THE CONTRARY INVESTOR
309 S. Williard St., Burlington, VT 05401.
Monthly, 1 year, $125.

A year in review: Stock picks 2005

        Ashley Bryan & Brent Sisco: "Throughout the year the Contrary Investor reports on certain securities that we feel are undervalued or overlooked by the mainstream investment community. Many of these stocks have appreciated significantly since our reports and remain attractive investments at current levels.
        One theme that we continue to follow is the consolidation in the financial industry. We recommended National Financial Partners Corp (NFP) in the March 2005 issue at $37.51. NFP is focused on providing three main businesses to its customers: 1. Life Insurance and Wealth Transfer, 2. Corporate and Executive Benefits, and 3. Registered Investment Advisory Services.

Still a good buy?

        Although NFP has appreciated 40 percent since our recommendation we believe that it remains attractive. NFP has continued to grow both organically and externally. It has been growing its earnings steadily by sticking to a solid plan for expansion. Currently, NFP plans to acquire 18 firms per year, which coupled with solid single digit organic growth has led to a large increase in the firms earnings available to stock holders. Since we recommend NFP in March the firm has acquired 14 firms, which has helped to bolster revenues for the first nine months of 2005 by 38 percent compared with last year. Net income has also benefited from these acquisitions increasing 25 percent for the first nine months of 2005 compared with the same period in 2004. Consequently the increase in earnings has allowed the firm to raise its dividend by 25 percent.
        When we recommend NFP in March there was a great deal of skepticism and worry involving the insurance industry. Several insurance companies were under investigation for price fixing and other accounting frauds. Although NFP was not under investigation the industry concerns may have weighed on investors' minds. Today those concerns have calmed. The growth areas of NFP's core businesses continue to show promise as more baby boomers retire and seek investment advisory and other financial services.
        Executive and employee compensation is once again on the rise and promises to generate great growth in NFP's Corporate and Executive Benefits business. A study conducted by the Corporate Library in Portland, Maine showed that the total compensation for CEOs at 1,522 big U.S. companies rose a median of 30% last year to $2.4 million, which is double the 15% increase for 2003. Other growth areas, such as the privatization of social security, continue to also show promise. We believe NFP's business growth through acquisitions to be a strong one that will continue to flourish in 2006.
        Another attractive segment of the market is the alternative energy industry. One firm that has experienced great success is Energy Conversion Devices (ENER). ENER operates through three segments: 1. Ovonic Battery, 2. United Solar Ovonic, and ECD. The Ovonic Battery segment is concentrated on producing Nickel metal hydride (NiMh) batteries, which are commonly used in hybrid vehicles. The United Solar Ovonics segment produces solar voltaic cells, which are a new version of solar cells used to capture the sun's energy. The ECD segment is primarily involved in researching and constructing a solid hydrogen storage process and fuel cells that will enable hydrogen to be a viable alternative to oil in the near future. Since we reported on ENER in September of 2005, the price has appreciated 36 percent.

Still a good buy?

        ENER continues to innovate and produce reliable sources of renewable energy, which will become integral to meeting the growing demand for energy worldwide. One of the main drivers for the company has been the fixed supply and therefore the high price of oil. A large part of ENER's business is related to hybrid vehicles. In addition to the NiMh battery the firm also owns patents on a multitude of other battery technology and collects royalties from all the hybrids produced by the Big Three automakers. The hybrid vehicle business is growing rapidly with firms like Ford planning to offer a hybrid version of most vehicles by 2008. Royalties for the NiMh batteries increased by 600 percent in the third quarter of 2005 compared with the same period last year.
        The solar cell business in the United Solar Ovonic segment has continued to grow with a 40 percent increase in product sales during the third quarter of 2005 compared with the same period last year. Currently this business is running at full capacity and plans on expanding production. The firm recently reached an agreement to build a photovoltaic module manufacturing facility in Tianjin, China. This new factory will enable the firm to increase capacity while controlling costs. ENER has also benefited from contracts like the one signed this December with the U.S. Army to power a base in Hawaii consisting of more than 30,000 residential units. Both federal and state governments have taken steps to promote the use of solar power. California is in the process of creating a bill that will offer consumers, businesses, farms, and other public buildings a rebate for installing solar panels on buildings. Currently there is around $400 million available to consumers for solar energy incentives, but the new bill will increase this amount to $3.2 billion to be used over the next 11 years. One of the California government's goals is to increase the number of solar powered buildings from the current 15,000 to 1 million over the next 11 years. This bill is awaiting a vote from the legislature, which should take place in January 2006. If programs similar to the one in California are instituted in other states there will be more demand for ENER's solar photovoltaic cells. As oil continues to remain at high prices and the scarcity of crude worsens, ENER is well positioned to continue capitalizing on the growing need for sources of alternative energy."

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THE ACKER LETTER
2718 E. 63rd St., Brooklyn, NY 11234.
1 year, 10-14 issues, $160.

Two tech powerhouses priced
near their 52 week lows

        Bob Acker: "Cisco Systems (Nasdaq NMS $17.12 CSCO), the worldwide leader in networking for the Internet, is no stranger to us. We recommend Cisco Systems for purchase for the Bear's Paw High Visibility Portfolio in 2002 during a period when it was out of favor, and sold it in pieces in 2003 for gains o 46.1%, 58.4%, and 78.1%. Now that this profitable industry giant is priced only 29 cents above its 52 week low of $16.83, it seems to be a good time for purchase. CSCO, which has a 52 week range of $16.83-to-$20.25, has a price/earnings ratio of 19.9. Street earnings estimates average $1.03 for this year and $1.18 for next year. Buy. Cisco Systems Inc., 170 W. Tasman Dr., San Jose, CA 95134, 408-526-4000, Fax: 408-526-4100.

Photronics

        Photronics Inc. (Nasdaq NMS $15.06 PLAB) is a leading worldwide manufacturer of photomasks for semiconductor and microelectronic applications. Photronics, which has a price/earnings ratio of 15.85, a current ratio of 4.6-to-1, and a book value which I calculate to be $15.82 ($11.98 after goodwill), is priced at the low end of its 52 week range of $14.27-to-$27.34 and looks like a good rebound candidate.
Photronics reported net income of $38.7 million, or $0.95 per diluted share, on record sales of $440.8 million for the fiscal year ended October 30, 2005, up from net income of $24.5 million, or $0.68 per diluted share, on $395.5 million in sales in fiscal 2004. Street earnings per share estimates average $0.83 for the current fiscal year and $1.15 for fiscal 2007. If these estimates were to translate to realities, PLAB's forward P/Es would approximate 18.1 for the current fiscal year and 13.1 for fiscal 2007. Given Photronics' high book value, level of profitability and respected status in its industry, it seems as if this stock has been overly punished, as it now trades at a $12.28 discount to its 52 week high and a premium of only 79 cents to its 52 week low. Photronics is recommended for purchase. Photronics Inc., 15 Secor Rd., Brookfield, CT 06804, 203-775-9000."

