S&P's Top Stock Picks for 2003

The PowerPicks 2003 portfolio -- best ideas from 40 S&P analysts -- includes 40 companies, from Amgen to Wal-Mart

By Ken Shea

Looking for an investment strategy that lets you build a stock portfolio with issues that mirror the sector makeup of the Standard & Poor's 500-stock index? With S&P's PowerPicks 2003 Portfolio you can do that -- and pick the brains of S&P analysts for their top choices in each group. Launched on December 31, 2002, the PowerPicks 2003 Portfolio represents the latest annual collection of "best ideas" from each member of S&P's equity research staff.

Each of the 40 contributing industry analysts has chosen one of the stocks he or she follows as the best-positioned for superior growth. The S&P PowerPicks 2003 Portfolio is diversified across all 10 S&P economic sectors that make up the S&P 500 index, and its sector representations are closely aligned with those of the S&P 500.

The portfolio will be "frozen," meaning that it will undergo no changes throughout the entire year. Its objective is to exceed the total return (capital appreciation plus dividends paid) generated by the S&P 500 during the year.

The median capitalization of the S&P PowerPicks 2003 Portfolio is approximately $6.2 billion, ranging from a high of $225 billion for Wal-Mart to a low of $640 million for Quiksilver. By contrast, the S&P 500's median market cap is approximately $7.2 billion, ranging from a high of $313 billion for Microsoft to $209 million for McDermott International. The PowerPicks 2003 Portfolio comprises 22 stocks considered to be large-cap issues (market cap above $5 billion), 16 mid-caps ($1 billion to $4.99 billion), and two small-caps (below $1 billion).

The heaviest S&P sector representations within this year's PowerPicks are Financials, Information Technology, and Health Care, which together account for nearly half of both the S&P 500 and the PowerPicks 2003 Portfolio. Since its inception on January 1, 1997, the S&P PowerPicks Portfolio's cumulative total-return performance through November 30, 2002, was +57.0%, vs. +37.6% for the S&P 500 (both including dividends). Year-to-date in 2002 through Nov. 30, the S&P PowerPicks 2002 portfolio total return was –18.1%, vs. –17.2% for the S&P 500 (both including dividends).

Here's the roster for the S&P PowerPicks 2003 Portfolio:

Sector/Company Market Cap $bil. Investment Rationale
CONSUMER DISCRETIONARY
Lear 2.3 Favorable shift in product mix, low valuation
Newell Rubbermaid 8.3 New CEO, better vendor relations
News Corp. 44.1 Prospects for improved ad market
P.F. Chang's 0.9 Exceptional growth characteristics
Quiksilver 0.6 Market share gains, margin improvements
Toys "R" Us 2.6 Free cash flow and p-e should grow
Wal-Mart 223.1 Continued market share gains, strong growth
CONSUMER STAPLES
Kraft Foods 68.6 Defensive appeal, superior prospects
Sysco 19.7 Positive sales trend continue
ENERGY
Apache 8.4 Shares attractively valued
Nabors Industries 5.5 Natural-gas activity rising
Questar 2.2 EPS growth to 2005 beats peers
FINANCIALS
Chelsea Property 1.3 Stronger earnings growth
Citigroup 182.0 Shares trading at a big discount to historical valuation
IndyMac 1.0 Attractively valued
Lehman Bros. 12.9 Strong franchise, undervalued, takeover candidate
MetLife 19.7 Restructuring initiatives
Moody's 6.3 Strong free cash flow and profit margins
National Commerce Financial 4.9 Strong market demographics
HEALTH CARE
Amgen 64.8 Undervalued vs. peers, with less risk
Boston Scientific 17.0 Explosive growth prospects
Cardinal Health 27.6 Strong performance expected from all business segments
Dentsply International 2.9 Attractive valuation
Invitrogen 1.6 Expect 10% growth over the long term
Lilly (Eli) 72.4 Unmatched product pipeline
INDUSTRIALS
Corinthian Colleges 1.6 Growing market share of for-profit institutions
FedEx 15.5 Stock attractively valued
Jacobs Engineering 2.0 Strong bookings from refining market
Precision Castparts 1.3 Potential upturn in aircraft manufacturing
INFORMATION TECHNOLOGY
Affiliated Computer Services 6.4 Solid defensive play in current market
Cisco Systems 96.8 More market-share gains likely
Microchip Technology 5.0 Pure play in microcontroller chips
Nokia 78.6 Leading market position
Overture Services 1.7 Good fundamentals, attractive valuation
Sybase 1.2 Valuation, balance sheet, strong management
Synopsys 3.3 Potential upturn in electronics markets
MATERIALS
IMC Global 1.3 Poised to benefit from industry rebound
Nucor 3.3 Attractive valuation
TELECOM SERVICES
ALLTEL 15.9 Solid EPS quality, stable balance sheet
UTILITIES
Entergy 10.1 Earnings growth above peers

Shea is director of global equity research for Standard & Poor's

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