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

Industry effects from Katrina

        Alexander Paris: "The stock market is usually very efficient in quickly identifying the victims and beneficiaries of natural disasters and other surprise events and acting promptly. So, a quick glance at the relative industry and individual stock performance in the week following Katrina will give a good review of the effects. For example, oil and oil service stocks rose along with engineering and construction stocks and homebuilders as investors bet on the reconstruction. Falling were airlines, insurance companies, affected hotel and casino stocks, retailers, auto stocks and the overall consumer discretionary sector, the only sector to fall in the first week following the storm. While it's difficult to discuss all the industry effects, here are a few insights.
        Communications: Bell South (BLS) is the largest telephone company in the region and costs for it and other telecom companies will be significantly increased due to destroyed equipment and damaged cables. Revenues will be negatively impacted by extended power shortages, particularly in Louisiana. Companies like Cingular and Sprint (FON) also had flooded switches and other damage and continuing lost business.
        Engineering & Construction: Companies directly involved in rebuilding infrastructure rallied nicely in the first week. This included such stocks as Chicago Bridge & Iron (CBI), Fluor (FLR), Jacobs Engineering (JEC), Foster Wheeler (FWST), and especially Louisiana-based Shaw Group (SGR). Homebuilder stocks were up, both because of prospective rebuilding activity but also due to the drop in bond and mortgage rates that followed the storm. This is more problematic since it ignores the near-term delay in housing activity in the short term and, if the Fed does not relent as many hope, any bond rally based on that hope would be reversed. Plus there are still early signs of moderation in nationwide housing activity that could offset any local positive rebuilding effects in the stricken areas. Caterpillar (CAT), as a heavy equipment manufacturer, also rallied as a reconstruction play. Manitowoc (MTN), a maker of cranes and marine vessels in another beneficiary.
        Road Building Stocks: As noted above, Caterpillar rallied as a reconstruction play, which probably makes good sense. All highway construction-related companies were already due to be enjoying a much better environment for the next few years due to the August signing of the long-delayed multi-year federal highway bill and improving state and local budgets that will be reviving depressed highway construction activity. The rebuilding of the stricken Gulf area will simply be icing on the cake. Quixote Corp. (QUIX), on our coverage list, is a pure play on highway and street spending. Astec Industries (ASTE) manufactures equipment primarily used in road building and other construction. Many companies involved in road building, such as Caterpillar, will also benefit from general cleanup and reconstruction. We presume that the increased spending on road repair will be in addition to the big new multi-year highway bill.
        Transportation: The overall transportation sector will mirror the economy, hurt by the initial impact of Katrina and then rebounding with the reconstruction. Airlines were, of course, doing terribly before the storm and the higher jet fuel prices afterward will make the going even tougher. The New Orleans airport will have a more direct negative impact on airlines that use it. Beyond that, the effects will differ by individual company and industry exposure. Some railroads, like CSX (CAO), lost quite a bit of track in the Gulf Coast region, which will take a long time to repair. Barge hauling of several farm commodities has clearly been negatively affected and most of it cannot simply be transferred to railroads, so farmers will have a difficult time moving their harvest and transportation costs will rise. There should be a significant increase in trucking, as material is moving in for the reconstruction. Some, like Landstar (LSTR), will have a more direct positive impact because of its contracts with FEMA.
        Water Infrastructure Plays: It didn't take much Katrina TV exposure watching truckload deliveries of bottled water to conclude that the supply of drinkable water is one of the big casualties of floods, storms and other natural calamities, along with, in this case, draining off the contaminated floodwaters. It spells a good opportunity for companies that supply pumps and pumping systems, water purification equipment and related plants, supplies and equipment for municipal delivery systems. On our coverage list, this includes IDEX (IEX), a leading manufacturer of pumps of all kinds and Robbins & Myers (RBN), which has operations selling to municipal wastewater systems as well as oil field equipment. Other companies, not counting the many that sell the bottled water that is the currency in New Orleans, are companies like Pentair (PNR) (water purification equipment), I.T.T. Industries (ITT) (a leader in pumping and water-treatment systems), Hughes Supply (HUG) (distributor of many products for municipal utilities and pluming and water contractors), and Lane Christensen (LAYN builder of water and wastewater treatment plants).
        Hotel/Motel/Casino Stocks: Investors quickly sold off hotel and casino stocks that had significant facilities in the stricken areas such as Hyatt and Harrah's (HET). The negative effects may already be priced into the stocks. We would be more concerned about lasting effects of sustained high gasoline prices on motel chains that benefit from driving vacationers and business travel by highways.
        Retailers: Retailers like Wal-Mart (WMT) were already complaining about the negative impact of rising gasoline prices on consumer spending before Katrina. If true, the effect will be intensified due to the additional surge in gasoline prices as well as the temporary effect of store closings in the stricken areas. Home improvement centers like Home Depot (HD) and Lowe's (LOW), will likely be the exception as they benefit almost immediately from the recovery period in the Gulf. Even when new home construction sales slow, they will also be beneficiaries of continuing home repair and improvement demand for some time after.
        Importers: There will be considerable temporary negative effects on companies heavily associated with imports to the U.S. through the Gulf ports. Chiquita Brands (CQB) is one such company that imported bananas and other fruit through the facilities at Gulfport. It quickly announced shifting of deliveries to Texas and Florida, but there will be delays and at temporarily higher costs that will affect earnings.
        Manufacturing Stocks: Without going into detail on individual stocks and industries, momentum in the overall manufacturing sector may moderate temporarily due to the macro effects of Katrina, but, since inventories are still very lean, rebuilding of stock at the factory level will offset most of the slowdown. Longer term, continued good strength in Asia, a recovery in Japan and stabilization in Europe along with a weakening dollar will be a plus for the sector. Manufacturing company margins will be more impacted by the higher energy costs, since they are much more energy-sensitive than other sectors. It will also be impacted by higher steel costs, electricity and freight costs. Some companies will be positively affected. On our coverage list, that would include Regal-Beloit (RBC) with its generator business and IDEX (IEX), again, which is not only a major pump manufacturer but also a leading provider of fire and rescue equipment."

