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Five Stock Picks for a Market Hiccup

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five.

Although the market has hit a few speed bumps recently, we found that some stocks still have plenty of runway and potential ahead of them.

Here with me to talk about these names and why they're trading at attractive prices is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: You are very welcome, Jason.

Stipp: So what do you have for the Friday Five this week?

Glaser: Well, this week, we're going to take a look at Ford, Sprint, Cisco, Abbott Labs, and finally Sonic.

Stipp: So Ford is an interesting name. I don't know that it's one that we would have always recommended throughout the history of Morningstar research. Why is it looking attractive today?

Glaser: Ford has really seen a remarkable turnaround in the last couple of years led by CEO Alan Mulally. When he came over from Boeing, he was new to the auto industry, and I think was able to use a first set of eyes and management techniques to really get Ford on the right track, starting with what Bill Ford had started with, mortgaging the plants to get enough money and liquidity to get through the crisis without having to resort to the government bailout money that GM and Chrysler did.

I think that really helped them in the consumer's eyes, but so did producing cars that people actually wanted. They were able to get their reliability up, get it on par with some of the Asian imports, and that really I think helped their sales and helped them take advantage of some of the problems that other automakers were facing. They were also able to get important concessions from labor and from other key stakeholders, so that they are able to have a more competitive cost structure.

So even though auto sales are still pretty depressed, and we're going to have to wait a few more years until we get back to that normalized range, when we do, Ford really has the opportunity to be incredibly profitable.

Our analyst, Dave Whiston, doesn't believe that the company has a moat, but he does think that they're going to see some pretty bright prospects in the coming years, and I think Ford is something that should be on a lot of investors' radar screens.

Stipp: So, maybe Ford beaten down a little bit because of the whole auto industry being depressed right now, but it's certainly well-positioned for that recovery that hopefully we'll see soon.

The second one, Jeremy, I think it's pretty clear why this one might be beaten down. It's Sprint, but why are its prospects brighter than what the market thinks they are right now?

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Glaser: Certainly, Sprint has had a lot of problems. Ever since its acquisition of Nextel, they've had problems with integration; they've had problems with losing customers. Right now, they have about an 18% share of the U.S. wireless market, and at the peak they had 25%. So certainly they've been seeing declining market share, seeing the average revenue per user decline over time.

But I think that people miss some of the big picture about Sprint--they are one of the few incumbent major wireless players, which is worth quite a bit. They still are producing a decent amount of cash flow that they are investing in their next generation networks that they'll be able to compete in the 4G space, both through Clearwire, which is their WiMAX technology, and through other technologies that they're trying to rollout. And I think Sprint really has the potential to stabilize their losses, and then just have modest growth.

At where the stock is priced right now, they don't need to see explosive growth, they don't need to become as large as AT&T Wireless or Verizon Wireless. They really just need to hold their own and make sure they can keep that niche that they have right now. If they're able to stem the losses, which our analyst, Mike Hodel, thinks that they will be able to do, they should be able to get on the road to more profitability, that's going to flow back to shareholders, and they could see really significant upside from where the shares are right now.

Stipp: Number three, Jeremy, is a company in the tech sector that had a string of two pretty disappointing earnings reports. Why should investors be considering this big name?

Glaser: Cisco is an interesting company. They have a wide moat. They are a firm that has great competitive advantages in the enterprise space, but they really started to move into some consumer spaces and to some other areas that really weren't their forte, weren't really where they have this large competitive advantage. So as they went to these businesses, it wasn't hugely surprising that they weren't as successful in them as they thought that they were.

It was bringing down profitability. It was distracting management from really focusing on that enterprise hardware that's their bread and butter, and it could take a while for them to get back to that core and to really see growth in that core again. And there could be a few bumpy quarters, it could be a few bumpy years for Cisco before they get back there. But we really believe that they have the competitive advantage to get back. And if management makes prudent decisions and is able to cut back on some of these consumer products, some of these other hobbies that they are basically spending money on, I think investors are going to be well served and that they are going to end up with a great return.

Stipp: Number four is in the health-care sector. This is an area that we've seen over the last few months anyway has been relatively cheaper, but there is one name in particular that our analysts have been talking a lot about. What is it, and why is it looking attractive?

Glaser: You're absolutely right that pharma as a whole looks pretty cheap right now. I just talked the other day with our analyst Damien Conover about how some of these stocks have sold off because there are a lot of fears about these patent cliffs, that there is going to be a lot of patent expirations. And one that comes up a lot is Abbott Laboratories, and that there was a big sell off of that stock. People are worried about a few of their larger drugs getting new competition from both generics and also some new branded drugs that treat similar diagnoses like rheumatoid arthritis.

But certainly Abbott has a pretty good pipeline. They have a lot of new drugs that they are developing that are going to come in and take the place of some of that revenue. They have a strong nutrition business. They have a great track record in acquiring other companies and integrating them into Abbott without a lot of problems. They are able to do that very successfully, and they have great dividend yields, right now, which is another thing that I know a lot of investors are focused on.

So, certainly Abbot is a health-care name that is going to have some problems; you are going to see some revenue loss from these patents, but it's not something that's going to blow up the whole company, and I think it's something that investors should really keep a close eye on.

Stipp: So the last one, Jeremy, is in the restaurant space. This is an area that isn't traditionally known to have competitive advantages, but this company has some bright prospects ahead. Can you explain why it deserves investors' attention?

Glaser: Absolutely. Sonic is a company that has spent a lot of money over the past few years with a national advertising campaign, building out a lot of national goodwill for the Sonic brand. Sonic has unique things like their beverage service--they have a bunch of different beverages, much more than most other fast food restaurants--they have carhops, who can bring food out to your car instead of going through a traditional drive-thru, and they have somewhat of a differentiated product from the other burger joints out there.

Our analyst, R.J. Hottovy, thinks that when we see Sonic continue to expand from their base of warm weather climates and into colder weather and into other metropolitan areas, they could see some nice growth. When they enter those markets, they see a lot of positive response, they see people who are excited to have these new restaurants there and have some new options on the block.

Certainly, there is an incredible amount of competition in this space, not only from the McDonald's and Burger Kings of the worlds, but also from all other sorts of restaurants and all sorts of places that you can eat, but I think that they have built up a really nice brand. I think, people are excited to go to the restaurants, and I think, as the geographic footprint expands, investors could also see their returns expand as well.

Stipp: Well Jeremy, it might be bad news that the market has hit a few rough spots recently, but the good news is there are some interesting opportunities out there. Thanks for presenting these five today.

Glaser: You're very welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.