The Outlook

Intelligence for the Individual Investor

Taking a Pit Stop

Vaughan Scully
May 11, 2011 S&P Editorial

Volume 83
Oil prices hit the U.S. economy and then pull back.
Number 17

For auto racers, truck drivers, and young we’re starting to feel the hit from high oil
What’s Inside children on a family road trip, pit stops prices.”
are an inevitable part of life. The most Following disappointing, and mostly dis-
Intelligencer 2
recent batch of U.S. economic data seems regarded, first-quarter gross domestic prod-
Observatory 3 to suggest that the economy is taking a uct growth of just 1.8% on an annual
Mutual Fund Strategies 4 pit stop, and having to rummage under basis, several recent reports also paint a
the seats to pay the bill at the pump. less-than-robust picture of the economy’s
ETF Strategies 5 Average U.S. retail gasoline prices are current state: the ISM Nonmanufacturing
Weak Dollar 6 closing in on $4 per gallon nationally, index — a measure of the increasingly
and are already over that in California important service economy — fell in
Nordstrom 7
and the Midwest. March, productivity gains slowed, and job-
Supermajor Oils 8 Whether it’s the psychological or finan- less claims made a surprising jump to an
Marcellus Shale 9 cial effects of wallet-draining gasoline eight-month high. Persistently low Treasury
prices, the recent rise in oil past $110 a yields — the yield on the 10-year note has
Stock Screen 10
barrel is starting to make itself felt, and actually fallen in 2011 — are another sign
Master List 11 the economy is responding. “The recovery of concern about the true strength of the
Top Ten Portfolio 12 is still moving along,” says Standard & U.S. economy.
Poor’s Economist Beth Ann Bovino, “but (Continued on page 10)

S&P Equity Research

Recommended Asset
Allocation S&P 500 GICS SECTOR PERFORMANCES AND RECOMMENDED SECTOR WEIGHTINGS
E2011 P/E TO ACTUAL RECOMMENDED
% CHANGE P/E ON PROJ. 5-YR. SECTOR % S&P SECTOR OVER/UNDER
S&P 500 SECTOR MAY YTD 2010 E2011 EPS EPS GROWTH WEIGHTINGS EMPHASIS WEIGHT
Cash Foreign
15% Equities Consumer Discretionary -0.2 8.2 25.7 15.7 1.0 10.6 Underweight -2%
15% Consumer Staples 0.5 7.4 10.7 15.2 1.6 10.5 Marketweight 0%
Energy -3.6 13.7 17.9 13.4 1.2 12.7 Overweight +1%
Bonds Financials 0.0 2.7 10.8 12.4 1.3 15.5 Marketweight 0%
25% Health Care 0.7 12.6 0.7 12.5 1.4 11.4 Marketweight 0%
U.S. Equities Industrials -0.5 10.6 23.9 16.0 1.3 11.2 Overweight +1%
45% Information Technology -0.6 5.6 9.1 13.7 1.0 18.1 Marketweight 0%
Materials -1.6 4.5 19.9 14.4 1.5 3.6 Overweight +1%
Telecommunication Services 1.3 5.6 12.3 17.7 2.9 3.0 Marketweight 0%
Utilities 0.7 6.3 0.9 13.2 3.5 3.3 Underweight -1%
S&P Composite 1500 -0.7 8.1 14.2 17.1 1.3
S&P 500 -0.5 7.9 12.8 14.0 1.3 Sector recommendations are market-cap
Please see page 3 for required research S&P MidCap 400 -1.6 10.1 24.8 18.7 1.4 weighted, influenced by economic,
analyst certification disclosures. fundamental, and technical considerations.
S&P SmallCap 600 -2.0 7.9 25.0 19.7 1.5
For important regulatory information, please Data as of 5/3/11. Source: Standard & Poor’s Equity Research
go to: www.standardandpoors.com and click
on “Regulatory Affairs and Disclaimers.”
2 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011

Intelligencer Standard & Poor’s The Outlook

Headlines, Highlights, and What’s on Our Minds EDITORIAL
Managing Editor Beth Piskora
JAPAN TAKES STEPS TO REBUILD: The reconstruction of Japan’s northeast coast Senior Editorial Manager Vaughan Scully
after the March 11 earthquake, tsunami and Fukushima nuclear disaster that killed Statistician Chris Peng
about 26,000 people and left more than 150,000 homeless will likely require the O P E R AT I O N S
assistance of many Japanese and international construction companies. Managing Director, Global Business Operations
One month after the triple disaster, the Japanese government launched the Robert Barriera
Vice President, Operations Frank LoVaglio
Reconstruction Design Council to create a plan to reconstruct homes, schools,
hospitals and other affected structures. The Council expects it will take at least
For customer service, please call 1-800-852-1641 between 9am
10 years to rebuild the devastated region. and 4pm Eastern Time, Monday through Friday.
Japan’s government recently estimated material damage costs may exceed The Outlook (USPS 415-780, ISSN 0030-7246) is published
$300 billion. As an initial step toward rebuilding, Japan’s parliament passed an weekly except for one issue in January, April, July, September,
and November by Standard & Poor’s, 55 Water St. New York,
emergency $49 billion disaster relief budget May 2. Standard & Poor’s Rating NY 10041.

Services, which operates separately from S&P Equity Research Services (ERS), Annual subscription: $298. Periodicals postage paid at New
York, NY, and additional mailing offices. POSTMASTER: Send
projects reconstruction costs could range from $245 billion to $608 billion. address changes to The Outlook, Standard & Poor’s, 55 Water
St., New York, NY 10041.
“Infrastructure projects to help rebuild parts of Japan following the recent
earthquake and tsunami should contribute to new awards” for construction Copyright ©2011 by Standard & Poor’s Financial Services LLC. All
rights reserved. “Standard & Poor’s,” “S&P,” “S&P 500,” “S&P
and engineering companies, says ERS. MidCap 400,” and “S&P SmallCap 600” are registered trade-
marks of The McGraw-Hill Companies, Inc. Reproduction in
Global construction companies such as Caterpillar (CAT 109 ★★★★), Fluor whole or in part prohibited except by permission. All rights
reserved. Officers of The McGraw-Hill Companies: Harold W.
(FLR 66 ★★★★), URS (URS 44 ★★★★), and Hitachi (HIT 54 ★★★) may be McGraw, III, Chairman, President and Chief Executive Officer;
Jack F. Callahan, Jr., Executive Vice President and Chief Financial
positioned to assist Japan. / Art Epstein Officer; Elizabeth O’Melia, Senior Vice President, Treasury
Operations; Kenneth M. Vittor, Executive Vice President and
NUCLEAR COVERUP: A quarter of a century after the world’s worst nuclear acci- General Counsel. Because of the possibility of human or mechan-
ical error by S&P’s sources, S&P, or others, S&P does not
dent and release of huge amounts of radiation at Chernobyl, Ukraine, a mas- guarantee the accuracy, adequacy, or completeness of any
information and is not responsible for any errors or omissions or
sive structure will be built to completely seal the destroyed reactor, which will for the results obtained from the use of such information.

