Not Listening to Buffett Cost Me Thousands

Forbes recently ranked Berkshire Hathaway Chairman Warren Buffett as the second-richest man in the world, with an estimated net worth of $37 billion. Although his net worth has dropped by a cool $25 billion over the preceding 12 months, it's still an impressive haul.

Although some people have recently questioned his judgment, Buffett is still almost universally accepted as one of the world's greatest stock market investors. When he talks, it pays to listen.

The Oracle is commonly considered a value investor, but he seems just as focused on growth. Either way, he has proved that he's an intelligent investor. As Buffett's sidekick Charlie Munger once said, "All intelligent investing is value investing."

Google as a value stock
Buffett focuses on companies with favorable long-term economics and strong competitive advantages -- companies such as Coca-Cola, ConocoPhillips (NYSE: COP), Harley-Davidson (NYSE: HOG) and Costco (NYSE: COST), all current Berkshire investments, either through common stock holdings or fixed-income securities.

One Wall Street analyst called Coca-Cola "very expensive" around the time Buffett started buying it. It wasn't a typical value stock. But as Buffett once said: "If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done."

Now that's a competitive advantage.

See, value investing is not all about buying stocks with low price-to-earnings, price-to-book, or price-to-sales ratios. Far from it.

For example, Google would have been a great value stock at its IPO in August 2004, despite selling, at the time, for more than 100 times earnings.

A value stock trading for more than 100 times earnings? Yep. Google was growing rapidly, continuing to take market share, and building sustainable competitive advantages in its enterprising culture, superior advertising platform, and brand loyalty. Given its growth rate ever since and its powerful business model, it was underpriced back then.

Investing shock: Buffett was wrong
Buffett didn't buy Google. Sadly, neither did I -- a decision that has cost me thousands.

I held off on buying Google shares because they seemed expensive. I knew it owned the vast majority of the search-market share and had both a great corporate culture and innovative leaders. But I couldn't get past that lofty P/E ratio.

Instead, I was concentrating on buying poor companies on the cheap. These "trash stocks," as I call them, have a nasty habit of getting even cheaper -- and sometimes even going bust.

At least I'm not alone in buying trash stocks. In his 1989 letter to Berkshire Hathaway shareholders, Buffett himself admitted to similar crimes. In a section of the letter called "Mistakes of the First Twenty-Five Years (A Condensed Version)," Buffett says he never should have bought control of the textile company Berkshire Hathaway.

Why? Even though he knew that the textile-manufacturing business Berkshire operated was in a declining industry, he was enticed to buy because the price looked cheap. The Berkshire of today wouldn't exist without that original purchase, but Buffett reluctantly closed the textile business in 1985.

And that brings to mind a timeless Buffett-ism: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Value investing for suckers
I'm a great fan of Warren Buffett and like to think of myself as a value investor. But too often I've been guilty of buying those "trash stocks" -- cheap stocks with mediocre (or worse) businesses.

Although I've never owned them, over the years, I've come close to buying shares in Palm (Nasdaq: PALM), Boeing (NYSE: BA), Morgan Stanley (NYSE: MS) and even Valero Energy (NYSE: VLO) -- all of which appear relatively cheap but operate in intensely competitive industries and/or carry plenty of debt.

Twenty years have passed since that famous 1989 letter to Berkshire Hathaway investors. As I review my portfolio today, I see fewer and fewer "trash stocks."

Through a combination of expensive errors, experience, and a commitment to continued investing education, I've slowly come to realize that the best long-term investments are in companies in growing industries that possess long-term, sustainable competitive advantages.

Are You Ready to Make Real Money?

Thanks to the recent rally, you may be feeling pretty good about yourself. After all, Dow members such as Cisco Systems (Nasdaq: CSCO), United Technologies (NYSE: UTX), and 3M (NYSE: MMM) are all up 28% or more since March 9. If you're new to the market, you may be thinking that this stock-picking stuff is easy money.

It's not -- and this recent rally cannot continue. It's not in the nature of U.S. large caps to offer greater than 50% returns in a year, let alone a few months. This market is seriously out of whack.

