Market Advisor Portfolio Update
Tuesday, August 3, 2004

Reminder: To supplement our biweekly StreetAuthority Market Advisor newsletter mailings and our occasional News Flashes on important events, my staff and I publish a regular "Portfolio Update" every other week. We use this mailing as a way to keep you abreast of the following important items:

-- Current performance data for all of our Market Advisor recommended equity portfolios
("Beat the S&P," Aggressive Growth, Bellwether, Value, Income and Fund).
-- An analysis of recent events and important developments that could have an impact on our holdings.
-- A summary of any changes we've decided to make to our guidance (ratings, price targets, etc...)

Below you will find today's installment of our "Portfolio Update" feature. Please note that all prices are as of the close of trading on Friday, July 30th...

Our "Beat The S&P" Portfolio includes a mixture of stocks and funds that we believe have the best potential to outperform the S&P over the long haul. It consists primarily of top picks we've gathered from our other various recommended holdings. (more info.)

Recent Events:

-- Shares of leading Biotechnology firm Gilead Sciences (GILD) jumped $5, or more than +8.0%, at the opening bell on Friday, July 30th after the company reported quarterly earnings of 49 cents per share--well above expectations for earnings of 36 cents. The company also posted a +34% rise in revenues to $319 million thanks in large part to strong sales of its HIV drug, Viread. And in other good news, on Monday Gilead announced that the FDA had approved its new combination drug, Truvada, for the treatment of HIV. The drug combines two of the firm's existing medications, Viread and Emtriva, into a single pill, and received FDA approval six weeks ahead of schedule. Investors took a "sell-on-the-news" approach to the stock today, sending the shares nearly -2% lower in what can only be described as an absolutely baffling reaction to the announcement. I don't think today's sell-off will last for long. Look for the stock to rebound into the $65-70 range within the next few weeks.

Taking a step back to look at the bigger picture, my staff and I have been impressed with Gilead's execution in recent quarters, and we believe the firm's new combo pill could lead to improving earnings estimates going forward. As a result, Gilead remains one of our top picks in the Biotech sector. Although GILD may flounder somewhat in the near term due to recent across-the-board weakness in Biotech stocks, in the long run investors will surely reward those companies that have managed to execute their business plans to perfection. Gilead is one such company.

-- In other portfolio action, I've decided to add 100 shares of title insurance giant First American Corp. (FAF) to our "Beat the S&P" Portfolio at the opening bell on Tuesday, August 3rd. At the same time, I'm also going to add the stock to our Value Portfolio. For further analysis of this firm, please see our complete profile in our Value Portfolio section below.

Recent Events:

-- Pursuant to the guidance we provided in our last Market Advisor Portfolio Update on July 19th, my staff and I added shares of stolen vehicle tracking device maker LoJack (LOJN) at a price of $9.40 per share at the opening bell on Tuesday, July 20th. We've initiated coverage of the firm with a "Buy" rating and a 12-month price target of $13. With projected earnings of 74 cents a share next year and a scalable, high-margin business with significant barriers to entry, LoJack's shares should perform admirably in the months ahead. The firm is getting set to report quarterly earnings at 9:00 AM ET on August 3rd, so we'll be sure to bring you further updates after we review that announcement.

-- Shares of Total Entertainment Restaurant (TENT) have fallen sharply over the course of the last month after the firm posted a second-quarter loss of $0.5 million, or 5 cents per share. On the positive side of things, the loss was due primarily to a one-time asset impairment charge of $1.5 million, or 15 cents a share. Excluding the impact of that one-time event, the firm would have earned 10 cents per share. In addition, the company's +23% jump in revenues was an encouraging sign that sales growth remains on track.

On the downside, however, Total Entertainment posted a -0.2% decline in same-store sales during the quarter. Although the firm blamed the weak figure on rising food prices, my staff and I think the firm's problems might run a bit deeper than that. As we warned back in mid-June, TENT has had trouble managing its growth in the past, and recent news from the firm--combined with information we've gathered from store visits--reminds us that old habits often die hard. I still think the stock could manage to jump back to around $14 (about 15X next year's projected EPS) in the coming year as it expands its footprint across the country, so I'm going to revise my target to that level. I'm hesitant to remove the stock from our Aggressive Growth Portfolio until it reaches this newly revised target. However, should TENT manage to rally up to $14, then I'll likely move on to other more attractive opportunities.

-- My staff and I have started to watch both Central European Distribution Corp. (CEDC) and Stericycle (SRCL) very closely for possible inclusion into our Aggressive Growth Portfolio. For those of you unfamiliar with these firms, CEDC holds a dominant position in the liquor distribution business in several booming countries in Eastern Europe, while Stericycle is the largest medical waste disposal firm in North America. (For further information on these companies, please see our July 26th Market Advisor issue.)

We plan to add CEDC to this portfolio when the stock breaks out of its current downtrend. Meanwhile, we'd like to add SRCL at a slightly more attractive level--perhaps on a pullback to $45. We'll bring you further information on both of these stocks if and when we ultimately decide to add them to our Aggressive Growth Portfolio.

Our Bellwether Portfolio identifies and invests in well established blue chip firms that have a unique edge that allows them to stay ahead of the competition and consistently post above-average profits over the long haul.

