One of our special focuses this week is on Southeastern Banks- a hot topic given the way the subprime crisis has continued to put pressure on the market. We asked the analysts we spoke to, given all the gloom and doom in this space, what is the burning question in mind of investors? For Robert Patten of Morgan Keegan & Co., it’s “When do I buy banks?” Mr. Patten had some ideas:

 Mr. Patten: When to buy the banks is everyone’s question right now. Nobody wants to be too early as the downside in this group has been difficult. In my view it is all about credit and balance sheets, the bigger the bank the bigger the black box in terms of complexity. With the larger banks, it is where the balance sheet time bombs are. For the smaller banks, credit and capital are the issues and then earnings challenges will take over. Obviously, banks with strong capital levels and good reserves are favored in this environment such as Marshall & Ilsley (MI, rated OP) and Synovus (SNV, rated OP), both of which spun off their processing businesses in 2007 and have excess capital, and SunTrust, which we believe will monetize its ownership in Coca-Cola stock, which we estimate could provide $1.7 billion in capital to be reallocated to deal with credit and reserve build, and share buybacks.

For the full Southeastern Banks report, including full coverage of the subprime crisis and stock picks, click here.

Our five pick’s this week come from Decatur Capital Management, a large and small cap growth investor based in Decatur, GA:

1. McDonald’s (MCD)- “The change in demographics indicates that McDonald’s is definitely a good consumer play as consumers look to get value for their meals. The hurried sense of our society lends itself to eating at McDonald’s, and we’ve seen substantial growth in McDonald’s stock price over the last year.”
2. MEMC Electronic Materials- “WFR is a global producer of silicon wafers used in semiconductors for microelectronic applications and in the solar industry. The solar power industry is projected to grow by 30% compound annual growth through 2010 and demand for WFR’s product, polysilicon, is surging.”
3. Radiant Systems (RADS)-  “RADS is a systems software firm that develops, installs and delivers solutions for managing site operations of hospitality and retail industries…Our model indicates that this company will continue to have price appreciation into 2008.”
4. Biogen IDEC (BIIB)- “BIIB is one of the largest firms in the biotech industry.Historically, earnings have been driven by strong sales of the multiple sclerosis drug Avonex. With the introduction of Tysabri, BIIB is positioned to maintain its leadership in this area. The firm also has a solid pipeline of new drugs, especially in the cardiopulmonary painless solutions.”
5. Curtiss-Wright (CW)- “Regarding Curtiss-Wright, we see that they are focused on manufacturing flow control and motion control for various military and commercial uses. Curtiss-Wright derives 50% of its sales from the military sector. We see additional sales growth in the military’s continued transformation initiatives.”

For the full Investing Strategies report, including  in depth interviews with portfolio managers across a wide range of styles, and more stock picks, click here.

Moving back to our focus this week on Defense, we spoke with J.B. Groh of D.A. Davidson & Co. He told us a little bit about the hot button question for investors in defense. They wanted to know:

“…When does this cycle roll over and what will happen to the stocks? You have had three great years of orders and correspondingly pretty attractive returns in most aerospace names. The big questions are: is the party over, and when should I leave? Traditionally, the stocks have followed trends in the backlog. As long as backlog continues to grow I think these aerospace names will outperform. The ramp in production in this cycle is not nearly as steep as it was last time around. That’s going to help preserve backlogs for longer. Additionally what has given me some confidence is weakness in other industrial areas. As Jeff Immelt said in his GE update recently, there is no recession in aerospace. That being said, what are the names you want to own in an environment where orders are dropping? I think that Alex pointed out that having some good aftermarket exposure is probably the place to be.”

For the full Aerospace-Defense report, including CEO interviews, a roundtable discussion and stock picks, click here.

Dick Davis,  long-time market commentator andfounder of the Dick Davis digest, has recently put out a book entitled “The Dick Davis Dividend”, in which he puts down for the record his two-cents on investing. One of the major points of the book is Mr. Davis’s insistence on the irrelevance of news in terms immediate action on the part of the investor:

TWST: You talk about the irrelevance of news, that the news follows the market and not vice versa.