That makes no sense
There's more evidence that the U.S. market has gotten ahead of itself, of course. Wal-Mart recently decided to stop publishing monthly sales statistics, hoping it will encourage investors to take a long-term view.

Of course, it was more than happy to publish these stats when they were good, so this action would seem to indicate that it expects them to get worse. And if U.S. consumers aren't shopping at a discount store like Wal-Mart, then where are they shopping?

Further, real estate values continue to decline and unemployment continues to rise, though at a lower-than-expected rate.

You may say, "Yeah, but the market is forward-looking." Sure it is, but it's not that forward-looking. If first-quarter earnings disappointments happen again in the second quarter (and the Fed's "beige book" revealed recently that the economy continues to be weak), the market will reassess its optimism.

Tack on the inflation that's likely to result from rampant deficit spending and, well, tread carefully in U.S. stocks.

What you can do
It's for these reasons that we continue to look outside the U.S. for compelling stock ideas at Motley Fool Global Gains, and why we're particularly excited about the opportunities in China, Brazil, India, Chile, and Peru.

Stocks in these countries today offer better valuations relative to their future growth prospects -- and many have been left behind by the recent rally. And the advantages over the U.S. aren't necessarily the same from country to country.

India has a younger workforce; Chile a large budget surplus and abundant natural resources; China a massive population with significant personal savings; Brazil and Peru growing resource economies that are developing stronger and stronger ties with China. Thus, these countries can hold up to some degree even as the U.S. falters, though complete decoupling is unlikely.

China's tiny Yanglin Soybean, for example, is actually down 39% since March 9 and now trades for a paltry 0.2 times revenue and 4.2 times EBITDA. Yet this is a company that pays no taxes to the Chinese government, since it's been classified as a Key Leading Enterprise in Agriculture and is helping that country achieve its strategic goal of becoming food-independent.

But if you look up Yanglin Soybean, you may be scared off. It trades over the counter, the stock is illiquid, and the board has no independent directors. There's no way to be sure that the company cares a lick for outside shareholders.

It's time to take off the training wheels
These are legitimate concerns. But I've already tried to assuage them. So, today, I point you to Baupost Group's Seth Klarman's 1997 letter to shareholders:

I frequently hear the argument that the rules are different overseas: the accounting murky, the annual reports unreadable, the currencies sometimes unhedgable. All of these points are fair, but, rather than being arguments to avoid foreign markets, they are instead arguments to embrace them. After all, as an investor you never have perfect information, and the biggest profits are always available (just as they have been in the U.S.) when competition and information are scarce. The payoff to fundamental analysis rises proportionately with the difficulty of performing it.

Yes, I added that emphasis, because it's such a key point. Klarman goes on to say that the highest return -- the real money -- is made in markets where information is scarce and management teams are not yet obviously shareholder-oriented.

The logical conclusion
Think about that and decide what kind of investor you're willing and able to be. If you're satisfied with average returns, buy an index fund and enjoy the 5% or so annual gains you'll reap from core holdings in Oracle (Nasdaq: ORCL) and McDonald's (NYSE: MCD). And yes, you're getting those same kinds of big, staid megacaps even when you purchase an emerging-markets index fund. Top holdings in Vanguard's offering are Petrobras (NYSE: PBR) and China Life Insurance (NYSE: LFC).

Is This the Next Incredible Buying Opportunity?

Do you know the five best years to have bought stocks in the past four decades? They were 1974, 1982, 1987, 1990, and 2002.

Had you the foresight to buy stakes in high-quality companies such as Berkshire Hathaway (NYSE:  BRK-B), Johnson & Johnson (NYSE: JNJ), or even Valspar (NYSE:  VAL) at some of those major market bottoms, you could be sitting on a small fortune today. Warren Buffett laid the groundwork for his stunning performance in 1973, buying Washington Post shares for $11.38 each; those shares now trade for about $345.

It turns out that there's a common thread among four of the years (all but 1987). Although no indicator can consistently predict the market's performance, this particular trait has coincided with four of the five best investing opportunities in the past 40 years.

Even better, this indicator suggests that we may be in one of those rare periods right now. But before I show you the data proving that point, let me explain what this indicator is.

