THE CONTRARY INVESTOR
published by Fraser Management Associates
309 S. Willard St., Burlington, VT 05401.
Monthly, 1 year, $125.

Basin Water positioned to capitalize
on groundwater treatment systems

        Ashley Bryan & Brent Sisco: "Basin Water Inc. (Nasdaq BWTR $16.43, www.basinwater.com) is a manufacturer of contaminated groundwater treatment systems. The Basin systems rely on an ion exchange technology that has been recognized by the Environmental Protection Agency (EPA) as a "Best Available Technology" for arsenic, nitrate, and perchlorate removal, which are main contaminates in groundwater. The company operates in the United States helping water municipalities, utilities, and other water providers to deliver safe drinking water to hundreds of thousands of people daily.
Background Information
        Basin is well positioned to capitalize on the growing need for groundwater treatment systems to provide water to the world's growing population. The company recently went public on May 12, 2006. Although Basin has many competitive advantages in an industry we believe to have a bright future, it has recently gone public, and with all new issues there are a lot of unknowns, leaving us cautiously optimistic on the future of this stock.
        Basin's focus is to provide service throughout the western U.S. The company's systems are ideal for supplementing or expanding existing water infrastructure. Basin's proprietary ion-exchange systems use a process that passes contaminated water through resins that chemically bond to specific contaminates, removing them from the water. Basin's systems have much lower waste levels than conventional systems, which allow for greater conservation of drinking water and lower operating costs. The smaller system size allows the firm to install a treatment system at the site of a well, treating the water as it is initially pumped out of a reservoir.
        The company holds a US patent for its high efficiency ion exchange system that removes nitrate from water. Nitrate contamination of water is a worldwide problem caused by the use of fertilizers in agriculture as well as aging septic systems. Basin's water treatment systems are aided by the firm's advanced computer modeling system which provides a cost effective tool to aid water providers in the modeling and utilization of water treatment. This enables the firm's new nitrate removal systems to create 90 percent less waste than a conventional treatment plant. As a result, customers can produce a high yield of treated water with a corresponding low level of generated waste.
        In January of 2006 the maximum contaminant level for arsenic in US drinking water supplies was reduced by 80 percent. The US Environmental Protection Agency estimates that 3,000 community water systems serving 11 million people will need to take corrective action to meet these new regulations. Water systems that do not have existing resources need to find arsenic treatment systems that are cost effective and readily available. Basin is a provider of such arsenic treatment systems and recently won a contract to install the first full-scale arsenic removal system to be permitted in California. This permit was awarded to Basin after the firm ran a successful system trial, which proved both the effectiveness of Basin's treatment process as well as the firm's computer modeling software. Ion exchange systems are typically not used for arsenic treatment because of the large amount of waste produced from the process, however Basin's new arsenic removal system produced significantly less waste than conventional systems.

Is It Timely?

        In the United States, over fifty percent of the population depends on groundwater for daily drinking water. Groundwater is also a very important source of irrigation for agriculture. Unfortunately, groundwater is very susceptible to pollutants and toxins. Many sources of groundwater are contaminated by toxins, which have been dumped on the ground in the past, and over time have accumulated in groundwater supplies. Common sources of groundwater pollutants are pesticides, fertilizers, motor oil, and agricultural runoff. A 1994 study of 29 major U.S. cities by the Environmental Working Group found that all 29 cities had traces of at least one weed killer in the drinking water. The same study also found that millions of Americans are routinely exposed to one or more pesticides in a single glass of tap water. Drinking contaminated groundwater can have serious health effects such as disease or poisoning, and the situation is not getting better. Contaminant levels are rising while Federal and State regulations continue to tighten, leaving fewer clean water sources available. This problem calls for treatment systems that are able to effectively treat water while producing minimal waste and maintaining flexibility to expand. Basin's systems are efficient and adaptable, enabling water providers to expand with population growth or supplement existing systems to meet stringent regulations.

Conclusion

        The Environmental Protection Agency estimates that water contaminant treatment projects in the U.S. will require $53.2 billion over the next 20 years. Groundwater in particular is a vital resources that is quickly becoming a commodity more important than oil reserves. As the population increases the demand for clean water sources grows, and translates into a need for more water treatment systems able to decontaminate tainted sources efficiently. We continue to look for under-appreciated and overlooked opportunities to participate in our water scarcity theme. It appears that Basin provides investors an additional option for consideration."

(Back to Index)

THE BOWSER REPORT
P.O. Box 6278, Newport News, VA 23606.
Monthly, 1 year, $54.

Memry Corp: Strategic supplier
to medical device industry

        Max Bowser: "Memry Corporation (AMEX MRY, price last 24 months - $1.30 to $2.80) is the leading independent manufacturer of Nitinol components and is the world's largest producer of Nitinol tubing, wire and various components thereof.
        MRY sells primarily to the medical device industry. The shape memory properties of the Nitinol materials are ideal for medical stent components, catheters, guidewires and laparoscopic sub-assemblies, which provide superior performance in surgical applications.
       Memry also produces and sells Nitinol strip, wire and tubing for cellular telephone antennas, dental applications, automotive parts, and eyeglass frames. The company is focused on the value-added processing of these items, such as state-of-the-art laser processing and finishing capabilities, plus specialized micro coil and guidewire components and high-speed automated forming.
        MRY holds 17 patents and has 12 patents pending. The company has extensive mechanical engineering, machine shop and prototype facilities for developing customer products and sponsored development projects.

What is Nitinol?

        Nitinol shape memory alloys (SMAs) are materials that can change shape in response to thermal and mechanical changes, but return to their original shape following deformations. This super-elastic characteristic provides ease of access and placement of sophisticated medical devices that are kink resistant.
        The most significant use is in stents, guidewires and catheters. There is a $2.5 billion worldwide end-user market for stents and stent-based structures and it is growing at 15% a year.

