HIGH-GROWTH GAINS FROM LOW-TECH STOCKS
Three low-tech firms that are growing at 50-100% per year

Although high-tech stocks took a pounding in the market from 2000 to early 2003, the technological revolution is by no means dead. In fact, we still firmly believe that some of the greatest modern advances of the 21st century will come in the form of technological improvements. Here are just a few examples of the types of changes that are going to make our lives better in the years ahead:

-- Faster microprocessing speeds and advanced computer software will pave the way for huge productivity gains both at work and at home.
-- Improved wireless and wireline communications technology will allow us to speak to anyone or connect to the Internet at high speeds from anywhere at any time.
-- Advancements in aviation and travel will make visiting new destinations both more affordable and more convenient.
-- The mapping of the human genome will to usher in a new era of more effective medicines and cures for some of today's most deadly illnesses.

And the list goes on an on…

These types of advances are not only going to bring huge gains to society in the form of improved health and worker productivity, but they're also going to lead to explosive profits for those firms that find themselves on the cutting edge of new developments. A select handful of high-tech companies are poised to become the Microsoft (MSFT), Intel (INTC) or Amgen (AMGN) of the next decade. And as they rise from the depths of obscurity into dominant global high-tech behemoths, these firms are going to make their early investors extremely rich.

This great promise is what motivates many investors to put their hard-earned savings into the stock market (and more specifically, into high-tech stocks). And as you might expect, millions of investors scour the investment landscape each and every day in search of these up-and-coming technology leaders.

DON'T GET BLINDED BY TECHNOLOGY'S LONG-TERM PROMISE
That's the bullish story on technology, and it's a valid one. However, this incredibly compelling story of groundbreaking discoveries and new technological breakthroughs has proven to be a very dangerous one for many individual investors.

Why?

Because the story is so compelling that it often clouds investors' judgment. For starters, common-sense principles such as diversification are often thrown out the window when investors are presented with the potential for astronomical short-term gains.

Back in the heyday of the great 1990s bull market, some of the world's most astute investors became so enamored with the high-tech industry that they found themselves overexposed to technology and Internet stocks. And despite the huge correction we saw from 2000 to 2003, many investors are still overweight in technology issues.

Here are some of the other negative aspects of technology stocks that many investors were all too quick to overlook during the 1990s bull run:

1. RISK -- Just by virtue of the fact that they are unproven and new, many high-tech industries are extremely risky. Take Biotechnology for example. The majority of Biotech firms have yet to develop a marketable drug, and only a few dozen out of the hundreds of companies in this industry have managed to turn a profit. And even though some companies have enough cash to fund their research for the next five or ten years, a study done by Ernst & Young in 2002 estimated that a third of all Biotech firms had less than two years worth of cash on hand at that time. This means that for every big winner like Amgen there are bound to be many, many failures in this industry in the years ahead. The risks here are tremendous.
   
2. UNCERTAIN FUNDAMENTALS -- The risks associated with technology investments are not only great, but they're also extremely hard to quantify and analyze. When it comes to evaluating companies in unproven industries with short historical track records and rapidly changing competitive landscapes, even the world's greatest fundamental analysts sometimes find themselves scratching their heads. In fact, legendary value investor Warren Buffett has even gone so far as to refuse to invest in high-tech companies altogether, noting that he simply doesn't understand them.
   
   The Internet boom (and its subsequent bust) provided us with a great example of just how difficult it is to perform fundamental analysis on high-tech firms.
   
3. VOLATILITY -- This goes hand-in-hand with risk. Although the high-tech industry is going to give birth to many long-term winners, the volatile nature of this industry means that high-tech share prices are likely to fluctuate wildly along the way. Do you have the stomach that it's going to take to ride out this volatility? Unless you follow a very disciplined long-term investing approach and your investing time horizon is at least five or ten years out, high-tech stocks might not be well suited for your portfolio.
   
4. CURRENT CONDITIONS -- Many technology-related markets are in the midst of a terrible slump at the moment. Simply put, high-tech companies don't always deliver stellar growth. 

THE TECH BOOM MIGHT HAVE STALLED, BUT IT ISN'T OVER
We could go on and on with a list of statistics that shed light on recent weakness in the networking equipment, data storage, software and many other high-tech sectors, but our objective here isn't to badmouth the technology industry. After all, we still believe that technology companies and technology stocks have incredible long-term promise. We also understand that many of the same risks and uncertainties that plague the high-tech sector are also present among other types of companies. And finally, although many tech-related sectors are still in the midst of a long slump right now, this downturn isn't going to last forever (in fact, it's now starting to look like the U.S. economy is turning the corner to more meaningful growth).

However, we DO think it is important for investors to recognize and understand the risks and uncertainties involved in many high-tech investments, so that's why we've opened up this research report by highlighting some of these risks.

