(MONEY Magazine) – COMPAQ-ORACLE-AMERICAN POWER-THERMO ELECTRON-ANDREW-WOLVERINE

Put money into the market every month, reinvest dividends and buy companies that are increasing their sales and earnings faster than the competition. That's simple, sound advice you don't hear much in a world of mouse-click day trading, CNBC talking heads and hot Internet IPOs.

It's a strategy we've long been comfortable with, and it forms the guiding philosophy of a group of stock pickers who've posted an extraordinary record--the 500,000 investment club members who belong to the National Association of Investors Corporation. Formed nearly 50 years ago, the NAIC has more than 37,500 clubs (with monikers such as Maida Lotta Money, Beat the Street and Great Expectations) that have nearly $400 million invested in 3,500 companies.

To evaluate potential investments, club members rely on the organization's Stock Selection Guide--a worksheet that uses a company's past sales, earnings, profitability and stock valuations to predict returns as well as risk of loss for the next five years. We're skeptical about the infallibility of the worksheet (available at www.better-investing.com), but it sure focuses investors on the right things. As NAIC president Thomas E. O'Hara has written, "Growing sales and earnings per share make a company increase in value and make its stock price go up."

Not fashion, not bubbles, but growth. No surprise then that the NAIC's 16th annual survey of the 100 stocks most widely held by its clubs (see the table below) includes Intel, Merck, General Electric, Microsoft and Home Depot. But America's do-it-yourself investors also love some stocks that go-go mutual fund managers and other pros have ignored. Who would have thought that insurance provider AFLAC and specialty chemical concern RPM would be among the most popular stocks? In fact, RPM is on its way to recording 52 years of rising sales and net income (though the stock hasn't had a huge run lately). AFLAC has been owned by NAIC members for decades and has grown earnings annually at a 12% clip over the past five years. The stock is up over 200% in that time.

Those two notwithstanding, the list is tech-stock heavy, as befits a growth-oriented portfolio. But it's worth noting that the NAIC's strict focus on historical earnings increases means that its top 100 list contains no pure Internet stocks--though many are making money from the Web's development. The absence of dotcoms doesn't appear to have hurt. Through February, the NAIC says its top 100, weighted by the estimated amount that clubs had in each stock, notched a 26% annual return over five years, beating the S&P 500.

Which of these stocks are good buys today? Many have already had runs that make them too expensive for our tastes (IBM at $221 a share comes to mind). But as of mid-May, 16 of the NAIC 100 were trading 30% or more below their 52-week peaks. Knowing that those companies had shown the kind of long-term performance we like, we scoured the group looking for solid businesses poised to rebound from temporary setbacks.

We used the NAIC's worksheet as a starting point, then conducted extensive interviews with industry analysts, fund managers and company executives to winnow the list. We passed over companies like Campbell Soup, which, despite its great franchise, may not have the growth possibilities of some other underperformers. In the end, we settled on six companies, five of which have ties to rapidly growing technology industries. But this isn't a story about tech stocks; it's about good, growing companies that are out of favor. Two are brand-name, big-capitalization stocks; three are midcaps and one is a small-cap. Here they are, from largest to smallest.

THE FALLEN KING

COMPAQ COMPUTER SHARE PRICE $25; MKT. CAP $42.3 BILLION

Until a few months ago, investors looking to build strong tech portfolios wanted to own the world's largest computermaker. They sent Compaq's stock soaring tenfold between 1993 and early '99 as earnings and sales increased at a 30% annual clip. The company stumbled now and then, but it kept the lead in PC sales. And it was pushing into services, high-end products and e-commerce with its purchases of Digital Equipment Corp. in 1998 and Shopping.com in January.

But, in fact, late last year Compaq was losing its way. Retailers, angry over the company's plan to start selling via the Internet, focused on other brands, says analyst Michael Kwatnetz of Credit Suisse First Boston. Meanwhile, Compaq's sales force was having trouble selling high-end servers. Competition from Dell and IBM, falling PC prices and an inventory glut squeezed margins, which dropped from 14% to 6%. Soon after Compaq announced that first-quarter earnings would be well below expectations, CEO Eckhard Pfeiffer was ousted. By late May, the stock sat at $25, down 54% from its $52 high.

