My latest column is up at RealMoney.

According to a release from the Bureau of Labor Statistics, core producer prices increased by 0.4% in April and 3% over the last 12 months. The monthly gain was twice the rate that had been forecast, and the 12-month change was the largest gain since December 1991.

I’ll leave reading the economic tea leaves to those who are better at it. For a stock picker like me, government economic reports can do more than just indicate the state of the economy. Instead, I like to examine the industry-level data to see if there are specific industries to consider more closely as investment opportunities. As usual, this month’s PPI report did not disappoint.

Disclosure: At time of publication, William Trent has no position in the securities mentioned in this article.

The pricing strength indicated by the PPI report seems to have been validated by Silgan’s (SLGN - Annual Report) earnings report today.

“Net sales for the third quarter of 2007 were $904.8 million, an increase of $48.4 million, or 5.7 percent, as compared to $856.4 million for the same period in 2006. This increase was primarily attributable to higher average selling prices resulting from the pass through of inflation in raw material and other manufacturing costs and an improved mix of products sold in the metal food container business, the inclusion of sales from our fourth quarter 2006 and first quarter 2007 acquisitions, the impact of beneficial foreign exchange translation on international revenues and improved volumes across all businesses.”

This article was originally published at RealMoney on October 15, 2007.

Last month I showed how investors can generate investment ideas by using the Producer Price Index (PPI) report prepared monthly by the Bureau of Labor Statistics. The idea is that industries where prices are rising may contain companies where revenue will grow faster and/or margins will improve.

Of course, like any initial screen the PPI report is only a starting place. It is useful to generate ideas, but further research is needed to determine whether they are good ideas. This month, I do some of that further research.

The first industry I mentioned last month was fruit and vegetable canning. Year/year price increases for the industry have been well above average, and although they have come down a bit from a peak earlier this year the trend still appears to be upward and last month inflation ticked up to 5.5% from 5.3% in August.

Year/Year Price Increases for Fruit and Vegetable Canning Industry

Source: Bureau of Labor Statistics

As I noted last month, possible plays on this industry include packaging companies (can makers) such as Ball Corp. (BLL), Crown Holdings CCK - Annual Report) or Silgan (SLGN - Annual Report). Or you can go to the food processors such as Campbell Soup (CPB), Del Monte (DLM - Annual Report), Hain Celestial (HAIN) or H.J. Heinz (HNZ).

Let’s start with Ball. When Ball released second-quarter results, they said they would be increasing capital spending “related in part to 2008 capacity additions for Europe, where we are essentially sold out this year and next.” President and CEO R. David Hoover called the first six months of 2007 the best half-year in Ball Corporation’s 127-year history in terms of sales and earnings. The strong first half supports the initial PPI reading, and the continued strength in pricing power suggests more good news to come.

However, Crown Holdings noted in its earnings report that raw materials prices were also rising. Passing through cost increases benefits sales growth, but may not help profit margins. Crown may be more exposed than others in the industry, suggesting greater caution on the name and an eye on raw material costs if any investments are made.

Silgan also commented on raw material costs, but reports that the pass-through works on a lag. “Operating margin increased to 7.6 percent from 5.4 percent [due in part to] the lagged contractual pass through beginning in the latter part of 2006 of significant inflation in other manufacturing costs.” Silgan looks like a good bet, as the lag effect will mitigate the impact of future cost increases and also help margins even more the next time raw materials prices head south.                                                                    

Moving to the food processors, Campbell’s Soup said “Gross margin increased to 41.9 percent from 41.8 percent… primarily due to productivity gains and higher selling prices, partially offset by cost inflation.” Rising prices also contributed 2% of the 7% total sales growth for the year. With the stock not yet reflecting these results, investors may want to take a good look.

For Del Monte, however, the rising prices are hurting more than they are helping. “The Company now expects fiscal 2008 diluted EPS from continuing operations to be at the low end of its previous guidance of $0.70 to $0.74” due primarily to cost increases in excess of what it can pass through. Given the better apparent prospects from other names that passed the screen, it is hard to argue in favor of Del Monte.

No so for Hain, which reported “gross margin of 27.9% in the fourth quarter, compared to 26.5% in the prior year fourth quarter. Margin improvements achieved through productivity gains and price increases were offset by the challenges at Celestial Seasonings.” Hain has had a good year, though, suggesting that investors may have already picked up on the positive news.

Finally, Heinz increased its sales and earnings guidance, saying on the conference call that “We are seeing positive net pricing and productivity offset these cost headwinds.”

In conclusion, on further review the initial positive read from the PPI report seems to be confirmed in five out of seven cases. In a few of the cases (Ball, Silgan and Hain) the stock price has followed the pricing trends, which bode well for continued strong performance. For Campbell’s and Heinz, the stocks have been stuck in neutral and (pardon the pun) may be ready for one of Cramer’s “ketchup” plays.

Originally published at RealMoney on September 19, 2007.

Tony Crescenzi says the latest PPI report should be tossed because the benign headline reading will almost certainly be reversed in the months ahead owing to the surge in energy costs that has occurred of late. I say not so fast! If prices are rising, that means some companies out there are likely to see better profits. Before tossing out the report, I’m betting we can figure out who a few of them will be.

The Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis. The problem is figuring out how to find it on their web site. Starting at the PPI home page, I scroll down to the headline that says “Get Detailed PPI Statistics” then click on Industry Data. You can then pick out which industries you want to see (I pick ‘em all) and click “Retrieve Data.” Then I select “More Formatting Options” and click on the boxes for 12-month percent change, all years, and include graphs. Once I hit “retrieve data” again I have what I’m looking for - graphs that make it easy to tell which industries are gaining or losing their pricing power.

First up is the fruit and vegetable canning industry. At 5.3% year/year inflation, pricing is clearly better than normal. It is down from a recent peak but still looks to be generally in a rising trend.

Possible plays on this industry include can makers such as Ball Corp. (BLL), Crown Holdings CCK - Annual Report), or Silgan (SLGN - Annual Report). Or you can go to the food processors such as Campbell Soup (CPB), Del Monte (DLM - Annual Report), Hain Celestial (HAIN), or HJ Heinz (HNZ).

Looking better still are industrial valves, up 9.3% year/year against tough comparisons.

Some of the industrial valve makers include Flowserve (FLS), Crane (CR) and Curtiss Wright (CW - Annual Report).

But enough with boring “old” industries. How about tech? It is seldom that tech prices actually increase, but sometimes they decline at a slower than usual pace, which can provide a similar opportunity. That may be the case right now with computer storage devices.

Last month’s 2.9% decline from last year was the smallest price drop on record for this industry, and the ongoing consolidation may help the trend continue. Plenty of ways to play this one, including Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), Sandisk (SNDK - Annual Report), Seagate (STX - Annual Report), and Western Digital (WDC).

By contrast, semiconductors are experiencing the worst pricing on record.

That could be the signal for a contrarian play (I happen to think the worst will soon be over for semiconductors) or possibly just an excuse to avoid the group for a while.

The PPI clued me in to the opportunity in railroads a year before Buffett bought in. I hestitate to bet against him, but it looks like the industry’s price increases have ground to a halt.

If you have the guts, I’d count this as bad news for Burlington Northern (BNI), CSX Corp. (CSX), Norfolk Southern (NSC), and Union Pacific (UNP).

Finally, Wired Telecommunications saw pricing decline for years after the 1996 Telecom Act, but recent consolidation is allowing them to raise prices again.

Winners here would be CenturyTel (CTL), AT&T (T - Annual Report), Verizon (VZ - Annual Report) and Embarq (EQ).

By my count, that is 26 potential stock tips, all courtesy of the U.S. government. I’ll take that over tossing the report any day.

Disclosure: Long Semiconductor HOLDRs (SMH).

Small Cap Watch List (Track at Marketocracy) member Silgan (SLGN - Annual Report) reported second-quarter revenue of $683.6 million and earnings per share of $0.74 excluding a $0.04 restructuring charge. Analysts were expecting $0.72 on $670 million in shares. My earnings preview had called for an upside surprise, and the PPI data offered support for the thesis. So given that I was right on the positive outlook, why is the stock declining?

The answer, as is often the case, lies in the guidance for next quarter and the rest of the year:

Based on the year to date financial performance and the outlook for the remainder of 2007, the Company reconfirmed its adjusted net income per diluted share estimate for 2007 in the range of $3.15 to $3.25 per diluted share. The current full year estimate includes the negative impact on comparative earnings of reducing levels of provisional inventory which benefited results when it was built in the fourth quarter of 2006 and the first quarter of 2007.

The Company expects adjusted net income per diluted share for the third quarter of 2007 to be in the range of $1.15 to $1.25, as compared to adjusted net income per diluted share of $1.19 in the third quarter of 2006.

When you beat estimates by $0.02, analysts don’t want you to “reconfirm” guidance - they want you to raise it, and preferably by more than the $0.02 that is already in the bag. Particularly when their estimates of $3.30 were already outside the guidance range. The third quarter guidance midpoint is also a penny below the current consensus of $1.21.

I think the PPI data will continue to support the business, and that the current guidance is probably still conservative (although the street estimates may have gotten ahead of themselves.)  The stock has had a nice run over the last year, and probably needed significant earnings surprise to drive it further. Today’s breather should let the stock price get back in line with the fundamentals.

Small Cap Watch List (Track at Marketocracy) member Silgan Holdings (SLGN - Annual Report) says in their latest 10K:

We are the largest manufacturer of metal food containers in North America, with a unit volume market share for the year ended December 31, 2006 of approximately half of the market in the United States, a leading manufacturer of plastic containers in North America for a variety of markets, including the personal care, health care, household and industrial chemical and pet care markets, and a leading worldwide manufacturer of metal, composite and plastic vacuum closures for food and beverage products.

It is often nice to find a small cap company with a dominant market share in its niche. It is even nicer when that niche is doing well. Today’s PPI report shows that the recent trend of strong pricing power in the canning industry continues. In fact, the chart is rather impressive.

