http://www.intelligentspeculator.net/free_stock_picks/4-winners-for-2009/

http://seekingalpha.com/article/112898-four-stocks-for-2009

http://articles.moneycentral.msn.com/Investing/JubaksJournal/the-10-best-stocks-for-2009.aspx

The Best Stocks for 2009

http://www.fool.com/investing/general/2008/12/18/the-best-stocks-for-2009.aspx

Jim Mueller
December 18, 2008

Christmas and New Year’s are fast approaching, and we all know what that means: gift-giving and parties!

OK, those, too. But I was thinking more along the lines of your investments, now that 2008 is finally drawing to a close. It’s no mystery that this has been a tough year for stocks and investors, with the economy dragging on just about every industry under the sun. In that light, it’s also no surprise that of the companies we highlighted last year in our “Best of 2008,” only a handful are in the black:

Gilead Sciences (Nasdaq: GILD)
Marvel (NYSE: MVL)
Buffalo Wild Wings (Nasdaq: BWLD)
McDonald’s (NYSE: MCD)
Three others — Archer-Daniels-Midland (NYSE: ADM), Johnson & Johnson, and Yum! Brands (NYSE: YUM) — fell less than the S&P 500 did year to date. Even Apple (Nasdaq: AAPL), the CAPS community’s choice for last year’s Best Stock, has fallen more than 50% this year.

But step back a moment and look at these stocks again. While Apple’s share price was yo-yo-ing up and down, the company grew revenue, increased both its gross and net margins, and increased the cash on its balance sheet by $9 billion over the course of its fiscal year. Is that the behavior of a terrible company?

And what about J&J? The share price was mostly flat for the year, until October brought on volatility and a steep plunge. However, over the trailing-12-month period, J&J increased return on equity by 360 basis points. It’s also recently made two acquisitions that should increase revenue and earnings going forward. Still sound so bad?

That’s why Fools like to look at what companies do in the long term, rather than what the stock price does in the short term. It’s also why we think this year’s selections will do well as companies, and hopefully as stocks, in 2009 and beyond.

Take a few minutes to peruse this year’s offerings. Then head on over to CAPS, the Fool’s investor intelligence database, and rate them as either an outperform or underperform going forward. Once we’ve got your votes, we’ll come back to tell you which one readers like you believe will be the best way to boost your portfolio. Until then, have some egg nog, get as close to or far from the mistletoe as you like, and celebrate the end of a long and challenging year.

The Best Stocks for 2009:

Agnico-Eagle Mines
Altria Group
Amazon.com
Cisco
Core Laboratories
Costco
ExxonMobil
General Electric
Google
Johnson & Johnson
Netflix
Pfizer
Somanetics
Starbucks

The Best Stocks for the Year Ahead

http://www.fool.com/investing/dividends-income/2008/12/01/the-best-stocks-for-the-year-ahead.aspx

Joe Magyer
December 1, 2008

Just when you think Mr. Market couldn’t do you much worse, he goes and spits in your Cheerios.

See, stocks struck me as extremely attractive as recently as a week and a half ago. At that point, the S&P 500:

Was down around 20% — from late 1997
Was yielding 3.4% — around an 18-year high
Had a price-to-operating earnings ratio — 12.4 — at a 19-year low
Naturally, the Gods mocked me by driving the market up 19%.

Between this spurt and the economic bellyache heard ’round the world, I was forced to circle back to my central question: Is this still a good time to buy stocks? And if so, what should you buy?

The truth
Before we get to whether I think this is a good time to buy stocks, let me tell you what I’m not saying: I’m not making any argument about whether or not this is the bottom.

Here’s the real deal: No one — not Warren Buffett, not Meredith Whitney, not even your uncle who wears a Simpsons T-shirt and camo pants each Thanksgiving — has any realistic insight as to where the market is headed over the next several months. The economy? Sure. The market? No.

See, the stock market tends to act as a leading indicator to the broader economy. In English, that means that the market tends to rise before the economy turns north, and fall before the economy turns south. Blend in historic volatility, and voila — the task of predicting the market’s short-term moves goes from impossible to even more impossible (if that’s possible).

