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Quality stock picks from S&P’s Outlook

Richard Loth

For many years, Standard & Poor’s has employed a highly respected stock rating system, which consists of a STAR ranking (five is the highest and one the lowest) and a Quality ranking (A+ is the highest and C the lowest).The former ranking indicates a stock’s 12-month price performance potential. The latter ranking indicates S&P’s appraisal of the growth and stability of earnings and dividends over the past 10 years.Recent issues (May 31, June 7, and June 14) of Standard & Poor’s weekly investment newsletter, The Outlook, ran tables listing S&P’s top picks for growth, value, and foreign stocks. At any given time, there are about 100 stocks, out of some 1,550 U.S. issues covered by Standard & Poor’s, that carry its highest five-star ranking. This ranking is described by S&P as a “strong buy” and indicates that a stock’s “total return is expected to outperform that of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.”In today’s volatile markets, it makes a lot of sense to put new money into those holdings in your portfolio that have performed well in the past and/or into new stocks such as those characterized by Standard & Poor’s five- STARS and positive Quality rankings.With this circumstance in mind, I dug into the S&P “top picks” and came up with these high-quality, diversified stocks in the “The Outlook’s” tables:In the growth stock category, I stuck to large-caps with low to average risk. Among several choices in this grouping, I selected two of what might be considered lesser-known companies – Franklin Resources, Inc. (BEN) and Fisher Scientific International, Inc. (FSH). Franklin Resources is one of the world’s largest asset managers with over $453 billion in assets under management for retail, institutional, and high-net-worth clients. Franklin Resources’ current price is around $87 and its twelve-month target price is $136. BEN’s current dividend yield is a modest 0.55 percent and its price/earnings (P/E) valuation is a reasonable 16.7.Fisher Scientific is a leading global manufacturer and provider of scientific research, health care, and safety-related products and services.FSH is to be acquired (closing expected in late 2006) by Thermo Electron (TMO). S&P thinks the deal “makes sense,” and expects the “planned integration of TMO products will result in the most comprehensive life science product offering, potentially accelerating sales growth.” FSH is priced around $70 with a P/E ratio of 18.There are several prominent companies in the large-cap value category. Some of the more well-known names include, Bank of America (BAC), Citigroup (C), and, coincidently, Thermo Electron. I selected FedEx Corp. (FDX) and CVS Corp. (CVS) as interesting long-term investment prospects. Neither of these companies needs an introduction and both are leaders in their package-delivery and drugstore operations, respectively.S&P has set a twelve-month target price for FDX at $143. It’s currently priced in the $115 range with a price/earnings valuation of 16.9. CVS’s P/E is 19.7 and is priced at about $29. Its S&P twelve-month target price is $38. Lastly, in the international markets, the S&P STARS are limited to ADR (American Depository Receipts) offerings of foreign stocks that trade on U.S. stock exchanges. In this regard, I found E.ON AG (EON) very appealing.This German-based entity is the world’s largest investor-owned energy company with operations throughout Europe, the U.K., and the U.S. Currently priced around $37, its twelve-month S&P target price is $48, and it has a very appealing dividend yield of 6.63 percent. Using Standard & Poor’s respected independent investment research as an analytical starting point provides a level of confidence for additional investor investigative effort. The five stocks mentioned here are good examples of investment opportunities that are worthy of further study.The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing, an independent registered investment adviser. Reach Loth by e-mailing mentor@centurytel.net or calling 328-5591.Vail, Colorado


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