Bull & Bear's Smarts

      Douglas Gerlach: "An upward change in the growth trajectory of a company can present one of the best investment opportunities. Accelerating growth attracts more aggressive investors who are willing to pay higher prices for a stock. Waters Corp. (NYSE WAT $45.36), a manufacturer of scientific instruments and supplies, is a well-run, reasonable growth company with new products that have the potential to improve its growth rate.
      The scientific instrument field is generally characterized by moderate growth and considerable cyclicality. The products involved are large purchases that can be deferred when budgets are tight. Within this large industry, there are some attractive segments and some good companies within those segments. Instrument companies with a focus on life sciences applications may be in a more favorable position than those focusing on general chemical analysis. Waters is one of the leaders in the life sciences area.
      The vast majority of Waters' business consists of two related product lines: high-performance liquid chromatography (HPLC) and mass spectrometry (MS). HPLC identifies and measures the chemical, physical and biological composition of materials. HPLC involves the separation of compounds that are dissolved into a solution. Different components pass through the analytical column (a plastic, glass or steel tube) at different rates as they have dissimilar chemical properties. The separated components are collected at the end of the column as they each exit at different rates. HPLC specifically uses a pump to force the compound through at a faster rate and improves the analysis time. Mass spectrometry involves the application of an electrical charge and separating and identifying components by examining the mass-to-charge ratio of the molecules involved.
      Waters is the world's largest manufacturer of HPLC instruments and consumables and has the highest market share in the United States, Europe and most of Asia. It is also one of the leaders in mass spectrometry instruments and the world's leader in slower-generating thermal analysis through its TA Instruments subsidiary.
      One of Waters' most attractive aspects is its tremendous cash flow. Over the past three years, free cash flow (cash from operations minus capital expenditures and dividends, if any) averaged 17% of total revenue. This is an exceptional rate of cash generation and gives the company much flexibility to make acquisitions, pursue new development activities or buy back shares.
      In addition to serving growth markets in pharmaceuticals and biotechnology, the company also sells to customers in the food and beverage, environmental, chemical and plastics industries, plus university and government laboratories. About 60% of revenue consists of instrument products with the remaining sales consisting of consumables and services. About 53% of sales in 2004 were to the pharmaceutical industry. Sales outside of the United States represented 64% of 2004 sales.
      We have been tracking sales of Waters' newest products and are quite impressed. Waters introduced Acquity UPLC in March 2004. UPLC is a new category which Waters describes as Ultra Performance Liquid Chromatography. Acquity offers more thorough chemical separation, faster analysis times and the potential to uncover "new levels of scientific information" compared to traditional high performance instruments. The Acquity instrument often drives sales of Waters' mass spectrometry instruments, such as the new Q-Tof Premier, and consumables. In July, R&D Magazine gave Acquity its R&D 100 Award as one of the 100 most significant innovations for "achieving new levels in performance and efficiency." Despite a high price tag, Acquity sales rose more than 50% in the second quarter compared to the first, and represented 8% of total sales. This has the potential to be a very significant product for Waters.
      As a base case, we are forecasting 15% annual EPS growth with the possibility of faster growth based on the potential for continued growth in Acquity, nanoAcquity and Q-Tof Premier sales. Five years of such growth could result in EPS as high as $3.80. Using the average high P/E of 27.8 and estimated EPS of $3.80, the price of Waters stock could rise to as high as 106. The total annual return could exceed 18%. The downside risk appears to be 34% to a price of 30, the product of the average low P/E of 15.9 and the last twelve months' EPS of $1.89."
      Editor's Note: The investor Advisory Service, published by ICLUBcentral Inc., continued its superior performance record for a fifth consecutive year, posting a gain of 14.1% for its portfolio picks in 2004, compared to a gain of 12.6% for the Wilshire 5000 Index.
      The IAS's longer-term performance has also been exemplary. In the nine years ending January 31, 2005, the IAS gained 14.1% a year, compared to 9.1% for the Wilshire 5000. Visit the web site at www.iclub.com

      NetSol is the story of three brothers from a prominent Pakistani family, who have created a truly global company. (They own over 23% of NTWK.)
      Nacem Ghauri, 48, is the chief executive officer. Formerly, he was project director of Mercedes-Benz Finance. He earned his degree in computer science from Brighton University in England.
      Salim Ghauri, 50, is president. Previously, he was a consultant for BHP in Australia. He has been influential in assembling NetSol's team of professionals.
      Najeeb Ghauri, 51, originally was CEO. Now, he's the chairman. He was a member of Atlantic Richfield's marketing group and has a BA in Management/Economics from Eastern Illinois University and an MBA from Claremont Graduate School.
      In the past year, 50% of NTWK's revenues came from software development and application sales, with 30% coming from servicing its software projects. The remaining 20% was contributed by the wireless broadband network (ISP) in Pakistan.
      Management acknowledges that 2005 was a watershed year for NetSol. Revenue is expected to be a profitable $19 to $20 million in fiscal 2006.
      On Sept. 22, the company launched a customized LeaseSoft asset-management software module for Daimler Chrysler Leasing in Thailand.
      The next day, on Sept. 23, the Pakistani subsidiary signed a partnership agreement with Oracle Corp. (through Oracle Singapore Pte. Ltd.), which designated NetSol Technologies as an official Oracle Approved Education Centre (OAEC). Office: 23901 Calabasas Rd., Ste. 2072, Calabasas, CA 91302, 818/222-9195, Fax: 818/222-9197, www.netsoltek.com."

      Joseph McKittrick: "Founded in 1888, the aluminum giant Alcoa (AA) and its history in Pennsylvania could easily lead one to reminisce about the peak of the industrial revolution, and the important role foundries and raw materials producers played in the American economy. After 117 years, the company remains on the cutting edge of technology. The company's diversified offerings are broken among five segments known as Alumina & Chemicals, Primary Metals, Flat-Rolled Products, Engineered Products, and Packaging & Consumer.
      To understand the operations of AA's Alumina & Chemicals segment, one must first understand the basics of aluminum. Alumina is the name often used for a substance also known as aluminum oxide. The element aluminum is one of the most plentiful on the earth's crust and is typically refined from an ore known as bauxite. During 2004, AA's mining and refining activities consumed a total of 40.6 million metric tons of bauxite. The company has interests in bauxite mines in Australia, Brazil, Guinea, Jamaica, and Suriname. These interests are generally leased and have expirations ranging from 2017 to 2045. Just over half of the company's annual production is typically sold under contract to third parties. We expect that the chemical portion of this segment's name will be changed shortly, as AA sold its specialty chemicals business in 2004.
      Primary Metals receives aluminum oxide directly from the Alumina segment and further refines the product into aluminum blocks, known as ingots. 90% of third party aluminum sales are for the finished ingot product. Product not sold externally is sold among the company's other operations at prevailing market prices. Complimenting the production and sale of pure aluminum ingot are complimentary operations which sell aluminum powder, scrap, and excess power from facilities.
      The supplies sold by Flat-Rolled Products will be known to the consumer. This segment produces aluminum plate, sheet, and foil. Major production focuses on rigid container sheets, which are sold to customers and used to make the ubiquitous aluminum beverage can. Sheet and plate are generally used for building, construction, and transportation purposes. Approximately 1/3 of third party sales are for rigid container sheets, with the remainder of sales coming from sheet, plate, and foil used by other industrial markets.
      Engineered Products are used by higher-end technical manufacturers. This segment produces hard and soft alloys, architectural extrusions, super alloy castings, steel and aluminum fasteners, aluminum forgings, and wheels. Customers include automobile manufacturers, airplane manufacturers, industrial gas turbine producers, and the building and construction industries. Depending on the specific product and customer, these items can be sold directly on through third party distributors.
      Packaging and Consumer rounds out AA's offerings with aluminum foils, plastic wraps, bags, plastic beverage containers, and other related food closures. Among the company's brands are Reynolds Wrap, Diamond, Baco, and Cut-Rite (wax paper). Packaging and consumer also has offerings which are used for imaging and graphic communications in the packaging industry.
      Interesting Qualities To Note: Recent market capitalization was $21 billion, AA has 119,000 employees, and Alcoa is a member of the Dow Jones Industrial Average.
      At a recent price of $24, Alcoa is in a Rising Trend with a 17% downside risk to an Undervalue price of $20, high yield of 3.0%. From current levels the company has an upside potential of 92% to an Overvalue price of $46, low yield of 1.3%. Shares of Alcoa represent a globally diversified manufacturer of raw materials. Despite having reasonable P/E ratio and dividend yield, shares could very easily return to Undervalue contingent upon a number of factors. We believe that rising energy costs will continue to hurt AA's bottom line, along with slowdowns in key customer sectors, such as the automotive industry. Investors should be vigilant for these factors to play into earnings. Shares of AA will again enter Undervalue at prices of approximately $22.25 and lower."