How to profit from payrolls 
The number is the Bureau of Labor Statistics' measurement of U.S. employment. It's the most basic statistic out there -- an estimation of all of the nonfarm salaried jobs in America. Like any statistic, it has limitations, one of which is that it does not count the self-employed. But it is an excellent measure of the health of the economy.

Given normal population and economic growth, there is upward pressure on U.S. employment numbers on the order of 1% to 3% per year. The time to perk up as an investor is when employment numbers shrink year over year, and, specifically, when they shrink at lower rates than they did the prior month.

This is because each of the best buying opportunities -- 1974, 1982, 1990, and 2002 -- were in the thick of large and protracted declines in employment. Unemployment soared and our economy suffered through painful contractions. When that happens, the stock market generally contracts as well. But buying in the eye of the storm has proven very lucrative over the long run, as this table shows:

Period	Length	Maximum Decline	S&P 500 Five-Year Return From Bottom
1974-1975	12 months	(2.7%)	66%
1981-1983	18 months	(2.7%)	225%
1991-1992	15 months	(1.5%)	96%
2001-2003	29 months	(1.6%)	101%
2008-2009	12 months (so far)	(4.3 %) (so far)	???

Source: Bureau of Labor Statistics.

A weak June
After a surprising May when the country lost only 322,000 jobs, June data came in with a loss of 467,000 jobs, which importantly took the year-over-year change down to negative 4.3%, a serious contraction by any measure. In fact, this was the largest contraction since 1949, 60 years ago[a1] . The following chart shows just how quick and severe this recession has been:

	Nonfarm Employment (in thousands)	Percent Change Vs. Prior Year
January 2008	138,002	0.7%
February 2008	137,919	0.6%
March 2008	137,814	0.4%
April 2008	137,764	0.3%
May 2008	137,717	0.1%
June 2008	137,617	0%
July 2008	137,550	(0.1%)
August 2008	137,423	(0.2%)
September 2008	137,020	(0.6%)
October 2008	136,597	(1%)
November 2008	136,013	(1.5%)
December 2008	135,489	(1.9%)
January 2009	134,333	(2.7%)
February 2009	133,652	(3.1%)
March 2009	133,000	(3.5%)
April 2009	132,481	(3.8%)
May 2009	132,159	(4%)
June 2009	131,692	(4.3%)

Source: Bureau of Labor Statistics.

And herein lies the opportunity. Clearly, this is a deep recession. After all, we've already experienced a 4% year-over-year drop in employment, and we're only a year into it. While the stock market could go down further, perhaps not everyone is aware that, like past contractions, this could be one of the greatest buying opportunities in years.

If the economy does rebound quickly, we may look back on Fifth Third Bancorp (Nasdaq:  FITB) and PNC Financial Services (NYSE:  PNC) as wonderful buys. But if we aren't out of the woods yet, I'll take my chances with blue chips like Kimberly-Clark (NYSE:  KMB) and Abbott Laboratories (NYSE: ABT).

Analysts Say This Stock Is a Double

Pssst. I've got a stock tip for you. Three of them, actually. Each of these stocks has been savaged over the past several years and, hey, analysts say each of them is at least a double.

Curious? Well, here you go.

Company	Recent Share Price	Analysts' Average Price Target	Potential Upside
Sirius XM Radio	$0.40	$1.00	150%
Delta Airlines (NYSE: DAL)	$5.76	$14.25	147%
Blockbuster	$0.62	$2.94	374%

Data provided by Capital IQ, a division of Standard & Poor's.

Great, right? There's just one glaring problem.

I wouldn't recommend these stocks to my worst enemy
You heard me. Look, if you're looking to cash in with big bets on penny stocks (and yes, I realize Delta is technically above the $5 threshold for penny stockdom), you may as well skip the "stocks" part and just buy some scratch-off lottery tickets. At least that way you'll support local schools while you vaporize your remaining savings.

Sure, these stocks could have huge upside from these levels. My dog could also learn to fetch me a beer from the fridge. Sadly, I'm unable to bank on either. Here's why.

