HENDERSHOT INVESTMENTS
11321 Trenton Ct., Bristow, VA 20136.
1 year, 4 issues, $45.

Package up UPS for long-term

        Ingrid Hendershot: "UPS is the world's largest package delivery company and a global leader in supply chain services, offering an extensive range of options for synchronizing the movement of goods, information and funds. In addition to world class package delivery, UPS offers not only ground and air transportation, but ocean, rail and over-the-road freight products; international trade management; customs brokerage; consulting and supply chain design; e-commerce solutions; logistics and distribution capabilities; and a variety of financial services related to the supply chain.

Market Leader

        In 1907, 19-year old Jim Casey borrowed $100 from a friend and established the American Messenger Company in Seattle, Washington. Jim's slogan for the business was "best service and lowest rates." In 1919, the growing company made its first expansion beyond Seattle and adopted the United Parcel Service name. Jim's strict policies of customer courtesy, reliability, round-the-clock service, and low rates are the principles which continue today to guide UPS - a market leader with more than $36 billion in sales.
        UPS's first international operations started in 1975 when it offered services in Canada. Today, UPS operates an international network serving more than 200 countries and territories. International trade is flourishing. According to McKinsey & Company, 20% of all manufactured goods cross borders today. By 2020, it is estimated that 80% of these goods will cross borders. Capitalizing on this, UPS is aggressively expanding international operations. In this year's first quarter, UPS international package revenue increased 13% with operating profit climbing 26%. Asia export volume increased 36% with export volume doubling out of China. Business volume in China is expected to accelerate. UPS is the first express and cargo carrier to offer non-stop flights between Guangzhou and the U.S. UPS plans to expand its infrastructure by building 20 new warehouse and distribution facilities over the next two years in China.

Strong Cash Flow

        Employees own more than 45% of UPS shares, which preserves an important owner/management philosophy within the company. In 1999, UPS offered shares to the public for the first time. With publicly traded stock, UPS now has the financial flexibility to use either stock or strong cash flow to make strategic acquisitions like the recent $1.25 billion cash acquisition of Overnite, a leading truckload carrier serving 60,000 customers.
        Since going public, UPS's free cash flow has quadrupled, growing to $3.2 billion as of 12-31-04. Over the years, UPS has parceled out brown boxes of free cash flow to shareholders via dividends and share buybacks. Since 1999, UPS's dividend payments have more than doubled. UPS increased its dividend this year by 18% with the current dividend yielding 1.8%. UPS has also repurchased about $7 billion of stock since 1999. About 10 million shares were repurchased in the first quarter with $1 billion still available under the current buyback program.

High Profitability

        Over the past five years, UPS's return on equity has averaged an exceptional 24%. This high profitability is a result of the wide moat UPS has built around its business over the past two decades. UPS owns a massive international transportation network interconnected with one of the largest technological infrastructures in commercial history. Every minute around the world, UPS is entrusted with 2% of global gross domestic product. UPS is the only company in the industry that has one operating network for all types of shipments: domestic, international, air, ground, commercial and residential. Given these economies of scale, improved customer service and operating efficiencies translate into high profitability and an excellent financial condition for the firm. UPS is one of only a handful of companies with triple-A credit rating from both S&P and Moody's. Long-term investors should package up UPS for their portfolio. UPS is a HI-quality, highly profitable market leader with strong cash flow."

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

Still buying GM and Ford

        Richard Lehmann: "Making my recommendation to buy the GM debt in the April issue of ISI and subsequently in my Forbes column was one of the easiest calls I've ever made. Here you had a company being threatened with a downgrade to BB yielding 10%+ when the average bond rated BB was yielding 6.79% and the average preferred 7.29%. As I indicated then, GM was suffering from a lack of buyers in what is a trillion dollar high yield market faced with having to absorb up to $300 billion of new supply. The absorption of so much debt was not being helped by the negative media attention which portrayed GM as being on the road to bankruptcy. All this changed dramatically when billionaire Kirk Kerkorian, as savvy an investor as ever lived, stepped up with a bid for GM common stock to increase his holdings to over a billion dollars. Only Warren Buffett could have created as greater stir or quicker turnaround. At 87 years of age, however, one can assume that Kerkorian is not looking for along term investment. As I indicated in my column in Forbes, at a market price of half its book value, GM is an attractive takeover candidate for entities like China's biggest automobile manufacturer, the Shanghai Automotive Industry Corp. (SAIC), which would like to become a leading exporter of cars. At this price, it could shutter and write off GM's plants in the US and have the distribution network, technology and international operations for free. And if it sold GMAC it could probably get most of their money back as well. But I don't want to bore you further with such stockholder concerns. What's the outlook for us creditors?
        The GM $25 preferreds bottomed at around 18 for most issues shortly after the S&P downgrade. Since then they have recovered to the 20-21 range. My guess is they will continue to recover to the 23-24 range before year end. Hence, they're still a buy here.
Those who are looking to make a sizeable long-term commitment can do even better with the GM bonds. The over-supply situation will take a little longer to clear up here so yields are still in the 10% plus range for the long maturities. I would list specific issues but, with over a thousand issues, you have a lot of coupon and maturity combinations to choose from. You should select from what's available and cheap the day you are shopping.
        Concurrent with the GM downgrade, Ford was also downgraded to junk by S&P but retained its investment grade rating from Moody's and Fitch. Hence, its preferreds did not drop as much and are currently trading in the 21 to 23 price range. The yields, however, are still close to those of GM since the coupon rates on the Ford preferreds are generally higher than for the GM issues which are all PET bonds. Note that the Ford preferreds are mostly third party Trust Preferreds created by a brokerage firm. Hence, they are not as easy to find. There are 11 such issues, four of which we have recommended (KSK, PIJ, PJE, and FpS which is convertible). Ford also has plenty of bonds to choose from, but the yields here are below the GMs. Those issues not shown on our website, www.incomesecurities.com can be found at www.quantumonline.com."

