By Ethan Haskel (TMF Cormend)
March 22, 2000

"The new phone book's here! The new phone book's here!"
--Navin R. Johnson

Every March, I feel a little like Navin R. Johnson, the lovable dimwit played by Steve Martin in The Jerk. Unlike Navin -- a white child growing up in a poor black sharecropper family who doesn't realize he's adopted -- I really don't get a big kick from seeing my name published in the telephone book. But I do admit to a slight tingling this time each year when Business Week publishes its annual list of the 50 best companies in the S&P 500.

The new Business Week listing means there's a new list of 30 Beating the S&P (BSP) companies for the year. The BSP 30, like the Dow 30, was created to represent a group of diversified, world-class companies. It's from these BSP 30 stocks that we choose a smaller, select group of stocks to buy, analogous to the way the Foolish Four are chosen from the Dow. (For those desiring a quick refresher course for BSP, click here.)

Based on strict rules for choosing our BSP stocks, we use the annual Business Week listing to find our new stocks for the year. The whole process takes less than half an hour, about the same time it takes my kids to get out of the car.

Without further ado, here is the list of the BSP 30 stocks for the year. The stocks new to the list this year are marked with an asterisk.

American International Group (NYSE: AIG)
Bank of America (NYSE: BAC)
*BellSouth (NYSE: BLS)
Bristol-Myers Squibb (NYSE: BMY)
Chase Manhattan (NYSE: CMB)
*Chevron (NYSE: CHV)
*Colgate-Palmolive (NYSE: CL)
Compaq (NYSE: CPQ)
*Computer Associates (NYSE: CA)
*Corning (NYSE: GLW)
*Electronic Data Systems (NYSE: EDS)
*Enron (NYSE: ENE)
Fannie Mae (NYSE: FNM)
Ford Motor (NYSE: F)
Gap (NYSE: GPS)
Gillette (NYSE: G)
*GTE Corp. (NYSE: GTE)
*Kimberly Clark (NYSE: KMB)
Lucent Technologies (NYSE: LU)
Morgan Stanley Dean Witter (NYSE: MWD)
Motorola (NYSE: MOT)
PepsiCo (NYSE: PEP)
Pfizer (NYSE: PFE)
Schlumberger (NYSE: SLB)
Target (NYSE: TGT)
Texas Instruments (NYSE: TXN)
Time Warner (NYSE: TWX)
Tyco International (NYSE: TYC)
*Warner-Lambert (NYSE: WLA)
*Wells Fargo (NYSE: WFC)

The stocks on last year's list that were bumped from this year's list are:

Anheuser-Busch (NYSE: BUD)
Bank One (NYSE: ONE)
Carnival (NYSE: CCL)
Eli Lilly (NYSE: LLY)
Home Depot (NYSE: HD)
Intel (Nasdaq: INTC)
Mobil
Monsanto (NYSE: MTC)
Sprint Corp (NYSE: FON)
Waste Management (NYSE: WMI)
Xerox (NYSE: XRX)

A few comments. This year there are 11 new companies on the BSP 30 list, more than any in recent memory. Last year, seven new companies made the list, a number that was still above average. This year's high turnover stems mainly from two factors: the shuffling of Dow stocks announced last October, and the extraordinary pace of economic changes we've experienced recently.

Of the 11 stocks in last year's BSP 30 that have been bumped from this year's list, two are directly related to the Dow changes. Recall that the BSP rules exclude a stock if it's already in the Dow. Last year, Home Depot, Intel, Microsoft (Nasdaq: MSFT), and SBC Communications (NYSE: SBC) were added to the Dow, replacing Chevron (NYSE: CHV), Goodyear Tire (NYSE: GT), Sears (NYSE: S), and Union Carbide (NYSE: UK). Both Home Depot and Intel left the BSP this year to join their new Dow family. Since both these companies pay minuscule dividends, we really won't miss them.

Of the four stocks that were booted from the Dow last year, BSP managed to snag Chevron. The other three dear Dow departed -- Goodyear, Sears, and Union Carbide -- are not BSP-worthy. Their relatively small size disqualifies them.

One other change in the BSP 30 was also Dow-related. At the end of the year, Dow-worthy Exxon merged with Mobil, forming Exxon-Mobil (NYSE: XOM). (I would have preferred Moxxon for the new name, but who listens to me in these matters?) Since Exxon-Mobil remained a Dow stock, we lost Mobil, a BSP stalwart.

While three of the changes in the BSP this year are Dow-related, eight are not. Many of the stocks dropped from the BSP 30 list simply performed poorly last year. As their stock prices slipped, their market capitalizations also fell and they were replaced by other companies with higher market caps -- often in the same sector. For instance, Wells Fargo replaced Bank One, Colgate-Palmolive edged out Anheuser-Busch, and Warner-Lambert supplanted Eli Lilly. Carnival, Monsanto, Waste Management, and Xerox performed poorly last year, and were replaced by much stronger-performing stocks. Charles Darwin would be proud!

Finally, there's one substitution from last year's list that was made because of a slight change in the rules. Previously, companies formed from the breakup of AT&T (NYSE: T), known as the Baby Bells, were excluded from the BSP 30 on the grounds that they were more like utility stocks. It's time to change the rule. Over the last few years these companies have evolved into true telecommunications giants, a far cry from their humble beginnings as utilities. The inclusion of one of the Baby Bell offspring, SBC Communications, into the Dow last year was the clincher. As a result, BellSouth replaces Sprint on this year's list.

So there you have them, the new BSP 30 stocks for the year. The new list has been updated in the Fool Calculator, which also shows you the (almost) up-to-the-minute list of BSP stocks you'd buy if you were investing today. (Currently, there's a technical glitch in the Calculator, which hopefully will be fixed shortly.)

Of course, just because a BSP stock is dropped from the new list doesn't necessarily mean that the stock is a poor investment to keep if it's in a current BSP portfolio. You'd still sell it a year and a day after you bought it, just like the rules say.

Next week, we'll take a closer look at the new BSP 30 stocks, analyzing their sizes, dividend yields, and other characteristics.

Remember, change is good. As wise old Ben Franklin once said, "When you're finished changing, you're finished." Or, as my wise Mom once said, "When you're finished changing, put your clothes in the hamper!"

Beating the S&P year-to-date returns
(as of 03-21-00):

Bank One(NYSE: ONE)           -13.9%
PepsiCo(NYSE: PEP)             -2.3%
Ford Motor Co.(NYSE: F)       -13.1%
Bank of America(NYSE: BAC)     +2.6%
Fannie Mae(NYSE: FNM)          -0.1%
Beating the S&P                 -5.4%
Standard & Poor's 500 Index     +1.7%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P                +23.9%
S&P 500                        +17.8%

$10,000 invested on 1-2-87 now equals:
Beating the S&P             $167,800
S&P 500                      $86,600

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