StreetAuthority Market Advisor for May 19th, 2003
Along with our regular weekly newsletters, your paid subscription to the StreetAuthority Market Advisor entitles you to several SPECIAL FEATURE ISSUES throughout the year. We publish some of these issues on pre-determined dates, and we often use them to give you a broader look at the markets as a whole. For example, in our special year-end report we not only give you an in-depth look at the year that was, but we also prepare you for the upcoming investing year by arming you with a host of valuable predictions.

In place of our regularly scheduled issues, my staff and I also sometimes publish a SPECIAL FEATURE ISSUE when we see a unique opportunity for you to profit in the months ahead, and/or when we need to better acquaint you with some of our proprietary investing techniques. By occasionally departing from our regular format, we give ourselves the freedom to explore certain topics in greater depth than we would have otherwise.

In today's SPECIAL FEATURE ISSUE we're pleased to bring you an in-depth look at an important improvement we've decided to make to our StreetAuthority Market Advisor newsletter. Although I'll give you the complete details below, the bottom line is that we're going to replace our TOP TEN LIST with a more specific, actionable portfolio that we will then profile in each of our weekly Market Advisor newsletters. My staff and I are extremely excited about this major improvement, and if the positive feedback we've already received is any indication, then we're certain that all of our subscribers will benefit from this new format. Please read on to learn more about our new "Beat The S&P" portfolio...

Table of Contents:
1. Introduction  
2. How Our "Beat The S&P" Portfolio Will Work  
3. Initial Portfolio Selections  
4. Analysis Of Each Recommendation  
5. Conclusion And A Look Ahead  

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(1.)  INTRODUCTION

Starting today, we're going to replace the "TOP TEN LIST" section of our StreetAuthority Market Advisor newsletter (you can view previous TOP TEN LISTS as article #6 in any of our archived issues) with a new section entitled "BEAT THE S&P." This new feature, which we'll include in each and every regular issue of the StreetAuthority Market Advisor, will be fairly similar to our existing TOP TEN LIST, but will incorporate several major improvements.

HOW IT WILL WORK
Starting this week, we're going to place $20K in the S&P 500 and another $20K in our brand new "Beat The S&P" portfolio. This new portfolio will include a mixture of stocks and funds that we believe have the best potential to outperform the S&P over the long haul. We will then track the value of this portfolio relative to the S&P, and in each weekly issue we'll give you a summary of our performance so you'll be able to see exactly how we stack up against this widely tracked index. Our primary goal, of course, will be to add and remove stocks and funds from our "Beat The S&P" portfolio in an effort to outperform the S&P 500.

HOW WILL THIS NEW NEWSLETTER SECTION HELP YOU?
Well, for starters, it will provide you with much more actionable information. Instead of just listing our Top Ten picks along with the date we initially added them to one of our recommended portfolios, our new "Beat The S&P" portfolio will provide you with more specific direction regarding add/remove dates and dollar amounts we're going to invest in each of our top investing ideas. (Remember: Any and all final investing decisions for your own account are entirely up to you. Please use this sample portfolio, as well as all of our other sample portfolios, only as a starting point for further research on your end.)

This new newsletter section will also make it easier for you to track our performance. We'll put our money where our mouths are and will go head-to-head against the S&P. Since the majority of professional money managers fail to beat this widely tracked index each year, this will be no easy task. However, we're looking forward to the challenge and we sincerely hope that you benefit from this new and improved section of the StreetAuthority Market Advisor. Please read on to learn more about how we're going to manage our new "Beat The S&P" portfolio.

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(2.)  HOW OUR "BEAT THE S&P" PORTFOLIO WILL WORK

As we mentioned above, we're going to start our "Beat The S&P" portfolio from scratch with $20K  this weekend. In the next two sections of today's SPECIAL FEATURE ISSUE we'll bring you an in-depth look at the specific stocks and funds we've decided to add to this new portfolio. But before we get into that analysis, we think it's important to provide you with a list of general guidelines and policies we're going to use when managing our "Beat The S&P" portfolio.