SEARCHING FOR GROWTH
As long-term investors, we still want to have exposure to technology stocks. Yet for all of the factors mentioned above, we realize that it's important to search for high-growth companies in other sectors of the economy as well. The good news is that you don't have to be tech-savvy in order to profit from high-growth stocks. That's because many of the world's fastest-growing firms aren't even involved in the technology industry at all!

The bottom line here is that high growth doesn't necessarily mean high-tech. Although technology might be the wave of the future, it isn't the only wave worth riding. The Internet, wireless communications and advancements in modern medicine might have changed the world over the last decade, but mankind's basic necessities haven't changed one bit.  

For example, people still need to eat. One of the companies that we profile in this report is poised to capitalize on a fundamental shift in Americans' eating habits. Health-conscious consumers are beginning to shy away from ordinary fast food restaurants and towards a new breed of so-called "fast-casual" restaurants, and this firm is in the best position to profit from that shift.

And regardless of how technology changes our lives in the years ahead, land is still going to remain valuable and limited in supply. The second firm that we discuss below has grown incredibly fast in recent years by buying up some of the most attractive plots of land right in the heart of many major metropolitan markets throughout the country.

And finally, people will still like to do enjoyable things with their free time, and one of the most addictive and profitable (for the house, that is!) hobbies that we can think of is gambling. As one of the nation's largest and most geographically diversified casino operators, the third firm on our "low-tech" list should continue to grow at a fast clip for the foreseeable future.

FOCUS ON TOP PERFORMERS
Regardless of how well the economy is holding up or how the overall indices are performing, there are always going to be a number of huge winners in the stock market each and every year. Not surprisingly, these big winners are going to be firms with aggressive expansion strategies that are growing at breakneck speeds.

We made it our mission to seek out these high-growth companies. For starters, we used our advanced screening software to search for firms with above-average earnings, revenue and cash flow growth. We also scoured the investment landscape for stocks that held up well during the market correction from 2000 to 2003. To our pleasant surprise, we found that a host of low-tech, easy-to-understand firms have been "delivering the goods," so to speak. After undertaking a rigorous fundamental and competitive analysis on all of these initial candidates, we came up with the following three favorites:

Panera Bread Company (PNRA)
Capital Automotive REIT (CARS)
Harrah's Entertainment (HET)

These shining stars have managed to buck the market downtrend over the last several years by posting impressive growth amidst difficult economic conditions. But to say that they have "outperformed" would be a major understatement, as these three stocks have gained an average of about +200% over the last three years. (For comparison's sake, the S&P 500 and Nasdaq have fallen roughly -30% and -60% from their early-2000 all-time highs, respectively.)

If you're concerned that you might have already missed the boat on these three winners, we have some advice for you -- DON'T BE! All of these companies are poised to extend their recent winning streaks for years to come. For starters, all three firms are still fairly small, leaving them with plenty of room for growth. In fact, two of the aforementioned firms still carry market values of just $1 billion each (based on market capitalization). As they continue to expand into new markets and capitalize on new opportunities, these companies should see their market values swell in the years ahead.

So without further ado, we're pleased to bring you an in-depth look at all three of these high-growth, low-tech winners…

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(1.)  PANERA BREAD COMPANY (PNRA)

With roughly 500 locations in 30 different states, Panera Bread Company is one of the nation's leading "fast-casual" restaurant chains. Panera specializes in made-to-order sandwiches, freshly baked breads and pastries, soups, salads, juices and custom roasted coffees. By positioning itself as a restaurant within a bakery setting and by offering a comfortable, relaxed atmosphere, the company has managed to attract a wide variety of clientele.

What this means is that the cash registers never seem to quiet down at any point during the day at Panera. Although the company owes much of its success to the mobs of hungry office workers that crowd into its stores around lunchtime during the week (according to a recent study by NPDFoodworld, lunch sales account for 45% of all revenues among fast-casual restaurants), the firm's high-quality pastries and gourmet coffees attract a sizable breakfast group as well. And in addition to dinner patrons, the firm's clean, casual setting draws groups of customers in during all times of the day who are simply looking to take a break from the day's activities. Finally, Panera's take-home breads have also won a strong following.

The fast-casual segment, which relies on moderately priced items and speedy service similar to that of fast-food joints, is one of the fastest growing segments of the restaurant industry today. And while a number of major competitors have emerged in recent years, Panera, which operates under the "Panera" and the "Saint Louis Bread Company" names, is quickly becoming the most widely recognized player in this market. In fact, some analysts have even gone so far as to refer to the firm as "the McDonald's of bakery cafes."

Competitive Advantages:
· Location -- Panera's restaurants are primarily located in suburban strip malls near schools or major metropolitan office areas. By becoming the first fast-casual restaurant to expand into many of these locations, the company should be able to fend off competition from lesser known rivals and local establishments.

