The Science of a Sizzling Club - Marquee, NYC

The Science of a Sizzling Club
Brett Nelson and Laurence Holland
Forbes.com

The anxious crowd pooling in front of the stone façade is 200 strong, maybe more. By all accounts, summer is "slow season" on the Manhattan nightclub circuit. And yet there they were, a herd of sleek and stylish 20-somethings sweating in the city steam, hungrily waiting an invitation to come inside -- if only for a brief glimpse. The time is already 3:15 a.m.; the club closes at 4.

This peculiar drama plays out year round at Marquee, a mainstay among New York City's nightlife aficionados. Most clubs have the lifespan of a fruit fly; two years is considered a respectable run.

Yet Marquee -- which opened in December 2003 on Manhattan's far west side -- has managed to preserve its precious allure and keep the fickle and fashionable coming back for more.

How'd they do it? Not quickly. The club's good fortune was years in the making, thanks to a decade-long customer cultivation campaign, feverish attention to detail and, as is the case with every successful small business, lots and lots of hours. And luck.

Marquee's success is even more impressive -- or bizarre, if you're used to a casual beer and a decent night's sleep -- considering what customers pay for the privilege.

Like other ultra-trendy clubs, Marquee uses a two-tiered pricing approach. The hoi polloi waiting in line pay a $20 cover charge, while the famous and well-heeled, who often reserve seats ahead of time, are expected to purchase entire bottles of alcohol at obscene premiums. A bottle of Absolut vodka that retails for around $25 at the local grocery store goes for $310 at Marquee -- a 1,240 percent markup. (For that, you get to mix your own drinks; juice, tonic and ice bucket are included.)

At that price, if you ordered by the drink and the bartender believed in 2-ounce pours, you would be shelling out roughly $24 per cocktail. One enthusiastic bubbly connoisseur forked over $10,000 for a bottle of Dom Perignon Vintage Methusalem.

Who in their right mind would do this? Celebrities, for starters, and the rubbernecking masses who want to party with (or at least near) them.

Take last week's event lineup. Tuesday: Christina Aguilera's album-release party. (Rapper Diddy, R&B singer Babyface and clothing designer Marc Jacobs were on hand.) Wednesday: Paris Hilton's album-release party. Thursday: Club founder Noah Tepperberg's birthday bash (he turned 31), which brought in 1,500 people during the course of the night. And the weekend hadn't even begun.

Tepperberg crows that this quarter (it's "slow" season, remember?) is shaping up to be Marquee's best ever, in terms of sales. Since its opening two and a half years ago, the club has pulled in more than $30 million, says Judy Tepperberg, Noah's sister and director of special events. As for profits, the club broke even inside of a year, she says.

The Formula
To understand Marquee's secret, you have to wind the clock back a decade to Tepperberg's days as a promoter and party organizer at the University of Miami. (He did his time behind the bar and working the front door, too.) On a good week during his senior year, he pocketed $2,000 for drumming up business at local clubs.

Right after graduation, Tepperberg, with high school pal Jason Strauss, launched a Manhattan-based event-marketing company -- basically, a group of ten to 15 promoters who cold-call, hand out fliers, run direct-mail campaigns and, well, hang out at clubs. And not just in New York: They also jetted to Miami, L.A. and Paris to talk up big parties in the city.

While Tepperberg logged at least six nights a week on the town (and has a gravelly voice to show for it), each outing laid the groundwork for something far bigger.

"By the time we opened Marquee, we had a huge network," he says. "Almost all club owners boast a database. But we herded our crowd from club to club for years. We had a bona fide following."

The real challenge was figuring out how to keep all those people coming back -- and paying those ridiculous tabs. Tepperberg's working formula: "We wanted a place that was exclusive, but big enough where you wouldn't see the same people every night."

Tepperberg and Strauss spent a year touring at least 25 locations -- some existing clubs, others mere empty shells -- looking for the right one. They finally settled on a 7,500-square-foot garbage-truck garage on Manhattan's far west side. Maximum capacity: 600. The transformation -- which cost around $2.5 million (Tepperberg won't say how much he put in) -- involved ripping off the roof and replacing it with 15-foot vaulted ceilings.

Behind The Rope
Today, Marquee has three bars in three distinct rooms, each playing its own kind of music.

"We knew there wasn't a good nightclub that played both house music and R&B" in the same venue, says Tepperberg, who will shell out $15,000 for a celebrity DJ at the drop of a hat, without a big promotion. "It's a special surprise. It makes the crowd feel like you're doing something for them." As if cocktail waitresses who spend their off hours modeling for the style section of the New York Times weren't enough.

The Marquee guys thought through the little things, too. The tops of the banquettes, for instance, are wide enough to sit and dance on, but curved so you can't perch a drink there; the seats also contain hidden drawers for storing purses and other accessories. There's no avoiding traffic jams in a packed house, so a bathroom run can be a chore; once there, though, the women's room has seven stalls to keep things moving.

If things happen to get out of hand, one of 12 to 14 NFL-lineman-sized bouncers in crisp black suits are there to diffuse the problem -- in a hurry. On that same recent summer evening, a couple was playfully tossing small pieces of ice into each others' mouths when another, rather intoxicated patron started throwing his own cubes at them. Seconds later, a large hand landed on his shoulder, and a bouncer's voice ordered him to stop. Barely fazed, the rowdy customer reached for the ice bucket, at which point the bouncer simply yanked him over the top of the banquette and out of the club. No one flinched.

Tepperberg still shells out big money for promoters, who might snag 15 percent of the business they bring in, while sister Judy adds to the buzz by running corporate events for huge companies like Citigroup, Virgin Records and Reebok. Special events now account for roughly 15 percent of Marquee's overall revenues.

That's a smart strategy, says competitor David Rabin, owner of The Double Seven and Lotus clubs and president of the New York Nightlife Association, a lobbying group: "Private events are crucial, as they not only bring in revenue and high-profile guests, they also generate press hits that last long after the party is over."

While he and Tepperberg duke it out for nightclub domination (indeed, Lotus has lost some staffers to Marquee), Rabin has to give his archrival his due. "Noah understands that nightlife is not just a party," he says. "The reason Marquee has been open for two and a half years -- and Lotus almost seven -- is because of the hard work the team puts into it. Anyone who can keep such a large place hot for more than a few months in Manhattan is certainly doing something right."

Of course, no club can thump like Marquee forever. That's one reason why Tepperberg is looking to diversify: Eleven months ago, he opened his second club, the Asian-themed Tao in Las Vegas, which so far seems a solid hit. As for Marquee's future, that will depend on whether it continues to entice its toughest customer: Tepperberg himself.

"When I'm tired of going there, it might be time to hang it up," he says. "But I'm still having a blast."

Slideshow: 18 Sizzling Clubs (Forbes)

Bottle Battle Against Clubs

Bottle Battle Against Clubs
By DAVID SEIFMAN City Hall Bureau Chief
NY Post, August 25, 2006

Nightclubs that require patrons to buy bottles of liquor at $300 or more a pop are creating "dangerous" conditions that a Queens legislator pledged yesterday to stamp out.

Councilwoman Melinda Katz (D-Queens) said she is drafting legislation that would outlaw the popular practice by some nightspots of demanding partygoers purchase two or more bottles of liquor to guarantee a table.

"I believe the two-bottle requirement is dangerous," said Katz. "Nobody's buying a $300 bottle of alcohol and leaving it."

Eight out of 12 clubs in and around Chelsea surveyed by Katz's staff imposed the "bottle service" requirement.

One of those was Guest House on West 27th Street, where 18-year-old Jennifer Moore was partying last month before a thug picked her up as she wandered drunk on the West Side, took her to New Jersey and killed her.

Guest House requires that two bottles be purchased per table, according to Katz's survey. Prices start at $300.

The nearby Cain club - where bottles are tagged $350 and up - has a minimum four-bottle buy-in for parties of 12 to 15.

Katz cited articles in The Post that exposed how some club owners resell leftover bottles as many as four times when big spenders actually leave a few behind.

Liquor laws are under the control of the state, not the city.

But Katz pointed out that the city intervened to ban smoking in bars just a few years ago.

"I'm not sure why we can't outlaw this practice, too," she said.

As insurance, Katz is adding a resolution asking state authorities to do away with the two-bottle minimum.

Katz is also looking to hike the minimum age for gaining entry to bars and nightclubs from 16 to 18. The drinking age in New York is 21.

"Do people know you could even get into a club at 16?" she asked.

Katz's aides reported that at the club Pre:Post "17-year-olds can come but cannot drink." Another club, 40/40, said a 17-year-old would be admitted "but has to leave by 11 p.m."

Ron Bookman, who represents the New York Nightlife Association, accused Katz of "grandstanding" and

predicted her legislation would never get beyond the draft stage.

"Ms. Katz is misinformed as to the city's authority in that issue. They have zero chance," he said.

"It's an embarrassment to her if she does it."

Bookman said it would make sense for all legislators to await a summit meeting scheduled next month with club owners before "picking on the industry."

Katz's legislation is being introduced on Sept. 13, along with other reforms pressed by council Speaker Christine Quinn.

The summit is scheduled for later that month.

World's Shortest Person - A Nepali?

Nepali boy submitted for world's smallest person record
AFP, Aug 28, 2006

A 14-year-old Nepali boy who is only 50 centimetres (20 inches) tall has been put forward for a Guinness world record as the world's smallest person, his family and supporters said.

"We found out that a Jordanian boy holds a record in the Guinness Book of World Records and he is 25.5 inches tall. But Khagendra is 5.5 inches smaller than the Jordanian guy, so we sent an application to the Guinness Book of World Records," said Min Bahadur Rana, president of Khagendra Thapa Magar Foundation, an organization set up to collect funds for the boy.

Fourteen-year-old Khagendra Thapa Magar weighs only 4.5 kilograms and will be taken on tour round Nepal to raise money for his upkeep, his father told AFP.

"We show him in exhibitions to collect fund for his education, health and future," said Rup Bahadur Thapa, his father.

According to the website set up by his supporters, www.khagendratma.org, Thapa weighed only 600 grams at birth and his hobbies include "playing with pebbles" and "worshipping Buddha."

Khagendra Thapa Magar, 14, dances in Baglung village, 270 kilometers (169 miles) west of Katmandu, Nepal, Monday, April 17, 2006. Magar, who is only 20 inches (50 centimeters) tall and weighs 4.5 kilograms (10 pounds), is waiting for word from the Guinness World Records, where he has applied to be named the shortest in the world, his supporters said on Wednesday, Aug. 30, 2006. (AP Photo/Prakash Mathema)

For more Pictures of Mr Thapa, click here

Sector - Casinos

Three Casino Stocks to Roll the Dice On
Sumit Desai
Morningstart, 08-28-06

Recent worries over a consumer spending slowdown have knocked some of our favorite casino stocks down to near bargain-basement prices. Though we think that some short-term concern is warranted, we hardly expect the demise of the American gaming industry and would encourage investors to consider the opportunity that the market has presented.

