At this point in the market, the best place to look for investment strength is health care, according to David J. Braverman, senior investment officer of Standard & Poor's. And in health care, he says S&P's favorite buys are Pfizer, Johnson & Johnson, and St. Jude Medical.
More broadly, Braverman expects most of the market gains to come next year, with a revival in corporate earnings as the necessary catalyst. He points out that even though Federal Reserve interest rate cuts might continue, they are running out of steam as an incentive for investors to buy. So the burden shifts to earnings.
Braverman notes that the stocks scoring best in S&P's STARS list (Stock Appreciation Ranking System) do significantly better than the S&P 500-stock index and suggests the STARS picks as a guide to investing. Incidentally, he sees the 500 moving to around 1250 by the third quarter of 2002, from around 1125 now.
Braverman made these points in a chat presented Dec. 11 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and BW Online's Jack Dierdorff. Edited excerpts from this chat follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: David, the Dow has notched back down below the mystical 10,000 mark. What does S&P think about the supposed rally -- and the outlook for the S&P 500?
A: Well, we've already had a fairly robust rally. And after a bit of consolidation, we think that the rally can continue. But most of the gains will probably be seen next year, once earnings start to improve. We see the S&P 500 moving a bit higher and probably getting to around 1250 by the third quarter of 2002.
Q: Is Kroger (KR) a buy today?
A: Actually, we decided to downgrade Kroger today from accumulate to hold, or a 3-STAR rating. We see the company having a more difficult time achieving growth amid competitive pressures. We have cut our estimate for fiscal 2003 to $1.70, from $1.73.
Q: Do you think this is a good time to buy Oracle (ORCL)?
A: Yes, we have a 4-STAR (accumulate) ranking on the stock. And we see earnings growing this year to $0.50.
Q: Any thoughts on Corning (GLW)? What's a good entry price?
A: We're not there yet. We see the company losing money in 2002. They've had a tough time as orders from the telecommunications industry have collapsed. When earnings do look better, it probably will be around current prices. But we would wait.
Q: What sectors are most appealing -- and what stocks are most appealing within those sectors?
A: Right now, our favorite sector is probably the health-care area. Names that we like there include Pfizer (PFE) and Johnson & Johnson (JNJ). Both of those are 5-STAR (buy) stocks and leaders in the pharmaceutical area. In medical equipment, we also like St. Jude Medical (STJ).
Q: And back on a telecom-related name, what are your thoughts on JDSU
A: The problem with JDSU is that they have little or no earnings visibility. Yesterday, they offered yet another negative pre-announcement. The company believes that the low point in sales will occur in the March quarter. But the company has thought that they hit bottom before. We would avoid the shares.
Q: David, did the market shrug off the interest rate cut today? Or did the news from the Fed arrest the bigger decline we saw earlier?
A: I hate to hedge, but the answer is really a little of both. The market anticipated a quarter-point cut in rates, and I suppose that there's some disappointment that that wasn't more. But ultimately, all of the Fed easing is going to come to an end, and I think that the market is realizing when it reads between the lines of the Fed's statement that the easing is probably coming to a close.
So there's some relief that the cut occurred, but there's going to be a growing realization that this is about it. And the market is going to be faced with having to look to earnings for support.
Q: So when will we see results from all of Greenspan's moves? It has been a long wait already.
A: Well, it ought to be pretty soon. It's now coming up on a year since the first cut, and when you combine 11 rate cuts with some tax-cutting, there's now a fair amount of stimulus being provided. So we're already seeing a lot of refinancing activity, as people move toward lower-rate mortgages. And that has probably kept the consumer spending, at least to some extent, during this holiday season. Usually, it takes about 9 to 12 months for each rate cut to filter through the market.
Q: What do you think of TYC
A: Tyco continues to be a strong buy. The company recently agreed to make another acquisition -- this time, Paragon Trade Brands (PGTR), a supplier of infant disposable diapers. This company ought to continue to grow effectively through acquisitions and has proven itself during the current economic downturn. We think that the stock is undervalued.
Q: How do you like Duke Energy (DUK) and Lowe's (LOW) for long-term holds?
A: Right now, we are not that favorably disposed toward the utility industry, but Duke is among our favorites, and we carry a 4-STAR (accumulate) ranking on the stock. Lowe's is also an accumulate, and we expect sharp earnings growth in fiscal 2003 (January), with EPS growing to $1.47, from $1.25 this year. There's nothing wrong with maintaining a position in Lowe's or Duke. However, we have a slight preference toward Home Depot (HD) over Lowe's.
