Markets

Stocks to Own in 2006

Our 8 picks are riding the improved economy. Look for them to deliver great returns for investors in the coming year.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, January 2006

Aetna (AET). Patients and doctors may gripe about managed care, but investors have no complaints. And more opportunities for growth are on the horizon for health-insurance providers, including Aetna, the third largest managed-care company. Health savings accounts, medicare's drug program, and high-deductible, low-premium insurance plans should boost profits even more.

Aetna's client base grew by one million in 2005, an increase of 6%. The company tightly controls its ratio of claims to premiums. That's important because small expense savings lead to big profit gains. The shares sell at 16 times estimated 2006 profits of $5.52 per share, a price-earnings ratio that equals Aetna's estimated long-term earnings growth rate of 16%. A P/E to growth rate ratio of 1 is a sign of good value.

American Express (AXP). Amex completed its exit from fund management and financial planning in September. Investment management can be a terrific business, as companies such as Eaton Vance and T. Rowe Price have demonstrated. But the fund business wasn't Amex's strong suit, so good riddance.

Now investors have a purer play on Amex's world-class card business. Amex cardholders spend thousands more each year than bankcard users do, so Amex is more profitable than other card issuers. Moreover, Amex's reorganization should lead to a higher return on equity, a measure of corporate profitability. The stock, which is trading below its 2000 high, sells for 17 times estimated 2006 earnings of $3.02 a share. That's a reasonable price to pay for this extraordinary financial-services company.

General Electric(GE). Judging by its recent stock-price performance, former boss Jack Welch was the glue that held this huge conglomerate together. After he left in 2001, the stock ceased its decades-long climb and fell by more than half. It seemed that the world's greatest industrial company had become a mishmash of disparate companies.

But GE's health-care, transportation (locomotives and jet engines), water and industrial-machinery units are all prospering, both in the U.S. and abroad. Finance and broadcasting remain important, but now those other businesses can pick up the slack. The company's earnings growth rate is again above 10% and is likely to stay there for several years. GE's price is right, at 17 times estimated '06 profits of $2.06 a share, and you can collect a nice 2.6% yield while you wait for the stock to appreciate.

Granite Construction (GVA). Granite is one of the few ways to invest directly in public-works construction. This is a timely pick because last summer Congress passed a six-year, $286-billion highway funding bill.

Granite, based in Watsonville, Cal., has offices or projects in 25 states. Officials say that Granite will benefit whether or not the company wins Hurricane Katrina reconstruction work because contractors that do flock to the storm-ravaged Gulf Coast will leave projects up for grabs elsewhere. In any case, Granite already has plenty of work. Its order backlog has doubled in the past three years, to $2.4 billion. Granite also mines sand and gravel and manufactures asphalt, all of which are in great demand. The stock sells for 18 times estimated 2006 earnings of $1.98 per share.

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