Earlier this month, the Nevada Gaming Control Board reported a 3.5% drop in Nevada gaming revenue for the month of June 2006. Atlantic City revenue saw a similar drop--5% in July. The Nevada numbers represent the first negative monthly growth for the state in two years and have sparked fears of an industrywide slowdown. Certainly, $3 per gallon gasoline, a weakening housing market, and higher interest rates have all taken a chunk out of the average Joe's gambling budget, and we see little over the next few quarters that could ease this pain.

A confluence of company-specific factors has also pressured casino stocks lately. Harrah's HET shares, off more than 25% from their 52-week high, were recently punished, possibly because the company announced that it increased the costs associated with researching potential expansion into new regions, such as Europe and the Caribbean. We find it short-sighted (and downright silly) that investors would fret over a few quarters worth of extra spending, especially when the expenditures should improve the company's growth prospects over time. Boyd Gaming's BYD shares, along with Station Casinos STN , have been plagued by worries of a hard landing in the Las Vegas real estate market. Together, these two firms control the majority of the lucrative Las Vegas locals market, which caters to residents that shy away from the more-touristy destinations on the Strip. We're not overly worried by these issues, though, since long-term trends point toward the industry's ability to weather short-term speed bumps.

According to the American Gaming Association, total domestic casino revenue has grown by about 6.6% annually since 1996, with not a single year of negative growth--even when travel fell off a cliff after the 9/11 terrorist attacks. During this time, weakness in the tourism-dependent Las Vegas Strip was more than offset by growth in other markets, including Illinois and the Gulf Coast region. Casino companies with properties across the country, like Harrah's and Boyd, are generally less susceptible to downturns in any one specific market. Further, regions outside the Strip are more dependent on local business and less on tourists, thus decreasing exposure to macroeconomic factors. For example, Illinois saw a 5.6% increase in gaming revenue in June 2006, bucking recent trends in Nevada and Atlantic City. In our opinion, these regional dynamics highlight the importance of geographic diversity.

We also think the long-term growth story for the Las Vegas locals market remains intact, despite potential for a weak housing market in this region. Clark County, home to Las Vegas and its surrounding area, has seen its population grow by around 5.5% annually since 1996, compared to around 1.1% for the entire U.S., and it is expected to grow by 5% annually through 2010, according to the UNLV Center for Business and Economic Research. Much of this growth will likely come from the almost $20 billion in planned development on the Strip over the next five years. We think population growth plays a more important role than housing in the success of the locals market, so as long as more people continue to move to the Las Vegas area, we like the prospects for casinos that serve these residents.

Our Picks

Harrah's Entertainment HET
Harrah's Total Rewards customer loyalty program is the envy of the industry. We also think the company is poised to increase cross-market play following its megamerger with Caesar's. From the Analyst Report: "Harrah's takes a unique approach to operating casinos. Unlike peers such as MGM Grand MGM , whose lavish, amenity-rich casinos draw high rollers and conventioneers, Harrah's focuses on small-time, frequent players. These avid gamers are less costly to lure, which is a large reason Harrah's returns on capital score among the industry's best."

Boyd Gaming BYD
Boyd's several growth projects should boost the company into the major leagues of casino operators. From the Analyst Report: "Boyd has accumulated a very nice set of properties. The firm has a strong position in the attractive Las Vegas locals market, a 50% stake in the thriving Borgata, and a massive project in the works that should capitalize on the rejuvenated north end of the Strip."

Station Casinos STN
In 1997, the Senate passed a law restricting the amount of off-Strip land approved for casino development. Station has scooped up most of this land, providing a narrow moat to protect itself from new entrants. From the Analyst Report: "Station Casinos has leading positions in two very attractive niches: the supply/demand-imbalanced locals market and the high-return management contract business."

Sector - Trucking

B.J. and the BearsWSJ, August 28, 2006

Trucking companies have been running at full throttle in recent years. But now they seem to be hitting a speed bump.

There aren't many better places to get a good read on the economy than the interstate truck stop. Since they haul everything from Barbie dolls to power generators, truckers are among the first to feel it when the economy shifts.

Oscar Sloterbeck, who runs the survey group at research firm ISI Group, says the trucking companies he polls on a weekly basis are seeing disappointing freight volume for this time of year. One factor is housing. The housing downturn means they're hauling less gypsum board and lumber than when construction was booming. Retail shipments more broadly also show signs of slowing.


None of this has been lost on investors, whose once optimistic view on trucking company shares has deteriorated sharply in the past few weeks. Since the end of June, the Dow Jones index of U.S. trucking shares has fallen 16%.

Production cuts in the auto industry will hurt truckers even more in the months to come. Two weeks ago, Ford announced plans to cut its fourth-quarter auto production by 21% from year-earlier levels. Last week DaimlerChrysler's Chrysler unit said it planned to cut fourth-quarter production as well. Rounding out the Big Three, auto analysts expect General Motors to announce fourth-quarter production cuts as early as this week. That is likely to add up to less work for truckers.

Jim Meil, chief economist with Eaton Corp., which supplies many truck manufacturers, estimates autos and auto parts account for 8% to 9% of total U.S. trucking freight.

A back-of-the-envelope calculation by Goldman Sachs economist Andrew Tilton suggests that Ford's cuts alone, if they were felt wholly in the fourth quarter and if there were no offsets (unlikely on both counts), would reduce the economy's growth rate -- as measured by gross domestic product -- by about two-thirds of a percentage point in the fourth quarter.

Mr. Meil says he sees signs of a slowdown in trucking, though it hasn't been alarming, as it was back in 2000 when a trucking slowdown preceded a recession. "My reading now is that trucking is OK," he says.

If businesses pull back sharply in response to the combination of automobile-production cuts, the drop in housing and a consumer slowdown, that assessment could change. That's why Mr. Meil says there's also good reason to be a little nervous right now.

NJ County Map

Top Public High Schools in NJ - By County

Top Public High Schools in NJ (New Jersey Monthly)

Atlantic
(104) Mainland Regional (Linwood)
(154) Egg Harbor Twp
(231) Absegami (Absecon)
(232) Oakcrest (Hamilton Twp)
(233) Hammonton
(270) Atlantic City
(281) Pleasantville
(289) Buena Regional

Bergen
(2) Tenafly
(6) Glen Rock
(7) Northern Highlands Regional (Allendale)
(8) Pascack Hills (Montvale)
(15) Cresskill
(16) Northern Valley Regional (Demarest)
(23) Pascack Valley (Hillsdale)
(24) Ridgewood
(25) Northern Valley Regional (Old Tappan)
(27) Ramsey
(28) Ramapo (Franklin Lakes)
(36) Indian Hills (Oakland)
(40) Park Ridge
(45) Paramus
(46) Mahwah
(51) Emerson
(61) River Dell Regional (Oradell)
(62) Fair Lawn
(66) Midland Park
(67) Leonia
(81) Westwood
(86) New Milford
(88) Rutherford
(92) Hasbrouck Heights
(96) Waldwick
(97) Ridgefield Memorial
(99) Fort Lee
(102) Teaneck
(132) Bogota
(133) Palisades Park
(143) Wood-Ridge
(145) Henry P. Becton Regional (East Rutherford)
(161) Ridgefield Park
(174) Dumont
(179) Lyndhurst
(180) Dwight Morrow (Englewood)
(182) North Arlington
(191) Saddle Brook
(192) Bergenfield
(195) Cliffside Park
(199) Lodi
(203) Hackensack
(206) Wallington
(237) Memorial (Elmwood Park)
(294) Garfield

Burlington
(63) Moorestown
(110) Shawnee (Medford)
(112) Delran
(131) Cherokee (Evesham Twp)
(134) Lenape (Medford)
(137) Cinnaminson
(138) Burlington Twp
(172) Bordentown Regional
(184) Northern Burlington Regional (Columbus)
(209) Florence Twp Memorial
(243) Rancocas Valley Regional (Mount Holly)
(252) Burlington City
(253) Maple Shade
(258) Seneca (Tabernacle)
(266) Riverside
(275) Palmyra
(277) Pemberton Twp
(300) Willingboro

Camden
(17) Haddonfield Memorial
(42) Cherry Hill East
(58) Eastern Regional (Voorhees)
(77) Haddon Twp
(105) Brimm Medical Arts (Camden)
(126) Cherry Hill West
(135) Haddon Heights
(187) Creative and Performing Arts (Camden)
(224) Highland Regional (Blackwood)
(228) Sterling (Somerdale)
(235) Collingswood
(236) Triton (Runnemede)
(238) Audubon
(247) Gloucester City
(250) Timber Creek Regional (Gloucester Twp)
(267) Lindenwold
(278) Overbrook (Pine Hill)
(292) Pennsauken
(297) Winslow Twp
(314) Camden
(315) Woodrow Wilson (Camden)

Cape May
(93) Ocean City
(185) Lower Cape May Regional (Cape May)
(223) Middle Twp
(299) Wildwood

Cumberland
(194) Vineland South
(282) Cumberland Regional (Upper Deerfield)
(283) Bridgeton
(295) Millville

Essex
(3) Millburn
(10) Glen Ridge
(14) Livingston
(34) West Essex (North Caldwell)
(43) James Caldwell (West Caldwell)
(47) Verona
(53) Science (Newark)
(55) Cedar Grove
(79) Columbia (Maplewood)
(90) Montclair
(98) West Orange
(129) Nutley
(146) University (Newark)
(186) Arts (Newark)
(204) Technology (Newark)
(225) Bloomfield
(241) Belleville
(255) Cicely Tyson Performing Arts (East Orange)
(276) Orange
(286) East Orange Campus
(301) East Side (Newark)
(303) Barringer (Newark)
(304) Central (Newark)
(308) Weequahic (Newark)
(312) Malcolm X Shabazz (Newark)
(313) West Side (Newark)
(316) Irvington

Gloucester
(111) Woodbury
(122) Pitman
(141) Clearview Regional (Harrison Twp)
(150) Washington Twp
(170) West Deptford
(176) Gateway Regional (Woodbury Heights)
(202) Kingsway Regional (Swedesboro)
(226) Deptford Twp
(230) Delsea Regional (Franklin Twp)
(242) Glassboro
(244) Clayton
(248) Williamstown
(264) Paulsboro

