Income Security Recommendations
BondsOnline Advisor - July 2007
By Stephen Taub

The BondsOnline Advisor strives to present you with income investment insights from analysts throughout the United States. Bonds, preferred stocks, real estate investment trusts, or master limited partnerships can be a part of a successful income portfolio – and BondsOnline and PreferredsOnline provide the “Income Investor Tools” to keep you informed.

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Strategy/Citi Smith Barney

Citi recently raised its year-end 2007 targets for the Dow Jones Industrials to 14,400 and for the S&P 400 to 955, citing a larger-cap focus and recent market moves. This is up from 14,000 and 905, respectively.

The bank kept its S&P 500 target for 2007 at 1,600 and its Russell 2000 target at 888.

Citi is also bullish on the first half of 2008. By the midway point of that year, it expects the major indexes to rise by double-digit rates--the S&P to 1,725; the Dow Industrials to 15,500; and the Russell 2000 to 925.

However, it warned of a possible correction in the second half of 2008, due to lower corporate-profit margins “and the usual political uncertainty surrounding the US presidential election.”

At the same time, Citi warned that small-caps are entering a phase of underperformance versus large-caps. It cited slowing profits as well as “other catalysts,” such as a pickup in volatility, a rise in consumer delinquencies, and a likely widening of high-yield credit spreads. “Thus, although our multi-faceted approach to the Russell 2000 yields an average target of 952 (12% higher from current levels, similar to our large-cap expectations), we are haircutting that number to 925,” Citi added.

Strategy/Banc of America Securities

The bank recently raised its 12-month target price for the S&P 500 index to 1590, asserting that broad market earnings growth is likely to reaccelerate in 2008 after an economic soft landing. It expects large-cap stocks to continue and extend what the bank called their recent “catch-up” trend compared to small caps. “We believe that growth stocks can enjoy some expansion of P/E multiples atop earnings that are likely to hold up better as a continuing housing slowdown pressures consumer spending,” it added.

BofA’s 12-month target rose to 14,350 for the Dow Industrials and 2,800 for the Nasdaq Composite.

MLPs

Credit Suisse recently upgraded its rating on Atlas Pipeline Partners L.P. to outperform from neutral, citing, among other reasons, the recent acquisition of Anadarko Petroleum's interests in the Chaney Dell and Midkiff/Benedum natural gas gathering and processing systems for $1.85 billion, which the bank stresses increased its estimated value beyond the market’s current expectations.

Lehman said it lifted its price target on K-Sea Transportation Partners. K-Sea’s payout ratio is currently about 170%. K-Sea provides refined petroleum products marine transportation, distribution and logistics services in the U.S. domestic marine transportation business.

For complete coverage, including target prices, please see the current issue of Yield and Income Newsletter. PreferredsOnline subscribers receive this monthly newsletter as part of their subscription.

Utilities/Citi Smith Barney

The bank recently told investors that its integrated thesis is intact while defensive stocks look fully priced. “Selectivity still key to outperformance,” it stressed.

In general, the banking giant took down its target price for the overall group, reflecting a one year-forward average P/E of 15.6 times, which is roughly in line with the current average.

Among defensive stocks, however, Citi stresses that recent volatility has “stirred the pot” and created a good entry point for two names: PG&E Corp. and Wisconsin Energy, asserting they have “highly visible rate-base growth stories and the ability to show stable to rising earned ROEs despite the general risk of compressing returns.”

REITs/Bear Stearns

The investment bank recently reduced its rating on US Apartment REITs to Underweight, citing what it calls “moderating fundamentals.”

The bank explained that softening demand and increasing supply are leading to a lack of pricing power. It pointed out that occupancy declined in the first quarter of this year and rent growth slowed from 2006 levels.

Bear also downgraded the multi-family sub-sector to Underweight. It said valuations are too high, supported to some degree by M&A premiums.

This said, Bear still rates two of the REITs “Outperform.” For complete coverage, including target prices, please see the current issue of Yield and Income Newsletter. PreferredsOnline subscribers receive this monthly newsletter as part of their subscription.

Energy/Banc of America Securities

BofA recently upgraded one high-yielding energy company—FirstEnergy. It also reiterated its buy recommendation on another-- Xcel Energy--despite trimming its target price and earnings estimate.

BofA recently upgraded the shares of FirstEnergy to Buy from Neutral and lifted its target price to $73 from $68. It also asserted that earnings should increase materially, first in 2009—up 22% versus ’08—and then in 2011, up 24% versus ’10.

Pharmaceuticals/Banc of America Securities

The investment bank reiterated its overweight rating of the US pharmaceutical sector. It said it is focusing on high free cash flow yielding stocks that screen cheaply, have positive earnings momentum and are expected to reduce their SG&A expense ratios the most over the next four-years. Its analyst favors three companies she deems to have under-appreciated drug pipelines on her detailed product analysis: Schering-Plough, Eli Lilly and Wyeth. Only the latter two have attractive yields.

Closed-end Funds/Stifel Nicolaus

The specialty research house recently singled out a number of high-yielding closed-end funds that it currently recommends.

For example, it likes Lazard Global Total Return & Income Fund as its top pick for global exposure, especially given the ever weakening US dollar.

Stifel recommends two funds that primarily invest in preferred securities, convertible securities, and related instruments. The funds also invest in other debt instruments and common stocks acquired upon conversion of a convertible security.

“We believe the rapid share price weakness resulted from investors selling funds to acquire funds that pay monthly, selling funds trading in the secondary to purchase new issues and Treasury yield volatility,” the brokerage recently told clients. It also pointed out that both funds are trading at levels significantly below their peer group and historical averages. “We strongly believe the recent sell-off is overdone,” it added. For complete coverage, including target prices, please see the current issue of Yield and Income Newsletter. PreferredsOnline subscribers receive this monthly newsletter as part of their subscription.

Municipal Bonds/Citi Smith Barney

Citi pointed out that yields on intermediate maturities are up nearly 60 basis points from lows reached in early March. As a result, the slope of the yield curve has doubled from 40 basis points to nearly 80 basis points.

"We believe that the rebound in rates will ultimately prove to be self-limiting, with longer-maturity yields remaining in a trading range around current levels,” the investment bank said.

So, what should investors do? Citi said they should view the rebound in yield and slope as an opportunity to put cash and underinvested assets to work in longer intermediates, focusing on the 10- to 15-year maturity range. “Investors should continue to consider premium bonds for a portion of holdings,” it said.