· Name-Brand Recognition -- If you haven't heard of Panera before, then wait a few years. As soon as one of the firm's restaurants opens up in your area, you'll quickly begin to understand what all of the fuss is about. For those familiar with the restaurant, the Panera name stands for quality food, reasonable prices and a comfortable eating atmosphere. This solid reputation should continue to spread as Panera expands its footprint throughout the country. National restaurant chains like Panera tend to do better and better as consumers begin to recognize the firm's name. If you've ever visited a national chain while you were on vacation instead of a local restaurant because you wanted to be assured of the quality of the establishment or wanted to order from a menu that you were familiar with, then you understand the value of name-brand recognition in the restaurant industry.

· Unique, Extensive, Quality Menu -- First and foremost, all of Panera's food is much higher quality than that which you would find at a fast-food restaurant. Moreover, the menu is very extensive. There's literally something for everyone at Panera, where you can order anything from a strawberry and walnut-laced salad to a plain old PB&J sandwich. There's also something to be said for the uniqueness of the firm's food and beverage offerings. Many of Panera's signature salads and sandwiches feature a mixture of different ingredients that consumers can't find anywhere else. If you're hungry for a Fandango Salad, which includes mixed field greens and romaine lettuce with toasted walnuts, gorgonzola cheese, mandarin orange slices and a fat-free raspberry dressing, we only know of one place where you can get one! By offering unique menu items like this and specialty breads that you can't get anywhere else, Panera has been able to successfully distinguish itself from the rest of the fast-casual pack.

The Bull Story:
· Tremendous Revenue and Earnings Growth – Panera's earnings and revenues have gone on an absolute tear over the past few years. Company revenues jumped 30% from $150 million to $200 million in 2001, and that growth rate increased to 39% last year, as the firm posted $278 million in revenues. Meanwhile, the firm's earnings have nearly doubled year in and year out, jumping from $6.9 million in 2000, to $13.2 million in 2001, to $21.8 million in 2002. Looking forward, analysts expect Panera to earn roughly $30 million this year, or about $1.00 per share.

Here's what's fueling this growth:

· New Store Openings -- The company had nearly 500 stores in operation at the end of 2002, but that figure is getting set to more than double in the coming years. Panera opened up about 110 bakery-cafes last year, and management's stated goal is to open up 115 new locations in 2003. The firm plans to open about 80% of these new stores through partnerships with franchisees. And given its recent success, Panera has found no shortage of willing franchisee candidates. In a recent press release the company boasted that it has already inked deals to open up over 500 additional franchises. The firm's current restaurants are based mainly in the Midwestern and Eastern United States, but Panera has plenty of room for future expansion in both these and other markets. For example, the company is just now beginning to open new stores in the lucrative California market. And finally, its worth pointing out that Panera is reaping huge returns on each and every one of the new restaurants it builds. The firm's cash return on investment is nearly 50% for each of its company stores.

· Strong Operating Margins -- Panera's cost base isn't growing very quickly, especially now that the company is expanding primarily through its franchise program. As sales improve and the firm opens new stores, those fixed costs are going to be spread over a larger and larger revenue base, leading to higher operating margins. Last year the company's operating margins averaged 11.8%, and this figure could move higher as the firm expands its store base in the years ahead.

· Zero Debt -- Panera has no outstanding debt at the current time and should be able to fund future expansion internally through strong operating cash flow growth.

· Quality Management Team -- Led by CEO Ronald Shaich, Panera's managerial team is composed of a seasoned group of restaurant industry veterans. Mr. Shaich founded Au Bon Pain in 1981, and his firm later went on to purchase Panera (which was then called the Saint Louis Bread Company) in 1993. In this day-and-age of investor mistrust of corporate management, it's worth pointing out that Mr. Shaich has over 80% of his net worth tied up in Panera's stock. Management's interests are definitely aligned with shareholders here.

· A Powerful Bread Brand In the Making? -- Most organizations change and evolve over time, and Panera should prove to be no exception to this general rule. In addition to selling its breads and other goods at its company-owned and franchised stores, management is apparently exploring other product distribution options. This means that you might one day see Panera-brand breads at your local grocery store. The possibilities for growth through additional sales channels are enormous.

The Bear Story:
· Rich Valuation -- The bear story on Panera focuses almost exclusively on the stock's valuation. At current prices, the stock trades at roughly 40 times this year's projected earnings per share (EPS). This rich PE could come crashing back to earth if the company's growth slows. For example, although total company sales have continued to rise thanks to new store openings, recent weakness in same-store sales (this naturally occurs as a restaurant chain matures, so we're not too concerned) has put pressure on the stock.

What else could slow down the company's growth?

· Competition -- Panera isn't the only firm itching to grab a larger share of the lucrative fast-casual restaurant market. Other players, such as the Chipotle Mexican Grill, Atlanta Bread Company, Fazoli's and the Baja Fresh Mexican Grill, are all vying for a piece of the action. It remains to be seen which of these firms, if any, will emerge as the leading national brand(s) in this marketplace.

