HE

By the editors of Personal Finance

THE NEW RULESOF PROFITABLE

INVESTING

Personal Finance

Portfolio for theMillennium MillionaireBy the editors of Personal Finance

Table of ContentsMEET THE PERSONAL FINANCE EDITORS 1

Part OneINTRODUCTION 2

CHAPTER ONE

The Essential Elements of Personal Finance 3CHAPTER TWO

Getting the Most Out of Personal Finance 7CHAPTER THREE

Other KCI Investment Publications 10

Part TwoSTOCKS 11

Thornburg Mortgage 11

News Corporation 11

Wal-Mart 12

Advantage Energy 12

ChevronTexaco 13

PIMCO Strategic Global Government Fund 13

KCI Communications, Inc., 1750 Old Meadow Road, Suite 301, McLean, VA 22102. Subscription and customer services: P.O. Box 3808, McLean, VA 22103-9823,800-832-2330. It is a violation of the United States copyright laws for any person or entity to reproduce, copy or use this document, in part or in whole, without theexpress permission of the publisher. All rights are expressly reserved. ©2005 KCI Communications, Inc. Printed in the United States of America. PNR0105-ST. The information contained in this report has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed.

Meet the Personal Finance EditorsNeil George Editor, Personal Finance and By George!

Neil George is an investor, philanthropist, professor andeditor of Personal Finance as well as the daily e-letter ByGeorge!. After years as an insider in the bond and bankingcommunities, Neil has focused his full attention on offeringsolid advice to individual investors—his only agenda isserving his readers and subscribers. He also serves as aprofessor and board member of Webster University’sSchool of Business and Technology. Neil has served asChief Economist at a number of institutions, includingMark Twain Bank, Mercantile Bank and British-basedGuinness Flight. He has worked on six continents analyz-ing the globe’s markets and economies and now he workssolely to help investors put his ideas to work for their ownportfolios. Neil earned an undergraduate degree from KingsCollege in Economics and an MBA in International Financefrom Webster University in Europe.

Roger S. ConradAssociate Editor, Personal FinanceEditor, Utility Forecaster, Roger Conrad’s Power Playsand Canadian Edge.

Roger S. Conrad is associate editor of Personal Finance,putting his expertise to work every issue in the IncomeReport. In addition, Roger is editor of Utility Forecaster, thenation’s leading advisory on essential services stocks,bonds and preferred stocks. His proprietary safety ratingsystem gauges every significant electric, natural gas,telecommunications and water company, including utility-based mutual funds and foreign utilities. He also editsPower Plays, a trading service offering fast-breaking oppor-tunities in mergers, acquisitions and special situations inthe utilities sector. And Roger Conrad’s Canadian Edgefocuses on opportunities in high dividend paying Canadianroyalty trusts. He holds a Bachelor of Arts degree fromEmory University and a Master’s of InternationalManagement degree from the American Graduate Schoolof International Management (Thunderbird).

Ivan D. MartchevAssociate Editor, Personal FinanceEditor, Wall Street Winners and Trading Floor Pro

As associate editor of Personal Finance, Ivan D.Martchev uses fundamental analysis and a top-downapproach to guide the online-only mutual fund portfolio. Inaddition to his mutual fund work, Ivan has broad interestsin technology investing and global markets, which he putsto work in PF. Ivan is also editor of Wall Street Winnersand Trading Floor Pro. He received an MBA inInternational Business and Finance from The University ofCincinnati, on a full merit-based academic scholarship. Mr.Martchev was a scholarship student in the opening class atthe American University in Bulgaria, the first US academicinstitution to open doors in the former Eastern Bloc. Helater transferred to finish his undergraduate degree inEconomics in the US.

Yiannis G. MostrousAssociate Editor, Personal FinanceEditor, Wall Street Winners and Trading Floor Pro

Yiannis G. Mostrous is associate editor of PersonalFinance and editor of Wall Street Winners and TradingFloor Pro. Yiannis brings his experience in internationalproject finance to the pages of PF, drawing on his pastwork with the World Bank. He holds an MBA fromMarymount University and a BBA from Radford Universitywith a major in Finance. Mr. Mostrous is also a veteran ofthe Hellenic Navy in the Landing Ships Command Office.

Elliott H. GueAssociate Editor, Personal FinanceEditor, Wall Street Winners and Trading Floor Pro

Personal Finance associate editor Elliott H. Gue special-izes in global equity and debt markets and also has broadinterests in technology and sector investing. Elliott is alsoeditor of Wall Street Winners, the premier monthly growthnewsletter designed to manage investors’ portfolio risk. Heexamines the market sector by sector to find the industrieswith big tailwinds and avoid investing pitfalls, work thatalso assists him in his work on Trading Floor Pro, which healso edits. He has worked and lived in Europe for fiveyears, where he completed a Master’s degree in Financefrom the University of London, the highest-rated programin that field in the UK. He also received his Bachelor’s ofScience in Economics and Management degree from theUniversity of London, graduating in the top 3 percent of hisclass. Mr. Gue was the first American student to complete afull degree at that business school.

The New Rules of Profitable Investing1

Part OneIntroduction

Whatever your investment goals, new profit opportunitieshave never been more numerous than now. PersonalFinance will help you maximize those opportunities. We

understand that you need advice that’s timely and diversified. Notonly do our articles tell you how to profit from stocks, bonds andother investments, but they also tell you how to manage your money.

