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Six Blue Chip Ideas From S&P

S&P analysts say high-quality stocks should perform best in 2007 and offer intriguing picks.

The big-stock indexes are at or close to record highs, but shares of high-quality, well-known companies continue to look relatively cheap. And it looks like interest rates aren't going higher soon. This means it's prime time for blue chips.

That's the word from Standard & Poor's in its annual forecast issue, published this week. The views are generally in line with Kiplinger's projections. SP chief investment strategist Sam Stovall foresees modest gains for stocks next year. It would be a bit of a downer after 2006's strength, but it's still positive. Kiplinger's forecasts returns of 7% to 12% in 2007.

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SP offers the following six ideas for 2007, based on its preference for companies with high levels of free cash flow (cash flow from operations left over after capital expenditures) relative to share price, as well as a history of share repurchases. Each of the analysts' selections also earn high marks from SP for consistent earnings and dividend growth.

Bemis (BMS) isn't a household name, but you'll likely find its products in your refrigerator. Its main business is making packaging materials for fresh foods, such as meat and cheese. The company has plants all over the world and has boosted dividends for 23 years in a row. The stock, which closed at $34.30 on Dec. 15, yields 2.2% and trades at 17 times the 2007 consensus earnings estimate of $2.07 per share, according to Thomson First Call. SP expects Bemis to hit $40 over the next 12 months.

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General Mills (GIS; $57.65) is the second-largest maker of breakfast cereals. Besides Cheerios and Wheaties, brands include Betty Crocker, Bisquick, Green Giant, Yoplait and Pillsbury. The company also has joint ventures, including one with Nestlé, through which it sells products internationally. The stock sports a P/E ratio of 17.9, based on earnings estimates of $3.22 per share for the four quarters ending Nov. 2007. SP's one-year target price is $61.

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TJX (TJX; $29.05) is spiffing up its off-price T.J. Maxx and Marshall's stores. Its other retail shops include A.J. Wright, Bob's Stores and HomeGoods, plus T.K. Maxx in Europe and Winners and HomeSense in Canada. In all, it runs 2,400 stores. Shares sell for 16 times estimates of $1.87 per share for the fiscal year that ends January 2008. SP target price: $33.

Toro (TTC; $47.46) helps keep the grass green in golf courses and football fields, and possibly your own back yard. The maker of lawn mowers, irrigation equipment, aerators, yard tools and other turf maintenance gear keeps developing innovative products. The stock sells for 14.6 times estimates of $3.26 per share for the fiscal year that ends October 2007. SP expects it to reach $56 over the next 12 months.

Sunoco (SUN; $68.26) is the second-largest independent oil refiner in the U.S, with gas stations in the East Coast and the Midwest, near its refineries. A share buyback program has reduced the number of shares outstanding by 25% since the beginning of 1999, according to Morningstar. The stock's P/E is 9.6, based on estimated 2007 company earnings of $7.09 per share. Shares yield 1.5%, and SP's target price is $86.

Kimberly-Clark (KMB; $67.23), maker of Kleenex, Huggies and Scott tissues, is in the midst of a major cost-cutting program that should improve earnings starting in 2007. SP's analysts like the company's expansion into new categories (such as toiletries for babies), as well as a focus on developing countries. Kimberly-Clark sells its goods in 150 countries. It returned $2.3 billion to shareholders last year through dividends and share repurchases and has increased its dividend 34 consecutive years. Analysts estimate 2007 earnings of $4.19 per share, a P/E of 16. The stock yields 2.9%. SP expects it to hit $76 over the next year.

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