      Richard Moroney: "So far, the September-quarter earnings season has failed to excite investors. The average company in the S&P 500 Index has delivered 10% per-share profit growth. While the percentage of companies exceeding consensus estimates is higher than usual, the average profit surprise is smaller than usual.
      According to Thomson Financial, 54 stocks in the S&P 500 had preannounced guidance for December-quarter results by Oct. 25. Negative announcements outnumbered positive announcements by a ratio of 2.3 to 1, up from 1.7 to 1 at the same time last year. The increase in negative guidance seems limited to large company stocks, as the marketwide negative-to-positive preannouncement ratio was 1.5, similar to year-earlier numbers.
      Despite the rise in profit warnings for large-company stocks, earnings estimates for the S&P 500 Index continue to rise. Estimates have been trending mostly higher for six months. Estimates for the next two quarters and next two years continued to edge upward in October.
      Rising estimates aside, the market has not responded well to earnings news. From the end of September through Oct. 25, the S&P 500 Index fell 2.6%. While corporate profits are likely to drive stock-price movements over the next several weeks, companies that deliver solid growth can often deliver market-beating returns. Our back-test of more than 10 years of stock returns, showed that stocks with the highest profit growth in their most recent quarter tend to outperform those with the lowest profit growth.
      The Forecasts' recommended stocks are unlikely to be among the very best for profit growth, mostly because we seek a mix of growth and value. But the back-test suggests that the latest quarter's results are worth considering, and our experience suggests buying reasonably valued growers is a lucrative strategy. The Forecast listed 17 stocks that delivered solid September-quarter profits and seem capable of continued double-digit profit growth. Most trade at reasonable valuations relative to their growth potential. Four of those stocks are reviewed below:
      Aflac (NYSE AFL $47), a provider of supplemental health and life insurance in Japan and the U.S., earned $0.66 per share in the September quarter, up 16%, and $0.02 above the consensus estimate. Revenue climbed 10% to $3.67 billion, beating the consensus estimate by 5%. New annualized premium sales rose 8% in Japan and 10% in the U.S. Results benefited from a record operating profit margin in Japan of 15.1%.
      Aging populations and increased out-of-pocket expenses for consumers are driving demand for AFLAC's products. To further boost revenue and product volume, AFLAC is aggressively recruiting sales associates. For 2005, consensus estimates project per-share profit growth of 12% to $2.58. Management targets 15% growth in per-share operating earnings for 2006, followed by growth of 13% to 16% in 2007. AFLAC earns a Quadrix( Overall score of 93 - ranking it No. 2 among the 32 firms in the life- and health-insurance sector. The stock trades at 19 times trailing earnings - below its five-year average P/E of 21 and a reasonable multiple for a company poised to grow earnings at a double-digit pace through 2007. AFLAC is a Long-Term Buy.
      Biotech titan Amgen (Nasdaq AMGN $76) reported September-quarter per-share earnings of $0.85, up 33% and $0.02 above the consensus estimate. Total revenue climbed 16%, sparked by a 38% increase for anemia drug Aranesp and strong demand for infection-fighting drugs. In November, the company expects to report the results of a two year test of denosumab, a bone growth compound used primarily to treat osteoporosis in women.
      For fiscal 2006 ending June, per-share profits are expected to surge 33% to $3.20. For fiscal 2007, per-share estimates range from $3.32 to $3.89, with an average of $3.67. At 24 times trailing earnings, the shares are far from cheap. But the valuation seems reasonable, considering that over the past five years the P/E has ranged from 24 to 64. Amgen is the 800-pound gorilla in the biotech space, but only five products accounted for 95% of total sales in the September quarter. For now, Amgen is rated Neutral.
      Golden West Financial (NYSE GDW $58) is benefiting from solid loan growth, improving credit quality, and better costs controls. The company, which sells adjustable-rate mortgages (ARMs), reported September-quarter earnings per share of $1.22, up 16% and $0.03 above the consensus estimate. The loan portfolio increased at a 13% annualized rate during the period. Strict lending requirements and robust real-estate markets helped push the ratio of nonperforming assets to total assets to what the company called "historic lows."
      One risk of owning Golden West is the impact on profits from a rapid increase in short-term interest rates. Rate increases can squeeze the net interest margin, the spread between what the company earns on loans and investments and what it pays on savings and borrowings. But considering the company's steady asset growth and strong market niche in ARMs, double-digit profit growth should continue through 2007. Golden West raised its quarterly dividend 33% to $0.08 per share, payable Dec. 12. Golden West is rated Focus Buy and Long-Term Buy.
      Ingersoll-Rand (NYSE IR $38), a provider of products for climate control, manufacturing, construction, and security and safety, posted September-quarter operating earnings per share of $0.75, up 27% and $0.03 above the consensus estimate. Sales rose 10% to $2.62 billion, or 8% excluding acquisitions. Orders increased a healthy 15%. Spurred partly by price increases, operating profit margins climbed to 13.0% from 11.7% a year earlier. Higher volumes and improved operating efficiency should drive continued margin expansion.
      During the quarter, the company completed three acquisitions, and so far this year Ingersoll has purchased businesses expected to contribute roughly $600 million in annual revenue. Ingersoll also stands to benefit from repair work in the wake of recent hurricanes. Management targets full-year 2005 per-share earnings from operations of $3.02 to $3.06, implying at least 28% growth. For 2006, the company projects double-digit profit growth, with 4% to 6% sales growth excluding acquisitions. Ingersoll-Rand, reasonably valued at 11 times expected year-ahead earnings, is rated Buy and Long-Term Buy."