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Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.

GM's Cash Curse

        Richard Lehmann: "The new year promises more of the same for GM shareholders, bondholders, and employees. For the employees that's just fine. For everyone else, its not.
        The beginnings of a solution for GM's multiple woes can be found in the Delphi bankruptcy. This bankruptcy is a stalking horse for GM since the issues and major players are all the same. The scenario I envision is that once the employees union sees how badly they are in bankruptcy court against Delphi, they will want to negotiate something less onerous with GM knowing what the alternative can bring. Witness what American Airlines' parent company, AMR, was able to achieve by threatening bankruptcy and pointing to the UAL bankruptcy as an example. However, the one thing the unions can do now is drag out the negotiations with Delphi and continue to receive their outsized compensation from GM as long as possible. The vulnerability here is the GM cash hoard.
        GM's cash strength is its biggest negotiating weakness. So long as it has billions in cash and continues to pay shareholders a dividend, union leaders won't ask their workers to take pay and benefit cuts. They would be thrown out of office at the next election coming up this year. Hence, GM must come up with another tactic.
        Crazy as it may sound, GM needs to whittle down its $19 billion cash hoard. By Kirk Kerkorian's thinking this should be done by a huge dividend. A better solution would be for GM to buy back its debt, which is currently selling at 60 cents on the dollar. Not only would this remove the cash honey pot, it would offset most of the 2006 operating losses and actually strengthen the balance sheet by reducing debt and increasing shareholders' equity. Yes, such a tactic would weaken their ability to delay needed changes or resist a bankruptcy filing. But then isn't that precisely the objective!
        GM's predicament will not be solved until management learns to play hard ball. In this case, hard ball means showing you are willing to risk a bankruptcy filing. Showing you have tons of cash and the ability to sell off GMAC to raise even more cash sends the wrong signal to the United Auto Workers and makes compromise by its leadership look like a sell-out.
        Do I expect any of this to happen? No. That would be unthinkable for the good-old-boys club management at GM. For my readers, however, who may have bought GM debt on my recommendation, don't despair. At 60 cents on the dollar, GM's bonds and preferreds are selling at less than their recovery value should bankruptcy occur. In fact, I believe debt holders will make out as well or better in bankruptcy than in the current state of limbo. Witness the recently concluded Mirant Corp. bankruptcy where debt and preferred holders came out as low as 7 cents on the dollar. Had Mirant struggled on without a bankruptcy, that debt would still be selling for sixty cents on the dollar today.
        This outcome is not unique when major companies file bankruptcy. When Texaco resorted to bankruptcy in the1980's there was little concern that bondholders would take a loss. It is reasonable to conclude a similar outcome for GM is likely once all the needed changes are weighed and valued. I don't think a bankruptcy will be necessary for GM, but profiting from their plight is not without risk and trauma. GM is a great franchise and can become an even more valuable company once its labor issues are resolved. As investors looking at the risk ratio for their debt, it is more promising than most equity investments today."

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WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99. 1-888-292-0296. E-mail: mckeough@idirect.com.

Cost cuts fuel 50% rise in stock price

        Patrick McKeough: "Hewlett-Packard Co. (NYSE HPQ $30; WSSF Rating; Above average) earned $0.14 a share (total $416 million) in its fourth fiscal quarter ended October 31, 2005, down 62.2% from $0.37 a share ($1.1 billion) a year earlier.
        However, if you exclude costs related to Hewlett's new restructuring plan, per-share income in the latest quarter grew 24.4%, to $0.51 from $0.41. The company hopes its plan will cut its annual expense by $1.9 billion. The higher earnings came largely from lower costs, although revenue did rise 7.0% in the quarter, to $22.9 billion from $21.4 billion.
        The quick progress of Hewlett's restructuring has helped spur a $10 rise in the stock over the past 12 months. It now trades at 16.5 times the $1.82 a share it should earn in 2006. But Hewlett spends around 4% of its $30 a share in revenue on research, which it must write off immediately, so it's more profitable than it looks. The $0.32 dividend yields 1.1%.
        The stock is a buy for long-term gains."

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THE KONLIN LETTER
5 Water Rd., Rocky Point, NY 11778.
Monthly, 1 year, $95.

