<FOOLISH WORKSHOP>

Trading Places      

by Ethan Haskel ([email protected])

Burlington, VT (March 31, 1999) -- Last week we looked at the 30 new Beating the S&P (BSP) stocks for the year, based on Business Week's recent edition of The Top Companies of the S&P 500. Let's peek a little closer to see how and why the stock list changed this year.

As we noted previously, there were seven stocks that fell off the list this year, and each replaced by a brand new one. Of the seven that have fallen from grace, three were the victims of an unprecedented wave of mergers and acquisitions that hit the markets last year. Amoco merged with British Petroleum to form BP Amoco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BPA)") else Response.Write("(NYSE: BPA)") end if %>. Citicorp joined with Travelers, creating Citigroup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %>. MCI married WorldCom, giving birth to MCI WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCOM)") else Response.Write("(NYSE: WCOM)") end if %>.

As a result of these mega-reshufflings, BP Amoco dropped from the Standard & Poor's 500 Index (as most foreign-owned companies are wont to do). Citigroup joined its partner Travelers in the Dow Jones Industrial Average, and MCI WorldCom decided to drop MCI's puny dividend after the wedding.

Four companies were booted off the new BSP 30 list because their market capitalization (stock price multiplied by shares outstanding) didn't make the grade. The falling stock price of Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %> caused it to fall way back down the list. The capitalization cutoff this year was $26.5 billion, shared by Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> and Carnival <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCL)") else Response.Write("(NYSE: CCL)") end if %>. Campbell's market cap had shriveled to a mere $18 billion. In the same food industry group, Sara Lee <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %> just missed out, weighing in at about $25 billion. Thus the BSP was left without a food stock for the first time in recent memory.

In the paper/forest products industry group, Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %> also just missed the grade, with a market cap of $25.6 billion. Finally, Emerson Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMR)") else Response.Write("(NYSE: EMR)") end if %>, competing in the electrical/electronics group, got squeezed out. Not only did its market cap ($25.1 billion) not meet criteria, but Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> surpassed it in its own sector, becoming the third and last stock chosen in that group.

How about our newcomers? With two exceptions, their claim to fame was their strong stock price performance last year. Here were the new stocks, listed in order of total return for the past 12 months:

Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> +117.9%
Anheuser Busch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %> +66.9%
Dayton Hudson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> +63.1%
Texas Instruments +54.5%
Carnival +52.6%
Waste Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMI)") else Response.Write("(NYSE: WMI)") end if %> +17.5%
Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> -2.1%

Bank One made it on the list due to Citicorp's defection into Dow component Citigroup rather than its strong price performance. Note that the total return for the four stocks leaving the BSP 30 this year (not the result of mergers) averaged a loss of 12.5% last year, compared with an average gain of 52.9% for the seven newbies.

Besides the obvious difference in stock performance for the past year, the other major difference between the comers and the goers was the dividend they paid.
The seven stocks that left the BSP list, with the notable exception of MCI, all paid high dividends relative to the S&P 500. The four stocks not leaving as a result of mergers averaged a dividend yield of 2.1%, compared with 1.0% for the seven incoming stocks. Furthermore, contrasting with the outgoing stocks, five of the seven newcomers had yields significantly lower than the average for the S&P 500 (currently about 1.2%).

No doubt about it, the BSP 30 stocks that joined the list are much stronger growers than the ones leaving. The same Business Week issue that we use to choose our BSP list also ranks each company in the S&P rankings, based on a proprietary growth model. The BSP newcomers' median ranking was 72 out of 500 companies, versus 183 for the four stocks that left. Along with all that growth, however, comes the lower dividend yield.

Will the lower dividend yield of the new BSP 30 hurt or help the returns of the BSP strategy? No one can say for sure. What one might lose in the extra dividend could be offset by higher price appreciation for a company that's growing more quickly. Despite the changes, the yield on the top 10 BSP stocks is still almost double that of the average stock in the S&P 500.

A number of readers have wondered what it means if the company they've held in a BSP portfolio is now off the new BSP 30 list. Should they sell it? I'd say definitely not. Many times these companies will come back strong; witness Anheuser Busch and Chrysler last year. Keep in mind that some of these displaced stocks were barely nudged off the chart this year and may be back soon. Anheuser Busch, BankOne, and Waste Management were all on past years' BSP 30 lists. It's often the sheer size of these companies that allows them to make dramatic comebacks. Not all have the wherewithal, but a high enough percentage do that it probably pays to hang in there.

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Beating the S&P year-to-date returns (as of 03-30-99):

Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>      +34.0%
Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>    -10.8%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>     -23.2%
Ford Motor Co.  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>      -2.7%
BankAmerica  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>      +18.8%
Beating the S&P                +3.2%
Standard & Poor's 500 Index    +6.1%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P                +20.6%
S&P 500                        +18.0%

$10,000 invested on 1-2-87 now equals:
Beating the S&P               $98,500   
S&P 500                       $75,100