      Charles Allmon: "Clorox (NYSE CLX $54.47) owns one of the world's most recognized brand names, the ubiquitous Clorox( bleach found all around the world. In addition to the Clorox( brand, here are some other brand names under the Clorox umbrella: Armor All(, STP(, Brita(, Lestoil(, Liquid-Plumr(, Pine-Sol(, S.O.S.(, Tilex(, Wash'n Dri(, Glad(, Hidden Valley(, Ever Clean(, Fresh Step(, Scoop Away(, and many others.
      In his report to shareholders, Jerry Johnson, chairman and CEO, reviewed the Clorox mission in the world marketplace: "Our company had another good year in fiscal 2005."
      "We also completed the largest transaction in Clorox history with the acquisition of $2.8 billion of our stock from Henkel KGaA at a cost of $46.25 per share in a tax-free exchange. The successful execution of this transaction resulted in a recapitalization of the company, lowering our cost of capital, increasing earnings per share and, importantly, generating substantial value for our shareholders.
      "The biggest challenge we faced in fiscal 2005 was the sharp increase in energy-related costs such as oil and natural gas. This drove our raw material and packaging costs up substantially, along with other operating costs such as transportation. While we executed our cost-savings program effectively and took selective price increases throughout the year, those actions were not enough to overcome our cost pressures. As a result, we fell short of our gross margin and operating margin improvement goals for the year."
      "We also reaffirmed our position in the marketplace. It's about having No. 1 and No. 2 leadership brands in our categories. In fact, we believe, 'We are the best at building big-share brands in midsized categories.' Ultimately, this guides our portfolio and investment choices."
      "Through these efforts we concluded that Clorox has an advantaged portfolio in both the U.S. and our international markets. We believe we can effectively compete and grow with our brands well into the future.'
      "The 3Cs - Consumer, Customer and Cost - are our core business strategies:

Consumer: This strategy choice is about building world-class consumer insights capability and applying it to our innovation work and to our integrated brand-building activities.
Customer: Our customer strategy choice is to deliver to our retail customers high-impact, value-creating services, based on mutual growth and profit potential.
Cost: This strategy choice focuses specific efforts on improving productivity and enhancing margins through systemic improvements across businesses and geographics...
We introduced 19 new products in the U.S., including two new 'game changers': Glad( ForceFlex' trash bags and the Clorox( BathWand system.
We increased total market share across all categories, and became the leader in the bathroom-cleaning category.
We leveraged our Clorox( bleach and homecleaning brand equity under a successful health and wellness platform. By working with our retail customers to communicate the benefits of disinfecting to their shoppers, we helped build their business with our brands and increase overall category sales. Ultimately, this is all about making people's lives healthier.
We received our best scores ever on a well respected study of consumer packaged goods manufacturers that asks a broad range of retailers to identify their best suppliers...
We continued our progress toward improving working capital management with U.S. days sales outstanding improving from 34 to 27. It's a great example of our process-improvement efforts delivering real business results....
On the partnership front, Procter & Gamble increased its stake in our Glad joint venture to the maximum 20 percent allowed under the terms of the venture agreement."

      "In fiscal 2006, we will continue to focus our efforts on driving growth through consumer insights for our brand-building and innovation activities. We will also be very focused on mitigating the effects of sharply escalating raw-material costs. We will continue our work to improve annual consistency and our predictability."
      On 6-30-05 total assets were $3,617,000,000 current assets $1,090,000,000, current liabilities $1,348,000,000, cash and short term investments $293,000,000, long term debt $2,122, 000,000, deferred income taxes $82,000,000, shares outstanding 151,683,000, shareholder deficit ($553,000,000), positive cash flow, LIFO accounting. [Company address: 1221 Broadway, Oakland, CA 94612. (510) 271-7000.]"
      Allmon's Comments: In fiscal 2005, Clorox completed a huge share buyback (or acquisition) by purchasing from Henkel KGaA a big chunk of Clorox shares which had been owned by the German firm for some years. As noted, the price was $2.8 billion. To complete this deal, Clorox leveraged their balance sheet to the point that it wiped out the company's net worth, and left a huge negative book value. In over 40 years, I cannot ever recall seeing a deal like this. If Clorox has leveraged their future, this deal is almost tantamount to leveraging the hearafter.
      On the plus side, bear in mind that Clorox profit margins are in double digits after tax. No doubt this huge deficit will be whittled down quickly. The concern that I have is what happens in the next recession which may be no" garden variety" slowdown. In fact, it could be a worldwide economic slowdown. While Clorox sells disposable products needed on an everyday basis by consumers, buyers may purchase less of a product when a family budget is strapped.
      North America accounts for 46% of Clorox sales, their Specialty Group 41%, and International sales 13%.
      In 2006 (June), revenues might climb to $4.6 billion. Management forecasts earnings around $2.91 per share, not much above earnings in 2005.
      I'll be watching Clorox carefully as the bear market continues. Clorox has made a bundle of money for us in years past. I like their great brand name, and especially that they sell disposable products, the mark of a bona fide growth company. The big question is at what price does Clorox represent good value since they have no positive book value. In a real financial crunch, Clorox share price could be crushed, and especially if sales should flatten or decline. Let's wish management every success in climbing out of that huge deficit hole."

      Roger Conrad: "Three years ago, Sierra Pacific Resources (NYSE SRP) crashed to the low single digits. Many speculated the combination of spiking purchased-power prices and regulators' refusal to grant desperately needed rate increases would soon land it in Chapter 11 bankruptcy.
      Instead, the Nevada-based company followed a path to recovery blazed by virtually every troubled regulated utility since World War II. Management reached an accommodation with regulators, allowing Sierra to recover hundreds of millions of dollars in previously disallowed costs.
      Then it enlisted state and federal politicians to overturn attempts by Enron creditors attempts collect $300 million for a fraudulent power-purchase contract, a battle federal regulators appear ready to resolve in Sierra's favor. It slashed costs and debt, while taking over more of its own power production.
      There's still much to do. But with Moody's boosting Sierra's credit rating in October and Fitch ready to follow suit, the direction is clear. As Sierra continues to pay down debt, invest in new infrastructure and win rate increases, it looks on track to restore both investment grade credit ratings and a cash dividend sometime in the next 12 to 18 months. That means big gains for the share price.
      To this point, we've played Sierra's comeback with the company's UNITS. With these slated to convert this month, I'll now be holding the temporarily dividend-less common shares. Sierra common is a buy up to 14."

      James Goss: "Tribune Company (NYSE TRB $34.42) announced that the tax court ruling related primarily to the Matthew Bender issue went against the company.
      The ruling actually applied to two parallel situations involving two former Times Mirror subsidiaries, Matthew Bender, a legal publisher, and Moseby, a medical publisher. Times Mirror attempted to create tax-free reorganization of both subsidiaries, which were eventually sold, but the IRS disputed the tax status. Bender was the larger operation, so both the IRS and Tribune agreed to treat the Moseby situation in a manner dictated by the Bender outcome. Tribune plans to appeal the verdict, a process that could take as long as 18 months.
      While this was clearly not Tribune's desired outcome, it was also not a complete surprise, and we think it was largely factored into the price of the stock. After a delayed opening, TRB opened down $1.65 and is currently trading off $1.33.
      We are maintaining our Outperform recommendation on TRB common and feel the silver lining is that the earlier-than-expected resolution of this issue removes an element of uncertainty that had been weighing on the stock.
      Business Description: Tribune Company, based in Chicago, Illinois, is engaged in two core business lines - newspaper publishing, and broadcasting and entertainment. Operations are focused largely in major metropolitan areas, and the company has multimedia franchises in all of the nation's three largest markets. Tribune Publishing is among the top several newspaper publishers. Tribune Broadcasting is among the top television station group operators, and is the flagship station group for the WB Television Network, in which the company owns a 22% interest. Tribune Entertainment is engaged in television program production and syndication and also owns the Chicago Cubs."