Mr. Davis: Correct. My point is that for the most part, there is very little news that comes out that requires action on the part of the investor. News that does require action only applies to news that is fundamental and basic in nature, i.e., news that is likely to have a serious impact on future prospects for the company. Usually, that judgment can only be made in retrospect. Most news is trivial; it is never as serious or important as it sounds when it’s released. Invariably, over a long period of time, what sounds very dramatic at the time turns out to be a small, almost imperceptible dot on a long-term chart. The problem is that we get our news from newsmen or newswomen and they’re not trained in the stock market and so, in reporting why things happen in the market, they will choose whatever reason sounds logical. Since the market is illogical and irrational and random, they will often come up with reasons that may or may not apply.

For the full interview with Mr. Davis, including more of his unique perspective on investing and a complete overview of his investment philosophy, click here.

The Airline Industry, as a whole, has been well below the S&P since March. Analyst Michael Derchin has three reasons why this has been the case:

1. After the merger bewtween US Airways (LCC) and Delta (DAL), people who had bought up shares anticipating the merger, sold en masse.
2. The price of fuel increased dramatically in 2007. At the beginning of year, it was at $50, and by the end of the year was near $100.
3. The credit crisis in late 2007 trickled down to investors feeling that a conservative consumer is going to spend much less on travel.

For the full interview with Mr. Derchin, including an outlook for 2008 in airlines industry, and stock picks, click here.

Our focus this week is on Aerospace Defense. We spoke with analyst General David “Bull” Baker about his outlook for the aerospace sector in 2008. He sees a new source of revenue as America starts to pull out of Iraq: the Iraqis.

Gen. Baker: I think we are going to see a dramatic increase in military equipment bought by the Iraqis. This may be a pleasant surprise for the companies that manufacture
military equipment. This equipment should include helicopters, C-130s, artillery shells, command and control systems, and a lot of other gear that increases the
operational capability of the Iraqi forces. It is across the board tools that the Iraqi forces need…These are dollars that are going to flow into our defense sector that come from other than Pentagon coffers. That usually creates a
positive environment, which I think is going to be robust in 2008.

For the full Aerospace-Defense roundtable- including additional analysts perspectives, a complete outlook for 2008 and stock picks click here.

In wrapping up our conversation on Gold this week, analyst Paul O’Brien talked a little bit about Gold companies to stay away from in the new year:

 TWST: Paul, are there any names that you would run away from at this point?

Mr. O’Brien: Alamos Gold (AGI:TSX) has hit operational issues. Alamos may be one to be looking at. Recovery is the topic of discussion for this company, at its Mulatos Mine in Mexico. Getting back to the political risk theme, that is keeping a lid on some opportunities; most recently, Gabriel Resources (GBU:TSX) has been a victim of that.

For the full Gold and Precious metals report, including a full overview of the sector, and stock picks, click here.

Our five picks this week come from John Babyak and Nick Caruso Jr. of Wolverine Investments out of Southport, Connecticut. Wolverine focuses primarily on convertible securities- their philosophy is that wealth is best created by long-term ownership in growing businesses. Here are some of those businesses as they see them now:

1. Chicago Bridge and Iron NV (CBI)- “Chicago Bridge & Iron operates as an engineering and construction company in global markets… Growth is being driven by expanding share in new LNG facilities, expansion of import terminals, and enhancing refining capacity to enable the processing of heavier and the more sour grades of crude oil.”
2. Bunge Limited (BG)- “The farm-to-consumer company, Bunge…have a strong foothold in the world’s largest food production regions, and they are focused on expanding in the fastest growing consumption markets…Bunge is also the world’s largest oilseed producer, the largest producer and supplier of fertilizer to farmers in emerging markets, and a leading supplier of bottled vegetable oils worldwide.”
3. Thermo Fisher Scientific (TMO)- “Thermo is a leading manufacturer and developer of the analytical and laboratory instruments, as well as supplies, for the entire biotech industry, with a hand in life sciences, drug discovery and industrial applications. Not being as close to the drug development pipeline has several advantages in that we are somewhat isolated from the risks inherent in the FDA approval process.”
4. Metlife (MET)- “Their growth has slowed somewhat in recent quarters, but we believe that the company is poised to continue to benefit from a diverse business mix; strong organic growth; impressive, trustworthy management, that we confidently believe will deliver on what they say…MetLife is a name that we believe should be a core holding as a diversified US life insurance and financial services company.”
5. i2 Technologies (ITWO)- “i2 Technologies [is a software developer that] has created an innovative approach to inventory management…This past September, the investment firm Amalgamated Gadget announced they owned a 17.6% stake in i2 via ownership of i2′s Series B convertible preferred stock. Furthermore, in October, SAC Capital, the large and renowned hedge fund, disclosed in a 13-D filing with the SEC that it had increased its stake in i2 from 1.1 million shares to 1.9 million shares, or 8.9% of the company. SAC Capital said it believed the stock to be undervalued and that the best way for i2 to increase shareholder value would be a public sale of the company. One Wall Street analyst believes i2 could be worth as much as $22 a share in an acquisition.”