Hudson
(1) McNair Academic (Jersey City)
(107) Secaucus
(109) Weehawken
(200) Kearny
(227) Harrison
(249) Liberty (Jersey City)
(260) Hoboken
(261) Memorial (West New York)
(265) Emerson
(268) Union Hill (Union City)
(273) Bayonne
(279) Lincoln (Jersey City)
(284) James J. Ferris (Jersey City)
(285) North Bergen
(291) William L. Dickinson (Jersey City)
(298) Henry Snyder (Jersey City)

Hunterdon
(30) Voorhees (Lebanon Twp)
(37) North Hunterdon Regional (Clinton Twp)
(57) Hunterdon Central (Flemington)
(80) Delaware Valley Regional (Alexandria)
(120) South Hunterdon Regional (West Amwell)

Mercer
(9) West Windsor–Plainsboro South
(13) Princeton
(59) Hopewell Valley Central (Pennington)
(119) Hightstown
(123) Lawrence
(165) Hamilton East-Steinert
(196) Ewing
(240) Hamilton West-Watson
(246) Hamilton North-Nottingham
(311) Trenton Central

Middlesex
(18) West Windsor–Plainsboro North
(31) Highland Park
(56) Metuchen
(60) East Brunswick
(75) South Brunswick
(82) J. P. Stevens (Edison)
(106) Monroe Twp
(130) North Brunswick
(142) John F. Kennedy Memorial (Woodbridge)
(147) Dunellen
(148) Middlesex
(155) Edison
(160) South Plainfield
(177) Piscataway
(183) Spotswood
(197) Old Bridge
(198) South Amboy
(208) Colonia
(217) Sayreville War Memorial
(222) Woodbridge
(269) Carteret
(271) South River
(274) Perth Amboy
(302) New Brunswick

Monmouth
(19) Holmdel
(33) Rumson–Fair Haven Regional
(69) Ocean Twp
(76) Marlboro
(85) Middletown South
(89) Red Bank Regional
(94) Shore Regional (West Long Branch)
(95) Freehold Borough
(103) Allentown
(108) Manasquan
(115) Matawan Regional
(118) Monmouth Regional (Tinton Falls)
(121) Wall
(125) Manalapan
(136) Colts Neck
(144) Freehold Twp
(153) Raritan (Hazlet)
(159) Henry Hudson Regional (Highlands)
(164) Middletown North
(181) Howell
(207) Keyport
(221) Neptune
(263) Keansburg
(290) Long Branch
(296) Asbury Park

Morris
(5) Mountain Lakes
(12) Chatham
(29) West Morris Mendham
(32) Randolph
(35) Kinnelon
(41) West Morris Central (Chester)
(48) Madison
(49) Montville
(52) Hanover Park
(54) Whippany Park
(65) Morristown
(71) Morris Knolls (Denville)
(78) Pequannock Twp
(84) Parsippany
(87) Parsippany Hills
(101) Morris Hills (Rockaway)
(113) Roxbury
(114) Mount Olive
(116) Butler
(128) Boonton
(152) Jefferson Twp
(229) Dover

Ocean
(68) Point Pleasant Beach
(117) Point Pleasant
(173) New Egypt
(178) Toms River North
(193) Jackson Memorial
(201) Lacey Twp
(205) Toms River East
(212) Brick Twp
(213) Southern Regional (Stafford Twp)
(219) Toms River South
(239) Brick Memorial
(254) Pinelands Regional (Little Egg Harbor)
(256) Manchester
(272) Central Regional (Berkeley Twp)
(288) Lakewood

Passaic
(70) Wayne Hills
(72) Wayne Valley
(127) Rosa Parks Arts (Paterson)
(140) Lakeland Regional (Wanaque)
(157) Hawthorne
(166) Passaic Valley (Little Falls)
(169) West Milford
(188) Pompton Lakes
(218) Manchester Regional (Haledon)
(280) Clifton
(306) John F. Kennedy (Paterson)
(309) Eastside (Paterson)
(310) Passaic

Salem
(171) Woodstown
(211) Arthur P. Schalick (Pittsgrove)
(220) Penns Grove
(245) Salem
(257) Pennsville Memorial

Somerset
(4) Montgomery
(11) Ridge (Bernards Twp)
(38) Watchung Hills Regional
(50) Bernards (Bernardsville)
(74) Somerville
(83) Bridgewater-Raritan
(100) Hillsborough
(163) Franklin Twp
(189) North Plainfield
(216) Manville
(259) Bound Brook

Sussex
(73) Sparta
(124) Vernon
(139) Lenape Valley Regional (Stanhope)
(149) Kittatinny Regional (Hampton Twp)
(151) High Point Regional (Sussex)
(158) Hopatcong
(168) Newton
(190) Wallkill Valley Regional (Hamburg)

Union
(20) Summit
(21) Governor Livingston (Berkeley Heights)
(22) Westfield
(26) New Providence
(39) Cranford
(44) Jonathan Dayton (Springfield)
(64) Scotch Plains–Fanwood
(91) Arthur L. Johnson (Clark)
(156) Roselle Park
(162) David Brearley (Kenilworth)
(210) Union
(214) Rahway
(262) Hillside
(287) Elizabeth
(293) Linden
(305) Abraham Clark (Roselle)
(307) Plainfield

Warren
(167) North Warren Regional (Blairstown)
(175) Warren Hills Regional (Washington)
(215) Hackettstown
(234) Phillipsburg
(251) Belvidere

Top Public High Schools in NJ - By Ranking

Top Public High Schools in NJ (New Jersey Monthly)

(1) McNair Academic (Jersey City) (Hudson County)
(2) Tenafly (Bergen County)
(3) Millburn (Essex County)
(4) Montgomery (Somerset County)
(5) Mountain Lakes (Morris County)
(6) Glen Rock (Bergen County)
(7) Northern Highlands Regional (Allendale) (Bergen County)
(8) Pascack Hills (Montvale) (Bergen County)
(9) West Windsor–Plainsboro South (Mercer County)
(10) Glen Ridge (Essex County)

(11) Ridge (Bernards Twp) (Somerset County)
(12) Chatham (Morris County)
(13) Princeton (Mercer County)
(14) Livingston (Essex County)
(15) Cresskill (Bergen County)
(16) Northern Valley Regional (Demarest) (Bergen County)
(17) Haddonfield Memorial (Camden County)
(18) West Windsor–Plainsboro North (Middlesex County)
(19) Holmdel (Monmouth County)
(20) Summit (Union County)

(21) Governor Livingston (Berkeley Heights) (Union County)
(22) Westfield (Union County)
(23) Pascack Valley (Hillsdale) (Bergen County)
(24) Ridgewood (Bergen County)
(25) Northern Valley Regional (Old Tappan) (Bergen County)
(26) New Providence (Union County)
(27) Ramsey (Bergen County)
(28) Ramapo (Franklin Lakes) (Bergen County)
(29) West Morris Mendham (Morris County)
(30) Voorhees (Lebanon Twp) (Hunterdon County)

(31) Highland Park (Middlesex County)
(32) Randolph (Morris County)
(33) Rumson–Fair Haven Regional (Monmouth County)
(34) West Essex (North Caldwell) (Essex County)
(35) Kinnelon (Morris County)
(36) Indian Hills (Oakland) (Bergen County)
(37) North Hunterdon Regional (Clinton Twp) (Hunterdon County)
(38) Watchung Hills Regional (Somerset County)
(39) Cranford (Union County)
(40) Park Ridge (Bergen County)

(41) West Morris Central (Chester) (Morris County)
(42) Cherry Hill East (Camden County)
(43) James Caldwell (West Caldwell) (Essex County)
(44) Jonathan Dayton (Springfield) (Union County)
(45) Paramus (Bergen County)
(46) Mahwah (Bergen County)
(47) Verona (Essex County)
(48) Madison (Morris County)
(49) Montville (Morris County)
(50) Bernards (Bernardsville) (Somerset County)

(51) Emerson (Bergen County)
(52) Hanover Park (Morris County)
(53) Science (Newark) (Essex County)
(54) Whippany Park (Morris County)
(55) Cedar Grove (Essex County)
(56) Metuchen (Middlesex County)
(57) Hunterdon Central (Flemington) (Hunterdon County)
(58) Eastern Regional (Voorhees) (Camden County)
(59) Hopewell Valley Central (Pennington) (Mercer County)
(60) East Brunswick (Middlesex County)
(61) River Dell Regional (Oradell) (Bergen County)
(62) Fair Lawn (Bergen County)
(63) Moorestown (Burlington County)
(64) Scotch Plains–Fanwood (Union County)
(65) Morristown (Morris County)
(66) Midland Park (Bergen County)
(67) Leonia (Bergen County)
(68) Point Pleasant Beach (Ocean County)
(69) Ocean Twp (Monmouth County)
(70) Wayne Hills (Passaic County)
(71) Morris Knolls (Denville) (Morris County)
(72) Wayne Valley (Passaic County)
(73) Sparta (Sussex County)
(74) Somerville (Somerset County)
(75) South Brunswick (Middlesex County)
(76) Marlboro (Monmouth County)
(77) Haddon Twp (Camden County)
(78) Pequannock Twp (Morris County)
(79) Columbia (Maplewood) (Essex County)
(80) Delaware Valley Regional (Alexandria) (Hunterdon County)
(81) Westwood (Bergen County)
(82) J. P. Stevens (Edison) (Middlesex County)
(83) Bridgewater-Raritan (Somerset County)
(84) Parsippany (Morris County)
(85) Middletown South (Monmouth County)
(86) New Milford (Bergen County)
(87) Parsippany Hills (Morris County)
(88) Rutherford (Bergen County)
(89) Red Bank Regional (Monmouth County)
(90) Montclair (Essex County)
(91) Arthur L. Johnson (Clark) (Union County)
(92) Hasbrouck Heights (Bergen County)
(93) Ocean City (Cape May County)
(94) Shore Regional (West Long Branch) (Monmouth County)
(95) Freehold Borough (Monmouth County)
(96) Waldwick (Bergen County)
(97) Ridgefield Memorial (Bergen County)
(98) West Orange (Essex County)
(99) Fort Lee (Bergen County)
(100) Hillsborough (Somerset County)

