Goin' Steady

But that's not to say there's nothing to look forward to in 2001. On the first day of the year, a gaggle of market strategists offered optimistic outlooks. They said the market was "oversold" due to panic selling. "Many individual stocks are at extreme levels of undervaluation," wrote UBS Warburg's Edward Kerschner. He believes the S&P 500 could rise as much as 30% this year.

We're not so sure. Even with the Fed's rate cut, the slowing economy will probably continue to plague the earnings outlook for many companies. And when times are uncertain, stability tends to be rewarded. So for this week's screen, we decided to seek out some stocks that combine consistently strong fundamentals with attractive valuations. We designed this stock screen with the tortoise-and-hare parable in mind. In other words, sometimes slow-but-steady wins the race.

(The last time we looked for such steady profit performers, we uncorked some pretty fine wine stocks. Since we highlighted them five months ago, Robert Mondavi (MOND) climbed 74% and fellow screen-survivor Beringer was bought out for a 51% gain to investors.)

Using Zacks screening software and data, we weeded out all companies that posted either a negative or positive surprise last quarter. Looking back over the past year, we trimmed our list further by eliminating any company that fell short of earnings expectations or reached too far ahead of them. Remember how that hare ran ahead and then napped while the dependable tortoise plodded along? (For the complete recipe, click here.)

Once we ran through all the screen criteria, we were left with a pool of just five stocks. A suit retailer and a ski-resort operator piqued our interest — especially because their industries are hardly known for consistent performance.

Men's Wearhouse
First, we turn to retailer Men's Wearhouse (MW), a company that managed to take workplace casual wear in stride. And now that laid-off dot-com workers are interviewing for new jobs, the company's low-priced, tailored suits, sold primarily in strip malls, could replace many a T-shirt-and-baggy-pants combo.

The leader in its menswear niche, this chain is a favorite of retail analysts. Recently, support for the stock hasn't been generated by how much the company does, but rather by how little. Put simply, Men's Wearhouse didn't get itself into trouble during this winter of discontent for retailers. Granted, the company reported that same-store sales rose just 1.5% in December compared with a 5.8% gain in last year's holiday season. But as Deutsche Banc Alex. Brown's Marcia Aaron explained Tuesday, management didn't rush to goose sales with margin-killing price promotions. "While most retailers were aggressive promotionally in December, the activity at Men's Wearhouse can only be described as meager."

That plays into the company's historical strategy, says Bear Stearns analyst Steve Kernkraut. "They've always had a belief that it's just dumb to do something that would be short-term fix. They run a very regular year-round business," he says. Part of that means keeping prices at a 30% to 40% discount to competitors year round, save for an annual sale in January. Besides avoiding markdowns, the company didn't boost its advertising budget during the Christmas season.

Not surprisingly, then, analysts expect Men's Wearhouse to meet its January quarter earnings expectations of 90 cents a share. In fact, it has met or beaten estimates every quarter for three years, according to First Call/Thomson Financial. And with growing profit margins (nearly 6% over the past 12 months compared with its below 5% historical average) and a low a debt-to-capital ratio (just 9%), this is one retailer with solid (if unexciting) financials.

Since the company's stock has fallen almost 20% since September, its price-to-earnings ratio is 13.4, well below the industry and S&P 500 average.

Intrawest
Now, if you think discount retailers' stocks have a bad rep, think of ski stocks. The business of running ski resorts is extremely capital-intensive, requiring many resort operators to carry heavy debt loads. Indeed, Intrawest (IDR) has a debt-to-capital ratio of 66%, which is too high for it to survive many of SmartMoney.com's screens. In recent years, this leading ski-resort operator strove to stay ahead as the industry boomed in response to America's growing affluence.

Compared with rivals American Skiing Company (SKI) and Vail Resorts (MTN), Intrawest has done quite well. That is to say, the stock hasn't fallen and the company has remained profitable year after year. You see, Intrawest posts relatively predictable results despite winter's unpredictable weather, thanks to its tight management and sizeable capital investments.

Merrill Lynch analyst Hayley Kissel says the company achieves stability in several ways. Its resorts are spread out all over North America, from Keystone, Colo., and Squaw Valley, Calif., to Stratton, Vt., and Snowshow, W.Va. There's usually snow somewhere. It builds its resorts around entertainment concepts (restaurants, shops, shows and such), so visitors have more to do than just ski in case the conditions are lousy. Perhaps most important, Kissel says the company receives 30% of its cash flow from real estate — homes on the resort grounds it sells year throughout the year to patrons. Those sales give it a steady stream of revenues. And with expansion underway at the Mountain Creek resort in Vernon Township, N.J., and various other new developments in the works, that pipeline will get larger.

Even so, the company saw operating margins fall below their historical average of 6.5% over the past 12 months. That was probably due to the warmer and less snowy winters of the past two years: Less snow and poor conditions equal more costly snow-making and fewer people skiing. Now, with cold temperatures and a snowstorm that creamed a good portion of the continent this New Year's weekend, Intrawest is looking at a much better season. "You have a pent-up demand, because the last two winters were a bust," says Kissel. Already, traffic is up at resorts this year, according to analysts.

Concerns over costs have kept the stock stagnant since this summer, at a P/E ratio right around the S&P 500's 22 to 26 range, but in anticipation of a snowier winter, the shares have climbed 12% since mid-November.

Although Intrawest posted a loss of seven cents a share in the September quarter, it sees a profitable run the remaining three quarters, led by an estimated $1.43 a share for this seasonal winter quarter. The company, as a result, expects overall fiscal 2001 earnings of $1.45 a share, which would mark a 21% increase over last year.

By contrast, competitor American Skiing Company has had problems managing its costs, and its earnings have shown severe volatility. It beat the Street by nine cents for its fiscal second quarter last year, but missed by 31 cents the next. (American Ski has since announced plans to merge with MeriStar Hotels and Resorts.)

With steady-looking prospects from a clothing retailer and ski-resort operator, we're finding predictability in unpredictable places. But remember, back in Aesop's story, no one expected that tortoise to win the race.