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UPSIDE
7412 Calumet Ave., Hammond, IN 46324.
Monthly, 1 year, $239. www.upsidestocks.com.

Four picks to click
with strong fundamentals

        Richard Moroney: "While some respond to choppy markets by tuning out and doing nothing with their stocks, smart investors strive to maintain a diversified portfolio limited to their best ideas. A regular flow of new ideas is crucial to this effort, and the four new recommendations reviewed below represent top picks for 12-month gains.
        Anteon International (NYSE ANT $45) provides technology solutions and systems-engineering services to more than 50 government agencies and 1,000 customers. Revenue climbed 22% to $1.27 billion in 2004, with more than 90% from defense, intelligence, and homeland-security programs. While growth in defense spending is likely to slow, Anteon's concentration on systems upgrades, services, and homeland security programs suggest it will continue to grow. Consensus estimates project per-share profits will climb 25% to $2.03 for 2005 and 14% to $2.31 per share for 2006. Though the stock is not a bargain at 22 times expected 2005 earnings, Anteon should be able to support a premium valuation given its consistent growth and operating momentum. The stock is ranked Buy.
        Digital River (Nasdaq DRIV $38), a fast-growing provider of e-commerce outsourcing, delivered June-quarter earnings per share of $0.47, up 88% and well above the consensus estimate of $0.40. Sales jumped 47%. Operating profit margin was 33.1%, compared to 25.1% in the year-earlier period. The company builds and manages Internet businesses for more than 40,000 software publishers, manufactures, distributors, and online retailers. On June 30, the company had $322 million, or about $9.40 per share, in cash and equivalents. Digital River expects operating per-share earnings to climb 63% to $2.00 for full-year 2005, with sales climbing 40% to $216 million. At 16 times expected 2006 per-share profits of $2.39, Digital River seems cheap considering its strong operating momentum and cash position. The stock is ranked Best Buy.
        Mobile Mini (Nasdaq MINI $41), the nation's largest publicly traded portable storage company, operates a fleet of more than 110,000 portable storage units and mobile offices. With 49 branches in 29 states and one Canadian province, the company serves about 75,000 customers. Uses for Mobile Mini's storage units include retail and manufacturing inventory, construction materials and equipment, and documents and records. For 2005, consensus estimates project per-share earnings will jump 45% to $2.02. That estimate was $1.92 just two months ago. For 2006, estimates range from $2.20 to $2.42, with an average of $2.30. Applying the 10-year average P/E ratio of 21.4 to next year's expected earnings implies a target price of nearly $50. The stock, showing bullish price action, is ranked Buy.
        Taylor Capital Group (Nasdaq TAYC $39), the parent of Cole Taylor Bank, provides commercial banking, real-estate lending, and wealth-management services through 11 offices in the Chicago area. The company has carved out a lucrative niche serving closely held and family owned businesses. June-quarter earnings per share reached $0.78, up from $0.34. In the first half of 2005, total loans rose 3%, fueled by a 23% increase in real estate-construction loans. In August, Taylor completed an offering of 1.5 million common shares at a price of $36.30. For 2005, per-share earnings are expected to be $3.20, up from $2.15 in 2004. For 2006, profit estimates range from $3.09 to $3.38, with an average of $3.22. Taylor Capital, trading at a reasonable 12 times expected current-year earnings, is ranked Buy."

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GROWTH STOCK OUTLOOK
P.O. BOX 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.