Putnam Plastics Acquisition

        In reading the SEC-filed documents, one sense that acquiring Putnam Plastics Corp. in late 2004 was a major coup for Memry.
        It's not Putnam's size, but the capabilities that it brings to Memry's table... Putnam's annual revenues is in the $9-to-$11 million range and it has been consistently profitable.
        The purchase price was $26 million - a combination of $17 million in cash, 2,847,143 shares of common stock and $2.5 million in deferred payments.
        Privately-held and founded in 1984, Putnam is a specialty polymer-extrusion company serving the medical device industry. Its primary products are complex, multi-lumen, multi-layer extrusions used for guidewires, catheters, delivery systems and various other interventional items.
        There are only a few producers of engineered small-diameter plastic extrusions and Putnam is one of them. Such a highly-specialized company, along with Nitinol suppliers (i.e. Memry) - are regarded by major medical device firms as strategic suppliers.

Earnings

        The most recently-reported quarter (March 31) was particularly strong. Revenues - $13,993,000 - were up 10% compared to the same period last year. But, net income zoomed 107% to $1,521,000.
        Memry CEO Robert Belcher: "A strong performance by Putnam drove the revenue increase during the quarter. Putnam's revenues increased to $4,146,000 - $1,074,000 higher over the same quarter a year earlier.
        "We are continuing to invest in manufacturing operations. This includes staff, equipment and systems needed to grow the business. Our cash flow continued to be strong. Our net interest expense was $252,000, down from $407,000 a year ago. This came from reducing the average outstanding debt."

Management

        Since Feb'05 and through Dec '05, insiders were aggressive buyers on the stock. In fact, one director, W. Andrew Krusen, Jr., acquired 54,119 shares. Two other directors were purchasers, as was CEO Belcher. They paid between $1.62 and $1.93 a share.
        The long-time chief executive, since Dec'91 - James Binch, 58 - retired in Dec '05. During his tenure, the company grew from annual revenues of $1 million to over $50 million.
        The Chief Financial Officer and Senior V-P Robert Belcher, 57, was immediately named as Mr. Binch's replacement. He has an extensive background in corporate finance. At one time, he was a principal with Booz, Allen & Hamilton. Mr. Belcher, through the outright ownership of stock and options, is the beneficial owner of 428,000 shares.
        Dr. Edwin Snape, 65, is chairman of the board. He is also the principal of New England Partners, a private equity investment firm, which owns 1,925,000 shares.
        Memry has approximately 375 full-time employees and three manufacturing facilities - Menlo Park, CA, Bethel, CT and Dayville, CT, with the latter housing the Putnam operations.
        Memry Corp. is not to be confused with Memory Pharmaceuticals (Nasdaq MEMY) in Montvale, NJ.... Office: 3 Berkshire Blvd., Bethel, CT 06801, 203-739-1100, Fax: 203-798-6526, www.memry.com.

(Back to Index)

THE ALEXANDER PARIS REPORT
161 N Clark St., Ste 2950, Chicago, IL 60601.
Monthly, 1 year, $195.

Oshkosh Truck awarded LVSR contract

        Walter Liptak: "Oshkosh Truck Corp. (NYSE OSK) was awarded the LVSR contract May 31, 2006. The official award was released under the Navy awards and is outlined below. This contract was a limited competition between TEX and OSK. We believe that the pricing on the contract may have been favorable to OSK for three reasons. First, OSK was the incumbent on the U.S. Marines LVSR vehicles and had a successful track record. Second, we believe that OSK was able to demonstrate efficiencies available through common parts and service. Third, we believe that Terex (NYSE TEX), through joint venture partner American Truck Corporation, was not competitive in the bidding process as indicated by TEX dissatisfaction during 2005. The U.S. marine contract supervisor that we talked to would not comment on contract pricing or production schedules, but we submitted a request for documents under the Freedom of Information Act.
        Typically, OSK accounts for military awards, as with the MTVR contract, on a percentage of completion basis and is conservative with upfront costs on the contract. We expect that OSK will continue that and contract profitability will ramp through 2012, when the contract is expected to be completed. We estimate that, assuming a straight-line basis for production and profitability, the LVSR contract could add $150 million per year and $0.20 per share.
        About the contract (official U.S. Navy release): Oshkosh Truck Corporation, Oshkosh, WI, is being awarded an estimated $740,220,577 firm-fixed-price, indefinite-delivery/indefinite-quantity contract for logistics vehicle system replacement vehicles with associated manuals, vehicle kits, test support and training. The maximum ordering quantity will be 1,350 cargo variants, 150 wrecker variants and 400 fifth wheel variants. The initial delivery order will be issued for $28,016,982 for 22 cargo variants, 2 wrecker variants, 2 fifth wheel variants, vehicle kits, training (operator/maintainer-cargo), test support production verification testing cargo, meetings, and contract data requirements list which satisfies all minimum quantities stated in the ID/IQ contract. Work will be performed in Oshkosh, WI, and work is expected to be completed by May 2012. Contract funds will not expire by the end of the current fiscal year. This contract is the result of a limited competition between the LVSR System Development and Demonstration Phase contractors for the Production and Deployment (P&D) Phase. The Marine Corps Systems Command, Quantico, VA, is the contract activity (M67854-06-D-5028).
        The LVSR is the U.S. Marines heavy tactical wheeled vehicle fleet replacement program. It is made up of five modules: front power unit, three rear bodies and tandem tow trailer. The combination of the modules makes a versatile truck for heavy lift U.S. marine work including fuel hauling, water, ammunition, equipment, containers and execute wrecker and recovery work. The U.S. Marines have stated that the LVSR would begin operations in the field in FY06.
        We see the LVSR contract as a positive for OSK's short- and long-term outlook. The contract should positively impact sales and profits for FY06-FY12. We reiterate our Outperform rating and $70 price target. We see the recent pullback in OSK shares as a buying opportunity and recommend buying at this attractive level. OSK is trading at 17.4x our 2007 EPS estimate, which is a valuation multiple below the recent historic average."

(Back to Index)

INVESTMENT QUALITY TRENDS
6450 Lusk Blvd., Ste. E-104, San Diego, CA 92121.
1 year, 24 issues, $310.