· Over Expansion -- An interesting phenomenon in the world of business is that fast-growing companies can sometimes become victims of their own success. Companies that grow too quickly often run into operational difficulties. In addition, top executives frequently have trouble managing larger organizations. In Panera's case, there's some legitimate concern that the firm might have trouble monitoring and managing its burgeoning number of franchisees. If those concerns were to ever materialize, then store quality (and subsequently, the company's reputation) could suffer.

StreetAuthority's Thoughts:
If you ever have any doubt as to which of the above scenarios to place your faith in, just walk into your local Panera at lunchtime during the week. Or should we say, just TRY to walk into your local Panera. Based upon what we've seen at our local locations, it's a pretty safe bet that the line will reach out the door!

The bottom line is that we fully believe in this company's growth story. Moreover, we're confident that it will continue for at least the next several years, if not longer. Panera has plenty of room to expand not just from 500 locations to 1,000, but perhaps to several thousand by the time all is said and done. We agree that the company's overall revenue and earnings growth will slow eventually, but we're confident that this "eventually" is still several years off. Consumer demand for the firm's high-quality food remains very strong, and keep in mind that Panera has yet to expand into about half of all U.S. states. And we haven't even mentioned the potential for international expansion yet! We had some international visitors in from Luxembourg a few weeks ago, and after taking them to Panera for a quick lunch, all of them mentioned how well they thought the restaurant would do in Europe. Company management knows this well, and is bound to turn its attention overseas in the coming years.

In terms of valuation, we understand that Panera's shares are richly valued at current levels, but we certainly do not consider the stock to be "priced for perfection." A quick glance at the stock's forward PE of around 40 might give investors some reason for caution, but remember that PE ratios completely ignore a firm's growth. And when it comes to Panera, growth isn't just part of the story, it's the entire story. As a better measure of valuation, we prefer to look at PEG ratios (calculated as PE divided by a company's growth rate). Based on that metric, Panera is actually reasonably valued relative to both the S&P 500 as a whole and the average firm in the restaurant industry. The company's earnings should continue to grow at a 30% clip for the foreseeable future (versus just 20% for the restaurant sector and 12% for the S&P), so we believe that Panera's high current PE is justified. And assuming that the firm's PE holds steady (or even trends slightly lower) and that the company's earnings continue to grow at 30+% per year over the next two or three years, the stock has plenty of upside potential from today's levels.

In our humble opinion, Panera is about to become THE major growth story in the restaurant industry over the course of the next decade. The company is the world's next Starbucks (SBUX), but with more to offer and higher average sales per customer. Should Panera grow to even a quarter of the size of Starbucks (which commands a $10 billion market cap), then the stock could easily double from today's levels (Panera's market cap still sits at around $1 billion).

Action to Take:
We purchased Panera in October of 2001 at $16.50 per share. If you haven't already established a position in this long-term winner, it's not too late to get in. We would continue to accumulate the shares today at any price up to $50 per share, and would plan to hold the stock for roughly 3-5 years (this should be the high point of the company's growth cycle).

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(2.)  CAPITAL AUTOMOTIVE REIT (CARS)

Capital Automotive REIT is one of the nation's largest owners of land, buildings and other improvements used by motor vehicle dealerships. Since its inception in 1997, the company has invested over $1.5 billion in roughly 300 different properties throughout the country. These properties consist of over 2,000 acres of land and 12 million square feet of buildings and improvements.

Operating as a real estate investment trust (REIT), the firm's basic strategy is to purchase real estate from large automobile dealer groups in major metropolitan areas. Capital Automotive then leases that real estate directly back to those dealerships and/or vehicle repair service centers under long-term, triple-net leases. Under the terms of those leases, the tenants are responsible for all maintenance and operating costs associated with the property, including such items as insurance and real estate taxes.

Why would a car dealership want to sell the land right underneath its feet and the roof over its head? The answer has everything to do with the changing face of the U.S. automobile business. Throughout the last several decades, most auto dealerships have been family-owned and operated. In recent years, however, major corporations such as CarMax (KMX) and Sonic Automotive (SAH) have begun to take over this market by scooping up some of the most attractive dealerships in major metropolitan areas. These companies tend to specialize in the operating business (selling cars) -- not in real estate ownership. Moreover, as they look to expand into new areas by buying up other existing dealerships, companies like Sonic and CarMax are always in need of additional cash.

That's where Capital Automotive comes into play. By selling their real estate holdings to Capital Automotive, these operating companies are able to not only focus on what they do best (again, selling cars), but they're also able to raise the cash that they need to fund future acquisitions. Meanwhile, Capital Automotive benefits from the relationship by obtaining secure, long-term leases for its newly acquired, high-quality properties. This is truly a win-win deal for both firms.

And finally, in addition to purchasing real estate from major operating companies like Sonic and CarMax, Capital Automotive sometimes purchases land and buildings from family-owned dealerships. In many of these cases, wealthy dealership owners sell out to Capital Automotive in an effort to diversify their investment holdings (with so much of their wealth tied up in their dealerships, it's a smart move for many) or to raise cash for a particular purpose, such as estate planning.

