INVESTMENT QUALITY TRENDS
7440 Girard Ave, Ste 4., La Jolla, CA 92037.
1 year, 24 issues, $310.
General Electric: Unattractive
Joseph McKittrick: "With market capitalization of almost $340 billion, General Electric (GE) is not only one of the largest companies we follow, but also one of the oldest. Originally founded through the innovations of Thomas Edison, General Electric was incorporated in 1892. During the period, electricity is now diversified into many different areas of business. Among the largest of its operating segments are Power Systems, Insurance, Medical Systems, Aircraft Engines, and those responsible for finance operations.
Last year, General Electric Power Systems provided 13.8% of the company's consolidated revenues. This segment produces generators and associated equipment used to generate electricity. Chief products are gas turbines and generators, used primarily by electric utilities. Power Systems also specializes in nuclear power, providing fuel for reactor systems. Other services and equipment are used by the petrochemical sector in oil and gas refineries. Social investors will be happy to see the company provides renewable energy products such as wind turbines, hydropower generators, and geothermal products.
Insurance operations constituted 19.5% of consolidated revenues in 2003. Through an initial public offering for Genworth Financial, and subsequent sales GE has transitioned away from what was the majority of its life and mortgage insurance business. The company's remaining major operations primarily offer reinsurance services. Under a reinsurance structure, the company offers insurance to other insurance companies for all or part of the liabilities held on policies. Though a major contributor to overall revenues, this segment held nearly $1.7 billion in outstanding debt at the end of 2003.
Medical Systems manufactures and sells a large variety of diagnostic and medical imaging equipment. Last year sales contributed approximately 7.6% to overall company revenue. Imaging products include x-rays, magnetic resonance scanners, nuclear imaging, ultrasound devices, and positron emission tomography scanners. Other products sold to hospitals include patient monitoring equipment, diagnostic cardiology machines, and oxygen therapy devices.
General Electric's Aircraft Engines legacy dates back to a 1917 project for the government to design an engine booster. The operation's modern product lineup includes jet engines, turboprops, and turbo shaft engines. Several engines made by General Electric and its partnerships produce the engines used in most of Boeing's commercial airliners, and several models made by Airbus. GE also makes products used by the military in helicopters, fighters, bombers, surveillance aircraft, and tankers. Last year, Aircraft Engines contributed 8.0% to total consolidated revenues.
Last but certainly not least of GE's major contributing segments are the two responsible for finance. In 2003, Commercial Finance contributed 14.1% to the company's consolidated revenues, while Consumer Finance contributed a further 9.6%. Commercial Finance offers a variety of services to customers. Financing typically is provided for items such as real estate, vehicles, aircraft, and industrial facilities and equipment. Consumer Finance offers auto loans, leases, residential mortgages, home equity loans, and credit insurance. Operations were recently bolstered by the 2003 acquisition of Conseco Finance Corp.
At a recent price of $33, General Electric remains in a Declining Trend with a 52% downside risk to its historic high yield of 5.0%. Despite better than expected earnings, General Electric still holds a very high debt-to-equity ratio and offers a low dividend relative to its own historic profile. The company has experienced problems with its turbine business, is getting rid of a large portion of its insurance business, and has also seen problems in other areas. Buying at these levels remains largely unjustified by the continuing high levels of downside risk. Visit the web site at www.ge.com."
WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99.
Brewers look abroad for growth
Patrick McKeough: "Anheuser-Busch (NYSE BUD $52; WSSF Rating: Above average) is already the world's largest brewer, and is now expanding in China. In May 2003, the company agreed to pay $182 million to raise it stake in Tsingtao Brewery, the largest in China, from 4.5% to 27% over the next seven years.
This year, the company paid $139 million for 29% of China's Harbin Brewery Group Limited, which specializes in low-cost brands. That raised its interest in Harbin to 36%. It later acquired the remaining 64% of Harbin for $444 million. To put these figures in perspective, Anheuser-Busch made $673. 5 million or $0.83 a share in the second quarter of 2004.
China is now the world's largest beer market, and these moves greatly expand Anheuser-Busch's Asian operations. That could be hugely profitable, particularly since Chinese beer consumption should grow by 5% annually in the next five years, compared with less than 1% in the United States.
The stock is just slightly below its all-time high of $55. That works out to 18.8 times the $2.77 a share it should earn in 2004. Although that's high for a brewer, it's still reasonable in light of Anheuser-Busch's ability to raise prices without hurting its 50% share of the U.S. market.
Anheuser-Busch is a buy.
Coors (Adolph) Co. 'B' (NYSE RKY $68; WSSF Rating: Average) is using acquisitions to improve its position as the world's ninth-largest brewer. In 2002, it expanded outside of the United States for the first time when it paid $1.7 billion for Carling, the UK's second-largest brewer.
Thanks to strong UK sales, Coors made $1.90 a share (total $72.0 million) in the second quarter of 2004, down 5.6% from $2.04 a share ($76.3 million) a year earlier. Sales grew 4.5%, to $1.15 billion from $1.1 billion.
The company has just agreed to merge with Molson Inc., Canada's largest brewer. Molson currently brews and sells Coors' brands in Canada, while Coors distributes Molson's products in the U.S.
The merged company, Molson Coors Brewing, will have annual sales of $6 billion and will be the world's fifth-largest brewer, based on volume. Coors stockholders will receive one share in the new company for each share they now hold. As a group, they'll own 45% of the merged company.
There's little overlap between Coors and Molson, but they feel they can cut costs by $175 million a year by 2007, probably by consolidating their production, marketing and other functions. A merger won't improve Coor's position as the third-largest brewer in the United States. But it will help Coors to compete with Anheuser-Busch and larger European brewers.
Coors has gained about a third since the start of the year, and now trades at 13.7 times the $4.95 a share that it will probably earn in 2004. That's on the cheap side, but stocks like Coors that have voting and non voting stocks often trade at a discount.
We see the stock as a hold."
THE TURNAROUND LETTER
225 Friend St., Ste. 801, Boston, MA 02114.
Monthly, 1 year, $195.
Airline stocks: More turbulence ahead
George Putnam, III: "In the past, when the economy was strengthening, the airlines would make money and their stocks would soar. Right now, however, the economy is doing well and most of the airlines are doing badly. United is mired in bankruptcy, USAir, which emerged from Chapter 11 last year, is threatening to go back into bankruptcy and even Delta, once considered the gold standard among U.S. air carriers, is using the "B" word in its financial releases. While most of the other airlines are not on the verge of bankruptcy, none of them is doing particularly well. Even the stock of upstart Jet Blue, which was a Wall Street darling, is down about 50% from its high reached last autumn.
What's different this time? Unfortunately for the airlines, quite a lot. New low cost carriers, like Jet Blue, are pushing ticket prices down. High fuel prices are pushing costs up. And lingering fears of terrorism are depressing passenger traffic. Moreover, the big old-line carriers are still saddled with high operating costs as a result of past labor agreements, benefit plans and the like.
