WHERE WILL CORPORATE

You see, companies with a wide range of earnings estimates tend to trade at lower valuations than comparable companies about which the future is more certain. So if you spot a good company stuck in a period of uncertainty, you might be able to pick up a bargain. And oddly enough, companies that confuse the experts may even make for slightly less risky bets than those about which the opinions are unanimous.

How's that? There's a better chance a company will report earnings somewhere within a wide range of estimates. On the flip side, if all estimates are the same or close to the same, a complete miss (and massive stock sell-off) becomes more likely. As Morgan Stanley U.S. Equity Strategist Steve Galbraith put it in his April research note (titled "Agreeing to Disagree"): "High dispersion of expectations signals opportunity while uniformity may signal risk."

So, to find wide estimate dispersions, we constructed a screen. We consulted with Prof. Lawrence Brown of Georgia State University, who is an estimate expert and editor of I/B/E/S International's "Annotated Bibliography of Earnings Expectations Research." Brown advised us to use a gauge called the "coefficient of variation," which measures the amount of disagreement in a company's earnings estimates.

We put consensus in quotation marks because it's actually an average

OK, that was the hard part, we promise. In our screen recipe, the first step was to sift through the earnings estimates tracked by Zacks Research Wizard, looking for companies with above-average estimate dispersion. We eliminated companies for which the consensus expects a loss in the upcoming quarter because the negative numbers throw off our ability to average the coefficients of variation.

See recipe

After all our demands had been met, we had whittled a list of more than 7,000 stocks down to 42. The majority hailed from the energy and technology sectors, where debates about cyclical and secular trends are fiercest. Below, we discuss the attributes and uncertain fates of fallen tech star Sun Microsystems and energy-pipeline giant Williams Companies.

Comeback Kids? APPLET PLACEHOLDER: archive= height=300 width=245 Data from July 14, 2000 through July 11, 2001 Source: DJNR

Sun Microsystems
Sun Microsystems has been followed by storm clouds lately. The server and software maker announced on May 29 that its fiscal fourth-quarter sales were likely to be about $3.9 billion, or 5% below the previous quarter's and off 22% year-over-year, and earnings were likely to amount to just two to four cents a share, down from 20 cents in the year-ago quarter. Next week, July 19 to be exact, the company is expected to report its actual June results. At the same time, Sun should also provide guidance for this current fiscal year, which just began July 1.

As analysts wait for the Sun report, their forecasts are all over the place. And that's one reason the company popped up in our screen results. According to Zacks, the consensus estimate pins Sun's fiscal 2002 earnings at 43 cents a share, just a penny higher than earnings for 2001. The Street's highest estimate expects 55 cents a share a 28% jump while the low expects just 32 cents a share a 24% decline. In other words, there's a high degree of dispersion (read: uncertainty) as analysts try to predict how much the business world will want to spend on Sun technology (or any technology, for that matter) in the year ahead.

Sun's uncertain picture is dragging down its stock price. At Thursday's close of $15.35, shares are 19% above their 52-week low hit April 9, and 75% below their 52-week high of Sept 1. According to Zacks, Sun is valued at 24 times its trailing earnings. Yet on average over the past five years, Sun has been trading for 44 times its trailing earnings. That means its current valuation is 46% below its historic average. Analyst Andrew Neff of Bear Stearns prefers to look at price/sales ratios during economic downtimes (because earnings get so messy). In that light, Sun is trading for 2.3 times trailing sales and that's also on the lower end of its 10-year trading range of 0.4 to 12.6, according to Bear Stearns research.

Based on this attractive valuation, Neff just raised his Sun recommendation from Attractive to Buy his firm's highest rating. And yet Neff's 2002 estimate is on the pessimistic side of the wide range. He expects fiscal 2002 will result in 40 cents a share 5% below 2001's consensus estimate of 42 cents and 7% below 2002's consensus estimate of 43 cents. But he thinks that this stock is likely to rally before the company's fundamentals do. The analyst summarized: "We have upgraded our rating on [Sun] despite weak fundamentals, because we are confident about its competitive position, its ability to identify and penetrate new market opportunities, its ability to execute under a variety of difficult business conditions (Y2K, Asian weakness) and the upside from the new UltraSPARC III product cycle it has just entered." (The UltraSPARC III is Sun's new line of high-end server for the corporate market.) Investors who agree with this view of Sun's strengths might be wise to buy amid the stock-crushing confusion. If you wait for more clarity on earnings, you might find a pricier stock.

Williams Companies
There's a similar case to be made for Williams Companies, which pipes in energy for businesses. Among our 42 screen survivors, the energy sector had the biggest showing (even bigger than technology). Basically, analysts can't agree how much longer energy prices will stay propped up. On top of that, it's in the process of acquiring Barrett Resources, an independent gas and oil exploration and production company. This stock is awash with uncertainty.

It's certainly true that oil and gas are famously cyclical commodities, and prices go up, and prices come down. But there are concurrent trends at work in the industry. Companies that have capitalized on the surge in energy prices are finding themselves with a lot of new cash, which can be used to pay down debt, buy productivity-enhancing equipment and make strategic acquisitions.

At the same time, Williams is in court with the state of California over the prices it (and other energy suppliers) has charged the state's utilities for natural gas. Settlement talks broke down Monday. It comes as no surprise that analysts have no idea how all these issues will affect the rest of the year's profits. According to Zacks, 19 analysts' estimates range from $1.40 a share to $2.75 a share for Williams calendar 2001.

But it seems Williams analysts can agree on one thing. All of them rate the stock either a Strong Buy or Buy, according to Zacks. Its low valuation could be a compelling reason to buy in. Williams trades for 15 times its trailing earnings, which is just a third of the cost of its five-year historic average of 45. And Williams trades for a little less than its oil-pipeline peers based on its price/earnings ratio of 15 (vs. the industry's 16) and price/cash flow ratio of nine (vs. the industry's 10). If you're looking for a little uncertainty, almost anything in the energy patch will serve you well. If you're bargain-hunting for a lot of uncertainty, Williams is the stock to watch.