Competitive Advantages:
· Location, Location, Location -- As we've mentioned time and time again, these are the three most important things to examine when it comes to any real estate investment. Capital Automotive's managerial team is keenly aware of this, as the company has focused its efforts almost exclusively on the nation's top 50 metropolitan markets. In fact, 75% of the firm's properties are located within these major cities. It's also worth noting that while the number of car dealerships in the U.S. is substantial, it isn't growing very rapidly. What this means is that Capital Automotive is really involved in a "land grab" when it comes to purchasing major dealerships in prime locations. Once those dealerships are bought up, they're gone. The competitive advantage of owning these limited-supply locations is obvious.

· Long-Term Leases --The average initial lease term for Capital Automotive's properties is an amazing 14 years. By locking in these kinds of long-term commitments from its tenants, Capital Automotive is effectively able to lock out the competition.

The Bull Story:
· Stable, Long-Term Leases -- The importance of Capital Automotive's long-term leases cannot be overstated. The firm's 14-year (and in many cases, even longer) commitments from its tenants make this a very low-risk business. None of the company's existing lease agreements come due until 2008 (at the earliest)!

· High-Quality, Diversified Customer Base -- Long-term leases might sound great, but they aren't worth the paper they're printed on unless they are made with companies capable of honoring their side of the deal. Knowing this, Capital Automotive only does business with dealer groups that have extensive and successful operating histories. In addition, it mainly works with dealerships that sell several different automobile brands. All told, the company's tenants operate over 400 motor vehicle franchises and sell nearly 50 different brands of vehicles.

· 100% Occupancy Rate -- This is yet another beautiful thing about Capital Automotive's business model. Because the firm doesn't purchase any new properties without first signing a long-term leaseback agreement, it guarantees that its properties are fully occupied for at least the initial lease term of around 14 years. Therefore, Capital Automotive's occupancy rate will never fall below 100% unless one of its dealership tenants goes out of business or moves to a new location. Car dealerships generally tend to stay put, and none of Capital Automotive's leases expire until 2008, so we aren't too concerned about the firm's tenants jumping ship. As such, tenant bankruptcies are the only major tenant-related risk that the company faces. Yet keep in mind that just about every REIT faces this same risk.

· Continued Expansion -- Capital Automotive has fueled its tremendous growth over the past few years by continually expanding into new markets and by purchasing new properties in existing markets. For example, the company closed roughly $200 million in new real estate acquisitions in 2002 alone! Looking forward, the firm's goal is to complete roughly $150 million in acquisitions during this calendar year. As long as Capital Automotive can continue to identify high-quality acquisition targets (which we think it will have no trouble doing for at least the next two or three years), this type of growth should continue for years to come.

· Solid Revenue and Earnings Growth -- It's amazing that we've come all this way without even discussing Capital Automotive's sales and earnings! If you're familiar with the company or you've paid attention to everything we've mentioned so far, you can probably guess that Capital Automotive has posted impressive, stable revenue and earnings growth over the past several years. Total revenues increased from $76 million to $142 million between 1999 and 2002 (nearly 25% annual growth), and similar growth is on tap for 2003. Meanwhile, Capital Automotive's earnings soared from $21.7 million to $43.8 million during that same time period (25% annual growth). In terms of funds from operations (FFO, which is the most commonly used earnings metric for REITS), the company earned $1.73 per share in 2000, $1.97 per share in 2001, and $2.25 per share last year. Looking forward, analysts expect all of these figures to continue to grow at a similar clip in 2003.

· Fat Profit Margins -- Capital Automotive's operating margins and profit margins have both hovered at roughly 40% in recent years. This firm is an absolute cash-generating machine, which brings us to our next topic…

· Stable, Growing Dividends -- In order to keep its status as a REIT, Capital Automotive is required by law to distribute at least 90% of its earnings back to shareholders in the form of dividends. With a current annual payout of well over $1.50 per share, the stock now carries an attractive dividend yield. What's more, company management has raised that dividend payout each and every quarter since the firm became a publicly traded company back in 1998. Given Capital Automotive's growth prospects and projected cash flow for the coming years, that streak of more than 20 consecutive quarters of higher dividends looks like it will continue well into the future.

The Bear Story:
· Valuation -- Eager for stability and drawn in by the firm's stellar financial performance in recent years, investors have pushed the stock up sharply over the past several years. At current levels, the shares trade at around 12 times last year's FFO of $2.25 per share. Although that might seem pretty reasonable when compared to the average PE for the S&P 500 (which currently stands at about 20), keep in mind that Capital Automotive is a real estate investment trust. Because they are required to return such a large portion of their earnings back to shareholders, REITs can't fund much of their future growth through internal cash flow. As such, REITs tend to be slower-growing investments than most other categories, and generally trade at lower valuation multiples for that very reason. So what would be a reasonable PE for your average REIT? Based on our experience and the industry data that we've examined, we'd say that most REITs trade for around 10 times earnings. Given its trailing Price/FFO of 12, some analysts believe that Capital Automotive is "fully valued" at recent levels.

