Warning: Hot Prospects
It’s every investor’s dream to get in early on the next Xerox, the next Microsoft. Is such a stock on the list to the right?
The list shows those companies expected to report the greatest profit gains, on a percentage basis, over the next three to five years. When you hear Wall Streeters talk about “growth” stocks, they’re talking about issues like these.
The stocks are ranked by how much their earnings per share are expected to rise, as forecast by at least five securities analysts. And not surprisingly, the list is peppered with stocks in the fast-growing computer services and telecommunications industries, such as firms providing browsers for the Internet’s burgeoning World Wide Web.
Before you plunge in, however, a few caveats. First, many of these companies have been losing money thus far, so any future profit is going to look like a big jump in the earnings column.
In addition, it’s not uncommon for analysts and their brokerage firms to have a vested interest in promoting certain stocks--for example, a stock whose public offering was underwritten by the firms.
Also note that great expectations carry a great risk. For one, stock prices may already fully reflect anticipated growth. If a company performs worse than predicted, its stock could get hammered by disappointed investors--especially if it’s a thinly traded stock of a small, fledgling enterprise.
Indeed, there’s no guarantee that companies on this list will meet analysts’ expectations, or even come close. For instance, such a list created in June would have included Western Pacific Airlines (ticker symbol: WPACQ). Last week, the Colorado Springs, Colo.-based carrier filed for reorganization under the U.S. bankruptcy laws--and lost half its value.
All that said, what are some of the stocks with the hottest profit prospects currently?
Tops on this list, prepared from the database of the CD-ROM “Market Guide for Windows,” is Thermo Cardiosystems Inc. (TCA), a Woburn, Mass.-based developer of implantable devices that help diseased hearts keep pumping. The company is profitable, but Wall Street continues to be wary of the firm’s growth potential, even though analysts expect 100% annual earnings growth in coming years. Thermo stock has dropped 28% over the past 12 months.
But Angus MacDonald, analyst at Lehman Bros., recommends the stock because Thermo’s newest device is expected to get U.S. regulatory approval any day, and because the number of people needing heart transplants far surpasses the number of donors.
“You’ve got demand [for the device] that’s just waiting,” he said.
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Next is Forte Software Inc. (FRTE) of Oakland, which develops software for large-scale computer users. Once again, analysts may see big profit gains ahead, but investors have sharply reduced the price they’re willing to pay for Forte anyway: The stock has plunged 62% during the last year.
Also on the list are three of the big names that help computer users search the Web: Yahoo Inc. (YHOO), Excite Inc. (XCIT) and Lycos Inc. (LCOS). Each is expected to post annualized earnings-per-share gains of 45% or more over the next few years.
Yahoo, for one, is matching the promise so far. Last week, the Santa Clara, Calif.-based company reported third-quarter earnings of 3 cents a share, easily besting analysts’ forecasts.
But one analyst, David Readerman at Nationsbanc Montgomery Securities, then cut his rating to “hold” from “buy,” because Yahoo’s stock has more than doubled in just the last three months.
Speaking of the Internet, another “hot prospect” stock is E*Trade (EGRP), a Palo Alto-based provider of online stock-brokerage services. But E*Trade recently exemplified how, even if a company is posting growing profits, investors can still get burned.
E*Trade’s stock had more than tripled in price over the last year, but a week ago the shares plunged 16% in a single day after some other online brokerages cut their commissions, raising the prospect that E*Trade might have to follow suit and risk lower profit margins.
Even after that drop, the stock is still selling for an astonishing 60 times its expected fiscal 1998 earnings per share. Which means that if E*Trade doesn’t fulfill its lofty profit expectations, its stock could be vulnerable again.
Among the non-technology stocks on the list are hotel operator Extended Stay America Inc. (ESA), whose stock also has disappointed (it’s off 27% so far this year) despite analysts’ forecasts of sizzling profit growth.
Then there’s CarMax Group (KMX), an operator of auto superstores that is majority-owned by Circuit City Stores Inc. (CC). CarMax’s stock likewise has been a lemon so far--dropping 18% from its initial offering price of $20 a share last February--as investors wait for the analysts’ predictions of rosy profits to actually come true.
In the six months ended Aug. 31, CarMax lost $3 million because it has been aggressively opening new outlets--it mainly operates in the Southeast and East--but the firm has said it expects to be profitable in its next fiscal year.
Evergreen Resources Inc. (EVER), an oil and natural-gas concern with holdings in Colorado and New Mexico, is also on the list. Evergreen, too, will be under pressure to fulfill its forecasts of rapid profit growth because its stock already has more than doubled in price so far this year.