So I’m not predicting the bottom — but I do think this is a good time to buy stocks.

Why buy?
Even though the market could fall further, the long-term prospects for investments look reasonably rosy.

World leaders are pulling out nearly all the stops to prevent a catastrophic depression.
Energy prices have fallen precipitously over the past couple of months.
And my favorite — dividend yields are very high, and, according to the University of Chicago’s John Cochrane, stocks tend to deliver stellar returns over the seven-year period following one when dividend yields are high.
I’m sure you can guess what I’m going to suggest next: If you want to play this market, go after solid, sustainable, dividend-paying stocks.

It’s true that dividend-paying stocks are my answer for nearly every market environment. Not only do they hold up better in bear markets and pay you to wait while the economy works out its kinks, but they’ve also significantly outperformed non-dividend payers over the long haul. Indeed, Jeremy Siegel found that from 1957 through 2003, portfolios invested in the highest-yielding S&P 500 stocks outperformed portfolios in the lowest-yielding by almost five percentage points a year.

My answer for this market
So where should you look for dividend payers in this market? Blue chips like Yum! Brands (NYSE: YUM), PepsiCo (NYSE: PEP), and Coca-Cola (NYSE: KO) are all yielding near 3% — nearly unheard of. Each should experience solid growth over the next half-decade including multiple expansion. Meanwhile, with a dividend that could easily double over the next seven years, cash-rich and globally diverse Philip Morris International (NYSE: PM) offers a rock-solid 5.1% yield.

The list goes on. Nearly every energy pipeline operator — fantastic high-yield, toll-gate businesses — is yielding above its cost of capital with distributions that, broadly speaking, look solid and sustainable. Incredibly, that’s been true lately of even the industry’s first-tier names, Kinder Morgan Energy Partners (NYSE: KMP) and Enterprise Products Partners (NYSE: EPD) among them.

And if, like me, you think oil and gas prices could pop in a big way in the not-so-distant future, you could conservatively play the space with ExxonMobil (NYSE: XOM) and its fortress-like balance sheet and 2% yield. Sure, Greenpeace may not send you a Christmas card, but your grandkids will thank you.

Obviously …
Despite last week’s market leap, I’m pretty excited about the current opportunities Mr. Market is presenting us with — and so is our team at Motley Fool Income Investor. With a focus on the long term and buying the right stocks for any market — dividend-paying stocks — we’re confident that we’ll look back at this time and feel proud for having had the nerve to buy in the face of the worst market thrashing of this generation.

Our average recommendation currently yields 7%, and we’ve outperformed the market by more than three percentage points on average since the newsletter’s inception. You can access all of our recommendations, along with our top five ideas for new money now, by joining Income Investor today.

And as a special kicker for those folks who join us now, new members will also get a free copy of the Fool’s flagship annual special report, Stocks 2009. The report features eight ideas — including several dividend payers — from the Fool’s top analysts. Among the picks:

A dominant audio specialist recommended by Rex Moore and Fool CEO Tom Gardner.
From David Gardner and Tim Beyers, a high-growth scrapper with the potential to revolutionize home entertainment.
From Philip Durell and Mike Olsen, a low-cost natural gas producer with strong growth and heady upside.
And from us dividend hounds at Income Investor, a fat-yielding oilfield equipment giant poised to pop when the economy turns.
Mr. Market may not be at his most polite right now, but he’s still providing some unparalleled opportunities. If you’d like to see which stocks we’re recommending to capitalize on that, just click right here.

Fool senior analyst Joe Magyer owns shares of Philip Morris International, but doesn’t own shares of any others mentioned in this article — yet. Coca-Cola is a Motley Fool Inside Value recommendation, while Enterprise Products Partners is an Income Investor recommendation. The Motley Fool’s disclosure policy doesn’t pay dividends, but it would if it could.

The best stocks for 2009

Here’s the silver lining of the market meltdown: Equities are cheaper than they’ve been in years. We found ten prospects that should flourish.

