Saturday, August 5, 2006
Volume 7, Issue 8

In This Issue:

1) Current Market Metrics - Mutual Fund Flows
2) Recent Blog Research Features
3) Viewing the Market
    A) A Second-half Rally?
    B) Alternative Energy Shows Progress
4) Feature Stock #1 - VeriSign (VRSN)
5) Feature Stock #2 - Merck & Co. Inc. (MRK)
6) Additional Stocks - Worth a Further Look
    A) Sonoco Products Company (SON)
    B) PACCAR, Inc. (PCAR)
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

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1) Current Market Metrics:

- NEW YORK, Aug 3 (Reuters) - Equity funds took in a net $380 million in the week ended Aug. 2, less than the $1.03 billion that investors added in the prior week, TrimTabs Investment Research estimated on Thursday.
Full Article

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Independent Data on Fund Flows
Data As Of: 2 Aug 2006

- Including ETF activity, Equity funds report net cash inflows totaling $2.415 billion in the week ended 8/2/06 with Domestic funds reporting net inflows of $1.173 billion and Non-domestic funds reporting net inflows of $1.242 billion;

- Money Market funds report net cash inflows totaling $22.223 billion;

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

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

2A)  (MOT) - Motorola, Inc. - return on equity crushes that of the industry average-19% compared to 9%:

http://www.vitalstocks.com/blog/2006/07/mot-motorola-inc-return-on-equity.html

2B)  (ILMN) - new consensus estimate calls for full-year GAAP profits of 42 cents per share, versus just 15 cents per share a week ago:

http://www.vitalstocks.com/blog/2006/07/ilmn-new-consensus-estimate-calls-for.html

2C)  (ALB) - Albemarle Corporation - company topped analysts' earnings expectations by an average margin of 24.4% during the past three quarters:

http://www.vitalstocks.com/blog/2006/07/alb-albemarle-corporation-company.html

2D)  (MS) - Morgan Stanley - return on equity of 22% is in line with the industry average:

http://www.vitalstocks.com/blog/2006/07/ms-morgan-stanley-return-on-equity-of.html

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

3A) A Second-half Rally? by Don Dion

Don Dion, editor of The Fidelity Independent Adviser Sector Momentum Tracker newsletter, discusses the previous week’s market action. Learn what this featured expert has to say about economic growth, the major averages and strong performing sectors. Then read his outlook for next week and beyond. Afterward, check out a recent mutual addition to the Sector Momentum Portfolio.

Don’s Outlook from July 31

Last week started off very well, then faded a bit in the middle, but bounced back strongly on Friday to produce excellent gains. Data that indicated a slowdown in the economy helped perk up investors despite signs that inflation was rising. Traders seemed to be taking their cue from the remarks that Federal Reserve Chairman Ben Bernanke made before a Senate committee one week earlier. Essentially, Bernanke said that a slowing economy would keep inflation in check.

So even though inflation grew by 2.9 percent, based on an annualized rate, it was more than offset by the fact that economic growth was halved. Investors took this as a sign that when the Fed meets on August 8, it might decide that further interest rates would hinder growth and that the central bank will pause its string of increases.

Well it’s all speculation, but the facts are that last week was the best performance for the S&P 500 in more than 18 months, and the Dow Jones Industrial Average turned in its best performance in more than a year. Both indices were up more than 3 percent, as was the Nasdaq. The gains came at a good time in the battle between the bulls and the bears. The S&P 500, for example, lies just beneath the trading range that has contained many of the rally efforts since May.

And the sectors that performed strongest on Friday bode well for ongoing investor confidence. They were not the defensive sectors that investors have turned to when oil and commodity prices (not to mention Ben Bernanke) have spooked them. Instead the biggest gaining areas from a performance standpoint were semiconductor manufacturers, internet companies, and computer makers, as well as brokerage, retailing, and biotech firms.

This week may be a cautious one, ahead of next week’s Fed meeting. But look for investors to read every tea leaf. And if the Fed does forego another interest rate hike next week, a strong second-half rally could be coming our way.