      Patrick McKeough: "Our investment revolves around the goal of building an investment portfolio that will prosper in good times without doing too much damage to your finances in bad times. If you follow our approach, you'll own some stocks that appeal to growth or momentum investors, and others that appeal to value seeking investors.
      To profit as a value investor, you need to employ a variety of tools, including the price-to-sales ratio, or p/s. Sales are much harder for a company to manipulate than earnings, so a company's p/s is often more reliable than its price-to-earnings ratio (p/e).
      An attractive p/s ratio varies widely, from industry to industry and company to company, because profit margins vary widely. But it pays to keep in mind that a company needs substantial sales per share to prosper, since sales are the raw material of profit.
      Here are four low p/s stocks that are buys for long-term gains.
      La-Z-Boy Inc. (NYSE LZB $11; WSSF Rating: Average) has moved down in the last few months, as rising interest rates and fuel costs have cut sales of new furniture. That's why La-Z-Boy's p/s has dropped from 0.6 times in early 2004 to 0.3 times in October 2005.
      The company is also struggling with the effects of Hurricane Katrina. It gets most of the foam it needs for its upholstered chairs and sofas from suppliers in the Gulf Coast region, and the storm forced them to cut production. Katrina also damaged La-Z-Boy's plant in Mississippi, and increased its distribution costs.
      However, these are temporary setbacks. La-Z-Boy's earnings should improve in the next few years from its restructuring plans, which include closing plants and outsourcing some operations to Asian suppliers. It also owns one of the industry's top brands, and now aims to expand revenue by licensing its name to other products such as sleeping bags and portable beds.
      The stock trades at 14.3 times the $0.77 a share it should earn in fiscal 2006 (fiscal years end April 30). Profits could rise to $1.07 in 2007, and the stock trades at just 10.3 times that forecast. La-Z-Boy's cash flow should support its $0.44 dividend, which yields 4.0%.
      La-Z-Boy is a buy.
      Newell Rubbermaid Inc. (NYSE NWL $23; WSSF Rating: Average) has stayed in a narrow range for the past two years, and now trades just below its sales of $23.67 a share.
      However, the stock moved up recently after the company's chief executive suddenly resigned. This should not affect Newell's latest restructuring plan, which aims to close a third of the company's 80 factories. It also plans to unload some of its slower growing operations, and invest more in research and marketing.
      This is the company's second major restructuring in five years. It will cut Newell's income by between $295 million and $340 million over the next three years. By the end of the third year, it should produce annual savings of $120 million. To put that in perspective, Newell earned $104.9 million or $0.38 a share before one-time items in the second quarter of 2005.
      The stock now trades at 15.8 times the $1.46 a share it should make in 2005. That's cheap if you consider that it owns some of the top brands in the household products industry. Newell's earlier restructuring strengthened its balance sheet, so it's in a better position to handle future downturns. That should also let it keep paying its $0.84 dividend, which yields 3.7%.
      Newell Rubbermaid is a buy.
      Winnebago Industries, Inc. (NYSE WGO $27; WSSF Rating: Average) rose to $41 in 2004, but has moved down as rising fuel costs and interest rates cut demand for motor homes. It now trades at 0.9 times its sales of $30.13 a share.
      In its fourth fiscal quarter ended August 27, 2005, Winnebago earned $0.46 a share (total $15.4 million), down 16.4% from $0.55 a share ($19.0 million) a year earlier. Sales fell 18.2% to $231.5 million from $283.0 million, as deliveries fell 17%. More customers are switching to less expensive models, which generate less profit for Winnebago. The company now plans to produce more diesel-powered motor homes, which are more fuel-efficient than gasoline-powered models.
      Winnebago spent $27 million on stock buybacks in fiscal 2005, and aims to buy back $30 million more. Buybacks cut the number of shares outstanding, which pushes up earnings per share.
      The company will probably earn $1.98 a share in fiscal 2006, and the stock trades at 13.6 times that figure. The $0.36 dividend yield 1.3%.
      Winnebago is a buy for aggressive investors.
      Philips Electronics N.V. (NYSE PHG $26; WSSF Rating: Average) has also traded in a narrow range lately, partly due to lower profits from its computer chip business. However, this division accounts for less than 20% of Philips' sales and income. The stock trades below its sales per share of 27 Euros (1 Euro = $1.21 U.S.)
      In the third quarter of 2005, Philips earned 1.14 Euros a share (total 1.4 billion Euros), up 25.3% from 0.91 Euros a share (1.2 billion Euros) a year earlier. However, the latest quarterly figure included gains of 1.1 billion Euros from the sale of assets; the year earlier quarter included 635 million Euros in unusual gains. Revenue rose 5.6%, to 7.6 billion Euros from 7.2 billion Euros.
      The company is currently selling its investments in several companies, and using the proceeds to expand into areas with greater potential. Philips recently acquired Stento Inc., which helps hospitals and clinics store and share x-rays and other medical images. It also acquired a majority stake in joint venture company that makes lights that are brighter and use less energy than regular light bulbs.
      Philips will probably earn $1.88 U.S. in 2005, and the stock trades at 13.8 times that figure. However, the company spends about 10% of its revenue on research, so it's more profitable than it seems. The $0.52 U.S. dividend yields 2.0%.
      Philips is a buy."

      Konrad Kuhn: "Gene therapy is technology that uses genetic materials as therapeutic agents to treat disease. Gene therapy seeks to restore, augment or correct gene functions either by the addition of normal genes or by neutralizing the activity of defective genes. Corautus Genetics (Nasdaq VEGF) is a biopharmaceutical company dedicated to the development of gene transfer therapy products for the treatment of cardiovascular (severe angina) and peripheral vascular disease.
      VEGF is currently developing and testing a gene transfer product candidate using its Vascular Endonthelial Growth Factor-2 (VEGF-2) gene to promote therapeutic angiogenesis in ischemic muscle. There is currently no effective treatment for severe angina. The GENASIS (Genetic Angiogenic Stimulation Investigational Study) trial is the world's largest cardiovascular study in gene transfer technology. VEGF has joined with key opinion leaders, leading clinicians in the field, and with Boston Scientific to develop and deliver this therapeutic angiogenic technology. VEGF-2, a naturally occurring protein, acts as a growth factor to stimulate the migration and proliferation of endothelial cells, essential components in the creation of new collateral blood vessels. It is believed that people with severe coronary artery disease lack the ability to produce sufficient VEGF-2. When injected into ischemic muscle tissue, the VEGF-2 gene encodes VEGF-2 and thereby stimulates the creation of new blood vessels that increase perfusion to this area.
      The American Heart Association estimates that approx. 6.4 mil. Individuals in the U.S. have angina. Of these individuals with angina pectoris, about 150,000-250,000 annually are diagnosed as having refractory coronary artery disease and cannot be successfully treated with conventional cardiovascular therapies. In most cases, these individuals have undergone multiple invasive procedures and/or surgeries that have been unsuccessful. The company has targeted this largely underserved critical population as the initial candidates for their VEGF-2 gene therapy treatment, a potential market in excess of $1 bil. VEGF holds an exclusive worldwide license from Human Genome Sciences for the VEGF-2 gene for vascular disease therapies. Human Genome holds 9% equity position in VEGF. VEGF has approx. $40 mil. In cash and cash equivalents and believes that this is sufficient capital to fund operations through Q1'07. Of the 19,606,079 shares outstanding, approx. 50% are closely held.
      Boston Scientific provides at no cost the minimally invasive Stiletto' delivery catheter used in GENASIS. Boston Scientific has invested $33 mil. in VEGF directly and has made significant additional project investments to support Stiletto' engineering, development and manufacturing along with physician training and other clinical support.
      The stock has been trading in the 4 - 4-1/2 area where we would purchase for a 1st objective up into the 6-7 area, especially since VEGF's cutting-edge technology seeks to improve the underlying condition itself, whereas conventional therapies only seek to relieve some of the symptoms associated with severe angina. In addition to Boston Scientific having global distribution and marketing rights to the commercial therapy (less royalties and transfer prices - VEGF receives 1/3 of product sales), it holds a 17% equity position in VEGF. Also, Boehringer Ingelheim, a world-class and established manufacturing partner, has completed feasibility testing for synthetic pVEGF-2 manufacturing and has signed a multi-year contract to supply the gene for the Phase III study and for commercialization. VEGF platform technology has the potential for treating additional large-market diseases. Following on promising pre-clinical and early clinical studies, VEGF is in discussion with FDA regarding the clinical development protocols for its VEGF-2 gene transfer technology in a number of large, underserved medical markets, including diabetic neuropathy and peripheral artery disease (PAD). Ultimate target 9-10."

