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DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $259.
Five attractive picks for the year ahead
Richard Moroney: "The Forecasts anticipates a good, but not great, year for stocks in 2003. Earnings targets for some technology and cyclical stocks still seem high. And with continued weakness in the labor market and consumers likely to slow down their spending a bit, a strong defensive presence seems prudent.
Attractive sectors for 2003 include financials, energy, and transports. Most health-care and technology sectors do not look good. However, many stocks in those industries have some appeal. History suggests retailers and consumer-staples sectors are likely to perform poorly in the 12 months after the market low, though investors can find strong individual holdings in these sectors.
Looking ahead to 2003, three questions seem paramount. First, are interest rates headed sharply higher? Second, is tech really headed toward a big profit rebound? Third, will the rest of the market be supported by improving profit growth?
We intend to keep these questions in mind as 2003 unfolds, looking for opportunities to put cash to work when opportunities arise. For now, keep 25% of your equity portfolio in money-market funds or short-term bonds. U.S. stocks are headed toward a third straight losing year in 2002, only the third time that has happened since 1800. Not once in the last 200 years have U.S. stocks declined four straight years, so it is not surprising that few are predicting a down year in 2003.
While we expect the stock market to provide opportunities in 2003, a down year is certainly possible. To think otherwise is to accept the gambler's fallacy. A roulette wheel that has landed on black for three straight spins is no more likely to register red.
This analogy is somewhat stretched, since shares typically become better values when stock prices fall. But considering the rebound since October with the most aggressive, richly priced stocks leading the way we would not be surprised to see a broad swath of the market lower in 2003.
In our view, the speculative rally that began in October has probably run its course. Rather than betting on depressed stocks with poor fundamentals, emphasize quality issues supported by solid sales and profit outlooks, reasonable valuations, healthy balance sheets, and attractive market positions.
This approach may lag in a speculative run-up. But over the course of 2003, we expect such quality issues to deliver market-beating returns. Five especially attractive picks for the year ahead are profiled below.
Founded in 1977, Biomet (Nasdaq BMET $28) is one of the world's largest medical-device companies. The firm offers a range of reconstructive devices, including knee and hip replacements. Spinal products include electrical stimulation devices and fixation systems. To ward off competition and accelerate product development, Biomet is spending aggressively on research and development. In fiscal 2002 ended May, the company spent nearly $51 million on R&D, up 18% from a year earlier.
Sector growth and new products should help sustain double-digit sales and earnings growth. Sales are projected to climb 18% to $1.4 billion in fiscal 2003 ending May. Per-share earnings are expected to jump 19% to $1.08. At 26 times that estimate, the stock's valuation seems reasonable considering the company's sold track record and clean balance sheet. The shares trade at a sizable discount to peers. Biomet, with support near $26, is a Focus List Buy.
Even a gradual increase in technology spending should help Microsoft (Nasdaq MSFT $54) in 2003, good news for a company that still generates 66% of its revenue from operating systems and applications software. But Microsoft also plans to help itself with a series of new-product launches. New versions of the Office software suite, server software, and the MSN Internet service will hit the market next year, while the company has high hopes for the tablet personal computer launched in November.
Perhaps most important, the amorphous .NET initiative is expected to come into focus in early 2003, as Microsoft launches the .NET server. This server will run Microsoft's databases and a variety of applications and development tools, expanding the company's penetration into the business software market. About 35% of Microsoft's revenues are recurring, and the continued move toward subscriptions should boost that percentage. Microsoft, a Focus List buy, offers an attractive mix of growth and defensive attributes.
Fears of slowing growth and increased competition have hurt Philip Morris (NYSE MO $41). But the stock, down 29% from a 52-week high set in June, remains a top pick for total return. At 6.2%, the stock's dividend yield is higher than that of all but 13 of the stocks in the S&P 500 Index. Over the last 10 years, the dividend has grown at a 13% annual clip. In late November, management trimmed near-term growth targets. Still, 6% to 9% annual profit growth seems likely over the long haul.
The stock sells for nine times the consensus 2003 earnings estimate of $4.77 per share, on the low end of its historical valuation range. Plenty of bad news is already priced into the stock, and Philip Morris seems capable of topping estimates. Moreover, the company's 84% stake in Kraft is worth about $28 per Philip Morris share. Backing that amount out of Philip Morris' current stock price infers a value of only $13 for the tobacco business, which generates about 66% of total earnings. That seems unduly low given the company's leading brands and strong cash flow. Philip Morris is a Focus List Buy.
Steris (NYSE STE $24), a leading maker of infection-prevention systems and laboratory and surgical supplies, is well positioned for growth. The company should benefit from a trend toward an increased number of surgical procedures and accelerating demand from pharmaceutical makers and research facilities. Recurring sales and services represent roughly 60% of total revenue, providing a solid foundation for growth. No single customer accounts for more than 2% of annual sales.
STERIS comes with some risks attached. The company competes against much larger companies, including Johnson & Johnson (NYSE JNJU $55), Kimberly-Clark (NYSE KMB $47), and 3M (NYSE MMM $122). Moreover, disposable medical instruments and other devices are gaining acceptance among doctors. Finally, hospitals are keeping a close eye on spending. Still, STERIS seems poised for solid growth over the next two or three years. For fiscal 2003 ending March, Wall Street expects earnings to surge 63% to $1.06. For fiscal 2004, the consensus estimate is $1.23, implying 16% growth. The stock is a Focus List Buy.
A low-interest-rate environment has helped Wells Fargo (NYSE WFC $47) deliver loan growth of 10% over the first nine months of 2002. Robust mortgage originations and home-equity loans have compensated for a weak commercial market. A slowdown in the housing market seems likely, but Wells Fargo's broad commercial exposure should serve it well when the economy rebounds. Wells Fargo, with about 5,600 U.S. locations, is the leader in mortgage originations (13% U.S. market share) and home-equity loans (18%), as well as small-business and commercial real estate lending.
Cross-selling opportunities abound, as only 9% of mortgage customers have a Wells Fargo home-equity loan and only 15% of depositors have a Wells Fargo mortgage. Wells Fargo expects double-digit revenue and earnings growth over the long haul, and it is positioned to excel whether the economy recovers or not. The company expects to generate 80% of its revenue growth from cross-selling and market-share gains. Sales should top $25 billion in 2003. Wells Fargo, a Focus List Buy, is our top pick in the financial-services sector."
LOW PRICED STOCK SURVEY
supplement to Dow Theory Forecasts
7412 Calumet Ave., Hammond, IN 46324.
Insist on high-quality growers
Richard Moroney: "Small-company stocks showed signs of life during the fourth quarter. Through Dec. 27, the S&P SmallCap 600 Index was up 5% and the Russell 2000 Index was up 6%. Despite the rebounds, both indexes were headed toward declines for full-year 2002 the first year both have declined since 1994. The S&P 600 is down about 15% and the Russell 2000 has tumbled 21%.
While the recent rally has been gratifying, investors need to look beneath the averages for a more accurate picture. In recent months, the most speculative stocks have significantly outperformed other stocks. Since the market bottomed on Oct. 9, the S&P 600's lowest-priced stocks (below $5 per share) have surged 48%, compared to a 19% increase for all other companies in the index. Among S&P 600 stocks, companies expected to be unprofitable in their current fiscal year have rallied 47%, versus a 20% gain for those expected to make money. Since Oct. 9, the average technology stock has soared 47%, far better than the 19% return for the average stock in the industrial sector the next best performing group.
In our view, investors are betting on the wrong horses. While it makes sense to tilt toward growth, the speculative rebound has likely run its course. Going forward, investors will be looking for concrete evidence that sales and profits are growing at rates that justify current price/earnings ratios. For 2003, investors need to focus on companies with sales and profit momentum supported by solid balance sheets. Spotlighted in the following paragraphs are four new selections with good operating momentum and reasonable valuations.
Founded in 1985, Exactech's (Nasdaq EXAC $18) medical devices are used to restore bones and joints. The company sells hip- and knee-replacement systems, as well as bone cement and grafting material. Joint-replacement procedures have accelerated because of the aging population. Moreover, earlier generations of joint replacements have begun to wear out. Competition is fierce rivals include Biomet, Zimmer, and Stryker. The current valuation seems attractive for a company with the potential to grow per-share earnings 15% to 18% per year. The stock trades at 19 times expected 2002 earnings of $0.94 per share and only 15 times 2003 estimates of $1.18. using 2003 figures, Exactech's expected P/E-to-growth (PEG) ratio is a modest 0.8. Exactech, which scores a solid 90 for Quadrix overall, is rated Buy.
