Table of Contents

1.  Market Outlook
2.  Cemex (CX)
3.  Kinder Morgan (KMP)
4.  Additional Investing Ideas
5.  Featured Topic — Double Your Dividends

Today's Top Stock Picks

This Stock Should See Gains of +85% as World-Wide Industrialization Spreads
A rapidly industrializing world needs mountains of basic building blocks like cement, which puts Cemex (CX) at the foundation of that growth — both literally and figuratively.
Read More. . .

Kinder Morgan (KMP): A Solid Play on Increasing U.S. Natural Gas Consumption
KMP operates natural gas pipelines around the nation. With expansion projects in the works, investors should be rewarded in the coming years. Read More. . .

Market Outlook

Another week, another round of bleak economic data, and another punishing sell-off for the major averages.

One month ago, the Institute of Supply Management (ISM) revealed that the service sector of the economy contracted for the first time in five years in January; and contracted may be too mild of a description, plunged would be more accurate. The news quickly set off alarm bells on Wall Street — not surprising, considering service (non-manufacturing) companies account for about 85% of the U.S. economy.

With that preface, last Wednesday's follow-up ISM report for the month of February took on even greater meaning. And for the second straight month, the index came in short of the breakeven 50 mark, as companies involved in transportation, education and other service-oriented industries continue to report a slowdown in business activity.

The "good" news is that the actual headline figure came in a shade ahead of expectations and showed improvement over last month.

Unfortunately, there was no such ambiguity when it came to the week's second marquee economic report — Friday's non-farm payrolls. Traders had been expecting to see net job creation of 25,000 positions over the past month, and were instead confronted with a loss of more than 60,000. Worse still, after running through the numbers again, January's losses were revised to 22,000 (from an initial tally of 17,000) and December's growth of 82,000 jobs was shaved in half to just 41,000.

While those two reports captured most of the attention, there were certainly other market-moving events — like crude oil prices spiking to record highs above $105 per barrel. In the end, a mild rally early in the week fizzled out, and the major averages all finished with steep losses of around -2.5% or more.

With this past week's sell-off, the benchmark S&P 500 has now sunk about -18% below its October peak — not far from the -20% threshold that technically defines a bear market. Fortunately, even in the most challenging of markets, there are always opportunities to profit.

For example, while the broader market has lost ground in each of the past four months, pipeline operator Kinder Morgan Energy Partners (NYSE: KMP, $57.78) has actually posted a gain of +14% over the same period. And below, Market Advisor editor Paul Tracy explains why investors can expect the company to continue growing for years to come.

But first, those looking to strengthen their portfolios might want to mix in some Cemex (NYSE: CX, $25.15). The cement and concrete maker controls a dominant market share, enjoys formidable barriers to entry, and is seeing rising global demand — a solid foundation for future success.

Good Investing!

— Nathan Slaughter
Co-Editor
TopStockAnalysts Digest

Cemex (NYSE: CX, $25.15) is the world's #3 supplier of cement, ready-mix concrete, aggregates and other products. The company boasts a production capacity of 75 million cubic meters of ready-mix concrete and nearly 100 million tons of cement annually. With operations spanning 50 countries around the globe, revenues are expected to approach $25 billion this year.

Like many commodities (including coal and iron ore), cement shipping costs can be high — which often means that purchasers will do business with the closest suppliers to minimize transportation expenses. This often serves as a formidable barrier to entry, giving entrenched market leaders a distinct edge over outside competitors. And Cemex has a dominant hold in many parts of the world, including Mexico — where it commands more than 50% of the market.

Over the years, the acquisitive company has used the cash flows generated at home to expand its footprint abroad. And the fruit of those expansion efforts is clearly visible in the firm's most recent quarterly report:

While revenues were only up a modest +3% in Mexico, they jumped +6% in the U.K., +8% in Africa and the Middle East, +9% in Spain, and +20% in South/Central America and the Caribbean. And in the Asia/Australia region, the recent acquisition of Australian cement maker Rinker pushed sales up +525% for the quarter. Overall, the company took in $5.8 billion and generated nearly $700 million in free cash flow.

However, the unyielding slump in the U.S. residential housing market has forced management to tone down its outlook for 2008. The vast majority of the company's U.S. revenues are generated in just five states (including hard hit areas like Florida and Arizona), and cement volumes in those states tumbled more than -35% last year.

