Bull & Bear's Smarts

       "The conventional knock against homebuilders is that they're cyclical, feast-or-famine companies at the mercy of interest rates. In the case of Centex, investors are best served when they cast aside such generalizations.
        Centex Corp. (NYSE CTX) has not reported a single quarterly loss since becoming the nation's first publicly traded homebuilder in 1969. The company expanded year-over-year gross profit margins every quarter over the past nine years and exceeded Wall Street earnings estimates in each quarter for nearly 12 years running.
        As the industry's fourth-largest homebuilder, Centex boasts competitive advantages that benefit the company well beyond the favorable interest-rate environment that continues to stoke housing demand. With $12.9 billion in revenue in the 12 months through March, Centex enjoys access to land, lower-cost capital and other scale-related advantages unavailable to the smaller, private companies that comprise the bulk of its competition.
        Centex grew earnings 34 percent in the March quarter, beating estimates by 10 percent. Revenues grew 25 percent. The quarter topped off a fiscal year in which Centex's earnings climbed 24 percent on 20 percent revenue growth.
        Friess Associates spoke with Brad Burns, President of Centex's Las Vegas division, after general demand for housing in the area briefly appeared to slow, fueling concerns about the housing boom's continued staying power. Speculators add volatility to Las Vegas and other markets, but that's not a major concern for Centex, which derives the majority of its revenue from moderately priced, single-family homes rather than the more cyclical markets for condos and luxury homes.
        Friess Associates bought Centex at less than six times earnings for fiscal year ended March 2006. Even with the stock's recent rise, Centex sells at less than eight times fiscal 2006 estimates. Analysts predict Centex will grow earnings 25 percent in the June quarter."

        George Putnam III: "The telecommunications equipment stocks were among the darlings of growth stock investors in the late 1990's and into 2000.
        Of course, they all came crashing down again - and for reasons well beyond growth stocks going out of favor. Many of the equipment sales that fueled the growth in the late 1990's were to fledging telephone carriers that have long since gone out of business. (Anyone remember Winstar or Teligent, just to name a couple?) Ever since the telecom bubble burst in 2000, most of the carriers that survived have continued to suffer from over capacity and haven't needed to buy new equipment. And those who did need more equipment could just pick it up on the cheap at the bankruptcy auctions of their failed competitors.
        To survive, the equipment makers have all hunkered down and cut costs drastically. As a result, they can now make money at much lower sales volumes. For example, in 2001 Lucent lost $4.7 billion sales of $21 billion (down from peak sales of $29 billion). Now, Lucent is making money again even though sales are down another 57% from 2001 levels to $9 billion in 2004.
        Now there are signs that telecom sales may be on the verge of picking up again. In addition to just maintaining their existing networks, all of the telecommunications carriers are being forced to offer new and upgraded services in order to remain competitive. And new services mean new equipment. For example, as the telephone companies begin to compete with the cable companies in offering video services to homes, they must install a whole host of new equipment, much of which didn't even exist a few years ago. And the same goes for the wireless companies that are letting you download all that cool new stuff onto your cell phone.
        The companies described below are likely to be major beneficiaries when equipment spending does finally increase. And, and even if we are too optimistic about the timing for the spending pick-up, they all have strong balance sheets so that they can survive for at least several more years at current sales levels.
        ADC Telecom (ADCT), which provides equipment and services for both land-line and wireless networks, is beginning to show signs of life after several years in the doldrums. A 1-for-7 reverse split in May pulled the stock out of the low single digits and seems to have revived investor interest. The stock has been moving up nicely since the reverse split.
        Alcatel (ALA), headquartered in France, weathered the downturn better than most of its competitors, and it is now the favored supplier for much of the big equipment used by the major telephone companies. With solid earnings even at current reduced sales levels, Alcatel represents the most conservative play in this sector.
        Ciena (CIEN) makes some of the smaller switches that play an important role in telecom networks. The company may be overshadowed by some of the bigger players in the industry, but as spending picks up, there should be plenty of business for everyone. And there is a lot of price leverage in the stock at its current low level.
        JDS Uniphase (JDSU) is the dominant provider of optical networking components, and optical networks are the medium of choice today for most telecommunications services. JDS has been slow to return to profitability, which has disappointed investors, but it appears very well positioned for the future.
        Lucent (LU), which was originally the legendary Bell Labs equipment arm of AT&T before its break-up, is still the leading producer of equipment for many key applications. Moreover, it maintains a high level of research and development and should continue to bring out innovative new products. Lucent may never be a $60 stock in any of our lifetimes, but it could hit 10 in a few years.
        Nortel (NT) is one of the big boys in the sector, along with Alcatel and Lucent. A series of accounting problems has shaken investors' confidence, but those appear to be over and done with, and there is good upside potential in the stock.
        Tellabs (TLAB) designs network systems for wireless and wireline systems (including cable TV applications). It has returned to modest profitability and is well positioned to resume a growth track. The balance sheet sports a hefty amount of cash and virtually no debt.
        Zhone Technologies (ZHNE) is smaller and newer (it didn't even exist during much of the telecom bubble) than the other companies described here, but it too has great potential. Its hardware will allow the telephone companies to offer the "triple play" - voice, data and video - that has become their holy grail."

        Konrad Kuhn: "Last year, World Health Alternatives, Inc. (OTC BB: WHAI) achieved rapid growth by acquiring seven healthcare staffing firms, and with strong organic growth, achieved critical mass in the Q4. WHAI is a provider of healthcare staffing services to hospitals and other healthcare facilities. Operating under the name MedTech Medical Staffing, the company provides clients with staffing solutions through either temporary or permanent placements of healthcare personnel. Its integrated staffing services are designed to meet all the clients' staffing requirements and include interviewing, screening and selecting the clients' prospective personnel. WHAI accomplishes this goal by offering the services of its experienced medical professionals in a variety of ways, including on a project or temporary basis, on a permanent basis, and on a temporary-to-permanent basis. These options allow clients to control the expenses associated with new staff while also giving them the unique opportunity to evaluate a candidate's performance essentially risk-free.
        WHAI operates in 50 states and Washington, DC, enabling it to respond quickly to its clients' needs for healthcare personnel. The healthcare staffing industry is a highly fragmented market consisting of national, regional and local staffing service providers who generally offer nurse placements and allied health placements. There are a significant number of companies that operate in three or fewer cities, generate less than $10 mil. In revenues and generally provide either nurse or allied healthcare placements but not both. WHAI has grown significantly through an aggressive acquisition program which has provided them with a nationwide presence and infrastructure. They now offer all the product lines that are integral to staffing the healthcare industry, making them a 'one-stop' staffing solution for an entire healthcare system. WHAI is well-positioned to meet the increasing demand for healthcare staffing services that they have been experiencing.
        Reflecting its strategic acquisition program, revenues for FY'04 surged 993% to $40.3., with a loss per share of (.81). It should be noted that excluding non-cash and non-recurring items mainly in connection with the acquisition program, net income would have been .02 per share vs. .00 for the prior year. For the Q1'05, WHAI reported record revenue soaring to $40.5 mil., with net income leaping into the black with .08 per share vs. a loss of (.01) for the same period in the prior year. Experiencing strong organic growth and benefits of their integration efforts and increasing demand for its services since the beginning of the year, it is expected that demand will remain strong in the immediate future. The astute management team, led by President Richard McDonald who has generated positive cash flow throughout growth, has stated guidance for '05 of $200 mil. In revenue and .50 to .55 to in net earnings. Of the 46,259,950 shares outstanding, approx. 21% are held by insiders.
        Recommended in Feb. '04 at 1.32, the stock hit our target of 4-5 for a 250% gain and we recently recommended reentering at 2.50 and under for a 1st target 5-6. We would Add/Buy on weakness, especially since it's the fastest growing publicly traded healthcare staffing company in the U.S. Also, the number of new jobs in the top 10 fastest-growing industries has seen the U.S. healthcare staffing market as a large, fast-growing sector. The annual growth rate of the staffing sector is projected to be the fourth fastest of those tracked, creating more jobs than any other sector through 2010.
        WHAI is well-positioned in the current environment of healthcare staffing services to take advantage of longer-term industry and demographic developments believed to include" a growing shortage and aging of nurses and other medical professionals, an aging U.S. population expected to increase hospital admissions, state legislation regarding minimum nurse staffing levels and maximum allowable overtime, and long-term operational trends among medical care facilities toward outsourcing healthcare staffing and increased consolidation of a very fragmented healthcare staffing market. Ultimate target 8-9."