· Competition -- With a market capitalization of under $1 billion, Capital Automotive is still a fairly small firm. And although it is the only major publicly traded REIT that specializes in the automobile dealership niche, it is not immune from competition. Other firms that often (or could, if they decided to expand their strategies) compete with Capital Automotive for existing dealerships include private investor groups, major financial institutions and large existing REITs. The company's recent string of successes surely hasn't gone unnoticed by these competitors. If a number of other investment firms decide to jump into the auto real estate market, then they might very well beat Capital Automotive to the punch on new properties (or at the very least, raise the bidding prices on for-sale properties). Higher purchase prices would lower Capital Automotive's return on investment. Meanwhile, if stiff competition kept it from reaching its annual acquisition target goals, then the firm's growth could slow considerably.

· Lack of Attractive Properties -- As Capital Automotive grows and the automobile dealership industry consolidates, it is going to become more and more difficult for the firm to identify and acquire high-quality real estate. In other words, this auto dealership "land grab" that we referred to earlier isn't going to last forever. Should the company start to have trouble finding new properties to invest in several years down the road, then its growth is bound to slow.

· Heavy Debt Load -- Capital Automotive currently has over $1 billion in total debt on its balance sheet, making this a heavily leveraged firm.

· Weakness in the Auto Dealership Market -- Should Capital Automotive's dealership tenants start to face financial trouble for whatever reason (perhaps the economics of the auto business change, etc…), then the firm's financial results could take a hit. Also, it's worth noting that Sonic Automotive (SAH) accounts for about a quarter of Capital Automotive's rental income, so any problems at Sonic could spell trouble for Capital Automotive.

· Real Estate Slump -- If the national real estate market turns sour, then the value of Capital Automotive's properties could fall.

StreetAuthority's Thoughts:
We believe that Capital Automotive is one of the most attractive publicly traded REITS in the country at the moment. Over the past several years, Capital Automotive has proven that its business model is a viable and extremely profitable one. Moreover, the company is still fairly small and has plenty of growth ahead of it.

We brought up a number of risks inherent in this business in the preceding section, but for a variety of reasons we do not think that any of these pose a serious threat to Capital Automotive. Let's address a few of those aforementioned risks now:

Lack of Attractive Properties -- Capital Automotive has had no trouble identifying high-quality properties in recent years, and given the relatively small size of the firm and the large number of dealerships in the U.S., that trend should continue for at least the next two or three years. Although this is a long-term issue that the company will eventually need to deal with, we're not overly concerned at the moment. The stock is unlikely to react to this issue until Capital Automotive's acquisition spree begins to slow down. We will address it further at that time and will issue revised guidance on the shares if it becomes a major concern.

Debt Load -- The company's debt load might seem substantial, but it is pretty normal when compared to most REITS. Moreover, the firm's debt as a percentage of total assets currently stands at less than 75%.

HIGH GROWTH AND SIZABLE DIVIDENDS FROM A STABLE, LOW-TECH INVESTMENT
All in all, we think the risks associated with an investment in Capital Automotive are fairly small, especially when considered alongside the tremendous rewards one should reap from holding the stock. The firm should post earnings growth of about 10% per year over the next several years, and we fully expect the shares to grow at least that quickly during that time span. Add to that a 6% dividend yield and you've got yourself a 16+% annual performer that should continue to appreciate regardless of how the overall economy does. Capital Automotive is one of our favorite low-tech, income-oriented investments for 2003 and beyond. We think the shares look attractive at current levels and would plan for an initial holding period of at least three years from today. If the stock's dividend yield remains attractive after the firm's acquisition-fueled growth slows down, then we will hold for the long term (10 years or more).

Action to Take:
We think Capital Automotive (CARS) looks attractive at any price up to $40 and would plan for an initial holding period of at least three years from today. If the stock's dividend yield remains attractive after the firm's acquisition-fueled growth slows down, then we will hold for the long term (10 years or more).

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(3.)  HARRAH'S ENTERTAINMENT (HET)
With 25 major casinos and operations in about a dozen different states, Harrah's Entertainment is one of the nation's largest gambling and entertainment companies. The firm's core business line revolves around five land-based and 10 riverboat casinos that it operates under the Harrah's brand name. Yet the company is also involved in a host of other casino and gambling-related ventures throughout the country. These include the Rio casino and resort in Las Vegas, the Showboat in Atlantic City, several racetracks in Kentucky, and management of three Indian reservation casinos in North Carolina, Kansas and Arizona. All told, the company owns and/or operates about 1.5 million square feet of casino space (which includes over 40,000 slot machines and 1,100 game tables), 13,5000 hotel rooms, 400,000 square feet of convention space and over 100 restaurants.