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INVESTMENT QUALITY TRENDS
6450 Lusk Blvd., Ste. E-104, San Diego, CA 92121.
1 year, 24 issues, $310. Online version, $265. www.iqtrends.com.

Home Depot streamlining operations

        Joseph McKittrick: "Just over 26 years ago, Home Depot (HD) was founded in Atlanta, Georgia. Over its short history the company has grown to become the world's third largest retailer and one of the leading companies in the United States. HD currently operates two major store concepts, its namesake Home Depot and a newer concept called EXPO Design Center.
        At Home Depot stores, inventory typically ranges between 40,000 to 50,000 items. From this wide selection customers are able to find building materials, home improvement items, lawn & garden care products, as well as many specialized services. Last year, the average store sales mix was 28.9% plumbing, electrical, and kitchen; 27.6% hardware and seasonal; 23.2% building materials, lumber and millwork; and 20.3% paint, flooring, and wall coverings. The company's 1,818 stores are located throughout the United States, Canada, and Mexico.
        EXPO Design centers compliment HD's warehouses with a special focus on home decorating and remodeling. Unlike regular warehouse locations, EXPO centers do not carry lumber or other building materials. These design centers serve as showcases for flooring, lighting fixtures, cabinetry, appliances, and related products. Part of EXPO's appeal comes from its unique inventory, much of which is available only through showrooms or by special order. Typical customers are known collectively within the industry as "DFIM" customers or "Do-It-For-Me", preferring to buy materials themselves, but hire outside parties to perform actual installation.
        The Home Depot Supply is an amalgamation of former small operations, previously operated under several different names. Among these, are HD Maintenance Warehouse, Apex Supply, and HD Builder Solutions. HD's Maintenance Warehouse previously operated 20 distribution centers and provided maintenance, repair and operations products to multi-family housing, hotels and the related lodging market. Apex Supply operated 26 locations across the Southern United States and was a wholesale supplier of plumbing, HVAC, appliances, and related products. Finally, HD Builder Solutions provided products to professional homebuilders through a network of 22 locations.
        At the close of the first quarter, HD shareholders were happy to see the company post gains in profit of 14%. Earnings came in at $0.57/share, a marked gain from the $0.49/share realized during the same period last year. Driving the increases were an 8% bump in sales, totaling $19 billion. As part of its plan to return to profitability, Home Depot will close 15 of its EXPO outlets, which have underperformed as compared to the company's other outlets. The company affirmed expectations for earnings growth in the range of 9-12% for 2005.
        Interesting Qualities to Note: Home Depot is a member of the Dow Jones Industrial Average, Over 22 million people visit Home Depot each week, Home Depot is the fastest growing retailer in history, Recent market capitalization was $85 billion, and Home Depot has approximately 221,000 employees.
        At a recent price of $40, Home Depot remains Undervalued with very low historic downside risk. From current levels the company has an approximate 400% upside potential until it will reach Overvalue according to its historic low yield of 0.2%. Though the company's low yield may make it unsuitable for investors looking strictly for income, shares of HD continue to offer attractive prospects for dividend growth. The company carries very little long term debt and holds an A+ quality ranking from S&P. Purchases of HD are also bound to benefit from a share buyback program which has been authorized to spend $10 billion. Though margin pressures and competition continue to be of concern, the company has made vast improvements and continues to upgrade store locations. Other measures such as the closure of several EXPO locations should insure that operations remain streamlined and efficient."

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THE TURNAROUND LETTER
225 Friend St., Ste. 801, Boston, MA 02114.
Monthly, 1 year, $195.

Automotive Suppliers: The Good
(Relatively), The Bad and The Ugly

        George Putnam, III: "There's a saying that when GM and Ford sneeze, their suppliers get sick. Well then, what happens to the suppliers if you think GM and Ford are sick? Right now many of the auto parts companies are in bankruptcy or teetering on the edge.
        However, just because they have problems doesn't mean the auto suppliers might not be good investments. Most of the companies will avoid bankruptcy and eventually rebound. Even some of the companies in Chapter 11 have some interesting securities, but there you should look at the bonds, not the stock. (The stocks of companies in Chapter 11 almost never do well; when a company emerges from bankruptcy, it is usually the former bondholders who end up owning the equity.)
       We've identified a number of auto supplier securities that we think are now, or could become, quite interesting. We've divided them into the "Good" - companies that we think are most likely to survive and rebound - the "Bad" - companies that have a greater risk of going into Chapter 11, but whose stocks offer sizable appreciation potential for risk-tolerant investors - and the "Ugly" - companies already in bankruptcies whose bonds are worth watching. The individual situations are described below.