        Roland Carter's recent buys include W.W. Grainger, The 3M Co., Nokia, Disney and Hormel.
        W.W. Grainger (GWW) is the leading U.S. distributor of industrial maintenance and repair parts. Their recent, outstanding quarterly results (sales +9%, EPS +22%) made the stock jump nearly 15% in three days. We think GWW's day in the sun is just beginning, though. As we've pointed out previously, GWW said all last year and reiterated in early January that good things were in store. They've nearly completed an extensive overhaul of their inventory system, though the SAP computer update won't be fully operational until January 2006. They've repeatedly said it will make earnings grow twice as fast as revenues for several years. Their two recent quarters sure appear to affirm this. GWW is a 0-debt beauty. The risk/reward from this lower-than-average level (P/E of 18 when its normal range has been 15-25) doesn't get much better. We expect 20% EPS growth this year and mid-teens for the next few years. If this is not a $100-$150 stock within 2 years, it surely will be within 5. Expect a P/E of 25-30 on accelerating earnings growth to a higher level of earnings. We've backed the truck up here and are loading on this long-time favorite.
        The 3M Co. (MMM) (formerly Minnesota Mining & Mfg.) Is the big ($20 billion 2004 sales), familiar, diversified manufacturer of everything from Post-It pads to sandpaper/granules to medical equipment. If you want buy and hold quality, here it is without question. 3M touched a high of 90 in mid-2004 (a P/E of 27). Earnings should continue to grow about 10%/year, accelerating from the past 10-year average of about 7%. The shares dropped about 10% recently on news of their CEO James McNerney, Jr. going over to Boeing, but he's just one man. We would use this weakness to do some buying. Its pullback may not be complete @71-74. Several chart trends say 69-70 is the perfect buy point, but don't wait too long if you want to own some. Sometimes, you snooze, you lose. Dividends paid since 1916.
        Nokia (NOK) with 2005 revenues reaching $41 billion, NOK is the world's largest cell phone maker. This financial fortress has miniscule debt, over $16 billion in cash (nearly $4/share), and generates well over $2 billion/year in free cash flow. Their recent quarter was excellent, with sales +25% and profit +16%, but they said EPS could be down 10%-15% in the 3rd quarter. They are currently positioned to sell lower-cost, no-frills phones, gaining back total market share, while Motorola, at the moment, has the hot, higher-end units. 2005 earnings should still be around $1.00/share. Maybe they should do a Wendy's!
        Disney (DIS) one of the world's huge, great media and entertainment companies. 2005 revenues should top $33 billion. Their theme parks and Disney entertainment products have been supplemented in recent years by the acquisition of the ABC and ESPN networks. These are all wonderful businesses, and with the recent ouster of embattled CEO Michael Eisner, this company appears set to get back to business. EPS have been erratic over the past eight years, but 2004 saw a record $1.09. 2005 is forecasted to reach $1.35 (+23%), and Value Line believes EPS can grow about 18%/year for the next few years. This stock peaked @43+ in 2000, at a P/E near 50.
        Hormel (HRL) is an international producer and marketer of brand-name meat and food products - fresh frozen, cooked, and canned. Their stable contains names such as Spam, Dinty Moore, Jennie-O, Little Sizzlers, etc. They've grown through successful acquisition and continue to do a marvelous job of such year after year. They are low debt (often 0-debt) and a dividend increaser. We see HRL as a solid, 10% grower with a 2% yield. We'd really like to buy around 26. Recent high of 32+ in early 2005. A trader would look at their long-term chart and call a buy @ 25, sell @ 35. Dividends paid since 1928... Note: Buy below 27."

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

ConAgra remains in Declining Trend

        Joseph McKittrick: "ConAgra (CAG) is the company behind many of America's favorite food products. Their massive brandings even include Butterball, a favorite choice of many Thanksgiving dinners. After the sale of its fresh beef, pork, chicken, and canned seafood businesses last year, the company began a new focus on its successful higher margin products. With its new set of assets, the company currently organizes itself into three business segments, known respectively as Retail Products, Foodservice Products, and Food Ingredients.
        Retail Foods provides the foods that consumers are most familiar with. Among this segment's category offerings are frozen, refrigerated, and shelf-stable retail items. CAG's exhaustive shelf-stable offerings include brands such as Wesson, Chef Boyardee, Healthy Choice, Hunt's, ACT II, Pam, Wesson, Van Camp's, Swiss Miss, La Choy, and Knott's Berry Farm. Frozen Good include the Marie Callendar's brand, Butterball, Rosarita, Artel, and Wolfgang Puck. In its refrigerated line of products, ConAgra sells such brands as Hebrew National, Armour, Louis Kemp, Ready Crisp, Brown 'N Serve, Fleischmann's, and Egg Beaters. At the end of 2004, retail products realized a gross profit of $3.2 billion.
        CAG's Foodservice Products is one of its newer segments. As the name implies, the company provides items to commercial and restaurant interests. These products include prepared potatoes, seafood, sauces, entrees, and meats. Actual brands repackaged and targeted directly to the non-consumer market include Butterball, Cook's, Wesson, Lamb Weston, Egg Beaters, Longmong, Decker, County Line, Angelia Mia, and Texas BBQ. At the end of 2004, the company announced an increase in gross profit derived from the Foodservice Products segment. The new number came in at $570 million.
        Food ingredients creates many of the ingredients used in the production of CAG processed foods. This segment produces spices, seasonings, blends and flavorings. ConAgra facilities also produce milled flour, corn, and oats. Among the risks in this segment are the fluctuating prices associated with the procurement of commodities. In 2004, Food Ingredients rose to a total of $348 million.
        The close for the fourth quarter brought news of gross declines for ConAgra. Net income for the quarter fell to only $0.20.share as compared to $0.32/share during the previous year. Earnings also fell a corresponding 40%. Results were partly impacted by loss of contribution from the company's fresh meat operations, which were recently sold. The company's outlook for 2006 called for increased earnings per share, with impaired growth during the first quarter. Margin problems, which have proven to be a source of continuing difficulty for the company are still being addressed through downsizing, reorganization, and consolidation.
        Interesting Qualities To Note: CAG has a market capitalization of almost $12 billion, 61% of shares are held by institutions, ConAgra holds $207 million in cash on its balance sheet, S&P includes ConAgra as a member of its S&P 500 index, and ConAgra has been known as a provider of the famous McDonald's French fries.
        At a recent price of $23, ConAgra remains in a Declining Trend. Though offering a 4.7% yield, the company historically will decline to the point at which investors could find a higher 6.0%. Recent problems with earnings, and the announcement of a class-action lawsuit may help to being the negative pressure necessary for a complete decline to Undervalue. In the near-term there is no expectation that margin pressures caused by rising prices in raw ingredients will soon let up. Investors should certainly find value in the company's current yield, but those looking for the best prices will ultimately have their patience rewarded with lower downside risk. Based on the company's current dividend, it is expected to return to Undervalue at a price of $20."