Harrah's geographic and operational diversity can make the company a bit overwhelming to analyze as a whole, so let's simplify things a bit. Although it brings in revenues through its hotel, restaurant and entertainment operations, the company's main focus is on its core gambling activities. Whether floating on a river in Illinois or stationed on the beach in Atlantic City, the company's casinos are the heart and soul of what makes Harrah's successful. In fact, Harrah's brings in over 80% of its annual revenue stream through gaming operations. Along those lines, the firm has expanded throughout the country in an effort to reach as many local gambling markets as possible. Moreover, Harrah's management has put a strong emphasis on the firm's service and has created a membership rewards program in order to attract repeat business and drive up same-store sales.

Competitive Advantages:
· Location -- Harrah's owes much of its strength to its geographical diversity throughout the country. By expanding into new markets where it is sometimes the only casino within a reasonable driving distance for many customers, Harrah's has come to dominate the so-called "middle market" casino patron. By contrast, most of its competitors operate almost exclusively in the Las Vegas market. Although Vegas gamblers tend to spend more per person, casinos based there are unable to reach casual gamblers (those who might not be interested enough to drive/fly all the way to Vegas), frequent gamblers (those who live far from Vegas but like to gamble every weekend), or those without the time/means/desire to travel to Vegas.

· Limited Licenses -- Although gambling regulations and licensing rules vary greatly from state to state (making the process difficult to discuss in general terms), the main point here is that opening up a new casino is by no means an easy endeavor. Because licenses are often limited and difficult to obtain, Harrah's existing casinos -- outside of Las Vegas, Reno, and a handful of other major gambling towns, of course -- generally do not face a great deal of local competition.

· Rewards Program -- Through its "Harrah's Total Rewards" program, the company offers free drinks, meals and hotel rooms to frequent visitors. By catering to this core client base, Harrah's has managed to turn its more than 20 million Total Rewards members into loyal, repeat customers at its casinos.

The Bull Story:
· Geographical Diversification -- With operations in Colorado, Nevada, New Jersey, Illinois, Tennessee, Missouri, North Carolina, Louisiana, Kentucky, Iowa and several other states, Harrah's is far and away the most geographically diversified casino operator in the country. The advantages of this strategy are twofold. For starters, the company is able to reach a wider customer base than its competitors. Perhaps more importantly, however, Harrah's is not dependent on any one city or location for the majority of its revenues and profits. In times of economic and political uncertainty like we've seen in recent years, many gamblers have been hesitant to fly to Las Vegas, leading to sluggish results for Vegas-based casino operators. By contrast, Harrah's has performed extremely well, as many would-be Vegas vacationers have flocked to its more convenient locations.

· Financial Strength -- Company sales jumped from $3.5 billion in 2000 to $4.3 billion in 2001, and held strong at $4.1 billion in 2002 despite the weak operating environment. Meanwhile, the firm's earnings have soared from a loss of $12 million to a profit of $235 million during that same time span. Looking at a longer-term period, Harrah's revenues and earnings have grown at roughly 20% and 10% per year over the past five years, respectively, and that growth should continue well into the future. In fact, many analysts are even calling for Harrah's earnings growth to accelerate to 15% over the next five years. In addition, Harrah's is the most efficient cash-generating casino operator in the business. In a study of all nine major hotel, casino and resort companies, Fortune magazine ranked Harrah's #1 in terms of net profit margins, return on assets and annual earnings-per-share growth from 1991 to 2001.

· Management -- CEO Phil Satre, who has been involved in upper-level management with the firm for the past 17 years, leads Harrah's experienced management team. Under his guidance the company has been one of the most successful casino firms in terms of expanding its footprint throughout the nation, building its brand, and developing a loyal customer base.

· Acquisitions -- Harrah's has fueled much of its recent growth through a series of timely acquisitions. For example, the company acquired Players International in March 2000 and inked a deal to purchase Harvey's Casinos Resorts in April 2001. Future acquisitions should continue to boost the firm's bottom line.

· Customer Loyalty -- We mentioned this above, but we feel it is worth reiterating. Harrah's marketing prowess is second-to-none, as the firm has created the only national rewards program -- Harrah's Total Rewards -- in the industry. With a combination of clever marketing and high-quality service, Harrah's has managed to boost its same-store sales at a double-digit annual clip in recent years.

The Bear Story:
· Regulatory Concerns / Higher Taxes -- In early June 2002, the Illinois legislature passed a bill that raised riverboat casino taxes to up to 50% of revenues. What's worse, the bill did not allow casinos to increase the number of tables and slot machines in their facilities (as many in the industry had hoped that it would). The higher tax rate will serve to lower profitability for firms like Harrah's, which has a strong presence in the Chicago market. To get an idea of how disappointing this is for Harrah's, all you need to do is hear what a company spokesman had to say following the announcement: "It is going to be interesting to see how [legislators] explain the inevitable carnage that occurs as a result of this capricious, outrageous increase." Moreover, if other states decide to follow Illinois' lead by raising their own taxes (New Jersey now looks to be headed in that direction), then the entire industry could suffer in the years ahead.

