Favorites from Standard & Poor's

08/29/2002 12:00 am EST


Of all the stocks issued or changed by Wall Street in the year 2000 – when the market was peaking – only 189 stocks were downgraded to sell ratings. Of that number, 24% came from just one company – Standard & Poor’s. That’s an amazing percentage considering that there are some 350 equity research houses making recommendations. The company is also at the forefront of helping investors attain better earnings estimates through their new “core” earnings model, which takes into account stock-option grant expenses, pension costs, restructuring costs, and certain write-downs.  Kudos to S&P! Here are some highlights from the S&P panel…

"There are many things to worry about today," says David Braverman, senior investment officer for S&P. "There are continued concerns over terrorist attacks. There are worries about going to war with Iraq. People are concerned about the lack of trust in reported earnings. Housing has driven the economy, and one has to wonder if housing is forming a bubble. And ultimately, interest rates are likely to go up. But there is also a bright side. We think stocks have seen their lows. The reason for that is our belief that earnings are going to improve. The impact of lower taxes and lower interest rates will lead to higher stock prices. We don’t see the double dip that others are talking about. By next year, we should see steadier and better growth. We think the stock market will improve. However, we don’t expect rapid improvement. Investors will have to resign themselves to slower, high single-digit returns. Overall, our asset allocation is now 60% in stocks." 

Kevin Gooley, senior market strategist for S&P, highlights the company's five current favorite stocks:

Wendy’s International (WEN NYSE) has over 6,000 restaurants, primarily in the US. They also operate 2,100 Tim Horton’s coffee shops, most of which are in Canada.   The company continues to open new units, which is a key driver for growth. Wendy's is seeing widening margins because the cost of food and utilities is going down. Sales per average unit are also rising. We always like to see that. More importantly, they are taking market share from their competitors. The company has also announced that they may be repurchasing shares, which is always a good sign.”

Constellation Brands (STZ NYSE) is the leading provider of wine, beer, and distilled spirits, including brands such as Almaden, Paul Mason, and Black Velvet. In the beer segment, they have six of the 25 leading imported beers, including Corona Extra and Corona Light. They are seeing good volume in profit growth and that should continue.  They are also seeing good demand across the board. They have also been able to put in some price increases while continuing to lower their costs.”

“In the energy sector, we like Ocean Energy (OEI NYSE), a leading exploration and production company. They have very good prospects in the deep water Gulf of Mexico, one of the most promising areas for drilling in the world. They are one of the largest leaseholders in that area through a joint venture with Kerr-McGee. This is really a good opportunity for them. Our analysts expect overall production to rise by 8% this year and by 17% to 19% next year. International operations account for 37% of production, which provides them with diversification.”

Tenet Healthcare (THC NYSE) is one of the largest for-profit hospital managers.  They have 116 acute care facilities in 17 states, primarily concentrated in California, Florida, and Texas. The company is benefiting from an improving pricing environment, including in their managed-care contracts. Government reimbursement levels have been stable and look stable going forward, which is always a key factor. They continue to see expanding operating margins and have been paying off debt and lowering interest costs.

“Although we have an underweight opinion on technology in general, one company we do like is Electronic Arts (ERTS OTC), which makes entertainment software for PCs, Sony Playstation, Nintendo Game Cubes, and the Microsoft X-Box. They are one of the dominant players in this market. The new consoles out there are going to drive the sale of new games. With their strong market position, they are very well-positioned to benefit from this. The market continues to expand. Not only are people upgrading their old systems, but new people are moving into the market as players. The company also has an agreement with America Online for their online gaming operations.”

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