Stock Picks Stock Market Investing Digest

"Unbiased Advice from America's Top Investing Newsletters"

Share this page with a friend
Home
Stock Blog
About Vital Stocks
Whitelist Us
Privacy Policy
Testimonials
Subscribe
Stock Newsletter Past Issues
Stock Market Articles
Stock Blog Hub
Search
Stock Links

 

 
 
 
 
 
 

 

 

  

 

 

VitalStocks.com Professional Investing Newsletter Digest

"Unbiased Advice from America's Top Investing Newsletters"

Saturday, July 22, 2006
Volume 7, Issue 7

In This Issue:

1) Current Market Metrics - Mutual Fund Flows
2) Recent Blog Research Features
3) Viewing the Market
    A)
Don't get too bearish
    B) Is the Economy Running Out of Steam?
4) Feature Stock #1 - Yahoo! (YHOO)
5) Feature Stock #2 -
Forest Laboratories, Inc. (FRX)
6) Additional Stocks - Worth a Further Look
    A)
Morgan Stanley (MS)
    B)
OMI Corporation (OMM)
7) About VitalStocks.com
8) DISCLAIMER:  Use of this newsletter signifies your acceptance of this disclaimer.

 RSS Feed available: Fresh content each weekday http://feeds.feedburner.com/VitalstocksInvestingNewsletterDigest

This issue sponsored by...
==============================================

Change Your Strategy Now! No More Mistakes

If you want to insure every position from loss, average 50% ROI per trade, and generate triple digit annual returns, then attend SpreadTrade's complimentary class. Learn how to profit from any market when you qualify for this important class.

==============================================

1) Current Market Metrics:

- NEW YORK, July 20 (Reuters) - Investors pulled a net $5.25 billion from equity funds in the week ended July 19, exceeding the prior week's outflows of $920 million, TrimTabs Investment Research estimated on Thursday.
Full Article

---------------------------------------------------------------------

Independent Data on Fund Flows
Data As Of: 19 July 2006

- Including ETF activity, Equity funds report net cash outflows totaling -$5.839 billion in the week ended 7/19/06 with Domestic funds reporting net outflows of -$4.999 billion and Non-domestic funds reporting net outflows totaling -$840 million;

- Money Market funds report net cash inflows of $6.581 billion;

Source (Much more information available): http://www.amgdata.com/

>>> Back to Table of Contents <<<

==============================================

Please support us - visit our blog and share an article with a friend.

2) Recent Research Articles - Actionable investment research and commentary, unedited, straight from the pros.  (Click to read a post)

2A) (PHRM) - exceeded earnings estimates in eight out of the past nine quarters, with each of the positive surprises exceeding 20%:

http://www.vitalstocks.com/blog/2006/07/phrm-exceeded-earnings-estimates-in.html

2B) (CMTL) - strong history of topping analysts' estimates, having done so for an amazing 13 quarters in a row:

http://www.vitalstocks.com/blog/2006/07/cmtl-strong-history-of-topping.html

2C) (EYE) - Advanced Medical Optics has risen about 35% since May 31, 2005 and set new highs on Tuesday:

http://www.vitalstocks.com/blog/2006/07/eye-advanced-medical-optics-has-risen.html

2D) (MTLM) - company surprised to the upside by an impressive 28.4%:

http://www.vitalstocks.com/blog/2006/07/mtlm-company-surprised-to-upside-by.html

==============================================

3) Viewing the Market:  Financial analysts / journalists comment on the current stock market and future direction.

3A) Don't get too bearish

It is easy right now to abandon the notion that the bulls have any chance at holding the long-term primary trend line. Despite several bad days, the long-term primary trend was tested hard. The risk of the war spreading into Syria and Iran and involving the whole Middle East is extremely threatening and yet the long-term primary trend held.

Before you go and short the stock market up to your eye balls and prepare for Armageddon, let's look at what the bulls may be thinking and pondering. I have argued for months that the Fed has maintained a pattern of expanding one quarter and then contracting the next. The Fed has maintained this quarterly pattern since 2003. Based on this pattern we should expect to see the money supply, or liquidity, start to grow. And that is exactly what we are starting to see.

We need to be careful to not get too bearish here if we start to see a zooming rate of change in the money supply. An expanding money supply is what expands the economy. I remember one of the biggest surges in the money supply occurred just before our military attack Iraq in 2003.

Short cycles are now deeply oversold, suggesting a bounce could take place any time now. Fear is approaching extremes again - often a prelude to a rally advance. Let's see if the market continues to hold here or not.

Stocks that Could Double in a Year

Smith & Wesson Holding Corporation (SWB) is the largest manufacturer of handguns in the United States and the largest U.S. exporter of handguns. The Company manufactures revolvers, pistols, and related products and accessories for sale primarily to gun enthusiasts, collectors, hunters, sportsmen, protection focused individuals, public safety agencies and officers, and military agencies in the United States and throughout the world.

Meadowbrook Insurance Group (MIG) is a holding company organized as a Michigan corporation in 1985. The Company was formerly known as Star Holding Company and in November 1995, upon acquisition of Meadowbrook, Inc. (“Meadowbrook”), they changed their name. Meadowbrook was founded in 1955 as Meadowbrook Insurance Agency and was subsequently incorporated in Michigan in 1965.

On the Stealth Stocks Watch List

TETRA Technologies, Inc. (TTI) operates as an oil and gas services company worldwide. It manufactures integrated calcium chloride and brominated products, and supplies feedstocks to energy and other markets.