Located along the eastern coast of Florida Harbor Florida Bancshares (Nasdaq HARB $22) has 33 offices and $2.1 billion in assets. Harbor's market continues to be healthy, supported by healthy income levels. Robust population growth and a strong local housing market should drive loan growth. Asset quality is impressive. At the end of September, the ratio of nonperforming assets to total assets was only 0.11%, down from 0.20% a year earlier. The company emphasizes residential family mortgages. In 2002, earnings per share are expected to be $1.53, up 13% from 2001. Estimates for 2003 range from $1.66 to $1.75. Strong operating results should support Harbor's new stock buyback program, which allows the purchase of up to 1.2 million shares, or 5% of the total outstanding. Harbor, showing encouraging stock-price action, is rated Best Buy.
Canada-based Methanex (Nasdaq MEOH $8), the largest supplier of methanol to major international markets, has bright year-ahead growth prospects. In 2001, the company's methanol sales accounted for roughly 25% of the total world market. Methanol is used to produce formaldehyde, acetic acid, and a variety of other chemicals. It is also used to make additives for learner-burning gasoline. Methanex has superior capital-gains potential but is risky. Methanol pricing can be volatile. Moreover, natural gas represents the largest cost, so access to low-cost supplies is critical. But Methanex has shut down higher-cost plans and is constructing new facilities with long-term, low-cost supply contracts. The stock trades at only 10 times current-year estimates of $0.80 per share. Using 2003, estimates of $1.24, the P/E ratio is only six. The Survey is initiating coverage with a Buy rating.
Fast-growing Sterling Financial (Nasdaq STSA $19) has $3.3 billion in assets and $2 billion in deposits. The bank, with 77 branches across Washington, Idaho, Oregon, and Montana, originates residential mortgages through its Action Mortgage subsidiary and commercial loans at its INTERVEST offices. The company also sells financial products through Harbor Financial. In recent years, Sterling has focused its efforts on becoming more like a community retail bank by increasing commercial real estate exposure and consumer and construction lending. Acquisitions should bolster growth. Sterling is buying Empire Federal Bancorp, expanding its footprint across central and eastern Montana. Sterling trades at 1.2 times book value and just nine times 2003 consensus profit estimates of $2.24 per share sizable discounts to its peer group. The Survey is initiating coverage with a Buy rating."
The TURNAROUND LETTER
Suite 801, 225 Friend Street, Boston, MA 02114.
Monthly, 1 year, $195.
Andrx: Good technology and
strong pipeline of generic drugs
George Putnam III: "Andrx (Nasdaq ADRX) began operating in 1992 as a distributor of generic pharmaceuticals made by other firms. The company's Anda distribution business, consisting primarily of sales reps and telemarketers, has grown to reach 30% of the U.S. market, essentially the entire market not covered by the warehousing chains, such as CVS, Wal-Mart, and Walgreen's.
Beginning in 1993, the company began to utilize its proprietary drug-delivery technology to develop its own generics and branded products. Its first in-house generic was launched in1997, and its first branded drug was brought to market just this last July. Andrx also operates a web portal, known as POL Physicians' online (www.po.com), that connects some 230,000 physicians.
Several years of rapid growth in both revenues and profits, together with investor enthusiasm for drug-delivery stocks in general, pushed Andrx's stock as high as 95 in 2000. Since then it's been all downhill for the stock. Delays in new product introductions caused earnings to fall in late 2001 and early 2002, and then an unfavorable ruling in a patent lawsuit hit the stock again later in the year.
Analysis: While earnings will continue to be volatile for the foreseeable future, Andrx's prospects look strong because of its pipeline of new products and its profitable distribution business. Wall Street hates unpredictability in earnings, and, just as they overreacted on the upside, we think investors have unfairly punished the stock recently.
The firm's current pipeline of generic products collectively targets pharmaceuticals that aggregated $8 billion in sales in 2001. Because of Andrx's proprietary controlled-release technology, it is able to market drugs developed by others that are still covered by patents. However, this approach can be subject to delays caused by the regulatory review process as well as occasional litigation over patent rights. The company also has a pipeline of 35 products targeting off-patent drugs, an area with more competition but fewer legal constraints and a quicker approval process. The firm's distribution network also provides a competitive advantage.
The company's branded strategy is twofold: 1) improving upon existing medications, a process that reduces the time-to-market and development costs because the basic "chemical entity" is already approved; and 2) searching for entirely new ways to apply existing products. The company's first branded drug, Altocor, came to market in July 2002. It is proven to be a cost effective extended-release form of cholesterol-lowering lovastatin. The company recently submitted a new drug application for its second branded product, Metformin XT, a diabetes drug.
Andrx brought in a new CEO last June, Richard Lane, who has thirty years of experience in the drug industry, most recently running the worldwide medicines group of Bristol-Myers Squibb. He is strengthening the management team and also focusing on improving the manufacturing process. This should help the company to get products to market in a more timely manner.
The balance sheet looks reasonably solid. Although the company is spending a good deal of money to launch its new products, it still has a decent amount of cash and no debt.
Andrx has good technology and a strong pipeline of new products. As it brings more products to market, and tightens up some of its manufacturing processes, it should be able to dampen the volatility in its earnings. When this happens, not only will earnings improve but investors will also pay a higher multiple for the stock. We recommend getting in before Wall Street rediscovers Andrx by buying the stock up to 22.
Tempered optimism for 2003
We are optimistic about the stock market in 2003, our optimism is tempered. Even after the last three years, equity returns over the past decade or so are running well above the historical average. The ten and fifteen year-annualized returns on the S&P 500 Index are 10.2% and 12.5%, respectively. We believe investors should not expect long-term equity returns much above eight percent. Therefore, going forward we think annual gains in the single digits will come to be viewed as quite good.
If we were forced to quantify our optimism for 2003, we would predict a gain of nine percent for the S&P 500 next year. What's our level of confidence in that prediction? Quite low. But we are very confident that over the long haul stocks will give you the best returns of almost any asset class."
HENDERSHOT INVESTMENTS
11321 Trenton Court, Bristow, VA 20136.
1 year, 4 issues, $45.
Kimberly-Clark should reward with
"Depend"-able long-term total returns
Ingrid Hendershot: "Kimberly-Clark (KMB $50.66) is a leading global consumer products company. Its tissue, personal care, and health care products are manufactured in 24 countries and sold in more than 150. Kimberly-Clark is home to some of the world's most trusted and recognized brands, including Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend. Nearly one-quarter of the world's population, or 1.3 billion people, use KMB products each year. KMB has been among Fortune Magazine's "Most Admired" corporations since 1983 and was recently named to its list of "100 Best Companies to Work For."
Global Brands
In 1872, in a Neenah, Wisconsin village, four young businessmen, John Kimberly, Charles Clark, Havilah Babcock, and Frank Shattuck, pooled together $30,000 to start Kimberly, Clark and Co. More than a century later, Kimberly-Clark now has operations spanning the globe with sales close to $15 billion.
Kimberly-Clark's strong global brands, including Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, are well-recognized throughout the world. In 80 countries, Kimberly-Clark's products are either number one or two in market share. ACNielsen recognized Kleenex and Huggies as among only 43 truly global, billion-dollar brands. Kleenex was originally introduced in1924 as a cold cream towel to remove cosmetics. When the company changed its advertising in 1930 to emphasize usage as a disposable handkerchief sales soared. Huggies diapers were an instant success when introduced in 1978. Despite intense competition from Pampers, Huggies has remained the leading diaper brand in the U.S. over the past decade.
Global branding enables Kimberly-Clark to better serve worldwide retailers like Wal-Mart. Global branding also provides great economies in scale in leveraging R&D efforts, manufacturing expertise and marketing costs. Product innovation is a KMB cornerstone that leads to expansion of key brands, such as Kleenex Cottonelle bathroom tissue, Huggies Little Swimmers swimpants and Depend protective underwear.
Strong Cash Flow
Kimberly-Clark generates strong cash flow from operations, which has more than tripled over the past decade to $2.3 billion as of 2001. So far this year, free cash flow (after capital expenditures) is nearly 50% higher than last year.
This strong cash flow permits the firm to reinvest for future growth, make acquisitions, pay a steadily increasing dividend and repurchase shares. Along with the acquisition of Scott Paper in 1995, which provided additional brands, Kimberly-Clark has acquired more than 40 personal care, tissue and health care businesses around the world over the last decade.
Kimberly-Clark has paid a dividend every quarter since 1935 and raised the dividend for 30 consecutive years to protect shareholders against the effects of inflation. Excess cash has been used to repurchase shares. More than $3 billion has been spent on share buybacks during the past four years. Management remains focused on improving return on invested capital (ROIC), which has grown from 14% in 1995 to nearly 17% in 2001.
