Up-and-Coming Bellwethers

	Paul Tracy Street Authority.com
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10 Stocks Poised to Become the Next Dell, Microsoft or Wal-Mart

Most investors across the country hold at least a few of today's top blue-chip stocks--companies like Microsoft (MSFT), Wal-Mart (WMT), Home-Depot (HD), McDonald's (MCD) and others. But while these bellwethers are likely to remain stable in the years ahead, these lumbering giants have already reached maturity and most are now well past their prime. As a result, they're no longer the best place for investors to park their money.

For example, Microsoft was one of the best-performing stocks of the 1990s, increasing from a split-adjusted price of 60 cents at the beginning of 1990 to a price of $57.69 by the end of the decade--a return of nearly +10,000%. However, since that time the stock has lost over 50% of its value, declining to just $27.49 as of the close of trading on September 10th, 2004. Investors have exited their MSFT positions in recent years after it became clear that the company's record growth streak would not continue.

This same scenario is all too common among today's giant bellwether stocks. By the time a company reaches bellwether status, its market-beating growth days are usually well behind it and its enormous size makes meaningful expansion difficult to come by. With this in mind, if you want to make above-average profits over the long haul, then these probably aren't the best choices for your portfolio.

Instead of investing in the bellwether giants of today, we think a better strategy is to look for stocks that are on their way to stardom--companies that have already proven themselves but have yet to fully expand their concept across the country/world. These up-and-coming bellwethers still have plenty of growth potential ahead of them, and some will eventually become the Microsoft's, Home Depot's, and Wal-Mart's of the next 10-20 years.

One such up-and-coming bellwether is leading organic grocery chain Whole Foods Market (WFMI). The recent trend toward healthier eating continues to gain momentum across the country, and Whole Foods is already starting to take control of this market in the U.S. And with just 150 locations across the country, the firm is still tiny compared to such established grocers as Kroger and Safeway, which already boast 2,500 and 1,800 locations, respectively. As a result, Whole Foods has plenty of room to expand in the years ahead. The company is well on its way to achieving bellwether status, and as it continues to grow in the years ahead, early investors in WFMI are likely to enjoy tremendous annual returns.

In the analysis below my staff and I will introduce you to two additional proven winners that could rank as some of the best-performing stocks of this decade....

TEVA PHARMACEUTICAL INDUSTRIES (TEVA)

With annual revenues of $3 billion, Teva is the world's largest generic drugmaker and the undisputed leader in this rapidly growing market. Generic drugs are the chemical equivalent of brand-name drugs, but are sold at drastically reduced prices. Recent Medicare reforms in the U.S. and the strong push to mandate generic drug use in Europe should lead to tremendous growth in this market in the years ahead.

Two other mega growth trends are also driving solid generic drug sales: an aging population and runaway medical costs. Teva stands to benefit on both counts. My staff and I are also impressed with the breadth and diversity of Teva's product offerings.

With an impressive lineup of over 150 different generic drugs, Teva Pharmaceutical Industries was the top generic manufacturer in 2003 in terms of both sales and volume. And in the generics business, size brings certain advantages--more specifically, the ability to mass produce drugs at extremely low costs, as well as the ability to quickly conduct trials and file for generic approval with the FDA. First-filers, of course, enjoy a highly profitable 180-day exclusivity period. Think of that exclusivity as a mini-patent--no other manufacturer can compete with the first-filer for the first 180 days, allowing the generic drugmaker to earn outsized profits.

And while Teva Pharmaceuticals remains primarily a generic drugmaker, the company isn't an R&D lightweight. Generic drugs must go through a rigorous approval process before they can be sold. Because of this, the larger generic drugmakers have an army of doctors and scientists just like most branded pharmaceutical firms.

In recent years, Teva has decided to leverage that R&D capability to develop its own line of branded drugs by focusing on treatments for neurological disorders. The company's pipeline of new drugs in development is among the most promising you'll find anywhere. In fact, Teva's first branded offering to market, Copaxone, is already its single most profitable product.

With an extensive portfolio of both branded and generic drugs, Teva is well positioned to profit from the aging U.S. population (see chart). And as we all know, older Americans require more drugs than their younger counterparts. So with the 80 million strong Baby Boomer generation just on the cusp of retirement, there's now a growing market for all sorts of healthcare services.

Due in part to those demographic trends, the U.S. has seen runaway healthcare cost inflation in recent years. Check out our chart of the Consumer Price Index (CPI) and the Medical cost component of the CPI since 1950. Note just how much faster medical costs have risen than costs in the economy at large. In addition, note just how much this trend accelerated after 1990--medical costs grew at over 4X the rate of the CPI from 1990 to 1999.