Interstate Hotels & Resorts, Inc. (IHR) operates as a hotel management company in the United States. It operates in three segments: Hotel Management, Hotel Ownership, and Corporate Housing. The Hotel Management segment manages hotels under various brand names, including Marriott, Hilton, Sheraton, Westin, Radisson, Doubletree, Embassy Suites, Wyndham, and Holiday Inn

Chaparral Steel Company (CHAP) produces structural steel and steel bar products in North America. Its structural steel products include wide flange beams, channels, piling products, and other shapes.

Courtesy:
http://www.stealthstocksonline.com

>>> Back to Table of Contents <<<

==============================================

What do we pick?

VitalStocks newsletter presents the two best ideas from the commentary of the week.  Here is the secret:  We take all those ideas and compare each stock to various industry averages.

Professionals pay thousands of dollars per year for access to this information.  Our publishers feel some investors need to take a test drive before purchasing the investing newsletters of their choice.

Submit all comments or ideas: webmaster@vitalstocks.com

==============================================

3B) Is the Economy Running Out of Steam?

Kelley Wright, editor of the Investment Quality Trends newsletter, doesn’t believe the geopolitical problems are having the biggest impact on the market. Instead, it may be that the market is finally becoming aware of the bearish trends it has been trying to ignore. In this featured expert, Wright offers his investment outlook and a pair of stock profiles.

Investment Outlook from July 14

Why are the markets really declining, except for oil and gold of course? Kelley Wright’s view is that the Street is starting to acknowledge that the growling noise they have been hearing is coming from the big bear in the living room they have been trying to pretend isn’t there.

Also, despite the conventional wisdom that The Pause is finally here, Wright suspects the Federal Reserve will continue to raise interest rates, and it may continue to do so even after the meeting in August. The fact that the bond market is signaling enough already will fall on deaf ears until something breaks. By all indications that something will be the housing market, unless of course the stock market joins in as well.

In any event debt is becoming more expensive. The question that hangs out there is will there ever be a point at which the consumer capitulates and cries uncle?

What isn’t in doubt is the mounting evidence that the U.S. economy is finally starting to run out of steam. Home Depot (HD), in Wright’s opinion the new proxy for the US economy, has been taken out and shot as can be witnessed by its decline to lows not seen for two years. In question is if this is the housing slump moving to secondary positions such as HD and Masco (MAS), or if shareholders anger over the CEO’s compensation and the underreported fact that HD’s application to create a bank a la Wal-Mart (WMT) has run into seemingly intransigent opposition in Congress.

At the time of this writing it appears that whatever the catalyst HD is poised to offer an even higher dividend yield. While the IQT parameters of Undervalue and Overvalue dividend yields are repetitive over significant time periods, Wright would remind subscribers that these levels are not inviolate. Indeed, both the markets in general and individual stocks can move above and below these repetitive levels during periods of excessive emotion and volatility. As for the Select Blue Chips that occasionally offer a dividend yield that exceeds their historic level of Undervalue, more often than not this proves to be an exceptional buying opportunity when viewed from the luxury of hindsight at some point in the future.

Underlying all of the above is that crude oil doesn’t look like it will be declining below $70 anytime soon. To add insult to injury, Wright’s contacts in the futures markets have shared tales of some very interesting buying taking place in the crude oil pits.

One has to question when and if these factors will take their toll on corporate earnings. The Big Money appears to think the time is now considering how the Street has been reacting to the early earnings announcements. We’ll know more next week when earning’s season kicks into high gear.

In conclusion none of the above is new news; Mr. Market may just be starting to care though. In Wright’s experience, this can make the Fourth of July fireworks look like sparklers.

Courtesy: http://www.zacks.com/experts/featured/view_article.php?art_id=2548&newsletter_id=15

>>> Back to Table of Contents <<<

==============================================

Change Your Strategy Now! No More Mistakes

If you want to insure every position from loss, average 50% ROI per trade, and generate triple digit annual returns, then attend SpreadTrade's complimentary class. Learn how to profit from any market when you qualify for this important class.

==============================================

4) Feature Stock #1 – Yahoo! (YHOO)

Outlook

We believe as a leader in branded advertising, Yahoo! (YHOO) will be a prime beneficiary of the shift in advertising spending from traditional media to online media. Yahoo has established itself as a leader in Internet video and has grown traffic through upgrades to its existing pages and the launch of new ones. Although investors have been disappointed in recent results, we believe growing traffic will impact the bottom line over the next year. We therefore reiterate our Buy rating on Yahoo with a six-month target price of $40.00.

Key Points

Yahoo! Inc. owns and operates one of the most trafficked Internet destinations worldwide. In addition to search, the company also owns and offers more content than its competitors. The Company's revamped home page and new offerings, primarily Yahoo! Answers, have driven increasing traffic growth.

The online advertising market is expected to continue to grow more rapidly than the overall advertising industry as it is currently under-represented as a percentage of media budgets relative to its share of the media market.

Yahoo! is well-positioned for the emergence of Internet video, which we believe will be a significant contributor to advertising revenue over the next year. Through its agreement with FIFA, Yahoo! streamed over 138 million video highlights of the World Cup.

Yahoo! has launched its search monetization initiative with improved content and greater relevance as well as improvement of the advertiser experience. Over the longer-term, we believe that revenue growth will follow.

Overview

Yahoo! Inc. (YHOO) owns and operates one of the most trafficked Internet destinations worldwide. It offers a comprehensive array of branded online products and services to consumers and businesses across the globe. As one of the first online navigational guides to the World Wide Web, Yahoo! Has become an Internet leader in terms of traffic, advertising revenue, and user reach. Its offerings are broadly classified into four areas: Search, Marketplace, Information and Entertainment, and Communications and Connected Life. The company provides users access to a wealth of information and a broad range of services. It also enables advertisers to reach a demographically diverse audience. The company provides both no cost and fee-based services to its growing customer base. Revenue is generated from marketing services (mainly advertising revenue, 87.4% for fiscal 2005) and fee-based services (12.6%). Yahoo! generated 69.8% of fiscal 2005 revenue from the U.S., while the remaining 30.2% was derived internationally.

