Top Stock Picks from S&P

David Braverman of Standard & Poor's says stocks now offer a good opportunity -- and names some favorites from S&P's 5-STARS list

With corporate earnings and the economy improving, it's a good time for stocks, says David Braverman, senior director of Standard & Poor's Portfolio Advisers. And Braverman has highlighted 10 names drawn from the approximately 90 stocks now classified as strong buys, or 5-STARS, in S&P's Stock Appreciation Ranking System (STARS). They are: American Standard (ASD ), Anheuser-Busch (BUD ), Career Education (CECO ), Chelsea Property Group (CPG ), Cisco (CSCO ), Exxon Mobil (XOM ), FedEx (FDX ), Intel (INTC ), Lennar (LEN ), and Reliant Resources (RRI ).

As the holiday season nears, Braverman notes that home-improvement companies may be among the retailers benefiting and adds that S&P prefers Lowe's (LOW ), which is ranked 4-STARS or accumulate. S&P also thinks well of drugstore chains CVS (CVS ) and Walgreen (WAG ), he adds.

These were some of the points Braverman made in an investing chat presented Nov. 11 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Note: David Braverman has no ownership interest in or affiliation with any of the companies under discussion. Also, this story was corrected and updated on Nov. 17.

Q: David, is the market just resting before it resumes an uphill climb? Or should we worry?

A:

No, I don't think I'd be overly worried at this point. Earnings are improving, the economy is improving, more people are becoming employed, so it's probably a good time for investors to be looking at stocks.

Q: Has S&P made any changes in its recommendations for asset allocation?

A:

Currently, we're recommending a 65% allocation to stocks, a 10% allocation to bonds, and a 25% allocation to cash.

Q: Moving to the audience, what are your feelings about Costco (COST )?

A:

We're currently neutral -- 3 STARS [hold] -- on Costco, but we do see some steady earnings growth with fiscal year '04 EPS [earnings per share] estimated at $1.67 and fiscal year '05 at $1.88. However, the stock is still fairly close to our 12-month target price of $36.

Q: What do you think about Staples (SPLS )?

A:

Our view on Staples is somewhat similar. Our target price is $30, giving only a small premium to the current market price. We see $1.10 for fiscal 2004 and $1.26 for fiscal year '05.

Q: What do you think of Cablevision (CVC )?

A:

Our view is to sell Cablevision. We are skeptical about the new Voom [its new satellite business] funding, with spin-off timing now more uncertain given unresolved accounting issues.

Q: Which retailers will gain the most from this upcoming holiday season?

A:

We think all retailers will see a better holiday season this year than last. One place to look would be the home-improvement retailers -- our preference is toward Lowe's (LOW ), which carries a 4-STARS ranking (accumulate). We also like some of the retail drugstore chains, such as CVS (CVS ) and Walgreen (WAG ).

Q: How will the pharmaceutical industry do long- and short-term? Any S&P buys there?

A:

In the last couple of days there has been some weakness, but we think that longer-term, that should be resolved. For the most part, we have neutral rankings on the big pharmaceutical firms.

Probably our favorite name at the moment in drug stocks would be Millennium Pharmaceuticals (MLNM ). Although there is high risk, we see good reward.

Q: Back on pharmas -- Teva Pharmaceutical (TEVA ) -- a good play?

A:

Yes, we have an accumulate ranking (4 STARS) on Teva. In general, we like the generic area better than the large pharmaceuticals because the pipeline of drugs coming off patent may be more desirable than the pipeline of new drugs being developed. We see $2.09 for '03 and $2.45 for '04, with a 12-month target price of $69.

Q: Thoughts on Hovnanian Enterprises (HOV ), please -- still up 20% after a rough last few days.

A:

We still like Hovnanian and have an accumulate ranking on the stock. We believe housing trends are continuing to strengthen, and we see HOV benefiting for an extended period from ongoing market-share gains. We have raised our 12-month target price to $96. We also like two other homebuilders -- Lennar (LEN ) and D.R. Horton (DHI ).

Q: What about Intel (INTC ) -- overvalued?

A:

No, we think that there's further growth and more strength in the stock ahead. We continue to see a cyclical upturn, so we would be an aggressive buyer of Intel. We believe earnings will grow to $1.10 in 2004 and $1.40 in 2005.

Q: What do you think of the QQQs?

A:

It's an easy way, as are more exchange-traded funds, to get diversification at a reasonable cost. However, my own view is that if you want to take on a bit more risk, a portfolio of 5-STARS stocks with heavy weighting in the technology area ought to also perform well.