By Jon Birger, Katie Benner, Stephen Gandel and Mina Kimes

December 11, 2008: 3:32 PM ET

(Fortune Magazine) — Where’s the bottom? It’s the question every investor is asking. We wish we could tell you when the stock market will reach that point – we really do. But we have no idea. Nobody does. This much, however, we can say: Don’t wait for that perfect moment when the markets sink to their absolute floor. Because by the time you’re certain prices have reached that spot, the moment will have passed, and you may have missed a dramatic rebound.

Since World War II, the Standard & Poor’s 500 index has soared 32% on average during the nine months following a bear market. But here’s the tricky part: Those gains often occur in sporadic, dramatic bursts. Which means that if you’re abstaining from investing, there’s a good chance you’ll miss the biggest gains. In most cases, it’s better to buy a bit early – and suffer some more paper losses – than to invest too late.

That’s a long way of saying that as much as you may be inclined to pull your money out of the market, dust off the passbook you used as a child, and transfer your few remaining dollars into a savings account, now is not the time to sit out.

No doubt, we’re mired in the grizzliest bear market in decades. But the good news is that stocks have been marked down to holiday-sale levels. The price/earnings ratio of the S&P 500 now stands at 11, or 50% below the index’s ten-year average. The S&P’s dividend yield is 3.4%, more than twice its ten-year average. There are now 62 S&P companies whose shares have P/E ratios below five and 52 with yields above 7%. One year ago those tallies would have been four and ten stocks, respectively. Says veteran mutual fund manager David Dreman: “This is the best buying opportunity since 1982.”

Yes, risk still lurks, and you should remember the warnings to be found throughout this year’s Investor’s Guide – most important, that stocks may still sink significantly before they rise and that, especially for some, the recovery may not occur until after 2009. But there are so many quality companies with strong growth prospects and sterling balance sheets that it should be possible to make big returns without taking outlandish chances.

One smart and easy way to get back into equities if you fled the markets in 2008 is with a low-cost S&P 500 index fund like Vanguard 500 Index (VFINX). That will give you broad exposure to the market, letting you enjoy the eventual comeback while minimizing the impact of any single company. But if individual stocks are your thing, keep reading. We crunched the numbers, combed through the research reports, interviewed our favorite investing pros, and came up with ten stocks we think are poised for strong returns in 2009 and beyond.

Altria

Nobody has ever accused the folks at Altria (MO, Fortune 500) and its Philip Morris USA subsidiary of being dummies. (A few other things, sure, but not that.) So when Altria endorsed legislation that would subject tobacco products to FDA regulation – a bill sponsored in the U.S. Senate by longtime tobacco company foe Ted Kennedy – you knew there had to be a reason.

There is. Indeed, the proposed legislation might as well be dubbed the Altria Earnings Protection Act. For starters, the bill prevents the FDA from ever banning cigarettes. Just as important, the wording makes it extremely unlikely that the FDA will ever approve a new cigarette product, because the new entrant would have to be deemed “appropriate for the protection of the public health.” The bill also restores states’ ability to restrict tobacco advertising. Yet another part of the measure would require the FDA to crack down on sales of counterfeit cigarettes, which have been a drain on Altria earnings for some time. All of these provisions would be beneficial to Altria, as they would help it “lock in its already dominant market share,” says Dan Clifton, a political analyst at Strategas Research Partners. (Altria currently controls about half the U.S. tobacco market.)

The upshot is this: If the bill becomes law – and there’s reason to think it will, since President-elect Obama was a co-sponsor – Altria’s already safe dividend (current yield: 8.5%) will become even safer. So, too, will its earnings growth, which analysts are pegging at 8% for 2009. Throw in the fact that vice stocks are usually recession stalwarts – they’ve outperformed the S&P by an average of 12 percentage points during the past six recessions, according to Merrill Lynch – and you’ve got a defensive stock with generous upside. “Given the current environment, both in terms of interest rates and overall uncertainty for almost every company in the market,” Citigroup tobacco analyst Adam Spielman writes of Altria, “we think this is worth seizing.”