Yahoo! has been generating revenue growth in the online advertising market by expanding its user base and catering to the marketing needs of major advertisers all the way down to small businesses. The company has benefited from the growing acceptance of online advertising with marketers, a trend that we expect to continue as companies that have traditionally relied on television, radio, and print advertising, expand their online presence. The online advertising market should continue to grow more rapidly than the overall advertising industry for the foreseeable future, as it is still underrepresented, and Yahoo! Is likely to be a prime beneficiary. It is estimated that Internet advertising represents approximately 5% of corporate advertising budgets while Internet represents 25% of the average person's media viewing time. Conversely, traditional media, for example newspapers, still get about 25% of the corporate advertising budget while only accounting for 11% of viewing time. By adding new features offered both for no cost and fee based services at attractive prices, Yahoo! has been able to develop a broad and loyal user base as its unique users per month has reached 412 million. Yahoo! expects global advertising opportunity to grow to $31 billion in 2006, with paid search market representing $15 billion. By 2010, global advertising market is expected to reach $55 billion.

Its flagship website, Yahoo.com, consistently ranks among the top web portals in terms of traffic, user reach, advertising, and brand recognition. The company is focused on increasing its user base and deepening its relationships with its users by offering compelling services and content. Yahoo's strong brand recognition and leading traffic is increasingly attracting advertisers to its branded advertising, an area where it enjoys a strong competitive advantage. While Google has gathered significant attention, we would note that its core market thus far has been paid search. Yahoo! also plays in the market for paid search, which has helped expand the company's addressable market by including small- and medium-sized enterprises in its searches, and now accounts for about half of advertising revenue or 40% of total revenue. However, Yahoo has a much wider base than paid search from which to grow its business. We expect Yahoo! to grow its paid search business as it rolls out an improved paid search engine during 2006. Although the pace of revenue growth has clearly been disappointing, we are encouraged by the company's ability to grow traffic. Over time, we strongly believe that YHOO will be able to monetize this traffic given management's strong media background.

We believe that one of the biggest opportunities for Yahoo! over the next several years is video programming. According to a Wall Street Journal report, home broadband access has spread to over 60% of U.S. Internet users today. As a result, use of Internet video has exploded over the past six months. Although pioneered by Apple with fee-based downloads of hit television shows such as Lost and The Office , we believe there is a potentially much larger market for video downloads on an advertising supported model. This may also help drive more traditional consumer product companies, where click through/paid search advertising is less effective, to increase budgets for Internet advertising. Under this model, advertisers could buy more traditional commercial time in the form of short segments that do not let the user skip through. Through a successful partnership with FIFA (Federation Internationale de Football Association), Yahoo! demonstrated the potential of streaming video with the recently ended FIFA World Cup. During this year's tournament, Yahoo! recorded more than 4.2 billion page views (more than doubled the pages viewed in 2002), over 138 million video highlights were streamed for no cost, and almost 73 million pages were viewed on FIFAworldcup.com's mobile Web destination. We believe streaming video holds the greatest potential for new revenue growth and Yahoo
has demonstrated that it has a strong platform in streaming video. We expect revenue to follow later in the year as larger budget advertisers increase investments in online advertising.

Over the past year, Yahoo! has launched a number of new features and/or made acquisitions in order to enhance its offering in each of its major categories as it continues attracting users. The area that the company has focused on the most is its social search platform, which has the potential of rapidly growing its base of registered users. To this end, the company acquired Flickr (http://www.flickr.com), a website offering photo management and sharing among groups. With the Flickr platform, registered users may create a group and upload photos to share among friends. While unregistered users may view group photos, they must register before uploading new photographs or commenting on existing photos. To further grow its social search platform, Yahoo! also acquired del.icio.us, a no cost website offering social bookmarking services, and launched internally developed services, Yahoo! 360 and Yahoo! Answers. Yahoo! Answers is a no cost platform that allows users to ask and answer questions on any topic in an easy to use environment, and has reached 50 million users as of June 30th. Yahoo! 360 is a service that allows users to communicate and connect with friends and family while integrating several Yahoo! offerings. Recently, Yahoo! allied with CBS to bring 60 minutes of video content and robust news packages to Yahoo's media properties. Yahoo! has also announced that it will form a co-branded business with NBC Universal Television Group and Telemundo, a U.S. Spanish-language television network owned by NBC Universal. Yahoo! introduced Yahoo! Tech, a new Web site that gives consumers advice and information about choosing and using technology and gadgets. The company has also upgraded Yahoo! Finance and re-designed its home page. In addition, the company expects to roll out a completely redesigned search advertising platform, named Project Panama, toward the end of 2006. Although delayed, this should help Yahoo transform its growing user base into growing revenue.

