MOST NOTEWORTHY:

• Stanford initiated BMC Software (NYSE: BMC) with a Buy rating and $45 target. The firm highlights the company's broad product portfolio and configuration management database leadership and thinks margin expansion should continue.
  
• ThinkPanmure assumed Smart Modular (NASDAQ: SMOD) with an Accumulate rating and $5.50 target. The firm expects better DRAM pricing but expects SMOD to experience some headwinds with Hewlett-Packard (HPQ) losing share in the server market.
  
• Broadpoint expects Entropic Comm (NASDAQ: ENTR) to benefit from the adoption of applications that allow video through numerous devices, especially high definition and data content. Shares were started with a Buy rating and $6 target.

• Banc of America initiated General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC) with Buy ratings and targets of $100, $120 and $80, respectively.
  
• Intercontinental Exchange (NYSE: ICE) was initiated with a Buy rating and $150 target at UBS.
  
• Intrepid Potash (NYSE: IPI) was assumed with a Buy rating at Merrill Lynch.

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• Cardinal Health (NYSE: CAH)
• Chevron Corp (NYSE: CVX)
• Exxon Mobil (NYSE: XOM)
• General Dynamics Corp (NYSE: GD)
• Goldman Sachs Group (NYSE: GS)
• JPMorgan Chase (NYSE: JPM)
• Northrop Grumman (NYSE: NOC)
• Pfizer (NYSE: PFE)
• Raytheon Company (NYSE: RTN)

• Automatic Data Processing (NYSE: ADP)
• Adobe Systems (NASDAQ: ADBE)
• Avon Products (NYSE: AVP)
• Black and Decker (NYSE: BDK)
• Cisco Systems (NASDAQ: CSCO)
• Coca-Cola (NYSE: KO)
• Costco Wholesale (NASDAQ: COST)
• Kraft Foods'A' (NYSE: KFT)
• Suntech Power Hldgs ADS (NYSE: STP)

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Ultralife Batteries (NASDAQ: ULBI) provides a range of non-rechargeable and rechargeable batteries, charging systems and communications accessories for use in military, industrial and consumer portable electronics products. The company's non-rechargeable lithium batteries are used to power such diverse devices as radios, emergency radio beacons, search and rescue transponders, portable medical devices and smoke alarms. Its lithium polymer and lithium ion rechargeable batteries are used in such portable devices as laptop computers and cell phones. The US Department of Defense accounts for about twenty percent of Ultralife's sales. Major commercial customers include General Dynamics (NYSE: GD), General Motors (NYSE: GM) and RadioShack (NYSE: RSH).

The company pleased investors last week, when it issued upside guidance for the current quarter and year. Management sees Q2 revenues of more than $75 million ($60.43M consensus) and FY08 revenues of at least $250 million ($240.27 million consensus). The CEO said the better performance was attributable to "strong shipments to date, strong backlog in most businesses and requests from customers for accelerated deliveries against their orders."

ULBI shares popped into a bullish "pennant" consolidation pattern on the news. Prices frequently exit pennants moving in the same direction they were traveling on entry. In this case, that would be to the upside.

Brokers recommend the shares with one "strong buy," three "buys" and two "holds." Analysts see an 18% average annual growth rate, through the next five years. The ULBI Sales Growth rate (53.56% y/y), EPS Growth rate (0.00 to 0.14 y/y) and Return on Investment (11.09%) compare favorably with industry, sector and S&P 500 averages. Institutions own about 55% of the outstanding shares. Over the past 52 weeks, the stock has traded between $9.50 and $22.98. A stop-loss of $11.50 looks good here. Note that the firm is expected to report Q2 results in late July.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com. He does not hold positions in any of the stocks mentioned above.

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MAJOR PAPERS:

• Merger talks between UAL Corporation's (NASDAQ: UAUA) United Airlines and US Airways Group Inc (NYSE: LCC) have been put off for now, the Wall Street Journal reported. United is reportedly close to an alliance with Continental Airlines Inc (NYSE: CAL).
• Harris Corporation (NYSE: HRS) is for sale and the company has begun to hear from interested parties, the Wall Street Journal also reported. Harris is looking for $75 to $80 per share. Speculation about the bidders includes General Dynamics Corporation (NYSE: GD) and Northrop Grumman Corporation (NYSE: NOC).

• The Charleston Gazette reported that Chesapeake Energy Corporation (NYSE: CHK) has decided not to build its Eastern Division headquarters in Charleston, West Virginia in the wake of a West Virginia Supreme Court ruling on May 22.

