Seven Stocks For The Next Seven Years

Seven Stocks for Seven Years

Undervalued, these shares should deliver outstanding returns.
In Gene Marcial's new book, 7 Commandments of Stock Investing, the BusinessWeek "Inside Wall Street" columnist shares his unique perspective gained from over 30 years of stock-picking. Marcial offers a counterintuitive method of picking market winners and profiting from a long-term approach. Have a look at 7 stocks he says are worth buying and holding for the next 7 years.

Apple
(AAPL) Superior and sophisticated products are pushing the company ahead of rivals. Although the stock has been on the rise since May, climbing to 177 a share from $99 a share a year ago, the stock is still below its high of 199, reached on Dec. 28, 2007.

Boeing
(BA) The formidable aerospace company isn't saddled with major financial problems. True it has bumped into some air pockets, which pulled down its stock to 72 a share on Mar. 12, 2008. But it has since powered higher, to 85, and going. It's likely it will surpass its 52-week high of 107 before yearend.

Cvs Caremark
(CVS) Despite a steady ascent, the stock of the largest U.S. pharmaceutical retail chain still trades at a modest valuation. It is trading at just 14 times its estimated 2009 earnings, below its 10-year P-E average of 22.4, and also below that of its peers.

Genentech
(DNA) At about 68 a share, the stock of the biotech behemoth is a bargain, trading close to its low of 66, hit on Jan. 7, 2008. It traded as high as 89 in mid-January of 2007.

JP Morgan Chase
(JPM) This company has the financial muscle, energy, and will to achieve its lofty growth goals. Its stock could triple over the long term, if the growth trajectory of Jamie Dimon's management team is sustained. Wall Street continues to underestimate JP Morgan's earnings power.

Petroleo Brasileiro
(PBR) Petrobras, one of the world's largest oil companies, continues to bulk up its reserves and other assets. Some of the major stakeholders in this Brazilian company are large U.S. institutional investors.

PFIZER
(PFE) Its robust pipeline of new drugs will rekindle the company's growth. Pfizer is also expected to do some acquisitions of biotechs that already have late-stage products in development. Its stock is one that's in the bargain bin, trading close to its low of 19.79. Any positive news, such as a significant acquisition or an activist investor taking a major stake in the stock could spark instant interest in this stock considered by many to be a ho-hum stock.

Starting tomorrow I will highlight each firm. (Tim)

Whole Foods Ready To Grow Again

Business Week - by Gene Marcial

Pressure on profit margins at Whole Foods Market (WFMI) has driven its stock to 32.64 plus or minus—near its March low of 29.99—down from 53 last October. Its purchase of organic-food retailer Wild Oats Markets in 2007 and new-store openings jacked up costs. But some analysts see sales jumping 28% in the year ending Sept. 30, to $8.5 billion. Sales growth in the "U.S. natural and organic food industry remains strong," notes Mark Miller of investment firm William Blair, who rates the stock outperform. Edward Aaron of RBC Capital Markets also tags Whole Foods outperform, based on its "superior growth prospects." He sees potential for an upturn as the company integrates Wild Oats, which runs 109 stores in 23 states, into its operations. "High-quality management" and stable cash-flow generation are positives, Miller adds.

The ISM Numbers - Expanding Economy

(Tempe, Arizona) — Economic activity in the non-manufacturing sector expanded in April, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Hotels Corporation. "The NMI (Non-Manufacturing Index) increased 2.4 percentage points to 52 percent, indicating expansion after three consecutive months of contraction within the non-manufacturing sector for April 2008.

The Non-Manufacturing Business Activity Index decreased 1.3 percentage points to 50.9 percent. The New Orders Index decreased 0.1 percentage point to 50.1 percent, and the Employment Index increased 3.9 percentage points to 50.8 percent. The Prices Index increased 1.3 percentage points to 72.1 percent in April, indicating a faster rate in price increases than in March. According to the NMI, 12 non-manufacturing industries reported growth in April. Members' comments in April continue to be mixed and vary by industry. The inflationary pressures of rising fuel, energy and commodity prices are of major concern for members."
INDUSTRY PERFORMANCE (Based on the NMI)

The 12 industries reporting growth in April based on the new NMI composite index — listed in order — are: Arts, Entertainment & Recreation; Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; Mining; Wholesale Trade; Public Administration; Educational Services; Construction; Utilities; Retail Trade; and Information.