If you're going the exchange-traded fund route, though, I would not make the QQQs my only pick. I would also be looking at other asset classes, such as the S&P 500 SPDRs (SPY ) and the MidCap 400 SPDRs (MDY ). All of these give you the opportunity to invest passively at a reasonable cost while being able to get in or out of the market intraday.

Q: Any recommendations on the financial sector?

A:

Our recommendation on financials is currently to market-weight. Some names that we like currently include Chelsea Property Group (CPG ), Citigroup (C ), and MBNA (KRB ).

Q: What do you think of Time Warner (TWX )? Now that AOL has been shorn from its name.

A:

We currently have an accumulate recommendation on TWX. We think the erosion of AOL subscribers should abate somewhat. Our 2003 EPS estimate is 45 cent, and our '04 estimate is 53 cents. Our target price is $19.

Q: What's your current opinion on Cardinal Health (CAH ) and McKesson (MCK )?

A:

We have a strong buy on CAH. We also have a strong buy on MCK. We see continued earnings growth at CAH -- by fiscal year '05 we see earnings growing to $4.35. We have a 12-month target price for CAH of $72. For MCK, we see earnings by fiscal year '05 growing to $2.67, and we have a 12-month target of $42.

Q: Your opinion on H&R Block (HRB ), please.

A:

We would avoid HRB. We carry a 2-STARS ranking on the stock. We think that growth in their mortgage business will slow, and the tax business seems mature. In the current tax season, HRB prepared 3.4% fewer returns in its offices.

Q: Any future in REITs?

A:

Absolutely. We are recommending a few REITs. Our two favorites at the moment are Vornado Realty Trust (VNO ) and Chelsea Property Group (CPG ). We think that there will be limited downside in these shares as investors continue to look for income.

Q: David, this might be the time to explain the S&P STARS [Stock Appreciation Ranking System] list -- we've had a request for the 5-STARS list -- not enough time for them all!

A:

Standard & Poor's, through its Equity Research Division -- which operates separately and has no access to the information used by our credit-rating division -- currently makes recommendations on approximately 1,200 U.S. equity issues. Of those, approximately 90 are ranked 5-STARS (strong buy), and about 250 are ranked 4-STARS (accumulate).

Many of these recommendations can be found on BW Online's Investing page, and before we finish today, I'll give you a selection of 10 stocks we like from that 5-STARS list.

Q: What do you think of United Parcel Service (UPS ) in the long term?

A:

We're currently neutral on UPS. We believe the shares are near peak cycle valuation on a p-e basis. We would sooner purchase FedEx (FDX ), which we rank 5-STARS and think has more upside potential.

Q: Here's a topic of much discussion: Corning (GLW ) -- what's your opinion?

A:

We have a neutral opinion on the shares. We see profitability improving with the disposal of the struggling photonics and conventional-TV glass units. Debt load is above industry average. We see the shares fairly priced at current levels.

Q: Your read on Level 3 (LVLT ), in which Berkshire Hathaway (BRK.A ) has an ownership?

A:

We would sell Level 3. With pricing pressure in both of its segments high and a delay in telecom spending, we don't see profitability in the near term. Quite frankly, Berkshire Hathaway is taking a much longer-term view than we would.

Q: What are your views on Dell (DELL ) and Microsoft (MSFT )?

A:

We're currently neutral on Dell. This is mainly because we see its revenue upside limited due to a stiff pricing environment. We have a strong buy, however, on Microsoft. We have a 12-month price target of $35.

Q: David, you've just published The Standard & Poor's Guide to Saving and Investing for College. Any quick tips for that kind of investing?

A:

I guess my quick tip would be to pay attention to how your savings plan integrates with your tax situation and your child's eligibility for financial aid. For many families, a 529 savings plan that has a healthy allocation to stocks is a good choice.

Q: A topical one here -- will Marsh & McLennan (MMC ) be able to shake off the effects of Putnam [a subsidiary] and prosper?

A:

For the time being, we would be a seller of Marsh & McLennan. We think that the damage to Putnam's reputation and the continued outflow from their funds will continue to take its toll on MMC's stock.

Q: Finally (and long awaited), what are the 10 stocks you alluded to earlier?

A:

I think these 10 stocks would provide a fair amount of diversification for many portfolios, and each of these issues is ranked 5-STARS by our analysts.

These are: American Standard (ASD ), Anheuser-Busch (BUD ), Career Education (CECO ), Chelsea Property Group (CPG ), Cisco (CSCO ), Exxon Mobil (XOM ), FedEx (FDX ), Intel (INTC ), Lennar (LEN ), and Reliant Resources (RRI ).

Edited by Jack Dierdorff

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