When Charles Payne, founder, CEO, and chief analyst of Wall Street Strategies, looks for stocks he thinks will outperform the market, he focuses on three key areas that he says indicate whether or not a company will increase its stock price.
The first involves the fundamental analysis of a company’s intrinsic value — whether a company can be innovative, deliver products, cut costs, and increase market share. The second is a technical analysis of the company’s historic trading patterns, which shows the supply and demand of a stock. Payne’s third criterion is what he calls behavioral analysis. “Behavioral analysis involves what we think the rest of the world would do,” he explains. “In other words, often we will buy stocks that we know Wall Street does not like, knowing that after the stock has made a substantial move, the rest of the Wall Street community will begin to like it and provide recommendations on it.”
Payne’s company, a 13-year-old independent stock market research firm, provides stock analysis to institutional investors, stockbrokers, portfolio and pension fund managers, and individual investors. Wall Street Strategies tracks over 700 companies, many of which Payne says, will see an upswing in stock price, partly because they have used the slow economy to reorganize their business. “I like the fact that corporate America has had three years to clean out inventories, streamline operations, and really become ultra productive,” he says. “I also think that the current Bush administration’s stimulus measures have helped the economy.”
Using his analysis, Payne selected four stocks he believes will perform well over the next
three years. The first is Bristol-Myers Squibb Co. (NYSE: BMY), which produces and distributes pharmaceutical and other healthcare-related products. Payne believes Bristol-Myers can stand out among its peers. “They have a steady business and a pretty good pipeline of drugs. They also have a very good management team that executes well,” he explains. “They deliver earnings the way Wall Street typically thinks they will. They don’t surprise, they don’t disappoint.”Another manufacturer of healthcare products Payne believes will do well is Johnson & Johnson (NYSE: JNJ). Last year, the company developed the CYPHERâ„¢ Sirolimus-eluting Coronary Stent for heart patients, which significantly reduces the likelihood of patients requiring treatment for restenosis, a condition in which a blocked artery that has been cleared becomes clogged again. “Johnson & Johnson was a victim of its
own success because it outperformed the market in 2002 based on excitement over the new coronary stent,” says Payne. Although he believes “the stock got ahead of itself,” Payne says, “Johnson & Johnson will be a viable competitor in that arena, regardless of the competition. It’s a value play with limited downside risk.”In the energy sector, Weatherford International Ltd. (NYSE: WFT) has caught Payne’s attention. The company provides equipment and services used in the drilling and production of oil and natural gas wells. In his view, Weatherford stands to benefit from an increased demand for oil. “You’re probably going to see more drilling demand over the next couple of years, driven by the global economy and the fact that oil prices will probably stabilize at just over $30,” Payne observes.
And finally, in technology, Payne’s research points to Harmonic Inc. (NASDAQ: HLIT), a company that designs, manufactures, and markets a variety of broadband solutions. Payne thinks the company should benefit from greater demand for their broadband access networks. Harmonic is a leading provider of digital video, broadband optical networking, and IP delivery systems to cable, satellite, telecom, and broadcast network operators. Their edge lies in their ability to offer companies the chance to exchange data at greater speeds. “I think you’re going to see demand ramp up for Harmonic’s products. People are going to need to be able to transmit very large documents and large amounts of data between offices in different cities across the country at higher speeds than are currently available,” Payne says.
CHARLES PAYNE’S Private Screening Picks
| Company Exchange: Symbol |
Price | 12- to 18-Month Price Target |
P/E on Projected 2004 Earnings |
Est. 3-Yr. Annual EPS Growth Rate |
Why Stock Will Outperform |
| Bristol-Myers Squibb Co. (NYSE: BMY) |
$29.55 | $40.00 | 18 | Flat | They have a good management team that executes well and they produce quality products. |
| Johnson & Johnson (NYSE: JNJ) |
$53.00 | $64.00 | 22 | 13% | Their CYPHER™ Sirolimus-eluting Coronary Stent for heart patients will continue to increase revenues. |
| Weatherford International (NYSE: WFT) |
$41.59 | $55.00 | 28 | 33% | The company will benefit from an increased global demand for oil. |
| Harmonic (NASDAQ: HLIT) |
$9.85 | $20.00 | 80 | 100% | There will be greater demand for high-speed data transfer services. |
| SOURCE: Charles Payne; wall street strategies; yahoo! finance | |||||