(101) Morris Hills (Rockaway) (Morris County)
(102) Teaneck (Bergen County)
(103) Allentown (Monmouth County)
(104) Mainland Regional (Linwood) (Atlantic County)
(105) Brimm Medical Arts (Camden) (Camden County)
(106) Monroe Twp (Middlesex County)
(107) Secaucus (Hudson County)
(108) Manasquan (Monmouth County)
(109) Weehawken (Hudson County)
(110) Shawnee (Medford) (Burlington County)
(111) Woodbury (Gloucester County)
(112) Delran (Burlington County)
(113) Roxbury (Morris County)
(114) Mount Olive (Morris County)
(115) Matawan Regional (Monmouth County)
(116) Butler (Morris County)
(117) Point Pleasant (Ocean County)
(118) Monmouth Regional (Tinton Falls) (Monmouth County)
(119) Hightstown (Mercer County)
(120) South Hunterdon Regional (West Amwell) (Hunterdon County)
(121) Wall (Monmouth County)
(122) Pitman (Gloucester County)
(123) Lawrence (Mercer County)
(124) Vernon (Sussex County)
(125) Manalapan (Monmouth County)
(126) Cherry Hill West (Camden County)
(127) Rosa Parks Arts (Paterson) (Passaic County)
(128) Boonton (Morris County)
(129) Nutley (Essex County)
(130) North Brunswick (Middlesex County)
(131) Cherokee (Evesham Twp) (Burlington County)
(132) Bogota (Bergen County)
(133) Palisades Park (Bergen County)
(134) Lenape (Medford) (Burlington County)
(135) Haddon Heights (Camden County)
(136) Colts Neck (Monmouth County)
(137) Cinnaminson (Burlington County)
(138) Burlington Twp (Burlington County)
(139) Lenape Valley Regional (Stanhope) (Sussex County)
(140) Lakeland Regional (Wanaque) (Passaic County)
(141) Clearview Regional (Harrison Twp) (Gloucester County)
(142) John F. Kennedy Memorial (Woodbridge) (Middlesex County)
(143) Wood-Ridge (Bergen County)
(144) Freehold Twp (Monmouth County)
(145) Henry P. Becton Regional (East Rutherford) (Bergen County)
(146) University (Newark) (Essex County)
(147) Dunellen (Middlesex County)
(148) Middlesex (Middlesex County)
(149) Kittatinny Regional (Hampton Twp) (Sussex County)
(150) Washington Twp (Gloucester County)
(151) High Point Regional (Sussex) (Sussex County)
(152) Jefferson Twp (Morris County)
(153) Raritan (Hazlet) (Monmouth County)
(154) Egg Harbor Twp (Atlantic County)
(155) Edison (Middlesex County)
(156) Roselle Park (Union County)
(157) Hawthorne (Passaic County)
(158) Hopatcong (Sussex County)
(159) Henry Hudson Regional (Highlands) (Monmouth County)
(160) South Plainfield (Middlesex County)
(161) Ridgefield Park (Bergen County)
(162) David Brearley (Kenilworth) (Union County)
(163) Franklin Twp (Somerset County)
(164) Middletown North (Monmouth County)
(165) Hamilton East-Steinert (Mercer County)
(166) Passaic Valley (Little Falls) (Passaic County)
(167) North Warren Regional (Blairstown) (Warren County)
(168) Newton (Sussex County)
(169) West Milford (Passaic County)
(170) West Deptford (Gloucester County)
(171) Woodstown (Salem County)
(172) Bordentown Regional (Burlington County)
(173) New Egypt (Ocean County)
(174) Dumont (Bergen County)
(175) Warren Hills Regional (Washington) (Warren County)
(176) Gateway Regional (Woodbury Heights) (Gloucester County)
(177) Piscataway (Middlesex County)
(178) Toms River North (Ocean County)
(179) Lyndhurst (Bergen County)
(180) Dwight Morrow (Englewood) (Bergen County)
(181) Howell (Monmouth County)
(182) North Arlington (Bergen County)
(183) Spotswood (Middlesex County)
(184) Northern Burlington Regional (Columbus) (Burlington County)
(185) Lower Cape May Regional (Cape May) (Cape May County)
(186) Arts (Newark) (Essex County)
(187) Creative and Performing Arts (Camden) (Camden County)
(188) Pompton Lakes (Passaic County)
(189) North Plainfield (Somerset County)
(190) Wallkill Valley Regional (Hamburg) (Sussex County)
(191) Saddle Brook (Bergen County)
(192) Bergenfield (Bergen County)
(193) Jackson Memorial (Ocean County)
(194) Vineland South (Cumberland County)
(195) Cliffside Park (Bergen County)
(196) Ewing (Mercer County)
(197) Old Bridge (Middlesex County)
(198) South Amboy (Middlesex County)
(199) Lodi (Bergen County)

(200) Kearny (Hudson County)
(201) Lacey Twp (Ocean County)
(202) Kingsway Regional (Swedesboro) (Gloucester County)
(203) Hackensack (Bergen County)
(204) Technology (Newark) (Essex County)
(205) Toms River East (Ocean County)
(206) Wallington (Bergen County)
(207) Keyport (Monmouth County)
(208) Colonia (Middlesex County)
(209) Florence Twp Memorial (Burlington County)
(210) Union (Union County)
(211) Arthur P. Schalick (Pittsgrove) (Salem County)
(212) Brick Twp (Ocean County)
(213) Southern Regional (Stafford Twp) (Ocean County)
(214) Rahway (Union County)
(215) Hackettstown (Warren County)
(216) Manville (Somerset County)
(217) Sayreville War Memorial (Middlesex County)
(218) Manchester Regional (Haledon) (Passaic County)
(219) Toms River South (Ocean County)
(220) Penns Grove (Salem County)
(221) Neptune (Monmouth County)
(222) Woodbridge (Middlesex County)
(223) Middle Twp (Cape May County)
(224) Highland Regional (Blackwood) (Camden County)
(225) Bloomfield (Essex County)
(226) Deptford Twp (Gloucester County)
(227) Harrison (Hudson County)
(228) Sterling (Somerdale) (Camden County)
(229) Dover (Morris County)
(230) Delsea Regional (Franklin Twp) (Gloucester County)
(231) Absegami (Absecon) (Atlantic County)
(232) Oakcrest (Hamilton Twp) (Atlantic County)
(233) Hammonton (Atlantic County)
(234) Phillipsburg (Warren County)
(235) Collingswood (Camden County)
(236) Triton (Runnemede) (Camden County)
(237) Memorial (Elmwood Park) (Bergen County)
(238) Audubon (Camden County)
(239) Brick Memorial (Ocean County)
(240) Hamilton West-Watson (Mercer County)
(241) Belleville (Essex County)
(242) Glassboro (Gloucester County)
(243) Rancocas Valley Regional (Mount Holly) (Burlington County)
(244) Clayton (Gloucester County)
(245) Salem (Salem County)
(246) Hamilton North-Nottingham (Mercer County)
(247) Gloucester City (Camden County)
(248) Williamstown (Gloucester County)
(249) Liberty (Jersey City) (Hudson County)
(250) Timber Creek Regional (Gloucester Twp) (Camden County)
(251) Belvidere (Warren County)
(252) Burlington City (Burlington County)
(253) Maple Shade (Burlington County)
(254) Pinelands Regional (Little Egg Harbor) (Ocean County)
(255) Cicely Tyson Performing Arts (East Orange) (Essex County)
(256) Manchester (Ocean County)
(257) Pennsville Memorial (Salem County)
(258) Seneca (Tabernacle) (Burlington County)
(259) Bound Brook (Somerset County)
(260) Hoboken (Hudson County)
(261) Memorial (West New York) (Hudson County)
(262) Hillside (Union County)
(263) Keansburg (Monmouth County)
(264) Paulsboro (Gloucester County)
(265) Emerson (Hudson County)
(266) Riverside (Burlington County)
(267) Lindenwold (Camden County)
(268) Union Hill (Union City) (Hudson County)
(269) Carteret (Middlesex County)
(270) Atlantic City (Atlantic County)
(271) South River (Middlesex County)
(272) Central Regional (Berkeley Twp) (Ocean County)
(273) Bayonne (Hudson County)
(274) Perth Amboy (Middlesex County)
(275) Palmyra (Burlington County)
(276) Orange (Essex County)
(277) Pemberton Twp (Burlington County)
(278) Overbrook (Pine Hill) (Camden County)
(279) Lincoln (Jersey City) (Hudson County)
(280) Clifton (Passaic County)
(281) Pleasantville (Atlantic County)
(282) Cumberland Regional (Upper Deerfield) (Cumberland County)
(283) Bridgeton (Cumberland County)
(284) James J. Ferris (Jersey City) (Hudson County)
(285) North Bergen (Hudson County)
(286) East Orange Campus (Essex County)
(287) Elizabeth (Union County)
(288) Lakewood (Ocean County)
(289) Buena Regional (Atlantic County)
(290) Long Branch (Monmouth County)
(291) William L. Dickinson (Jersey City) (Hudson County)
(292) Pennsauken (Camden County)
(293) Linden (Union County)
(294) Garfield (Bergen County)
(295) Millville (Cumberland County)
(296) Asbury Park (Monmouth County)
(297) Winslow Twp (Camden County)
(298) Henry Snyder (Jersey City) (Hudson County)
(299) Wildwood (Cape May County)

(300) Willingboro (Burlington County)
(301) East Side (Newark) (Essex County)
(302) New Brunswick (Middlesex County)
(303) Barringer (Newark) (Essex County)
(304) Central (Newark) (Essex County)
(305) Abraham Clark (Roselle) (Union County)
(306) John F. Kennedy (Paterson) (Passaic County)
(307) Plainfield (Union County)
(308) Weequahic (Newark) (Essex County)
(309) Eastside (Paterson) (Passaic County)
(310) Passaic (Passaic County)
(311) Trenton Central (Mercer County)
(312) Malcolm X Shabazz (Newark) (Essex County)
(313) West Side (Newark) (Essex County)
(314) Camden (Camden County)
(315) Woodrow Wilson (Camden) (Camden County)
(316) Irvington (Essex County)

Will Ethanol Finally Bring Gold to Corn Farmers?

Will Ethanol Finally Bring Gold to Corn Farmers?
GARY WULF
The Wall Street Journal, August 7, 2006

CENTRAL CITY, Neb. -- Depressed corn prices might have U.S. farmers feeling as if they're being left out of the "ethanol gold rush," but agriculture analysts said demand soon might outstrip supply, giving growers an upper hand.

Dozens of multimillion-dollar stills -- loftily known as "biorefineries" in ethanol-industry parlance -- opened for business during the past year, putting 101 plants in operation nationwide. An additional 37 are under construction, and seven more are in the process of major expansions.

"There is a 'gold rush' occurring now in building ethanol plants," said Purdue University agricultural economist Chris Hurt. "With [Chicago Board of Trade] ethanol futures prices averaging about $2.20 [a gallon] for the remainder of 2006, net margins above all costs may be around $3 per bushel. This means payback could be as short as 15 months, on a preincome tax basis."

The construction boom will dramatically increase domestic production capacity of the alternative fuel, now estimated at 4.8 billion gallons annually. Plants have popped up all over the U.S., largely predicated on record energy prices that have caused ethanol's value to appreciate by 50% in the past 12 months.