GENERAL NOTES ABOUT OUR NEW NEWSLETTER SECTION

• Similar to what we've done with our TOP TEN LIST, we do not intend to publish our "Beat The S&P" portfolio on our web site. Since it will primarily incorporate a mixture of current holdings from our other various portfolios, and since we will include a full listing of this portfolio with updated returns in each weekly newsletter issue, we see no added value to placing it on our web site along with our other sample portfolios.
• In addition to listing our actual "Beat The S&P" portfolio and providing you with descriptions of any recent changes we've made, each week we'll provide you with a short "Watch List" of stocks we're considering adding to this portfolio.
• Whenever we make a change to our portfolio mix, we will always inform you of this ahead of time in our weekly StreetAuthority Market Advisor newsletter or via a special News Flash.
• We will start this portfolio with $20K at the beginning of each year, but we will not add additional funds to it during the year. Therefore, in order to add a new security to our portfolio, we're going to need to either draw down our cash balance or to sell another one of our existing holdings.
• Since the StreetAuthority Market Advisor is a long-term-oriented publication, we don't intend to make frequent changes to our "Beat The S&P" portfolio throughout the year. This should make it easier for you to track our portfolio, and will also reduce transaction costs for those subscribers interested in emulating our performance.
• Since commission prices vary by broker, there is no way for us to provide an accurate gauge of these. We recommend that you use Interactive Brokers, which charges roughly $1 per trade for most small stock orders. Unless you trade very frequently or your portfolio size is very small, your transaction costs should not have much of a meaningful impact on your annual returns. With this in mind, we will not incorporate commissions into our profit/loss calculations.

STRATEGIES WE WILL EMPLOY IN AN EFFORT TO OUTPERFORM THE S&P 500

• We will draw most of our "Beat The S&P" picks from our other various recommended Portfolios and Specialty Lists since these already include most of our favorite stocks and funds.
• On occasion we might add picks we've identified using our proprietary SVI (StreetAuthority Value Indicator) quantitative model or using one of our weekly INSIDE THE NUMBERS scans.
• From time to time we might employ a short-term trade identified by one of our expert technical analysts -- Steven Poser or Dr. Melvin Pasternak. In certain cases we might also use options to enhance our returns.
• In an effort to show profits in both bull AND bear markets, we will occasionally include a few short sales in our "Beat The S&P" portfolio.
• Since we're going to want to keep a small sum of cash on the sidelines to invest in new opportunities as they arise throughout the year, our portfolio will almost never be fully invested in individual stocks. But instead of holding cash, which will earn zero returns, in most cases we will put our extra money in the S&P Depository Receipts (SPY). This exchange-traded fund tracks the performance of the S&P 500 and can be bought and sold in the open market just like a regular stock. By holding this unique instrument instead of cash, we will ensure that our excess funds perform in line with the S&P 500.
• On the other hand, in special instances where we feel the S&P might be due for a near-term correction, we may hold a sizable cash balance. (In extreme cases we might even decide to short SPY to profit from a declining market.)

We will add other general guidelines and strategies related to our "Beat The S&P" portfolio in the future as they arise, so please stay tuned! In the meantime, read on to learn which stocks and funds we're going to add to this portfolio today...

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SPECIAL NOTE:  If you like this analysis and you're currently a limited-time TRIAL MEMBER of the StreetAuthority Market Advisor, then you'll need to subscribe soon to ensure continued delivery of this newsletter.  The StreetAuthority Market Advisor retails for $199 per year, but if you act now you can take advantage of a special, limited-time discount offer of just $97 per year.  Please CLICK HERE to subscribe today and lock in this special savings.  We'll also send you two FREE in-depth research reports as a thank-you for your order! 