The Good:

        American Axle & Manufacturing Holdings (AXL $21.03) is a major supplier of driveline components - the parts that help connect the transmission to the wheels. It has roughly 80% of sales going to GM, but still looks like a survivor. A decent balance sheet, profitable operations, low stock valuation levels and a decent dividend combine to make the stock look attractive.
        Dana's (DCN $13.28) $9 billion in worldwide annual sales of axles, driveshafts, engine components, chassis and transmission products are derived from the automotive/light vehicle (60%), commercial (25%), and off-highway (15%) markets. The company has completed a number of divestitures in recent years, including the sale of its automotive aftermarket group for $1 billion. It has streamlined operations as well, and has taken steps to improve the balance sheet.
        Lear (LEA $38.40) is a $17 billion make of components used in vehicle interiors, including seat systems, interior trim and electrical systems. The company has sought to expand internationally in recent years and has made some progress, but it has further to go. Lear has maintained profitability, and its balance sheet is pretty decent.
        Modine Manufacturing's (MOD $30.23) expertise in thermal technologies translates into a range of products used in heating and cooling systems for cars and trucks, heavy-duty vehicles, off-highway and industrial equipment as well as a number of commercial applications. The company's operations are reasonably well diversified, both by customer and internationally. Despite the drag of North American automotive sales, the company has reported solid operating results, and the balance sheet is strong.
        Superior Industries International (SUP $22.56) makes cast aluminum wheels; GM and Ford account for roughly 80% of total sales. The company is diversifying its base, but the "International" in the name remains a bit of a misnomer. Even so, the company has remained profitable, and its balance sheet shows no long-term debt. Attractive valuation levels and a decent dividend - management recently raised the dividend for the 22nd consecutive year - combine to offer an intriguing long-term opportunity.

The Bad:

        Delphi (DPH $4.41) was spun out of GM and still supplies a number of components to its former parent. It inherited many of the legacy cost issues that plague GM, and it currently has some accounting issues as well. If things get too bad at Delphi, GM may be forced to step up and bail it out, just as Ford recently did with Visteon (below).
        Dura Automotive (DRRA $4.31) supplies Ford and GM with various modules used in SUV's and light trucks. Dura had better finances coming into the current downturn than some of its competitors, but it would suffer from protracted problems at its big customers.
        Hayes Lemmerz (HAYZ $6.30) is the largest supplier of wheels to the U.S. automakers. It emerged from Chapter 11 less than two years ago, but when it restructured its liabilities, the company apparently did not foresee the current industry problems. It looks like a survivor, but if the industry struggles for too long, it could become a "Chapter 22" (filing for bankruptcy a second time).
        Tenneco Automotive (TEN $15.11), which makes exhaust and suspension equipment, appears to be on the mend after a brush with bankruptcy a few years ago. While still dependent on Ford and GM, Tenneco is winning more contracts from the Japanese auto makers. In addition, it has a substantial aftermarket parts business, which includes such well known brands as Monroe and Walker. Tenneco's stock is well off its lows of 2-3 years ago, but it still has plenty of upside when the industry recovers. We'd put it in the "Good" category, except that it still has a hefty debt burden.
        Visteon (VC $7.87) was spun out of Ford, and much of its business remains with its former parent. Ford recently agreed to buy back a number of plants from Visteon, and its stock more than doubled on the news. It now seems likely that Visteon will survive as long as Ford is around, but we think you may get a chance to buy the stock cheaper as the enthusiasm from Ford's bailout begins to fade.

The Ugly:

        Collins & Aikman, Intermet and Tower Automotive are in the relative early stages of their respective bankruptcy proceedings. Their bonds could be interesting down the road, but we think they may drop further in price as the bankruptcies drag on. Federal Mogul is in the later stages of its Chapter 11, and we find the bonds attractive at current levels."

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PERSONAL FINANCE
1750 Old Meadow Rd., Ste 301, McLean VA 22102.
1 year, 24 issues, $97.

Lights, Camera, Action

        Elliot Gue and Jason Koepke: "With the onset of digital cinema and on-demand video, cinemas face the most profound competitive challenges since the 1950s. Here's how to profit and what to avoid.
        The local, independent movie theater was once a centerpiece of American life. Before television, movie theaters offered more than full-length feature films; cinemas showed newsreels, cartoons and short comedy features.
        The heyday for the cinema business was the 1920s and '30s. During these golden years of cinema, Elliott's grandfather owned a chain of local cinemas. At the time, local chains had little competition for viewers; TV wasn't introduced until the late '40s and wasn't popular until the '50s. Even relatively small theaters could rely on a steady stream of films from public Hollywood studios.
        Yet as his grandfather would say, there's time to be in the movie theater business and there's a time to be out of the movie theater business. He saw the writing on the wall and sold off his screens in the late '40s and early '50s when the first major shift occurred. Television news, cartoon features and variety shows began to supplant the short feature films that filled screen time in the '30s and '40s.

The New Challenge

        Fast forward 50 years and the industry is facing new challenges. Movie makers are going digital, so theater companies will need to pay up for digital projection equipment, which is extremely expensive.
        Concurrently, new technologies such as DVD, on-demand video and significantly more sophisticated stereos and televisions, are reducing the relevance of cinemas consumers are watching movies at home.
        Since 2002, theater attendance has been steadily declining. And even the most optimistic analysts put growth at around 2 percent during the next few years. But during the past five years, the number of hours spent watching movies at home has ballooned by more than 11 percent.
        Even worse for theatres, the cost of advanced home-theatre audio and video technologies is falling, while theaters' costs are rising. A movie in most major metropolitan areas is easily $10, making matinee prices no bargain either.
        Two of the most vulnerable theatre chains Regal Entertainment Group (NYSE RGC) and Carmike Cinemas (Nasdaq CKEC).
        Regal operates nearly 500 cinemas, with a total of 6,200 screens, in 40 states around the US. The company will have a tough time maintaining its growth rate during the next few years.
        And with more than $2 billion in debt, Regal doesn't have a lot of flexibility to pay up for new digital theatre equipment. Avoid Regal.
        Carmike is a smaller operator that focuses on rural markets. The company has 282 cinemas around the US. The stock is even more vulnerable than Regal. It suffers from the lowest profit margins in the industry, a boatload of debt and negative free cash flow.
        That's a very dangerous combination considering the industry dynamics in play. Aggressive traders can short Carmike above 30. More conservative investors should simply avoid the stock.