Annaly Capital Management

No matter how superb its business or how cheap its valuation, a complicated stock – especially one that involves mortgages – can get hammered in a market like today’s. Annaly (NLY) and its 16% dividend yield (that’s not a misprint) is a prime example.

Annaly is a real estate investment trust, but it’s not a conventional one. The company is basically a hedge fund that uses short-term bank loans to make long-term investments in mortgage-backed securities. That may sound scary, but Annaly buys only mortgages guaranteed by government-sponsored (now government-controlled) enterprises like Fannie Mae and Freddie Mac. Annaly does not acquire the toxic, unguaranteed stuff that’s been laying waste to bank balance sheets.

CEO Michael Farrell says the biggest question for Annaly shareholders has always been whether the federal government would stand behind Fannie and Freddie’s mortgage guarantees if the duo ran into trouble. “And now we know the answer,” says Farrell, referring to the government’s bailout of Fannie and Freddie in September.

If this story sounds familiar, it may be because Annaly is the sole holdover stock pick from our 2008 Investor’s Guide. What we said a year ago was that “there’s probably no company better positioned to profit from the ongoing mortgage crisis than this one.” And indeed, Annaly delivered a cool 84% earnings growth for the first three quarters of 2008.

Annaly makes its money off the net interest margin, or spread between the rate it pays on short-term loans and the yield it earns off its mortgage-backed securities. Federal Reserve rate cuts trimmed Annaly’s short-term borrowing costs, while the selloff in the mortgage market raised the yield of mortgage-backed securities it bought. The end result was a massive improvement in Annaly’s net interest margin, from 0.67% in September 2007 to 2.08% today.

Better still, the margin improvement allowed Annaly to ratchet down its risk: Its leverage ratio (the ratio of borrowed money to shareholder equity) now stands at seven to one, down from ten to one a year ago. That’s modest by Wall Street standards. Goldman Sachs’s leverage ratio is currently 17 to one, for example, and Goldman takes risks with its money that Annaly wouldn’t dream of taking.

Best stocks for 2009 (pg. 2)

By Jon Birger, Katie Benner, Stephen Gandel and Mina Kimes

December 11, 2008: 3:32 PM ET

The problem is, investors are now too scared to care about any of this. When we recommended Annaly last year, the stock traded for $17 a share, had a price-earnings ratio of nine (based on projected earnings), and offered a dividend yield of 5%. (Like all REITs, Annaly pays out the bulk of its earnings as dividends.) Today, the shares sell for $13 with a forward P/E of five and a dividend yield of 16%. “They’re making more money on less leverage,” says Anton Schutz, portfolio manager of the Burnham Financial Services Fund. “I think Annaly is one of the best places to be in this market.”

Dell

It is clear again who put the D-E-L-L in Dell. When Michael Dell returned in early 2007 to the helm of the computer maker he founded nearly 25 years ago, costs at the Round Rock, Texas, company were spiraling out of control. Worse, Dell (DELL, Fortune 500) was losing market share to rivals HP and Apple, particularly in selling computers to individuals. Nearly two years and more than 10,000 job cuts later, Dell’s operating expense dropped 12% in the most recent quarter, compared with an increase of 24% a year ago.

What’s more, the company has regained market share this year, according to research firm Gartner. “A year and a half ago there was a question about the integrity of Dell’s business,” says David Katz of Matrix Asset Advisors, which has recently been purchasing Dell shares. “All of those issues have been addressed.”

Mr. Market, though, hasn’t seemed to notice. That, along with the cash on its balance sheet, is what makes Dell’s shares a great buy now. The company has nearly $7 billion in net cash, or about $3.60 a share. Exclude that from its recent share price of $10, and you get a price/earnings ratio of just under five, based on next year’s earnings estimate of $1.31 a share. By that measure, Dell’s shares are cheaper than 95% of all the companies in the S&P 500 and significantly less expensive than rivals HP and Apple, at eight and 12 on the same scale, respectively, according to Standard & Poor’s. Once the quintessential growth stock, Dell has become a value play.