But Evergreen is on the right track. It’s enjoying higher production rates and gas prices, which enabled the Denver-based firm to post earnings of $1.7 million in the first half of this year, versus a $220,000 loss in the comparable period of 1996.
Another non-technology prospect is Corrections Corp. of America (CXC), which runs more than 60 prisons and other correctional facilities. The Nashville-based concern is expected to post per-share earnings growth exceeding 50% a year.
But Corrections’ stock has soared nearly 80% since late March, and now the shares sell for a dizzying 60 times the company’s expected 1997 earnings. On the plus side, Corrections’ first-half 1997 net income surged 86% from a year earlier. But if the firm doesn’t keep growing earnings as analysts expect, the stock could face rough sledding.
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Times staff writer James F. Peltz can be reached by e-mail at james.peltz@latimes.com
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Great Expectations
These companies are ranked by Wall Street analysts’ mean estimates of average annualized earnings per share (EPS) growth over the next three to five years. Investors should note that estimates may be overly optimistic--especially given analysts’ tendency to support companies their firms underwrite. Still, the list highlights smaller companies whose prospects are believed to be hot.
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Rank and company (ticker symbol): 1. Thermo Cardiosystems (TCA)
Industry description: Medical equipment and supplies
Proj. EPS growth rate: 100.0%
EPS no. ofyears: 5
Number of analysts: 8
Latest quarterly EPS: $0.056
Mon. close: $27.00
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Rank and company (ticker symbol): 2. Forte Software (FRTE)
Industry description: Software and programming
Proj. EPS growth rate: 81.0
EPS no. ofyears: 1
Number of analysts: 5
Latest quarterly EPS: --0.118
Mon. close: 14.38
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Rank and company (ticker symbol): 3. Evergreen Resources (EVER)
Industry description: Oil and gas operations
Proj. EPS growth rate: 75.0
EPS no. ofyears: 1
Number of analysts: 6
Latest quarterly EPS: 0.079
Mon. close: 18.50
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Rank and company (ticker symbol): 4. Yahoo (YHOO)
Industry description: Computer services
Proj. EPS growth rate: 66.7
EPS no. ofyears: 0
Number of analysts: 14
Latest quarterly EPS: --0.493
Mon. close: 51.13
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Rank and company (ticker symbol): 5. Getchell Gold (GGO)
Industry description: Gold and silver
Proj. EPS growth rate: 65.0
EPS no. ofyears: 0
Number of analysts: 11
Latest quarterly EPS: --0.115
Mon. close: 40.75
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Rank and company (ticker symbol): 6. i2 Technologies (ITWO)
Industry description: Software and programming
Proj. EPS growth rate: 62.5
EPS no. ofyears: 6
Number of analysts: 10
Latest quarterly EPS: --0.013
Mon. close: 50.13
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Rank and company (ticker symbol): 7. Spine-Tech (SPYN)
Industry description: Medical equipment and supplies
Proj. EPS growth rate: 60.3
EPS no. ofyears: 0
Number of analysts: 9
Latest quarterly EPS: 0.251
Mon. close: 46.38
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Rank and company (ticker symbol): 8. Extended Stay America (ESA)
Industry description: Hotels and motels
Proj. EPS growth rate: 60.0
EPS no. ofyears: 1
Number of analysts: 5
Latest quarterly EPS: --0.095
Mon. close: 14.75
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Rank and company (ticker symbol): 9. Pacific Gateway Exchange (PGEX)
Industry description: Communications services
Proj. EPS growth rate: 60.0
EPS no. ofyears: 3
Number of analysts: 5
Latest quarterly EPS: 0.156
Mon. close: 42.13
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Rank and company (ticker symbol): 10. Centocor (CNTO)
Industry description: Biotechnology and drugs
Proj. EPS growth rate: 57.8
EPS no. ofyears: 0
Number of analysts: 20
Latest quarterly EPS: 0.01
Mon. close: 52.50
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Rank and company (ticker symbol): 11. PSINet (PSIX)
Industry description: Computer networks
Proj. EPS growth rate: 56.3
EPS no. ofyears: 0
Number of analysts: 9
Latest quarterly EPS: --0.281
Mon. close: 8.97
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Rank and company (ticker symbol): 12. E*Trade Group (EGRP)
Industry description: Investment services
Proj. EPS growth rate: 55.0
EPS no. ofyears: 0
Number of analysts: 7
Latest quarterly EPS: 0.089
Mon. close: 36.50
