to sap any raise you might secure at the office. The same holds true for a company out on the market. Strap huge debt service payments onto any corporation’s bottom line and you’re draining away capital that could buy new equipment, beef up dividends or even show up in the form of increased profits. So, with that in mind, we looked to cap debt-to-capital at 40%.
Finally, we wanted to check on what Wall Street thought of each of our picks. The big brokerage houses have tight relationships with corporations that issue stock. After all, the Merrill Lynchs and Paine Webbers of the world help bring shares to market. To help keep the world up to date and interested in a company’s shares, brokerages assign analysts to run a microscope over company finances. Invariably, the reports net a wide audience, including everyone from institutional investors on down to your boss in the office across the hall. With that kind of following, we felt it was important to know just how much support a given stock had at a given time, so we looked for stocks with an average rating of “buy” or better. After all, according to the simplest of economic laws, greater demand for a limited supply helps push prices higher.
LOOKING FOR THE BARGAINS
At a time when the market seems somewhat high-priced, we decided to lead off with our screen for bargains, what investment professionals typically label as “value stocks.” One telltale sign you’ll find in this undervalued group is a relatively low P/E ratio, a sign that investors may well have overlooked a company and haven’t yet bid up share prices. Another is a high yield. It’s only logical, after all, that if a corporation’s stock price doesn’t move much, even while dividends are increased, that the yield on its shares will drift upward. It’s a phenomenon value managers have come to appreciate since a sizable dividend will deliver some sort of income as they wait for investors to finally spot and buy up long-neglected shares.
By focusing on stocks with a projected average annual earnings growth of 10% or better, we looked to surpass the 6.7% rate predicted for the S&P 500 for the next five years. We then looked for a solid history-earnings growth, coupled with a dividend exceeding the S&P 500′s 1% yield.
Our top pick was Big Dave’s own Wendy’s International (NYSE: WEN). According to a survey of U.S. economic sectors put out by Standard & Poor’s, the near-term outlook for restaurants is turning positive. Stocks like Wendy’s took a hit because of concerns over the rising price of meat and labor costs. That change in market sentiment pushed Wendy’s stock price down to 14.91 times projected 1997 earnings. That’s despite analysts’ estimates of over 16% earnings growth in the next five years. Our other choice, Lockheed Martin (NYSE: LMT), might seem like something of an anomaly, especially given sizable defense cuts the past few years. The fact is, however, that a considerable amount of consolidation