then be dismantled. The Outlook is a publication of Standard & Poor’s Investment

Services. This department operates independently of, and has no
A sarcophagus made of tons of concrete and steel was hastily built over the access to, non-public information obtained by Standard & Poor’s
Ratings Services, which may in its regular operations obtain
ruined reactor in 1986 to prevent further release of radiation, but was never information of a confidential nature. Information included in The
Outlook may at times be inconsistent with information available
intended to be permanent. in S&P’s MarketScope, an electronically delivered online serv-
French construction companies Vinci (DG Paris ★★★★) and Bouygues (EN ice. Permission to reprint or distribute any content from this
newsletter requires the written approval of Standard & Poor’s.
Paris ★★★) were awarded contracts in 2007 totaling $1.5 billion to build a
19.8 ton, 345 foot high (equal to a 30 story building), and almost 500 foot
long confinement structure, expected to
be completed in the summer of 2015
S&P 500 TOTAL RETURN (%) S&P EVALUATION SYMBOLS
and guaranteed to last 100 years.
ENDED APRIL 30, 2011 To protect workers from radiation
STARS Rankings
Our evaluation of the 12-month potential of stocks is indicated by
YEAR- LAST LAST
5-YEAR* 10-YEAR* TO-DATE 12 MONTHS MONTH exposure, most of the arch-shaped STARS:
Strong Buy—Total return is expected to outperform
2.95 2.82 9.06 17.22 2.96 structure will be fabricated at other the total return of a relevant benchmark by a wide
margin over the coming 12 months, with shares rising
sites, assembled at Chernobyl, and then in price on an absolute basis.
Monthly total return statistics for all S&P indices are available Buy—Total return is expected to outperform the
slid over the reactor.
at www.standardandpoors.com. *Annualized average through total return of a relevant benchmark over the
4/30/11. / Art Epstein ■ coming 12 months, with shares rising in price on an
absolute basis.
Hold—Total return is expected to closely approximate
the total return of a relevant benchmark over the

MARKET MEASURES
coming 12 months, with shares generally rising in price
on an absolute basis.
CLOSE % CHG. % CHG. ‡OPERATING †P/E RATIO INDICATED Sell—Total return is expected to underperform the
FRI. YEAR TO PAST —EARNINGS— FRI. ANNUAL % total return of a relevant benchmark over the coming
12 months, and the share price is not anticipated to
INDEX 5/6/11 DATE 52 WKS. A2010 E2011 5/6/11 DIVIDEND YIELD show a gain.
S&P 500 Composite 1340.20 6.6 20.6 83.77 98.55 13.60 25.93 1.93 Strong Sell—Total return is expected to underperform
the total return of a relevant benchmark by a wide
S&P MidCap 400 988.90 9.0 30.7 43.91 53.23 18.58 12.60 1.27 margin over the coming 12 months, with shares falling
in price on an absolute basis.
S&P SmallCap 600 444.14 6.8 26.6 17.00 22.79 19.49 4.64 1.04 NR Not ranked.
S&P SuperComposite 1500 310.62 6.8 21.7 18.64 22.06 14.08 5.73 1.84
Quality Rankings (QR)
Our appraisals of the growth and stability of earnings and dividends
Dow Jones Industrials 12638.74 9.2 21.8 857.59 1005.98 12.56 311.27 2.46 over the past 10 years for STARS and other companies are indicated
Nasdaq Composite 2827.56 6.6 24.8 ... ... ... … ... by Quality Rankings:
BBB Indus. Bond Yield (10-yr.) 5.17 -0.38 ◊ -0.43 ◊ ... ... ... A+ Highest B+ Average C Lowest
A High B Below Avg. D In reorganization
Data through 5/6/11. E-Estimated. †Based on estimated 2011 earnings. ‡Before special factors. ◊Actual change in yield A- Above Avg. B- Lower NR Not Ranked
(not percentage change). Quality Rankings are not intended to predict stock price movements.
 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011 3

The Observatory
Selected actions for April 29 through May 5.

STARS
CURRENT NEW OLD CHANGE QUALITY
NAME SYMBOL PRICE ($) STARS STARS DATE RANK
AGL Resources AGL 41 2 3 5/4/11 A
Airtran Holdings AAI 7 NR 3 5/2/11 C
Alaska Communications ALSK 9 2 1 4/29/11 B
Alpha Natural Resources ANR 52 3 4 5/3/11 NR
Armstrong World AWI 46 4 3 5/2/11 NR
Avon Products AVP 29 3 2 5/3/11 A-
Chart Industries GTLS 49 4 3 5/4/11 NR
Compass Minerals International CMP 92 3 2 5/2/11 NR
Electronic Arts ERTS 21 2 1 5/5/11 B+
Entertainment Properties EPR 47 3 2 5/3/11 A-
Fidelity National Information FIS 33 3 4 5/2/11 NR
Fresenius Medical Care FMS 73 3 4 5/4/11 NR
Hain Celestial HAIN 35 3 2 5/4/11 B-
Human Genome Sciences HGSI 28 3 4 4/29/11 C
Innophos IPHS 44 4 3 5/3/11 NR
Kyocera KYO 109 4 5 5/3/11 NR
LDK Solar LDK 10 4 5 5/2/11 NR
Leggett & Platt LEG 26 4 2 4/29/11 B
Magna International MGA 51 5 4 5/4/11 B
Massey Energy MEE 62 3 4 5/3/11 B-
MasterCard MA 278 3 4 5/3/11 NR
Merck MRK 36 4 3 4/29/11 B
Monolithic Power Systems MPWR 16 4 5 4/29/11 NR
Monro Muffler Brake MNRO 30 3 2 5/3/11 B+
Oneok Partners OKS 82 4 3 5/4/11 NR
Overseas Shipholding OSG 30 3 4 5/4/11 B
Potash POT 54 4 3 4/29/11 B+
priceline.com PCLN 539 3 2 5/5/11 B
Regeneron Pharmaceuticals REGN 48 3 4 5/3/11 C
Rowan RDC 38 4 3 5/4/11 B-
Sears SHLD 78 2 3 5/3/11 NR
Shanda Interactive Entertainment SNDA 45 3 2 5/3/11 NR
Silgan SLGN 45 4 3 5/4/11 B+
Skywest SKYW 16 3 4 5/4/11 B+
Sonus Networks SONS 3 3 4 5/4/11 B
Sun Healthcare Group SUNH 11 4 3 4/29/11 NR
Tenneco TEN 43 4 3 5/4/11 C
Timberland TBL 29 4 3 5/5/11 B
Trimble Navigation TRMB 43 2 3 4/29/11 B
Varian Semiconductor VSEA 61 3 4 5/5/11 B
WebMD WBMD 56 4 5 5/2/11 B-
Westlake Chemical WLK 59 4 3 5/4/11 NR

For daily STARS changes, subscribers can call The Outlook hotline, 800-618-7827, and put in your subscriber access code.

