideas from lists generated by magazines, newspapers, and Web sites may seem obvious. But those who pursue it will place themselves in the careful, thoughtful minority of investors -- and boost their chances of success.

MARCH 28, 2002

Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His column appears every Friday, only on BusinessWeek Online
Edited By Patricia O'Connell

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