The News Issue Week Day

RICH AMERICA, POOR AMERICA The split nature of today's economy has been great for stock like Coach, tough for ones like Wal-Mart. Why that won't change much, even as the Democrats gain clout in Washington. he New IBM

Big Blue's shareholders have been blue for the past few years. But the tech giant has a new strategy, focused on software. Best of all, it's working.

Randall Forsyth The buck may be real loser in Iraq ...

Review&Preview A vote keeps ASMI intact. Going more nuclear ...

Storming Ahead, After run-up, a few insurers look good ...and Direct TV

Smooth Style Polo stock will stay in fashion ...

Follow the Leaders Copying smart stockpickers is one way to build a best-ideas portfolio, and it saves on management fees. A look at Oracle, Sears, AutoZone,Wendy's and other top holding of five closely watched hedge funds ...

Coming Spinoff Duke Energy's powerful idea ...

The New Big Blue Cover Story: IBM investors may soon be smiling like CEO Palmisano, as Wall Street comes to realize that Big Blue's reinvention as a software giant gives it a steadier, more profitable business with plenty of potential for further improvement ...

Spreading Joy The four rules of good giving ...

Technology Trader Microsoft stock could be ready for takeoff, now that new version of Vista and office have launched ...

13 Great Gadgets Our pick for sleek and sophisticated gadget gifts include Sony TAV-L1 all-in-one home theater, a digital SLR camera, Logitech's Harmony 1000 universal remote ...

Thursday

Polo: Still in Style


POLO RALPH LAUREN'S WEBSITE OF­ fers fashionistas smart advice on how to wear this season's hot item, super-skinny denim jeans: Pair them with a cropped jacket, or tuck them into thigh-high boots. The metaphor is apt. Despite a 44% run-up in the company's shares (ticker: RL) in the past 12 months, to Thursday's all-time high of 78.75, Polo is likely to stay in fashion and make a fine tuck-in to an investment portfolio.

Although the stock has soared 188% since Barron's wrote a positive piece on the company three years ago ("The Lat­ est Fashion," Sept. 29, 2003), earnings continue to grow at an impressive rate. Analysts expect earnings per share to rise 21%, to $3.63, in the year ending March 2007. The shares could advance into the mid-80s in the next year or so.

Polo isn't as cheap· as it was in Sep- . tember 2005, when we wrote a fol­ low-up ("In the Black," Sept. 12, 2005), urging investors to hang on after the stock had risen to 49-and-change. But, at 19 times analysts' fiscal 2008 earn­ ings estimates of $4.08 a share, neither is it expensive. Its price-to-earnings­ growth ratio is an appealing 1.18.

Some critics, like Douglas Kass of Seabreeze Partners, think the shares will unravel as consumer" rein in spend­ ing.Kass says he has been "shorting Polo aggressively" on a bet that it will retreat to the low 60s. The hedge-fund manager expects Polo and other upscale retailers to face a downbeat Christmas, as a slowdown in cash refinancing of home mortgages curtails the purchase of high-priced items.

Kass also cites "enormous" insider selling, by Chairman Ralph Lauren, among others: Insiders unloaded more than 300,000 shares over the past six months, according to regulatory filings.



Polo senior vice president Nancy Mur­ ray says most of the transactions are programmed and tax-related selling. "We think the stock is just beginning to enter its appropriate valuation level," she says. ''And I stress 'beginning.'''

The company is a smooth operator, with a keen fashion sense. The compa­ ny's operating margins continue to rise. and its products, which include apparel. accessories, housewares and linens, com­ mand full price in both the wholesale and retail markets. An expanding inter­ national presence also has contributed to the company's growth.

Polo could be energized by new store openings, which are expected to jump to 40 to 50 a year, from 20 to 25. "We firmly believe that [company-owned] re­ tail represents the company's largest growth opportunity," says Credit Suisse analyst Omar Saad, who has an 87 price target for the shares.

Some investors might be tempted to follow Lauren's lead and take some prof­ its at current levels. But the fabled Polo pony has proved to be a long-distance runner, and isn't tired yet.

~CHRISTOPHER C. WILLIAMS

Complete Archive Desember 2006

The New Cisco As technologies like Internet video take off, Cisco Systems, the king of computer networking, will be among the biggest winners. Why its shares could rally another 15%.

Survivor! GOP Will Hang On Despite a profusion of predictions to the contrary, the Republicans will keep control of Congress through just barely. So says our highly reliable seat by seat analysis of local political funding.

The New IBM Big Blue's shareholders have been blue for the past few years. But the tech giant has a new strategy, focused on software. Best of all, it's working.