National Lampoon:
Powerful, time-tested brand

        Konrad Kuhn: "The "National Lampoon" brand is a household name in comedy and is one of the most powerful brands in media, having little direct competition in the comedic media space. National Lampoon, Inc. (AMEX NLN $2.45) is a brand-driven, multi-platform media and entertainment company focusing on creating and delivering comedic content to their audiences. NLN, operating in four divisions - National Lampoon Network, Entertainment, Publishing and Licensing - is active in a broad array of entertainment segments, including feature films, television programming, interactive entertainment, home video, audioCDs, and book publishing. The company also owns interests in all major National Lampoon properties, including "National Lampoon's Animal House," the "National Lampoon Vacation" series, and "National Lampoon's Van Wilder."
        The National Lampoon Network, the nation's largest and fastest growing independent college TV network serves 618 affiliated colleges and other television stations, reaching nearly 5 mil. college students in their dormitories and other places of residence. For these retailers targeting the college market, the network provides an integrated marketing approach that includes advertising during the airing of its television programming, field marketing such as product sampling, live events hosted on college and university campuses throughout the U.S., and Internet promotions.
        The network is a powerful distribution source for NLN's content, as well as a platform to leverage all of its entertainment initiatives. The network also develops, produces, and distributes comedic television programming to college audiences through its network. Tooned Up, Greek Games, College Town, and Masters Debaters are among the television programming that they developed and produced and are distributing in the retail market. In addition, NLN operates a humor website, www.nationallampoon.com on the Internet. NLN is now offering group travels and entertainment packages through its subsidiary National Lampoon Tours, Inc. The destinations of their first two travel packages, timed to coincide with most college and university spring breaks, were Las Vegas and Cabo San Lucas, Mexico. The packages include professional entertainment, theme parties, and other attractions for young adults.
        Revenues for FY'05 jumped 91% to $3.67 mil., with a loss per share of $3.69. The loss was primarily due to substantial charges related to severance of their former CEO, costs related to closing their 'Series C' Financing, and costs related to the closing of its successful common stock offering of $9.6 mil., all part of the overall business plan and strategy to reenergize NLN. The stock pulled back to the lower end of its long-term trading cycle of 2, where we recommended to purchase aggressively for a 1st target back up into the 7 area. Under the leadership of CEO Daniel Laikin (former venture capitalist), who recently purchased 70,000 shares in the open market increasing his holdings to roughly 40%, intends to transform NLN, a holder of a powerful brand, into an aggressive media company. Of the 6,769,451 shares outstanding, approx. 63.4% are held by insiders.
        NLN is aggressively expanding into the home entertainment market by repackaging existing material and developing/producing original material for DVD distribution. The company licenses the National Lampoon Brand, as well as content from their library, for use in a wide variety of products, including movies, television programming, live events, radio broadcasts, recordings, electronic games, and other consumer products. NLN also derives a substantial portion of their revenues from license fees relating to the production of new motion pictures, and from royalties from previously released motion pictures bearing their brand. Twenty-five motion pictures have been released using the National Lampoon name and three additional motion pictures are planned for release during the 1st half of '06: Pucked (starring Jon Bon Jovi and David Faustino), Cattle Call (Starring Thomas Ian Nicholas and Nicole Eggert), and Pledge This! (Starring Paris Hilton).
        By expanding the use of the National Lampoon brand, NLN significantly increased revenues in FY'05. NLN also launched its mobile comedy content service, National Lampoon Mobile, available exclusively on select wireless service providers. Customers have access to entertainment features, including daily humor, deep thoughts, foto funnies, and party pics and spring break slide shows anytime, anywhere. The initial launch far exceeded expectations attracting thousands of subscribers (at $3.99/monthly).
        NLN differentiates itself from other media companies through its powerful, time-tested brand, the development of unique comedic content, and its direct distribution outlet to the elusive college demographic. Through these factors and related initiatives currently underway, NLN is strategically positioning themselves as the brand of choice for advertisers, sponsors, or studios seeking a direct entry into their coveted demographics. Ultimate target 9-10."

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THE PRIMARY TREND
700 N. Water St., Milwaukee, WI 53202.
Monthly, 1 year, $80.

Tribune Co: Undervalued, Buy

        Barry Arnold: "Tribune Co. (NYSE TRB $30.26), has been a terrible performer over the past year. The stock is down 25% on continued circulation deterioration that is an industry-wide dilemma, not just TRBs. Despite internet-based media constantly taking bites at the ankles of these traditional newspaper conglomerates, TRB and its peers continue to print money. TRB's Board just announced a $1 billion stock buy-back. Technically, TRB has declined to a multi-year support level of $30. In so doing, its Relative Strength Index has also registered several positive non-confirmations. We bought TRB for its underappreciated asset value. At $30, it's even more undervalued. Buy TRB common."

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DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
year, 52 issues, $279.

Capital-gains favorites for 2006

        Richard Moroney: "While the market provided plenty of thrills and chills, 2005 has been a good year for the Forecasts' top picks. As of Dec. 13, the Focus List was up 8.6% for the year excluding dividends, versus 4.6% for our benchmark, the S&P 500 Index. Our Buy List, up 10.9%, and Long-Term Buy List, up 5.9% also beat the S&P 500.
        But the market never stops moving, and investors who tarry to revel in past victories get left behind. After 60 years of continuous weekly publication, the Forecasts knows that to be successful, investors must focus on the battles to come.
        Every year at this time, the Forecasts like to share with subscribers our top choices for year-ahead capital gains. The seven companies detailed in the following paragraphs - including two additions to the Focus List - represent attractive picks for new buying. All come into the new year with solid operating momentum, reasonable valuations, and plenty of reasons for optimism about business prospects in 2006.
        An expanding economy and increasing international trade should boost growth in rail shipments, and Canadian National Railway's (NYSE CNI $80) superior service has positioned it to gain market share from rail and truck competitors. High oil prices have prompted greater demand for Canadian coal, and hurricane reconstruction should increase the need for forest products. While CN benefits from those short-term trends, it is working to increase its exposure to the less-cyclical intermodal business - shipments of goods that require a combination of ship or truck as well as rail transportation.
        CN pays out just 63% of revenues as operating expenses, less than any of its peers and well below the industry average of 80%. The company expects to lower the operating ratio to 60% by the end of 2010 through cost cuts and efficiency gains. CN has planned major infrastructure improvements in all its operating regions, which should improve transit times and network reliability. Canadian National is a Focus List Buy.
        ConocoPhillips (NYSE COP $58) stands to benefit from acquisitions, investments in development projects, and increased refining capacity. Conoco plans capital spending of $9.1 billion in 2006, up from $8.6 billion in 2005, plus another $2 billion to increase its stake in Russian oil firm Lukoil to 20%. Production should rise 6% in 2006 excluding Lukoil results and 11% including Lukoil. Over the next several years, the company targets annual production growth of 3%.
        Conoco would nearly double its natural-gas production with the pending $35 billion acquisition of Burlington Resources (NYSE BR $85). The cash-and-stock deal represents a 19% premium to Burlington's share price prior to news of the merger talks. Conoco will fund the purchase with cash and about $18 billion in debt. Given Conoco's strong cash flow, the company expects to pay off half of the merger debt over the next three years. While the merger will dilute near-term earnings per share, the stock's reaction to the deal represents a buying opportunity. For the 10 analysts that have revised 2006 profit estimates since the deal was announced, the consensus is $9.38 per share. Conoco, now trading at just six times that estimate, is a Focus List Buy and a Long-Term Buy.
        Freeport-McMoRan Copper & Gold (NYSE FCX $55) owns the second-largest copper reserve in the world. Copper grades at the main Indonesian mine are high, and the ore also contains gold and silver. Revenue from these byproducts makes Freeport one of the world's lowest-cost copper producers. Improving industrial demand is boosting volumes and prices for copper and gold. In the first nine months of the year, revenue jumped 86%.
        Operating cash flow reached $883 million in the first three quarters of this year, compared to negative flows over the same time period last year. Freeport used the cash to pay down debt, buy back shares, and pay out $1.00 per share in special dividends so far this year. Low capital-spending requirements for the next three to four years should help maintain high free cash flows. Freeport-McMoRan is being added to the Focus List.
        Golden West Financial (NYSE GDW $65), the second-largest thrift in the country by asset size, has proved it can deliver consistent earnings growth in various interest rate environments. When rates rise, the net interest margin - the difference between the interest rate the company earns off loans and the interest pays out on deposits - narrows because liabilities reprice more quickly than assets. However, asset yields usually catch up to funding costs after four to six quarters. Short-term interest rates began rising more than a year ago.
        Rising short-term interest rates have tightened the spread between adjustable- and fixed-rate mortgages, making ARMs less appealing relative to traditional loans. Yet in the 12 months ended October, Golden West increased its loan portfolio by 19%. Consensus estimates project per-share-profit growth of 13% in 2006. Golden West is a Focus List Buy and a Long-Term Buy.
        Harris' (NYSE HRS $43) radio-frequency-communications segment has driven most of the company's profit growth in recent quarters. The company believes this trend will continue, projecting 35% to 45% revenue growth for the unit in fiscal 2006 ending June on the heels of 25% revenue growth in fiscal 2005. While defense spending may slow, the military seems likely to continue upgrading its communications capabilities to equip ground forces that now operate in smaller units more dependent on radio systems. The government and radio-frequency segments have a combined order backlog of more than $4 billion.
        Commercial demand is also on the rise, as wireless carriers expand networks and television and radio broadcasters upgrade from analog systems to Harris' digital-transmission equipment. Consensus estimates project per-share-profit growth of 36% in fiscal 2006 ending June and 14% in fiscal 2007. Harris is a Focus List Buy and a Long-Term Buy.
        Ingersoll-Rand (NYSE IR $40) is changing into a diversified industrial company with less exposure to cyclical industries and greater focus on such products as golf carts, air compressors, and machinery attachments, for which demand is less economically sensitive. But in the near term, the cyclical construction-equipment segment, which now accounts for less than a quarter of revenue, should benefit from hurricane-related rebuilding. High volumes and price hikes are offsetting higher raw material and fuel costs.
        In the September quarter, Ingersoll bought back $145 million in shares. The company has about $1.24 billion available under an existing buyback plan, which it expects to complete in the next two years. Management projects 4% to 6% internal revenue growth and 12% to 15% per-share-profit growth in 2006. Ingersoll-Rand, already a Long-Term Buy, is being added to the Focus List.
        Manulife Financial (NYSE MFC $59), the second-largest life insurer in North America and fifth-largest in the world based on market capitalization, should continue to benefit from sales growth and improved investment results. Total premiums and deposits, which reached a record $15.7 billion in the September quarter, should continue to grow in 2006. Wealth-management sales in the U.S. have been particularly strong, and funds under management continue to rise sharply. Strong flows into mutual funds have boosted wealth-management results in Canada as well. Manulife continues to focus on growth in China by opening new offices and introducing new products.
        Asset quality remains solid, and Manulife is working to reduce its exposure to the lower-rated credit inherited from the purchase of John Hancock Financial Service. Manulife has bought back $1.7 billion in stock over the last four quarters and increased the amount repurchased in each quarter. Manulife is a Focus List Buy and a Long-Term Buy.