There's good reason to believe Compaq will recover: It's already modified its retail strategy, giving better deals to fewer distributors. And while the Digital Equipment integration hasn't gone as smoothly as hoped, ultimately it will allow Compaq to be less dependent on low-margin PCs. In the short term, the catalyst for the stock will be a new CEO. Until one arrives, says Wendy Abramowitz of Argus Research, "they're in a holding pattern."

Compaq's P/E hovers around 20, but Doug MacKay, co-manager of the White Oak Growth Stock fund, which owns the stock, thinks the shares could reach a market multiple of 30 if the company posts good results for four straight quarters.

INTERNET ON SALE, PART I

ORACLE CORP. SHARE PRICE $25.75; MKT. CAP $37.1 BILLION

The nation's biggest software maker after Microsoft has taken investors on a wild ride in the past year. Its shares traded as low as $12 and reached a high of $42 before falling back to a recent $25.75. While Oracle is best known as a database company, it makes an array of high-priced software packages that help big companies run their manufacturing, accounting and personnel operations. The stocks of so-called enterprise software firms like Oracle have been in a tailspin over the Y2K computer bug. Once companies have made sure that their systems can handle a date after 1999, they may stop buying software until next year. PeopleSoft, Baan and SAP have all announced revenue shortfalls. Oracle missed earnings projections last quarter; analysts have been cutting estimates for this one.

But this is short-term noise that most investors should tune out. Oracle is one of the software makers best positioned to exploit Internet technology and e-commerce, says Chuck Phillips, an analyst for Morgan Stanley Dean Witter. Oracle has the greatest breadth of software and services in the industry and has reworked all of its product lines to make them Internet compatible. A new release of its applications software (which lets a user, perhaps a salesman in the field, access a database for, say, prices or inventory) will be out this summer. For the first time, it will tie together the latest versions of Oracle's other software. Integrated product lines can be a great selling advantage: Programs can work together seamlessly, and the package is less expensive for the client.

Oracle trades at 25 times the $1 per share that it's expected to make in the next 12 months. Internet plays just don't get much cheaper.

INTERNET ON SALE, PART II

AMERICAN POWER CONVERSION SHARE PRICE $35; MKT. CAP $3.3 BILLION

This company's performance (year-over-year earnings growth in 42 of the past 45 quarters) is nearly as dependable as its products--uninterruptible power suppliers that keep PCs and computer networks running no matter what. So why is the stock trading 38% below its 52-week high?

Seeing the company as a way to cash in on the growth of the Internet--websites and Internet service providers that are open 24 hours a day need reliable power--investors pushed the stock up to $56 in January. But when American Power announced quarterly results that included a 119% increase in inventory, investors panicked. By April the stock had dropped 53% and was trading at 14 times estimated 1999 earnings, well below its projected 23% annual earnings growth rate. "It's a good example of Wall Street stretching the rubber band too far in both directions," says Gilford Securities analyst Casey Alexander.

The band has snapped back a bit: Year-over-year sales grew 27% in the first quarter, and the company reported a decrease in inventory. At $35 the stock is up 35% from its low. "More critical business functions need electrical backup, and these guys are the clear front-runner in that market," says Brent Jesko of the Strong Opportunity fund, which was buying the stock in February and March. Indeed, sales of high-end mission-critical products grew 40% in the first quarter and account for 70% of revenues. "The sweet spot of the market is backing up servers that run websites," says American Power CFO Donald Muir. That's where the company intends to stand.

RESTRUCTURING PLAY

THERMO ELECTRON SHARE PRICE $19.50; MKT. CAP $3.1 BILLION

When the managers of Franklin Mutual Shares fund are banging on a company's door demanding changes, it's a clue that the stock is undervalued. The value-style fund has pushed Chase Manhattan and Sears, among others, to take action to boost returns. Its latest target: Thermo Electron, a conglomerate pieced together over 40 years by George Hatsopolous, a onetime Massachusetts Institute of Technology professor.