ServiceMaster: A very attractive yield

        Joseph McKittrick: "Of all the companies followed by Investment Quality Trends, only ServiceMaster (SVM) has the distinction of being founded by a former minor league baseball player. In 1929, Marion Wade started a small moth-proofing from which he would grow a major pest control operation. Over the years ServiceMaster has added a variety of other companies to its service-oriented lineup. The company's five operating segments include TruGreen, Terminix, American Home Shield, American Residential Services, American Mechanical Services, and a segment devoted to miscellaneous operations.
        Last year, TruGreen ChemLawn operations contributed 35% to SVM's revenues. The company provides lawn and landscape maintenance services to 3.5 million customers in 46 states. TruGreen also has a presence in Canada and the Middle East through one of its subsidiaries and licensing agreements. At the close of 2005, the company held 208 locations and franchised an additional 52 locations domestically.
        E.L. Bruce founded Terminix in 1927 and is credited with receiving the first patent for a termite control procedure. In 1986 the company was acquired by ServiceMaster and represented 33% of SVM revenues in 2005. Terminix provides comprehensive pest control services, including treatments for termites, bees, and rodents. Each year, Terminix serves the pest control needs of over 2.9 million residential and commercial customers. Foreign operations are conducted through a subsidiary in Mexico and by licenses in the Caribbean and Middle East.
        American Home Shield was responsible for 16% of 2006 corporate revenues. Home Shield provides warranty contracts for common home appliances and systems. Though contracts are held and administered by American Home Shield, repairs are performed by independent contractors. Also under this segment, SVM operates AmeriSpec, a home inspection company.
        As part of its reorganization, ServiceMaster has planned the sale of a number of its businesses. Among the largest of these planned sales is the American Residential Services segment. Under this branch, the company operates a Heating, Ventillation, and Air Conditioning (HVAC) company as well as its Rescue Rooter subsidiary. SVM is also looking to sell its American Mechanical Services, which also dealt with HVAC and electrical services.
        Interesting Qualities to Note: Recent market capitalization was $3.0 billion, SVM has 39,000 employees, 64% of shares are held by institutions, SVM serves 10.5 million homes and businesses annually, and ServiceMaster has a network of over 5,400 service centers.
       At a recent price of $10, ServiceMaster is priced precisely at Undervalue. From current levels the company has an upside potential of 100% to an Overvalue price of $20, low yield of 3.0%. SVM has had problems with fluctuating earnings for years. Now offering a very attractive yield, turnaround for shares will most likely hinge on the timely and successful sale of the businesses SVM has listed on the market. In the mean time, the company only marginally meets many of our fundamental measures. Accordingly the stock will probably not be an ideal pick for the more conservative investor, but attractive for those interested in the yield and extra upside posed by its currently depressed prices. Shares will remain priced to yield in historic areas of Undervalue up to a price of approximately $11."

(Back to Index)

THE MAJOR TRENDS
published monthly for clients of Sadoff Investment Management
250 W. Coventry Ct., Ste. 109, Milwaukee, WI 53217.

C.R. Bard's gross profit margins
have risen significantly

        Ronald Sadoff: "Charles R. Bard started doing research for the treatment of urinary discomfort in 1907. Formally incorporated in 1923, C.R. Bard, Inc. (BCR) is a leading multinational developer, manufacturer and marketer of innovative, life-enhancing medical technologies in the fields of Vascular (24% of sales), Urology (30%), Oncology (23%) and Surgical Specialty products (19%).
        In early 2002, after a merger agreement to be acquired by Tyco was terminated, the company went through a restructuring to improve margins and research & development. We started purchasing C.R. Bard for client accounts back in mid-2003 after it broke out of a 15-year donwtrend. C.R. Bard recently hit an all-time high just before the recent market correction.
        Approximately 31% of sales are outside the United States, with Europe (19% of sales) and Japan (5%) as the two largest countries. Over the past two years, the company has improved efficiencies and reduced its cost of goods sold by 400 basis points, which has allowed gross profit margins to rise significantly over the past two years.
        While we are becoming more cautious on the stock market we are keeping a close eye on C.R. Bard and the rest of the medical equipment industry."

(Back to Index)

