TheStockAdvisor

Happy July 4th

Fri, 03 Jul 2009 04:00:00 +0000

We wish all our readers and advisors a happy and safe July 4th holiday.

Yum Brands (YUM): A global meal

Thu, 02 Jul 2009 04:00:00 +0000

"Yum Brands (NYSE: YUM), the world's largest restaurant company, is our latest featured stocks," says Alex Kolb, editor of Zacks Elite Stocks. Here, he looks at the firm's global reach.

"The company has more than 36,000 restaurants in more than 110 countries and territories. Four of its brands -- KFC, Long John Silver's, Pizza Hut and Taco Bell -- are the global leaders of the chicken, quick-service seafood, pizza and Mexican-style food categories.

"The company, which is based in Louisville, Kentucky, saw more than $11 billion in total revenues in 2008 and is #239 on the Fortune 500 List. Solid Income Yum recently declared a dividend of 19 cents per share.

"The company said it continues to return cash and build shareholder value through its dividend program first initiated in 2004, adding that it has increased its dividend four-fold since then.

"Yum is a dividend leader among its industry peers, offering an annual dividend of 76 cents per share, which translates into a yield of 2%.

"In late April, Yum reported robust results, including first-quarter earnings of 48 cents per share, excluding items.

"The result topped the year-prior 42 cents and exceeded Street expectations by 20%. Yum saw worldwide sales growth of 1%, including 2% growth in mainland China, which offset weaker U.S. sales.

"Management said the power of Yum's global portfolio allowed the company overcome a challenging environment by accelerating productivity and managing costs while continuing to drive and invest in global growth strategies.

"Yum issued a full-year earnings guidance of $2.10 per share, which represents 10% over last year. Analysts are in agreement, pegging full-year earnings at $2.11 per share, 11% higher than the year-prior. For 2010, the consensus forecast stands at $2.34."

DuPont (DD): 'World class'

Thu, 02 Jul 2009 04:00:00 +0000

"DuPont EI de Neumours (NYSE: DD) is a world-class company with a world-class dividend yield," says growth & income expert Bryan Perry. Here's the latest from The Cash Machine.

"Some of the biggest winners in a recovering economy are those stocks of companies engaged in the basic businesses such as industrial chemicals, plastics, and adhesives.

"The firm can implement price increases along the way, which could translate into phenomenal earnings surprises and set a stock like DuPont in motion higher.

"Since 1802, DuPont's business has been focused on science-based products and services by using science to create sustainable solutions essential to a better, safer, healthier life for people everywhere.

"Currently, the company has operations in more than 70 countries, and offers a wide range of innovative products and services that include agriculture. It stays ahead of their competition by investing in research.

"With greater emphasis on the execution of its product development efforts, DuPont delivered more than $10 billion in sales from new products that are less than five years old in 2008.

"And in the first quarter of 2009, DuPont commercialized more than 500 new products to the market, nearly double compared to first quarter 2008.

"The shares are sporting a dividend yield of 5.70%, one of the highest yields for any blue chip stock traded today. 2010 sales are estimated to rise by 6.5%, and earnings are forecast to advance by 12% -- not bad for a company doing $26 billion in sales.

"In the latest quarter, the company earned 54 cents per share, beating Wall Street estimates by two cents, and maintained forward guidance for the second quarter.

"Overall, DuPont is a world-class company with a world-class dividend yield poised to benefit from the eventual upward pressures of inflation. From and fundamental and technical standpoint, DuPont looks good to go. The stock deserves to be on our Conservative High-Yield Buy List."

MannKind (MNKD): High risk bet on inhaled insulin

Wed, 01 Jul 2009 12:00:00 +0000

"In looking for a highly speculative stock for our portfolio, I have settled on MannKind Corp. (NASDAQ: MNKD), a company that is developing an inhaled insulin product," says Nate Pile.

In his growth-oriented Nate's Notes, the advisor cautions, "I believe we are looking at a situation in which we will either lose most of our money, or triple (or better) our investment in a fairly short period of time."