The fuel-alcohol industry's consumption of corn is expected to reach 2.15 billion bushels during the next year. That's compared with 1.6 billion this season and 1.32 billion in 2004-05.

Why then, farmers must be asking, is a bushel of corn worth less than it was two years ago, with physical, or cash, prices a dollar a bushel lower than they were in April 2004?

U.S. grain merchandisers were bidding less than $2.08 for a bushel of corn as of the close of trade Thursday, meaning the cash basis stands near record-low levels, averaging about 38 cents less than spot futures nationwide. Basis is the adjustment applied to futures prices to reflect real-world supply and demand and the availability of local transportation and storage.

"If you simply looked at basis levels and actual cash prices, you would never know we were in a bull market on the futures, or that ethanol even existed," said analyst John Roach.

Dwight Sanders, assistant professor of agricultural economics at Southern Illinois University, said ethanol is to blame for the divergence in prices, pointing out that ethanol plants are drawing corn away from delivery points designated by the CBOT, resulting in greater basis volatility.

Volatility in cash corn prices also may be heightened by the structure of the spot ethanol market itself, which saw thinly traded spot contracts spike to $4.23 a gallon, only to plunge 40% during the past five weeks.

The Renewable Fuels Association estimates that only 5% to 15% of all ethanol produced is traded on the open market, with the remainder sold directly by individual plants under long-term contracts of six to 12 months negotiated between ethanol plant and fuel refiners or gasoline blenders.

Feasibility studies conducted by companies considering construction of ethanol plants routinely predict that an average-size facility will improve local cash corn prices in corn-belt states -- such as Iowa and Nebraska -- by 12 cents to 15 cents a bushel. But a new study conducted by Iowa State University economist David Swenson challenges those figures, placing the net impact at less than half that amount.

"There are claims to economic outcomes associated with ethanol production that seasoned analysts cannot swallow," he said in a report titled, "Input-Outrageous: The Economic Impacts of Modern Biofuels Production."

Mr. Swenson says that claims that a new ethanol plant will produce sharply higher cash prices for local farmers aren't justifiable, and that, in practice, premiums have totaled only about five cents a bushel, at least so far.

"The market is telling us that nobody wants corn," explains Scott Stewart with the Top Farmer market advisory service. "U.S. farmers have managed to produce more corn than what was needed. Thus, a buildup of carryout has existed in most years, which has kept corn in a prolonged sideways price pattern."

After two consecutive record harvests, U.S. grain bins are expected to contain more than 2.1 billion bushels of leftover corn this fall -- the largest surplus in 10 years -- even before growers bring in yet-another substantial crop.

It is little wonder that farmers who still have bins full of corn out behind the barn are feeling nauseous, but to Mr. Roach the remedy is simple: "build two more bins and call me in the morning."

"After harvest, I expect the corn market to experience rapid basis improvement and higher futures prices to supply record demand," he said. "We have been saying consistently to store as much corn as you can, because that will be your greatest asset for the next couple of years. We believe that the cash prices we see in the next couple of months may be our lowest for a very long time to come."

U.S. Department of Agriculture economists characterize the cash corn market as on the cusp of a potential sea change, predicting a rise of almost 50 cents a bushel in season-average farm gate prices during the coming crop year, averaging $2.45 a bushel, the highest return in a decade.

Putting It Down on Paper

Putting It Down on Paper
By KOPIN TAN
Barron's, August 7, 2006

INVESTORS STOPPED BUYING PAPER STOCKS A LOT sooner than consumers stopped buying paper. Today, the average American still uses 675 pounds of paper every year and, despite conscientious recycling, discards enough to make the stuff the single biggest component of landfills. And while U.S. usage has been stable, demand is booming in emerging markets like China and India.

All this ought to be good news for International Paper, the world's largest paper-products maker. But the global economic expansion that sent commodity-related stocks soaring seemed to have bypassed Memphis, Tenn., where IP is based. At about 34, the shares (ticker: IP) have barely budged over the past year -- in fact, they have gone nowhere in six years. Even an ongoing restructuring, which could eventually boost per-share earnings by $3 or more, has failed to lift the stock.

Investors' aversion to IP is understandable (if regrettable). Not only has the electronic age raised the prospect of a world that never puts pen to paper, but the underlying business of paper-making is notoriously price-competitive and capital-intensive. The soaring cost of raw materials -- oil, chemicals, timber -- further threaten to slice margins that already are, well, paper- thin. Meanwhile, every data point suggesting a potentially slowing economy sends IP shares aflutter. Even staunch value investors have adopted a "show me" stance toward IP.

But the pervasive skepticism is also the reason IP shares are undervalued -- and poised to improve as an ambitious financial restructuring begins to pay off. At recent levels, IP stock is trading at 16.9 times expected 2007 earnings and 13.1 times 2008 estimates, compared with 17.6 and 14.4, respectively, for the sector. Any upside potential will be further enhanced by an upswing in the paper cycle that has quietly begun this year, could accelerate over the next few years and could help drive the shares toward 40.

"Short of a severe global recession, we believe there is very limited downside risk to the stock at this price," says Phyllis Thomas, a portfolio manager at NWQ Investment Management, which owns about 10.9 million shares, or 2.2% of outstanding IP stock. "In fact, we think there is a strong probability of upside earnings surprises in the future."

IP gave a glimpse of its potential last week when it reported its strongest second-quarter sales in six years. Earnings from continuing operations rose 32%, to 41 cents a share, handily beating the 33 cents forecast, and revenue of $6.3 billion topped the $5.9 billion of a year ago.

Higher raw-material and freight costs did eat into profits, but results were particularly encouraging in printing papers and industrial packaging -- two areas of emphasis for IP, which now devotes 75% of its production capacity to these paper grades. Operating profits for printing papers (what the industry calls "uncoated free sheets") jumped 98%, to $254 million from the first quarter, while those for industrial packaging rose to $100 million from $38 million. (IP's other units include consumer packaging, distribution and forest products).

Company executives, who declined to be interviewed by Barron's, told analysts that they expect stronger profits this quarter. But the earnings power should persist well beyond that.

Already, management, led by CEO John Faraci, has demonstrated it can deliver more than promised. One of the largest landowners in the U.S., IP last year began selling millions of acres of forestland as it abandoned logging to focus on becoming a more nimble paper and packaging producer. Last month, it said that the sale is going better than expected and could raise more than $11 billion, up from $8 billion-to-$10 billion initially forecast.

The strong sale means IP can set aside $3 billion to buy back nearly 20% of its outstanding shares, the top end of the previously forecast range; reduce its debt by $6 billion to $7 billion, compared with the initial expectation of $3.2 billion to $5 billion; and reinvest another $2 billion to $4 billion in as yet unspecified corporate projects, versus a previous estimate of $1.6 billion to $2.5 billion.

"Investors are not giving IP enough credit for [these] structural changes," says Morgan Stanley analyst Edings Thibault.

As IP shrinks its share base and whittles down interest expense, speculation has increased that it might raise its 3% annual dividend. What's more, included in its debt repayment is the $500 million-to-$1 billion IP is plunking down for its U.S. pension fund. With pension costs projected to peak in 2007 at about $400 million, JPMorgan analyst Claudia Shank estimates that the cash contribution will wipe out 2007 pension expense and add 40 cents to 50 cents to per-share profit projections.

Analysts expect IP to earn $1.38 a share this year, $2.01 in 2007 and $2.60 in 2008. In time, those projections could be revised upward. Citigroup analyst Chip Dillon, for one, believes "Street estimates are too low and likely will rise," in part to "reflect IP's cash-redeployment plans" and better-than-expected paper prices. He reckons that International Paper will earn $1.55 a share this year and $2.25 next year, with shares worth about 38.

Others are even more bullish. Mark Wilde, Deutsche Bank's veteran paper analyst, values IP using various metrics that take into account both cycle peaks and averages. Most of his projected ratios value IP slightly above the industry, its historical premium based on size and earnings consistency. He expects the stock to trade at about twice book, or accounting, value, and 5.9 times peak, or 10.7 times normalized, earnings. Using these and other measures Wilde has set his target at 40, 18% above the current stock price.

PREDICTIONS OF PAPER'S DEMISE date back to the 1960s when the computer's potential was first widely recognized and long before the world went onto the World Wide Web. But while computers have radically changed the way paper is used, they haven't much curbed the quantities needed. Today, survey after survey shows paper use increasing in offices after e-mail systems are introduced -- chiefly because workers print out documents to read or keep. Online bill-paying, to cite another example, has cut demand for envelopes and forms. But rapidly proliferating home offices have spawned a whole new market. "Electronic substitution may be one factor why the paper industry is slow-growing, but it hasn't resulted in declining demand," says Paul Rogers, a partner and paper expert at Deloitte & Touche USA.

In fact, paper manufacturers have been able to raise prices by about $50 a ton several times this year. Why? Because they've shuttered less-efficient mills and shrunk the overcapacity that curtailed previous paper booms. The result: Supply and demand are "in balance," says Standard & Poor's. And the newfound pricing power could grow -- since there has been disciplined capital spending in recent years and, compared with prior decades, less of a rush to build mills whenever paper prices creep up.

As Thibault notes, printing-paper inventories are now below the industry's five-year average while demand continues to rise. Containerboard inventory, too, is running low, all of which improves the odds that recent price hikes will stick. Meanwhile, speculation that Weyerhaeuser (WY) might sell its printing paper business -- possibly to Boise Cascade (BCC) or Domtar (DTC) -- could remove more capacity from the segment, which augurs well for IP's pricing.

That said, demand for printing paper and packaging will rise and fall with the economy. But while U.S. GDP is expected to slow in the second half, global economic growth remains robust. Living up to the adjective in its name, IP derives a fifth of its revenue from outside North America and runs profitable mills in emerging markets, including Poland and Russia. It also continues to broach joint ventures everywhere from Brazil to China.

At the same time, International Paper has streamlined its business to become less reliant on the cycle and to maximize profits even when the cycle matures. By slashing its head count to 68,700 from about 112,900 six years ago, it's boosted revenue per employee 37%, to $342,000. The return on capital, near a middling industry average of 4.1% last year, is projected to improve to 6.5% this year and 9.5% in 2008, says Morgan Stanley.

INVESTORS HAVE SUFFERED paper cuts from IP before and are right to be a little wary about its sudden trove of cash. With $2 billion to $4 billion earmarked "for reinvestment," the prospect of a big, feckless IP acquisition has some money managers quaking in their Bruno Maglis. It overpaid in 2000 when it shelled out $9.5 billion for rival Champion International.

But CEO Faraci has won fans with his unrelenting focus on cost, and for reserving his enthusiasm for deals that can promptly earn back the cost of capital. People familiar with his thinking say they expect only small, add-on transactions that quickly boost earnings.

