We note that the (desperate?) appeal by the Department of Justice to overturn the completed AT&T...
11/07/2003 12:00 am EST
Standard & Poor's represents the very best on Wall Street - high quality research and an equally strong focus on integrity. Stephen Biggar is S&P's group head of equity research . In a special panel at the Money Show, he sha red his current favorite sectors and top stock picks.
"Currently, we are overweight in three sectors: consumer discretionary, health care, and technology. Part of the reason we like this segment is that retail spending by consumers remains favorable. And the consumer accounts for two-thirds of spending in the economy. Consumer confidence has recently rebounded after falling earlier this year. And we look for increased improvement.
"One company we like in the consumer area is Regis Corp. (RGS NYSE). This is the largest operator of retail hair salons in the US. It is a growing business. It can almost be considered a consumer staple. We like that they have an aggressive growth strategy – both opening and acquiring new salons. In 2004, expectations are for the company to open about 550 new stores and acquire about 400 others. There is a lot of capacity in this industry that they can acquire. We also see expanding margins from higher volume and a shift in the product mix to hair care products, which provide higher margins than hair cuts. We see continued opportunities for expansion and consistent low-teens growth rates.
"In the retail area, we also like Abercrombie & Fitch (ANF NYSE), which specializes in lifestyle branding. One area that is providing strength right now is the women’s and girl’s business. Sales have been improving in recent periods, despite a lack of promotional actdivity. That’s a good thing. We like opportunities like that, as it suggests that brand-conscious consumers are flocking to the stores, which is basically a free source of publicity. The shares trade at a valuation discount to its apparel retailing peers.
"The next segment we like is healthcare. One sector in particular that we are bullish on is generic drugs, as there is an effort on the part of the government to speed up approval of generics. In the biotech area we have also seen a number of approvals, and successes in oncology. In the HMO area, we have seen rising spreads between premiums and medical costs. That’s a trend we haven’t seen in quite a long time. In the medical device area, we like the fact that there are a lot of new product launches in such areas as cardiology, orthopedics, and diagnostics.
"One company that we think will benefit from that push to faster generic drug approvals is Mylan Labs (MYL NYSE). This is a maker of generic pharmaceuticals. The company recently launched generic versions of Prilosec, Zaniflex, and some other very popular branded drugs. And they have 30 new drug applications, so it’s a fairly robust pipeline to take advantage of.
"Also in the healthcare area, we like Coventry Health Care (CVH NYSE), a managed health care benefit provider. We like the strong premium growth we expect from higher commercial premiums, and higher organic enrollment growth. This company is doing well on that front. A number of underlying things to look at here are pricing discipline, the trend toward moderating medical costs, and acquisition integration. They’ve made some acquisitions in recent periods, and they are able to squeeze out costs in that area.
"The third segment we like is technology. Basically, this is a segment that has been out of favor for quite a while, and has come back into favor in the last six months. We see the sector benefiting from the replacement cycle, particularly for aging equipment. There was a big push in the 1998-99 period as companies ramped up in advance of Y2K compliance issues. Now we are through that and it is time for those machines to be replaced. So we like the hardware area. We’d also note that software also benefits due to similar buying trends. In addition, the low interest rate environment is conducive to spending on business equipment. And we do see a recovery for the semiconductor industry – an area where we have seen favorable trends recently. This sector goes in and out of favor every two to three years and we think now is a good time to buy select semiconductor companies.
"One stock in that area that we like is Microchip (MCHP NASDAQ), a supplier of micro-controllers and memory products. We think they will prosper in the multi-year cyclical upturn in the industry. The shares are trading below the mid-point of its price to book and well below the high for previous up cycles. Another technology company we like is Automated Data Processing (ADP NYSE). This is a company that provides a wide range of data processing services, including payroll processing. We think this is a favorable trend, as it allows companies to save a lot costs on their payroll expenses. The firm is also benefiting from acquisitions and strong customer retention. We also look for a very healthy balance sheet, particularly in industries with up and down cycles such as technology. We like to see strong balance sheets that are capable of carrying these companies through the down cycles. ADP is also a strong cash flow generator. We believe that a premium valuation is warranted."
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