Reasonable Valuation
In line with long-term objectives, Kimberly-Clark has averaged 6 8% sales growth and double-digit earnings growth over the past 3, 10 and 15-year periods.
Difficult business conditions this year have pressured KMB's growth with sales rising 3% so far this year and EPS up 6%. Even though advertising and promotion spending is higher than originally anticipated, Kimberly-Clark should generate solid overall sales, volume, cash flow and earnings growth this year with EPS in the $3.42 - $3.46 range. At current price levels, Kimberly-Clark appears reasonably valued trading for less than 15 times expected earnings. This Kleenex-maker's 2.4% dividend yield is nothing to sneeze at either. Kimberly-Clark is a HI-quality company with steady future growth prospects, thanks to its disposable products with leading global brands and strong cash flow. Given the current attractive valuation, investors that give Kimberly-Clark a "Huggie" should be rewarded with "Depend"-able long-term total returns."
THE PURE FUNDAMENTALIST
7412 Calumet Avenue, Hammond, IN 46324.
Monthly, 1 year, $195. Hotline included.
In 2003, investors will smile with glee
Al Toral: "In spite of world and United States economic conditions, we expect the Dow to gain a minimum of 15 percent in 2003. We also expect to see the Nasdaq with a minimum gain of 20 percent in 2003.
Certain stocks with strong fundamentals should easily beat our projected percentage gains. We see strength in 2003 in such sectors as pharmaceutical, bio-medical, medical devices, computer software, defense and computer hardware companies.
Certain companies within these sectors are moving strongly upward, showing continued expansion of earnings growth, and improvement of margins. Better control of debt and improvement of earnings is a fundamental factor in achieving and stimulating this kind of healthy growth.
Our stock picks for 2003 follows. There will be three portfolios: The Aggressive Lion X and the Conservative Lamb X, each capitalized with $50,000. And the Speculative Hope portfolio, capitalized with $5,000.
The Aggressive Lion Portfolio X: Biosite Tech. (BSTE) medical; Cisco ((CSCO) high-tech; Cognizant Tech. (CTSH) high-tech; Ebay (EBAY auction; Electronic Arts (ERTS) game software, Idec Pharmaceutical (IDPH) medical; Quest Diagnostics (DGX) medical; Teva Pharmaceutical (TEVA) generic drugs; Taro Pharmaceutical (TARO) drugs; and Yahoo (YHOO) internet media.
The Conservative Lamb Portfolio X: Affiliated Computer (ACS) computer services; Chico's Fas (CHS) women's fashions; First Data (FDS) financial services; Forest Laboratories (FRX) medical; Health Management (HMA) medical management; Medtronic (MDT) medical devices; Microsoft (MSFT) software; Pfizer (PFE) pharmaceutical; Panera (PNRA) fast food and Walgreen (WAG) retail.
Speculative Hope Portfolio I: Celgene (CELG) medical, Inter-Tel (INTL) telecommunications and Palm (PALM) computers.
How Big Is Big?
Cisco Systems Inc. (Nasdaq CSCO; recent price $13). During the economic market slump of the last two or three years, Cisco's stock price has gone from more than $80 a share to less than $10 a share.
Once the darling of high-tech (and it still might be), it has been languishing in the range of $12 to $14 a share. One thing's for sure, it is not because it was asleep at the "switch." If anything, the company was too aggressive in trying to create more business than the market could handle at the time. Cisco completely dominates the enterprise switch and router markets, which account for more than 80% of its business.
The breakdown includes 70% of Ethernet switches and 90% of the enterprise routers market. With this kind of commanding lead in switches and routers, Cisco is now out to conquer new horizons.
It already has developed a lead in IP telephony, with a 60% share of that market and has big plans for the storage-area network area as well.
The company is about to boost its presence in the telecom business and continues to make acquisitions in its thrust for more growth.
Fundamentally, the company is a gem. While most of its competitors are cash poor and debt ridden, Cisco is cash rich and debt-free. However, its revenue growth has slowed down a bit and it had its first down year in fiscal 2002, recording revenue of $18 billion compared to $22 billion in 2001.
The company has a better-than-even chance of eclipsing its poor results in 2002, with $2 billion growth to more than $20 billion for 2003. Earnings could double from $0.25 a share in 2002 to $0.54 a share in fiscal 2003, which ends in July 2003. The company has bought back more than 1 billion shares of its stock. We expect profit margins to improve to more than 10%. The company has no long-term debt and a good current ratio of more than 2.1. Its P/E may seem high at around 40, but strong, fundamentally sound growth companies can command a higher value price. We continue to VISCA rate the company .1 (Those stocks selected for the very aggressive investor. This rating reflects fast-growing companies with strong fundamentals.)"
Charles M. LaLoggia's SUPERSTOCK INVESTOR
1900 Glades Rd., Ste. 441, Boca Raton, FL 33431.
1 year, 12 issues, $395.
Cubic should benefit from a
rebound in the defense sector
Charles LaLoggia: "A November 18, 2002 headline in The Wall Street Journal put it succinctly: "Defense Stocks Ignore War Talk, Remain Duds." The WSJ story noted that despite rising defense spending and the possibility of war with Iraq defense stocks had lost a third of their value since mid-2002, when most of them touched their 52-week highs. Amazingly, most of the leading defense contractors are actually no higher today than they were in the days following their post-September 11 price spikes and some of them, like Northrop-Grumman (NOC) and Raytheon (RTN) are actually below their post-September 11 price spike levels. The laggard performance of the defense sector is all the more surprising because their revenues and earnings appear to be locked in as a result of an ever-growing defense budget; and in an environment of extreme economic uncertainty one would think that the stock market would look favorably on an industry where revenue and earnings visibility is fairly solid over the next few years.
However, recently the large-cap defense stocks have been stirring and the relative strength of most of these stocks has been improving. As a possible war with Iraq draws closer, and as a potential crisis in North Korea bubbles up again, some of the well-known defense contractors have either broken out of short-term bases or are acting like they are about to do so. L-3 Communications (LLL) appears to be on the verge of breakout above $48. Northrop (NOC) appears to be sketching out a base with a breakout level of $100. General Dynamics (GD) would breakout crossing $84. Raytheon (RTN), which has perhaps the most potentially powerful chart, has sketched out a nice-looking base with a breakout level of $31.50. And Lockheed-Martin (LMT) appears to have already broken out of a base crossing $54. Another good sign for the defense sector in general is that various defense stock indexes, such as the Investors Business Daily Defense Index, show multiple attempts to break down below key support levels in October November. Despite these attempts to break down, the IBD Defense Index held every time and it has now returned to the upper end of its recent trading range and looks as though it may break out to the upside.
If these short-term stirrings among the larger-cap defense stocks are an early signal that these stocks could be among the major winners of 2003, this bodes extremely well for Cubic Corp (CUB). Back in October we ran an update on Cubic in which we expressed the view that this smaller-cap defense company which has zero analytical coverage had reached a very attractive long-term buy point just below the $15 area, a key support zone that had served as the major breakout level that propelled Cubic to its ultimate high of $32.97 early in 2002. Because Cubic is a small-cap stock that is more thinly-traded than its bigger-name industry peers this stock tends to move in more exaggerated percentage terms along with the defense stocks in general. This characteristic served us well in late 2001 and early 2002 and not so well when the defense stocks fell out of favor recently. But if the defense stocks in general are getting set to resume their market leadership in 2003, Cubic could be a big winner in percentage terms.
So far, Cubic's chart seems to be telegraphing this very message. After holding at its long-term support area between $12 - $15 in mid-October, Cubic sketched out a 6-week base with a breakout over $16.50. CUB then ran up to $20, a short-term resistance level that revealed itself back in September when CUB tried twice to move above $20 and failed both times. This most recent attempt to break out over $20 in early December now establishes the $20 level as a key breakout point for Cubic, and we would view any move over $20 as a signal that CUB has begun a new major uptrend. Look for support now on any drift back toward the $16.50 - $17 area.