Among them, the PF editors have a lifetime of synthesizing informa-tion about the economy and the markets. Each issue of PF brings youregular coverage of our top growth and income recommendations aswell as some riskier fare. We group our picks by risk level—rangingfrom low-risk to aggressive. We always provide the common sense rea-soning of our trades so you can decide which investments make sensefor you. And we continually track our portfolio recommendations in aQuarterly Scoreboard, providing the total return performance of eachof our recommendations.

PF has three feature articles in each issue to show you how to profitfrom current trends in various markets and sectors of the economy.These recommendations are also tracked in an Article Update.

PF is designed primarily for long-term investors. Although we pub-lish twice each month and post a daily market update on the Internet,we’re not a trader’s newsletter. Our goal is simply to keep youinformed about developments affecting your holdings.

We believe PF, unlike most other advisory services, should bemore than one person’s view. No one can rely on a single voice, sowe tell you what other respected advisors are saying—and how theirviews compare with ours.

In Part One of this report, we give you a detailed description of PF.Part Two elaborates on how to best take advantage of the advicegiven in PF along with detailed information on a few of our favoritestocks. And, as always, to access the most current advice and stockinformation, check the pages of the most recent issue of PersonalFinance, also available at www.pfnewsletter.com.



CHAPTER ONE

The Essential Elements ofPersonal Finance

How to Get StartedTo get a reasonably complete summary of PF’s latest

investment news in a relatively short amount of time, fol-low the approach below:

First, read Marketwatch (listed on the front page of ourprint version). This represents Neil George’s very latest opin-ion on the direction of the market during the next few weeksand months. No investor should be without this information.

Next, read the main or front-page article. The subject ofthis piece is whatever we determine to be the most excitinginvestment opportunity at the moment. Then, check thetables that accompany the other two feature articles. Theseare the lists of stocks, mutual funds and other investmentsthat are published within the articles. If you see stocks orfunds that have interested you in the past, read the text to getour complete views.

Next go to our model portfolios, which are tracked eachissue in regular investment columns and segmented forgrowth and income investors. You should choose the port-folio(s) that best addresses your investing needs. Keep inmind that these are model portfolios. Feel free to use andrevise them to meet your specific needs and circumstances.

Every quarter we devote one issue of PF to tracking thetotal return and year-to-date return for holdings in the port-folios. This Quarterly Scoreboard gives the overall year-to-date return for each portfolio as well.

Other articles bring you more specific investment opportu-nities and sectors, or present “how-to” advice on topics suchas how to analyze stocks, how to select and deal with bro-kers or how to lower your tax bill.

The Growth TrackIn the Growth Track, Neil George shows you how to

consistently make money with everything from little-knownundervalued growth investments to the most familiar bluechip stocks.

Included in this column are PF’s Growth Portfolio rec-ommendations, which are tracked and followed in everyissue. For each company recommended, we include datasuch as the recommended price, the recent price and theprice-to-earnings ratio based on this year’s projected prof-its. We also provide asset allocation advice based on yourtime horizon until retirement.

The Growth Portfolio has two major goals: First, it shouldgrow consistently. Second, it should outperform the S&P 500.And if we do things right, it should do so by a wide margin.

We’ve structured the Growth Portfolio around two basicprinciples. First is diversification. The idea is to be diversifiedat all times in all areas of the economy that have strong non-cyclical growth. Non-cyclical is the key word. In today’senvironment, recessionary threats can come out of nowhere.

However, even a portfolio of non-cyclical growth stocksisn’t diversified enough. As market psychology shifts fromone group to another, you need to be represented in allgroups that are experiencing sustained growth.

The portfolio is organized into six major groups. Theyare: consumer—specialty retail, selected consumer prod-ucts and entertainment; energy and environment—anycompany leveraged to rising energy prices or the grow-ing need for clean renewable fuels; financial services—from banks to insurers; health care—drug companies andhealth care service providers; technology and telecom-munications—any company with a stake in informationtechnologies; and commodity producers—commoditycompanies capable of growing even if prices of theunderlying commodities don’t increase.

Our insistence on investing in all growth groups at alltimes is an acknowledgment that in volatile times it’s hardto time the market or particular sectors. The specificweightings are based on where value resides, not on anyeffort to predict where the “hot” money will flow.

The Income ReportDesigned for those who want wealth preservation while

amassing above-average gains, the Income Report, is writ-ten by the country’s leading expert on utility stocks, RogerS. Conrad.

Included in the column are PF’s Income Portfolio recom-mendations—profitable, risk-averse investments in top-ratedbonds, safe, high-dividend stocks such as utilities and high-yielding money market funds. We update their current yieldsand keep you abreast of any developments with our holdings.

Each Income Report shows you our 12-month projec-tion for bond yields. This is derived from PF’s bond fore-casting model, which is based on 40 years of data oneconomic growth and inflation.

Based on our projections for bond yields and stocks,we divide the Income Portfolio’s holdings amongstocks, bonds and cash. To provide a cushion againsterror, we always put more into cash than our projec-tions suggest we should. In this portfolio, cash—thesafest but lowest-return investment—always gets thebenefit of the doubt.

