Invest Like the Big Guys.

Profit in the stock market with a do-it-yourself approach

BERLIN BAILEY CLOSELY FOLLOWED THE MICROSOFT antitrust trial last year. "At one point," recalls Bailey, 51, a urology consultant in Walnut, California, "the CEO of Sun Microsystems stated that he was afraid Microsoft might put his company out of business. When the trial seemed to turn against Microsoft, I thought that might be good news for Sun Microsystems."

However, Bailey didn't rush out and invest in the company. "I've done that in the past and gotten burned," he says. "As a result, I've learned to do a lot more homework before investing. Fortunately, there's a tremendous amount of information easily available on the Internet." One site he consults frequently is Wall Street Research Net (www.wsrn.com).

Bailey eventually learned enough about Sun Microsystems that he decided to buy the stock in 1999. It doubled in price soon after. He's still holding on to it in hopes of long-term gains.

"The World Wide Web levels the playing field," says Bailey's financial advisor Jim Hatcher of American Express Financial Advisors, Irvine, California. "Formerly, professionals had a corner on information. Now it's all available to individual investors."

With access to this wellspring of information, personal investors can now take the reins of their portfolios firmly in their own hands. But learning to invest like the big guys means just that--taking the time to educate yourself about both broad market concepts and individual companies you may want to buy into. Here's how to access the tools that can help garner pro-sized returns on your investments.

PROFILE OF A WINNER

What makes a good stock good? There are a number of ways to answer this question, but much depends on the investment style you're most comfortable with. Bailey, for example, likes to find stocks selling for between $30 and $70, because this makes buying round lots of 100 shares affordable. He looks for stocks with good earnings potential yet modest price-to-earnings ratios. Once he finds a good prospect, he'll track the stock for a short period of time before buying it, watching to see if its price trends upward. He'll also ask professionals for their insights into the company.

In broad terms, there are three approaches to stock analysis. Fundamental analysis is based on a stock's price relative to sales and earnings, growth rates of sales and earnings, and corporate assets--factors that are fundamental to the enterprise. Making good long-term judgments generally involves fundamental analysis.

Technical analysis is the use of past patterns to try and predict future price movements based on long-, intermediate-, and/or short-term trends. Charts are often used.

Sentimental analysis tries to gauge the mood of individual and professional investors. Some analysts believe in momentum investing ("don't fight the tape"), so favorable sentiment is a bullish sign. Contrarians believe that overwhelmingly favorable sentiment is a sell signal and the time to buy is when gloom and doom are pervasive.

Specifically, what does a pro such as Hatcher look for in a stock? He insists on strong management and a product or service that's in demand. "I like to a see a company where revenues are growing at least 15% per year and earnings are growing at least 20% per year," he says. "If earnings are growing at a faster rate than sales, that's a positive sign for the future."

But Hatcher cautions that these days investors need to be careful with earnings reports. "A lot of companies have profits from investments in the stock market," he says. "With the market up, some companies are selling these investments and reporting gains, which is misleading. You should be looking at profits from operations when you're thinking about investing in a company."

One example of a stock that meets Hatcher's criteria is Cisco Systems (Nasdaq: CSCO), which supplies components necessary for the growth of the Internet. "Cisco is well-known, though, so there may be greater value in up-and-coming technology companies such as Nortel Networks (NYSE: NT), Juniper Networks (Nasdaq: JNPR) and Sycamore Networks (Nasdaq: SCMR)," he says.

Thomas H. Fitzgerald Jr., president of T.H. Fitzgerald & Co., New York, looks at stock buybacks as a signal to buy. The firm, primarily an institutional money management firm (with minimum investments of $20 million required), offers the Reserve Informed Investors Growth Fund for individual investors. This fund returned a sizzling 130% in 1999. The tag "informed investor" is appropriate, Fitzgerald says, because that's the first screen his company uses when picking stocks. "We want to invest alongside the people who really know what's happening with a company." That is, in order for Fitzgerald to consider buying a stock, it has to meet one of these criteria:

* The company's officers and directors are buying its stock.

* The company has announced it intends to repurchase some of its outstanding shares.

* A substantial amount of its common stock is held by the founding family or by corporate management.

* A major outside investor has filed with the federal Securities and Exchange Commission on Form 13D, announcing a purchase of at least 5% of the company's stock. History has shown that 13D filers tend to make good decisions based on exhaustive research. They generally focus on fundamental research, finding out as much as they can about the company, its management, products and competition, in search of good values that Wall Street has overlooked. (For more information about 13D filings, click on "What's New" at www.fedfil.com and scroll down to "Significant 13D Filings.")

