The issue….We have observed what we believe to be the initial stages of a decline in the rate of return earned on reinvestment by corporations, along with a modest increase in interest rates. Both are difficult to predict, and both are negatives for the underpinnings of a very expensive market. If this is of significant concern to you, please call!

Autodesk is in trouble with me, because management does not protect its long-term shareholders from dilutions. Occasionally they buy unprofitable companies in exchange for our relatively cheap stock, and issue themselves gobs of stock options. This accentuates the excessive volatility of the stock. Long-term earnings growth has strong momentum, but is cyclical, based on the biannual timing of new releases of AutoCAD software. The stock has a pattern of peaking about six months after a new release comes out, and bottoming about six months before the next release comes out. Release 15 should debut in April. I expect to sell the stock several months later if the pattern holds true. Since I expect superior long-term earnings growth from this company, I will be watching for both buying and selling opportunities.

HRB will be the main beneficiary of the new $400 child tax credit, 11 new forms, and 177 changed forms for 1998. Block is also trying on their own to grow by adding home mortgages and financial planning to help pay the rent on their 1200+ stores outside of the tax season. Earnings per share are projected to nearly double in the next five years.

Coca Cola has seen a drop in earnings caused by carrying excess international capacity when many of those economies are in trouble. Currency translation also did damage. About 85% of revenues are earned outside the US. Coke is still, in my judgement, the best business on the planet. I do not know when foreign economies will recover, but I am comfortable that Coke will be in place to capture the lion’s share of business. The potential is still large for the company that tops the Fortune list of companies creating Economic Value Added. Earnings per share should double in the next five years.

Disney’s high horsepower growth engine ran out of gas last year, as movie and television production costs inflated and growth at CapCities/ABC fell with the network ratings. This gave us a rare buying opportunity in this wonderful company. People worldwide love Disneyland. People go to Disney movies just because of the name – a claim no other studio can make. The name invokes immeasurable goodwill. Disney does a lot of business on the Internet now, and I cannot think of a more powerful Internet brand. Management expects earnings growth to return to the 15-20% range in a year.

Enron has been a great performer for us. Purchased when Enron was investing heavily in electrical power to the detriment of earnings growth, the "powerful" return being reaped on the investment is driving earnings growth and stock appreciation. I project long-term earnings growth in the low to mid-teens. The stock is expensive over $60.

Gillette has also been hurt by weak foreign economies and currencies. The stock has been very strong this year, because of strong sales reports from a new product, the Mach 3 shaver. Mach 3 is selling twice as well in its introductory stage as did Sensor Excel. Rumor has it that the Mach 3 for Gillette is akin to Viagra for Pfizer. More importantly, a good analyst can project healthy growth out as much as ten years for this wonderful company. Retiring CEO Al Zeien says earnings growth in the second half of 1999 will return to the 15-20% level. With more new products on the way, I hope for earnings growth at the lower end of this range over the next five years.

Mattel was negatively affected by large reductions in inventories by retailers last year, causing a decline in earnings. Inventories are now at record low levels as a percentage of revenues, and this bodes well for business this year. Acquisitions of The Pleasant Company (americangirl.com) and The Learning Company are preparing Mattel to be an Internet retailer. And none of it is in the stock price. The stock is cheap in the mid 20’s. Earnings are projected to double from last year’s $1.20 in the next five years.

Medtronic evolved implantible medical devices as a product franchise over the past 15 years, growing enormously in the process. The growth continues, but everybody expects it now, so the stock is very expensive. If earnings double in the next five years, the p/e will drop to a mere 26. Medtronic’s technology leadership is solid. A number of acquisitions were made in the last year. I have learned from St. Jude Medical that integration of medical technology acquisitions can be very expensive. That concerns me, as does the current $80 price.

Merck is the "grand dame" of the drug business. However, management will be facing some big challenges in the next five years. After reversing restructuring effects, sales growth in 1998 was 9%, and drug growth was 3%. Patent expirations loom in the near future. These add up to slower earnings growth ahead if management does not have undisclosed new products of notable potential. This super quality stock appears expensive. It is splitting as I write.

Nike is recovering from a period of inventory bloat that coincided with general weakness and harsh competitive conditions in the sporting goods industry. Peaking at $75 two years ago, our purchases look cheap. I have never seen a $10 billion business clean up its inventories and receivables faster than Nike in the last three quarters. It’s amazing how fast a business can clean itself up when the boss owns 35% of the company. Nike is the only company in sports that sees the whole elephant – they see themselves as a sports company, not just a shoe company. I am optimistic that earnings can double over the next five years from last year’s $1.62.

Monsanto’s stock price success this year is riding on Celebrex, their new replacement for aspirin, Ibuprofen, and acetaminophen. Very early prescription trends are excellent, because this product does not cause ulcers, like the drugs it is replacing. In the prospectus for a recent offering Monsanto management said they expected a return on capital invested in recent years of thirteen times!! All I can say is that I hope they are right.

Qualcomm’s earnings are currently growing at a rate in excess of 40%. Qualcomm’s CDMA is close to acceptance as the world’s next wireless standard. The evolution of this technology franchise has added well to Qualcomm’s value, and, as we know from Medtronic, the potential can be breathtaking. Before we get too excited, though, this is technology -- standards rise and fall fast. There is likely to be important news in the next several months.

Wrigley’s volume growth in China was 40% last year, offsetting weakness in Russia. The most steadily growing company I know earns almost 29.6% on reinvested capital, versus a cost of capital of less than ten percent. That translates into very low-teens long-term earnings growth. There has been some talk of a new product for Wrigley, gum impregnated with medicine. This could reinvigorate lackluster volume growth in the US. The stock is expensive.

St. Jude Medical ended 1998 with operating margins that improved by 4.2%, a noteworthy improvement, while revenue growth grew by a disappointing 2%. St. Jude has finally integrated the numerous acquisitions that built its cardiac rhythm management business. St. Jude appears likely to make great strides late in 1999 and 2000 in catching up to Medtronic and Guidant, both of which sell at about three times St. Jude’s price/earnings ratio. Meanwhile, Medtronic and Guidant have made large acquisitions that will absorb a lot of effort to integrate. The tables are turning and St. Jude is relatively cheap.