Setting Stock's Target Price

Step 1: Determine a target earnings per share for your stock.

a) First find the consensus estimate on Yahoo! Finance's individual stock quote pages, by clicking "Analyst Estimates." Or this can be achieved through reading one or more analysts' opinions
b) Make any necessary adjustments to their estimates based on your own research or macro-level opinions. For example, if you are looking at a general merchandise retailer and the analysts whom you have read believe that the company will increase earnings by 10% in the next year, but you believe that overall consumer spending will slow down, then adjust the analysts' estimates accordingly.

Step 2: Determine a target price/earnings multiple for your stock.

a) Use the company's historical P/E ratios. While P/E ratios are not static, they do tend to move around a mean (average) value. This mean P/E should provide a good grounding for this analysis.
b) Compare the company's P/E with that of its industry or closest competitors. There should not be a big discrepancy amongst competitors with an industry. However, the better companies will garner a premium multiple to that of their lesser competitors.
c) Look at alternative investments. Consider the P/E for a risk-free investment. Let's say the five-year U.S. Treasury Note is yielding 5%. The P/E for this note will be the 20 (1 divided by .05). If you can earn a 20 P/E on a risk-free investment, then the P/E on a riskier investment needs to be considered in the context of its relative risk. In other words, why pay more for a riskier investment than a less risky one?
d) Look at growth rates. This is what I refer to as the Cramer Rule. Jim Cramer states that you should never pay twice the growth rate for a stock. By that he means that the P/E should never be more than two times the expected growth in future earnings per share (see price/earnings-to-growth ratio). You can use this benchmark as a rule of thumb. For example, if a company that you're invested in is expected to grow earnings at 15% next year, your forward P/E should not exceed 30 times earnings.

Step 3: Calculate an overall price target.

Having your forward earnings estimate and P/E multiple, take the two numbers and multiply them to arrive at a price target for next year. For example, with Google (GOOG - Cramer's Take - Stockpickr - Rating), I have estimated that the company will earn $21.25 EPS in 2008 and have applied a 40 target multiple (or P/E) on those earnings. This allows me to derive a price target of $850 ($21.25 multiplied by 40) per share.

Credit: http://www.thestreet.com/university/financeprofessor/10395936_1.html

Industry Metrics

Every company performance is measured by the industry's metrics. An investor needs to know what the wall street used to measure so that the company can be evaluated correctly.

The following information is from FastMoney show:
http://www.cnbc.com/id/21901167

TRADING BROKERS

Metrics That Matter?

1. - M&A Advisory Business
2. - Underwriting
3. - Trading

TRADING RETAIL STOCKS

Metrics That Matter

1. - Same-Store Sales (A.K.A "Comps")
2. - Fashion Initiatives
3. - Execution

Usually on the first Thursday of every month the retailers release same-store-sales, which are a report card for the sector, says Jeff Macke. Don’t own a retailer who’s missing their numbers.

TRADING DRUG STOCKS

Metrics That Matter

1. - Conferences & Clinical Test Trial Dates
2. - Current Roster Of Drugs
3. - Pipeline Of Future Drugs

It’s important to know these metrics says Pete Najarian because drugs sometimes hit stumbling blocks. Of course, other times they become multi-billion dollar blockbusters.

TRADING ENERGY & COMMODITY STOCKS

Metrics That Matter

1. - Price of the Commodity
2. - Beware Valuation
3. - Stocks are NOT a proxy play for the underlying commodity

Guy Adami feels the third point is extremely important. For example, he says if you’re bullish on gold don’t buy a mining company such as Newmont Mining (NEM) because you also get all kinds of corporate risks.

TRADING TAKEOVER TARGETS

Questions You Should Ask

1. - Are there "supervoting shares"?
2. - What state is the company incorporated in?
3. - Are there big shareholders who've been active in the past?

Stay away from companies incorporated in Pennsylvania, says Karen Finerman. They’re not shareholder friendly. By contrast, Delaware is extremely friendly. And you can find out the state of incorporation on the front of a “10-Q”

TRADING DEALS "IN LIMBO"

Questions You Should Ask

1. - What kind of bidder is it? Corporate?
2. - Is it a "trophy property"?
3. - What leverage can the buyer use against the target?