This Week’s Featured Fund

Fidelity Select Medical Delivery (FSHCX) joined the Sector Momentum Portfolio last week for the first time since last fall. The fund’s addition to the Portfolio reflected a recent turnaround in its share price: FSHCX stagnated between late 2005 and early spring 2006 and then fell 15% between late March and mid-June before recovering more than 5% through July 21.

Select Medical Delivery historically has focused primarily on shares of insurers, particularly managed-care companies, as well as hospitals and companies associated with marketing and distributing pharmaceuticals. Those industries have been terrific places to be in the last few years, as shares of HMO sponsors, medical facilities operators and drug distributors have benefited from stronger pricing power, consolidation and the Medicare prescription drug benefit. Such trends are partly responsible for this fund’s world-beating returns during the past half-decade: Through July 27, FSHCX’s three- and five-year annualized gains of 27.14% and 14.03%, respectively, demolished the S&P 500’s annual returns by 17.02 and 11.33 percentage points, respectively, and made this fund the best-performing health-care fund tracked by Morningstar during those time periods.

Such gains also have increased stock valuations in the medical delivery business to the top of their historical range. Morningstar analyst Christopher Davis points out that manager Matthew Sabel, who took the reins in January of 2005, has attempted to address that problem by interpreting the fund’s mandate far more broadly than past managers did. For example, Sabel’s portfolio recently included shares of national funeral home chain Services Corporation International, which, as Davis notes, seems to stretch the definition of “medical services.” Likewise, shareholders may be surprised by recent holdings such as grocery giant Safeway and weight-loss icon Weight Watchers. Diversifying the fund with such stocks might help protect against industry risk, but potentially at the cost of diluting FSHCX’s raison d’être: targeted exposure to the medical delivery industry.

Sabel also has greatly increased the size of the fund’s portfolio since assuming management responsibilities, taking it from roughly 20 holdings to its recent count of more than 150. Morningstar analyst Davis takes issue with that move, suggesting that the portfolio is less likely to contain exclusively management’s best ideas. That said, one could argue that holding a larger slice of the medical delivery pie is a good idea— not just to reduce individual company risk, but to provide shareholders with exposure to more of the industry’s growth opportunities.

Despite Sabel’s changes, however, Select Medical Delivery still predominantly rises and falls with managed care, hospital, and drug distribution and marketing stocks. The fund’s top ten holdings, which recently accounted for just over half of its assets, included stocks of six insurance companies and four firms that manage and/or distribute pharmaceuticals. Number one holding UnitedHealth Group alone has accounted for more than 9% of assets at times this year.

The concentration in UnitedHealth helps explain part of this fund’s spring swoon. The massive managed- care firm has been at the forefront of the recent stock-options backdating scandal. The Securities and Exchange Commission, the IRS and the Justice Department have begun investigating whether in 1999 the company awarded CEO William MacGuire options to buy 825,000 shares at an artificially low price and then failed to adequately notify shareholders. UnitedHealth in May announced that it may have to restate earnings for the past three years downward by $286 million due to problems with the firm’s stock-option program. Concerns about potential litigation, penalties and earnings restatements, along with investor reassessment of the stock’s valuation, caused the shares to lose almost a third of their value between late February and late May. Those developments helped drag down competitors such as Cigna, Aetna and Humana as well.

The stocks’ declines have increased their attractiveness to some analysts, including Deutsche Bank’s Scott Fidel. He issued a report on Monday, July 17, in which he granted “buy” ratings to Aetna, Cigna, Health Net, UnitedHealth and WellPoint—all members of this fund’s top ten—citing the possibility that higher premiums and improved Medicare profitability will lead to 15% to 20% earnings growth next year. That report came the same day Goldman Sachs upgraded its rating on the managed care industry due to lower stock valuations.

But while the Goldman report hailed the improved short-term outlook for the industry, it also cautioned about a more difficult road ahead. The report’s authors expect earnings growth to slow during the next two years to about 10% per year, on average, in part because they believe competition will drive down pricing power.