All in all, things look pretty bleak for the airlines. But good contrarian investors know that the best time to invest is often when things look the bleakest. So, we are pounding the table to buy airline stocks now, right? Well, sort of. There is a tremendous amount of gain potential in the stocks, but also a very high level of risk. The trick is picking the securities with the best balance between gain potential and risk.
As always, one of the best ways to mitigate investment risk is to diversify. Thus, one strategy for playing the airlines right now is to buy a basket of different securities. The chart below highlights a number of interesting possibilities. Our thoughts on some of the individual securities follow.
America West (AWA $6.19) is quite an appealing, though still speculative, stock at the moment. The company has reduced its costs and is now cash flow positive. Its small size and limited routes make America West somewhat vulnerable, but the stock should do very well if the industry begins to recover.
Delta (DAL $5.23) is another interesting, although even riskier, speculation. Our best guess is that they will succeed in getting their costs down and will avoid bankruptcy, but that is far from a sure thing. The best way to invest in Delta now is through its bonds which are trading around 36 cents on the dollar. If Delta recovers you can double or triple your money on the bonds; if it ends up in bankruptcy, you will still lose money on the bonds, but, unlike the stocks, they will probably not be worthless.
Of the other big, traditional carriers, we particularly like Northwest (NWAC $8.75) because of its Asian routes. We are concerned that there is a real risk that either UAL (United) or USAir (UAIR $2.88) could end up in liquidation. (If you are interested in UAL, look at the unsecured bonds trading around eight cents on the dollar; the stock, even at pennies a share is almost certainly overpriced). We don't have strong convictions, either way, about AMR AMR $8.56) or Continental (CAL $9.08).
The low cost carriers, AirTran (AAI $11.16), JetBlue (JBLU $24.05), and Southwest (LUV $14.51), have less risk than many of their older brethren, but from current price levels they may have less gain potential as well. From this group, our current favorite is AirTran."
THE BOWSER REPORT
PO Box 6278, Newport News, VA 23606.
Monthly, 1 year, $54.
Rotonics Manufacturing improves
Performance despite rising costs
Max Bowser: "Rotonics Manufacturing (AMEX RMI) has been around for along time. In May 1978, it was one of our picks when the company was named Pentron Industries.
At that time, the firm was making primarily plastic consumer items.... Harry Schark, then president, was quoted as saying: "I don't know where they all go. We've probably produced enough dustpans for every woman, man, child and their pets in America."
Rotonics manufactures plastic products for commercial, agricultural, refuse, pharmaceutical, marine, recreation, medical waste, healthcare, and retail use, as well as an array of custom molded plastic items for customers in a variety of industries.
Specifically, their products include various types of storage tanks, bin lids, refuse containers, medical waste containers, agricultural/livestock items, kayaks, outdoor polysteel lamp posts, furniture, planters, etc.
The company has 10 manufacturing plants - all located in the U.S.
Dustpans are now only a minute portion of their sales. In fact, during 2003, consumer products made up only $3.2 million of total sales of almost $36 million. (Manufacturing for other corporations was the biggest source of revenue in 2003 - $14.19 million).
When we reviewed the last three quarters, as chronicled in news releases, RMI improved its performance despite rising costs. The three quarters:
RMI announced a net loss of $94,200 on sales of $9.1 million for the second quarter, ended December 31, 2003, compared to net income of $198,000 on sales of $8.5 million for the same period the year before.
"We are pleased with an improved marketplace that resulted in the 7% sales increase. The largest gains were reflected in our contract manufacturing and refuse product groups, as well as in some of your industrial products... We also continue to receive positive feedback from the numerous trade shows we have attended.
"Even though sales volumes have shown a marked improvement, our operating expenses have been impacted by rising raw materials, natural gas and insurance costs. Too, we incurred a one-time inventory write-down of $200,000 that further diminished operating profits and resulted in a loss for the period.
"During the balance of fiscal 2004, we plan to continue our efforts to mitigate the effect of these costs with systematic price increases and manufacturing efficiencies."
Rotonics announced earnings of $375,700 on sales of $10,036,100 for the third quarter, ended March 31, 2004, compared to earnings of $102,800 on sales of $8,720,800 for the same period the year before.
"We continue to realize momentum in our market place. This positive trend has been instrumental in the 15.1% gain.
"All of our product groups have posted improvements, with the most notable being refuse products, up 25.6%; industrial products, up 25.3% and contract manufacturing, up 10.6%. We have also sustained a steady rise in our backlog over the last several months."
2004 Fourth Quarter
The company reported net income of $850,000 on sales of $12,292,500, compared with $493,200 on sales of $9.8 million for last year's fourth quarter.
"Sales for the current quarter depict a return to sales volumes that were comparable to those prior tour country's latest economic downturn that began in 2000. (During fiscal 2004, we spent $1,525,000 on new equipment, tooling and other improvements.)
"We are certain that the 4.1% jump in material costs, natural gas and insurance will continue to burden future results. Nevertheless, we've been able to overcome these increases."
The board of directors declared the eighth annual cash dividend. It was payable July 23 at the rate of 5¢ per common share to holders of record July 9.
Management
Sherman McKinniss, 67, chairman and president, is the firm's largest holder, owning 5,368,721 shares. His salary is reasonable and, in fact, was reduced last year. Mr. McKinniss has spent a career in the plastics field.
RMI has a strong balance sheet. For every $4.71 of current liabilities, there are $11.44 of current assets. Long-term debt has been slashed from$9.5 million in 1999 to the current $3.6 million.
Rotonics Manufacturing, 17022 South Figueroa St., Gardena, CA 90248, 310-538-4932, Fax: 310-323-9567, www.rotocast.com.
Editor's Note: Max Bowser writes the only truly legitimate newsletter for stocks $3 a share or less. His 3rd book, Guaranteed Profits With Small Stocks: The only stock market Investment System that comes with a $5,000 guarantee is the culmination of creating a fool-proof system for investing in penny stocks. Available for $19.95 at book stores, Amazon.com and BarnesandNoble.com.
INVE$T...Carolina!
published by Investments 101, Ltd.
100 Brantmere Ct., Jamestown, NC 27282.
Monthly, 1 year, $69.
TriPath Imaging rates Strong Buy
Jeff Brommer: "TriPath Imaging, Inc. (Nasdaq TPTH) develops, manufactures, markets and sells products for cancer detection, diagnosis, staging and treatment selection. TriPath is using its technologies and expertise to create an array of products designed to improve the clinical management of cancer. The Company has developed and marketed and integrated solution for cervical cancer screening and other products that deliver image management, data handling and prognostic tools for cell diagnosis, cytopathology and histopathology. The Company is organized into two operating units: Commercial Operations and TriPath Oncology. The Commercial Operations unit manages the market introduction, sales, service, manufacturing and ongoing development of the Company's products. The TriPath Oncology unit manages the development of molecular diagnostic and pharmacogenomic products and services for cancer.