Finerman says when you’re looking at the bidders, determine if they’re corporate bidders or some kind of LBO. Finerman likes corporate bidders best.

TRADING CHIP STOCKS

Metrics That Matter

1. - Global Demand
2. - Commoditization
3. - Gadgets

Gross margins are very important explains Guy Adami. Intel’s (INTC) margins are expected to go higher into next year and that makes it a stock he wants to own.

TRADING SOFTWARE & VIDEOGAME STOCKS

Metrics That Matter

1. - Product Cycle Demand

Judge video games by the hardware release, says Jeff Macke. Typically Sony (SNE), Nintendo (NTDOY) and Microsoft (MSFT) lead on new consoles he says. A few years after that, profit margins are strong on the new software titles.

TRADING GADGETS AND TELECOM

Metrics That Matter

1. - Product Cycle Demand
2. - Wireless Capacity

Pete Najarian investigates how much growth lies ahead for companies in this sector. For example, he likes Research In Motion (RIMM) because Pete anticipates they will explode when they get into China.

Video clip is here:http://www.cnbc.com/id/21998606#

A Playbook for Selloff

From Jim Cramer's Mad money show:
http://www.thestreet.com/_tscnav/funds/madmoneywrap/10396256_1.html

1) Have Cash Available
To take advantage on down days, investors are going to need cash. Because corrections are inevitable, it's important to have cash available to buy stocks when they get cheaper.

• Never have less than 5% cash.
• When market is up huge, have as much cash as possible around 20% to wait for opportunity to buy on down days.

2) Circle the Wagons
Cramer suggested that investors make a list of stock they own and every stock they're considering. Stocks can be divided into four categories and "Rank them every Friday," Cramer said. "Wait until you have a free moment to catch your breath." It doesn't pay to try to rank stocks in the heat of the trading day.

• The first stocks are "ones you're trying to back the truck up on. These are the stocks you plan on buying, period. They're your serious conviction names."
• Second are the ones that are buys, but only if they come lower.
• Third are stocks "you own and would sell, but only if they rally 5 to 7 percent."
• The fourth set of stocks is made up of "stocks you own and want to sell right now," Cramer said.
• During a bad day, investors should shift their capital to stocks on the first and second lists. The money to buy those stocks will come from selling the stocks on the third and fourth lists, Cramer said. When the market gets hit hard, investors should throw out their worst stocks and "circle the wagons" to buy the best stocks.

3) Where to look for opportunities

Stocks that have pulled back from their highs.

The first place to look for opportunities, according to Cramer, is in stocks that have pulled back from their highs. Stocks that are hitting new highs tend to be more expensive, but when they get knocked off the new high list, they become more attractive.
Of course, some stocks coming off their highs will be going lower for good reasons, so it's important to choose wisely. "You'll have to use your discretion for each individual stock," Cramer said.
The rewards of picking correctly, though, are great, as stocks that are off their highs in a correction "recover hardest and fastest from the carnage unless again they are the reason for the carnage," Cramer said. Investors should have at least one stock that's off its high in their selloff playbook, so when the decline comes they can take advantage of it.

Dividend that becomes a whole lot more attractive as share price decreases

The second kind of stock to shop for during a correction is one with a dividend that becomes a whole lot more attractive as share price decreases, Cramer said. "A market correction will give you higher yields," he added.
"I know dividend investing isn't sexy," Cramer said, but "no one ever woke up unhappy" the morning after buying a stock that made them money. "You want stocks that are practically guaranteed to put money in your pocket."
Again, be careful, Cramer urged. A good rule of thumb is to look at a company's earnings. If the expected earnings are at least twice the size of the dividend, the stock is a safe bet.

Two Kinds of Selloffs

Cramer said that a selloff is "a real sustained period of negative action." A correction can be caused by by inflation or a recession, and the fear of either can spur a decline.
Cramer urged viewers: "When the market takes a 10% hit in under a month, don't get clever." No one can outsmart a down market. "Follow that darn herd," he said, at least for the duration of the negativity. "You're better off being attuned to the mood of the market than being right."
"When the Street thinks inflation is a problem, certain stocks go up. Most stocks go down. When the Street thinks recession is a problem, certain stocks go up. Most stocks go down," Cramer said. It doesn't matter whether the Street's view is correct. Investors shouldn't fight the sentiment.