• AppleInsider reported that Apple Inc (NASDAQ: AAPL) is expected to announce a back-to-school deal soon that will encourage students to buy new Macs by offering some of the largest incentives in the history of the company.

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I have not decided who I am voting for yet. Or maybe it would be more accurate to say I have decided on multiple occasions only to become undecided again. While some will see me as fickle, or worse, others may be in the same boat.

I am also continuing to think about what difference any of the candidates can make on the economy, and based on these musings, where to invest. My current belief is that none of them will have a profound impact on our economy.

There are no financial wizards among them. Here is the shocker though: I like all three candidates, or at least can find some good in each of them. Each of them is a fighter, and I believe each one of them brings certain skill sets to the job. There are also things about each candidate that are inescapably negative. Clinton has so much baggage, Zsa Zsa Gabor would be jealous. Obama does not have the experience and he has a degree of arrogance (right sweetie); McCain is an old stick-in-the-mud who, as a long-time senator, has spent more hours with lobbyists than almost anybody, though he is pretending otherwise.

Where does this leave me from an investment perspective? My first choice, for stability with moderate growth and dividends, remains the defense sector. I wrote Defense sector rolls over S&P 500 for 8th straight year a while back and I still think that it is the most secure. Here's why:

A) None of the candidates will want to appear soft on defense when we are at war, and all three have made threatening remarks in some country's direction to make sure the electorate knows that.

B) The War in Afghanistan and Iraq rages on, and even the most optimist view is that a draw-down will take years.

C) Even if all war ceased immediately, the upgrading and replenishment of the hardware will cost billions of dollars and most of the defense contractors have that in their backlogs now. Chasing Value: General Dynamics & Raytheon -- The defense does not rest

Mike Huckabee made news by suggesting he would be delighted to pair up with John McCain as his VP running mate. He is another guy that has a real hunger to be heard, but has no interest in a real job. While this may strengthen the party ticket, shoring up conservative support, historically successful candidates move to the center in the general election. Huckabee would lose him as many votes as he would gain.

Nobody is more hungry to be president then Hillary Clinton, who may view this go-around as her one shot at the oval office, since the next occupant could be there eight years if they don't screw up too bad (right Dubya).

Hillary Clinton is doing some big time pandering to stay in the presidential race, and does not look like she has lost any of her fight yet. She seems to be the most polarizing of the three candidates, because there are many that simply do not trust her. Oddly, if this were any other type of race, trust might not be an issue, just success -- and an argument could be made that she might be the most successful. For all her husband's problems in office, the economy was humming and legislation was moving.

There are a growing number of hungry folk -- the continuous rise in food prices has supported one of my thesis from last December Serious Money: ADM, Bunge, Potash Corp. -- it's a hungry world and I expect, like the defense sector this is still a smart place to be investing, although these three stocks are on the pricey side. However, who is to say they have topped out. Archer-Daniels-Midland (NYSE: ADM), Bunge Ltd. (NYSE: BG) and Potash Corp. of Saskatchewan (NYSE: POT) dominate a major portion of he world market in grains, oils and fertilizers.

A) Our sinking dollar makes our prices on the world market more competitive.

B) China, Russia, India, Brazil -- the whole world for that matter have been adding more meat to their diets and that is raising the price of everything. The number of capitalists has doubled!

C) Diets will change in tough economic times, but food will remain a higher priority than most everything else.

Looking beyond the economics of guns and butter for other themes and hearing every day the drum beat that change is afoot, I wonder where else things might remain stable or grow. What comes to mind is power, and I have thought this for quite some time -- Serious Money: Electric utilities are the place to be. I still like the Southeast U.S. and own stock in Duke Energy (NYSE: DUK) and the Southern Company (NYSE: SO) for the long haul.

A) Power companies will be open for business every day of the year and pay solid dividends.

B) Even if housing is down and foreclosures are increasing, someone will own the homes and they will still need the power company.

C) The increase in consumer products requiring power, and the movement toward electric vehicles, will increase demand.

Speaking of a newcomer that seeks power -- Barack Obama promotes himself as the candidate of change. I ask, CHANGE WHAT? Does he think he can become more touchy-feely, like Jimmy Carter, and make nice to everyone? That did not work. He wants to bring us all together, but that's not going to happen. Some folks want to eliminate capital gains taxes and others want to raise them; some want to stop all abortions and others want a women to have a right to choose; and some want health care coverage to be provided by the private sector and others want the government to take over. There will have to be a compromise, but there will be a battle royale to get there.

The Democrats are happy to run against Bush, because even many Republicans would not like to do the Bush economy over again and economics does not seem to be McCain's strong suit anyway. If Obama is the survivor of the political process ("winner" does not seem apt), the biggest surprise will be the economy. Since he is the biggest wild-card, we may see the market go soft, at least in the short term, if he is elected.

