Top Five Large-Cap Stocks

Southern Copper and Smith International are in the lead.
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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, 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.

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.

Southern Copper

(PCU)

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 growth in revenue and net income. 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 to exceptional return on equity. Southern Copper also has a strong project pipeline, with plans to increase copper output by 100,000 tons by 2009. 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.

Smith International

(SII)

, which provides products and services for oil and gas exploration and production, has been rated a buy since May 2006. The company reported a strong financial performance in the recently concluded quarter, benefiting from the favorable industry environment.

Smith International's second-quarter revenue increased 21.6% to $2.11 billion from a year ago. Net income increased at a higher rate of 28.8% to $153.05 million because of lower production, general and administrative costs, which were partially offset by higher net interest expense.

Smith's performance depends on the level of oil and natural gas exploration and development activities, which are cyclical. There has been a rise in oil price in the past two years, which might lead to either a decline in demand or increased use of alternatives.

Oilfield services company

Schlumberger

(SLB) - Get Report

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. Schlumberger also shows a strong net income growth and improved return on equity, a clear sign of strength.

The stock is not without its risk. In the short term, management has 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.

Freeport-McMoRan Copper and Gold

(FCX) - Get Report

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.

Parker-Hannifin

(PH) - Get Report

, which makes motion and control technologies and systems, has been rated buy since October 2006. The company's revenue and net income for the third quarter of fiscal 2007 were both up over the year-earlier period, driven by better sales in most of its business segments. Parker-Hannifin also posted higher return on equity for the quarter. There was also an improvement in its debt-to-equity ratio, which demonstrates financial stability.

The company has recently been involved in a series of acquisitions, notably those of Airtek, Rectus AG and Rayco Technologies. There are potential risks, however. Parker-Hannifin operates in a highly competitive environment, and its growth is partly dependent on the continued development of new products and technologies. A significant portion of the company's revenue comes from customers outside the U.S.; this leaves it vulnerable to international political risk as well as currency risk.