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Analyst reports: Investors should buy AOL, Microsoft

A day after Wall Street's frightful morning plunge, bullish analysts say investors should snap up relatively depressed stocks in companies that reported healthy third-quarter earnings.

    A day after Wall Street's frightful morning plunge, bullish analysts said investors should snap up relatively depressed stocks in companies that reported healthy third-quarter earnings.

    Among their top picks on Thursday were America Online and Microsoft. Both companies reported earnings on Wednesday and gave financial institutions nuggets of hope that upcoming quarterly financial performance will be strong.

    AOL said its fiscal first-quarter profit almost doubled as the Dulles, Virg.-based Internet access provider and Web portal scored 1.4 million new subscribers. Net income soared to $345 million, or 13 cents a share, compared with $181 million, or 7 cents, in the fiscal first quarter last year.

    AOL reported that revenue for the quarter ended Sept. 30 was $1.98 billion, not quite matching analysts' overly optimistic estimates of roughly $2 billion.

    When Apple Computer and other companies reported earnings this past week, executives dramatically reined in enthusiasm and warned investors that the fourth quarter would be challenging. Yahoo and other Internet companies that depend on advertising for a large chunk of revenue have also been pessimistic about their ability to maintain the soaring growth curve of advertising revenue over the next several quarters.

    By contrast, AOL chief financial officer Michael Kelly said Thursday in a conference call that AOL's advertising revenue is "very healthy." Kelly wouldn't give specific percentage gains for advertising growth in the fourth quarter.

    Analysts responded favorably to Kelly's boosterism. They agreed that AOL's depressed stock, which is 20 percent above the company's 52-week low of $37, represents a good buying opportunity.

    Analysts at Chase Hambrecht & Quist and Credit Suisse First Boston reiterated their "buy" ratings in broker reports Thursday morning. ING Barings, UBS Warburg and Deutsche Banc Alex Brown reiterated more bullish "strong buy" ratings. Twelve-month target prices ranged from $80 per share to $90 per share.

    AOL stock traded Thursday at $44.58, down 4.97 percent from Wednesday's closing price. That's 53.4 percent lower than the company's 52-week high of $95.81. AOL shares slipped 17 percent Wednesday, based on worries among investors that the company would be dented by stalled advertising growth.

    Microsoft was also a favorite pick among analysts Thursday morning, with numerous financial institutions drafting favorable reports on the world's largest software company.

    Although Windows 2000 is not taking off as quickly as some analysts expected, Microsoft raced ahead of earnings estimates Wednesday on the strength of operating system sales, profits from investments and curtailed spending.

    Excluding charges, the software giant earned a fiscal first-quarter profit of $2.58 billion, or 46 cents a share, compared with $2.19 billion, or 38 cents a share, during the same period last year.

    Analysts polled before the earnings announcement by First Call/Thomson Financial expected the Redmond, Wash.-based company to earn 41 cents per share.

    The solid earnings report and slew of positive research notes from financial institutions caused Microsoft's stock to hit $60.56 in midday trading Thursday, up $8.81, or 17.03 percent, from Wednesday's closing price.

    The stock, which has rebounded 12.56 percent this week, has dragged down the broader markets and burned millions of investors. Microsoft shares have lost 48.18 percent since the beginning of the year, based mostly on investor concerns about the looming antitrust hearing engulfing the company.

    But many analysts said in research notes Thursday that Microsoft shares represent a buying opportunity at their current price, which has inched up a scant 0.31 percent since the beginning of October.

    J.P. Morgan, Chase H&Q, Deutsche Banc Alex Brown and Lehman Brothers each reiterated their "buy" ratings for Microsoft on Thursday, while ING Barings reiterated a "strong buy."

    The only brokerage to draft a slightly negative report was Prudential Securities. Analyst Douglas Crook maintained his tepid "accumulate" rating but cut his 12-month price target to $65 from $90 per share.