R. Scott Pearson: "Capital One Financial (COF) is one of the leading credit card issuers in the United States with over 50 million revolving credit accounts. The company also offers auto loans, home-equity loans, mortgages, medical loans, insurance and high-yielding CD's. Capital One, based in suburban Washington, posted strong quarterly figures last quarter, dispelling some concerns that growth was slowing. Reduced earnings in the 4th quarter of last year (resulting from expensive new advertising) worried many analysts at the time. Today the strategy appears wise, with rising revenues as the pay-off. Earnings rose 16% fueled by a $300 million increase in revenue. Revenue from managed loans performed particularly well, rising by 13%. The company's acquisition of Hibernia, a bank with operations throughout Louisiana and parts of Texas and Mississippi, is expected to close by September, giving the company an entry into traditional banking sector and cheaper access to deposited funds. The company also recently acquired auto finance company Onyx Corp, which made COF the nation's 2nd largest independent auto lender. These two deals broaden the Capital One's market space, and the added diversity of earnings will improve the company's stability.
With the Bank of America-MBNA merger announcement, closely following Washington Mutual's offer to buy Providian, all the other major credit card firms are losing their independence. This elicits the possibility of an agreement between Capital One and one of BofA's competitors. HSBC, Wells Fargo, Wachovia, and even Citibank are among the rumored suitors. Meanwhile, the industry consolidation may also offer COF an opportunity to boost market share, as many banks currently offering cards through the MBNA network may dislike subcontracting through Bank of America, a direct competitor. This suggests an opportunity for Capital One to steal some business. Whether Capital One remains independent or accepts a takeover offer, the likelihood is that the future share price will be higher, so we recommend purchase of this growing finance company."

        Stephen Leeb: "General Electric (GE) provides safety plus the opportunity to play the energy crisis to the hilt.
        In the coming inflationary world, most blue chips, those with just moderate growth rates, are likely to be dismal stock market performers, just as they were in the 1970s. But General Electric will be the exception. This ultra-high quality, triple-A stock is leveraged to prospective chronic shortages of fossil fuels and electricity. As a result, beyond its blue-chip attractions of safety and diversification, GE also offers potentially fast-paced growth that will keep you well ahead of inflation.
        Jeffrey Immelt, the head of GE, definitely gets it. That is, while Wall Street is mostly still projecting falling oil prices over the next five years, and most politicians, Republicans and Democrats alike, are paying only lip service to the impending energy crisis, Immelt has helped position GE so that it can play the energy crisis to the hilt.
        The company is roughly divided between financial services (about 40 percent of revenues) and non-financial services. Within the latter segment, energy-related products - currently accounting for about 12 percent of overall revenues - make up the fastest-growing area. This energy division is widely diversified, and most of its products have leading or dominant market shares in critical areas of energy generation, including almost every important alternative energy technology. While consensus expectations are that the energy division will grow in the low double digits, we think the gains will be considerably higher over the next five years or more, helping to keep overall earnings growth on a fast track.
        Among other things, GE is the world's largest integrated wind company and the second-largest maker of wind equipment. Over the past three years, wind revenues, admittedly from a small base, have been growing by 50 percent a year. The Street projects growth in the low 20s over the next five years. We think it could easily exceed 30 or even 35 percent.
        Keep in mind that wind today, while barely a rounding error in terms of energy production, is a less expensive electricity source than is natural gas and, when you factor in health-related costs, cheaper than coal as well. Moreover, a recent study found that wind electrolysis - in which wind is used to separate hydrogen from water - could compete with gasoline as a fuel source for cars. If - and we're confident it's a question of when, not whether - wind becomes recognized as critical in meeting our energy needs, long-term growth for wind energy in general, and for GE's wind production in particular, would dramatically accelerate, and GE's wind revenues could easily grow by 30 percent or more a year for a decade or longer.
        Wind is just one of the alternative energies in which GE leads. It's also the leading producer of turbines for coal gasification, which is possibly the next most promising alternative energy after wind. Here, too, growth could be explosive. In addition, GE is in the forefront in turbomachinery, products vital to the liquefied natural gas (LNG) industry as well as in the storage and transmission of energy sources such as natural gas. Among fossil fuels, LNG and coal are likely to show the greatest growth over the next 10 to 20 years, and thus this area, too, should bring on torrid growth for GE.
        There's more. GE is a major player in nuclear energy, producing essential components of nuclear plants, an area that will in importance in both the U.S. and abroad. Finally, it's the leading manufacturer of turbines used in standard gas- and coal-powered utilities. In this arena the company stands to benefit from the near certain shortage in electricity-generating capacity, the aftermath of the bust in capital spending on electricity that followed the boom of the late 1990s.
        GE's energy division easily could grow by more than 20 percent a year over the next decade - and as the energy crisis worsens, 25 to 30 percent growth is a possibility. Along with high single-digit or low double-digit growth in its other divisions - one particularly promising area is the company's rapidly expanding stake in infrastructure spending in China - overall growth easily could be in the low teens and, by the end of the decade, as energy becomes and ever larger share of profits, even in the mid-teens.
        In other words, GE offers solid near-term growth that is likely to accelerate, perhaps sharply. An unmatched combination of quality and growth, it's one-of-a-kind company that represents one of the best chances we have of successfully negotiating one of the most difficult periods we're ever likely to face. Over the next 12 months we're targeting GE for at least 40, and once investors wake up to how important and well-positioned the company is, we may raise our target higher."

Donald Pearson: "Nam Tai Electronics, Inc (NYSE NTE $23.70) provides electronics manufacturing and design services to original equipment manufacturers of telecommunication and consumer electronic products. It manufactures electronic components and subassemblies, including liquid crystal display (LCD) panels, LCD modules, radio frequency modules, flexible printed circuit subassemblies, and image sensors modules. These components are used in various electronic products, such as cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys, handheld video game devices, and microwave ovens. NTE also manufactures finished products, including cellular phones, palm-sized personal computers, personal digital assistants, electronic dictionaries, calculators, digital cameras accessories, and Bluetooth wireless headset accessory for use with cellular phones.
Wells Fargo & Company (NYSE WFC $61.34) and its subsidiaries provide banking, insurance, investments, mortgage banking, and consumer finance in the US and internationally. The company operates in three segments: Community Banking (CB), Wholesale Banking (WB), and Wells Fargo Financial (WFF). The CB segment offers various products and services, which include the Wells Fargo Funds, a family of mutual funds as well as personal trust, employee benefit trust, and agency assets. Loan products include lines of credit, equity lines and loans, equipment and transportation loans, and education loans. As of December 31, 2004, the company served approximately 23 million customers through 6,046 stores, the Internet, and other distribution channels. WFC was organized in 1929 and is headquartered in San Francisco, California."

