Although quantitative easing by the Federal Reserve would boost stock prices, investors are worried that the economy needs government intervention. To play it safe, here are 10 large-cap stocks that rank as analysts' favorite picks within their sectors.
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Most of these stocks won't soar — but that's the point. These 10 companies are some of the largest and strongest in the U.S. The stocks are ordered by projected upside, from modest to medium.
After each synopsis are the names and tickers of three more top-rated large-cap companies in the same sector.
10. UTILITIES
Top Pick: CMS Energy is an electric and gas utility in Michigan. Second-quarter net income increased 5.1% to $82 million, but earnings per share soared 86% to 39 cents. Revenue grew 9.4% to $1.3 billion. The operating margin widened from 12% to 16%. CMS has $558 million of cash and $6.7 billion of debt, equal to a debt-to-equity ratio of 2.2.
Its stock trades at a book value multiple of 1.4, a sales multiple of 0.7 and a cash flow multiple of 3.9 — 26%, 42% and 38% discounts to utility industry averages. All 15 analysts covering CMS advise purchasing its shares.
Bullish Scenario: Oppenheimer predicts that CMS Energy's shares will rise 7% to $20.
Three More Top-Ranked Utility Stocks:
CenterPoint Energy
Public Service Enterprise Group
Sempra Energy
9. TELECOMMUNICATIONS
Top Pick: American Tower builds and manages wireless and broadcast infrastructure. Second-quarter net income surged 77% to $100 million and earnings per share gained 92% to 25 cents. Revenue grew 11%. The operating margin rose from 39% to 40%.
American Tower has $383 million of cash and $4.2 billion of debt, converting to a debt-to-equity ratio of 1.2. Its stock sells for a forward earnings multiple of 48, a book value multiple of 6 and a cash flow multiple of 22 — premiums to peer averages. Still, 80% of analysts rate it "buy."
Bullish Scenario: Citigroup expects American Tower's stock to gain 21% to $61.
Three More Top-Ranked Telecom Stocks:
CenturyLink
AT&T
Windstream
8. CONSUMER GOODS
Top Pick: Coca-Cola, the world’s largest soft drink company, sells beverages, concentrates and syrups worldwide.
AP
Coca-Cola bottles
Second-quarter profit increased 16% to $2.4 billion, or 88 cents a share, as revenue climbed 4.9% to $8.7 billion. The operating margin extended from 30% to 33%. Coca-Cola has $10 billion of cash and $12 billion of debt, equal to a quick ratio of 1 and a debt-to-equity ratio of 0.5.
Its stock trades at a forward earnings multiple of 16, a book value multiple of 5.4 and a sales multiple of 4.3 — on par or at slight premiums to peer averages. Roughly 88% of researchers following Coke rate its stock "buy."
Bullish Scenario: Credit Suisse values Coke's stock at $70, suggesting an 18% return.
Three More Top-Ranked Consumer Goods Stocks:
Snap-On
General Mills
Philip Morris International
7. BASIC MATERIALS
Top Pick: Peabody Energy mines for coal. Second-quarter profit more than doubled to $206 million, or 76 cents a share, as revenue increased 24% to $1.7 billion. The operating margin extended from 16% to 19%.
Harald Sund | Photographer's Choice | Getty Images
Peabody has $1.2 billion of cash and $2.8 billion of debt, converting to a quick ratio of 1.3 and a debt-to-equity ratio of 0.7. Its stock sells for a forward earnings multiple of 11 and a book value multiple of 3.4 — 23% and 16% discounts to industry averages. It's expensive based on sales and cash flow. Around 85% of analysts rate it "buy."
Bullish Scenario: JPMorgan forecasts that Peabody's stock will rise 29% to $65.
Three More Top-Ranked Basic Materials Stocks:
Eastman Chemical
Cliffs Natural Resources
Freeport-McMoRan
6. FINANCIALS
Top Pick: Ace sells insurance and reinsurance. Second-quarter profit advanced 27% to $677 million, or $1.98 a share, as revenue grew 6% to $3.8 billion. The operating margin stretched from 19% to 23%.
Ace has $5 billion of cash and just $3.6 billion of debt, equal to a net liquidity position. Its stock trades at a trailing earnings multiple of 7, a forward earnings multiple of 8.2, a book value of 0.9, a sales multiple of 1.3 and a cash flow multiple of 5.4 — 59%, 25%, 79%, 75% and 42% discounts to peer averages.