Fortunately, the slowing U.S. housing market (which only accounts for about one-fourth of total revenues) will be offset by strong supply/demand dynamics in other markets. Plus, interest payments tied to the Rinker financing arrangement have fallen from 6% to 4%, and the reduced payments will essentially free up an extra $300 million in cash flow this year. In the meantime, the company has been de-leveraging its balance sheet and will likely see substantial cost savings as synergies from the deal begin to unfold.

Over the long-haul, a rapidly industrializing world will need mountains of basic building blocks like cement, which puts Cemex at the foundation of that growth — both literally and figuratively. Yet, the stock is now trading at just 7.5 times next year's earnings, a
-25% discount to its historic average of ten.

And using management's internal forecast of $3 billion in annual free cash flow, modest growth of +5% per year, and a conservative 11% discount rate to reflect near-term uncertainties, my calculations imply an upside of about +85%.

The stock may be weighed down over the next few quarters given increased cement capacity and decreased consumption here in the U.S. However, the company is an attractive idea for longer-term investors looking to capitalize on robust infrastructure spending around the world.

Kinder Morgan (NYSE: KMP, $57.78) is one of the largest owners and operators of energy-related pipelines and storage facilities in the U.S. KMP operates natural gas, refined products and carbon dioxide pipelines that ship these commodities around the nation.

Competitive Advantages:  Pipeline and storage assets offer large barriers to entry for would-be competitors. Such assets require significant planning and regulatory approvals before they're built.

Even better, most pipeline and storage owners negotiate long-term contracts with key customers, guaranteeing a certain minimum revenue. These long-term contracts are essentially unbreakable, so competitors cannot compete for that business.

KMP also benefits from its huge size — it's one of the largest pipeline owners in North America. This gives it the size and access to capital to fund large pipeline projects that typically require huge up-front capital investments.

Growth Drivers:  Kinder Morgan has undertaken a series of major pipeline projects in recent years that will generate growth.

The largest of these new projects is the Rockies Express Pipeline, a $2.2 billion project that will carry natural gas from the Rocky Mountains east to the Pennsylvania/Ohio border. The first stages of that project are already complete; the pipeline should be totally finished by the end of 2009.

The Rockies Express Pipeline will be in high demand. It's estimated that natural gas production from the region will grow from 8.2 billion cubic feet per day in 2006 to more than 10.2 bcf/day by 2010. There is simply not enough pipeline capacity to handle all of that gas — thus, KMP has already had success booking capacity on this pipe.

Kinder Morgan also has a large pipeline network in the Barnett Shale area of Texas, a network it plans to expand in the coming years to handle increased production from that region.

Valuation and Outlook:  KMP is organized as a master limited partnership (MLP), meaning that it pays no corporate tax and offers a high yield for investors.

Typically, MLPs are not valued based on earnings and P/E ratios. For master limited partnerships, we calculate ratios using distributable cash flow (DCF) rather than earnings. The reason is that non-cash charges like depreciation and amortization are included in the earnings measure. These can be significant for MLPs because their assets typically throw off large non-cash depreciation charges.

Distributable cash flow is basically net income with non-cash charges added back. From this adjusted figure we subtract maintenance capital expenditures (CAPEX), which is a measure of how much money it costs annually to keep up, repair and maintain existing infrastructure. The final figure is a close approximation of how much cash an MLP actually has on hand to pay distributions to partners.

Kinder Morgan had distributable cash flows of $3.65 per share for 2007 and paid out a total of $3.48 in distributions. Over the next few years, KMP should be able to generate distributable cash flow growth of more than +10%. Meanwhile, the shares trade at roughly 17 times 2007 DCF, an attractive valuation for an MLP.

Better still, KMP offers a solid 6.4% yield backed up by steady cash flows and long-term contracts with customers. Kinder Morgan is a solid, low-risk way to play the growth in natural gas production from key U.S. reservoirs.

Entire Markets Surging

On top of eye-popping returns, when you venture off the U.S. exchanges you also find freakishly high yields. 

While U.S. shares pay less than 2%, the average stock in New Zealand yields more than 7%! And there are dozens of Kiwi blue chips throwing off 9%, 10%, 11% and more!

Check out my chart and you'll see how much more other markets yield. And I'm not even including a dozen other smaller markets that are also paying more than the U.S.