        Louis Navellier's recent Buys include Cemex and Toll Brothers. Both are in Navellier's Quantum Growth trading service, so they're very powerful.
        "Cemex (CX) is based in Mexico and is now the third-largest cement company in the world. The firm's operations are concentrated in North America and Europe, but it also does business in the Middle East, South America and the Pacific Rim. North America accounted for more than half of Cemex's sales, but after acquiring U.K.-based cement giant RMC Group this year, the company's biggest market is now Europe. About 75% of sales come from cement, and the company can produce more than 90 million tons annually. Cemex also makes ready-mix concrete, aggregates and clinker (an intermediate product used to make portland cement).
        Management announced that it sees second-quarter cash flow rising by 53%, and that it plans to use some of that cash to pay down debt. The company recently rewarded shareholders with an extraordinary $1.18 dividend. The stock is also due to split 2-for-1 any day now.
        Cemex recently said that it could recover over $100 million if Washington lifts anti-dumping tariffs on Mexican cement in a bid to ease shortages in the U.S. Last month, a NAFTA panel ordered the U.S. International Trade Commission to revise a decision ratifying the anti-dumping tariffs. Francisco Garza, head of Cemex's North America Operations and international trade, said that Mexico and the United States would meet soon to seek an agreement on the matter.
        Cemex wants back the $100 million it has paid for exporting its cement to the United States since 1990. Garza said that it's "key for the U.S. consumer that anti-dumping tariffs are lifted...so final consumers can access cement."
        Cemex's U.S. unit imports about five million tons of Asian cement into the U.S. market every year. If the U.S. tariffs were lifted, Cemex says its Mexican operation could easily meet U.S. demand and substitute imports from China, South Korea and Turkey.
The stock improved considerably on the recent news of potential NAFTA settlement. Trading volume has also been rising, which means that institutional investors are likely placing big bets on the stock. I'm placing Cemex in the moderately-aggressive group with an initial buy-below price of $47.
        Toll Brothers (TOL) is the largest U.S. builder of luxury homes, specializing in move-up, empty-nester, active-adult and second-home buyer markets in suburban communities in 20 states.
        Its single-family detached homes average about $680,000, while attached homes (townhouses and carriage homes) average over $300,000. The company also develops active-adult communities (many with golf courses) and operates country club communities. Through subsidiaries, it offers insurance, home security, landscaping, cable TV, broadband Internet and mortgage services.
        The company recently said that it expects 70% earnings growth this year, plus another 20% for the next year. Based on earnings of $409.1 million for the year ending October 31, that guidance works out to about $695.5 million for fiscal 2005 and $834.6 million for fiscal 2006.
        Robert Toll, the CEO, said that his company might seek to grow abroad after expanding domestically. Among the areas where Toll plans to boost its operations are Washington, D.C., Charlotte, Orlando, Jacksonville, Hoboken (New Jersey), Brooklyn and Manhattan. Toll may look abroad for new luxury housing markets within the next five years.
The stock surged several weeks ago after the bullish earnings forecast was issued and after Smith Barney upgraded many homebuilders. The stock just split 2-for-1. I'm also making TOL a Top 5 stock for August. It's a moderately-aggressive stock with a buy-below price of $62."

        Tina Vital: "We think this major oil company's scope and resources provide significant competitive advantages.
        ExxonMobil (NYSE XOM $58, 5 Star Ranked) is the largest publicly traded oil company in the world, and we think its size gives it advantageous economies of scale. In our opinion, it is also one of the best-managed companies in the energy sector.
        On August 4, the company announced that Lee R. Raymond, its chairman and chief executive, will retire at the end of the year. His successor in both posts will be Rex W. Tillerson, currently president. In our view, the change in leadership is consistent with the company's goals. Tillerson previously ran ExxonMobil's production business and was responsible for its investments in Russia.
        ExxonMobil's strong earnings and cash flow have enabled the company to build a cash balance of about $30 billion, which greatly exceeds its $9 billion of debt. The company has also repurchased more than $7 billion of its stock so far this year, and has increased its capital expenditures by $2 billion to $17 billion from 2004. We expect strong cash flow growth to continue, and look for more share buybacks and dividend increases.
        This year through August 4, ExxonMobil's shares went up 14.2%, and we believe the stock's strong performance reflects the company's solid fundamentals. Earnings from exploration & production have benefited from high oil prices, while earnings from refining & marketing have benefited from significant pricing discounts resulting, in our view, from ExxonMobil's ability to refine lower-quality crude oil. Higher oil prices and better refining margins boosted the company's second-quarter operating earnings by 35% to $1.23 a share, excluding a $200 million special charge. The results were $0.03 shy of our estimate, and we attribute the short-fall to lower-than-expected production and decreased chemical sales volumes as customers lightened inventories in anticipation of lower petrochemical prices.
        During the second quarter, oil & gas production declined about 4.3% to 3.91 million barrels a day, reflecting the effect of entitlements, divestments, downtime, and natural field declines. ExxonMobil expects production to improve in the second half of the year because of stepped-up drilling in Africa and as large new projects progress. We expect hydrocarbon production to be flat for the year, and project annual increases of about 3% thereafter, on contributions from new field development. In our view, ExxonMobil's finding & development, proved acquisition, and reserve replacement costs are in line with those of its peers, but its internal reserve replacement is above average.
        We estimate that the company's complex refineries have the ability to refine heavy sour crude oil at the rate of 2.85 million barrels per day, among the highest amounts in the world. While the differences in price between light and heavy and sweet and sour crude oils narrowed during the second quarter, the gap remained large. We project high oil prices and continued strong global demand for light, sweet transportation fuels amid limited refining conversion capacity. As we see it, this will keep wide price differences between the various qualities of crude oil over the next few years.
        Based on our upwardly revised price and margin projections, we raised our 2005 earnings estimate by $0.22 to $4.92 per share and our 2006 estimate by $0.23 to $4.89. The stock has a premium valuation, and we think it is warranted, in part, by the company's relatively high return on capital employed and its relatively low cost of capital.
        ExxonMobil shares have provided a total return of 15.5% annually over the last 19 years vs. 11.7% for the S&P 500. While changes in market conditions affecting the oil & gas industry, political instability, and changes in operating conditions could hurt the company, we think ExxonMobil has high-quality assets and balanced growth. We strongly recommend purchase of the shares, which yield 2% from the $1.16 annual dividend. Our 12-month target price of $73 is based on discounted cash flow and relative valuation analyses."

        Dr. Mark Skousen: "The second half of 2005 should be strong for technology stocks. Google, Yahoo, and Microsoft have all announced sharp increases in revenues and earnings for the previous quarter. I believe such trends are bullish for tech stocks in 2005.
        Samsung Electronics (KSE: 00005930, $537) leaped ahead 12% last month after announcing another break through, the semiconductor industry's fastest high-speed graphics memory (DRAM), makes it ideal for high-quality images and fast animation in PCs and high-end games consoles. Samsung also rose after its second quarter earnings release. Although sales declined 2%, net income increased a remarkable 13%, meaning that Samsung is getting more productive, and its massive R&D spending is paying off big time. We can expect further surprises in the near future, as Samsung has dozens of new products coming down the pipeline, given that it outspends its competition in R&D (over $3 billion a year), with 20,000 researchers in 15 labs worldwide. Even at over $500 a share, Samsung is our favorite hidden gem in the high tech market.
        Unfortunately, Samsung does not trade in the U.S. Brokers must buy it on the Korean exchange, or in London (institutional investors only), and the minimum can be steep (usually $10,000 or more). An alternative to investing in Samsung directly is the Korea Fund (KF, $29.65), 30% of which is invested in Samsung. KF, which sells at a 3.4% discount to NAV, was up 8.6% last month.
        American Insurance Group (AIG, $60.30), the world's largest insurer, is up 18% since our buy recommendation. In the most recent Business Week, value investor Saul Eisenberg labels AIG as a "value steal," adding, "Crunching the numbers to get the (SEC and New York Securities) probe's worst-case impact, we saw that AIG was way oversold." Eisenberg sees the company regaining its business momentum, and overseas operations are growing fast, particularly in Japan, India, and China. Like me, he sees the stock going to $75 by year end. AIG is making all the right moves to defray any doubts. It fired its CEO Hank Greenberg and has brought on to its board Arthur Levitt, former chairman of the SEC."

