S&P's Top Picks and Market 'Outlook'

11/01/2002 12:00 am EST


Sam Stovall

Chief Investment Strategist, CFRA Research

Analytical independence has long been the watchword for Standard & Poor’s, the world’s leading provider of research and analysis. While many are embroiled in the battle between research and investment banking, we'd note that this 140-year old firm is not a brokerage, underwriter, or fund and has no conflicts of interest. It strictly provides unbiased advice. In a special panel at The New York Money Show, the team behind S&P's The Outlook offer their 'outlook' and top picks.

Sam Stovall, chief investment strategist for S&P, notes, “Can investors feel optimistic in this environment? If you use history as a guide, I’d say ‘yes, there are reasons for optimism.’ Certainly, we are not going back to the races as we were many years ago, but I certainly believe that the bias is likely to be on the upside once again.

“Have we bounced back too quickly? No, quick bounce backs are normal. Going back to 1949, we have found that three months after bear markets have ended, the stock market rises an average of 13%. Six months later, it is up an average of 24%. If you look back at prior bear markets and analyze the action in the following bull markets, you would see that in the first two months you tend to regain one-third of what had been lost in the prior bear. Six months after, on average, you have recovered about two thirds of the previous bear market losses and on average about one year later, you have recovered about 95%. So usually about one year after a bear market has ended – and you are in a new bull market – you have recovered almost all of the losses from the prior bear.

“What kind of rally can we expect? If history were to repeat itself, we would see the strongest gains in consumer discretionary stocks such as retail, autos, and homebuilding. These are the kind of stocks that typically perform the best, rising an average 55% in the one-year period after a bear market has ended. We still think there is a lot of life left in the homebuilding area, as well as in the home environment stocks. Even when homebuilding peaks, you still have demand for home improvement and home furnishing stocks for another 12 to 24 months. 

“Consumer staples, including food, alcoholic beverages, and tobacco also tend to do well coming out of bear market. We also like energy stocks. Because of an improving economy, we still think that energy stocks have life left in them. We also like materials, such as packaging and metals, because they are economically sensitive and are likely to do well. And while technology is very different today than prior to 1990, history does indicate that technology will be a good performer coming out of a bear market.”

Kevin Gooley, senior market strategist for S&P, summarizes five current favorites:

"Fortune Brands (FO NYSE) has diversified interests in consumer businesses, including home improvement, spirits and wine, office products, and gold. We are still seeing pretty good demand in the housing market, both building and improvement. The firm makes Master Lock, as well as faucets, plumbing products, and recently acquired a cabinetmaker. They are also benefiting from the growing popularity of golf, with such brand as Pinnacle and Titleist. In the spirits area, they signed a very favorable distribution agreement, which will make them the second largest distributor in the US. The company has also been restructuring their office products division, lowering costs and revamping operations.

"Kraft Food (KFT NYSE) is one of the world's largest branded food and beverage companies, with a number of market leadership positions including Nabisco snack foods, Oscar Mayer, Philadelphia Brand, and Post. These are very strong and impressive market positions, which is a key advantage for the company. The firm is continually working on maintaining their efficiency and improving their cost structure and improving operating margins, which will always be a driver to profitability. They are seeing solid growth in volumes, pretty much across the board. We believe this is a company that is very well positioned within the consumer staples area.

"Ocean Energy (OEI NYSE) is an exploration and production company that explores for natural gas and oil. They have very good prospects in the deep water Gulf of Mexico. It is one of the most attractive areas for oil exploration in the world and the company is one of the largest lead holders there. This gives them tremendous access to a great number of reserves. In addition, the firm's average development costs remain at very low levels. Over the years, they have perfected the ability to explore at a very reasonable and cost-effective basis.

"Ambac Financial (ABK NYSE) is one of the largest municipal bond insurers. When a municipality issues a bond, it pays a premium upfront to a company like Ambac. In return, Ambac agrees to guarantee the payment of principal and interest in the case of a default. And currently, many municipalities are taking advantage of the low interest rate environment by issuing or refinancing muni bonds. Meanwhile, they company is very selective about the bonds that they insure and 95% of their portfolio is investment grade or higher. The company is also taking its expertise in bond insurance and leveraging it into other similar financial guarantees, such as structured finance including asset-backed and mortgage-backed loans. Ambac is also now targeting the huge, untapped global market for its services.

"Triad Hospitals (TRI NYSE) operates hospitals and ambulatory surgical centers. Most of its hospitals are located in smaller, fast-growing cities in the Southwest. They are very selective and they tend to be in less-competitive cities where they are either the only hospital or one of a just a few. The hospital environment is pretty strong right now. In spite of their success, they continue to focus on cost-control initiatives, which is something we like to see. They also have a very effective acquisition strategy, taking over under-performing hospitals and making them more profitable. They also have a consulting business, which helps in finding potential acquisition opportunities."

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