The Winners

        Even though theatres are suffering and will continue to do so, there are still quality theater-related investment plays.
        Avid Technology (Nasdaq AVID) isn't directly involved with theatres, but its products are tied directly into the digitalization of the film industry, a trend that theatres will have to expensively deal with.
        Avid produces the equipment and software for every part of a film's development; that includes editing of film, splicing in audio tracks and adding special effects.
        Born out of technology developed for the first Star Wars films, Avid has been a leader in its field ever since. Its products are currently used in 90 percent of primetime television shows, 85 percent of feature films and 80 percent of commercials.
        That kind of market share is hard to earn and even harder for competitors to overcome. Its financial numbers reflect this position, as it first quarter revenues grew by more than 30 percent. What's more, Avid has no debt and is sitting on $176 million in cash.
With this kind of balance sheet, it can easily acquire, expand or deal with any short-term setback that may strike - something that's important given the cost of competing for business in the digital media world.
        That health and market-leading position make Avid a buy up to 60.
        Another company well positioned for the digital transition is Dolby Laboratories (NYSE DLB). It has strongholds in the analog and digital markets for both theatres and home entertainment.
        Product-wise, it sells professional audio recording equipment to movie, music and TV studios and licenses its intellectual property to consumer-electronics companies.
        Those licenses cover the methods by which audio is recorded and played back (i.e., the encoding and decoding algorithms). You may even be familiar with these formats: B-Type Noise Reduction (found in cassettes), Surround (found in analog films), Pro Logic (found in video games, car stereo systems and home-theatre systems) and Digital (found in movie and home theatres, and coming in 5.1 and 6.1 setups).
        Don't buy into the hype surrounding most newly public companies, including Dolby. But Dolby does have what it takes to do extremely well during this time of tumult in the film and entertainment industry because of its strength in both the old (analog sound and film) and the new eras (digital sound and home entertainment systems).
        Buy Dolby on dips below 17.50."
        Editor's Note: Elliott Gue is an associate editor of PF and editor of The Energy Strategist (www.energystrategist.com). To sign up for his free bi-weekly e-zine, please visit www.energyletter.com. Jason Koepke is the assistant managing editor for PF.

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COMMON CENTS II
A supplement to Common Cents
P.O. Box 126354, Benbrook, TX 76126.
1 year, 12 issue package, $96.

Buys include Norfolk Southern, Werner
Enterprises, LLoyds TSB Group and McDonald's

        Roland Carter's recent buys include Norfolk Southern, Werner Enterprises, LLoyds TSB Group and McDonald's.
        Norfolk Southern (NSC) - Is one of the two very major railroads serving the eastern U.S. (CSX is the other.) The last couple of years have been very good for most U.S. rail and trucking companies. Fuel surcharges have let them overcome nasty fuel price increases, and several railroads, including NSC are big coal haulers. U.S. coal stockpiles have been declining, so a further pickup in coal shipments seems assured. NSC also hauls lots of new cars for GM and Ford, so there's a question mark there. Also, general economic weakness would hurt NSC, for instance. NSC's 2005 financial projections, from revenues to earnings to book value are all 50%-100% higher than 10 years ago. The stock peaked at 41 in 1998. NSC has been a roller coaster over those 10 years, due mainly to integration snafus with their purchase of 58% of Conrail. All that appears behind them, 2005 should see a record $2.45/share in earnings, and Value Line thanks 15% EPS growth is possible over the next few years. There's real "meat" here, and one has to be impressed that their pension assets exceed obligations by a strong 15% - that's rare for an old-line industrial company.
        Werner Enterprises (WERN) - Is a $1.7 billion (2004 revenues) trucker hauling general commodities throughout the U.S. and in Canada and Mexico. WERN has been in CC II before, and we owned it in some accounts in the 1998-2001 period, making modest profits. We still follow WERN, they still execute very well and operate without debt. WERN shares are down from 2004's high of 23+. They have hit a record high every year in the past 8 save for year 2000, the terrible year for "old economy" stocks. Value Line thinks they'll earn $1.32 this year and $1.50 next. WERN share will surely trade at new highs and again at a P/E of 20+ in the year ahead. We see WERN as a 10%-12% grower well into the future, and a possible takeover candidate in a consolidating industry.
        LLyods TSB Group (LYG) - These NYSE ADR's represent shares in one of England's largest diversified financial organizations, offering retail and corporate banking products through over 2300 branches in the U.K. and 24 foreign countries. They have no connection to the insurer, Lloyds of London, but they've been around for a long, long time. LYG shares peaked @ 44 in May of 2002 and appear quite tradable as they move around on general banking news/paranoia. The big attraction here is a low P/E and huge dividend yield on a major bank with 28 years of dividend increases!
        McDonald's (MCD) - The familiar, world leading (30,000 restaurants), original fast-food operator seems back in control of their destiny, rebounding from some big question marks (and a share price of 12+) in 2002-2003. MCD shares peaked @ 49 in 1999. We had a double there and sold for some clients at 45+, but held for others all the way down and now back up to 34+ here in 2005. Earnings will probably rise only a couple of pennies this year, to $1.95/share, but a 10% gain is expected for 2006. There' s big chart support around 26. Here's a familiar, A+. dividend-increasing blue-chip, with record sales/earnings, in a non-cyclical business, at a P/E of 15. Quick, find me about 10 other such names - or even 5. MCD pays only a single, year-end dividend. They've raised it appreciably over the past two years (+134%!), and further increases of some size seem assured. Recent news carried word of a case of mad cow disease in the U.S., though authorities say it's contained. Weakness in MCD shares associated with this news could present an even better buying opportunity."