Under its Marketplace category, Yahoo! launched the next-generation of Yahoo! Messenger, which includes no cost PC-to-PC calling, enhanced PC-based calling, and interactive photo sharing. The company also entered into an interoperability agreement with Microsoft to connect users of Yahoo! Messenger and MSN Messenger. In its Information and Entertainment segment, Yahoo! launched Yahoo! Music Unlimited, a subscription-based music service, allowing users to listen to and download music onto compatible devices. Unlike competitors, such as iTunes, that charge users for each song downloaded, Yahoo! charges a monthly subscription fee for unlimited downloads. Finally, under its Communications and Connected Life category, Yahoo! Launched an enhanced mail service with an improved user interface and entered into new broadband alliances as well as extended existing alliances. Current strategic alliances include, BellSouth, BT, and Verizon to provide co-branded broadband services to their respective internet subscribers, which follow on the heels of a successful arrangement with AT&T (formerly SBC). Yahoo! will also be a third-party provider of sponsored search and graphical advertising throughout the eBay.com site. In addition, Yahoo! will provide online payment options through PayPal, a co-branded eBay toolbar, and the opportunity to explore "click-to-call" advertising technologies on both
Yahoo! and eBay's respective websites in the U.S., which will be accessible by users of both Yahoo! Messenger with Voice and Skype. Both the partners will roll out these initiatives this year, with a plan to achieve full implementation in 2007.

Yahoo also continues its growth in international markets. Most recently, the company acquired approximately 10% ownership in Gmarket Inc., a leading e-commerce marketplace provider in Korea, to expand its presence in Asia by leveraging Gmarket's e-commerce expertise in providing its users with a comprehensive selling and convenient buying platform. Yahoo also has a strategic partnership with Alibaba in China, a joint venture with Softbank in Japan and a strategic partnership with Seven in Australia and New Zeland. In Taiwan, Yahoo is working to grow through a build and buy approach. In addition to advertising revenue, Yahoo's paying base of users grew to 14.3 million unique users at the end of 2Q06, up 41.6% over the previous year period. The company ended the most recent quarter with 412 million unique users (up 28.3% year-over-year) and an active registered user base of 208 million, an increase of 19.5% year-over-year both figures exclude Yahoo! China that was divested in October 2005. The company has demonstrated strong growth in revenue and earnings over the past several years and generates significant Free Cash Flow, including $357.8 million in the second quarter of 2006, an increase of 19.3% over the year-ago period. While Yahoo! may be regarded as a mature company by many, we believe that the company is poised to re-accelerate growth in 2007 as the result of new search initiatives, video, and increasing budgets for Internet advertising. We reiterate our Buy rating on YHOO shares with a slightly lower $40.00 price target to account for delays in some of its search monetization efforts.

Industry Outlook

The outlook for the software industry is Neutral. The last few quarters have shown signs of demand stabilization and cost cutting initiatives. While areas like enterprise resource planning systems, supply chain management software, and customer relationship management software have been hit hard by weak IT spending, other niches have held up relatively well. These include gaming, video editing and security software. Government spending also has been supportive to the software industry. With several important software categories reaching maturity, top-line growth for the industry is likely to remain below historical levels, even after the industry recovers. Nevertheless, long-term growth prospects are still modestly above average. In addition, several of the group's top companies possess stellar fundamentals, including high profit margins, pristine balance sheets and cash flow well in excess of capital requirements.

Industry Position

Yahoo! Inc. owns and operates one of the most trafficked Internet destinations worldwide. It offers a comprehensive array of branded online products and services to consumers and businesses worldwide. Yahoo1 is exposed to stiff competition, primarily from Google. Google is expanding its offerings in news service, shopping, and email service. We believe this comprehensive suite of offerings from Google will put significant pressure on Yahoo's market share in the respective segments. In addition, Yahoo! Faces competition from FindWhat, LookSmart, and Terra Lycos in the paid search market. The competition is likely to intensify with the entry of Microsoft.

Valuation

Yahoo is currently trading at 58.6x our 2006 earnings estimate, although on an intra-day price the stock is down to 45.8x EPS estimates. While expectations became somewhat unrealistic during 2005, we believe Yahoo's strong long-term fundamentals and broad user base will continue to drive traffic, which will show up as revenue growth over the next 12 months. Moreover, we believe expectations for the stock have fallen significantly. We believe price-to-sales is a better metric for valuing these companies, and believe that similar to software stocks, leading players should trade at a P/S multiple up to 15x current year revenue estimates. Based on our 2006 revenue estimate, Yahoo! is currently trading at 9.9x P/S multiple, which is well-below the mean of its peer group and Google. Excluding TAC, we expect revenue of $3.25 per share for 2006, and base our $40.00 price target on a multiple in the 12.3x range.

Risks

Since Yahoo generates most of its revenue from marketing services, any downturn in online advertising spending will significantly depress the firm's overall growth.

Margin depression is possible if competition intensifies as the industry begins to mature.

Although expectations for the Internet advertising market are very high, investors disappointment cannot be ruled out even if the company meets expectations.

While Google is more focused on paid search, it has begun to compete in branded advertising as its dominance in search gives it a good platform to launch a traditional portal site and attract branded advertisers. According to ComScore, Google controls 44.7% of all searches while Yahoo has 28.5% share of the Internet search market. We would note though that other Internet tracking groups, Yahoo is fairing much better. Moreover, Google's partnership with MSN will lead into more direct competition with Yahoo!

With a delay in a portion of Yahoo's advertising management application, which includes an improved interface for advertisers, some of its expected monetization of search traffic may take longer to materialize.

Insider Trading and Ownership

Institutions hold about 74.0% of total shares outstanding. The top three institutional holders are Capital Research and Management Company (5.9%), Legg Mason Inc. (5.6%), and Fidelity Management & Research Company (5.4%). Net Institutional holders sold approximately 50.2 million shares in the previous quarter.

Insiders control roughly 11.9% of total shares outstanding. Insiders have sold approximately 4.1 million shares over the past six months.

The short interest ratio is around 4 days, which we do not consider meaningful.