For the three months ended 3/31/04, the Company's first quarter for fiscal 2004, net sales rose 39% to $15.5 million. Net loss fell 62% to $884 thousand. For the 2nd quarter ended June 30th, the Company reported Revenues of $16.7 million, a 26% increase over 2003 2nd quarter numbers and Net Income was a respectable $203,000 or .01 per share as compared to last years Net Loss of $2.7 million or (.07) per share. You can bet there were some sighs of relief that particular day in Burlington, and of course on Wall Street.
Based upon 2nd quarter numbers, things are certainly looking up for TriPath Imaging. The surprising thing is that you would never know it by looking at the chart, but I think the lousy market conditions have affected this stock like many others, greatly. Talk about a turnaround! Let me share with you what the "professionals" think of TPTH: There are 4 "Strong Buy" ratings and zero buy, hold, sell, or strong sell ratings. Earnings Per Share (EPS) growth for the coming quarters are predicted as follows: 133.33% for the 3rd quarter, 115.22% for the '04 Fiscal Year, and a whopping 528.57% for Fiscal '05! That equates out to an estimate of $0.04 per share for Fiscal '04 (ending 12/31) and $0.22 for Fiscal '05! Now, these are indeed high and low estimates from the best on Wall Street, but you can see where I am going here. And this stock is trading today below $8? We rate TPTH a Strong Buy. Risk Rating of 2/10 with 10 being the highest.
Editor's Note: Editor Jeff Brommer profiles companies exclusively headquartered in North Carolina. www.investments101.com.
THE LANCZ LETTER
2400 N Reynolds Rd., Toledo, OH 43615.
1 year 15 to 17 issues, $250.
Intelli-Check building
a leadership position
Alan Lancz: "Intelli-Check, Inc (IDN $4.98) develops, manufactures and markets advanced document verification systems to detect and reduce the use of fraudulent driver licenses, state issued ID's and military ID's. Their technology can be utilized to increase security and deter terrorism at airports, shipping ports, rail and bus terminals, stadiums and arenas, military installations, high profile buildings and other sites where security is a concern. In addition such technology can be a valuable tool to prevent economic loss from "identity theft" the fastest growing crime in America. The company is working with a growing list of quality partners and clients ranging from Northrup Grumman, C.U.N.A. (Credit Union National Association) and AAAE (American Association of Airport Executives). Eight states are already using IDN's technology to help prevent the use of fake driver licenses as breeder documents for the issuance of valid driver licenses. The company recently completed beta testing with a national recognized convenience store chain with over 5000 locations. This chain has plans to expand its testing of IDN's technology into several more states in the Northeast. A new homeland security product is currently being completed to allow for industry leading comparisons between the information encoded on many passports against the verified information encoded in Driver licenses or state issued ID cards. The company also has a pilot program with a leading global payment-services provider to authenticate check cashing transactions. Any success within such huge markets would advance IDN's current stock valuation several fold in our opinion. Despite all this potential, the stock has plunged toward new lows down from the teens to less than $5 a share. This presents opportunity for the speculative, patient investor seeking substantial capital gains potential. The entire market cap of IDN is now less than $50M - very modest compared to the emerging markets in which it is building a leadership position. We strongly recommend purchase up to $6 a share for our 18-24 month initial target price range of $10-16 a share."
TECH STOCK INSIGHTS
1200 Fifth Ave., Ste. 625, Seattle, WA 98101.
Monthly, 1 year, $275. Web version, $225.
Four stocks for the long-term
Randy Williams-Gurian thinks the following four stocks should perform nicely, both in the current market environment and during the eventual recovery in equity prices. Readers can feel confident in owning these four new stock recommendations for the long term.
"Research in Motion, Ltd. (RIMM) designs, manufactures, and market wireless solutions for the worldwide mobile communications market. The company's BlackBerry technology is quickly becoming the industry standard for use in mobile communications. BlackBerry technology allows users to read and exchange emails while away from the office or traveling on business. Research in Motion provides platforms and solutions for access to time-sensitive information, including e-mail, phone, short messaging service, and Internet- and intranet-based corporate data applications. The company also licenses its technology to handset and software vendors to enable them to offer wireless data services using the BlackBerry Enterprise Server (BES) and BlackBerry Web Client.
The Research in Motion story is a good one. Williams-Gurian has watched the RIMM story unfold for some time and is now convinced the company has a product that is highly desirable. It is quickly becoming a must-have solution for employees who are away from the office for any significant amount of time. The company's BlackBerry wireless e-mail service is selling like hotcakes.
Research in Motion reported a monster quarter for its first quarter, ending May 29, 2003. The company reported a profit of 36 cents a share, or $70.6 million on $263 million in revenues. Sequentially, revenues jumped 28% from the previous quarter. Revenues skyrocketed 158% from the prior year. The total number of BlackBerry subscribers increased 270,000 during the quarter and now totals an estimated 1,340,000.
TSI expects more positive news from RIMM in the coming quarters and therefore remains convinced the shares should have further upside potential. Buy at or below $60 a share, and we think the stock could hit $85 a share within the next 12-18 months.
Full disclosure: Williams-Gurian recently purchased shares of Research in Motion in the accounts over which he has discretion.
Harley Davidson (HDI) is definitely not a technology company, but it is a company worth owning at current levels with the expected continued demand for the company's motorcycles or Hogs. Harley-Davidson, Inc. is the parent company for the group of companies doing business as Harley-Davidson Motor Company, Buell Motorcycle Company, and Harley-Davidson Financial Services. Harley-Davidson Motor Company produces heavyweight motorcycles and offers a line of motorcycle parts, accessories, apparel, and general merchandise. It manufactures five families of motorcycles: Touring, Dyna Glide, Softail, VRSC, and Sportster. Buell Motorcycle Company produces sport motorcycles, including four big twin XB models and the single cylinder Buell Blast. Buell also offers a line of motorcycle parts, accessories, apparel, and general merchandise. Harley-Davidson Financial Services provides wholesale and retail financing, and insurance programs, primarily to Harley Davidson/Buell dealers and customers.
Harley Davidson is a must-own stock for long-term investors because the demand for the company's products is expected to increase, driven by the aging of the U.S. population. As baby boomers reach 50-plus years in age, many are interested in pursuing their dream of owning a motorcycle, and more specifically a Harley.
The company reported that revenues in its most recent quarter grew 8.9% to $1.33 billion, and revenues from the sale of motorcycles topped a billion dollars in a quarter for the first time ever. Unit sales for the quarter were 82,034, and the company reaffirmed its goal to sell 317,000 motorcycles in 2004. HDI earned $247.2 million or 83 cents a share, up from $202.2 million or 66 cents a share in the year earlier period. Wall Street expected the company to earn 75 cents a share. The stock reacted favorably to the news and traded near a 52-week high of $64 a share, before pulling back to the $60 a share level.
HDI is a conservative company, with no long-term debt, and holds over $1.3 billion in cash. Demographics are working in the company's favor. TSI thinks the stock could hit $75 a share within the next 18 months, especially if the stock market can move in a more positive direction.