For starters, Wall Street analysts are notoriously inaccurate. The analysts are sheep, dragging their estimates and targets behind the market like a puppy chasing after its owner. Now, to me, there are some very good reasons why these companies have been hit so hard. Sirius XM has the fiscal responsibility of a first-semester freshman. I'd rather own $0.40 worth of a stake in a local car wash. Blockbuster, whose lunch is getting eaten by Netflix, is suffocating under its own debt load. And short of a Southwest Airlines, I'll believe Delta or nearly any other airline can achieve consistent profitability just as soon as pigs fly.

OK, so these stocks are garbage. Now what? Well, if you're ready to make the leap from a speculator to an investor, read on.

The path to huge returns
Building real wealth doesn't happen overnight, and it certainly doesn't happen by making emotional short-term bets on bad companies. Consider the following:

• A study published in The Journal of Finance showed that investors who trade most frequently trail the market by 6.5 percentage points annually.
• According to Wharton's Dr. Jeremy Siegel, portfolios of the highest-yielding stocks returned 4.8 percentage points higher annually, with less risk than baskets of the lowest-yielding stocks, over the years 1958 to 2002.
• The list of top-performing surviving S&P 500 members from 1957 to 2003 is dominated by dividend payers, names like Hershey (NYSE: HSY), Merck (NYSE: MRK), Fortune Brands (NYSE: FO), Pfizer (NYSE: PFE), and Income Investor recommendation Coca-Cola (NYSE: KO).

In short, the path to building wealth and crushing the market over the long haul doesn't involve day trading or chasing after the next rocket stock, just patiently investing in the tried and true -- specifically, blue chips that pay large, sustainable dividends.

Getting paid to invest
The merits of dividend-focused investing are fairly obvious: The strategy is a proven market-beater over the long run, it comes with lower risk, and you get paid cash along the way. For perspective, the average yield of the select companies on our scorecard is 5.5%. Compare that to the flat 3% yield you can get on a five-year CD.

Of course, you can't just throw darts at a dividend dartboard and hope for the best. You'll want to take a page from our Income Investor playbook. We look to separate the wheat from the chaff by specifically looking for:

1. Dividend yields greater than 3%. Again, research shows that stocks yielding above-market rates provide higher returns with lower risk.
2. Capital gain potential. What can I say? We're a bit greedy. We only recommend companies trading at big discounts to their intrinsic value.
3. Great management, great returns. We like tenured management teams that have brought home the bacon via long histories of dividend increases and double-digit returns on invested capital.
4. Durable competitive advantages. Companies with big moats: unique, sustainable cost advantages; network effects; valuable intellectual property; high switching costs; and so on.

There aren't many companies that make the cut. At best, we think the universe of stocks capable of making the Income Investor grade is only a couple of hundred companies, among the thousands of publicly traded names out there.

How about a case in point? Take Sysco (NYSE: SYY), the biggest kid in the U.S. food marketing and distribution sandbox. Sysco has about 16% share of this highly fragmented market, which affords it huge scale advantages over its much smaller competitors. Its ability to comfortably compete on price and successfully integrate smaller players should only allow that market dominance to grow over time. Meanwhile, Sysco shareholders will collect on a 4.4%-yielding stock, which we peg as having major upside on an economic rebound. An overnight double? No. An outstanding, low-risk business trading at a great price? Yes, sir.

5 Stocks That Are Swimming in Cash

Some say cash is king. And today, many are saying it loudly.

According to The Wall Street Journal, 64,000 companies bit the dust and filed for bankruptcy in 2008. And, terrifyingly still, credit markets are bracing for significant increases in corporate default rates in 2009.

For those companies that survived this first wave, the really bad news is that debt will still require repayment, employees will still want their paychecks, and electricity bills will still fall on their doorstep every month. Companies need cash -- and the ones holding a lot of greenbacks should do quite well.

I've found seven companies that have tons of cash, but it doesn't really matter. Let me explain why.

Cash helps, no doubt
We can all agree that a good amount of cash on the balance sheet is an excellent defense for a company facing complete, financial destruction. If General Electric (NYSE: GE) didn't have plenty of cash on hand, it would be in a heck of a pickle right now; the same is true of Wells Fargo (NYSE: WFC). Let's not forget that Bear Stearns went under not because of insolvency, but because it had no liquidity.