The six industries reporting contraction in April are: Other Services*; Transportation & Warehousing; Finance & Insurance; Accommodation & Food Services; Health Care & Social Assistance; and Management of Companies & Support Services.

The NMI is a composite index based on the diffusion indexes for four of the indicators with equal weights: Business Activity (seasonally adjusted), New Orders (seasonally adjusted), Employment (seasonally adjusted) and Supplier Deliveries. Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index reading above 50 percent indicates that the non-manufacturing economy in that index is generally expanding; below 50 percent indicates that it is generally declining. Supplier Deliveries is an exception. A Supplier Deliveries Index above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

Business Week's Top 50 No. 15 - CME Group

No. 15: CME Group

Industry: Specialized Finance
Sales: $2 billion
Net Income: $658.5 million

When a rival group tried to muscle in on the Chicago Mercantile Exchange's deal to buy the Chicago Board of Trade last year, the Merc ponied up $3 billion more, paying $11.9 billion to create CME Group (CME). The deal has made CME the global leader in derivatives. Net income soared 62%, to $659 million, in 2007, as revenue jumped 61%, to some $2 billion. CEO Craig Donohue plans to make the Merc bigger still, offering more than $9 billion in cash and stock to acquire Nymex Holdings, parent of the New York Mercantile Exchange. But the stock has been bludgeoned by doubts about whether such deals will fly; the Justice Dept. has suggested CME has too much market power. CME may have more competition soon, from an exchange planned by investment banks.

This Week's News

Monday, May 5th - The Institute for Supply Management (ISM) reports the nonmanufacturing index for April. Lehman predicts that it will be above 50% indicating an expansion in the services industries. The national non-manufacturing index based on a survey of roughly 370 purchasing executives in industries including finance, insurance and real-estate (or FIRE), communications and utilities. This sister of the Purchasing Managers' Index measures service-sector activity. The index has risen the last three months. January 44.6%, February 49.3%, and March 49.6%.

Yum Brands meets with investors and analysts on Monday and Tuesday.

Tuesday, May 6th - Walt Disney reports 2nd Qtr results. Cisco reports 3 Qtr results.

Thursday, May 8th - US retailers report comparable same store sales for April. Thompson Reuters expects an increase of 2.3%

Friday, May 9th - Citigroup presents to investors.

Business Week's No. 14 - UnitedHealth Group

No. 14: UnitedHealth Group
Industry: Managed Health Care

Sales: $75.4 billion
Net Income: $4.7 billion

Stephen Hemsley, who became chief executive in 2006 after a stock options scandal forced out his predecessor, has kept UnitedHealth Group (UNH) growing. As health-care costs soar, many of the nation's largest companies count on the $75 billion-a-year behemoth to keep a lid on costs. UnitedHealth is the No. 2 health insurer in the U.S., behind WellPoint, and reaches some 71 million customers. The 2008 elections could be a boon for the Minne tonka (Minn.) company—if plans to cover the uninsured take off, and include a bigger role for private companies.

Business Week's No. 13 - Intercontinental Exchange

No. 13: Intercontinental Exchange
Industry: Specialized Finance

Sales: $574.3 million
Net Income: $240.6 million

Chief Executive Jeff Sprecher built what was once a money-losing cooperative created by small utilities to swap energy during peak hours into an online energy exchange backed by the likes of Goldman Sachs and British Petroleum. Atlanta-based Intercontinental Exchange —known as ICE—now handles everything from frozen OJ to yen. Since 2004 profits have leaped elevenfold, to $241 million, on a 430% rise in revenue, to $574 million. Along the way, Sprecher has been rolling up global bourses, including the New York Board of Trade, and has made ICE one of Europe's top futures exchanges.

