From Top to Bottom: S&P's Best Picks

Ten energy and IT stocks shine in this week's screen using S&P's proprietary qualitative and quantitative ranking methodologies

Do you look at the big picture when you make investing decisions—macroeconomic conditions, industry trends, stock market action? If so, you could be said to be a "top-down" investor. Or do you like to examine things on a stock-by-stock basis, examining company fundamentals, management, and so on? Then you are taking a "bottom-up" approach.

Rather than play favorites, we decided to combine the best of both worlds in this week's screen.

Let's start with the bigger picture. Standard & Poor's maintains recommendations on each of the 10 sectors that constitute the S&P 500-stock index—consumer discretionary, consumer staples, energy, financials, health care, industrial, information technology, materials, telecommunication services, and utilities. Currently, S&P has overweight recommendations on two of the groups: energy and information technology. (We elevated the IT group's recommendation from market weight on Sept. 18 in the wake of the Federal Reserve's rate cut.) Our screen this week used these two groups as a starting point.

Bottoms Up

Then we took the bottom-up approach, using two proprietary methodologies: S&P's Stock Appreciation Ranking System (STARS) and S&P's Fair Value ranking system.

STARS is a qualitative ranking system based on fundamental research conducted by S&P's own analysts. We looked for those stocks in the energy and IT groups that carried S&P's highest ranking of 5-STARS (strong buy). S&P analysts expect 5-STARS stocks to outperform the S&P 500 over the coming 12 months on a total return basis, with the shares rising in price on an absolute basis.

S&P's Fair Value model is a quantitative stock-ranking system. The model calculates a stock's weekly Fair Value—the price at which it should trade at current market levels—based on fundamental data such as corporate earnings and growth potential, return on equity, current yield relative to the S&P 500, and price-to-book value.

Stocks are ranked from 5—indicating significant undervaluation compared to the Fair Value universe—to 1, indicating significant overvaluation. We looked for those issues ranked 5.

When we finished our top-to-bottom search, these 10 names emerged:

Top-Down, Bottom-Up: S&P's Best Picks
Company (ticker symbol) Price (9/20/07)
Alpha Natural Resources (ANR) 22.59
Noble Energy (NE) 49.42
Superior Energy Services (SPN) 38.00
Seagate Technology (STX) 25.38
Oracle (ORCL) 21.04
NDS Group (NNDS) 48.65
Microsoft (MSFT) 28.42
MEMC Electronic Materials (WFR) 58.13
Logitech International (LOGI) 27.69
EMC (EMC) 19.03
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