These runaway healthcare costs have placed significant strains on consumer wealth, as well as on government-run programs like Medicare. The search is on for ways to cut medical costs without cutting service. Generic drugs, as lower cost alternatives to branded pharmaceuticals, are likely to be the cornerstone of any cost-cutting drive. Already, generic prescription trends are positive for growth. IMS Health estimates that half of all prescriptions written in the U.S., and that figure should continue to rise in the years ahead. Meanwhile, the story looks even more compelling in many overseas markets. For example, generics still account for less than 25% of all prescriptions written in Europe. European countries generally have nationalized health services, and many of these government health plans are in financial trouble--staggering under the weight of rapidly rising pharmaceutical costs. Generics represent a major path to lowering those costs, so they are now rapidly growing in popularity. We expect generic market share in Europe to gradually rise to U.S. levels over the next decade or so.

Another positive for Teva is that the firm is quite large in comparison to other generic drugmakers, giving it the size and scale to compete aggressively on price. However, Teva is still tiny when compared to established branded drugmakers like Pfizer (PFE) and Merck (MRK). That's despite the fact that generics like Teva are poised to inherit a big chunk of big pharma's revenues over the next few years.

More specifically, between now and 2006 about $40 billion worth of drugs are expected to lose patent protection. This is the most rapid schedule of patent expirations the industry has ever seen, and it will translate into literally tens of billions in extra business for the best in the generic group. Teva is clearly #1 on that list, so we expect the stock to continue its impressive run for years to come.

CERADYNE (CRDN)

It's clear that the world is an increasingly dangerous place. And right now, U.S. forces are stationed in some of the most dangerous regions of the globe, including Iraq, Afghanistan and even the volatile North Korea/South Korea border.

It should come as little surprise to most readers that U.S. defense spending has been steadily rising since 2001. Spending accelerated rapidly in the wake of the 2001 terror attacks not only due to military operations in Iraq and Afghanistan, but also due to increased security within U.S. borders.

Check out our chart of U.S. defense spending over the past 20 years. Note that spending ran up in the late 1980s at the end of the Cold War, pulled back in the 1990s and then exploded to the upside after 2001. With geopolitical and terror risks now a fact of life both inside the U.S. and abroad, we expect this strong spending to continue well into the future. This is an inflection point for the defense industry--the slow growth years of the 1990s are now a thing of the past.

Troops in Afghanistan and Iraq are often faced with urban combat situations. In such scenarios one of the only lines of defense for troops is ceramic body armor. Ceradyne is a leading producer and supplier of such armor to U.S. forces.

The advantage of ceramic material is that it's lightweight and very good at stopping incoming enemy rounds. Already, orders from the U.S. government have been pouring in for Ceradyne and the company is struggling to open up new factories fast enough to keep up with demand. Last summer, the firm reported an outstanding order backlog of over $100 million, more than double year-ago levels.

And don't be surprised to see demand emerge from other nations well. Armies across Europe and Asia are being fitted with body armor as a first line of defense. That means rising orders for Ceradyne for at least the next five years as the firm grows to keep up with demand.

Yet despite that growth dynamic, Ceradyne remains a small company. A brief look at our chart shows that the company's nearest competitor, Armor Holdings (AH), sports a market cap just under twice Ceradyne's. And, of course, Ceradyne is still a tiny fish when compared to established defense contractors like General Dynamics (GD) and Lockheed Martin (LMT).

However, just because the company is small doesn't mean it's a fly-by-night operator. Ceradyne has no debt, is solidly profitable and sports a return-on-equity (ROE) of nearly 25%. An established player in a rapidly growing business, Ceradyne looks like a solid candidate for future bellwether status.

Editor's Note: The analysis above represents just a small sample from our recently completed 40-page special report -- "Up-and-Coming Bellwethers: 10 Stocks Poised to Become the Next Dell, Microsoft or Wal-Mart." In that report we included further research along with in-depth profiles of eight additional up-and-coming blue-chip stocks. To view this report in its entirety, you'll need to read the September 28th, 2004 issue of our premium Market Advisor newsletter. If you haven't already signed up for this biweekly newsletter, then please visit the link below to subscribe. After doing so, you'll gain immediate access to the remainder of this special report, as well as a biweekly newsletter and a host of additional premium content: http://StreetAuthority.com/p/ma-io.asp.

Paul Tracy will be available to take your questions until Thursday, October 7. Please use the form below to submit your questions.