Our picks this week come from Neil Hennessy, president and portfolio manager of Hennessy Funds. The Hennessy funds consist of six no-load mutual funds that use a “time-tested, quantatitative investment formula.” Here’s what they pick this week:

• Dick’s Sporting Goods (DKS)- “Their earnings are higher than the previous year, their price to sale ratio is .95, and so you are vuying a $1 of renue for $.95.”
• Warnaco (WRNC) “They make intimate apprel jeans wear, swim wear, etc. What pople don’t realize is that Calvin Klein is one their brands and Speedo is also one of their brands.”

For the full interview with Mr. Hennessy, including a complete profile of their unique Focus 30 fund, click here.

When you think of Harley-Davidson (HOG), you might think of the kind of person who lives hard and dies young. This, however, is not the case.

According to analyst James Hardiman, the heavyweight center of Harley-Davidson’s business are middle-aged white males between the ages of 45 to 55 these days. The challenge that Harley-Davidson faces in the near future is where to turn when these customers become to too old to making a motorcycle riding lifestyle feasible.

Harley-Davidson’s solution is to start initatives that reach out to other markets- to “target a younger consumer, a minority consumer, a female consumer.” While Harley-Davidson has been on these iniatives for some time, and some success in Europe, according to Mr. Hardiman, it’s not quite a news story yet. But for the future success of Harley-Davidson, the company is going to have find other kinds of people are “born to be wild.”

For the full interview with Mr. Hardiman, including a complete overview of the leisure space and stock picks, click here.

Moving back to our special focus on Lodging this week, we spoke briefly to analysts William Truelove who had a few things to say about the supply side of the lodging sector:

• “You have a fantastic outlook [on the supply side] the more urban you get. “
• “The more urban you get, the more relevant it becomes to public hotel companies, because that is where they tend to own or manage hotels”
• “When you start talking about the suburban highway stuff, the franchise companies, like Marriott (MAR), Choice (CHH), Starwood (HOT) or even Hilton…are benefiting there from the supply in the suburban hotel.”
• “I think the conerns over the next year’s economy, whether or not it is going to be a recession, have really put a lid on stocks in the near term.”

For the full lodging issue, including a full sector overview and stock picks, click here.

Every week at the Wall Street Transcript, the Portfolio Managers we speak tell us what possible indicators are showing where the market is headed. For some it is economic indicators, like the behavior of Fed or the price of oil. For Thomas Au of R.W. Wentworth & Co., however, the current market climate can be observed through the lens of cultural signifiers. For example, Britney Spears’ hemline:

Mr. Au: You may have heard of the so-called hemline indicator? The hemline indicator started in the 1920s and they were talking about the length of ladies skirts. The hemlines rose also in 1920s in tandem with the stock market, until they reached a certain point, then they fell basically all through the 1930s, which also correlated with the indices.

Actually, this past year, we saw a hemline indicator that suggested that at least the US stock market is again at its peak. I’m referring to the fact that Britney Spears’ hemline rose to the point where, to put it delicately, her dress left nothing to imagination.

What happens is when morals are loose, that’s usually a sign that money is loose and money that was maximally loose about a year ago is now being tightened, the Fed rate cuts notwithstanding. The tightening is being seen in the weakening dollar and also in the tighter lending standards by banks vis-a-vis subprime and mortgage loans generally.

It’s even being seen in the cultural sense in the fact that Britney Spears lost custody of her kids to the father, who was seen as a better parent. This is an unusual event for a mother, but it’s basically saying that the American public has had enough.

For the full interview with Mr. Au, including his complete take on the current market climate and stock picks, click here.

Our other special focus this week is on the Leisure space. We spoke with Steven Wieczynski of Niclaus & Company, who talked a little bit about his speciality in the leisure sector: cruises. He talked about the combination of rising oil prices and a boredom factor with the Carribean have made it a tough time for cruises.

•  Rising oil costs have majorly affected cruise lines across the board. The cost of fuel is now 8% to 9% of revenue for cruise lines, where it was only 3% to 4% a few years ago.




• The Carribean, a major hub of cruise line income, has seen some weakness in the past months. The “boredom factor”, where people who typically go to the carribean are seeking other destinations for vaction combined with hurricane fears, and weak markets in the Carribean have all contributed to this weakness.
• The outlook for the future, however, is better. The Carribean markets are beginning to stablize by shifting capacity to European cruises, which is an less developed market with a strong demand at present. According to Mr. Wieczynski, pricing should pick up in the first part of 2008 for the Carribean.

For our full interview with Mr. Wieczynski, including a complete sector overview and stock picks, click here.

Lodging has had a volatile year this year- a strong first half followed by a hard second half. In our special focus on lodging this week, we spoke with analyst William Truelove who talked to us a little bit about where the lodging sector stands today.