One of the most fascinating things about the economy, reported on this site and in business journals, is that the economy often does the best when there is a log jam in Washington and nothing happens. Maybe the economy would improve the fastest if Bush left office and we had a one-year moratorium in Washington and they all just went home. There was a time, a long time ago, when that's how it was.

No matter who wins the election, I think the defense, food and energy sectors will remain strong and the housing sector, airlines, and retail remains weak for a few more years. In this case the past may be a good predictor of the future.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares in DUK, GD & SO.

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When it comes to defense spending over the last nine years, there has not been any rest. As I have reported on numerous occasions, the defense sector has beaten the market indices year after year. This year is no exception and two of my recommendations remain ahead of the market and are reporting new contracts every day.

Today, theThe Arizona Republic reports [registration required] that General Dynamics (NYSE: GD) is to receive billions in contracts for its C4 Systems as part of the Army's extensive modernization plan. The company is building a communications network for the Army and is the lead contractor with Lockheed Martin (NYSE: LMT) for a wireless network that will deliver mobile connectivity to soldiers on the field.

General Dynamics is up about $10 (12.5%) in the last year and offers a 1.5% dividend yield. Its current P/E is 16.5 and its P/S is 1.33 with a 15% ROIC. It opened today at $90.58.

The Times of Shreveport, La., writes that Raytheon Company (NYSE: RTN) recently acquired S.I. Government Solutions, a small Florida software company that specializes in protecting government and commercial data. The deal is estimated to be worth $35 million. The acquisition is expected to give Raytheon the ability to sell more services to its DOD clients.

Raytheon is up about $7 (12.7%) over the last twelve months and you can add the 1.8% dividend yield to that. It has a P/E of 15 and a P/S of 1.26 and almost a 19% ROIC. Raytheon opened at $62.78.

Everything these companies make is very high-tech but you will not find them mentioned in that investment category -- that will be the subject of another story.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of GD.

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Radio World reported that Harris Corp. (NYSE: HRS) might sell itself. I just spoke with an analyst who said that there's a rumor that the suitor might be military contractor General Dynamics (NYSE: GD).

Harris is based in Melbourne, Fla., and has a market capitalization of $7.3 billion. Perhaps Harris thinks its growth potential in the defense industry is "less attractive" than anytime since Sept. 11, 2001. Harris has 16,000 employees and reported $5.1 billion in revenues and net income of $410 million over the last 12 months, ending March 28, 2008.

General Dynamics may be able to cut costs and increase revenues by combining the two firms. And Harris stock is clearly rising -- it's up 2.8%. Could it be due to this rumor? Please comment if you know more.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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Last year, my best Chasing Value recommendation was Aluminum Corp of China ADS (NYSE: ACH), which sailed from $22 per share to a 52-week high of $90.95. I will take credit for finding a winner, but I cannot in all honesty say that I thought it would more than quadruple -- that part was luck. (The original story was Chasing Value: Aluminum Corporation of China ADS, which I still think is worth a read today.)

If you acquired what is often referred to as Chalco (China Alum. Co.) anywhere near the time I recommended it and still own it you are probably still very content with only perhaps a 90% gain as the stock has come down some, closing last Friday May 9 at $40.98

Another of my recommendations was General Dynamics Corp (NYSE: GD), which closed Friday at $90.92. This one is only up a few percentage points from my starting point of $88 per share, but you will note, curiously, that it is only 3 cents off ACH's high. Given the market's bad year, a gain when the market is losing is a bigger plus than the casual observer would perceive. The defense sector has provided the anticipated market defense as I discussed.

The reason I bring these two stocks to your attention is because I did something I do not often do -- I traded a long-term position. Most readers of my articles know I am a buy-and-hold guy, not a stock trader. However, when ACH hit $88 per share at the same time I was reviewing defense sector stocks, and GD was trading for the same price, I decided that was an unusual event: One pick being at an all-time-high, while the other looked to be a value and a good defensive position for uncertain times.

We sold one-third of our long-term ACH position, capturing all of the original investment and a healthy profit, and bought some General Dynamics for the same price with the "house money" protecting us against giving it all back. This worked out perfectly, and now we have two strong companies going forward and collecting dividends. I think both of these stocks belong on your watch list.

Even us old curmugeons can learn from our mistakes. I did not want to give it all back like I did in 2001.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of ACH and GD.

