NEW YORK – From 1996 to 2001, data from the Conference Board show that orders for non-defense capital goods rose 7% on an annualized basis. Companies that have kept up a more robust pace of capital spending could be well-positioned if the recovery continues.

Example: Griffon (nyse: GFF – news – people ) has increased its capital budget by 18% (annualized) over its past five fiscal years, which end in September. The Jericho, N.Y.-based company makes garage doors; plastic films for personal care products such as diapers; and communication systems for military and municipal use.

Griffon has devoted capital expenditures toward automating its factories and increasing production. Research and development is an important component. In plastics, for example, the company operates a center where 30 scientists and engineers develop new products. On the communications side, Griffon internally funded the development of an airborne maritime-surveillance system.

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NEW YORK – In late December 2000, one-month natural gas futures spiked to a ten-year high of $10 per million btu. But, as the familiar oil patch story goes, the boom times led to bust as production surged and demand tapered off. April gas futures now trade at $3.26 per million btu.

Still, that’s an improvement from a 52-week low of $1.83. “We think prices will trend up for the remainder of the year,” says Martin King, energy commodities research analyst with Calgary, Alberta-based brokerage FirstEnergy Capital. “But they’re certainly not going to explode.” King expects prices to firm from an average $2.74 in the second quarter to $3.11 by the end of this year.

King suggests the price improvement is primarily a function of contraction in supply. On the other hand, Christopher Ellinghaus, energy analyst with New York’s Williams Capital Group, thinks increasing demand, driven by an economic recovery, will spur prices. He estimates that mild weather and a recession-induced slowdown in industrial activity depressed demand for natural gas by up to 2 trillion cubic feet in 2001.

Whether driven by supply or demand, rising prices will benefit companies such as Western Gas Resources (nyse: WGR – news – people ). The Denver-headquartered company produces, processes and transports natural gas through operations in the Rocky Mountain, Southwest and Gulf Coast regions.

Full story at Forbes.com

One theory of corporate finance says that the whole point of owning stock is to collect dividends on it. Yet this doesn’t do justice to companies that generate healthy cash from their businesses but choose to pay no or meager dividends. To capture these, we screened for companies that generate cash above and beyond dividend payments. Specifically, our metric of excess cash flow is cash from operations less capital expenditures and dividends paid.

Example: DST Systems (nyse: DST – news – people ), a developer of statement- and billing-processing systems for financial services and communications firms, has enjoyed 27%-a-year growth in excess cash flow per share over the past three years.

Thornburg Value Fund has 700,000 DST shares. Fund manager William V. Fries notes that DST’s model calls for spending heavily up front to develop technology, but the company collects revenues for each mutual fund or billing account it processes. Over its past eight reported quarters, DST Systems has averaged excess cash flow equal to 11% of sales. DST has used its cash to reduce shares outstanding. Other ways shareholders can be enriched: A company pays down its debt or expands its business.

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NEW YORK – Some short-sellers predicted trouble for Enron, and they may have been the only people to walk away from that debacle with their pockets full and reputations untarnished. Still, the presence of short-selling–the practice of betting on a stock’s decline by selling borrowed shares in the hope of purchasing them cheaper at a later date–doesn’t always spell doom for a stock.

Take Marriott International (nyse: MAR – news – people ), for example. The Bethesda, Md.-based hospitality concern has seen its short interest (the amount of shares sold short but not yet repurchased) rise 43% from January to February. Short interest now equals 3% of Marriott’s float, or the 196 million shares available to the public.

Marriott has had a good run in the market lately–perhaps too good for the shorts’ taste. The stock has bounced 59% from a 52-week low and has outpaced the S&P 500’s performance by 17 percentage points over the past year. It has advanced 11% since mid-February.

While short-sellers often target stocks in which they think the market is overexuberant, Todd Salomone, director of research at Schaeffer’s Investment Research, a Cincinnati-based firm specializing in information for options trading and sentiment analysis, thinks that Marriott’s scenario is potentially bullish.

Salomone deems it a positive when a stock manages to rally despite short-selling. If the stock continues to climb, the shorts could be forced to cover their positions by buying back the shares they’ve sold. Such a “short squeeze” could push the stock even higher.

As the example suggests, Salomone thinks upticks in short interest are a positive when they take place in the context of a bullish price trend. Salomone looks for signals such as a recent 52-week high, strong performance relative to the market or a share price above a 200-day moving average. Marriott satisfies the latter two conditions.

Full story at Forbes.com

NEW YORK – The market has knocked the stuffing out of Avici Systems, a North Billerica, Mass.-based maker of fiber-optic products. From a 52-week high, the stock has fallen 88% to $2.19. But with cash and equivalents of $129 million and not much long-term debt, Avici has $2.62 per share in cash.

Sound interesting? It does to John Buckingham, co-editor of the Prudent Speculator investment newsletter and manager of the value-oriented Al Frank Fund, a mutual fund with $60 million in assets. Buckingham suggests that companies in situations such as that of Avici (nasdaq: AVCI – news – people ) are often candidates for buyouts.

“We’re not the only ones who see all that cash,” he says, “and if you like the business, why not buy the company when you can basically get it for free?”