Pixar (PIXR) is a digital animation studio that uses its creative, technical and production capabilities to make animated feature films and related products, such as video products, toys, interactive games, and other merchandise. As of January 3, 2004, the company has created and produced five full-length animated feature films: Toy Story, A Bug's Life, Toy Story 2, Monsters, Inc., and Finding Nemo, which were marketed and distributed by the Walt Disney Company.
Pixar ended talks to renew its distribution agreement with The Walt Disney Company. After completing the final two films under the current agreement with Disney, The Incredibles in 2004 and Cars in 2005, Pixar said it intends to retain full ownership of future productions. TSI thinks the decision by Pixar to stand on its own will be positive for the company longer term.
Pixar shares are only for very patients investors, but the stocks provides excellent value at current levels. Pixar has no debt, 58 million shares, an outstanding $650 million in cash and receivables, and it earned 46 cents in its fiscal first quarter, which ended April 3, 2004. Pixar's results were driven by strong sales for the 2004 home video release of Finding Nemo.
Pixar stock is another solid company that should do well in both up and down markets. Buy at or below $65, and TSI thinks the stock could hit $80 within 18 months, with the strong results expected from the company's next two animated film releases.
Getty Images (GYI) provides imagery and related products and services to businesses worldwide. While holding its own as the world's leading imagery company, Getty has barely been recognized for its successes by Wall Street.
Based in Seattle, Getty Images was born out of the Internet. The products and services are offered through the Getty Web site, compact disc-read only memory (CD-ROMs), and an international distribution network. Getty offers a range of visual content products that include creative or stock imagery (still and moving images), editorial photography, archival imagery (still and moving), and illustrations. The company's photography collections consist of The Image Bank, Photodisc, Photographer's Choice, Stone, and Taxi. Getty Images Film and Editorial includes news, sports, entertainment, and archival imagery, and collections of other imagery providers such as Digital Vision, National Geographic, and Time Life Pictures. Getty offers assignment services for custom photography projects such as photographing executives for an annual report, producing product shots for a brochure, or documenting a news event.
Why is TSI excited about Getty Images? It is a solid company with excellent prospects and should do well in bear markets. GYI's business results prove that the company has an outstanding opportunity to build on its current successes. Getty reported revenue grew 20% over the prior year to $156.5 million in its first fiscal quarter. In addition, the company reported earnings in its first quarter of 43 cents a share, an 87% improvement over the same period a year ago. More importantly, operating margins jumped to 27% from 18% thanks to the strength of the business model.
The company sports gross margins of 72% and no inventory. Essentially, GYI's business model is similar to that of a software company in that each incremental sale will drop to the bottom line, since no additional investment is required to generate incremental revenue.
TSI thinks investors with a long-term view will be well rewarded for owning shares of GYI at current levels. Buy at or below $52. We think the stock could hit $67 within 12 months."
THE ALEXANDER PARIS REPORT
161 N Clark St., Ste 2950, Chicago, IL 60601.
Monthly, 1 year, $195.
Maintaining "Outperform"
rating on Fiserv
Michael Hutchison: "With the combination of relatively high visibility and improving internal growth, we believe Fiserv, Inc. (Nasdaq FISV) deserves an above-average PE multiple versus its peers. Consequently, we are maintaining our OUTPERFORM rating on the stock, with a $52 price target, based on a multiple of 27x our 2004 estimate. Our target implies 51% upside potential from current levels.
Fiserv announced that second quarter EPS came in $0.01 better than the consensus estimate, as well as $0.02 above our number that was at the low end of management's range of guidance. Earnings in Q2/04 increased 21% to $95.0 million ($0.48 per share) from $78.4 million ($0.40 per share) a year ago. This compares to management's guidance of $0.46-$0.48. Free cash flow increased 40% to $251.6 million from $179.4 million in Q2/03.
Excluding customer reimbursements, revenues were up 33% to $855.9 million from $643.9 million last year, reflecting strong acquisition growth. Our estimate was $860 million, while the consensus estimate was $842.1 million. Management had guided for a range of $845-$865 (up 31%-34% from last year's restated number).
Overall, internal growth was 11% compared to 5% in Q2/03. The internal growth contribution by segment includes: Financial outsourcing, systems and services - 0% from 2% last year; Health plan management services - 50% from 27% last year; Investment support and securities processing services - 4% from negative 8%; and all other and corporate - 25% from 9%.
The quarterly revenue contribution includes: financial institution outsourcing, systems and services segment - up 17% to $551.1 million from Q2/03; health plan management services - up 134% to $218.3 million; and Investment support and securities processing services - up 4% to $57.5 million.
Management reiterated their previous 2004 EPS guidance with a range of $1.87-$1.93. Despite the fact that Fiserv came in $0.02 per share ahead of our earnings estimate, we are fine-tuning our Q3/04 and Q4/04 EPS estimates, reducing them by $0.01 to be in line with management's full-year 2004 EPS guidance. As such, our full year estimate remains the same at $1.93.
Internal growth at Fiserv is expected to improve this year due to a rebound in the core bank processing business, a cyclical increase in securities processing and continued strong internal growth in the new pharmacy benefit management business.
Trading at 18x and 15x our 2004 and 2005 estimates respectively, Fiserv is selling far below its peers that are trading at an average of 25x and 18x our estimates. We believe that Fiserv has the best visibility in its peer group, as evidenced by the tight range of EPS estimates on the shares."
NATE'S NOTES
P.O. Box 667, Healdsburg, CA 95448.
Monthly, 1 year, $150. www.natesnotes.com.
Celgene and Martek Biosciences
core stock picks
Nate Pile believes that Martek Biosciences (MATK) and Celgene (CELG) are must own stocks. Both companies should be your first purchases and largest positions from his Model Portfolio.
"Not only does Celgene have one of the deepest product pipelines among its peers in the biotech sector, the company is profitable, has retained marketing and commercialization rights to all of its compounds, and is sitting on a horde of cash that gives it the ability to confidently walk away from any partnership deals that it does not feel fully value the company's long-term prospects. Buyout rumors seem to have finally subsided in recent months, but I cannot help but think that many of the large pharmas (or perhaps even Genetech or Amgen) must be eyeing Celgene's progress and wishing there was a way to participate in the product pipeline Celgene has assembled over the last couple of year. Celgene represents one of the two best long-term bets in my newsletter at current prices (Martek being the other). CELG remains a strong buy under $48 and a buy under $55.
Martek's stock has bounced incredibly well of recent lows. I am hopeful that the stock is in a sustainable uptrend; however, it has come awfully far fast, and is therefore due for some profit-taking. As a result, I am holding off on any new purchases this month. I am, however, raising buy limits slightly so subscribers will have a better chance of establishing a position if the stock does not make it all the way back to $45 during the consolidation phase. MATK is now considered a strong buy under $40 and a buy under $52."
THE ACKER LETTER
2718 E 63rd St., Brooklyn, NY 11234.
1 year, 10-14 issues, $160.
