My latest column is up at RealMoney. It is part of an ongoing series on “wallflowers” - stocks that have little or no analyst coverage from Wall Street. In this case, it is Seacor Holdings (CKH).

Over the last 12 months, Seacor has generated about $325 million in free cash flow, which equates to a very juicy free cash flow yield of nearly 17%. This wasn’t just a fluke number, either. Over the last three years, free cash flow has averaged $295 million per year.

At 1.2 times book value, Seacor is trading well below the industry average (according to Zacks Research Wizard) of 2.7 times. On the basis of its return on equity, I estimate a sustainable growth rate in the high single digits. Adding in a potential valuation expansion to the industry average, total return could range from 20% to 30% per year, with the main variable being the estimated time for Seacor’s price/book to converge to the industry average.

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

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Conventional wisdom holds that magazine cover stories are contrarian indicators - by the time a company’s success or failure reaches the cover page of a major publication the story is so well known as to be completely reflected in the stock price. Therefore, all good news is priced in and the stock can only underperform or all bad news is priced in and the stock can only outperform.

While simplistic, the magazine cover indicator now has the support of recent academic research. This research did find that cover story headlines on Business Week, Fortune and Forbes tended to indicate that the mood (bullish or bearish) of the story was about to change in the market.

As a result of this research, we have decided to develop a portfolio of stocks based on using those three magazine’s covers as a contrary indicator. We also track this portfolio on StockPickr. This week’s results:

Business Week: International Business News : Business News, Technology Industry News
3M’s Innovation Crisis
Delve into IN5, our supplement devoted to innovation. This issue’s theme: Managing the yin and yang of efficiency and creativity — a delicate balance illustrated by one of the great innovators of American business

Contrarian Take: Bullish on 3M (First bullish pick)

Fortune: The hottest investor in America

Fortune’s Shawn Tully peers deep inside the brain of Carl Icahn, who now portrays himself as a billionaire Robin Hood, hounding CEOs and enriching shareholders to the tune of $50 billion. (more)

Contrarian Take: Uncertain (no company mentioned.) Possibly bearish on Icahn’s current/pending ventures

Forbes:
Special Report: Decoding Your DNA Destiny

Super-cheap genetic scanning is set to jolt medicine, offering patients new insights–and painful choices.Contrarian Take: Uncertain. Possibly bearish on DNA testing companies such as Orchid, Life Technologies (LTI) or Lifecodes.

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 Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is:

Stock Market Beat Large Cap Watch List (Track at Marketocracy) member 3M Company (MMM) announced a large share repurchase program yesterday:

3M today announced that its Board of Directors approved a new $7 billion two-year share repurchase authorization between Feb. 12, 2007, and Feb. 28, 2009, the largest in 3M’s history.”While our first priority remains investing for growth, returning cash to our shareholders remains an integral part of our strategy,” said George W. Buckley, 3M chairman, president and CEO. “The strength of our operations and our confidence in 3M’s future continue to afford us the flexibility to do both.”

During the calendar years 2004-2006, the company returned more than $10 billion in cash to shareholders through the combination of share repurchases and cash dividends.

The press release was mum on how, exactly, the company would pay for the shares. 3M has about $2 billion in cash on hand, and generated about $4 billion in operating cash flow in each of the last two years. However, replenishing equipment and making acquisitions ate up about $2 billion each year, while dividends eat up another $1-$1.5 billion. That leaves $0.5-$1.0 billion in cash flow each year for repurchases. Combined with existing cash, the company comes up about $3.5 billion short of the $7 billion they plan to buy back over the next two years.

So where will they come up with the money? By issuing debt, of course. (They could also defeat the purpose of the buybacks by issuing new shares, but we’ll assume for now that they aren’t pulling the switcheroo.) Indeed, total debt rose by $1.5 billion in 2006 as part of their return of “more than $10 billion in cash to shareholders” over the last two years.

Now, we aren’t criticizing debt per se, particularly at the low low interest rates companies can borrow today. If the company doesn’t borrow to buy its own shares, a private equity buyer may well come along and do the same thing anyway. Furthermore, 3M’s current debt load of $3.5 billion ($1.5 billion net of cash) is hardly budget busting against $21 billion of assets at book value and a $55 billion market cap. In fact, many would likely argue that a recapitalization from debt to equity is the wisest thing to do for 3M.

