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So How Well Does the Net Trawl for Stocks?


The Internet opens a world of information and provides handy tools to uncover investment opportunities--at least that's what its promoters say. So I decided to log on and actually test this hypothesis. Here's what I found:

There are thousands of stocks out there. And my mission was to find only a handful. That shouldn't be that hard, right?

Before I started, I decided I wanted stocks that could be stashed in a retirement portfolio, not ones that would need daily monitoring. I'm basically a value investor but I wanted to include some equities that offered good growth potential in return for some added risk and volatility. I intended to focus on a company's long-range prospects and whether its price could be justified.

Becoming familiar with stocks and what's happening in the market is a must for a do-it-yourself investor. Web sites like finance.yahoo.com and CBS.MarketWatch.com can help on that score.

But good industry information is hard to come by on the Net--and you often have to pay for it. Standard & Poor's charges $19.50 a month for its Outlook Online (spoutlookonline.com), which ranks industry sectors and lists promising stocks (S&P, like BusinessWeek, is part of The McGraw-Hill Companies). There is a 30-day free trial. Value Line (valueline.com) costs $598 a year, or $65 for a 13-week trial, but includes stock reports as well. Ten stock reports per month now come with S&P's Outlook product, and subscribers to BusinessWeek or its Web site can get three reports at businessweek.com.

Or you could buy individual S&P (MHP) reports, as well as those from investment house analysts, for $5 and up at Yahoo! (YHOO) or multexinvestor.com. Many brokers provide their own, and even S&P, reports free to clients on their Web site. Of course, general industry news is scattered throughout the Net. Scottrade.com, an online broker, does a good job of organizing news by industry.

I started by looking for promising industries that were also familiar. S&P liked home furnishings and Value Line favored restaurants, and there's no mystery in what they do. Furnishings tend to be cyclical, but I planned to add exposure to health care, a defensive sector that could thrive as baby boomers age. Biotechnology tempted me, though I knew it held risks. And computer technology still seemed like a good bet for the future. As a value investor, I thought I'd trawl for bargains in airlines, an industry hard-hit since September 11. After that, I wanted to see where the stock screens and company research led me.

Plugging value-oriented criteria into the full search screen at quicken.com, I came up with some tantalizing restaurant choices, as well as a few retailers I knew. My first screen was demanding. I eliminated very small, illiquid companies by setting a minimum market capitalization of $200 million. Then I asked for a price-to-earnings growth (PEG) ratio below the industry average and a price-to-sales ratio of 1.5 or less. To ensure good management, I demanded a return on equity above the industry average. Given the uncertain times, I added a below-average long-term debt-to-assets ratio.

Brinker International and Papa Johns International were restaurants that turned up. Upscale department store Neiman Marcus (NMG.B) and more moderately priced Pier 1 Imports (PIR) were also there. As I loosened the criteria, dropping the PEG and the price-sales requirement, other familiar names--Lands' End (LE) (which I spotted before Sears (S) announced its takeover May 13, pushing up the price) and Bed Bath & Beyond (BBBY)--came into view.

Since I wanted to include growth stocks, I also did a couple of screens for that. First, I asked for companies where the 1-year, 3-year, and 5-year earnings-per-share growth had exceeded the industry average, and where that was expected to happen again over the next five years. I specified the $200 million minimum market cap and insisted on a 1.0 or less long-term debt-to-equity ratio to eliminate companies with the greatest financial risks. I also screened for stock price strength. One of the resulting stocks, Cheesecake Factory (CAKE), had already shown up on one of my value screens.

Then I ran a screen for companies that had seen EPS and revenue growth of at least 25% in the past 12 months and were predicted to enjoy growth that high over the next five years. I again set a minimum market cap, and demanded a PEG of 1 or less. Specialized chipmaker NVIDIA turned up on a shortlist.

Quicken is just one of a plethora of screeners out there. It's easy to use, lets you revise settings without starting from scratch each time, and provides a quick tutorial. Multexinvestor.com's screen is more complicated, but you can create and save your own screens.

Patterns began to emerge. Some of the stocks from my screens were recommended by Value Line or S&P. As a happy coincidence, several--like Jack in the Box (JBX) and Office Depot (HD)--turned out to be held by mutual funds rated highly by Morningstar (www.morningstar.com).

While checking the two rating services, I added candidates like Quest Diagnostics (DGX), a growth stock that has already seen a healthy runup, and Boeing (BA), where a p-e ratio below the ROE number made it a value play. Neither had shown up on my screens, but S&P rated them buys.

By now, I had more stocks than I could comfortably research in-depth. I needed to winnow the list. I began by using www.starmine.com, a site that tells you whether top-rated analysts think a stock is a buy or a sell (which brokers often signal with the seemingly neutral "hold" rating). Jack in the Box fell by the wayside because of relatively low ratings. So did Cheesecake Factory. AOL Time Warner (AOL) was dropped as I plugged candidates into valuepro.net, a tool that lets you value a company using a discounted cash-flow model. Even at $17.35, the stock seemed overpriced. (All prices are as of May 13.)

With only six stocks left, it was time to do a more thorough study, checking revenue, earnings, and stock price trends; looking for unusual insider trading activity; reviewing Securities & Exchange Commission filings, and reading news sites.

Quest Diagnostics, the country's largest diagnostic testing company, looked like a long-term winner. It's in an industry expected to benefit from demographics and a trend toward more testing for preventative care. Jet-manufacturer Boeing saw revenues drop in 2000 and is expected to face sales pressures in 2002, but S&P and Valuepro considered it undervalued at its recent price of $44.28. Brinker (EAT) should benefit from a trend toward quick, casual dining. Beazer Homes (BZH) has run up in price on the continuing strength in homebuilding, although it could fall if the housing market slows. AutoNation (AN) appeared less lustrous on closer inspection, but S&P values it higher than its current price of $18.10. NVIDIA (NVDA) was my wild card. The price dropped after questions were raised about its accounting, but a company review found profits were actually higher than earlier reported.

I decided to forget biotech. It's too volatile, and Quest provides the desired exposure to the medical industry.

Thousands of stocks to choose from. And in the end, it was a chore to find even six. Some things only sound easy. By Carol Marie Cropper


Silicon Valley State of Mind
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