1) Inflation-fueled selloffs
During inflation-fueled selloffs, investors should buy gold or mineral stocks, which are anti-inflation plays. These stocks should preserve their value or go higher, Cramer said.

2) Slowdown selloffs
During slowdowns, "raid the supermarket aisles and the medicine chests." Soft goods and diagnostics are good bets for a recession, Cramer said.
"It's important that you not confuse these two things," Cramer emphasized. Buying the wrong stock during a selloff can be very painful.

Sector Outlook: Infrastructure

Collapsing bridges, pipeline explosions, rolling blackouts. You don't have to look far to appreciate the need for colossal investment in infrastructure projects throughout the U.S. In China and India, annual economic growth of 9% to 11% has been driving the same need for construction, while Europe has been privatizing public roads and water treatment plants for the past 15 years. For investors, opportunities include everything from cement manufacturers to owners of airports and parking lots.
The trick now, with the sector hardly undiscovered, is to ferret out stocks that are reasonably priced based on growth prospects. Given the long legs of the infrastructure boom and the growing need for projects, there should be room to run for the stocks and the funds that invest in them. While most people think of infrastructure as asphalt and steel, opportunities stretch all the way to the tech sector.
A relatively cheap way to own some of the top global construction and engineering stocks is through the iShares S&P Global Industrials Sector Index Fund (EXI). Among its biggest holdings: General Electric (GE), Siemens (SI), and United Technologies (UTX). The fund, which tracks the S&P Global Industrials Index, was up 14.8% for the year on Dec. 14, says Morningstar (MORN). James Dunigan, chief investment officer at PNC Wealth Management (PNC), thinks "there's still room for meaningful outperformance over the [Standard & Poor's 500-stock index]" in the months to come. He expects a high-single-digit to low-double-digit return in 2008.
A more concentrated play comes from one of the stocks in the iShares fund, United Technologies. The conglomerate, which makes heating, ventilation, air conditioning equipment, elevators, and security systems, is a good way to buy into the building boom in Asia. While rivals will be busy integrating acquisitions over the next few years, the company already has an extensive array of products and services in key markets. A report from independent research firm Sterne, Agee & Leach estimates that its operating margins, now 13% to 14%, could approach 20% by early in the next decade. The stock trades at 77, and Sterne analyst Nicholas Heymann thinks it can go to 95.
BORDER CROSSINGS
Other opportunities emerge out of the energy sector. With oil in the $90 to $100 range, projects that seemed too costly in the past, such as getting oil out of the Canadian tar sands, make more sense. One company in the thick of it is Jacobs Engineering Group (JEC), which provides engineering and construction services. Jacobs is getting lots of work from those looking for oil in remote areas such as the tar sands.
The company is also getting better contract terms by pricing its services competitively, so it doesn't put too much pressure on clients' margins, a recent Bear Stearns (BSC) report noted. Major chemical makers, as well as the U.S. government, keep hiring Jacobs for new projects. At 95, the stock has a lofty p-e ratio of 32, but S&P analyst Stewart Scharf says the company deserves to trade at a premium to its peers' p-e of 25. His reasoning: promising growth prospects and a low-risk business model based largely on cost-reimbursement contracts.
A less visible side of the boom is found in tech. Emerson Electric (EMR) has led the pack in providing wireless controls for refining, pharma, food, and other industries that allow plant operators to better monitor and control production. The company is expanding into emerging markets and setting up manufacturing sites in low-cost countries. Last year, 23% of sales came from emerging markets, where growth is expected to average at least 12% to 14% between 2007 and 2009. Emerson trades near a 52-week high, but its p-e is closer to the low end of its 10-year average.
While many infrastructure companies are near their highs, Cemex (CX), the Mexican building-materials company, at 26.35, is near a 52-week low. It's been hit by worries about U.S. homebuilders, who are big customers. But Citi Investment Research analyst Stephen Trent says a recent acquisition, Rinker Group, expands Cemex's product line, which should enable it to smooth out its earnings stream.