Not only is pricing power near the high end of the 10-year range, it is in a general rising trend. The only concern is whether that bend at the end is just a bend or whether it is the start of a new trend. Whatever the case, though, this chart bodes well for Silgan’s earnings report tomorrow.

This trend should also be good for Silgan’s competitors, which include Ball Corporation (BLL), Crown Holdings CCK - Annual Report), Rexam (REXMY) and Constar International (CNST).

The Economic Calendar is fairly active this week.

• PPI (Tuesday) - Look for my usual breakdown of the industries with pricing power
• Industrial Production (Tuesday) - Let’s see if businesses really are picking up steam
• CPI (Wednesday) - We know food costs more. What else does?
• Housing Starts (Wednesday) - Preview: They will be bad, and if not it will be bad news.
• Leading Indicators (Thursday)

The Earnings Calendar is going into overdrive this week. Some names I’ll be watching:

• Tata Consultancy Services (TCS)  - What will they say on Monday about rising wages and currencies?
• Intel (INTC - Annual Report) - (Tuesday) - Estimates seem low enough. Margins will improve ex Flash.
• Yahoo! (YHOO) - (Tuesday) - Low expectations likely justified but perhaps rewarded.
• American Standard (ASD) - (Wednesday) - They are on my Large Cap Watch List (Track at Marketocracy) and they are on the move. They’re picking up momentum and I suspect they will top estimates.
• Silgan Holdings (SLGN - Annual Report) - (Wednesday) - They are on my Small Cap Watch List (Track at Marketocracy) and have been blowing estimates out of the water. This one seems like another beater to me.
• Advanced Micro Devices (AMD - Annual Report) - (Thursday) - Hard to see how it could get any worse, but if anyone can pull it off…
• Landstar System (LSTR - Annual Report) - (Thursday) - This is one of my favorite companies and is on both the Small Cap Watch List (Track at Marketocracy) and the Mid Cap Watch List (Track at Marketocracy). They are trading a touch higher than I would like, though.
• Google (GOOG - Annual Report) - (Thursday) - Numbers are set up for them to beat them. If they don’t beat by enough, however, the stock could still suffer.
• Sandisk (SNDK - Annual Report) - (Thursday) - Who knows?
• SAP (SAP - Annual Report) - (Thursday) - Shouldn’t be much to trade on, but they might say something nasty about Oracle (ORCL - Annual Report) to make listening to their call worthwhile.
• Tempur-Pedic (TPX) - (Thursday) This one also graces both the Small Cap Watch List (Track at Marketocracy) and the Mid Cap Watch List (Track at Marketocracy). Estimates have been rising but they will probably still beat them.

Keep on your toes!

With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.

Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:

I will continue to track both lists on StockPickr.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Mid Cap Watch List (Track at Marketocracy).

As with the Small Cap Watch List (Track at Marketocracy), we were surprised at the amount of turnover in our screens. Only 7 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Part of the reason for the turnover was to reduce the overlap between the Small Cap and Mid Cap Watch List (Track at Marketocracy)s. Now there is only one-third overlapping names rather than two thirds. Furthermore, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.

So without further ado, the names on the chopping block from the previous list are:

Silgan Holdings (SLGN - Annual Report); Middleby (MIDD); Olin (OLN); Vector Group (VGR); Sanderson Farms (SAFM); Tesoro (TSO); Downey Financial (DSL); Waddell & Reed (WDR); Gamco (GBL); Apria Healthcare (AHG); Quest Diagnostics (DGX); ITT Educational Services (ESI); Equifax (EFX); Delhaize Group (DEG); Papa John’s (PZZA); Rent-a-Center (RCII); Cato Corp (CTR); Dassault Systemes (DASTY); Ingram Micro (IM); Energy East (EAS); South Jersey Industries (SJI - Annual Report); and American States Water (AWR).

The new list is:

Yes, we know it has only been two days since the Watch Lists were priced, but they were a nice two days. In fact, despite our complaints that some stocks were going up dramatically between the time we announced the watch list and the time we priced it, several names had nice earnings reports Wednesday night and got an immediate boost to their at-the-close official pricing.

The small cap watch list was up 1.31%, significantly better than the 0.50% and 0.58% posted by the Russell 2000 and S&P small cap indices over the two day period. The performance was driven by particularly strong results from Silgan (SLGN - Annual Report), Landstar (LSTR - Annual Report), Rent-a-Center (RCII) and NVR (NVR - Annual report). The worst performers were Vaalco Energy (EGY) and Apria Healthcare (AHG).

The mid-cap watch list turned in 1.58%, compared with just 0.46% for the S&P mid-cap. Due to significant overlap, the same names accounted for the gain. However, Vaalco is not in the mid-cap watch list so the second-worst performance came from Equifax (EFX).

The 0.49% return for the large cap watch list was also sufficient to beat the S&P 500’s 0.28%. Positive stocks were fairly evenly dispersed, but the performance was held back by poor returns from Freeport McMoRan (FCX - Annual Report), TJ Maxx (TJX) and Ricoh (RICOY.OB).

We’ll also continue to track the original all-cap watch list against the S&P 500 and our own portfolio. Embarrassingly, the only negative performance this week was our own portfolio.