      Robert Acker: "Optical Cable Corp. (Nasdaq NMS $6.20 OCCF - rec. 10/04 at $4.53) is a leading manufacturer of fiber optic cables primarily sold into the enterprise market, and the premier manufacturer of military ground tactical fiber optic cable for the U.S. military. Optical reported net income increases of 22.9% and 133.3% for its fiscal third quarter and nine months ended July 31, 2005. While this underfollowed special situation has appreciated a respectable 36.9% from our initial recommendation at $4.53, its strong balance sheet, impressive results and encouraging chart combine to form a fundamental/technical tapestry which (in this writer's opinion) would seem to be indicative of potential for additional (and perhaps significant) appreciation.
      Optical posted third quarter net income or $391,000, or $0.07 per basic and diluted share, up from $318,000, or $0.06 per basic and diluted share, for the same period last year. Net sales for both periods approximated $11.3 million net income for the first nine months of fiscal 2005 increased 133.3% to 977,000, or $0.17 per basic and diluted share, compared to $419,000, or $0.08 per basic and diluted share for the first nine months of fiscal 2004. Net sales increased 9% to $34.1 million from $31.3 million.
      In Optical's release of September 6, 2005, Neil Wilkin, Pres./CEO noted that while OCCF's gross profit margin of 39.9% so far in fiscal 2005 and significant net income growth have exceeded expectations, an expected seasonal increase in third quarter net sales was not experienced. "We believe this was partially due to the trimming of certain future projects and possibly a temporary softening of certain segments of the enterprise fiber optic cable market. However, we will continue to take the steps we believe necessary to deliver improved sales results," said Wilkin.
      Optical Cable, which only has about 5.8 million shares outstanding, is a thinly traded and underfollowed stock. Proxy listed beneficial ownership by directors and executive officers is 6.72% and FMR Corp. is listed at 9.4% ownership. Optical has a strong balance sheet which boasts a current ratio of 4.06-to-1, an absence of long-term debt, and a book value of about $5 per share. Unless reducing extended positions continue to accumulate."

      InterActive Corp. (IACI $35.82), our sale, unfortunately illustrates the latter situation. While it remains Legg Mason's fifth-largest holding, we feel the company hasn't capitalized on the huge potential of its collection of assorted strong brand names. As a result, its market share just isn't big enough to let it compete from a position of dominance. The company owns Web businesses ranging from retailing (HSN) to financing (LendingTree) to event sales (Ticketmaster) to a search site (Ask Jeeves). But only Ticketmaster could be considered dominant. If the company had combined its brands into one portal, enabling each to feed off traffic from the others, each site could have been more effectively monetized, making the whole greater than the sum of the parts. Absent this, and especially now that Expedia has been spun off, InterActive's prospects have become cloudy, and we're selling it.
      We're replacing it with Google (GOOG $297.44), a company that pretty much epitomizes the idea of dominance. Google - currently Legg Mason Value Trust's eighth-largest holding after the fund recently accumulated additional shares - is, of course, the leading online paid search company, by far. It makes money mainly through revenues from the ads that appear on its pages. By placing ads that are relevant to a consumer's query on the same page as search results, Google simultaneously serves both the consumer, who receives additional useful information, and the advertiser, who receives measurable and cost-effective ad space. Google's AdWords and AdSense further help advertisers reach Google's vast network of users.
      Google also offers free email service, instant messaging (with voice capabilities), and a shopping network. Future plans include making the text of printed books searchable online, sponsoring citywide Wi-Fi network, and teaming up with SunMicrosystems to challenge Microsoft's hegemony in software. Sales and earnings have soared since the company's founding. Looking just at information available since Google went public in mid-2004, quarter-to-quarter revenue growth has ranged from 10 percent to 28 percent, while diluted earnings per share have grown from $0.19 a share in the second quarter of 2004 to $1.19 a share in the like 2005 quarter. Given such rapid growth, no debt, and tremendous cash reserves (more than $10 per share), Google's financials are enticing. The company has plenty of money to buy out competitors and develop cutting-edge technology through its talented and fast-growing staff of techies. Though the stock trades at a P/E above 80, its 35 percent a year growth prospects keep the valuation reasonable and make Google an attractive investment. Buy Google with a 12-18-month price target of 375."

Donald Pearson: "Bank of America Corporation (NYSE BAC $43.74) is a bank holding company that conducts its operations though its bank and non-bank subsidiaries. The Company provides a range of financial services and products throughout the United States and in selected international markets. As of December 31, 2004, Bank of America operates its banking activities primarily under three charters: Bank of America, National Association (Bank of America, N.A.), Bank of America, N.A. (USA) and Fleet National Bank. The Company conducts its business through 25,000 locations in 44 states, the District of Columbia and 34 foreign countries. On April 1, 2004, the Corporation completed its merger with FleetBoston Financial Corporation. In October 2004, the Company acquired National Processing, Inc., a public company, which is 83% owned by National City Corporation.
Mercantile Bank Corp. (Nasdaq MBWM $38.15) is a bank holding company of Mercantile Bank of West Michigan, which provides commercial and retail banking services to businesses based in and around the Grand Rapids and Holland metropolitan areas. It makes secured and unsecured commercial, construction, mortgage and consumer loans, and accepts checking, savings and time deposits. Courier service is provided to certain commercial customers and safe deposit facilities are available at all branch locations. Through a joint brokerage services and marketing agreement with Raymond James Financial Services, Inc., the Company offers its customers financial planning, retail brokerage, equity research, insurance and annuities, retirement planning, trust services and estate planning. Total deposits were $1,159.2 million at December 31, 2004."

      Richard Lehmann: "Two months on, and the havoc wreaked by hurricane Katrina is still being sorted out. However, the important thing is that the rebuilding process has begun. Short-term reconstruction is covered by emergency federal funding, but long-term development will depend on alternative financing. With a number of ideas on the table ranging from a $40 billion bank check from Washington, to an entirely self-financed recovery, the actual remedy will likely see municipalities shouldering the brunt of the bill through favorably structured debt payment plans.
      If recent remarks by the U.S. Secretary of Treasury are any indication, the federal government opposes any debt free bailout plan. With their tax bases in shambles and state governments predicting over a $1 billion loss in tax revenue, municipalities are in a tight spot. However, investors shouldn't misinterpret this as a recipe for default. Of the $15 billion muni debt identified as at risk (BusinessWeek 09/23/05), about $12.7 billion is insured. Additionally, this debt represents less than 1% of the outstanding bonds covered by the country's nine largest bond insurers, according to Merrill Lynch. Analysts agree that insurers are sufficiently diversified to weather the regional impact of Katrina. Secured muni bonds prices in the region have been gradually declining - increasing yields by up to help a point above pre-hurricane prices- but overall confidence seems to be high; buoyed by the fact that no defaults have occurred yet.
      Revenue bonds, which are prone to default even without natural disasters, may be an area of concern as it's likely many revenue-producing projects have been destroyed; nursing homes seem especially susceptible. But aside from this, the consensus seems to be that default must be avoided at all cost. The state of Louisiana alone has lined up $6 billion in cash (more than three times its debt obligation) to be used in payment assistance and Mississippi has arranged a $100 million line of credit with its development bank. With this type of insurance and government action already in place, and yields on the rise, Gulf coast municipal bonds may be a better investment than one might think."

