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Goldman Sachs' 8 New 'Conviction' Stock Buys

Goldman Sachs has added 19 stocks to its Conviction Buy List in 2011 and removed others. For investors willing to go against the grain and buy stocks in a down market, the global investment bank's picks may offer substantial upside.

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Goldman Sachs

Of those 19 new Conviction Buys, the following eight offer the most potential, based on current price targets.

Each is expected to rise at least 20% and as much as 36% in the next 12 months.

8. Buckeye Partners is an oil-and-gas storage and transportation company. It is structured as a master limited partnership, a unique corporate structure that's required to pay the majority of its cash flow to shareholders in exchange for preferential tax treatment.

Buckeye owns a pipeline for refined petroleum products spanning 5,400 miles in the eastern and mid-western U.S. Its stock has fallen 5.4% in 2011. It pays a quarterly distribution, taxed differently than a qualified dividend, of 99 cents, converting to an annualized yield of 6.3%.

Buckeye's adjusted fourth-quarter earnings rose 51% to 66 cents, missing analysts' consensus target by 31%. Sales, up 75%, beat consensus by an impressive 55%. Buckeye's stock sells for a forward earnings multiple of 17, a 19% premium to its oil-and-gas peer average.

Of analysts covering the equity, four, or one third, advise purchasing it and eight advise holding. None advocate selling. Goldman expects the stock to rise 20% to $76. Barclays ranks Buckeye "equal weight," expecting it to appreciate to $71. Deutsche Bank rates it "hold," predicting a drop to $60.

7. NCR sells financial computer hardware, including ATMs and personal kiosks, such as DVD rental machines. Its stock has advanced 33% in the past 12 months and has risen an eye-catching 19% so far in 2011 amid the stock sell-off.

NCR's adjusted fourth-quarter earnings dropped 8% to 55 cents, but exceeded researchers' consensus estimate by 10%. Sales grew 4.5%. NCR's quarterly gross margin rose from 21% to 23% and the operating margin inched up from 3.4% to 3.7%. The company has $485 million of net liquidity (cash minus debt).

NCR's stock trades at a forward earnings multiple of 9.8, a book value multiple of 3.4 and a sales multiple of 0.6, 31%, 27% and 80% discounts to computer and peripheral industry averages. Its PEG ratio, calculated by dividing the trailing P/E by analysts' terminal earnings growth rate, of 0.2 signals an 80% discount to estimated fair value.

Currently, five, or 45%, of analysts in coverage rank NCR a "buy" and six rank it "hold." None rate it "sell." Goldman expects the stock to rise 24% to $23. JPMorgan, ranking it "neutral," forecasts a marginal rise to $19 over 12 months.

6. Embraer designs and develops jet and turboprop aircraft for civil and defense aviation. Based in Brazil, Embraer's American Depository Receipt, or ADR, trades on the New York Stock Exchange. The ADR has appreciated 41% in 12 months and has gained 12% in 2011.

Embraer is due to release fourth-quarter results on May 2. Its adjusted third-quarter earnings expanded 2.7% to 70 cents, more than doubling the consensus projection. Sales fell 17%, missing by 9.5%. Embraer held $2.1 billion of cash and $1.9 billion of debt at quarter's end.

Embraer shares sell for a book value multiple of 2.4, an attractive 56% discount to the aerospace and defense industry average. They are fairly valued on the basis of trailing earnings, forward earnings and sales.

Of researchers following Embraer, six, or 55%, advise clients to purchase its stock, four suggest holding and one says to sell. Goldman is most bullish, valuing Embraer at $42 and implying a one-year return of 26%. Credit Suisse more conservatively foresees a rise to $37. And RBC Capital Markets forecasts that the stock will ascend to $35.

5. Carnival owns several cruise lines, including Carnival, Princess and Holland America. Its stock has gained 5.7% in the past 12 months, but has fallen 14% in 2011. Carnival's adjusted fiscal first-quarter earnings increased 58% to 19 cents, matching the consensus target.

Despite cyclical consumer exposure, Carnival retained profitability during 2008 and 2009. Its sales have gained 3.6% a year, on average, since 2008. Carnival held $429 million of cash and $9.4 billion of debt at fiscal fourth-quarter's end. First quarter data isn't available.

Carnival's stock trades at a trailing earnings multiple of 16, a forward earnings multiple of 11, a book value multiple of 1.4, a sales multiple of 2.1 and a cash flow multiple of 8.3, 50%, 51%, 20% and 36% discounts to hotel, restaurant and leisure industry averages. Its PEG ratio of 0.8 signals a 20% discount to estimated fair value.