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MAJOR PAPERS:

• According to senior industry sources, the Financial Times reported that the Ministry of Defense could ask General Dynamics Corporation (NYSE: GD) to provide the vehicle design for a new generation of armored vehicles for the army. It is unclear whether General Dynamics, in competition with Nexter and Artec, will be awarded the contract or will be named the preferred bidder.
• Following the collapse in March of The Bear Stearns Companies Inc (NYSE: BSC), the Financial Times also reported that the SEC will soon require Wall Street banks to publicly disclose more details about liquidity and capital positions. Cox also urged lawmakers to pass legislation that would allow the SEC, or another regulator, the "explicit mandate to supervise" investment banks.

• According to the New York Times, Citigroup Incorporated (NYSE: C) will move senior investment banker Alberto Verme to Dubai by the end of the month in the hopes of establishing a stronger foothold in the region, a crucial area for global banks.
• The New York Times also reported that several large oil companies, including BP Plc (NYSE: BP), ConocoPhillips (NYSE: COP) and Chevron Corporation (NYSE: CVX), agreed to pay nearly $423M in cash in order to settle a lawsuit that alleged water contamination from methyl tertiary butyl ether, a gasoline additive. Under the terms of the deal, the oil giants also agreed to pay 70% of the future cleanup costs for the next 30 years. Exxon Mobil Corporation (NYSE: XOM) and several other companies named in the suit did not agree to the deal.

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General Electric Company (NYSE: GE) recently down $4.49 to $31.96:

GE reported Q1 earnings per share (EPS) of 44 cents versus consensus estimates of 51 cents. GE lowered 2008 EPS guidance to $2.20-$2.30. GE's Jeffery Immelt completed "Transformational" deals in 2003; paying $10 billion for Amersham and considerations valued at $5.5 billion for Vivendi.

GE call option volume of 410,894 contracts compared to put volume of 371,896 contracts. GE May option implied volatility of 33 was above a level of 27 from April 10 and its 26-week average of 25 according to Track Data, suggesting larger movement.

Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

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President Bush prides himself on his personal integrity. I wish he would demonstrate some integrity by being the first president to be honest with his budget, especially when it comes to defense. That would go a long way to setting us on the right path toward improving our current economic mess. Every short term Band-Aid, be it interest rate cuts, tax rebates, restructuring debt, extending unemployment benefits or anything else only allows the economic pressures to build and build and build until we have an explosion.

That economic explosion will create higher inflation, higher unemployment, and a loss of national equity until the money we spend on defense only defends assets owned by foreigners and rented back to us. That is what is happening now as growing economic powers in China and the middle east buy our real estate and our banks from us in the open market 'doing us a favor' to bail us out.

Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm. Disclosure: I own shares of GD.

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In recent months I have been recommending that investors take a look at the defense sector as a safe haven during this erratic stock market -- erratic and down. My most recent post on the subject was Chasing Value: Raytheon (RTN) up on earnings & 2008 outlook. The defense sector has beaten the S&P 500 index for eight years running and this year may mark the ninth straight.

In a previous post I trumpeted General Dynamics Corporation (NYSE: GD) and still believe in the stock. The price-to-sales is a modest 1.33. The P/E of 16 and dividend are average, but it has a healthy ROE near 20%. If you believe the forward looking P/E it is only 14. GD makes the Gulfstream aircraft for the wealthy jet-setter and the Abrams tank for the military. How many of those will need parts or replacement in the coming years?

When I was evaluating my 2008 picks I looked at most of the large defense contractors and included RTN over GD. If you look at the chart below and the original story Chasing Value: General Dynamics (GD) looking long and flying high!, you will find I was looking at General Dynamics around $90 a share. We bought in at $88 so you know I like it even more in the area of $83 where it is trading now.

Speaking of government purchases of spare parts, this was released on Monday: General Dynamics Receives $44 Million for Mine-Protected Vehicle Spare Equipment. For a company like General Dynamics the large inventory of their equipment on bases around the world assures continued business. I do not have to explain much when I say the government is not getting these at deep discount!

For whatever it's worth, the Standard & Poors report, issued February 1, 2008, rates GD (the worlds sixth largest defense contractor) four stars with a 12-month price target of $98. If this pans out, then we are looking at a possible 20% return counting the dividend.

I am not comfortable speculating on price targets. I would rather deal in probabilities or likelihoods, and from everything I see there is a high probability that General Dynamics beats the overall market, while minimizing investor risk.

Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm. He owns shares of ISRG. Disclosure: I own shares of GD.

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"The weak start to 2008 has left many investors scrambling for a safe haven in which to stash their cash," notes Jocelynn Drake, who sees the defense sector as one such haven.

The analyst with Schaeffer's Investment Research explains, "The recent losses suffered by many of the defense-sector components has brought them back to long-term support, creating potentially strong buying opportunities."