No matter how this fund performs in the near term, shareholders should keep in mind that the industry it targets tends to move in multiyear cycles based largely on competition and pricing power. That characteristic can help the fund generate several consecutive years of superior performance, as Don Dion and his team have seen during recent years, but can also contribute to similarly long periods of lagging returns. Consider 1998 and 1999, when the fund fell by more than a third even as the broad market and other health-care stocks were enjoying a tremendous bull market.

Courtesy: http://www.zacks.com/experts/featured/view_article.php?art_id=2580&newsletter_id=186

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3B) Alternative Energy Shows Progress, with Jonathan Kolb

Aug 03, 2006
As oil prices again top their previous record highs and global tensions are never very far from the surface, we were interested to find out whether there were good opportunities in alternative energy stocks at this time. We spoke with senior alt-energy analyst Jon Kolb to get his perspective.

What’s been happening with alternative energy these days?

I’d say one thing that has happened since the last time we talked [about six months ago] is that ethanol has emerged as one of the top alternative energy sources out there. There have been quite a few ethanol-related IPOs – some have done well, some not so well. But when it’s all said and done, ethanol will likely be the biggest component in the alt-energy space, followed closely by solar and wind power.

Click here to find out more!
There is clearly a strong political incentive to develop reliable alternative sources of energy and this emerging industry likely benefits from significant government funding, subsidies and tax incentives. Ethanol, for example, not only helps break U.S. dependency on foreign oil, but increased demand for corn is also clearly good for the American farmer. Most of the corn grown by farmers is subsidized by the federal government and yet it often simply goes to waste sitting in silos. This win-win scenario is one of the reasons why I think ethanol will be a significant segment of the alt-energy industry.

You say solar power will be the second-most utilized alt-energy?

Yes. Recently, the state of California announced it will spend about $3.2 billion dollars on solar power over the next ten or so years. This is, so far, the biggest state investment in alternative energy – and solar energy, specifically – that has ever been made. So this is a really significant movement. Plus, electric utilities have incentives to derive a portion of their electricity output from alternative sources such as solar, so there is regular source of demand for solar power.

Solar power obviously will be biggest in states that get a lot of sun: California, Florida, Texas, Hawaii. In the Midwest, where the terrain is flat – Kansas, Texas – that’s where most of the wind power turbines are going to be put up. Wind farms are also popping up off the coast of Texas, Cape Cod, and in the Great Lakes.

Wind energy is facing a bit of NIMBY sentiment, isn’t it?

Yeah, “not in my back yard.” Off the coast of Cape Cod in Massachusetts we’ve seen a bit of that over the past couple years. I read about some companies trying to put up wind turbines on Lake Michigan, and some people who live in the northern suburbs of Chicago are upset about it. The thinking is: they pay a lot of money to get these homes right on the coastline, and they don’t want to have to look out onto a bunch of big pinwheels.

So where do you see alt-energy headed as an industry going forward?

My feeling right now is that these sub-groups will eventually all evolve into their own industries – solar, wind, biomass, what have you – and be independent of each other. We’re still only in the first or second inning of this ball game.

The differences in economics of these different groups show how diverse they are from one another. They all have bottlenecks, but in solar energy’s case, the only real bottleneck is the supply of silicon used to make solar panels. Otherwise, this is about as inexpensive as you can get with alt-energy. It’s cheaper than the electricity rates that currently exist.
Alternative Energy Shows Progress

With wind, keep in mind that the weather is one of the hardest things to predict – even harder than the stock market! So the way to value wind power companies is by having really good wind data. And not just data, but predictions as well. We’ve all noticed how often the weatherman is wrong, so we see continued difficulties in valuing wind projects.

Do the costs for building these high-tech windmills add to the difficulties?

Not really, actually. Wind turbines are not that bad as a capital expenditure. They tend to last a long time, and maintenance isn’t too much of an issue. The economics for wind power in the long term should be really good, in fact.

With ethanol, though, the big issue being discussed is in regards to the infrastructure. Plenty of companies right now are turning corn, sugar cane, even turkey dung and palm trees into energy, but the infrastructure pipelines is where the questions are. How best to deal with the trucking and delivery to the end-user, that sort of thing.