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Rank and company (ticker symbol): 13. Intermedia Communications (ICIX)
Industry description: Communications services
Proj. EPS growth rate: 55.0
EPS no. ofyears: 0
Number of analysts: 14
Latest quarterly EPS: --2.39
Mon. close: 52.06
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Rank and company (ticker symbol): 14. Westell Technologies (WSTL)
Industry description: Communications equipment
Proj. EPS growth rate: 55.0
EPS no. ofyears: 0
Number of analysts: 8
Latest quarterly EPS: --0.124
Mon. close: 20.50
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Rank and company (ticker symbol): 15. Hugoton Energy (HUGO)
Industry description: Oil and gas operations
Proj. EPS growth rate: 53.6
EPS no. ofyears: 1
Number of analysts: 5
Latest quarterly EPS: --0.125
Mon. close: 12.88
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Rank and company (ticker symbol): 16. CarMax Group (KMX)
Industry description: Retail (specialty)
Proj. EPS growth rate: 53.3
EPS no. ofyears: 0
Number of analysts: 10
Latest quarterly EPS: --0.02
Mon. close: 16.38
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Rank and company (ticker symbol): 17. Arbor Software (ARSW)
Industry description: Computer networks
Proj. EPS growth rate: 53.1
EPS no. ofyears: 3
Number of analysts: 13
Latest quarterly EPS: 0.148
Mon. close: 49.75
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Rank and company (ticker symbol): 18. Corrections Corp. of America (CXC)
Industry description: Prison facilities
Proj. EPS growth rate: 52.5
EPS no. ofyears: 5
Number of analysts: 11
Latest quarterly EPS: 0.138
Mon. close: 44.38
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Rank and company (ticker symbol): 19. Premiere Technologies (PTEK)
Industry description: Communications services
Proj. EPS growth rate: 52.5
EPS no. ofyears: 0
Number of analysts: 8
Latest quarterly EPS: --0.918
Mon. close: 35.94
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Rank and company (ticker symbol): 20. CIENA (CIEN)
Industry description: Communications equipment
Proj. EPS growth rate: 51.7
EPS no. ofyears: 1
Number of analysts: 7
Latest quarterly EPS: 0.332
Mon. close: 57.75
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Rank and company (ticker symbol): 21. Smithfield Foods (SFDS)
Industry description: Food processing
Proj. EPS growth rate: 50.3
EPS no. ofyears: 15
Number of analysts: 7
Latest quarterly EPS: --0.165
Mon. close: 32.88
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Rank and company (ticker symbol): 22. Cooper Cameron (RON)
Industry description: Oil well services and equipment
Proj. EPS growth rate: 50.1
EPS no. ofyears: 1
Number of analysts: 15
Latest quarterly EPS: 0.617
Mon. close: 77.63
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Rank and company (ticker symbol): 23. American Communications (ACNS)
Industry description: Communications services
Proj. EPS growth rate: 50.0
EPS no. ofyears: 0
Number of analysts: 6
Latest quarterly EPS: --0.92
Mon. close: 12.25
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Rank and company (ticker symbol): 24. Cymer (CYMI)
Industry description: Scientific and technical instruments
Proj. EPS growth rate: 50.0
EPS no. ofyears: 2
Number of analysts: 5
Latest quarterly EPS: 0.242
Mon. close: 30.88
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Rank and company (ticker symbol): 25. Delia’s (DLIA)
Industry description: Retail (catalog and mail order)
Proj. EPS growth rate: 50.0
EPS no. ofyears: 2
Number of analysts: 5
Latest quarterly EPS: 0.07
Mon. close: 22.13
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Rank and company (ticker symbol): 26. Digital Lightwave (DIGL)
Industry description: Communications equipment
Proj. EPS growth rate: 50.0
EPS no. ofyears: 0
Number of analysts: 5
Latest quarterly EPS: 0.051
Mon. close: 16.88
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Rank and company (ticker symbol): 27. Documentum (DCTM)
Industry description: Software and programming
Proj. EPS growth rate: 50.0
EPS no. ofyears: 2
Number of analysts: 6
Latest quarterly EPS: 0.098
Mon. close: 30.88
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Rank and company (ticker symbol): 28. Immunex (IMNX)
Industry description: Biotechnology and drugs
Proj. EPS growth rate: 50.0
EPS no. ofyears: 0
Number of analysts: 10
Latest quarterly EPS: --0.22
Mon. close: 79.13
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Rank and company (ticker symbol): 29. International Network Services (INSS)
Industry description: Computer networks
Proj. EPS growth rate: 50.0
EPS no. ofyears: 3
Number of analysts: 5
Latest quarterly EPS: 0.08
Mon. close: 20.88
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Rank and company (ticker symbol): 30. Legato Systems (LGTO)
