At the beginning of 2002, BLACK ENTERPRISE sifted through large and small companies and chose two groups of stocks we hoped would weather the effects of a sagging economy. We tailored one portfolio to include value stocks, shares with bargain prices relative to the market that also paid sizeable dividends to investors to cushion them from any volatile swings. The second portfolio we filled with growth shares, companies that were modestly priced relative to the market, yet they were linked to businesses that could ferret out profits in a slothful economy. In both portfolios, we chose companies that had very little debt and had a market value of $2 billion or more.
In both cases, we ended up with something of a coup. Even as the market rocked and roiled, our value portfolio managed to maintain its footing. If you factor in the dividends over the months, the value group’s total return rose to a very respectable 3.5%–a downright success in a tattered stock market. Paccar Inc. (Nasdaq: PCAR), an outfit that manufactures the Peterbilt and Kenworth heavy-duty truck lines, led the value portfolio. Paccar saw revenue rise almost 10% over 2002 and paid investors $2.58 a share in dividends from the time we chose the stock until the end of 2002. UnionBanCal (NYSE: UB) was another solid performer. The holding company, which owns Union Bank of California, was well on its way to an 11% increase in earnings last year. Meanwhile, overcapacity in the telecommunications business hurt SBC Communications (NYSE: SBC), a value pick that slipped more than 30%, but the dividends cushioned the blow by paying out $1.07 a share.
Our growth picks managed to hold off a stormy market as well, finishing with a slight loss of 2.1%, or a total return of -1.4% including dividends. Fashion retailer Liz Claiborne (NYSE: LIZ) led the pack with a share price gain of nearly 40%. Carpet maker Mohawk Industries (NYSE: MHK) was a close second, climbing 35%. Two stocks, however, foiled what was an otherwise strong portfolio. Energy supplier Dynegy (NYSE: DYN) crashed, falling more than 90% after overextending its reach into telecom and somewhat riskier energy trading activities. SCI Systems (NYSE: SCI), an electronics manufacturing outsourcer, was taken over by rival Sanmina (Nasdaq: SANM). Nonetheless, a drop in demand for telecom equipment hit Sanmina’s revenues and sent the stock down by more than 70%.
Investors can take away a couple of lessons from our story. The first is that dividends provide financial padding during market seesaws. The second is the importance of maintaining a diversified portfolio. Despite a difficult period, our two groups of stocks managed to fare quite well, primarily because our assets were spread across a variety of holdings in different industries.
22 Stocks for 2002
Company (Exchange: Ticker)
|Alliance Capital (NYSE: AC)||$48.12||$31.00||-35.6%||$2.97||-29.4%|
|Clorox (NYSE: CLX)||35.28||41.25||16.9||1.06||19.9|
|Fortune Brands (NYSE: FO)||37.21||46.51||25.0||1.27||