For the full interview with Mr. Babyak and Mr. Caruso, including a full overview of their investment philosophy, sell discipline, and an outlook on market overall, click here.

Our special focus this week is on gold and precious metals. As earlier, we wrote about the gold side, let’s take a look at how precious metals are doing; anaylst Paul O’Brien has an interesting look at the state of Jewelry:

TWST: Paul, what do you see on the jewelry side of the equation?

Mr. O’Brien: The main thing to keep in mind, of course, is that it is not really absolute prices of jewelry; it is the volatility of prices that affect purchasing habits and if gold is all over the map, that gives purchasers the opportunity or the temptation to sit on the sidelines waiting for a lower price. If gold is in a range or perhaps in one vector or direction, the average jewelry purchaser may say, “I have to buy it now.” Volatility in price is typically the thing that will inhibit purchasing habits or purchases of jewelry. I believe on a dollar amount basis versus tonnage basis, dollar amounts are still fairly healthy, whereas if you divide through by a record high gold price, the tonnages may look to be a bit weaker.

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

Every week here at TWST, we interview portfolio managers from firms all around the U.S. An important part of each interview is how each portfolio manager distinguishes themselves from the countless others that have talked to TWST.  In order to help them distinguish themselves, every week we ask portfolio managers: What gives your company it’s edge?

Nitin Kumbhani, Apex Capital Management (long-only, growth equity manager):

 Mr. Kumbhani: Our ability to identify secular themes, especially with a global mindset, and a lot of traveling internationally to see what’s happening, where the growth areas globally are. Especially with US growth slowing down, that’s extremely important. We are portfolio managers who think beyond the obvious. Additionally for the size of our company, we have some of the best in-house biotech research. We follow almost every single drug that is going through different phases of clinical trials. We monitor the drug compounds, assess their eventual market value, and examine the entire food chain – who are the beneficiaries at various different cycles. These are important things.

R. Brent Byrne, Divi-Vest Advisors (high-yield growth and income stocks):

Mr. Byrne: We think we do a great job of maximizing the math that decides total return. Simply, total return equals growth plus dividends less expenses. We maximize each component, growth, income, and cost control in our process. By bringing that level of efficiency and approach to the math that decides total return, we believe, in the long run, the edge will be on our side versus the Street.

Peter Goldman, Chicago Asset Management (Large Cap Garp Investing):

Mr. Goldman: I think that the portfolio construction, coupled with our risk overlay and our longer-term outlook, has contributed materially to our performance. Also, there is the fact that there are two of us working on top of this portfolio where we really are generating the ideas and making the decisions. Scott has the veto power ultimately on the portfolio, but it’s really two of us making all the decisions. The accountability rests with the people pulling the trigger so there is no ego involved. You have an IRR, you have confirms going out to clients and you have consultants watching 24/7. So you really are running around naked. I have been doing this 23 years, Scott has 25 plus years of experience and we really feel that in this age of information overload, we are better able to filter and process pertinent information as it becomes available.

For the full interview with Mr. Khumbani, click here.
For the full interview with Mr. Byrne, click here.  
For the full interview with Mr. Goldman, click here.