      Featured in each issue of Investor's Digest of Canada is "Best Buys from leading analysts" column. Analysts follow as many as 20 stocks, most of which are rated "buys." Of those buys an analyst has one or two special favorites most suitable for new buying. The "Best Buys" column is devoted to those one or two favorite "best buys."
      Avi Dalfen is climbing aboard Canadian Pacific Railway Ltd. (TSX CP $48.58), Canada's oldest and second-largest transcontinental hauler of rail freight.
      "CP is introducing an integrated operating plan that should lower its operating ratio," says Mr. Dalfen, adding that the plan designed to raise CP's information technology capabilities, should enable the railway to put its assets to better use.
      Indeed, the plan is expected to improve CP's operating ratio - a measure of overall efficiency - by three to five points over the next three to five years.
      Mr. Dalfen also likes the fact that CP enjoys strong exposure to the Pacific Rim's red-hot growth. Not only does Asia now account for 40 per cent of the railway's revenue, but it stands to boost CP's 2006 earnings by $0.25 to $0.40 a share, the analyst believes.
      In fact, he sees the Asian exposure boosting CP's 2007 EPS by more than $0.40. And he forecasts additional increases if Asian markets continue to grow.
      Meanwhile, Mr. Dalfen suggests that because of strong demand for North American rail transportation, CP will enjoy pricing power in its contracts with shippers.
      Recent deals have seen the railway score price increases of four to six per cent before fuel surcharges, while an April 2005 agreement with Elk Valley Coal will give CP hefty price hikes for the base volume of coal it moves.
      For both 2005 and 2006, for example, CP will gain rate increases of 60 per cent above the prices it charged 2003.
      Overall, Mr. Dalfen believes the deal will give CP incremental revenue of roughly $100 million from 2005 to 2008 inclusive.
      For Mr. Dalfen, an analyst with Blackmont Capital, a Toronto-based investment dealer, Canadian Pacific Railway is a best buy. His 12-month target price $57.70; his earnings per share call for 2005, $3.27; for 2006, $3.80.

      From its base in Calgary, Alberta, CP offers cross-Canada freight haulage from Montreal to Vancouver and, in Central Canada, to Toronto, the Niagara Peninsula and Windsor, Ontario.
      A player as well in the U.S., CP serves Buffalo, New York City, Philadelphia, Detroit and Chicago, among other centers.
      For the three months ended June 30, Canadian Pacific's net income grew to $123.2 million, or $0.77 a share, from $83.7 million, or $0.53 a share, for the similar period in 2004.
      Total revenue was also higher, rising 10 per cent to $1.1 billion, while operating income grew 22.9 per cent to $271.1 million.
      Mr. Dalfen may like Canadian Pacific. But he also favors its arch-rival, Canadian National Railway Co. (TSX CNR $82.20), a Montreal-based transportation giant that not only crosses Canada from east to west, but traverses North America from the Great Lakes to the Gulf Coast.
      For one thing, he says, CN boasts an enormous pile of cash - something that allows it to continue buying back its shares. That bounty also enables it to keep on making strategic acquisitions.
      And although it's been a year since CN last made such heavy duty acquisitions as BC Rail and Great Lakes Transportation, Mr. Dalfen thinks it's a good bet that CN will continue to buy other similar properties as they come down the track.
      In addition, CN has led the North American railway industry in such productivity improvements as scheduled arrivals and departures for freight trains.
      Indeed, CN's rivals are not only watching it closely, but in some cases copying what it has done, Mr. Dalfen notes.
      For Mr. Dalfen, Canadian National Railway is also a best buy. His 12-month target price is $87.50; his EPS call for 2005, $5.39; for 2006, $5.75.
      Once a lumbering crown corporation, CN long since privatized, is now the most efficiently run railway in North America, having steadily improved its operating ratio from 76 per cent in 2002 to 66.9 per cent in 2004.
      For the three months ended Sept. 30, Canadian National's net income zoomed to $411 million, or $1.47 a share, from $346 million, or $1.19 a share, for the similar period in 2004. Revenue was also higher, rising 5.9 per cent to $1.8 billion."

      George Putnam III: "For years, owning a broadcast (i.e. old fashioned, pre-cable) television stations was the modern equivalent of owning a gold mine. You controlled one of a limited number of information pipelines into the home, and advertisers were willing to pay dearly to get their messages into that pipeline.
      Today, with the advent of cable television and the Internet, things are less golden for the broadcast TV industry. Not only is competition greater, but advertising spending in all media is in a multi-year slump. As a result, the broadcast TV stocks have been beaten down.
      We have no particular insight into when advertising revenues will bounce back, but we suspect there are some good values in the broadcast television sector. Investors have scorned the industry for so long - many of these stocks peaked in 1998 - that it has virtually fallen off the investment radar screen.
      In fact, it has become difficult to even find pure broadcast television stocks. The major television networks are all buried within much larger conglomerates. (ABC is part of Disney; CBS - Viacom; NBC - General Electric; Fox - News Corporation). And many of the television stations themselves have been bought up by newspaper or other multi-faceted media companies.
      Some of the purer plays in the broadcast TV sector are:
      Acme Communications (ACME $3.90) owns nine WB affiliated television stations. The recent pessimism in the broadcast sector has hit the value of WB affiliates hard, and ACME stock recently traded at an all-time low. Acme's cash flow is negative, but it appears to have plenty of value in excess of its debt.
      Belo Corp. (BLC $21.09) owns 20 television stations, four daily newspapers and interests in several cable news channels. It has a solid balance sheet and has been one of the less volatile stocks in the sector.
      Fisher Communications (FSCI $47.69) owns 9 network affiliated stations and 27 radio stations in Washington, Oregon, Idaho, and Montana. The company has very modest debt, and its relatively small size makes it a possible acquisition target.
      Gray Television (GTN $8.99) owns 31 network affiliated television stations and five daily newspapers. Like Fisher, Gray is a relatively conservatively financed company, and its small size makes it an attractive acquisition candidate.
      Hearst Argyle (HTV $23.81) is the largest (by market cap) pure play television company with 25 network affiliated television stations in major markets across the United States. It is conservatively financed and controlled by a trust. Earlier this year there was speculation that the trust was going to take the company private, but so far, no transaction has materialized. Its stations represent some of the best stand-alone television assets in the country.
      Lin Television (TVL $12.59) holds a variety of television assets including 23 stations in major markets. It also owns a majority interest in NBC Universal, which is a subsidiary of GE. Lin was formerly owned by a private equity firm, and it still has a complex and highly leveraged capital structure which makes the stock riskier and difficult to value.
      Nexstar Broadcasting Group (NXST $4.45) is based in Texas and it controls 29 television stations and provides services to numerous others. Its balance sheet is highly leveraged, which increases the volatility in the stock.
      Paxson Communications (PAX $0.42) owns 60 stations as well as programming assets. Founder Bud Paxson recently took the risky step of severing all of the company's network affiliations in order to position it as an independent television network. The company is highly indebted and by some accounts may be insolvent. As a result the stock is very speculative.
      Sinclair Broadcast Group (SBGI $8.41) owns or operates 62 television stations in 39 markets across the U.S. Its stations are smaller than the stations owned by other companies mentioned in this article. Sinclair has a highly leveraged capital structure, but its cash flow appears adequate to service its debt.
      Young Broadcasting (YBTVA $2.83) owns 10 network affiliated stations in major markets across the country. It also owns one large independent station in the San Francisco market which was formerly an NBC affiliate. Young has an ongoing feud with NBC, and has suffered as a result. The company is highly indebted, and its cash flow is insufficient to cover its debt service. Although the value of Young's assets is probably greater than its debt, the company may be forced to restructure, which would hurt the stock."

      Joseph Parnes: "Hot Sectors: Internet, transportation, wireless services, air freight, invest banking/brokerage, semiconductors.
      Cold Sectors: Reits, automobile, integrated oil/gas, Hmo's, drug retail, systems software.
      Joseph Parnes' current long positions include Sandisk (Nasdaq SNDK $62.13) and Scherring-Plough (NYSE SGP $19.81).
      Sandisk the flash memory titan reported 3rd quarter earnings of 55c/shr vs. street's estimate of 35c/shr. With sales soaring 44%. Beneficiary from consumer trendy products: digital cameras to mobile planes, to portable drives. The negative sentiment from analysts has created short positions boosting the price on a 20% rally to new highs. Retesting support @ 10 day and 20 day moving averages a possibility. Volatile. Buying range: 60-62, Near term objective: 66-68, Inter med objective: 72-74, and Stop loss: 55.
Scherring-Plough the pharmaceutical Co. reporting an improved 3rd quarter registering the fourth consecutive quarter of strong sales growth and its third consecutive quarter of higher earnings. All due to increased sales for Pegintron, Remicade, Temodar and Rebetol. Sale of Vytorin and Zetia: cholesterol drugs in partner with Merck & Co. /mrk/up to $616 mil from $340 mil. Buying range: 19-21, Near term objective: 23-25, Inter med objective: 28-30, and Stop loss: 18."