Our top picks for 2006 income

       Stocks: For investors in search of yield, banking stocks continue to offer fertile hunting ground. Among the 35 stocks on the Forecasts Monitored List yielding more than 3%, 11 are in the financial include Bank of America (NYSE BAC $47), yielding 4.3%; Citigroup (NYSE C $49), yielding 3.6%; and Wells Fargo (NYSE WFC $63), yielding 3.3%. Enhancing the appeal of these shares has been outstanding dividend growth. Bank of America's dividend has increased 56% from the end of 2002. Citigroup's dividend is up 120% since the second quarter of 2003. Wells Fargo's payout has doubled since the first quarter of 2002. All three companies should raise per-share dividends at least 7% in 2006. Banking stocks have come back nicely following declines earlier this year. A slowdown in the housing market could impact mortgage-related operation, but all three companies have diversified revenue streams that should compensate for weakness in any one area. Bank of America is rated Buy and Long-Term Buy. Citigroup is rated Long-Term Buy. Wells Fargo is a Focus List Buy and Long-Term Buy.
        Mutual Funds: The two favorite funds that look especially appealing for investors who like income as well as equity exposure are Vanguard Wellington (VWELX $32) and Vanguard Wellesley Income (VWINX $22).
        The Vanguard Wellington fund traditionally contains approximately 60% equities and 40% fixed-income investments. The Vanguard Wellesley is the mirror image, with approximately 60% invested in bonds and 40% in stocks. Both funds have performed in the top 10% of their peer group for the last five and 10 years. Wellesley Income currently yields 4.2%, while Wellington yields 2.9%. Both funds, with low expense ratios, are recommended for investors who want income and reasonable appreciation potential.
        Exchange traded funds: Exchange-traded funds (ETFs) are mutual funds that trade like individual stocks on the exchanges. Unlike open-end mutual funds, which are bought and sold at the end of each day, ETFs can be traded throughout the day.
        The largest dividend-oriented ETF is the iShares Dow Jones Select Dividend (DVY $63), with some $7 billion in assets. This ETF, which began trading in November 2003, focuses on 100 high-yielding stocks in the Dow Jones U.S. Total Market Index that meet the following criteria: (1) positive dividend growth over the last five years, and (2) payout ratios below 60%. This ETF has returned 4.3% so far this year. Currently yielding 3.0%, the iShares Dow Jones Select Dividend offers an attractive ETF option for income investors. For ETF investors who desire higher yields, the iShares Lehman Aggregate Bond (AGG $100) provides broad exposure to the bond market. This ETF, currently yielding 4.4%, is one of the best choices for fixed-income investments among a fairly small field of bond ETFs.
        Preferred Stocks: Because of high yields, preferred stocks have become increasingly attractive for income-hungry investors. Be aware, however, that preferred stocks behave more like bonds than common stocks in terms of sensitivity to interest-rate movements. Thus, a continued rise in interest rates could pressure the prices of preferred stocks. Still, adding preferred stocks to income portfolios makes sense from a diversification standpoint. Citigroup 5.864% Pfd. M (C-M; $49) has a current yield of 5.9%. The preferred has a little less than two years of call protection. Metlife 6.50% Series B Pfd. (MET-B; $25) has call protection to Sept. 15, 2010, and offers a hefty yield of 6.5%."

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INGERLETTER.COM
Inger & Co., 100 East Thousand Oaks Blvd., Suite 227, Thousand Oaks, CA 91360.
805-496-6441.