Some analysts worry that next year could be rough for the company. It makes 80% of its sales to corporations, which are likely to hesitate to buy huge quantities of computers as they try to keep costs low. Overall, Wall Street expects Dell’s earnings per share to fall 7% next year. But Dell has been stepping up its efforts to sell to individuals by increasing the money it spends on design. Its formerly generic products can now be found in a painter’s wheel of colors (some even have covers designed by African abstract artists) with features like glow-in-the-dark keyboards. And the company is selling in 20,000 retail stores, including Best Buy and Wal-Mart. “They have the cash they need to retool for a global economic slowdown,” says money manager Nick Calamos of Calamos Investments. “The market is saying, ‘This company is dead.’ Instead, this may be one of the best buys in the market today. It’s an unbelievable bargain.”

Devon Energy

Do you believe oil will remain at under $50 a barrel? We certainly don’t. With oil prices collapsing by $100 a barrel in the past six months, a rebound seems inevitable. After all, even if global demand were to remain flat over the next 25 years – the International Energy Agency actually expects it to increase 45% by 2030 – the world would still have to develop new sources of oil and gas equivalent to four Saudi Arabias just to offset the declining outputs at existing oilfields. “It’s hard to argue with the data,” says Matthew Simmons, president of Houston energy banking firm Simmons & Co. and author of the peak-oil treatise Twilight in the Desert. “And it’s ghastly, what the data says.”

What’s more, Africa, the Middle East, and Russia, where much of the oil is, remain politically unstable. So you can bet that when it’s clear the recession in the U.S. and elsewhere is coming to an end, oil prices will snap back. The only uncertainty is when that will occur.

Shares of oil and gas companies have dropped nearly 50% in the past six months, and many of the stocks now trade with single digit price/earnings ratios. Simmons believes oil stocks in general are as undervalued as they’ve been in 75 years. But earnings at energy companies are on average expected to drop 16.3% in the next 12 months, according to Standard & Poor’s. So the question is how to take advantage of the long-term bargains without your portfolio getting stomped in ’09.

Devon Energy (DVN, Fortune 500) is one answer. The Oklahoma City-based exploration and production company does business almost exclusively in the U.S. and Canada, so it doesn’t have to worry about Russia or some other nation deciding it wants a greater cut of oil profits. Devon’s revenues are split between oil and natural gas, giving it an added cushion against oil price drops. To be sure, natural-gas prices are down as well. But many experts believe an Obama administration will shift the nation’s energy consumption toward cleaner natural gas and away from oil and coal, which should boost demand over time. “Obama’s policies are likely to strain natural-gas supplies,” says Larry Nichols, chief executive of Devon. “So all else being equal, I expect higher prices next year, which is good for us.”

With very little debt – just 13% of capital – the company already has a frugal operating structure. And Nichols says he plans to cut his budget “meaningfully” this year. On top of that, the company estimates that its reserves are up 10% this year, giving it more oil and gas to sell in ’09. “We will sell 100% of our product next year,” says Nichols. “That makes us different from hotel chains or fancy restaurants. People don’t stop using oil and gas.”

Earnings are expected to drop 36% in 2009. But that’s much better than the 53% drop expected at Anadarko Petroleum, Devon’s closest competitor. And at a recent $66, the company has a P/E ratio of ten, based on next year’s earnings. That’s lower than the 12 P/E of Exxon Mobil, which analysts also say is well positioned to weather the energy downturn. “We believe Devon has the most attractive asset portfolio in the oil sector,” says Oppenheimer analyst Fadel Gheit, who recommends Devon’s shares. “Everybody’s earnings are going to fall. These guys’ are going to fall less.”

Diamond Offshore

Our second energy-related stock may pay off faster than Devon. Indeed, what stands out about Diamond Offshore (DO) is its home-run potential – Barclays Capital has a $134 price target for the shares, which are now $66 – as well as the protection shareholders get from its hefty dividend should the stock market continue to slide.