Bard and Bausch & Lomb
headed for a record year

        Charles Allmon: "C.R. Bard (NYSE BCR $66.62) - Bard continues with strong growth and a record year appears likely.
        "We are pleased to report solid revenue and earnings results for the quarter. Our diversified product portfolio helped drive top-line growth and we benefited specifically from strong sales in our Oncology business," commented Timothy M. Ring, chairman and CEO. "Healthy margins and controlled spending have again positively impacted earnings this quarter. We continue to prudently invest operational savings into the business with a goal to enhance growth and increase shareholder value."
        Bard is a leading multinational developer, manufacturer, and marketer of innovative, life-enhancing medical technologies in the fields of vascular, urology, oncology, and surgical specialty products.
        Another company headed for a record year in 2005 is Bausch & Lomb (NYSE BOL $76.61).
        "We were very satisfied with our second-quarter performance," said chairman and CEO Ronald L. Zarrella," and from an earnings perspective, first- half results were a bit ahead of our expectations. Given our performance to date, and recognizing that new products and further share gains are expected to accelerate top-line growth in the second half of 2005, we have upwardly revised our outlook for the full year."
        Excluding the sales impact of the previously announced acquisition of Shandong Chia Tai Freda Pharmaceutical Group, Bausch & Lomb is now projecting full-year constant-currency sales growth of approximately 7%, at the upper end of previous guidance, which called for growth between 6% to 7%. Based on the current foreign exchange environment, currency is expected to be essentially neutral to actual-dollar full-year sales growth. Full-year earnings per share are projected at $3.50, up from previous expectations of $3.45, with the increase expected to be realized in the fourth quarter. The company indicated that ongoing product launch-related expenses and increased R&D spending will moderate earnings in the third quarter."

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

Gannett's best news
Is not in the paper

        Gannett's 99 daily newspapers have a combined U.S. circulation of 7.6 million. Its 21 network-affiliated television stations reach about 53 million people, 18% of the U.S. population. With size comes market power, and Gannett (GCI $68) should be able to continue raising advertising rates at USA Today and other large properties.
        While size matters, growth matters even more. Gannett's traditional publishing units provide sufficient cash to fund moves into specialty and Internet publications. The company's Internet sites already reach nearly 15% of the U.S. Internet audience, and that audience is key to future sales and profit growth. Gannett faces its share of challenges in the year ahead, but the reasonably valued stock, a Long-Term Buy, should reward patient investors.

Modest revenue growth

        Newspaper publishing (85% of year-to-date 2005 revenue) is a mature businesses with high fixed costs and limited growth potential. Excluding the effect of acquisitions, revenue rose 1% to $5.20 billion in the first eight months of 2005, hurt by flat national advertising sales. Broadcasting (9% of revenue) sales fell 11%, though much of the decline can be traced to a lack of political and Olympic advertising that boosted revenue in August 2004.
        Gannett's daily newspaper circulation fell 2.6% in the first eight months of 2005, reflecting tighter circulation accounting standards, a federal law limiting telemarketing, and a multiyear trend toward less newspaper readership. That trend is unlikely to reverse, forcing Gannett to become more creative in its quest for greater reach and revenue.
        Revenue from Gannett's magazines and specialty publications, which generate lower profit margins than daily newspapers, rose 9% in the first eight months of 2005. This high-growth business comprises less than 6% of total company revenue, and Gannett is likely to continue investing heavily in this area, sacrificing profit margins for top-line gains.
        The publishing giant has leveraged its stable of national and regional brands to create Internet sites that attract hundreds of thousands of visitors a day. In August, 22.5 million people visited Web sites operated by Gannett publications, up 17% from the year-earlier period. While the Internet remains a tiny piece of Gannett's business, online-advertising revenue jumped 52% in the first half of 2005. Gains in Internet market share could also help slow circulation declines, as the company said young readers visiting Web sites often end ups subscribing to a print publication.

Conclusion

        Concerns about Gannett's ability to grow sales and profits are legitimate. Profit margins, while high relative to peers, have declined in each of the last 10 quarters because of higher costs. Consensus estimates of project per-share-profit growth of 2% in 2005 and 10% in 2006, targets Gannett may be able to beat with modest operational gains and share buybacks.
        At 14 times estimated year-ahead earnings of $5.16, Gannett's forward P/E is near a six-year low. While a return to past P/E levels is not guaranteed, high-quality Gannett shares are likely to pay off over the next two to four years. An annual report for Gannet Co. can be acquired at 7950 Jones Branch Dr., McLean, VA 22107; (703) 854, 6000."

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INVESTOR'S VALUE VIEW
1212 Summit St., Columbus, OH 43201.
1 year, 6 issues, $110.

Lennar rated strong buy

       R. Scott Pearson: Lennar Corp. (LEN), a leading homebuilder, rates a strong buy
        The company operates under the names Lennar, U.S. Home, Pacific Greystone, Rutenberg Homes and others. Lennar also owns subsidiaries such as Eagle Home Mortgage, North American Exchange Co., Universal American Insurance Agency and Mortgage Company, North American Title, and Strategic Technologies, which installs underground conduit and cable/broadband services for new homes.
        Lennar operates in 20 states, from New York to Florida on the east Coast, to California, Arizona and Nevada out West. Their operation also covers most of the more populous and lucrative states between the coasts, such as Texas, Illinois, Ohio, Minnesota, Michigan, Missouri, and Colorado. Among homebuilders, Lennar probably has the longest record of consistent growth, with earnings increases stretching back to the '80's.
        On the homebuilder front we continue to remain bullish despite lower consumer confidence levels. We forecast an ongoing low interest rate environment with healthy demand for new homes. With this said, Lennar remains attractive.
        LEN just reported a 50% spike in 3Q earnings year-over-year. Additionally Lennar raised its target for full-year 2005 earnings per share to $8.10 from $7.80 after posting a record-level backlog and a substantial jump in new orders. This kind of profitability will not go away soon. Such a backlog guarantees profits for at least the rest of the year, and the extra cash that it brings will give LEN the opportunity to continue buying other builders as opportunities arise. We remain excited about the profit potential for homebuilders in general, and are particularly happy when a company with the stature of Lennar becomes available at a reduced price, as is currently the case.
        Lennar shares, and those of other builders, fell following Hurricane Katrina. There are fears that competition for construction resources (both labor and materials) will be in high demand in the hardest-hit areas, making all of these inputs more expensive for builders elsewhere in the country. And, while one might assume that homebuilders should profit from the increased demand for new homes resulting from the devastation, history has proven that this is not always the case. In fact, in situations like this, those companies operating in the destruction zone will not see significant business until many months later.
        For the moment, at least, infrastructure problems (roads, power, etc.) are still severely inhibiting the ability to do any significant work in those areas. Today's efforts are being directed at surrounding areas (like Baton Rouge), where builders are able to operate normally. So, while the reallocation of inputs will eventually affect the homebuilding market, the initial impact will be quite small. And, by the time the impact is large enough to be felt, producers will have had time to increase their production of raw materials. Thus we don't foresee any significant negative impact to Lennar's growth prospects.
        We rate these shares a strong buy.