Inger's Picks of the Year

       Gene Inger, pioneer of financial television and publisher of The Inger Letter: Daily Briefing and (audio-email) MarketCast S&P intraday trading guidelines, announces his Picks of the Year for 2006. They are:

• Mid-Cap: Ionatron (Nasdaq IOTN 10) was an unusual 'pick of the year' over a year ago, because first it wasn't yet a Nasdaq National Market issue, or Russell 2000 component (now part of both), and as we'd never before selected a speculative issue prior to its becoming listed. It was around 2 at first review by ingerletter.com and is followed consistently, with augmentation during a dip to 6.50 months ago, along the way. Now amidst raging battles between bulls & bears near 10, Ionatron is hovering close to new highs and stands potential of being a key player in 'disruptive technology' breakthroughs for our Armed Forces FCS (Future Combat Systems), as the Defense Department embraces Directed Energy Weapons starting with IOTN's JIN (counter IED detector/neutralizer); a spin-off of IOTN's core technology, LIPIC (Laser Induced Plasma Channel). Believing that IOTN has continuing significant speculative potential it's elevated to mid-cap 'pick of the year' in 2006.
• Small-Cap: With interest focused on special-situation issues we select Advanced Photonix (Amex API 2.75) as small-cap 'pick of the year' for uniquely promising 'disruptive technology', which like Ionatron, has potential to shake convention. One of the few survivors of the old optical boom, API's position is virtually a sole supplier of certain optoelectronic devices, for which virtually no competition now exists. It's their Picometrix acquisition (a University of Michigan spin-off) that piqued us. Funded partially by NASA needs (Space Shuttle foam density), API/Pico's technology delves into density differentiation; plus a fascinating use of looming exploration of Terahertz spectrum technology to control consistency of products (pilot projects involve pharmaceutical and tire manufacturing), and revolutionize mass screening procedures for crucial security checking; as Terahertz technology may be able to detect certain explosives or other contraband trying to pass security checkpoints (think: trains; subways and/or large gatherings, and the next leap beyond individual screenings).
         With API's shares prices fairly based for existing profitable business, and not carrying a premium for the potential of revolutionary Terahertz applications of their wholly-owned Picometrix division, ingerletter.com thinks API under 3 has potential to advanced solidly over the year on current and future business (which may involve optical routers used by cable companies), providing 'Pico' as a no-cost added bonus. A limited amount of venture capital overhead supply may still constrain shares just for a while, but as that is worked-through (or they simply hold shares) we envision API as a solid core speculative retention for 2006, and suspect it may be 'in-play' by 2007, particularly if Terahertz applications or devices find a market in the manufacturing or security realms sooner.
• Micro-Cap: As market interest broadens into tertiary issues, so do aggressive 'Vegas bet' picks; including (for the first time) a micro-cap 'pick of the year'. InkSure (OTCBB INKS 2.90) is an Israeli/American hybrid; and the only company with U.S. patents on 'chipless' RFID technology. Existing covert authentication ink and scanning systems that deters forgeries or counterfeiting is successful; and the advent of 'chipless' RFID (to be presented at MIT in early March) potentially opens doors to a 'supply chain management' disruptive revolution beyond barcode scanning, as in practicality via a unique process replacing chips with essentially digital ink. The 'per impression' costs conceivably could rock the emerging RFID field, and lower the cost barrier to inventory control and tracking. At this point it's a microcap, but with experienced hands from Sensormatic (an RFID pioneer) aboard InkSure, we think the company has significant opportunity to make inroads in an immense field.
• Big-Cap: As to big-cap plays; we have no qualm with optimism about Intel (INTC) and Texas Instruments (TNX), which continue inline with ingerletter.com pattern evolutions, as they have since 2002 lows in the 'teens for each. For early-mid 2006 it's new mid-small-micro cap selections potentially most exciting (plus other contenders) with big-cap techs consolidating a bit prior to new moves higher.

       Editor's Note: IngerLetter.com publishes Gene Inger's analysis and reflections regarding technology stocks, geopolitics, monetary policy, and market trends via The Inger Letter Daily Briefing ($159 quarterly). S&P intraday guidelines and pattern expectations are provided via intraday Internet audio (e-mail-audio 5 times daily) as Gene Inger's MarketCast ($390 quarterly). Inger's analysis and recommendations are intended to provoke research and due diligence by investors, and do not constitute buy, sell or hold recommendations for any security. Decisions are all-risk and sole-risk of individual investors. Inger receives no compensation, directly or indirectly in any form from the companies he covers, or their representatives. He does, on occasion, buy and sell stock in the open market for his personal portfolio, with appropriate disclosure.

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SA ADVISORY
2274 Arbor Ln., #3, Salt Lake City, UT 84117.
www.saadvisory.com.

Moore-Handley: Diamond in the debris
left behind by Hurricane Katrina

        Bill Velmer's Top Stock Pick for 2006 is Moore-Handley, Inc. (Pink Sheets-MHCO.PK $7.00).
       "$150,000,000,000 repair bill from Katrina will "blow" our stock pick 200-300% or more during the next 12-18 months.
        Moore-Handley, Inc. is the second largest independent hardware and building material distributor in the US located in Birmingham, AL. The company is located on 30 acres of fully paid land and the "new" facility 500K square feet in size.
        The company distributes (38,000 items) plumbing & electrical supplies, power and hand tools, paint & paint sundries, lawn & garden equipment, and other hardware and building material products. The company's customers include retail home centers, hardware stores, building material dealers, paint stores, combo stores, mass merchandisers, businesses & institutions.
        Before Katrina MHCO.PK was extremely cheap and undervalued, under followed and unknown, but because of the massive destruction caused by the most costly event in US History - it is in our opinion that MHCO.PK has the potential to 2 to 3x its business for many years to come because of the rebuilding of the affected area!
        For the 9 months ending Sept 30th revenues equaled $134 million and net .46/share fully diluted (based upon 1.6 million shares). The stated BK is $8.36 (doesn't include the hidden value of the land that is worth around $3 million or an additional $1.87/share in book.
        When you consider the massive amount of products that will be needed in order to rebuild and repair these devastated areas for many years to come and the fact that MHCO.PK has the perfect presence in the area - it is hard to believe that MHCO.PK sales will not balloon during the next few quarters and beyond as demand for building products increases like a "category 5"! We assume for year ending .05 sales will reach at least $185 million and net over .75 - pretty cheap for a $7 number! Sales for 06 in our opinion can easily double or triple and earnings could easily zoom above the $1.50/share level. Our numbers might be very low! With demand so high - we assume discounts will disappear and product pricing will rise resulting in huge profits for MHCO.PK!
        In our opinion MHCO.PK could be bought out and we also believe that a dividend could also be paid to shareholders. If MHCO.PK can earn $1.50/share for 06 and we assign a P/E of 15x then we calculate a $22.50 share price - a far cry from the $7 current valuation. The stock currently trades at 17% below stated book and based upon 05 revenue est. of $185 million MHCO.PK sports a tiny PSR of .06 with a 05 and 06 P/E established of 9.3x and 4.6x!
        In our opinion, MHCO.PK is the cheapest and most promising undervalued opportunity that you will find anywhere in 06! This investment opportunity is truly a diamond in the debris left behind by Hurricane Katrina. The recovery effort will last for years and this investment is the perfect play! The corporate web site is www.moorehandley.com.
        Editor's Note: Receive free e-mail recommendations at www.saadvisory.com or www.nasdaqstocksrus.com. A phone service is available for the serious investor. Personalized Buy and Sell communications for $750/yr. (801) 272-4761.

