Forest Labs Sees Generic Threat

Forest Laboratories, Inc. (FRX) focuses on the therapeutic areas of the central nervous, cardiovascular and respiratory systems, as well as research and development programs that address a range of health conditions. Principal brands include Lexapro for depression, Namenda for Alzheimer's disease, and Benicar for high blood pressure.

The company turned in a very strong FY 2008, but we are concerned about longer-term growth, especially towards the beginning of the next decade when Lexapro and Namenda are exposed to generic competition. That puts a lot of pressure on the pipeline to come through.

Forest has a number of other candidates in their pipeline that have the potential to be very big contributors but none likely to make a meaningful impact by the time Lexapro goes generic. Management's most recent goal is to double their current pipeline by 2012 a lofty goal in just three years time, although one that is necessary to fill the enormous hole that key drugs will leave beginning in 2012.We rate the shares Hold with a $32 price target.

Diamond Offshore Leverage Strong

Our continued favorable view of Diamond Offshore (DO) shares reflects the company's strong leverage to the favorable deepwater drilling outlook. With a backlog of more than $11 billion, Diamond offers a solid level of earnings and cash flow visibility going forward.

The company remains committed to returning excess cash shareholders, primarily through dividends. In addition to its regular dividend, the company has paid a special dividend of $1.25 per share in each of the last four quarters and $4 per share earlier in 2007. Given its cash flow outlook, we expect this payout pattern to remain in place in the near to medium term.

In terms of its deepwater drilling leverage, its closest peer is Transocean (RIG), relative to which it continues to trade at a discount. Our unchanged $145 price objective reflects 2009 P/E and EV/EBITDA multiples of 10.8x and 7.0x, respectively, both well within historical trading ranges and still at a discount to Transocean.

ReneSola Upside Shines Brightly

Through its short history, ReneSola (SOL) regularly adapted to changing market dynamics. The company is aggressively ramping up its polysilicon and solar wafer production capacities. Going forward, increased captive generation of polysilicon will improve its cost structure and enable wafer capacity expansions.

Globally, rising solar wafer sales, along with escalating crude and new long-term sales agreements, should collectively generate significant earnings growth.