Weak Dollar Play

From BusinessWeek Magazine:

http://www.businessweek.com/magazine/content/07_53/b4065058264133.htm?chan=magazine+channel_investment+outlook+2008

A weak greenback can fan inflation by raising the cost of the necessities
of daily life. It also can curb your pleasures by making an overseas vacation
ridiculously expensive. But as an investor, you can even the score by buying the
stocks of U.S. exporters and multinationals. The sagging dollar makes those
companies' products cheaper to foreign buyers paying in their appreciated
currencies, and it shows up in companies' profits.
The dollar has declined
sharply in the past five years—29% against the euro, 20% against a basket of
trade-weighted currencies. Will it continue to weaken in the coming year? More
important, is the benefit from the enfeebled dollar already baked into the stock
prices of exporters and multinationals? That's anybody's guess. But investing in
the stocks of exporters and multinationals is still a smart play, given the
weakness in housing and anything connected with it in the domestic economy.
"Even if the dollar weren't falling," says Ian Shepherdson, chief U.S. economist
at High Frequency Economics, an economic research firm in Valhalla, N.Y., "I
would be looking for companies with an international focus—and that's just to
get away from the consumer slowdown."
Not all U.S. companies with a global
focus benefit from the weak dollar. Some hedge currencies to avoid the gyrations
of the foreign exchange market. Others manufacture many of their products
abroad, so their costs are in euros or sterling or renminbi.
Investors who
want to exploit the weak dollar should check out mutual funds that aim to do
just that. Fidelity Export & Multinational Fund (FEXPX)has a year-to-date return through Dec. 14 of 13.5%, vs. a
3.5% return by the Standard & Poor's 500-stock index. And those holding the
fund for the past five years have enjoyed an even better return: a 15.3% average
annually, vs. 11.6% for the S&P 500.
Victor Thay, who has managed the
Fidelity fund since October, 2005, emphasizes that his investments are not based
on currency forecasts. Instead, he takes a bottoms-up view of exporters and
multinationals, focusing on operating cash flow and reinvestment rates. Thay
seeks companies where earnings per share or free-cash flow can double over a
seven-year period of time.
Fidelity's Export & Multinational Fund is
weighted heavily toward technology stocks, followed by financials and energy. "With a lot of technology companies, nearly a majority if
not the majority of their revenues are coming from overseas," says Thay. Indeed,
one measure that stands out in the fund's portfolio is the high proportion of
company revenues coming from non-U.S. sources. Computer and printer giant
Hewlett-Packard (HPQ), one of the
fund's top holdings, earns roughly 65% of its sales outside the U.S. For
Monsanto (MON), the
agricultural and chemical giant, the figure is 43.4%.
GAINS IN HEALTH
CARE
Big-cap technology giants aren't the only companies benefiting from a
weaker dollar. NCR (NCR), a midsize technology services company
in Dayton, saw its revenues rise 12% in the third quarter. One-fourth of that
gain came from a favorable currency tailwind. NCR is a leader in automatic
teller machines. That segment of its business jumped 17% year-over-year because
of strong demand in the Asia-Pacific market as well as in Europe, the Middle
East, and Africa.
Health-care companies, too, get
a boost from the weaker dollar and strong overseas demand. International
revenues at $6.4 billion Becton Dickinson (BDX), a core holding of Fidelity Export & Multinational, came
to 52.3% in 2007. That was an increase of 11% from a year earlier, reflecting a
5% favorable impact from translating revenues in strong foreign currencies into
weaker dollars. For Allergan ), a pharmaceutical maker that does a third of its
business overseas, foreign currency added 2.7% to a 23.6% third-quarter sales
jump. Another company getting a healthy share of sales overseas is Sigma-Aldrich
(SIAL), which sells supplies to medical researchers in 165
countries, says Richard Moroney, who edits the Dow Theory Forecasts newsletter.
The impact of the falling dollar has been greatest for midsize U.S.
manufacturers, notes Moroney. Two companies he recommends for their ability to
tap into growing markets abroad are Ametek (AME) and Manitowoc (MTW). Ametek, a Paoli (Pa.) maker of electric motors and
electrical instruments, conducts 48% of its business outside the U.S. "Ametek is
benefiting from growth in the aerospace and power sectors," says Moroney.
Manitowoc, which manufactures cranes and other construction equipment, is a play
on the infrastructure boom continuing in emerging markets such as China and
India. The Manitowoc (Wis.)-based company raised its earnings forecast on Dec.
12, saying sales at its crane division are expected to rise 20% in 2008.
While the domestic car and truck market has been a drag on many U.S. auto
parts manufacturers, Tenneco (TEN) may be able to weather the slowdown better than most. Based
in Lake Forest, Ill, the $5.8 billion maker of emissions control devices makes
more than 50% of its revenues overseas. Although Tenneco shares are down about
30% from their high of 37.73 in August, due to jitters over the economy, the
stock was upgraded to a buy in November by Goldman Sachs analyst Patrick
Achambault with a price target of 36. Even U.S. apparel makers are seeing
advantages in the falling dollar: Timberland (TBL), the outdoor clothing maker, does about 40% of its business
overseas. Foreign exchange rates added 2.4% in revenues in the third quarter.
For Timberland, a company in the midst of cost-cutting and restructuring, those
extra dollars provide a layer of comfort.
Manufacturers aren't alone in
benefiting from the weak dollar. Some service companies are also finding an
advantage. New York-based advertising agency Interpublic Group (IPG) took in $1.56 billion in revenues in the past quarter, up 7%
from a year ago; a positive foreign currency translation added 3% to those
revenues. International ad sales for the third quarter and the first nine months
of 2007 accounted for 42.1% and 43.2%, respectively, of total sales. Corporate
Executive Board (CBE), which provides best-practices research to 3,700 corporate
clients, already derives 27% of its revenues internationally and plans to focus
its efforts on midsize European companies. Morningstar (MORN) analyst Brett Horn recently bumped up Corporate Executive
Board's rating to five stars, Morningstar's highest.

