Stocks you can count on
graphic February 1, 2002: 3:50 p.m. ET

The market has suddenly become obsessed with accounting. Here are five dependable stocks that you shouldnít have to worry about.
By Staff Writer Paul R. La Monica
graphic graphic
NEW YORK (CNN/Money) - Who can you trust? Investors these days seem to have little faith in any public company.

Concerns about another Enron-like debacle have roiled the markets despite a rash of positive economic news. Tyco, Williams Companies, and Electronic Data Systems have taken turns wearing the scarlet A (for accounting) label and it didn't help matters that another prominent firm, Global Crossing, has filed for bankruptcy.

But despite all this tumult, there are clearly stocks that investors can depend on, companies that have posted steady -- if not spectacular -- sales and profit gains over the past few years while also paying shareholders a dividend.

Look for stocks with solid earnings track records

To find such stocks, we ran a screen looking for companies that have posted dividend increases over the past three years, have operating profit margins that are higher now than their five year average, and boast five-year sales and earnings growth rates that exceed 10 percent.

In addition, we wanted companies that have actually posted an increase in earnings and a stock price gain during these difficult last twelve months and are also expected to continue generating profit growth of at least 10 percent annually over the next three to five years.

Thirty made it through our initial net. From there, we took a close look at the income statements and balance sheets to make sure they passed various "smell tests" (i.e. the accounting was easy to understand and there didn't seem to be anything problematic lurking)

The first cut

This "smell test" got rid of a few companies right away. Harley-Davidson, for example, has had a rise in bad debts recently (that could wind up being a drag on earnings in the future if the company has to write these debts off). And uniform-rental company Cintas has had a big increase in inventories.

We also knocked off several homebuilders, which though seemingly cheap, also have mortgage finance divisions that can have big impacts on earnings. Earnings can be whipsawed by the effects of sales of their mortgage loans.

And we didn't want to mess around with big writedowns. That eliminated cleaning-products manufacturer Ecolab, which recently announced it would take a $50 to $60 million restructuring charge. We also wanted to avoid companies that had many moving parts, making them more difficult to understand. That's why we eliminated Jefferson-Pilot, an insurer that also owns and operates radio and television stations.

Finally, we looked at valuation. Home Depot and Lowe's are two fantastic retailers but the market already seems to know that. With P/Es of more than 30 (based on estimates for this fiscal year), we figured we could find better value elsewhere. Ditto for Commerce Bancorp, a Philadelphia based bank. It's got great numbers but it trades at 23 times 2002 earnings estimates, a huge premium to most banks.

We settled on five stocks.

A look at the five stocks

Casual dining chain Applebee's (APPB: down $0.45 to $36.00, Research, Estimates) has been growing steadily and profitably over the last few years. The company now has 1,392 restaurants, up from 819 at the end of 1996. And over the past five years, earnings have increased at an average rate of 21.2 percent annually on an average sales gain of 15 percent. †

What's more, the company has performed admirably during the recession. Earnings for the past twelve months are up by 11.6 percent and the company just reported a solid December. Same-store sales (i.e. restaurants open for at least a year) increased 3 percent in the month.

Regis (RGIS: down $0.08 to $25.54, Research, Estimates) operates chains of hair salons under the Regis, MasterCuts and Supercuts brand names. The company continues to make acquisitions to fuel growth in what is a highly fragmented industry.

Earnings have increased at a rate of 35.5 percent over the past five years and sales have grown at a 16.3 percent clip. "The persistency of earnings and revenue growth is what attracts investors," says Dennis Nielsen, an analyst with brokerage firm Miller Johnson Steichen Kinnard in Minneapolis.

Shares of General Dynamics (GD: down $2.10 to $85.90, Research, Estimates), which builds ships, marine systems and tanks, have performed well since the war on terrorism began and received another nice boost after President Bush's State of the Union address on Tuesday. The stock is up more than 18 percent since Sept. 10.

But General Dynamics has historically been a solid performer even before there was a renewed emphasis on the nation's defense. Earnings have increased at an 18.1 percent pace over the past five years.

Mortgage buyer Freddie Mac (FRE: down $0.39 to $63.60, Research, Estimates) may get overshadowed by its larger sibling Fannie Mae (FNM: down $0.54 to $77.48, Research, Estimates) but it has been a strong performer thanks to the strong housing market.

Freddie makes money by purchasing mortgages from lenders and selling them as securities. Profits have grown at a rate of 19 percent over the past five years and 2001 in particular was a really good year due to low mortgage rates. Earnings over the past twelve months were up 76 percent for Freddie.

Finally, medical-device maker Stryker (SYK: down $1.62 to $58.39, Research, Estimates) popped up on our list. The company, which makes orthopedic implants, is a model of consistency. Earnings have grown at an average of 20.3 percent annually over the past five years and analysts expect earnings to increase at a rate of 19.7 percent over the next three to five years.

And what's particularly noteworthy about Stryker is the fact that it has been aggressively paring its debt load. The company had $1.2 billion in long-term debt at the end of 1999 following its acquisition of Pfizer's orthopedic device maker Howmedica. But as of Dec. 31, 2001 Stryker had cut its debt load to $720 million. graphic