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

Efoodsafety.com, Inc. on verge
of explosive revenue growth

        Konrad Kuhn: "Efoodsafety.com, Inc. (OTC BB: EFSF .25) is a pioneering company with stunning breakthrough technology on the verge of explosive revenue growth. EFSF is dedicated to improving health conditions around the world through its proprietary innovative technologies with products entering multi-billion dollar markets. EFSF believes it has formulated the "Total Solution" to the potential Avian Influenza (Bird Flu) pandemic. Its Knock-Out Technologies, Ltd. subsidiary has developed a revolutionary, environmentally safe sporocidal product formulated entirely of food-grade components that eradicates the most lethal of all biological weapons, Anthrax, and a germicidal product Citroxin (EPA REG #82723-1) that kills six major bacteria: E-coli, Listeria, Pseudomonas, Salmonella, Staphylococcus, Streptococcus, and is 100% effective at wiping out Black Mold (stachybotrys chartarum), which is overrunning hurricane-ravaged areas in the Gulf Coast. Most important, it could become the anti-viral prophylaxis (applying the remedy before the cure), the total solution of choice for the deadly Bird Flu.
        EFSF's MedElite, Inc. subsidiary distributes clinically proven products to physicians who then prescribe them to the patients. It is the exclusive worldwide and U.S. distributor of the Talysn(tm)-Ci-bid ScarCream that has been clinically proven to facilitate and improve the appearance, redness, and strength of scars. It is one of the most efficacious scar creams on the market today, entering a $4 bil. Market. The potential is huge. EFSF is also a distributor for Cinnergen(tm), anon-prescription liquid whole food nutritional supplement that promotes healthy glucose metabolism and Trimmendous(tm), a weight loss formula focusing on the body's 24-hr. metabolic processes.
        Health professionals have been aware of the adverse health effects of exposure to mold for decades. Studies indicate that 50% of all homes contain certain molds and the dramatic increase in asthma over the past 20-yrs. can be attributed to mold exposure. Toxic mold can form on most building surfaces and products (dry wall, insulation, ceiling tiles, carpet, etc.) if it remains wet for 24-48 hours. Citroxin Cleaner can significantly reduce costs of the rapidly growing new sector of the environmental remediation industry - toxic mold.
        EFSF continues its massive Direct Response Marketing Campaign via radio and TV for its Cinnergen(tm) Diabetes product (a $132 bil. market). Diabetes is becoming one of the fastest growing chronic health problems in America's aging population. Cinnergen(tm) encapsulates a proven effective naturally occurring compound found in cinnamon that can supplement subscription diabetes medications (Type 1 diabetic patients) and help decrease medication needs in Type 2 diabetic and borderline patients. Sales have exceeded expectations with their marques of companies including, General Nutrition Centers (GNC - over 5,000 related locations worldwide), The Vitamin Shoppe (over 260 retail locations in the U.S.), Kinray, Inc., the largest privately held distributor of pharmaceutical, generic and health and beauty care products in the world (sales in excess of $3.5 annually), The F. Dohmen Co., a wholesale distributor serving the pharmacy industry for over 140 years and Smith Drug Co. (division of J.M. Smith Corp., 6th largest privately held company) serving over 1,000 pharmacies in the mid-southeast U.S.
        In less than a year of a major restructuring, EFSF has generated sales for the 1st 9 mos. FY'06 of $116,008, with a loss per share of (.04). EFSF anticipates to be profitable for Q1'06 on an operational basis with sales exceeding all of FY'05. The company has virtually no debt and of the 128,674,000 shares outstanding approx. 60% are held by insiders. The stock, testing support since Sept. '05, successfully achieved higher lows. It is on the verge of completing a short-term double bottom for the launching of its next up-leg. The huge short position is the fuel to drive it to our 1st target of 2.00, but it must first close above .8750. This ground floor opportunity with explosive growth potential has already established positive fundamentals, and has more products in the pipeline (some already generating revenue) that could see sales growth of $8 mil. in the next 10 months, especially as it enters into a multi-million-dollar worldwide direct marketing campaign to sell its anti-acne product with a high-profile celebrity spokesperson. Worldwide appeal for the product could easily approach $200 mil. as the leading competitor's sales exceeded $300 mil. last year.
       EFSF has entered the biotech arena with its revolutionary Lyme's Disease product; human clinical trials are currently underway with EFSF's safe, natural, ingestible product that is believed to offer a positive treatment for chronic Lyme's Disease. In '03, the National Center of Infectious Diseases estimated annual cost for treatment of disease at $60 mil. a year in the U.S. EFSF is also on the verge of entering the $33 bil. domestic market of obesity to sell Trimmendous(tm), an all-natural (effedrine-free) weight loss formula that has unique selling and performance benefits that could readily capture significant market share. Our original target has been $4-$6, but with products coming on line better than anticipated with positive lab results, along with EFSF's total solutions to the Bird Flu, and with live testing about to begin, the stock could soar. Yes, I own the stock and believe in both the company and its management."

(Back to Index)

PEARSON INVESTMENT LETTER
P.O. Box 3739, Apollo Beach, Fl 33572.
Monthly, 1 year, $150. www.pearsoncapitalinc.com.

Defining value

        Walter Pearson: "How does one define the value of assets? How does one figure the value of one's stock holdings? It is easy enough to go to the newspaper's financial section and get a quote, but does that do the job? Is that a real value? Considering the value of a stock is quite different than computing other values. A home that you bought twenty years ago may be worth double what you paid for it in today's market. What has happened? Has your home actually appreciated in value, or is it simply the fact that the value of the dollar has depreciated to that degree? Thinking of it in real terms we know that the home is older and should actually be worth less.
        Think of this same situation in relation to the stocks in which you choose to invest. What is the real value? A stock may be quoted today for $35 a share. In your opinion it may be worth more and you become a buyer, or you may consider it to be overpriced at which point you depart. On occasion you may find a company move up or down in price 10-20-or 30% in one day. What this means is that the old price was simply the price and not the real value.
        Because of inflation many people are investing in stocks or/and property and most people seem to be doing this successfully. As you might expect, some are more successful than others. When choosing direction, remember that companies can grow in size and real value, but properties do not grow. You could look back at numerous companies today and see the differences for yourself. Take Bed Bath and Beyond as an example.
        Eleven years ago you could have bought it for less than $3 a share; today it is quoted for $37. The reason here is that the company has grown. Earnings were 14 cents a share and today they are more than ten times as much. Sales have grown and earnings have grown. Ergo - the market value has followed suit.
        One of the things to remember in choosing one's investments is to search out real value. The price of a stock is simply one thing to look at. The earnings in relation to price are another thing to consider, but one very important thing is the amount of growth to be expected over the next period in which we shall participate. When the horse and buggy went out, automobiles came in. If you were here then, you should have seen the change coming and participated. More recently, we had the advent of the high tech industry. It shouldn't have been too difficult to figure that the place to be. Investing $3500 in Cisco yen years ago would have taken you to more than $21,000 today, and Cisco still looks very good. A similar story with Microsoft: $3500 invested ten years ago is worth about $19,000 today.
        Sometimes you will find that a stock seems to be rather high priced in comparison with its peers, and I am one who does not like to pay too much for a stock; but it is also necessary to consider the amount and rate of growth to be expected over the foreseeable future. I can recall a personal experience along those lines. Some years ago Liz Claiborne was selling at $26 a share. It looked very good to me, but I felt it was overpriced. However, I felt it was so good that I bought some anyway - 50 shares for $1300. In a few years I had 1500 shares worth $40,000. Through the years I have given some away, but I still hold 254 shares worth about $10,000."

(Back to Index)

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

Two big pluses for Yum!