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Ian Wyatt's GROWTH REPORT
611 Pennsylvania Ave SE., #417, Washington, DC 20003.
Monthly, 1 year, $179.95.

Focus Media and JAMDAT Mobile
positioned to be real winners

        Ian Wyatt: "In spite of the volatile market environment, this month we bring you two companies with a short history of rapid growth, and are quickly becoming favorites of small cap money managers. We view both of these opportunities as early inning opportunities. While we didn't catch either of these companies in the minor leagues, we believe both have enough upside potential to deserve coverage in the Growth Report.
        First up is Focus Media (Nasdaq FMCN), a leading out-of-home flat panel display advertising company that reaches +20 million consumers each day through its flat panel display advertising in office and retail locations throughout China's largest cities. The company offers a compelling medium for advertisers, and financial results indicate that Focus Media is gaining real traction, as marked by 128% revenue growth in the second quarter. While this may seem like an unconventional advertising model, advertisers appear to be big fans of Focus Media's ability to target demographically appealing Chinese consumers.
        Next up is JAMDAT Mobile (Nasdaq JMDT), the number one mobile gaming company in the U.S. with an estimated 20-25% market share. The company is partnered with all of the major carriers (80 in total, worldwide) to distribute its games to wireless subscribers. Chances are, if you have a BREW or Java enabled phone, you can download a game from JAMDAT today. Research firm IDC expects the mobile gaming in the U.S. alone to grow from $345 million in 2004 to $1.5 billion in 2008, with growth driven largely by new handset sales. The international market represents a significant opportunity for JAMDAT, and is expected to grow from $2.6 billion in 2004 to $11.2 billion in 2010.
        We believe both companies are positioned to be real winners in the coming quarters."

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

Mercury General: Solid balance
sheet and stable record of growth

        Joseph McKittrick: "Since 1961, Californians have traveled the highways with their faith in Mercury General Corp. (MCY). Cleverly named after ancient Roman god of travel, the company has grown to write homeowners insurance, mechanical breakdown insurance, commercial & dwelling fire insurance, and commercial property insurance. During the 1990's, expansion came as acquisitions increased MCY's home territory into seven additional states: Florida, Texas, Oklahoma, New York, Virginia, Illinois, and Georgia.
        During last year, lines of automobile insurance accounted for 90.8% of gross premiums written by MCY. Of these premiums, 76.2% came from California. The vast majority of auto policy holders have policies providing liability coverage less than or equal to $100,000 per person, with a $50,000 allowance for property damage. Special policies are occasionally written for as high as $1,000,000 per vehicle. Last year, California rated 78% of private passenger policy holders as "good drivers," with the remaining 22% falling into various higher risk categories. Policies are sold through more than 4,200 agents and brokers who work independently. In California, it is well known that much of Mercury's agents and brokers have represented the company for at least ten years.
        Mercury has used acquisitions as means for expanding its business presence into other regions of operations. As mentioned above, the company has also expanded its business to write several forms of non-automobile policies, which last year accounted for 8.6% of gross premiums written. In 1996 MCY acquired American Fidelity Insurance group, allowing it to add customers from Oklahoma and Texas. In Kansas, MCY acquired Cimarron. In 2000, Mercury acquired the rights to Elm County Mutual Insurance in Texas. In December 2001, the company began writing policies in Florida through its Mercury Insurance Company of Florida, and Mercury Indemnity Company of Florida.
        At the close of the second quarter, Mercury General reported falling profits. Earnings per share for the company came in at $1.35 compared to $1.43 during the same period in 2004. The numbers still beat Wall Street expectations which called for a lower $1.26/share. The company also announced yet another dividend increase of 16%, bringing the annual payout per share to $1.72. The first installment of the new dividend was just paid to shareholders on 9/29/05.
        Interesting Qualities to Note: MCY has assets worth over $3 billion, Mercury has approximately 3,800 employees, The company's annual dividend rose 10% from 2002 to 2003, Dividends have been paid each year since 1986, MCY is the third largest private insurer in California, and CEO George Joseph is ranked as the 283rd richest American by Forbes.
        At a recent price of $59, MCY is Undervalued with only a 3% downside risk to its low price of $57, high yield of 3.0%. From current levels the company has a 94% upside potential to its Overvalue price of $115, low yield of 1.5%. Although earnings are expected to be impacted by hurricanes Katrina and Rita, it is notable that the company has only just begun expansion outside of California. Policy exposure in affected areas is limited to automobiles and a minimal amount of homeowners policies. Investors interested in the stock will find a company with a solid balance sheet and stable record of growth. The company holds an almost unperceivable amount of long-term debt. In coming weeks shares should be bolstered by MCY's recent inclusion in the S&P 400 Midcap index. This move will cause institutions and various index funds to acquire shares, often over a short timespan, boosting prices for the individual investor."

