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Stock picks by the pros
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August 18, 2000: 1:40 p.m. ET
Barnes & Noble, Cardinal Health, Sysco, Broadcom, AMD win favor
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NEW YORK (CNNfn) - Equity strategists and stock analysts were looking at companies in the retail, healthcare, technology, oil, and semiconductor sectors for their top picks Friday. BP Amoco, Texas Instruments, Cypress Semiconductor, and Williams-Sonoma were some of their top draws.
While the markets continued a mixed session, recent guests on CNNfn commented on the stocks they are buying and why.
 "The big wheels will tend to be more sensitive to the direction of oil prices. So as crude prices rise, the big oils, the BP Amoco's (BP: Research, Estimates) et cetera are going to rise generally with that. The oil service - you know, the call there was we weren't sure how long oil prices would rise after they made a nice 50 percent move earlier in the year. So what we thought was you know the safer place to be was service because they respond more to the level of prices, and it looks like oil will be over $20 a barrel for quite a while here," said Ron Hill, partner and equity strategist at Brown Brothers Harriman.
"The only area in retail we really like are the distributors and the electronic retailers," Hill said. Cardinal Health (CAH: Research, Estimates) is a medical products distributor. They sort of sold off earlier with you know the disasters at McKesson HBOC (MCK: Research, Estimates) and now they're really coming back. They've been sticking to their knitting, doing what they do best, which is sort of you know just distributes you know healthcare products out through the entire healthcare system. And that's been a tremendous growth story across time, and now you have just got a chance to buy at reasonably cheap, the stock's been moving nicely recently.
"The food service company, Sysco (SYY: Research, Estimates): You're starting to get some more oligopolistic competition, meaning fewer bigger players, developing here," Hill continued. "The idea is that you know they hold - the Dutch company has just bought PYA/Monarch out of Sara Lee so that's - continuing some consolidation there. Sysco is the largest player in the food service business in America. And they're starting to do what GE has done - they're taking a new computer system and a whole new arrangement to run their business, and they're just starting to see the benefits of that. that could be a multiyear roll-out. So here's an old economy company starting to do some new economy things, and look for some good profit improvement in that company, going forward."
 "We've seen investment in capacity go up quite a bit and we had a scare this summer with wireless. So you can make a case that the business is in trouble. We try to focus on slightly longer term fundamentals. The relationship between spending and revenue in this business is still reasonable. Visibility is still good. Pricing is good. Let's not forget, wireless handset demand is growing 50 percent over year-on-year. So with stocks down a bit and the fundamentals still solid, we though it was time to declare the mid-cycle correction over," said Joe Osha, semiconductor analyst at Merrill Lynch.
"Texas Instruments (TXN: Research, Estimates) have done a tremendous job. They essentially are to the digital handset industry what Intel has been to the PC industry. It's very hard to make digital signal processors and TI really owns that market. So as that market grows, so should TI," said Osha.
"Broadcom (BRCM: Research, Estimates) is more of a wireline play. I've been astonished," Osha said. "I don't think I've ever seen a company come on so quickly. This company did $33 million in the March 1998 quarter and they'll probably do a billion in revenue this year. It is an awesome growth story. It is a company that is run by one of the more impressive, aggressive people that I've seen. They seem to be able to hire the best engineers, get the best products out there and they're in a very high growth market. It's hard to identify exactly why they're doing so well. But they certainly are.
"Cypress Semiconductor (CY: Research, Estimates) is more of a commodity memory," said Osha. "There have been a lot of scares about the communications especially the wireless handset industry. But our checks with that company confirm that the supply/demand balance is very, very solid and that the stock is well off of its high."
"I am marginally less positive on the PC oriented names, AMD (AMD: Research, Estimates) we're recommending enthusiastically because of that companies market share gain. But I think expectations versus reality for demand from that sector are a little ahead of themselves," said Osha. "So if you ask me where I think you'll make less money between now and the end of the year it would probably be in the PC-related names."
 "I thought Barnes & Noble (BKS: Research, Estimates) earnings were actually pretty good. When you look at book segment their sales as you mentioned were better than expected, they came in almost with a 7 percent comp and about a point of that was due to the strong traffic from Harry Potter. And the earnings in the book business were also right on target with what we were looking for. On the other side of the business, their video game and entertainment software companies, posted better-than-expected sales but the earnings were less than expected, due to the mix. But what we are anticipating going forward is some pretty good results out of the video game segment and that's because of all the new platforms coming out starting in October, with Sony Playstation II. And when you get into next year you have an unprecedented release of 3 additional new platforms which should really help that business," said Amy Ryan, senior retail trade analyst Prudential Securities.
"I'm out there with a $32 price target on Barnes & Noble," Ryan asserted. "And the way I get there is if you look at their core book business and the video game business, that should do about $2 in earnings this year. And it's growing 15-to-20 percent. And when you look at their ownership of BarnesandNoble.com, it is worth about 2 dollars per share. So what I have looked at is just the valuation for the core book business and their video game and put in you know a little bit of valuation for the ownership of BarnesandNoble.com, and we arrive at $32.
"Williams-Sonoma (WSM: Research, Estimates) also has a lot of growth vehicles," she said. What they are doing is they're broadening out the merchandise offering both in both their Pottery Barn and the Williams-Sonoma divisions. If you flip through for example the most recent catalogs you can see a lot of new merchandise offered. So broadening out the brands. The other thing that they have done is they have a lot of margin initiatives because they're working on integrating the design sourcing and merchandising initiatives in those two division. And then they have new formats pr new ideas that they are testing and rolling out such as the Pottery Barn Kids, the catalog was very successful. And the new stores they will have seven new stores. It's the debut of that concept. Pottery Barn Bed and Bath they just tested. And then when you go into 2002 a whole new concept is going to launched and it's called Elm Street. And it's really going to target the value consumer and really isn't a segment out there a concept out there, that targets the value consumer with nice offering of merchandise. So I think Williams-Sonoma has a lot of growth vehicles and we're looking for about 25 percent earnings growth forward.
"Yankee Candle (YCC: Research, Estimates) is small company. It is a candle company. They manufacture and sell candles and that's exactly what they do. 50 percent of the business is to the wholesale consumer. So if you go into a mom and pop gift shop and you see Yankee Candle that's the wholesale division. And their retail stores, they have about 100 stores right now with the potential of 700 stores domestically. This company generates over 25 percent pretax margins, extremely profitable and the dominant player in that niche," Ryan said.
-- compiled by Staff Writer Lucy Banduci
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