The PF Income Portfolio has consistently generatedstable returns and income in both bull and bear markets.Through careful study and testing, Roger has developed afour-step process to help him uncover the best invest-ments for this portfolio:

• He first specifies the minimum 12-month totalreturn he considers acceptable.

• He then projects the 12-month total returns forstocks, bonds and cash.

• Using these projected returns, he specifies weight-ings for stocks, cash and bonds.

• Checking historical weightings in the portfolio,Roger then fine-tunes his holdings to provide an extracushion against error. He generally does this by addingmore cash holdings and reducing stock and bond hold-ings. And for those investors who prefer either an allincome approach or a total return portfolio, Roger pro-vides alternative asset allocations.

As most income-oriented investors are at or nearretirement, preservation of capital is a key factor in ourinvestment selection.

Because these stocks are bought and sold based ontheir current dividend yield, they’re highly sensitive tochanges in interest rates. As interest rates rise, these stockprices will fall. Keep in mind that you should take a long-term, disciplined approach to investing in these stocks.And add to the investment regularly, especially on anyprice weakness.

Also be sure to diversify your assets according to theallocation advice given in each issue of PF. This is acrucial part of your strategy. If you’re not adequatelydiversified in a large number of stocks, bonds andcash, you’ll be taking on greater risk. A diversifiedportfolio of bonds or bond mutual funds is just asimportant as diversification in stocks.


STOCKS

BONDS

CASH ORMONEY MARKETFUNDS

INCOME PORTFOLIO

GROWTH PORTFOLIO

LONGHAULERS

CASHCOWS

NIBBLERS

CASH


Advantage PortfolioThis is a new addition to PF, that seeks to capitalize

on those beaten-down stocks that are now set torebound with gusto in the context of a strengtheningmarket. For nearly three years, the US and global mar-kets have been in a slowdown—a bear that has broughtthe major indexes to tremendous lows. But we’re nowseeing the signs of a resurgence in certain companiesand sectors. This section of the newsletter will guideyou through the ashes to find the still strong and veryundervalued companies that are set to shine again—andmake you major returns in the process.

Capsule AdvisoryThe Capsule Advisory provides newsworthy nuggets of

practical advice on a broad range of financial topics—such as new mutual funds, news events affectinginvestors, new financial products and upcoming events.The first capsule, called Roundup, is a digest of currentopinion from other advisors.

The next feature is an Article Update. Readers arebrought up to date on past recommendations that werehighlighted in PF articles, but not added to our portfolios.If there’s a previous recommendation you want to knowabout, contact us and we’ll try to cover it in the ArticleUpdate. You can write to us at: Personal Finance, 1750Old Meadow Road, Suite 300, McLean, VA 22102, U.S.or e-mail us at [email protected].

Mutual Fund Close-UpA former feature within the print version of Personal

Finance, the Mutual Fund Portfolio is tracked and main-tained online at www.pfnewsletter.com as well as updatedonce a month in the print issue, on a rotating basis withour Article Update. Resident mutual fund guru and associ-ate editor Ivan Martchev tracks the current positions andupdates the column whenever a change or announcementneeds to be made, as well as providing quarterly perform-ance updates.

The Mutual Fund Portfolio covers the best stock, bondand cash-equivalent funds for investors; it’s tailored to pro-duce above-average returns with below-average risk. Thefunds in the portfolio are either no-load or low-load, mean-ing more of your money goes to work for you immediately.For a look at the current Mutual Fund Portfolio, visitwww.pfnewsletter.com.

ROUNDUP CAPSULE

ARTICLEUPDATEOR MUTUALFUND CLOSEUP

CAPSULES ON FINANCIALTOPICS

On the MoneyIn On the Money, we invite nationally recog-

nized financial experts to write about retirementplanning, tax strategies, money management, stockanalysis, where to find investment-related informa-tion, book reviews and much, much more. Theseexperts show you how to apply PF’s valuableadvice toward meeting your specific financialgoals, whether you’re saving for retirement, livingon a fixed income, paying for your child’s educa-tion or researching stocks.

Quarterly ScoreboardsWe pride ourselves on giving readers a review

of how well our portfolios are doing. At the end ofeach financial quarter, we publish QuarterlyScoreboards that show the return on the invest-ments we’ve picked for the portfolios.

To calculate the returns, we figure the gains ofthe stocks we have rated “Buys” or “Holds” dur-ing the quarter. If we recommended selling anyinvestments, we figure what the gain or losswould have been as of the day the readersreceived the issue, not the date we wrote the arti-cle. We also take into account any adjustmentsin our allocations during the period.

A Note on Bold and ItalicsIn PF, you’ll see many company names that are

boldfaced and many that are italicized. All invest-ments that are PF recommendations are boldfacedon their first mention. All other companies areitalicized on their first mention, as are titles andnames of products.

PF Online Now, you can read the current issue of PF before

the issue date—on the Internet. When you sign upto receive PF over the Internet, you’ll continue toreceive your print subscription as always. But yourissues will also be available in Adobe AcrobatReader format at 12:00 a.m. ET Saturday onwww.pfnewsletter.com—that’s midnight Fridaynight. To sign up, go to www.pfnewsletter.com, clickon “Subscriber Services,” then click on “NewOnline User Signup.”