A falling dollar can't make a winner out of a weak company that does a lot of business overseas. It can, however, make a strong company even stronger.

Sector Outlook: Technology

Tech giants with substantial business outside the U.S. should enjoy a boost in demand this year

It all started on Nov. 7 with John Chambers. While announcing quarterly results, the Cisco Systems (CSCO) CEO told investors the company's business of selling networking equipment to big U.S. companies would be "lumpy" in coming months. Shares of Cisco fell 16% over the next several days, taking a major bite out of the 18% gain it had racked up for the year. The decline was contagious, affecting even stars such as Google (GOOG) and Apple (AAPL). The tech-heavy Nasdaq composite index fell 5.9% in the three trading days following Cisco's announcement.
The good news: Following this latest beating, analysts say the sector is attractively valued. The subdued earnings expectations of Cisco, Qualcomm, Texas Instruments, and others means there's room for pleasant surprises, says Keith Wirtz, president and chief investment officer of Fifth Third Asset Management. "Things may start out mixed, but estimates could rise up again, lifting stocks in the first half."
Analysts are betting healthy fundamentals will make the sector's blue chips a relatively safe haven from the credit and housing crises roiling the financial markets. Worldwide, the tech outlook appears upbeat: Strong demand for computers, software, networking equipment, and semiconductors is expected to continue and even accelerate, especially outside the U.S., in 2008. On Dec. 4, a Merrill Lynch (MER) research report identified tech as one sector likely to be a strong performer in 2008.
A lot could go wrong with the optimistic picture. Most tech companies do significant chunks of business in the U.S., where the economy is slowing and, some believe, could descend into recession. The deeper any recession, the more corporate customers in areas including financial services and autos could cut back tech spending. On Dec. 6 research firm IDC (IDC) projected U.S. companies' tech spending will grow by 3% to 4% in 2008, down from an earlier projection of 5.5%. In 2007, U.S. tech spending rose at a 6.6% rate, says IDC.
UNDERVALUED MEGA-CAPS
Indeed, investors who have been selling off tech are probably spooked by the macroeconomic news. But they may be overlooking the strong points of these companies.
Large-cap tech stocks as a group have higher growth rates, better margins, and healthier returns on invested capital than the Standard & Poor's 500-stock index, says Tony Ursillo, tech analyst at Loomis Sayles (LSBRX), which owns big slugs of Cisco, Microsoft (MSFT), Intel (INTC), and other tech giants in its funds. Ursillo considers the big tech stocks to be undervalued given that they're trading at a price-earnings ratio that is a 10% to 15% premium to the S&P 500, based on 2008 earnings estimates. He figures the premium should be closer to 30%.
Investors should also look for companies that do a substantial chunk of business in fast-developing emerging markets, where spending on technology is expected to grow at double-digit rates. Those markets include not only the so-called BRIC countries of Brazil, Russia, India, and China, but also smaller nations in the former Soviet Union and Eastern Europe.
Which companies fit the bill? Ursillo and others point to Cisco, the very outfit that set off chills in November. Cisco's sales in emerging markets are expected to jump from $2.5 billion in 2007 to $10 billion in 2010, or about 20% of Cisco's total. Overseas, the company is replicating the dominant position it holds here at home. "Despite its cautious outlook, it's balanced with international growth," says Kenneth A. Smith, manager of the Munder Technology Fund, where Cisco is a top holding. "As the Internet grows [overseas]," he says, "they'll grow, too."