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

In Search of Value in Utilities

        Richard Moroney: "In the wake of strong share-price gains over the past two years, more than 80% of the 109 utility stock in the Quadrix" research universe trade a premium to their three-, five-, and 10-year average price/earnings ratios. The average utility trades at 20.8 times trailing earnings, a 19% premium to the S&P 500 Index. Over the last 10 years, utility stocks have averaged a discount of more than 46% to the S&P 500.
        But most utilities pay a dividend, and as such compete for investors' money with income securities as well as stocks. Using a variant of the Fed Model, which compares stock valuation to bond yields, the utility sector's valuation looks more reasonable relative to fixed-income investments, though still not cheap.
        Earnings yield, the reciprocal of the P/E ratio, measures per-share earnings as a percentage of per-share stock price. The higher the earnings yield the cheaper the stock. Over the last 10 years, the average utility's earnings yield has exceeded the 10-year Treasury bond yield by 1.9%. That spread represents a type of equity premium, or a barometer of the excess market return utility-stock investors expect to receive relative to the guaranteed return from the bond.
        The spread between utility earnings yields and T-bond yields has fallen sharply since topping out at 5.7% in September 2002, though it remains healthy at 2.2%. While the earnings premium is currently higher than the 10-year average, the Federal Reserve appears ready to continue raising short-term interest rates. So far, short-term rates have not had much effect on long bonds. But over the next year, long-term rates are likely to trend somewhat higher, potentially tightening the spread.
        There is value in the utility sector, but it takes some effort to find. According to the Forecasts' back-testing, the Quadrix Value score has had good predictive power for utility stocks. We have also had success recommending high-quality utilities with profit- and dividend-growth potential, which tend to have lower Value scores. In our newsletter, we list 20 utilities with strong Value scores or reasonable P/E ratios relative to the sector average or the individual company's profit growth potential. Five such companies are discussed below:
        Equitable Resources (NYSE EQT $67), with both a natural-gas utility and natural-gas production division, offers a mix of stability and growth. Equitable Utilities, which generates about one-third of operating profits, distributes natural gas to about 275,000 customers in both regulated and unregulated markets in Pennsylvania, West Virginia, and Kentucky. The utility also operates an interstate gas pipeline consisting of 1,500 miles of transmission lines. Steady utility performance helps to offset the production arm's sensitivity to natural-gas prices. Equitable Supply, the largest owner of proved natural gas reserves in the Appalachian Basin, is stepping-up drilling activity, with plans for 440 wells in 2005 compared to 314 in 2004.
        The annual dividend has increased in each of the last five years. Consensus estimates project per-share earnings will jump 17% in 2005. Equitable trades at 19 times projected 2005 earnings of $3.50 per share. A robust long-term profit-growth estimate of 10% gives Equitable a price/earnings-to-growth (PEG) ratio of 1.9, one of the lowest in the sector. Equitable Resources is a Long-Term Buy.
        KeySpan (NYSE KSE $41), the fifth-largest natural-gas utility in the U.S., serves about 2.6 million customers through six regulated businesses in New York, Massachusetts, and New Hampshire. Utility rates in the Northeast have remained generally stable, while the populations of some of KeySpan's urban markets, such as New York City, have grown at above-average rates. Most residential customers in the Northeast use oil or electricity for heating, and Keyspan aims to increase its market share by converting more customers to gas heating systems.
       In November, KeySpan sold its stakes in Houston Exploration (NYSE THX $53) and KeySpan Energy Canada Partnership for a combined $488 million. The divestitures simplified KeySpan's business model and capital structure and funded some debt retirement, but also limited the company's ability to benefit from rising natural-gas prices. After five years of paying the same dividend, KeySpan raised its quarterly dividend by 2% to $0.455 per share in December. KeySpan, yielding 4.5%, has mediocre growth potential. But the Neutral-rated stock has appeal for value-oriented income investors.
        MDU Resources Group's (NYSE MDU $28) diversified mix of energy-related businesses should generate better earnings growth than that of most utilities. Consensus estimates project per-share profits will increase 10% in 2005 and 5% in 2006. Natural-gas and oil production, construction materials and mining, and independent power production generate most of MDU's profits. An electric utility, pipeline, and natural-gas distribution network provide most of the rest.
        The company distributes electricity and natural gas to about 340,000 customers in North and South Dakota, Montana, and Wyoming. The production segment operates from the Rocky Mountains to the Gulf of Mexico. In 2004, production increased nearly 9% and reserves grew about 10%. MDU, yielding 2.6%, has a track record of consistent dividend growth and strong, but choppy, profit growth. MDU has above-average appeal as a growth utility, though its investment in mining and independent power and reliance on acquisitions add risk to the stock. MDU is not on the Monitored List.
        New Jersey Resources' (NYSE NJR $46) primary business is distributing natural gas to nearly half a million residential and commercial customers in New Jersey - a fast growing service territory. For fiscal 2005 ending September, the utility projects customer growth of 2.4%, above the industry average. While population growth accounts for about two-thirds of the gains, New Jersey Resources also grows its customer base by converting heating systems from electricity and oil to natural gas.
        New Jersey Resources operates a nonregulated wholesale business, NJR Energy Services, which buys natural gas from producers and sells and transports the fuel to energy marketers and utilities. The division stands to benefit from high natural-gas prices and growing demand. The company has increased per-share-earnings and dividends in each of the last five years, paying out more than 50% of profits in dividends every year. The stock trades at 17 times projected fiscal 2005 earnings of $2.67 per share, below the sector average. New Jersey Resources, yielding 2.9%, is a Long-Term Buy.
        Questar's (NYSE STR $65) exploration-and production arm continues to drive growth, with results helped by increased production and high natural-gas prices. Despite delays in drilling wells due to inclement weather and a shortage of equipment, production volumes increased 4% in the March quarter. Management projects 2005 production growth of 8% to 10%. The Pinedale Anticline - the company's best production asset - is located in a largely untapped Wyoming region rich in natural gas. Production from Pinedale, which now includes 106 producing wells, increased 24% last quarter and now comprises about 29% of Questar's total production.
        In the March quarter, Questar distributed natural gas to more than 800,000 customers, up 3.1% from a year ago. Customer growth and higher per-customer natural-gas usage more than offset a small rise in expenses. Consensus estimates project per-share profit growth of 25% in 2005 and 13% in 2006, among the highest growth rates in the sector. Questar is a Long-Term Buy."