NEWS

ADVANTAGERECOMMENDATIONS

ADVANTAGE PORTFOLIO

QUARTERLY SCOREBOARDRESULTS OF PORTFOLIO RECOMMENDATIONS


CHAPTER TWO

Getting the Most Out ofPersonal Finance

Building a PortfolioIf you’re relatively new to investing, it’s important to

define your goals and needs. Even veteran investors losefocus of their portfolio blueprint from time to time. Sowe’ve created two portfolios that can be used as guide-posts to your individual investment needs. We feel the bestway to achieve your goals is to build a solid portfolio thatminimizes risks and maximizes return.

Younger, more aggressive investors who can afford to takemore risks will want a diversified portfolio of growth stocks,such as the Personal Finance Growth Portfolio. More conser-vative investors who are retired or near retirement and want asteady flow of income from their investments should build aconservative portfolio along the lines of PF’s Income Portfolio.Investors who want to try a little bit of both approaches canbe guided by the allocations of the Mutual Fund Portfolio,which strives for a balance between growth and income. TheMutual Fund Portfolio is now tracked online atwww.pfnewsletter.com and updated every other print issue.

Our picks encompass a wide variety of companies. Ifyou don’t adequately diversify your portfolio amongmany types of investments, you open yourself up tounnecessary risks. For example, if you hold a portfolio ofjust five stocks, all of which are oil companies, and theprice of oil plummets, all five of your stocks are sure toplummet in tandem.

Remember, there are times when stocks aren’t the bestinvestment, so hold some bonds or bond funds. It’s also agood idea to always have some cash on hand so that youcan pick up bargains when they appear.

Looking at the Economic DataWhen it comes to investing, economic data can be

used to confirm market trends or identify new ones. Anddata that isn’t good for stocks in one market can handinvestors a bonanza in another, or give the bond market anice boost. The key is to know what to look for and howto read it.

Core MacrosAt PF, we start with the basic macro conditions of an

economy. At the core is the Gross Domestic Product

(GDP), which measures the value of goods and services anation produces within its borders.

For a market to be attractive for stocks, this statisticshould be advancing at a greater pace than in other com-petitive markets. When it comes to some markets such asJapan or the UK, this number is less important than theGross National Product (GNP), which measures the sum ofproduction by companies on a worldwide basis.

As the nation is a huge direct investor, particularly in theAsian region, expansion of enterprises beyond their borderscertainly benefits their native listed companies. And as aneconomy is a mix of goods and services, breaking it downcan be done by tracking the progress of industrial produc-tion in all markets.

Inflation is next; it’s cancer for investments. Markets thatare in transition from higher to lower inflation levels pro-vide very attractive markets for both bonds and stocks.

Employment conditions are also vital for market deci-sions. High or rising unemployment will hit retail sales butmight offer a strong case for bonds within the same market.

Trade and current account balances are also part of theprimary data of a nation. If a nation is running a tradedeficit, it’s important to distinguish whether it’s stemmingfrom just overeager consumers buying disposable goods orif it’s coming from industries that are importing capitalgoods for future production of new goods or services. Thecurrent account takes the trade data further by includinginvestment and cash flows. This data stream is important asoutflows from trade can be offset by inward capital flows.

Economic surveys always provide charged data that canbe skewed in many ways. However, that doesn’t dismisstheir usefulness toward identifying or confirming economictrends. Each market has its own versions of two importantsurveys that track business and consumer confidence.

In the US, we look to the Institute of SupplyManagement for both the manufacturing and service indus-tries to give us a read on business sentiment. In Europe, thecore market of Germany provides the monthly IFO surveyand in Japan we look to the quarterly Tankan Survey.

Consumer numbers are provided on several fronts in theUS and are still in the process of being consolidated withinthe EU. But while a downward shift in the surveys might bedistasteful for stocks, they can be a delicacy for bond buyers.


Consumer sentiment can also be measured by theirspending trends. This can be tracked by retail sales dataprovided on an ongoing basis in the major markets.

Home sales are also a good indicator of future growthprospects. Homes are a large debt-financed purchase for themajority of consumers—the buyer needs to be confident offuture earnings prospects before buying. And beyond just asentiment indicator, home sales also provide for a multipliereffect; home transactions support a host of industries fromfinancials to housewares and durable goods.

For More Information There are numerous places on the Internet that can give

you a wealth of economic information. The best place for USinfo is the Federal Reserve website at www.federalreserve.gov.

However, if you want to get a better picture of wherethe world economy stands, visit the “Markets” section ofwww.bloomberg.com or visit our favorite site, www.ft.comand click “Markets.” The Financial Times Web site may bea bit difficult to navigate, but it also happens to be one ofthe most extensive resources for individual investors onglobal markets.

Investing in Dividend ReinvestmentPlans (DRIPs)

A dividend reinvestment plan (DRIP) lets you reinvestyour dividends back into the stock, and more important, buyadditional shares directly from the company. Consequently,you pay no commissions and you can also buy fractionalshares, generally in dollar amounts as low as $25.

To join these plans, you’ll have to buy the requirednumber of shares through a broker. If you already hold alarge account with a full-service broker, you should be ableto bargain this expense down. Otherwise, deep discountbrokers are still the best bet.

