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Finding Strong Stocks Among Weak

Twenty blue-chip prospects with growth and value requirements stand out. Six from the tech sector make the cut.

November 28, 2000|JOSH FRIEDMAN

What's old is working again on Wall Street.

Companies with good old-fashioned fundamentals such as substantial--and rising--earnings and reasonable valuations are the stars of this year's market, while many former highfliers have plunged.

In the Dow Jones industrial average, that means the leaders are stocks like Boeing and Philip Morris--not Microsoft and Intel.

To find blue-chip stocks that might be worth buying in this new environment, The Times screened the online database of Zacks Investment Research (http://www.zacks.com) last week and came up with 20 prospects that met some basic growth requirements, plus a key value requirement.

Perhaps surprisingly, six of the stocks are in the tech sector. But because some investors may be more than a little nervous about technology in light of the sector's deep slide since spring--even as others may be looking to bottom-fish--we divided the stocks into two groups.

The "Anything but Tech" portfolio, with 14 names, is a hodgepodge that includes three energy stocks, three companies in the hotel field and two health-care firms.

The six tech and telecom names that made our screen are listed separately in the accompanying chart. They are mostly tech equipment makers of one type or another whose stocks have fallen sharply from their 2000 peaks.

To get this list of 20 stocks, we screened issues in the blue-chip Standard & Poor's 500 index that had, as of Wednesday:

* A "Zacks Rating" of 2 or better. These ratings estimate expected price performance over the next three to six months, according to Chicago-based Zacks.

The scores, ranging from 1 ("strong buy") to 5 ("strong sell"), are based on a proprietary Zacks ranking system that measures recent company earnings surprises and changes in Wall Street analysts' earnings estimates. This cut-off pared the S&P to 157 stocks.

* A "PEG" ratio of 1.5 or less. This is a simple way to look at a company's growth and value characteristics in tandem.

To calculate a PEG, you divide a stock's price-to-earnings ratio for the current fiscal year by the company's annualized rate of expected profit growth over the next three to five years, as projected by analysts. With PEGs, lower is supposedly better, as it may signal strong growth at a relatively cheap stock price.

Our PEG cutoff winnowed the list to 58 names.

* Annualized per-share earnings growth expectations averaging 15% or better over the next three to five years, as projected by analysts. Twenty-seven stocks were left after applying this screen.

* Rising, or at least flat, share prices in the previous calendar week, to try to weed out stocks moving in the wrong direction for whatever reason.

That left us with 20 names.

*

None of these stocks comes with any guarantees, of course. Just because a stock looks reasonably priced doesn't mean it will rise in the near term.

Also note that a low PEG ratio may be a result of what will turn out to be overly optimistic earnings growth forecasts by analysts. Still, you could question earnings growth forecasts for practically any stock.

Digging into the stocks that survived our screen, the three energy issues are Anadarko Petroleum (ticker symbol: APC), Apache (APA) and Devon Energy (DVN). All three explore for, and produce, oil and natural gas, though they are much smaller players than giants such as, say, Exxon Mobil.

Deutsche Banc Alex. Brown recently initiated coverage of Houston-based Anadarko with a "strong buy" rating, noting the company's growing activity in oil and gas exploration at home and abroad.

Anadarko's "growth trajectory on virtually any performance measure should outpace that of its peers against a backdrop of surging natural gas and oil prices," the firm's analysts wrote in their report.

Though the stock is up 99% this year, its "valuation has yet to reflect the realities of Anadarko's potential," Deutsche Banc said. The stock trades at an estimated P/E of 17 based on profit projections for this year, but its earnings are expected to rise an annualized 16% longer-term.

Shares of Houston-based Apache are up 71% this year, and Oklahoma City-based Devon Energy is up 64%.

All three firms, of course, are susceptible to a collapse in energy prices. Such a turn is always a concern with commodity-based stocks.

The good news: Analysts don't expect oil and gas prices to plunge any time soon. The risk: Analysts are rarely known for being ahead of the curve.

*

Though hotel stocks have not been as hot as the energy group, they have done well in 2000 relative to broad market indexes. Bethesda, Md.-based Marriott International (MAR) is up 28%; Las Vegas-based Harrah's Entertainment (HET), which operates casino-hotels and riverboat gambling facilities, is up 6%; and White Plains, N.Y.-based Starwood Hotels & Resorts Worldwide (HOT) has lived up to its ticker symbol, rising 41%.

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