A deal now under way in Brazil may offer a preview. There, IP is negotiating to sell its Tres Lagoas timberland to a joint-venture partner that will then construct a pulp mill, with IP using the proceeds to build two new machines on site that can each produce 200,000 tons of paper. "We never thought IP could gain 400,000 tons of low-cost Latin American uncoated free- sheet capacity at little or no capital cost," notes Citigroup's Dillon. Earnings may be smaller than those generated by a pulp mill, "but the returns on what little capital is invested would likely be higher," he says.

There also are concerns that IP might merit a lower valuation once it sells off its land. Lenders and value managers are partial to a patch of forest on a paper company's balance sheet, since it diversifies assets and requires little encouragement to grow -- and increase in value -- if left alone.

"But the feeding frenzy for timberland among timber investment-management and private-equity firms may have reached a point where the smarter business decision is to sell and capitalize on current high prices," says NWQ's Thomas. By streamlining, IP is inoculating itself against any potential downturn -- and positioning itself to cash in on the latest upswing. The paperless society seems a very long way off.

Home Depot, Seeking Growth, Knocks on Contractors' Doors

Home Depot, Seeking Growth, Knocks on Contractors' Doors
By CHAD TERHUNE
The Wall Street Journal, August 7, 2006

On a recent Monday morning, Home Depot Inc. salesman Allen Perry pulled his pickup truck into a subdivision of two-story brick homes in Atlanta's booming suburbs. Dressed in jeans and a yellow polo shirt, he grinned widely as he gazed upon one of his biggest sales this year: a $170,000 set of aluminum panels used to form concrete walls.

Mr. Perry doesn't wear the retailer's trademark orange attire. And he never mentions Home Depot to customers like Jason Hewatt, a contractor whose workers were busy preparing the aluminum panels for a concrete pour. As the two men spoke, it was obvious that little from their jargon-filled banter would be familiar to the typical Home Depot customer -- a do-it-yourself home tinkerer buying a gallon of latex paint.

But Mr. Perry, and hundreds of other salespeople like him, are part of the company's crucial next wave: conquering the lucrative building-supply market.

In the 1990s, Home Depot was a megagrowth machine, churning out new stores, strong sales and big profits. The company's shares soared. But after blanketing North America with more than 2,000 "big boxes," Home Depot -- with its core business of selling to homeowners and small-fry carpenters, electricians and plumbers -- seemed to have few places to grow. In its biggest markets, it also faced formidable competition from rival Lowe's Cos.

Such problems have weighed heavily on Chairman and Chief Executive Bob Nardelli. Home Depot posted $81.5 billion in revenue last fiscal year. Among retailers, its annual sales are exceeded only by Wal-Mart Stores Inc. and Carrefour SA of France. But since Mr. Nardelli arrived in late 2000, overall sales growth has slowed to about 12% a year, down from 19%. The company's shares have slid by 20%.

Despite still-healthy profits, shareholders have griped about the CEO's compensation -- an estimated $240 million over a five-year period. In May, they were further roiled when no directors, other than Mr. Nardelli, showed up at the annual meeting and the company refused to immediately disclose the results of shareholder votes. (Mr. Nardelli says the meeting format "didn't work" and that all directors will attend next year. He also points out that about $100 million of his compensation is in stock options that have no value at the current share price of nearly $35.)

Today, the CEO is on a mission to retool the company's image and improve his own standing with shareholders. Just as Wal-Mart used grocery sales to trigger a massive growth surge in the 1990s, Home Depot is pushing outside the orange box to redefine itself as more than a retail chain.

In 2005, Home Depot started sending out high-end catalogs such as "10 Crescent Lane," featuring baroque-style headboards and other items not sold in its stores. This year, the company began selling automotive parts in Florida and opened its first two convenience stores in Tennessee.

To reduce the cannibalization of sales from existing stores, Mr. Nardelli said earlier this year that Home Depot would slash store openings by nearly half over the next five years.

Mr. Nardelli's biggest gamble, however, is his expensive plan to dominate the building-supply market. The idea: buy up companies that sell building products, tools and other industrial supplies to contractors and municipalities. The plan is reminiscent of Home Depot's consolidation of the retail hardware industry more than a decade ago.

The wholesale building-supply business is a highly fragmented $400-billion-a-year market in the U.S., spread across more than 22,000 distributors.

"We have reached a defining moment in the history of this company as we broaden our market view from the traditional $200 billion retail market," says the CEO. "What we really are doing here is repositioning our company so we can continue to have sustainable, predictable growth."

Over the past two years, Mr. Nardelli has quietly spent $6 billion to acquire more than 25 wholesale suppliers. They serve a range of customers, from utilities needing poles and cables to builders ordering truckloads of lumber. He bought White Cap Construction Supply Inc. in 2004 for about $450 million and last year acquired National Waterworks Inc., a leading provider of water and sewer-system materials, for $1.35 billion. Home Depot retained most of the management and rolled them into a new unit called Home Depot Supply.

Biggest Acquisition

In March, Home Depot closed on its biggest acquisition yet: $3.2 billion for Hughes Supply Inc., a leading distributor of building, electrical and plumbing supplies. Two months later, the company announced plans to acquire EnerBank USA, a small company providing home-improvement loans. Some analysts think the deal, if granted government approval, could be the foundation of a bigger finance arm -- like General Electric Co.'s GE Finance -- offering loans to the construction industry.

So far, the deals have given Home Depot more than 900 supply branches across the U.S. and quickly made it one of the leading distributors nationwide -- on par with the biggest established players, such as Wolseley PLC and W.W. Grainger Inc. By 2010 Home Depot Supply expects to have 1,500 supply houses with revenue of about $25 billion annually. That would represent nearly 20% of the company's overall sales -- up from 5% in 2005.

But selling to the construction trades is far different from hawking basic tools, appliances and paint. Large-scale contractors rely on longstanding relationships with specific suppliers who offer highly trained sales staffs and specialized services. Handshake deals with trusted associates often trump rock-bottom prices from a stranger.

Many contractors, who often associate the brand with amateurs, won't darken the door of a regular Home Depot. A few years ago, they shunned the company's efforts to roll out Home Depot Supply stores. The stores looked and worked too much like the standard warehouse format.

That is why veterans such as Mr. Perry are so crucial to the new effort. The 34-year-old got his start in this business after graduating from college in 1994 loading trucks at a Hughes supply branch in Atlanta. Now the White Cap salesman roams the metro Atlanta area on his own, visiting work sites and selling concrete-related supplies to contractors. Last year he booked roughly $10 million in sales for Home Depot and won a "Top Gun" sales award inside the company. For his success, he is richly rewarded. Although he won't divulge his pay, Home Depot says its best supply salesmen can earn $200,000 to $800,000 annually, primarily in commissions. Store employees, by contrast, start out at $7 an hour, or less than $15,000 a year.

It is a departure from the company's roots. Home Depot founders Bernard Marcus and Arthur Blank passed out dollar bills in the parking lot to attract customers into the first store in 1979 and encouraged store managers to tear up edicts from headquarters. The rank-and-file store employees were lionized by the company and often received direct coaching from Messrs. Marcus and Blank on customer service.

That free-wheeling attitude helped Home Depot become one of the hottest growth stocks ever, doubling its store count nearly every four years. Hundreds of early employees became millionaires.

But Home Depot failed repeatedly at finding its next great idea. Rural stores called Crossroads in the mid-1990s flopped. Many of its 54 upscale Expo Design Centers were closed last year amid poor sales. By 2000, the company was struggling to maintain its typical 25% annual earnings growth. The company shocked investors in October 2000 with a profit warning that sent the stock tumbling 28% in one day.

Meanwhile, the performance of Lowe's, which has 1,250 U.S. stores versus more than 2,000 for Home Depot, has surged. It has outpaced Home Depot in same-store sales -- or sales at stores open at least a year -- for 19 of the past 20 quarters.

Mr. Nardelli, a manufacturing veteran at GE who had never run a retailer, arrived at Home Depot in December 2000 two months after the profit warning. He made it a priority to stamp out the decentralized "cowboy culture" of Messrs. Blank and Marcus. He reined in Home Depot's costs, centralized purchasing and boosted the company's profit margins. The result: Home Depot posted earnings-per-share growth in excess of 20% for four consecutive years, one of only two companies in the Dow Jones Industrial Average to do so.

Faced with fewer store-expansion opportunities, Mr. Nardelli began buying the new lines of business. He had been a serial acquirer during his GE career, stringing together roughly 50 global deals in 1999 and 2000 while leading the company's power-generation unit.

Mr. Perry's old employer, Concrete Foundations Supply, was one of the earliest purchases. In the spring of 2004, during a round of golf, Mr. Perry's boss at the time broke the news that he was selling his 30-employee company to Home Depot's newly acquired White Cap division. Mr. Perry considered leaving. "I was a big fish in a small pond. Now I'm thinking I'm employee No. 2,749,000," he said.

'We Are Not Barbarians'

Mr. Nardelli pledged to keep the top management, salespeople and internal cultures of the companies he acquired, usually maintaining their corporate name and colors on stores and delivery trucks. "We are not barbarians at the door," Mr. Nardelli says.

At White Cap, Hooters waitresses still cater branch openings, and a buxom brunette in a tight-fitting White Cap T-shirt was recently featured on the company Web site.

Cultural continuity is important because large contractors often base their buying decisions as much on relationships as price points. Mr. Perry, for one, was relieved Home Depot largely left him alone to service his clients. He soon saw that the company's clout also made it easier to get manufacturers to demonstrate new products in front of his customers. The acquisitions gave Mr. Perry more products to sell, as well as a broader geographic selling turf.

Mr. Perry spends much of his day monitoring deliveries and quality control. Nothing inflames the ire of a contractor like a late or missed delivery. He uses a Nextel walkie-talkie to keep in touch with a dispatcher and truck drivers -- passing on directions to construction sites where streets are rarely labeled. A global-positioning-system device perched on Mr. Perry's dashboard guides him across the Atlanta suburbs.

Some analysts and investors believe that the money being spent on supply could be better used elsewhere. Specifically, they would like to see more renovations of Home Depot's aging stores and more seasoned, higher-paid employees with home-improvement know-how.

Customer service at Home Depot has suffered in recent years as the retailer relies increasingly on novice, part-time help. Another concern is that the supply businesses have lower profit margins than Home Depot's existing stores. In the most recent quarter, Home Depot stores had an operating profit margin of 11.8% compared with 7% for the supply side.

Home Depot concedes the supply business will drag down overall operating margins this year but expects to expand its margins by 2010. And Mr. Nardelli points out that Home Depot's strong balance sheet enables it to invest in both store renovations and supply acquisitions.

It clearly frustrates the CEO and other top executives and directors that some investors and analysts haven't embraced his vision.