Thermo Electron incubates technology-based businesses in industries from medicine to semiconductors to paper mills and then spins pieces off to the public. But lately the spinning looks out of control. Thermo manages 23 publicly traded entities, making it difficult for investors to get a handle on the overall company. Combine that with a downturn in some businesses last year due to Asia's economic woes, and you know why Thermo's share price has been nearly halved, from $36 to a recent $19.50, in the past 12 months.

Enter Mutual Shares. "Thermo is structurally inefficient," says portfolio manager David Marcus. "It could get higher returns by being managed centrally."

The company seems to be moving in that direction. Chairman Hatsopolous, 72, handed the CEO reins to former American Stock Exchange president Richard Syron on June 1. Syron is pruning the number of operating companies to 11 by selling off units or consolidating them into Thermo, which will take a $450 million charge against earnings.

"They're on the right track with regard to responding to our criticism," says Marcus. "But we still need a clearer understanding of all the issues, and execution is very crucial." Mutual Shares also wants Thermo to add outside directors to its board, further shrink the number of operating units to four and stop a $2.5 million severance payment to John Hatsopolous, George's brother and Thermo's outgoing CFO. Mutual Shares has bought 2% of Thermo's shares over the past six months at an average price of $14. The fund's managers won't say how much they think the stock is worth, but Anne Anderson, president of Atlantis Investment, a private money-management firm that bought a stake in Thermo when it was trading higher, figures the sum of its parts comes to about $32.50 a share.

WIRELESS' WIRER

ANDREW CORP. SHARE PRICE $16; MKT. CAP $1.3 BILLION

Two years ago this stock offered a 20/20 vision: 20 consecutive quarters of 20% growth. Andrew, the world's third largest seller of specialized high-end coaxial cables for satellite and wireless network transmission towers, was riding a boom in telecom spending.

But demand plummeted last year. Hot growth markets in Asia and Brazil cooled off just as U.S. carriers were choosing to spend their capital budgets to build digital networks, not towers. "The trends weren't playing to Andrew's strengths," says Standard & Poor's analyst Mark Cavallone.

Trading as high as $30 in early 1998, the stock dipped to $10 last September after a year without earnings growth. Profits last quarter fell 67% compared with a year ago, and they're not expected to recover in 1999. At a recent $16, the stock is 30% below its 52-week high of $23.

But analysts expect U.S. cellular carriers to start putting up towers again next year as the industry expands into the country's mid-section and one-rate plans push up demand. With plants in China, Europe and India, Andrew is positioned for global growth too. Within 10 years, 15% of the world's population will be wired, up from 3% now. Analysts expect Andrew's earnings to rebound 26% to 95 [cents] a share next year; sales should rise 13%. Its P/E of 21 makes Andrew look like an inexpensive way to invest in the next generation of communications.

FOOTWEAR, NOT FASHION

WOLVERINE WORLD WIDE SHARE PRICE $12.75; MKT. CAP $500 MILLION

You've likely forgotten the Hush Puppies craze of 1997-98, but investors in this maker of shoes and boots haven't. They prospered as chic shoppers couldn't get enough of Wolverine's top brand. But in the second half of last year, Hush Puppies sales plunged 13% amid a general industry slump, and the stock collapsed. The stocks of Nike and other industry leaders have recovered, but Wolverine's shares remain 53% below their 52-week high because earnings haven't come back.

But soon the company will no longer have to compare results against Hush Puppies-pumped earnings. Analysts expect Wolverine to post 12% and 31% gains in the third and fourth quarters compared with a year ago. "We were happy to sell into that fashion-induced spike in demand," says Wolverine spokesman Thomas Mundt, "but it's not something we depend on--it's not even our core competency, which is boots."

In that area, the company has seen strong orders for its new Harley-Davidson line; Wolverine also sells under the Caterpillar name. And while Hush Puppies won't be making a comeback at Saks, sales are growing at mid-price stores, says analyst Steve Marotta of Wasserstein Perella. The stock sells for just 13 times 1999 earnings, half the S&P 500's P/E of 27. Historically, it's traded anywhere from a 20% discount to an 80% premium to the market. It may not be long before this stock is back in fashion.