Stocks That Almost Made The Cut: October 2006

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October 4, 2006 | S.T.A.M.T.C | | Author Asif

I wrote in detail about the stocks that almost made the cut in the newsletter this month. Here is what I had to say,

“I originally decided to pick the chemical companies Dow Chemical (DOW) and DuPont (DD) as a play on the declining price of natural gas. Both Dow and DuPont use a lot of natural gas and even though Dow sports an extremely low P/E of 9.23 and a dividend yield of 3.80%, investors have stayed away from the stock because of high natural gas prices. So the logical conclusion would be that both these companies would benefit from falling natural gas prices. Not so fast. As mentioned above, U.S chemical shipments dropped by 6.2% in the first week of September and the outlook for the economy appears bleak. Chemical companies are cyclical and do not do well in a weak economy. The low P/E for Dow Chemical starts to make sense if you believe that it has reached or is close to the peak of its current cycle.

Having discarded the chemical companies, I decided to feature the health and fitness company Nautilus (NLS) instead. I even did a fair amount of research and wrote up my thoughts on Nautilus. While there were some positive catalysts for Nautilus, I just could not get past the fact that the company had lowered its earnings guidance twice in the last few months. Moreover Nautilus is a retail company that makes the Bowflex line of products and I just do not see people spending hundreds or even thousands of dollars on a home gym if the economy is weak.

Given my outlook and my inability to find another attractive investment, I have decided to allocate about 5% of the model portfolio to Gold given its recent retreat.”

Apart from these three stocks I also considered a company called Landec Corp (LNDC) that a subscriber brought to my attention in August. Instead of getting into what Landec does, I will let this excellent SmartMoney.com article titled Breathe Easy, Bananas do it for me.

Landec’s Breathway products, which are primarily used to wrap fruits and vegetables, sound very interesting and the prospects of this technology being used in other areas in exiting. However Landec’s profit and operating margins at 3.94% and 3.57% respectively seem to be as slim as the margins of the grocery store customers it serves. The company reported first quarter results on September 26th and while the company reported a profit aided by an insurance settlement, revenue growth was an anemic 2.82% and fell short of Wall Street estimates. So for now Landec remains on the top of my watch list but did not make the cut for the October investment newsletter.




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