STOCK WATCH


5 Stocks We Love

Elizabeth Ody

These companies will continue to flourish long after the Valentine's Day roses wilt.



Who says investing isn't romantic? We simply swoon over the shares of these five companies:

General Electric (symbol GE)

This blue-blooded blue chip offers more than just appliances. The Fairfield, Conn., conglomerate dabbles in everything from media (GE owns NBC and CNBC) to healthcare to consumer finance.

Its infrastructure business has been benefiting from strong growth around the world. That segment garnered $58 billion in sales in 2007, up 23% from 2006 and accounting for 34% of the company's total revenues.

The company has also been a leader in the green movement. GE produces energy-efficient home appliances, jet engines and locomotives, plus clean wind turbines. "People don't give them much credit for the wind business," says Phil Davidson, manager of American Century Equity Income, "but it could be a pleasant surprise."

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Since hitting a 52-week high of $42 in October, the stock has been pummeled on investor concerns about its consumer finance segment, GE Money. The shares, which closed February 12 at $34.28, trade for 14 times analysts' average earnings estimate for 2008 of $2.43 per share.

Besides a modest valuation, the other big allure of GE is that its size and diversification will allow it to weather the worst. "Its businesses can experience significant downturns, and yet GE continues to chug along," Davidson says. And while you wait for the stock to appreciate, you get paid a nice 3.6% dividend yield.

GameStop (GME)

Shareholders have been whisked away to thrilling returns with this videogame retailer. GameStop sells everything from new Guitar Hero consoles to used Nintendo games, so the company profits no matter which brands come out ahead.

The Grapevine, Texas., company recently reported record holiday sales. Over the nine weeks through January 5, sales jumped 35% over the same period a year earlier. The opening of new stores -- some 550 for the fiscal year that ended February 2 -- is partly responsible for the rise in sales. But greater also has played a role: Same-store sales (sales at stores open at least one year) increased by 20% over the nine-week holiday shopping period.

GameStop shares have soared 12-fold over the past five years. But at $49.10, the stock is down 22.4% from its late-2007 high of $63.

Zacks analyst Rob Plaza says that 2008 will be "another blockbuster year for video game sales" and that GameStop will continue to flourish. The company's leaders "know their customer base better than anybody else in retail," he says. Plaza rates GameStop a "buy" and gives the racy stock a six-month price target of $65.

Schlumberger (SLB)

This oilfield services heavyweight is at the cutting edge of exploration and production technology. As easy-to-exploit oil reserves tap out, companies must purchase better technology to extract what's left. That means plenty of more business for Houston-based Schlumberger.

Schlumberger expanded profits by 58% annualized over the past five years, with recent growth fueled by sales to customers in emerging markets. In 2007, Schlumberger saw a 31% revenue increase in the Middle East and Asia, and a 29% rise in Latin America.

A global exploration boom means more good times for energy-service companies, says Calyon Securities analyst Mark Urness: "The explosion in exploration licenses over the last three years, along with the expansion of new offshore rigs being delivered, gives a clear indication of future growth."

A weak overall stock market, concerns about a global recession and management's dour comments in January about the outlook have taken some of the froth off of Schlumberger's shares. The stock, which closed at $81.49 is off 27.2% since hitting a 52-week high of $112 on October 16. If a recession were limited to the U.S., Schlumberger would be relatively insulated because it derives 75% of its revenues abroad, Urness says.

Schlumberger shares look cheap. They trade at 17 times estimated 2008 earnings of $4.82 per share. Over the past ten years, the lowest P/E ratio on estimated forward earnings has been 15.5.

Costco Wholesale (COST)

Costco's shares, like GameStop's, have been a rare beacon in these dark days for retailers. The company reported more than $5 billion in sales for January, an 11% increase over the same period in 2007. Meanwhile January sales at Kohl's dropped 20% from the previous year, while Macy's sales dipped 28%.

Unlike Kohl's and Macy's, Costco gets a boost every year from membership fees. Those fees brought in $1.4 billion in fiscal 2007, which ended September 2. Costco's gas stations also buoyed profits: The company's 279 stations brought in $4.6 billion in sales in fiscal 2007.

Despite falling 12% from their December high of almost $72, Costco's shares are not especially cheap. At $64.41, the shares trade at 22 times the average earnings estimate of $2.99 per share for the fiscal year that ends this August. But that's not an outrageous price for "one of the best long-term stories in retail," says UBS analyst Neil Currie. Although he's neutral on the stock, he has a 12-month price target of $75.

Microsoft (MSFT)

We love it; we love it not.

Long-term Microsoft shareholders have had a tempestuous relationship with the software giant -- from the throes of 1999 passion to the $44.6 billion bid for Yahoo that has resulted in a steady decline in Microsoft's shares. Microsoft shares have lost 13% since the bid was announced, on February 1, and are off 23% since December 26.

Should the deal go through, management expects it to dilute profits until fiscal 2011 (the company's fiscal year ends June 30). If Microsoft boosts its bid, that timeline could stretch.

But Microsoft's core businesses are as lustrous as ever. Profits have grown at a 10% clip over the past five years. The company sold more than 55 million Windows Vista licenses and 71 million Microsoft Office licenses in fiscal 2007. Microsoft captures 90% of the market for applications and operating systems.

"These businesses continue to beat expectations in terms of growth and profitability, and we expect that to continue," says Edward Jones analyst Andrew Miedler.

Microsoft closed at $28.34, and trades for 15 times estimated fiscal 2008 earnings of $1.87 per share. That low a price-earnings ratio is unheard of for Microsoft.




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