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

Oceaneering International should
profit from high oil prices

        Ashley Bryan and Brent Sisco: "Hurricane Katrina will most likely become the most costly hurricane to ever hit the U.S. Katrina left the Gulf of Mexico in shambles and dealt a crippling blow to the nation's oil production. Katrina ripped through the Gulf of Mexico leaving 20 oil rigs damaged, missing, or afloat, and hurricane Rita has added to the destruction. As seen by the recent rapid increases in fuel prices nationwide Katrina and Rita have exposed the vulnerability of the country's energy infrastructure. Damage to rigs and refineries must be repaired as swiftly as possible to meet the ever-growing demand for oil Since Katrina damaged the nations oil operations many companies are scrambling to return their operations to full capacity. Oceaneering International, which performs inspections of pipelines and underwater infrastructure, believes that regardless of the damage to these structures it will take weeks to finish the inspections needed to bring production back on-line after Katrina. A hurricane's massive destruction offers some ample opportunities to OII because of the growth in demand for their services and hardware.
        Oceaneering International (NYSE OII $52.22) operates in the oil services industry. OII provides integrated services and hardware to companies operating in underwater, space, or other hazardous environments. OII products and services include mobile offshore productions systems, engineering and project management, manned diving, and more. The firm is organized into two segments: Oil and Gas as well as Advanced Technologies. OII has operations internationally that account for about 56 percent of their revenue.
       What makes it timely?
        OII owns and operates the largest fleet of remotely operated vehicles, which are utilized by many energy firms on their oil rigs in the Gulf of Mexico and worldwide for underwater operations, such as repairs. The U.S. government requires that after any tropical storm or hurricane an oil rig must be inspected for damages and certified as safe. OII vehicles are used to inspect and repair oil rigs after such storms occur. Even before Katrina and Rita made landfall OII was hard at work inspecting the facilities. Before the hurricane season began OII began an inspection process, which ended in August. OII's inspection program during this period is believed to be the largest of its type ever performed. OII inspection crews visually examined the coatings and structural integrity of 1,531 Gulf of Mexico platforms including over 5,000 risers for 21 oil and gas customers. OII crews are currently continuing to perform inspections related to Hurricane Katrina and Rita.
        OII stands to benefit from oil exploration and production operations in the future. The demand for oil continues to grow creating an increase in demand for exploratory services. The rising oil prices have created a trickle down effect in the oil industry. Money flows from the larger diversified oil companies benefiting from high oil prices, down to the smaller production and exploration companies to find and produce new oil wells. This could benefit OII because discovery and setup of new wells requires some of the services the firm provides. Many exploration efforts are moving into deeper waters and unheard of depths, which require the use of OII's remotely operated vehicles and subsea products.
        Besides the potential that harsh storms offer OII, investors must always consider the fundamentals of the firm. For the six months ended June 30th, 2005 the firm saw revenues increases by 24 percent compared with revenues for the same time period last year. Net income also rose in the same period with a 60 percent increase as compared to the same period of 2004. This increase is partly due to additional units being available for use in company operations leading to higher utilization rates.
        OII stands ready to capitalize on the growing frequency and intensity of hurricanes in the coming hurricane seasons. The firm should prosper from high oil prices, which have potential to create cash flow for companies that desire OII's products and services."

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

Seeking to build long-term wealth?
nail Home Depot into your portfolio

        Ingrid Hendershot: "The Home Depot, Inc. (HD $39.81) is the world's largest home improvement retailer, the second-largest retailer in the United States, and the third largest retailer on a global basis. Home Depot stores are full-service, warehouse-style stores averaging approximately 106,000 square feet in size. The stores stock 40,000 to 50,000 different types of building materials, home improvement supplies, décor and lawn and garden products that are sold to do-it yourselfers, home improvement contractors, trades people and building maintenance professionals. The company also operates EXPO Design Center stores, which sell products and services primarily for home remodeling and decorating projects.

