Salomon Picks 15 Stocks That May Outperform The Market
By Shaheen Pasha, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- With investors scrambling to find a place to put their money, Salomon Smith Barney offered some suggestions in the firm's ninth annual Ten Exceptional Names Plus report for 2002 to 2003.
The TEN+ List, published in July, is a compilation of the top companies Salomon analysts see outperforming the market over the next 12 months. Top picks are reviewed on the basis of their economic, quantitative, and technical merits, resulting in a list of 15 stocks that Salomon thinks investors might want to consider.
This year's top picks cross a broad spectrum of industries. The 15 companies on this year's list include the following: Aetna Inc. (AET), Applied Materials Inc. (AMAT), Air Products & Chemicals Inc. (APD), Charter One Financial Inc. ( CF), Cisco Systems Inc. (CSCO), Deere & Co. (DE), Dell Computer Corp. (DELL), Walt Disney Co. (DIS), Devon Energy Corp. (DVN), HCA Inc. (HCA), Philip Morris Cos. (MO), Pfizer Inc. (PFE), Prudential Financial Inc. (PRU), Staples Inc. ( SPLS), and Weyerhauser Co. (WY).
Of the 15, only Pfizer and Weyerhauser were also recommended in the firm's previous list for 2001 to 2002. Notable companies that dropped out this year include AOL Time Warner Inc. (AOL), Freddie Mac (FRE), and Tyco International Ltd. (TYC).
After putting together the list of 15 companies expected to outperform the market, Salomon broke down the strengths of each company in terms of its earnings and revenue growth potential, price-to-earnings ratio, potential upside to its price target, and projected return on equity. Salomon also highlighted the stocks with the highest dividend yields.
Applied Materials ranked No. 1 in a number of categories. Salomon expects the semiconductor equipment maker's revenue to climb 63% in 2003 from its 2002 estimates, while earnings per share is seen jumping 346% from its 2002 EPS estimate of 19 cents a share. Salomon has a price target of $38 on the stock over the next 18 to 24 months, saying that the company is the industry bellwether and is in the best position to capitalize on the expected recovery in the industry. Salomon said the stock may double beyond its $38 price target. The stock traded recently at $13.50.
Weyerhauser was also among the companies expected to show the sharpest revenue and earnings-per-share gains in 2003. Salomon said it expects Weyerhauser's revenue will climb 16.6% in 2003 from 2002 estimates and earnings per share could jump 280% from its 2002 view of $1.40 a share. Weyerhauser's strength lies in its exposure to the wood products cycle, which the firm believes will continue to benefit from strong demand and reduced supply resulting from mill closures and a tariff on Canadian lumber imports.
Philip Morris, meanwhile, has the lowest P/E ratio in the group at about 8.18-times 2003 expected earnings of $5.50. The company also led the list of stocks expected to produce the highest return on equity, with a return of 53.9%, and Philip Morris is expected to produce the highest dividend yield of 5.16%.
Salomon said the stock remains undervalued, but strong company fundamentals, an attractive dividend yield of 4% and an improving litigation environment should make it attractive. Philip Morris shares traded recently at $48.22.
Rounding out the three companies with the lowest P/E ratios are Devon Energy and Charter One Financial, trading at 10.38-times and 11.70-times 2003 earnings estimates, respectively. Salomon touted Devon Energy's leaner cost structure following its integration of Anderson Exploration and Mitchell Energy and its internal oil and gas production growth of about 5%.
Charter One, likewise, is expected to continue to generate double-digit growth in banking fees, and the stock trades at a discount to its peers due to the perception that the retail bank is "just a thrift" with low-yielding mortgage assets. That makes it an interesting bet in terms of valuation, Salomon noted. Charter One pays an annual dividend of 88 cents a share, and the dividend yield is expected to remain above 2%.
Pharmaceutical giant Pfizer, one of the two companies included on Salomon's list for two years in a row, is expected to produce a 36.7% return on equity. Salomon said Pfizer is expected to have the highest earnings growth rate among major drug companies due to merger-related cost savings, low risk from generic companies and a strong pipeline of drugs. In addition, Salomon said the company is in a good position to increase its market share and expand profit margins.
While the firm's top picks are broadbased, one theme is pervasive with the majority of the companies: a sustained slowdown in the economic recovery will hurt the stocks. That risk appears even more pronounced given the recent spate of disappointing economic data which have been driving concerns in the market of a potential double dip recession.
Economically sensitive cyclical companies such as Charter Financial, Weyerhauser, as well as some of the tech companies like Applied Materials and Dell, which rely heavily on capital spending, may have a tough time meeting expectations if the economy doesn't improve. |