(3.)  INITIAL PORTFOLIO SELECTIONS

Below you will find the initial listing of stocks and funds we're going to include in our new "Beat The S&P" portfolio. We will begin tracking each of these holdings using Friday's closing prices (the "Add Price" listed below), but in future years we'll use prices from December 31st (or the last trading day in any given year), or from the date we add a particular security (for new additions).

Since we just established this portfolio, all of our returns will show 0% in today's issue. In future issues we'll adjust our profit/loss and percentage return data accordingly based on current market prices for each security.

And finally, because valuation levels aren't as attractive as they were a few months ago, we aren't in any rush to add a large number of stocks to our "Beat The S&P" portfolio today. For starters, we've just decided to add a select handful of stocks that we feel are well positioned to outperform the S&P in the latter half of the year. As valuation levels improve and new opportunities arise in the coming weeks and months, you can rest assured that our portfolio will grow to include a more diverse array of stocks and funds. Please be on the lookout for new additions in the future, but in the meantime, here is how our initial portfolio is going to look...

StreetAuthority's "Beat The S&P" Portfolio
Stock/Fund                 # of   Add      Crnt   Total   
(Symbol)                   Shrs   Price    Value  Return% 
Chelsea Prop (CPG)          50   $43.90   $2,195    0%
Goldman Sachs (GS)          20    76.70    1,534    0%    
PEC Solutions (PECS)       100    14.05    1,405    0%
Pfizer (PFE)                50    33.61    1,681    0%    
S&P Depos Receipts (SPY)    90    94.87    8,538    0%
Take-Two Int (TTWO)        100    24.34    2,434    0%    
$ Cash Holdings                            2,213

Total Portfolio                          $20,000    0%

S&P 500 Index Performance
Index                             Add      Crnt   Total   
                                  Price    Value  Return% 

S&P 500 Index                     944.3  $20,000    0%

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(4.)  ANALYSIS OF EACH RECOMMENDATION

Chelsea Property Group (CPG)
Chelsea Property Group is one of America's largest owners of specialty outlet malls. More specifically, the firm owns, operates, develops, markets and leases 58 factory outlet centers located in 28 states and Japan. CPG rents this vast property portfolio out to over 700 different tenants, most of which are high fashion, upscale manufacturers and retailers such as Nike, Polo and Gucci.

I like the fact that the majority of the firm's popular outlet malls are located within a 30-mile radius of major cities with populations of over 1 million and average annual household incomes of greater than $50,000. And when it comes to competitive advantages, Chelsea's manufacturer-operated outlet stores offer something unique that regular department stores and regional malls simply can't match -- high-quality, fashionable name-brand goods at deep-discount prices. On the financial front, the firm's track record is solid, its earnings are soaring (thanks to recent acquisitions, new outlet developments, expansion of existing facilities, stable occupancy rates and higher rental rates, FFO jumped +21% in 2002), and the stock pays a $2.14 annual dividend, making it one of the most attractive REITs on the market today.  Here's a look at how the stock has performed relative to the S&P 500 over the course of the last year...

Goldman Sachs (GS)
Although best known for its position as one of the world's leading investment banking firms, Goldman Sachs is also involved in a wide variety of other financial business lines, including equity, fixed-income, currency and commodities trading, asset management and securities services.

If you're bullish about the market's prospects for the remainder of the year (which I certainly am), then financial service firms like Goldman Sachs could be your ticket to above-average gains. With the conflict-of-interest investigation over and the equity market finally beginning to stabilize, things are looking much better for the investment banking industry. And with projected earnings of over $4.50 this year and $5.00 next year, Goldman's shares could easily head back into the low-$90s in the coming months. Here's a look at how the stock has performed relative to the S&P 500 over the course of the last year...

