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Markets

A Great Stock Picks List

Pay attention to this one from Raymond James because it has a solid history of beating the market.

Raymond James's annual best picks stock list is one of the few worth looking at closely. On average, the stocks on this list returned an astounding 34% annualized over the past ten years through December 6, beating Standard & Poor's 500-stock index by an average of 28 percentage points per year.

That performance isn't quite as remarkable as it seems. Raymond James distributes the list to its brokers in mid-December, and the stocks tend to pop soon thereafter.

In 2005, for instance, the stocks on the list gained an average of 5% in the first five minutes of trading. But that still leaves a lot left over for latecomers to the party.

Still, do your own research before buying any of these stocks. Apache, for instance, has already risen more than 8% and Diamond Offshore has soared 15% since James distributed the 2008 list. Outside of oil-patch stocks, though, none of the 14 stocks on the list has moved up appreciably.

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Only veteran analysts contribute to the list. Each analyst can pick only one stock, and only one stock per industry is allowed. Stocks also must have a market value of at least $500 million and a share price of more than $10 to ensure liquidity. Here are the 14 stocks for this year, along with the analyst's case for each stock. Share prices are as of December 31, 2007.

Allstate Corporation (symbol ALL, $52.23), one of the nation's largest property and casualty insurers, boasts strong brand recognition and a solid marketing strategy. The firm is trimming exposure to homeowners insurance while increasing sales of auto insurance. The stock should earn $6.60 per share this year giving it a price-earnings ratio of just 7.9.

Apache Corp. (APA, $107.54) is one of the world's biggest independent oil-and-gas exploration-and-production companies, with the equivalent of 2.4 billion barrels of oil in proven reserves. In addition to producing more than 500,000 barrels of oil equivalents daily (more than half in natural gas), Apache boasts a rock-solid balance sheet.

The company is poised to continue growing this year. Raymond James expects Apache to earn $8.67 per share this year, giving the stock a price-earnings ratio of just 12.4.

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Best Buy Co. (BBY, $52.65), the electronics retailer, continues to grab market share from weaker competitors at its 1,224 stores. It's expanding rapidly overseas and has a valuable partnership with Apple.

Raymond James expects the company to earn $3.26 per share this year, so the stock's P/E of 16 is just a little more the average company in Standard & Poor's 500-stock index, but earnings per share should grow about 15% annually for the next three years.

Con-way (CNW, $41.54) is one of the nation's biggest and best-managed trucking firms and should increase earnings per share 10% annually over the next three years. The San Mateo, Cal.-based trucker is also one of the leaders in helping companies reduce the costs of complex supply chains.

Other brokerage analysts are underestimating 2008 profits, says Raymond James, which expects earnings per share of $3.85. On that basis, the P/E ratio is a modest 10.8.

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CVS/Caremark (CVS, $39.75) benefits from the increasing use of low-cost generic drugs, which boost sales volumes. It's also a big winner from the new Medicare drug benefit for seniors. Caremark gives it a huge presence in the booming mail-order business.

The mild flu season hurt sales in 2007, but they should rebound this year. Over the next three years, earnings per share should rise 19% annually. The company should earn $2.30 per share this year, giving it a P/E of 17.3, which is low compared with the P/Es of its competitors.

Diamond Offshore (DO, $142) operates one of the world's largest and most sophisticated fleets of offshore drilling rigs. Benefiting from continued strong demand for oil and gas continues to rise, Diamond has a huge backlog of orders.

Earnings per share should surge 32% per year over the next three years, yet the P/E ratio is just 12 based on estimated earnings this year of $11.65 per share.

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Embarq (EQ, $49.53), a spinoff of Sprint Nextel, is the fourth largest phone company in the nation, providing local phone services in 18 states. The stock has fallen in recent months because of overdone fear about exposure to the weak Nevada and Florida housing markets.

The company will likely announce a share buyback soon. Earnings per share should be $4.65 this year, giving the stock a P/E of 10.7.

Home Depot (HD, $26.94), the home-improvement giant, has been hit by the housing recession. But the P/E is now just 10.4 on anticipated earnings of $2.60 per share for the 12 months that end January 31, 2009.

Sales and earnings will improve this year, and the stock is a compelling value. Favorable demographics and the aging housing stock support that view. Expect earnings per share to rise 10% annually over the next three years.

Nvidia (NVDA, $34.02) is a leading designer of graphics chips used in computers, handsets and game consoles. More than half of its sales are overseas, and the company outsources all production. Its products are growing increasingly popular -- and its new products are on the cutting edge.

The company has nearly $2 billion in cash, which it will likely use for acquisitions. Earnings should soar 50% annually over the next three years. The P/E is 21.8 based on earnings per share of $1.56 for the 12 months that end January 2009.

Pfizer (PFE, $22.73), the pharmaceutical giant, should finally emerge from its long slumber. Although patent losses loom, including one on Lipitor in 2010 or 2011, the company has 47 drugs in phase two trials (the second of three phases before a drug wins approval). If some of those phase-two drugs succeed, the stock could rally almost 50%.

The company spends $7 billion annually on research and development. Meanwhile, Pfizer shares yield nearly 5.6%. The P/E is a modest 11 based on expected earnings per share this year of $2.05.

Polaris Industries (PII, $47.77) designs and manufactures snowmobiles, all-terrain vehicles and motorcycles. New product introductions and a cut in dealer inventories should help the firm. Earnings per share should rise 15% annually over the next three years, and the stock trades at 13.5 times anticipated 2008 earnings per share of $3.55.

Reinsurance Group of America (RGA, $52.48) provides insurance to insurers, mainly providers of life insurance and related products. It stands to benefit from an increase in sales of annuities and other retirement-income products to aging baby-boomers.

The company operates in 44 countries outside the U.S., where business is also growing. Earnings per share should rise 12% per year over the next three years. The firm should earn $5.80 per share in 2008, giving the stock a P/E of 9.

Ryanair Holdings (RYAAY, $39.44) is the largest discount airline in Europe. The Ireland-based carrier offers the lowest fares in Europe and has maintained annual pretax profit margins of 20% over the past eight years, which should continue for the foreseeable future.

Earnings per share should rise 20% annually over the next three years, and the P/E is just 16 based on anticipated 2008 earnings of $2.46 per share.

Whirlpool Corp. (WHR, $81.63) is the world's largest producer of major home appliances. Shares have been depressed along with the housing market. But most people don't buy appliances because they want to upgrade; they buy them because they need to replace appliances that break down.

So the stock is a bargain at a P/E of 8.2 based on expected earnings in 2008 of $10 per share. Earnings should increase 20% annually over the next three years.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.

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