"What do General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), and L-3 Communications (NYSE: LLL) have in common? These four defense stocks have enjoyed strong rallies during the past four years.

"In addition, they are all currently resting right near support at their ascending 10-month moving averages. These stocks have benefited from this long-term support level and could use their respective trendlines as springboards to launch them on the next leg of their uptrends.

"What also makes these stocks very appealing from a bullish perspective is that short-term options players are very skeptical of the stocks' outlooks. As a result, options speculators have loaded up on bearish bets toward these securities in an attempt to call a top to their rallies.

"For GD and LMT, put open interest outnumbers call open interest among options that are slated to expire in less than three months. Pessimism toward these stocks among options traders is resting very close to an annual high while the shares are sitting on support and their long-term uptrend remains intact.

"If you are interested in trying to capture some profits on these four defense companies should the successfully bounce off long-term support, options players should consider an in-the-money strike on an option that is not due to expire for at least three months, such as an April or May option.

"This will not only provide the option player with some cushion should the stocks not bounce as expected, but it will also provide you with the time needed for this bullish scenario to play out."

Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.

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MOST NOTEWORTHY:

• Baird upgraded shares of Stryker (NYSE: SYK) to Outperform from Neutral as they believe the company's manufacturing problems are more manageable than expected and that supply constraints involving the Trident acetabular cup appear more limited.
  
• Wachovia raised General Dynamics (NYSE: GD) to Outperform from Market Perform, citing valuation, likely resumption in buybacks, and conservative guidance.
  
• Oppenheimer upgraded shares of Garmin (NASDAQ: GRMN) to Outperform from Perform on valuation, as they believe sentiment has troughed and that downward revisions are already priced into shares.

• Merrill raised Turkcell (NYSE: TKC) to Buy from Neutral.
  
• Lehman upgraded HealthSouth (NYSE: HLS) to Overweight from Underweight.
  
• Bear Stearns upgraded McAfee (NYSE: MFE) to Outperform from Peer Perform.

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Ultralife Batteries (NASDAQ: ULBI) provides a range of non-rechargeable and rechargeable batteries, charging systems and communications accessories for use in military, industrial and consumer portable electronics products. The company's non-rechargeable lithium batteries are used to power such diverse devices as radios, emergency radio beacons, search and rescue transponders, portable medical devices and smoke alarms.

Its lithium polymer and lithium ion rechargeable batteries are used in such portable devices as laptop computers and cell phones. The U.S. Department of Defense accounts for about 20 percent of Ultralife's sales. Major commercial customers include General Dynamics (NYSE: GD), General Motors (NYSE: GM) and RadioShack (NYSE: RSH).

The company pleased investors late last month, when it received a $40 million follow-on to a $62 million defense order for communications systems. Management also issued FY08 revenue guidance of at least $230 million, a level well above the Wall Street consensus view. ULBI shares popped on the news and then moved into a bullish "pennant" consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling on entry. In this case, that would be to the upside.

Brokers recommend the shares with two "strong buys," two "buys" and one "hold." Analysts see an 18 percent average annual growth rate through the next five years. The ULBI Sales Growth rate (40.32%) and EPS Growth rate (92.55%) compare favorably with industry, sector and S&P 500 averages. Institutions own about 44 percent of the outstanding shares. Over the past 52 weeks, the stock has traded between $7.98 and $21.76. A stop-loss of $18.25 looks good here. Note that the firm is next expected to report quarterly results in mid-February.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com. He does not hold positions in any of the stocks mentioned above.

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In searching out investments for 2008 -- what is likely to be a precarious stock market -- I have been touting the defense industry for the last two months as one of the stories for next year in terms of growth and safety. A press release today noted: "The benchmark SPADE Defense Index (AMEX: DXS) currently has a year-to-date gain of 21.5%, nearly 20% better than the widely followed S&P500 broad-market index."

Certainly this might have been expected in the aftermath of the September 11 tragedy, and given that the U.S remains at war in Iraq and Afghanistan. But this is just one aspect of the industry. Some companies like Boeing Co (NYSE: BA) are doing equally well in the private sector selling new planes and replacement parts for aging fleets.

Raytheon Co (NYSE: RTN) is heavily involved not just with airport security, but develops radar and monitoring systems for airport safety. This is of growing concern as the skies become more congested and airports more impacted.

United Technologies (NYSE: UTX) makes military helicopters that are also used for civilian fleets and fire fighting. UTX also is a world leader in the private sector owning Otis Elevator, Carrier Air Conditioning and more.

