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Finding Gems In '94 Will Take A Keen Eye


Investing in 1994: EARNINGS OUTLOOK

FINDING GEMS IN '94 WILL TAKE A KEEN EYE

The stock market hit a number of record highs this year, thanks mostly to strong earnings performance. And it looks as if profits will keep rising in 1994, buoyed by continued corporate restructurings and an improving economy. "It will be a good earnings environment, and that is a positive factor in the equity market outlook," says Richard D. Rippe, chief economist at Prudential Securities Inc. Rippe predicts that earnings will rise 16% to 17% next year. That would compare with 1993's expected earnings gain (adjusted for write-offs) for the Standard & Poor's 500-stock index of 15%.

Yet some economists and portfolio analysts are worried that the market is overvalued, with increased speculation. While most experts agree that 1994 will be a good year for the market, they feel gains will be spotty, with many stock groups not participating in the upward movement. "The upside potential for the overall market is limited, so you can't afford to make any mistakes," says Hugh A. Johnson, chief investment officer at First Albany. To help you find the winners, BUSINESS WEEK has compiled its annual Investment Outlook Scoreboard.

STRENGTH IN STEEL. The following pages contain a wide array of financial data on 900 publicly traded companies put together by Standard & Poor's Compu-stat, a division of McGraw-Hill Inc. The Scoreboard is divided into 24 industries, from aerospace to utilities. To make stock evaluations easier, it provides historical data and investment ratios, such as dividend yield and book value per share.

The Scoreboard also helps investors track the performance of individual stocks and stock groups using I/B/E/S Inc., a unit of Citicorp that surveys the opinions of 2,500 securities analysts and provides annual earnings forecasts for each company. They predict a 26% earnings increase in 1994 vs. 1993's 29%. Analysts say the steel industry is likely to show the biggest earnings improvement. The biggest disappointments, according to the survey, could come in the printing and advertising industry group.

Since many investors are interested in specific company information, BUSINESS WEEK has sifted through piles of statistics to select stocks that satisfy the requirements of six popular investment strategies (tables, page 144). One key approach: Target companies most likely to have big increases in earnings per share.

For the 900 companies, the largest profit increase in 1994--517%--is forecast for Lafarge Corp., a Virginia-based construction-materials company that is benefiting from rising cement prices. It's a good idea for investors to peek behind the per-share gains because the number of outstanding shares for any given company can change from quarter to quarter.

High yields are another useful mea-sure. But investors should be careful because yield, which measures the dividend as a percent of the stock price, can be deceptively high if a company's share price has fallen dramatically. Investors should also be aware of other quirks. For instance, Manville Corp., a Denver-based holding company, is expected to show the highest yield in 1993. But that's based on a special dividend, and Manville's dividend policy in 1994 is unclear.

Stockpickers sometimes find great deals in stocks selling way below their per-share book value--the difference between assets and liabilities divided by the number of shares outstanding. But it's important to determine whether or not these companies are merely overlooked or are in serious financial trouble. For example, Glendale Federal Bank tops the list, but the California-based thrift is beset by a slew of bad loans.

Price-earnings ratios can be another helpful tool when searching for places to invest. A low p-e multiple might signify that a company is struggling with short-term bad news and could reward patient investors when the trouble passes. But it's not so easy to pinpoint which companies may actually turn the corner. America West Airlines Inc. is expected to have the lowest p-e ratio next year. But the company is in Chapter 11. Analysts say that although the airline's performance has improved greatly, the stock is risky because the shares are likely to be worthless when the company reorganizes.

The Scoreboard offers basic guidelines to help investors, but that's only a starting point. After that, smart stockpickers will need to dig deeper--and hope for a bit of luck.WHAT THE ANALYSTS EXPECT:

INDUSTRY GROUP WINNERS AND LOSERS

1993'S STRONGEST...

Earnings change

from 1992

APPLIANCES 155%

CONGLOMERATES 130

SEMICONDUCTORS 110

TEXTILES 100

TELECOMMUNICATIONS SERVICES 94

OIL & GAS 86

AUTO PARTS & EQUIPMENT 80

APPAREL 79

SPECIAL MACHINERY 75

INSTRUMENTS 73

...AND WEAKEST

SAVINGS & LOANS -88%

PAPER CONTAINERS -79

COAL -35

MISCELLANEOUS LEISURE -33

TOBACCO -22

RETAILING -11

AEROSPACE & DEFENSE -11

GLASS CONTAINERS -10

CHEMICALS -4

PERSONAL CARE -3

1994'S STRONGEST...

