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Stock Picks: Alcoa, Gap

Plus Wall Street analyst opinions on Mattel and Walgreen

Alcoa Inc. (AA)

Morgan Stanley upgrades to overweight from neutral

Morgan Stanley analyst Mark Liinamaa raised its rating on Alcoa on Dec. 21, saying the largest U.S. aluminum producer could benefit as aluminum rally could continue in the first half of 2010.

Liinamaa said in a note that price premiums suggest the physical market for aluminum is tight, and that many investors are concerned about substantial price risk due to high inventories. "We think financing deals that limit availability of inventory and support prices will persist well into 2010," he wrote.

The analyst also thinks China will prove less disruptive than the market thinks, as its reliance on imports for energy and raw materials keep aluminum exports in check. He also sees a potential increase in alumina pricing, as spot transactions "suggest alumina can rise to [more than] 15% from [around] 13% of the aluminum price".

The analyst introduced a $22 price target, representing 50% upside from the recent stock price.

Gap Inc. (GPS)

Jesup & Lamont downgrades to hold

Jesup & Lamont analyst Barbara Wyckoff lowered her rating on Gap Stores on Dec. 21, saying that recent channel checks at the apparel retailer indicate that "the Gap brand is not getting the traction it needs to justify the incremental marketing spend this holiday.

Wyckoff notes the appearance of a 25%-off promotion in stores the weekend before Christmas indicates that management had to tap its "contingency plans" at the last minute to drive traffic. The promotion included already reduced goods but excluded denim; denim was offered with a $20 off store card redeemable before Jan. 31, 2010, she noted.

"This promo was not replicated on the web, leading us to believe that comparable store sales are the problem vs. web sales," she wrote in a note.

Of Gap's Old Navy chain, Wyckoff said the "value message is very clear and the product is compelling, leading to strong customer response." She believes that comparable-store gains in Old Navy in December will continue to offset the projected declines in Gap domestic stores. She also noted that Gap's recent advertising "fell flat".

Mattel Inc. (MAT)

BMO Capital Markets upgrades to outperform from market perform

Analyst Gerrick Johnson at BMO Capital Markets upgraded shares of Mattel Inc. on Dec. 21, saying the world's biggest toymaker based on toy industry strength and product improvement.

Johnson said in a note that he believes the shares will outperform their peers and the market because toy sales are outpacing sales of other consumer discretionary categories this holiday season; Mattel's new product pipeline "looks improved"; and he believes key company segments like Fisher-Price and Hot Wheels are showing signs of growth.

The analyst lifted his 2010 earnings per share (EPS) estimate to $1.50 from $1.40 and initiated a 2011 EPS estimate of $1.70. He also raised a price target on Mattel shares to $24.

Walgreen Co. (WAG)

Standard & Poor's Equity Research reiterates hold

S&P Equity analyst Joseph Agnese said on Dec. 21 that Walgreen's November-quarter earnings per share (EPS) of 49 cents were one cent above his estimate. Agnese said in a note that results at the second-largest U.S. drugstore chain benefited from increased flu traffic despite weak demand for discretionary goods.

Agnese sees increased pressure on Walgreen's margins in fiscal 2011 (ending August) as company initiatives designed to increase long term sales leverage result in increased merchandise markdowns and negative SG&A leverage." He lowered his fiscal 2011 EPS estimate by 2 cents to $2.37 and reduced his 12-month price target by $3 to $38.

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