Wall Street
By Tara Kalwarski


All of our benchmark indexes are down from last month; the Nasdaq's 3.4% loss was the worst.

NOTES AND SOURCES: Unless otherwise noted, data as of March 24 from Lipper, New York; 877-955-4773. Bond index data from Lehman Brothers. Market Benchmark index levels from Bloomberg. Stock data from Thomson/Baseline. Fund category averages as of March 17. Monthly S&P ratios as of March 16 from Standard & Poor's. Ratios are based on previous four quarters of earnings. [1] Annualized. [2] Price change only.



Burlington, Tyco Make the Grade

NOTE: As of March 24. P/E ratios based on projected 2005 earnings. Earnings growth is compound annual rate projected for five years. SOURCE: Thomson/Baseline.


These companies are no longer growing quickly enough for inclusion.

• Baxter International has an interesting portfolio of medical businesses, including specialty intravenous products, biopharmaceuticals and treatments for kidney disease. But earnings growth has slowed.

• Union Pacific is the largest U.S. railroad, but since the company's 1996 acquisition of Southern Pacific, it's had difficulty managing traffic, especially as freight demand picked up in the economic recovery. Over the past two years, Union Pacific has had to scramble to add engineers and locomotives. Some analysts think the stock may still be attractive as a turnaround. But it doesn't have the long-term growth we look for.


These stocks could deliver market-beating returns over the long term.

• Tyco is an industrial conglomerate that has been in the news a lot thanks to the messy trial of former top execs. The current CEO, however, has received great credit for cleaning up the company, and results have rebounded strongly. The stock is up, so the turnaround play in Tyco is probably over, but earnings growth over the next five years looks to be well above average.

• Burlington Northern Santa Fe, the No. 2 U.S. railroad, has a more impressive record over the past two years than Union Pacific does. Moreover, Burlington has better prospects. Its projected earnings growth is higher, and its price-to-earnings ratio is lower.



A Scary Outlook for Bond Funds

NOTE: As of March 29. SOURCES: Lipper, the fund companies.

• How much risk is there in your bond funds now that interest rates are rising? Two recent studies suggest the same answer: plenty. So the shorter the maturity the better. Research from two Smith Barney strategists and Lipper senior research analyst Andrew Clark found that if the Federal Reserve continues its policy of raising its target rate by 0.25% a pop, the optimal maturity for a bond will shorten to less than five years. Two years ago, all maturities performed well. (Longer bonds pay nominally higher interest rates, but their prices fluctuate more as rates rise and fall.) But if the Fed decides rates need to go up more, the findings suggest you should go even shorter. Clark found that optimal duration--a measure that looks at maturity and coupon size and determines a bond's price fluctuation, assuming a rate change--is also shrinking. "A number between 3.0 and 3.5 years is ideal in this type of volatile rate environment," he says.

Worried about rising rates, managers of several MONEY 50 fixed-income funds have been dumping long-term bonds for more than a year in favor of shorter maturities. That's hurt returns, as long-term rates stayed surprisingly stable until recently. "There's no free lunch," says Tom Dugan, a manager at Dodge & Cox Income (DODIX). "Shorter bonds gave us less income in 2004." Dugan's fund lagged its Morningstar category average for the first time in 14 years in 2004. On the other hand, caution will save shareholders a good bit of pain over the coming months if rates continue to rise. --T.K.