Reading the STARS

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

New 5-STARS this week: During the trading week ended Oct. 10, 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.

Abercrombie & Fitch (ANF ; recent price, $30)

S&P analyst Marie Driscoll upgraded the youth-oriented clothing retailer from 4 STARS (accumulate) on Oct. 10, noting that its September sales markedly improved despite a lack of promotional activity. With Abercrombie's women's and girls' business providing a lift, and its Hollister products comparable-store sales growing at a double-digit percentage rate, Driscoll has become more optimistic about the company's prospects.

Driscoll lifted her 12-month price target to $40 from $35, or 16 times his fiscal 2005 (ening January) estimate of $2.51. Driscoll views Abercrombie as the most attractively priced apparel retailer S&P covers, at a 30% discount to the S&P 500 vs. the average 6% premium of its industry peers. She thinks a few more months of negative comparison are possible, but sees Abercrombie's outlook as improving.

Automatic Data Processing (ADP ; recent price $25)

S&P analyst Jonathan Rudy based his Oct. 7 upgrade of ADP (See BW Online, 10/10/03, "A Payoff for Payroll Services") from 3 STARS (hold) on its valuation as calculated from S&P's discounted cash-flow analysis. He notes that ADP's balance sheet is strong with $2.3 billion in cash and little debt. Moreover, he believes the stock is trading at a discount to peers on an enterprise value to sales basis, though on a price-earnings-to-growth (PEG) basis, it trades in line with its industry peers, due to its growth rate.

All in all, Rudy believes the shares deserve a premium valuation to the rest of the industry, based on ADP's market-share leadership, healthy balance sheet, and strong cash-flow generation. He has a 12-month target price of $48 on ADP shares.

New 1-STARS this week: There were no new 1-STARS stocks -- S&P's designation for issues expected by S&P analysts to underperform the S&P 500 index by a wide margin over the next 6 to 12 months -- during the trading week ended Oct. 10.

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