S&P Observatory provides a selection of analytical actions — upgrades, downgrades, initiations — from S&P Equity Research. Stoc ks featured in S&P
Observatory are selected by The Outlook according to factors including, but not limited to, newsworthiness, capitalization, and inclusion in a portfolio published
by The Outlook. Please note that all investments carry risks. Investors should seek financial advice before investing.
All of the views expressed in this research report accurately reflect the research analysts’ personal views regarding any and a ll of the subject securities or issuers.
No part of the analysts’ compensation was, is, or will be, directly or indirectly , related to the specific recommendations or v iews expressed in this research report.
 4 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011

FUND
STRATEGIES

Inflation at the ‘TIPS’ing Point Dylan Cathers

S&P Mutual Fund Analyst

Four funds for the inflation weary investor.

Looking around shops these days, PIMCO Real Return Fund Vanguard Inflation-Protected
it’s hard not to notice that prices When we search for top per- Securities Fund
for many of the items we use forming funds over the three The low-cost option is unques-
every day have increased recently, years ended April 29, PIMCO tionably the Vanguard Inflation-
some dramatically. Real Return Fund stands out. Protected Securities Fund.
Grocery shopping is one area Over that span, it has returned Specifically, its net expense ratio
of noticeably higher prices, as are 6.11% annually, outpacing the of 0.22% is well below the peer
gas stations. S&P’s Economics average TIPS fund by more than group average of 0.83%, and it
team forecasts a rise in consumer 150 basis points. It also bested its has no sales load. We also note
prices, as measured by the con- peers over one, five, and ten-year the turnover rate of 29% is about
sumer price index, of 2.9% in time frames, as well as since its a quarter of the TIPS funds’ aver-
2011 and 2.1% in 2012 after two inception in January, 1997. The age of 115%. Despite its low
years of only modest increases. fund’s net expense ratio of 0.90% costs, the fund outpaced the
For those concerned about the is comparable to its peers’ aver- group over the three years ended
effect of rising prices on the pur- age of 0.83%, though we note it April 29 by nearly 50 basis points
chasing power of investment does have a maximum sales load on an annualized basis. The
income, investing in Treasury of 3.75%. fund’s standard deviation and
Inflation-Protected Securities Sharpe ratio are both in line with
(TIPS) may be a solution worthy Franklin Real Return Fund the TIPS funds average.
of consideration. TIPS provide Investors who are more con-
protection against inflation by cerned about the volatility of their TIAA-CREF Inflation-Linked
adjusting their principal value funds may want to take a look at Bond Fund
according to changes in the con- Franklin Real Return Fund, which This fund had a 30-day SEC
sumer price index. has a standard deviation that is yield of 5.2% as of March 31,
To identify some attractive about 30% below the peer aver- which compares very favorably
TIPS funds, we looked for fund age. Additionally, the fund man- with the group’s average of 3.2%.
that were a leader in one of aged to outpace its peers over the Given its much higher-than-peers
four different categories: the top trailing five-year period ended yield, it is no surprise that this
performer over the past three April 29 on an annualized basis fund outdistanced its peers on an
years, the lowest standard devi- by about 20 basis points, although annualized basis over the trailing
ation for reduced volatility, the it has trailed the group over the one-, three-, and five-year time
lowest costs (as measured by past three years. Like the PIMCO spans. Moreover, it accomplished
net expense ratio), and the high- fund, it has a Sharpe ratio that is this with a net expense ratio of
est 30-day SEC yields. We higher than the group. Its expense 0.49%, notably below the peer
excluded institutional share ratio of 0.90% is slightly above average. Finally, its standard devi-
classes as well as those closed to the peer average, and it sports a ation and Sharpe ratio are com-
new investors. maximum sales load of 4.25%. parable to the group. ■

POSITIVE POTENTIAL IMPLICATIONS

GROSS
S&P *TOTAL RETURN CURRENT EXPENSE **YIELD
FUND NAME / TICKER RANKING YTD 1-YEAR 3-YEAR 5-YEAR PRICE RATIO %
Franklin Real Return Fund; A / FRRAX NR 2.94 7.46 3.7 5.53 11 1.08 2.1
PIMCO Real Return Fund; A / PRTNX NR 4.32 7.73 5.97 7.02 12 0.93 4.1
TIAA-CREF Inflation-Linked Bond; Retail / TCILX NR 4.65 7.64 4.94 6.35 11 0.48 5.2
Vanguard Inflation-Protected Securities; Inv. / VIPSX NR 4.63 7.84 5.03 6.56 14 0.25 NA
Data through 5/5/11. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. **As of 3/31/11.
NA-Not available. Source: S&P MarketScope Advisor.