When purchasing through brokers, tell them that youwant the shares issued to you. This means that you’ll be onthe books of the company as a shareholder, rather thansimply a holder in Street name (in the hands of the broker).

Once you’re on the books, contact the company and tellthem you want to sign up for their DRIP. Most firms willautomatically send you information on these plans. Butphone anyway to speed up the process.

As a member, you’ll enjoy the option of getting yourstock certificates mailed to you. Most investors, however,are better off leaving them with the company to preventthe possibility of loss, and to make it easier to cash out.

Begin a regular investment plan of buying shares directlyfrom the companies. Though stock purchases are commis-sion-free, most DRIPs do charge a small withdrawal fee forcashing out. Also, you’ll owe taxes on reinvested dividends,

even though you don’t actually receive them as income.Most plans, however, let you take at least a portion of yourdividends in cash to pay the taxes. Capital gains on thesecommission-free stock purchases are tax-free until you sell.

In addition, some passive trustees will allow you to putDRIPs into a tax-deferred retirement account, shelteringyou from taxes altogether. You’ll have to shop around forone, however, since many brokers are reluctant to help youwith an investment that’s commission-free.

DRIPs do take longer to cash out of than stocks held ina Street name. But cashing out from the company is gener-ally much cheaper than selling through a broker.

CommissionsWe recommend you keep your commissions to a mini-

mum. This can particularly become a problem when exe-cuting smaller trades, as fixed transaction costs (i.e., brokercosts) can eat up a large percentage of your returns.

Dollar Cost AveragingSystematic accumulation is the key to getting big returns

with modest investments. An investment with a low mini-mum initial purchase that allows you to add regularly toyour position is great for this purpose. A system that auto-matically adds to your position is even better. Consider uti-lizing this system with the PF portfolio recommendations.As long as a recommendation is still labeled as a “buy,” it’ssafe to dollar cost average.

Dollar cost averaging means investing the same amountof money in a stock on a regular basis, rather than buyingin all at once. The goal is to accumulate shares of goodcompanies and draw their dividends, while limiting the riskthat you’ll invest too much money at a market top.

Suppose you want to buy $4,000 worth of a stock, notcounting commissions. If the stock is selling for $40 pershare, you could buy 100 shares now. You believe, however,that the stock is overpriced and is likely to pull back to the$35 area. That leaves you with two choices. You can wait forthe stock to fall, and make the entire investment once the tar-get price is reached. Or, you can start dollar cost averaging.

For example, the first month you buy $1,000 worth ofstock, or 25 shares at the stock’s current price of $40 ashare. The second month, the stock’s price rises to $42. Youagain pay $1,000, but this time you get just 23.81 shares.

The third month, it finally falls to $35 a share, so you’reable to buy 28.57 shares. And during the fourth month thestock rises to $36 a share, so you get 27.78 shares.

During the four-month period, you’ve accumulated atotal of 105.16 shares, at an average price of about $38 ashare. In contrast, had you made your entire purchase ini-tially, you’d own just 100 shares at a price of $40 a share.


Your total stake would now be worth just $3,600, com-pared to $3,785.76 if you had dollar cost averaged.

Of course, if you had waited until the stock bottomed at$35 to buy, you’d own 114.29 shares with a value of$4,114.29. However, you wouldn’t have enjoyed the incomepaid by your stock while you held it. Also, there are no guar-antees that you’d have been able to buy at the bottom.

Another point: If the stock had risen during the fourmonths, you’d have been better off buying all at once.That’s why dollar cost averaging is best used in high-pricedmarkets, when the odds favor a drop in stocks.

What We Look At When Evaluating Stocks

Companies we recommend must be well managed, withestablished positions in growing markets. They must alsobe both great producers and great marketers. As a generalrule, they’re undervalued by “the crowd”—so you neverrisk chasing them at historically high prices.

We look at a variety of fundamental and technical indi-cators when choosing stocks, but here are some of themore salient indicators we use:

One of the most important indicators we look at is acompany’s price/earnings to growth ratio, known as thePEG ratio. It’s a way to measure a stock’s valuation relativeto its earnings growth rate. You calculate it by dividing acompany’s price-to-earnings ratio (P/E) by its five-yearexpected earnings growth rate.

A stock could have a high P/E, but if its earnings are growing quickly, it’s not necessarily overvalued. APEG ratio under one suggests a company is undervaluedrelative to its growth rate, while a number above 1 sug-gests it’s overvalued.

The PEG isn’t typically presented on the financial web-sites’ stock snapshots. To find it in Yahoo Finance(finance.yahoo.com), click “research” and go to the tablelabeled “earnings growth.”

Another indicator we look at is the debt-equity ratio. Forthe typical U.S. company, this is about 60 percent. Thiscan be calculated by dividing long-term debt by net worth.This rate must then be less than the industry average.

We also check the operating margin, or profit marginson operations. Companies with strong market positionshave higher profit margins than their competitors. We pre-fer companies with profit margins that are within 10 per-cent of their record highs.

Then we look at free cash flow. To figure this out, sub-tract current capital spending per share from cash flow pershare. Free cash flow should not be negative even in theworst year the company has had in terms of profits.

