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Analyst Watch: Buy Companies With Strong Balance Sheets

U.S. stock index futures pointed to a higher open Tuesday, in the wake of a lackluster session Monday, ahead of key economic statistics and after Home Depot's profit slightly beat expectations.

Here's what analysts and others are watching before the bell:

John Morris, managing partner of Crestwood Advisors, says his outlook for 2010 includes soft GDP growth and a slow recovery in employment.

So how's he playing it? Right now, he favors equities and, "in particular, companies that are defensive or have strong competitive advantages and solid balance sheets," he says.

The stocks he likes and why:

Direct TV

  • Huge free cash flow generation is enabling company to buy back 1/3 of shares outstanding over last 3 years
  • Recurring revenue model with fast growing Latin America business provides for predictability regardless of macro-climate

Pepsico

  • Global growth opportunity (Frito Lay, Gatorade, Quaker Oats); 40% of profits now ex-US
  • Strong balance sheet and cash flows support 3% dividend yield and $15B three year share buyback program (15% of mkt cap)
  • Attractive valuation (15x P/E vs. historical 20x P/E) similar to other quality franchises in current market

CR Bard

  • Stock is attractive; trading at 14x 2010 earnings. 20% annual returns on capital, 8% free cash flow yield,
  • Seasoned, "shareholder friendly" management team. Shown track record of thoughtful capital allocation

Morris says "we continue to avoid the consumer lending banks (e.g. Citi, B of A, Wells Fargo) as we have little visibility in their balance sheets and the consumer discretion stocks (restaurants, airlines, hotels, leisure)."

See more of what analysts and money managers have to say, and get the latest financial news. Watch Squawk on the Street every weekday morning starting at 9 a.m. ET.

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Disclosure: Morris and his family own all 3 of the above stocks.

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