Tuesday, February 3, 2009

Stocks: Where the Bulls Are

Stocks: Where the Bulls Are

There are certain stocks that everybody seems to love. But not that many.

In an effort to see just where the strongest concentration of analyst bullishness lies in the battered equity market, BusinessWeek examined the analyst ratings on stocks in the Standard & Poor's 500-stock index. Out of all the names in the big-cap benchmark, analysts are universally positive on just three: Philip Morris International (PM), Covidien (COV), and Thermo Fisher Scientific (TMO). That means that each of the 11 or more sell-side (i.e., brokerage) analysts who follow these firms rates the stock a "buy." Think of it as the analytical equivalent of batting 1,000.

Even as the economy slows and investors remain fearful and stunned from last year's market sell-off, it's hard to find a discouraging word about these equities.

The lack of dissenting voices is a rarity. Even an analyst favorite like Google (GOOG)—which gets a buy rating from no fewer than 35 analysts—receives a "hold" or "sell" rating from a handful (12% for a total of five) of its analysts.

Money Where Their Mouths Are?

A "buy" rating is high praise, but it's not the ultimate expression of Wall Street approval. Investors truly love a stock when they put their money where their mouths are, by buying it and bidding up the price.

So far, that hasn't happened with these three stocks, which are all well off their 52-week highs. If it had, it's likely that some of their analysts would lower their buy ratings on worries the stocks have become overvalued.

So does the unanimity of the Wall Street seers signal good things ahead for Philip Morris International, Covidien, and Thermo Fisher?

Tobacco giant Philip Morris International separated last year from Altria (MO) and took over Altria's international sales operations, with rights to Marlboro and other brand names.

Tobacco stocks often attract in investors fleeing economic distress. Because tobacco is addictive, "tobacco products are among those most likely to be resistant to the recession," says Morningstar (MORN) analyst Philip Gorham.

Fifteen analysts cover Philip Morris International. They cite the company's strong cash flow—which funds a 5.8% dividend yield—and the new firm's efforts to cut costs and widen profit margins further.

But the true appeal of the firm is the prospect that, despite the economic slowdown, it can grow. Executives are focused on markets like China, Bangladesh, India, and Vietnam, where about 40% of the world's cigarettes are smoked. "It really has a wide global footprint and access to some growth markets that its international competitors really don't," Gorham says.

Philip Morris International's shares are down 14% from the start of the year, and down 24% since its March spin-off.

Litigation and taxes can take their toll on tobacco companies, and foreign revenue leaves the company vulnerable to a strengthening dollar. (A rising dollar makes overseas profits look smaller.) Along with broader market turbulence, Gorham thinks the stronger dollar has hurt the stock price.

But, he adds, "the fact that the stock has been soft in the last few months is a buying opportunity."

Todd Lowenstein, a portfolio manager of the HighMark Value Momentum Fund (HMVMX), owns shares. He warns that, in a recession, even addicted customers may choose to trade down to cheaper brands.

The firm is "not without risk, but we think the business has strong staying power," he says. "They should be able to weather the storm."

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