Also, the company’s projected free cash flow yield for the

next three to five years should equal the current after-taxreturn on bonds, now about 3 or 4 percent. From that, sub-tract capital spending for the projected period, and dividethe result by the stock’s current share price. This gives youthe projected free cash flow yield. In general, if this yield isless than 5 or 6 percent, think twice before buying.

Demonstrated earnings growth must also be present.Earnings must have grown even during the recessions of1973-75, 1981-82 and 1990-91. Keep in mind that whenread in a vacuum, past earnings tell you very little aboutfuture growth. Past profits tell us how companies fare dur-ing recessions. And if a company meets all our other crite-ria, its past earnings are a pretty good indication of what toexpect in the future.

We’d rather overpay for a great company than underpayfor a bad one. As long as growth is there, the stock pricewill keep rising over time, although you may have to waita while.

Where to Go for More InformationIf you like a stock, fund or bond we recommend, you

can place a buy order, or dig deeper before investing.There are many great research sources both in print and onthe Internet. To list a few of the major sources: Value LineInvestment Survey, Morningstar, Moody’s Bond Record,cbsmarketwatch.com, Yahoo Finance (finance.yahoo.com)and Bloomberg.com.

A Note About Mailing ListsOccasionally, we feel that an outside mailer or publisher

has products and services that directly relate to our sub-scribers’ needs. If asked, we’ll make Personal Finance sub-scriber names and addresses available to them. If you do notwish to receive these mailings, please let us know by send-ing your name, address and account number in writing to:

Personal FinanceSubscriber Services Center 1750 Old Meadow Rd., Suite 300McLean, VA 22102USA

Final WordsAt PF, we continually scan the economic horizon to

provide you with the most up-to-date advice on currenttrends and how to profit from them. We go beyond thebusiness news headlines and give you specific advice onhow to adjust your portfolio as conditions change.

If you have additional questions you can reach ourSubscriber Services Center by calling 800-832-2330 or703-394-4931, by faxing 703-905-8100 or sending us an e-mail at [email protected].


CHAPTER THREE

Other KCI Investment Publications

Following are descriptions of other products by KCICommunications, the publisher of Personal Finance. Formore information on any of them, call PF’s SubscriberServices Center at 800-832-2330 or 703-394-4931.

Newsletters

Utility Forecaster (www.utilityforecaster.com), edited byRoger Conrad, is the only source in America devoted exclu-sively to helping investors make money in utilities. Perfectfor conservative investors looking for income and safe,steady growth, this newsletter has rung up an impressiveaverage annual return of more than 12 percent since thefirst issue in 1989. Every month Utility Forecaster analyzesthe latest trends and developments in the utilities markets,as well as provides specific investment advice on electric,natural gas, telecommunications and water utilities. Twomodel portfolios allow you to follow the approach that bestsuits your investment goals.—12 issues annually.

Wall Street Winners (www.wallstreetwinners.net) edi-tors Elliott Gue, Ivan Martchev and Yiannis Mostrousdraw on their market experience and financial prowessto bring investors successful portfolio managementstrategies. Each issue highlights trading strategies forshort-term investing, which give subscribers the toolsthey need to win in the short-term market while remain-ing safely anchored by their core long-term holdings.Wall Street Winners also presents mutual fund advicethat can be applied to IRA or 401(k) accounts; a summa-ry of relevant current news and events; and an exhaus-tive analysis on economic and financial issues, sectorthematics and fund allocation.—12 issues annually.

Roger Conrad’s Canadian Edge focuses on opportuni-ties in high dividend-paying Canadian royalty trusts.Canadian Royalty trusts are a form of business organiza-tion that lets companies pay the vast majority (in manycases 85 percent) of what they earn in the form of divi-dends and return on capital directly to shareholderswithout paying taxes. Plus, since payments are madefrom pre-tax cash flow yields can be as high as 15-20percent or more. The most widely known are oil and gas

trusts, but there are also trusts for a wide range of otherbusinesses, including electric power, real estate andtelecommunications.—12 issues annually with detailedweekly updates and flash alerts.

Fax and E-mail Services

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Thornburg MortgageMortgage Maven

As a rule, we prefer owning pools of property to portfo-lios of mortgages. As a result, we’ve tended to avoid rec-ommending mortgage REITs. The disastrous examples ofCapstone Mortgage and others in the 1990s, who gotcaught betting the wrong way on interest rates, is a sternreminder that the mortgage game isn’t for amateurs.Indeed, even the best run of these could have a tough timeif rates rise in earnest and they’re inadequately prepared.

That said, there are exceptions to the rule. One is anoffshoot of an old veteran in Santa Fe, New Mexico,Thornburg Mortgage (NYSE: TMA).

Unlike the majority of players in the mortgage REIT mar-ket, Thornburg’s management has a solid history of navigat-ing tough times for rates and mortgages. It’s also very con-servative, specializing in adjustable rate mortgages; whichdon’t soar when rates fall or go under when rates rise.

Like a bank, the REIT raises cash through the initialinvestment of shareholders and boosts it by borrowing in

the market at lowerrates due to a strongbase of solid assetson its balance sheets.It uses the funds toeither buy mortgagesand mortgage bondsor issue them direct-ly. The profit comesin two ways.

