We continue to like high yield, low valuation and low-beta stocks (page 1 of 3)

US Equities

1Q results of the Standard & Poor's 500 index have just passed. It was the best profit growth since the 3Q of 2001, an average of 13.2%. But looks can be deceiving.

Over half the growth came from oil companies when crude prices went as high as $40 during the quarter. Excluding the energy sector, the average increase of earnings of the S&P500 was just 6.3%. This figure is even lower than the average profit growth of 7% for the index since the 1950.

With oil prices down to $25 per barrel, the market hardly looks like a bargain at 17x expected 2003 earnings. We believe the fair value for the market is around 15x. Therefore, we advice caution, and use rallies to take profits.

We continue to like high yield, low valuation and low-beta stocks:

• Altria Group Inc. (MO, $31.70, CSFB: Neutral)
• Northrop Grumman Corp. (NOC, $88.80, CSFB: Outperform)
• Johnson Controls Inc. (JCI, $83.82, CSFB: Not rated)

Continue with our theme play. The Federal Communications Commission (FCC) will vote on what would be the most significant change in the rules governing media ownership. This would expand the reach of the nation's largest broadcast and newspaper companies. The following are companies that we think would benefit from the up-coming changes:

• Clear Channel Communications (CCU, $39.60, CSFB: Outperform)
• Walt Disney (DIS, $18.66, CSFB: Outperform))
• Viacom (VIA/B, $44.57, CSFB: Outperform)

General Motors Corp.'s (GM, $35.97, CSFB: Restricted) assembly plant in Oklahoma City has been shut down temporarily. The plant had been running on two shifts with daily output of 600 units. According to management, the company is currently assessing damages and has not yet determined when the plant would be re-opened. However, with current inventories above normal for vehicles assembled in Oklahoma City, sales should not be affected dramatically in the short-term. However, if the plant remains closed for a longer period, the company would face shortages, which could have a significant impact on an already weak business. It is unclear whether the company's coverage includes only repair costs of the plant or any portion of the lost profitability on the units of both. Morgan Stanley estimates GM could be losing roughly $3.6mm per day, assuming a variable profit of $6,000 per unit produced at Oklahoma City. Therefore, we would not recommend investing in GM for the moment.

JP Morgan Chase & Co.'s (JPM, $30.08, CSFB: Outperform) commercial credit portfolio has been for several quarters a source of concern. Lately, the company has seen stabilization, and expects cost to be in line with the results reported in 1Q'03 (commercial charge-offs were $292 million, down 33% q-o-q). First, there have not been a lot of new credits deteriorating, and certain industries, such as telecom, are progressing and generating recoveries for lenders. Furthermore, the company has been actively looking to reduce the overall size of the portfolio. In 1Q'03, commercial credit exposure stood at $406 billion (18% non-investment grade), down from $413 million (20% non-investment grade) q-o-q. This is a good step for JPM in order to regain investors' confidence, however, despite this reduction; JPM still has a significant amount of risk from troubled industries such as telecom ($2.3 billion in criticized exposures), cable ($2.2 billion), and merchant energy ($1.4 billion, source: Putnam Lowell NBF). For investors having bought JPM stocks at lower prices, we recommend taking profit, because we believe stock price would remain under pressure in the short-term, due to profit taking on U.S.