An Energy Boost for S&P's Top Ten

Oil and gas equipment supplier Smith International replaces chemicals outfit FMC in the list of S&P's best investment ideas

By Kenneth Shea, Robert Gold, and Steve Biggar

On July 5, Standard & Poor's Equity Research Group made changes to the S&P Top Ten portfolio -- those stocks it considers to be the best candidates for capital gains over the next 6 to 12 months. To reflect our continued bullish stance on the oil and gas equipment and services subindustry, we at S&P added Smith International (SII ) to the portfolio, replacing diversified chemicals concern FMC (FMC .

Like all the stocks in the portfolio, Smith carries Standard & Poor's highest investment ranking of 5 STARS (strong buy). FMC retains its 5 STARS ranking.

Smith supplies products and services to the oil and gas exploration and production industry, petrochemical industry, and other markets. Its offerings include drilling and completion fluid systems, solids-control equipment, waste-management services, three-cone and diamond drill bits.

In our view, Smith is well positioned to capitalize on rising drilling activity in several frontier geographic regions and deepwater fields. We see revenues rising 21% in 2005, to $5.3 billion, and operating earnings per share increasing 40%, to $2.78.

We believe the shares are attractive relative to peers and our calculation of intrinsic value. Our 12-month target price on the stock is $80.

The S&P Top Ten portfolio was launched on Dec. 31, 2001. From inception through May 31, 2005, it has gained 23%, compared to a 10.1% climb 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 (total return). Year-to-date through May 31, 2005, the portfolio advanced 2.05%, while the S&P 500 declined 0.95%.

Here's the latest list:

Company Ticker Price (7/5/05 close) 12-Month Target Investment Rationale
Burlington Northern BNI 47.75 65 Strong market share, rising shipping volume
Covance CVD 45.79 61 Attractive valuation
Guitar Centers GTRC 60.69 75 Attractive valuation
Ingersoll-Rand IR 72.58 100 Expected improvements in several end-markets
International Speedway ISCA 59.51 68 Dominant position with NASCAR
Landstar System LSTR 30.47 46 High returns on assets and equity
Lennar LEN 64.07 76 Attractive valuation
St. Jude Medical STJ 44.32 55 Positive ICD market data
Smith International SII 66.95 80 Attractive valuation
Spectrum Brands COO 35.80 50 Strong earnings outlook

Shea is director of global equity research, and Gold and Biggar are senior portfolio group analysts, for Standard & Poor's Equity Research

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