ETFs for a Weak Dollar Environment
S&P sees large-cap, developed world companies as a good bet.
Standard & Poor’s Equity
Strategy believes a low dollar
environment is likely to keep
driving gains for domestic equity
sectors that have outperformed
thus far in 2011, and views
exchange traded funds that own
American Depositary Receipts of
shares in companies in foreign,
developed world economies as a
good way to play a the dollar’s
weakness.
Cyclical sectors with large
global revenue footprints have
been the leaders of the domestic
equity market so far this year
and are likely to stay ahead of
the pack in the coming months,
according to S&P Equity
Strategy. Those sectors include
materials, information technolo-
gy, industrials, and energy, most
of which are also benefiting from
higher commodity prices.
“Large cap stocks, which have
been in the cat-bird seat benefit-
ing from a high percentage of
non-U.S. earnings, large cash
positions, and an ability to raise
investor-friendly dividends, will
likely continue to outperform,
with late economic-cycle sectors
doing the best,” says Stephen
Biggar, global director of S&P
equity research.
Those sectors maximize lever-
age to strong emerging-market
demand and dollar weakness and,
as a result, are enjoying the
biggest positive first-quarter earn-
ings-per-share growth revisions.
They are also expected to chalk
up the largest year-over-year
earnings gains, according to S&P
Equity Strategy.
On the flip side, other domestic
sectors have seen their profit out-
STANDARD & POOR’S THE OUTLOOK MAY 11, 2011 5
ETF
STRATEGIES
Isabelle Sender
S&P Editorial
looks barely budge while some tional (global ex-US) markets for
have seen a downward revision, which S&P has an “Overweight”
namely the consumer discre- recommendation, most of which
tionary, financials, telecommuni- tracking indices of large-cap,
cations, and utilities sectors. In developed world stocks. Two of
addition, despite a large global those funds stand out for their
presence, positive earnings revi- combination of strong 1-year
sions for consumer staples com- performance, high yield, and low
panies have been tempered by ris- annual expense ratio.
ing input costs. The SPDR DJ Euro Stoxx 50
S&P International Equity ETF, which invests in some of the
Strategist Alec Young believes 50 largest European companies,
that one of the best ways to play has the strongest 12-month
dollar weakness is to invest in a return (23.6%) among interna-
basket of foreign stocks, espe- tional ETFs with an Overweight
cially in developed markets, such rank, as well as one of the five
as Europe. highest yields and five lowest
“When U.S. investors buy annual cost. Its top three hold-
American depositary receipts ings as of May 3rd were French
(ADRs), or foreign equity oil supermajor Total (TOT 60
exchange-traded funds (ETFs), ★★★★), German industrial con-
their returns are boosted when glomerate Siemens (SI 138 NR),
overseas currencies rise against and Spanish telecom giant
the U.S. dollar,” Young explains. Telefonica (TEF 25 ★★★★).
As the greenback declined, The Vanguard FTSE All World
developed international equities Ex-US ETF is more diversified,
enjoyed a major currency tailwind, with more than 2300 individual
rising by 8.4% in U.S. dollars for holdings. Its 1-year return of
the year through April 29 com- 19.34% ranks sixth among inter-
pared to a much smaller 1.8% national ETFs ranked
gain in local currency terms. Overweight, and its annual
Meanwhile, emerging-market expenses are among the lowest of
equities enjoyed a much smaller similar funds. Its top three hold-
foreign-currency tailwind of only ings as of March 31 were global
3.7%, rising 4.6% in U.S. dollar mining and resources company
vs. 0.9% in local currency terms. BHP-Billton (BHP 94 NR), Royal
There are currently a dozen or Dutch Shell (RDS.A 73 ★★★),
so ETFs that invest in interna- and Nestle (NSRGY 62 NR). ■
POSITIVE POTENTIAL IMPLICATIONS
S&P *TOTAL RETURN CURRENT EXPENSE
FUND NAME / TICKER RANKING YTD 1-YEAR 3-YEAR 5-YEAR PRICE RATIO
SPDR DJ Euro Stoxx 50 ETF / FEZ MW 14.6 28.7 -7.4 0.3 43 0.29
Vanguard FTSE All-World ex-US ETF / VEU OW 4.4 23.1 -2.7 NA 51 0.22
Data through 5/5/11. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not
reflect the effect of sales charges. OW-Overweight. NA-Not available. Sources: S&P MarketScope Advisor.
6 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011
The Weak Dollar: Sector by Sector
Who wins, who loses in a weak dollar environment.
The weakness of the U.S. dollar has
raised concern about the health of the
U.S. economy and the potentially infla-
tionary consequences of flooding the
market with billions of U.S. dollars to
keep interest rates low. It has also
served to boost revenue for companies
that derive a significant portion of
their revenue from overseas markets,
since a weak dollar magnifies the value
of sales earned in a stronger currency.
A further decline in the value of the
U.S. dollar against key trading part-
ners would benefit some stocks and
sectors while hurting others, S&P
Equity Research believes. Oil produc-
ers and service companies would ben-
efit, for example, while refiners might
suffer. Apparel retailers could take a
hit, but a weak dollar would proba-
bly be a net positive for consumer
staples. Export oriented chemicals,
industrials, and technology companies
might gain, as would gold miners.
“A depreciating dollar is normally
associated with rising oil prices,”
says Michael Kay, the S&P equity
analyst who follows integrated oil
companies. “In turn, rising oil prices
can be a catalyst for integrated oils
and the exploration and production
companies, which are leveraged to
crude prices. The risk, of course, is
oil prices rising so far that they
choke off demand.” So far, that has
not been the case, he says, and his
fundamental outlook for the inte-
grated oil and gas industry for the
next 12 months is positive.
Oil services companies benefit as a
weakening dollar drives up long-
term expectations for high crude
prices, since it is those expectations
that give exploration and production
companies the confidence to start
new, capital-intensive projects.
“Even a modest reversal in the dol-
lar, which would suggest a downtick
in oil prices, would not change senti-
ment,” says Stewart Glickman, S&P’s
Beth Piskora
S&P Editorial
head of energy equity analysis. “Oil neutral outlook for apparel retailers.
prices would have to collapse, per- For consumer staples companies,
haps down to the $65-70 per barrel many of which garner significant rev-
level, for upstream companies to start enues overseas, it’s a more complicat-
reconsidering some of their more ed story. Profits from overseas sales
expensive projects, such as drilling in may rise, says Tom Graves, S&P’s
ultra-deepwater.” head of consumer staples, but some
U.S.-based oil refiners that do not companies already have currency
have their own production will have hedges in place, and a corresponding
to spend more to buy imported rise in oil prices may drive up a wide
crude oil if the dollar weakens fur- range of input costs, he says. “Putting
ther, says S&P energy equity analyst all the variables together, we view a
Tanjila Shafi. That tends to narrow weaker dollar as a net positive for
profit margins and weaken demand U.S.-based multinational consumer
as the costs are passed on to con- staples companies,” Graves says.
sumers in the form of higher retail Exports are a big business for
gasoline prices and other refined chemicals, industrial, and technology
products. companies, who would gain from
“The concern here is what happens further dollar weakness. “We think
if retail prices rise so far as to choke multinational technology companies
off demand,” she says. “To the have been benefiting from a weak
extent that a rising dollar signals an dollar,” says Scott Kessler, S&P’s
improving economy and improving head of technology equity research.
demand, refiners would benefit from “Their non-U.S. customers have
a stronger, not a weaker, dollar.” been able to more easily afford and
As consumers face more “pain at spend on offerings, and tax rates on
the pump,” they may cut back on related profits tend to be lower.”
spending in other areas. Some retailers Lastly, a persistent decline in the
are already feeling the effect in their dollar would boost gold and gold
same-store sales statistics, says Marie stocks, according to Leo Larkin,
Driscoll, S&P’s head of consumer dis- S&P’s metals equity analyst. “Steel
cretionary-retail equity analysis. S&P’s companies would also benefit,
fundamental outlook for apparel because a lower dollar would make
retailer stocks is neutral. Driscoll sees steel imports more expensive and
only a modest 3%-4% rise in sales for enable U.S. steel companies to gain
specialty retailers this year and has a share against foreign competition.” ■
US DOLLAR PERFORMANCE VS. A BASKET OF SIX MAJOR CURRENCIES
95
90
85
80
75
70
May ‘10
Jun ’10
Jul ‘10
Aug ’10
Sept ‘10
Oct ’10
Nov ‘10
Dec ’10
Jan ‘11
Feb’11
Mar ‘11
Apr ’11
May ‘11
Source: S&P ER, Bloomberg.