        Patrick McKeough: "One-product companies can be great moneymakers when demand for their product is strong. But profits can evaporate when a competitor comes along with a slightly better alternative. For that matter, when a company depends too heavily on, say, Wal-Mart or any one buyer (or class of buyers, or geographical area, and so on), its bargaining position can quickly erode. In extreme cases, it may feel more like a sharecropper than an independent business.
        That's one reason why we like Yum! Brands, a fast-food operator with five distinct banners. In addition, U.S.-based Yum is now the largest fast-food company in China. This was once a niche market. Today, however, China's middle class of about 300 million people is roughly equal to the population of the United States.
        Yum! Brands Inc. (NYSE YUM $49; Aggressive Growth Portfolio, Consumer sector; WSSF Rating: Average) operates around 32,000 fast food restaurants in over 100 countries. That's more outlets than McDonald's, although McDonald's generates higher annual sales.
       The company owns about 25% of these restaurants, and franchisees own the rest. It aims to sell more of its U.S. outlets to franchisees in the next few years, which would cut its overall risk. Yum prefers to own stores in developing countries, however, at least until local managers learn the business.
        Yum gets most of its sales and profits from three main banners: KFC (chicken); Pizza Hut; and Taco Bell (Mexican food). It also operates the smaller S&W (hamburgers) and Long John Silver's (seafood) chains.
        Offering a wide variety of foods helps cut Yum's exposure to changing tastes and preferences. It also cuts its risk to unpredictable food-safety issues, such as mad cow disease and avain flu.
        Yum's sales grew 34.5%, from $6.95 billion in 2001 to $9.35 billion in 2005. Earnings before unusual items rose 57.4%, from $1.62 a share (total $492 million) in 2001 to $2.55 a share ($762 million) in 2005.
        Most of this growth comes from Yum's aggressive overseas expansion. It now operates 1,900 KFC and 300 Pizza Hut outlets in China. Yum's China division, which includes Hong Kong, Taiwan and Thailand, now accounts for 15% of its total sales and profits.

Surviving a 2005 safety scare

        In 2005, the discovery of an illegal dye in a seasoning used in its Chinese KFC restaurants hurt Yum's sales. It quickly fixed the problem, and sales in China still grew a healthy 11% that year. But that's well short of Yum's target of at least 22% growth.
Another risk for Yum's Chinese operations is avain flu. Its chicken suppliers have stepped up testing, so it's unlikely that any contaminated meat will ever reach consumers. In the event of an outbreak, Yum could import chickens from other parts of the world.
        Yum plans to add 400 more restaurants in China this year, mostly KFC. It also plans to expand Pizza Hut's home delivery service to more cities.
        Yum has other overseas expansion targets in addition to China. It recently acquired Rostik's, a chain of about 100 fried chicken restaurants in Russia. It's also opening more Pizza Huts in India.
        India is a particular inviting market for pizza since so much of the population is vegetarian.
        In the United States, Yum aims to spur long-term growth by combining two or more of its brands in a single location. These stores, particularly KFC/Taco Bell outlets, tend to generate higher sales than stand alone locations. They also make better use of real estate, and let Yum reach markets that are too small for a single-brand location.

Multibrand units fuel profits

        The company now has over 3,350 multibrand stores, more than 10% of its total outlets. It plans to add 550 multibrand locations a year for the next few years.
Consequently, Yum will probably spend $2.50 a share on capital upgrades in 2006, up 14.2% from $2.19 in 2005. Capital spending could reach $2.75 a share in 2007.
Yum's cash flow this year should reach $4.80 a share, up 8.3% from $4.43 in 2005. That gives it plenty of cash for its planned projects, as well other uses such as share buybacks. Yum just increased its quarterly dividend 30.4% from $0.115 a share to $0.15. The new annual rate of $0.60 yields 1.2%.

Still cheap in relation to prospects

        Yum has more than doubled for us since we first recommended it in our January, 2000 issue at $19 (adjusted for splits).
        The stock now trades at 17.3 times the $2.83 a share it should earn in 2006. That's cheap in light of its growth potential and well-known brands.
        Yum Brands is a buy."

(Back to Index)

THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301, Bloomfield, CT 06002.
1 year, 50 issues, $297.

Manitowoc a stealth play

        Gregory Spear: "Water transportation companies have been on the move for several weeks and Manitowoc (MTW) is a stealth play on that industry, but it is primarily a play on global infrastructure development. The Wisconsin company was founded in 1902 as a shipbuilding and ship repair operation, but since then, MTW has slowly diversified. The company entered the crane business in the mid-1920's and branched into commercial refrigeration equipment shortly after World War II.
        In the marine segment, Manitowoc operates three shipyards on the Great Lakes. The company recently announced a large (up to $600 million) contract with the U.S. Coast Guard for the construction and delivery of up to 250 Response Boats, and has a marine backlog that extends through 2008. That said, MTW appears to be concentrated on the substantial global opportunities available in cranes and foodservice equipment, which is why the impressive long-term stock chart of MTW resembles that of other global infrastructure players.
        The crane business is booming, as commercial construction and infrastructure buildout and repair are strong both at home and abroad. Developing countries are reinvesting their export income into new highways, airports, power plants and grids, waste treatment facilities, office buildings and residential developments at an unprecedented pace. Manitowoc is one of the world's largest providers of lifting equipment for the global construction industry, including lattice-boom cranes, tower cranes, mobile telescopic cranes, and boom trucks. MTW makes cranes in Wisconsin, Pennsylvania and Arkansas, but now has impressive worldwide operations in Germany; France, Portugal, Italy and China. The company recently replaced an aging manufacturing operation in China with a new 500,000 sq. ft. facility as management expects a positive marketing environment to last for the rest of the decade. We concur.
        In the foodservice segment, Manitowoc offers the broadest line of "cold-side" equipment in the foodservices industry. The company has ice machine manufacturing facilities in Wisconsin and China; commercial refrigeration operations in Maryland and Tennessee; and beverage equipment manufacturing and distribution facilities in California, Indiana, Ohio and Virginia. MTW introduced more than 25 new foodservice products in 2005 and a new facility in China is expected to maintain production at high levels. Moreover, this equipment is going to be targeted to Asia and the emerging markets, where GDP growth is robust. In total, over 45% of the company's revenues now come from outside the U.S.
        In 2005 net revenues generated by its 8,000 employees were up 22% to $2.2 billion, while net earnings rose 50% to $2.14/share. In the first quarter of 2006, sales increased 24% to $633 million, while earnings per diluted share exploded to $0.48 compared to $0.11 for the 2005 quarter. The crane segment has a backlog of almost $1 billion, up 85% year over year. The company has about $200 million in cash and about $400 million in debt.
Technically, shares of MTW rose quite rapidly from December to May, as it served as a proxy for the emerging markets. Shares suffered a rather substantial haircut since then and are bouncing nicely, as a result of increased quarterly and full-year earnings guidance last week. MTW is a great way to play the merging market theme with a stable, high-growth company."