General Dynamics Corporation (NYSE: GD) makes the Abrams tank but it also makes the Gulfstream aircraft for the wealthy jet-setter.

These companies also benefit from the growing global economy and most of the larger defense companies pay dividends. Given that it is an election year, I do not expect anyone is going to be soft on defense. If you are wondering about investment ideas for next year, you should be looking at all of these companies ... or just buy the sector.

To find potential opportunities and verify my track record, read Chasing Value or Serious Money.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.

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It' s not everyday that investors are presented with a growth opportunity, supplemented by more-than-modest downside protection, but that's the case with General Dynamics.

General Dynamics (NYSE: GD) is a diversified manufacturer of corporate jets and heavy vehicles, and is the second largest military shipbuilder -- specializing in nuclear-class submarines.

Along with consistent earnings and dividend growth, analysts like GD's platform diversity, with civilian work (Gulfstream corporate jets) complementing defense contract work (Trident submarines, armored vehicles). Analysts expect GD's revenue to increase about 10-13% in 2007, and 9-11% in 2008.

Moreover, GD's shares offer a measure of safety in that the submarine portion of the U.S. defense system is the force projection most likely to continue to be funded by Congress. Along with stealth fighters/bombers, submarines are the least-detectable form of military operations.

Long term, analysts generally see growth in GD's sales of business jets, land vehicles and munitions. Cost containment has been adequate. The Reuters F2007/F2008 EPS consensus estimates for GD are $5.07/$5.71.

The qualifiers? A reduction in U.S. Department of Defense appropriations would hurt GD's results, as would a failure to deliver existing work on time.

The First Call mean rating for GD is: Buy. [19 firms.] Mean 2008 target: $99.00. [high: $106, low: $94.]

Stock Analysis: General Dynamics is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from GD's shares. Sell / Stop Loss if you were to purchase shares in this company: $62.

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Year-end is almost upon us and I need to get this short list cut down to size with two weeks to go. Because this story is an ongoing process, the heart of the story, the possible stocks, are posted below again, with the latest in bold type as the story builds and I examine things more closely. This week I am adding another energy play in the form of a Canadian Trust. Then I follow with the current edited stock list and the stocks to be cut.

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In seeking value stocks that have seen their share prices greatly diminished this past year based on reduced earnings, I came across Precision Drilling Trust ADR (NYSE: PDS), which has a P/E near 5 and a dividend yield over 10%. According to AOL Money & Finance information, the company is Canada's largest drilling contractor, with a fleet of 240 service rigs. Its contract drilling units provide drilling services, equipment supply and repair, and on-site catering and management. PDS has extended its reach into the United States this year and has invested in new technology, replaced older rigs and is preparing for continued expansion. Favorable metrics include a low P/B of 1.57 and high historic profit margins of 40%.

PDS closed yesterday at a price of $15.47 per share, near its 52-week low of $15.35, a low set today during the trading day, and 44% off its high of $27.78. The P/E is a trailing figure and is actually higher but the dividend looks secure. For a few more details see: Chasing Value: Precision Drilling for 10% yield.

Disclosure: I have already bought shares of PDS at $17 in several portfolios.

The following stocks have been put in three groups, considering I want to reduce the number to eight. The first group is highly likely to make the cut based on what I know today. The second group is still under consideration but depends on what the value is in two weeks because of current volatility. The last group is being cut, and I noted why.

Looking good:

