FOOLISH FOUR PORTFOLIO

Foolish Four Portfolio
Earnings Watch
Caterpillar and International Paper report this week
By Ann Coleman (TMF AnnC)

RESTON, VA (Oct. 11, 1999) -- International Paper (NYSE: IP) is continuing its modest climb before tomorrow's earnings release, but now it looks like Caterpillar (NYSE: CAT) is doing the same thing. Caterpillar's earnings are due out this Friday before the market opens. Do these recent rises as we head toward earnings announcement day bode well?

Our other two Foolish Four stocks report earnings this month as well: JP Morgan (NYSE: JPM) on the 18th and 3M (NYSE: MMM) on the 25th. The October earnings are actually rather important for Foolish Four investors -- at least for those using the recommended December renewal cycle.

These are the last earnings announcements before the stocks are re-evaluated at the end of the year. So these announcements can be fairly influential, although last year we saw "earnings warnings" coming out in mid-December that caused share prices to slide and helped propel Caterpillar and JP Morgan onto the Foolish Four.

Estimates for Caterpillar are not exactly robust. Consensus estimates are for $0.61 per share, which is down 34% from the same quarter last year. The estimates for fiscal year 1999 (ending in December) are for $3.03 per share compared to $4.10 in 1998. Fiscal year 2000 also looks anemic with estimated EPS of $3.80. Even 1998's $4.10 in profits trailed 1997, when earnings were a far more palatable $4.37 per share.

Despite this decline in earnings and no particular growth spurts projected, Caterpillar is selling for rather close to its high in 1997 and 1998. Therefore, it is selling for a higher multiple of those earnings. Back in 1997, with the company earning $4.37 per share and the stock selling in the high 50s, the price-to-earnings ratio (P/E) was around 13 (e.g., 58/4.37 = 13). Today, with trailing 12-month earnings (TTM -- earnings for the four most recent quarters) of $3.10 and a price of $58, the P/E is around 19.

So why are investors willing to pay more today for a dollar of Caterpillar's earnings than they were willing to pay last year or two years ago? Good question. I don't know the answer, but if I had to speculate, I would blame it on two things: P/E Inflation and the Dow Effect.

P/E Inflation is another term for an "overvalued" market, if you buy into that idea. Stocks in general sell for more today, relative to their earnings, than at just about any time in the past. For an interesting take on that, see Dow 36,000?

The Dow Effect is my spur-of-the-moment theory stolen mostly from our general Foolish Four explanation. Caterpillar is a Dow stock, a major global player. Even if earnings are down at the moment and prospects aren't bright, I think investors are starting to realize that a company like this isn't likely to be "out" permanently. As the global economy recovers from last year's slump, Caterpillar is bound to share in that recovery. So even someone who isn't following a Dow Investing-type strategy might find the company attractive as a long-term investment, especially investors who might be getting a bit concerned with all those stocks that are selling for 100 times earnings -- if they even have earnings. A company that makes bulldozers and tractors is nothing if not down to earth.

Got a better theory? Share it with us.

Fool on and prosper!

Today's Stock Lists | 1999 Dow Returns

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

10/11/99

1. Philip Morris
   (NYSE:MO)
2. * Sears
   (NYSE:S)
3. * General Motors
   (NYSE:GM)
4. * Goodyear Tire & Rubber
   (NYSE:GT)
5. * JP Morgan
   (NYSE:JPM)
6. Chevron
   (NYSE:CHV)
7. International Paper
   (NYSE:IP)
8. Caterpillar
   (NYSE:CAT)
9. Eastman Kodak
   (NYSE:EK)
10. DuPont
   (NYSE:DD)

NOTE: Today's Foolish four stock selections are marked with an asterisk.

Foolish Four Portfolio

10/11/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INC13/16$58.44
IPINTL PAPER15/16$48.50
JPMMORGAN (JP)-2 9/16$115.56
MMMMINNESOTA MIN'G/MFG-1/4$95.00

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four .77% .77% 1.94% 21.20% 23.00% 29.56%
S&P 500(DA) -.06% -.06% 4.09% 9.20% 9.26% 11.72%
NASDAQ 1.02% 1.02% 6.18% 32.99% 34.22% 44.50%
DJIA (DA) -.01% -.01% 3.01% 16.89% 17.05% 21.77%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/9824CAT43.083$58.4435.64%
12/24/9814MMM73.571$95.0029.13%
12/24/9822IP43.551$48.5011.36%
12/24/989JPM105.514$115.569.52%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9824CAT$1,034.00$1,402.50$368.50
12/24/9814MMM$1,030.00$1,330.00$300.00
12/24/9822IP$958.12$1,067.00$108.88
12/24/989JPM$949.63$1,040.06$90.44
  Cash: $80.43  
  Total: $4,920.00  

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

Note
The Foolish Four Portfolio was launched on December 24, 1998, with $4,000. Additional cash is never added, all transactions are discussed and explained publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen once per year using a formula based on dividend yield and price. See The Foolish Four Explained for details.