(Back to Index)

THE MONEYPAPER
555 Theodore Fremd Ave., Ste. B-103, Rye, NY 10580.
Monthly, 1 year, $108.

Walgreen's: Industry leader in
development of new pharmacy services

        Robert Briechle: "The Walgreen Co. (WAG): The nation's largest drugstore chain with fiscal 2005 sales of $42.2 billion, Walgreen operates 5,250 drugstores in 45 U.S. states and Puerto Rico, of which nearly half are in Florida, Illinois, Texas, Arizona, and California. Prescription drugs account for 64% of sales, with other retail sales at about 36%. In addition to its retail stores, WAG has a mail-order pharmacy operation and provides medications to nursing homes.
        With its investment in pharmacy over the past 25 years, Walgreen leads the industry in the development of new pharmacy services, including the most 24-hour pharmacies in the country, prescription labels in 14 different languages, personalized Medicare drug benefit information, and nationally linked pharmacies that allow patients to have their prescription needs met at any of Walgreen's stores nationwide.
        WAG historically has grown organically, rather than through strategic acquisitions. Just announced, though, is the purchase of Happy Harry's, a drugstore chain in 76 stores in Delaware, New Jersey, Pennsylvania, and Maryland. The company has a dominant market share (65% of the pharmacy market) in its home state of Delaware. Management has said it expects to take advantage of the availability of small acquisition targets to increase operations and sales in the next 12-18 months as small pharmacies recognize the need to have the scale to negotiate effectively with payors and suppliers. It has opened more than 3,800 new locations over the past 10 years, while acquiring and operating fewer than 30 in that period.
        Management expects to continue the firm's history of growing sales and earnings, and indicated that this trend is sustainable as it grows from its 5,250-store base. It is on pace to meet or exceed its goal of 7,000 stores by 2010; 25% of its stores are less than three years old and not yet profitable, which augurs well for bottom-line growth going forward. Over the past decade, the firm has chalked up an average annual EPS growth rate of 16% and a forward P/E multiple of 28.3%. However, its current forward P/E is only 23.7%."
        Editor's Note: Robert Briechle is Senior Vice President, AFA Financial, Inc., North Royalton, OH.

(Back to Index)

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

Small get fried

        Roger Conrad: "Shares of upstart Voice over Internet Protocol (VoIP) provider Vonage have fallen by more than half its market value since their initial public offering (IPO) in late May. One reason: Founder and 31 percent owner Jeffrey Citron - who has fined $22.5 million by the Securities and Exchange Commission (SEC) for allegedly dumping stock at his last company, day-trading firm Datek - waited too long for the IPO.
        Even a perfectly timed deal would have had a hard time in the current landscape, where Goliaths routinely crush would-be Davids with irresistible financial, marketing, legal and lobbying might. Last month, Big Tel and Big Cable giants won a major victory as Congress refused to act on "network neutrality," allowing them to theoretically toll Google, Vonage and other service providers. Congress also advanced a bill that will grant Big Tel national pay TV service franchises.
        Over at the executive branch, the Bush administration has abolished the tax on long-distance phone calls and is refunding users $13 billion. It's also put a repeal of the local phone tax in motion. The Federal Communications Commission now has a 3-2 Republican majority, making passage of the AT&T/Bellsouth merger likely with few conditions. And VoIP providers will now be forced to contribute heavily to the universal service fund at a time when fry like Vonage are already stretched thin.
        As for legal issues, Congress won't question Big Tel executives about their alleged role in helping the National Security Agency collect phone records. And a divided Court of Appeals for the DC Circuit has ruled even broadband and Internet phone companies must allow wiretapping by law enforcement, eliminating even the perception of a privacy advantage.
        The result is a clear path for Big Tel and Big Cable companies to keep posting earnings gains. And now, after a six-year depression, the stocks appear to be getting stronger. Buy AT&T up to 28, Comcast below 32 and Verizon up to 34."

(Back to Index)

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

2 out-of-favor women's clothing retailers

        Robert Acker's new additions to the Bear's Paw High Visibility Portfolio includes New York & Co. and Chicos Fas, Inc.
        "New York & Co. (NYSE NWY $10.34) This leading specialty retailer of fashion-oriented, moderately-priced women's apparel has seen its stock price severely punished because of earnings and earnings projections which seem to be disappointing the street. NWY, which has a 52 week range of $9.41-to-$24.28, and a P/E of 13.97, reported net income of $1.02 per diluted share for fiscal year 2005 and estimates that fiscal year 2006 net income per diluted share will fall in a range of $0.70-to-$0.82. Street estimates average $0.77 per share for this year and $0.98 per share for next year. If these estimates translate to reality, then NWY is selling for about 13.4 times this year's earnings and 10.6 times next year's. New York & Co., which is priced only $0.93 above its 52 week low, is a whopping $13.94 below it 52 week high. While the psycho-technicals which have been characterizing NWY's recent trading have been pretty dismal, this writer is of the belief that (although this stock's darkest days may not yet have been seen) the market has overreacted and that NWY has the potential to appreciate significantly from current levels. Buy.
        Chicos Fas, Inc. (NYSE CHS $24.90) This specialty retailer of private label, sophisticated, casual-to-dressy clothing, intimates, accessories, and other non-clothing gift items operates about 805 women's specialty stores. Chicos, which recently lowered its diluted earnings per share guidance for fiscal 2006 to $1.20-to-$1.24 from $1.23-to-$1.26, is trading at the low end of its 52 week range of $24.65-to-$49.40. In May, Chicos announced the completion of its $100 million stock repurchase program which resulted in the repurchase of approximately 3.1 million shares at an average cost of $32.46 per share, and that its Board of Directors had authorized the repurchase of up to $100 million of its outstanding common stock over the next twelve months. Chicos, which is priced $24.50 below its 52 week high and $7.56 below the average price paid for the 3.1 million shares which were repurchased, is very out of favor and appears to be capable of significant appreciation. Buy."

(Back to Index)

THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
Monthly, 1 year, $175.

