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Top Five Large-Cap Stocks

Schlumberger and Southern Copper take the lead.

Each weekday, 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, large-cap stocks are in the spotlight. These are stocks of companies with market capitalizations of over $10 billion that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors. In addition, the stocks must be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. The stocks 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.

Leading the list today is oilfield services company



, which has been a rated buy since July 2005. It saw double-digit revenue growth across its segments in the second quarter compared with the same period last year, and its operating margin for the quarter hit 28.16%, driven by increased exploration and drilling activity.

Schlumberger also completed the acquisitions of Geosystem and Tyumenpromgeofizika, a supplier of land and marine electromagnetic and seismic imaging services, and a geophysical and wireline logging services provider in Western Siberia, respectively. Schlumberger also shows a strong net income growth and improved return on equity, a clear sign of strength within the company.

The stock is not without its risk. In the short term, management cautioned of uncertainty in its North American market due to a rapid rise in gas storage levels and expected declines in commodity prices. These factors could hurt the company's performance over the long run.

Southern Copper


mines, smelts and refines copper in southern Peru. It has earned a buy rating since August 2005. The company has benefited from higher metal prices, which have translated into strong revenue and net income increases. Net income growth has been further driven by expanded operating margins, lower net interest expenses and a decline in the effective tax rate. The positive trend in net income has contributed exceptional return on equity. Southern Copper also has a strong project pipeline, with plans to increase copper output by 100,000 tons by 2009.

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The principal risk to the buy rating emanates from any undue delay in the completion of Southern Copper's capacity expansion and new mine products. Copper supply could also be affected by production stoppages, due to labor strikes and the availability of mining equipment, as well as transportation bottlenecks.

Freeport-McMoRan Copper and Gold


engages in the exploration, mining and production of copper, gold and silver. It has been rated buy since July 2005. Despite a correction in copper prices in July, the long-term industry outlook remains strong, supported by the growing industrialization of China and India. The company's acquisition of Phelps Dodge resulted in a more than threefold year-on-year growth in revenue for the second quarter, to $5.81 billion.

Freeport-McMoRan has ongoing significant development activities to expand its copper production, extend mine lives and develop large-scale underground ore bodies. The stock is not risk-free, however. Any unexpected slowdown in copper demand could lead to an inventory pileup and result in lower copper prices. This, when coupled with higher cost of consumables and energy, could further build pressure on Freeport's operating margin and affect its profitability.

Precision Castparts


, which makes complex metal components and products for the aerospace and industrial gas turbine industries, has been rated buy since August 2005. The company has recently made acquisitions expanding its casting, forging and fastener product offerings, and these should fuel revenue growth. Precision's net income has also been increasing as a result of strong top-line growth combined with an improvement in operating margin and a lower interest expense.

Because Precision depends on the aerospace industry for its top-line growth, any slowdown in that industry could lead to reduced demand for its products. Other possible concerns include fluctuations in the prices of basic materials and any unseen difficulty in integrating recent acquisitions.

Air Products and Chemicals


, a chemical and gas producer, has been rated buy since August 2005, on the basis of the company's strong revenue growth, increasing net income, expanding operating margin and improved return on equity. In July, Air Products and Chemicals said that third-quarter sales surged 15.6% to $2.6 billion compared with the same period last year. Earnings climbed 35.5% to $284.9 million, or $1.28 a share, in the quarter, sparked by higher sales volume and expanding operating margins.

Return on equity for the quarter improved 136 basis points to 16.61%, primarily due to the increase in net earnings. Risks to the buy rating include challenges associated with integrating acquisitions and an unfavorable effect of currency fluctuation.