Markets
Stocks to Own in 2007
From a coal miner to a high-tech giant, we suggest eight timely picks.
By Jeffrey R. Kosnett, Senior Editor
From Kiplinger's Personal Finance magazine, January 2007
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AT&T
(T, $33) Many megamergers have done little for investors. But today's AT&T, a combination of the former AT&T, regional Bell holding companies SBC and BellSouth, and wireless-service provider Cingular, is a force. In fact, with the original AT&T's long-distance operations and four of the Baby Bells in the fold, the new AT&T comes close to replicating old Ma Bell. Size is an asset in telecommunications, which requires heavy spending on construction and technology.
With a yield of 4.0%, AT&T is attractive to income investors. But analysts are also enthusiastic about its earnings prospects. Based on savings from the BellSouth acquisition and solid growth from Cingular, analysts see an 11% boost in '07 and annual gains of 10% over the next few years. If they're right, the stock could see $40 in 2007.
Cisco Systems
(CSCO, $27) Cisco is a timely play on the tech-stock recovery. Once dependent on sales of routers and switches, Cisco is now active in data, video and voice. It has also become an all-in-one systems supplier, a strategy that has energized sales and earnings momentum. Profits for the quarter that ended last October handily beat expectations. The news extended a surge in the stock that began in August, when it still languished at $17.
A 55% run-up in three months is reason to worry whether the stock has come too far too fast. But business is solid, and most analysts are raising earnings estimates and target prices. At $27, Cisco won't threaten its $82 record, hit in 2000. But at 20 times analysts' earnings estimates for the next four quarters, the stock is reasonably priced and could reach $35 in 2007.
Johnson & Johnson
(JNJ, $66) The Democrats' victory on Election Day raised fears that lawmakers would now try to force drug makers to cut prices. But with the Republicans still in control of the White House, it's unlikely that Congress could quickly enact legislation that would severely harm this important industry.
Shares of J&J climbed 11% between mid May and mid November, whipping the market and underscoring its status as a stock you can rely on when the economy is slowing. But it's not just a safety stock. J&J has a strong lineup of new drugs in its labs. It is also a major player in medical devices, sales of which should grow as more people worldwide are able to afford treatments Americans consider routine. Selling at only 16 times estimated 2007 profits, this is a classic case of a great company at an average share price.
Textron
(TXT, $90) Imagine if Toyota had so many orders you couldn't get one of its cars until 2008. That's the story at Cessna, the corporate-jet maker that tops Textron's stable of businesses. Cessna is sold out for 2007 and already heavily booked for 2008, a $7.2-billion backlog that reflects a global boom in business jets (45% of Cessnas go to foreign buyers).
Textron's Bell Helicopter division is so busy that the company's CEO says bottlenecks are squeezing earnings. Still, Textron's 2006 earnings are expected to have climbed 42% from the previous year, and analysts expect profits to rise 18% in 2007. The stock's price-earnings ratio of 17 should move up as Textron continues to get rid of old-line, slow-growing businesses, such as fasteners. It won't take much good news for Textron shares to move beyond $100.
Photographs by Antonis Achilleos