Five "5-Star" Favorites
09/02/2005 12:00 am EST
Sam Stovall is the chief investment strategist at the highly prestigious Standard & Poor's, and a member of the S&P policy committee where he focuses on market history, valuations, and industry recommendations. Here, he looks at some favorite ideas
"The common factor in these recommendations is that each of them earns earns S&P's highest 5-star buy rating. In addition, each of these stocks also have very high quantitative rankings. Each one comes from an industry that has good relative momentum and each of the industries in which these companies are found has a positive investment outlook.
"Coach (COH NYSE) is in the consumer discretionary category. The firm makes and markets handbags and apparel items for both men and women. Our price target is $44. Last year, the company earned 68 cents. We think it will earn $1 this year and up to $1.30 next year. It has a little bit of a pricey p/e at 27, yet that is well below the average we’ve seen over the past five years. The company has given very good guidance, and we are very enthusiastic about their new product line-up and their efforts to continue to grow their market share.
"Nabors Industries (NBR ASE) is the world’s largest oil and gas land driller. Our target price is $78. The company earned $1.92 last year. We think it will earn $3.88 this year and $4.83 next year. It’s trading at a below market p/e of 16.9 times 2005 earnings. Our feeling is that there is still upside potential for drilling companies, not only in the greater efficiency of the rigs that are in use, but also the increase in capital expenditures that we foresee for the majors. We see an increase in gas drilling in the US and oil drilling internationally.
"CIT Group (CIT NYSE) has been around since 1908. It was owned by Tyco and then recently spun off. It engages in all types of commercial and consumer financing. Its target price is $55 a share. It earned $3.50 last year and we think it will earn $4 this year and $4.50 next year. Its p/e is 11. Basically, this company is a steady-eddy. We think it will continue to post earnings growth, with very reasonable valuations. We believe that when the Fed does finish tightening rates, financials will start to come under greater appreciation by investors. And a very low p/e makes this stock even more attractive.
"WellPoint (WLP NYSE) is in the managed health care area, and serves 28 million members. We have an $88 per share target. It earned $3.05 last year. We think it will earn $4 this year and $4.65 next year. It’s trading at 17.7 times earnings, even though it’s had a very good run recently. We think that consumers will go to this company because of their long-standing reputation and thus they will be attracting additional members. Because this employment picture is improving, this will benefit the health care management organizations. And because of its size, they have a greater ability to reduce costs and improve margins.
"Citrix Systems (CTXS NASDAQ) is a leading developer and supplier of access infrastructure software and services. What the heck is that? Basically, what they do is make products that allow employees to access a company’s systems from remote locations anywhere in the world from a landline or a wireless situation. This allows either customers or employees to access a secure system. Our target is $29. They earned $0.75 per share last year. We expect it to post $1.04 this year and $1.23 in 2006. It’s trading at a p/e of 23. In general, we’re expecting technology spending to be improving both this year and next and we’re looking for revenue increases in the high teens for this company."