Cubic's operational results would certainly seem to support the message of the chart that this stock could emerge as a big winner in 2003. On December 9 Cubic reported that earnings for its fiscal year ended September 30 soared 41% to $1.10/share compared to $0.78/share, adjusted for a 3-for-1 stock split. Moreover, both sales and earnings for the fourth quarter seemed to be accelerating, with earnings rising 73% to $0.38/share (vs. $0.22). Sales for the fourth quarter jumped 14% compared to a 12% increase for the full year. What this seems to imply is that Cubic's results were gaining momentum as the fiscal year went on, and how many companies can make that claim in the current economic environment? As of September 30, Cubic's order backlog stood at $1.165 billion compared to $1.095 billion a year earlier pretty impressive numbers for a small-cap defense company with only 26.7 million shares outstanding and absolutely no mainstream analytical coverage, wouldn't you say? In its earnings release, the company which had tended to be fairly conservative in its earnings projections until recently seemed to go out of its way to convey the message that these trends are expected to continue. "The company expects that sales and operating income will continue to grow next year," Cubic said. "New contract bookings are expected to increase substantially in 2003."
Cubic is not a "pure play" defense contractor. The company's defense operations account for around 56% of its revenues. The other 44% of Cubic's revenues come from its Cubic Transportation Systems operations, which is a leader in "smart card" technology for use in mass transit systems. Cubic's computer, infrastructure and smart card technologies make it possible for commuters to move securely and seamlessly between various forms of mass transit in major metropolitan areas. This is a major growth area for Cubic on a worldwide basis and is a key element of this stock's appeal, as far as we are concerned and yet, this unique business mix is precisely the reason why not one mainstream brokerage firm analyst is following Cubic. Cubic's "smart card" contains an embedded computer chip that contains large amounts of data. The Cubic "smart card" can also accommodate the sort of biometric data, such as fingerprints, voice recognition technology and eye scans which can be used for the sort of highly sensitive security applications necessary in our post-September 11 environment. The national security applications of Cubic's smart card technology is a new potential growth avenue for this company, the surface of which has barely been scratched. In its early-December earnings release, Cubic noted that it has "been successful with minimal investment in marketing its products and services to governmental agenciesfor Homeland Security resources." Cubic also noted that it has "won small but strategically significant contracts in domestic counter terrorismand is positioning itself with potential teammates on future business in a wide range of homeland defense and security areas."
Finally, keep in mind that Cubic's founder, CEO and Chairman, W.J. Zable, is now 86 years old. Mr. Zable has publicly stated that potential acquirers are constantly asking if Cubic is for sale but that he is not interested in selling the company. Still, considering Mr. Zable's age, one must factor in the possibility that a major defense company could make a takeover bid for Cubic at a premium too difficult to resist.
For all of these reasons, we think Cubic's stock price has turned the corner and we can see any number of potential international developments in 2003 that could cause the defense sector in general and Cubic in particular to move higher in a major way."
THE WALL STREET DIGEST
One Sarasota Tower, Sarasota, FL 34236.
Monthly, 1 year, $150.
United Online will benefit from
a strong market in 2003
Donald Rowe expects the economy and the stock market to turn around in 2003 and looks for record highs in the stock market indices by the summer of 2004 (see Rowe's comments in the Markets section).
Currently rated a Strong Buy is United Online, Inc.
"United Online, Inc. (Nasdaq UNTD) is an Internet service provider (ISP) that offers value-priced Internet access and e-mail services to consumers on a monthly subscription basis. United's services are available through three different ISP-brand names: NetZero, Juno, and BlueLight. All three ISPs are offered at less than half the standard prices of their major competitors and feature faster page loads and no banner-ad windows. United Online's services are available in more than 5,000 cities across the United States and Canada.
Subscribers to any of United's three ISPs have the ability to exchange e-mail with anyone on the Internet, access search engines, news and sports content, online shopping and financial services, as well as use instant messaging or chat programs such as those offered by AOL, Yahoo!, and MSN.
United Online offers its advertisers and sponsors various ways to direct their messages to millions of NetZero, Juno and BlueLight subscribers. The company's products include a broad range of targeting techniques for online advertising e-mail campaigns, as well as full-motion video commercials. United Online can also provide advertisers with market research through its CyberTarget Division. With access to millions of Internet users, along with the benefits provided by one of the largest Oracle data warehouses in the world, CyberTarget is able to create real-time market research in an Internet environment.
United Online generates the majority of its revenue from billable services, but also receives income from media fees, direct marketing agreements, e-commerce transactions, sales of market research data, and by referring subscribers to advertisers' Websites and services.
Over the past four quarters, United Online has realized earnings growth of 118%, 105%, 101% and 87% on sales increases of 312%, 355%, 299% and 200%, respectively. The company is expecting earnings of $0.70 per share this year, an increase of 179% from last year, while the industry is expecting a decrease of 14%. Long-term earnings growth is expected to average 30% annually. www.unitedonline.net."
INVESTMENT QUALITY TRENDS,
7440 Girard Ave., Suite #4, La Jolla, CA 92037.
1 year, 24 issues, $310. www.iqtrends.com.
"Lucky 13" portfolio for 2003
Geraldine Weiss and Kelley Wright: "Every stock in the Undervalued and Rising Trends is considered to be our investment portfolio. That would include 128 stocks, according to the Mid-December issue, clearly too large a number to be practical. Investors, therefore, must be selective and fashion a diversified portfolio of Undervalued and Rising Trend stocks according to personal preferences, investment objectives, financial conditions and tolerance for risk.
However, three years ago we initiated a feature at the beginning of the year that we call our "Lucky 13" portfolio. The feature has been popular and successful. Not every stock in the portfolio was a winner, but there were enough winners in the group to result in three banner years. In the year 2000, the portfolio gained 26.0%. The following year the portfolio was ahead by 15.2%. Last year, the total return on our "Lucky 13" portfolio was 10.9%. We are proud of those results as they occurred during one of the worst bear markets in history.
Now, we step up to the plate with a new "Lucky 13" portfolio for 2003. Hopefully, they will result in growth of capital and growth of dividend income in the year ahead.
Lucky 13, 2003
Barrick Gold (ABX) 2002 was a banner year for the shiny metal with fear about war and uncertainty on the economy center stage. 2003 may prove to be no walk in the park, so prudence and diversification justify adding the metal to our picks for the year. When discussing gold stocks one need look no further than the bluest of the gold, Barrick Gold. Although this issue has been bludgeoned by the earnings stick, this too shall pass.
CitiGroup (C) Should a new Bull arrive in '03 the financials will most certainly be represented, and we feel there is no better representative than C. Currently in our Undervalued category and sporting a PE of 11 and a low payout of 22%, the downside risk on this stalwart is minimal.
Electronic Data Systems (EDS) Despite the fact of a mid-year hiccup, we feel this is a case of the baby out with the bath water. This industry leader offers smart investors a great opportunity to pick up quality and value at a very undervalued price.
Philip Morris (MO) Occasionally the market thumbs its nose at investors and says, "I dare you." In our opinion this is such an occasion and we say thank you! A+ credit quality, a low P/E, a well-protected and sterling dividend of over 6%, what more could one ask?
Royal Caribbean (RCL) All work and no play makes even the most mild-mannered investor cranky. Care for a cruise, anyone? If so, this should be your outfit. Operating 22 ships through two lines to over 200 points of call for 2 million passengers, RCL specializes in fun. Oh, by the way, they also are undervalued. Bon Voyage!
ServiceMaster (SVM) With the recent year's pace of new and existing home sales, it is amazing that SVM isn't overvalued, based on its collection of top consumer brands: Merry Maids, Terminix, TruGreen Chem Lawn, Rescue Rooter, AmeriSpec, for home inspections and American Home Shield for home warranties. With an attractive yield just north of 4%, a decent P/E of 17 and a manageable debt load, this company is undervalued at $10.
LSI Industries (LYTS) Signs, signs, everywhere signs. If you are looking at a service station, convenience store or other establishment with lighting graphics, odds on favorite are LYTS is at work. With a low P/E, payout and debt load, this is an undervalued bargain at $11.
NiSource Inc. (NI) We make no editorial claim of objectivity with NI, we love this company. Although the company has moved from undervalued recently to $19, the yield at just over 6% is secure and has plenty of appreciable upside.
Bristol-Myers (BMY) Like MO above, what are they thinking? Very low debt, a great yield approaching 5% and undervalued to boot. A no brain needed pick for 2003.
Fresh Brands (FRSH) This little Piggly Wiggly went to market, and often, all overt the Midwest. Undervalued at $12, FRSH is less than 2 times book and has a low P/E, payout and debt level.
Teleflex (TFX) TFX is nothing is not flexible with products as diverse as skin staples to steering systems. Featured June 1, 2002 as a quality company that deserved attention but not purchase, TFX has since declined to undervalue and should now be considered.
Synovus Financial (SNV) The holding company for community banks throughout the South as well as a large credit card processor. A+ quality, a low payout and an outstanding dividend growth rate of 16% per annum make this company wildly undervalued.
