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Sitting Around the Table July 16, 2004

Dow Jones 10185
S&P 11

July 16, 2004

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You have to be in the game to make money

Our neighbor Martha Stewart was sentenced to jail today. She will serve five months in a federal facility (it won't be gourmet food and the clothing is drab in color). She will also server five months under house arrest. This is an interesting woman, brilliant, committed, entrepreneurial, and totally in over her head. The way it works is this, once you are above the radar screen you have to make sure you can handle it. Ms. Stewart is a perfect example of someone who could not handle her celebrity and her life, and it's coming home to haunt her.

Harvard did a study several years ago of people who win lotteries. We're talking about a couple of hundred winners. Does it surprise you that most of these people wind up losing everything they won? They go back to being poor, buying more lottery tickets hoping to win again? There is such a thing as a "money personality". It can probably be taught to some extent, but there is nothing that compares to having the right genes.

So how do we make some money?

You have to be in the market to make money. We put a sell on Harley Davidson today after a wonderful run-up. Could it go higher, you bet it can. We think over the next few months you could see another five points. Our problem is that we have taken the cream out of the stock, and we don't want to overstay our welcome.

Harley is clicking on all cylinders. Sales are up, registrations are up, revenues are up, internal financing of motorcycle sales is up as well. What more could you ask for? It's all being reflected in the current price of the stock. The company is selling at about the same price as its two year running PE. We could go back and research the last five or ten years but we already know what it would tell you. You would see that HDI is selling at a much lower price earnings ratio than its five or ten year ratios. HDI is also growing at about a 12 to 13 percent annual rate compared to 20 plus percent when those higher ratios were in effect. In the end, we are very pleased and satisfied to take this 38 percent profit on Harley Davidson. The stock never really hurt our subscribers, and you could sleep at night owning it. Let's talk about another one.

Kohl's (KSS) $41.85

This stock is going to deliver, you wait and see. The consensus estimates are $2.16 for 1/05 and $2.55 for 1/06. That's the equivalent of 19 times this year's earnings and 16 plus times next year's earnings. The stock just has to go. We have had many false starts with Kohl's. Up and down, up and down, after a while, you do get tired of it, but don't lose faith in this company. The historic trading multiple for this stock is 36 times, what a number. We won't see a 36 PE anymore, but 16 times isn't going to last either.

The Northeast is the best performing region. Inventories remain right on target. Management has reaffirmed guidance to Wall Street. We say the turnaround in Kohl's is taking place right now. They have improved their margins. They are working with lower inventories and they are controlling their expenses better. If you just work with 22 times earnings which is no big deal, it takes you to $56 per share from $41 plus where it is today.

Kohl's has just brought in the Estee Lauder cosmetic line. This company has competitive advantages versus its competition. You have dramatic unit growth with the possibility of increasing their stores by 150% over the next six years or so. You have a low operating cost structure with department store type names (Estee Lauder). You have the benefit of off-mall locations with dramatically lower rent, and real strong vendor relationships. Don't miss out on Kohl's folks.

Honeywell (HON) $36.29

Just because we haven't spoken about HON in a while, doesn't mean we have forgotten about the company. We got into this one when nobody wanted it or would even read about it. We are now looking for $42 to $43 per share over the next one or two quarters. Give us another year or so, and we think somewhere in the mid $50's is likely.

What a transformation Honeywell has gone through. They are about to attend the Farnborough Air Show near London, England on July 19th to July 25th. Every two years the International Exhibition and Flying Display is put on by the British Aerospace Companies. On alternate years, there's the Paris Air Show. Last year, America did not attend in Paris to show our displeasure with the lack of French support for the Iraq war. This year, the US is going all out in London to pay back the Brits for their support. No, we're not going, but Honeywell sure is.

Honeywell is involved in the avionics for Boeing's 7E7 as well as the new narrow-bodied B737, and A320 aircraft. HON is doing the flight management functions, the air data systems, and the multi-mode receiver that contains the global air-navigation sensors. They have also been awarded the contract for health-management and crew information systems. These systems monitor what's taking place on board and report the data back to the ground as well as the crew. For the 7E7 alone, it looks like a $1.5 billion dollar deal.

It also looks like Honeywell is going to get a deal with Airbus for a large portion of the avionics, and systems integration on its giant aircraft. We actually think this deal is 3 times bigger than any other deal Honeywell has ever signed with Airbus. What we are talking about is Honeywell returning to their normally high profit margins in their aerospace division for the first time in many years.

If we are right and this big blue chip trades to the mid $50's in the next year, we are going to be very pleased. Honeywell is an old line company that's been around for many, many decades. The turnaround is happening and hopefully you have taken advantage of it. Our buy up to on the stock is $37 per share. There's still time and good luck.

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