Hughes Supply Inc. is a distributor of construction, repair, and infrastructure products. The firm mainly supplies the Southeastern and Southwestern United States with 503 branches in 40 states. Hughes is organized into six segments: Plumbing, and Heating, Ventilating, and Air Conditioning (HVAC); Industrial Pipes, Valves, and Fittings; Electrical; Utilities; Water and Sewer; and Maintenance, Repair, and Operations (MRO). During the fiscal year 2005 Hughes' sales grew by 36 percent and net income increased by 114 percent year over year. After taking out increases from acquisitions sales still grew organically by about 15 percent. Hughes also continues to push for growth with a wide array of acquisitions in all areas of its key businesses. Hughes recently completed the acquisition of TVESCO Inc., a distributor of electric utility and electrical products in the Tennessee Valley region. This will increase its geographic expansion of the utilities business into the Southeastern U.S. Currently, the firm is also implementing information technology systems that will help to streamline the supply chain and collect data from all aspects of the business. The technology system will be successful in changing the firm's operation from 46 different operating systems into one integrated platform.

Readers of Ruminations of the Contrary Investor know that two of our investment themes involve identifying companies that may benefit from continued water scarcity and extreme weather. Hughes is able to take advantage of both themes through its water and construction supplies business segments. The firm will benefit from the hurricane destruction through required building material sales for reconstruction efforts. Many climatologists agree that this year's unusually strong and busy hurricane season will become the norm for years to come based on a variety of global climate factors. If these strong hurricanes continue to make landfall, Hughes could experience higher sales volume in the coming years.
The water related business is already a large part of the Hughes business and will be equally important in the future with the growing need for new water infrastructure in much of the Eastern U.S. The water related business segments accounts for 35 percent of the firm's annual sales. This area will continue to be an important part of Hughes' business since there is projected increase in future spending on the U.S. water infrastructure. A large portion of the eastern U.S. has an aging water infrastructure that is in need of an upgrade. Replacing these water systems will produce steady sales for Hughes water and sewer business. According to a 2002 report by the Congressional Budget Office federal, state, and local governments will need to spend approximately $300 billion to repair or replace aging water infrastructures over the next decade. In fact, infrastructure business represents 20 percent of fiscal year 2005 annual sales. The water business should further be driven by residential and commercial building growth, which will require new water infrastructure.

The firm's fiscal year 2005 was the best year in company history. The firm recorded record revenues representing strong organic growth, strategic acquisitions, and completed technological and operational improvements. Net sales for building materials in 2005 grew by 40 percent compared to sales for 2004. This increase was driven by growth in building projects, a large portion of which is attributed to rebuilding of damaged property from hurricane Ivan that hit Florida in 2004. Hughes construction related products make up about 50 percent of the firm's annual sales. The company is well positioned to benefit from the reconstruction efforts from the hurricanes because of its existing infrastructure, which is in place to serve consumers in the effected regions. Reconstruction efforts from this year's hurricanes are expected to begin in full force by fiscal year 2006. Congress has already granted over $60 billion in disaster relief funds to hurricane victims. Based on insurance analyst estimates, the total cost of the damage caused by Katrina alone is estimated to be between $25 and $100 billion.
Hughes is a market leader in the wholesale building materials industry and is also well established geographically in high-growth markets. The company is in 14 of the 15 fastest growing states, such as Florida, Tennessee, and Texas, which represent 76 percent of the firm's sales for 2005. This could serve as a hedge against the cyclical nature of the construction industry, which is largely influenced by broad economic factors."

      Roland Carter's recent buy recommendations are Cree, Inc; Dell Inc; Intel Inc; Lubrizol, and Disney.
      "Cree Inc. (OTC CREE) is the smallish ($400 mm annual sales) maker of LED's (light emitting diodes) that we've liked for some time and recommended before. When we see another smaller growth stock such as our Sandisk take off like a rocket and become too expensive to keep buying we'll simply come back and buy some more CREE that's down. Their September quarter EPS were down about 22%, but they've had down quarters before. That's the time to buy. They continue to announce impressive technological developments. Two of their founders along with two former CREE colleagues are forming a start-up company to use CREE's LED's and concentrate on LED lighting fixtures for larger commercial purposes than the current uses in cell phones, other backlighting, and low illumination areas. These will be light bulbs that will last 20 years' while using maybe 1/10 the energy of an incandescent. Exciting.
      Dell Inc. (OTC DELL), recommended last month @ 34+, we're in there buying on this week's drop to 29+. The negative news was a forecast of slightly lower third quarter revenue and EPS at the low end of the previous $.39 to $.41 guidance. $.39 will still be +18% from last years record level. They should still earn $1.55 in 2005. Below 30 is looking like a great bargain on this powerhouse, still growing @ 15%-20%. There should be at least 10-point move back up here within a year. That's 30+%.
      Intel Inc. (OTC INTC), while we're on tech stocks, don't forget this other leader, now back down to a nice buy point. INTC has big technical support in the 22-23 area. We'd expect a move in 2006 to the 34 or 36 level which were on the peaks in 2003 and 2001. EPS estimates are $1.43/share for 2005 and $1.61 for 2006. Buy INTEL in the low 20's to hold or for a 30%-50% trading gain within a year or two years at the most.
      Lubrizol (LZ), we've presented this mid-cap many times in the past. They are a world leader in lubricant activities for engines, transmissions, etc. We present LZ here this month for the simple reason that @ the 40-42 price area we've bought a lot of it. Usually the more investors read about the market the more stocks they see presented as buys. It can become confusing and overwhelming, so sometimes we just go back to an old friend we know something about. We believe LZ is a very good company at a good price. (P/E of 14) that won't get you in bad trouble. It should offer perhaps 50% upside within a year or two. It appears their large 2004 acquisition (Noveon Int'l - the specialty chemical operations of the old Goodrich company) will put LZ firmly back on track for 10%+ earnings growth going forward.
      Disney (DIS) Again, this blue-chip is one of the world's great entertainment and media companies. After a few years of stumbles, things seem to be coming back together at DIS. Record sales, earnings, and greatly improved profit margins, along with management discord now behind them and a lot of steady performers in their stable should put DIS back on the buy list of many. This stock has been a high P/E glamour stock more than once in its history. If they can show some continued 15%-20% EPS growth don't rule out a P/E of 30-40 again. They also have a lot of what the multitude of new "providers" of entertainment want and need - content. The race is still on for the telecom/wireless/TV operators to be able to deliver anything, at anytime to anyone almost for free. It's no secret that due to this race owners of legacy "content", i.e. movies, music, TV footage, etc. have valuable assets. Even though DIS is huge - about $32 billion in revenues - we wouldn't rule out a takeover targeting their archives of content."