PITCHING WINDOWS AT BRICS
Analysts also say IBM (IBM) and Microsoft will continue their overseas momentum. At IBM, revenue in the first three quarters of 2007 grew 25% in the four BRIC countries combined, far faster than the single-digit growth rate of its businesses in the U.S. In India, the increase was a hefty 39%.
Microsoft, meanwhile, is aggressively targeting BRIC countries with low-cost versions of Windows, and sales should benefit as more countries, especially China, begin to better enforce copyright law, says Smith. In its most recent fiscal year, Microsoft rang up about 39% of its $51.1 billion in revenue outside the U.S., up from 36% the prior year.
Even in developed nations, sales will get a boost, thanks in part to the weak dollar. More important, though, are the fundamentals: Developed markets are seeing rising demand for certain kinds of hardware, particularly laptop computers, sales of which are expected to rise 25.6% next year. That's great news for PC makers since laptops on average sell for more than desktop computers and are replaced more frequently. Analysts say Hewlett-Packard (HPQ) is prepared to ride the laptop boom, thanks in large part to its well-established retail and distribution network around the world. In the most recent fiscal year, HP saw revenue from laptops jump by 47%, compared with an 8% rise in desktop sales.
With rising sales of all kinds of tech products, from personal computers to servers to new mobile devices and video gadgets, some analysts are betting on companies that make the innards for those devices. Makers of semiconductors, including Maxim Integrated Products (MXIM) and chip king Intel, are expected to see a jump in demand. In 2008, Intel plans to launch new chips for mobile devices and home-video products.
Those devices, of course, now have people churning out massive quantities of data, video, and music. The need for more storage has created yet another demand, says Scott Kessler, an analyst at Standard & Poor's (like BusinessWeek, a unit of The McGraw-Hill Companies (MHP)). Two companies aiming to supply it are Seagate Technology (STX) and Western Digital (WDC).
From good old computers and chips to newfangled gadgets, as the world goes digital, there are lots of ways for investors to get in on the action.

Sector Outlook: Energy

Regardless of the source, energy is likely to become more expensive. That should make energy stocks a good bet over the next few years. Since the world will remain dependent on oil and gas for the next couple of decades at least, shares in companies that extract those substances from the earth or refine and market them will remain the big plays.
The only caveat is these stocks already had a good run in 2007. For instance, the CBOE.OIX index of 11 oil companies is up 32.1% on the year, vs. just 4.9% for the Standard & Poor's (MHP) 500-stock index. Fadel Gheit, an analyst at Oppenheimer & Co. in New York, says investors jumped on any stocks related to energy in 2007.