But there's a bigger problem.

You may be looking at the cash line on a company's balance sheet with the belief that companies with lots of cash will be the companies that can avoid bankruptcy, and therefore be properly positioned to succeed in the future. You might be tempted to buy shares of these companies.

Not so fast.

I agree -- to some extent. These companies probably won't go bankrupt (in the near term, at least), but it has nothing to do with how well the company can or will do in the future. That train of thought will steer investors into a classic mistake.

Show me the money!
I've selected seven companies with market caps larger than $500 million and cash in excess of 20% of that market cap (which is a lot of cash!) to illustrate a simple point:

Company	Market Capitalization (billions)	Cash and Cash Equivalents (billions)
Apple (Nasdaq: AAPL)	$122	$25
Siemens (NYSE: SI)	$55	$16
Electronic Arts (Nasdaq: ERTS)	$6.5	$2.5
Sprint Nextel (NYSE: S)	$13.3	$4.5
Sun Mircrosystems (Nasdaq: JAVA)	$6.9	$2.7

Source: Capital IQ, a division of Standard & Poor's.

These are relatively some of the "richest" companies in the world. But that fact alone doesn't have any bearing on whether they make for good investments.

Market beaters? Maybe.
These companies could be burning through cash faster than a teenager with your gold card -- or they could be tossing lots of money into that expensive new pet project that may or may not work.

You just don't know with these figures alone. The financial picture remains incomplete.

A tale of two opposites
Take Apple and Sprint Nextel, for example. Both have lots of cash. But Apple has more than $24 billion in cash, no debt, hauled in $9.1 billion in free cash flow in the past 12 months, and pushes returns on invested capital at rates in the ballpark of 20%.

Sprint, on the other hand, has $4.5 billion in cash, carries a whopping $22 billion in debt, fails to deliver nearly as much cash flow per revenue dollar, and fails to push positive return rates on invested capital. Most of what cash is made just goes back to debt holders.

Suffice it to say that these are two different companies in two remarkably different places.

I'm not saying that Apple is a much better investment than Sprint (OK, it is); I'm simply trying to illustrate why looking at cash figures can be misleading.

Cash is just one piece of the puzzle
Instead of simply highlighting companies with huge bank vaults, ask yourself whether a given company will be adding to that stockpile in the future or taking away from it. And most important, identify just what the company intends to do with that cash.

Companies sporting generous coffers can't guarantee that their products are going to sell in the future or that their industries are sustainable for the long term.

Cash is necessary -- necessary to avoid bankruptcy in the short term and to operate properly in the medium term. In fact, we Fools like our stocks to support healthy cash cushions in the (likely) event of an emergency. But cash can only get you so far. Companies still need to have a plan -- a good plan -- for that cash.

The truth is stranger than fiction
There is another wrinkle you should know about cash and the people who hold it. According to research confirmed by several different sources, the best managers of cash tend to be, ironically, the same companies that regularly redistribute it back to shareholders in the form of dividends.

As the master of your own money, you can probably appreciate how a dividend-paying company with limited resources must be more disciplined with its spending, because it knows it'll have to pony up a dividend to shareholders on a regular basis. Over the long run, these institutions generally become better stewards of capital.

The difference isn't marginal, either. Research has shown that from 1972 to 2006, S&P 500 dividend-paying stocks actually performed significantly better than their non-paying peers -- by a sizable margin of six percentage points per year! That outperformance can be at least partly explained by the burden (a blessing for shareholders) of having to pay a dividend regularly.

Top-Rated Stocks That Treat Shareholders Right

The flip side to shareholder-friendly stocks expected to underperform the market? Highfliers that pay little heed to their owners' interests. Conversely, there are top-flight companies that also treat their shareholders with respect.

Institutional Shareholder Services -- the big name in corporate proxies -- measures how well a company performs in as many as 63 categories covering four broad areas. Moreover, each company is scored relative to its market index and its industry group. It assigns the stocks a rating that it calls its corporate governance quotient, or CGQ.

Some evidence supports the notion that companies with weaker governance have higher risk, decreased profitability, and lower valuations. We'll be looking at stocks that Motley Fool CAPS investors have marked to outperform the market and that also sport above-average CGQ scores, either in their index group or among industry peers.