Of course, a downtrodden company such as Avici could confirm the market’s fears and go bust. Public since July 2000, Avici has yet to turn a profit, and given the oversupply in fiber-optic cable and equipment, it’s not surprising that the firm shows discouraging consensus forecasts for 2002 and 2003.

Analysts expect Avici to post a loss of $1.25 per share this year, narrowing to a loss of 92 cents in 2003. Over the next several quarters, Avici will probably have to tap into its cash hoard to pay for day-to-day operating expenses.

Still, at just over half book value, shares of Avici might be worth a flier, particularly if one has faith that there’s still enormous untapped demand for broadband communications. Another positive: Over the past six months insiders have bought 50,000 shares, while refraining from selling.

Full story at Forbes.com

NEW YORK – Up 38% in the last three months of 2001, the Russell 2000 Growth Index has sagged 12% so far this year. But William A. Muggia, co-manager of the Touchstone Emerging Growth Fund ($180 million assets), remains bullish on small and mid-cap growth companies, which he says are cheaper than those with large market values.

Quintiles Transnational (nasdaq: QTRN – news – people ), a clinical research and consulting services company for the drug, biotechnology and medical device industries, is one of Muggia’s picks. He thinks the company has several items working in its favor, notably new management, recent cost-cutting measures, a likely increase in genomics-related research and the fact that several high-volume prescription drugs sold by rival firms are coming off patent.

Full story at Forbes.com

NEW YORK – Consolidation was kind to shareholders of American Water Works. Last September, the company announced an offer from Germany’s RWE to purchase outstanding American Water shares at $46 each, a 35% premium to their closing price just prior to the offer.

Are more such acquisitions in store for the U.S. water business? Yes, according to Hans Peter Portner, manager of the Pictet Global Water Fund. The fund invests in companies with at least 20% of revenue derived from water activities: production, services and related technologies.

Portner sees two forms of consolidation on the horizon. The first is a trend toward privatization of America’s 55,000 community water systems. The most likely model, he contends, will be “public-private” partnerships between municipalities and leading water companies such as Suez (nyse: SZE – news – people ) and Vivendi Environnement (nyse: VE – news – people ).

This model has taken hold in Europe, and Portner sees a fit for the United States. He argues that municipalities will need private water companies’ financial muscle to upgrade community water infrastructure. His assertion finds support in estimates by the American Water Works Association, which foresees a need for $325 billion in capital spending on water distribution over the next 20 years.

Second, Portner thinks water giants will also snap up midsized companies that provide water-related technologies such as membrane filtration, ultraviolet-light disinfection systems, and consulting and engineering services.

So how to spot the likely targets? One means is the enterprise multiple, or the ratio of a company’s enterprise value divided by its earnings before interest, taxes, depreciation and amortization. Enterprise value–the sum of a company’s market capitalization and total debt, minus cash and marketable securities–makes a good proxy for the minimum price an acquirer must pay.

Full story at Forbes.com

Relative value managers, such as Linell McCurry of Walnut Asset Management, keep their value bias, but they pick stocks that would make a Ben Graham purist blush.
Conjure up a typical value stock, and Biogen doesn’t exactly leap to mind. Shares of the biotechnology concern sell for 8 times trailing revenues and 29 times trailing earnings. Analysts reporting to Thomson Financial/IBES expect Biogen’s profits to increase 18% (annualized) over the next three to five years. This doesn’t look like a stock shunned by Wall Street.

But consider Biogen (nasdaq: BGEN – news – people ) relative to its peers. The biotechnology stocks with market capitalizations exceeding $1 billion in the Market Guide database sell for an average of 74 times latest-12-month earnings. Limit the universe to biotech stocks bigger than $5 billion in capitalization, and the average multiple is still a rich 67. Alongside competitors, Biogen looks cheap.

Finding such “bargains” among high-multiple stocks is the domain of the relative value investor. “There are whole areas of the market that people will miss if they’re looking for just low price-to-book multiples and low P/Es,” says Linell McCurry, portfolio manager with Walnut Asset Management, a Philadelphia firm managing $700 million.

Full story (reg. required) at Forbes.com

NEW YORK – Debt isn’t evil. Prudent companies issue bonds to help pay for new plants and equipment, and invest in new products. But excessive debt can put enormous pressure on cash flow–particularly during an economic slowdown. In the current business environment, a good case can be made for investing in companies that aren’t excessively burdened with debt.

Example: BJ Services (nyse: BJS – news – people ), an oil-field services company. Over the past four quarters, the Houston-based firm has reduced its long-term debt from $142 million to $79 million. BJ Services’ long-term debt stands at just 5.4% of its total capitalization, versus a 28% average for an S&P index of industry peers.

With debt at such a manageable level, BJ Services should be able to ride out the current weakness in energy prices, particularly natural gas. Nevertheless, the decline in fuel prices has helped drive down BJ Services’ stock, which is off 33% from its 52-week high.

Shares of BJ Services sell for 14 times latest 12-month earnings, and 20 times estimated profits for the coming 12 months. The 12-month forward price-to-earnings ratio for the S&P 500: 31.

Full story at Forbes.com