Industry description: Software and programming
Proj. EPS growth rate: 50.0
EPS no. ofyears: 4
Number of analysts: 6
Latest quarterly EPS: 0.168
Mon. close: 33.25
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Rank and company (ticker symbol): 31. Matrix Pharmaceuticals (MATX)
Industry description: Biotechnology and drugs
Proj. EPS growth rate: 50.0
EPS no. ofyears: 0
Number of analysts: 5
Latest quarterly EPS: --0.518
Mon. close: 4.44
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Rank and company (ticker symbol): 32. Sapient (SAPE)
Industry description: Computer networks
Proj. EPS growth rate: 50.0
EPS no. ofyears: 5
Number of analysts: 5
Latest quarterly EPS: 0.229
Mon. close: 54.13
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Rank and company (ticker symbol): 33. Sequus Pharmaceuticals (SEQU)
Industry description: Biotechnology and drugs
Proj. EPS growth rate: 50.0
EPS no. ofyears: 0
Number of analysts: 6
Latest quarterly EPS: --0.244
Mon. close: 9.00
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Rank and company (ticker symbol): 34. McAfee Associates (MCAF)
Industry description: Software and programming
Proj. EPS growth rate: 49.0
EPS no. ofyears: 7
Number of analysts: 7
Latest quarterly EPS: 0.437
Mon. close: 66.38
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Rank and company (ticker symbol): 35. Cylink (CYLK)
Industry description: Security systems and services
Proj. EPS growth rate: 48.7
EPS no. ofyears: 1
Number of analysts: 6
Latest quarterly EPS: 0.046
Mon. close: 16.88
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Rank and company (ticker symbol): 36. Siebel Systems (SEBL)
Industry description: Software and programming
Proj. EPS growth rate: 47.5
EPS no. ofyears: 2
Number of analysts: 6
Latest quarterly EPS: 0.101
Mon. close: 41.00
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Rank and company (ticker symbol): 37. America Online (AOL)
Industry description: Computer services
Proj. EPS growth rate: 47.0
EPS no. ofyears: 0
Number of analysts: 18
Latest quarterly EPS: --0.12
Mon. close: 83.13
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Rank and company (ticker symbol): 38. Advanced Fibre Commun. (AFCI)
Industry description: Communications equipment
Proj. EPS growth rate: 46.3
EPS no. ofyears: 2
Number of analysts: 8
Latest quarterly EPS: 0.103
Mon. close: 42.38
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Rank and company (ticker symbol): 39. Harbinger (HRBC)
Industry description: Software and programming
Proj. EPS growth rate: 46.3
EPS no. ofyears: 0
Number of analysts: 11
Latest quarterly EPS: 0.106
Mon. close: 40.13
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Rank and company (ticker symbol): 40. Vantive (VNTV)
Industry description: Software and programming
Proj. EPS growth rate: 46.3
EPS no. ofyears: 2
Number of analysts: 15
Latest quarterly EPS: 0.119
Mon. close: 28.00
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Rank and company (ticker symbol): 41. Security Dynamics Technl. (SDTI)
Industry description: Software and programming
Proj. EPS growth rate: 46.0
EPS no. ofyears: 7
Number of analysts: 15
Latest quarterly EPS: 0.15
Mon. close: 40.25
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Rank and company (ticker symbol): 42. CNET (CNWK)
Industry description: Computer services
Proj. EPS growth rate: 45.0
EPS no. ofyears: 0
Number of analysts: 8
Latest quarterly EPS: 0.336
Mon. close: 32.56
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Rank and company (ticker symbol): 43. DAOU Systems (DAOU)
Industry description: Computer networks
Proj. EPS growth rate: 45.0
EPS no. ofyears: 3
Number of analysts: 5
Latest quarterly EPS: 0.005
Mon. close: 28.00
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Rank and company (ticker symbol): 44. Excite (XCIT)
Industry description: Computer services
Proj. EPS growth rate: 45.0
EPS no. ofyears: 0
Number of analysts: 8
Latest quarterly EPS: --0.631
Mon. close: 33.69
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Rank and company (ticker symbol): 45. Lycos (LCOS)
Industry description: Computer services
Proj. EPS growth rate: 45.0
EPS no. ofyears: 0
Number of analysts: 8
Latest quarterly EPS: --0.04
Mon. close: 34.25
Note: Industry descriptions by Market Guide. Fifth column is the number of years the company has reported positive earnings per share; sixth column is the number of analysts’ projections used to calculate the growth estimate (only companies that are followed by at least analysts are included); seventh column is the most recently available quarterly earnings per share figure, including any extraordinary items. For more information on Market Guide, go to https://www.marketguide.com
Source: First Call Corp. via Market Guide
