By Kenneth Shea, Steve Biggar, and Robert Gold
On Oct. 12, Standard & Poor's Equity Research Group made changes to the S&P Top Ten Portfolio -- those stocks it considers those stocks it considers to be the best candidates for capital gains over the next 6 to 12 months. S&P added Wal-Mart Stores (WMT ; recent price: $44.94) to the portfolio, replacing M.D.C. Holdings (MDC ; $70.30), which was downgraded.
Like all the stocks in the portfolio, Wal-Mart carries Standard & Poor's highest investment ranking of 5 STARS (strong buy). Our bullishness on Wal-Mart reflects our view of the company's relatively solid earnings momentum in the face of such substantial recent economic challenges as hurricanes and high gas prices, its attractive valuation at 15 times our forward earnings per share estimate, and its S&P Quality Ranking of A+, which is an indication of growth and consistency in earnings and dividends through business cycles.
S&P's target price for Wal-Mart shares is $56, which implies total return prospects of approximately 25%.
Meanwhile, S&P lowered its opinion on shares of M.D.C. Holdings to 3 STARS (hold) from 5 STARS. Recent anecdotal evidence suggests that some of the hottest U.S. real estate markets -- in Nevada, Arizona, and Southern California -- have begun to cool. Compared to other production builders, these areas account for a relatively large share of M.D.C.'s profitability, and we are lowering our 2005 and 2006 EPS estimates for the company to $10.25 and $11.70, from $10.50 and $12.10, respectively.
On the lowered 2006 EPS forecast, we now apply a 6.6 price-earnings multiple for M.D.C. shares, in line with peers, to arrive at our 12-month target price of $77, lowered from $97.
A dynamic model portfolio concept, the S&P Top Ten was launched on Dec. 31, 2001. From inception through Sept. 30, 2005, it has gained 21.13%, vs. 14.23% for the S&P 500 index (on a total return basis). For all of 2004, the S&P Top Ten rose 19.2%, vs. a gain of 10.9% for the S&P 500. Year-to-date through Sept. 30, the portfolio rose 0.50%, vs. 1.39% for the index.
Here's the S&P Top Ten list:
|Company||Ticker||Price (10/12/05 close)||12-Month Target||Investment Rationale|
|Bank of America||BAC||41.89||54||Attractive risk/return profile|
|Burlington Northern||BNI||58.03||65||Strong market share, rising shipping volume|
|Guitar Centers||GTRC||56.63||75||Attractive valuation|
|Ingersoll-Rand||IR||36.42||50||Expected improvements in several end-markets|
|PepsiCo||PEP||57.71||68||Capturing market share, expanding margins|
|Oneok||OKE||30.74||42||Highly profitable natural gas business|
|Wal-Mart Stores||WMT||44.94||56||Solid earnings momentum, attractive valuation|
|St. Jude Medical||STJ||44.25||61||Positive ICD market data|
|Smith International||SII||30.83||81||Attractive valuation|
Shea is director of Global Equity Research, Biggar is director of U.S. Equity Research, and Gold is senior portfolio group analyst, for Standard & Poor's Equity Research