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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.

Make an exception for Japanese stocks

        Patrick McKeough: "We generally advise against international investing, since U.S. stocks provide all the diversification that American investors need. Much international diversification just exposes you to slower-growing and corrupt markets overseas, along with higher commission costs and, in the case of mutual funds, higher fund management fees and other hidden costs.
        We make an exception for a handful of foreign issues (such as EnCana, a Canadian natural gas producer that has been a terrific performer for us). But we also like these two Japanese carmakers, as well as Sony Corp.
        Toyota and Honda continue to gain market share over GM and Ford. They have been more responsive to consumer desires, and they profited form offering more vehicles with better gas mileage at a time of soaring oil prices.
        (Note - Both Toyota and Honda trade on the New York Stock Exchange as American Depository Receipts; each ADR represents two common shares. The Japanese government imposes a 15% withholding tax on dividends paid to U.S. stockholders.)
        Toyota Motor Corp. (NYSE TM $73; WSSF Rating: Above average) is the world's second-largest automaker, after General Motors. It operates plants in Japan, the U.S. and 21 other countries. It also provides financing and makes non-automotive products like pre-fabricated housing.
        In its fiscal year ended March 31, 2005, Toyota's profits edged down to $10.9 billion form $11.0 billion a year earlier. However, earnings per ADR rose 4.2%, to $6.66 from $6.39, due to fewer shares outstanding. Revenue grew 4.5%, to $171.0 billion from $163.6 billion.
        Toyota spends about 5% of its revenues on research. Accounting rules force the company to immediately write off these costs, which makes it look less profitable than it really is. Toyota will probably continue to increase its research spending in the next few years.
        This strong commitment to research has helped Toyota take the lead in hybrid engine technology, which combines a traditional gasoline-powered engine with an electric generator to cut fuel consumption and emissions. The company plans to expand hybrid production, and may license the technology to other carmakers.
        In the past 10 years, Toyota has doubled its overseas operations. Shifting more production to countries outside of Japan reduces the company's exchange rate risk. That's particularly important, since the improving Japanese economy drive up the value of the yen in the next few years.
        The company paid dividends of $0.97 per ADR in fiscal 2005, and will probably pay $1.05 per ADR in fiscal 2006. That implies a yield of 1.5%. Toyota will probably earn $7.15 per ADR in fiscal 2006, and the stock trades at just 10.2 times that amount. It's also cheap in relation to its revenue of around $96 per ADR.
        Toyota is a buy.
        Honda Motor Co., Ltd. (NYSE HMC $25; WSSF Rating: Above average) is Japan's third-largest carmaker, and the world's biggest producer of motorcycles. Honda also makes power lawnmowers, electrical generators and snow blowers. It has production facilities in over 35 countries.
        Honda's earnings in the fiscal year ended March 31, 2005 rose 2.3%, to $4.5 billion from $4.4 billion a year earlier. But per-ADR profits grew 4.8%, to $2.41 from $2.30, due to fewer shares outstanding. Revenue rose 4.3%, to $80.5 billion from $77.2 billion. If you disregard unfavorable currency translation effects, revenue would have increased 8.8%.
        Like Toyota, Honda also spends about 5% of its revenue on research. Besides hybrid engines and other automotive technologies, Honda is also working on fuel cells, robots and jet engines. It hopes this research will help cut its reliance on the cyclical auto industry, as well as help it build better cars.
        Honda has high hopes that Ridgeline, its first pickup truck, will help raise its 8.1% share of the U.S. auto market. The company's sport utility vehicles, which are smaller than competing models, are also selling well thanks to higher gas prices. That's good news for Honda, since these vehicles tend to generate higher profits for it than regular cars.
        The company should earn $2.55 per ADR in fiscal 2006, and the stock trades at 9.8 times that figure. It also trades for 57% of its revenue of $43.48 per ADR.
        Honda plans to pay dividends of $0.32 per ADR in fiscal 2006, up 39.1% from $0.23 in fiscal 2005. The new rate yields 1.3%.
        Honda is a buy."

Top Brand & Products Make Sony a Buy

       "Sony Corp. (NYSE SNE $36; WSSF Rating: Above average) is one of the world's biggest makers of home entertainment equipment. This business supplies about two-thirds of Sony's total revenue. The remaining third comes from its other operations, including its movie and TV studios (Columbia Pictures and MGM) and music division.
        In the fiscal year ended March 31, 2005, Sony's profits rose 66.3%, $1.48 per ADR from $0.89 a year earlier (each Sony ADR represents one common share). Higher profits at its entertainment units offset losses from the electronics division. Sales fell 7.2%, to $66.9 billion from $72.1 billion.
        In recent years, Sony refused to make digital music devices that could play songs illegally downloaded from the Internet. It feared that these devices would hurt profits at its music division.
        Consequently, Sony no longer dominates the portable music market the way it used to. This forced the company to loosen its restriction on future hardware. However, new anti-copy technology embedded into its CDs should help curtail piracy.
        Sony's new handheld PlayStation game player is selling well, and it plans to launch the PlayStation 3 console in 2006. Sony designs and makes most of the chips for these devices, which helps keep costs down.
        The company also plans to use the PlayStation 3 to advance its new "Blu-ray" DVD format, which can hold around 10 times more information than a standard DVD disc. Blu-ray will make games appear more life lifelike, and make it easier for movie studios, including Sony, to release high-definition versions of films.
        Restructuring costs will probably cut Sony's profits in fiscal 2006 to $0.85 per ADR, and the stock trades at 42.4 times that estimate. That may seem high at first glance, but those one-time restructuring costs and Sony's high research spending will eventually pay off in higher profits. The $0.23 dividend yields 0.6%.
        Sony is a buy."

