Markets & Finance

Why It's a Good Time to Buy


From Standard & Poor's Equity Research

Considering the volatility of world stock markets over the past few weeks, most of it on the downside, it is not too surprising that Standard & Poor's equity analysts have found more upgrade than downgrade opportunities. In recent weeks, the number of stocks with rising STARS rankings has far exceeded the number of those with falling STARS. Our STARS rankings are assigned according to the difference between a stock's current price and its 12-month target price. When the current price is falling, the potential gain gets larger, hence the upgrades.

But at the same time, S&P analysts have also been boosting their target prices. Analysts revise their target prices for any number of reasons - better-than-expected profits, a lucrative new contract, the sale of a less profitable division - but generally, the revisions are linked to signs of improving fundamentals.

Standard & Poor's studied the recent target price revisions and came to the following conclusions, all of which omit the effect of any dividends:

S&P equity analysts increased their 12-month target prices for issues in the S&P 500 by an average of 1.1% in May.

Based on our fundamentally derived target price forecasts, the S&P 500 is projected to reach 1,472 by May 2007. The S&P Investment Policy Committee target for year-end 2006 remains 1385. From current levels, the target prices suggest a 10.6% increase by the end of this year and a 17.6% increase by May 2007.

Projected gainers outnumber projected losers seven to one, with 435 of the S&P 500 issues expected to gain over the next 12 months and 62 expected to lose. These breadth projections are the strongest since S&P started calculating expected breadth in 2003.

All 10 sectors of the "500" are expected to gain.

Energy remains on top, with 28 issues expected to gain and one to decline, resulting in an expected weighted sector gain of 20.8% over the next year. S&P Equity Strategy recommends an overweight allocation to energy, which makes up 10% of the "500." An exchange-traded fund (ETF) that tracks this sector is the Select Sector SPDR-Energy (XLE).

In the financial services sector, S&P analysts are expecting 76 issues to show 12-month price gains, and 10 to post declines. S&P has an overweight recommendation for financials, about 20% of the "500." An ETF option here is Select Sector SPDR-Financial Services (XLF).

Telecommunications looks like the weakest sector, with five issues expected to gain and three not, for an estimated weighted sector gain of 6.5%. S&P advises underweighting telecom, which makes up 3% of the "500."

Of consumer discretionary stocks, 71 are expected to gain and 15 to lose. S&P recommends an underweight position in this sector, 10% of the "500."

Thirty utilities stocks are expected to gain, and one to decline. S&P advises an underweight allocation to utilities, which make up 3% of the "500."

Recommended stocks with recent upward target price revisions


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