Roughly 83% of analysts rate Ace's shares "buy."
Bullish Scenario: FBR Capital Markets predicts that Ace will climb 30% to $77.
Three More Top-Ranked Financial Stocks:
MetLife
JPMorgan
Visa
5. CONSUMER SERVICES
Top Pick: Kohl's operates department stores. Second-quarter profit stretched 13% to $260 million, or 84 cents a share, as revenue grew 7.7% to $4.1 billion. The operating margin inched up to 11%. Kohl's has $2.5 billion of cash and $2 billion of debt, translating to a quick ratio of 0.9 and a debt-to-equity ratio of 0.2.
Its stock sells for a trailing earnings multiple of 15, a forward earnings multiple of 13, a book value multiple of 1.9 and a cash flow multiple of 8.8 — 15%, 28%, 25% and 48% discounts to industry averages. Around 84% of analysts rank it "buy."
Bullish Scenario: Citigroup expects Kohl's shares to gain another 29% to $68.
Three More Top-Ranked Consumer Services Stocks:
Wyndham Worldwide
Omnicom Group
Interpublic Group
4. INDUSTRIALS
Top Pick: Republic Services Group provides nonhazardous solid-waste collection, transfer and disposal services. Second-quarter profit dropped 29% to $160 million, or 42 cents a share, as revenue hovered at $2.1 billion. The operating margin rose from 19% to 20%. Republic Services has $56 million of cash and $7.1 billion of debt, equaling a quick ratio of 0.4 and a debt-to-equity ratio of 0.9. Its stock trades at a forward earnings multiple of 15, a book value multiple of 1.6 and a cash flow multiple of 9.1 — 24%, 48% and 27% discounts to peer averages. All nine analysts following the stock rate it as a “buy.”
Bullish Scenario: First Analysis Group projects that Republic's stock will climb 25% to $39.
Three More Top-Ranked Industrial Stocks:
Jabil Circuit
R.R. Donnely
Flowserve
3. TECHNOLOGY
Top Pick: Apple sells the iPod, iPhone and iPad tablet computer. Fiscal third-quarter profit soared 78% to $3.3 billion, or $3.51 a share, as revenue rose 61% to $16 billion. The operating margin remained steady at 27%.
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The Apple iPad
Apple has close to $46 billion of cash and marketable securities and no debt. Its stock sells for a forward earnings multiple of 16, a book value multiple of 6.1 and a cash flow multiple of 16 — slight premiums to computer and peripheral industry averages.
Of analysts covering Apple, 48 rate its stock "buy" and just three rank it "hold."
Bullish Scenario: Ticonderoga Securities predicts that Apple's stock will climb 49% to $430.
Three More Top-Ranked Technology Stocks:
Cognizant Technology Solutions
Microsoft
Oracle
2. OIL AND GAS
Top Pick: Halliburton is an oilfield-services company. Second-quarter profit soared 83% to $480 million, or 52 cents a share, as revenue increased 26%. The operating margin rose from 14% to 17%. Halliburton has $3.1 billion of cash and $4.6 billion of debt, converting to a quick ratio of 2 and a debt-to-equity ratio of 0.5.
Halliburton's stock trades at a forward earnings multiple of 14 and a sales multiple of 2 — 34% and 19% discounts to peer averages. It's expensive based on book value and cash flow, but roughly 94% of analysts rate the stock "buy."
Bullish Scenario: Jefferies values Halliburton at $54, suggesting a 59% return.
Three More Top-Ranked Oil and Gas Stocks:
Schlumberger
Occidental Petroleum
EQT
1. HEALTH CARE
Top Pick: Medco Health Solutions is a pharmacy-benefits manager. Second-quarter profit increased 14% to $357 million, or 77 cents a share, as revenue expanded 9.9% to $16 billion. The operating margin contracted from 3.8% to 3.6%. Medco has $1.2 billion of cash and $4 billion of debt, translating to a quick ratio of 0.8 and a debt-to-equity ratio of 0.8.
Medco's stock sells for a forward earnings multiple of 14, a book value multiple of 4.8 and a cash flow multiple of 11 — sizable premiums to peer averages. Still, around 85% of analysts rank its stock "buy."
Bullish Scenario: Maxim Group forecasts that Medco's stock will rise 54% to $81.
Three More Top-Ranked Health Care Stocks:
Express Scripts
Life Technologies
Abbott Laboratories
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