        One of the trends Ruminations of the Contrary Investor have been following for some time is the consolidation taking place in the financial services industry. Mergers and acquisitions among banks, insurance companies, investment advisory and brokerage companies, and other participants in this space have accelerated. In addition, the prices these companies command have risen steadily and stand at all-time highs.
        In September of 2004, editors focused on regional banks that they felt were good takeover targets, as well as excellent investments on their own merits. One of the picks was Hudson United Bancorp (NYSE HU), located in New Jersey, Connecticut, New York and Pennsylvania in very densely populated, affluent regions. The stock was recommended when it was trading at $35.64. On July 12, 2005, TD Banknorth announced it had agreed to acquire Hudson for $1.9 billion in cash and stock, a deal that puts the value of Hudson's stock at $42.78 per share.
       "TD Banknorth said it is paying 4.5 times tangible book value and 15.8 times estimated 2005 earnings, compared with 17.9 multiple on comparable recent bank purchases. "The transaction carries a rich price," said Gerald Cassidy, an analyst at RBC Capital Markets in Portland. "Banknorth has been given a mandate by Toronto-Dominion to expand through acquisition."
        "Our reasoning in recommending Hudson was set out in our September 2004 stock pick" "Hudson is a bank holding company offering full-service commercial banking. HU has positioned itself well for the expected pick up in small commercial loans and offers a nice dividend yield of 4.1 percent thereby drawing income-focused accounts to the investment. HU's EPS growth for the past 5 years has been 41.5 percent and its capital spending has growth 21.9 percent. HU's low debt-to-equity ratio along with its strong margins makes it a very attractive investment option."
        "Our comments on the environment of consolidation: "Strong regional banks located in growing geographical areas with a good revenue mix between interest income and non-interest will prosper within a consolidating industry environment. The current increasing interest rate environment is a sign of an improving economy. A strong economy will increase loan growth and margins will expand for banks. In addition, asset quality should improve. Currently the banking industry is very segmented with many small to medium sized banks. It is poised for continued consolidation making it an attractive time to invest. The banking industry has been experiencing a major consolidation during the past 10 years. This consolidation has accelerated most recently and banks keep getting larger."
       "Two other regional banks we liked along with Hudson were Trustmark Corporation (TRMK) and Alabama National (ALAB). Both of these companies are based in the Southeast U.S., and share many of the same qualities that made Hudson attractive.
        "Another play we recommended that has been a big winner for us in this space is Affiliated Managers Group (AMG). AMG is a consolidator of mid-sized investment advisory firms, and we picked it in June of 2004 when the stock was trading at $48.75. At the time of this writing it is around $72 per share, and the company continues to strengthen its balance sheet through additional acquisitions.
        "Consolidation in the financial services industry remains a trend that is underappreciated, and we will continue to look for opportunities to capitalize in our contrarian fashion."
        Editor's Note: The 43rd Annual Contrary Opinion Forum will be held at the Basin Harbor in Vergennes, VT, October 17-19, 2005. Economists, investment managers and contrary-minded individuals from all parts of the U.S., Canada and overseas gather for this annual conference. The Forum centers around the idea of learning to think for yourself in solving practical investment problems. For more information call (802) 658-0322 or visit the web site at www.fraser.com.

Thomas Bishop: "In between the kingdom of branded pharmaceutical where the heavy R&D lifting occurs and the land of the generics where there is little in the way R&D going on, there dwell the specialty pharmaceutical companies. These companies opportunistically roam the branded countryside looking for nice little products, already researched and developed but about to be cast off for one reason or another. Larger branded pharmas often outgrow some of their smaller products, or change strategies, or pick up products that don't fit into their lineup as part of acquisitions and are willing to sell them for some cold cash. In other cases development companies that are bringing small but promising products through clinical trials, which can get expensive, look for a partner to help out with the final stages of clinical trials or simply to bring the product to market... or acquire it outright. Our new selection, First Horizon Pharmaceuticals (FHRX $21.28), is clearly demonstrating remarkable success in the specialty pharmaceutical realm.
After a strategic shift fueled by a lousy performance in 2002 and 2003, First Horizon emerged with a more finely tuned operational focus, increased profitability and accelerating growth. The Company realized it needed to have lower operating costs, so it cut discretionary spending, streamlined the corporate office and adjusted investments in samples and marketing materials. It terminated agreements with contract sales organizations and began vigorously expanding its own sales force. First Horizon also took steps to maximize the life cycles of its products by developing ideas for line extensions. In addition, it became more aggressive regarding acquiring and licensing approved products or late stage development products, focusing exclusively on products in Cardiology and Women's Health. Success in 2004 and 2005 has been remarkable with more of the same predicted for 2006 and beyond.

        As a specialty pharmaceutical company that markets and sells brand name prescription products into the Cardiology and Women's Health markets, First Horizon currently sells 15 products but is primarily focusing its marketing resources on about 8 of them. In Cardiology, which accounted for about 50% of last year's sales and 70% of sales in Q2, Sular, a once-daily calcium channel blocker of hypertension, is the Company's biggest product. It accounted for 38% of 2004 sales, or about $57 million in revenues, and prescriptions were up 19% in Q2. Patent protection expires in 2008, so the Company is working on three line extensions. Nitrolingual, which is a pump spray form of nitroglycerin for the treatment of acute angina, is the Company's 2nd biggest product with about $18 million of sales, but prescription growth has been slow, up 3% in Q2, though it was in a declining mode a year ago. In Europe and elsewhere abroad the pump spray delivery format is preferred to a pill. However, in the US for some reason the pill is more popular and the Company is working to swing this preference.
        In March First Horizon acquired the worldwide rights to Fortamet and Altoprev from Andrx for about $85 million. Fortamet, an extended release form of Metformin, is a once a day treatment from Type-2 diabetes, competing in a $6 billion oral diabetes market. Altoprev, an extended release lovastatin, is a once-daily treatment for cholesterol which helps patients increase their HDL and decrease their LDL levels. Altoprev competes in a $15 billion market, but has minimal growth expectations. The Company added 125 reps to its sales force (now totaling 470) to handle these two products and at a recent national sales meeting, relaunched them with new marketing strategies.
        In addition, in May 2005, the FDA approved Triglide, a fenofibrate, which is licensed from and manufactured by SkyePharma PLC (in exchange for 25% of sales). This product is an oral treatment for lipid disorder with the competitive advantage that it is one of only two such products on the market that does not have to be taken with food and it sells at a 25% discount to that competitor, TriCore- a fact the Company is making sure the managed care formularies and state Medicaid programs are aware of. Triglide was launched in mid-July.
        Women's Health products accounted for about 20% of Q2 sales. This line currently includes prenatal vitamins and Ponstel, a non-steroidal fenamate indicated for the relief of mild to moderate (menstrual) pain and menorrhagia. In prenatal vitamins, Prenate Elite is the only prenatal vitamin with Metafolin, the active form of folate. Its advantage is that up to 50% of women have trouble converting the folic acid in other prenatal vitamins to this active form. Prenate Elite captured #1 in the market place 11 weeks after its March '04 launch and remains there with 15% of total prescriptions. A line extension, OptiNate, a premium prescription prenatal vitamin with DHA from a vegetarian source rather than fish oil source, was launched in march '05 and has already captured 8% of new subscriptions. A third prenatal vitamin is expected to be introduced in Q1 2006. Also the Company seems optimistic that it will make a product acquisition in the Women's Health area, where such efforts are currently being focused, before year end.
        So First Horizon's strategy is to find innovative ways of selling the products it has, extend the life of those products with the line extensions, acquire new products to further fuel its growth... and keep its costs down so it can use price as an advantage as well. With regards to line extensions, it is important to note that three are in the works for Sular. One is a pediatric extension and two others are in progress in conjunction with Bayer and SkyePharma. The Company uses third parties, often the innovator, to do the manufacturing.
        Financially, First Horizon has 97 million of cash and debt-to-equity ratio of 0.48. The debt is a $150 million contingent convertible (at $22.15) paying 1.75%, that under GAAP has already been figuring into the diluted EPS calculation as equity for the past year. In 2004 the Company earned $.66 a share and generated a hefty $50 million in cash flow from operations. For the quarter ended 6/30 EPS advanced 43% to $.20 a share on a 38% increase in revenues to $50 million and the Company's EPS guidance for the full year calls for $.90-$.96 on a 38% revenue advance to $208 - $215 million.
        The next 12 months should be fueled by the recent Fortamet and Altoprev acquisitions, as well as the recently introduced OptiNate and their prenatal vitamin to be launched early next year, along with continued growth of Sular and a possible acquisition for the Women's Health line, hopefully before year end. Despite the above growth rates, including a long-term consensus of 32%, the shares are trading at just 22 times 2005 EPS, presenting a mouth watering PEG. This undervaluation probably explains why the Company has been actively buying back its stock, including 1,057,000 shares in 2004. Last week the Board authorized another $20 million share buyback. I do own some shares of FHRX. The BI Rank is a solid 8.9. Volume is strong, but use limit orders. FHRX is a good Buy up to $24. For more information call (770) 442-9707 or visit the web site, www.fhrx.com."

