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Applied Materials manufactures semiconductors and fabrication equipment for the semiconductor industry worldwide. Some predict that these businesses will suffer in 2007 due to a chip glut. That may be true, but Applied Materials is clearly a market leader in this important business. The shares appear to be fairly priced, and the company has some very interesting long-term growth prospects. I own AMAT indirectly through an investment in the Clean Energy ETF (PBW) and I do not plan to buy it in its own right.

Applied Materials is a former highflier of the 1990s which has come down to earth. AMAT’s price to earnings, sales, and book value ratios all compare favorably with the S&P 500, and the P/E ratio of 16 matches the expected earnings growth rate. The dividend yield is rather low at 1.05%, and the beta is high at 1.42, so this is not an investment for the faint-hearted. But an average annual total return of at least 15% appears reasonable based on current fundamentals. The company looks financially strong and it has little debt. Applied Materials’ annual net earnings have been quite volatile, but they have made money every year since 1997, except for 2003; and their net earnings have been strong since then. They started paying a dividend of .09 a share in 2005 and doubled it to .18 in 2006. The payout ratio is only 15%. There have been many 2-for-1 splits over the years. The most recent was in 2002.

According to a recent article in Telegraph.co.uk, AMAT is two years away from a photovoltaic product that will reach the magic level of $1 a watt, at which solar electricity becomes directly competitive with electricity generated from fossil fuels. Cell conversion efficiency and economies of scale are moving ahead so fast that the cost will be down to 70 cents per watt by 2010, with a target of 30 or 40 cents by 2017.

“We think solar power can provide 20% of all the incremental energy needed worldwide by 2040,” said Mike Splinter, chief executive of Applied Materials. “This is a very powerful technology and we’re seeing dramatic improvements all the time. It can be used across the entire range from small houses to big buildings and power plants,” he said. “The beauty of this is that you can use it in rural areas of India without having to lay down power lines or truck in fuel.”

Applied Materials is betting on both of two rival solar technologies: the new thin film panels as well as the traditional crystalline wafer-based cells, which are not as cheap but produce higher yield per surface area. The thin film panels are so light they can be stuck to the side of buildings as well as on their roofs. This material can be mass-produced in long rolls of any color and easily applied by ordinary construction workers.

The major oil companies are ignoring this development, and electric utility companies don’t want to hear about it, but I think that within five years solar power will finally be cheap enough to be practical, even in cold northern regions, and that will mark the beginning of a world-wide solar power boom. Within ten years, I think the cost of photovoltaics will have fallen enough for solar electricity to be much cheaper than electricity from conventional sources. The technology is beginning to proliferate in a parabolic curve, just the way computer chips did in the 1980s and 1990s, and Applied Materials is ideally positioned to profit from this new trend.

Summary: Avista turned up on one of my screens for cheap stocks. The company sells electricity and natural gas in the Pacific Northwest and also engages in several unregulated businesses, including energy trading. AVA stock does look cheap in terms of its P/E ratio, P/B ratio and cash flow, but here again the company does not meet stringent standards for financial strength. AVA has taken on considerable debt to finance its activities. While cash flow appears adequate to keep everything going, there is not much margin for error. The stock has increased in volatility in recent years and it has underperformed the S&P. The dividend yield appears inadequate to compensate investors for the level of risk. In my opinion AVA is trading at a significant premium to its intrinsic value. The stock price appears to have fully discounted possible positive developments in the future. AVA does not look like an attractive investment at this time.

Summary: The Calumet Lubricants Co. has been around a long time, but Calumet Specialty Products Partners LP stock (CLMT) has only a year of trading history as a unique entity. The chart looks great. CLMT has been making new 52-weeks highs, and it is easy to see why. The L.P. units are yielding close to 5.5% and the valuation numbers look quite good. This security has been trading with a relatively high correlation to the financial, consumer staples and consumer discretionary sectors, and a relatively low correlation to the energy, technology, and health care sectors. I have some reservations about jumping in because of the lack of long-term financial data, and I anticipate widespread weakness in the stock market, but I would consider buying CLMT after a pullback....

Cullen/Frost looks like a good long-term investment which is fairly priced at this time, with an expected average annual return in the 13% range. I am going to pass because of CFR’s high correlation to the energy sector, where my portfolio is overweight, but for anyone without that problem CFR might reward further research. This Texas bank has enjoyed excellent profit and dividend growth but it is relatively inexpensive compared to some its peers. CFR has strongly outperformed the S&P, but it has a higher dividend yield and less volatility. In addition to offering the customary banking services through 100 offices all over Texas, the company does international banking business with customers residing in Mexico or doing business with customers in Mexico, sells a variety of insurance products, and acts as a correspondent for other banks in the area.

I keep a list of growth stocks that I might be interested in buying if they ever tank enough to selll at less than 20 times earnings. Whole Foods Market, currently selling at 32 times earnings, is on the list. This stock has enjoyed phenomenal growth, but it has been in a downtrend for the last year. I have been watching for signs that WFMI is bottoming out, but recent developments lead me to believe that the company is headed for more trouble in the months ahead...