Of analysts evaluating Carnival, 18, or 78%, rate its stock "buy," three rate it "hold" and two rank it "sell." Sanford Bernstein expects a rise of 36% to $54. Goldman offers a $51 projection. JPMorgan predicts an advance to $47 over 12 months.

4. Williams Cos. locates, produces and processes natural gas in the U.S. It also owns an interstate gas transportation pipeline. Williams' stock has appreciated 30% in the past year and 20% so far in 2011, demonstrating relative strength as the market corrected. The company's fourth-quarter adjusted earnings ascended 3.5% to 44 cents, outpacing analysts' consensus estimate by 58%. Sales stretched 4.2% to $2.4 billion.

Williams' gross profit margin hovered at 43%, but its operating profit margin contracted from 19% to 18%, hurting profit.

Williams' stock sells for a forward earnings multiple of 20, a 44% premium to its peer average. But its book value multiple of 2.4, sales multiple of 1.8 and cash flow multiple of 6.6 represent industry discounts of 45%, 39% and 31%, respectively.

Of researchers following Williams, nine, or 81%, advocate buying its stock and two recommend holding it. None advise selling. Goldman is most bullish on Wall Street, with a $38 target, consistent with a 28% rise. BMO Capital Markets has a $36 12-month target. Citigroup, rating Williams "buy," expects a rise to $32.

3. First Solar makes thin-film, cadmium-telluride solar panels. Its stock has gained 27% in 12 months and 13% in 2011. It popped nearly 5% intraday yesterday (Wednesday) on nuclear-power concern, stemming from Japan, which affirmed the relevance of its safer alternative energy.

First Solar's adjusted fourth-quarter earnings expanded 9.1% to $1.80, beating researchers' consensus estimate by 3.5%. Sales decreased 4.9% to $610 million, missing by 5.7%. The gross margin rose from 48% to 56% and the operating margin stretched from 24% to 27%.

First Solar's stock trades at a forward earnings multiple of less than 13, equal to a 15% industry discount. It's fairly valued based on its trailing earnings multiple of 18, book value multiple of 3.5 and sales multiple of 4.7. Its PEG ratio of 0.7 signals a 30% discount to estimated fair value. Of equity analysts following the company, 22, or 46%, recommend purchasing its stock, 18 advise holding and eight suggest selling.

Piper Jaffray offers the highest target, at $200, implying a 37% return. In contrast, Cantor Fitzgerald ranks the stock "sell" with an $87 projection for the next 12 months.

2. Prudential Financial is a life- and health-insurance company. Its stock has risen 9.4% over the past 12 months and 4.2% year-to-date. Prudential's adjusted fourth-quarter earnings soared 48% to $1.48, exceeding analysts' consensus estimate by 20%.

Sales, down nearly 6% to $8.1 billion, still beat the consensus by 2.9%. The gross margin tightened from 19% to 10% and the operating margin contracted from 13% to 5.2%. Prudential's stock is undervalued relative to peers' and those of other industries.

Prudential sells for a trailing earnings multiple of 11, a forward earnings multiple of 8.3, a book value multiple of 0.9, a sales multiple of 0.8 and a cash flow multiple of 4.7, 74%, 26%, 73%, 80% and 85% discounts to insurance industry averages. Its PEG ratio of 0.8 reflects a 20% discount to estimated fair value.

Roughly 81% of stock analysts in coverage rank Prudential "buy" and the remainder ranks it "hold." Goldman offers the highest target on Wall Street, at $81, implying 33% upside. Deutsche Bank, rating it "hold," forecasts that the stock will drop to $66 in the next 12 months.

1. Huntington Bancshares is a regional bank based in the Midwest that provides commercial- and consumer-banking services. Its stock has risen 21% in 12 months, but is down 3.6% in 2011. Huntington swung to an adjusted fourth-quarter profit of five cents a share from a loss of 65 cents a year earlier.

Despite the improvement, earnings missed the consensus expectation by 40%. Revenue declined marginally to $793 million. The gross and operating margins climbed from negative territory to 75% and 32%, respectively. Huntington's stock is cheap.

It trades at a forward earnings multiple of 10 and a cash flow multiple of 7, attractive 25% and 48% discounts to commercial bank peer averages. It's fairly valued based on its book value multiple of 1.2 and sales multiple of 1.8.

Of researchers following Huntington, 12, or 46%, rate its stock "buy," 12 rate it "hold" and two rank it "sell." Stifel Financial has a target of $9.50, suggesting a return of 43%. Goldman forecasts that the stock will gain 36% to $9. KBW, ranking Huntington "market perform," is less optimistic, auguring a rise to $7 within the next 12 months.

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