TECO Energy (TE) Here is a company that knows how to keep the juice flowing. An "A" quality rating, a low payout for a utility, plus the book value is right at the market and, well, let's throw in a hefty dividend as well. Another undervalued smart bet!"
PEARSON INVESTMENT LETTER
6431 Rubia Circle, Apollo Beach, FL 33572.
Published monthly for clients of Pearson Capital, Inc.
Abercrombie & Fitch ranks in Fortune's
list of Fastest-Growing Companies
One of Walter Pearson's recommended stocks for January is Abercrombie & Fitch Co. (NYSE ANF $20.46) which is ranked #94 in Fortune's list of Fastest-Growing Companies. The company targets college students, sells upscale men's women's, and kids' casual clothes and accessories. Abercrombie & Fitch publishes its own lifestyle magazine, A&F Quarterly, which doubles as a catalog. Its racy content and the controversy it generates seems to work to the company's advantage. Abercrombie has about 490 U.S. stores (mostly in malls) and also sells through its magazine/catalog, A&F Quarterly, and online. For the 26 weeks ended August 3, 2002, net sales rose 18% to $641.9M. Net income rose 19% to $54.4M. Revenues reflect the net addition of 128 stores. Net income reflects an increase in gross income due to higher initial markup and continued improvement in the sourcing of merchandise."
LOOKING FORWARD
Client letter for Friess Associates and Brandywine Fund shareholders. www.brandywinefunds.com.
Nextel topped Wall Street earnings
estimates in each of past five quarters
"Economists and market strategists might quibble over GDP forecasts, the durability of the housing market and other underlying trends, but they almost universally agree on the continuation of a modest recovery in 2003 that will take an uneven, rocky path," says Bill D'Alonzo, CEO of Freiss Associates, LLC. "Now is not the time for sector bets on semiconductors or any other broad group of stocks. This environment lends itself to careful stock picking," says D'Alonzo.
"Competitive price wars and stalled subscriber growth mark a landscape of stumbling wireless carriers with look-alike products. Unique technology, however, fuels unique success for Nextel Communications (Nasdaq NXTL), which is currently the only nationwide wireless provider turning a profit.
Nextel Communications is the fifth-largest wireless carrier in the U.S. with nearly $9 billion in revenue. On top of traditional cellular services, its phones include a "direct connect" two-way radio feature. The Boston Police Department, U.S. Marine Corps, Federal Express and countless contractor outfits across the nation utilize the feature to communicate quick blasts of information.
Nextel more than doubled September-quarter earnings to $0.14 a share. The company added 480,000 subscribers while the ranks of users at rivals such as Sprint PCS and Cingular Wireless shrank. Strong results bolster cash flow, allowing the company to retire a total of $2.6 billion in debt and preferred stock through September.
The typical Nextel customer pays a premium each month for services thanks to Nextel's focus on the high-end business market, which considers increased productivity worth the extra cost. Direct Connect minutes are Nextel's most profitable voice product, as they use the least amount of company's network capacity. Nextel's low 2 percent customer turnover rate shows that the feature, soon to be available nationwide, also fosters customer loyalty.
Your team spoke with Chief Executive Tim Donahue about Nextel outsourcing customer care and back-office support in an effort to control costs. Costs per average customer were down 13 percent from a year ago in the September quarter. In addition, a direct marketing campaign through company owned stores and the Internet are helping lower customer acquisition costs.
Your team bought Nextel at 11 times 2003 earnings estimates. Nextel topped Wall Street earnings estimates in each of the past five quarters."
THE LANCZ LETTER
2400 N. Reynolds Road, Toledo, OH 43615.
1 year, 15 to 17 issues, $250.
Six Favorites for 2003 offer
excellent risk-to-reward
Alan Lancz: "In the same spirit as our Favorite For 2002, Allstate Corp., we have selected six quality leaders trading near their lows with very modest expectations on Wall Street. Now that we are actually taking profits in many of our old favorites that have outperformed like Procter & Gamble, 3M and Boston Scientific, it should come as no surprise that our new favorites offer the same exceptional risk-to-reward as the aforementioned did at the time of their respective recommendation. Following our Favorites List is our traditional two speculative plays for those investors looking for even better appreciation potential, albeit with far greater risk.
1. Pharmacia Corp. (PHA $40.50) is being acquired by Pfizer later this quarter, and the resulting entity will be an industry leader in terms of growth, profit margins and upcoming pipeline. When you combine this with no significant patent expirations, investors will jump on the Pfizer bandwagon at much higher prices into 2003-2004. Buying Pharmacia here is like buying Pfizer in the mid-to-upper twenties, which is a level we feel extremely comfortable with over the long-term. Similar to Allstate, which never traded lower for us upon our mid-December 2001 recommendation, we feel Pharmacia/Pfizer contains minimal risk in comparison to its total return potential for 2003.
2. Kimberly Clark (KMB $46.80), another high quality leader trading at new lows. We are buying KMB stock at current lows as Wall Street has once again over-reacted to negative news. When we recommended Proctor & Gamble in March of 2000 the stock was similarly hitting new daily lows with analysts focusing solely on the negatives and expressing that P&G could do nothing right. This was the opposite of two months prior when P&G was trading at 2x the price and analysts felt they could do nothing wrong. Today KMB is in the nothing-right category, and therefore, its stock offers an exceptionally favorable risk-to-reward ratio from current depressed levels. Since March 2000 Procter & Gamble stock is up 80% for us and Kimberly Clark is trading at exactly the same level. We now would rather go with the low expectation stock with the higher dividend yield and the more favorable risk-to-reward potential.
3. Honeywell Int'l (HON $22). Asbestos concerns have kept this industry leader's stock down but we feel such concerns are overblown and already well reflected within its stock price. Honeywell has an excellent balance sheet and impressive new management. We feel the company will once again become an ideal takeover target once asbestos concerns are more defined.
4. McDonald's Corp. (MCD $15.40). Nearly everything that could go wrong, has over the past year, with this fast food leader. Now is the time to buy McDonald's at nearly an 8 year low for its long-term recovery potential under new leadership.
5. Toys `R' Us Corp. (TOY $9.70), at $8 - $10 the stock offers exceptional risk-to-reward, with new management updating stores, improving service and concentrating on international and exclusive product sales, their long-term potential seems bright. The last time we recommended TOY in single digits was three years ago and the stock more than tripled eighteen months later. We expect gains more in the 50% range within the next 12 18 months.
6. Albertson's Inc. (ABS $21.89). The nation's second largest grocery retailer is another contrarian position considering the industry's low margins and anemic sales growth of late. Once again Wall Street has overreacted to the industry problems, which are all more than reflected in its depressed stock price. We would be aggressive with this stock on weakness back into the mid-to-upper teens, which would make for 11 year lows.
Speculative Plays
1. Elan Corp. (ELN $2.19). After more than doubling to over $3 a share early in December the stock has since fallen over 30% back to strong buy territory. We expect the news of further asset sales netting more than Wall Street expectations as well as progress on the clinical trial front will continue into 2003. Wall Street is still skeptical but continued liquidity progress, and time, will have them changing their outlook at much higher valuations.
2. Strategic Diagnostics, Inc. (SDIX $3.10). This small (approximately $58M market cap), thinly traded company has niche positions in antibody products and test kits for the water and food industry. The company is starting to receive testing revenues for E-coli and should soon generate revenue for the much larger markets into other food pathogens salmonella and listeria. The company's antibody product with Bayer should pay off more in the 2004 2005 time frame. All in all the company is developing exposure into some intriguing markets, and yet, its tiny market cap reflects the fact that nobody knows and/or cares about its potential."
UNIQUE SITUATIONS
2563 Jardin Ln., Weston, FL 33327.
Monthly, 1 year, $240.
Wells-Gardner Electronics
A repeat "Stock of the Year"
Leo Rishty: "My selection last year was Wells-Gardner Electronics (Amex WGA). I am so convinced of the potential value of Wells-Gardner Electronics that I am repeating my recommendation.
A number of events took place over the past 12 months that have strengthened my convictions. Their 9 months sales were reported at an increase of 10.1% over the prior year period. While earnings were $553,000.00 ($0.10 a share) versus a loss of $3.1 million in the prior year, revenues for the third quarter were up more than 20% over the same quarter last year. They also reported an exclusive supplier contract with one of the largest manufacturers of video slot machines that is valued at $58 million.
