Ultimate Stock-Picker's Portfolio Eyeing Four Stocks

As we discussed in a recent article, the Ultimate Stock-Picker's Portfolio has recently made some subtle changes, including new additions to our investment manager roster. We've also refined our stock selection criteria, factoring in not only the number of managers holding a stock, but also their recent trading patterns and the size of their positions. In other words, we favor those stocks in which our Ultimate Stock-Pickers demonstrate more conviction. We continue to consider for investment only stocks rated 5 stars by Morningstar analysts, and we use our estimates of three-year expected returns as another deciding factor.

After poring over the holdings of our Ultimate Stock-Pickers and comparing them to Morningstar's list of 5-star stocks, we've compiled an updated watch list of 15 stocks. This is the main list we use to source new ideas for the Ultimate Stock-Picker's Portfolio. While many of the names remain the same (such as  Microsoft (MSFT),  General Electric (GE),  eBay (EBAY),  Comcast (CMCSA),  Home Depot (HD),  Pfizer (PFE),  3M (MMM),  United Health (UNH), and  Lowe's (LOW)), our updated watch list also includes several new companies, including  Wells Fargo (WFC),  ConocoPhillips (COP),  WellPoint (WLP),  Walt Disney (DIS),  Sanofi-Aventis (SNY), and  Costco Wholesale (COST).

Ultimate Stock-Picker's Watch List
	Number of Funds Owning	Price/Fair Value Estimate*	Moat	Fair Value Uncertainty	Star Rating
Microsoft (MSFT)	11	0.56	Wide	Low
Wells Fargo (WFC)	10	0.59	Wide	Medium
ConocoPhillips (COP)	9	0.45	Narrow	Medium
General Electric (GE)	9	0.37	Wide	Medium
eBay (EBAY)	8	0.30	Wide	Medium
Comcast	7	0.53	Wide	Medium
Home Depot (HD)	7	0.46	Wide	Medium
Pfizer (PFE)	6	0.51	Wide	Medium
Well Point (WLP)	6	0.32	Narrow	Medium
3M Company (MMM)	6	0.63	Wide	Low
Walt Disney (DIS)	6	0.62	Wide	Low
United Health Group (UNH)	6	0.32	Narrow	Medium
Sanofi-Aventis (SNY)	6	0.55	Wide	Medium
Costco Wholesale (COST)	6	0.67	Narrow	Medium
Lowe's (LOW)	6	0.44	Wide	Medium
* As of 11-21-08.

In our opinion, all of the companies on the watch list benefit from an economic moat and their stocks trade at considerable discounts to our estimates of their intrinsic value. We're still looking at a few of these names in more depth, but we're definitely considering buying one or more of the following stocks for the portfolio: Microsoft, Wells Fargo, Conoco Phillips, and General Electric.

Commenting on Microsoft's first-quarter results and revised guidance, Morningstar associate director of equity analysis Toan Tran wrote in a recent Stock Analyst Note: "Microsoft's fiscal 2009 got off to a good start with sales of $15.1 billion in the first quarter. Operating margins were a healthy 39.8%, and net income came in at $4.4 billion. With the difficult economic environment, investors were most concerned about the company's outlook. Although Microsoft did trim its fiscal 2009 forecast, the cuts were probably less than investors had feared. The firm now expects fiscal 2009 revenue of $64.9 billion-$66.4 billion (down from $67.3 billion-$68.1 billion) and net income per share of $2.00-$2.10 (down from $2.12-$2.18). However, it is likely that the economic picture will continue to deteriorate, so Microsoft may need to reduce its outlook again in future quarters." Read the full  Analyst Report.

Morningstar senior stock analyst Jaime Peters shared her views on Wells Fargo's recent equity offering, writing in a recent Stock Analyst Note: "Wells Fargo priced an equity offering of $11 billion at $27 per share. Wells previously announced it wanted to raise up to $20 billion of equity to help fund its pending merger with  Wachovia . The capital raise removes this risk from our thesis. Consequently, we are lowering our uncertainty rating as well. This reflects the company's strong capital position and our expectation that the tax benefits Wells stands to receive from the Wachovia deal create a large cushion that will help offset some of the risks. We also raised our fair value estimate based on the equity pricing and the addition of the tax benefits." Read the full  Analyst Report.

In his latest  Analyst Report, Morningstar stock analyst Allen Good recently discussed ConocoPhillips' attractiveness to national oil companies, writing "Oil majors like Conoco must convince host nations that it can add value through its expertise in hydrocarbon extraction and must often partner with the local national oil company in order to gain access to resources. Conoco demonstrated its ability to strike such deals with the recent announcement that it will develop the Shah Gas Field in Abu Dhabi with the Abu Dhabi National Oil Company. This agreement, along with its ongoing deal with Saudi Arabia's Aramco to develop a refinery, leads us to believe Conoco is viewed as a viable partner that will be able to secure future deals.

Morningstar stock analyst Daniel Holland wrote in his latest  Analyst Report about General Electric's competitive strengths: "GE avoids the typical characterization of a conglomerate by combining businesses with strong synergies and opportunities for information-sharing across business lines. Add to this GE's ability to invest large amounts of money in growing businesses and virtually any barrier to enter a new market is significantly lower. With its legendary knack for squeaking out operating efficiencies, the firm is able to generate healthy returns on invested capital in many of its markets. By focusing its efforts on the most value-added components for customers, GE is able to remain relevant with customers and focus its research and development efforts on projects that customers will be willing to pay the most for."

Which stocks would you consider buying from our updated watch list? Which ones would you avoid? Share your thoughts with us on our Ultimate Stock-Picker's forum at this thread.