My main overall point here is that all these sub-industries have their own issues. That being the case, it gets tough to put a number on.

How should investors look to play the alt-energy market?

Well, there’s always big companies like General Electric (GE) and Archer Daniels-Midland (ADM). They are not pure plays, of course. Another angle is that many utilities receive tax incentives to use alternative energy – 15% or whatever.

The problem with a lot of the pure-play alt-energy companies is that they’re trading at extraordinarily high valuations. Many of them have multiples way up in the hundreds; some have even gone over 1,000. This obviously creates a great deal of risk, especially when profitability is still a year or two out.

This reminds me of the Internet bubble in the late-90s. Those valuations got way out of whack and eventually plummeted down. Unfortunately, I expect some of the same thing with many of these alt-energy stocks.

The winners will be those that are first to market – I’m thinking specifically of Evergreen Solar (ESLR) and Energy Conversion Devices (ENER). We like the stories of these two companies, but we feel they are very expensive at this time. Recently, we upgraded ENER and ESLR to a Hold, and it looks like a good time to have done it. But there still is considerable downside risk – and they won’t be showing profits until 2008.

Pacific Ethanol (PEIX) is another company worth taking a look at here. This stock has done really well – Bill Gates was an early investor – but another issue with ethanol companies is that their reliance on the commodity of corn may cause it to trade like a commodity stock. Again, the multiples are way too high from that perspective right now.

What developments will you be watching for going forward?

It will be interesting to see how alt-energy evolves over the next 10 years. I expect solar power will probably earn higher multiples than the other forms of alt-energy because there is a little more proprietary knowledge in making their product.

I also expect a lot of volatility. This is one thing investors should definitely watch out for. These are stocks you can’t just buy and ignore, because they tend to be all over the board.

Jon Kolb is a senior analyst covering the utilities, defense & aerospace and alternative energy industries for Zacks Equity Research.

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Courtesy: http://www.zacks.com/newsroom/commentary/?id=3393

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4) Feature Stock #1 – VeriSign (VRSN)

VRSN Set for Stronger and More Consistent Growth

Bill Martin, editor of the FindProfit newsletter, is disappointed that VeriSign’s shares have struggled over the past year, but believes that the provider of infrastructure services is a high-quality name that’s cheap versus its peers and set for stronger and more consistent growth ahead. In today’s featured expert, Martin offers his VRSN commentary and explains why he thinks this company is poised to get back on track.

Quick Hit Alert from Jul 21

Second-quarter profits at VeriSign (VRSN) checked in at $58.6 million, or 24 cents per share, meeting the consensus estimate, and down from $73.6 million, or 27 cents per share, a year ago. Revenue, meanwhile, was $392.9 million, beating the $386.3 million consensus, and down from $430.4 million a year ago. Note that the year-over-year comparisons are not apples-to-apples due to the sale of the company's payment business to eBay (EBAY).

Breaking down VRSN's two business units, the Internet Services Group ("ISG") delivered revenue of $186 million, up from $168 million a year earlier. The Communication Services Group ("CSG"), which includes the company's Jamba and Jamster mobile content units, posted revenues of $206 million, down from $277 million last year. The content and commerce group of CSG contributed revenue of $120 million, including $74 million from Jamba/Jamster's business-to-consumer unit. The company ended the quarter with 8.9 million wireless billing customer subscribers, a 24% year-over-year increase.

VRSN's balance sheet continues to look solid. The company ended the quarter with cash, cash equivalents, restricted cash, and short-term investments of $734 million. This is down -$76 million from the previous quarter, but VeriSign repurchased approximately 3 million shares of stock for $60 million during the quarter. VeriSign also spent $266 million in cash to acquire m-Qube.

"We are pleased with our execution in the first half of 2006," said Stratton Sclavos, chairman and chief executive Officer of VeriSign. "As our results indicate, demand for our intelligent infrastructure services continues to grow as our customers accelerate their migration to network-based interactions with their business partners, employees, and customers."

