Down nearly 20% from its 52-week high, Exxon Mobil’s (XOM) stock has become quite controversial after reporting 2Q08 results (see conference call transcript). I like controversy because it may yield investment opportunities.

Here are the key issues, both bull and bear, as I see them.

PM USA estimates that total cigarette industry volume declined approximately 4% in the first quarter. For the full-year 2008, PM USA estimates a total cigarette industry volume decline of approximately 3%.

In July 2007, I put the Dow Industrials on Fast Track, and concluded that, “If the Dow were a stock, it failed my 3-category rule, and I would pass.” The Dow is down 7.4% from last July and 5.9% year-to-date at the time of this writing.

Fast Track is a screening tool that focuses on 10 key categories incorporating the balance sheet, cash flow, earnings, valuation, and how management and the Street feel about the stock under consideration. I get interested in doing more extensive research using the entire Company Stock Risk Profile research process if a stock fails no more than 3 categories.

Informed opinion almost always advocates the popular course, so you must steel yourself to stand apart. To be a contrarian is to be an outsider – until you’re proven right. (David Dreman, Contrarian Investment Strategy, 1979)

Unlike oil, gold, and other such commodities, water is the one commodity we must have to live. And I don’t even think about it. I don’t have to. Clean water is delivered to my home and where I work. It’s always available, and it’s cheap. Will it always be this easy?

Living in Arizona, one of the fastest growing and driest states, I thought back to a discussion I heard on NPR about population migration. I remembered this startling prediction: the Southwest will be riddled with ghost towns when water runs out, and those looking back 50 years from now will be mystified as to why people ever wanted to live there. Last year 26% of the Southeast was covered by an “exceptional” drought – the National Weather Service’s worst drought category.

I've structured my portfolio over the last several years with a healthy complement of natural resource stocks. I purchased leading companies with solid fundamentals in the oil, natural gas, base metals and timber industries. The investment themes surrounding my holdings are: (1) "Peak oil" is here or will be soon; (2) The robust growth of the Chinese and Indian economies will continue for many years; and, (3) Trees, well, they just keep growing. I do not own gold or gold stocks. The price of gold has been hitting new highs so I thought I would take another look.

Briefly, the principle variables influencing the price of gold are:

1. Because gold is priced in U.S. dollars, its price is inversely correlated with the value of the dollar relative to other currencies. A depreciating dollar makes gold more attractive to foreign investors since it takes less of their currency to buy a given amount of gold in dollars. Likewise, a strengthening dollar makes gold less attractive to foreign investors.
2. Investors turn to gold during times of political and economic upheaval because gold is an accepted currency in and of itself. The value of paper currency depends on the confidence holders have in the government and economy that the currency represents. Those that favor owning gold cite the large budget and current account deficits in the U.S., inflation and the declining value of the dollar. Some hardened gold bugs go so far as to predict the collapse of the U.S. economy. Since year-end 2002, the dollar has depreciated 40% against the Euro and 14% against the Yen. The Consumer Price Index ranged from +2.3% in 2003 to +3.4% in 2005, and came in at +2.9% in 2007. The price of gold is up 180%.

Recession or not, we all need to eat. The food industry should be one place I would expect to find solid balance sheets and consistent operating performance in an uncertain economic environment. I screened 14 food, beverage and confectionery stocks using the Company Stock Risk Profile Fast Track*.

Here’s what I found. The industry has a lot of financial leverage. Long-term debt as a percentage of total capital averaged 38.2% for all 14 companies. Only three companies were below 20%, which is the Company Stock Risk Profile’s definition of low long-term debt – Coca-Cola (KO), Pepsico (PEP) and Diamond Foods (DMND). Heinz (HNZ) and Hershey (HSY) were at the high end with 70.4% and 68.3%, respectively.