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WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99. 1-888-292-0296. E-mail: mckeough@idirect.com.

Stick with Fair Isaac

        Patrick McKeough: "I still haven't come across anything to beat Fair Isaac Inc. (NYSE FIC $44; WSSF Rating: Average), our "Stock of the Year" for aggressive investors in 2005. So for now, we'll let Fair Isaac hang on to the Stock of the Year title for 2006.
Our Stocks of the Year, particularly Symantec (Nasdaq SYMC) from 2000-2003 and Autodesk (Nasdaq ADSK) in 2004, have produced great gains for us, averaging 61.6% in the past five years. This record may lead some readers to overindulge in our choice for 2006.
        Unfortunately, in the stock market, nobody gets it right every time. Our most widely followed stock of the year may turn out to be the one that disappoints.
        After all, as stock prices rise - and they have been rising for three years - the pickings get slimmer. There are few undiscovered gems these days.
        It also pays to keep in mind that market downturns have a way of appearing during the year of a mid-term Congressional election. The next one is in November 2006.
        Overall, I'm looking forward to a profitable year. But we may get to choose a great new Stock of the Year during a mid-year slump."

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Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Rd., Ste. 301, McLean, VA 22102.
Monthly, 1 year, $129.

Two great buys

        Roger Conrad: "For the 31st time since 1969, utility stocks finished the year on a strong note. Unfortunately, seasonal strength in the past has tended to fade after New Year's Day, with 21 Januarys and just 13 Februarys of the past 37 coming up positive.
Utility fundamentals remain strong, all but ruling out a major sector wipeout. Equally encouraging - despite a winning 2005 - two of every three How They Rate companies are cheaper than a year ago, valued on either worst case earnings or my Value Index, which compares price-to-earnings ratios to annual returns.
        I still advise avoiding any slow-growth utilities that yield less than 4 percent. But surprisingly, most companies appear to be growing into their high prices of recent years. That's another reason to seek bargains, rather than cash out.
        Two great buys are Valor Communications and KeySpan Energy.
        Basic phone networks may become obsolete, but they still generate mountains of cash. Unlocking it is the goal of Alltel's spinoff/merger of wireline assets with new Growth Portfolio Aggressive Holding Valor Communications (NYSE VCG $12.13).
        Under the deal, Alltel shareholders will receive 1.05 shares of Valor in a tax-free transaction when regulatory approvals are received, probably by summer 2006. Valor will then have roughly 3.4 million basic phone customers in 16 states, 2 million and 400,000 of which also take its long distance and broadband service, respectively. These operations generated $3.4 billion in sales and $1.7 billion of operating income in the last 12 months.
        Ultimately, Valor's value will lay in the sustainability and growth of its post-merger quarterly dividend of 25 cents a share, about 70 percent of initial cash flow. Debt reduction, meeting the $40 million annual synergies target and upselling services are the keys. The company will also have to control last year's 4 percent loss rate of basic phone customers.
        Its rural focus and management's demonstrated selling ability point to long-term success, and the new combination is apparently priced at just 6.4 times projected 2006 cash flow. Valor will pay a dividend of 36 cents a share for the two quarters before the deal closes.
        That adds up to a low-risk first year cash take of more than 10 percent at current prices. Buy Valor up to 13.
        Consistent, strong operating performance has been KeySpan Energy's (NYSE KSE $35.38) hallmark from its roots as Brooklyn Union Gas. It remains true today for the company's 2.6 million gas customers in New York and New England, as well as the 1.1 million customers of Long Island Power Authority (LIPA) and the one-quarter of New York City residents for whom it generates electricity.
        During the past year, the ute has successfully confronted challenges concerning its relationship with LIPA and high gas costs. Last month, the company extended its deal to manage LIPA plants at least until 2013, and laid to rest fears it would buy LIPA or sell the agency its 4,160 megawatts of power plants on Long Island.
        Fitch rated KeySpan's outlook "positive," noting "greater financial stability" following the deal and management's "demonstrated skill and patience in dealing with complex regulatory and political situations."
        As for gas costs, hedging and storage will keep the ute's customers' rates under control. And while some load will be lost to conservation, customer growth and cold winter temperatures will offset it.
        After revisiting its 2000 highs this summer, KeySpan shares have since skidded to the mid-30s. One reason: Growth will apparently remain subdued during the next couple years, as the company cuts costs, debt and risk. But paying a dividend of more than 5 percent - which increased 2.2 percent last month - KeySpan is again cheap up to 38."

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INVESTMENT QUALITY TRENDS
6350 Lusk Blvd., Ste. E-104, San Diego, CA 92121.
1 year, 24 issues, $310. Online version, $265.

