Many analysts believe 2007 could be another profitable year for stock investors, provided they know where to put their money.
During the final week of the year, CNBC spoke with analysts to get their top picks for 2007. Large cap names and private equity were winners in 2006, and many analysts are expecting more of the same next year. But look for some picks that may be surprising as well.
If you could only own one stock in 2007, it should be Walt Disney, according to Mike Cuggino, Portfolio Manager at Permanent Portfolio Funds.
"I think it's a company that's hitting on all cylinders right now," Cuggino told CNBC. "The television division is going great at ABC; they've got some hit shows. Also, the cable division has tremendous products like ESPN. A real leverage driver of this company is the movie and film entertainment division. For the first time in several years, it's going to be profitable in '06 and I think that's going to continue in '07."
Intel was the worst Dow performer in 2006, but David Goerz, Highmark Capital Chief Investment Officer, believes this dog of the Dow will bark profits in the future.
"As we look forward two years out, we think that this is a stock that could see earnings double from where they are, about 85 cents for 2006 doubling to $1.50 and possibly $1.60," said Goerz. "This will come from the significant product cycle transition that they're going through. Technology earnings, which are going to be about 20% next year versus 9% this year, are going to be a major tailwind as we think about PCs going into '07."
KKR Private Equity Fund
Private-equity backed deals accounted for more than a fourth of all mergers in the United States in 2006. Jason Trennert, Chief Investment Strategist for Strategas Research Partners, told CNBC he believes there is still more momentum to come from private equity in 2007. One of this top picks is the KKR Private Equity Fund.
"It goes back to this idea that there's been a ton of money that's been raised by private equity funds," said Trennert. "These guys know what they're doing and the stock is trading just below book value. To me, that is one of the best ways to play this private equity merger boom."
Eli Lilly , Wyeth
The valuations of pharmaceutical companies have been in a tight range, so it makes more sense to play it safe and focus on large-cap stocks such as Eli Lilly and Wyeth, according to Scott Henry, Pharmaceutical Analyst at Oppenheimer & Company.
"The biggest factor is the lack of negatives, the lack of patent expirations," said Henry. "So, if you count on your base business and you can trade or buy the stocks at 15 times earnings, you have left the window wide open for upside surprises to come in the pipeline."
Neither Henry or his firm own Eli Lilly or Wyeth.
Birinyi Associates looked at the price targets for every analyst that covers the Dow stocks and came up with consensus top picks for 2007. Analysts expect the big blue-chip winner next year to be the world's largest retailer, even though the company warned of its first sales decline in 10 years this past November and shares are down nearly 2% for 2006.
"Wal-Mart doesn't seem to have a lot going well right now, but sometimes the stocks where no one can find anything good are the names where you see some gains going forward," said Paul Hickey, Birinyi Associates Equity Market Analyst.
Other top Dow picks, according to the Birinyi study, were 3M , Caterpillar and United Technologies .
Microsoft boosted revenue in fiscal 2006 by 11% and operating profits rose 13%. The software giant is a top pick of Peter Misek, Senior Technology Analyst at Canaccord Adams, who sees further growth in 2007.
"We think that Vista (the latest release of Microsoft Windows) provides some reasonable upgrade advantages and it will add about 200 basis points on PC unit volume growth," said Misek. "The big factor for Microsoft will be the Xbox, which had a great holiday season. We see it turning profitable ahead of company expectations."
Misek nor his firm own Microsoft.
International Business Machines
Large cap companies were the top picks of a lot of analysts interviewed by CNBC. However, Scott Kessler, Internet Software Analyst at Standard & Poor's, chose IBM as one of his top picks more for the company's fundamentals than its market cap.
"We think the services business has turned the corner," said Kessler. "The company has been making a lot of acquisitions in the software area. The P/E on 2007 estimates is around 14, which is below market."
Neither Kessler or his firm own IBM.
Centex , KB Home , DR Horton
Shares of homebuilders have declined compared to a year ago after a slump in the housing market. However, Margaret Whelan, UBS Homebuilding Analyst, believes the book value of some of the nation's largest builders will continue to grow in 2007. She maintains a "buy" rating on 7 of the 14 homebuilders UBS covers, including Centex, KB Home and DR Horton.
"We think they have stronger management teams and they are well-positioned," said Whelan. "The type of product that they are selling to the first-time buyer helps a lot because affordability is an issue right now. Plus they are committed to shareholder value and a lot of them are doing buybacks."
Whelan nor her firm own Centex or DR Horton.