Financial Watch

Financial Watch has compiled a list of 20 stocks we expect to outperform the market during the upcoming year. Our projected growth for the S&P 500 and Dow Jones Industrial Average are fairly modest at 5-10%, but every year presents opportunities to beat the market. This is the first year this list has been put together, so this is no record of solid performance or any guarentees as to the quality of our picks. Our firm is setting a goal of beating the market averages by 10% over the upcoming year including dividends. The portfolio was developed by using fundamental analysis and historical trends to predict future returns. The portfolio is entirely composed of large cap stocks with strong histories of delivering solid returns to investors. This is to minimize the risk of realizing large losses, but should also reduce the possibility of great returns.

2006 Stock Picks
3M
AIG
Allstate
Capital One

CDW
Deere (sell 11/21 @ 95.27)
Dow Chemical
FedEx
General Electric
Goldman Sachs
IBM
Intel (sell 10/17 @20.90)
Johnson & Johnson

Kohl’s (sell 7/31/06 @ $56.63)
L-3 Communications
Microsoft
Morgan Stanley (sell 12/18/06 @ $80.37)
Nike
Seagate (sell 1/27/06 @ $26.12)
Yellow Roadway
Bear Stearns (buy 10/16/06)
Qualcomm (buy 10/16/06)

Cisco (buy 10/16/06)
Google (buy 11/21/06)
Lehman Brothers (buy 12/18/06)

***Conflicts of Interest***
The author of this report presently holds positions in Microsoft, IBM, Qualcomm, Cisco, General Electric, and Dow Chemical.

1/27 SELL SEAGATE @ $26.12 (+30.67% since start of year)
Financial Watch recommends investors sell Seagate. The stock is up more than 30% in the last month after the company turned in a great 4th quarter. The stock has surpassed our targets and we believe it will be range bound for the rest of the year.

7/31 SELL KOHL’S @ $56.63 (+16.52% since start of year)
Financial Watch recommends investors sell Kohl’s. Stock has the potential to move higher, but underlying concerns about the health of the consumer sector could potentially hit hard at Kohl’s target customer base. Kohl’s price multiple is at the richer end for its sector meaning it could be hit particularly hard in any meaningful slowdown.

10/16 SELL INTEL @ $20.90 (-16.27% since start of year)
Intel is expected to report a solid 3rd quarter number tomorrow, but Financial Watch is concerned about the company’s outlook for next year. Tech sector is currently very strong, however, price war with AMD has permanently compressed Intel’s profit margins. We expect to see Intel’s 2007 numbers fall below current consensus estimates.

10/16 BUY BEAR STEARNS, QUALCOMM, and CISCO
Financial Watch expects tech and financials to outperform during the fourth quarter. Cisco and Qualcomm represent two of the best names in tech right now. Bear Stearns is known as a bond powerhouse, but its conservative valuation has room for multiple expansion. The addition of Bear Stearns, Qualcomm, and Cisco puts Financial Watch at our limit of 20 investments. Despite being underinvested during the recent rally, Financial Watch’s portfolio is returning slight more than the S&P 500 on the year.

11/21 SELL DEERE @$95.27 (+39.88% since start of year)
Great earnings report today, but the company warned about weakness next year as a result of the housing slowdown or collapse. Deere surpassed our price target following its move up today. It appears this run up is more of a result of a short squeeze than momentum that will move the stock higher. Financial Watch expects Deere to set a new range in the low to mid 90s going into next year.

11/21 BUY GOOGLE @509.65
Google’s move through the $500 mark sets the company up for further gains. Tech stocks typically are strong at this point in the cycle, but the price movement in the tech sector during the fourth quarter looks like a return to the late 1990s. Google has unlimited upside potential next year with little chance of anything more than a short-term pullback. Google continues to put up great numbers and it still has tremendous growth ahead of itself in international markets.

12/18 SELL MORGAN STANLEY @$80.37 (+41.65% since start of year)
Morgan Stanley is set to report this coming week. Financials usually see most of their gains over the course of some time following a stellar earnings report. Morgan Stanley’s move into the subprime lending business earlier this year leds us to be concerned about both the increased potential for portfolio losses and a lack of management focus on gaining share in the red-hot investment banking business.

12/18 BUY LEHMAN BROTHERS @ $77.09
Lehman Brothers earnings report that it topped last years results by 20% failed to triggered much excitement among investors. Unlike its competitors, Lehman Brothers has been in a holding pattern the last couple months. Financial Watch believes the stock should move higher the last couple weeks of the year. Potential for profits should be somewhat moderate, but we expect Lehman Brother’s stock to slightly outperform the S&P for the remainder of 2006.