Diamond is a contract driller; it has 46 offshore rigs and drill ships, which it leases to oil companies such as Apache and Petrobras at rates of anywhere from $100,000 to $500,000 a day. While day rates for offshore rigs have been under pressure, most of Diamond’s rigs are covered by long-term contracts. According to Goldman Sachs analysts, 89% of Diamond’s revenues for 2009 are already locked in (the most of any offshore driller), as are 71% of 2010 revenues. And as oil prices move back up, demand for drilling – and Diamond’s services – will surge.

Diamond’s shares trade for a mere six times 2009 profits, but what we really like is the yield. Unlike other drillers, Diamond distributes the bulk of its earnings as dividends. The total quarterly payout (regular dividends plus special dividends that have become quite regular) now stands at $2 a share, which works out to an annualized dividend yield of 12%.

Fluor

The recession has pounded the construction industry, with engineering and infrastructure stocks sinking as cash-strapped municipalities delay large public projects. But the sector should get a boost from an ambitious public works spending plan expected to be part of President-elect Obama’s economic stimulus package. This bill is likely to be a direct grant rather than the more typical stimulus package that forces local governments to match federal funds, according to Bentley Offutt, of Offutt Securities. That should speed spending and allow projects to go forward even in cities and states where shrinking tax bases and bond market problems have crimped state budgets.

Fluor stands to prosper. About 45% of the engineering and construction company’s business is in the U.S., and Phil Dodge, an analyst at Stanford Group, says the company will probably work on larger projects like interstate highway renovations.

Even without a stimulus package, Fluor (FLR, Fortune 500) has been flourishing. The company’s revenue rose 38% to $5.7 billion in the third quarter of 2008; earnings doubled to $1.01 per share. It has robust businesses inside and outside the U.S., including oil and gas, mining, power, and global infrastructure. And Fluor generated a record $8.8 billion in new contracts for the third quarter, including a $3.4 billion project for the BP Whiting Modernization Project in the U.S. and a $1.8 billion contract to build the world’s largest offshore wind farm near the coast of England. Fluor has even raised its earnings guidance for 2009, one of the few companies to do so. Despite that, the shares are trading at only ten times earnings, making it a stock that seems engineered to rise next year.

Johnson & Johnson

Think of Johnson & Johnson (JNJ, Fortune 500) as a comfort stock. Strength and stability seem like cardinal virtues at a time when even the bluest of blue chips – AIG, Citigroup, and Goldman Sachs, to name a few – have suffered calamitous stock declines. “In an environment where large companies are going bankrupt and seeing huge declines, J&J is safe,” says Tao Levy, an analyst with Deutsche Bank Securities.

Yes, a triple-A credit rating has never looked so good (or so rare: J&J is one of only six U.S. corporations with that distinction). But it’s not just a gold seal. It means J&J can borrow money at lower cost than its competition. This often-ignored strength will become more meaningful because the troubled debt markets, which are unlikely to clear in the first half of 2009, will make life more expensive for most companies.

J&J’s fortress-like balance sheet, with $150 million in net cash – $14.8 billion in cash and $14.6 billion in long- and short-term debt – means it can easily complete the $10 billion share-repurchase program it began in 2007 (it has so far bought $7.4 billion in stock), increase its dividend, or swoop in for a cheap, strategic acquisition to boost earnings. In November the company announced it would acquire biosurgical-product maker Omrix Biopharmaceuticals for $438 million. (J&J bought the shares for a third less than their 52-week high.) And in December it picked up breast-implant maker Mentor Corp. at a 24% discount to its 52-week high, calling the acquisition a “cornerstone” for its move into the $4.6 billion cosmetic medicine business.

With J&J, investors gain exposure to a leading medical-device maker as well as to blockbuster drugs and top consumer product names such as Neutrogena and Listerine. The company has done well despite the current turmoil. In the third quarter, earnings per share jumped by 10.4% over the previous year, and it is growing rapidly overseas. Worldwide sales rose by 6.4% in the quarter, and nearly all of that increase was booked in Latin America and Asia.