Company	CAPS Rating (Out of 5)	Index CGQ Ranking*	Industry CGQ Ranking*
Automatic Data Processing (NYSE: ADP)	****	76.5%	97.7%
Harris & Harris (Nasdaq: TINY)	*****	84.1%	76.2%
Level 3 Communications (Nasdaq: LVLT)	****	93.8%	94.7%
USEC (NYSE: USU)	*****	86.5%	78.7%
Vaalco Energy (NYSE: EGY)	*****	67.9%	67.0%

Sources: Yahoo! Finance, Motley Fool CAPS.
*Relative placement when compared with companies in index or industry. Higher is better.

Although finding good companies and holding them for the long term is one of the greatest secrets to success in investing, there are many factors an investor should consider, and how well a company treats shareholders shouldn't be least among them. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies.

Go to the head of the class
The green-shoots economy continues to wilt in the summer sun, but like crocuses breaching the last winter snows, there do remain some signs of life. Ah, poetry ...

According to the National Venture Capital Association, five companies backed by venture capital went public in the second quarter and raised a total of $720 million. At $279 million, satellite-imaging firm DigiGlobe (NYSE: DGI) was the largest. That's small during normal times, but considering there had been no debutantes over the previous two quarters, it was something of a milestone. Further, there were 59 venture-backed mergers in the quarter, with Medtronic's (NYSE: MDT) $700 million acquisition of Corevalve topping the list.

That development offers hope to the capital markets, although Dow Jones notes that 51 venture-capital firms raised only $5.1 billion over the first six months of 2009. That was a 63% drop-off from a year ago and the worst outing since 2003. Consequently, according to the Wall Street Journal, some VC investors want to stick their hands in taxpayers' pockets and grab some of the stimulus money that Washington has been throwing around. The U.S. government has promised about $60 billion for four key areas -- environmentally clean technology, rural Internet broadband, cyber-security, and health-care information technology -- in which venture capital has invested heavily.

Yet some start-ups are attracting great interest: Former Netscape whiz kid Marc Andreessen was able to lure $300 million in capital and even oversubscribed his new venture-capital firm, which will focus on the computer industry. Perhaps that action indicates that there's plenty of interest left in technology.

Harris & Harris certainly thinks so. It's a business-development company that invests exclusively in venture-capital-backed tiny tech: nanotechnology, microsystems, and microelectromechanical systems (MEMS). Its portfolio is valued at almost $59 million, and it has another $51 million in U.S. Treasuries at its disposal. With no debt on its books, it's not in any danger of facing a liquidity crisis even in this recession. In fact, it's poised to find the next big thing.

Investors such as top-rated CAPS All-Star member TSIF are looking at the potential of seeing Harris' investments eventually paying off when they're finally brought public:

Harris and Harris's Tiny has been a favorite of mine for a long time. I hold some hoping they will take off some day, even years from now. Investing in tiny techs is a tough proposition in any economy, but the lack of funding has made it hard for even the better tiny's to grow. While funding is still tight, Harris and Harris has some nice plays in their stable. If any of them soar then Harris and Harris will gain in bounds. Harris and Harris, however, is savvy enough to keep enough cash on hand to help the better ones along and to be open to new positions.

10 Stocks to Shake the Market

Some stocks are one-hit wonders, making a big splash when they first appear, then quickly fizzling into oblivion. But for other stocks, that initial big move is only a preview of bigger and better gains.

Today, we've compiled a list of stocks that made some of the biggest moves up over the past 30 days. We'll then pair that list with the ratings issued by our Motley Fool CAPS community. The higher each stock's rating, the greater CAPS members' faith in that company's ability to keep on beating the market.

