The S&P 500 index has lifted nicely from its 52-week low of 769, set earlier this month. Optimists have interpreted the move as a sign of a market bottom, and they may well be right. But that doesn’t mean all stocks are cheap.

Take Weight Watchers International, for example. Since a public offering in mid-November of last year, the stock has been on a tear, rising from $24 to a recent $47. True, Weight Watchers had some good news: Both its earnings and attendance at the company’s weight-loss classes have been above expectations. Recent controversy about the extent of America’s problems with weight and obesity has also helped the stock.

Still, Weight Watchers looks a bit too pricey. It sells for 36 times expected earnings per share for this year. Contrast that with an estimated annual price-to-earnings ratio of 18 for the S&P 500. And Weight Watcher’s price-to-sales ratio (PSR) of 7 isn’t exactly reassuring.

Another red flag: For its latest reported quarter, ended June, Weight Watchers’ total debt stood at 83% of total assets. That’s down from the prior quarter, but still looks ugly next to the 25% average for S&P 500 companies.

Like the other companies in the table, Weight Watchers has good fundamentals and promising growth prospects, but the market may have bid its shares too high in relation to its industry or historical norms.

Full story at Forbes.com

Only the most efficient companies fare well in a period of falling prices and slack productive capacity. Look at the success of low-cost operators such as Southwest Airlines and JetBlue, or Dell’s continued dominance in computer hardware. Predicting more such winners in the current economy isn’t easy, but one strategy might help: Bet on companies carrying a manageable debt load.

“Having debt is never so expensive as when inflation is low and moving lower,” says Jason Trennert, investment strategist and senior managing director at New York brokerage and economic research firm International Strategy & Investment.

Trennert and colleagues don’t expect a surge in corporate pricing power anytime soon. What’s more, even if trouble in the Middle East forces oil prices up in the short term (see story, p. 126), the deflationary trend is unlikely to abate. Why? Companies, still saddled with too much capacity, will find it hard to pass on energy costs to consumers. “There’s no way to sugarcoat a spike in oil prices,” Trennert warns.

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According to Edward Yardeni’s “Fed model,” it’s a great time to buy stocks.

An investment strategist with Prudential Securities, Yardeni derived this valuation technique from a 1997 monetary policy paper from the Federal Reserve. Roughly speaking, Yardeni’s model (never endorsed by the Fed) says that the fair value price for the S&P 500 is equal to estimated earnings for the index divided by the yield on the ten-year Treasury note.

According to Thomson Financial, estimated next-12-month earnings for the S&P 500 now stand at $54.53 a share. Divide that by the 3.996% yield on the ten-year Treasury, and you arrive at a fair value price for the S&P 500 of 1,365. As of last night, the index closed at 881.

Thus, by Yardeni’s model, the market is undervalued by 35%.

Full story at Forbes.com

The Morgan Stanley Capital International index of Asian stocks outside Japan shows a 3% gain since the end of August 2001–not too shabby next to the 23% drop for the S&P 500.

Switch up the time parameters, however, and the picture changes substantially. Over a ten-year horizon, the S&P 500 has appreciated 110% (excluding dividends), while that same Morgan Stanley Capital International index has risen just 15%. Throw Japan into the mix, and Asian equities show a 21% decline.

The discrepancy could explain why some Asian stocks still look like bargains relative to their U.S. counterparts. Take KT, a South Korean provider of fixed-line, wireless and other telecom services. The stock, available to U.S. investors as an American Depositary Receipt (ADR), currently trades at 0.9 times sales. Contrast that with BellSouth and SBC Communications which carry price-to-sales multiples of 1.7 and 1.9, respectively.

At 13, KT’s latest 12-month price-to-earnings ratio also looks reasonable relative to a five-year average multiple of 20. BellSouth sells for 18 times its trailing profits per share.

To be sure, comparing multiples across the Pacific may be of limited use. “[Asian] markets have a history of higher volatility, and the companies are smaller,” says Subodh Kumar, chief investment strategist with CIBC World Markets, a Toronto-based investment bank. “Maybe valuations should be lower.”

