Watch List

As I have mentioned, I'll be having my first real round on stock sales in the back half of Feb. Over the weekend I created a watchlist of stocks as potential replacements. Last time I went through this process (mid May) I ended up picking some real bow-wows. This time I will look at just two elements:

1. growing earnings before taxes
2. some sort of moat or competitive advantage.

My plan is to pare the list down based upon (1) & (2). And then if I see one of the stocks drop for no apparant reason, I will buy it. I will not necessarily wait until February 24th when my 1st stock comes up, nor will I necessarily buy all my stocks the same day.

Here is the list and then I'll begin my commentary. Comments from the peanut gallery (meaning you) are welcomed as well.

BRL 52.64
DGX 50.14
HAL 29.12
KSWS 30.18
LMS 24.49
NOOF 10.14
OFLX 20.31
PWEI 29.46
SCSS 18.02
SHOO 34.98
THO 46.17
TTMI 10.73
VCI 13.77
WCC 61.10
WSTL 2.97

Pretty funny, in looking at my Yahoo listing it looks like PWEI has just been bought for $33. Guess I can cross them off the list.

BRL - Barr Labs. Wow Fiscal year 2006 ERS went from $2.07 to $3.20 per share. Revenues went up almost 30%. But 1st quarter of fiscal year 2007 was down. Wonder why? I see a -43m charge under "Other Net". Here is what MF had to say: (Barr's Wounded Quarter). Not sure whether they have any competitive advantage. Selling Generics does seem to me like a good place to be with the Dems coming in and pressure will be placed on drug prices.

DGX - Quest Diagnostics. Much lower EPS growth rate, single digits. Revenues are increasing about 10%. Going forward, growth will increase from purchase of Lab One. Perhaps they'll have more pricing power?

HAL - Halliburton. Cramer did list "King Hal" as one of his best value plays for 2007. Looking at their statements, pretty good example of why you need to look at income before tax as they had a 380m tax credit in 4q05. Income before tax has been increasing nicely. Revenues don't seem to be increasing as fast as EBIT. I don't know, HAL would have to fall to $23 or $24 before I'd bite.

KSWS - K Swiss. Hey this stock was on my list in May. Here is link to my witty posting: (Other Shoe). Cramer just gave KSWS a rare triple sell (Cramer's 'Mad Money' Recap). Might be a reason to buy? Looks like 2006 will basically be flat against 2005 in income. Not sure they have a competitive advantage. Just make shoes. International growth is quite high, but domestic sales are dropping. Like HAL, KSWS would have to drop a few bucks for me.

LMS - Lamson & Sessions. These guys make the nuts and bolts of electrical parts. Wow, these guys are doing great! Revenue over past 5 years has gone 312, 340, 387, 494 and 560m. Again, not sure if they have major competitive advantage, though there are likely barriers to entry. I like this stock. It'll be high on my list.

NOOF - New Frontier Media. Believe it or not, this is adult programming through like the internet. The ultimate sin stock. Well, they seem to have been increasing revenues and earnings in FY 2007, though 06 was flat vs 05. I know porn is a huge industry. Seems like there must be quite a few competitors, but I suppose a customer base is worth something. I don't know, I'd put them under LMS & BRL inless they drop 10 to 15%.

OFLX - Omega Flex. They make flexible metal hoses. Revenues have increased nicely: 46m, 65m, 74m. EBIT has gone 6.9, 9.7 and 12.4. Very nice. Then rolling 4 quarters is almost $16m! Hard to say what their competitive advantage is. But I like this company, right up there with LMS.

SCSS - Select Comfort. They make beds, they might be the ones where each side selects their setting. Revenues are going up 20 to 25%. From 2002 to 2005 EBIT has gone 19, 43, 51 and 69. 2006 looks like about 68. I think they may have had recent spike from deals with hotels. Decent stock though with unique product. Worth considering.

More tomorrow, it is getting late. Here is my ranking so far:

LMS, OFLX, BRL, SCSS, NOOF, HAL, DGX & KSWS