"In a nutshell, the company’s near-term fate hinges upon AFRESA, a novel, ultra rapid acting mealtime insulin therapy being studied for use in adult patients with type 1 and type 2 diabetes mellitus for the treatment of hyperglycemia.

"Working against the company is the fact that there has never been an inhaled insulin product approved for commercial use that has worked very well.

"Thus, if MannKind’s product manages to both win FDA approval and achieve commercial success, MannKind will truly be treading where no one has gone before.

"Indeed, an inhaled insulin product is one of those ideas that has been around forever, but, for all its promise, has never really resulted in anything but heartache for investors over the years.

"For example, though Pfizer managed to get its inhaled insulin drug (Exubera) approved a few years ago, the product was pulled from the market in late 2007 after generating only $12 million in sales.

"While this implies that MannKind may be facing an uphill battle, it should be kept in mind that Pfizer’s product required users to become proficient at loading and 'pressurizing' a cumbersome apparatus – and releasing the powder and inhaling it with precisely the right technique.

"But MannKind has managed to develop a much more compact and discreet device for delivering inhaled insulin.

"AFRESA passed its Phase III clinical trials with what appear to be sufficiently robust results to warrant approval for the control of hyperglycemia in patients with type 1 or type 2 diabetes, a New Drug Application has been filed with the FDA based on those results, and a ruling is expected early next year.

"In anticipation of approval, the company recently acquired an insulin production facility in Germany from Pfizer. If approved, this facility will nicely complement MannKind’s existing facility in Danbury, Connecticut.

"An additional 'intangible' value associated with this story is that it is still being led by its founder (and largest stockholder), Aflred E. Mann, who has started -- and then sold -- several biomedical companies.

"We again caution that the stock has already made very nice run in recent months (and thus may be due for a pullback before new highs are set again. In addition, the stock has the potential to be even more volatile than your typical development stage company.

"Further, a delay or denial of approval from the FDA will almost certainly results in a major 'haircut' in the stock price. As such, you do not want to become too overweighted in the stock until after the risk surrounding approval has been removed.

"For now, we would encourage speculative investors to start building a position in the stockso that you at least have a bit of 'skin in the game', as the saying goes. We rate the stock a buy under $10 and a strong buy on any pullbacks under $7."

Immunogen (IMGN): Antibody play

Wed, 01 Jul 2009 12:00:00 +0000

"How does one go about investing in the antibody space?" asks biotech specialist John McCamant. In The Medical Technology Stock Letter, he eyes Immunogen (NASDAQ: IMGN).

"As background, T-DM1 is a second generation Herceptin that may even exceed the original in sales because the armed antibody has been more potent to date by showing effectiveness in mBC patients who have failed either Herceptin or Tykerb.

"The company will continue to benefit from Genetech's extensive antibody experience as they continue to run all development for Immunogen's T-DM1.

"In addition, the armed antibody companies can offer significant patent extensions for naked antibodies after they lose patent protection. This additional patent protection is a significant long-term value, especially given the very strong current and projected sales for naked antibodies.

"Companies will spend lots of money to protect/extend patents on blockbuster drugs. Thus, we believe that a premium buy-out from Roche or one of their competitors could happen in the next few years as antibodes become even more pervasive in the drug sector.

"Given the recent pull back in IMGN’s share price from the low $8 level to $7 after the stock's recent secondary offering -- the company sold 5,000,000 shares of its common stock at $7 per share raising $33 million -- we are raising our buy limit to $8 to reflect our growing confidence in the company and it’s significant long-term growth potential.

"While dilution is rarely positive, the fact that the company raised cash after the stock has almost doubled in price over the last year makes it much easier to digest. Additionally, IMGN has not raised cash in a very long time, making it that much more tolerable as they run a tight fiscal ship.

"With the offering out of the way, we expect more positive news flow either in the form of additional partnerships or more data on T-DM1 later in the year. We believe that T-DM1 is a potential blockbuster drug candidate that will provide the company with a very good revenue stream.

