Giving Credit Where It's Due

Credit-ranking upgrades and solid equity positions earn 14 companies a this week's basket of investing plums

By Michael Kaye

One nasty side effect of the lackluster economy: Earnings pressure is hampering the credit quality of many U.S. companies, according to a recent report from S&P's global fixed-income research group. The sluggish growth environment has depressed corporate cash flow, constraining the ability of companies to reduce their indebtedness, according to Standard & Poor's.

Ratings agencies such as S&P evaluate a variety of financial performance measures -- including changes in earnings and cash flow, debt levels, and margins -- as well as a company's competitive position and industry trends, to come up with a credit rating.. Of late, the picture hasn't been too encouraging. With 37% of U.S. nonfinancial companies having either a negative outlook from S&P (meaning the rating may be lowered over the next two years to three years) or on its watch list with negative implications (meaning S&P continues to monitor the companies' credit standing), vs. 35% one year ago, the rating agency says that credit-rating downgrades will continue to outstrip upgrades.

In today's uncertain economy, it might be comforting for investors to find companies that have actually seen improvement in their credit ratings -- and by implication, their financial strength. That's the thought behind this week's screen.

We set out to look for companies that have had their credit ratings upgraded by S&P in the last 12 months. Admittedly, it wasn't a very large list. We then looked to the equity analysis side of S&P to narrow the field to those names that also carry S&P STARS rankings of 4 STARS (accumulate) or 5 STARS (buy). Those designations mean that S&P equity analysts expect them to outperform the overall market over the next 6 to 12 months.

The following 14 stocks made the cut.

Company Name/ Ticker STARS Ranking
Amgen (AMGN) 5
Anthem (ATH) 4
Biovail (BVF) 4
Ensco International (ESV) 4
Fidelity National (FNF) 4
Millennium Pharmaceuticals (MLNM) 4
Oxford Health Plans (OHP) 4
Packaging Corp. of America (PKG) 4
Pactiv (PTV) 4
Rent-A-Center (RCII) 4
Sovereign Bancorp (SOV) 4
Stryker (SYK) 4
TJX Cos. (TJX) 4
Union Pacific (UNP) 5

Kaye is a portfolio services analyst for Standard & Poor's

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