Nordstrom Gains from Online, Discount Stores
Nordstrom Rack, online store bring upscale retailer new customers.
We see fashion retailer Nordstrom
benefiting from improved consumer
confidence and a corresponding
increase in discretionary spending by
its higher-income customers. We also
think the company is successfully
meeting the needs of value-seeking
shoppers through expansion in the
off-price retail channel. Nordstrom’s
valuation is compelling; based on
our 12-month target price of $57,
the shares have implied potential
appreciation of about 20% from
recent levels.
Nordstrom has a multi-channel
retail strategy with 116 full-line
stores, Nordstrom Direct
(www.nordstrom.com), and 91 off-
price Nordstrom Rack stores as of
April 8, 2011. With Nordstrom’s
emphasis on high-quality merchan-
dise and customer service, we believe
it is increasing its “wallet share”
among affluent baby boomers whom
we consider to be its core customers.
We also think it is attracting younger
customers through a broader offer-
ing of contemporary fashions, an
enhanced online shopping experi-
ence, and investments in technology
such as the recent addition of in-
store WiFi access and mobile check
out now in testing.
As part of its efforts to improve
the online customer shopping experi-
ence, Nordstrom acquired
HauteLook, Inc., a leader in
the online private sales mar-
ketplace, for $180 million in
company stock in March
2011. Meanwhile,
Nordstrom is using the
Nordstrom Rack business to
expand its presence in exist-
ing markets and to enter
new markets (e.g., Delaware
in April 2011). We believe
there is limited overlap
between Nordstrom and
Rack customers.
STANDARD & POOR’S THE OUTLOOK MAY 11, 2011
While Nordstrom has been nega-
tively impacted in past years by the
downturn in the U.S. economy,
channel diversification has proved to
be a plus for the company, as the
weak performance from Nordstrom’s
full-line stores was partially offset by
relative strength in Nordstrom
Direct and the Rack stores.
By delivering the merchandise its
customers want, however they want
to shop, and at the prices they are
willing to pay, we expect the compa-
ny to sustain its positive same-store
sales momentum, maintain above-
peer margins, and capture market
share in its fiscal 2012 year which
began on January 30. We see
Nordstrom’s retail sales increasing by
9% in fiscal 2012 to $10.1 billion,
supported by 5% growth in total
same-store sales and new store open-
ings. We expect the company to
maintain positive momentum in its
Nordstrom and Rack businesses by
focusing on its most productive
brands, by flowing receipts more fre-
quently in-season to create a sense of
newness for shoppers, and by making
further improvements to the customer
shopping experience.
We look for
about a
4% gain
in retail
7
Jason Asaeda
S&P Equity Analyst
selling square footage in fiscal 2012,
based on Nordstrom’s plan to open
three new Nordstrom full-line stores
and 17 new Rack stores, and to relo-
cate two Rack stores. We expect
credit card revenue growth to mod-
erate as improving economic condi-
tions support a recovery in customer
payment rates. All told, we see rev-
enue climbing 8% to $10.5 billion.
We project a flat gross margin rate
in fiscal 2012. We expect close align-
ment of inventory with sales trends to
support full-price selling. However,
occupancy costs will be higher due to
new stores. The rapidly growing Rack
business also has a lower gross mar-
gin rate than the Nordstrom business.
While Nordstrom plans to increase
technology and marketing spending
to improve the customer shopping
experience, we expect operating mar-
gins to expand to 8.6% in fiscal 2012
from 7.8% in fiscal 2011, supported
by cost controls, expense leverage off
projected same-store sales growth,
and improvement in credit trends.
Assuming no share activity under the
company’s existing $411 million
repurchase authorization, we estimate
earnings per share of $3.15 in fiscal
2012, versus $2.75 in fiscal 2011.
Over the past 10 years,
Nordstrom has traded in a
forward price/earnings ratio of
6.4 to 22.7 times earnings.
Given our view that the com-
pany is capturing market share
through superior multi-
channel merchandising and
customer service, we think the
shares deserve to trade at the
higher end of that range, as
well as at premium to the 15.6
peer group median. Applying
a forward P/E multiple of 18
our fiscal 2012 earnings per
share estimate of $3.15, we
arrive at our 12 month target
price of $57. ■
8 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011

Supermajor Oils See Profit Surge Art Epstein

S&P Editorial

High oil prices drive strong gains in first-quarter earnings.

