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.

“PM USA estimates that total cigarette industry volume declined approximately 4% in the first quarter. For the full-year 2008, PM USA estimates a total cigarette industry volume decline of approximately 3%.” Altria Group’s tobacco manufacturing and distribution business, PM USA expects this trend to continue with industry shipment volume declining 2.5% - 3.0% annually over the next few years. So, why would anyone own Altria Group (MO)? I do, and here’s why:

Altria dominates the U.S. tobacco industry with powerful brand names. The company has a commanding 50.9% share of the cigarette retail market. Marlboro boasts a 41.5% share. Acquired last December, John Middleton placed Altria in a leading position in the machine-made large cigar market with a 26.8% share. Middleton’s key Black & Mild brand controls 25.9% of that market.

Altria has a fortress balance sheet with lots of cash and low debt. The company ended this year’s first quarter with $4.8 billion in cash and cash equivalents, and long-term debt as a percentage of total capital of 13.5%.

Altria has always been and still is a cash machine. Right out of the box post spin-off the company delivered free cash flow of $1.9 billion in the first quarter.

Management is implementing a strategy that should support earnings growth in a shrinking market. The strategy calls for: cutting expenses at rates that exceed declines in cigarette volume; growing market share; and extending product lines and leveraging distribution through acquisitions and internally developed products.

Here’s how the company is performing so far:

1. Management plans to slice $1 billion out of the company’s cost structure by 2011. Selling, general and administrative expenses will drop by $600 million. Corporate headquarters functions have been restructured, including the relocation to Richmond, Virginia from New York, and should yield annual savings of $250 million starting next year. Another $156 million will come from the closing of the Cabarrus, North Carolina manufacturing facility and subsequent consolidation with the Richmond, Virginia facility by 2010.
2. Market share grew in the first quarter from a year ago. The company’s share of the cigarette retail market gained 0.5% on the back of Marlboro’s 0.7% increase.
3. John Middleton is in a segment of the industry that’s growing 4% - 5% per year. Middleton posted a first quarter volume gain of 8.2% with Black & Mild increasing its market share by 3 points.
4. New products have not worked out so well. Marlboro Ultra Smooth, a high tech filter cigarette, was recently pulled from the marketplace due to low acceptance. Other failures include a cigarette with a battery-powered holder to heat the tobacco, and a spit free chewing tobacco. I believe that shareholders would be better served if management would abandon this part of their strategy and redeploy these resources on what they know and already are doing best.
5. Altria has started 2008 with a solid earnings performance. Earnings per share (adjusted for one-time items and from continuing operations) came in at $0.37 in the first quarter, up 12.1% from the same year earlier period on a 2.8% gain in net revenues. Management affirmed their forecast for 2008 earnings per share at $1.63 - $1.67, for an increase of 9% - 11% off of a 2007 base of $1.50, and set an objective of growing earnings 8% - 10% over the next few years. Projections by Street analysts are at the high end of these ranges.

Altria has a 28.6% ownership interest in SABMiller, the world’s largest brewer. At the end of the first quarter, Altria’s investment in SABMiller was carried on the books at $4.1 billion and had a recent market value of nearly $10 billion.

The company is returning cash to shareholders. The Board of Directors set the initial quarterly dividend at $0.29 per share, and is targeting a 75% payout ratio. They also approved a $7.5 billion share repurchase program to be completed over 2 years. The company began buying back shares in April.

Altria’s shares are attractively valued with a price / earnings ratio and yield that compare favorably with the S & P 500. The shares’ price / earnings ratio, at 12.9x 2008 earnings per share of $1.63, is below the S & P 500’s 14.5x based on S & P’s earnings estimate of $88.04 for this year. The shares also offer a fat 5.5% yield, well above the S & P 500’s 2.4%.

In July 2007, I put the Dow Industrials on Fast Track, and concluded that, “If the Dow were a stock, it failed my 3-category rule, and I would pass.” The Dow is down 7.4% from last July and 5.9% year-to-date at the time of this writing.

Fast Track is a screening tool that focuses on 10 key categories incorporating the balance sheet, cash flow, earnings, valuation, and how management and the Street feel about the stock under consideration. I get interested in doing more extensive research using the entire Company Stock Risk Profile research process if a stock fails no more than 3 categories.