• Since I added Newcastle Investment Corp (NYSE: NCT) to the list last week I have even more confidence in the company. The stock price has risen about 10% and I think the Fed's reduction in interest rates and its indication that it will be taking action to improve inter-bank lending are positive signs. For the detailed review read Chasing Value: Newcastle's 21.9% yield too good to be true?. I will summarize here by letting you know I did what homework I could and checked out NCT's recent conference call. This company has averaged an 8.8% yield over the last five years. However, today because the stock is now a third of its recent price, the yield has jumped to 21.9%. Newcastle is standing by this dividend. Actually I think it has to because REITS are required to pay out most of their profits and Newcastle has earned 23% over the last fiscal year. The stock is down because the underlying value of the collateral has gone soft in some cases, but mostly it has fallen victim to the generally poor market for various classes of loan packages, be they Alt-A, sub-prime CDOs, or Uncle Joe's handshake. That said, NCT's cash flow seems fine, it only has 10% of its portfolio in residential real estate and of that it claims to have a 60-day delinquency rate of less than 1%. NCT also expects $1 billion in loan repayments over the next year. The PEG ratio is 0.15 and it is trading at a book value of 0.74. On the conference call, management claimed a book value after being marked-to-market of $15-to-$16 a share. This is a strong value proposition. This stock may or may not return to its highs, which I think is unlikely in the coming year. However, NCT just has to keep its doors open to be a success story.
• Raytheon (NYSE: RTN) is a top-shelf defense contractor, and that is the place to be whether we are at war or whether we have to replace everything that was destroyed, damaged, or become obsolete. I think the defense sector will be one of the safe havens for 2008. RTN is a tech stock if you look at all the advanced electronic systems it is developing and selling. This is another touted sector lately. I am not happy that 85% of its revenue comes from the federal government, but this revenue is from different agencies. Beside defense, RTN makes radios, air traffic control systems and radar, and satellite communications systems, so airports and security are customers too. The fundamentals do not display a screaming value, but its growth potential and "recession-proof" business offer value. No presidential candidates will be soft on defense in an election year. The basic metrics are sound, with a PEG ratio of 1.13, a P/B of 2.4 and a P/S of 1.3. The down side does not seem to be a major issue. The P/E and the yield are only average, but like most of my recommendations, it does pay a dividend, and that is important. RTN has the potential to expand airport business as this industry continues to be in the headlines. Airport congestion and security constraints are not going away, they are only getting worse.
• Huaneng Power International, Inc. (ADR) (NYSE: HNP) does pay a sizable dividend and has plenty of room to run. It has come down a lot with the rest of the inflated Chinese stock market, but this one is not threatened by competition and is a good long-term value. The largest potential downside might be costs associated with environmental clean-up. China is addressing these issues but has a long way to go. This is a must own and with all the stories about electric cars and more devices requiring power all the time plus its recently soft price I still favor HNP. It still has a 3.6% yield, and is increasing equity every day. We have all read lately that the Chinese stock market might be ready to bust, but if it does I will probably ride it out long term with this particular stock. It is beyond my imagination how it cannot be a success long term.
• Valero Energy Corporation (NYSE: VLO) was one of my favorites last year, remains one of my favorites now and is a very strong candidate to stay in favor next year. Its margins have been squeezed lately by high crude prices and stable pump prices, but that could change, and the stock may appreciate significantly in 2008. I have no idea what Wall Street is thinking, but it still seems too cheap with a P/E just over 7, a P/S of 0.34 and still no one seems to be building any new refineries, except outside the United States.
• The Dow Chemical Company (NYSE: DOW) has done well this year but not spectacular. It meets my criteria for consideration on all counts and has a lot going for it. In partnership with Corning, it is developing materials for the solar energy industry. It will probably continue to be mentioned in merger and acquisition rumors, and it has historically been an innovator willing to spend on R&D. If oil goes down in price, the primary ingredient in many of DOW's products will create improved margins. A P/E of 10 and a 4% yield, need I say more? Well now there is more, a Kuwaiti Co., Petrochemical Industries Co has invested $9.5 billion in a joint venture - seems like a merger to me.

Looking too pricey with a few outstanding questions:

• Berkshire Hathaway Inc. (NYSE: BRK.B) is a strong candidate. It meets two of the three criteria in a big way. Although it does not pay a dividend, most of its stock holdings do and Warren Buffett has been the gold standard for creating shareholder equity. If 2008 proves to be a shaky year on Wall Street, you will want to own this stock. BRK.A/B has been appreciating but given all the uncertainty in the market I will stick with this solid company. Berkshire is up 35% on the year, see: Chasing Value: Berkshire Hathaway did what it's supposed to do -- go up! I have nothing bad to say about this stock, but it has had a huge run-up to an all-time high and seems like it has been given full credit for all its virtues. A repeat perfomance would be hard to envision, although it is about 6% off its high today, so maybe it will be perfectly situated when the list is finalized.
• Intuitive Surgical, Inc. (NASDAQ: ISRG) is also a strong candidate that I have written about many times. It does not pay a dividend, but this one has beat everybody and everything every year since I bought it, and is likely to do it again. It has hardly penetrated its potential market. It is significantly off its all-time high, and may look like a bargain by December 28. My regular readers know I love this stock but it has gone back up from about $280 to new highs around $357 before simmering down to the $330 neighborhood and by the 28th may not be much of a value unless it drops below $300 or thereabouts.
• Anadarko Petroleum Corporation (NYSE: APC) is one of my favorite stocks. It is in the right business at the right time, and it has substantial proven reserves in North America. I see APC as a perpetual takeover target, but it has been successful as a stand-alone and can remain so. The stock price is about 5% off its 52-week high, but the P/E is still under 7, so I am bewildered as to why some larger fish has not swallowed this one whole just for its North Amercian reserves. Need to take pause after 15% jump in the last week. This too will be strictly a valuation call on stock price at the time.
• Duke Energy Corporation (NYSE: DUK) (NYSE: SE) will remain on the possibility list for now. It pays a handsome dividend and might see some growth next year as investors look for stability. This year it was flat. That might be good enough if the market ends in turmoil next year. Yes, there is room for two power companies on my list, and this one is paying a solid 4% yield. All seems well at Duke but stability and safety might not equal much growth.
• The Home Depot, Inc. (NYSE: HD) was one of my dogs this year (and continues to report poor earnings) but there is value here and this year going forward it is greater than last year. There are a number of latent problems at HD, but at current prices there is also deep value. I still think HD is a buyout candidate now more than ever, but whether the stock recovers in 2008 or deep into 2009 remains a question. It still worthy of consideration because the smallest gains plus the dividend may be more upside then the S&P sees in 2008.
• General Dynamics Corporation (NYSE: GD): The price-to-sales is a low 1.26 and the P/E is average. It makes the Gulfstream aircraft for the wealthy jet-setter and the Abrams tank for the military. How many of those will need parts or replacement in the coming years? See Chasing Value: General Dynamics (GD) looking long and flying high! Another stock I like but I have seen some gains already and the dividend is not competitive, they should share more.
• Anglo American plc (ADR) (NASDAQ: AAUK) is another stock that could end up in M&A discussions. Let's see, it's a global player in diamonds, gold, silver, platinum, coal and more. This is a currency play, a commodities play, a global play, and an inflation hedge - got to love that if you can get it at the right price. Unlike oil prices which may be affected by the weather, new technologies, or alternative sources these commodities will remain in demand. Gold may be used instead of silver, platinum instead of gold but except for locating new supplies the demand for these precious metals and commodities can only grow with the growth of the new economies and the wealth of their citizens. AAUK was one of my better calls during 2007, up about 30%, but I take pause wondering if it will do well based on economic fear driving precious metals up, or whether it will have to rebalance its mining efforts based on less demand for commoditities if there is a slow down.
• Nucor Corporation (NYSE: NUE) is one of the world leaders in the idea of mini-mills. This smallish steel producer prides itself on running a tight ship, pays a dividend, and has a P/E around 10. Once again, it could be a takeover target as the industry continues to consolidate. It is 25% off its high, and is a strong candidate to make the final cut. Still looks like a winner but not as much so given its recent rise. Maybe someone is actually reading my rants? Like AAUK, this one has jumped since I mentioned it, now up 20% in three weeks, but unlike AAUK, it does not sell any precious metals, only commodities.
• Reliance Steel & Aluminum (NYSE: RS) processes and distributes more than 100,000 products made of carbon, alloy, stainless, and specialty steel, as well as aluminum, brass, copper, and titanium. It serves more than 125,000 customers. For reasons that I will explore in future stories, the entire steel industry seems to be on sale and perhaps priced for a recession. Reliance has a P/E of 9.6 and a PEG ratio of 0.71, so unless there is something here that is well concealed, it seems way too low. My opinion has not changed but I wish RS would raise its meager dividend of 0.63%. That might affect my decision if it becomes a close call. The price is back up and the yield is shrinking. The more I learn about this company the more I am convinced it will be a meal for some bigger fish.

The trimmings:

• Northrop Grumman Corporation (NYSE: NOC) sports an even lower P/S of 0.81 and a lower P/E too, of 15.25. It has a higher dividend yield than General Dymanics and a P/B of 1.57, which seems too low. Another defense contractor adding new contracts every week. NOC is a defense systems conglomerate, and like many, has a very complicated corporate structure in many enterprises. Although it is diversified, most of its revenue depends on large government contracts. NOC's debt is higher than General Dynamics and its return on equity and profit margins are half.

Only eight of these stocks will be on the 2008 list, but all of them should be on your watchlist if you are interested in acquiring individual stocks. During 2007, I wrote about many of them in my Chasing Value column and all of them did extremely well. Many actually did better than the ones on the initial 2007 list. In the case of ISRG, it beat just about everything. The final list will be posted in about two weeks.

To find potential opportunities and verify my track record, read Chasing Value or Serious Money.

DISCLOSURE: I currently own shares of BRK.B, ISRG, HNP, DOW, DUK, VLO, GD, APC, and AAUK.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.

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Eight for 2008:

• Berkshire Hathaway Inc. (NYSE: BRK.B) is a strong candidate. It meets two of the three criteria in a big way. Although it does not pay a dividend, most of its stock holdings do and Warren Buffett has been the gold standard for creating shareholder equity. If 2008 proves to be a shaky year on Wall Street, you will want to own this stock. B