First-quarter earnings for several of largest oil and gas companies, saw reporting a first-quarter earnings
the “supermajor” oil companies its profits balloon 69% to $10.65 gain of 36% to 46.21 billion. Kay
are in, and the high price of oil is billion in the first quarter, or $2.14 raised his estimates and target price
generating super-sized profits. Over per share. In response, S&P equity for Chevron as well and kept his
the past year alone, the price of oil analyst Michael Kay raised his full “Strong Buy” recommendation on
has jumped more than 30% and year earnings estimate by 24% to the shares. Risks to the target price
now stands well above $100 a bar- $8.75 per share, and his 2012 esti- and recommendation include weaker
rel. Comparisons are being drawn mate by 25% to $9.70 per share. economic, industry, and operating
with mid 2008, when oil hit $147 He also raised his target price for conditions. In February, Chevron
a barrel. shares in ExxonMobil to $103, cit- lost a court case in Ecuador and was
According to the U.S. Energy ing “upward pressure on prices ordered to pay damages of about
Information Administration (EIA), and volume as catalysts.” Risks to $8.6 billion. The company has
the global economic recovery is the recommendation and target appealed what it calls an “illegiti-
boosting gasoline and diesel fuel price include deterioration in eco- mate” decision and countersued in
consumption, which says crude oil nomic, industry, and operating New York. Kay sees little near-term
and liquid fuels consumption rose conditions, such as difficulty impact since the company has no
by an estimated 2.3 million barrels replacing reserves or increased operations there.
per day (bbls/d) in 2010 to a production costs. Profits of French oil giant Total
record-high 86.7 million bbls/d. First-quarter earnings for lagged behind the above companies,
EIA expects world liquid fuels con- Netherlands-based Royal Dutch but were still a hefty $4.2 billion,
sumption will rise by another 1.5 Shell jumped 41% to $6.93 billion 34% above the prior-year period on
million bbls/d in 2011 and an addi- $2.04 per American Depository rising hydrocarbon prices, accord-
tional 1.6 million bbls/d again in share, above Kay’s estimate. Kay ing to the company. “Growing
2012. EIA sees oil markets tighten- raised his estimates for full year geopolitical tensions and the after-
ing as rising world oil demand out- earnings in 2011 and 2012 as well as math of the earthquake in Japan
paces supply growth from oil pro- his target price. He kept his “Hold” will shift the balance of the global
ducing countries outside of the recommendation on the shares, how- energy markets,” Total’s Chairman
Organization of the Petroleum ever, because the company has rela- and CEO Christophe de Margerie
Exporting Countries (OPEC). tively large exposure to natural gas said in the earnings release. “In the
Political protests in Northern and “challenges await as it is in the face of these new challenges, Total
Africa and the Middle East, midst of an $8B restructuring to sell confirms its strategy of investing to
increased scarcity of worldwide oil 15% of refining capacity in Africa increase its production to better
supplies, and rising U.S. refining and the European Union.” Risks to respond to changes in energy
costs all helped push gasoline prices the recommendation include a pro- demand and in the energy mix.”
higher, says Standard & Poor’s longed global recession, geopolitical Kay also raised his 2011 earnings
Equity Research Services (ERS), con- risks, inflation, lower crude oil per share estimate for Total, and
tributing to the huge profits for prices, operational problems, and/or lifted his target price by $4 to $69.
supermajor oil companies. acts of terrorism. He has a “buy” recommendation
ExxonMobil, one of the world’s Chevron followed closely behind, on the stock. ■

POSITIVE POTENTIAL IMPLICATIONS

12-MONTH
‡QUALITY CURRENT TARGET †P/E YIELD
COMPANY / TICKER ‡STARS RANKING *RISK STYLE PRICE PRICE RATIO (%)

• Chevron / CVX 5 A Low Blend 103 128 7.8 3.0

• ExxonMobil / XOM 5 A+ Low Blend 83 103 9.5 2.3
Royal Dutch Shell / RDS.A 3 NR Low Foreign 73 83 7.4 3.9
Total / TOT 4 NR Low Foreign 60 69 8.1 4.4
• Master List issue. *Based on our analysts’ assessment of qualitative factors, including financial strength, potential share vol atility, competitive position, industry cyclicality, regulatory/legal issues, and
other factors. Please note that all investments carry risks. ‡See definitions on page 2. †Based on S&P estimated fiscal 2011 ea rnings. Source: S&P Equity Research.
 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011 9

Marcellus Shale Gas Keeps Prices Low Christopher Muir

and Michael Kay
S&P Equity Analysts
Natural gas producers, utilities benefit, while power producers suffer.

Natural gas production from the to 25 to 30 Bcfe in 2011, from 7.2 Pennsylvania’s Marcellus Shale terri-
Marcellus Shale — a roughly 95,000 Bcfe in 2010. NFG’s gas transporta- tory, will allow the company to con-
square mile area extending from tion and storage business is likely to nect gathering pipelines to UGI’s
West Virginia through Ohio into benefit from opportunities to build utility mains and subsequently inter-
New York — is growing rapidly, natural gas gathering pipelines, state pipelines. UGI is teaming up
bringing a large new source of sup- expand existing pipelines, and with NiSource to build a pipeline to
ply onto the market and helping to expand compression capabilities. As provide Marcellus Shale producers in
keep gas prices low. This is having a of November 2010, NFG planned to Pennsylvania better access to high-
potent impact on natural gas pro- spend close to $500 million on such value northeastern markets. UGI
ducers and utilities, as well as inde- projects through 2013. plans to spend $300 million on
pendent power producers that burn NiSource owns mineral rights in Marcellus shale development by
natural gas to generate electricity. the Marcellus shale and is leasing 2013, and we expect additional proj-
Standard & Poor’s Equity Research those rights to exploration and pro- ects to be announced.
believes that gas wells in the duction companies. NiSource also On the flip side, we believe that
Marcellus shale are delivering strong plans to spend $2 billion through high natural gas storage levels and
returns to producers, keeping activity 2014 on gas gathering, transporta- new production coming from the
levels high despite the weak price tion, storage and other projects. Marcellus Shale will keep natural gas
environment. Gas utilities and mid- These projects may help position the prices from rising dramatically in the
stream storage companies in the area company to raise its dividend, which near future. Independent power pro-
are benefitting from the new supply we project will not occur until 2016. ducers (IPPs) have been struggling to
as well, but independent power pro- EQT Corp has 12.2 Tcfe (Trillion) deal with relatively low power prices
ducers are being hurt as low natural in proved, probable, and possible during times of peak usage. When
gas prices hold down electricity reserves in 520,000 acres in the fuel costs decline, power market
prices and hurt their revenue. Marcellus shale, accounting for 58% prices also decline, forcing power
According to the Pennsylvania of the company’s total. Its midstream producers sell their uncontracted
Department of Environmental business is adding gas gathering capacity at lower prices. S&P sees
Protection, total Marcellus Shale pipelines and is expanding its natural gas prices staying below $5
natural gas production in the last six Equitrans pipeline in West Virginia. per MMcf through the end of 2012.
months of 2010 was 256.4 billion EQT’s $970 million of 2011 planned In addition to the positive impact
cubic feet (Bcf), compared with capital spending is focused mostly on on specific gas utilities listed above,
194.6 Bcf in the full year ended June exploration and production (about we think relatively low gas prices
2010. $700 million), but also targets a could have a negative affect on AES
National Fuel Gas, through its significant amount of spending on its (AES 13 ★★★★), TransAlta (TAC 22
Seneca Resources subsidiary, midstream business (about $235 ★★★), GenOn (GEN 4 ★★★★),
increased its daily production of million). NRG Energy (NRG 24 ★★★), and
Marcellus shale gas from nothing at One utility we see benefitting from Dynegy (DYN 6 ★). We think
the beginning of October 2009, to increased Marcellus shale develop- Dynegy may even violate debt
53 million cubic feet equivalent ment is UGI Holdings. We believe covenants due to lower earning
(MMcfe) by November 2010. Seneca UGI’s service area, located in the power caused in part by weak gas
plans to increase annual production northern and eastern portions of and power prices. ■