"We are going through an enormous transformation," says Mr. Nardelli. "Sometimes transformation is unsettling not only internally but also externally to Wall Street. We pose a real challenge for traditional retail analysts to understand our business model."

Walter Todd, a principal at Greenwood Capital Associates in Greenwood, S.C., sold his firm's 189,000 shares in Home Depot in May, after he became dissatisfied with the company's direction under Mr. Nardelli. Although he says the CEO "has done a lot of good things at Home Depot," he says he "comes across as arrogant and overconfident."

But Home Depot director Bonnie Hill, who heads the company's compensation committee, says Home Depot's board remains fully committed to Mr. Nardelli.

"Bob has done a great job with the company," says Ms. Hill, who runs a corporate-governance consulting firm. "The place was maturing and we were reaching the point of saturation. A new direction was needed."

The Inside Scoop on Staffing Companies

The Inside Scoop on Staffing Companies
By Kristan Rowland
Morningstar, 08-25-06

The aging United States workforce boasts broad implications for the country. The 78 million strong baby boomer population (those born between 1946 and 1964) not only controls much of the nation's net worth and makes up about half of U.S. discretionary spending, but it also accounts for a significant portion of the U.S. labor force. According to the Bureau of Labor Statistics, the 55 and older age group is projected to gain share of the U.S. labor force, from about 16% currently to 21.2% by 2014. Let's take a look at how an older workforce might create some investing opportunities in the staffing industry.

According to IDC, a global provider of industry information, about 19% of the entire U.S. workforce holding executive, administrative, and managerial positions will retire in the next five years, which we think bodes well for firms like Heidrick & Struggles HSII . It is the leading executive search firm that fills the most-senior-level positions and enjoys a 50-year history. This firm's strong brand and network will be the keys to its success. We think that the firm will continue to attract talent given its huge share of topnotch employment opportunities. Furthermore, with this looming talent shortage, companies are likely to rely more heavily on Heidrick & Struggles given its long history and extensive unparalleled network of relationships. Also, companies may be forced to pay more for talent, given supply constraints. Heidrick & Struggles should benefit from this trend, as its per-placement revenues are based on the size of executives' first-year pay packages.

Current baby boomer spending habits, a lack of savings, increased longevity, and lifestyle choices may mean that many boomers continue to work part-time. A working paper from the Bureau of Labor Statistics using data from the University of Michigan's Health and Retirement Study found that half to two thirds of respondents with full-time careers take on "bridge" jobs before exiting the labor force and that more individuals are choosing to work part-time after leaving full-time career employment.

Several temporary staffing firms may stand to benefit from these workforce trends. Robert Half International RHI is one of our favorite professional staffing firms. It is the leader in specialty staffing, and benefits from topnotch management. Its gross margins are among the highest in the staffing industry, a reflection of its focus on highly skilled temporary workers. It boasts average returns on invested capital of 18% over the last 13 years. Other temporary staffing firms that may also benefit include Manpower MAN and Adecco ADO . Adecco is the worldwide leader in temporary staffing, with Manpower not too far behind. These two firms have a strong network and the ability to attract workers with their solid brand names. They may also benefit from similar demographic trends in Europe and other countries as individuals may supplement benefits with part-time temporary work.

Now is not the time to be buying these stocks. All of the companies listed have Morningstar ratings of 3 stars, but because these companies are cyclical, the ratings can change dramatically. Typically these stocks decline during recessions, when the employment picture is poor. Following the end of the 2001 recession, the unemployment rate peaked 19 months later. Likewise, most of the above stocks hit bottom in 2003, as unemployment peaked, and have all at least doubled in value since then. We think these rough periods provide good buying opportunities and would seek to pick up any of these names when they return to 5-star territory.

Why Economists Blog?

Why Economists Blog?
The Economist, Aug 3, 2006

Clearly there is here a problem of the division of knowledge, which is quite analogous to, and at least as important as, the problem of the division of labour,” Friedrich Hayek told the London Economic Club in 1936. What Mr Hayek could not have known about knowledge was that 70 years later weblogs, or blogs, would be pooling it into a vast, virtual conversation. That economists are typing as prolifically as anyone speaks both to the value of the medium and to the worth they put on their time.

Like millions of others, economists from circles of academia and public policy spend hours each day writing for nothing. The concept seems at odds with the notion of economists as intellectual instruments trained in the maximisation of utility or profit. Yet the demand is there: some of their blogs get thousands of visitors daily, often from people at influential institutions like the IMF and the Federal Reserve. One of the most active “econobloggers” is Brad DeLong, of the University of California, Berkeley, whose site, delong.typepad.com, features a morning-coffee videocast and an afternoon-tea audiocast in which he holds forth on a spread of topics from the Treasury to Trotsky.

So why do it? “It's a place in the intellectual influence game,” Mr DeLong replies (by e-mail, naturally). For prominent economists, that place can come with a price. Time spent on the internet could otherwise be spent on traditional publishing or collecting consulting fees. Mr DeLong caps his blogging at 90 minutes a day. His only blog revenue comes from selling advertising links to help cover the cost of his servers, which handle more than 20,000 visitors daily.

Gary Becker, a Nobel-prize winning economist, and Richard Posner, a federal circuit judge and law professor, began a joint blog in 2004. The pair, colleagues at the University of Chicago, believed that their site, becker-posner-blog.com, would permit “instantaneous pooling (and hence correction, refinement, and amplification) of the ideas and opinions, facts and images, reportage and scholarship, generated by bloggers.”

The practice began as an educational tool for Greg Mankiw, a professor of economics at Harvard and a former chairman of George Bush's Council of Economic Advisers. His site, gregmankiw.blogspot.com, started as a group e-mail sent to students, with commentary on articles and new ideas. But the market for his musings grew beyond the classroom, and a blog was the solution. “It's a natural extension of my day job—to engage in intellectual discourse about economics,” Mr Mankiw says.

With professors spending so much time blogging for no payment, universities might wonder whether this detracts from their value. Although there is no evidence of a direct link between blogging and publishing productivity, a new study* by E. Han Kim and Adair Morse, of the University of Michigan, and Luigi Zingales, of the University of Chicago, shows that the internet's ability to spread knowledge beyond university classrooms has diminished the competitive edge that elite schools once held.

Top universities once benefited from having clusters of star professors. The study showed that during the 1970s, an economics professor from a random university, outside the top 25 programmes, would double his research productivity by moving to Harvard. The strong relationship between individual output and that of one's colleagues weakened in the 1980s, and vanished by the end of the 1990s.

The faster flow of information and the waning importance of location—which blogs exemplify—have made it easier for economists from any university to have access to the best brains in their field. That anyone with an internet connection can sit in on a virtual lecture from Mr DeLong means that his ideas move freely beyond the boundaries of Berkeley, creating a welfare gain for professors and the public.

Universities can also benefit in this part of the equation. Although communications technology may have made a dent in the productivity edge of elite schools, productivity is hardly the only measure of success for a university. Prominent professors with popular blogs are good publicity, and distance in academia is not dead: the best students will still seek proximity to the best minds. When a top university hires academics, it enhances the reputations of the professors, too. That is likely to make their blogs more popular.

Self-interest lives on, as well. Not all economics bloggers toil entirely for nothing. Mr Mankiw frequently plugs his textbook. Brad Setser, of Roubini Global Economics, an economic-analysis website, is paid to spend two to three hours or so each day blogging as a part of his job. His blog, rgemonitor.com/blog/setser, often concentrates on macroeconomic topics, notably China. Each week, 3,000 people read it—more than bought his last book. “I certainly have not found a comparable way to get my ideas out. It allows me to have a voice I would not otherwise get,” Mr Setser says. Blogs have enabled economists to turn their microphones into megaphones. In this model, the value of influence is priceless

Small Caps for the Picking

Small Caps for the Picking
by Pat Dorsey, CFA
Morningstart, 08-11-06

As regular Morningstar readers know, we've been pounding the table for high-quality large caps for quite some time now. Lo and behold, it seems that the tide may finally be turning: Morningstar's Large-Cap Index is now ahead of our small-cap index both year-to-date and for the trailing year. Over the past three months, in fact, small caps have lost almost 12%, while large caps have held up pretty well, with a 3% loss.

This is a really great development for a couple of reasons. For one, it means that almost two years after initially advancing the notion that lower-risk, high-quality large caps were cheap relative to generally riskier small fry, I might finally be right. (Long stretches of looking dumb are an occupational hazard in the stock analysis profession.) But even better, the poor recent performance of small caps means that, in typical fashion, Wall Street has been throwing the baby out with the bathwater, and there are now some very interesting smaller companies that are cheap enough to buy.

So, I trolled our coverage universe of more than 1,800 stocks--which includes about 600 small caps--for some of the most promising smaller companies that we cover. Here's what I came up with.

Although Blue Nile NILE would be near the top of the list alphabetically, it would still be at the top even if the online diamond merchant were named Zambezi. The firm has a beautiful business model with negative working capital--the firm holds no inventory, so Blue Nile doesn't need to pay suppliers until after the consumer has paid for the diamond--that generates enormous returns on capital. Moreover, the firm has a management team that seems to understand the importance of capital allocation, rather than growth for growth's sake, as evidenced by management's decision to pull back on paid search advertising late last year when keywords became too expensive. Although the shares popped recently on the heels of a solid earnings report, we think they still have substantial upside.

Another high-quality smaller name that looks attractive is for-profit education company DeVry DV , which saw enrollment in its technology-related programs get whacked during the bursting of the tech bubble. However, as improved enrollment levels work their way through the firm's multiyear programs, margins should improve nicely, and the firm has not suffered from any of the investigations that have dogged some of its peers. At 15 times cash flow, the shares look pretty attractive to us.

Sticking with the growth theme, logistics firm Forward Air FWRD has seen its shares plunge recently on fears of a slowing economy to a point at which we think they offer a compelling value. This asset-light firm occupies an interesting niche of the transportation industry, moving freight via truck between airports with such efficiency that customers use it as an alternative to pricier air-cargo services. The firm has a great track record of creating shareholder value, and we think that it has many years of excess returns ahead of it.

These are three very high-quality firms trading at fair prices. Moving down the quality--and valuation--scale somewhat, I'd highlight three more companies that are all solid and trade at very attractive prices. It's an eclectic group: a beaten-up specialty retailer, a slumping casual-dining chain, and the owner of two great education brands.

Tuesday Morning TUES is the beaten-up retailer, and it has suffered from the same slump in houseware spending that's taken Pier One PIR from $20 to $6 over the past couple of years. The difference is that Tuesday Morning has no debt, is still generating meaningful free cash flow, and occupies a defensible niche--selling branded closeout goods. This is a very solid little company that's gotten very, very cheap. Even better, the private equity firm that took it private about 10 years ago still has a sizable stake, which means it may very well just take the company private again if the share price stays as cheap as it is now.