Celgene: Strong upswing

        Dan Sullivan: "Celgene (CELG) ranks #16 in our relative strength ratings. It recently hit an all-time high and has been in a strong upswing over the last month-and-a-half. Since May 22, when it started its latest run-up, the shares have surged 28.5% versus the S&P 500's gain of 2.1%. The long-term chart pattern also looks impressive as Celgene has been in a strong uptrend since early 2005. During that time it has carved-out a highly bullish pattern of ascending tops and bottoms. Since recommending it for both the Actual Cash Account and Traders on 11-22-05, it has a gain of 50.7%.
        Celgene develops and markets pharmaceuticals to treat cancer, immunological disorders and other diseases. Most of its success comes from sales of the drug Thalomid that threats multiple myeloma, the second most common form of blood cancer.
        Originally, the drug was used in the 1950s and 1960s by a German company to treat morning sickness. The drug however, was pulled when it was discovered that it could cause severe birth defects. Celgene found others uses for the drug and in 1998, Thalomid was approved by the FDA to treat leprosy. In February 2004, the company filed for approval to use the drug to treat multiple myeloma which was granted in May of this year. Even before the FDA action, however, the drug had already posted strong sales from doctors and patients using it "off-label" to treat the disease. The official FDA approval should boost sales.
        The company's first quarter sales jumped 62% from a year earlier to $181.8 million. Earnings rose 50% to 9 cents a share."

(Back to Index)

S.A. ADVISORY
4700 S. Holladay Blvd., Salt Lake City, UT 84117.
1 year, 6-8 issues, $80.
One year telephone service + letter + access to communicate with S.A. Advisory, $1,200.
www.saadvisory.com

Asia Pacific Wire & Cable:
Extremely undervalued situation

       William Velmer rates Asia Pacific Wire and Cable (AWRCF.PK) a Strong Buy.
       Asia Pacific Wire & Cable Corporation is a leading manufacturer of wire and cable products for the telecommunications and power industries in selected markets in the Asia Pacific Region.
        Business is exploding in Asia-Singapore 8%, Thailand 6.5% and China 8.5-9%. The current picture that the marketplace paints with respect to AWRCF.PK is one of clouds and fuzzy figures, but in reality if you examine the picture more carefully you will see a company that is trading at a steep discount to its cash-on-hand, plant and equipment, revenue and profits!
        A management report presented at the annual general meeting on June 30th addressed certain financial results of the Company and certain subsidiaries for the fiscal years ended December 31, 2004 and December 31, 2005. Management announced that for the fiscal year ended December 31, 2004, the consolidated unaudited Company revenues were US$296,000,000, a 40% increase from the fiscal year ended December 31, 2003, and the Company's gross profit was US$39,100,000, a 17% increase from the fiscal year ended December 31, 2003.
        For the fiscal year ended December 31, 2005, the Company's consolidated unaudited revenues were US$341,000,000, a 15.2% increase from the fiscal year ended December 31, 2004 and the Company's gross profit was US$37,900,000, a decrease of 3% from the fiscal year ended December 31, 2004. The Company reported that, at December 31, 2005, its cash and short-term deposits totaled approximately US$40 million and that its bank debts, accounts payable and related party debt totaled approximately US$76.3 million.
        "In our opinion, we believe that the balance sheet has improved regardless of a few questionable write downs and poor financial controls at one of their divisions. Even if we write off the goodwill which stands at a tiny $8 million it is our view that the equity of AWRCF.PK remains between $115 and $120 million, which yields a book value of $8.69!
When we look at cash/sh-the numbers continue to be very impressive!
        At the end of 03 cash was $29 million of $2.10/sh.
        At the of 05 cash was $40 million or $2.89/sh.
        With a share price of .95 it is hard to believe that our shares are selling at 1/3 of cash value!
        When you consider that the book value is around $8.70 and the share price is.95 that AWRCF.PK is trading at 11% of stated book!
        When you consider that the revenue for 2005 was $341 million and the market cap is only $13.1 million, which yields a PSR of .04 - that this stock is so cheap that it defies all reasoning!
        Because management mentions that business is strong during the first half of 06. We are assuming that revenues for 06 will approach $400+ million with proportional earnings.
        We believe that this company will become current with their filings and will move to a listed exchange and greater visibility will increase the share price of AWRCF.PK to a more fairly priced and valued as it should be!
        The 20-F for 2003 and all the 6-K's can all be viewed via SEC filings.
        Additional Note: The division that caused all the problems has been closed and a new plant is being built in another part of China. The management and directors that were involved in this division have been removed according to management during the conference call.
        We view Asia Pacific Wire and Cable as an extremely undervalued investment opportunity at current levels.
        We rate AWRCF.PK with a strong buy rating with almost zero risk and 10x your investment during the next 12-18 months.

(Back to Index)

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

Home Depot falls, still
has strong foundation

        Richard Moroney: "Despite solid recent results and a strong growth outlook, shares of Home Depot (NYSE HD $36) have fallen 17% from March highs, hurt by concerns about a slowdown in the housing market. The stock trades at an attractive 11 times estimated year-ahead earnings of $3.15 per share, well below its five-year average forward P/E of 18 and the forward P/E of 14 of chief rival Lowe's (NYSE LOW $61). Home Depot earns outstanding Quadrix scores - 92 Overall, 94 in Value, and 94 in Quality. The stock is Focus List Buy and a Long-Term Buy.

Corporate Profile

        Home Depot, the world's largest home-improvement retailer and the second-largest U.S. retailer, operates 2,051 stores in North America.
        Home Depot targets both retail and professional customers. Through numerous acquisitions, the company has built up its supply business, the division that serves professional contractors. Its largest and most recent purchase was the March acquisition of Hughes Supply for $3.2 billion. The acquisition substantially increased the size of the supply division, which rose from 5% of sales at the end of January to 10% of sales in the April quarter. Expansion of the supply segment helps diversify Home Depot's business mix while tapping into new markets with good growth potential. Excluding the Hughes acquisition, Home Depot supply's sales increased 18% in the April quarter.
        Despite concerns about a slowdown in home-improvement spending, Home Depot's retail consumer sales remain solid, increasing 6% in the April quarter. Home Depot is introducing more higher-priced goods across its merchandise mix and plans to remodel 35% of the display bays at its 500 highest-volume stores. Stores in the southern U.S. are preparing for the Atlantic hurricane season and the potential run on emergency supplies.
        Home Depot said the Securities and Exchange Commission has launched an informal inquiry into its stock-option grants, another possible cause of the stock's recent weakness. An internal company review turned up five option grants that were approved retroactively before 2000, and two of those five grants were back dated to days when the stock price was lower. The company failed to record about $10 million in compensation expenses, but doesn't intend to restate prior results.
        Shareholders have also criticized the chief executive's pay package. Since taking charge of Home Depot in 2000, a period in which the stock price fell more than 10%, CEO Bob Nardelli has received $123.7 million in compensation, not including stock options. While the critics have a point, Home Depot has delivered strong operating results - five-year annualized sales growth of 12% and per-share-profit growth of 21%.