        Richard Lehmann: "The credibility and usefulness of credit rating agencies has come under fire in the 21st century. Looking at the two years with the largest amount of defaulted debt is illustrative.
        The worst two years in recent memory were in 2001 and 2002. In 2001 $95 billion in bond debt defaulted while in 2002 the amount rose to $102 billion. In those two years, of the ten largest defaults, $63 billion were initially rated investment grade while only $36 billion were rated below investment grade. The failure of credit ratings to predict these defaults is typically shrugged off as idiosyncratic events with a variety of causes such as fraud, legal adversities or just bad luck. But then, if it doesn't predict these, what good are they?
        The ratings scale from AAA to C, presented as a smooth continuum, in reality describes two different states, investment grade or non-investment grade. The differences between the two have enormous consequences to the rated companies. The invasive, but necessary acceptance of ratings has penetrated the financial markets to such an extent that they are now routinely included in many types of financial contracts. In one case the coupon rate of a preferred security adjusts directly with the security's credit rating change.
        A rating downgrade below investment grade can actually cause a default. This may have happened to Mirant. After Enron filed for bankruptcy, the rating agencies had egg on their faces. The agencies then went after merchant power producers and downgraded their debt in steady inexorable increments. Each decline caused greater financial stress on these companies, leading to a call for more loan collateral and eventually leading to bankruptcy. That's a lot of power for an oligopolistic rating industry to wield. Despite all this power, there are only three agencies who's ratings are recognized by the SEC; Moody's, Standard & Poor's and Fitch. The SEC has been slow to designate additional agencies as Nationally Recognized Statistical Ratings Organization or NRSROs, their official designation.
        Since Sarbene/Oxley legislation was enacted, all investors are as privy to the financial information as analysts. This takes away most of the advantage of the NRSRO's, since they no longer have exclusive access to financial information. Theoretically this should open the doors to other companies that wish to join the ratings game.
        There are several non-NRSRO rating agencies that have done a better job of predicting trouble, especially for some big defaults. For example, Egan-Jones Ratings Corp. downgraded Enron and WorldCom debt to junk 1 month and 10 months, respectively, ahead of both Moody's and S&P. Sean J. Egan of Egan-Jones Corp. has testified before congress, accusing rating agencies of having a conflict of interest, since they derive their fees from the companies they rate. Rapid Ratings, another non-NRSRO, uses a different methodology to measure credit risk, which does not rely on analyst opinions. They use an objective computer derived model that takes its input from public financial statements. The objective nature of this approach is appealing since it measures the same risk by a different method. Rapid Ratings gave early warnings about Enron, WorldCom and Parmalat. It also showed companies such as GM as being below investment grade for the last four years."