· Competition -- The company not only faces competition from the likes of MGM Mirage (MGG), Park Place Entertainment (PPE) and Mandalay Resort Group (MBG) in many of its main markets (Nevada and New Jersey), but it is also being challenged by a host of new online gambling sites.

· Valuation -- The bear story on just about EVERY stock includes grumblings about valuation, and Harrah's is no exception. With projected earnings of a little over $3.00 per share in 2004, Harrah's trades at a forward PE of roughly 15. That doesn't seem unreasonable to us, but many investors still believe that the stock is fairly valued at current levels.

· Weakness in Non-Core Operations -- Although the firm's "Harrah's-brand" resorts and casinos have performed well in recent years, some of its non-core operations have posted disappointing results. For example, the company holds a 49% interest in a money-losing casino in New Orleans. In addition, its racetrack operations and its Rio resort in Las Vegas have not delivered the kinds of returns that management had hoped for.

· Economic Slump -- Should the U.S. economy dip back into a recession and/or should domestic consumer spending slow, then Harrah's (along with every other major consumer-oriented company) results would surely suffer.

· Class-Action Lawsuits -- There is some concern that compulsive gambling might eventually be considered a public health problem. Should the industry be found guilty of perpetuating this problem through its marketing or other practices, then it could be slapped with hundreds of class-action lawsuits filed by money-losing gambling addicts. And even if the industry is successful in fending off these lawsuits (which it has been in the past), the legal fees involved could be quite substantial.

StreetAuthority's Thoughts:
The U.S. economy is getting back on track, consumer spending remains solid, and we fully believe that domestic casino operators are now at the very early stages of what could prove to be an extended industry bull market. And given its leading position as not only one of the most efficient and fastest-growing players in the business, but also one of its most diversified and financially stable operators, Harrah's Entertainment should continue to post stellar revenue and earnings growth in the years ahead. By expanding upon and improving its Total Rewards program, the company's same-store sales are likely to grow at a 5-10% annual clip. Meanwhile, through the integration of recent acquisitions (Harvey's Casinos) and the signing of similar deals in 2003 and beyond, Harrah's should continue to expand its presence throughout the country.

Although we feel the risks inherent in this stock are a bit greater than those associated with Panera and Capital Automotive, we think Harrah's will be effective in managing and overcoming those risks in the future. When it comes to the Illinois tax increase, keep in mind that Harrah's brings in less than 15% of its earnings from that state. If other states decide to follow Illinois' lead and raise their own taxes, then we will reevaluate the stock and may issue new guidance on it accordingly at that time. Until then, however, we don't see this as too great of a concern, mainly because we do not believe that other state legislatures will be as aggressive as Illinois has been in raising taxes. And even if they do raise taxes, they are likely to increase their limits on allowable "gaming positions" per casino, which will lead to higher revenues for operators like Harrah's.

The weakness in non-core operations is also a bit of a concern. However, even though the company's New Orleans and Rio properties have been a drag on its earnings and cash flow, the company has still managed to post impressive earnings and revenue growth in recent years. Going forward, we're confident that the firm's management will straighten up its act by divesting or reducing its exposure to these underperforming properties.

And as far as the threat of class-action lawsuits goes, we don't think gamblers have a leg to stand on when it comes to suing the industry. Moreover, Harrah's has made a conscious effort in recent years to promote what it calls a "responsible gaming" environment.

All in all, we're impressed with Harrah's growth record and future prospects, and we firmly believe that the casino business will remain one of the most profitable consumer-oriented industries in the world. A few gamblers might get lucky here and there, but the general rule in the gaming business is that THE HOUSE ALWAYS WINS. Investors in Harrah's Entertainment will continue to reap the rewards of this certain victory.

Action to Take:
We added Harrah's to our Aggressive Growth Portfolio in October 2001 at a price of $26 per share. Those who entered at that time are now showing solid gains on the position. We view the stock as a solid long-term holding and would continue to accumulate the shares at any price below $50.

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CONCLUSION

Given how quickly new technologies can change, the risks involved in investing in high-tech stocks are often enormous.  So instead of trying to time the volatile tech market tops and bottoms, you might want to focus on low-tech companies like Panera (PNRA), Capital Automotive (CARS) and Harrah's Entertainment (HET) that you can more readily understand and evaluate. Best of all, each and every one of these companies are growing at an annual clip that would make even some of the most successful high-tech executives jealous.

By investing in these winners at today's prices, you'll not only diversify your portfolio away from the volatile technology sector, but you'll also put yourself in a great position to profit from some of the fastest-growing firms in the country.

Good investing!

Paul Tracy
Editor
The StreetAuthority Market Advisor
Washington, D.C.

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