POSITIVE POTENTIAL IMPLICATIONS

12-MONTH
‡QUALITY CURRENT TARGET †P/E YIELD
COMPANY / TICKER ‡STARS RANKING *RISK STYLE PRICE PRICE RATIO (%)

EQT / EQT 3 B+ Medium Growth 52 53 27.4 1.7

NiSource / NI 2 B Low Value 20 17 15.5 4.6
National Fuel Gas / NFG 3 B+ Low Blend 72 72 27.1 1.9
UGI / UGI 5 A Medium Blend 32 37 13.7 3.3
*Based on our analysts’ assessment of qualitative factors, including financial strength, potential share volatility , competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please
note that all investments carry risks. ‡See definitions on page 2. †Based on S&P estimated fiscal 2011 earnings. Source: S&P Eq uity Research.
10 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011

Admirable Stocks? Beth Piskora

S&P Editorial

Forbes published its list of the country’s “most-admired” companies, and S&P
Equity Research cross-referenced the list against its STARS recommendations.

Amazon may be the “most admired”

company in the country, according POSITIVE POTENTIAL IMPLICATIONS
12-MONTH
to Forbes magazine, but that doesn’t ‡QUALITY CURRENT TARGET †P/E YIELD
mean the stock is worth buying at its COMPANY / TICKER ‡STARS RANKING *RISK STYLE PRICE PRICE RATIO (%)

current price, according to Standard Caterpillar / CAT 4 A+ Medium Blend 112 142 15.8 1.6
& Poor’s Equity Research. Disney (Walt) / DIS 4 A Medium Growth 43 50 16.1 0.9
Forbes recently published its FedEx / FDX 5 B+ Low Growth 95 113 19.1 0.5
annual ranking of the country’s General Mills / GIS 5 A Low Blend 38 41 15.4 2.9
“most admired” companies, based Google / GOOG 5 NR High Growth 540 700 18.2 Nil
on a poll of more than 30,000 Kohl’s / KSS 4 B+ Medium Growth 53 61 12.2 1.9
consumers who were asked about • United Parcel / UPS 4 B+ Low Growth 74 92 17.0 2.8
companies for which they had Whirlpool / WHR 4 B+ Medium Blend 84 105 37.5 2.4
trust, esteem, admiration, and ● Master List issue. *Based on our analysts' assessment of qualitative factors, including financial strength, potential share vol atility,
good feeling. Amazon, Kraft Foods, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. ‡See
definitions on page 2. †Based on S&P estimated fiscal 2011 earnings. Source: S&P Equity Research.
and Johnson & Johnson top the
Forbes list.
However, S&P Equity Research includes analysis of both a compa- while 1-STARS stocks underper-
has “hold” rankings on all three, ny’s fundamentals and its valuation formed by 608 basis points. The
due to a view they are appropriately to determine whether the shares long-term performance trends also
valued at their current stock prices. should be bought, held or sold. It is bear out S&P’s stockpicking
In fact, the top five on Forbes list are quite possible for a company to have prowess. From December 31, 1986,
ranked “hold” by S&P Equity outstanding fundamental traits, yet when the STARS system was first
Research, as are six of the top 10 have its shares be fairly priced or launched, to March 31, 2011, 5-
and 12 of the top 20. overpriced,” says Tom Smith, STARS stocks posted an average
Of the top 20 in the Forbes list, Associate Director of U.S. Equity annual gain of 13.5%, outperform-
S&P has “buy” or “strong buy” Research at S&P. ing the S&P 500’s 7.3%. In the same
rankings on eight. They are listed in This year through the end of April, timeframe, 1-STARS stocks posted
the table. S&P’s 5-STARS stocks outperformed an average annual gain of only
“Our STARS ranking methodology the S&P 500 by 222 basis points, 0.5%. ■

Taking a Pit Stop (Continued from cover)

S&P’s Chief Investment Strategist
Sam Stovall sees investors now
looking past the strength of first
quarter earnings reports to an econ-
omy laboring under “the dampen-
ing effects of higher oil prices on
consumer spending, the winding
down of stimulus measures, the lack
of progress on the U.S. deficit, as
well as increasing global inflation
and the rate-tightening responses by
central banks.”
So far, investors have yet to feel economy have served to undercut
much pain from the bad news, and it expectations of tightening commodi-
may be fleeting: job growth – the all ty markets, sending prices for oil, as
important indicator – was strong in well as copper, coffee, corn and
April, even though the unemploy- cocoa, into swift if perhaps tempo-
ment rate ticked up to 9%. S&P rary retreat. Balancing the desire for
Equity Strategist Alec Young says stronger economic growth with the
he’s still “moderately bullish” on corresponding increase in demand
stocks, in part because stocks aren’t for raw materials will be a major
lavishly valued. challenge for policy makers through-
This may even be a self correcting out the rest of 2011. Maybe a pit
process. Signs of weakness in U.S. stop will help. ■
 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011 11

High-Quality Capital Appreciation Portfolio

12/31/2010 — 4/29/2011
Base Currency: US Dollar
To enter the High-Quality Capital Appreciation time, for reasons that can include a downgrade in the
Portfolio, a stock must have an S&P Quality Ranking S&P STARS and S&P Quality Ranking of the consti-
of A- or better, which indicates an above-average 10- tuents or other fundamental factors.
year history of earnings and dividend growth and stabil- The High-Quality Capital Appreciation Portfolio
ity. A recent S&P study showed that over the long term, slightly underperformed its benchmark from the begin-
stocks with the best S&P Quality Rankings outperform ning of the year through April 29, rising 8.1% vs. an
lower quality stocks on a risk-adjusted basis. Stocks 8.4% advance in the S&P 500. The data we have pro-
must have a four- or five-STARS ranking to enter this vided show which stocks contributed to, or detracted
portfolio. S&P’s Senior Portfolio Group may replace from, the portfolio’s performance year-to-date through
any stock in the portfolio with another stock at any April 29. ■

CURRENT HIGH-QUALITY CAPITAL APPRECIATION PORTFOLIO

12-MONTH
‡QUALITY CURRENT TARGET †P/E YIELD
COMPANY / TICKER ‡STARS RANKING *RISK STYLE PRICE PRICE RATIO (%)

