SIVY ON STOCKS from money.com
June 4, 2001

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Building boom

Prospects for a strong economy next year are boosting the share prices of
companies like Caterpillar and Fluor.

By Michael Sivy

The stock market has been listless since mid-May, marked by low trading
volume and weak share prices. But although the financial media seem to be
focusing almost entirely on daily earnings warnings and weak trading volume
trends, the accumulating evidence points to an excellent 2002. Most
Fedwatchers think that chairman Alan Greenspan will cut interest rates at
least one more time this summer -- probably at the June 26-27 meeting.
Since rate cuts need six to nine months to take effect and the first cut
occurred in January, the economy should be picking up by October at the
latest -- and should continue to gather momentum through the early part of
next year.

The consensus forecast for 2002 is that the economy will grow more than 3
percent, that unemployment will hold steady below 5 percent, and that oil
prices will come down slightly. That, in turn, should lead to a small
decline in inflation. Accelerating growth combined with falling inflation
is the magic formula for a rising stock market. And though neither trend
figures to be strong, they both are definitely going in the right
direction. Not surprisingly, such an economy is great news for cyclicals,
such as construction-related businesses.

One stock I like is Caterpillar [CAT], the world's largest maker of
earthmoving equipment, especially big-ticket machines that can weigh more
than 50 tons and sell for $500,000. I first recommended the shares in
August at $39, or about 11 times this year's estimated earnings. Since
then, the shares have appreciated 43 percent to $55.80. Despite that run,
shares trade at just 16.4 times next year's estimated results, and are
still 10 percent below their all-time high, set in 1999.

One reason the stock's price/earnings ratio remains moderate is that
profits are expected to rise more than 30 percent next year, as the economy
rebounds. Such growth isn't sustainable, but longer term, earnings should
be able to rise at a compound annual rate of 11 percent. Include the 2.4
percent yield, and the stock's total return potential still looks quite
attractive.

A slightly riskier, but potentially lucrative choice is Fluor [FLR], a
leading construction and engineering firm that is just coming out of a
major restructuring. Fluor manages enormous projects, such as building oil
refineries and electricity-generating plants. Given U.S. energy needs over
the next five years, as well as likely demand for other big construction
projects as the economy rebounds, Fluor should be set to enjoy good times.

The stock is up a little over 12 percent since I recommend it in April. At
a current $57.40 a share, the stock trades at 23.4 times next year's
estimated earnings. Profits are expected to rise more than 23 percent next
year, and earnings could rise at a 12.5 percent compound rate over the next
five years. Moreover, once a coherent U.S. energy policy is in place --
presumably before the end of the year -- investor attention will likely
shift even more to a company that boosts the nation's capacity to keep
gasoline and electrons flowing.

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AOL users go to Keyword: MarketTalk
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