Strong Brand

        More than 25 years ago, Bernie Marcus and Arthur Blank fired from Handy Dan, a chain of hardware stores they were running. Undeterred, they came up with an idea for a new large-volume discount hardware chain that would offer low prices and high service. Ignoring a consultant's suggestion that they name this new chain, Bad Bernie's Buildall, they wisely opted for The Home Depot name instead.
        The first three Home Depot stores were opened in 1979 in Atlanta with 200 associates generating $7 million in sales. Over the next quarter century, The Home Depot has impressively grown to become the world's largest home improvement retailer with more than 325,000 associates slated to generate approximately $80 billion in sales this fiscal year.
        Today, The Home Depot is one of the world's most recognizable brands. There are few folks in the U.S. who wouldn't recognize a Home Depot store or its orange-aproned associates. Maintaining an intense customer focus, The Home Depot is committed to offering customers the most innovative and distinctive products and services in the industry. This strategy differentiates their brand and spurs future growth.
        The Home Depot achieved record growth in the second quarter hammering out a 12% increase in revenues and a 17% rise in net income. Management affirmed its fiscal 2005 sales growth guidance of 9%-12% and increased earnings per share growth to 14%-17%. This strong growth is a reflection of the solid execution of various initiatives to improve retail stores efficiency and customer service, while expanding the business to provide top-notch service to professional contractors.

Expanding Profit Margins

       Over the past five years, Home Depot's net profit margins have steadily expanded. In the second quarter, Home Depot continued focusing on operating efficiencies and generated the highest operating margin in the company's history. Through the addition of products like Ryobi One+ power tool systems, Ralph Lauren Metallic paints, Duclane gas grills and Hampton Bay patio furniture, the company achieved a record second quarter average ticket of $57.54, a 5% increase over last year. At the end of the second quarter, HD reported an impressive 23% return on invested capital. HD's profitable business has also been a profitable investment, providing a 269% total return over the past nine years.

Reasonable Valuation

        Outstanding financial performance allows HD to continue to reinvest in their business and at the same time return billions of dollars to investors through share repurchases and dividends. Due to the company's strong free cash flow, HD's dividend has more than doubled over the last five years. Since the company's share repurchase program began in late 2002, the company has spent $8.6 billion to repurchase 250 million shares or more than 10% of shares outstanding. HD recently expanded the share buyback program by $1 billion.
        HD's EPS should approximate $2.60 this year and $2.90 in fiscal 2006. At current price levels, HD is trading for about 14 times 2006 earnings. This is a reasonable valuation for a HI-quality company with a strong brand, expanding profit margins, an active share buyback program and double-digit growth in sales, earnings, and dividends. Investors seeking to build long-term wealth should nail Home Depot into their portfolio!"

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LOOKING FORWARD
published by Friess Associates,
115 E Snow King Ave., Jackson, WY 83001
for clients and Brandywine Funds shareholders.

Analysts predict earnings will double
this year, followed by 34% growth in '06

        "Demand for oil and natural gas continues to outpace supply, and international drillers are drawing from existing reserves at a frantic pace. In pursuing a strategy that provides drillers with services that span the lifecycles of their wells, Tetra Technologies is highly leveraged to their increased activity.
        Tetra Technologies Inc. (NYSE TTI) provides a range of oilfield services, from the initial testing of new wells to their ultimate abandonment and decommissioning. The company also manufactures fluids critical to well operations and efficiencies. Its diverse customer base includes major multinational exploration and production companies.
        March-quarter earnings tripled to $0.24 per share, topping estimates. Revenue of $118 million increased 69 percent as acquisitions that closed last year boosted comparisons. Backlogged demand increased for well abandonment and decommissioning in the Gulf of Mexico as government agencies forced operators to remove old platforms. Tetra is able to acquire "sunset" properties before cash flow turns negative, generating decommissioning work and, in many cases, income from leftover production.
        In the fluids segment, steady volumes coupled with increased pricing for both calcium chloride and bromine helped drive expanded revenues and profit margins after a large competitor declared bankruptcy. Tetra is a vertically integrated producer, which means it produces its own fluids, giving it an edge as raw chemical costs climb.
        The Friess Associates team spoke with Chief Executive Geoffrey Hertel regarding synergies associated with the company's acquisition of European calcium chloride manufacturer Kemira. The chemical is costly to transport, and the combination eliminates overlapping trans-Atlantic shipping routes.
        The Friess Associates team bought Tetra at 18 times current 2005 earnings estimates. Analysts predict the company will double earnings this year, followed by 34 percent growth in 2006."

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

Wal-Mart should provide
good long-term gains

        Russ Kaplan: "Our recommendation, Wal-Mart (WMT) is somewhat controversial. Some people love the company and shop there constantly. Others will never go there to shop. We have studied this company thoroughly as we do with all of our recommendations and we understand the viewpoints of both sides.
        It is our responsibility as an investment advisory firm to recommend those stocks that we feel will provide you with good long-term gains and we feel that Wal-Mart currently falls into this category.
        Wal-Mart has fallen due at least in part to the unfavorable publicity. In 1999 it traded at over $70 per share and during 2005 has traded about 30% lower. For a financially sound company like Wal-Mart we feel that this is a great overreaction.
        In our opinion Wal-Mart is a growth stock that is trading at value levels. It is continuing to add stores in the United States, but the more exciting story is that it is opening stores oversees. This is going on all over the world and the local populations are responding positively.
        In the red-hot market of China there are 32 stores, but there are plans to open up around 400 in the next ten years.
        We also like a company where the management owns a lot of stock. This tends to discourage the kind of short-term thinking which can so harm a company. At Wal-Mart the officers and directors, mainly the Walton family, own 40.5% of the shares. This gives them a real interest in the long-term growth of the company."

