has taken place in among defense contractors, leaving Lockheed Martin as one of three surviving heavyweights in the industry, alongside Boeing and Raytheon. Lockheed’s 11% growth rate and 1.8% yield both surpass the S&P 500’s averages, while a P/E of 13 makes it look relatively cheap.
THE STALWARTS: BLUE CHIPS
Call them blue chips or even industry leaders. The stock market loves large cap stocks, companies that command $1 billion in market capitalization, simply because that kind of financial girth acts as a cushion. At times, when the economy shakes, large caps have the heft to remain reasonably steady and are almost guaranteed that their institutional following won’t charge toward the exit the minute things get a little rough. The problem is that with the economy looking rather uncertain at the beginning of 1997, large caps’ aura of stability attracted investors near and far. An example: by late April, the classic large-cap index, the Dow Jones Industrial Average, had risen 4.5%, compared to a 7.1% loss for the S&P Small Cap 600 index.
All of which made it incredibly difficult to choose solid blue chip stocks since the run on large cap stocks the last year and a half pushed their P/E multiples up to a point where many no longer seemed as cheap. As a result, we opted to alter our criteria somewhat to get good long- term holdings from our screen. We looked for earnings growth double that projected for the S&P 500, while we allowed P/E to range as high as 25%. We also sought out a dividend large enough to push yield above 1%. In terms of sheer value, toy maker Mattel (NYSE: MAT) led our list. The company’s P/E of 18 ranked the lowest of our group, and wasn’t too much greater than the company’s projected earnings growth rate of almost 15%. That low number might be linked to the appointment of a new CEO, Jill Barad, to head the famous maker of Barbie. Still, with a reputation bolstered by its line of products linked to Disney movie releases and Hot Wheels, Mattel seems too strong to ignore, especially after buying Tyco in the first quarter. Our runners-up were Johnson & Johnson (NYSE: JNJ) and Merck (NYSE: MRK), two pharmaceutical/health care companies that should profit from well-stocked pipelines and the overall aging of the American population. The two had almost identical tallies in our screen: yields just above 1%, estimated earnings growth of 14% and slightly high price-to-earnings ratios of about 24.
SPROUTING PROFITS: GROWTH STOCKS
During much of the 1990s, growth stocks have been the rage. As computers continue to invade every facet of society and medical advances appear in the news almost daily, the shares of companies tapping new markets, blazing the lead in new technologies or devising strategies that make earnings mushroom have often tallied unbelievable increases. It’s this type of stock price appreciation, called capital gains, that lures investors to growth companies and helps push P/E ratios up to levels that exceed index averages.