Bottom Line: VRSN delivered an in-line quarter; however, guidance was a touch light, and that's sending the stock 5% lower in a tough tape today (Friday). The company's Internet Services Group, which includes the security and registry businesses, continues to grow nicely, while the Communications group remains a mixed bag. Within Communications, the SMS messaging business continues to grow quickly, the legacy telco services business is flat (mostly due to industry consolidation), and the mobile content business is finally starting to stabilize (on a sequential basis).

With year-over-year comparables becoming significantly easier for VRSN's Communications Group, and new acquisitions set to begin to contribute to operations, Bill Martin and his team are looking for VRSN shares to finally get back on track to close out the year. Furthermore, with a free cash flow yield of nearly 7% on the shares, and strong multi-year growth visibility in the company's core businesses, Martin believes that VRSN will start to see its PE multiple stop compressing and start expanding over the coming next few quarters.

Again, it's disappointing that VRSN shares have struggled over the past year, but Martin continues to believe that this high-quality name is cheap versus its peers and set for stronger and more consistent growth ahead.

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Content Courtesy: Zacks Investment Research

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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

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VitalStocks.com Research Summary:
Data as of: 4 Aug

Price / Cash Flow Ratio is 23.57% of the Industry Average.

Forward Price to Earnings Growth (PEG): 1.22

Debt / Equity Ratio is 15.91% of the Industry Average.

Net Profit Margin is 169.0% of the Industry Average.

Return on Equity is 67.78% of the Industry Average.

Current P/E Ratio is 16.04% of the Industry Average.

5-Year Avg. Pre-Tax Profit Margin: n/a

Price/Sales Ratio is 51.33% of the Industry Average.

Income Per Employee is 133.24% of the Industry Average.

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

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5) Feature Stock #2 – Merck & Co. Inc. (MRK)

Kelley Wright, editor of the Investment Quality Trends newsletter, explains that a dividend payment provides an element of certainty, while appreciation of stock price is a probability at best and a possibility at worse. Read this featured expert’s thoughts on dividends. Then take a look at two of the stocks Wright recently featured.

INVESTMENT OUTLOOK from August 1

The return on a stock market investment is twofold. First is the dividend, which pays the stockholder an ongoing cash return on investment. The second is the growth in the price of shares which offers the investor the possibility of selling at a profit.

Between the two profit paths, only the dividend payment provides an element of certainty. A company’s dividend is tangible. The appreciation of its stock is a probability at best and a possibility at worse.

Whether dividend or share price appreciation is selected as the source of return, investors must first find a way of measuring the value of the shares they plan to buy. Of the three fundamental measures of value: dividend yield, price/earnings ratio, and price/ book-value ratio, the dividend yield is the most revealing measure of value because in addition to producing income, dividends tell something about a company’s state of health that earnings and book values may not show.

Featured stock updates include:

Merck & Co. Inc. (MRK) In 1668, a man named Friedrich Jacob Merck opened a small apothecary shop across from the castle moat in the town of Darmstadt, Germany. In 1827, one of Friedrich’s descendants, Heinrich Emmanuel Merck transformed Merck from a small shop into a major drug manufacturing business. In 1891, the company was established in the United States. Continuing today as a global supplier and manufacturer of pharmaceuticals, Merck operations provide an exhaustive list of medications, treatments, and preventative illness products.

Merck’s best-selling group of pharmaceuticals is designed to treat atherosclerosis. Zocor, the leader of this group is designed to lower “bad” cholesterol while raising “good” cholesterol levels. Zocor’s exclusivity in the United States will end in June of this year. Complimenting Zocor is Cozaar/Hyzaar which is designed to help treat hypertension. Other successful medications include Singulair, which is used to treat asthma and Fosamax used to treat osteoporosis. Last year, the company’s Fosamax began seeing competition from generic manufacturers overseas, but will have patent protection in place until 2008 in the United States.