Content Courtesy: Zacks Investment Research

>>> Back to Table of Contents <<<

==============================================

Actionable, Professional Research updated daily

Our daily professional research content blog is up and running.  We post new research daily.  See it here:  http://www.vitalstocks.com/blog/index.html

 RSS Feed available: Fresh content each weekday http://feeds.feedburner.com/VitalstocksInvestingNewsletterDigest

==============================================

VitalStocks.com Research Summary:
Data as of: 21 July

Price / Cash Flow Ratio is 49.8% of the Industry Average.

Forward Price to Earnings Growth (PEG): 1.73

Debt / Equity Ratio is 112.5% of the Industry Average.

Net Profit Margin is 107.1% of the Industry Average.

Return on Equity is 108.0% of the Industry Average.

Current P/E Ratio is 66.0% of the Industry Average.

5-Year Avg. Pre-Tax Profit Margin is 813.3% of the Industry Average.

Price/Sales Ratio is 71.0% of the Industry Average.

Income Per Employee is 138.7% of the Industry Average.

MSN Money Price Target:  http://moneycentral.msn.com/investor/research/wizards/srwtarget.asp?Symbol=yhoo

==============================================

>>> Back to Table of Contents <<<

5) Feature Stock #2 – Forest Laboratories, Inc. (FRX)

Outlook

Forest Laboratories, Inc. focuses on the therapeutic areas of the central nervous, cardiovascular and respiratory systems, as well as research and development programs that address a range of health conditions. Principal brands include Lexapro for depression, Namenda for Alzheimer's disease, and Benicar for high blood pressure. Fiscal 2006 was a transition period for Forest with earnings declining due to loss of Celexa sales and higher R&D spending. We remain enthusiastic about the potential for further growth in the Lexapro and Namenda products. Growth should return this year, but until visibility improves we rate the shares hold with a $45 target.

Overview

Forest Laboratories, Inc. (FRX) and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical prescription drug products, as well as non-prescription pharmaceuticals sold over-the-counter. Forest Laboratories has well-established franchises in therapeutic areas of the central nervous, cardiovascular and respiratory systems, as well as research and development (R&D) programs that address a wide range of health conditions. Principal brands include Lexapro (escitalopram oxalate) for depression, Namenda (memantine HCl) for Alzheimer's disease, and Benicar (olmesartan medoxomil) for high blood pressure. Based in New York, Forest Laboratories has operations on Long Island, as well as in New Jersey, Missouri, Ohio, Ireland and the U.K. The company employs 5,050 people worldwide.

Bull Story

Sales of Forest Laboratories anti-depressant drug Lexapro account for over half of the company's top line. In fact, in fiscal 2006 Lexapro accounted for 63% of total revenues. Lexapro is FRX's next generation selective serotonin reuptake inhibitor (SSRI), a molecule that helps restore the brain's chemical balance by increasing the available supply of serotonin, a substance in the brain believed to influence mood. Lexapro is a treatment for both depression and generalized anxiety disorder (GAD) in adults. Currently, more than 19 million American adults suffer from depression and four million American adults suffer from GAD. Forest is also working to expand the Lexapro label into other areas of psychiatric disorder such as social anxiety, panic disorder, obsessive-compulsive disorder and posttraumatic stress disorder. These are all rather large markets. Lexapro offers both excellent efficacy and tolerability relative to the company's first-generation SSRI, Celexa. We have also seen impressive clinical data demonstrating Lexapro's clinical advantages relative to other depression category therapies, such as Zoloft (Pfizer) and Paxil (GlaxoSmithKline). Lexapro may be the best-in-class SSRI as demonstrated by category leading growth and market share. Management discussed plans to have the sales force step up promotion based on the data from some new clinical trials. The category remains highly sensitive to product detailing; this is a positive for Forest Labs considering that we expect Pfizer to cease heavy promotion of Zoloft which lost exclusivity in June 2006. Lexapro sales for fiscal 2006 (ended March 2006) were $1.9 billion in-line with our forecast. Going forward, sales should benefit from an 8% price increase implemented this year. Lexapro sales in the first quarter of fiscal 2007 came in at $507 million, exceeding our expectations by $2 million. For the fiscal year 2007, we expect Lexapro to post sales of approximately $2.1 billion, up 10% from fiscal 2006.

Forest Laboratories also possesses enormous potential with Alzheimer's disease drug Namenda. Alzheimer's disease (AD) impacts roughly 4.5 million Americans. The AD market is rather wide-open, and we view Namenda as a potential breakthrough therapy for this debilitating disease. Namenda is currently approved for moderate-to-severe AD. The FDA surprisingly issued a not approvable letter to Forest Labs for expanding the label to include more mild cases in July 2005. This was a shock to us considering the previous guidelines issued by the FDA on what was necessary to achieve approval. Nevertheless, Forest is discussing the application with the FDA in hopes to eventually gain approval for the expanded population. We see Namenda overtaking Aricept (Pfizer) as the category leader within the next few years; although roughly three-quarter of Namenda use is in combination with acetylcholinesterase inhibitors like Aricept, Razadyne (J&J) and Exelon (Novartis). Improved patient access and increased promotional efforts should help drive growth for the product. For fiscal 2007, we see Namenda posting sales of $626 million, slightly above the company's guidance. We believe the compound memantine (Namenda) could offer near billion-dollar sales potential based on expanding the label to include neuropathic pain (phase II) and post herpetic neuralgia (phase II).

In the first quarter of fiscal 2007, hypertension drug Benicar/HCT, an angiotension II receptor blocker, delivered $41.7 million in income to Forest Labs through the profit-split with distributor Sankyo. Benicar remains a prescription market share gainer and should post 40-45% growth in a category that is only expected to deliver 7-8% growth.