Texas Instruments:
high tech powerhouse
Bob Acker: "Industry giant, Texas Instruments (NYSE TXN $19.90 - Rec. 7/04 - adjusted price $22.99875) reported a "knock your sock off" second quarter with net income increasing by $320 million to $441 million, or $0.25 per share, from $121 million, or $0.07 per share, in last year's second quarter on revenue which increased 39 percent to $3241 million from $2339 million. Texas Instruments expects that third quarter revenues will be in the range of $3200 million to $3440 million and that earnings per share will be in the range of $0.26 to $0.29.
TXN's quarterly dividend lowered our cost basis to $22.99875. This high - tech powerhouse has a 52 week range of $18.06-to - $33.98. Unless reducing extended positions buy."
HENDERSHOT INVESTMENTS
11321 Trenton Ct., Bristow, VA 20136.
1 year, 4 issues, $45.
Long-term investors should write
Buy 3M on a Post-It Note
Ingrid Henderhshot: "3m Company (MMM $80.27), formerly known as Minnesota Mining and Manufacturing Company, is a diversified technology company with a global presence in the following markets: health care; industrial; display and graphics; consumer and office; safety, security and protection services; electronics, telecommunications and electrical; and transportation. 3M's brands include icons such as Post-It, Scotch, Scotchgard, and Scotch-Brite. Serving customers in more than 200 countries around the world, the company's 67,000 people use their expertise, technologies and global strength to maintain leading market positions.
In 1902 Minnesota Mining and Manufacturing was founded when five businessmen set out to mine a mineral deposit for grinding-wheel abrasives. The deposits proved to be of little value, so the focus shifted to sandpaper products. After years of struggle, innovations finally began to produce successes, and the company paid its first dividend of six cents a share in 1916. A dividend has been paid each subsequent year, as the business grew and prospered over the decades. The dividend was boosted by 9% to $1.44 per share in 2004, marking the 46th consecutive dividend increase.
Over the past century, innovation has become a 3M hallmark as the company has invented everything from masking tape to one of their largest and fastest growing product lines - Vikuiti Display Enhancement Films. Vikuiti films are extensively used to make electronic displays brighter, more colorful and easier to read in notebook computers, color cellular phones, personal digital assistants, LCD desktop computer monitor and LCD televisions.
Today, 3M boasts well-diversified operations. Strong brands in the consumer product segment include Scotchgard, which was born when an employee dropped chemicals on his tennis shoes, and Post-It Notes, which came about when a scientist wanted to bookmark pages in a church hymnbook. These powerful brands guarantee solid returns on investment.
3M's largest business segment currently is in the health care unit, which accounted for 22% of sales last year and 28% of operating income. Sales of Aldara, a cream for the treatment of genital warts, continues to grow rapidly. The FDA also approved Aldara this year for the treatment of a pre-cancerous skin condition and is reviewing it for the treatment of a common form of non-melanoma skin cancer.
For the first time in the company's history, sales exceeded $5 billion in a single quarter during the second quarter. Profit margins continued to expand as they have over the last three years due to continued operational efficiencies. Reducing costs and increasing productivity have become a company-wide mandate since W. James McNearny, Jr. joined the firm in 2000 and began employing strategies he learned at General Electric. 3M's business is highly profitable with return on equity averaging more than 25% over the last decade. Return on equity rose to an outstanding 31% last year.
Free cash flow (operating cash flow less capital expenditures) has more than doubled at 3M over the last four years to more than $3 billion. Free cash flow rose an additional 14% in the first half of 2004. This strong cash flow is being used to accelerate organic sales volume growth, make disciplined acquisitions, increase the dividend and buy back shares under a $1.5 billion authorization this year.
Management's objective is to improve what 3M does best - innovation and new product development. With a new product pipeline holding the potential to generate more than $5 billion of annual sales, broad-based growth should continue. Management expects earnings to rise more than 20% to about $3.75 per share in 2004. 3M is a HI-quality company with innovative products, powerful brands, expanding margins, high profitability, strong free cash flow and a long dividend growth record. Long-term investors should write "Buy 3M" on a Post-It Note!"
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $259.
Michaels Stores hit a home run
Richard Moroney: "After a long stretch of record home sales, Michaels Stores (NYSE MIK $56) continues to benefit from growth in home-décor spending. While home-purchase trends may slow, the retailer should continue to deliver double-digit earnings growth. At 18 times expected earnings of $3.03 for fiscal 2005 ending January, the stock trades at the high end of its five-year valuation range and a modest premium to its peer group. But, considering the company's strong Quadrix( scores, operating momentum, and potential to exceed consensus estimates, the stock represents an attractive Buy for 12-month gains.
Michaels Stores operates the largest chain of stores specializing in arts and crafts, hobby supplies, and seasonal and holiday merchandise for do-it-yourself home decorators and hobbyists. Located mostly in strip shopping centers, the stores carry about 40,000 different items an average $3.8 million in annual sales. In addition to the 821 Michaels stores in 48 states and Canada, the company also operates 159 Aaron Brothers stores, primarily on the West Coast. Aaron Brothers stores sell photo frames, ready-made frames, custom-framing services, and art supplies, averaging $1.1 million in annual revenue.
Store expansion is a primary growth driver. In fiscal 2004 ended January, the company opened 65 stores, relocated 16 stores, and closed five stores. In fiscal 2005, the company plans to open about 70 new stores and relocate up to 20. New stores cost about $1 million to open, and the company expects them to be profitable during the first year of operation. Management believes U.S. and Canadian markets can support up to 1,100 Michaels stores and 600 Aaron Brothers stores.
The company is also experimenting with new store concepts. In 2003, the company launched ReCollections for customers who make decorative scrapbooks. The company has two ReCollections stores and should add around five in fiscal 2005. Michaels also operates three Star Decorators Wholesale Warehouses, business-to-business stores for designers working on bigger projects.
Michaels has been working to improve supply-chain management and lower inventory. Inventory per store declined 3% in the April quarter, after a 3% rise in fiscal 2004 ended January and a 6% rise in fiscal 2003. The company believes it can cut average inventory per store by 10% to 15% over the next three years. The company's new perpetual-inventory and automatic-replenishment systems should help it identify and capitalize on trends while keeping inventories lean.
Michaels generated $166 million in free cash flow in fiscal 2004, or 6% of sales. The company began paying a quarterly dividend in June 2003 and increased it 20% in April 2004 to $0.12 per share. Michaels repurchased 2.2 million shares in fiscal 2004 and still has 2.4 million shares in its existing stock-repurchase plan.
July-quarter total sales increased 11% while same-store sales grew 5%. Earnings were slated for release Aug 25. For fiscal 2005 ending January, the company expects per-share earnings of $2.92 to $3.05, up 15% to 20%, and a same-store sales increase of 3% to 5%.
JUNIOR GROWTH STOCKS
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 4 issues, Supplement to Growth Stock Outlook.