        Richard Moroney: "In your search for dividends, don't limit yourself to stocks with high current dividend yields. Many of the stock market's best income plays have yields of 1% to 2.5% - along with the potential to grow dividends at superior rates.
        Below are eight such companies, all of which have delivered solid results in recent quarters. All eight should grow per-share profits by at least 10% both this year and next, and consensus estimates project at least 11% annualized profit growth over the next five years. All eight, ranked Buy or Long-Term Buy, have increased dividends at healthy rates over the past 12 months. Solid finances and moderate dividend payout ratios suggest continued dividend growth is likely. Six of the companies are reviewed below.
        A recovering boating market is driving sales at Brunswick (NYSE BC $45), fueling double-digit profit growth. June-quarter sales of marine engines increased 14%, while the division's operating earnings climbed 12%. At the boat segment, operating earnings jumped 31% on an 18% sales gain. All boat sizes have been selling well, and all geographic markets are delivering healthy results.
        With 80% of revenue generated from marine-related products, Brunswick is capitalizing on a cyclical upswing in boat sales. In each of the last four quarters, revenue has increased at least 12% and per-share earnings have grown at least 23%. Consensus estimates project per-share-profit growth of 22% in 2005 and 21% in 2006.
        Bowling and billiards sales rose 9% last quarter, while fitness sales grew 2%. Brunswick is a highly acquisitive company, but internal growth has been strong, with organic sales up 10% last quarter. After nearly a decade of flat dividends, the once-yearly payout rose 20% in 2004, reaching $0.60 per share. Given the company's solid prospects, another increase seems likely with this December's payment. Brunswick is a Buy.
        An improving global economy has contributed to three consecutive quarters of double-digit growth in per-share profits at General Electric (NYSE GE $34). Chief executive Jeffrey Immelt expects more of the same for the rest of 2005 and 2006, stating "the economy is going to give us all the momentum we need" to achieve more than 10% per-share-earnings growth this year and next. Consensus estimates project per-share profits will rise 14% in 2005 and 13% in 2006. GE has increased its dividend 29 years in a row.
        All 11 segments delivered double-digit gains in operating income for the June quarter. Going forward, GE sees its consumer-finance business as a key growth driver. Management expects the segment's 2005 net income to increase 20%, boosted by 15% asset growth. GE Consumer Finance offers credit cards, auto loans, mortgages, insurance, and deposits in 47 countries. The consumer-finance unit will continue to depend on acquisitions to provide access to new markets. GE is a Long-Term Buy.
        Ingersoll-Rand (NYSE IR $79), a leading provider of products for climate control, industrial operations, construction, and security and safety, is positioned for solid growth. The company boosts a diverse product line that includes well-recognized industrial and commercial brands like Bobcat, Club Car, and Schlage.
        Consensus estimates project per-share profits will grow 19% to $5.93 in 2005. That estimate has climbed $0.11 over the past month. For 2006, profit estimates range from $6.15 to $7.00, with an average of $6.67. Solid year-ahead sales prospects and recent earnings surprises suggest analyst estimates may be conservative. Per-share earnings have topped the consensus in each of the last four quarters, but an average of nearly $0.08.
       Healthy cash flow should fund stock buybacks and dividend increases. In August, management raised the quarterly per-share dividend 28% to $0.32, payable Sept. 1. The stock, capable of reaching $87 to $90 over the next year, represents a top industrial pick. Ingersoll-Rand, yielding 1.6%, is a Buy and Long-Term Buy.
        Toronto-based Manulife Financial (NYSE MFC $51) offers a diverse mix of products, including life and health insurance along with such pension and investment vehicles as variable annuities. The company reported strong results in the June quarter, reflecting solid growth in U.S. wealth-management operations as well as Canadian and Japanese businesses. Per-share earnings rose 13% to C$1.05. Premiums and deposits climbed 11%.
       New products, continued demand for annuities, and acquisitions should sustain growth. In addition, share buybacks should bolster per-share earnings. The company repurchased more than 6.6 million shares of its stock during the June quarter. Consensus estimates project per-share profit growth of 18% for 2005, followed by 15% growth in 2006.
       Manulife pays an indicated annual dividend of C$1.20 per share. Based on current exchange rates, the dividend in U.S. dollars is roughly $1.00, putting the yield at 2.0%. Based on trailing 12-month distributions in U.S. dollars, the dividend has increased 39% over the past year. The stock, a Focus Buy, earns a Quadrix Overall score of 94.
        PepsiCo (NYSE PEP $55), the world's third-largest food and beverage company, has delivered double-digit growth in per-share profits in each of the last three years. The company has posted strong results so far this year, with volumes up 4%, revenue up 8%, and per-share earnings up 15% in the first six months. Demand for noncarbonated beverages continues to grow - noncarbonated beverage volumes climbed 5% in the June quarter, versus a 4% decline in carbonated-beverage volumes.
        PepsiCo enjoys strong competitive positions in its core North America market - with a 60% share of salty snacks and a 26% share of carbonated and noncarbonated beverages. The international business, which generated 34% of 2004 revenue, is becoming increasingly important, with revenue growth of 14% and an operating-profit gain of 21% in the first half of 2005. PepsiCo's dividend has increased in each of the last 10 years. A 5% to 10% increase seems likely over the next 12 months. PepsiCo is a Focus List Buy and a Long-Term Buy.
        As demand for groceries continues to outpace demand for general merchandise, Wal-Mart Stores (NYSE WMT $47) is expanding its supercenter store concept. Food items generate about one-third of sales at Wal-Mart's more than 1,700 U.S. supercenters. The company plans to open another 240 to 250, including relocations and expansions of existing stores, by the end of fiscal 2006 ending January. Groceries have driven U.S. same-store sales in recent months, up 4.5% in June and 4.4% in July. Management forecasts August same-store-sales growth of 3% to 5% in the U.S. Back-to-school shopping typically makes August the second-biggest retail period behind the November-December holiday season.
        July-quarter earnings per share rose 8% to $0.67, beating consensus estimates by $0.02. Sales increased 10% to $76.81 billion. The company projected it would generate per-share earnings of $0.55 to $0.59 in the October quarter and $2.63 to $2.70 for the year ending January. Consensus estimates called for $0.60 for the quarter and $2.66 for the year. The company earned $2.41 last year. The annual dividend has risen sharply in the last three years - up 20% in fiscal 2004, 44% in fiscal 2005, and 15% to $0.60 per share in fiscal 2006. Though not timely, Wal-Mart remains a Long-Term Buy based on its 24- to 48- month potential.
        Our other two growth stocks with solid dividend outlooks are Home Depot (HD) and Michaels Stores (MIK)."

        Geoffrey Eiten: "This month's buy recommendation, Option Care Inc. (Nasdaq OPTN), is another healthcare company in the hot medical sector, that is an integrated provider of home infusion pharmacy services to patients with acute or chronic conditions. With technology allowing patients to live longer lives and the aging population increasing dramatically, this company has an extremely bright future.
       Option Care a leading integrated provider of home infusion pharmacy services and specialty pharmacy services to patients with acute or chronic conditions that can be treated at home, at one of the Company's local ambulatory infusion centers or in a physician's office. The Company provides services to patients on behalf of managed care organization, government healthcare programs and biopharmaceutical manufacturers through two central high volume distribution facilities, 39 company-owned locations and 83 franchised locations.
       Option Care services include the distribution and administration of infused and injectible medications, patient care coordination, clinical and compliance management and reimbursement support. For the years ended December 31, 2004 and 2003, the Company generated net revenue of $414.4 million and $355.4 million, respectively, and net income of $18.9 million and $8.7 million.
       With rapid growth in technology and innovation over the past decade has come the ability to live longer, more productive lives than ever before. Evidenced by growing concerns about the rapid 'aging of America,' and how to pay for it, consumers and businesses alike are increasingly seeking low cost, high quality alternatives to traditionally expense care for long term or extended term illness. Option Care provides a low cost alternative to traditional service provisions of home infusion therapies and pharmaceutical offerings, while specializing in ease-of-use and practically for all involved. As the Company continues to grow its nationwide footprint and moves to international markets show signs of similar healthcare crises, expect OPTN to continue its impressive growth trajectory."

        Joseph McKittrick: "In 1668, an man named Friedrich Jacob Merck opened a small apothecary shop across from the castle moat in the town of Darmstadt, Germany. In 1827, one of Friedrich's descendants, Heinrich Emmanuel Merck transformed Merck from a small shop into a major drug manufacturing business. In 1891, the company was established in the United States. Continuing today as a global supplier and manufacturer of pharmaceuticals, Merck & Co (MRK) operations provide an exhaustive list of medications, treatments, and preventative illness products.
        Merck's best-selling group of pharmaceuticals is designed to treat atherosclerosis. Zocor, the leader of this group is designed to lower "bad" cholesterol while raising "good" cholesterol levels. Zocor's exclusivity in the United States is expected to end in 2006. Complimenting Zocor is Cozaar/Hyzaar which is designed to help treat hypertension. Other successful medications include Singulair, which is used to treat asthma and Fosamax used to treat osteoporosis. Later this year, the company's Fosamax should begin seeing competition threats from generic manufacturers. The company's arthritis medication Vioxx was pulled from sale earlier this year over potential side-effects.
        Over the last two years Merck has made a number of organizational changes. In August 2003, the company spun-off shares of Medco health, a prescription benefits subsidiary. Prior to the spin-off, Medco paid Merck $2 billion dividend. Merck also launched a tender offer for Banyu Pharmaceutical of Japan through its MSD subsidiary. The move increased Merck's ownership to 99.4% of all common shares. Strategically, the Banyu deal will allow Merck quicker product deployment time in Japan, which is the second largest market of pharmaceuticals in the world behind the United States.
        As drug patents inevitably expire, the new product pipeline remains essential for the maintenance of revenues. In 2004, Merck hit a number of obstacles with its new product development. The company canceled development of what was to be its first diabetes treatment, MK-767. Prior to that, late stage development for anti-depressant and asthma medication were also canceled. The company also withdrew its application for Arcoxia which was planned as a new pain-killer and expected to provide "substantial contributions to earnings," (according to the company's 2003 annual report) along with a new drug Vyotrin. Vytorin, which will combine Schering-Plough's Zetia and Merck's Zocor is expected to partially cannibalize Zocor's current sales figures. As mentioned above, Fosamax is seeing legal challenge from generic manufacturers. Other products being threatened with shortened exclusivity include Propecia, and Prilosec which was just approved for generic manufacture.
        Interesting Qualities to note: MRK has approximately 63,200 employees, Merck is a member of the Dow Jones Industrial Average, recent market capitalization was $70 billion, MRK has approximately $7 billion in cash, and a 52-wk low of $25.60 was made on 11/9/04.
        At a recent price of $32, Merck is yielding well over its typical high of 3.5%. In coming years as patents continue to expire, Merck will only have a handful of vaccines to replace faltering sales. In response to the many inquiries we receive regarding Merck, we have decided to provide this article as a reexamination of the many challenges the company is facing. One regular avenue of respite, an acquisition, has been ruled out by the company's CEO several times during public appearances. Short of any alternative, we fail to see how Merck can ever generate sales anywhere near its former levels in the foreseeable future. Investors should accordingly be extremely cautious and not be drawn into speculation. Though share prices are at lows, they reflect the company's current troubles. Low prices alone is not a sufficient indicator of "value." Generic competition will begin to hurt the company's bottom line more and more as patents are challenged and exclusivity passes on a number of key medications starting next year."