As drug patents inevitably expire, the new product pipeline remains essential for the maintenance of revenues. In 2004, Merck hit a number of obstacles with its new product development. The company canceled development of what was to be its first diabetes treatment, MK-767. Prior to that, late stage development for an anti-depressant and asthma medication were also canceled. Vytorin, which combines Schering-Plough’s Zetia and Merck’s Zocor is partially cannibalizing Zocor’s sales figures, though experiencing brisk success. Current products in Merck’s pipeline include Zostavax, a vaccine for shingles in adults; Rotateq, a vaccine for gastroenteritis caused by the rotavirus; and Gardasil, a vaccine for various strains of Human Papilloma Virus (HPV), which cause cervical cancer in women.

>>> Back to Table of Contents <<<

Content Courtesy: Zacks Investment Research

VitalStocks.com Research Summary:
Data as of: 4 Aug

Price / Cash Flow Ratio is 91.08% of the Industry Average.

Forward Price to Earnings Growth (PEG): 3.34

Debt / Equity Ratio is: n/a

Net Profit Margin is 142.63% of the Industry Average.

Return on Equity is 94.13% of the Industry Average.

Current P/E Ratio is 81.28% of the Industry Average.

5-Year Avg. Pre-Tax Profit Margin is 188.68% of the Industry Average.

Price/Sales Ratio is 97.6% of the Industry Average.

Income Per Employee is 105.94% of the Industry Average.

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

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6) Additional Stocks - Worth a Further Look

6A) Sonoco Products Company (SON)

Sonoco Products Company (SON), a Zacks #1 Rank stock, met or topped the Street’s earnings estimate for the past 11 quarters. After posting solid results for the first six months of 2006, the company raised its earnings per share outlook for the full year. SON has a price-to-book ratio of 2.5, compared to 3.8 for the market.

Full Analysis

Sonoco Products Company is a manufacturer of industrial and consumer packaging products, and a provider of packaging services. The company serves the paper, textiles, films, food, chemicals, pharmaceuticals, packaging, construction and wire and cables markets.

Over the past 11 quarters, SON exceeded analysts’ earnings expectations on eight occasions, while matching estimates three times. During this period of time, SON’s average surprise amounted to 9.2%.

On Jul 19, 2006, the company beat the Street by a penny when it posted second-quarter profits of 49 cents per share. Compared to the prior-year period, earnings were up 8.9%. Net sales came in at $917 million, up 4.4% when compared to the $878 million achieved in the second quarter of 2005.

For the first six months of 2006, net sales jumped 2.6% to $1.7 billion, while profits soared 22.4% to $94.5 million. With results for the first half coming in better than expected, SON raised its earnings per share outlook to the upper range between $2.07 and $2.10. On Apr 19, 2006, the company raised its 2006 profit guidance to the upper range between $1.96 and $1.99 per share from its prior guidance between $1.90 and $1.94 per share.

Analysts are growing increasingly optimistic about SON’s future earnings potential. Consensus estimates for this quarter and next are up 5.7% and 5.5%, respectively, over the past 30 days. Profit forecasts for this year and next have risen 5.0% and 5.1%, respectively, over the same period of time.

The Board of Directors declared the company’s 325th consecutive quarterly dividend on Jul 19, 2006. The 24-cent dividend will be paid on Sep 8, 2006, to shareholders of record as of Aug 18, 2006. SON has a current dividend yield of 2.9% and a five-year average dividend yield of 3.3%. Healthy cash flows from operations have also enabled the company to repurchase 2.5 million shares of its common stock for approximately $83 million during the first six months of 2006. The company’s return on equity exceeds that of the industry average—16% compared to 14%.

SON is currently trading at a valuation of 16.3x trailing 12-month earnings and at 15.4x current fiscal-year estimated earnings. The market, as represented by the S&P 500, is trading at a valuation of 16.6x trailing 12-month earnings and at 15.4x its current fiscal-year estimated earnings. The company has a price-to-book ratio of 2.5, compared to 3.8 for the market.

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.

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Content Courtesy: Zacks Investment Research

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6B) PACCAR, Inc. (PCAR)

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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.

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