The Lucky 13 2006

        Kelley Wright: "Every stock in the Undervalued and Rising Trends categories is considered part of our model portfolio for tracking purposes. That would total 95 stocks as of the Mid-December 2005 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. Six years ago at popular urging we initiated a feature in the first issue of the year we call our "Lucky 13" portfolio. The feature has been popular and quite successful. While not every stock in the portfolio has been a winner, there were enough winners in the group to produce six consecutive years of positive returns, the first five years in double digits and overall has averaged about 18.11% per year.
        Now we step up to the plate with a new portfolio for 2006. Our focus this year, as always, is to select stocks that exhibit the highest quality, offer historic value and have attractive dividend yields. Hopefully these selections will safely provide all of the above.
        Abbott Labs (ABT) - One of the finest large pharmaceutical companies in the world. ABT is A rated and sports our "G" rating for increasing their dividend at a minimum of 10% per year for the last 12 consecutive years.
        American International Group (AIG) - This insurance behemoth appears back on track after cleaning out the executive suite and appeasing the honorable attorney general for the great state of New York. A+ rated and another "G" stock.
        Atmos Energy (ATO) - Natural gas and pipelines are businesses we like. The company is working off debt but it is good debt and the dividend is attractive.
        Bank of America (BAC) - Arguably the best run bank in America. A-rated and another "G."
        Popular Inc. (BPOP) - S&P doesn't hand out it's A+ rating indiscriminately as we don't with our "G's." BPOP has both and is an interesting play on the fast growing Latino demographic.
        ConAgra Inc. (CAG) - A past member that is completing its declining trend. Another A rated company with a "G" and a 5.40% yield to boot.
        McDonalds (MCD) - The luster is back at the golden arches. More healthy options for adults compliment the ever popular burgers and fries. A welcome site to worn out parents with mini vans full of screaming kids.
        Mercury General (MCY) - Best known as an auto insurer MCY is highly visible in California and Florida, two places with a lot of autos. "G" rated by us, this one might be attractive to a bigger company with a appetite, say AIG for example.
        Pfizer (PFE) - We've been waiting on this one to become undervalued for a long time. A rated and another "G", we think this big pharma was worth the wait.
        Sigma-Aldrich (SIAL) - Can you have too many A+ rated stocks that raise their dividend at least 10% per year for the last 12 years? We think not.
        UST Inc. (UST) - Nothing is as defensive as a good old sin stock and nothing fits the bill like tobacco. The 5.40% dividend yield and A-rating are also pretty hard to pass up.
Washington Mutual (WM) - Short rates will peak and start coming down again; the markets are already starting to discount it. With an A rating, a "G" designation and a nice fat dividend, WAMU should benefit.
        Wal-Mart Stores (WMT) - Say what you will about this A+ rated, "G" designated member of the DJIA, but they know how to fill those stores with customers and their coffers with cash.

Investment Outlook

        I will suggest that the Fed will again cut rates; probably around mid-year. The yield on the 10-year should fall below 4.0% by September/October. The financials should do well.
        I believe gold is in a long-term bull market and will move significantly higher before all is said and done.
        I believe crude oil will move higher as refineries switch from heating oil to gasoline in preparation for the driving season. Americans have already proven they will pay $.300 a gallon so look for a reprise this summer.
        I believe this will be disinflationary as consumers will shift capital from discretionary spending to non-discretionary spending. This should act to restrain GDP in 2006.
        While this doesn't bode well for the stock market in general, it does suggest opportunities for the market of stocks that are of high-quality, are at their historic area of undervalue and are traditionally defensive in nature. As Providence would have it we happen to specialize in just those issues."

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DISTRESSED DEBT SECURITIES
6175 NW 153rd St., #201, Miami Lakes, FL 33014.
Monthly, 1 year, $495.

Adios to Video Rentals

        Richard Lehmann: "The sun has set on another year... and much the same could be said in the video rental industry. Blockbuster Inc. and Movie Gallery, the heavyweights of video rentals, ended 2005 on such abysmal performance notes that it appears only an act of God will keep them out of bankruptcy court. Their combined debt of nearly $2.5 billion ($635 million of which is bond debt) coupled with tanking sales, increased competition and dramatically decreasing market value has created a perfect recipe for bankruptcy.
        The numbers are disheartening. Blockbuster has posted $606 million of losses through the first nine months of the year, half a billion in losses in the last quarter alone. It attempted to stop the bleeding by doing away with late fees, which were unpopular with customers but a source of 13% of the company's revenue. The plan failed. Sales still fell 4% on the year and a major source of revenue had been eliminated. Blockbuster is currently seeking to restructure its debt and has admitted that if an agreement can't be reached, bankruptcy is a viable option. Movie Gallery's position is even more dire. The company has lost 70% of its share value since the beginning of the year and has seen sales drop by 10%. Complicating matters is its excessive debt/capital ratio, which severely restricts its restructuring and borrowing options. However, the nail in the coffin may have been its takeover of bankrupt rental chain Hollywood Video for $1.1 billion. It's decision to invest in a troubled company rather than upgrade to online services appears almost masochistic.
        These companies, and their industry in general, are not just victims of poor management but also innovation. The advent of video-on-demand from cable providers, low cost DVD's from retailers like Wal-mart, and 99-cent DVD kiosks at places like McDonalds have all doomed traditional rental services. But perhaps the most damage has been inflicted by personal video recorders like TiVo and on-line retailers like Netflix , which appear to be the future of the industry. Blockbuster has an online entity, but its subscriber base remains a fraction of runaway leader Netflix. Movie Gallery has no such operation and will continue to suffer because of it. Both companies are saddled with thousands of store outlets, which have yet to find products to supplement video rental, and will likely become redundant as renting videos from your home grows increasingly easier.
        So in this new year of 2006, it appears that video rental chains will go the way of the Betamax, vinyl records, eight-tracks and everything else that has outlived its utility and been replaced by innovation. Your new year's resolution this year should be to sell the video rental bonds and invest in movie distribution alternatives."

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THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301, Bloomfield, CT 06002.
1 year, 50 issues, $279.

