Many Happy Returns

S&P turns up 22 5-STARS names that have topped the S&P 500 in total return over the past 12 months -- and seem good bets to continue doing so

By Numer de Guia, CFA

Please see the note regarding changes to Standard & Poor's STARS ranking system.

Most weeks in this column, we use Standard & Poor's Stock Appreciation Ranking System as a key criterion in helping us uncover attractive investing ideas. STARS, as it's more commonly known, is a ranking system based on fundamental research conducted by S&P analysts. Over 1,500 issues receive STARS rankings.

The STARS system's long-term track record speaks for itself. From its inception Dec. 31, 1986, through Oct. 31, 2004, the portfolio of stocks with S&P's highest ranking, 5 STARS (strong buy) posted an aggregate TOTAL RETURN of 1,316%, vs. a 366.7% return for the Standard & Poor's 500-stock index. What about the shorter-term? Well, thus far in 2004 (through Oct. 31), the gain in the 5-STARS have also topped that of the "500" by a tally of 6.1% to 1.6%.

While that info is nice to know, equity investors probably want some names to go along with the numbers. We're happy to oblige.

Our screen this week is rather basic. S&P equity analysts predicted 12 months ago that the 22 stocks listed below would outperform the market, as all of them were ranked 5 STARS back in October, 2003.

Flash forward one year. These issues did indeed post total returns greater over the 12 months through October, 2004, than the S&P 500's figure of 9.42%. And they are are still ranked 5 STARS today -- meaning S&P analysts still consider them good bets to outperform the market over the next 6 months to 12 months.

Company Ticker
Affiliated Computer Svcs. ACS
Allstate ALL
Alltel AT
American Standard ASD
Automatic Data Processing ADP
Capital One COF
Commerce Bancorp CBH
Constellation Brands STZ
ExxonMobil XOM
Fortune Brands FO
Imclone IMCL
Indymac Bancorp NDE
Kaydon KDN
La Quinta LQI
Landstar System LSTR
Lehman Brothers LEH
Nabors Industries NBR
Nextel Communications NXTL
Smurfit-Stone Container SSCC
Total TOT
Wachovia WB

Note: Effective Novermber 12, 2004, Standard & Poor's has modified its Stock Appreciation Ranking System (STARS) nomenclature:

• 5 STARS now designates a stock ranked strong buy, instead of the previous buy;

• 4 STARS is now buy, instead of accumulate;

• 2 STARS is now sell, instead of avoid; and

• 1 STARS is now strong sell, instead of sell.

The 3 STARS ranking remains as hold.

De Guia is an analyst for Standard & Poor's Portfolio Advisors

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