The Dow on Fast Track is a bottoms-up quick study of the Index and its components, and may also uncover a few ideas that may be worth your time for in-depth research. Here’s the Dow on Fast Track today:

1. More cash has been showing up on balance sheets. Cash and cash equivalents and short-term investments totaled $400.8 billion for the Dow companies at the end of this year’s first quarter, as compared with $301.3 billion a year ago. Excluding the 4 financial stocks in the Index, these same numbers were $248.8 billion and $209.5 billion, respectively. Moreover, 26 companies had stable or growing cash and cash equivalents and short-term investments on their balance sheets, up from last year’s Fast Track total of 15.
2. Long-term debt as a percentage of total capital for the Dow companies averaged 33.6% at the end of this year’s first quarter, excluding General Motors, which had negative total capital. Last year, the average was 35.2%, and 32.6% without General Motors. Fast Track favors companies with debt to total capital of 20% or less. Nine companies had percentages below 20%, 1 less than last year’s Fast Track.
3. Despite a tough economic environment, most Dow companies have been posting healthy cash flow. In 2007, free cash flow (cash from operations less capital expenditures) for all 30 companies came in at $86.7 billion, down from $114.1 billion in 2006. However, excluding the financials, free cash flow was $235.7 billion, up from $160.4 billion in 2006. This year’s first quarter is starting out on an equally strong note (without the financials) at $54.5 billion, as compared with $32.1 billion a year earlier. Twenty-five companies had stable or growing free cash flow, 5 more companies than last year’s Fast Track results.
4. But there were more earnings disappointments. Fourteen companies reported earnings that were below Street estimates in at least 1 of the last 4 quarters, 6 more than last year’s Fast Track.
5. Street analysts have been cutting earnings estimates for 11 companies versus only 3 a year ago. Last year’s optimism may be waning.
6. Only 5 stocks passed Fast Track’s 2 valuation measures. Last year, 12 stocks passed.
7. While managements remain overwhelmingly net sellers, they were somewhat more positive about their companies’ stocks. There were 7 companies where insiders were net buyers in the last 6 months. Home Depot stands out with net purchases of 5.7 million shares. Last year’s Fast Track turned up only 1 stock, Coca-Cola, with net purchases.
8. The majority of Street analysts continue to like the Dow stocks. Sixty-seven percent of the analysts following 21 Dow stocks are recommending their purchase. The remaining 9 stocks have the buy support of 41% of those analysts covering them. Fast Track gives higher marks to these 9 stocks, which have more room for ratings upgrades.

The average of all 30 stocks failed 4.3 out of 10 categories, as compared with last year’s 4.5. If the Dow were a stock, I would pass again since it would have failed my 3-category rule.

But the Dow is comprised of individual stocks, and Fast Track uncovered 11 potential ideas that are worth a closer look: 3M (MMM), Altria (MO), American Express (AXP), Boeing (BA), Caterpillar (CAT), Coca-Cola (KO), Hewlett-Packard (HPQ), Johnson & Johnson (JNJ), Microsoft (MSFT), Pfizer (PFE), and Disney (DIS), all having passed my rule of failing no more than 3 categories. Altria, Coca-Cola and Hewlett-Packard each failed 2.

Fast Track is a research tool for quickly and easily screening stocks for ideas. The 11 stocks cited above may or may not be good ideas. So whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen.

In 1997, the Federal Reserve offered a valuation measure for the stock market. The model compared the earnings yield for the S&P 500 to the yield on the 10-year U.S. Treasury note. The earnings yield is forward earnings divided by price, which is the reverse of the price / earnings ratio. According to the model, the market is overvalued when the earnings yield is below the Treasury note yield (negative differential), and undervalued when the earnings yield is above the Treasury note yield (positive differential).

In the 1988 – 2007 period, the highest negative differential (based on year-end figures) was 2.61% in 1999. The differential remained negative and the market dropped precipitously, bottoming in 2002 when the differential moved to a positive 2.40%. The subsequent trend was up. The differential reached a high of 2.64% in 2005, and has been positive since 2002.

Standard & Poor’s current estimate for S&P 500 2008 earnings per share is $89.44. Dividing $89.44 by the S&P 500 index of 1396.60 (at the time of this writing) gives an earnings yield of 6.40%. The 10-year Treasury note yield is 3.94%. The positive differential is 2.46%, which is the third highest behind 2005 and 2007’s 2.53%. Based on the Fed model, the market is undervalued.

We can get the S&P 500 earnings implied by the model by setting the earnings yield equal to the 10-year Treasury note yield and then multiplying the S&P 500 index by the 10-year Treasury note yield. Multiplying 1396.60 by 3.94% gives implied earnings of $55.03. This is $34.41 below the current Standard & Poor’s earnings estimate for this year, and is the highest negative differential from actual earnings in the 1988 – 2007 period. Unless Standard & Poor’s is way off the mark, the Fed model is suggesting that investors in the aggregate are far too negative about the outlook for corporate earnings.