I am expecting the common stock of Wells-Gardner Electronics to more than triple in value over the next 12 months. I am basing my assumptions on some of the events of this past year. They moved the majority of their production of video monitors to a joint venture in Malaysia. This is expected to substantially improve their profitability and reliability now and into the future. The video slot machine market is exploding. I am estimating that 80% of the new gaming machines that are being installed in the casinos are video slots with one or more video monitors. Wells-Gardner supplies video monitors to the top manufacturers of video slots: WMS Industries, Aristocrat, as well as a number of smaller manufacturers. They are, without a doubt, the leading supplier of video monitors to the gaming industry. The company cleaned up their books last year so as to get a clean start into 2003. I rate Wells-Gardner Electronics a strong buy with a 12 month target of $8 to $10 a share."
S. A. ADVISORY
2274 Arbor Lane #3, Salt Lake City, Utah 84117.
Tel: 801-272-4761. www.saadvisory.com.
Top Investments for 2003
Bill Velmer: Here are my observations and Top Stock Picks for 2003 (assuming $20k available funds divided equally/op.)
"We assume that during the first half of 03 that we may continue to muddle along.
We must contend with Iraq. Once the war starts (within 6 weeks), we assume that the market will begin to rally. Investors will then be able to re-focus on economic growth prospects.
When one considers the trillions of dollars on the sideline generating a meager 2% yield, a record "short" position on the NYSE and Nasdaq, mutual funds are underexposed to Chip, Teleco, Networking, software segments and countless other industrial groups and if greater visibility of rev and earnings become clearer then this market of stocks could, should and would explode!
We could easily see a 1900 Nasdaq and 10,000 on the Dow! We believe that the majority of investment dollars should be placed in quality Fortune 100 and 500 companies. We also believe that a portion of funds should also be ear marked towards oil/gas ventures and a few "severely depressed microcaps"!
Oil and Gas Ventures
The Oil/Gas Industry is a portfolio segment that should always be considered due to the endless geopolitical events and economic expansion potential. Both oil and gas are at 2-year highs and the potential for further appreciation short and longer term has been and will remain attractive! It is our belief that direct participation in developmental oil/gas joint ventures can offer investors strong monthly income and very attractive tax advantage. A well-rounded portfolio must have oil and gas exposure!
Energy equities has been in business for 10 years and has had a successful record for investors that want direct ownership in oil and gas project within Texas and surrounding states. For more information call 1-800-794-3429.
Here are my Top Three Microcap Selections for 2003:
1. Defense Industries International (OTC BB DFNS $.60), a great microcap defense play that has huge upside potential from cutting edge technologies! DFNS is a leading manufacturer and global provider of personal military & civilian protective equipment and supplies. DFNS's main products include body armor, bomb disposal suits, bulletproof vests and jacket and "Internationally patented" Ballistic Wall Covering, which is a blast-resistant armored wall fabric designed to prevent injury from explosion.
Customers for their products include IDF, NATO, UN peacekeeping force and many other law enforcement agencies and special security forces. Recently formed a joint venture with Smith & Wesson (Amex SWB), 150 year-old handgun maker, and anticipate sales of $8 million, DFNS assumes closing of $5 million acquisition within 30 days, anticipate "organic growth" of 15% over 02 from existing clients and, according to a recent press release, assumes $8 million in sales from the Ballistic Wall Covering. This division has the potential to "blow-the-doors-off" all corp estimates. The potential of this product being integrated within thousands upon thousands of high security installations worldwide is staggering!!
According to conversations with management, rev and earnings est. for year-ending Dec 31, 02 will reach $11 million and net .055/sh. Rev and earnings est. for 03 detonates in every direction and zooms to $33 million with a net/sh of .13 (based upon additional shares from anticipated funding of $10 million by KPMG). This surge in growth will result in a 200% rev increase and 120% earnings est. increase. If we assign a PE of 20, then a $2.60 share price emerges or a 333% share price appreciation from current levels. A dated Research Report and Disclosure on DFNS is available on www.saadvisory.com.
2. Five Star Products (OTC BB FSPX $0.10) is engaged in the wholesale distribution of home decorating, hardware and finishing products. Five Star is a distributor of paints sundry items, stains, brushes, rollers, caulking compounds and hardware products. Americans purchased over $187 Billion of Home Improvement products during 01 and growth is anticipated at 5%/yr until 06.
FSPX will generate rev for year-ending Dec 02 in excess of $100 million and earn .05/sh. FSPX has around 15 million shares outstanding yielding a super-tiny market-cap of only $1.5 million!! The bk is around .20 and the PE value for 02 will come in at 2X!!
Has to be one of the cheapest stocks alive today! Recently 2+ million shares were valued at .22 resulting from a transaction. This situation has takeover painted or rolled all over it! This company could easily be sold at 7X and still be super-cheap! This would yield a .35 stock (250% appreciation from current levels). We also believe that management could take the company private, but would have to pay up dramatically from current levels. Even at .50/sh or a market-cap of $7.5 million is a possibility. Anyway you look at this picture .10 is beyond cheap!
3. Seto Holdings (OTC BB SETO $.30) operates as a broad based technical manufacturer and distributor in three major product groupings. Technical Products to industry, inclusive of diamond tools, wafer fab supplies and technical ceramics; SETO is also involved with contract manufacturing. Two new Safety & Rescue products designed, developed and patented by SETO will be introduced during the first Q of 03.
We have followed SETO for many years and have had numerous conversations with management and believe that ramped-up growth will continue. For fiscal yr ending Jan 03 management anticipates rev of $7.1 million and .13 EPS based upon 14.4 million shares. For yr ending Jan 04 management est. rev of $ 10.2 million and .16 EPS based upon 14.3 million shares.
What we have here is a stock trading at .30 and will earn .13 ending 1/03 and .16 ending 1/04 anticipating rev growth to exceed 30%. If we assign a conservative PE of 12X and the current earnings est. from management of .13 and .16 are used in calculations then a share price of $1.56 and $1.92 respectively is generated! If SETO could get fairly valued then we have appreciation potential of 420% to 540% during the next 12 months.
We see little downside risk in purchasing SETO shares at current levels and "see" extraordinary upside potential. The company is also acquisition oriented! For "dated" research and disclosure visit www.saadvisory.com."
Editor's Note: Editor Bill Velmer has published S.A. Advisory since 1983. In addition to the newsletter, Velmer provides personal "Buy/Sell" recommendations by phone for $650/yr. For free email recommendations visit the web site www.saadvisory.com and leave your address.
THE MONEYPAPER
555 Theodore Fremd Ave., Suite B-103, Rye, NY 10580.
Monthly, 1 year, $99.
Cross border opportunities
opened for Bank of America
Vita Nelson recently published her 15th Annual Rest Assured Portfolio which is designed for conservative investors seeking a steady stream of dividend income to supplement retirement income. One of the featured companies in the portfolio is Bank of America Corp. (BAC). Robert Briechle, Senior V.P., AFA Financial Inc., Brecksville, OH gives the following overview on the company.
"Bank of America is a bank and financial holding company that operates in 21 states and the District of Columbia and has offices in 34 countries with over 4,000 banking centers. The company is organized into four segments: consumer and commercial banking, asset management, global corporate and investment banking, and equity investments. Services include deposit products, loans, treasury management, investment banking, capital markets, trade finance, leasing, and financial advisory counseling, which are provided to individuals, small businesses, middle market companies, financial institutions, and government entities. International operations are offered in Asia, Europe, and Latin America. Interest and fees on loans accounted for 51% of 2001 revenues; other interest income, 21%; and non-interest income, 28%.
BAC's management is focused on generating consistently better than 10% annual earnings growth by improving the bank's growth prospects, its productivity, and its risk profile. Progress is evidenced by excellent year-do-date results, notably better than expected earnings in a weaker than expected operating environment. These efforts are reflected in faster growth in new accounts and deposits in the consumer bank. Also, market share has grown for the investment bank, and productivity initiatives are showing results on the bottom line. The end result is that the prospects for longer-term sustainable earnings growth are improving. Management is shooting for 6 9% revenue growth, the consistent achievement of positive operating leverage, and the benefit of excess capital to fund continued aggressive share buybacks. Accomplishing these earnings goals would translate into a 20 22% return on equity.
BAC plans to open about 150 branch banking offices in 2003, including the now well-publicized addition of 7 10 sites in the Chicago area, with sites in New York, Boston, and Philadelphia also on the radar screen.
In late November, BAC announced plans to buy a significant interest in a Mexican bank, a subsidiary of Santander, for $1.6 billion in cash. Its equity stake should give it ready access to the Hispanic population in its U.S. service area, which, the bank estimates, accounts for more than 75% of the U.S. Hispanic population. At the same time, the partnership with the third largest Mexican bank should allow BAC to participate in a market with lucrative margins and attractive demographic trends, as well as cross-border business opportunities. Mexican-Americans currently generate approximately $1 billion a year in commissions to transfer money between the United States and Mexico.