The progressive energy ETF was reviewed in this blog when it started trading last fall. I thought it sounded promising, especially as a complement to its sister ETF, PowerShares WilderHill Clean Energy (PBW), which I own. To recap briefly, PUW is based on the WilderHill Progressive Energy Index. This Index is comprised U.S. listed companies that are significantly involved in “transitional energy bridge technologies”, with an emphasis on improving the use of fossil fuels. Simply put, the ETF invests in companies which are likely to profit from more efficient use of existing energy resources. The portfolio is rebalanced and reconstituted quarterly. PUW’s expense ratio is a reasonable .60. According to a chart on powershares.com’s website, the index would have outperformed the NASDAQ and the S&P 500 by a wide margin in the last five years, but with a little less volatility. The index has a beta of .92. Of course, these results are hypothetical, and do not take into account management and transaction fees....

The Chubb Co. is a profitable property and casualty insurance operation. CB has outperformed the S&P for many years, but with less volatility (beta .91). Although the current dividend yield of 1.89% is a bit light, dividend growth has been quite satisfactory - Chubb has raised the dividend annually for at least 25 years - and the payout ratio is modest. CB’s annual total return potential appears close to 12%. This stock looks quite cheap by conventional valuation standards. The P/E ratio and P/CF ratio are both below 9. The company is financially sound and has relatively little long-term debt. There have been good years and lean years, but Chubb consistently makes a lot of money. In most of the last ten years Chubb’s premium income has exceeded casualty losses by a hefty margin....

I found this company while running screens for cheap stocks. Zions stock does look cheap. The P/E ratio is 15.9, the P/B ratio is 1.9 , and the stock appears to be selling at a significant discount to its intrinsic value. ZION operates over 500 banking offices through seven subidiairies in ten Western states: Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Utah, Texas, and Washington, and also engages in money management, insurance sales and other financial businesses through ten other subsidiaries. The firm has a market capitalization of 9.1B. Zions has outperformed the S&P, but with less volatility. But the current dividend yield is only 1.82%. However, the dividend does show an excellent 5-year growth rate and the payout ratio is only 27%. A glance at the balance sheet shows a current ratio of 1.11, within the range of many banks. But it is proving difficult to obtain enough information to assess this company’s financial strength in any detail, and the current ratio by itself certainly does nothing to inspire confidence. Earnings and the rate of earnings growth have been quite good....

I bought ADM yesterday afternoon. I think Archer Daniels Midland is a great company with tremendous potential for future growth. ADM has come to be viewed by the market as an ethanol and biodiesel stock, and they are in fact the world’s largest ethanol producer, but biofuels are just a sideline to their main business of crushing soybeans and corn to manufacture food products. ADM is a strong company with a solid leadership position in the highly profitable business of processing soybeans, corn, wheat, and cocoa. It is hard to find commercially prepared food or beverages which do not contain ingredients manufactured by ADM. Although the stock’s current dividend yield is only 1.14%, this company has paid dividends for 75 years, they have increased the dividend every year for more than 25 years, and the payout ratio is only 17%. The stock is quite cheap for a blue chip with excellent prospects. It has a price-earnings ratio of 15, a price to cash flow ratio of 10, and a price to book value ratio of 2....

Description of Business from Company’s Website:
“South Jersey Industries is an energy services holding company. Subsidiaries include South Jersey Gas, South Jersey Energy Service Plus, South Jersey Energy, Marina Energy, and South Jersey Resources Group.”

Additional information from Yahoo Finance: “South Jersey Industries, Inc., through its wholly owned subsidiaries, engages in the purchase, transmission, and sale of natural gas for residential, commercial, and industrial use. It also sells natural gas and pipeline transportation capacity to various customers on the interstate pipeline system, and transports natural gas purchased directly from producers or suppliers. The company also acquires and markets natural gas and electricity to retail end users and provides energy management services to commercial and industrial customers. It also markets an air quality monitoring system through an environmental consulting firm. The company markets wholesale natural gas storage, commodity, and transportation in the mid-Atlantic and southern states. The company develops and operates energy related projects, which provide cooling, heating, and hot water services. In addition, the company installs residential and small commercial HVAC systems, as well as provides plumbing services in southern New Jersey. As of December 31, 2005, the company served approximately 322,424 residential, commercial, and industrial customers in southern New Jersey. South Jersey Industries was founded in 1910 and is headquartered in Folsom, New Jersey.”...

Description of business from the company’s website: “Central Vermont Public Service [is] an independent, investor-owned company providing energy and energy-related services to customers throughout Vermont. CVPS, the largest of the state’s 21 utilities, serves 155,000 customers across the state. The Home Service Store, an affiliate, operates a national home maintenance and repair service. Subsidiary SmartEnergy is a water-heater rental business. . . . Central Vermont Public Service customers who want to support renewable energy and Vermont dairy farms have a new energy choice - CVPS Cow Power. The Vermont Public Service Board has approved CVPS Cow Power, which is intended to help promote development and reliance on renewable energy in Vermont by creating a market for energy generated by burning methane from cow manure.”...