S&P Puts Wal-Mart in Top 10

The giant retailer replaces homebuilder M.D.C. Holdings in S&P's portfolio of favorite stock ideas

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
Covance CVD 49.04 61 Attractive valuation
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

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