"In all four scenarios these are informed investors, and I want to be on the same side they are," says Fitzgerald. "Lately, I've been investing in technology companies because many of them have extensive management ownership." Examples include JDS Uniphase (Nasdaq: JDSU), SDL (Nasdaq: SDLI), Human Genome (Nasdaq: HGSI) and IDEC Pharmaceuticals (Nasdaq: IDPH).

GOING FOR GROWTH

Interest by informed investors may be a useful initial screen, but you still need to further narrow your choices. Measuring a stock's growth prospects is a good next step. William Burman, 50, an urban planner in San Antonio, Texas, says that he applies many of the lessons he's learned as a member of Spectrum VII, his investment club, to his own investing. Burman looks for companies whose sales and earnings have more than doubled in the past five years.

Burman gleans information from www.quicken.com and Better Investing, the magazine published by the National Association of Investors Corp. (www.better-investing.org). "I like growing companies with relatively low price-to-earnings ratios," he says. "Stock splits also appeal to me, because they bring the stock's price down into the reach of more investors."

From there Burman exercises patience before investing. "When I see a stock I like, I keep a close watch on it," he says. "I saw Compaq Computer fall from over $50 to under $20 in 1999, but I still liked the company. So I bought it and now it's up to $28." (For stock quotes that are updated regularly, see www.blaekenterprise.com.)

Moreover, Burman says he considers local companies he likes as possible investments. "That includes Cullen/Frost Bankers Inc. (NYSE: CFR), which survived the savings and loan shakeout; Luby's (NYSE: LUB), a cafeteria chain that's a step up from fast food; and Taco Cabana (Nasdaq: TACO), a franchise ready to cash in on the popularity of Tex-Mex food."

Burman's focus on sales and earnings growth is echoed by William Fries, manager of Thornburg Value Fund, a five-star Morningstar fund with a three-year annualized return of 31%, which places it in the top 4% of all mutual funds. "Revenue growth is particularly important," he says, "because that indicates whether there's a demand for the company's products or services."

AND ON THE FLIP SIDE ... VALUE

Fries, who considers himself a value manager, says he watches these basic indicators closely:

* Price-to-earnings (P/E) ratio. This is the multiple of earnings at which a stock sells. It is determined by dividing the current stock price by current earnings-per-share. A company that earns $2 per share, for example, and sells for $20 has a P/E ratio of 10. Higher ratios mean investors have high expectations for future growth and have pushed up the price.

* Price-to-cash flow ratio. A similar ratio that compares a company's stock price to the amount of cash the business generates.

* Price-to-book value. This ratio compares the stock price to a company's book value, the value of a company's total assets minus intangibles and liabilities. A company with a book value of $5 per share and a stock price of $15 has a price-to-book ratio of 3:1.

* Dividend yield. The company's latest dividend, annualized, as a percentage of the stock price. Suppose a company with a $40 stock price declares a quarterly dividend of 15 cents. Annualized, that's 60 cents per year, or 1.5% of the $40 trading price.

Of these ratios, price-to-book is the one preferred by Charles Smith, chief investment officer of Fort Pitt Capital Group, Pittsburgh. "I like to see a company with a low price-to-book ratio and a high and rising return-on-equity," he says. Return-on-equity, or ROE, is essentially a company's net income as a percentage of shareholders' equity. "Today," says Smith, "the average company has a price-to-book ratio of around 4:1 and an ROE of 17%." Among his current favorites is Tollgrade Communications (Nasdaq: TLGD).

While Smith focuses on a company's price-to-book ratio, James O'Shaughnessy of O'Shaughnessy Capital Management, Greenwich, Connecticut, says the price-to-sales ratio is the best value indicator. "We have checked data going back to the 1950s," he says, "and companies with low price-to-sales ratios turn out to be the best performers in the future."

The trouble, says O'Shaughnessy, is that some stocks sell at a low price-to-sales ratio because the company's prospects are dim. Thus, investors need a way to separate undervalued companies with good prospects from those that are about to be buried. "The best combination of indicators is a low price-to-sales ratio with 52-week price momentum," he says.

Currently, for example, the average stock has a price-to-sales ratio of 3:1, so O'Shaughnessy starts by screening for stocks with a ratio under 1.5:1. "From that list of stocks we pick the ones with the greatest one-year price appreciation," he says. "Following such a strategy, you'd have earned 19% per year for the vs 13% for the S&P 500. A $10,000 investment would have grown to more than $30 million." One site that offers customized stock screening is www.schwab.com (see the sidebar, "Set Your Sites for Better Stock Picking").