Corporate And CEO Greed - The American Way

By Neil Weinberg, Michael Maiello and David K. Randall 05.19.08, 12:00 AM ET

What does it cost to attract first-class talent to a chief executive job? A lot. What does it cost to hire a clunker? Almost as much.

You need look no further than Gary Forsee to see why the absurdities of executive compensation rankle shareholders so much. In 2003 Forsee negotiated a pay package to join Sprint as its chief executive officer that promised to leave him rich--whether he succeeded or failed at turning around the troubled long-distance phone company.
Sprint first paid him $6.5 million in cash and stock just to leave BellSouth, where he was the number two executive. Sprint also bought Forsee's house in Atlanta before he moved to Kansas City. Once on the job Forsee was paid between $1.5 million and $5 million a year. His only real claim to fame while running Sprint was engineering the disastrous Nextel merger and watching its stock price tumble from $25 two years ago to $7.40.
At the end of 2007 he was fired "without cause." But he had negotiated well. Sprint gave him $40 million, including a $1.5 million salary through 2009, $5 million in bonuses, stock options and restricted shares worth $23 million and an $84,000-a-month pension for life. This package was structured under his contract as if he were still running the company and had met all his goals. Oh, Sprint also paid for "outplacement services" that landed him the presidency of the University of Missouri (where his annual salary and bonus amount to $500,000).
Nowadays directors, in the guise of rewarding performance, blithely bestow vast fortunes on bosses who destroy shareholder value, as well as on those who create it. Somewhere along the way just becoming a chief executive, rather than a good one, became tantamount to winning the lottery.

In 2007 chief executives overall took a 15% pay cut, rightly so, as the return on the S&P 500 fell nearly two-thirds to 5.5%. Average salaries came in at $1.1 million and total pay at $12.8 million. But, as is evident in our annual performance-versus-pay survey (which weighs shareholder returns against pay over six years), plenty of bosses rake in large sums for mediocre work.

Marriott International (nyse: MAR - news - people ) Chief Executive J. Willard Marriott, for example, ranks among the most overpaid bosses of the past six years. His 2007 pay jumped 22%, to $44 million, as investors suffered a 28% stock price drop.
Black & Decker (nyse: BDK - news - people )'s Nolan Archibald, another bottom dweller, raked in 269% more, a total of $34 million, as his firm's stock fell 13%. Was this just a statistical fluke related to one bad year in the stock market? Or was it the fact that we count options when they are cashed in rather than when they are awarded? No, it wasn't. There we compare pay over six years with performance both over six years and over the full period that a boss has been in office. In the composite scorecard Marriott is 18th from the bottom (out of 175 executives) in cost effectiveness. Archibald is 31st from the bottom. (Forsee wasn't around long enough at Sprint to be ranked.)
At Eli Lilly (nyse: LLY - news - people ), salary increases, bonuses and long-term performance awards are all based mainly on earnings per share. In other words bosses are paid three times for hitting one target. Bull's-eyes aren't too tough either, since they require only average results among Lilly's peers. If they come in lower, the brass doesn't forgo bonuses--it just earns "below-target payouts." Sidney Taurel, chief executive through March, and now chairman, earned $9.5 million in 2007. Lilly's stock rose 3%, slightly lagging the S&P 500. Over the long term he doesn't look terrific, either. Because he's no longer chief exec, he's not on this year's performance-to-pay ranking; last year he was ninth from the bottom on a list of 189.

"It's like a fourth-grade soccer league where everyone gets a trophy. You can't call it pay-for-performance," says Nell Minow of the Corporate Library, a governance handicapper.
Big business has gone to considerable lengths to protect the status quo. Following Enron, when reform was the rage, executives grumbled about the Sarbanes-Oxley Act's high cost. But they scaled the ramparts when the SEC proposed shareholder "proxy access," meaning the right to nominate independent director candidates who might threaten the pay orgy. They lobbied the White House and got the initiative killed. A chastened SEC responded by revamping pay disclosure rules two years ago. Gaming them has proven a cinch. All told, executive compensation has risen from 40 times that of the average worker in 1980 to 433 times now. The top-paid executives at the country's public companies now collect pay equal to 10% of corporate profit, according to a 2005 study by Lucian Bebchuk of Harvard Business School and Yaniv Grinstein of Cornell University.

