Stuart Shaw, CFA

In the January/February 2006 issue of the Financial Analysts Journal, Jeremy Siegel and Jeremy Schwartz published a study titled Long-Term Returns on the Original S&P 500 Companies. Their conclusion would seem to support a buy and hold strategy: “We found that a portfolio of the original 500 stocks chosen by Standard & Poor’s in 1957 to launch their index outperformed the actual (updated) S&P 500 over the subsequent 46-year period and with lower risk.”

They provided a table of the 20 best performing survivor companies based on returns over the period from March 1957 to December 2003. The list was comprised of 13 consumer products companies, 6 pharmaceutical companies, 1 retailer, and 1 integrated oil company. The company completing the list and that caught my attention was Crane. Here’s a mid-cap industrial company vulnerable to economic cycles whose stock returned 15.1% over the period studied making it the 10th best performer.

Fast Track results: Crane (CR) failed 3 of the 10 categories, and is a potential idea that’s worth the time to thoroughly research.

Key points:

1. “A diversified manufacturer of highly engineered industrial products,” Crane adds a lot of value to the products it sells. The Aerospace and Electronics division can boast that its products can be found on “virtually all commercial and military aircraft.”
2. Crane’s long-term staying power through good and bad times, together with the returns that the stock has awarded shareholders is impressive.
3. Crane has been growing cash on its balance sheet. The company ended this year’s first quarter with cash and equivalents of $294.7 million, up from $133.9 million a year earlier and $283.4 million at the end of 2007.
4. Free cash flow has been growing. The company generated free cash flow of $185.7 million in 2007, up from $154.5 million in 2006. The first quarter came in at $35.0 million, which was $5.1 million above a year ago.
5. Earnings beat Street expectations for the last 4 quarters, and consensus estimates for this year and next have held steady. Management stated their earnings forecast for 2008 in the annual report and re-affirmed it in the first quarter earnings release at $3.45 - $3.60, for a gain of 8% - 13%.
6. Street analysts are giving little support to the stock, leaving plenty of room for ratings upgrades. Eight analysts are covering Crane, and only 2 are recommending purchase.
7. Crane offers good value. The stock’s P/E based on trailing 12-months earnings per share is 11.3, well below the S&P 500’s 18. The PEG ratio at 1 also compares favorably with the S&P 500’s 1.2.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

The demand for oil continues to grow. New discoveries, such as Petrobras’ Tupi field, are offshore and in deep water. Spending by oil companies on exploration and production is increasing. I Fast Tracked several oil and gas drillers. Transocean (RIG) and Noble (NE) passed my screen.

Fast Track results: Transocean failed 3 categories, and Noble failed 2 categories.

Key points:

1. Transocean is the world’s largest offshore drilling contractor with 138 rigs, as well as being the leader in deep water drilling. Noble has 62 mobile offshore drilling units.
2. Transocean and Noble are benefitting from strong backlogs, high rig utilization rates, and high day rates.
3. Both companies are generating a lot of cash. Noble recently declared a special dividend of $0.75 a share.
4. Transocean is highly leveraged with long-term debt as a percentage of total capital of 46.9%. I prefer Noble’s 13.1%.
5. Earnings at both companies have equaled or beat Street consensus estimates in each of the last 4 quarters.
6. Both stocks passed Fast Track’s valuation measures.

Transocean and Noble are potential buy ideas worthwhile thoroughly researching.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

“We’re off to a good start in what we expect to be another strong year of financial performance for Boeing,” said Chairman and Chief Executive Jim McNerney. The company delivered first quarter earnings that handily beat the Street’s consensus estimate.

Fast Track results: Boeing failed 3 categories. The stock is a potential idea that is worthwhile thoroughly researching.

Key points:

1. Cash and equivalents ended the first quarter at $9.6 billion, up from $7.0 billion last year and $3.2 billion in 2004.
2. Free cash flow came in at $1.5 billion in the first quarter, as compared with $277 million a year earlier.
3. Boeing’s earnings have beat Street estimates for the last 4 quarters. The Street has been lowering estimates, and that trend could change.
4. Boeing’s stock passed Fast Track’s 2 valuation measures.
5. Eleven analysts rate the stock hold and 3 underperform/sell out of a total of 22 analysts, leaving room for ratings upgrades.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

Use the parameters listed below to quickly screen for potential stock ideas. You can usually find the information at these websites:

Company website
http://finance.yahoo.com
http://online.wsj.com (fee)
www.reuters.com
www.morningstar.com

Just fill in the answers with an X under yes or no on this easy to use worksheet. I like to see a stock fail no more than 3 categories before going further with more extensive research. Whether you choose to use Fast Track or any other screening tool, always thoroughly research the stocks that pass your screen before buying.

Company Stock Risk Profile Fast Track™

Company Name ———— Stock Symbol—————- Date

Yes —No

Cash and cash equivalents
and short-term investments
are stable or growing.

Low or no long term debt.

Cash generated from
operations is close to or
higher than net income.

Free cash flow has been
stable or growing.

Reported earnings have
equaled or exceeded analysts’
consensus earnings estimates
for the last four quarters.

Analysts’ consensus earnings
estimates have been stable
or rising.

P/E is less than 100% of the
average of the high and low
P/E’s of the last five years.

