5-star buys from the 'Best on the Street'

by S&P Capital IQ, The Outlook

Six S&P Capital IQ equity analysts ranked as “Best on the Street” in The Wall Street Journal’s annual survey of recommendation-performance scores for stock pickers in 2011, a year in which “U.S. stock indexes were largely flat and some sectors were roundly beaten.”

Here are some of the winning analyst’s recommended stocks in the category for which he or she won. Each stock earns our highest 5-star buy rating.

“Coming off of last year’s No. 1 ranking in the ‘Best on the Street’ survey, our equity research team at S&P Capital IQ maintains a strong showing of third place (tied), with nearly 200 firms in this year’s survey,” says Stephen Biggar, Global Director of Equity Research for S&P Capital IQ.

Angelo Zino, Alternative Energy

Despite recent softness in the thin-film solar energy business unit at Advanced Energy Industries (AEIS), we expect segment orders to begin to rebound.

We anticipate strong growth in the company’s renewables business, with solar-inverter sales to experience robust growth as the company increases its penetration of the U.S. utility solar market.

We think the company will be able to sustain a high share of the U.S. inverter market despite competitive pressures, but expect pricing pressure to persist in the foreseeable future. We expect revenues to decline 6.5% in 2012 but to rebound with a 14% gain in 2013.

Our 12-month target price is $16 per share. Risks to our recommendation and target price include weaker than expected growth in the global economy, lower than projected semi- conductor demand, and a greater than expected decline in non-semiconductor sales.

Stuart Benway, General Industrials

We estimate that 2012 revenue at Neenah Paper (NP) will increase by 8%-10%, following growth of 5.8% in 2011. The acquisition of Wausau Paper’s fine paper brands is expected to account for about half of the improvement.

Sales of filtration products used in automotive applications as well as specialty papers used in tapes, packaging, and labels are likely to rise modestly this year due to market share growth and a further gradual rebound in the worldwide economy.

Over the long term, we expect Neenah Paper to report higher profits and cash flow due to growth in its higher margin businesses.

Risks to our recommendation and 12-month target price of $34 a share include unexpected declines in paper prices and demand, a lack of recovery in the worldwide economy, and fur-ther increases in energy and raw-material costs.

Phil Seligman, Health Care

We think Humana (HUM) has the scale, diversity and financial flexibility to adjust to the health care reform law. We are encouraged by gains in its Medicare Advantage (MA) health plan enrollment, based on Centers for Medicare and Medicaid Services data, which appear to us to be ahead of its guidance and most peers.

We believe Humana has a good opportunity to gain additional MA members thanks to an aging U.S. population and an expected shake-out among health insurers caused by health care reform.

We also see good prospects for its penetration of the “dual eligible” (beneficiaries of both Medicare and Medicaid) market, partly aided by an alliance with CareSource, a non- profit Medicaid managed care organization.

In addition, we see its individual commercial enrollment benefiting from what we consider attractive, price-competitive products and services.

We expect Humana shares to reach $108 a share over the next 12 months. Risks to our recommendation and target price include intensified competition, a medical-cost spike, and MA-rate cuts.

Esther Kwon, Hotels & Casinos

We see growth for Las Vegas Sands (LVS) being driven by operating performance in Macau and Singapore, where its newest integrated resort, Marina Bay Sands, opened its first phase in 2010. Las Vegas Sands just opened its second property in Macau, the Sands Cotai Central, in April.

For 2012, we see revenue rising by more than 20% to $11.7 billion from $9.4 billion in 2011, boosted by the opening of Sands Cotai Central, strong performance at existing properties in Macau and Singapore, and improvement in Las Vegas.

We see property EBITDA rising at a slower rate than revenue as Sands Cotai Central improves its operational efficiency, but we forecast some improvement in property EBITDA margins in Macau and Las Vegas. For 2013, we see revenues rising at a double-digit rate.

We have a 12-month target price of $64 on the shares. Risks to our recommendation and target price include an unexpected slowdown in the growth rates of key markets, sudden regulatory changes in China, and a terrorist event.

Efraim Levy, Specialty Retailers

(Because Efraim Levy currently has no 5-STARS/”strong buy” ranked stocks in specialty retail, the category for which his award was given, we have included a 5-STARS recommended stock from a different category.)

Johnson Controls (JCI), a leading manufacturer of auto- motive interior systems, batteries, and automated building control systems, also provides facility management services for commercial buildings.

It is one of the few suppliers to the auto industry whose shares we believe are undervalued. We see Johnson Control’s revenue rising by 7.6% in fiscal 2012 (ending September) on increasing global vehicle sales, despite weakening auto sales in Europe.

We see operating margins improving in fiscal 2012 on stronger demand, the benefits from its restructuring activities, and reduced restructuring costs.

Our 12-month target price of $41 a share reflects our expectation that long-term sales and earnings growth will exceed that of peers, and for the company to show greater earnings stability.

Risks to our recommendation and target price include lower than expected demand — especially for automotive parts — higher than anticipated raw material costs, further weakness in Europe and of the euro versus the U.S. dollar, and less than expected acquisition synergies and restructuring savings.

Todd Rosenbluth, Telecommunications

In 2012, we look for Windstream (WIN) to report revenues of $6.3 billion, with 35% from the newly acquired assets of broadband-services provider PAETEC Holding.

We expect strong growth in the business segment. Within consumer, we see broadband customer additions nearly offsetting the impact of access line losses.

However, growth will likely slow on an above-average penetration rate. On a pro forma basis, revenues in 2011 were $6.24 billion.

We view Windstream’s fundamentals as stronger than many peers, and we see the shares as undervalued; we have a 12-month target price of $14 on the shares.

Risks to our recommendation and target price include increased cable telephony competition, federal or state regulatory changes that pressure cash flow, and inability to support the dividend.

Learn more about this financial newsletter at S&P The Outlook.

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