Corporate boards are devilishly clever at concocting ways to reward chiefs whether they make shareholders richer or poorer. Some of them:

The Golden Handshake
Last year Robert Nardelli walked away from a mediocre tenure at Home Depot (nyse: HD - news - people ) with $210 million. It was too late for the compensation scolds to complain; the board's real sin was committed years before in luring Nardelli to the company from General Electric (nyse: GE - news - people ). His contract said he'd get 90% of his pay regardless of performance, plus an enormous retirement package when he left.
Citigroup (nyse: C - news - people ) has done something similar with new Chief Executive Vikram Pandit. To recruit him the troubled bank paid him $241 million, including $165 million for Pandit's stake in hedge fund firm Old Lane Partners (a quarter of whose value Citi has already written down); a sign-on stock grant, performance-based options reportedly worth $48 million and $250,000 in salary. Pandit may prove to be a management genius. But so far he is still feeling the aftershocks of his predecessor's mistakes. Since his arrival the stock has fallen a further 25%.

Cherry-Picked Peers
One way boards try to deflect criticism is to argue that everyone's doing it. So they compare their chief's pay to the pay at similar companies. But companies cheat by packing the comparison group with "aspirational peers"--firms that are larger, more successful and pay more.
Ford Motor (nyse: F - news - people )'s "peer" group includes Altria (nyse: MO - news - people ), IBM and Procter & Gamble (nyse: PG - news - people ). Those companies have similar revenues, but--in measures that better reflect shareholder value, such as profits and market cap--moneylosing Ford is a laggard. What about General Motors (nyse: GM - news - people )? Ford includes it, too, but it's a circular exercise, since gm bases its pay on many of the same peers as Ford--Altria, IBM and P&G included. On FORBES' performance-to-pay ranking GM Chief Richard Wagoner comes in at position 160 out of 175.
With Ford's pay scale on steroids, directors then set at ankle height the performance bar its bosses must clear to hit the jackpot. Their "profit" goal in 2007 was to lose only $4.9 billion, excluding special items. It hit that goal, losing $3.9 billion. For beating the bogey, Chief Executive Alan Mulally got $12 million, including a $7 million bonus. Ford's shares fell 10% last year. Can he rescue this firm? If--and when--he does, shareholders won't mind a $12 million cost.

Consultant Collusion
Compensation consultants are hired by boards to advise them on how much to pay executives. But their real value appears to be providing cover for lavish pay. In 2006 Countrywide Financial (nyse: CFC - news - people ) hired a consulting firm that had the temerity to suggest that boss Angelo Mozilo was overpaid at $103 million. It was a conspiracy, Mozilo shot back, in which boards are "under enormous pressure from the left-wing antibusiness press and the envious leaders of unions." He countered by hiring Towers Perrin's John England, whose numbers were more to his liking. Mozilo's board relented, paying him a $10 million bonus just for staying on. Mozilo and his fellow directors soon began selling shares, even as the firm went $1.5 billion into debt to fund buybacks. It lost $19.7 billion in market value last year.

Changing the Rules
When executives don't perform well enough to earn incentive pay, boards sometimes just change the rules. Investors in home builder Toll Brothers (nyse: TOL - news - people ) have taken it on the chin, with the stock off 28% from the beginning of 2007. Chief Executive Robert Toll, who has made $152 million the past five years, received no bonus last year and saw his pay tumble to $9 million.
His board thought it too much to expect Toll to scrape by for another year without a bonus. So instead of basing it on the firm's financial performance alone, this spring it added an "individualized performance component" so Toll will be enriched by a bonus, even if his shareholders suffer.
Kerry Killinger, chief executive of beleaguered mortgage lender Washington Mutual (nyse: WM - news - people ), received no 2007 bonus amid huge losses and a 70% stock price drop. That cut his pay to a mere $4.9 million. His board decided in March to exclude the financial damage from WaMu's subprime lending from the operating profit figure used to calculate his bonus. Directors backed off in April after shareholders forced former finance committee head Mary Pugh to resign.