Bottom line: This is a well-run bank that should be well positioned to make the transition through some interest-rate choppiness and competition with large-cap competitors in its peer group. Look for 5 6% annualized dividend growth going forward that rests on 8%-per-annum earnings growth."
Editor's Note: Visit Vita Nelson's new site at www.GuidetoDRIPs.com which offers an interactive version of the Guide to Direct Investment Plans, and much more.
COMMON CENTS II
P.O. Box 126354, Benbrook, TX 76126.
1 year, 6 issues, $72.
Somewhat of an up year
Roland Carter: "Were 2003 to finish down we'd tie the infamous record of four straight down years set during the Great Depression of 1929-32. It's hard to imagine 2003 giving us a fourth down year, but it's not impossible to think we could slip a few percentage points. But I believe 2003 will be somewhat of an up year."
Four current Buy recommendations are:
"Baxter Int'l (NYSE BAX) is a leading worldwide supplier of medication delivery, blood handling and other bioscience products, and renal dialysis offerings. Revenues should top $9 billion this year. 2002 EPS should reach $1.90 a new record for now 6 years running after 5 flattish "repositioning" years, 1991 96. 2003 EPS may reach $2.20/sh., and BAX thinks they can grow future earnings at 15%/year. They've stumbled somewhat in their renal operations; smoothing that out should clear the path to that 15% growth, hopefully rewarded by a P/E of 25 30. Long a raise-the-dividend issue, BAX gave up a 44-year record 4 years ago to concentrate more on growth. We'd have rather they had not, but we still really like their medical businesses. 59+ in 2003.
V.F. Corp. (NYSE VFC) is the world's largest publicly held (Levi is private) apparel company, with brand names of Wrangler, Lee, Riders, Vanity Fair, Bestform, Jansport, etc. This is an old-line, blue chip master-list company supplying one of life's basics (food, clothing, shelter). Usually affected by recessions, their business and stock has held up well, 2001-2002, but was punished (low of 20+) back in 2000 with other "old economy" stocks. VFC grows 8% - 9%. We usually target a 4% yield to buy (25), but news is good and EPS estimates for 2003 are around $3.70. The shares had highs of 54+ in both 1998 and '99.
Ingersol-Rand (NYSE IR) is an industrial equipment company. Their $10 bb annual sales cover a wide range of industries from road construction, compressors, temperature control, refrigeration, and generators, to golf carts and security systems. They've made many acquisitions/divestitures over the years with good success. Don't forget economic recovery candidate stocks for your portfolio as 2003 progresses. This one always participates, as Wall Street knows them well. 73+ in 1999.
Cree, Inc. (OTC CREE) This small (2003 sales may reach 200 million) company is quite different from usual CC offerings. It is high-priced relative to fundamentals, but is well positioned in a very exciting area light emitting diodes (LED's 58% of sales) and other advanced semiconductor technologies. In time, LED's will replace the world's incandescent light bulbs. Within 10 20 years this technology will offer lighting 10 times as efficient with bulbs lasting 100 times as long. CREE seems like a ground-floor situation here, yet already generates real sales/earnings with a pretty broad product line. I have a good CREE article from the 9/02 IEEE (electrical engineering) magazine. Send a SASE if interested. Like Sandisk, Qualcomm, and others, CREE had a huge run, 1998 2000, from under 5 to 101. Wild."
WALL STREET STOCK FORECASTER
250 Liston Road, Suite700, Buffalo, NY 14223.
Monthly, 1 year, $99.
Two buys for an economic turnaround
Patrick McKeough: "The economic downturn hurt these two cyclicals in 2002. But both dominate their respective markets, and recent cost cutting plans put them in a good position to grow strongly as the economy improves.
Tennant Co. (NYSE TNC $32; WSSF Rating: Average) makes floor maintenance equipment like sweepers and scrubbers for industrial users. It also makes equipment for cleaning outdoor areas like roads, parking lots and parks.
Profits in the first nine months of 2002 fell to $0.47 a share from $0.48 a share a year earlier. If you ignore restructuring costs, per-share profits fell 29.3%, to $0.87 from $1.23. The soft economy cut sales by 3.0%, to $309.8 million from $319.4 million. Tennant has $13.3 million in cash and only $5.0 million in long-term debt. Its order backlog grew to $14 million at September 30, 2002 from $8 million a year earlier.
Sales will probably improve in 2003 with the launch of several new products, including its new Centurion street sweeper. The Centurion is more powerful and environmentally friendly than older models. It is cheaper to run since it needs only one operator, rather than two.
Tennant fell to a five-year low of $26 in October 2002. It now trades for 25.6 times the $1.25 a share it will probably earn in 2002. It also trades for 28.6% less than its sales of $44.84 a share. The $0.84 dividend yields 2.6%.
Tennant is a buy.
Briggs & Stratton (NYSE BGG $42; WSSF Rating: Above average) makes air-cooled gasoline engines for original equipment makers of outdoor power equipment like lawn mowers, compressors and pumps. The company also makes its own electrical generators and pressure washers for the consumer market.
Briggs usually loses money in the fall since demand for lawn mowers and garden equipment peaks in the spring. But it cut its losses in the fiscal quarter ended September 30, 2002 to $0.32 a share from $0.81 a share a year earlier, mainly due to cost cuts and better inventory management. Sales grew 8.5%, to $238.2 million from $219.6 million.
The company plans to aggressively promote its portable electric generators and pressure washers in 2003. Sales of these products slipped 1% in the latest quarter as a drop in pressure washer sales offset higher demand for generators. December's severe ice storms in the mid-Atlantic region, which cut electricity in certain areas for several days, probably boosted generator sales in the final 2002-quarter.
An acquisition in 2001 raised long-term debt from 0.2 times equity to 1.1 times. But Briggs' cash flow is strong ($0.71 a share in the latest quarter compared with $0.08 a share a year earlier), so it will probably use some of it to pay down debt.
Briggs now trades for 13.5 times the $3.10 a share it should earn in the fiscal year ending June 30, 2003. It also trades for 0.6 times its sales of $71.58 a share. Briggs has raised its dividend every year since 1993. The current rate of $1.28 yields 3.0%.
Briggs & Stratton is a buy."
INVESTOR'S VALUE VIEW
2254 Winter Woods Blvd., Suite 2000, Winter Park, FL 32792.
Monthly, 1 year, $129.
Slow but steady wins the race
R. Scott Pearson: "Picking the right stocks will be increasingly important. Do your homework before buying anything. Don't depend entirely upon your own guesswork. Read reports from other sources, and keep up with the latest outlooks. If you don't have time to follow all the research, hire someone who can.
This market will not carry the excitement of the late 1990's, and it will hardly be newsworthy. However, as the tortoise said to the hare, "Slow but steady wins the race."
L-3 Communications made Pearson's Dynamic Insurgents portfolio. Dynamic Insurgents are companies on the cutting edge of the world's new architecture. The companies have a strong position in their changing field.
"L-3 Communications (LLL) has great potential despite a lawsuit brought by OSI Systems Inc. The company has been awarded several contracts, including a $39.9 million contract from Naval Air Systems Command. In addition, L-3's Space and Navigation division has been employed to work on the solid rocket boosters for the space shuttle a contract that could potentially reach $27 million in value. Of special interest is the fact that L-3 is one of only 2 companies in the U.S. capable of producing bomb detection equipment for airports. Since airports are now required by law to search luggage for explosives, L-3 has been hard-put to keep up with demand. Considering the political and economic climate, coupled with the threat of war, we highly recommend this conservative stock."
THE BLUE CHIP INVESTOR
575 Anton Boulevard, Suite 570, Costa Mesa, CA 92626.
Monthly, 1 year, $249.
Wells Fargo should continue
to post strong performance
Peter Hughes: "Wells Fargo (WFC $48) is the fourth-largest bank holding company in the United States, with over 5,400 total consumer locations. It was formed in 1998 by the merger of Norwest and Wells Fargo, retaining most of Norwest's management while adopting the Wells Fargo name. The company has achieved relatively good earnings and loan growth despite the recession, although it was forced to take a $1.1B accounting charge in 2001 to write down the value of its venture-capital portfolio. Wells Fargo's performance has been strong in recent quarters, due largely to the benefit it derives from declining interest rates.
Over the past three years the entire stock market has been declining. In the past six months the sell-off has worsened, as stories of financial manipulation and accounting fraud at companies like Enron and WorldCom proliferated. Because financial companies, by their nature, have complex balance sheets that are often difficult to analyze, these securities have been particularly hard-hit. Wells Fargo is no exception, now trading 18% below the all-time high it achieved in 2000. Even with a slowdown in refinancing activity, the company should continue to post strong performance.