But Kumar is no bear on Asia. Instead, he prefers to focus on the growth aspects of investing in the region. Even with a slowdown in exports to the U.S. and Europe, he suggests, Asian countries will benefit from rising consumer demand within their own borders, as well as the surging economies of China and India.

Full story at Forbes.com

You can’t trust earnings anymore. So what should you look for? Dividends. They are harder to fake. We went hunting for stocks with solid cash dividends but didn’t do the obvious thing: Rank all stocks by yield and select the highest. If you simply want the highest yields, go for real estate investment trusts (see p. 126). Or take a chance on tobacco. On page 140 David Dreman makes the case for Philip Morris, which yields 4.7%.

The list below features dividend stars of a different sort. Their yields are only so-so, averaging 2% or so, but their dividends are well covered and rising. The percentage of earnings being paid out is small. Only a deep and prolonged earnings contraction would force these outfits to shrink their payouts. These companies have been raising dividends recently (three-year growth of 3% or better). They also all have good balance sheets: debt less than 50% of total capital and interest coverage (earnings before interest and taxes, divided by interest) greater than 1.5.

Headquartered in Menasha, Wis., Banta Corp. prints everything from Bibles to software manuals. Banta earned $50 million last year on revenue of $1.5 billion and distributed $15 million of that to shareholders. Banta’s free cash flow, in the sense of net income plus depreciation minus capital expenditures, has been positive for the past ten years.Michael Friedman, equity analyst with New York brokerage Sidoti & Co., notes that the company has recently trimmed capital expenditures in light of the economy’s downturn. Shareholder payouts first, expansion second.

Contrast Banta with a stock such as Bristol-Myers Squibb, which now yields a robust 4.8%. Using the consensus mean estimate for 2003 EPS, Bristol-Myers shows a payout of 69%. Switch to the most pessimistic profit projection for next year, and the expected payout climbs to 78%–not exactly reassuring.

Full story (reg. required) at Forbes.com

In this turbulent market, investors seem to have even lost their appetite for stocks in traditionally defensive areas such as drugs, managed care and medical devices. Health stocks in the S&P 500–while faring better than the overall index–are still down 18% for the year.

“None of these sectors is emotion-proof,” says William Meade, managing director and institutional sales specialist with RBC Capital Markets, an investment bank headquartered in Toronto.

This dip may well be an opportunity. Valuations for many health care and medical companies are low relative to history–and 79 million baby boomers aren’t getting any younger. By 2011, estimates the Centers for Medicare and Medicaid Services, health care expenditures in this country will hit $2.8 trillion, or 17% of gross domestic product.

Health stocks also come with certain risks, namely from Washington. These include the possibility of declining reimbursement levels, the push to control drug prices and the unpredictability of actions by the Food and Drug Administration. But RBC’s Meade isn’t too worried about the government: “This administration is much more company-friendly because they realize that costs do have to go up.”

Full story at Forbes.com

Wall Street has taken BellSouth’s stock to the shed lately. Since topping out at $43 in September, shares of the Atlanta-headquartered Baby Bell have lost nearly half their value.

Insider activity, however, tells a less grim tale. Over the past six months, insiders have scooped up 10,000 BellSouth shares. Amount of insider selling: none.

That’s a drop in the bucket–BellSouth has nearly 1.9 billion shares outstanding–but it’s an encouraging sign. Contrast that to another Baby Bell, SBC Communications, where insiders have also bought 10,000 shares but dumped 211,000 during the same period.

Of course, the motives for insider selling aren’t always ominous–an insider may be financing a kid’s college education or building a new house. Still, a predominance of insider buying is at the very least reassuring, if not a positive reflection of the company’s outlook.

Moreover, net insider buying often signals an undervalued stock. BellSouth, for example, goes for 1.8 times latest 12-month sales versus a five-year average price-to-sales (PSR) multiple of 3.3. And BellSouth shares sell for just ten times projected 2003 earnings.

Full story at Forbes.com