Toothless Clawbacks
When a company stumbles, shareholders feel the pain through stock-price declines. But the executives most responsible for the problems are almost never required by boards to give back incentive-based pay--even when earned via questionable means. "A lot of clawbacks are poorly written, and as currently structured don't relate to writedowns," says Broc Romanek, who runs a Web site on corporate governance (www.thecorporatecounsel.net).
Merrill Lynch (nyse: MER - news - people )'s former boss, Stanley O'Neal, shows how the absence of clawbacks can encourage executives to take wacky risks. After O'Neal took over as Merrill's boss in 2002, he dramatically hiked its risk profile, pushing deeply into exotic mortgage markets.
O'Neal received $87 million in pay during the five years through 2006, when this strategy appeared to be paying off. Since then Merrill Lynch has suffered $30.5 billion in mortgage writedowns. The employment contract included no clawbacks to recoup pay when the earnings on which bonuses were built had to be, in effect, retracted. Merrill's directors, moreover, allowed O'Neal to resign, rather than be fired, which forced investors to kick in another $136 million for his deferred compensation and stock options.

Perks
An SEC perks rule that went into effect a year ago tightened disclosure of the extras executives receive, but it's full of holes. Goodies need not be itemized, for example, if deemed to be worth less than $10,000 a year.
Even more valuable freebies often go unreported, especially when chief executives mix work with pleasure. "A CEO who makes one business phone call while on a golf trip on the company jet will say that the trip was a business expense," said David Yermack, a professor of finance at New York University.
Some extras are just too big to hide. Bank of America (nyse: BAC - news - people ) Chief Executive Kenneth Lewis received $127,643 for use of corporate aircraft, $16,740 for tax prep and $16,333 for home security last year. He also received a free apartment, although the bank won't say how much it's worth. It doesn't have to. It can claim there is no "aggregate incremental cost," since the bank owned the apartment before Lewis arrived.

Buyout Bonanza
Coming to work with a new shingle on the building might not sound like a reason for a fat payday. Yet 37% of companies have change-in-control provisions with so-called single triggers. Under them, a buyout triggers a sudden windfall for the bosses.
After drug distributor Caremark merged with CVS last year, Chief Executive E. Mac Crawford stayed on at the combined firm as chairman. That didn't stop him from collecting a $26.4 million "cash severance payment" in addition to $30 million from stock options and other benefits. The buyout was also designed to protect Crawford and other Caremark bosses "to the fullest extent permitted by law" from accusations that they had previously backdated stock options grants.

Gross Gross-Ups
This monster, which involves shareholders' paying executives' taxes, evolved from a 1984 congressional bid to penalize "excessive" golden parachutes by slapping on an excise tax when they exceed three times average annual wages.
Instead of discouraging fluffy golden parachutes, the law legitimized them at just below the level where the excise tax kicks in, says RiskMetrics. If the golden parachutes exceed that level, many firms, including Chevron (nyse: CVX - news - people ) and Deere & Co. (nyse: DE - news - people ), offer "excise-tax gross-ups" and pay the levies for their executives. All told, such policies are in place at 77% of companies with golden parachutes, up from 10% in 1987, says Towers Perrin. Among the top 50 New York Stock Exchange companies, 36 pay all of chief executives' excise taxes on parachutes. Alcoa (nyse: AA - news - people ) last year estimated the present value of excise tax gross-ups for its chief financial officer at $2.7 million in the event of a buyout. When his predecessor Joseph Muscari retired a year earlier and was given a watch, the company paid $1,102 in taxes on its value.