Earnings change

from 1993

STEEL 844%

PAPER CONTAINERS 406

CARS & TRUCKS 256

FOREST PRODUCTS 171

MISCELLANEOUS LEISURE 122

PAPER 109

COAL 61

EATING PLACES 58

NONFERROUS METALS 55

SPECIAL MACHINERY 49

...AND WEAKEST

PRINTING & ADVERTISING 2%

ELECTRIC UTILITIES 3

BANKS--MIDWEST 7

TELEPHONE COMPANIES 8

DRUGS & RESEARCH 10

FINANCIAL SERVICES 10

GAS UTILITIES 12

BANKS--SOUTH & SOUTHEAST 12

BANKS--EAST 12

CONSTRUCTION & ENGINEERING 12

Because of actual or estimated losses in 1992, 1993, or 1994, earnings gains or

losses cannot be meaningfully calculated on a percentage basis for airlines,

aluminum producers, auto makers, computer manufacturers, forest products

companies, nonferrous metal manufacturers, and steelmakers

DATA: I/B/E/S INC., STANDARD & POOR'S COMPUSTAT

A MENU OF INVESTMENT OPPORTUNITIES

But be careful. Though the numbers below may seem enticing, unusually high or

low percentages may be a sign of trouble.

HIGH HOPES FOR

EARNINGS PER SHARE

Looking at the bottom line? These

companies' earnings are forecast to move

smartly in 1994.

Percent change 1993-94

LAFARGE 517%

ADVO 381

OCCIDENTAL PETROLEUM 350

CROWN CENTRAL PETROLEUM 326

GEON 320

CNA FINANCIAL 319

GEORGIA-PACIFIC 315

RAYCHEM 305

LYONDELL PETROCHEMICAL 300

RIVERWOOD INTERNATIONAL 284

TRAVELERS 264

PERKIN-ELMER 256

STOCKS SELLING

WAY BELOW BOOK VALUE

Bargain hunters take note. The stock

price of these companies as a percentage

of book is at the bottom.

Percent

GLENDALE FEDERAL BANK 32%

CALIFORNIA FEDERAL BANK 35

CROWN CENTRAL PETROLEUM 43

GM HUGHES ELECTRONICS 46

SEQUA 50

IMO INDUSTRIES 54

ACTAVA GROUP 57

ASARCO 61

COAST SAVINGS FINANCIAL 62

OSHKOSH TRUCK 64

FIGGIE INTERNATIONAL 65

INTERGRAPH 67

COMPANIES WITH

THE HIGHEST YIELD

If the goal is income, these companies pay

among the highest annual dividends as a

percentage of stock price.

Percent

MANVILLE 12.6%

CENTERIOR ENERGY 11.3

OKLAHOMA GAS & ELECTRIC 7.7

NORTHEAST UTILITIES 7.5

LONG ISLAND LIGHTING 7.5

NEW YORK STATE ELECTRIC & GAS 7.3

FREEPORT-McMORAN 7.3

TEXAS UTILITIES 7.2

SCECORP 7.0

OHIO EDISON 6.7

PUBLIC SERVICE CO. OF

COLORADO 6.7

FPL GROUP 6.7

STOCKS THE INSTITUTIONS

RARELY HOLD

Unpopular--or just overlooked? Either way, if

the institutions suddenly take notice, prices

could rise.

Number of

Percent of shares institutions

held by institutions holding

CONTINENTAL AIRLINES 0.1% 7

MARRIOTT INTERNATIONAL 1 9

AT&T CAPITAL 2 14

AMERICA WEST AIRLINES 2 15

FOOD LION 4 65

U.S. HOME 5 19

FOXMEYER 7 31

VIACOM 7 116

ARCO CHEMICAL 8 96

KAISER ALUMINUM 9 27

SPIEGEL 9 65

MITCHELL ENERGY & DEVELOP. 9 74

AVERAGE OF 900 COMPANIES 56% 276

THE LOWEST PRICE-

EARNINGS RATIOS

Prices of these stocks compared

with 1994 forecast for earnings

per share suggest unrecognized

values. Negative earnings-per-

share estimates excluded.

Ratio

AMERICA WEST AIRLINES 0.7

ALLIANT TECHSYSTEMS 5.5

ADVANCED MICRO DEVICES 6.3

FIRST AMERICAN FINANCIAL 6.4

MIDLANTIC 6.7

HOOK-SUPERX 6.8

FLEET MORTGAGE GROUP 6.8

CONTINENTAL BANK 6.9

BANK OF BOSTON 6.9

MICRON TECHNOLOGY 7.0

BEAR STEARNS 7.1

STANDARD FEDERAL BANK 7.3

FORECASTERS AGREE LEAST

ABOUT THESE COMPANIES

Uncertainty could spell opportunity. The 1994

earnings-per-share estimates are all over the

lot for these stocks. Example: Estimates for

Champion International range from a profit of

49 to a loss of 53 .

Consensus for 1994 Variation

Cents per share in forecasts

CHAMPION INTERNATIONAL -2 2,550%

TIME WARNER -1 2,400

ASARCO -12 1,383

AMDAHL 2 950

MAXTOR 11 818

IMC FERTILIZER GROUP 16 556

DATA GENERAL 12 442

FLAGSTAR -18 372

KAISER ALUMINUM -26 285

ZENITH ELECTRONICS -50 282

DELTA AIR LINES 81 267

McCAW CELLULAR COMMUNS. 30 217

DATA: AS OF NOV. 30, I/B/E/S, STANDARD & POOR'S COMPUSTAT

Lori Bongiorno, with Frederick F. Jespersen, in New York


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