"Any other progress from the company’s pipeline would just be icing on the cake. In addition, any progress in the pipeline would probably trigger a buyer to try and buy them at a premium.

"With cancer antibodies expected to be the largest class of drugs, armed antibodies represent both better drugs and excellent patent extension vehicles. Overall, we believe that Immunogen is an undervalued antibody play. We rate the stock a buy under $8 with a target of $17."

NovaGold (NG): 'Exceptional bet' in mining

Wed, 01 Jul 2009 12:00:00 +0000

"In the 2000s, as we’ve alternated between deflationary and inflationary worries, gold has been the only major investment to rise every year," says Stephen Leeb.

In his The Complete Investor, he explains, "We think that many miners are exceptional bets today. And among our favorite gold investments is one that we hold in our small cap value model portfolio: NovaGold Resources (ASE: NG)."

"The case for mining stocks is that the price of gold rises faster than miners’ costs, allowing margins to increase.

"That’s not to deny the risks, such as possible shortfalls in production, sudden price increases, environmental costs, and so on. Still a miner that can increase production and maintain or boost margins will outperform the metal over time.

"NovaGold -- and its relationship with Barrick (NYSE: ABX) -- illustrates particularly well the potential a superior miner can have even when gold prices are flat.

"Barrick, now Nova’s partner in developing one of the world’s largest gold deposits, proves that miners can rise independently of a bull market in gold. Between the mid-1980s and early 1990s, Barrick climbed more than fifty-fold on extraordinary increases in gold production.

"Production of gold, copper, and silver from Nova’s major properties, Donlin Creek and Golore, may come close. The Donlin discovery, one of the largest ever in North America, is estimated to contain at least 54 million ounces of gold.

"How much gold is this? In 2006 with gold trading below $700, Barrick offered to buy Nova for the equivalent of $16 a share. Then as now Barrick had a 50% interest in Donlin.

"Today, in the midst of a credit crunch, Nova has been beaten down to where it trades at some 80% below Barrick’s 2006 bid. Barrick still has a 50% interest in Donlin, whose potential reserves are considerably higher than in 2006.

"Moreover, the other significant holding of Nova is Galore, which represents one of the largest undeveloped copper deposits in the world.

"What are the risks? The only meaningful one is that the company does not get the financing to develop the properties. But that’s extremely unlikely given Barrick’s 50% interest in a deposit that would more than double its North American gold resources.

"Clearly any company that has no production and is dependent on others for its continued existence has to be rated as highly speculative. That said, from a risk/reward perspective you won’t find a better play than NovaGold."

Guangshen Railway (GSH): On track in China

Wed, 01 Jul 2009 04:00:00 +0000

"A focal point of China's ambitious $586 billion stimulus package will be railroadsl in fact, investment in railways has already tripled over this time last year." explains value Investor Nathan Slaughter.

In his Half-Priced Stocks he adds, "Guangshen Railway Limited (NYSE: GSH) looks to be an obvious choice to benefit from this trend. Indeed, pricing flexibility, stellar efficiency and utilization has made Guangshen the most profitable rail company in China."

"Growth in China's railways doesn't come as a surprise. Years before this plan was put in motion, China already had bold ideas about building out its railway system -- and was bankrolling those ideas with about $200 billion in government cash.

"And now, those commitments will be supplemented with an additional $100 billion earmarked from this latest stimulus package.

"To be sure, the sprawling country is certainly in need of additional rail capacity, and many rural areas have no service at all.

"Meanwhile, we all know that China has a ravenous appetite for iron ore, petroleum, coal and just about every other raw material.

"Much of the nation's commodities production takes place in the Western provinces, and those goods must then be shipped to population centers and economic hubs on the Eastern seaboard.

"However, the Chinese Railway Ministry estimates that railroads can only handle about 35% of the country's massive cargo demand -- the other two-thirds must be carried by less efficient means of transportation.

