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Get Four
|  | JANUARY 9, 2004
This Year, Large Caps Will Lead That's the prediction from S&P's upbeat Sam Stovall, who sees the market rising, but not quite so energetically as in 2003 It will be a good year for investors in stocks -- but not quite so good as 2003. That's the forecast of Sam Stovall, chief investment strategist for Standard & Poor's, who sees large-cap names taking the lead. Stovall suggests that investors should "gravitate toward higher-quality earnings and take profits in low-quality/high-risk companies that appreciated nicely in 2003." He also notes that the stocks rated 5 STARS or buy in S&P's Stock Appreciation Ranking System (STARS) gained 35% in 2003, vs. a 26% gain for the S&P 500-stock index as a whole. Asked if he can point to a single favorite stock for 2004, he notes that in BusinessWeek's yearend Where to Invest issue, he named Sysco (SYY ), the marketer and distributor of food-service products, because in an improving economy more people should be going out to eat. Moreover, he says, Sysco has a good earnings and dividend record and is in a defensive sector of the economy. These were a few of the points Stovall made in an investing chat presented Jan. 6 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk. Note: Sam Stovall is a registered representative of Standard & Poor's Securities, Inc. He has no affiliation with or ownership interest in any of the companies under discussion. Other S&P affiliates may provide services to the companies under discussion. Q: Sam, the old year ended with the S&P 500 happily above S&P's predicted 1085 -- and the market is continuing to do well so far. How optimistic are you? A: In some ways, I was a bit disappointed that the market closed handily above our 1085 target, because our earnings outlook has remained unchanged (a 14% gain in operating earnings for the S&P 500 is expected in 2004), and therefore our yearend 2004 price target of 1190 might be met sooner than anticipated. Until we adjust our earnings estimates or interest rate targets, etc., we're still looking for a high-single-digit price advance this year. Q: It's interesting that our first question today is about satellite radio -- XM Satellite Radio (XMSR ) vs. Sirius (SIRI ). Last time I looked, S&P wasn't yet covering that new subsector -- or has that changed? A: I'm sorry to announce that we did not add either company to our STARS universe, and I'm unable to offer any optimism toward their being included any time soon. S&P has a team of more than 60 equity analysts who cover nearly 1,200 stocks on a buy, hold, and sell basis. Our coverage universe is influenced by inclusion in any of the S&P domestic indexes or by shareholder ownership, as well as other factors. Sorry, I don't have any investment opinions for you. Q: How about the financial sector? A: I'm happy to tell you that S&P currently has a market-weight recommendation on the sector (believing that this sector will keep pace with the S&P 500 in the coming year). However, there are pockets of potential strength in this sector where S&P analysts have several buy recommendations. Those include the insurance category, with such companies as Allstate (ALL ) and Hartford Financial Services (HIG ); mortgage bankers such as IndyMac Bancorp (NDE ) and Washington Mutual (WM ); as well as some selected consumer/regional banks, such as Capital One Financial (COF ), Commerce Bancorp (CBH ), and U.S. Bancorp (USB ). Q: Is it possible to single out any one stock in answering this? What will be the hottest stock in 2004? A: Well, let me answer that a different way and say which company was I willing to state as my one pick for all of 2004 in the Investment Outlook 2004 edition of BusinessWeek. That company was (envelope, please...) Sysco Corp. (SYY ) [which markets and distributes to the food service industry]. Our feeling is that even though in 2003 the market threw caution to the wind and embraced low-quality, high-beta issues, the same will not be the case in the second year of this bull market. We believe that as the economy improves, consumers will likely treat themselves to more meals away from home. Yet because this company carries an A+ earnings and dividend rank, it has an impeccable record of earnings and dividend growth over the past 10 years. It also offers a modest dividend yield of 1.4%. And so we believe that this stock will benefit from a continued improvement in the U.S. economy but should also hold up well in the face of increased investor skepticism, due to its being a member of a defensive sector that has a history of delivering earnings and dividend increases. Q: Two big pharmas here: What will happen to drug companies like Merck (MRK )? And what's the prospect of Pfizer (PFE ) doing well in this year? A: S&P has an overweight recommendation on the health-care sector, primarily because of our interest in biotech, medical equipment, and health-care facilities. We're neutral on the near-term prospects for the major pharmaceuticals, because of the still-weak drug pipeline. As a result, none of the companies in the pharmaceuticals index carries a 5-STAR (buy) ranking. However, several carry 4-STAR (accumulate) rankings, such as Abbott Labs (ABT ), IVAX (IVX ), Eli Lilly (LLY ), Pfizer, and Valeant (VRX ). Q: And another quick one on a pharma -- what about Teva (TEVA )? A: Teva Pharmaceuticals ADR is a nonindex pharmaceutical that also carries a 5-STARS ranking. This foreign-based company receives about 64% of revenues from North America and about 24% from Europe. Q: Over to the Net and e-biz -- do you see continued growth in eBay (EBAY )? A: The Internet retailing industry (which eBay dominates) was one of the best-performing industries last year, gaining 90.5%, vs. 26.4% for the S&P 500. We currently have a 3-STARS, or hold, recommendation on eBay.... We believe that the shares will trade in line with the S&P 500 over the coming 12 months. Q: Is this a year for software? And what's your price target for Microsoft (MSFT ), short-term? A: S&P has two software categories -- applications software and systems software. Microsoft is found in the systems-software category. We're currently neutral on this category, as well as the applications category. However, the Microsoft shares are ranked 5 STARS (buy), as we believe that investors will focus on the industry leaders once this industry becomes a market outperformer.... Other software companies that we favor include Cadence Design Systems (CDN ), Open Text (OTEX ), and Sybase (SY ).
BW MALL
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