Informed opinion almost always advocates the popular course, so you must steel yourself to stand apart. To be a contrarian is to be an outsider – until you’re proven right.

David Dreman, Contrarian Investment Strategy, 1979

Pfizer (PFE) reached a high of $48 a share in June 2000, and now trades at about $20. Twenty-one analysts are following the stock, but only 6 are recommending purchase. The contrarian investor in me had to take a look.

First, I put Pfizer through the Fast Track screen. The stock passed my rule of failing no more than 3 categories, so I continued to do more research using the Company Stock Risk Profile research tool. While Pfizer came through with a Medium Risk rating, having failed 19 of the 50 categories, the stock missed being rated Low Risk by only 2 categories.

Pfizer’s Risk Profile highlighted these negatives:

1. Pfizer is not delivering any growth, as sales have been essentially flat since 2004. Reported earnings have been extremely erratic, impacted by ongoing “purchase accounting adjustments, acquisition related costs, discontinued operations and certain significant items.” Adjusted for these items, as management does, earnings are smoother, but still are not growing. First quarter 2008 sales declined 5.0%, and reported and adjusted earnings per share dropped 12.8% and 10.3%, respectively.
2. Pfizer is being hurt by multiple patent expirations on very successful pharmaceuticals – Zithromax (antibiotic) in November 2005, Zoloft (depression) in August 2006, and Norvasc (hypertension) in March 2007. Lipitor (cholesterol) produced sales of $12.7 billion in 2007, and its patent is up in March 2010. As an example of what could happen to Lipitor’s sales, Zoloft’s sales went from $3.3 billion in 2005 to $531 million last year. Generics, as well as branded competition, already are eating away at Lipitor’s U.S. sales, which fell 8% in 2007 and 18% in this year’s first quarter.

I’m not presenting anything new here, as these issues are well known and baked into the stock price. The following positive factors also are there for investors to see, but are being overlooked:

1. Pfizer has a fortress balance sheet. The company ended the first quarter with cash and cash equivalents and short-term investments of $28.6 billion, which is up from $25.5 billion at year-end 2007 and $22.5 billion a year earlier. Long-term debt as a percentage of total capital is at a low 10.8%. And if that is not enough, net current assets (current assets less current liabilities) are more than 3 times long-term debt.
2. Pfizer remains a strong cash flow generator. Cash flow from operations was $13.4 billion last year, and after capital expenditures, free cash flow was $11.5 billion. These same numbers in this year’s first quarter were $3.3 billion and $2.8 billion, respectively. 2007 free cash flow could drop 25% and still cover the dividend. Management is forecasting operating cash flow of $17 - $18 billion this year, and expects “to continue to generate strong operating cash flow beyond 2008.”
3. Pfizer has 102 medicines in its pipeline – 47 in phase 1, 37 in phase 2 and 16 in phase 3. Two drugs are in registration. Management’s goal is to have 15 – 20 submissions in 2010 – 2012. Whether any blockbuster drugs emerge is, of course, uncertain. But investors have no expectations anyway, leaving plenty of room for positive surprises.
4. Newer drugs already on board are doing well, and posted robust sales in this year’s first quarter: Lyrica (fibromyalgia) - $582 million, up 47%, Sutent (cancer) - $190 million, up 86%, Chantix (smoking cessation) - $277 million, up 71%.
5. Management is streamlining the company. Costs are targeted to drop by $1.5 - $2.0 billion by the end of 2008, as compared to 2006.
6. Pfizer is a cheap stock. The shares failed only 2 of the 12 Company Stock Risk Profile valuation measures. Pfizer offers a dividend with a juicy 6% yield, which I believe is safe based on the strength of the company’s balance sheet and cash generating capability.

Investors with the fortitude to take the road less traveled should consider Pfizer. Whether Pfizer delivers a positive surprise down the road is anyone’s guess. But if the company should, the stock would be a rewarding investment indeed. In the mean time, you’re getting paid a very attractive dividend and own a stock that I believe has minimal downside risk.

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.

Unlike oil, gold, and other such commodities, water is the one commodity we must have to live. And I don’t even think about it. I don’t have to. Clean water is delivered to my home and where I work. It’s always available, and it’s cheap. Will it always be this easy?

Living in Arizona, one of the fastest growing and driest states, I thought back to a discussion I heard on NPR about population migration. I remembered this startling prediction: the Southwest will be riddled with ghost towns when water runs out, and those looking back 50 years from now will be mystified as to why people ever wanted to live there. Last year 26% of the Southeast was covered by an “exceptional” drought – the National Weather Service’s worst drought category.