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COMMON CENTS II
P.O. Box 126354, Benbrook, TX 76126.
1 year, 6 issues, $96. Supplement to Common Cents.

Buys include Diebold, Avery-Dennison,
Illinois Tool Works, and EMC Corp.

       Roland Carter's recent buys include Diebold, Avery-Dennison, Illinois Tool Works, and EMC Corp.
        Diebold (DBD) is a world leader in automated transaction systems equipment - making, marketing and servicing a product line which includes automated teller machines (ATM's) and point of sale systems for retailers. They are the leading U.S. ATM company and the leader in bank security products such as vaults and surveillance systems. In 2002 they entered the electronic voting machine business with operations now in the U.S. and Latin America. DBD has excellent, 12%, 10-year growth in sales and earnings, but they have a down quarter or two once in a while. 1990 and 1998 saw EPS down 13% and 3% respectively. Their recent quarter had revenues up 15% but EPS down about 10%. 2005 EPS will probably be about $2.65/share (+4%), but most expect 2006 earnings to reach about $3.00/share. If they come close, this should be a $60+ stock by late next year. This 0-debt jewel has bottomed at 2X book in past pullbacks, but the news just doesn't seem bad enough this time for shares to reach that level (36). DBD has the largest market share of ATM's in both China and India. Note the buy below 45 limit.
        Avery-Dennison (AVY) is the maker of a broad range of self-adhesive base materials, labels, tapes, and various office products and chemical adhesives. Last presented 2/05 in CC @ 59+ after which a -10% first quarter EPS Knocked the shares down to 49+. They roared back in the second quarter with an +23% EPS gain on a 7% sales increase. Anyway, it appears they had a hiccup, it's over, and we expect EPS growth around 10% to resume, perhaps reaching $3.30/share in 2006. AVY's 15-year average P/E is 20.2, so this is simply a chance to buy a real good company at a below-average P/E.
        Illinois Tool Works (ITW) a master list company that has seen revenues grow from $600 million in 1985 to probably $13+ billion here in 2005. They are an industrial manufacturing company, extremely well-managed, who have been on an acquisition tear these past 20 years. They've brought mainly small companies into their hold. ITW companies make numerous components, fasteners, and equipment used across a very broad swath of industries around the world. They operate in 45 countries, deriving over 43% of sales from outside the U.S. They have 37 years of dividend increases and first crossed my screen years ago while I was searching for new master list candidates. This is a really good one, and you just never get a chance to buy it real cheap. Even in 2001 when EPS dropped 17% the stock bottomed @ 49+ which was 15X 2000's record earnings. Its 2004 high was 96+ (P/E of 22). Its recent low has been near 80. We would target another leg down on the chart to the mid-70's, or a P/E 15 on 2005's estimate. 2006 should see EPS growth of near 12%, to perhaps $5.70/share. This is a good example of one that's always on my radar screen. ITW has very low debt and has paid dividends since 1933.
        EMC Corp (EMC) this $9.65 billion (estimate 2005 revenues) tech stock is basically the world leader in electronic data storage, providing a broad spectrum of offerings including software, networking, and information management. With the world using more computing power every day and with users needing to store more records and data daily, this sure seems like a good business to be in! There's fierce competition, though. EMC's 10-year chart looks like the typical high-profile tech stock. From 1997 to 2000 it rose from 4 to 104 (a P/E of 100+!), then plunged right back down to 4 by 2002. They've now regained their footing and are posting solid results. They target 15% future sales growth and Value Line thinks EPS can grow twice that figure. Their 2-year range has been 9 to 15+. If it can break above 15+ it could add several points in a hurry. They should earn $.60/share in 2006 (+20%). $3 billion in cash."

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

Merck judgment:
any lessons from history?

