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
Advertisement
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.
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.
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.
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.
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.