Buy below $51."
THE BOWSER REPORT
P.O. Box 6278, Newport News, VA 23606.
Monthly, 1 year, $54. www.thebowserreport.com.
10 stocks for 2003
Max Bowser responding to our question of "How would you invest $10,000 in 2003?" His reply:
"I would invest $10,000 among these 10 stocks: Capital Title Gp. (Nasdaq CTGI); Chad Therapeutics (Amex CTU); Covalent Group (Nasdaq CVGR); Forward Ind. (Nasdaq: FORD); Hi-Shear Tech (Amex HSR); Int'l Remote Imag (Amex IRI); On-Site Sourcing (Nasdaq ONSS); Pyramid Breweries (Nasdaq PMID); Valley Forge Sci (Nasdaq VLFG) and Ocean Bio-Chem (Nasdaq OBCI).
We do not make forecasts as to what the Dow Jones or the S&P 500 will do in the future. However, our microcaps have done well the last three years as long as our subscribers follow our Game Plan, which is a very disciplined method for investing in these small companies."
Editor's Note: The Bowser Report is the only newsletter featuring stocks at $3 a share or less. Focuses on affordable investments possessing explosive upside potential and limited risk. From August 9, 2001 to January 2, 2003, the Bowser Micro Stock Index was up 45% versus the Dow being down 15% and the Russell 2000 Stock Index down 17% for the same period.
THE ACKER LETTER
2718 East 63rd Street, Brooklyn, NY 11234.
1 year, 10 14 issues, $170.
Featured portfolio stocks with the
potential for significant appreciation
Robert Acker: "The Bear Paw High Visibility Portfolio consists of well-known and widely followed stocks which, at the time of their inclusion, were out of favor and had suffered severe sell-offs. While additional swipes of the bear's paw and/or company-specific disappointments may send them lower, their high visibility and prior "darling" status support the notion that they have the potential for significant appreciation.
AT&T (NYSE T $26.11, Rec. 12/02 - dividend adjusted price $27.8125). T's Feb. dividend payable to shareholders of record 12/31/02, lowers our cost basis to $27.8125. Buy.
Celestica (NYSE CLS $14.10, Rec. 9/02 at $13.98). Buy.
Cisco Systems (Nasdaq NMS CSCO $13.10, Rec. 9/02 at $11.231). Buy.
Ford Motor Co. (NYSE F $9.30, Rec. 9/02 - dividend adjusted price $9.52). Buy.
Goodrich Corp. (NYSE GR $18.32, Rec. 11/02 dividend adjusted price $14.81). Buy on weakness.
Intel (Nasdaq NMS INTC $15.57, Rec. 9/02 dividend adjusted price $14.60). half sold 11/02 for +24.7% and half sold 12/02 for +26.7%. Position closed.
Monsanto (NYSE MON $19.25, Rec. 9/02 dividend adjusted price $14.29). MON's January dividend will lower our cost basis to $14.17). Hold. Buy on weakness.
Marathon Oil (NYSE MRO $21.29, Rec. 12/02 at $20.81). Buy.
Plexus (Nasdaq NMS PLXS $8.78, Rec. 9/02 at $9.92). Half sold 12/02 for +34.1%. Buy.
Raytheon (NYSE RTN $30.75, Rec. 11/02 dividend adjusted price $28.93). RTN's Jan. dividend payable to shareholders of record 12/30/02 lowers our adjusted price to $28.93). Buy.
Reuters Group (Nasdaq NMS RTRSY $17.20, Rec. 12/02 at $20.02. Buy. Average down for an adjusted price of $18.61.
Texas Instruments (NYSE TXN $15.01, Rec. 9/02 dividend adjusted price $15.56). Buy.
New Additions To The Bear's
Paw High Visibility Portfolio
Hitachi, Ltd. (NYSE HIT $37.25. Hitachi, a leading global electronics company, has a 52 week range of $33.33-to-$77.95 and yields 0.66%. Buy.
The Home Depot (NYSE HD $24.02). The Home Depot, the world's largest home improvement specialty retailer and the second largest retailer in the United States, has a 52 week range of $23.01-to-$52.60 and yields 1%. Buy."
PINNACLE
published for clients of Pinnacle Investment Management Inc.
573 Hopmeadow Street, Simsbury, CT 06070.
"Alternative" investments are appealing
John W. Eckel: "U.S. monetary and fiscal policy will provide clues to investment opportunities and risks in 2003. The U.S. government will likely use every available method to get the economy advancing strongly before the 2004 elections. Potential tools they are likely to use include tax cuts, increased spending and putting downward pressure on the U.S. dollar to boost U.S. exports. A stronger economy would provide a boost to profits, which would, in turn, help the stock market. A stronger economy would also make it easier for corporations to repay debt, which would benefit the high yield (non-investment grade) bonds market. However, a stronger economy would also produce rising inflation and be detrimental to U.S. Treasury and high-grade corporate bonds. A weaker dollar would cause foreign investments, precious metals, and commodities to become more valuable in U.S. dollar terms but would also present an obstacle to the U.S. stock market. Reduction of the tax on dividends would be beneficial to the overall stock market, particularly stocks with high dividends, and may reduce demand for municipal bonds. Investors will need to monitor any changes in the tax code carefully since the changes may create new opportunities and pitfalls.
It is not difficult to make a case for the long awaited return of a bull market, and once it does return, investors will certainly want to fully participate. However, there have been six rallies since the beginning of 2000, with the Dow gaining 10 to 28% in each. Following each rally the market declined further, dashing hope and proving painful for investors. Although the market is undervalued, economic and geopolitical uncertainties, an unpredictable North Korea, and the potential military conflict with Iraq provide reasons to remain cautious.
Caution should be also applied to U.S. Treasury bonds. Extremely low interest rates and the potential loss of principal which will occur if interest rates begin to rise, make U.S. Treasuries (except for TIPS) unappealing.
Given the stock and bond market uncertainty, "alternative" investments whose returns are not wholly dependent upon the stock or bond market are appealing. These include real estate investment trusts (REIT's) and market neutral strategies (which use a variety of strategies to offset their "long" investments with stocks they sell "short", to produce an overall neutral exposure to the market). These investments are attractive since they have the potential to enhance return and provide excellent diversification without the risks inherent in the stock and bond markets. Funds such as Kensington Strategic Income (a preferred stock REIT), Merger, and Calamos Market Neutral funds are examples of alternative investments that follow relatively low risk strategies. In addition, Hussman Strategic Growth fund hedges its portfolio when they believe market risk is high.
Cautious international equity funds such as First Eagle SoGen Global and First Eagle SoGen Overseas should benefit from a weakening dollar and are relatively low risk equity investments.
High yield bonds are currently offering attractive double-digit yields and their "spread" over U.S. Treasuries is unusually large. Both corporate and municipal high yield bond funds, such as Janus High Yield and Vanguard Long Term Tax Exempt, offer investors the opportunity to achieve a high yield and a potential capital gain as these bonds benefit from an improving economy. TIPS (Treasury Inflation Protected bonds) and TIP funds such as Pimco Real Return should continue to provide very low risk. FPA New Income and Pimco Total Return offer a good opportunity to invest in a diversified portfolio of government, mortgage, and corporate bonds.
Individual stocks that look particularly attractive in 2003 include United Health Group, Washington Mutual, H&R Block, Autozone, Stryker, Dell, Helen of Troy and Corinthian Colleges.
THE COOLCAT EXPLOSIVE SMALL CAP GROWTH STOCK REPORT
2406 Tamarack, Sanger, CA 93657.
1 year, 26 issues, $139. Trial: 4 months, 9 issues, $69.
Top Stock Pick for 2003
Kevin Kennedy's Top Stock Pick for 2003 is Leading Brands (NasdaqSC LBIX) is the largest independent, fully-integrated premium beverage company in Canada. "The company's unique integrated Distribution System offers turnkey, one-stop shopping to food and beverage brand owners, including manufacturing, distribution, sales/marketing and licensing. In addition, Leading Brands produces their own line of beverages such as TREK, Pez 100% Juices, Johnny's Roadside Iced Tea and Lemonade, Country Harvest Juices, Caesar's Bloody Caesar Cocktail, and Cool Canadian Water.
Leading Brands recently undertook a major expansion into the U.S., with its U.S. headquarters located in Stamford, CT.
Editor's Note: Cool Cat Report was ranked #1 by The Hulbert Financial Digest for 2001 with a gain of 77.6%. Visit the web site www.coolcatreport.com for special offers and to register for a free trial.
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-- February 2003