"But this is all changing. Thanks to heavy investment from both foreign and domestic sources, more than 10,000 miles of new railroad networks will be on the ground within the next few years.

"Guangshen Railway Limited operates both passenger and freight lines, and it's sitting on some prime real estate -- including routes between Guangzhou and Shenzhen, as well as the only network linking Hong Kong with the Mainland.

"Despite damaging earthquakes, record snowfall and other headaches, GSH still carried about 83 million passengers to their destinations last year -- representing volume growth of +15%.

"And the company has started off 2009 on the right foot, posting healthy double-digit first quarter gains in both revenues and earnings. Going forward, recent acquisitions and continued optimization of existing lines should lead to solid (though not spectacular) growth.

"I like the fact that GSH is sitting smack in the middle of the Pearl River delta of Guangdong Province, among the most affluent and rapidly expanding regions in all of China.

"This is a heavily traveled artery, and the company has it all to itself -- as a state-owned enterprise, I don't see many competitors being allowed in.

"The shares are currently approaching a 52-week high, but I think they could continue on this path and take investors on a quick ride to fair value at $30. Nevertheless, the stock is still best suited to risk-tolerant investors, preferably with a wide +25% or greater margin of safety."

Noble (NE): 'Jackup' profits

Tue, 30 Jun 2009 04:00:00 +0000

"Noble (NYSE: NE) offers a compelling combination of deepwater and international 'jackup' drilling exposure," says energy expert Elliott Gue in his The Energy Strategist.

"The stock is cheaper on a price-to-earnings and price-to-cash flow basis than most other contract drillers.

"In total, Noble has 14 deepwater and ultra-deepwater rigs operating in the Gulf, with all but one of these rigs contracted through early to mid 2011. Its booked contracts amount to around $10.6 billion, a solid base of defensive, visible earnings.

"The fundamental upside turnaround potential for Noble resides in its jackup fleet, which consists of 40 rigs of varying qualities.

"In total, Noble has 12 jackups working for Mexico's Pemex, primarily at day rates in the $125,000 to $160,000 range; these rigs offer exposure to any improvement in international jackup rates.

"In addition, Noble has eight harsh environment jackups working in the North Sea, a market that appears to be showing signs of stabilization.

"Finally, Noble is a conservative operator with an outstanding balance sheet and a solid backlog of rigs. I am adding Noble to the Wildcatters Portfolio."

Tide turns for US dollar?

Tue, 30 Jun 2009 04:00:00 +0000

According to Bryan Rich, a currency specialist and the editor of The World Currency Alert, the US dollar is now poised for a rise based on both technical and fundamental factors.

"The correction in dollar strength has been sharp over the past few months, but the key support area I've been watching in the U.S. Dollar Index has proven resilient. Now the dollar's resurgence is under way, and it's time to hop on.

"The dollar has broken key trendlines against the Australian dollar, the Euro, the Swiss franc and the Canadian dollar. This further indicates that this recent trend of dollar weakness should be over.

"Perhaps the biggest confirmation, however, is occurring in the stock market; the S&P 500 has broken a key supportive trendline that describes the sharp climb from the March lows of 666. This is a very bearish signal that should summon heavy selling pressure.

"This recent surge in risk appetite has been bad for the dollar, bad for U.S. longer-term Treasuries and good for almost all other markets. But now, with this tide reversal, I expect that the investor optimism and the cherry-picked data that has been paraded as 'green shoots' will fade quickly.

"The focus should return to the fragile nature of the global economy, the structural issues that need repairing, and the long road that lies ahead for economic growth. Bottom line: This environment bodes well for the U.S. dollar and safety of capital, in general.

"So it's time to enter a position in PowerShares DB U.S. Dollar Index Bullish Fund (NYSE: UUP). This ETF offers the easiest way to express a bullish view on the dollar.

"Plus, the major support area in the dollar that was tested and held its ground gives us a clear area to place a stop loss order -- at the $23.09 level."