        George Putnam III: "A Texas jury recently awarded a judgment of $253 million to a woman who sued Merck claiming that its Vioxx pain relief drug had caused her husband's fatal heart attack. This was the first Vioxx case to reach a verdict. There are many other similar cases pending, and the verdict is likely to unleash a flood of new cases against Merck in the coming months.
        We thought it might be useful to look back at some of the analogous major litigation situations that affected particular stocks over the last few decades to see if there are any lessons that might help investors decide whether to buy or sell Merck stock. Set forth below are brief summaries of some litigation events and their effect on the principal defendant's stock over time. They are listed more or less in chronological order.
        Ford - Pinto. In May 1978 the National Highway Traffic Safety Administration ordered Ford Motor Company to recall 1.5 million of its compact Pinto model cars because of a design defect in the car's gas tank that made it vulnerable to exploding in a rear end collision. Even though there were alleged to be thousands of fiery crashes caused by the defective gas tanks, Ford emerged largely unscathed. While its stock performed poorly for several years after 1978, so did GM's, and Ford eventually had a much stronger rebound in the mid-1980's.
        Manville (and others) - Asbestos. Asbestos is probably the most prominent product liability issue of all time, and it has dragged down most of the major companies that used asbestos in their products. Ten of thousands of people have claimed to have contracted lung diseases from exposure to asbestos, and billions of dollars have been spent removing the substance from buildings. Manville was the first asbestos company to file for Chapter 11, and its stock was largely wiped out during a six-year bankruptcy (1982-88). Since then, the stocks of a number of other well-known asbestos users have suffered major declines as the companies were forced into Chapter 11, including Armstrong, Owens Corning, National Gypsum and USG.
        Union Carbide - Bhopal. In December 1984, a Union Carbide chemical plant in Bhopal, India exploded killing 3,800 people. Union Carbide's stock lost nearly a third of its value right after the accident, but within the following 14 months the stock rebounded to set new highs. Union Carbide eventually reached a settlement with the government of India in 1989.
        A.H. Robbins - Dalkon Shield. In the early 1980's pharmaceutical company A.H. Robins faced a flood of lawsuits from women who claimed to have been injured by its Dalkon Shield intrauterine device. The lawsuits caused the company to file for Chapter 11 in August 1985, pushing the stock, which had been trading in the 20's, as low as 5.50. However, the stock gradually rebounded over the next several years, and Robins was eventually acquired out of Chapter 11 by American Home Products (now known as Wyeth) in 1989 for around $38 per share.
        Texaco - Pennzoil. Texaco and Pennzoil competed to acquire Getty Oil in 1984. When Texaco won the bidding war, Pennzoil sued alleging that Texaco had acted improperly. In November 1985, a Texas jury awarded Pennzoil a $10.5 billion verdict against Texaco. The verdict caused Texaco to file for chapter 11 protection in April 1987. The initial verdict pushed Texaco's stock down to the high 20's from the low 40's. It rebounded to the high 30's before the bankruptcy filing pushed it down to the high 20's again. Texaco's stock rebounded quickly, however, reaching 47 by August 1987. Texaco settled with Pennzoil in December 1987 and emerged from bankruptcy shortly thereafter. Texaco eventually merged with Chevron in 2001.
        Dow Chemical and Corning - Breast Implants. Dow Corning, a joint venture between Dow Chemicals and Corning, produced silicon for breast implants that was alleged to be defective and harmful. A growing number of lawsuits drove the joint venture into bankruptcy in 1995, and it languished in Chapter 11 for nine years before emerging in June 2004. However, the breast implant litigation does not appear to have had much impact on the stocks of either Dow or Corning.
        American Home Products - Fenphen. In July of 1997, an article in a medical journal revealed that the diet drug fenfluramine-phentermine, known as "fen-phen," could damage the heart valves of those who used it. The article was followed by a flurry of lawsuits against makers of the drug, particularly American Home Products (which has since charged its name to Wyeth). Many of the suits were merged into a class action, which was settled in late 1999. The fen-phen litigation may have caused a few dips in American Home's stock price, but the stock's performance appears generally to mirror the price movement of other large drug companies since 1997.
        Tobacco Litigation. The major tobacco companies such as Altria (formerly known as Philip Morris) have been under legal attack since 1954. During the last half century, the companies have been besieged with individual cases, class actions and even government suits. The tobacco companies did not lose an individual case until 1988, but since then they have agreed to pay billion of dollars in damages, principally to settle a suit brought by 46 states. The tobacco stocks have had their ups and down over the years in response to litigation news, but on the whole they have been very profitable for investors, particularly those who bought on the dips.
        So what does this history teach us about Merck situation? All in all, it makes us reasonably positive about the stock. Sure, you can paint a pretty dire picture for Merck if you multiply multi-million dollar judgments by thousands of cases. But our look back over the decades suggests that Merck will survive and eventually prosper. Only in the asbestos cases did stockholders suffer over the long run, and that group of cases can be distinguished because it had much larger pools of plaintiffs and potential damages.
        There is still plenty of "headline risk" in the stock - any time Merck loses another Vioxx suit, the stock will get hit. But we think the company has more than enough assets and cash flow to assure its survival. We also find Merck's current yield of 5.5% attractive. This dividend will support the stock and compensate investors while they for the litigation concerns to subside."

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

Caterpillar and Kinder Morgan
recommended Growth & Income stocks

        Donald Pearson: "Caterpillar, Inc (NYSE NTE $55.49) manufactures construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. It operates in three segments: Machinery, Engines, and Financial Products. Machinery segment engages in the design, manufacture, and marketing of construction, mining, agricultural, and forestry machinery, including track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders, and related parts. The company was formed as Caterpillar Tractor Co. in 1925, pursuant to the merger of The Holt Manufacturing Company and the C.L. Best Tractor Co. Caterpillar Tractor Co. changed its name to Caterpillar, Inc. in 1986.
        Kinder Morgan, Inc. (NYSE KMI $95.47) provides energy transportation, storage, and related services in the U.S. It operates approximately 35,000 miles of natural gas and petroleum products pipelines, and approximately 135 terminals. Through its subsidiary, Natural Gas Pipeline Company of America (NGPL), the company owns and operates approximately 9,800 miles of interstate natural gas pipelines, storage gas fields, field system lines, and related facilities. NGPL provides transportation and storage services to third-party natural gas distribution utilities, marketers, producers, industrial end-users, and other shippers. In addition, KMI offers retail natural gas distribution services to residential, commercial, agricultural, and industrial customers in CO, NE, and WY, as well as owns and operates natural gas-fired electric generation facilities. The company is based in Houston, Texas."

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