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Stocks to adore
Strong fundamentals and reasonable P/Es are so romantic. Here are 5 stocks that we find enchanting.
February 3, 2004: 9:56 AM EST
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Can you feel the love? After three years of playing the role of jilted suitor, individual investors once again have good reason to fall head over heels for stocks.

Still, caution is necessary following last year's big market gains. Rushing into pricey momentum stocks could be a recipe for heartbreak.

With that in mind, CNN/Money has come up with a list of stocks that we believe investors can trust. These are steady growers that aren't too expensive and that are also unlikely to wind up dominating the headlines because of accounting problems.

We've done this for the past two years and for the most part, our picks have delivered. The five stocks from 2002 are up 34 percent in the past two years, compared to a 1 percent gain for the S&P 500. And although our five stocks from last year have underperformed the S&P 500's 37 percent run, they are still up a more-than-respectable 25 percent.

So we're ready to play stock market Cupid again. This year we loosened our requirements a bit, dropping the demand that companies had to pay a dividend. Sure, a dividend is nice but there are plenty of dependable companies that aren't paying them, particularly in the tech and retail sectors.

Other than that, we pretty much stuck to the same formula that we used for the past two years, looking for companies with strong earnings and sales growth over the past year as well as growth expectations for the next few years.

In addition, we screened for companies with a higher-than-average return on equity, relatively low levels of debt, reasonable valuations and "clean" earnings (i.e., not too many write-offs over the past few years).

Forty-one stocks made it through this vetting process and we've chosen these five to send little pink heart cards to: Bed Bath and Beyond, Dell, Express Scripts, Lennar and Sysco.

Bed Bath and Beyond

Several retailers made it through our list, including household names like Lowe's, Best Buy and Bed Bath and Beyond.

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You probably couldn't go wrong with any of these three as a long-term holding but Kent Mergler, president of Northstar Capital Management, who owns all three stocks in the Fremont Large Cap Growth fund, said that if he had to choose one, it would be Bed Bath and Beyond (BBBY: Research, Estimates).

"Bed Bath and Beyond has the cleanest outlook with the fewest question marks. It is a unique retailer that's done extremely well on execution," Mergler said.

The home furnishings retailer has posted average earnings growth of 26 percent over the past five years and is expected to generate annual earnings gains of 20 percent over the long-term. Bed Bath and Beyond currently has 569 U.S. stores and plans on expanding to 1,050 over the next few years, which leaves ample room for sales growth as well.

Shares trade at 27.5 times earnings estimates for the next four quarters but that's only 1.4 times Bed Bath and Beyond's long-term growth rate. Based on this metric, the company trades at a discount to other high quality retailers such as Wal-Mart and Home Depot.


Investors have had a love/hate relationship with the tech sector over the past few years. Techs were everybody's blushing brides in the late 1990s but by 2002, most investors stuck with a lot of tech probably were wishing for an annulment. In 2004, Wall Street is once again smitten.

But investors that want to sleep at night would probably be wise to stick with companies like Dell (DELL: Research, Estimates), which was one of the few techs to emerge from the downturn relatively unscathed. A relentless focus on keeping costs down allowed the company to continue expanding earnings during the bear market, even as many rivals lost money.

Valentine's Day

Dell also continued to gain market share in the PC business and in other areas such as servers and storage. Bill D'Alonzo, manager of the Brandywine and Brandywine Blue funds, which both own the stock, said that increasing demand for higher-margin laptop computers by large corporate customers will also help Dell.

The company is expected to post earnings gains of 21 percent this year and 15 percent over the next three-to-five years. Dell is not cheap, trading at about 29 times earnings estimates. But when you consider that the company has net profit margins of 6.2 percent while companies like Hewlett-Packard and Gateway struggle to make money in PCs, the premium seems worth it.

Express Scripts

The skyrocketing costs of drugs makes pharmacy benefits managers like Express Scripts, a solid investment, said D'Alonzo, who owns the stock in both funds. In particular, the growth of generic, mail order and specialty drugs should lift profit margins.

Express Scripts (ESRX: Research, Estimates) should also get a significant revenue boost from two key contract wins with the Department of Defense last year. The company has a five-year deal to provide mail pharmacy services for DOD beneficiaries and has a one-year contract (with an option for four additional years) to provide retail pharmacy services as well.

D'Alonzo said he's also impressed by cost cutting moves taken by the company recently, such as the decision to close one of two mail order facilities in Arizona.

Earnings are expected to increase 21 percent in 2004 and at a 20 percent clip over the next three to five years. Yet, the stock trades at only 18 times 2004 earnings estimates, a discount to its long-term growth rate.


What housing bubble? New home construction continues at a record pace, which means that a large homebuilder like Lennar (LEN: Research, Estimates) should remain a solid long-term bet for investors.

The company is expected to post earnings gains of 12 percent this year and 15 percent over the next three to five years. Interest rates are expected to remain relatively low this year and the 30-year mortgage rate is currently about 5.68 percent. Ted Parrish, co-manager of the Henssler Equity fund, which owns the stock, said he thinks mortgage rates would need to rise to between 7 percent and 8 percent in order to put a major dent housing permit growth.

Since the market is still skeptical about how much longer this housing cycle can last, Lennar's stock is incredibly cheap, trading at just 8.5 times earnings estimates for the next four quarters.

In addition, once the market inevitably cools, Lennar's strong balance sheet ($1.2 billion in cash) will give it the flexibility to buy more land, positioning it for the next upswing. "For homebuilders, scale is what keeps the bottom lines growing," Parrish said.


Sysco, the nation's largest distributor of food to restaurants, schools and hospitals, may not be in a sexy business. But 27 consecutive years of sales and earnings growth should make investors' hearts flutter.

While fads and economic cycles come and go, people continue to eat. This is a dependable company with a capital D. Parrish owns Sysco (SYY: Research, Estimates) and said it is very similar to Dell, which he also owns, in that it is extremely efficient and keeps a tight rein on costs.

Earnings are expected to increase at a 15 percent clip this year and for the next three to five years. As more people continue to eat away from home, Sysco's prospects remain solid.

So even at a valuation of 27 times 2004 earnings estimates, Parrish said the stock is worth it. "Sysco is almost priced to perfection but the stock deserves this multiple. It's a high quality company," he said.  Top of page

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