We are also optimistic about a number of late-stage and recently approved products that will contribute to growth in the coming years. Forest launched Campral for the treatment of alcohol dependency (maintenance of alcohol abstinence), in early January 2005. Campral prescriptions were in-line with our thinking for the first few months on the market. Perhaps the biggest wildcard product candidate in Forest's pipeline is milnacipran, a norepinephrine serotonin reuptake inhibitor (NSRI) for the treatment of fibromyalgia syndrome and pain associated with fibromyalgia. Fibromyalgia is a chronic pain illness characterized by musculoskeletal aches, pains, stiffness, soft tissue tenderness and general fatigue. The disease is rather common in the U.S., with approximately 3-6% of the population suffering from either some combination of these symptoms or chronic fatigue syndrome (CFS). Phase III data released in late September failed to demonstrate statistical significance, but the companies plan to continue development of milnacipran further in two additional phase III trials. The company is enrolling patients for these trials and we do not expect to see results from these trials before mid CY2007. If Forest Labs can demonstrate that milnacipran offers a viable therapy against fibromyalgia pain, the drug may have multihundred million dollar potential.

Another late-stage candidate, desmoteplase (a blood-clot dissolving agent) seems under-appreciated by the Street. We believe that Forest's late-stage pipeline should begin to attract significant attention throughout the year. We believe that milnacipran, nebivolol, and desmoteplase will be key long-term drivers of growth at Forest Labs.

The fiscal fourth quarter has been very active for Forest Labs. In January 2006, Forest Labs paid $75 million upfront to Mylan Labs for nebivolol. The drug is a long-acting, cardio-selective beta-blocker with mild vasodilating properties. The unique characteristics of the drug such as its low side-effect profile and the potential to achieve superior efficacy in diabetic or African-American patients could make it a blockbuster. Nebivolol was designated approvable by the FDA for hypertension in June 2005. Forest Labs will be conducting an additional preclinical study and a pharmacokinetic (PK) study, which will form the basis of the company's response to the approvable letter. We believe the company is on track to submit its response by the end of 2006. At that time, the company expects a six-month review period. The company also expects to conduct a large-scale phase IV trial to test the diabetic and African-American hypothesis, as well as a phase III trial in congestive heart failure (CHF). A filing for the CHF indication should also take place in the second half of calendar 2006. We model the product launch in the first half of calendar 2007. Forest will pay royalties to Mylan Labs. In February 2006, the company licensed faropenem medoxomil from privately held Replidyne, Inc. for an upfront payment of $50 million and future royalties and milestones on sales. The drug is an oral broad-spectrum antibiotic with improved bioavailability over older generation faropenem products. The NDA was filed in December 2005 by Replidyne for the treatment of acute bacterial sinusitis, community - acquired pneumonia, acute exacerbation of chronic bronchitis and uncomplicated skin and skin structure infections in adults. The NDA has since been accepted by the FDA and a response should be out by October 20, 2006. On the first quarter conference call, the company indicated that it would need approval for at least two indications for the product to be successful. If the company succeeds in gaining full approval later this year, the product launch should take place in late summer 2007, just before the start of the cough-cold season. However, the product launch could get delayed by a year if the FDA requests the company to submit additional data. Forest is already conducting additional studies. We are currently modeling the product launch in mid 2007. We are positive on both in-licensing deals. Based on our long-term projections, both deals should be accretive in fiscal 2008.

We are pleased to see that Forest is continuing to work on building its pipeline. The company recently added another candidate to its pipeline by entering into a deal with privately held Almirall. LAS34273, a long-acting muscarinic antagonist, is scheduled to enter into phase III trials for chronic obstructive pulmonary disorder (COPD). COPD is the fifth leading cause of death worldwide and the fourth in the U.S. Phase II results showed that the candidate has a fast onset of action and provides 24 hours of bronchodilation. LAS34273 is being developed in a multi dose dry-powder inhaler, which represents an improved form of drug delivery over the currently available devices. Forest will sell and market the product in the U.S.

Bear Story

The overall anti-depression franchise at Forest showed negative growth in fiscal 2006 as its first generation product, Celexa, succumbed to generic competition. The product posted sales in fiscal year 2004 of just over $1 billion. This number fell to $653 million in fiscal year 2005. Multiple generic alternatives were launched in early November 2004. Celexa posted sales of just $19 million in fiscal 2006, in-line with our estimate.

Perhaps the biggest near-term risk to Forest Labs was the company's patent infringement lawsuit with Teva Pharmaceuticals for Lexapro. Lexapro is patent protected through at least September 2011 (March 2012 with pediatric extension), yet there are several (paragraph IV) challenges that seek to bring an alternative product to the market sooner. Forest received a major boost recently when a federal judge ruled in its favor in the patent infringement case with Teva. Teva has the option to appeal the ruling. On the first quarter conference call, Forest announced that it is not yet aware of Teva's future course of action. Teva already has FDA approval for its generic version of the drug. Meanwhile, Forest and H. Lundbeck have filed a patent infringement lawsuit against Caraco Pharmaceuticals which is seeking approval for a generic version of Lexapro. Forest intends to defend the Lexapro patent vigorously.

Generic Celexa, Paxil, and Prozac are creating enormous pricing pressure on branded drugs such as Lexapro. Although we believe Lexapro to be best-in-class , Forest Labs may find it difficult to maintain pricing once generic versions of Zoloft, the category leader, hit the market by the end of July.

Forest has had its share of R&D failures over the past year. Above we discussed the recent failure of a phase III trial on milnacipran in Fibromyalgia. Management recently expanded the second phase III trial
from 800 to 1,200 patients, delaying the data until mid 2007. At this time we do not model any revenue contribution from milnacipran until fiscal 2009.