 TWST: From a market perspective, Will, has the group done what you thought it would?

Mr. Truelove: The first half of the year was fantastic, but that market was very conducive to M&A. It was almost a discussion of how many hotel companies would be left standing in the public marketplace. Since the summertime and the credit market meltdown, you have had a complete retraction in the names. Beyond that, I think that the market does also perceive that not only are the takeout premiums gone, but, as Rod mentioned, we are also in somewhat of a decelerating growth environment. It is still good growth but just not accelerating as fast. Concerns are about earnings going forward. When you combine those two, the market action has been far different from what we anticipated. While I would say the business environment has fallen in line with what we thought, I would also say that we completely missed this year’s market reaction.

For the full roundtable forum on the Lodging sector, including a complete sector outlook and stock picks, click here.

Our other special focus this week is on Natural Gas. Despite the political and fear issues present in today’s market, the price of natural gas seems to be staying a lot more stable than that of oil. Analyst Fadel Gheit of Oppenheimer & Co. Inc. says why:

 TWST: Why haven’t we seen the same reaction in gas prices, given all the political and fear issues that have boosted oil prices?

Mr. Gheit: Natural gas is more of a regional commodity; oil is more global. Any international crisis will have an impact on oil prices, but obviously would not have the same impact on natural gas prices. The disparity between gas prices from different regions is magnified significantly higher than the disparity in oil prices. For example, the gas price in Argentina is between $1 and $1.50; the gas prices in the US and Europe are between $6 and $7. The gas price in Equatorial Guinea or West Africa in general or in the Middle East could be less than $0.50 or even lower… It is basically infrastructure and the lack of transportation that makes gas more regional. The prices are determined by supply and demand based on a regional, not on a global basis.

For the full interview with Mr. Gheit, including a complete overview of the market climate for natural gas and stock picks, click here.  

One of our special focuses for this week is on Oil & Gas exploration and production. We sat down with a roundtable of analysts who cover this space, and talked about the future of oil- and where the next big find will be.

• John Gerdes, Suntrust Robinson Humphrey Capital Markets: “I think the Appalachian Basin and the Rockies region are two areas that are recieving an elevated amount of attention in terms of evolving potential new resource concepts.”
• Phillip Dodge, Stanford Group Company: “One that is important to mention is the North West Shelf of Australia, which has really emerged in the last couple of years with companies like BHP (BHP) and Woodside doing well.”
• Phil Weiss, Argus Research Group: “One place that hasn’t been mentioned yet…is the Deep Water Gulf. We just had the recent lease sale there, which I believe was the second largest in history. That is one area where a lot of companies are looking.”

For the full roundtable discussion, including a complete overview of the sector and stock picks, click here.

We spoke this week with Fred Astman and Scott Hood, chairman and president, respectively,  of First Wilshire Securities. They spoke to us about a number of companies that First Wilshire invests in, but the one that really got them going was the company IMAX (IMAX), who make the enormous movie screens we all know and love.

• Until a few years ago, IMAX was a documentary science center museum exhibitor.
• IMAX realized that the movie experience they were providing was really great, and they figured out a way convert Hollywood movies to IMAX screens.
• The result were astronomical; whereas most movie screens are on the decline, with 60% or 70% sell out rates, IMAX screens remain at 90% sell out rate, and are competitive even with the most advanced home entertainment centers.
• With filmmakers switching over to digital format completely in the next few years, the fact that IMAX can just send a hard drive to a theatre saves a huge amount on printing costs. This system, it has been announced, will come out earlier than expected.

For the full interview with Mr. Astman and Mr. Hood, including an in depth look at their investment strategy and more stock picks, click here.

As we said in our earlier post, the Royalty Trust space has been in trouble this past year. However, companies are trying to do all they can to adjust to this turbulent climate. Gordon Tait, analyst at BMO Capital Markets, has more on what companies are trying to do:

 TWST: Given that difficult environment, what have the companies been doing to adjust to it?Mr. Tait: They have been doing a couple of things. As gas prices fall, it impacts their cash flows. In order to keep their balance sheets intact, without stretching them too far, they have to bring their distribution levels down to reflect the weaker operating environment. A lot of them have cut their distributions to prevent them from getting too onerous. They don’t want to keep their distributions artificially high when their cash flow is reduced or falls. When you are buying a royalty trust, you are becoming an owner of the cash flow. Like any other owner, you enjoy the good times and you enjoy rising cash distributions. You get strong cash flows and rising distributions, but you have to take the down side. When cash flows fall because commodity prices fall, you have to cut back on the amount of cash you are paying out.

For the full Royalty Trust issue, including interviews with 13 different CEOs and stock picks, click here.