But you won’t, apparently, catch management saying that.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.

Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.

Since 3M announced their earnings disappointment last week, other negative news has continued to come in. We run down the news items below. It looks like the panel glut has still not worked itself out, but it is at least going in the right direction now.

LCD upstream makers trying to lower production costs

Due to pressure from panel makers to cut prices amid falling panel prices, LCD key component and material makers are seeking methods to stay profitable by lowering costs, according to the makers.

CMO Reports June Sales

Chi Mei Optoelectronics (CMO) today reported its shipment volumes increased 9.26% sequentially in June while ASP (average selling price) continued to decline, with revenues increasing by only 0.42% sequentially.

AUO Reports June Sales

AU Optronics (AUO) today announced consolidated June 2006 monthly revenues of NT$18.206 million while its unconsolidated net sales totaled NT$18.196 million, decreasing 9.6% respectively, from the results in May. On a year-over-year comparison, June 2006 consolidated revenues increased by 14.1%, while unconsolidated net sales also rose by 14.1%.

In the second quarter, consolidated and unconsolidated revenues totaled NT$60,784 million and NT$60,767 million respectively, representing 31.4% and 32% on-year growth.

CPT temporarily reduces LCD production, to push TV panels

Chunghwa Picture Tubes (CPT) has lowered the utilization rate at its six-generation (6G) LCD plant and the plant was not running at its full capacity of 60,000 glass substrates in June, the company said.

CPT, however, may raise the monthly capacity to 90,000 units in the second half of this year, depending on the market situation, the maker indicated.

Wah Hong Industrial, a Taiwan-based LCD optical film maker, saw its sales decline for the second consecutive month in June to NT$363 million (US$11.2 million) due to a slow LCD industry, the company said.

Sumika Technology postpones LCD polarizer expansion.

Still, there are those who won’t play ball.

Syntax-Brillian on July 10 announced a strategic alliance with Group Senna, a family-owned business conglomerate in Brazil, that will accelerate expansion of Olevia LCD TVs into Brazil and Latin America. Through the alliance, the companies have formed a joint venture company in Brazil called “Olevia Senna do Brasil” that will manufacture, market and support the full line of Syntax-Brillian’s Olevia LCD TVs, starting at 20 inches and greater, customized for the Brazilian and Latin American markets, according to the company.

Samsung LCD operating profits drop on weak pricing, but company upbeat about 3Q.

Taiwan Panel Makers Optimistic Despite LPL Stumble

Despite the general market consensus being uncertain about the panel supply/demand outlook for the third quarter after LG.Philips LCD reported larger-than-expected losses in the second quarter on high inventory levels, Taiwan-based panel makers are still optimistic about the outlook for the second half of this year.

LG.Philips LCD yesterday said its net income turned from a positive 48 billion won (US$51 million) in the first quarter to a negative 322 billion won (US$339 million) in the second quarter due to the impact of weaker-than-expected panel pricing. The losses were more than analysts and industry watchers had expected and it was the maker’s worse quarter ever in terms of income.

However, Taiwan-based panel makers remain positive toward about the market outlook in the second half, as end-user demand is picking up and will become even stronger in the fourth quarter, the makers indicated.

Although we kinda-sorta promised to have fewer LCD panel posts just this morning, that was before Watch List company 3M dropped its earnings bomb. We have been asked why we don’t believe that the bad news is “priced in” and here is the answer - a high single digit percentage drop in market value for a conglomerate - not a pure play - suggests that the news is still far from being priced in.

3M Updates Second-Quarter Sales and Earnings Expectations: Financial News - Yahoo! Finance

3M (MMM) today announced that second quarter sales would be approximately $5.7 billion, an increase of between 7.5 and 8 percent versus the second quarter of 2005. Organic local currency sales growth, which excludes the impact of acquisitions, divestitures and foreign currency fluctuations, is expected to be near the low end of the company’s previous guidance of 5 to 8 percent.

This second quarter performance was impacted in large part by lower than expected sales volumes and higher than anticipated new capacity start-up costs in its optical systems division, a part of 3M’s Display and Graphics business segment. 3M develops and manufactures the world’s broadest line of proprietary optical films that enhance the brightness and viewing angle of all types of LCD displays.

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