The last week of September 2007 and the Stocks you should care about

Fellow Masters, what a month it's been, some great gains, pains, and plenty to watch for the coming months.

The economy has started to slow and up-scale restaurants have been hit hard as expected. On August 1st Ruth’s Chris Steak House (NASDAQ:RUTH) lowered their 2007 profit outlook, citing slower traffic, higher food and beverage costs and higher restaurant operating costs in the second quarter. Traders killed the stock and in the last 6 months shares are down more than 30%.

Today is yet another 52-week low for RUTH, coming in at $14.36 a share and we think it will get worse. However, for bargain hunters, it's time to start thinking about a good entry point on this stock. Their Cash position isn't so great, but they still have been making some great revenue over the past few years:
2006: $271 million, 2005: $211 million, 2004: $189 million - not bad for selling dinner.

We don't expect the stock to bounce any time soon, people aren't going to rush out to clog their arteries with expensive rib-eye's because they have money to burn. People can't afford to pay their mortgages, they aren't going to be packing the steak houses. Government spending, inflation and interest rates rise, but do not translate into higher incomes for the people. Thus, even if loan defaults are small presently, the underlying causes are much deeper and will surely play out in time to come. The US media is full of stories of how borrowers are cutting down on their food and other necessities to meet their loan repayments. High employment can, therefore, prevail along with lower incomes which is a precursor to a wider economic crisis. We've watched McCormick & Schmick's Seafood Restaurant (MSSR) and Morton's Restaurant Group, Inc. (MRT ) feel the pain and friends, it will get worse. It's not time to buy these tasty stocks, but it will be in a few months. However if these stocks keep headed down, they're could be a nice bounce, so do stayed tuned -- it may be time to act sooner than later.

Rite-Aid Corp. (NYSE:RAD) took a big hit this week and shares are now just $4. However, considering their 52-week high is only $6.74 there really isn't anything to get excited about. Chairman and CEO, Mary Sammons, participated in a post-earnings conference call this week and was quoted by Forbes as taking a cheerful view: "The good news is we've seen the margin rate improve and expect sales to do the same."Things don't look so "rad" going forward, however. The company reduced its full-year revenue guidance to a range of $24.5 billion and $25.1 billion, down from an earlier target of $25.3 billion to $26 billion. What's more, Rite Aid expects to lose between $78 million and $161 million this year, wider than the previously estimated loss of $47 million to $129 million.

The Masters are willing to bet this stock will make a nice comeback a few months down the road. People will need their drugs to stay alive, so that will help the bottom line at RAD, but not enough for the time being. Now that RAD operates 2,000 newly acquired stores it's enough to sell Lehman Brothers on their $7 price target. Don't lose faith, besides for shares that cost less than $5, it's not such a bad deal, RAD will get to that $7 in less than a year.

Fellow Masters, ZymoGenetics (NASDAQ:ZGEN) is a stock we talked about in the past, and it's been a poor performer no doubt about it. However, their drug rThrombin (Phase III completed) is in a class of it's own. The FDA approval is a way off, but the stock is trading at a good entry point and should rThrombin get the green light, it's on like Donkey Kong (click to play the game - its free and uses flash, nothing to install on your PC, it's damn cool) . Shares of ZGEN are now $12 and change.

Look for a possible pullback to the $12 area to buy more shares in anticipation of likely approval of rThrombin by 1/17/2008.

The rThrombin will clearly be the best-in-class thrombin product because of its recombinant, highly purified manufacturing process & room temp shelf life up to 2 years giving it advantages over refrigerated versions from animal or human plasma sources which are inherently less pure. What did you say? It stops bleeding really good, and no other drug is as good. The pipeline at ZGEN is looking good, especially atacicept for arthritis/lupus & interferon lambda for hepatitis. Who says bleeding is bad?

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Just consider a few stocks that may come down if the market tanks:

Apple (AAPL) shares trading at $153. I know everyone thinks they will take over the world, but come on, $153?

Amazon.com (AMZN) at $93. It's an online merchant, let's be serious. Think you could talk your parents into pouring their nest eggs into AMZN shares, hell to the No. Overstock.com (OSTK) is at $28, that's almost $27 more than I would pay for that crap company.

Online travel guys: Expedia (EXPE) at $28 and Priceline.com (PCLN) at $89 -- both won't stay at those prices once the market turns ugly.

Friends, we're not telling you to go out and short all these stocks, just take some loot off the table and sure, short a few of them. That some slams on Tech but when the market poops it's pants, people aren't going to be throwing money at technology. We know everyone buys what they really need: Booze (BUD, TAP, BF.B, STZ) and Cigarettes (MO, BTI, RAI, CG) and everything else they have to have (KFT, CL, PEP, PG).

Article written by: The StockMaster Staff
Article posted on: September 28th, 2007

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