Once small stocks start beating big stocks, as they have recently, the pattern usually persists for years. Since World War II, in fact, periods of small-stock overperformance have averaged five years. Small stocks also perform well after recessions. Following the previous 11 post-World War II recessions, small stocks led large stocks 10 times, says Prudential Securities' Steve De Santis. "That's because small stocks are more sensitive to the economy."
Longleaf Partners Fund has made 15.22 percent annually for its investors over the past decade by following a strict value strategy. From an assessment of a company's assets, its free cash flow and the sales of comparable companies, it arrives at a determination of the stock's intrinsic worth. It buys only those selling for at least a 40 percent discount to that figure. Recent favorites: Disney, FedEx, Yum! Brands, AT&T, Waste Management, Marriott International, Comcast.
For-profit companies represent just a fraction of the enormous, and rapidly growing, $800 billion annual education industry, notes Kiplinger's Personal Finance Magazine (1729 H St. NW, Washington, DC 20006). "Recent political and legal initiatives have increased funding for education. Enrollments are climbing as baby boomers' kids mature and have children of their own. And more adults are returning to school to acquire new marketable skills." Kiplinger's favorite get-smart stocks: Apollo Group, Bright Horizons, School Specialty, Sylvan Learning Systems.
The Enron fiasco has left many investors worried about the reality of their stock's earnings. Harvard Business School professor David Hawkins, along with Merrill Lynch, has developed an earnings-quality formula based on five criteria: return on capital, cash-realization ratio, tax rates, debt levels, past earnings growth. Hawkins recently evaluated 404 non-financial public companies based on his formula. The top scorers: Home Depot, Southwest Airlines, Wal-Mart, Tiffany, Walgreen, Sipco, Dupont, Target, Sherwin-Williams, Intel.
Stable-value funds, which can be held only in tax- deferred accounts, invest in high-quality bonds and investment contracts issued by insurance companies and banks, observes Money magazine. "They're less volatile than bonds or bond funds, yet have outperformed money-market funds by at least 1.25 points annually over the past five years." For more information, go to www.stablevalue.com.
Which discount brokers provide the best service? According to a recent survey of 21 major discounters, these three do best by their customers: Fidelity ("Tops at delivering online record-keeping. At tax time your accountant will love their 1099s."); Ameritrade ("Best at answering technical support questions and has the fastest-loading Web site."); Charles Schwab ("Still a titan, with customizable stock reports, a great newsletter and the most reliable site.")
Site of the Week: The Financial Times' Web site, www.ft.com, offers free news, select weekly analysis and commentary, portfolio management tools, interactive stock and mutual fund charting, company reports and analyst recommendations and daily e-mail with headlines. It also has two new fee-based plans. One offers a five-year archive of news and articles ($95 annually). Another adds information on 18,000 stocks and on 12 million articles from more than 500 media sources.
Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.