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Are the stocks of the BusinessWeek 50 as interesting as the companies? In many cases, yes -- at least for courageous investors. BW50 company stocks tend to be unusually volatile and richly priced.

Shares of NVIDIA Corp. (NVDA), the factory-less maker of high-performance computer graphics chips, for example, are among the most volatile in the Standard & Poor's 500-stock index. And the price-earnings ratio of the BW50 is 18.6, two points more than the index. Shares of Yahoo! Inc. (YHOO), another BW50 member, recently traded at a massive 60 times expected 2006 earnings, even though the stock had tumbled 20% in the preceding two months.

High valuations and volatility are no surprise among the ranks of the BW50. Many of the companies are well known, widely held, and carry a median market capitalization of $33 billion, nearly three times the median S&P 500 company. Their potential growth attracts a lot of attention. Stock analysts surveyed by Thomson First Call expect earnings per share of the median BW50 company to grow annually the next five years by 15%, vs. 11% for the S&P 500.

Dividends Yielding Clues

Still, the BW50 is worth mining for investing ideas. Consider Prudential Financial Inc. (PRU), the insurance and investment giant. Its stock is moderately volatile and sells at a below-market p-e of 14. Analysts figure earnings will grow 13% annually over the next three to five years. Pru pays a dividend yield of 1% and has enough resources to continue buying back shares even after reducing its share count by a sizable 6% last year.

For investors who abhor stock gyrations, rail carrier Burlington Northern Santa Fe Corp. (BNI) is worth a closer look. The stock is less volatile than the market as a whole, and the company is raking in cash as it packs its lines with railcars loaded because of the growing economy. It is handing a good chunk of that cash back to investors through dividends and share buybacks. And while Texas Instruments Inc.'s (TXN) high volatility might put off nervous investors, its earnings per share are expected to grow an exceptional 20% annually over the next three to five years. Better yet, the stock has been selling for a relatively modest 20 times earnings recently.

To find potential winners, we screened the shares of the BW50 in several ways using data from research divisions of Standard & Poor's (MHP). First, we pruned the list to 36 by including only those rated four- and five-star buys by S&P's Equity Research Services. Based on S&P's data and analysis, these shares are expected to make money and beat the total return of the market over the next year.

We also sifted the stocks according to their riskiness. Since there's no real way to know the odds that a stock will lose money, we used the next best thing to gauge risk: betas, a standard Wall Street tool. Betas measure how much a stock price changes compared with the market as a whole. If you're looking for stocks that don't jump around more than the market, you want a stock with a beta of 1 or less.

Only 12 of the BW50 stocks met that test, most of those just barely. The betas we used were based on weekly price changes for the past two years as compiled by Capital IQ, an S&P research service for institutional investors, investment bankers, and private equity funds. (Wall Street often uses five-year periods to measure beta, but we shortened the period after finding that the five-year measure classified stocks of energy producers as exceptionally low risk, apparently because they barely budged until the price of oil spiked in 2004.) For moderate risk, we found nine stocks with betas from 1 to 1.2. Then we flagged as higher risks 12 stocks with betas of 1.6 and greater.

Sharing the Wealth

And then we refined each list even further. We hunted for stocks with low prices compared with expected earnings. Alas, few companies in the BW50 have the safety margin of a low p-e ratio. So we looked to dividend yields -- one of the more reliable components of future returns on stocks -- as tallied by S&P's Compustat. Only six BW50 companies yield more than the 1.9% of the S&P 500. A number, however, have been returning a lot of money to shareholders by buying back stock. To winnow out buybacks made by companies just to sop up the shares they issue for employee stock options, we gave companies credit for the percentage by which they actually reduced their numbers of shares outstanding. And then we added that to their dividend yield and came up with what we call shareholder payout. We found 17 of the BW50 with payouts of more than 2%.

We discovered three stocks with low volatility and high payouts worth a further look, including Burlington Northern. Another company, Microsoft Corp. (MSFT), reduced its shares outstanding by 4.5% last year and is yielding 1.4%. Analysts expect earnings to grow 12% annually. The third, banking giant JPMorgan Chase & Co. (JPM), is yielding 3.3% and trading at a relatively low 12 times expected 2006 earnings.

Investors willing to accept greater stock gyrations have more opportunities. Among the stocks with moderate risk to consider, several now offer the prospect of growth at a reasonable price. Five, including Prudential Financial and Goldman Sachs & Co. (GS), traded as of Feb. 28 at price-earnings ratios of less than 1.1 times their expected earnings growth -- the so-called p-e to growth, or PEG, ratio. Oilfield service company Weatherford International Ltd. (SFT) has among the highest earnings-per-share growth forecasts of any of the BW50 at 25%. Another oilfield company, Halliburton Co. (HAL), is expected to increase earnings 16% annually as demand for energy stays strong around the world.

The most volatile stocks include some with exceptionally high expected growth rates. They may not all be worth the extra risk of owning them, but four have projected earnings per share growth of 20% or more. Chipmaker Texas Instruments (TXN) has the most going for it. Its price-earnings ratio of 20 is below its historical average and no more than the stock's growth rate. Buybacks cut the company's share count by 7% last year. NVIDIA, too, has a p-e roughly equal to its 20% growth rate. But the stock has run up 115% from April through February, vs. a 20% gain at Texas Instruments in the same period.

The contrast between NVIDIA and Texas Instrument shares shows that quantitative filters can only guide investors so far. Buyers have to look around to flush out the rest of the story. With so many stocks to choose from and so little time, the BW50 is a good place to start.

By David Henry


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