SMALLER IS BETTER
Already high prices could give energy stocks less room to run in 2008. Gheit thinks that if energy prices continue to rise, smaller companies are a better bet than the heavyweights such as ExxonMobil (XOM) and Chevron (CVX). Among the independents, he recommends Noble Energy (NBL), which has doubled production since 2000, and Apache (APA), which specializes in squeezing oil from older fields. Eitan Bernstein, an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Va., thinks two stocks worth considering are Occidental Petroleum (OXY) and Valero Energy (VLO). Occidental, a medium-size company, has reclaimed its old concessions in Libya, one of the world's most promising oil countries. Valero, the largest U.S. refiner, is selling off less profitable properties after an acquisition binge and is buying back stock.
A special case, Gheit says, is BP (BP), which has been battered by a spate of spills and accidents. Gheit estimates BP has lost $5 billion in the past 30 months because of refinery outages and delayed projects. Bringing two damaged refineries back up to capacity and starting up two new fields in the Gulf of Mexico, Gheit figures, will add up to $3 billion to the bottom line by 2009. He thinks the earnings boost could be 15% on a per share basis.
Malcolm Polley, president and chief investment officer of Pittsburgh-based Stewart Capital Advisors, which manages $1 billion, says while the majors are usually safe bets, he prefers trying to pick home run candidates. His choices include oil-field services companies such as Halliburton (HAL) and Schlumberger (SLB), which are profiting from all the drilling and exploration. Another good prospect is Transocean (RIG), the largest offshore driller.
Investors also would be smart to figure out a way to buy into the fast-growing business of liquefied natural gas, formed by supercooling natural gas so it shrinks and can be transported on ships. The volatile stuff is being traded like oil, and worldwide demand is huge. But the only major LNG-producing country accessible to equity investors is Australia. Bernard J. Picchi, an analyst at Wall Street Access in New York, recommends Woodside Petroleum (WOPEY). It's well-entrenched in the growing Australian gas fields, and may be subject to a takeover offer by Royal Dutch Shell (RDSa), which owns 34%.
Oil and gas alternatives have a bright future, but it isn't easy to figure out which energy sources or companies will prove the big winners. Adventurous investors could look at VeraSun Energy (VSE), a Brookings (S.D.) ethanol producer, which had net profits of $22.6 million on revenues of $535 million for the nine months ending Sept. 30. Pavel Molchanov of Raymond James Financial (RJF) in St. Petersburg, Fla., says VeraSun is the industry leader but warns: "Ethanol is a challenging industry because of the oversupply in the U.S." Molchanov also favors SunPower (SPWR), a San Jose producer of solar panels and cells, which is majority-owned by Silicon Valley icon Cypress Semiconductor (CY). But it's too early to know whether one of these young companies is tomorrow's ExxonMobil.

From Businessweek magazine:
http://www.businessweek.com/magazine/content/07_53/b4065054251425.htm?chan=magazine+channel_investment+outlook+2008

An Inconvenient Truth About Oil

If you're an oil sheikh, you will love what Paul Horsnell has to say. If
you're a consumer, you won't. Horsnell, head of commodities research at Barclays
Capital in London, has been an oil-price bull for years, and he doesn't see any
reason to change. He thinks we will probably be stuck with today's high price
levels next year and that oil prices will spend some time trading above the
yet-to-be-pierced $100 per barrel. He is confident that 2008 will be the seventh
straight year of price increases. The average price for 2007 will be about $72 a
barrel.
A rumpled former Oxford economics lecturer, Horsnell, 46, spent 11
years as assistant director of the Oxford Institute for Energy Studies, which
has close ties to such OPEC countries as Kuwait, Saudi Arabia, and Venezuela. He
joined JPMorgan (JPM) in 2001, moving to Barclays Capital two years later. He
studies world supply and demand statistics, trying to figure out how much new
oil will be coming from Kazakhstan or how rapidly China's thirst is growing.
While the rate of increase in world demand for oil has dropped off since the
huge 4% surge in 2004, demand continues to grow because of rapidly increasing
consumption by China and the Middle East producers themselves.
At the same time, new supplies have been a disappointment because of slimmer exploration
pickings and lack of access to new areas. All you need to do is look at the
difficulty ExxonMobil (xom), BP (BP), and Royal Dutch Shell (RDSA) are having in increasing their oil production. Horsnell
thinks 2008 may be the year when there is no increase in supply at all from
countries outside of OPEC, leaving the world even more at the cartel's mercy. It
used to be conventional wisdom that higher prices would crush demand and boost
supply, but that hasn't proved to be the case.
The new dynamics, he argues,
are better seen in prices for oil to be delivered in five to seven years than on
the volatile nearest futures contract, which grabs headlines. In 2007, near-term
prices gyrated all the way between about $50 per barrel and nearly $100 per
barrel. But since 2003, the long end has been moving steadily upward, to nearly
$90 per barrel now for oil to be delivered in seven years. Horsnell believes
that such long-range prices represent "the market's view of the long run,
sustainable price."
The oil analyst doesn't expect the fundamentals that are
driving up prices to change anytime soon. No massive new sources of energy are
likely to come on stream. Other options such as Canadian tar sands are
environmentally ruinous, or in the case of biofuels produced from corn, push up
food prices. Horsnell doesn't see any relief.

Source: http://www.businessweek.com/magazine/content/07_53/b4065055254967.htm