Golden Kiss-Off
How does it benefit shareholders to pay a departing chief executive, who is already world-class rich, tens of millions of dollars more as he heads out the door?
That's what ExxonMobil (nyse: XOM - news - people ) did in January 2006 when Lee Raymond retired without an employment contract but was granted a lump-sum retirement benefit of $98.4 million, based on a multiple of his salary and bonus.
At least Lee went out on a high note. The same can't be said for Charles Prince at Citigroup. Under him, Citi dived headfirst into the mortgage debacle and shunted massive liabilities off its balance sheet. So far it has written off $41 billion as a result and been forced to raise capital from abroad, diluting existing shareholders. Even so, Citi's board decided shareholders should pay Prince a $10.4 million bonus, for which they'd previously had no obligation, on top of $28 million in unvested stock options and $1.5 million in annual retirement perks.
Prince's pay was "entirely proper and fair," based on his years of service and agreement not to compete with or recruit from Citi, the firm said in a written statement.
Proper and fair? Or would it be more accurate to say, "entirely business as usual in the compensation game

Exxon 1st Qtr 2008 Earnings

NEW YORK (CNNMoney.com) -- Record oil prices netted Exxon Mobil $10.89 billion in the first quarter, sharply higher than a year earlier but short of Wall Street expectations and below what was needed to set a new all-time profit record.
The sheer size of the Exxon profit reported Thursday will still likely attract attention from consumer groups and lawmakers, who have been arguing for higher taxes on oil companies amid soaring gas and oil prices.
Oil passed $100 a barrel for the first time ever last quarter, and traded sharply higher from prior-year levels.
While Exxon made more money from producing oil this quarter, it made much less money from selling gasoline, as gas prices have not risen at as fast a pace as oil prices.
"Higher crude oil and natural gas realizations, driven by record worldwide crude oil prices, were partly offset by lower refining and chemical margins, lower production volumes and higher operating costs," Rex Tillerson, the company's chief executive, said in a statement.

The company posted first-quarter net income of $10.89 billion, or $2.03 a share. That's up 17% from the $9.28 billion, or $1.62 a share it earned a year earlier, but it missed the earnings per share consensus forecast of $2.14 from analysts surveyed by earnings tracker First Call.
Revenue hit $116.85 billion, up 34% from a year earlier when sales hit $87.2 billion. The revenue was short of forecasts of $124.4 billion.
The profit was still enough to be the second highest U.S. corporate profit on record, falling just short of the record $11.66 billion Exxon Mobil (XOM, Fortune 500) earned in the fourth quarter. The profit came to $1,385 a second, enough to buy nearly 382 gallons of gas at current prices.

Oil - ANWR and The Democrats

Democrat Fiction: ANWR isn’t worth it.
According to House Minority Whip Steny Hoyer, drilling in ANWR “will produce no oil for a decade and do nothing to end our addiction to oil.”

Fact: Yes, it may take a decade for ANWR oil production to get going. But keep in mind that President Clinton’s veto of ANWR in 1995 was upheld thanks to Hoyer and his colleagues. Had that veto been overridden, we could now be seeing an additional one million barrels of oil a day flow into a world market with virtually no excess capacity. Those million barrels would help ease prices.

Steny Hoyer has the audacity to say ANWR oil is not worth it. In 2008 if we were pumping one million barrels per day at $120.00 per barrel that would equal $120m per day. Over the course of one year that would equal $3.6b per month and $43.2 billion per year. That's $43.2 billion that wouldn't be going to Saudi Arabia, Mexico, Canada, etc.

Consider this, in February 2008 we imported 9.6m barrels per day. The 1.0m barrels per day from ANWR could replace 10% of the total imports. Put another way we imported 945,000 barrels per day from Venezuela in February 2008. If we had ANWR oil today we tell Venezuela to kiss off. The only thing Democrats want to do is conserve which is a great idea but we also need more internal sources of energy including nuclear, cleaner coal, alternative fuels, and more oil. (Tim)