Stock	30-Day % Change	CAPS Rating
Jazz Pharmaceuticals (Nasdaq: JAZZ)	278.00%	*
Monogram Biosciences	132.99%	**
Savient Pharmaceuticals	89.40%	**
Oshkosh (NYSE: OSK)	49.71%	****
Merge Healthcare	42.00%	**
Orexigen Therapeutics	37.63%	*
Labopharm (Nasdaq: DDSS)	36.52%	**
Poniard Pharmaceuticals (Nasdaq: PARD)	36.48%	**
Ivanhoe Mines	34.33%	**
Alvarion (Nasdaq: ALVR)	30.82%	****

As the market goes into its second week of dropping, the magnitude of gains is less than what we saw in previous weeks. With almost all of the stocks carrying low one- and two-star ratings, let's see why the CAPS community thinks the higher-ranking companies might outperform the market.

A new winner
Well, that had to hurt. MRAP manufacturers Navistar International (NYSE: NAV), Force Protection (Nasdaq: FRPT), and BAE Systems have to feel a bit slighted by the Pentagon's decision to assign a $1.1 billion contract to truck maker Oshkosh.

Earlier this year, Navistar protested the Defense Department's decision to move to a lighter vehicle than the one it manufactures now, but when it withdrew its protest, some thought it was back in the lead to win the contract to build the mine-resistant, ambush-protected trucks.

Oshkosh says the contract calls for 2,200 trucks, but that it's likely to receive a second order, valued at $1.8 billion for 3,000 more vehicles, by the end of July. CAPS All-Star member swingtrader930 says this influx of revenue will bolster an already solid company.

The government is giving them a contract worth $1Billion. That's as much as their market cap. All vehicle manufacturers have been suffering. They were a fairly stable company before the contract and they weren't burning cash. This infusion of revenue should help this issue. The news is out and old at this point. Waiting for a small pull back would be [advisable].

Alvarion didn't win any government contracts as large as that, but the wireless broadband equipment maker might help Nokia Siemens Network deploy next-generation WiMAX technologies. The joint venture is expected to invest heavily in 4G wireless networks, and Alvarion is a contender.

It could use the contract, but some investors aren't sold on it. CAPS member sunbakd1 looks at the wider losses the company reported and suggests Alvarion needs to do a lot more to be considered a growth story.

Has anyone looked at their income statement? Hello, negative income, negative cash flow. How is this a solid company to buy on growth when they dont make money? Down 600% in revenue growth. I would not follow the herd on this stock. It could lead you directly to the slaughter house.

3 Stocks Ready to Roar

There are plenty of strategies for picking stock winners: For example, you can look for low-P/E stocks, or you can seek out companies selling at a discount to their future cash flows. At the small-cap stock-picking service Motley Fool Hidden Gems, our analysts are able to stay ahead of the market -- even in the current environment -- by finding undervalued stocks that have gone ignored.

Yet what if we could find a way to whittle down our list of prospects beforehand and find those whose engines are just getting warmed up?

Using the investor-intelligence database of Motley Fool CAPS, I screened for stocks that were marked up by investors before their stocks began to move up over the past three months, in a market that has headed south in a dramatic fashion. My screen returned 93 stocks when I ran it and included these recent winners:

Stock	CAPS Rating 1/7/09 (Out of 5)	CAPS Rating 4/7/09	Trailing- 13-Week Performance
Cell Therapeutics (Nasdaq: CTIC)	**	***	284.2%
Isilon Systems (Nasdaq: ISLN)	**	***	73.2%
Jackson Hewitt Tax Service (NYSE: JTX)	**	***	4.4%

Source: Motley Fool CAPS screener; trailing performance from April 9 to July 7.

Jackson Hewitt, in fact, was previously picked as a stock ready to run, and I featured it in October. So while the screen above tells us which stocks we should have looked at three months ago, it would be more helpful to see  the stocks  we ought to be looking at today. I went back to the screener and looked for stocks that were just bumped up to three stars or better, that boast attractive valuations, and that sport a price increase of more than 10% over the past month. 

Here are three out of the 41 possible stocks that investors in the CAPS community seem to think are ready to run today:

Stock	CAPS Rating 4/7/09	CAPS Rating 7/7/09	Trailing-4-Week Performance	P/E Ratio
HQ Sustainable Maritime Industries (NYSE: HQS)	**	*****	(3.9%)	8.9
EnPro Industries (NYSE: NPO)	**	***	(15.7%)	8.0
M&F Worldwide (NYSE: MFW)	**	***	(26.8%)	3.5

Source: Motley Fool CAPS screener; price return from June 12 to July 7.

