(MONEY Magazine) – An addictive stock

Investors these days crave nicotine nearly as much as smokers do. Shares in Philip Morris (MO) are certainly smokin'. Since February 2000 the stock has blazed from $19 to $45. Before this 137% run-up, the peddler of Marlboro cigarettes, Miller beer and Kraft foods traded almost as if it were going out of business. A year ago, it had an anemic P/E of 6, not to mention a dividend yield of 10%.

The threat of anti-tobacco lawsuits still looms as a potential time bomb. About 45 cases against tobacco firms are scheduled for 2001. But even if the plaintiffs win, it's likely to take many years for them to receive a dime. In the meantime, Philip Morris can keep hauling in fat profits--a fact that tech-weary investors have come to value.

Even after its recent surge, the stock trades at only 11 times this year's expected earnings--56% cheaper than the average stock in the S&P 500. And the company still has a plump dividend yield of 4.7%. Meanwhile, earnings are expected to grow an average of 13% annually for the next five years. Donald Yacktman, who has 11% of the Yacktman fund's assets riding on the stock, argues that there's still more upside: "Philip Morris was in the sub-basement, and now it's probably at ground level. But it's a long way from being in the sky."

--ADRIENNE CARTER

No flash in the pan

A year ago, at the height of the tech-stock craze, we recommended a hot little company called Sandisk (SNDK)--then a favorite of Jeff Wrona, manager of PBHG Technology & Communications fund. We cautioned that it traded at an "astronomical 181 times expected earnings," but we failed to heed our own warning. The stock has since crashed from a high of $170 last March to a recent price of $32.

Sandisk is in the fast-growing niche of selling flash memory cards, which store data inside popular products such as cell phones, digital cameras, camcorders and MP3 players--even when those devices are turned off. The company's memory cards store users' preferences, just as a hard drive stores data on a PC.

So what went wrong? Investors fell out of love with overheated tech stocks. And, with the economy slowing, Sandisk has warned that sales will disappoint in the next few months. Still, the company's long-term prospects remain strong. Gary Craven of Evergreen Small Company Growth fund expects Sandisk's market to balloon from $718 million in 1999 to $5 billion in 2004. And the stock--now trading at about 26 times expected earnings for 2001--looks way more reasonable than when we last picked it.

--ALEC APPELBAUM

Sale at Nordstrom

Investors slashed shares of retailers last year as consumer spending slowed and fears of a recession intensified. The S&P retail index dived 30% between April and October 2000. Since then, however, investors have begun to revisit the sector, rummaging for bargains. Federated Department Stores has jumped 64% since October, and May Department Stores has gained 86%.

Despite these recent markups, at least one retail stock remains on sale: upscale department store Nordstrom (JWN). Even after rising 33% since October, the stock is still trading at around $19--about 44% below last year's peak. The company has been beset with problems, including increased competition and a drop in same-store sales. Last year the company's earnings plunged a devastating 34%.

Mark Picard, an analyst at Lazard Freres, worries about Nordstrom's ability to sustain its historic growth rate. A new management team, led by the Nordstrom family, has decided to scale back the company's ambitious plans to open new stores--a move that Picard fears might crimp future sales.

David Dreman of Dreman Value Management disagrees. Dreman, who says he's "always loved Nordstrom," likes the new management team and approves of the decision to scale back on opening new stores. Nordstrom has also been revamping its merchandise strategies in key areas, says Dreman, including women's fashion and shoes.

Wall Street expects the company's profits to grow 16% this year. Yet the stock trades at a modest 16 times estimated earnings for 2001--well below the department store average of 25. It's not dirt cheap, says Dreman, but "it's still a good value."

--A.C.

Gabelli's latest bet

Mario Gabelli of Gabelli Asset Management has a gift for spotting plum take over targets. A few months ago, when Bestfoods was trading at $50, he told us it was ripe for being bought out. Within days, Unilever bid to acquire Bestfoods for $73 a share. Likewise, Gabelli invested in Honeywell International last summer right before GE announced plans to buy it.

Now, says Gabelli, he's scouring the media sector "more passionately" than ever to identify small firms that might be taken over. Two of his favorite candidates are newspaper publishers Pulitzer (PTZ) and EW Scripps (SSP). Pulitzer owns desirable newspaper properties in St. Louis and Arizona that Gabelli expects to grow more valuable if the government repeals a rule preventing companies from owning TV stations and papers in the same market. As for Scripps, Gabelli likes its fast-growing "category television" business, which includes Home and Garden TV and the Food Network. Both stocks are fairly cheap, despite 30% moves since last fall. Pulitzer trades at 11 times 2001 operating earnings, and Scripps at 12 times.

Gabelli expects to see a flurry of media mergers, driven in part by a new accounting rule. The Financial Accounting Standards Board has proposed to alter the way U.S. companies write off the "goodwill" of firms they acquire--a change that would lower the cost of acquisitions. Putting it more bluntly, says Gabelli, "Here is a place to make a lot of money." --LISA GIBBS

Crazy for soybeans

Mad cow disease is wreaking havoc on European farms, but, perversely, it's been a boon for Archer Daniels Midland (ADM). Scientists say the disease is spread by giving cows food that contains animal byproducts. One solution: Feed them soy as an alternative source of protein. ADM, the king of soybean processors, is seeing demand soar.

Since September, Archer's stock has jumped 63%, boosted also by higher prices for its other products, which include ethanol (used in gasoline) and corn syrup (used in soft drinks). Scott Schermerhorn, head of the value investing team at Stein Roe--which owns 6.5 million shares--expects ADM to average earnings growth of about 15% annually over the next few years. Meanwhile, the stock trades at an appetizing 40% discount to last year's sales--hardly crazy.

--ILANA POLYAK

Internet has-beens?

Internet analysts were once the rock stars of Wall Street. Merrill Lynch's Henry Blodget became a Net-stock guru at the tender age of 32. Mary Meeker of Morgan Stanley Dean Witter was widely hailed as "Queen of the Net." And Jonathan Cohen, Blodget's predecessor at Merrill, was so desirable that online investment bank Wit SoundView lured him away with a $5 million signing bonus and $10 million in options.

So what will happen to these hotshots and their once-frenzied niche now that the mania is dead? "It's over," says Cohen, now managing director of mergers and acquisitions at Wit. "The Internet as a category is not going to survive as a sell-side research discipline. The rock stars will still be around but will focus on other disciplines--telecom, infrastructure, retailing."

Cohen's tendency to issue bleak pronouncements is nothing new. In 1998, when Blodget--then at CIBC Oppenheimer--said Amazon would hit $400 (split-adjusted), Cohen lashed back with a price target of $50, dubbing it the "single most expensive publicly traded company in the history of the U.S. equity markets." It took a while for Cohen to be vindicated. But nowadays you can pick up shares of Amazon for around $20 apiece.

--LISA CULLEN