General Dynamics (NYSE: GD)
By Paul "Bearer" Larson (TMF Parlay)

Trading at $81.76 as of 10/23/01

With the war on terrorism now on its way, the defense industry has been one of the hottest sectors on Wall Street. The thesis has been that the economy post-September 11 was going to see a great deal more money spent on security and defense, and the increased growth would benefit an industry that is at its healthiest in years.

The stock idea I'm dropping in your goodie bag is a leading defense company I've owned for several years -- General Dynamics(NYSE: GD). In my mind, the company responsible for such things as the M1 attack tank and the Seawolf attack submarine is by far the best-managed large-cap firm in the industry. As you can see below, the company has been an extremely consistent earner and grower:

    Sales (bil.)
  1996         $3.6       $2.13
1997          4.1        2.50
1998          5.0        2.86
1999          9.0        4.36
2000         10.4        4.48
2001 (est.)  11.9        4.55
2002 (est.)  12.5        5.22

Source: Media General Financial, Thompson FN

Not bad, eh? The company is also pretty much guaranteed continued growth in the near-term because it has a $24.3 billion backlog of orders from Uncle Sam. That's essentially two years worth of business that is already "in the bag." The fact the vast majority of General Dynamics' business is insulated from economic conditions is another bonus for those owning the stock.

The company has also been extremely busy on the merger front, as have just about all the companies in the defense industry. General Dynamics has acquired no fewer than 20 companies over the last five years, yet the company has been able to maintain and grow its profitability during these mergers. The one unknown with General Dynamics today is whether or not it will win the footrace with Northrop Grumman(NYSE: NOC) to acquire naval supplier Newport News Shipbuilding(NYSE: NNS), but General Dynamics is still positioned quite nicely with or without Newport.

Even with the northward sprint seen by all the defense companies in the last several weeks, General Dynamics is still trading at a very reasonable valuation with a P/E ratio only in the high teens. There is real substance, not hype, behind the industry, and investors are realizing the previously maligned defense companies are doing quite well. For an outfit with a very durable set of businesses that are seeing their fundamentals go from good to great, General Dynamics remains one of my absolute favorite companies.

Paul Larson was married the day before Halloween. Paul owns a stake in General Dynamics. You can see what else he owns online thanks to The Motley Fool's progressive disclosure policy.

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Pixar (NYSE: PIXR)
By Rick "Gore and Guts" Munarriz (TMF Edible)

Trading at $39.00 as of 10/23/01

It's Halloween and I've got Monsters in the brain. Well, it's actually Monsters Inc. Due out next month from the fine folks at Pixar(Nasdaq: PIXR), it will be the first movie we take our three-year-old son to. We have to. He's a shareholder.

While the company might have risen to prominence on the heels of a five-picture joint venture deal with Disney(NYSE: DIS), it's about time that Wall Street realizes that Pixar is no fluke. Toy Story. A Bug's Life. Toy Story 2. How many film studios do you know that are three for three, fresh out of the gate?

While this year's non-Pixar smash hit Shrek and Final Fantasy have helped popularize the computer animation genre, it is Pixar that rules the roost. Financially, this company goes to infinity and beyond. While the movie business is an erratic lot, Pixar has been profitable every single year since its 1995 market debut. While a great deal of credit goes to Disney in helping Pixar make waves in the home video market and merchandising front, it has produced that rare company with margins higher than even Microsoft(Nasdaq: MSFT) -- last year, a stunning 45% in net profit margins. Yes, after taxes.

Debt-free and imagination rich, how can Pixar lose? Well, it won't be able to compete with Harry Potter and his celluloid wizardry next month, but all of Pixar's films have had long box-office shelf lives. Then they roll on for an eternity of video and DVD releases, toys, video games, Disney theme park attractions, and televised cartoon shows. With every Pixar release comes a new fleet of characters into the merchandising mix.

While earnings are projected to dip this year from last year, they are estimated to double in 2002 and climb another 66% the following year. This is a growing library of endearment that you don't want to bet against. During troubled times like these, you can't find a better release than Monsters, where a child confronts the monsters in the closet, only to find that they are more afraid of her than she ever was of them. So, I'll see you at the movies next month. I'll tell my son to munch his popcorn quietly for you. After the flick, you can thank him. He owns the place, you know.

Rick "Howl at the" Munarriz thought Toy Story 2 was one of the few sequels to better the original. He's also off to buy Sulley and Mike toys in anticipation of Monsters and, yes, his son does own some Pixar in his Education IRA. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy .

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