Six Beaten-Down Stocks With Promise

With the Dow Jones industrial average safely beyond the 13,000 mark, seers are pondering which sectors will lead the market even higher. A.G. Edwards is betting on the giants of the health-care and consumer-products industries. The brokerage recently spotlighted six "buy"-rated stocks, all trading at their lowest valuations in the past ten years:

Eli Lilly & Co (symbol LLY). The pharmaceutical heavyweight is poised for above-average earnings growth over the next few years, writes A.G. Edwards analyst Joe Tooley. One reason is Lilly's promising lineup of new products, which includes drugs to treat osteoporosis and attention-deficit hyperactivity disorder.

The company invests heavily in research and development -- around 20% of sales annually -- to help offset patent expirations. Since 2001, the year Lilly's patent on Prozac expired, the company has sent nine products to the market. These newer drugs accounted for nearly a quarter of the company's sales in 2006, up from 18% in 2005.

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Despite the huge R&D investments, Lilly's revenue is growing at a faster pace than its operating expenses, Tooley writes. In 2006, Lilly's sales increased 7%, to $15.7 billion, and earnings grew 11%, to $2.45 per share. The Indianapolis-based company expects sales to grow in the low double digits in 2007, and earnings to increase 7% to 11%. The stock, which closed at $58.39 on May 11, trades at 17 times the $3.39 per share that analysts expect the company to earn in 2007, according to Thomson Financial. Tooley thinks Lilly's stock could reach $65 over the next 12 to 18 months.

Herbalife (HLF) Riding the wave of consumer interest in weight-loss products and alternative medicine is Herbalife, a maker of nutritional supplements. Although it's based in Los Angeles, the company relies on more than a million independent sales representatives in 63 countries to push its products, which include weight- management and personal-care products and nutritional supplements. Each sales rep buys Herbalife's products at a discount, resells them at full price, and then pockets the difference.

The company's shares plummeted in January when it revised its 2007 sales guidance, from growth of 10% to 15% to more modest growth of 6% to 10%. The revised estimates were the result of slowing sales in Mexico, Herbalife's largest market. A.G. Edwards analyst Andrew Speller thinks the company is back on track, however, and that its recent share price -- $38.91 on May 11 -- is a good entry point for investors. Speller thinks the stock is worth $46.

In the first three months of 2007, Herbalife experienced strong sales growth in North America, South America and Southeast Asia. Speller expects this momentum to continue for the rest of the year. The company recently began selling products in China, which could give the company an extra boost, Speller writes. Share of Herbalife trade at 15 times the $2.54 per share that analysts expect the company to earn in 2007.

Novartis (NVS). The growth outlook for this Swiss drug firm is bright, says Tooley. He thinks Novartis' earnings could grow at an annualized 13% clip through 2011, compared with 7% for its peers. Driving this growth is "a combination of attractive and well-established products," he writes. Novartis' portfolio includes patent-protected Diovan, a blood-pressure medication, and Gleevec, a leukemia drug. The company also has a competitive advantage in its fast-growing stable of generic drugs and vaccines.

Analysts see the company making $3.37 per share in 2007, giving the stock, at $57.31, a price-earnings ratio of 17. Tooley's 12- to 18-month price target is $64.

Procter & Gamble (PG). The broad product portfolio of this consumer-goods behemoth includes 300 brands, among them such household names as Tide, Folgers, Charmin and Pringles. The Cincinnati-based company holds the number one or two share in the U.S. market as well as globally in 50 market categories. P&G also recently gained the leading market share in batteries and razors through its 2005 purchase of Gillette. "We believe that Procter & Gamble continues to add to its position by offering lower prices in a number of product categories, such as laundry, diapers, skin care, shampoo, and even toothpaste," writes analyst Jason Gere. Over the past five years, the company's earnings have grown at an annualized 13%.

P&G's market dominance provides a solid foundation for greater expansion into foreign markets, Gere says. The company has been increasing its international reach by expanding into Latin America and Asia. The stock, which closed at $61.63 on May 11, trades at 20 times the $3.03 per share that analysts expect the company to earn in the fiscal year ending this June and 18 times the $3.48 per share that they expect for the June '08 year.Gere figures that the shares are worth $76.

Sysco Corporation (SYY). Although it only controls 16% of the market, Sysco is the nation's leading food distributor. The company supplies food and related products and services to restaurants, nursing homes, hospitals, hotels, motels, schools, colleges, cruise ships, sports parks and summer camps.

Houston-based Sysco is generating plenty of free cash flow. The extra cash has enabled it to increase its dividend nearly 20% annually over the past five years, and grow through acquisitions of smaller competitors. The company also has several other initiatives in the works to boost sales and profits, including expanding its sales force and building more distribution centers to increase its capacity.

The stock, at $32.66, trades at 21 times the $1.58 per share that analysts expect the company to earn in the fiscal year ending this June and at 18 times estimates of $1.79 per share for the June 2008 year. Analyst Steve West thinks Sysco shares could reach $40 within 12 to 18 months.

Walgreen (WAG). This drugstore chain has a strong competitive position. Walgreen leads its rivals in sales and profits -- and also in technology, says analyst Steve West. The Deerfield, Ill., company keeps an extensive network of information on its customers.

Although the public at large views Walgreen as a drugstore chain, West considers it more like a high-growth retailer. Same-store sales, a closely watched measure in the retail world that takes store closings and chain expansions out of the equation, grew at a near-double-digit rate in Walgreen's most recently reported quarter. Moreover, the company expects to open 400 new stores in 2007, and aims to open 7,000 new units by 2010. "Walgreen continues to take a conservative approach of avoiding large-scale acquisitions and growing its store base using cash or long-term leases as the finance mechanism," West writes.

At $44.11, Walgreen sells for 21 times analysts' estimated profits of $2.08 per share for the fiscal year that ends in August. The shares trade at 19 times fiscal 2008 estimates of $2.35 per share.