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STOCK PICKS: Top 5 All-Around Value

Kroger, General Dynamics, ConocoPhillips, Hess and Chevron make the list.

Each business day,

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 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.



is one of the nation's largest grocery retailers. The company also manufactures and processes some of the foods that it sells in its supermarkets, as well as operates a variety of additional store formats that include convenience stores, multi-department stores and mall jewelry stores.

Our buy rating for Kroger has been in place since March 2006. Although the company has generally had poor debt management, we feel that the rating is justified due to strengths such as the company's return on equity, attractive valuation levels, and growth in revenue, net income and earnings per share. For the first quarter of fiscal 2008, Kroger reported a revenue increase of 11.5% year-over-year, while net income grew 14.5%.

Earnings per share also improved, rising 23.4% from 47 cents in the first quarter of fiscal 2007 to 58 cents in the most-recent quarter. The company's total sales increased 11.5%, while identical supermarket sales increased 9.2% with fuel and 5.8% without fuel. Return on equity also improved slightly in the first quarter, rising to 24.73% from 21.79% in the prior-year quarter.

On the basis of a strong start to fiscal 2008, Kroger raised its identical sales and earnings guidance for fiscal 2008. Management now anticipates identical sales growth of 4.0% to 5.5%, excluding fuel, while estimating earnings of $1.85 to $1.90 per diluted share. The company had previously released earnings guidance of $1.83 to $1.90 per diluted share. While management is confident in the underlying strength of the company's business model, bear in mind that future financial results could be negatively impacted by increased competition, weather and economic conditions, interest rates and labor disputes, among other factors.

General Dynamics


designs, develops, manufactures and supports technology, products and services for use across the spectrum of military operations.

Our buy rating for General Dynamics has not changed since July 2003. This rating is based on strengths such as revenue growth, an impressive record of earnings per share (EPS) growth, and compelling growth in net income. Sales, earnings and operating margins increased in all four General Dynamics business groups in the second quarter of fiscal 2008. The Combat Systems group experienced increased sales in its armored vehicle and tank programs compared with the year-ago period and significant margin growth.

New-aircraft volume in the Aerospace group, increased shipbuilding activity in Marine Systems and continued strong demand for tactical communications and computing systems in the Information Systems and Technology sector also contributed to the overall strong performance. Revenue for the second quarter rose 10.8% year over year. This growth appears to have boosted the company's net income and EPS, which improved by 25% and 26%, respectively.

While the stock is trading 12.7% higher than it was a year ago, it should go without saying that even the best stocks can fall in an overall down market. However, we believe that the company's strengths outweigh the risks inherent in this industry.



operates worldwide as an integrated energy company. The company is headquartered in Houston and operates in nearly 40 countries.

ConocoPhillips has been rated a buy since April 2003. While the company currently shows low profit margins, we feel that strengths such as its robust revenue growth, compelling growth in net income, attractive valuation levels and notable return on equity justify our rating.

For the second quarter of fiscal 2008, the company's revenue surged 55.5% year over year. This appears to have helped boost earnings per share, which rose dramatically from 18 cents in the second quarter of fiscal 2007 to $3.50 in the most-recent quarter.

At the same time, net income increased 1,707% in the second quarter. Net operating cash flow increased 14%, while the company's return on equity exceeded that of the same quarter one year prior, rising from 12.86% to 19.07%. The company recently signed an interim agreement to develop the Shah gas field in Abu Dhabi, and also approved the continued funding for the development of the Yanbu Export Refinery Project. Additionally, the company plans to expand the Keystone crude oil pipeline system in North America.

Looking ahead, management anticipates full-year fiscal 2008 production to be consistent with the company's operating plan. The company has authorized a $10 billion share repurchase program for fiscal 2008, and expects to repurchase between $2 billion and $3 billion in the third quarter. Bear in mind that crude oil and natural gas prices are highly volatile and cyclical in nature. A downturn from the currently high pricing trends could affect the future profitability of the company, as could further slowdown of the U.S. economy.



is a global independent energy company that explores for, produces, purchases, transports, and sells crude oil and natural gas.

We have rated Hess a buy since August 2004 due to a variety of strengths. These include the company's strong revenue growth, strong cash position, solid performance across all segments in the second quarter of fiscal 2008 and higher natural gas production volumes. Increased crude oil and natural gas prices and higher capacity utilization helped boost the company's revenue, which rose 57.9% year over year in the second quarter.

The company reported that its earnings rose 61.6% when compared with the same quarter last year, while net income surged from $557 million to $900 million. Cash and cash equivalents soared increased from $482 million in the second quarter of fiscal 2008 to $1.48 billion in the most-recent quarter. In addition, the company's leverage levels improved, as its debt-to-equity ratio declined to 0.36 from 0.44.

It is important to remember that oil and gas prices are highly volatile and cyclical in nature. Because Hess generates a significant portion of its income from the production of oil and gas, any significant unexpected downturn in oil prices could negatively affect the company's earnings. In addition, the company's gross profit margin contracted during the second quarter despite solid revenue growth, and the rising cost of operation along with lower crude production volumes could impact the company's profitability in the future.



is one of the world's largest integrated energy companies. The company is engaged in every aspect of the oil and natural gas industry, with major operations in many important gas and oil producing regions worldwide.

We have rated Chevron a buy since October 2003. This rating is based in part on the company's strong growth in revenue and earnings, as well as its attractive valuation levels. For the second quarter of fiscal 2008, the company reported revenue growth of 49.0% year over year. This appears to have helped boost earnings per share (EPS), which improved 15.1% over the same quarter a year ago, thus continuing a trend of positive EPS growth over the past two years. Net income increased 11.1%, rising from $5.4 billion to $6 billion.

Chevron's future performance depends largely on the movements of crude oil and natural gas prices. Any adverse changes in these prices could negatively impact revenue. Furthermore, lower sales volumes and margins on the sale of refined products could also negatively affect the company's bottom line. However, we currently feel that the company's strengths outweigh the fact that its shows low profit margins and give the stock good upside potential under most economic market conditions.

Our quantitative rating is based on a variety of historical fundamental and pricing data and represents our opinion of a stock's risk-adjusted performance relative to other stocks.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could impact the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe a rating alone cannot tell the whole story, and should be part of an investor's overall research.

This article was written by a staff member of Ratings.