PEG is below the Industry’s
and S&P’s 500’s.

Management has been buying
stock.

Of the analysts following the
stock, no more than half are
recommending purchase.

Definitions:

Low long-term debt = long-term debt as a percentage of total capital of no more than 20%.

Free cash flow = cash from operations less capital expenditures.

PEG = price / forward earnings divided by forecasted earnings growth, usually the Street consensus for the next 5 years. Read the rest of this entry »

Target is on the cover of the current issue of Fortune. I like shopping at Target, and the stock is down 30% from its 52-week high.

Fast Track results: Target failed 5 categories, so I would not go further with this idea.

Key points:

1. Target has a lot of financial leverage with long-term debt as a percentage of total capital of 49.7%.
2. Free cash flow has been declining since fiscal 2005, and came in at a negative $244 million last year.
3. Consensus earnings estimates have been trending lower.
4. The stock passed two valuation measures, and more than half the analysts covering the stock are not recommending purchase are positive factors.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

In June 2005, I concluded that, “Starbucks is a great company, but the shares are expensive. Moreover, their valuation reflects investors’ expectations that management will deliver on their forecast. I do not want to take on the valuation risk at the current price that they may not.” The stock has fallen 33% from that time and 57% from its high in May 2006.

Fast Track results: Starbucks failed 3 categories, and is an idea that is worthwhile taking a closer look.

Key points:

1. Starbucks has new operating management as founder and Chairman, Howard Schultz, took over as CEO in 2007. His plan is to renew the company’s focus on coffee, improve profitability, and emphasize growth in overseas markets. Investors’ expectations about management delivering on these plans are much lower today.
2. The power of the Starbucks brand name has not changed.
3. The balance sheet is solid with long-term debt as a percentage of total capital at a low 19.6%.
4. Free cash flow has been growing: $360.4 million in 2006, $559.1 million in 2007, and $695.2 million in the latest 12-months.
5. The stock passed Fast Track’s two valuation measures.
6. Nine of the 18 analysts covering Starbucks rate the stock hold leaving plenty of room for ratings upgrades.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

Pfizer (PFE) is the world’s largest pharmaceutical company with such well-known products as Lipitor, Celebrex and Aricept. The stock has fallen into the rubble pile as the price dropped precipitously from $39 in February 2004 to $21 currently, reflecting patent expirations, including Lipitor’s in 2010, and flat sales last year.

Fast Track results: The stock failed 3 categories. Pfizer is a classic contrarian idea, and is worth a closer look.

Key Points:

1. Pfizer has a fortress balance sheet. The company is cash rich with $25.5 billion of cash and short-term investments on the balance sheet at year-end 2007. Long-term debt as a percentage of total capital is a low 10.1%.
2. Pfizer generated operating cash flow of $13.4 billion in 2007 and, after capital expenditures, free cash flow of $11.5 billion. Management is forecasting operating cash flow to rise to $17-$18 billion this year.
3. The Street on balance is not interested in the stock, with 13 hold and 2 underperform ratings out of a total of 23 analysts.
4. The stock offers a hefty 6% yield. As an expression of confidence in the future of the business, management raised the dividend 10% in this year’s first quarter.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

I like to go where the cash is. So, I Fast Tracked Google (GOOG), Apple (AAPL) and Microsoft (MSFT).

Fast Track results: Each stock failed four categories. Staying with the discipline of my three-category rule, I’m not going further with these ideas.

Key Points:

1. These companies are cash machines, with strong and growing free cash flow, lots of cash on their balance sheets, and no long-term debt. While substantial, cash balances at Microsoft have been declining.
2. Google reported earnings that were slightly below Street estimates in two of the last four quarters. Street estimates have been trending lower at Google and Apple. Microsoft’s earnings have not disappointed and estimates have been stable.
3. Valuation is a mixed picture at Apple and Microsoft. Google’s stock passed Fast Track’s two valuation measures.
4. Managements at all three companies have been selling stock at the same time that the Street loves these stocks. I want to see just the opposite. There are a total of 97 ratings on all three stocks, of which 81% are buy recommendations – not much room for any disappointment.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than three categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

Johnson & Johnson’s (JNJ) products are part of our daily living. Tylenol, Aveeno, Band-Aid and, of course, Johnson’s Baby Powder are well known brands. But did you know that Johnson & Johnson is the leading company in the medical devices industry and the 5th largest pharmaceutical company?

Fast Track results: Johnson & Johnson’s stock failed 3 categories, and is an idea worthwhile thoroughly researching.

Key Points:

Generated $12.3 billion of free cash flow last year.

1. Generated $12.3 billion of free cash flow last year.
2. Ended 2007 with $9.3 billion of cash and marketable securities on the balance sheet.
3. Long-term debt as a percentage of total capital is a low 14%.
4. Warren Buffett’s Berkshire Hathaway is a major shareholder with 61.8 million shares.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

General Electric (GE) is a broad based industrial company spanning infrastructure, healthcare and consumer products, in addition to media and financial services.

Fast Track results: GE’s stock failed 3 categories, and is worthwhile thoroughly researching.

Key points:

1. Strong free cash flow.
2. Earnings have not disappointed, and analysts’ estimates have been stable.
3. Management has been buying stock.
4. Attractive 3.6% yield.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.