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FORECAST
Eight Stocks to Own This Year
by Jeffrey R. Kosnett
Emerson Electric (EMR, $69). You won't find many better ways to cash in on a global industrial and construction boom. The St. Louis company makes commercial heating and air-conditioning systems, parts for power plants, motors for appliances, factory automation systems and other industrial wares. It books 45% of its sales outside the U.S. -- much of it in China, India and Eastern Europe. With the weak dollar, Emerson's ability to ring up sales in various currencies should enhance profits. (When the dollar depreciates against, say, euros or yen, sales in those currencies translate into more bucks.) Emerson is a well-managed company that continually dumps low-return businesses and expands into more profitable lines. It generates some $2 billion a year in free cash flow (the money left after necessary capital investments). The stock is at 1998 levels and yields 2.4%. Emerson has raised its dividend 49 straight years.
Lyondell Chemical (LYO, $26). Economic strength is boosting materials prices -- a big help to this petrochemical manufacturer. Lyondell was expected to make money in 2004, which would mark its first profitable year since 2000. It produces such standard chemicals as ethylene, benzene and propylene. But the Houston company also has a stake in oil refining via a joint venture, and Lyondell was set to merge in the fourth quarter of 2004 with Millennium Chemicals, which will result in a broader product line.
Producers have the upper hand in pricing, so there's a good chance that Lyondell could leapfrog the $1.34 per share that analysts expect it to earn in 2005. Meanwhile, the stock yields 3.6%, which is why Jill Evans, manager of Alpine Dynamic Dividend fund, has Lyondell on her buy list. The stock is a bit of a gamble, but the generous dividend will ease your angst while you wait for some appreciation.
Medtronic (MDT, $53). Health stocks have been tepid performers the past few years. The extended lull offers an opportunity to invest in some great companies at reasonable prices. Shares of Medtronic, the world's largest maker of implantable medical devices, trade at 20% below what they fetched in 2000 and for only about 25 times estimated 2005 profits -- an unusually low price-earnings ratio for one of the stars of the device sector.
The Minneapolis company is known for pacemakers and defibrillators, but it has ambitious goals beyond heart devices. It generates some $2 billion a year in free cash flow, so it can spend generously on research to develop devices that treat diabetes, spinal injuries and gastrointestinal diseases. At the same time, Medtronic is cleaning its financial house by trimming manufacturing, sales and administrative expenses. An added plus: Compared with drug companies, device makers have fewer hassles with regulators and insurers.
MetLife (MET, $38). Life-insurance stocks could be the stars of the financial-services sector in the coming year. Life insurers don't mind rising interest rates as much as banks and brokerages do. They collect a constant stream of cash from premiums and invest it in bonds, mortgages and real estate. As rates rise, insurers can also reinvest the proceeds of maturing bonds at higher yields. The result: more investment income.
MetLife's return on equity, a measure of profitability, is below average for the industry but rising toward the norm. On the other hand, its shares trade at 1.4 times book value (assets minus liabilities), which is below the industry average. MetLife's president, Robert Henrikson, says the New York City company wants to become a bigger player in annuities -- a good long-term strategy as an aging workforce decides what to do with lump sums from 401(k)s and IRAs.
Southwest Airlines (LUV, $16). If you want to take a flier with some money, invest in a flier. Yes, it's true that rising fuel prices are poison for airlines. But Joseph McAlinden, chief investment officer for Morgan Stanley Investment Management, says carriers could produce unexpectedly large profits if energy costs ease. A strengthening economy could boost ticket sales and enable carriers to lift fares.
Southwest is no longer the soaring growth stock it was in the 1980s and '90s. And although the stock is off 25% since 2000, it's not flea-market priced, trading at 30 to 35 times analysts' 2005 earnings guesses (guess is the right word when discussing airline estimates). But if the airline business takes flight, Southwest is in the best position to benefit. It has the best balance sheet of any major carrier, low operating costs and among the fullest planes. If US Airways and ATA fail, Southwest can take over their gates in Philadelphia and Chicago.
Symantec (SYMC, $61). Curse the jerks who foul up your files, but invest in the company that protects your PC. Symantec is the world's leader in security software. More than 4,500 viruses and worms are floating around cyberspace, up from about 1,000 just a year ago. Creating defenses against these attacks is a growing business -- and will be for many years to come.
Symantec actually trades above the price it fetched when the tech bubble burst in early 2000. Still, given its growth potential, the stock is reasonably priced at 32 times calendar 2005 earnings estimates. Every time the company appears to be maturing, it makes a smart acquisition or develops an exciting new product. Symantec is now expanding into complex security systems that companies install to protect all their Web-based operations. That will help Symantec avoid over-reliance on its Norton antivirus software. Symantec, which has $2 billion in cash, does about half of its business abroad.
Valero Energy (VLO, $42). It's being called the golden age of refining. Demand is strong, refining capacity is scarce, and profits from turning petroleum into gasoline, heating oil and jet fuel are soaring. San Antonio's Valero owns 15 refineries that, in total, can process 2.4 million barrels of crude a day. That accounts for 8% of the industry's refining capacity. Valero also benefits from its extensive use of sulfur-heavy crude, which sells at a steep discount to "sweet" crude oil.
Valero's shares have nearly quadrupled since late 2002, but earnings per share have soared more than tenfold. Profits may slip in 2005, but will remain strong as long as the economy prospers.
Worried about new facilities easing the refinery shortage? Forget it. No refineries are currently being built in the U.S., and it takes three years to construct one once you find an acceptable site and win all the necessary approvals.
Yahoo (YHOO, $38). Yahoo's shares have recovered nicely from their low of $4 in 2001 -- and with good reason. Online advertising is taking off. PricewaterhouseCoopers reports that online ad revenues climbed 40% in the first half of 2004, to $4.6 billion, and the brisk growth is expected to continue. Unlike the legions of failed dot-coms, Yahoo makes good money. The company collects fees from advertisers as well as users who pay for such premium services as sports broadcasts. Yahoo has a $3-billion cash horde that it can use to buy or launch new revenue-generating services. "The best is yet to come," says Kathleen Fisher, a portfolio manager for Bernstein Investment Research and Management.
You have to suspend the usual cautions about price (Yahoo sells at 77 times 2005 earnings forecasts). For a company that dominates its niche and is growing rapidly, it's worth a shot.
--Research: Jessica Anderson |
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