Earlier in 2005 the company announced that its phase III candidate, neramexane, failed to achieve statistical significance in a safety and efficacy trial studying the drug for Alzheimer's disease. The result from this study was surprising, considering the company had high hopes for this drug. We believed neramexane, an NMDA receptor agonist, offered another large potential in Alzheimer's disease along with Namenda. The company has conducted additional AD studies, one completed in mid July 2005. Forest is planning to study neramexane in other central nervous system (CNS) disorders, and will initiate phase II trials shortly. Meanwhile, the company announced that it will be moving neramexane into an additional phase III trial for AD by the end of this year. We do not model any neramexane contribution in the coming years despite the recent positive proof-of-concept data. We consider visibility on both milnacipran and neramexane to be low. Likewise, Lexapro received a non-approvable letter from the U.S. Food and Drug Administration on March 30, 2005 for social anxiety disorder (SAD). This was a surprise considering the drug is already approved for generalized anxiety disorder (GAD). This rejection follows a non-approvable letter for panic disorder earlier. The company will need to conduct additional clinical trials to expand the Lexapro label to include these indications.

Finally, the recently launched Combunox, a combination ibuprofen and oxycodone, pill looks dead. Management decided to cease marketing and promotion for the drug after a very sluggish first nine months on the market. We had previously thought that the drug would have sales of around $100 million given the high demand for pain medication in a post-Vioxx market. Now we have slashed the product down to insignificant levels. This was an unfortunate failure given the previous management enthusiasm around the drug.

Valuation

Forest Laboratories currently sells for 19.2x our calendar 2006 EPS estimate of $2.22. Fiscal 2006 was a transition period for the company with earnings declining primarily due to the lost sales of Celexa and the $125 million up-front R&D payments to Mylan and Replidyne. While Celexa sales declined from over $1 billion in fiscal 2004 to $19 million in fiscal 2006, R&D expense increased to $410 million, mainly due to two milestone payments in the fourth quarter of FY2006.

We are also disappointed with the recent R&D failures at Forest Labs. Pipeline drugs milnacipran and neramexane both failed to demonstrate statistical significance in phase III trials. Forest will head back to the drawing board with more phase II and phase III trials for both. Couple these failures with the label expansion setbacks to Lexapro and the pulling of marketing efforts for Combunox, and we see investors waiting on the sideline until growth returns in fiscal 2007. Investor attention now turns to the recently acquired nebivolol and faropenem, and phase III candidate desmoteplase. Both deals for nebivolol and faropenem are positive in our view. Both should be accretive in fiscal 2008.

We believe FRX shares may begin to recover eventually in calendar 2006 as investors start looking at the strong return to top-line and earnings growth in fiscal 2007. Yet, we believe investors can be patient while anticipating that recovery. The stock was up 15% recently when a federal judge ruled in favor of Forest in its Lexapro patent infringement case with Teva. The favorable ruling removes a significant overhang on the stock and will allow investors to focus on the company's pipeline prospects. We rate FRX a Hold with a $45 price target. Our target is based on 20.3x our calendar 2006 estimate of $2.22.

Content Courtesy: Zacks Investment Research

>>> Back to Table of Contents <<<

==============================================

Actionable, Professional Research updated daily

Our daily professional research content blog is up and running.  We post new research daily.  See it here:  http://www.vitalstocks.com/blog/index.html
==============================================

VitalStocks.com Research Summary:
Data as of: 21 July

Price / Cash Flow Ratio is 95.6% of the Industry Average.

Forward Price to Earnings Growth (PEG): 0.66

Debt / Equity Ratio is 0.0% of the Industry Average.

Net Profit Margin is 477.1% of the Industry Average.

Return on Equity is 503.9% of the Industry Average.

Current P/E Ratio is 23.0% of the Industry Average.

5-Year Avg. Pre-Tax Profit Margin is 573.3% of the Industry Average.

Price/Sales Ratio is 158.5% of the Industry Average.

Income Per Employee is 761.1% of the Industry Average.

MSN Money Price Target:  http://moneycentral.msn.com/investor/research/wizards/srwtarget.asp?Symbol=FRX

==============================================

>>> Back to Table of Contents <<<

6) Additional Stocks - Worth a Further Look

6A) Morgan Stanley (MS)

Morgan Stanley (MS), a stock that we first featured on Mar 29, 2006, has continued its winning ways. The company has maintained its Zacks #1 Rank due to its history of topping analysts' expectations while experiencing upward estimate revisions. Earnings per share are projected to grow 12.6% over the next 3-5 years. MS has a current dividend yield of 1.7%.

Full Analysis

Morgan Stanley is a global financial services firm that operates in four segments: institutional securities, retail brokerage, asset management and Discover. With more than 600 offices in 30 countries, the company's diverse client base includes corporations, governments, financial institutions and individuals.

When MS was first highlighted as a Growth and Income stock on Mar 29, 2006, it had topped the consensus earnings estimate for the past three quarters by an average margin of 24.8%. The company continued its winning ways by beating the Street yet again in its most recent quarter, and has now done so in 13 out of the past 15 quarters. Furthermore, and most importantly, it is still a Zacks #1 Rank.

On Jun 21, 2006, MS posted second-quarter fiscal 2006 profits of $1.85 per share, surprising to the upside by a solid 28.5%. Earnings were almost a dollar better than the 86 cents per share achieved in the prior-year period. Net revenues soared 48.3% to a new record of 8.9 billion. Chairman and CEO John J. Mack stated, "I could not be more pleased with the outstanding results the employees of Morgan Stanley delivered in the second quarter. There is still a great deal of work to be done, but we are moving aggressively on many fronts and we see significant opportunities to create shareholder value."