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Russ Kaplan's HEARTLAND ADVISER
5002 Dodge St., Ste. 302, Omaha, NE 68132.
Monthly, 1 year, $150.

Harley-Davidson: Rock solid

        Russ Kaplan: "Speaking of strong brand identities, our recommendation this month is Harley-Davidson (HDI), a name almost synonymous with motorcycles. In fact, some motorcycles enthusiasts are so fanatic about this brand that they will ride nothing else but Harley-Davidsons no matter the cost.
        Earlier this year the usual tragedy for short-term investors happened. One quarterly earnings report for Harley-Davidson was not what the investment community expected and the stock plunged. For us long-term investors this is no big deal and represents a wonderful opportunity to purchase an excellent company at a significant discount.
        Harley-Davidson is a rock solid financial company. We at Heartland Adviser would settle for nothing else. A short-term panic reaction has caused a company, which is seldom undervalued to in fact be undervalued which is an opportunity we don't think you should pass up.
        We would not be at all surprised to see some successor of Heartland Adviser published in the year 2055 to list Harley-Davidson as in the top five performing stocks of the Standard & Poor 500 for the past fifty years."

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Ian Wyatt's GROWTH REPORT
611 Pennsylvania Ave. SE, #417, Washington, DC 20003.
Monthly, 1 year, $179.

Time to Buy Autobytel

        Ian Wyatt says its time to buy Autobytel (Nasdaq ABTL $4.81) a leading automotive marketing company that helps auto dealers market car buyers, and assists automotive makers in marketing their vehicles and building their brands. The company's services include lead generation, advertising, and customer relationship management. Autobytel owns and operates web sites including Autobytel.com, Autoweb.com, Carsmart.com, Car.com and AutoSite.com, and the AIC (Automotive Information Center).
        "Autobytel is certainly not the typically small cap growth stock we follow in Growth Report. The company has recently completed a seven month process of restating its financial statements for years 2002 - 2004, and is involved with a class action legal proceeding that may continue to drain resources.
        In spite of the company's restatements and legal issues, we like the growth and valuation we're seeing in Autobytel. The company grew its revenues by 38% in 2004, the business is profitable, cash flow positive, and the long-term trend points to growth at Autobytel. Among Internet names, shares appear to be trading at a significant discount, likely due to the issues management has been dealing with for the past seven months. We believe these issues are now behind the company, and look forward to seeing management turn this company around and get back on the path to growth. It's important to note that shares are trading below $5, a recent historical low for the company, on news of three years of restated financials, class action lawsuits, and possible delisting from the Nasdaq.
        We believe there is very limited downside to the shares given the current share price and all of the negative news that is behind the company and priced into the name at these levels. In our opinion, we have a growth stock in a growth industry that is down in the dumps and could rise from the ashes if the new management team is able to effectively execute and begin focusing on the company's core business operations.

The Road Ahead

        Autobytel shares have been down and out for many months now, as most investors have simply walked away from the company. We believe that at less than $5 per share ($3.75 on an enterprise value basis after subtracting roughly $1.25 per share in cash), shares have priced in all of the bad news and risks. We believe investors continue to expect the worst out of Autobytel. On the other hand, we believe there is substantial upside to the stock if management can indeed turn this ship around, return the company to quarterly profits, and begin to show some organic growth out of the core lead business and in other areas.
        We believe positive execution on the part of management and the return to normal quarters with more controlled G&A expenses could be a near term catalyst for Autobytel shares. When everyone is expecting the worst and betting against a company, positive surprises can have significant positive impact on a company's share price.
        Shares of Autobytel currently command an enterprise value of $148 million, or just 1.2x trailing 2004 revenues. On an enterprise value basis, shares trade at 35x our 2005 EPS estimate of $0.10 after backing out legal and restatement costs. Autobytel is the clear leader in the online automotive marketing space, with a proven business model, continuous revenue growth, and a history of earnings and running on a cash flow positive basis.
        While there are certainly risks with the company, we believe the main ones do not focus on the company's proven business, but rather on legal and compliance costs that are negatively impacting the company's bottom line. Overall, we see growth in the online automotive advertising space and Autobytel has demonstrated its leadership within this business. We expect the worst is now behind the company, and expect better quarters and a return to normalcy in the coming quarters. When this happens, we expect investors will be willing to pay a healthy premium to today's price of $5 per share ($3.75 on a enterprise value basis).
        We believe Autobytel could grow its revenues by 20% in 2005, which would mean revenues of $146.4 million. We believe shares could trade at 2x current year revenues within the next 12-months if management is able to get the company back on track within the next couple of quarters and shareholders can see a return to normal operations with organic growth. Based on a P/S ratio of 2 (excluding cash), we arrive at $293 million. By adding $50 million in cash, we at a market capitalization of $343. Based on 42 million shares outstanding, we arrive at our share price target of $8. Shares represent a compelling value in our opinion at current levels, and we see little downside risk to the company given the low share price and valuation, both on a historical basis and in comparison with Internet group peers."

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THE YAMAMOTO FORECAST
P.O. Box 573, Kahului, HI, 96733.
Monthly, 1 year $350.

