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Top Five All-Around Value Stocks

TheStreet.com Ratings Staff

Each weekday, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.

This list, updated daily, is based on data from the close of the previous trading session. Today, all-around-value stocks are in the spotlight. These are stocks of companies that meet a number of criteria, including annual revenue of more than $500 million, lower-than-average valuations such as a price-to-sales ratio of less than 2, and leverage that is less than 49% of total capital.

In addition, they must rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors. The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.

Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.

Brazilian oil company Petrobras-Petroleo Brasileiro(PBR Quote) has had a buy rating since July 2005. The company is banking on capital expenditures to boost future growth, looking at increasing its exploration-and-production activities to take advantage of rising commodity prices. It recently outlined an $87.1 billion capital development plan to run from 2007 to 2011. Once the program is complete, the company expects its oil and gas production to reach 2.93 million barrels of oil equivalent per day, up from around 2.30 million currently.

The prices of oil and natural gas have increased sharply over the past two years and are likely to remain at higher levels for the foreseeable future. There are, however, several potential risks to the buy rating. Oil and gas prices remain volatile and cyclical in nature, and a sharp downturn in prices could hurt Petrobras. Also, the company is somewhat vulnerable to production disruptions, since its production facilities are based in remote and politically sensitive regions.

Total S.A.(TOT Quote), an integrated oil and gas company, has been rated a buy since July 2005. The company's revenue growth outpaces that of the industry average, driving higher earnings. Total has demonstrated a pattern of positive EPS growth over the past year, a trend that should continue.

This steady revenue and earnings growth has helped the stock appreciate 30.7% in the 12 months prior to July 13. Even though it has already enjoyed a nice gain the past year, Total's stock should continue to move higher. These strengths outweigh the company's low profit margins.

Deere & Co.(DE Quote) has been rated a buy since June 2005. It recently completed the acquisition of Lesco, a leading supplier of lawn care, landscape, golf course and pest-control products, which doubled the number of wholesale distributor locations for its landscaping equipment. Deere is well-positioned to benefit from the surge in corn production -- driven by increased demand for ethanol -- which could compel farmers to buy more equipment.

L-3 Communications Holdings(LLL Quote), a military-equipment company, has been rated buy since July 2005. The company recently reported that its second-quarter earnings more than tripled. Higher defense spending worldwide, together with the company's recent acquisitions and a healthy backlog order book, has encouraged management to raise guidance for fiscal 2007.

L-3 Communications is expected to benefit from increased defense spending, as it is ranked among the top 10 biggest federal contractors. Also, higher security measures adopted by the airports throughout the world will create a new demand for L-3's baggage-screening systems and surveillance programs.

Aerospace and defense contractor Northrop Grumman(NOC Quote) has carried a buy rating since July 2005. Northrop has seen revenue and net income increases, and the federal government's fiscal 2008 budget request continues to favor spending on defense and homeland security.

The company's growth will also be driven by its acquisition of high-tech defense manufacturer Essex Corp., which was completed on Jan. 26. (There is still $575 million remaining under the share repurchase authorization, which is expected to be completed by the end of fiscal 2008.) Northrop Grumman's business is highly cyclical and dependent on government spending. A reduction in national security spending could cause a risk to its buy rating.