-- In other action, after watching the stock decline from $96 to $80 last month, my staff and I have decided to take advantage of the recent dip by adding shares of Whole Foods Market (WFMI) to our Bellwether Portfolio. With about 150 locations across the country, Whole Foods has come to dominate one of the fastest-growing niches in the grocery business -- the market for premium organic and health-oriented foods. By offering quality produce and a wide selection of healthy food items, Whole Foods has managed to grow at a fast clip even amidst a general downturn in the grocery business. While traditional grocers are quickly losing ground to the likes of Wal-Mart (WMT) and Target (TGT)--both of which have added groceries to many of their stores at rock-bottom prices--Whole Foods has carved out a profitable niche for itself. And even though many traditional grocery chains are now attempting to compete with Whole Foods by offering a growing selection of health-oriented items, their selection and quality still pales in comparison to that of WFMI's, so we don't expect to see significant customer defections here.

On the financial front, WFMI's sales have grown at a roughly +20% annual clip over the past five years, and all signs are pointing toward a continuation of that growth in the years ahead. Key to the company's strategy will be growth in same-store sales (which jumped roughly +10% last year alone) and an increase in new store openings (the firm has regularly boosted its total square footage by more than +10% per year in recent years).

Of course, no company can grow at an extremely fast clip without encountering some growing pains along the way. Investors were reminded of that last month after Whole Foods warned that its aggressive store expansion would put a damper on profit margins both this year and next year. Because start-up expenses associated with new stores tend to be significant, management's decision to boost its square footage by more than 15% over the next year is likely to reduce the firm's profitability in 2004 and 2005. In addition, the company's recent decision to move into the U.K. market could also slow down profits in the near term.

On the positive side of things however, Whole Foods has proven its ability to turn new locations into thriving, highly-profitable cash-generating machines within a year or two, so over the long run we're confident that the firm's aggressive new store expansion will pay off. Wall Street sent the shares tumbling due exclusively to near-term concerns last month, but as long-term investors, we're not the least bit concerned with these short-term earnings fluctuations. Over the long run we're confident that the firm is headed in the right direction and is poised to dominate the booming market for natural and organic foods not only in the U.S., but also abroad. As such, investors who are willing to take a longer-term view of things should be nicely rewarded here. With this bullish long-term outlook in mind, we're going to add WFMI to our Bellwether Portfolio at the opening bell on Tuesday, August 3rd. We'll initiate coverage of the firm with a "Buy" rating and a 12-month price target of $96.

Our Value Portfolio is comprised of companies that are trading at a substantial discount relative to the value of their current asset base and/or future earnings prospects.

 Recent Events:

-- Pursuant to the guidance we provided in our last Market Advisor Portfolio Update, my staff and I added shares of used car dealer CarMax (KMX) to our Value Portfolio at a price of $18.70 on July 20th. The stock has moved nicely higher since then, and we expect it to continue to rebound off its recent lows in the coming months (we purchased the stock just 65 cents above its 52-week low of $18.05). We initiated coverage of the firm with a "Buy" rating and a 12-month price target of $26. However, we're extremely confident in this stock's long-term potential, and recent data has reinforced that optimism. As such, we've decided to raise our rating on the shares to "Top Pick." Our $26 target may also prove to be a bit too conservative, so we may need to adjust that down the road. As always, we'll make sure to bring you further updates on this quality investment idea in the weeks and months ahead.

-- In other portfolio action, as noted above, we've decided to add shares of First American Corp. (FAF) to our Value Portfolio. The company is the nation’s second-largest provider of title insurance, which in recent years has proven to be an extremely lucrative and growing business. Clearly, this business is dependant on a healthy real estate market. With that in mind, the soaring real estate market of late has been a boon to sales. And while rising interest rates have taken a bite out of refinancing activity, home sales have remained strong in recent months and that has spelled more business for First American.

But that’s not the company’s only business. The fastest growing market for credit in recent years has been in sub-prime lending-- essentially lending to borrowers with less-than-perfect credit. This is a profitable business for banks because they can charge much higher interest rates to such customers. But it’s also risky--sub-prime credit carries a much higher-than-average risk of default. That puts a real premium on the value of quality credit information that can help determine if a particular borrower is a reasonable risk or a bad loan in the making. First American is the undisputed leader providing detailed information and credit analysis to lenders. Because most other major credit agencies don’t have access to information on such borrowers, the company stands nearly alone in this profitable niche market.

The stock has come under some selling pressure in recent months due to concerns over rising interest rates. Looking at the long-term picture, however, we believe FAF is a downright bargain. Company revenues have been growing at over +30% in recent years, yet the company only trades at about 8X forward earnings. Even better, the firm's core near-monopoly business in sub-prime information should keep profit margins growing in the years ahead. With all of these factors in mind, we're going to add First American (FAF) to our Value Portfolio at the opening bell on August 3rd. We'll initiate coverage of the firm with a "Buy" rating and a 12-month price target of $33.

Our Income Portfolio contains a variety of holdings that deliver above-average dividend payments for income-oriented investors. 

Recent Events:

-- Based on the guidance we provided in our last Market Advisor Portfolio Update, my staff and I added the iShares Dow Jones Select Dividend Index (DVY) to our Income Portfolio at a price of $55.18 on July 20th. We've initiated coverage of this rock-solid exchange-traded fund (ETF) with a "Buy" rating and a 12-month price target of $62.

For those of you unfamiliar with DVY, this unique exchange-traded fund invests in a diverse basket of income-producing stocks. DVY sports an annual management fee of less than 0.5% and pays a dividend yield of about +3.6%. Offering instant diversification and solid income, this exchange-traded fund should make an excellent defensive play for long-term-oriented investors.

Our Fund Portfolio includes a diversified group of both mutual funds and exchange-traded funds suitable for long-term investors who either don't want to actively manage their own portfolio or want to diversify and complement their existing portfolio holdings.

Good investing in the coming week!

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