** For disclosure purposes it is important to note that I currently hold positions in each of the stocks that I recommend in this article.

THE TOP PICKS:

A couple of no-brainers…

Pfizer (PFE) - Current Price: $39.85

Pfizer is not only home to such blockbuster drugs as Viagra, Lipitor, Zithromax, and Zoloft, but it has among the largest, if not the largest, drug pipeline in the industry. At a recent analyst meeting, Pfizer management reiterated that the company would deliver 20% earnings growth in 2002 and at least 15% growth in 2003 and 2004. At a recent price of $39.85, PFE is currently trading at about 25x 2002 earnings. Relative to its projected growth rate, Pfizer’s P/E is at the low end of its peer group. Management also stated that Pfizer would likely not face any patent expirations until 2006 or 2007. By comparison, competition from cheaper generics could lead to the loss of $4 billion in annual sales for Merck during 2002, as five of their aging drugs lose the last of their patent protection. If you want to invest in a pharmaceutical company (and you should given our aging population), PFE is the place to put your money.

Citigroup (C) - Current Price: $50.48

Citigroup, now the largest diversified financial services company in the world, has been one of the most consistent performers in its industry over the past decade. Yet at $50.48 per share, its stock trades at just over 15x 2002 earnings, or 1.0x its projected growth rate. The company’s sturdy chief, Sandy Weill, no doubt believes that Citigroup should be valued at least as highly as long-time rival American Express, which currently trades at a P/E of 18.7x, or 1.4x its projected growth rate. That would imply that Citigroup should be trading at a P/E of 21x 2002 earnings or $69 per share. Citigroup’s recent announcement that it will spin off its relatively slow growth property casualty insurance business in 2002 was a clear signal that Weill will do what it takes to secure that premium valuation.

Going against the grain…

Ford (F) - Current Price: $15.72

Given that virtually no analysts dare put an outright sell rating on a stock and 11 of the 16 major analysts who cover Ford currently rate it a “hold,” this is somewhat of a contrarion pick (all the more reason to love it). Having been beaten down by the economic recession and the Explorer tire problems encountered early in the year, Ford ended 2001 at $15.72 per share, off 50% from its 52-week high. It’s been nearly 5 years since the stock has traded this low. But, with the economy poised for a rebound later in 2002 and much of the blame for the tire problems having landed on the shoulders of Bridgestone/Firestone, the stage is set for shares of Ford to begin moving up in the coming months. And, as an added bonus, Ford will pay you a 3.76% dividend while you wait for the shares to bounce back.

Playing the ad rebound…

iVillage (IVIL) - Current Price: $1.75

This may be stating the obvious, but bear with me. Advertising supported media companies had a pretty rough 2001. Cash flow margins in the industry are typically fairly high (20%-40%), meaning a good portion of the revenue generated by ad pages in magazines and newspapers and spots on radio and television drops right to the bottom line. Thus, as media volume declines – as it did significantly in 2001- profits dry up. Of course, the opposite occurs when adverting volume picks up – as it likely will with the improving economy later in 2002.

Now, you can certainly play the ad rebound by investing in the more traditional media companies (i.e., Viacom, Gannett, Clear Channel), but I still believe there’s an opportunity to make some real money investing in the online media space. And, believe it or not, there’s actually an online media company out there that has solid management, a strong brand, dominates its respective market, has proven that it can generate cash, and, is currently trading at what is arguably a reasonable level for investment (no, not Yahoo!). I’m talking about iVillage.

iVillage is the leading operator of websites targeted towards women. Like many of its dot-com brethren, iVillage rocketed to stratospheric heights shortly after going public in 1999, only to see its valuation plummet more than 99% over the following two years. Despite its $1.75 stock price, things have been going very well for iVillage over the past year. In June of 2001, iVillage completed a merger with what had been its largest competitor, Women.com. This merger brought a valuable partner to the company, magazine publisher Hearst Corporation, who had been in a joint venture with Women.com. In conjunction with the merger, Hearst invested $20 million in iVillage and committed to purchase from iVillage production and advertising services in a range of approximately $15 - $21 million over a three-year period. Then, in October, CEO Doug McCormick, who came to iVillage last year after running the Lifetime cable network, made good on his bold promise to deliver breakeven cash flow by the third quarter of 2001 (it was actually slightly positive). The company also has a hidden gem in The Newborn Channel, a growing satellite television network that delivers ad-supported maternity programming in over 1,000 hospitals nationwide.

A quick valuation analysis:
iVillage is going to deliver roughly $70 million of revenues in 2001. The company should easily be able to grow that to $80-$85 million of revenue by 2003 (only 8.5% annual growth) and $10.5 million of EBITDA (assumes a 12.5% cash flow margin). Applying a conservative 12.5x multiple to 2003 EBITDA yields a Total Enterprise Value of $131 million. The company has no debt and $35 million of cash on its books, leading to a total Equity value of $166 million. With 54.5 million shares outstanding, this implies a per share price of $3.05, a 74% premium to where the stock is currently trading. Even at a 10x cash flow multiple, the implied price of $2.57 per share represents a still significant 47% premium over the current stock price. As a basis of comparison, Yahoo is currently trading at around 40x 2003 EBITDA.

One concern that I would like to point out is the highly concentrated advertising base that iVillage currently has. The company’s five largest advertisers accounted for roughly 35% of total revenues during 2001. Presumably, as the ad market picks up iVillage management will look to diversify their ad base.

A FEW OTHER PICKS:

They said no one would ever pay for cable and satellite television…

XM Satellite (XMSR) - Current Price: $18.00
Sirius Satellite (SIRI) - Current Price: $11.50

XM Satellite and Sirius Satellite are the two companies that have been licensed by the FCC to operate satellite-based radio systems in the United States. Both services offer subscribers 100 channels of audio programming via satellite, with a mix of music, news, sports, and talk radio. XM launched their service in September of 2001. Sirius is scheduled to launch in February of 2002. Both stocks have risen sharply over the past two months (XM to a greater extent) as positive buzz surrounding the successful launch of XM’s service has grown. These should be viewed as long term investments of at least 5 years. A small position in both is recommended since it is far too early to tell which of the two companies has the soundest long-term strategy and will execute it best. Sirius probably has the most room to move up in the short term and I’d pick up XM on any kind of dip.

A relatively safe bet hiding in the telecom wreck…

Amdocs Limited (DOX) - Current Price: $34.00

If you are looking for an investment in the telecom sector, this may be the way to go. Amdocs is a provider of software products and services to major communications companies in North America, Europe and the rest of the world. Its systems support a wide range of communications services including wireline, wireless, broadband, electronic and mobile commerce and Internet services. In addition, Amdocs provides a full range of directory sales and publishing systems to publishers of both traditional printed yellow page and white page directories and electronic Internet directories.

Who needs oil? An alternative energy play…

Hydrogenics Corporation (HYGS) - Current Price: $7.50

Hydrogenics develops and manufactures fuel cell systems for all major power markets - transportation, stationary, and portable power. Fuel cells generate electricity by converting the chemical energy from hydrogen and oxygen into electrical energy. In October of 2001, General Motors acquired 24% of HYGS in conjunction with the formation of a strategic alliance between the two companies to accelerate the development of fuel cell technology into global commercial markets.

Small business comes back strong in the economic recovery…

Staples (SPLS) - Current Price: $18.50

CEO Thomas Stemberg runs a tight ship at this office products distributor that has over 1,300 retail stores located in the United States, Canada, and Europe. The company’s Staples.com website has been performing above expectations for much of the past year and is expected to contribute to earnings growth going forward.