Airline stocks on bargain counter

        Irwin Yamamoto is currently 30% in stocks and 70% in cash.
       "Oil - a new record high. And in the long run, higher highs are in store. Yet in the near term, a peak could be near. Perhaps, a final spike will complete the surge. Speculation is running rampant. That condition tends to mark a top. At these heights, all the bad news has been partially discounted.
        Granted, the summer driving propels demand upward. As for the supply side of the equation, one would naturally assume that at $60.00 a barrel for the commodity - the inventory must be low. Hardly. Actually, the supply of oil is ample at this stage. Hence, we believe the justification for $60.00 a barrel seems to be unwarranted, at least for the time being.
        It's our contention that OPEC thinks the present price won't be sustainable. The oil cartel doesn't want a collapse in prices due to the froth. Consequently, it has raised its production ceiling to 28 million barrels. An we suspect OPEC has secretly pledged to quickly increase production if required. OPEC is already pumping nearly 30 million barrels a day, an equivalent of 35 percent of global demand.
        On the home front, the United States' emergency fuel supply - the Strategic Petroleum Reserve - will be full by the end of August. It would be the first time since it began in 1975. There are 700 million barrels of oil stockpiled in the reserves. Based on estimates, the Strategic Petroleum Reserve holds a 2-month inventory. The amount is critical in case of a future supply disruption.
        An interesting note. The airline sector, the most vulnerable sector to high energy prices, has been a remarkable performer. The shares of air carriers have been grudgingly giving some ground. However, they continue to remain at surprisingly decent levels. A sign of low speculators are pricing in a possible correction in the price of the commodity.
        Our picks remain, JetBlue Airways Corp. (Nasdaq JBLU), Playboy Enterprises Inc. (NYSE PLA), and Southwest Airlines (NYSE LUV).

Sector Watch

        High Technology: The high-tech group has enjoyed a sharp run-up in the latest advance. It looks good on the charts. But we wouldn't ride on the momentum. A lot of the potential reward is already factored in.
        Biotech: The biotechs will be the wave of the future. Yet you are going to pay a premium for them at today's prices.
        Brokers: The stock brokerage firms should benefit when there's a perception that the Fed is ready to finish its plan of raising interest rates. Don't go in - not just yet.
        Pharmaceuticals: This group's undervalued. And the dividend yield's generous. Yet they usually underperform in a surging market. Still, these pharmaceutical shares are overachievers in a weak market as investors search for safe-haven ideas.
        Homebuilders: There's a real estate bubble. When it collapses, the equities of the homebuilders will take a dive. This is one area you don't want to be in.
        Oil: The $60 price tag for oil has made energy-related shares overbought and expensive. Avoid them at these elevated levels.
        Airlines: The cost of fuel is the largest expense, next to labor, for the airline companies. The skyrocketing oil prices have placed the airlines stocks on the bargain counter."

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TECH STOCK INSIGHTS
1200 Fifth Ave., Ste. 625, Seattle, WA 98101.
Monthly, 1 year, $275. Web-only version, $225.
www.techstockinsights.com.

Excellent time to buy eBay

        Randy Williams-Gurian thinks investors need to be more selective to be successful stock pickers within the technology sector. In other words, in today's market, investors need to identify and purchase only those stocks that have established themselves as the new market leaders.
        "Apple Computer (AAPL) and Genentech (DNA) are excellent examples of new market leaders. Both of these companies are reporting stellar growth numbers, and investors are flocking to them in droves. In addition, these companies remain poised to continue to deliver better than expected profit numbers for an extended period of time.
        Other notable growth companies include: Starbucks (SBUX), Coach (COH), Whole Foods Markets (WFMI), International Game Technology (IGT), Yahoo (YHOO), eBay (EBAY) and Research in Motion (RIMM). Investors who put money into these high flyers need to understand that these stocks can slump quickly on any negative news. EBAY is an excellent example. EBAY reported inline numbers in its recent quarter, but predicted full-year 2005 numbers to be impacted by investments in marketing and in the China market. The stock was hammered at the news and has yet to recover, it is down more than 35% in 2005 alone.
        We do not think these news items justify the 35% drop in shares.
        Instead, we think now is an excellent time to consider accumulating a meaningful position in eBay shares. Here are the reasons for aggressive investors to own shares in eBay at current levels.

• eBay's recent purchase of Shopping.com for cash makes a lot of sense. Shopping.com is the largest comparison shopping site on the Internet, and provides eBay customers and vendors with another avenue to sell their wares.
• eBay management uses innovative methods to respond to customer and vendor needs. Ebay developed the buy-it-now concept, which allows vendors to sell more items on its site, and encourages vendors or frequent sellers to utilize the eBay stores concept.
• Currently only 5% of all commerce occurs online, but of that 25% occurs through eBay. Catalog merchants account for 10% of commerce. TSI thinks growth of online commerce will continue and eBay will be a major benefactor of this growth.
• Growth within the U.S. market, a key segment for eBay, should remain strong for the foreseeable future.
• PayPal, eBay's secure online payment system, has more users than American Express or the Discover Card.
• eBay owns a 25% interest in Craigslist, a popular web site for advertisements.

        Keep in mind that eBay reports impressive gross and operating margins, since the economy carries no inventory risk. In its most recent quarter, eBay gross margins of 85%, operating margins of 32% and revenue growth of 36%. Ebay is also flush with cash and has the first-mover advantage in a number of the markets it serves, meaning competition will find it difficult to take market share from the auction giant.
        TSI suggests investors establish a position in eBay shares at or below current levels of $35 a share. TSI is setting a one-year price target for eBay of $48 a share. BUY."
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