For the first six months of fiscal 2006, profits and net revenues were up 51.0% and 34.9%, respectively, when compared to the first six months of fiscal 2005. Earnings per share are projected to grow 12.6% over the next 3-5 years.

Consensus estimates for this quarter and next jumped 11.4% and 4.2%, respectively, over the past 90 days. Profit forecasts for fiscal 2006 and fiscal 2007 have risen 12.9% and 6.0%, respectively, over the same time period.

On May 31, 2006, the Board of Directors declared a quarterly cash dividend of 27 cents per share of common stock. The company's annual dividend was 80 cents per share in fiscal 2000 but has since jumped to $1.08 per share. MS is currently yielding 1.7%. Moreover, the company repurchased approximately 22 million shares of its common stock since the end of fiscal 2005. Its return on equity of 22% is in line with the industry average.

Note: The Zacks Rank is a very sensitive indicator that can change frequently for an individual stock. This important indicator is updated daily on Zacks.com and is available to Zacks Premium subscribers. As such, it is prudent to check the site for the latest Zacks Rank on the stocks highlighted in this section. Simply click the link for the stock or enter the symbol in the ticker entry box in the upper left hand corner of the web site.

Content Courtesy:
Zacks Investment Research

>>> Back to Table of Contents <<<

==============================================

6B) OMI Corporation (OMM)

OMI Corporation (OMM), a Zacks #1 Rank stock, met or exceeded the Street's earnings estimate for seven consecutive quarters. Analysts' profit forecasts have been trending higher. The Board of Directors at OMM recently declared a quarterly dividend of 10 cents per share and approved the repurchase of an additional $70 million of its common stock. The company has a price-to-book ratio of 1.8, compared to 3.8 for the market.

Full Analysis

OMI Corporation provides seaborne transportation services for crude oil and petroleum products in the international shipping markets. The company's customers include major independent and state-owned oil companies, major oil traders, government entities and various other entities.

OMM met or topped analysts' earnings expectations in the past seven quarters. During this time frame the company surprised to the upside on six occasions by an average margin of 6.9%, and matched once. Earnings per share grew at a robust rate over the past five years--49.9%. Over the next 3-5 years, they are projected to grow at a 17% clip, compared to 16% for the industry.

On Apr 24, 2006, OMM posted a 3.5% earnings surprise when it reported profits of $63.6 million, or 89 cents per share. When compared to the prior-year period, earnings were up four cents per share. Revenues increased 12.6% to $192.5 million, driven by more operating days and higher rates. Furthermore, global demand for oil was up about one million barrels per day over the prior year. The company is expected to release second-quarter results on Jul 26, 2006.

Consensus estimates have been on the rise for this quarter and next quarter, jumping 12.1% and 31.6%, respectively, over the past 90 days. Three analysts revised their estimates upward for this quarter, while four did so for next quarter. Profit forecasts for this year and next are up 9.5% and 13.9%, respectively, over the same period of time. Five analysts revised their forecasts upward for this year and two followed in their footsteps for next year.

On Jun 6, 2006, the Board of Directors declared a quarterly dividend of 10 cents per common share of stock. The company has a current dividend yield of 2.0% and a five-year average dividend yield of 0.79%. In late-April, the Board authorized the buyback of an additional $70 million of its common stock, bringing the total available for repurchase to approximately $100 million.

OMM is currently trading at a valuation of 7.7x trailing 12-month earnings and at 8.1x current fiscal-year estimated earnings. The market, as represented by the S&P 500, is trading at a valuation of 16.2x trailing 12-month earnings and at 15.0x its current fiscal-year estimated earnings. The company has a price-to-book ratio of 1.8, compared to the market's multiple of 3.8. OMM's return on equity tops that of the industry average--26% versus 17%.

Note: The Zacks Rank is a very sensitive indicator that can change frequently for an individual stock. This important indicator is updated daily on Zacks.com and is available to Zacks Premium subscribers. As such, it is prudent to check the site for the latest Zacks Rank on the stocks highlighted in this section. Simply click the link for the stock or enter the symbol in the ticker entry box in the upper left hand corner of the web site.

Content Courtesy: Zacks Investment Research

>>> Back to Table of Contents <<<

==============================================

Change Your Strategy Now! No More Mistakes

If you want to insure every position from loss, average 50% ROI per trade, and generate triple digit annual returns, then attend SpreadTrade's complimentary class. Learn how to profit from any market when you qualify for this important class.

==============================================

7) About VitalStocks.com:

I believe America has incredible opportunities for people to succeed by making money in the stock market. After making and losing lots of money myself, I realized that there were no sources were investors could get unbiased valuable information.

That is what made me begin this project.  I continue to work with the top professional investing newsletters to bring “capsules” of their best stock picks to you.

Please help keep them participating in our newsletter, follow their links and see what services they provide.  Please consider sharing this with your friends. All will benefit.

Read More: http://www.vitalstocks.com/about_us.htm

 RSS Feed available: Fresh content each weekday http://feeds.feedburner.com/VitalstocksInvestingNewsletterDigest

==============================================

8) DISCLAIMER: "VitalStocks.com is an independent republisher of investment advice.  The companies, or newsletters, whose stocks we republish, compensate neither the company or its employees in any way, and we hold no positions in the securities aforementioned.  Sources of information are assumed to be reliable, but they are in no way warranted to be complete.  Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks.  Readers must keep in mind that, "Past performance doesn't predict future results." Investors should always research companies and securities before making any investments.  Nothing herein should be construed as an offer or solicitation to buy or sell any security."

>>> Back to Table of Contents <<<

 


© VitalStocks 2001-8. All rights reserved