Bed Bath & Beyond
firing on all cylinders
Charles Allmon: "Bed Bath & Beyond (Nasdaq BBBY $34.56) operates a chain of 592 home goods retail stores in 44 states and Puerto Rico. In 2002 the company entered the health and beauty market by acquiring Harmon Discount's 27 stores in the New York tristate area. Last year BBBY acquired Christmas Tree Shops, a giftware and household item retailer, operating 23 stores in six northeastern states.
In a recent earnings conference call, Warren Eisenberg, co-chairman, had this to say:
"Home goods has been and continues to be one of the most attractive sectors of all retailing. We believe we are in the best position to benefit from this. Despite our substantial growth, our share of the approximately $85 billion home goods market remains relatively small, affording us the opportunity to grow to well over 1,000 Bed Bath & Beyond stores in the U.S."
BBBY continues to generate stellar topline growth. Management opened 87 stores in 2003 and plans an additional 80 to 90 stores in fiscal 2004. Comparable store sales increased 6.3% last year, the company's twelfth straight year of growth since going public in 1992. Although average store sales have been diluted by the recent acquisitions, profit margins increased to 8% and average sales per square foot increased more than 4%.
BBBY will grow by opening new stores under each brand. It is testing Harmon departments in certain BBBY stores, but don't expect to see Harmon health and beauty departments chainwide anytime soon. As Ronald Curwin, CFO, explained: "We are very deliberate. Whether we're bringing in a line of towels or housewares, we don't plunge in. We run tests on a limited basis around the country before rolling a concept out to 300 stores."
BBBY owns a solid balance sheet, debt free for the last eight years. Return on equity has exceeded 20% for the last 10 years, indicative of merchandising expertise and efficient management. The company has funded growth through internally generated funds. We like everything about BBBY but the price.
On 5/29/04 total assets were $2,975,940,000, current assets $1,986,793,000, current liabilities $784,784,000, cash and short term investments $814,782,000, no long term debt, deferred rent and other liabilities $111,562,000, shares outstanding 300,573,000, shareholder equity $2,079,594,000 ($6.92 per share), return on shareholder equity 20.1% (2/28/04), positive cash flow. [Company address: 650 Liberty Ave, Union, NJ 07083. (908) 688-0888. www.bedbathandbeyond.com]"
MinuteWoman.com
1040 First Ave., Ste. 305, New York, NY 10022.
Monthly, 1 year, $144.
Vivian Lewis: "Israeli tech holding company Formula Systems reported a 34% sequential rise in net profits for Q2, at $2mn or 19 cents/sh. A year earlier, profit was only $553,000 or 6 cents/sh. Revenues rose yoy to $110.3 mn. One of the reasons was acquisition at the start of the year of 59% of Formula Vision Technologies via a private placement. FVT is now partly being consolidated. The positive trend is forecast to grow during the second half of 2004."
MONEY SHOW DIGEST published weekly by InterShow
1258 N. Palm Ave., Sarasota, FL 34236.
www.MoneyShowDigest.com.
Editor Steven Halpern brings investors the latest ideas and market forecasts from the nation's leading investment advisors. Many of these advisors are featured speakers at the Money Show Conferences. Three of a number of investment luminaries that will be speaking at the 26th Annual San Francisco Money Show, September 22-24, Joe Battipaglia, Louis G. Navellier and Stephen Biggar offer the following investment strategies and stock picks.
S&P's Top Ten Stocks "Our key principle is independence," says Stephen Biggar, VP of equity research for Standard & Poor's, www.standardandpoors.com. "Our qualitative and quantitative research is unbiased and rigorous." Here, he highlights the ten favorite stocks from S&P's exceptional universe of equity analysts.
"We think it's a stock picker's market. I don't think there are any bets out there we can make from a sector perspective. So we are relying on the analysts within each sector to find good opportunities. Our analysis is unbiased. Very rigorous analysis goes on behind the scenes as balance sheets, cash flow statements, income statements, are dissected. A lot of rigor goes into this, both qualitative and quantitative. We look at technical factors as well as corporate governance issues. Our analysts have an average of 14 years experience with S&P.
"In our bottoms-up approach, we use three primary methodologies for valuing stocks. Our analysts use value analysis, which is generally referred to as discounted cash flow. The analysts will come up with expectations for cash flow going forward, and we think that is the driver of stocks. We then discount that back at an appropriate rate, which includes such factors as the riskiness of the stock itself, the current level of interest rates, the risk-free rate, and the corporate capital structure - how much of the business is funded by debt versus equity or preferred stock. Second is relative valuation. These metrics are generally those that are most appropriate for that specific industry based on what typically drives a particular company to excel within its peer group. Lastly, we look at the sum of the parts. This generally works well when you have a company that is not readily comparable to many peers. In that case, we dissect the units and value them as if they were stand-alone businesses.
"At the end of the day, our overall investment theme is growth at a reasonable price, known as GARP. We like growth, but not at any price. We look for discounts based on our three methodologies in order for our analyst to have a good sense that the company is undervalued and has a greater chance of outperformance over the next 12 months. We are very selective. We cover over 1,500 companies and only 8% - or 125 - of those are deemed to be worthy of our highest 5-star buy recommendation. Over the last 17 years, the average annual performance of S&P's 5-star stock recommendations has been 16.5%, relative to the S&P 500 index, which had a return of 9.3%. A hypothetical $10,000 investment on Dec. 31 1986 when the star system was created would now be worth $142,000. That same investment in the S&P 500 would have only yielded $47,000, the Dow, $55,000 and the NASDAQ, $58,000.
"Let's move on to our top ten portfolio. These stocks are all taken from the 5-star stocks and they represent the stocks that we believe have the best total return opportunity. A senior group chooses this portfolio and we try to balance this portfolio across economic sectors and by asset class.
"The first name on our list is Amgen (Nasdaq AMGN). This is a large cap stock with a $73 billion market cap. It is a leading biotech company that is certainly well established. It offers treatments for anemia and rheumatoid arthritis. We think the shares are undervalued based on strong earnings growth, an under appreciated pipeline which includes a lot of areas in oncology, diabetes, and inflammation, and a reasonable P/E ratio. We're always looking for value and this stock is trading at about 23 times our 2004 estimate. And that's for a biotech company with a significant growth rate.
"Our next company is Anheuser-Busch (NYSE BUD), with a $41 billion market cap. It's the parent company of the world's largest brewer. We like them for basically where they are going in the demographic sweet spots in the economy. They do have a very large market share - 50% at the moment. They have very consistent earnings expansion. This is a stable and steady grower with very sustainable cash flow growth in a wide variety of economic environments. They have earned our dividend and earnings ranking of A+, which requires a history of ten years of very consistent earnings and dividend growth.
"BJ Services (NYSE BJS) is in the oil service sector. It is a mid-cap company, with a market cap of $8 billion. It provides pressure pumping and other oilfield services. We're seeing rising demand for pressure pumping and high capital spending by the oil and gas producers. We see especially high crude oil prices right now. The energy sector is one we are favorable on at the moment. They are very large and diversified, and they are global. We like the diversification that provides. Based on these factors, including market leadership and a higher return on equity than its peer group, we believe this company should trade at a premium price-to-earnings multiple.