Toby Smith: In the chips with SanDisk (SNDK)

Tue, 30 Jun 2009 04:00:00 +0000

"For two years chips stocks have unequivocally stunk; the industry has been mired in a host of problems, including massive overcapacity and shrinking demand," says Toby Smith, adding, "But that's changing."

In his ChangeWave Investing, he suggests, "One recommendation in this sector is SanDisk (NASDAQ: SNDK), the leader in flash memory -- one of the strongest segments in semis today."

"For the second quarter in a row the semiconductor sector is showing major signs of momentum that are so good that the industry ranked at the top of the nearly 20 industries we track each quarter.

"The bottom line is that these results clearly indicate that it is time to be invested in the semis, and the best way to do this is with two short-term plays.

"So, one of our favorite recommendations is the leader in flash memory -- SanDisk, whose flash memory data storage products serve both consumers and original equipment manufacturers.

"Its products are made for a wide variety of electronic systems and digital devices from cameras to mobile phones.

"SanDisk is a real innovator, holding more than 860 U.S. patents, more than 550 foreign patents and it's the only company that has worldwide rights to both manufacture and sell every major flash card format.

"SNDK managed to weather the downturn better than the Street expected. For Q1 it reported that revenues fell 22% to $660 million, but beat the estimates by more than $120 million -- and only lost 48 cents per share vs. the 76 cents consensus.

"SanDisk recently renewed its existing cross-licensing agreement with flash chip supplier Samsung. Importantly, this new supply agreement removes a cloud from over SNDK and provides more clarity about its long-term business model and outlook.

"Also, NAND flash memory prices were up 30% in April over March, and that's much better than the SanDisk's forecast.

"Our intelligence points to further strength this summer thanks in part to Apple orders related to new iPhones and iPods, as well as orders for memory from Sony and Nokia for new handsets."

Microsoft (MSFT) Bet on Bing?

Mon, 29 Jun 2009 04:00:00 +0000

"Microsoft (NASDAQ: MSFT), a holding on our buy list, was added to Goldman Sachs' Conviction Buy List," says Bill Martin. In BullMarket.com, he offers the reasoning for his buy rating.

"Analyst Sarah Friar at Goldman raised her price target on the name to $29 from $25.

"She said,'"We are adding Microsoft to our Conviction List as we think the combination of better revenue drivers, improved expense management, and sizeable cash balances provides more opportunities for bottom-line beats.'

"'Windows 7, Windows Server 2008 R2, Bing, Xbox 360 and new Halo content, Office 2010, and the Azure Cloud provide renewed innovation beyond anything we have seen in multiple years,' Friar wrote.

"She added, 'Looking out to CY2010 and beyond, the new product pipeline, combined with a modest rebound in IT spending, should buoy top-line growth. The stock remains under-owned by growth managers, providing further buying power.'

"While Friar is bullish on Microsoft, she isn't expecting a great June quarter due to the current IT spending environment. However, she believes investors will soon start to look beyond 2009 and towards higher growth rates from the 2010 Windows 7 product cycle.

"She said the biggest risks the stock faces are a prolonged weak economic environment and a more rapid than expected shift to software as a service (SaaS) offerings.

"In our view., Microsoft has been a hated company and reviled stock for years. However, it is currently an inexpensive stock (P/E around 13x) with a strong balance sheet and a clear catalyst (the Windows 7 launch).

"Yes, the ten-year chart may look like the stock flatlined on the operating table, but we think it may finally be ready to show some signs of life.

"Windows 7 is getting good early reviews (when was the last time that happened?), and if the company can make bundles of money selling products that many people don't particularly care for, a product end users actually like could do wonders for the bottom line and the stock.

"Throw in Microsoft cutting some fat after years of getting a bit bloated, and you have a stock that is a 'Buy.' Our Target is $30."

Powershares Agriculture (DBA): Invest in crop circles!

Mon, 29 Jun 2009 04:00:00 +0000

"There are many reasons to like PowerShares DB Agriculture (NYSE: DBA), and ETF that tracks agricultural commodity prices," says fund expert Doug Fabian.