The casual-dining chain is Applebee's APPB , which caters to a less-well-off clientele that's been pinched badly by higher gas prices. This is not great, but neither is it a terminal problem, and we think Applebee's has more sticking power than most restaurant chains given its scale, advertising muscle, and unique attributes, like an exclusive alliance with Weight Watchers WTW . A reasonable top-line growth estimate coupled with steady margins yields a fair value estimate almost twice the current price.


The smallest of the firms in this group is Educate EEEE , which operates Sylvan Learning tutoring centers and owns the well-known Hooked on Phonics brand. The firm's management has made a hash of things over the past year by getting too aggressive in an ongoing plan of buying back franchised Sylvan centers; this seriously damaged operational performance. As a result, the shares have been absolutely hammered. However, the brands are still strong, the demand for tutoring services is still solid, and the operational problems are fixable. We think the shares are cheap enough to be worth a look, and we also think that Educate's majority owner--private equity firm Apollo Management--could very well make a bid for the whole company.

Finally, we have three small caps that all have serious warts, but which are all so dirt cheap that adventuresome types should give them a look. Homebuilder Levitt LEV trades for just 60% of book value, and while the shares may very well take time to turn around, the current stock price assumes a doomsday scenario that we think is unlikely to occur. Radware RDWR is an Israel-based maker of networking equipment that's got solid products, decent growth potential, and a dirt-cheap stock--net of the firm's almost $9 per share in cash, the shares trade at just 1 times our 2006 sales estimate. (Radware could also make a tasty treat for one of the major networking companies.)

Then there's video-game company Take Two Interactive TTWO , which has some of the worst corporate governance we've seen, but also owns the amazingly successful Grand Theft Auto gaming franchise. We estimate this one game alone is worth about 40% more than the current share price, and that the whole company (which does have some other successful games) could be worth as much as twice the current share price. This one's not for the timid, but a large enough margin of safety can compensate for a lot of risks.

Quality Will Withstand

Quality Will Withstand
By Paul A. Larson
Morningstart, 08-09-06

One of my favorite Warren Buffett quotes is, "It's only when the tide goes out that you learn who's been swimming naked." In the early part of 2006, it seemed that many were swimming in their birthday suits in the strong economy's high tide, plowing into everything from risky commodity companies to emerging markets with abandon. Now that the markets have taken a breather since May and the tide has started to roll out, the benefits of investing in wide-moat firms have made themselves more evident.

A booming economy like we've experienced in the past couple of years covers up a lot of sins made by marginal companies. Meanwhile, the types of companies we own in the Tortoise and Hare portfolios in StockInvestor--ones that have wide economic moats--are not economic sinners. They are like the tallest trees, withstanding the wildfires that occasionally wipe out the weaker or poorly positioned competitors.

The companies we own at StockInvestor may not partake in the party created by a strong market rally, but I strongly suspect they will hold up much better when an economic downturn hits. And a downturn will indeed hit … eventually. As the saying goes, "If something cannot go on forever, it will eventually stop."

I don't mean to sound like an alarmist, but the worldwide economy will slow down from its recent record pace at some point. I am not certain what the catalyst will be--perhaps China will consolidate its white-hot growth of the past couple of years, maybe high energy prices will hit the economic brakes, or the two-headed monster of inflation and higher interest rates might mop up all the worldwide excess liquidity. I don't have any reasonable projection when the clouds will come, but come they will.

I am not worried. The companies we own in our Tortoise and Hare portfolios are well-positioned for nearly any economic condition short of a world war. And for those portfolio holdings that do have some meaningful economic sensitivity, we have given ourselves a sufficient margin of safety by modeling a significant decrease in sales and earnings into our discounted cash-flows.

Just think of investing as taking a long, cross-country road trip with other investors. Those who forgo the tire chains, spare tire, emergency supplies, and pre-trip mechanical checkup may be able to leave sooner and, with less weight, possibly drive faster--when the weather is good. (Or as Buffett might say, there is no need for swimsuits at high tide.) But when some bumps in the road appear and it starts to snow, those who planned ahead for the longer term will get the last laugh. We expect the companies we have bought to hold up much better than average over the long haul.

Last spring, my colleague Pat Dorsey (Morningstar's director of equity research) published a very interesting article titled "Buy Quality, Buy It Now." In his studies published in late April, Pat found a direct correlation between a stock’s riskiness (as measured by Morningstar’s business risk rating) and its three-year trailing return. The riskier the company, the better the trailing return. He found a similar phenomenon with the economic moat rating. Those companies without a moat had far outperformed those we have rated "wide."

I am here to preach patience, since I think it is only a matter of time before this trend reverses, particularly on the moat side. Almost by definition, companies with wide economic moats earn large returns on their invested capital, while those with no moat tend to earn low returns. Over very long periods of time, a company's returns on capital will drive its stock price.

Companies with no economic moat can occasionally earn oversized returns when the economy is good (like today), but the profits are usually fleeting. Meanwhile, I'm highly confident that nearly all of the companies we own in the Tortoise and Hare portfolios will continue to earn high returns on capital 10 years from now and will have significantly larger earnings streams at that time. This is what is truly important in investing--the long-term cash-flow-generating power of a company, and its ability to defend those cash flows. Focus on this, and I think your returns will be much better.

The good news is that the recent down draft in the stock market has caused a large number of high-quality companies to trade at very compelling prices. Whether it is Johnson & Johnson JNJ , Microsoft MSFT or Berkshire Hathaway BRK.B , I think our investments in the Tortoise and Hare will hold up well no matter what happens to the economy.

An Afternoon with Charlie Munger

An Afternoon with Charlie Munger
by Toan Tran
Morningstart, 07-26-06

I had the pleasure of attending Wesco Financial's WSC annual meeting in early May. The main attraction, of course, was Wesco chairman and Berkshire Hathaway BRK.B vice chairman Charlie Munger. Although Munger is sometimes obscured by the long shadow of his more famous partner, Warren Buffett, his contributions to the philosophy of value investing cannot be overstated. Buffett never hesitates to say that without Munger's influence, Berkshire may have never purchased great growth businesses like See's Candy or Coca-Cola KO .

We also owe much of what we do at Morningstar GrowthInvestor, the monthly newsletter that I edit, to Munger's thinking, so the annual meeting was a superb opportunity to learn at the foot of the master. Here are some of his nuggets of wisdom.

Opportunity Cost
"There is this company in an emerging market that was presented to Warren. His response was, 'I don't feel more comfortable buying that than I do of adding to Wells Fargo.' He was using that as his opportunity cost. No one can tell me why I shouldn't buy more Wells Fargo. Warren is scanning the world trying to get his opportunity cost as high as he can so that his individual decisions are better."

When you are evaluating any investment, you must compare it to every other available investment, including ones you may already own. Instead, many investors collect stocks like baseball cards and the resulting portfolio bloat will likely not increase returns or reduce risk. So when you hear about the new hot stock in the next can't-miss sector, ask yourself two questions: (1) Do I understand the investment as well or better than one I already own? (2) Is the risk and reward profile of the investment superior to all other alternatives? If the answer is "no" to either questions, it is probably best to stay away.

Rationality
"Rationality is not just something you do so that you can make more money, it is a binding principle. Rationality is a really good idea. You must avoid the nonsense that is conventional in one's own time. It requires developing systems of thought that improve your batting average over time."

Munger is an evangelist for the virtues of rationality and his outstanding investment record is testimony to a lifetime of disciplined thought. To succeed as an investor, one has to make good decisions that are anchored in reality and free from emotional and cognitive distractions. At GrowthInvestor, we are searching for companies with significant market potential, rising demand, an economic moat, and growth-oriented management for purchase in the portfolio. This is not merely a checklist, but a research process focused on helping us make the most-rational decisions. If we make enough rational decisions, we will eventually have the returns to show for it.

Envy
"Harvard and Yale concentrated with venture capitalists that got the best calls and brainpower. Very few firms made most of the money, and they made it in just a few periods. Everyone else returned between mediocre and lousy. When returns happened, envy rippled through institutional money management. The amount invested in venture capital went up 10 times post-1999. That later money was lost very quickly. It will happen again. I don't know anyone who successfully resists this stuff. It becomes a new orthodoxy."

Munger and Buffett often say that envy is worst of the seven deadly sins because it is the only one that isn't fun to commit. When a group of people make money, others are compelled by an irresistible force to get a piece of the action, even though prices have risen so far above fair value as to guarantee disappointing returns and there are much better alternatives available. I am completely puzzled by this behavior, but I am also glad it exists.

Learning
"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side. If you can't state arguments against what you believe better than your detractors, you don't know enough."

Carl Jacobi, a noted 19th-century mathematician, counseled his students to "invert, always invert" when they encountered a particularly vexing problem. I think this is a great way to approach investing. After you compile all the reasons you should buy a stock, invert the question and state the reasons why you should not buy the stock. By doing this, you ensure that your research process is more complete.

Mistakes
"Chris Davis [of the Davis funds] has a temple of shame. He celebrates the things they did that lost them a lot of money. What is also needed is a temple of shame squared for things you didn't do that would have made you rich. Forgetting your mistakes is a terrible error if you are trying to improve your cognition. Reality doesn't remind you. Why not celebrate stupidities in both categories?"

I have kept track of my investing mistakes for some time now, and it is a painful, but illuminating, experience. Without doubt, I am a better investor for it. I will be keeping track of our mistakes at GrowthInvestor, and I suggest you do the same with your portfolio. With a post-mortem catalog of your mistakes, you will be able to identify patterns in your decision-making process that produce unforced errors.

Risk
"I know a man named John Arriaga. After he graduated from Stanford, he started to develop properties around Stanford. There was no better time to do it then when he did. Rents have gone up and up. Normal developers would borrow and borrow. What John did was gradually pay off his debt, so when the crash came and 3 million of his 15 million square feet of buildings went vacant, he didn't bat an eyebrow. The man deliberately took risk out of his life, and he was glad not to have leverage. There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table. We might all consider imitating John."

Palatial casinos are built in the desert because people find risk to be fun and exciting. I am not much of a gambler, so whenever I visit Las Vegas, I spend most of my time watching friends try their luck. One intriguing thing I have noticed is that when things are going well and money has been won, it is nearly impossible for many people to walk away from table. Instead, they take on more risk by betting larger amounts, even though the odds are clearly stacked in favor of the house. Taking on risk only makes sense when it is sufficiently outweighed by the potential reward, which is why we only buy stocks when there is a margin of safety. Otherwise, consider Munger's advice and imitate John Arriaga.