WHY BUY

a stock? For a day trader, the answer is to make a quick buck when the share price ticks up. But for those of us who plan to hold the stock past lunchtime, what we are really doing is giving the company's management our money to invest in their business. Our hope is that the firm's investments, which will ultimately determine its stock price, will return more than we'd get in a savings account.

What's amazing is that so few people stop to think about whether a company's investments will post the kinds of returns that will make the stock a winner

After all, a stock's price is the sum of its current assets, plus the market's expectation of its future earnings. Those earnings are a company's return on its investments.

Great Expectations Nine stocks poised to beat the market

Company	Price	% Of Value Based On Future Investments	Holt Dual Grade	Median CFROI* Past 5 yrs.	Next-yr. est. CFROI*
Casey's General Stores	$13.75	6%	CD	7.30%	8.50%
Clarcor	19.06	14	CD	9.4	9.8
Donaldson Co.	21.69	29	BC	10	10.9
Hormel Foods	38.56	31	CC	9.2	10.3
Micros Systems	33.31	53	AA	16.5	17.9
Southdown	57.5	-10	BE	6.6	11
SunGard Data Systems	26.5	42	BB	8	11.5
Valspar	36	35	BB	12.8	12.9
Whirlpool	69.88	-12	CE	3.7	8.7

Prices as of 8/13/99

*Cash Flow Return on Investment

Source: Holt Value Associates

Consider Campbell Soup. The company's soup business delivers healthy returns, and its stock is priced as if that growth can continue. But the evidence is to the contrary. Campbell has failed to find other equally attractive uses for its cash stake -- be they investments, new products or acquisitions. The result? Campbell has used its cash to buy back stock, not a recipe for creating long-term value, especially in a company that investors expect to continue growing faster than nearly all its peers.

What should investors do with a company like Campbell? Sell it, according to Timothy Bixler, president of Holt Portfolio Advisory, part of Holt Value Associates, a Chicago research firm. Ignore Holt's advice at your own peril. Since 1986 Chairman Robert Hendricks' buy list of stocks has returned a total of 930%, vs. 574% for the Standard & Poor's 500-stock index. And proving again that a rising tide doesn't lift all boats, Holt's sells have actually fallen overall during the greatest bull market of all time.

Holt thinks Campbell is a stock to avoid because of its limited opportunities for growth. "Just because the company is doing the best they can, if that's not creating value, it doesn't mean I want to own the stock," Bixler says.

In what follows, I'll explain Holt's unique research, including its emphasis on cash flow rather than on earnings, highlight a list of its current buys and show how you can use the firm's Web site to look for stocks and perform a reality check on your own portfolio.

Holt was founded 14 years ago by Hendricks, a stock analyst whose frustration with the way companies manipulated earnings numbers led him to seek out a better way to value companies. The result: a system that focuses on cash flow, meaning the money a firm earns before it deducts things like onetime charges, depreciation and interest payments. Cash-flow numbers are hard to finagle, so they paint a truer picture of a firm. Combining Holt's obsession with cash along with its emphasis on return on investment gives you the firm's key indicator, known as cash flow return on investment.

That number and the research behind it are what Holt sells to its two groups of clients. The first, 275 money managers, including Putnam, Warburg Pincus and RS (formerly Robertson Stephens) Investment Management, pay at least $50,000 a year for the firm's research. Holt's other clients are corporations trying to judge their own past investment efforts and plan for the future, including potential spinoffs and acquisitions. Monsanto, for example, used the cash-flow return on investment analysis to evaluate the performance of its chemicals business, which the company believed was returning 16% on its investment. But the analysis found that the cash-flow return on investment was more like 4%. Soon, the unit was spun off into what is now Solutia.

Over the past two decades, the average inflation-adjusted cash flow return on investment for American companies has held steady at 6%. Excellent companies such as Microsoft and Cisco Systems have posted returns in the 20% range, and both have been on Holt's buy list, but they aren't now for two reasons. First is what Holt calls fade, meaning that nearly all top performers eventually fall to earth, if only because of increased competition and lack of investment opportunities. What are the chances, say, of Microsoft finding an investment that will pay off as handsomely as Windows has?

The second reason is price. Even if these companies don't fade -- and to date they've both beaten the fade -- the market has already priced that into the stock. So at best, they should only match the market, Holt's analysis says.

Fade figures prominently on Holt's sell list. For example, Best Buy, the hot electronics retailer, is a sell candidate. Why? Three years ago, when Best Buy was a buy, its cash-flow return on investment figure was about 4% and rising. Since then, it's hit 15%, and the stock has returned an unbelievable 3,000%. So while the market believes Best Buy won't fade, Holt thinks its returns will slow to 9%. Then, according to Bixler, the decision is easy. If you were a gambler, he asks, would you bet the over (that Best Buy will beat expectations) or the under (that it won't)? "This is a situation where we want to be the under."

Now for the table. I won't discuss each of these companies, all of which are drawn from Holt's current buy list, but I will explain how they got there. Stocks are considered buys because Holt believes they will beat market expectations, be they rosy or dismal. More specifically, a company's upside potential, in Holt's view, must be twice its downside risk.

First, Holt determines investors' expectations for a stock by totaling up the market value of the firm's equity and debt and comparing it with the value of the firm's existing assets. That difference, investors believe, is the value that the company's investments will create and is listed in the column labeled "% of Value Based on Future Investments."

The next column lists Holt's Dual Grade score for each company. To get that grade, Holt ranks stocks in terms of next year's estimated cash-flow return on investment (the first grade) and investors' view of the firm's outlook, which comes from the percentage of its current value based on future investments (the second grade). The companies are ranked in four size categories -- small, medium, large and very large -- with the top 20% receiving A's, the next 20% B's and so on. Companies with grades of AA, such as Micros Systems, are at the top of the heap. Companies such as Donaldson, with a BC grade, look good in the near term, but have a so-so future ahead of them. In Southdown's case, its BE grade means it's a good company that the market thinks is headed for the toilet. If the market's right, stay away, but if you have good reason to think it's wrong, you could be looking at a great investment. In the case of Micros Systems, Holt believes not only that the firm will beat the fade, but that it will top the market's optimistic expectations.

The next two columns let you rate the companies' management based on recent and expected cash-flow returns on investment. The data in the table is available on Holt's Web site, though Holt reserves its buy and sell calls for paying clients. More details on Holt's methodology can be found in a new book by Holt's research director, Bartley Madden, entitled "CFROI Valuation: A Total System Approach to Valuing the Firm."

The best way to use Holt's site is to view the companies by industry. Then you can spot the standouts, both positive and negative, and some further research should tell you whether the market is right or wrong about the stock. Consider Whirlpool and its CE score. The market is saying Whirlpool's investments will actually lose money, so its stock is cheap right now. But its cash-flow return on investment numbers are improving, and investors think its competitors look good, meaning the industry is healthy. Can Whirlpool close the gap with its rivals? Holt thinks so, which is why Whirlpool could be a very good bet.