PEC Solutions (PECS)
PEC Solutions is a professional technology outsourcing firm that develops web-based and other high-tech applications primarily for federal and state government entities. For example, the firm builds information systems for criminal justice departments, delivers technology solutions to defense and intelligence agencies, and provides management consulting services to the INS (Immigration & Naturalization Service), among other things. PEC has staked a strong foothold in the booming eGovernment solutions market in recent years, allowing the firm to post tremendous revenue and earnings growth (63% and 74% per year, respectively, since 2000) in an otherwise rough domestic IT market. I like the relative earnings stability PEC enjoys thanks to the fact that its main customer -- the U.S. government -- has the deepest pockets on the planet. In addition, PEC should benefit nicely from the government's new homeland security push.

After posting weaker-than-expected fourth-quarter numbers and lowering its first-quarter financial guidance, the stock got absolutely hammered earlier this year, declining from the $30s down to a low of under $10. The firm attributed the shortfall to delays in the 2003 federal civilian agency budgets. But now that those appropriations have been finalized, the company should see an uptick in new business in the latter half of the year. And although PEC's growth is likely to slow in 2003 (revised estimates call for revenue growth of just 10-20%), the firm is still growing and its long-term outlook remains solid.

With the shares now trading at much more reasonable valuation levels, the risk/reward scenario here looks appealing. Assuming that PEC Solutions can get its growth back on track in 2004 (the outlook for government technology projects looks strong, so I think this is a reasonable assumption), the firm's shares could head back into the high-teens within the coming year. If that takes place, then the stock should have no trouble outperforming the S&P 500. Here's a look at how the stock has performed relative to the S&P over the course of the last year...

Pfizer (PFE)
Thanks in large part to quality research and a series of strategic acquisitions, this pharmaceutical giant has managed to post 24% average annual earnings growth since 1992. Pfizer should have no trouble posting double-digit growth well into the future due to the firm's stable of blockbuster drugs, promising new drug candidates, and cost savings related to its recently-completed $60 billion mega-merger with rival Pharmacia. The combined company boasted total revenues of more than $46 billion last year, and at $7 billion, its R&D (research & development) budget dwarfs that of any other major drug company. This bodes extremely well for future drug development.

In terms of existing products, Pfizer now controls 10 drugs with annual sales of over $1 billion, giving it a remarkable 11% share of the world's prescription drug market. Best of all, only one of those products is slated to lose patent protection over the next two years. More importantly, the firm's #1 seller -- cholesterol fighter Lipitor -- should see its sales increase at a roughly 20% clip this year, and further gains are likely in the years ahead as more and more consumers begin to seek treatment for high cholesterol. (And remember, Lipitor doesn't go off patent until 2010.)

Rarely do investors have a chance to invest in a clear industry leader that's trading at an actual DISCOUNT to its peers. But with Pfizer now selling at under 19X this year's projected EPS (relative to about 20 for the average drugmaker) and with the company expected to grow at a 12% clip over the next five years (versus 11% for the industry), this is one of those rare opportunities. Here's a look at how the stock has performed relative to the S&P 500 over the course of the last year...

Take-Two Interactive (TTWO)
With a market cap of just $1 billion, this up-and-coming videogame software maker isn't widely followed on Wall Street. However, ask any serious videogame player about the firm and chances are you'll be met with a burst of enthusiasm. After all, Take-Two makes one of the best-selling videogames on the market right now -- Grand Theft Auto. A crime adventure game that features violent, mature-themed content, "Grand Theft Auto 3" and its recently-released sequel, "Grand Theft Auto: Vice City" have each sold nearly 10 million copies, ranking them as two of the best-selling videogames of all time. Grand Theft Auto 3 was far and away the top seller in the videogame market 2001, and Take-Two followed up that performance by vaulting its Vice City sequel to the #1 spot last year. In addition to this winning franchise, Take-Two also makes other blockbuster hits such as "Max Payne," which has sold nearly 4 million copies, as well as the new release "Midnight Club II."