Q:What about an S&P 500 index fund?
A: That's a great way to get wide diversification at the lowest possible cost. Most people who buy index funds do better than those people who buy actively managed mutual funds. However, hope springs eternal, and people still want to actively manage. Here's a plug, though, for us: our STARS picks, over time, have significantly outperformed the S&P 500.
Q: And how can someone invest in the STARS picks?
A: There are a few ways: One is to just follow the STARS picks, and a select number of our 5-STARS are available online at businessweek.com/investing. In addition, there's a mutual fund available from Bear Stearns that also uses the 5-STAR picks as a selection universe. That fund's ticker is BSPAX
Q: What companies will survive in the telecommunications sector?
A: Most of the large-cap names will continue to survive. Some of the smaller ones will not. Our two favorites at the moment are Nextel (NXTL) and Sprint PCS (PCS). We also recommend accumulation of Alltel (AT).
Q: We haven't touched on financial stocks yet. How do you feel about Charles Schwab (SCH)? Is this the time to start accumulating the stock?
A: We're currently neutral on Schwab. They're having their problems in Asia, and they will be shutting down their brokerage operations in Australia and Japan. We aren't ready to add to positions, given that the shares trade at a premium to larger, more diversified brokerages.
Q: So, any high-ranking financials at S&P, David?
A: Sure, we have a bunch! We like some of the insurers, including Allstate (ALL), AIG
(American International Group), and Berkshire Hathaway (BRK.B). We also like some of the banks, including: MBNA (KRB) and Fleet Boston (FBF). We also like Countrywide Credit (CCR), given the current mortgage-refinancing boom.
Q: I bought some NOK
(Nokia) -- up over 50% in two months. Buy, sell, hold?
A: Nokia has been strong, but we're not convinced that the momentum will continue. We think that competitor discounting and rollout of low-margin, 3G-network products will put pressure on operating margins. We would now avoid the shares.
Q: What is your opinion on REIT investments for the coming year? Especially Simon Property Group (SPG).
A: We're currently neutral on SPG, although we see 2002 earnings rising to $1.62. Our favorite REIT at the moment is Boston Properties (BXP).
Q: What about AOL
(AOL Time Warner), with blockbuster movies hitting the theaters? Conversely, ad revenues are down.
A: We have a 4-STAR accumulate ranking on AOL. And we remain confident in the company, even as the top leadership changes. We think that AOL will remain among the leaders in the media industry for some time. We estimate EPS to grow to $1.34 in 2002.
Q: What do you think of XOM
(Exxon Mobil)? And on energy stocks generally now, what's best?
A: Exxon Mobil may be the best way at the moment to play the energy industry. We think that with the short-term oil outlook uncertain, the dividend yield of 2.4% provides some stability. Another name in energy would be ChevronTexaco (CVX).
Q: Best Buy (BBY)? I bought at $44 -- should I sell now or hold on for a while?
A: We would stick with the company. It looks like electronics retailing may be a bright spot this holiday season. Best Buy remains well positioned, and we see fiscal 2003 (February) EPS growing to $2.75. We still have an accumulate ranking on the shares.
Q: Will E*Trade (ET) make a rebound in the market in the near future? Is this a good long-term stock to own?
A: We're currently recommending a hold on E*Trade. But the news seems to be improving. ET is acquiring 20 million of its shares from SoftBank (SFTBF). And the company is also raising its '02 operating EPS guidance. But we think that the shares are currently fairly valued.
Q: I was just cleaning out my office and found a book called The 100 Best Internet Stocks. Are there any left?
A: You need to get better books! Yes, there are some Internet stocks left, eBay (EBAY) probably being among the strongest. We currently have the company as a hold. We also have a hold on Amazon (AMZN). Of course, Yahoo! (YHOO) is still around, and we recommend that people sell that. Probably our favorite Internet stock at the moment is Akamai (AKAM). They have $2.30 a share in cash and equivalents, and the company expects fourth-quarter sales of $34 million to $36 million. The company is still losing money, but those losses continue to drop. We recommend that aggressive investors accumulate.
Q: What now about Hewlett-Packard (HWP)? And CPQ
(Compaq), for that matter?
A: We're neutral on HWP, as well as on CPQ. There is still a small chance that the acquisition will get completed, but it would need overwhelming support from nonfamily shareholders. Given the uncertainty, we would stay on the sidelines.