In The ETF Trader, he explains, "We like the technical picture. In addition, we believe commodities are a great hedge against inflation." Here's his assessment.

"I’m a pretty skeptical guy; one of the more wild claims of the past decade or so was that so-called 'alien' crop circles -- those bizarre patterns carved into wheat, corn and other fields around the globe.

"Well, I say forget about the aliens, but don’t forget about the patterns taking shape in the world’s key agricultural crops.

"The patterns being cut into price charts of crops like corn, soybeans, sugar and wheat all have given us one compelling message, and that message is it’s time to buy.

"That’s why I now am recommending that you purchase the PowerShares DB Agriculture (NYSE: DBA). This is an ETF that seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return.

"This index is composed of futures contracts on corn, soybeans, sugar and wheat, some of the most liquid and widely traded agricultural commodities.

"There are many reasons to like DBA besides just its technical picture. First off, commodities are a great hedge against inflation.

"Second, many of the countries with the biggest demand for agricultural commodities are experiencing explosive growth.

"China, India and Brazil all are in hyper-growth mode, and that means demand for commodities is going to continue being very strong.

"In addition to the strong demand for these big four crops, we also know that the supply of these commodities is not growing fast enough to meet demand. According to some industry estimates, food inventories are currently at multi-decade lows.

"And what do you get when you have increasing demand and a decreasing supply? That’s right, higher prices.

"The underlying index that this ETF tracks is now trading right at its 200-day moving average. There’s been a pullback in DBA during the past several weeks, and that pullback has now given me the go ahead to buy DBA.

"In addition to your buy orders for DBA, I also want you to place a stop-loss order at 10% below your buy price. Putting in a stop loss is a must in this fund, as it tends to be more volatile than your average equity ETF. If you are not prepared to put in a stop loss with your buy order, I recommend not putting in a buy."

Utility expert taps into water

Fri, 26 Jun 2009 12:00:00 +0000

"Investors have given up on the water industry -- the sector has fallen 60% -- but the best firms have hardly missed a beat," says Roger Conrad; here's two favorites in Personal Finance.

"The EPA stimates the US will have to spend $335 billion over the next decade to keep the taps turned on, given aging infrastructure and supply degradation.

"Service providers are the highest percentage way to play growth in global water spending. Demand fluctuates with weather depending on the season but has proven steady even during deep recessions, including this one.

"Water utilities’ earnings are based on the size of their rate base--the reservoirs, treatment centers, water mains and distribution pipes they use to provide service. The more money invested, the more rate base grows, which generates higher revenue, earnings and dividends.

"American Water Works (NYSE: AWK) and Aqua America (NYSE: WTR) are also growing via acquisitions. Some 85% of the US is still served by cash strapped municipal water systems.

"In 2002, German utility RWE bought out American Water Works at several times book value. Since 2007, however, it’s been selling off its holdings at barely book value. Their loss is our gain.

"RWE still owns 49% of shares, which is likely to weigh on the market for a while. American, however, continues to grow.

"It has a thriving business managing municipal systems and continues to pursue new contracts as well as outright acquisitions in the 32 US states it serves. American Water Works yields a safe 4.5%.

"Unlike American, Aqua has no system management business but owns 100% of the infrastructure it operates. The company has completed hundreds of acquisitions since former Pennsylvania regulator Nick DeBenedicitis took the reins in the early 1990s.

"This year it’s taken over another half a dozen, including a small municipal system in the Keystone State that could be the harbinger of more muni buys in the 13 states it serves.

"Aqua’s earnings growth has been a picture of consistency for years. And with the company on track to invest a record $300 million in 2009, there’s more ahead."

What's the safest dividend in the Dow?

Fri, 26 Jun 2009 12:00:00 +0000

"Following last year's dismal market, investors are looking for something they can be sure of in the year ahead; and for income investors, that means finding a safe and rewarding dividend," says Carla Pasternak.

In her High Yield Investing, she offers a fascinating review to find the "safest dividend in the Dow." Here's her breakdown of the Dow and her top pick for dividend safety.