INVESTOR'S DIGEST of Canada
133 Richmond St. W., Toronto, ON M5H 3M8.
1 year, 24 issues, $137.

Canada's railways keep
barreling down 'buy' track

        Michael Popovich: "There was a time when railways were investment no-no's. Burdened with excessive trackage, weighed down with government regulations and hobbled by lazy unions, most railways derailed well short of the profit column.
        Times, however, have changed. Having pared back track, hacked away staff and merged with each other, North America's railways are leaner, meaner - much more profitable.
       Indeed, with China running full tilt, they can barely keep up with imports of consumer goods and exports of commodities, Witness the piled-up wharves at Los Angeles and Vancouver.
        As a result - and, for the first time in years - the railways now enjoy pricing power, notes Pierre Bouchard, vice president of global equity research for TAL Global Asset Management in Montreal.
        And unlike higher volumes, which usually involve higher costs, higher prices go right to the bottom line, Mr. Bouchard notes.
        Of course, pricing power could go off the rails if the economy collapses. But as long as it doesn't, railways, given high demand for freight transportation, should continue to enjoy a seller's market, Mr. Bouchard maintains. After all, current congestion won't vanish overnight.
        With railways barreling down the track, it's not surprising that they've once again made it onto our list of top-10 buys.
        In third place, for example, our analysts have slotted Canadian Pacific Railway Ltd. (TSX CP $47.42, 403-319-3591, www.cpr.ca), our country's second biggest hauler of rail freight.
        Of the 13 market watchers we surveyed for CP, seven rated it a buy; five, a buy/hold and just one, a hold/sell, raising the Calgary-based carrier three notches from last month.
        And CP merits the upgrade. Although its operating ratio - a measure of efficiency - lags that of arch-rival Canadian National Railway Co. (TXS CNR $82.24, 800-319-9929, www.cn.ca), the ratio still managed to rise 3.4 per cent in the first half of 2005.
        Moreover, CP is making money, having posted second-quarter net income of $123.2 million, or $0.77 a share - a 47.2 per cent jump over the similar period in 2004.
        Revenues were also higher, rising 5.9 per cent to $1.8 billion, while income before income taxes grew 30.2 per cent to $630 million.
        Meanwhile, CP continues to hold the line of labor costs, having kept year-over-year compensation expenses to just one per cent, despite an increase in head count for the quarter of 1.8 per cent.
        Little wonder that Morgan Stanley analysts James Valentine and Michael Manelli continue to rate CP the cheapest railway in their coverage universe.
        In fact, Canadian pacific is now trading at just 12.2 times its forward earnings - in line with its historic multiple.
        For Mr. Valentine and his colleague, CP continues to merit a rating of "over weight" - the highest of Morgan Stanley's four stock recommendations.
        CP may be our analysts' top railway pick this month, but CN also made the grade. Of the 14 analysts we polled, six rated CN a buy; three, a buy/hold and five, a hold, propelling the Montreal-based rail giant to ninth spot (10th last month) on our list of top-10 buys.
        It's easy to see why. For starters, the company is making money. For the three months ended June 30, CN's net income jumped to $416, or $1.47 a share, from $326 million, or $1.13 a share, for the similar period in 2004.
        Revenues, not surprisingly, were also higher, rising 5.9 per cent to $1.8 billion, while income before taxes grew 30.2 per cent to $630 million.
        Moreover, CN is turning over on all four pistons, giving logged an operating ratio of 61.2 per cent - one of the best in its history.
        And thanks to its expense control program, CN's cost-per-employee dropped six per cent year over year, coming in at $53, or $0.12 a share, below what Messrs. Valentine and Manelli had forecast.
        Indeed, because of lower overtime costs, as well as lower health and welfare expenses in the U.S., most of CN's improvement in labor costs will be sustainable, the two analysts believe.
        Meanwhile, Canadian National should continue to see better utilization of its physical plant, now that it's trying to run its freight trains on schedule, Mr. Bouchard believes.
CN has also done well with its acquisitions, having picked up railways that complement, rather than overlap, the trackage it already has in place."

        Bob Acker: "I continue to believe that Logic Devices (Nasdaq NMS $1.18 LOGC - Investment Position - Rec. 5/05 at $1.22; Trading Position - Rec. 5/05 at $1.15) represents a well measured value and turnaround special situation. This fabless semiconductor manufacturer, which has an exceptionally strong balance sheet and is priced below book, reported a reduced net loss for the third quarter ended June 30, 2005 despite having experienced lower revenues.
        LOGC posted a third quarter net loss of $234,500, or $0.03 per share, on revenues of $662,100 compared to a net loss of 296,100, or 04 per share on revenues of $1,099,800 for the third quarter of fiscal 2004. LOGC's net loss for the nine month period was sharply reduced to $554,600, or $0.08 per share on net revenues of $1,424,400 from $1,262,300, or $0.19 per share, on net revenues of $3,407,600 for the prior year period.
        Logic Devices' release of July 28, 2005 noted that customers spanning the communications, digital cinema, military and semiconductor test equipment markets didn't order at rates which were consistent with previous quarters.
       "Even with extremely weak revenues, our losses were reduced from prior years as a result of ongoing cost control measures. Our new product introductions, although not yet contributing meaningful revenues, have generated a great deal of application support work as we help customers design-in these products. We believe this bodes well for future revenue contributions from the recent product introductions. We continue to support a strong product development effort that should result in a number of additional product introductions during the remainder of the year," stated Bill Volz, president of Logic Devices.
       "Also reflecting the great shift in business to Asia, we have established as direct sales presence in Hong Kong to oversee the distribution network we have in place across the Far East. Looking forward, we expect revenues to recover during the current quarter based on initial bookings rates in July." Said Volz.
        Logic Devices, an out of favor balance sheet beauty, boasts a current ratio of 72.8-to-1 and continues to trade below its book value of $1.49. We've been trading LOGC for years and have booked profits ranging from 50%-to-110%. Like we say in the newsletter business "past performance is no guarantee of future results," but we've never lost money by buying this stock when it was out of favor and priced below book. Logic Devices, which is out of favor and priced below book, is recommended for continued purchase. Unless reducing extended positions - buy for the Investment Position, and trading oriented subscribers - buy for the Trading Position."