About 10 months ago, financial analysts competed in their speculations on whether the stainless steel U.S. economy was headed for a "hard landing" or a "soft landing" after its supersonic flight in the '90s. Then, as the landing gear seized up, that speculation turned to whether stocks would experience a V-shaped, U-shaped or an L-shaped bottom after they touched ground.
latest revelations of its midair disintegration, it seems we need a richer set of words to describe this mess. And so in honor of the last few minutes of the U.S. spy plane flight over the South China Sea, I propose that we are experiencing a Hainan Island landing with a foggy bottom.
This is a phenomenon in which one of the four propellers of our economy is knocked out of commission, threatening to make tech investors bail out over shark-infested waters. Instead, we stabilize at a lower altitude, radio for guidance and get no answer. We land in hostile territory, where the locals buy only, yuck, cyclicals. After a short period, we're rescued amid cheers and yellow ribbons by an early April rally.
And then we realize we may be too traumatized to ever fly again.
Time to Take a Risk
As professional bears and bulls on Wall Street hammer out apology letters to each other in language that might as well be Chinese for all the sense it makes to us, one thing has become clear: Smart investors who stockpiled cash in 2000 eventually will be rewarded for taking risks now -- amid this foggy bottom -- on good companies with shipwrecked stocks. For me, that means screening for stocks in ways that have been successful in the past.
How far in the past? The last time the U.S. markets sold off amid a transient Asian and tech-cycle-related crisis was the summer of 1998. Our problems seem much more serious today, but back then it seemed they were pretty darned serious, too. So many of our current worries will prove overdone.
In September 1998,
asked me to develop a series of screens to deliver 100 stocks that would beat the market over the remainder of the year. Overall, the 100 stocks did beat the
by a substantial margin, even though a couple of the individual screens failed to produce winners.
One of the steadiest producers was a simple screen that sought growth companies trading at reasonable prices. Called
, it tabbed
Transocean Sedco Forex
. Collectively, they were up 20.5% four months later -- not bad, though a little less than the market. But after two years, they were up 130%, about three times better than the market.
When I described this screen again in the second edition of my book,
Online Investing, which I wrote in October 2000, the model was pulling up the following stocks:
Electronics for Imaging
American Power Conversion
. And the screen came through again. Collectively, these names are up 30.4%, vs. a 40% decline in the
and a 14% decline in the S&P 500.
Why does the screen work? It essentially looks for companies with strong five-year earnings records that are expected to keep up the good work. For the moment, however, they've hit a big bump in the road that's taken their
price/earnings multiples down below their growth rates, and they're trading within 20% of their one-year lows. The stocks that the screen pulls up never seem too attractive at the time, but I do like the look of the current bunch. Here they are:
This gang of six includes two telecommunications-equipment makers -- Tellabs and ADC Telecommunications -- that have been the subject of rampant analyst downgrades. That's good news to contrarian GARP buyers, as the negativism wrings out high valuations for steady performers. Meanwhile, analysts believe Pixar will have a hard time maintaining earnings momentum in 2001 because of tough comparisons with last year, when its hit movie
Toy Story 2
animated the bottom line. Conglomerate Tyco International is perennially the subject of conspiracy rumors about its merger and accounting methods, but its past growth achievements and strong management are undeniable. And prospects for international operators like
are impeded for the moment by darkening gloom about the world economy. They've both been solid performers in the past, however, so a one-year hold would be expected to give the bulls time to send shares higher.
Another screen that worked well in 1998 was dubbed
. It looked for the best companies -- in terms of balance-sheet strength and growth prospects -- in the least-favored industries. At the time, that meant oil drillers, oil services firms and semiconductor-equipment makers. All rebounded sharply over the next two years as sentiment and business picked up dramatically.
- The oil services stocks Baker Hughes (BHI) , Schlumberger (SLB) - Get Report, Veritas (VTS) , Willbros Group (WG) and Lufkin Industries (LUFK) -- are up 41% since Sept. 4, 1998, vs. a 1% gain for the S&P 500 and the Nasdaq.
- The semiconductor-equipment stocks -- Teradyne (TER) - Get Report, Applied Materials (AMAT) - Get Report, KLA-Tencor (KLAC) - Get Report and ATMI (AMTI) -- are collectively up 235% since September 1998, despite the recent plunge in prices. (One additional stock, Etec Systems, also had a big gain before it merged with Applied Materials.)
- The oil drillers -- Nabors Industries (NBR) - Get Report, Noble Drilling (NE) - Get Report, Global Marine (GLM) , Diamond Offshore Drilling (DO) - Get Report and Transocean Sedco -- are collectively up 154%.
It's particularly notable that while the semiconductor stocks started to pick up about two months later, the energy-related stocks didn't start moving for a full year. But they started to fly not long after they started to walk -- and were hard to purchase at that point. Here's the latest group of sleepers -- the best names in the worst-performing groups over the past year.
I'll follow all these stocks over the next two years and let you know how everything turns out. Hopefully, there will be yellow-ribbon cutting for these names, too, as they return to their rightful places in the market when the technology business warms back up over the next 24 months.
At the time of publication, Jon Markman owned shares in the following equities mentioned in this column: Cisco, AES Corp. TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.