Oil giant Exxon Mobil recently scored the most profitable quarter in corporate history, qualifying it as one of Standard & Poor's current favorite stocks. Other members of that exclusive group include Allstate, BJ's Wholesale Club, Cytyc, Emulex, and Philip Morris, according to David J. Braverman, senior investment officer of Standard & Poor's.
He expects a softer market in 2001 and says tech is far from dead, but he cautions against overweighting it in your portfolio. Braverman spoke in a chat presented Jan. 30 by BusinessWeek Online and Standard & Poor's on America Online in response to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.
Q: What are your favorite sectors, and how long do you expect them to stay in favor?
A:Right now, our favorite sectors include health care, energy, and utilities. To answer the second part of your question, a lot of that is driven by the relative strength of the market, so I would [say] the time horizon for those kinds of sector recommendations is about three to six months.
Q: Do you think tech is finished?
A:Not at all. But I wouldn't go out and overweight it in my portfolio at this time. I'd probably limit my tech holdings to about 25% of the typical portfolio.
Q: Please tell me your short-term and long-term opinions on Lucent (LU ) and how much will Lucent's spin-off in early summer affect its price?
A:Last week, we upgraded our opinion on Lucent to neutral. That was after the company set up another restructuring plan. The spin-off valuation is really going to depend on how much of the company's debt stays with each piece of the company.
Q: Your opinion on Cisco (CSCO ), short and long term?
A:Cisco remains one of our favorite technology stocks, even though the company has indicated this will be a difficult quarter. But at the same time, they've said that over the long run, 30% to 50% revenue growth appears conservative, which to me is astounding for a company their size. So our long-term view, right now at least, is stronger than our short-term view.
Q: David, we've been hit by big lay-off announcements in several industries. What does this bode for earnings and the market -- and the economy?
A:Well, clearly, the economy is going to be softer this year. I think that we're going to see in the market a tug of war between the negative of disappointing earnings and the positive of lower interest rates. Typically, the market responds more to lower interest rates in the short run. So, we're cautiously optimistic.
Q: ATT Wireless' (AWE ) revenue is up 39%. What's the outlook for continued growth? And what is your view on parent AT&T (T )?
A:We're recommending accumulation of AWE. We're extremely impressed with year-to-year and sequential net subscriber growth.... We're neutral on AT&T. And we think that most of the value, and most of the growth, is currently embedded in the wireless unit.
Q: What are your views on semiconductors 3 to 12 months out?
A:We've downgraded most of our semiconductor stocks from strong buy. Our favorite at the moment is probably Intel (INTC ), with an accumulate rating.... The entire industry is going to be wrestling with excess PC inventories, as well as the weakening U.S. economy. But Intel is attractive for the long term as the company ramps up for production of the P4 chip.
Q: What's your view on Corning (GLW )?
A:The fourth quarter was spectacular for Corning. But the shares weakened when the company forecast photonics growth of "only" 75% to 90% for the year. The market was looking for 100% growth. But we see demand for Corning's products outstripping supply.
Q: Would you buy Alcoa (AA ) -- or is it too late?
A:No, we wouldn't be a buyer at this point. While aluminum prices have gone up, world economic growth is probably slowing, so we may have already seen some of the best news for Alcoa. We're currently neutral on the stock and wouldn't add to positions.
Q: Would you buy Exxon Mobil (XOM ) now?
A:We sure would. Last week, the company reported blow-out earnings, making it the most profitable quarter ever reported by any company. The valuation is slightly high from a historical perspective, but it's justified considering the likely strong performance we see ahead.
Q: Your position on GE?
A:We're neutral on General Electric (GE ), and we think that the charges in connection with the Honeywell (HON ) acquisition could cloud GE's earnings picture. We think that Honeywell will be a difficult acquisition to integrate, so we wouldn't add to positions at this time.
Q: Your long-term outlook on WorldCom (WCOM )?
A:We have an "accumulate" ranking on the company. Clearly, though, these will continue to be somewhat difficult times for the long-distance business as industry pricing pressure continues, but we think that WCOM is likely to be a winner.
Q: How do you see regional banks doing this year in general?
A:Our focus, right now, is on some of the larger banks. However, regional banks should thrive in an atmosphere of declining interest rates, provided they can keep their loan losses under control as the economy weakens. Some of the names that we like include PNC Financial Services (PNC ) and AmSouth Bancorporation (ASO ).
Q: Is Motorola (MOT ) cheap enough to buy here?
A:No, not yet. The problem is that MOT's market share in handsets has fallen. In addition, they're suffering from higher manufacturing costs in handsets. They also have too much inventory in their semiconductor division, so we would wait for them to straighten out some of these problems. We have an "avoid" recommendation on the shares.
Q: Any thoughts on Union Planters (UPC )?
A:UPC is another regional bank that we like. That's mainly because it's a reasonable acquisition target, so we think that it's a stock worth accumulating.
Q: What about Sealed Air (SEE )? Safe to buy at this time?
A:Sealed Air will always be my favorite bubble-wrap company. However, their recent margins have been hurt by higher energy costs and higher material costs...We currently have a neutral opinion.
Q: Are you as excited about AOL (AOL ) as everyone else seems to be? All I hear is buy, buy, buy.
A:Well, you didn't hear that from me. Our opinion is neutral. We think that it's going to take time for AOL to impress the Street further on the earnings side, since all that they're doing right now is figuring out which employees need to be fired.
Q: And now for the good news (we hope) -- can you give us a sampling of S&P's best-buy list now?
A:Sure. Our favorites include Allstate (ALL ), BJ's Wholesale Club (BJ ), BJ Services (BJS ), Citigroup (C ), Cisco Systems, Cytyc (CYT C), Emulex (EMLX ), Exxon Mobil, and Philip Morris (MO ). (For lots more from S&P, go to businessweek.com and click on the Investing channel tab.)
Edited by Jack Dierdorff