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Get Four
|  | AUGUST 22, 2005
Can't Stop the Big MoHealthy spending and productivity add up to some good stock buys, says S&P's Kenneth Shea. Plus: His formula for a diversified portfolioEnergy costs are a wild card in the future of the U.S. economy -- but in the view of Standard & Poor's, "even at current elevated levels for oil, real gross domestic product is likely to rise at a 3% or above rate through next year, paced by healthy consumer spending, continued strong equipment investment, and further productivity gains." Those are the words of Kenneth Shea, managing director of Standard & Poor's Equity Research Services. Looking at the stock market, Shea notes that the worst-performing sector has been telecommunications. However, S&P does give Verizon (VZ ) a buy rating because of its relatively low valuation and attractive dividend. AT THE PINNACLE. And despite worries over banking stocks because of rising interest rates, S&P has a strong buy rating on both Bank of America (BAC ) and Citigroup (C ). S&P maintains a list of Top 10 stocks -- all strong buys -- as a guide to investors. This portfolio is up 8.4%, vs. 2.9% for the S&P 500 year-to-date through July, says Shea. The current list: Smith International (SII ), International Speedway (ISCA ), Lennar (LEN ), Covance (CV ), St. Jude Medical (STJ ), Burlington Northern (BNI ), MDC Holdings (MDC ), Audible (ADBL ), Ingersoll-Rand (IR ), and Guitar Center (GTRC ). These were a few highlights of Shea's remarks in an investing chat presented Aug. 16 by BusinessWeek Online and Standard & Poor's on America Online. (BW and S&P are both units of The McGraw-Hill Companies Inc.) Following are edited excerpts from this chat. AOL subscribers can find a full transcript at aol.businessweek.com/chats. (Kenneth Shea is an S&P Equity Research analyst. He has no ownership interest in or affiliation with any of the companies on which he writes research. All of the views expressed in this chat accurately reflect the analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this chat.) Q: Ken, how does the market look to S&P now? Does today's loss in the indexes mean that energy prices are starting to hurt the market? A: Let me answer that by saying today's pullback in the equity markets reinforces the volatility that the market has experienced virtually all year. But this is not necessarily indicative of oil's influence on the markets. That said, stocks did tumble shortly after Wal-Mart (WMT ) said higher gasoline prices curb customer spending. So the wild card remains as to what extent energy costs will dampen economic activity, but our feeling is that even at current elevated levels for oil, real gross domestic product is likely to rise at a 3% or above rate through next year, paced by healthy consumer spending, continued strong equipment investment, and further productivity gains. Q: Any thoughts on Home Depot (HD )? A: Standard & Poor's reiterated its buy (4 STARS) recommendation on the shares of Home Depot following the company's earnings report today, which was a bit higher than expectations. The company's comparable-store sales growth of 4% was a healthy performance, bolstered by the continued good times for housing and related home improvement. S&P remains positive on the home improvement industry. Q: How about telling us your top picks for the balance of this year? A: Standard & Poor's evaluates companies on a five-tiered system called STARS [for Stock Appreciation Ranking System], where 5 is a strong buy recommendation, or those stocks believed by the equity analysts to be best poised for total return gains over the coming 12 months. S&P maintains an active model portfolio of what it believes are its Top 10 stocks [out of the more than 100 stocks rated 5-STAR] for upside potential, dubbed the S&P Top 10 Portfolio. Those stocks consist of Smith International, International Speedway, Lennar, Covance, St. Jude Medical, Burlington Northern, MDC Holdings, Audible, Ingersoll-Rand, and Guitar Center. The portfolio is up 8.4%, vs. 2.9% for the S&P 500 year-to-date through July. Q: Why is Verizon's price so low? A: On a year-to-date basis, the telecommunications services sector has been the worst-performing of the 10 S&P sectors. S&P analysts have a negative fundamental outlook on the sector and a negative stance on the integrated companies, though the stance on wireless is neutral. Despite these negatives, Standard & Poor's recommends investors buy (4 STAR) the shares of Verizon, in light of what we believe is an attractive price. Trading at a relatively modest 13 times 2005 estimated earnings and sporting a 5% dividend yield, the shares seem relatively attractive for total-return investors. Q: What are your thoughts on the financial sector, and specifically Citigroup? And what do you think of Bank of America (BAC )? Buy or sell? A: S&P recommends investors market-weight the financial sector, as a flattening yield curve normally portends a challenging earnings environment for banks. We do believe that this potential negative is offset some by relatively attractive valuations. S&P recommends investors buy (strong buy, 5 STAR) Citigroup, as we believe Citi's wide geographic presence and diverse business mix position it well for sustained growth, even in this challenging environment. The valuation appears attractive at only 11 times estimated 2005 earnings per share and sporting a secure 4% dividend yield. S&P also maintains a strong buy (5 STAR) recommendation on Bank of America in light of its recent success in integrating numerous acquisitions and its diverse business mix. S&P looks for the company's net interest margin to remain relatively stable ahead.
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