A severe economic slowdown in 2009 will put pressure on the consumer segment, and generic drug competition will weigh on pharma. For 2009, earnings per share are expected to grow by 3%, according to research firm CapitalIQ. Pharma will be the biggest albatross as patents expire on blockbuster drugs like Topamax, a migraine and epilepsy treatment.

The best stocks for 2009 (pg. 3)

By Jon Birger, Katie Benner, Stephen Gandel and Mina Kimes

December 11, 2008: 3:32 PM ET

As patent worries subside, J&J should improve growth in 2010 and beyond. Analysts estimate that earnings per share will climb by nearly 9% in 2010, by 10% in 2011, and by 8% in 2012, according to CapitalIQ. While investors wait for the company to work through a slow 2009, they get a decent 3% dividend yield and a 46-consecutive-year track record of dividend increases.

J&J is trading near its 52-week low at $55, and at a price/earnings ratio of 12. That may seem steep when so many stocks are trading at P/Es of eight or lower. But it’s the lowest for J&J since 1979 – the company has averaged a P/E of 22 over the past three decades – and far below its consumer-staples peers. And even with stocks, comfort is worth paying for.

Medco Health Solutions

For decades, Americans’ health coverage has been fraying, and every new President vows to tackle the problem. The incoming Obama administration has made similar promises. Will it be able to deliver? As the largest pharmacy benefits manager (PBM), Medco Health Solutions (MHS, Fortune 500) is poised to benefit from potential reforms. But this well-managed enterprise should thrive even if the government fails to overhaul health care, because the company already addresses the overarching problems of high costs and low quality.

Medco helps customers, including Blue Cross/Blue Shield, HMOs, employers, and government agencies, keep prescription costs down. It attacks the quality-of-care issue by collecting data on how well drugs perform so that patients can be put on more effective medicines faster, which saves money wasted on drugs that don’t work. CEO David Snow argues that dramatic cost cutting, with Medco’s help, will extend coverage to more Americans.

Snow has been actively communicating with policymakers who are creating a reform plan, and his company has already been tapped as part of the government’s efforts to shrink costs. Medco has been managing the government’s Medicare Part D prescription drug program, which went into effect in 2006. The federal program subsidizes prescription drug costs for Medicare beneficiaries.

Increased use of generic drugs should also give Medco a lift. “Generics benefit prescription benefit managers because the margins on generics tend to be better,” says Les Funtleyder, author of Healthcare Investing and an analyst at Miller Tabak. “The companies that make blockbuster drugs can demand a higher price because their drug is the only choice for a PBM, but generic drugmakers must compete against several companies, so PBMs have more say over pricing.” In just a few years we will see some of the biggest blockbusters come off patent, including Pfizer’s Lipitor, the cholesterol treatment that is the top-selling name-brand drug on the market (see next entry). Bristol-Myers’s heart-attack-prevention drug Plavix and Eli Lilly’s bipolar-disorder treatment Zyprexa also lose their patent protection in the next three years. “Even if health-care reform doesn’t generate increased use of generics, these expirations will,” says Funtleyder.

Medco has been doing well even without those external factors. The company keeps its corporate customers happy; it has a retention rate of 98% for 2008. Earnings per share jumped in the third quarter by 49%, and the company gave a full-year 2009 earnings estimate of $2.45 to $2.55 per share, up 15% to 21% over its 2008 guidance. Moreover, the company trades at a P/E ratio of 15, the same as rival Express Scripts, despite Medco’s dominance in the category.

Executives say they want to increase Medco’s cash, an attainable goal if the company generates its estimated $2 billion in free cash flow in 2009. Medco’s cash balances have been growing all year to about $441 million, and the company expects to double that balance by the end of 2009. “There’s not a lot of liquidity out in the marketplace,” CFO Rich Rubino said recently, “so we make our own.”