CASH COWS

Other experts find still other numbers critical to making good investment decisions. Bob Olstein, whose Olstein Financial Alert Fund has gained nearly 28% a year for the past three years, looks at the ratio of total assets to shareholders' equity. "If that ratio is over 2.5:1," he says, "the company may be a risky investment because of excess debt." Similarly, Olstein is wary of companies where accounts receivable and inventories are rising faster than sales, because that means a company is producing more goods than customers want.

Most important, says Olstein, is whether a company is generating excess cash flow each year. That is, he likes to see a business that brings in more cash than goes out. "The cash can be used to pay down debt or to build up cash reserves. Ideally, we like to see enough cash come in to permit the company to pay off all of its debt within six years."

Among Olstein's favorites is General Motors (NYSE: GM), which generates $3 billion worth of free cash flow each year. "The stock doubled in the last four years and I think it's still 50% undervalued," he says. J.C. Penney (NYSE: JCP) is another favorite of his, with a solid 6% (The average blue chip stock yields around 1%.)

All of this information, says Olstein, is available in the quarterly and annual reports that every company must file with the SEC--yet one more source of online data to help you make investment decisions just like the big leaguers do. Perhaps the best approach is a balanced one, a do-it-yourself portfolio tempered by professional consultation as needed. In this respect, Bailey may have the best of both worlds. He has both a conservative retirement portfolio, for which he relies upon financial planner Hatcher, and a smaller speculative portfolio, for which he picks his own stocks.

RELATED ARTICLE: Set Your Sites For Better Stock Picking

To pick stocks like the pros, bookmark these Websites:

www.americanexpress.com

In the Financial Services section of the American Express site, a free Resource Center features market commentary and "sector spotlights" that recently looked at the Internet infrastructure. Premium services: An online brokerage, fund tracker, 401(k) manager and other retirement planning services.

www.ameritade.com

Ameritrade's site features an Education Center with daily topics and a guide to online investing that includes a brief history of the stock market, risk levels of various types of investments and portfolio diversification by company. Also, a variety of free articles, such as "Avoiding Online Fraud," are available. Premium services: All trades and a "Report and Alert" service that e-mails personalized market reports to subscribers.

www.datek.com

Datek Online's focus is on trading, and it offers after-hour trades until 8 p.m. EST, A free learning center includes "Online Investing Facts You Should Know," and links to other investment resources by category, such as sites for government, stock exchanges and investor education. Premium services: All trades.

www.dljdirect.com

This online brokerage site offers quotes, news, charts and research and analysis on thousands of stocks, options and mutual funds. Free features include market winners, losers and most active issues. Premium services: All trades, real-time news from Dow Jones and research from the site's brokerage affiliate, Donaldson, Lufkin & Jenrette Co.

www.etrade.com

E*trade offers fantasy portfolio contests like "Market Madness" that let participants take a shot at winning $100,000 through savvy stock picking. Site users who aren't quite ready to invest can access real-time stock quotes and a customizable portfolio manager, Premium services: Stock and option trades, access to 5,000 mutual funds, bond trading and research, portfolio management and screening tools.

www.merrilllynch.com

Visitors to the Merrill Lynch site can tap into premium resources that include top equity picks for 2000, market commentary and an Investor Education section for determining personal asset allocation. A 30-day free trial membership with access to analyst research is also available, Premium services: Trades through ML OnLine and other accounts and services such as the Cash Management Account.

www.msdw.com

The Morgan Stanley Dean Witter site provides access to free research and news including commentaries from U.S. and global investment strategists. Premium services: The "ichoice" account offers individual investors various levels of trading options including consultation with financial advisors, trades on a self-directed basis, and online or over the phone trading.

www.schwab.com

Charles Schwab, the leading discount broker and a pioneer of do-it-yourself investing, also offers workshops through its local branches that give hands-on lessons in using the Website. Free info on the site includes a step-by-step guide to retirement and the day's featured articles. Premium services: A full range of charts and stock analysis tools. Two options under "Strategies," for example, are "low price/sales" and "high performance over last 52 weeks," the technique advocated by James O'Shaughnessy.

www.thestreet.com

Visitors to TheStreet.com can see market movement and read analysis, access a Personal Finance section, check out investing basics and read message boards. Premium services: In-depth commentary, e-mailed updates, tech and international stock watches, stock quotes and a portfolio tracker.

For more Websites to help you invest like the big guys, see www.blackenterprise.com.