Smith Barney's Big Picks

Each year, Smith Barney asks its analysts to name one stock they think will do best over the next 12 months. A committee then vets the analysts' picks. Each candidate undergoes a rigorous review on such fundamentals as the prospects for a company's products, industry or the economy, plus the so-called technical and quantitative measures. Here's the list of "Ten+" (there are 14 stocks total), released this week, with Smith Barney's rationale:

Alltel Wireless (symbol AT, recent price $55). Alltel, based in Little Rock, Ark., spun off its local telephone business on July 17. Its remaining wireless operations should get a boost from a new marketing program and the restructuring of some recently acquired wireless markets.

Avon Products (AVP, $33). The cosmetics company is streamlining operations to become more profitable. It is also rich in cash and has tremendous long-term opportunity in markets such as China.

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Bank of America (BAC, $51). This is a compelling opportunity, with earnings per share projected to grow at an annual 10%-plus over the next three years, compared with 7% on average for competitors. Yet Bank of America sports one of the lowest price-earnings ratios in banking, trading at just ten times Smith Barney's estimated earnings of $4.95 a share in 2007. You also get a 3.9% dividend yield.

Bunge Limited (BG, $52). This is a global agribusiness and food company. Its operations range from the farm (fertilizer and animal feed) to the processor (transporting and milling grains and seeds worldwide) to the retail store shelf (bottled oils, mayonnaise, margarines). Bunge has a major presence in South America and Eastern Europe, the two fastest-growing agricultural markets. Smith Barney's 2007 earnings estimate is $4.68 a share, well above the average analysts' peg of $4.31, with lots more earnings growth ahead.

Entergy (ETR, $78). New Orleans-based Entergy is the second-largest nuclear plant operator in the U.S. It is likely to recover $1.5 billion in post-hurricane expenditures and should see earnings growth above the industry average over the next year or two. The 3% yield may not excite you for a utility, but the $2.16 annual dividend is likely to increase.

First Data Corp. (FDC, $42). First Data is the leader in electronic commerce and payment services for business and consumers. Think money transfers, bill-paying, transaction processing (including ATM transactions) and credit-card issuing and processing. A new management team is focused on long-term shareholder value, including a planned spinoff later this year of Western Union.

Genentech (DNA, $82). In a market fraught with inflationary concerns, Genentech qualifies as a defensive health care stock because drugs with novel mechanisms targeting life-threatening illnesses will continue to be in strong demand, whatever the cost. Genentech makes multiple cancer drugs that are the standard of care. Lucentis, a new drug for age-related macular degeneration, will contribute to revenue growth. Earnings should grow 55% to 60% over the next two years.

Halliburton (HAL, $30). The oil services company has divested several noncore businesses and is now focused on technology related to finding, producing and enhancing the production of oil and natural gas. The company's return on equity (a measure of a company's profit relative to stockholders' investment) is above its peers. A dividend increase or a share buyback is likely. It also trades at a discount to competitors Baker Hughes and Schlumberger.

McDonald's Corp. (MCD, $35). McDonald's shares are under pressure because of worry about declining consumer spending, but its lower-priced food suggests that Big Macs will remain a staple in the U.S. Business in Europe is improving, as McDonald's curtails discounting and coupons. The company has said it will return $5 billion to $6 billion in cash to shareholders via a combination of buybacks and dividends this year and next.

PepsiCo (PEP, $63). The market underestimates the Frito-Lay division's ability to grow its traditional snack business while also generating faster growth in its healthier, sensible offerings, such as Sunchips and Rold Gold Pretzels. Pepsi International will drive growth over the next several quarters as sales volumes increase by double digits and profit margins expand.

Prudential Financial (PRU, $78). The financial services giant's diverse product line (real estate, insurance, mutual funds) means the company is only moderately sensitive to stock-market and interest-rate fluctuations. Expect $2.5 billion of stock buybacks per year through 2009, plus a steadily rising dividend. Return on shareholders' equity could expand by three-quarters of a percentage point, to 16%, by 2009 -- a good reading for a life insurance company (which is how the stock market generally things of Prudential, although it is more than that).

Textron (TXT, $87). The aircraft, industrial and finance company could earn $8 a share in 2008, up from the $5.16 estimated this year and $6 and pennies for next. Cessna jets are essentially sold out through 2007. The Bell commercial helicopter business should ramp up to well over 300 helicopters in 2008, from 105 in 2005, spurred by brisk demand in the oil and gas industry and the military's need to upgrade an aging fleet.

Waste Management (WMI, $33.52). Trash is with us in good times and bad, and Waste Management is the leader in this defensive industry. A long-awaited uptick in industry pricing is underway, which should be sustainable, helping cash flow remain strong and stable as well. The company expects to generate $1.2 billion to $1.3 billion in free cash flow (cash remaining after expenses to maintain or expand the business) for the year and return it to shareholders via dividends and stock buybacks.

Wellpoint Inc. (WLP, $78). The health benefits company's best-known brand is Blue Cross/Blue Shield. Overall enrollment growth, market share gain and price increases should lead to annual earnings-per-share growth of 17% to 18% the next two years. Meanwhile, the stock trades at just 14 times Smith Barney's 2007 estimate of $5.55 a share, near the low end of its historical P/E range. SB says the stock deserves to trade closer to 18 times earnings, which translates to nearly $100 a share.

Smith Barney, of course, rates all of these stocks a "buy." But not all of them carry the same risk. McDonald's, PepsiCo, Prudential and Wellpoint are rated low-risk, which means they should log total returns over the next 12 months of 10% or more without much worry. Medium-risk stocks, including Alltel, Avon, Bank of America, Bunge, Entergy, Textron and Waste Management have a potential payoff of 15%; while high-risk First Data, Genentech and Halliburton could return 20% -- if all goes well.