NEW YORK – On a 12-month basis, the consumer price index has yet to flip over to the deflationary side, but prices are falling throughout the economy. This bodes poorly for hard-asset companies, whose business lies in timber, gold and other resources susceptible to price declines.

So why should investors give natural-resource companies a second look this time? It’s hard to believe now, but the recession won’t last forever. An economic stimulus package is working its way through Congress, the Federal Reserve has pumped liquidity into the economy via 11 cuts in short-term interest rates, and corporate overhead has been dramatically reduced. A few months from now, the bad times could be a faint memory. If so, the fortunes of companies in the business of hard assets are likely to improve.

Of those companies, timber concerns look like worthwhile long-term investments, according to Todd Perkins, analyst with Denver-based Berger Funds. One such example is Jacksonville, Fla.-headquartered Rayonier (nyse: RYN – news – people ), which is held by the Berger Small Cap Value Fund ($1.3 billion in assets).

For hard-asset companies, Perkins likes a reasonably healthy balance sheet, with debt preferably no more than 50% of total capitalization. He also prefers companies with positive free cash flow, which is cash from operations minus capital expenditures and dividends paid. Cash flow from operations refers to net cash provided by core business activities.

Rayonier, with $8.52 in free cash flow per share over the past 12 months, fits this profile. The stock, trading 4% off its 52-week high, sells for six times free cash flow and 22 times estimated 2002 earnings per share. Rayonier yields 3%.

Full story at Forbes.com

The S&P 500’s 10% post-attack rally has cheered investors. But what if this is a bear trap? A sustained rally will require a rebound in profits, and that may not happen until 2003. Although the consensus forecast from Thomson Financial/IBES calls for a 15% rebound in S&P 500 profits in 2002, Stuart A. Schweitzer, global investment strategist at JP Morgan Fleming Asset Management, predicts profits will be flat or down 5% next year, to $42 per S&P 500 unit. That’s before writeoffs (and accounting changes), which total $18 per share for the 12 months ended September.

If the market continues its decline, Chuck D. Zender, who comanages $18 million in the all-short Leuthold Grizzly Bear Fund, will be prepared. His advice: The 300 largest stocks are usually good candidates for finding overvalued companies. He is particularly suspicious of companies trading at more than 30 times 2002 estimates.

Full story at Forbes.com

NEW YORK – By December 2000, it was clear that the market for IPOs was headed for a long winter. In that month, only 15 companies went public versus 33 in December 1999.

At the time, market watchers consoled themselves with the thought that the slowdown would improve the quality of the deals making it past the starting gate. And in fact, of those 15 new issues from December 2000, eight have outperformed the S&P 500 since their debut. Six now trade above their opening price.

A year later, the market for new issues is still in the doldrums. Deal volume remains thin, even for a seasonally quiet December. Just ten offerings are scheduled for December 2001.

As for deal quality, the December schedule features established companies in aluminum, defense, food service and insurance. While these sectors don’t promise explosive growth, Randall Roth, senior analyst at Renaissance Capital, predicts significant demand for these stocks, as investors look for reliable names at reduced prices.

Example: Prudential Financial, a Newark, N.J.-based insurance and financial services concern with $606 billion in assets under management. The firm’s IPO, which will convert it from a mutually held company to a public one, is set to price on Dec. 13.

Full story at Forbes.com

NEW YORK – The wrangling in Congress has grown intense over the economic stimulus bill, officially entitled the Economic Security and Recovery Act of 2001. The bill, amending certain sections of the tax code, narrowly passed the House of Representatives in late October. It has been under consideration in the Senate since early November.

While some have warned that deadlock between Republicans and Democrats over the bill’s scope threatens to derail the legislation, it’s a safe bet that neither party wants to be perceived as impeding an economic recovery. Thus, the chances of passage before year-end remain substantial.

Within the proposed law, one measure likely to pass is the “depreciation bonus.” Over the next three years, this provision entitles companies purchasing equipment to an accelerated first-year depreciation allowance, equal to 30% of the purchase price of the asset. Andy Laperriere, a Washington-based analyst with brokerage ISI Group, thinks that this provision has a good chance of being included in the final package.

Laperriere and his ISI colleagues provide the following thumbnail example: Suppose a business buys a $1 million piece of equipment, depreciable over years. Under a straight-line depreciation schedule, the business would write off 20% of the equipment’s cost, or $200,000, in the first year.

With the new law in place, the business would be able to deduct 44%, or $440,000, in the first year. How? First, the business deducts the bonus, or 30% of the purchase price. In this case, $300,000. Next is a deduction for the amount already allowable as a depreciation from the remaining equipment cost, which in this case is $700.000. A 20% depreciation write-off of $700,000 comes to $140,000.

For companies investing in new assets, the effect of the new provision will be to boost cash flow and provide an up-front break on taxes. “If you do a present value calculation,” explains ISI’s Laperriere, “it’s worth more to deduct now than it is to deduct five years from now.”

Houston-based Apache (nyse: APA – news – people ), an independent oil and gas exploration-and-development company, is in a capital-intensive business. In the latest twelve months, depreciation expenses comprised 63% of Apache’s cost of goods sold. Given the calls for diminished reliance on foreign oil, drillers like Apache may well see demand for their services rise–along with their need for new equipment.

Full story at Forbes.com
http://www.forbes.com/markets/2001/11/19/1119sf.html

The economy is struggling and the stock market is a mess. If you are looking for bargains churned up in the turmoil, you may have to set your computer to screen for companies trading at low multiples of their earnings.

That’s not a bad way to look for cheap stocks, but it’s not the only way. Here are two other approaches to the notion of low-multiple investing: price to cash flow and enterprise multiple.

The “cash flow” we are talking about here (be careful-the phrase has three entirely different meanings on Wall Street) is earnings plus depreciation and amortization. In some industries, like newspaper publishing, it is perhaps a better measure of profitability than net income; in many others, like cement making and railroads, it is merely a supplemental measure. (Although amortization may be nothing but a bookkeeping entry related to goodwill, depreciation tends to reflect real wear and tear on equipment and buildings. As investor Warren Buffett likes to say, capital expenditures are not paid for by the tooth fairy.) In the table we picked out companies trading at cash flow multiples that are low in relation to historical norms.

Full story at Forbes.com

NEW YORK – Fearing the “falling knife,” money managers often avoid stocks priced under $10. Frances Tuite has no such qualms.

“Low-priced stocks often carry the stigma of high risk and poor quality,” says Tuite, portfolio manager at Talon Opportunity Partners, a Chicago hedge fund with $40 million under management. “In many cases, that’s true,” she adds, “but you shouldn’t throw the baby out with the bathwater.”

One of Tuite’s under-$10 recommendations is Tyler Technologies (nyse: TYL – news – people ), currently priced at $3.75. The Dallas-based company provides software and technology systems for local and county governments, including 911 dispatch, utility billing, vehicle data and tax collection.

In an effort to clean up its balance sheet, Tyler Technologies has shed assets and sold businesses. Since mid-2000, the company has reduced its long-term debt load by 82%, to $12 million. Long-term debt now stands at 12% of shareholders’ equity “They have a very focused product line and improving cash flow from operations,” says Tuite.

Full story at Forbes.com