Consider these worldwide facts from the United Nations’ Human Development Report 2006:

1. Less than 1% of the world’s freshwater is easily accessible.
2. 1.2 billion people lack access to freshwater, and 2.6 billion are without adequate sanitation.

More people with higher living standards, pollution, and climate change may be pointing to water shortages down the road. A key example, China has 20% of the world’s population but only 7% of the water. Will China have enough water to support its rapidly growing urban population?

The water industry should be ripe with investment opportunities. I put together a group of 18 stocks, certainly not all-inclusive of ways to participate in the industry, to begin to find out:

York (YORW), Pennichuck (PNNW), Middlesex (MSEX), Connecticut (CTWS), Southwest (SWWC), Artesian (ARTNA), SJW (SJW), American States (AWR), Aqua America (WTR), and California (CWT) are all domestic water utilities.

Mueller Industries (MLI) - tubes and fittings used in water distribution systems.

Watts Water Technologies (WTS) – water safety and flow control products.

Nalco (NLC) - water treatment chemicals and services.

Flowserve (FLS) – flow control equipment.

Gorman-Rupp (GRC) – pumps and fluid control equipment.

Calgon Carbon (CCC) – products to purify water and air.

Veolia Environment (VE) – water treatment services based in France.

Consolidated Water (CWCO) – desalination plants and water distribution systems in the Caribbean.

I used Fast Track to get a quick study on the group and find potential buy ideas:

1. These are mostly small cap stocks, and they are not widely followed on the Street. Thirteen stocks have market capitalizations under $ 1 billion. Thirteen stocks are covered by 5 analysts or less, and 9 stocks by 3 analysts or less.
2. Financial leverage is high, with long-term debt to total capital averaging 40.9%, ranging from 0% for Gorman-Rupp to 74.1% for Nalco.
3. Free cash flow was negative at 10 companies in 2007, and 7 companies posted negative free cash flow in each of the last 5 years. These are all utilities.
4. Thirteen stocks had P/E’s below their high / low 5-year average. Only two stocks, Mueller and Watts, also had PEG ratios that were below both their industry and the S&P 500.
5. California Water was the only company where management was a net buyer of stock.
6. The Street is not particularly enamored with this group of stocks. There are 40 purchase recommendations out of a total of 86 ratings, so there’s room for ratings upgrades. Aqua America seems to be the darling of the group with 10 analysts following the stock and 9 recommending purchase.

Here’s my take:

1. I was disappointed to find that Flowserve was the only stock that passed my Fast Track screen, having failed no more than 3 categories. But Flowserve is really a play on oil and gas, which accounts for 41% of their business, as opposed to 6% for water.
2. Only 3 companies, Veolia, Flowserve and Calgon, did not report disappointing earnings in any of the last 4 quarters. But Street analysts have held their earnings estimates steady at 12 companies. Watts pre-announced an earnings disappointment for their March quarter, citing weak construction here, slowing economic activity in Europe, and even problems in China. While this could be unique to Watts, is it a harbinger of more disappointments at other companies?
3. No company in the group delivered consistent earnings growth in the last 5 years. This, and that Watts is a pure play on water makes me question whether the water industry’s growth story has really kicked in yet.

I’ve decided to stay on the sidelines for now.

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.

Initial claims for unemployment benefits rose to a seasonally adjusted 407,000 for the week ended March 29. Claims over 400,000 are usually considered recession territory. The Labor Department just reported that nonfarm payrolls fell 80,000 in March bringing the unemployment rate to 5.1%. But the unemployment rate is a lagging economic indicator.

What may the market be telling us about the economy? I looked at the year-to-date performance of the Dow Jones Industries Indexes, and I found this:

Delivery Services + 6.70%
Railroads +13.16%
Transportation Services +25.07%
Trucking +14.95%
Home Construction +24.28%
Home Improvement Retailers +8.56%
Hotels +5.07%

The stock market is a discounting mechanism, and the strong performance of these economically sensitive industries may be telling us that a pickup in economic activity is up ahead.

I also thought that it may be informative to look at passenger traffic at McCarran International Airport in Las Vegas. Passenger traffic as compared to a year ago was up 3.4% in February and 0.2% year-to-date.

This also caught my attention. Research in Motion added 2.2 million subscribers and shipped 4.4 million smart phones in the quarter ended March 1.

So, more people are going to Las Vegas to vacation and gamble, and they are buying a lot of BlackBerrys. Is the economy really as bad as the headlines make it seem?