"Chattem (Nasdaq CHTT) is a nationally branded health and beauty aids company, which targets niche segments. We see strong growth in topical analgesics, such as Gold Bond and Selsen Blue. There are new product introductions coming out. The company has the highest profit margins in the S&P personal care universe and yet it trades at a 25% discount to its peers, based on 15 times our fiscal 2005 estimate. This is a small-cap company with a market cap of just over half a billion.
"FMC Corp. (NYSE FMC) is a mid-cap stock with a market cap of $1.5 billion. It is a diversified product of industrial specialty and agricultural chemicals. The company is the leading manufacturer of hydrogen peroxide, which is widely used in products such as insecticides and herbicides for crop dusting and the like. The company underwent a restructuring in 2003 and it was a low point for earnings. We now see operating earnings up 65% for 2004 and for double-digit growth for 2005. We expect a cyclical recovery in this business over the next two years. The firm is generating very strong free cash flow, which is targeted toward debt reduction.
"Guitar Center (Nasdaq GTRC) is a small cap with a market cap of about $1 billion. The firm is the leading US retailer of guitars, amplifiers, and other musical instruments. When we look in our small cap and emerging growth sectors, we try to find companies that have a niche in segments or industries in which consolidation can take place. This company operates in the very fragmented music-store industry, where the top five retailers only have 26% market share. We see them growing organically from expected store openings of 16 to 18 stores this year - off a base of about 120 stores. So this is good growth. They are altering their product mix a bit, by offering lessons and a broader selection.
"Landstar Systems (Nasdaq LSTR), with a market cap of $1.5 billion, operates a family of truckload carriers. They use independent drivers and commissioned sales agents, rather than actually investing in the fixed assets themselves. They compensate the drivers with a percentage of revenues generated per load rather than at a fixed rate per mile that you would get if you owned the equipment. This generates much stronger return on equity. We also see a healthy price environment, with tight capacity in the industry right now, which should benefit sales as well. It's a very strong cash flow generator and has a very strong balance sheet with low debt and a high current ratio, which should sustain them through a wide variety of economic environments.
"SCP Pool (Nasdaq POOL) has a market cap of a billion and a half. They are the largest independent distributor of swimming pool supplies. Here you have favorable demographics, with aging baby boomers and increased home ownership as a result of low interest rates. We see consolidation in a fragmented industry. The swimming pool business does not really have a national supplier or distributor. Return on equity has improved to 30% in 2003, up from 14% in 1997. This is based off of leverage from a higher sales base. We are assuming 20% cash flow growth going through 2008 and we derive a $52 target price on this company.
"In the technology sector, Qualcomm (Nasdaq QCOM) focuses on products and services based on CDMA, which is digital wireless technology. There is very strong demand for the chipsets that are used in phones - particularly in China, India, and South Korea. They are moving their product mix towards higher-margined license fees. They have very strong cost controls. We like this financial model, with 30% sales growth, 35% net margins, no debt, and $7 billion in cash on the balance sheet. This is a large-cap company, with almost $60 billion in market cap.
"Winnebago (NYSE WGO), with market cap of $1.2 billion, is a motor home manufacturer benefiting from leisure activities. It has very favorable demographics, as it targets the 50-year-old and older market. They are making a lot of enhancements - added creature comforts - to their vehicles. We also see higher margins and higher return on equity and assets, which we feel justifies a premium multiple compared to its peers."
Joe Battipaglia, chief investment officer at Ryan Beck & Co., is a formidable force, both in stature - he's 6'7" - and reputation. He has long been one of the most popular speakers at Money Shows. Here's he offers his market outlook and some of his top bullish picks.
"The stock market is behaving badly. There is guarded caution ahead of an election season and the upcoming conventions have been reason for concern and heightened vigilance following the Madrid train bombings earlier this spring. Beyond the near-term 'doom and gloom', however, there is another point of view to consider. It is never easy and it seldom feels good to buy into a declining market. Nonetheless, the best opportunities can be found when prices are weaker. In the past several weeks, we have witnessed a dramatic sell-off in equity prices brought about mostly by reaction to fear and uncertainty. The fundamental underpinnings of the economy and markets, however, appear intact. The quarter's earnings figures have been dramatically positive (S&P 500 operating earnings up 30%) and the economy continues to produce more jobs and higher incomes.
"There has, however, been a significant and measurable increase in the level of anxiety quotient. We now estimate that investors are pricing in the highest risk premium seen in the market since the beginning of the war in Iraq. In short, the economic fundamentals that drive stock price performance are in good stead and should eventually yield higher equity valuations. The palpable nervousness surrounding a heightened terrorism watch and other geopolitical issues may well prove to be temporal and not translate into changes in behavior. In time, we would expect economic reality to assert itself on asset prices and, hence, would use weakness as an opportunity to commit capital in a portfolio.
"In the big-cap stock category, we like Procter & Gamble (NYSE PG). Among consumer discretionary stocks, it is an ideal candidate for a portfolio. They reinvent their product lines, they add where they have holes, and quite frankly, I think the earnings are strong.
"In the REIT category, I like Pan Pacific Real Properties (NYSE PNC), Health Care Properties Investors (NYSE HCPI), and Weingarten Realty (NYSE WRI). I think they are an excellent substitute for traditional fixed income portfolio. The dividend streams will rise as this economy succeeds, providing the ultimate hedge against inflation. Weingarten in particular, offers geographically diverse properties, and it's an ideal equity-based portfolio for a total return investor
"In the retail sector, look at Gymboree (Nasdaq GYMB), Joseph A. Banks (Nasdaq JOSB), and Bakers Footwear Group (Nasdaq BKRS). I also like Neiman Marcus (NYSE NMG.B). I think in the specialty and high end of retailing there has been no cessation of appetite for these products. Recent quarterly results did not move the stock because of general market concerns. I think in the coming quarter we will again see strong relative performance, which will attract investors to a high quality retailing name like Neiman Marcus.
"Lo-Jack Corp. (Nasdaq LOJN) makes a homing system for identifying automobiles. These products are becoming more widely accepted; they have a more dynamic approach to selling to new auto purchasers. They are also looking to address the truck fleets that are out there. From the point of view of homeland security, identifying where trucks are, may be an important market. Lo-Jack would be among the small-cap names I would recommend."
"As the economy improves and the industrial companies do better, I think some of the human resource companies - suppliers of individuals who do accounting, etc. - will also improve. Two names in this market are CDI Corp. (NYSE CDI) and Navigant Consulting (NYSE NCI)."
"Let's talk about financial services. I think that while large banks are not as attractive now as their smaller constituents, there is value to be had in names like Citigroup (NYSE C) and Merrill Lynch (NYSE MER), which have a bright future based in part on the fact that capital markets have reopened for them, they are getting past some of the issues that they needed settled, and they now have a better profile for their earnings. But among smaller banks, which is a great place for investors, I would look at Synovus (NYSE SNV), Zion Bancorp (Nasdaq ZION), Sovereign Bank (NYSE SOV), Independence Community Bank (Nasdaq ICBC).
