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Picks From a Main Street Broker

With all the news over the past year about brokerage analysts promoting stocks for the wrong reasons, it’s hard to know whose picks to trust. Many brokerages let their analysts invest in stocks in the industry they cover, and some put pressure on analysts to boost stock ratings to attract (or keep) investment banking contracts.

It’s different at St. Louis-based Edward Jones. Top stock picking by its analysts and few complaints by regulators and clients were just two of the reasons the brokerage finished number one among the dozen full-service brokers we evaluated for Kiplinger’s Stocks 2003, a special annual publication devoted to stock investing.

Second-place finisher A.G. Edwards & Sons, also located in St. Louis, has a similar straight-arrow reputation. A.G. Edwards does a small amount of investment banking.

Main Street investing

With one-person offices scattered in small towns and rural areas around the country, Edward Jones is a world away from Wall Street.

The brokerage extols the virtues of buy-and-hold investing. A recent strategy piece notes if you hold the Standard & Poor’s 500-stock index for five years, your odds of making money are 82%. That compares with a 67% chance of profiting on a one-year investment.

Alan Skrainka, the firm’s chief market strategist, is bullish but admits that no one can predict the market -- something you’ll almost never hear from Wall Street strategists. The firm’s recommended list is filled with steady-eddy blue chips.

Reasons to buy

Skrainka sees a number of reasons to buy stocks now. The “technology/telecom bubble has been deflated,” he says, with the average tech stock down 75%.

The economy is recovering, he believes. Housing and auto sales remain strong and “inventories are at an all-time low relative to sales, which means production should pick up.”

Earnings should rise in the fourth quarter compared with a year ago, he adds, because earnings were so low last year. Finally, pessimism is everywhere -- typical “in the late stages of a bear market.”

On the Edward Jones list

Some of the stocks Edward Jones’s analysts currently recommend:

ADP (ADP), the nation’s largest payroll processor, has had 41 consecutive years of double-digit earnings growth. It trades at 19 times Jones’s 2003 earnings estimate of $1.85, well below the average price-earnings ratio of 28 over the last ten years.

Johnson & Johnson (JNJ), the widely diversified pharmaceutical, medical devices and consumer health care firm, likewise trades at a discount to its historical P/E. Jones expects it to earn $2.60 in 2003, making its P/E about 20.

Northern Trust Corporation (NTRS), which provides trust services to wealthy people and businesses, is expected to grow 13% annually and has a P/E of about 15.

PepsiCo (PEP), which besides Pepsi-Cola makes snacks, Quaker Oats and Mountain Dew, trades at 16 times Jones’s 2003 estimate of $2.20.

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