Pfizer

It’s no secret why Pfizer’s shares have dropped 40% in the past two years. The pharmaceutical giant’s top seller, cholesterol medicine Lipitor, loses patent protection in 2011. Drugs representing more than a third of Pfizer’s revenues will cede their exclusivity in the next five years. CEO Jeffrey Kindler has so far failed to deliver replacements, and investors have punished him for it: Pfizer (PFE, Fortune 500) shares trade just above their five-year low of $14, or six times the company’s next 12-month earnings. That’s a 25% discount to its peers, according to Steven Lichtman, an analyst at Banc of America Securities.

Pfizer’s stock is undeniably cheap – but it’s also undervalued, given the company’s healthy assets and recent turnaround efforts. “The price reflects the known issues – the generic threat to Lipitor,” says Lichtman, who thinks the shares are worth $20. “But it doesn’t take the opportunities into account.” What many investors don’t know (or disbelieve) is that Pfizer, which used to chase the ever elusive next blockbuster drug, has changed its ways. Kindler drastically restructured last year, breaking the company into smaller, more concentrated units. In a note to investors, Deutsche Bank analyst Barbara Ryan applauded management for turning Pfizer “into an operationally leaner, nimble, and customer-centric business.”

Pfizer is now aiming for numerous little hits rather than a few mega-successes. And the company has the pipeline to do it, in Lichtman’s view. Pfizer is developing 114 drugs, 25 of which are in the final stage before being submitted for approval. (By contrast, rival Merck has nine in the latter category.) Pfizer is working on a treatment for rheumatoid arthritis that Lichtman thinks could yield as much as $4 billion a year. That drug embodies Pfizer’s shift from emphasizing obesity and heart disease to other fields, including pain, Alzheimer’s, and cancer. Such markets are not only lucrative but also expensive for generics to enter – a vital shield against the next wave of cheap drugs.

The company’s most immediate salve may be its wallet: Pfizer has $26 billion in cash, which is more than Merck, Eli Lilly, and Bristol Myers-Squibb combined. Kindler could snap up a biotech company, many of which are available at low prices; Deutsche Bank’s Ryan points to Gilead and Amgen as possible candidates. Until then, investors can tide themselves over with the company’s 8% dividend (again, the best in its class). CFO Frank D’Amelio recently assured investors that the payout is safe. That’s a good reason to buy in – and wait for Kindler’s plans to pay off.

Potash Corp. of Saskatchewan

Six months ago, Potash Corp. of Saskatchewan (POT) – the world’s largest fertilizer company – peaked at $240 a share. Today it’s $56, only three times projected earnings per share for 2009.

Yes, slumping grain markets and credit-crunched farmers have sent fertilizer prices tumbling. And yes, it’s possible – likely even – that analysts will trim 2009 earnings estimates further. But a P/E of three means there’s margin for error. Next year’s earnings could straggle in 50% below expectations, and Potash Corp. would still be reasonably priced. The current price assumes the company will earn less than $5 a share in 2009, Citigroup analyst Brian Yu recently noted. The analyst consensus for 2009: $16.

The long-term case for higher grain prices – and thus stronger fertilizer demand – remains intact despite the global recession and withering commodities markets. Government mandates mean biofuel production will continue to rise. Ethanol will consume 33% of this year’s U.S. corn crop vs. 23% of last year’s. Global population growth and an expanding Third World middle class are expected to lead to a 10% rise in food-related grain demand by 2017. “The food crisis, which was headline news in June of this year, has not gone away – it’s just been overshadowed,” says Potash CEO Bill Doyle.

Potash Corp. is well positioned compared with its competition. Prices for fertilizers based on nitrate and phosphate have plummeted, while those for potash (its specialty) are at record levels. One reason: It’s brutally expensive to enter the business, as potash mines cost $2 billion to $4 billion to build. Potash Corp. should also benefit from its 32% stake in SQM, a Chilean miner and the top producer of lithium and iodine. Those are key ingredients in the lithium-ion batteries expected to power the next generation of hybrid cars. SQM stands to be a big winner. That means Potash Corp. should profit from multiple long-term trends.

http://money.cnn.com/2008/12/11/magazines/fortune/best_stocks.fortune/index.htm