"The 30 members of Dow Jones Industrial Average represents some of the strongest names in America. So these corporate titans are a good place to start searching for the safest dividend.

"The first step in the process is not to look at the Dow at all, but to start with the 10-year Treasury note, currently yielding 3.86%.

"In theory, stocks represent more risk than Treasuries, so you want to make sure you're getting compensated for that risk with a higher yield.

"Using the yield of the 10-Year Treasury as our threshold eliminates most of the Dow. Though the Dow components pay an average dividend yield of 3.3%, about 40 basis points higher than the S&P 500 Index, we find that only seven Dow components yield more than the 10-Year Treasury.

Kraft (NYSE: KFT) -- 4.4%
Caterpillar (NYSE: CAT) -- 4.4%
Pfizer (NYSE: PFE) -- 4.5%
Merck (NYSE: MRK) - 5.9%
DuPont (NYSE: DD) -- 6.1%
Verizon (NYSE: VZ) 6.3%
AT&T (NYSE: T) -- 6.8%

"Next, I want to be sure the outlook for the company is stable. If there is notable trouble on the horizon, one place it will show up is in a company's projected earnings.

"For the purposes of this analysis, I'll shy away from any company expected to show more than a -5% decline in earnings this year, based on the consensus Bloomberg estimate.

"Considering the challenges of the current economic environment, it's not surprising that this analysis takes five more companies out of contention. As such, we're left with just two firms: Kraft and Verizon.

"Remember, safety is the first and most important criteria I look at when examining a dividend-paying stock.

"With that in mind, I decided to look into the most recently reported quarter for each company and compare net earnings to total dividends paid. We must exclude any company that paid more in dividends than it earned.

"That sort of arrangement is unsustainable. Any company whose dividend costs exceed its net earnings lacks the margin of safety that conservative income investors in this market must demand.

"This is a tough hurdle to clear: The first quarter of 2009 presented extremely difficult operating conditions. Any company able to comfortably maintain its distributions in such a challenging environment clearly has demonstrated a wide economic moat. Here are the results:

Kraft earned $662 million and paid out $426 million for a payout ratio of 64.7%.

Verizon earned $1.6 billion against its $1.3 billion dividend obligation for a payout ratio of 79.4%.

"We're still left with two companies. Both Kraft and Verizon have above-average yields, have a stable outlook and have demonstrated an ability to cover their dividends under tough economic conditions.

"At this point, I'll turn to history as a guidepost, looking at each company's average P/E, dividend growth rate and average annual total returns for the past five years.

"Amazingly, both companies are trading at almost identical discounts to their five-year average P/E. If each stock returned to its average P/E, Verizon would appreciate +37.1% while Kraft would appreciate +37.2%.

"Apparently that's not going to break a tie. Verizon does yield 1.9% more than Kraft, although Kraft has grown its dividend at a faster rate.

"Both companies also outperformed the S&P 500's annualized total returns for the past five years. But Verizon outgained Kraft by +1.7% a year -- by almost the same amount as its dividend premium over Kraft.

"As a telecommunications provider, Verizon is an essential service with high subscriber loyalty. Meanwhile, Kraft Foods includes strong consumer food brands like Kraft cheeses, Oscar Mayer meats and Nabisco cookies.

"Both companies boast of above-average yields and both dividends passed my stringent safety criteria.

"If pressed, I'd have to tip the scale to Verizon for the safest dividend in the Dow. Its higher 6.3% yield has made a positive impact on its total returns. And that difference is something we income investors can take to the bank."

Dow Theory's mid-year favorites

Thu, 25 Jun 2009 12:00:00 +0000

"Midyear is as good a time as any to pause and reﬂect," says Richard Moroney in Dow Theory Forecasts -- a newsletter that has been published for over 50 years.

Here, he reviews the state of the market and offers a look at trio of favorite stocks which he considers "fundamentally superior" companies: Biogen Idec (NASDAQ: BIIB), Comcast (NASDAQ: CMCSA), and Oceaneering International (NYSE: OII).