Apache / APA 5 A- High Blend 127 160 11.4 0.5

C.H. Robinson Worldwide / CHRW 4 A+ Low Growth 79 95 29.4 1.5
Church & Dwight / CHD 5 A+ Low Growth 79 82 18.0 1.7
CVS Caremark / CVS 5 A+ Medium Blend 37 42 13.2 1.4
Express Scripts / ESRX 5 A- Medium Growth 57 65 17.5 Nil
Fastenal / FAST 5 A Medium Growth 66 85 28.1 1.4
Hudson City Bancorp / HCBK 4 A Low Blend 10 12 12.7 3.2
Int’l Business Machines / IBM 4 A+ Medium Growth 168 196 12.7 1.8
McKesson / MCK 5 A- Medium Blend 83 96 13.4 0.9
Mylan / MYL 5 A- Medium Growth 24 29 12.0 Nil
Nike / NKE 4 A+ Medium Growth 83 99 19.8 1.5
Oracle / ORCL 5 A- Medium Growth 35 39 16.8 0.7
United Technologies / UTX 4 A+ Low Growth 89 96 16.6 2.2
VF / VFC 5 A Medium Blend 101 120 14.0 2.5
Wal-Mart Stores / WMT 5 A+ Low Blend 55 65 12.3 2.7
*Based on our analysts’ assessment of qualitative factors, including financial strength, potential share volatility , competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please
note that all investments carry risks. †Price/earnings ratios are based on Standard & Poor's estimated fiscal 2011 per -share earnings. ‡See definitions on page 2. Source: S&P Equity Research.

LEADERS LAGGARDS
COMPANY NAME YTD RETURN (%) COMPANY NAME YTD RETURN (%)
Church & Dwight 19.50 C.H. Robinson Worldwide -0.01
McKesson 17.95 Procter & Gamble** -0.51
Mylan 17.94 Nike -3.63
VF 16.69 Hudson City Bancorp -25.20
Int’l Business Machines 16.23
Oracle 14.89
United Technologies 13.80
Fastenal
Apache
CVS Caremark
11.98
4.55
4.17
The Outlook
Express Scripts 3.31 Intelligence for the Individual Investor
Wal-Mart Stores 1.95
Occidental Petroleum* 0.46
The YTD Return column represents the performance for the period of time the security was in the portfolio, so if the security w as not in the portfolio for the full YTD period, it’ s the performance of the secu-
rity from when it was added to the portfolio to 4/29/11. *Replaced on January 18. **Replaced on April 18.
12 STANDARD & POOR’S THE OUTLOOK MAY 11, 2011

Top Ten Portfolio

S&P launched this focused list on December 31, 2001.

A dynamic, actively managed portfo- S&P’s Senior Portfolio Group, a sub- and consumer staples sectors, and
lio, the S&P Top Ten Portfolio com- committee of our Investment Policy one telecommunication services
prises stocks that S&P Equity Committee, selects the stocks. The stock.
Research believes to be well posi- intention of the portfolio is to be The best-performing stock in the
tioned for solid capital appreciation fairly balanced among economic portfolio this year through April 29
over the next 12 months. sectors. was Domino’s Pizza (+16.4%). The
Stocks must have a five-STARS worst-performing stock over the
ranking to enter the portfolio. If the same period was Akamai
ranking drops below four STARS, The goal of the Top Ten Technologies (-13.9%). On April 21,
the stock will be removed. In addi- Portfolio is to outperform the 2011, Akamai replaced Teva
tion, any stock in the portfolio may Pharmaceutical in the portfolio.
S&P 500 index on a capital
be replaced with a five-STARS stock From its inception through April
at any time. With the exception of appreciation basis. 29, 2011, the portfolio rose 2.2% on
Akamai Technologies, Applied an annualized basis vs. a 1.9% gain
Materials, Domino’s Pizza, and for the S&P 500.
International Business Machines, the The portfolio currently has seven This year through April 29, the
other stocks are currently ranked large-cap stocks, one mid-cap and portfolio rose 3.0%, while the
five STARS. two small-cap issues. It has three benchmark climbed 8.4%.
The goal of the Top Ten Portfolio stocks from the information technol- Readers should note that past per-
is to outperform the S&P 500 index ogy sector; two issues each from the formance is no guarantee of future
on a capital appreciation basis. consumer discretionary, industrials, results. ■

TOP TEN PORTFOLIO

12-MONTH
‡QUALITY †P/E CURRENT TARGET
COMPANY / TICKER RANKING *RISK STYLE RATIO PRICE PRICE FUNDAMENTAL SNAPSHOT
Akamai Technologies / AKAM B- High Growth 33.3 35 42 Leader in Internet content delivery services
American Tower / AMT B High Blend 55.8 53 70 Market leader in wireless tower industry
Applied Materials / AMAT B- Medium Blend 9.9 15 20 We see rising flash memory orders and China-based solar sales
Coach / COH B+ Medium Growth 20.3 59 67 Coach is the number one luxury accessories brand in the U.S.
• Coca-Cola / KO A+ Low Growth 17.0 67 75 We expect sales growth of more than 20% in 2011.
• Domino’s Pizza / DPZ NR Medium Blend 13.7 21 24 We expect strong customer traffic trends for this pizza delivery company
General Mills / GIS A Low Blend 15.4 38 41 We expect more at-home eating by consumers
• Int’l Business Machines / IBM A+ Medium Growth 12.7 168 196 Should benefit from revenue growth in emerging markets
• Kelly Services / KELYA B- Medium Value 17.3 19 29 We see its primary nonprofessional client market leading the labor recovery
USG / USG C Medium Growth NM 15 23 We expect sales to start a modest revival in the near -term
● Master List issue. *Based on our analysts’ assessment of qualitative factors, including financial strength, potential share vol atility, competitive position, industry cyclicality, regulatory/legal

issues, and other factors. Please note that all investments carry risks. †Based on S&P estimated fiscal 2011 earnings. ‡See def initions on page 2. NM-Not meaningful. Source: S&P Equity
Research.

Performance calculations do not take into account reinvestment of dividends, capital gains taxes or brokerage commissions and f ees. If the foregoing had been factored into the portfolio’s investment
performance, it would have been lower. This performance calculation also does not take into account timing differences between the portfolio selections and purchases made based on those selection
by actual investors. Over certain periods, the portfolio incurred losses and over time the portfolio is expected to continue to pose a risk of negative investment returns. Because the portfolio has a high
turnover rate, it is best suited for tax-deferred accounts such as IRAs and is less suited for other accounts. Investors should seek financial advice before investing based on the portfolio. This portfolio
does not address the specific investment objectives, financial situation, and particular needs of any person. Stocks in the por tfolio will not be suitable for all investors. Past performance is
no guarantee of future results.