"Among big name technology stocks, the one that I would recommend for you to consider is Hewlett-Packard (NYSE HPQ). This is a different kind of animal. What you are paying for now is only their printer and the supply business and you are getting their computer business for free. To the extent that they can become competitive against Dell, I think there is value to be found in Hewlett-Packard shares and we may see the stock moving to the higher 20s.
"Another name among big tech stock that is getting slaughtered regularly is Nokia (NYSE NOK). This stock is becoming more and more interesting to me. At some point, value investors will circle around this name. The firm has introduced a couple of changes to the product profile to stem the loss of market share. It's trading down to levels that we have not seen for a long time, and this may very well create a buying opportunity for investors."
Navellier's Blue-Chip Bets
Louis Navellier is one of the most respected advisors and money managers around. And it's no wonder. His Blue Chip Growth Letter returned over 90% between 1998 and mid 2004, outpacing the S&P by over 60 percentage points, www.navellier.com. Here are his latest favorites.
"The earnings season is ideal. This is the fourth quarter in a row with over 20% earnings growth, which are the best earnings since 1993. The bears on Wall Street will tell you that earnings momentum is decelerating. That's absolutely true. The S&P had 28% earnings growth at the end of last year, 26% in the first quarter, and this quarter might decelerate to 25%. So there is a perception out there that this earnings season was poor, but I would argue that while there may be slimmer picking, if you pick them right, it's fine. Our goal has been to find stocks that are fundamentally superior. And, indeed, in our Blue Chip Growth stocks, earnings came in 19% better than expectations. In MPT Review, our more aggressive letter, we're seeing surprises up about 34%. In our most aggressive service, Quantum Stocks, the surprises were up over 40%.
"So, from our perspective, this is a stunning market environment. What happens when you have all these great earnings and the market doesn't go up? Price to earnings ratios plunge, and that is exactly what is happening. I have no problem finding stocks with very strong earnings and sales growth, trading at very low multiples to next year's estimated earnings. The S&P is trading at 15 times next year's earnings. The all-time low was 13.3 times. So we are about to hit rock bottom here. In addition, corporate cash flow is at a record high. This is unbelievably bullish. And what are companies doing with this record cash flow? A lot of them are redeeming bonds, buying back stocks, and declaring dividends. Over 1,400 companies have declared new dividends since dividend relief was past last year.
"The best defense is a strong offense of fundamentally superior stocks. The fundamentals are the most important variables at this time - sales, profits margin expansion and sales stability, earnings momentum, return on equity, and cash flow. There are a lot of good things developing in the market. But we need a catalyst, some event that will cause investors to pour money back into the market. I suspect that if there are no terrorist issues after the convention - which is perceived to be a target - we will gap higher. I will tell you that in the summertime the breadth and power of the market is poor. We're in the summer shenanigans, the volume is light, there's a lot of cash building on the sidelines, there's a lot of selling of bonds as rates go higher, and all this cash will eventually pour into the market.
"The biggest oasis out there is in energy. One of my picks would be Valero Energy (NYSE VLO), which is the biggest refinery in the United States. The company's profit margins are soaring, and it's no wonder why. Twenty years ago, when the last refinery was built in the US, there were 282 refineries. Today, there are less than 150. Buy below $84.We're at full capacity in refining. Whether oil is at $35 or $45 - it makes no difference - they are running full bore. It's a great stock. Another stock in the energy sector is Occidental Petroleum (NYSE OXY). It's got a 2.4% dividend yield. This is a great integrated oil company. It did get some Libya contracts. The company reported a 55% increase in profits. OXY's earnings jumped to $581 million, or $1.48 share which easily beat expectations. The stock looks very strong here. Buy below $54. In the meantime, you get a good dividend yield with a lot of appreciation potential. I also like Alcon (NYSE ACL), a Swiss company that makes medicine for degenerative eye diseases like glaucoma as well as products associated with contact lenses. It is a $25 billion company. The stock soared on July 14 after the company raised its earnings guidance for the second quarter. Wall Street had been expecting 64 cents a share. The company said that it would earn close to 76 to 78 cents a share (excluding a favorable tax item). I would consider all three of these as 'lock-and-load' stocks, which you can bank for the next several months.
"Among trading ideas, I'd like to share two. The first is an easy and smooth trade - Starbucks (Nasdaq SBUX). Sales have gone up for 150 months in a row. You get free Wi-Fi broadband access at its stores. There are a lot of things going on. And, of course, caffeine is an addiction. The company continues to thrive. Some investors are concerned over the stock's high P/E ratio. I'm not worried at all because the company is growing its profits so quickly. For this fiscal year, Starbucks will probably earn about 92 cents a share, that's a 37% increase over last year. There aren't many companies this large, growing that fast. The other trading idea is more aggressive. If you want to swing for the fences, we really like Research in Motion (Nasdaq RIMM) at these levels. They make the Blackberry devices. There are now more advanced cell phones that have the keypad on them. Research in Motion has a big market share in this area. They are on the cutting edge. The stock soared 15% in one trading session recently after it announced great earnings. The company netted 36 cents a share for the quarter, four cents more than Wall Street was expecting. The number of Blackberry subscribers ballooned to 1.3 million from 270,000 in the quarter before. The stock is still very volatile so I must urge caution when buying it. A stock like RIMM should only be a small portion of your overall portfolio.
"I also have three new recommendations for the conservative part of Blue Chip Growth Letter buy list. American Standard (NYSE ASD) is a leading manufacturer of air conditioning systems, plumbing products and auto braking systems. American Standard recently raised its 2004 earnings forecast, and now expects to earn $2.17 to $2.27 a share for the year, up from earlier projections of $2.08 to $2.20 a share. Buy ASD below $41. Hershey Foods (NYSE HSY) makes such well-known chocolate and candy brands and grocery goods such as baking chocolate, ice cream toppings, chocolate syrup, cocoa mix and peanut butter. Its operating earnings are being helped by the weak US dollar, so the company's earnings outlook is excellent. I rate Hershey a buy up to $50. Procter & Gamble (NYSE PG) is also benefiting from the weak dollar. The company is the #1 US maker of household products, and it's continuing to capture more worldwide market share. P&G is very well managed, and it now has 16 brands that are billion-dollar sellers. The outlook for Procter & Gamble is excellent, especially if the dollar remains weak. Buy below $59."
Editor's Note: Bull & Bear Financial Report readers can receive The Money Show Digest - free of charge. Log on to www.MoneyShow.com for this digest of leading financial advisors. Bull & Bear Financial Report readers and their guests are invited to attend the 26th Annual San Francisco Money Show, September 22-24, San Francisco Marriott - free of charge. To register call 1-800-970-4355 or register online at www.MoneyShow.com. Free registration ends September 17th.
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