Reading the STARS

The latest names to join Standard & Poor's list of stocks to buy -- and sell

During the week ended Nov. 14, the following issues were added to Standard & Poor's list of stocks with its highest investment ranking, 5 STARS (buy). S&P analysts expect those issues to outperform the S&P 500 index by a very wide margin over the next 6 to 12 months.

Medtronic (MDT ); recent price: $46.39

S&P analyst Robert Gold raised his recommendation from 4 STARS (accumulate) after Medtronic reported fiscal second-quarter EPS of 39 cents, in line with S&P's estimate. In his view, the strong results were highlighted by market share gains in ICD segment, continuation of 25%-plus growth in spine, and stable performance in vascular area and improved results in diabetes. Gross and operating margins were at the high end of guidance, and he believes overall bullish trends will persist in the second half of the year. He boosted his fiscal year 2004 EPS estimate by 2 cents, to $1.64. He says the shares are trading at deep discount to device group, at 24 times his calendarized 2004 EPS estimate. His 12-month target price remains $57.

U.S. Bancorp (USB ); recent price: $27.64

S&P analyst Mark Morgan raised his recommendation from 4 STARS (accumulate), saying he expects stronger commercial loan growth in 2004, a continued decline of nonperforming loans, and lower loss provisions and low operating costs. He raised his 2004 earnings per share estimate to $2.25 from $2.20 and kept his $2 2003 estimate, reflecting lower credit costs and firming of commercial loan growth in 2004. He raised his 12-month target price to $33 from $30, valuing the shares at 14.5 times the 2004 estimate. His target implies a modest premium to peer group that he believes is warranted, given his view that the company has better than average EPS growth prospects.

Bear Stearns (BSC ); recent price: $74.93

S&P analyst Robert Hansen upgraded the stock from 4 STARS (accumulate), on the belief that revenue growth in investment banking, private client services, and global clearing services will significantly offset declines in fixed income in fiscal year 2004 (ending November). Diversification in the fixed income segment since fiscal 2000 beyond mortgages and high yield will produce more stable earnings, he says. Hansen increased his our EPS estimate to $7.50 for fiscal 2004 and raised his 12-month target price to $100 from $89. He recommends investors buy the shares based on his view of Bear Stearn's focus on sales and trading, prudent expense management, and cautious risk management.

Hologic (HOLX ); recent price: $15

S&P analyst Robert Gold raised his recommendation from 3 STARS (hold) after the company reported September-quarter EPS of 13 cents, 5 cents above his forecast. It installed 27 Selenia digital mammography systems in the quarter, seven ahead of original guidance. Looking into fiscal year 2004 (ending September), HOLX's goal of 100 Selenia installations seems reasonable, based on order backlog. In his view, the company's plan to focus on womens' health products, along with cost disciplines, will allow accelerating EPS growth through fiscal 2007. HOLX trades at big discount to our device group on price/sales and 3-year P/E-to-growth basis, he says. Gold boosted his 12-month target price to $21 from $14.

National City (NCC ); recent price: $32.69

S&P analyst Evan Momios upgraded the stock from 4 STARS (accumulate) on his belief that EPS in the quarters ahead will be aided by further asset quality improvement, market share gains in retail businesses not related to mortgages, and stock buybacks. At 11 times his 2004 EPS estimate of $3, vs. 13 times for peers, he thinks NCC is undervalued. He expects its p-e to expand to peer-average levels as investors become more comfortable with its post-mortgage boom outlook. Momios raised his 12-month target price to $39 from $36, or 13 times his 2004 EPS estimate, in line with peers. Based on valuation and 3.9% dividend yield, he views NCC as attractive.

S&P did not downgrade any stocks to 1-STARS (sell) this week.

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