      Charles Allmon: "Procter & Gamble (NYSE PG $55.99) hardly needs identifying as a great consumer products firm with numerous brands, each drawing over a billion dollars in sales. I do not know of any company which can match that.
      On August 9, PG's dynamic A.G. Lafley, chairman, president, and CEO, had this notable comment for shareholders: "Four years of solid performance is a good start - but each time we add another year to P&G's track record of consistent growth, we remind ourselves that the hard work is still ahead. Our commitment to delivering reliably year after year resulted in another strong year of growth in fiscal 2005."
      "With the planned acquisition of Gillette, roughly half of P&G sales will come from Baby, Family, and Household, and half will come from Beauty and Health. P&G's lineup of billion-dollar brands in Beauty and Health, and 12 billion-dollar brands in Baby, Family, and Household."
      "About half of P&G sales come from North America and half from international markets. Ten of the top 16 countries are billion-dollar markets - countries in which we generate a billion dollars or more in P&G sales each year."
      "Nearly half of P&G's top 10 retail customers sell a billion dollars or more each year in P&G products. We have grown volume 9% a year on average over the past three years with these billion-dollar customers, and 9% with the top 10 customers worldwide. In addition, we have delivered high-teens volume growth on average in high-frequency stores common in developing countries."
      "P&G aspires to be the leading consumer products company in sales, profitability, market capitalization, shareholder return, and - particularly important - in each of our core strengths. We are creating sustainable leadership advantages in branding, innovation, go-to-market capability, and scale - and we aspire to be the industry best in each area."
      "Gillette will accelerate the shift of P&G's business mix toward faster-growing, higher-margin, more asset-efficient businesses: beauty and health. We are bringing together many of the industry's most successful brands; with Gillette, P&G will have 22 billion-dollar brands."
      "No other consumer products company is creating entirely new businesses at the rate we are. We have generated nearly $5 billion of retail sales in categories where we did not compete or that did not exist four years ago."
      "Completing the integration of Gillette is a key challenge. We've identified $1-$1.2 billion in cost synergies. We remain confident we can achieve these synergies while integrating our companies and, importantly, keeping P&G's and Gillette's existing businesses healthy and growing."
      On 6-30-05 total assets were $61,527,000,000, current assets $20,329,000,000, current liabilities $25,039,000,000, cash and cash equivalents $6,389,000,000, long term debt $12,887,000,000, deferred income taxes $2,894,000,000, shares outstanding 2,472,900,000, shareholder equity $17,477,000,000 ($7.07 per share), return on shareholder equity 39.6%, positive cash flow. [Address: P.O. Box 599, Cincinnati, OH 45201.]"
      Allmon's Comments: While PG cannot match Wal-Mart in total sales, they leave WMT in the dust when it comes to profit margins, almost 13% after tax. Without question this is an extraordinary company, albeit they leverage their balance sheet, which can operate in reverse when times are tough. A November 1 news release indicates debt far in excess of shareholder equity, courtesy of the Gillette deal. Hopefully, PG will quickly reduce this burden.
      Nevertheless, PG knows how to use their leverage for top results. The Gillette merger may help to improve an otherwise so-so balance sheet.
Meanwhile, I would look for revenues to hit $60 billion in 2006, without benefit of Gillette. Management forecasts 2006 earnings in the $2.54-$2.60 range, up a tad from 2005. I also would look for a dividend boost again, perhaps to $1.18. Return on shareholder equity is a huge 39%, thank to leverage.

      Gregory Spear: "The threat of avian flu (H5N1) is not something to take lightly. The virus is already having catastrophic consequences for small farmers and poultry breeders in Asia. Should the pathogen find a way to mutate into a human-transmissible form, it would mark a critical bifurcation point in this complex, evolving story, potentially unleashing an Armageddon-like cascade of infection and death that would spread around the globe in three months time. According to the World Health Organization, which has taken the lead in organizing a global response to this threat, should this natural bioterror event occur during the current flu season, little could be done to stop it.
      By this time next year there will be more epidemiological bulwarks and early warning systems in place, but no one has ever been able to contain an outbreak of influenza on a global scale and quite frankly, we doubt that the world will be successful this time. WHO believes that in regard to a pandemic, it is a question of when, not if. The key factors will be how lethal the virus is when it actually becomes human-transmissible, how responsive it is to treatment and how prepared we are to deliver treatment in a timely manner. Vaccines were available for the 1957 and 1968 pandemics, but they arrived too late in the respective regions to have an impact.
      We are in the pre-pandemic period at this time, during which certain stocks present speculative investment opportunities. This phase could last a few more months or a few more years, as H5N1 has been around since 1997. The problem is that like a tropical storm that eventually turns into a hurricane, the virus is getting stronger and stronger as time goes by. Should an actual pandemic of a lethal avian-derived influenza begin, subscribers would be well advised to take aggressive steps to protect financial assets (as well as their families, by assuring they are near a vaccine supply). In our sister publication, Spear's Security Industry Analyst (SSIA), we discuss this situation in detail. One of our profiled stocks recently is Cepheid (CPHD) one of the original SSIA recommendations back in 2001.
      During October, the possibility of a global influenza pandemic driven by a possible mutation in the H5N1 avian influenza virus began to make the headlines. The media coverage reached a fever pitch last week, when President Bush further validated the legitimacy of the issue by proposing $7 billion in emergency funding to Congress, followed on Wednesday with the Department of Health & Human Services announcement of their avian flu program. Of course, many of the micro-cap avian flu stocks that had rallied on the news hype lost altitude thereafter in a typical sell-the-news reaction. Most are still falling. One, however, has been going up every day. That stock is Cepheid.
      Cepheid develops fully-integrated systems that perform fast DNA and RNA analysis for the life sciences and homeland security markets. Their systems enable rapid, sophisticated genetic testing for the presence of pathogens by automating otherwise complex manual laboratory procedures. Based on state-of-the-art microfluidic and microelectronic technologies, Cepheid's systems integrate a series of complex laboratory steps in a proprietary test cartridge designed to detect a specific bacteria, virus or other biochemical agent. The company has focused their efforts on those applications where rapid genetic testing is particularly important, such as infectious disease, cancer and biothreat testing. They handle the anthrax testing for the US Postal Service, for example, where nearly 1.5 million anthrax tests have been with no false positives.
      Cepheid also makes test kits for influenza and pneumonia. Their influenza test will detect avian flu and may be used to help track the spread of the disease. Because Cepheid's technology is DNA based, they have a shot at developing a fast influenza test that is specific to H5N1. That would be a major catalyst for this company's stock.
      Product sales for the quarter ended September 30, 2005 increased 43% to $19 million, and that was not a fluke. Sales for the last nine months were up 90% to $58 million. While profits are not there yet (the company is burning about $3 million a quarter) they have about $40 million in cash to get them over the hump. The stock is up about 50% in the last two weeks, so we expect a pull back to start any day now. Averaging-in over several weeks would be a reasonable strategy to be sure you are not left behind by a continued rally, and to take advantage of any pull-backs."

      As a result of HouseValues (Nasdaq SOLD) magnificent historical growth, and the long-term prospects for the stock, Ian Wyatt added the company to the Growth Report portfolio.
      "HouseValues is a leading provider of advertising and marketing services throughout the U.S. HouseValues allows realtors to connect with home buyers and sellers in their local area, and provides realtors with customer leads and online customer relationship management solutions that allow the realtor to convert those leads into customers. The company offers a vertical lead generation play in the real estate business, and we believe it is positioned for continued growth. While some investors may have concerns that this business would dry up if the much anticipated real estate slowdown comes to fruition, history shows us that in times of slower home sales, realtors actually are more aggressive with their advertising. We therefore believe HouseValues is well positioned to continue its growth in either a booming real estate market or if there is a slowdown or slight correction.
      We are initiating coverage with a Buy rating and a 12-month share price target of $22. Our share price target represents a price to earnings multiple of 28-times 2006 consensus EPS, plus the $2.00 per share in cash on hand. While this may appear high, the price to earnings multiple is actually a discount to the company's expected revenue and EPS growth from 2005 to 2006. With our share price target representing a 57% increase over the recent share price of $14, we would be buyers of HouseValues at this share price."