By going out on a limb and creating games that other more family-oriented publishers have been hesitant to make, Take-Two has managed to gain control of one of the hottest and fastest-growing sectors of the videogame market -- mature-themed games. Sales of such games more than doubled last year -- jumping from 9 million in 2001 to over 20 million in 2002 -- and further growth is on the horizon. Part of this is due to a demographic shift in the gaming market, as older videogame players are now accounting for a larger and larger percentage of industry sales. This older age group is clamoring for high-quality adult-oriented games, and right now Take-Two is one of the only firms delivering the goods.

This fast-growing company is on pace to become one of the most dominant players in the highly profitable videogame software market. Take-Two's revenues have soared from $365 million to $794 million since the year 2000. Meanwhile, company earnings have grown from just $6.4 million to $71.5 million over the same time period. That stellar growth record should continue in the years ahead as Take-Two introduces new hit games (its Rockstar unit alone is currently developing 10 new titles) and fresh versions of its existing blockbuster Grand Theft Auto franchise (the next version is due out in 2004) and other popular titles. In addition, next year the company will benefit from another wave of Grand Theft Auto sales when its two existing versions finally become available for sale on Microsoft's Xbox and Nintendo's GameCube (Sony's Playstation 2 has exclusive rights until then).

The market will likely catch on to this tremendous growth story in the coming months and years, and as it does, I wouldn't be surprised to see TTWO handily outperform the S&P 500. Here's a look at how the stock has performed relative to the S&P over the course of the last year...

S&P Depository Receipts (SPY)
As I mentioned above, when we aren't fully invested in common stocks, my staff and I intend to put most of our extra portfolio funds into the S&P Depository Receipts (SPY). This exchange-traded fund (ETF) tracks the performance of the S&P 500 and can be bought and sold in the open market just like a regular stock. By holding this unique instrument instead of cash, we will ensure that our excess funds perform in line with the S&P 500.  Here's a look at how good of a job this ETF has done in tracking the performance of the actual S&P 500 index over the course of the last year...

Cash Holdings
Since the S&P has been on a tear in recent months and could be due for a near-term pullback from today's levels, I've decided to keep a small portion of our funds in cash for the time being.

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(5.)  CONCLUSION AND A LOOK AHEAD

We've outlined a number of major improvements in today's issue that we will incorporate into all future issues of the StreetAuthority Market Advisor. Again, the primary goal of our new "Beat The S&P" portfolio is to provide you with more specific, actionable information that you can use as a guide when making your own investing decisions. It should also make it easier for you to gauge our performance relative to the S&P throughout the year. But remember: Any and all final investing decisions for your own account are, of course, entirely up to you. Please use this sample portfolio, as well as all of our other sample portfolios, only as a starting point for further research on your end.

We sincerely hope that you benefit from the more specific direction we're going to provide in our new "Beat The S&P" section of this newsletter. We plan to add a number of new picks to this portfolio in the weeks and months ahead, so please be on the lookout for those. As always, we will make sure to inform you of any changes ahead of time either in our weekly StreetAuthority Market Advisor newsletter or via a special email News Flash.

Looking ahead, we'd like to remind you that we will not publish an issue of the StreetAuthority Market Advisor next weekend (May 26th) in observance of the Memorial Day holiday in the U.S. We will publish our next full issue on Monday, June 2nd.

To view our publishing schedule for the remainder of the year, please click here:
http://www.StreetAuthority.com/ma/schedule.htm

Good investing!



Paul Tracy
Editor
The StreetAuthority Market Advisor
Washington, D.C.

P.S. -- If you like the analysis above and you haven't signed up for a paid subscription to the StreetAuthority Market Advisor, then you'll need to subscribe soon to ensure continued delivery of this newsletter -- as well as all of our future Special Feature Issues -- throughout the rest of the year.  The StreetAuthority Market Advisor retails for $199 per year, but if you act now you can take advantage of a special, limited-time discount offer of just $97 per year.  Please CLICK HERE to subscribe today and lock in this special savings.  We'll also send you two FREE in-depth research reports as a thank-you for your order! 

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