First, the yieldearned is generally

higher than interest expenses. And second, by managingthe types and maturities of the mortgages the company cancash in on market gains as well. Focus on adjustable ratesecurities minimizes exposure to interest rate swings.

Thornburg also sticks to the high-quality credit side ofthe market, limiting the risk of default on its cash flows.That leaves the REIT in position to profit richly when onedoes occur, from its role as a lender.

Basically, if times get tough and some of its high-qualitydebtors take a bath, it can foreclose and grab the propertyon the cheap.

Thornburg is a mortgage lender that knows its marketcan hand you your head faster than you can punch your

calculator. It’s lean and run by smart guys who are in it forthe shareholders. Though the stock can periodically seevolatility due to bond market concerns, I'm still holdingon. Buy Thornburg Mortgage up to 32.

News CorporationSly Fox

News Corp’s (NYSE: NWS) Rupert Murdoch began hiscareer by inheriting two Australian newspapers from hisfather in 1952. From those humble beginnings he’s createdan empire spanning the Americas, Europe and Asia withfilm, television, cable, newsprint and satellite businesses.

Murdoch’s strategy is to control both the content con-sumers want and themeans of distributingthat content. Thecompany’s deal to buyDirectTV is a perfectexample.

DirectTV’s growing12.6 million sub-scriber base is thecrown jewel of the USsatellite business. Afew years ago, whenHughes Electronics put the business on the block, NewsCorp made a bid. But Murdoch refused to pay too much,instead allowing DISH Network provider Echostar to out-bid. When the Echostar deal fell through, News Corp wasback with a lower bid—vintage Murdoch.

DirectTV expects 15 million subscribers with averagerevenue per subscriber of $70 over the next three years—the best metrics in the business. The market has beenpaying attention.

The company’s Fox television business has also been onfire. And on the cable side, the Fox News Channel has man-aged to edge out CNN as the most popular news network.

But that’s just the US business; foreign operations areeven more impressive. Most exciting is Asia where thecompany’s satellite broadcasting unit Star TV is broadcastin seven languages across 53 countries. According toNews Corp, over 173 million people view Star TV pro-gramming each week. With growing wealth across theregion, that’s sure to result in growing advertising dollarsin coming years.

Part TwoStocks

THORNBURG MORTGAGEPrice Per Share

Source: Bloomberg

$36

28

20

1210/01 10/02 10/03 10/04

NEWS CORP.Price Per Share

Source: Bloomberg

$48

36

24

1210/01 10/02 10/03 10/04


In Europe, Murdoch’s Sky Empire covers everything fromnews to sports and films. This satellite broadcasting systemis a market leader across most of Europe. And becausecable was never very popular in Europe, satellite is emerg-ing as a key distribution method for content—Murdoch iswell-placed to benefit.

And it’s not just television either. Murdoch certainly has-n’t abandoned the business he started with—newsprint. Inthe United Kingdom, News Corp controls several of themost popular newspapers, including The Sun, The DailyTelegraph and the venerable Times.

No media company has a more diversified range ofassets than News Corp. Buy Growth Portfolio memberNews Corp up to 36.

Wal-MartThe World’s Biggest Store

By far the world’s largest retailer, Wal-Mart (NYSE:WMT) has totally changed the way business is done. Thecompany’s dogged pursuit of low prices and extreme effi-ciency has meant that it’s come to dominate just aboutevery segment of the market it’s chosen to enter includinggroceries, inexpensive electronics and even clothing.

And because the company focuses on low cost it’s theleast affected by recessions. Even when consumer spendinglooks dull, Wal-Mart seems to manage reasonable salesgains—attracting a larger share of consumers’ dollars andacting as a one-stop shop.

That includes a recent aggressive expansion into thegrocery segment. Most consumers shop frequently for gro-

ceries, far more fre-quently than foritems such as cloth-ing or electronics.But that strategyensures a constantstream of foot trafficinto Wal-Mart stores;consumers shoppingfor groceries are

often tempted by the store’s other offerings. And drugstore operations are another key component of

the company’s strategy. Wal-Mart’s prescription drug busi-ness is becoming more ensconced in their stores. As newlarger super centers are built, they’re focused on this ever-more-important segment. And even in the company’s newsmaller model stores, look for the drug section to be para-mount for local business plans, especially as the companymoves closer to towns and cities around the nation.

And the company’s size is a real advantage. Wal-Mart isable to continuously lower costs by squeezing its suppli-ers—after all, who can refuse a huge order from theworld’s largest retailer. The company has become a master

of sourcing goods, squeezing a little extra margin out ofevery imaginable product line.

And there’s even growth outside the US. In Europe, thecompany has made some tentative steps including the pur-chase of the UK supermarket group Asda. Already the pres-ence of Wal-Mart is changing the way business is done onthe continent.

More importantly, there’s Asia. With a burgeoning baseof literally a billion consumers, China has been an earlytarget of expansion and Wal-Mart is poised to benefit. BuyWal-Mart up to 55.

Advantage EnergyFor Superior Returns

Dividends will help enable your portfolio to keep youout of the red. This is no longer a secret. More investorsare coming around to this concept, which means thatcompanies that pay fat and steady dividends are gettingmore expensive.