Conclusion

        Consensus estimates project per-share-profit growth of 14% in fiscal 2007 ending January and 12% in fiscal 2008. Estimates have trended higher in recent weeks. In May, the board approved the immediate repurchase of $2 billion in stock and increased the share-repurchase program by another $2 billion. Home Depot had $2.59 billion in cash and short-term investments at the end of April. An annual report for Home Depot Inc. is available at 2455 Paces Ferry Rd., NW, Atlanta, GA 30339; (770) 433-8211."

(Back to Index)

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

Options backdating "scandal"
Opportunity to buy on bad news?

        George Putnam, III: "One of the favorite techniques of contrarian investors is to buy a stock that is the subject of bad news. The theory is that many investors over-react to the bad news and push the price of the stock down further than is really appropriate. This approach works especially well when the bad news isn't really as bad as it seems.
        In recent weeks, many of the negative headlines in the financial press have dealt with options backdating, the practice of awarding stock options to executives with an effective date prior to the award date. Such a practice allows for an awarding options with a particularly low exercise price, thus maximizing the reward to the executive. Some of the articles suggest that such backdating represents malfeasance comparable to the fraud at Enron and WorldCom a few years ago.
        To be sure, options backdating is not particularly shareholder friendly, but it is not at all clear that the practice is illegal. And even if it is, the long-term damage to the companies involved may be quite minor. In the short term, these companies will suffer some damage to their reputations. Perhaps of most concern to investors, certain top executives involved may be forced to depart. Some companies may have to restate prior results, but the economic effect on their balance sheets and future earnings is not likely to be of great consequence.
        However, in the best Wall Street tradition of "sell first, analyze later," many stocks have been pummeled at the first hint that they may be implicated in the options backdating "scandal." The strikes us as a good scenario for finding buying opportunities. We scanned the list of candidates (which seems to grow daily) for companies that were already in the throes of a turnaround. Following are some of the miscreants that strike us as particularly interesting.
        Apollo Group (APOL $51.84) provides higher education programs, including the University of Phoenix, at 90 campuses and 54 learning centers. After peaking at just over 98 in mid 2004, the stock has been moving steadily lower - a trend began by concerns about costs but compounded by recent news of an SEC investigation into the firm's option pricing. Enrollment and revenues continue to grow, and the balance sheet is fine, so patient investors could benefit from the current weakness.
        Broadcom (BRCM $29.98) is a leading player in the market for semiconductor products for just about every mode of information transfer. The stock has been hurt by the cyclical downturn in the industry, but the cycle could turn up again soon. By outsourcing its manufacturing, Broadcom is able to focus some 70% of its workforce on R&D. And with impeccable financials, the company is likely to remain at the forefront of the ever burgeoning communications marketplace.
        Home Depot (HD $36.37) has garnered some bad PR recently due to a fumbled annual shareholder meeting and questions regarding CEO pay. But those issues mask a recent improvement in measures of financial efficiency, and the company is making impressive in-roads in new areas such as the professional market and overseas markets. The stock is off its 2003 lows, but hasn't really made any progress in the last two-and-a-half years.
        McAfee (MFE $23.96) is one of the best known providers of security software. With a debt-free balance sheet and a strong position in this growing market, McAfee should reward patient investors.
        Medarex (MEDX $8.81) is a biotechnology company that is developing antibody-based therapeutic products for cancer, arthritis and psoriasis. The balance sheet, bolstered by an issuance of stock in April, is decent enough, but with no profits in sight, Medarex must be considered somewhat speculative. The stock has fallen more than 40% from its early 2006 high, and so at least the valuation is more attractive.
        Microsoft's (MSFT $22.86) former options practices have provided more fodder for the naysayers as the stock continues to tread water. But with a new version of its Windows operating system coming out early next year, this could be a good time to get into the stock.
        Openwave Systems (OPWV $11.02) is a dot-com survivor that has now found a niche providing software for the communications industry for uses such as accessing the internet via a cell phone. A selloff in the stock that began when Wall Street was disappointed by the April earnings report was exacerbated when options-related issues came out. The company is well financed, and patient investors are likely to be rewarded from current levels.
        Vitesse Semiconductor (VTSS $1.20) focuses on the communications and data storage markets, both of which are strong now, and results for the first quarter were encouraging. Then the options issue caused the company to fire several executives and restate its financials. This made lenders nervous. Moreover, the stock will soon be delisted from Nasdaq because of the lack of current financial statements, reducing trading liquidity. All of these factors make the stock very risky, but if the business continues on its uptrend, the stock could appreciate dramatically."
        Editor's Note: The Turnaround Letter is celebrating their 20th year of publishing. Editor George Putnam, III has seen a lot over the 20 past years: the market crash of October 1987; the high yield and leverage buyout boom of the late 1980's; the bankruptcy wave of 1989-1991; the bull market of the 1990's; the Internet bubble; the telecommunications bubble; the bankruptcy wave of 1992-2002; the bear market of 2000-2002 - to name a few of the high (and low) points.
        He believes that the basic tenets of his investment philosophy are as valid today as when he wrote the first issue of The Turnaround Letter back in 1986. Putnam believes that turnaround stocks represent an under-followed and therefore undervalued niche in the stock market. And he remains convinced that the keys to being a successful investor are to: 1) be patient; 2) avoid trying to time the market; 3) diversify your holdings; and 4) be humble and learn from your mistakes. Our congratulations go out to New Generation Research Inc. for making available to investors their dedicated research and very informative newsletters.

(Back to Index)