"The Dow Theory indicator remains in the bearish camp, as the last conﬁrmed signal was the move to new lows in March.

"But both the Industrials and Transports have staged signiﬁcant rallies since March, so the pathway to a bull-market signal has been established.

"If at least one average can hold above a March low on a signiﬁ cant market correction and then both averages rebound above the closing highs established in the current rally, the Dow Theory will return to the bullish camp.

"While the average U.S. stock is no longer particularly cheap, many attractive values are available. Among S&P 500 stocks, more than 100 have trailing P/E ratios below 10 — down from 230 in March but well above the 18-year norm of 42. Some 77 stocks in the S&P 500 have P/Es between 10 and 12 — more than double the 18-year norm.

"While bulls and bears appear sharply divided, we see no reason to make an all-or-nothing decision on be found among the fundamentally superior companies favored by Dow Theory Forecasts.

"Fortunes at Biogen Idec are leveraged to three drugs: Rituxan (rheumatoid arthritis and non-Hodgkin’s lymphoma), Avonex (multiple sclerosis), and Tysabri (Crohn’s disease and MS). Over the next 12 months, Biogen will rely on these drugs to sustain its operating momentum.

"Biogen plows its strong cash ﬂow into research and development, spending an average of 32% of sales on R&D for the past ﬁve years. The pipeline includes 20 drug candidates in the late stages of clinical trials that could broaden Biogen’s portfolio.

"In May, a Tysabri patient fell ill with progressive multifocal leukoencephalopathy (PML), a rare but often fatal brain infection. This marks the seventh PML case linked to Tysabri since its reintroduction in July 2006, and the third in 2009.

"Despite its side effects, Tysabri has gained acceptance among neurologists; it is regarded as the most effective MS treatment available. Trading at 12 times trailing earnings, a discount to the three-year average of 31, Biogen is a Focus List Buy and a Long-Term Buy.

"Anticipating that subscribers will upgrade to more expensive packages, Comcast is shifting toward a fully digital platform.

"New services will include access to 10,000 OnDemand choices and also triple the number of high-deﬁnition stations to 100. The transition won’t require new TV set-top boxes and has been successful in test markets.

"Comcast plans to roll out the initiative in more than half of its markets this year and expects completion by 2010. Despite these plans, management expects to reduce capital expenditures ($5.75 billion, or 17% of sales, in 2008) in both dollars and as a percentage of sales in 2009.

"CEO Brian Roberts considers Comcast’s primary operations, video and broadband services, as intertwined.

"He says he does not expect a material impact from 'cord cutters' — those who cancel cable subscriptions and watch video on the Internet. Comcast is working on a Web service that will stream cable-TV shows only to subscribers.

"The consensus predicts 2009 per-share profits will increase 13% on 4% higher revenue. Over the next ﬁve years, proﬁt growth is expected to average 11%. Already a Long-Term Buy, Comcast is being upgraded to a Focus List Buy.

"Whether it is deep sea or deep space, Oceaneering International helps customers reach distant environments.

"In March, Oceaneering won a $180 million contract to design NASA spacesuits, but the company gets 90% of its revenue from selling equipment and services to offshore oil and gas drillers.

"In 2009, Oceaneering will likely find growth in its Remotely Operated Vehicles (ROVs). Accounting for nearly half of operating income, the ROV ﬂ eet should expand at least 8%, and most of these new vehicles already have contracts.

"Further out, prospects looks bright for the other segments. Oceaneering controls 30% of the global market for subsea umbilicals, for which orders are expected to leap 60% over the next ﬁve years.

"Deepwater markets have proved less vulnerable in the downturn because of their massive scale and contract lengths, which frequently exceed five years.

"This year, management expects per-share proﬁts of $3.10 to $3.60. Oceaneering is not a bargain at current prices but trades at a reasonable 14 times trailing earnings, a 30% discount to the five-year average. Oceaneering is a Focus List Buy."