Stocks to Love on Valentine's Day
By Eric Wahlgren
What's not to love about stocks these days? The blue-chip Dow Jones industrial average closed at a two-and-half-year high earlier this week after Federal Reserve Chairman Alan Greenspan told Congress the economy is strengthening and inflation is nil. And corporate romance is in the air. Network-security product outfit NetScreen Technologies (NCSN ) agreed to get hitched to Juniper Networks (JNPR ), which makes high-end networking equipment, on Feb. 9 in a roughly $3.5 billion deal.
Then cable giant Comcast (CMCSA ) put the moves on entertainment conglomerate Disney (DIS ) on Feb. 11. Though Wall Street doubts Comcast can get the Mouse to the altar for its initial offer of $66 billion, analysts believe Disney will probably be married off eventually.
All this courtship activity is helping to boost stocks, but how about some special shares for investors to snuggle up with on Valentine's Day? After chatting with a few pros, BusinessWeek Online's Eric Wahlgren came up with five stocks that these analysts think could warm your heart -- and portfolio.
Four of the five stocks they picked have matched or exceeded the 38% rise in the benchmark Standard & Poor's 500-stock index since the market rally began in mid-March, 2003. Still, as a sign of how unscientific our list of five hot stocks is, we turned for inspiration to the messages on those NECCO's candy hearts that appear this time of year, starting with:
Dependable. Who doesn't want stability in a long-term partner? Bank of America (BAC ) delivers earnings growth of 11% a year, plus it pays a 3.9% dividend (twice the average of the S&P 500), says Michael Farr, president of investment firm Farr, Miller & Washington in Washington, D.C. That works out to a total annual return of about 15%, he says. "Ain't nothing wrong with that," notes Farr, whose firm manages more than $450 million.
After Charlotte (N.C.)-based BofA finishes tying the knot with FleetBoston (FB ) this spring, it will be the No. 2 U.S. bank by assets. But the financial-services goliath doesn't carry a hefty price tag. At about $82 a share, BofA's p-e multiple is 11, compared to about 19 for the S&P 500, Farr says, meaning it trades at "around a 50% discount to the market."
BofA recently took a big write-off from its exposure to scandal-plagued Italian food concern Parmalat but says its problems are over. Farr says BoFA's stock could climb above $90 by yearend, resulting in a 10% gain on top of the 22% increase since the market rally began (Could BofA be a takeover target? See Inside Wall Street in BW's 2/23/04 issue.)
Big Heart. You can't get much closer to the ticker than Medtronic (MDT ), which makes pacemakers, defibrillators, and other medical equipment. The Minneapolis-based company's stock has risen only 7% since mid-March of last year to $47.67 a share on Feb. 12, underperforming the S&P 500 as revenue growth recently has been weaker-than expected.
Yet as the world's largest medical products maker, it's very likely to benefit from long-term trends, including the growing number of elderly in the U.S., Farr says. In fiscal 2004, profits are expected to rise 16% on sales that are also 16% higher, or $8.88 billion, according to earnings tracker First Call/Thomson Financial. "These are the guys who keep your heart going," says Farr, whose firm invests in both BofA and Medtronic for clients. "Long term, you won't go wrong with Medtronic," he says. Sounds romantic to us.
Wow. Of course, lots of hot prospects cool considerably after you get to know them a little better. Remember dot-coms? One exception is eBay (EBAY ), the world's largest Web auctioneer. The San Jose (Calif.) company, which sells everything from diamond rings (ahem, guys) to single-family homes, is seen posting 44% higher profits in fiscal 2004 on 41% higher sales of $3.06 billion, according to First Call. "It's a franchise that's really without parallel in terms of market share and domination in the online auction market," says Scott Kessler, a S&P equity analyst in New York.
There's plenty to love about eBay, says Kessler, who has assigned it his highest rating -- 5-STARS, or buy. Among the reasons: eBay is expanding rapidly overseas, where it has quickly become the market leader in places like Britain and Germany. And its 2002 purchase of online payments company PayPal guarantees it a cut every time a transaction occurs on the site. Meantime, the "Buy It Now" option, which allows impatient customers to bypass what can be a lengthy auction process and purchase products immediately at a set price helps to stoke sales, he says.
Of course, eBay's p-e of 58 can be off-putting, Kessler admits. But he predicts that the company will crank out earnings growth of some 40% over the next three to five years. And, eBay's stock, he says, could rise 17%, to $81, in a year, after roaring 65% higher in the last 11 months or so. "eBay is great to own if you want to have a long-term investment in you portfolio that gives you exposure to the Internet," says Kessler, who has no ties to the company, although other units of S&P may.
Sweetie. For something really sweet, analysts say, consider J.M. Smucker (SJM ), which makes fruit spreads, ice-cream toppings, peanut butter, and other products under the Smucker, Jif, and Crisco brands. The outfit has been run by the Smucker family for four generations, but it's hardly a stodgy old company. The stock has advanced 41%, to $47.49, since mid-March of last year, and Peter Cohan of Babson College in Babson Park, Mass., believes it has room to run. He's impressed by how much people love working there. "The employees carry that love over to customers by making better products, providing better service, and adapting to the market," says Cohan, who wrote about Smucker in Value Leadership, a recent management book.
There are other reasons to have a crush on Smucker. The Orrville (Ohio)-based company's Uncrustables -- peanut butter and jelly sandwiches without the crust -- are shaping up to be a hit with consumers. Smucker's fiscal 2004 profits are seen rising 9%, on sales of $1.43 billion -- 9% higher. "They're innovative," says Cohan, who doesn't own Smucker stock. "But the fact that they treat people like family is the important thing to think about on Valentine's Day."
New Flame. A stock that's promising and cheap? Those are certainly good traits in a Valentine's date. But you might not want to describe Axcan Pharma's (AXCA ) product line over dinner: The Mont-Saint-Hilaire (Canada)-based company makes drugs to treat a variety of gastrointestinal diseases and disorders. Axcan's track record, however, is nothing to turn up your nose at. It has logged eight quarters in a row of at least 20% sales growth, says Richard Moroney, editor of Upside financial newsletter in Hammond, Ind. And it posted 58% profit growth in its latest quarter.
"It has a nice attractive niche in gastrointestinal drugs," Moroney says, "and they are doing a good job of expanding their product line."
Moroney is encouraged by news that its ITAX has been cleared for the last stage of clinical trials. Axcan says that drug, which treats functional dyspepsia -- an upper gastrointestinal disorder that affects one in four Americans -- could double its business by generating as much as $300 million in annual revenue, Moroney says. Axcan did about $180 million in sales in 2003.
The stock has gained more than 104% since mid-March 2003, to $19.99 on Feb. 12. But Moroney thinks it could still go up 25% in the next 12 months. What's more, it's trading at only about 20 times earnings, while its peers have price-earnings multiples of 25 on average. "It has a little bit of a Canadian discount," says Moroney, who doesn't own any shares but whose firm holds some for clients.
So there you have it: Five stocks that are sweet, stable, and sexy -- with a lot of heart and soul. Now that sounds like a sizzling Valentine's Day, especially if these shares are faithful and deliver plenty of loving returns over the next 12 months.
Wahlgren covers financial markets for BusinessWeek Online in New York
Edited by Beth Belton
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