But there’s a collection of companies that aren’t onmost of Wall Street’s radar screens. They’re Canadian andthey own a collec-tion of natural gasand oil producingassets primarily scat-tered around theircountry, pumpingcash into the coffersof their owners.

The companiesare called “incomefunds” or “energytrusts.” Each combines equity investment that’s leveragedby debt capital to fund the ongoing operations as well asacquisitions that produce cash flows from the sale of natu-ral gas, oil and other petroleum products.

Each of these trusts pays high double-digits dividends totheir investors—steady each and every month. To invest inthese trusts, you have to make one main assumption: thatnatural gas prices remain above $3.00 and crude remainsabove $15 a barrel. We think they will.

Advantage Energy (OTC: AVNNF) holds interests inproperties in Alberta and Saskatchewan but it also has inter-ests in British Columbia. Yes, it’s tough to buy, but worth it.

It’s kept performing for its investors through the darkerdays of cheaper petroleum and stronger stock markets, aswell as in recent boom times. The price for the perform-ance is that new investors have to pay more; the companytrades at around 3.5 times book value.

The company continues to pump oil, pay its bills andreinvest—the rest goes to us. Dividends are steady andmonthly, with a yield in excess of 14 percent. BuyAdvantage Energy under 19.

WAL-MARTPrice Per Share

Source: Bloomberg

$70

60

50

4010/01 10/02 10/03 10/04

ADVANTAGE ENERGYPrice Per Share

Source: Bloomberg

$21

14

7

010/01 10/02 10/03 10/04


ChevronTexacoJoining the Big League

ChevronTexaco (NYSE: CVX) is now the No. 2 US oilcompany. After a failed merger in 2000, Chevron finallytook over Texaco in a $35.7 billion deal in 2001.

The goal of the game has been to get bigger faster. Thismerger has done exactly that, creating a company withcombined annual revenues near $115 billion. The newcompany sports some of the world’s most valuable oilreserves, including 2.5 million barrels of proven oilreserves. And the company is the third-largest US producer

of oil and gas, pump-ing out more than amillion barrels of oilequivalent per day.

But more importantis what the companiessave from the combi-nation. Most analystsagree that Chevrondidn’t overpay forTexaco’s assets andthe cost savings from

the merger were significant. Look for more than $1 billionin annual costs savings as synergies are exploited.

The company is expanding its reach beyond its tradi-tional role of producing and refining crude oil. It recentlybought stakes in two South Korean power plants. Thepurchase is part of the company’s plans to build a world-wide power business, including deals using the compa-ny’s gasification technology.

Gasification produces synthetic gas from dirtier fuelssuch as heavy oil or coal, which can then be used to gener-ate electricity or run oil refineries. So far, ChevronTexacohas licensed more than 65 gasification plants includingones in China, Japan and the US, and there are more tocome. It’s a technology that will bridge the company’s tradi-tional producing and refining oil activities and its up-and-coming role in alternative energy sources such as fuel cells.

On the Internet front, ChevronTexaco has raised thestakes by getting its new procurement service up and run-ning quickly. And e-procurement ventures, along withonline commodity trading platforms, have been mush-rooming. Look for Internet ventures to be expanded evenmore aggressively in the future.

ChevronTexaco is beefing up its capital spending mostlyon exploration projects in Asia, Africa and the North Sea.With production continuing to ramp up, the combined

company should have no problem expanding its profits ata double-digit rate for years to come. ChevronTexaco is abuy up to 60.

PIMCO Strategic GlobalGovernment FundNot-So-Boring Bonds

During the past few years, some of the best investmentsthat have accomplished both price gains and steady, headycash have been bonds.

Bonds—and more important for us, bond funds—havecontinued to benefit from falling yields, subdued inflationthreats and less com-petition from otherinvestments, likecommon stocks.

Rather than buyingmachines or using itto fund the inventionof some new gizmo,the companies thatrun closed-end bondfunds keep makingmoney every quarterby simply picking andholding the right kind of bonds. Then, after paying theemployees and the expenses and retaining some for busi-ness development, the owners—shareholders—get paidhandsomely.

One of our favorite bond funds is PIMCO StrategicGlobal Government Fund (NYSE: RCS). This is a closed-end fund, and one of the best ways to grow your money. Ittrades on the NYSE, therefore it’s easy to buy and sellwhile allowing its managers complete flexibility in tradingtheir portfolios—a key advantage when using bond fundsin a growth strategy that isn’t shared by open-end funds.

The fund has walloped the rest of the stock market byover elevenfold in the past five years and more than four-fold in the past three. This means the company tookinvestors’ cash and made it worth 100 percent more in fiveyears, or more than 59 percent in the last three.

Strategic Global owns a bunch of different bonds,including foreign governments and US agency notes. ButStrategic Global conservatively hedges its exposure to cur-rency dangers and volatile foreign bond markets.

PIMCO Strategic Global Government Fund is a buy upto 13 and offers a solid 8 percent-plus dividend.

PIMCO STRATEGICGLOBAL GOVERNMENT

Price Per Share

Source: Bloomberg

$14

12

10

810/01 10/02 10/03 10/04

CHEVRONTEXACOPrice Per Share

Source: Bloomberg

$60

50

40

3010/01 10/02 10/03 10/04

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