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Commentary

Research Highlights: This Week's Recommendations

It was a bad, bad week for a lot of stocks. Motorola (MOT) got crushed. Hewlett-Packard (HWP) got crushed. And the list goes on.

Now for the good news. With stock prices heading lower, the number of Morningstar’s five-star stocks is going higher. Lower stock prices, after all, mean that Mr. Market is feeling pessimistic and pinning a lower value on companies. Out of the nearly 500 stocks we rate, 66 now earn five stars, meaning we think they’re at least 30% undervalued. For the long-term investor, that’s great news.

To help you sort through the research we published this week, here are the stocks and funds our analysts had strong feelings about--whether bullish or bearish--among the hundred or so Stock and Fund Analyst Reports we published.

Blow Ups: Where Did We Stand?
Several stocks fell off a cliff this week because of earnings warnings or poor sales figures--Motorola, Gap, and Providian to name a few--and the question naturally arises: What did Morningstar think about those stocks prior to the blowups? Well, for the most part our calls were right on the mark. We don’t predict short-term stock prices (we don’t think anyone can), but if you had listened to us, you would have known that these stocks had "risky" written all over them. In most cases, we were soundly negative on the stocks.

 Motorola, by Todd Bernier
Motorola fell 6% on Wednesday and another 15% on Thursday. Todd’s been negative on this stock for a while. "Like makeup on an aging diva, creative accounting can only do so much to hide Motorola's underlying flaws: The company's fundamentals are eroding. That the stock has already rallied since bottoming in April provides even more reason to avoid Motorola, in our opinion."

 Ericsson (ERICY), by Todd Bernier
Todd’s also been negative on Ericsson, which plunged 19% on Tuesday. "Thus, we will avoid the shares until wireless capital spending resumes, or when losses abate in Ericsson's problematic cell phone division."

 Gap (GPS), by Mike Porter
Gap fell 21% on Thursday, and Mike had this to say a few weeks ago. "The stock trades at about 23 times consensus earnings estimates for the current fiscal year. That's not quite cheap enough for us, given that there's no slowdown in sight to the company's problems."

 Abercrombie & Fitch (ANF), by Mike Porter
Nobody’s perfect. We were positive on Abercrombie, and it fell 17% on Thursday. Here’s what Mike said in late August: "We've reduced our fair value for the company to be on the conservative side, but its shares still trade substantially below that value." By the way, he still likes the stock now that it’s cheaper.

 Providian Financial (PVN), by Craig Woker
Providian warned investors to lower expectations early in the week, and its stock plunged. Craig had this to say in early August: "We are nervous about Providian's outlook and believe that this stock has become increasingly risky."

 Sanmina (SANM), by Jay Ritter
Sanmina fell 11% on Tuesday, and Jay struck a cautionary note in his latest write-up in August. "We'd steer clear for now given Sanmina's heavy exposure to the telecom sector and the fact that our valuation model suggests that the stock is overvalued."

Positive Stock Analyst Reports

 AFLAC (AFL), by Aaron Westrate
We initiated full coverage of AFLAC this week, and analyst Aaron Westrate likes the stock. "Given AFLAC's outstanding competitive position and stellar long-term record of earnings growth, we think this is a rare opportunity for investors to buy the shares at a fair price."

 AT&T Wireless (AWE), by Todd Bernier
"…We think there are enough reasons to like AT&T Wireless as a long-term investment: strong cash flow growth, a solid balance sheet, a deep managerial bench, and a reasonable valuation."

 Advanced Micro Devices (AMD), by Jeremy Lopez
"We conservatively peg AMD's fair value at roughly $18 per share, or about 35% above the current price."

Negative Stock Analyst Reports

 Hewlett-Packard (HWP), by Joseph Beaulieu
"…We don't think HP shares look any more compelling now than they did before the merger announcement."

 Du Pont de Nemours (DD), by Dan Quinn
"Not unless the shares fell to the mid-$30s would we begin considering them fairly valued."

 J.C. Penney (JCP), by Mike Porter
"…Catalog sales, which probably account for between 15% and 20% of total revenue (the company does not break out this figure), are in a nosedive."

Positive Fund Reports

 Van Kampen Global Equity (MGEAX), by Gabriel Presler
"…Over the long run, this fund has been hard to beat; it's one of the least volatile offerings in the group and has a strong long-term record."

 T. Rowe Price International Discovery (PRIDX), by William Samuel Rocco
"…This fund remains a terrific holding for those who want a supplemental international holding with real pop."

 Vanguard Short-Term Treasury (VFISX), by Bradley Sweeney
"As we predicted a little more than a year ago, the management transition that took place here in May 2000 has been seamless."

Negative Fund Reports

 Van Kampen Insured Tax-Free Income Fund (VKMTX), by Eric Jacobson
"At 0.89%, the fund's expense ratio has come down slightly since 1999, but remains roughly 20% higher than the average for other A share and no-load rivals plying the same turf."

 Putnam Health Services (PHSTX), by Peter Di Teresa
"Without clear indications that the fund can at least get back to that level, we can't recommend it."

 Franklin Global Health Care (FKGHX), by Peter Di Teresa
"The category boasts better-performing options."

New Fund Analyst Picks
Our fund analysts maintain a list of their
favorite funds in each category, and this week we took a fresh look at four categories.

 Mid-Cap Value, by Christopher Traulsen
"Our mid-value picks are having an eventful year in several respects. First, the category as a whole is enjoying strong performance relative to the broader market, as are our picks. Second, we made two changes to the picks earlier in 2001."

 Small Blend, by Brian Portnoy
"A number of solid small-blend funds exist for investors who are seeking such exposure, but here are some good choices."

 Specialty-Real Estate, by Kunal Kapoor
"Among individual funds, our picks--though all up nicely in absolute terms--are having a less-than-stellar year on a relative basis."

 World Stock, by Brian Portnoy
"Most funds have been hurt because they've held significant stakes in mainstream picks such as Nokia NOK and Vodafone VOD, which have been among the worst hit."

Next Week on Morningstar.com

  • Starting Saturday, September 8, and lasting one week, we'll highlight 10 stocks of lesser-known companies with high star ratings. If you're not a Premium Member, you can still see these 10 star ratings. Each week we highlight a different list. (To view each week's free star ratings, you do need to register, but that's easy--and free.)
  • Video Reports three times a day. Check out our weekly schedule for what’s on tap.
  • Pat Dorsey, our director of stock analysis, on Fox News Channel. Pat makes his weekly appearance on the Bulls & Bears show on Saturdays at 10:00 a.m. EST. (The show also runs at 6:30 p.m. Saturday and 9:00 a.m. Sunday.)
  • Russel Kinnel on CNBC. See our director of fund analysis each Friday morning at about 10:25 a.m. EST.
  • Christine Benz on CNNfn. See the editor of Morningstar FundInvestor talk funds every Friday at 4:45 p.m. EST.

If you read research you love or hate on the site, let me know at haywood.kelly@morningstar.com. Also note that you can keep up with Morningstar.com through two of our weekly e-newsletters: Weekly Wrap and SmartInvestor. They’re both free.