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Markets

Stocks to Own in 2007

From a coal miner to a high-tech giant, we suggest eight timely picks.

If you're shopping for stocks that should do well in the coming year, take a look at our eight picks below.

3M

(MMM, recent price $79) A fine third quarter dispelled the gloom over the shares of this fabulously diverse company. The stock had been whacked in July on news of lower-than-hoped-for sales in optical films, which are used in LCD flat-screen TVs and desktop monitors. The optical business is recovering, and the rest of 3M continues to steer a steady course.

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Consumers, who know 3M through Scotch tape and Post-it Notes, hold the company in high regard. But investors have been lukewarm. For that, blame investor disdain for blue chips and not failures at 3M, which is a reliable producer of double-digit earnings gains. The shares trade at 16 times 2007 earnings estimates, well below their historical levels. If the global economy continues to grow, there's no reason 3M can't trade at $95 in the coming year.

American International Group

(AIG, $70) With various scandals now behind it, AIG is regaining the confidence of investors, and its once-bulletproof shares are no longer in retreat. So far, AIG's new top executives are passing two tests: They're keeping clean and making money. Both are among the reasons the stock is up from $50 in 2005. Analysts think AIG can easily tack on another $10 in 2007.

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The absence of Katrina-like catastrophes helped this past year. But AIG doesn't just bend with the wind. Its life-insurance, investment-management and consumer-credit businesses are performing well, especially overseas. AIG once commanded a price-earnings ratio in the 20s. Now, it sells at just 11 times estimated 2007 profits. If AIG could trade at a P/E of 15, which is about what some rivals sell for, it could reach $100 within a few years.

Annaly Capital Management

(NLY, $14) One antidote to the dilemma fixed-income investors face (see Why Bond Investors Are in a Bind) is an investment that prospers when short-term interest rates fall and long-term rates remain unchanged or rise gently.

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That describes Annaly, a real estate investment trust that uses the proceeds from stock sales and borrowing to buy mortgage-backed securities. The idea is to profit from the spread between Annaly's cost of money and its income, which can come from investments in fixed- or adjustable-rate mortgages. Based on dividends of 48 cents a share over the past four quarters, the stock yields a measly 3.4%. But if the Federal Reserve cuts short-term rates, look for dividends and the share price to sparkle over the next 12 months.

Arch Coal

(ACI, $34) Here's a burning reason to take this stock and shovel it into your portfolio: It's cheap. Arch, the nation's second-biggest producer, has 3.1 billion tons of coal reserves and a stock-market value of $5 billion, or just $1.60 a ton. Arch's shares have sunk 38% since May as prices for coal and natural gas, a competing fuel for power generation, have declined.

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Arch points out that many of its contracts expire soon and that many of its new contracts call for prices of up to 25% more than those in the pacts they're replacing. Utilities plan to add 30% to the U.S.'s coal-fired electricity capacity in the next few years, so demand for low-sulfur steam coal, which Arch produces, should accelerate. The stock, at $34, sells at just 13 times estimated 2007 earnings, which analysts forecast will be up a whopping 60% from 2006.

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ATT

(T, $33) Many megamergers have done little for investors. But today's ATT, a combination of the former ATT, regional Bell holding companies SBC and BellSouth, and wireless-service provider Cingular, is a force. In fact, with the original ATT's long-distance operations and four of the Baby Bells in the fold, the new ATT comes close to replicating old Ma Bell. Size is an asset in telecommunications, which requires heavy spending on construction and technology.

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With a yield of 4.0%, ATT 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.

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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.

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Shares of JJ 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. JJ 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

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