Tech stocks showing strength

        Gregory Spear: "Recently, analysts at Morgan Stanley upgraded the semiconductor capital equipment (CE) sector and noted that they expected these stocks to outperform the market and other pure semiconductor plays. The CE stocks have underperformed the rest of their sector for three years. This call is analogous to cogent advice we gave last fall touting the formidable prospects of the oil service names, which had lagged both the exploration and production companies and the refiners. The oil service holders (OIH) hit an all-time high (1/12/06) while exploration companies have traded sideways to down since mid-September.
        If the CE stocks are going to play catch up, what is the real driver? We suspect it is the boom in smart gadgets of all sorts, which we believe is in the early stages of a secular tidal wave. We are all familiar with the rapid spread of the iPod, which utilizes flash memory. Gartner believes capital spending on semiconductor equipment will grow 8% in 2006, which is nothing spectacular, but that compares to a 10.6% decline in 2005. Capacity has been slightly excessive and that tends to crimp margins, but when demand exceeds supply these companies can make money.
        A Bank of America analyst rates the largest CE stock, Applied Materials (AMAT), a "sell" with a price target of $14.70. We find this curious because all signs point to very strong quarters at both Intel and Advanced Micro Devices (AMD). Both companies are experiencing demand outstripping supply, fabrication facilities are running full-speed ahead, there is little inventory in the distribution channels and no significant price cuts have been announced for months. That is unusual in this highly competitive industry driven by Moore's Law. In September, Samsung, which holds a 50% share of the flash memory market, announced a seven-year, $33 billion capital investment plan to keep up with the NAND flash market, which is growing over 200% annually because of the burgeoning diversification of storage applications. Apple (AAPL) announced plans to pre-pay $1.25 billion for flash memory components during the next three months from Samsung, Hynix and Toshiba, the three largest suppliers, to guarantee iPod supplies into 2010. Apple also made a $500 million deal with IM Technologies, the new flash memory company being formed by Intel (INTC) and Micron Technologies (MU).
        While the success of the iPod has put NAND flash in the lime-light, we should not underestimate the market for disc drives, another source of demand for chips. We will soon be seeing disc drives and their associated display screen in places no disc drive has gone before, such as car dashboards, cell phones and hand-held GPS devices. Accordingly, we profile disc drive maker Seagate (STX) below. STX has almost doubled since the October low, but we still consider it a buy on a dip. Just as TV sets proliferated throughout the rooms of the American home in the 1980s and 90s, we expect sub-$500 laptop computers, wirelessly networked, multi-media enabled and loaded with open source software, will be sprouting up throughout the home later in this decade.
        Advanced Micro Devices (AMD), of course, has a vision of providing hundreds of millions of even lower-cost Internet-enabled computers (flash memory-driven, no hard drive) to developing countries and has already begun this program in India and South America. Then, we have the wireless broadband revolution driving chip demand, as computing decentralizes from the desktop to a myriad of smaller devices, and television converges with computer displays. Last but not least, the advent of affordable GPS chips is opening up the possibility of providing location awareness to every electronic device on the planet. This is a hyperbole, or course, but it is indicative of the inexorable trend toward intelligent, chip-driven devices of all sorts that will be infiltrating our lives in ever more surprising ways.
        Seagate Technologies (STX), the largest pure-play on hard disc drives, has a P/E of 12 because until recently disc drive makers "got no respect." Earlier this year shares of Western Digital (WDC), for example, were trading 82% below all time highs and Seagate shares were 55% below peak levels. The focus in the data storage world over the last year or so has been on high capacity flash memory, which is now available in meaningful capacities and at affordable prices. This has driven shares of leading flash memory beneficiaries such as Sandisk (SNDK) to challenge their bubble highs at the expense of the disc makers.
        Recently, however, Forbes Magazine named Seagate the Company of the Year. Seagate is the 800 lb gorilla of disc drives, selling three times more than its two closest competitors combined. Revenues are growing 20% annually because more and more consumer products are becoming "smart" and multi-tasking, and disc drives of all sizes, including miniature 1" drives, are needed for data storage more than ever. Just as CDs replaced magnetic tape in the music world, disc drives are now replacing CDs, they are replacing film in cameras, and soon you will find disc drives in cell phones, built-in to the console of your new automobile and in handheld GPS products. While demand for flash memory is going to grow exponentially, it is clear that it won't curtail demand for disc drives anytime soon. With the convergence of voice and video in portable devices such as the iPod and cell phones, disc drives are going to be needed to handle the storage requirements.
        But demand for Seagate's products is not only going to come from consumer devices. Legacy tape drives used for enterprise bulk storage and backup are likely to be replaced by products such as Seagate's new half terabyte (500 GB) hard drives, which have much higher read/write speeds and are cheaper to operate than tape.
        Seagate recently announced the intention to acquire one of its competitors, Maxtor, which means STX will now own 40% of the world's disc drive business. This will increase efficiency and boost pricing power and margins. In the most recent reported quarter, revenue increased 34% to $2 billion, while net income grew over 400% to 54 cents a share. The company reports earnings on January 18th after the bell. The consensus number is just 51 cents. STX posted an all-time high at $31 in November of 2003. Currently trading hands at $23, we would expect shares to challenge that former high on this run.
        Applied Materials (AMAT) is the primary supplier of equipment used to make semiconductors. Without getting too technical about it, the processes involve the production of extremely pure materials such as silicon, the precise deposition of very thin layers of various conducting and insulating materials, and the etching, cleaning, polishing and assembling the layers. AMAT is headquartered in California and serves semiconductor wafer manufacturers and integrated circuit companies in Taiwan, North America, Japan, Korea, Europe and Asia Pacific. AMAT is well positioned to supply the Asian chip giants that are attempting to meet the surge in flash memory demand driven by small, high-capacity consumer electronics and embedded software devices.
        The chip makers themselves are victims of Moore's Law, which means that technological innovation is proceeding at such a rapid pace that a 30%-40% decline in memory prices per year is a fact of life for DRAM manufacturers, and the situation is even worse for NAND, a special type of flash memory used in devices such as the iPod. Last year, the average price of 512-Mb NAND flash chip was about $6.75; this year the price dropped below $3 and next year it's likely to come in around $1.50. By the end of the decade, the chip that cost $6.75 last year will be selling for 18 cents. As you can imagine, this puts incredible pressure on the chip manufacturers to make up for the price decline by increasing sales volume. To increase volume, they have to invest in the latest capital equipment and that benefits companies like AMAT.
        The company's results for the fourth-quarter were not particularly impressive, however, but one might want to discount them somewhat based on the intensely cyclical nature of the business. Net sales were $1.72 billion, a 5% sequential increase but a 22% decrease year-over-year. Net income was $247 million, a 33% sequential decrease and a 46% decrease year-over-year. Earnings per share were $0.15, which is also the expectation for the current quarter to be reported in mid-February. New orders came in at $1.69 billion, a 15% sequential increase but a 35% decrease year-over-year. AMAT used its strong cash flow to repurchase more than 100 million shares for $1.7 billion in 2005 and paid out $100 million in dividends.
        Applied Materials was selling for split-adjusted 25 cents a share at the bottom of the recession in 1990 and shares peaked in March of 2000 at $57, a 22,800% rise. In the big picture, the fact that shares then lost 82% of their value and fell to $10 at the post-bubble lows still put AMAT at a 4,000% gain for the twelve years. That is the kind of appreciation that can happen when a new compelling technology bursts upon the scene and redefines our world. Shares are now trading for $20, which gives the company a trailing P/E ratio of 28, higher than the average for the S&P 500, but not extremely out of line.
        Despite the lackluster fundamentals, the technical picture on the stock is quite positive, suggesting that the market is pricing in a positive earnings surprise. Shares closed higher on (1/12) on a down-market day. Given the bullish environment for tech, our target price for AMAT would be its 2003 swing highs between $24-26, a 20-30% move."

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