Though you may get different results, since the data is updated in real time, you can run your own version of this screen. First let's take a look at why investors  think these companies will go on to beat the market.

HQ Sustainable Maritime Industries
HQ Sustainable may be able to capitalize on growing worldwide demand for tilapia. The U.S. is the second-largest market for the healthy "new white fish," after China -- good news for HQ Sustainable, as it serves its toxin-free, natural tilapia to both markets. Industry watchers expect China, including HQ Sustainable, to produce about 40% of the world's supply by 2010. CAPS member Sprint2Me thinks HQ Sustainable can capitalize: "[HQ Sustainable] is a company that can take advantage of healthier trends worldwide while being "green." Also a play on the growing Chinese economy."

EnPro Industries
EnPro Industries, developer of engineered industrial products, has had to contend not only with a contracting economy and an inevitable decline in sales volume, but also with asbestos-related expenses. Its first-quarter profit plummeted by 7% year over year. However, as the economy has recently begun a slower rate of contraction, so EnPro and similar companies, such as MSC Industrial Direct (NYSE: MSM),  are beginning to see the light at the end of the tunnel. CAPS All-Star Caligiuri writes of EnPro: "Considering Book value, earnings, and market cap ... this should beat the market in 5 years."

M&F Worldwide
Having a diverse business can often act as a defense against decreasing revenues in a specific segment. Yet the hodgepodge of operating units that make up M&F Worldwide (a company that offers check printing, financial services, educational testing services, and licorice!) didn't offer enough of a cushion to stop shares from dropping by more than 50% over the past year. Still, the company managed to turn in higher first-quarter profit as it extinguished debt, reduced interest expenses, and bought back shares. While the result depended heavily on one-time gains, M&F Worldwide should benefit in the future from lower interest expenses.

Top-Rated Stocks Blowing the Doors Off This Market

No one has perfect foresight, but let's be honest: The market is full of people who, as Oscar Wilde would say, know "the price of everything and the value of nothing." Far too often -- over the past year especially -- investors have been pitched sensational stock recommendations only to be left high and dry as shares crumble.  

To hunt down top-recommended stocks that have been rewarding investors accordingly, I summoned our Motley Fool CAPS community to point out a few four- or five-star stocks that have been shootin' for the moon in recent months.

While they're not formal buy recommendations, these three-month bloomers caught my attention: 

Company	13-Week Price Change	Recent Share Price	2009 EPS Estimates	CAPS Rating (out of 5)
Colgate-Palmolive (NYSE: CL)	22%	$73.34	$4.24	*****
Kellogg (NYSE: K)	21%	$47.80	$3.09	****
Marvel Entertainment (NYSE: MVL)	32%	$37.11	$1.35	****
TexasInstruments (NYSE: TXN)	21%	$20.42	$0.75	****
U.S.Steel (NYSE: X)	21%	$30.50	($10.05)	****

Data from Motley Fool CAPS and Yahoo! Finance as of July 8. 

You can rerun the CAPS screen I used by clicking here.

A deeper look at Colgate-Palmolive
There's a healthy debate raging these days about whether branded products made by the likes of Colgate and Procter & Gamble (NYSE: PG) will succumb to cheaper store-brand names provided by retailers like Costco (NYSE: COST).

It's undeniably true that as we save more -- which we're doing, in a big way -- we tend to scale our purchases down toward cheaper products. For consumers, it's the easiest way to save money while not completely cutting material aspects out of daily life. This is unquestionably bad news for companies reliant on selling branded products for a premium.

But this argument can be effectively neutralized by two points:

• Most consumer-staple stocks trade at historically low valuations, which already price in a heavy slowdown.
• Companies that sell premium products for low dollar amounts -- such as soap, toothpaste, and deodorant -- aren't as affected as higher-dollar-amount items. Saving a buck on toothpaste isn't as important as saving a few hundred bucks with store-name clothes.

As I showed a few weeks back, that's currently the case with Procter & Gamble. P&G is trading at a dramatic discount to its historical average multiples. And while growth might be stalling out, we're not talking about the kind of cliff-diving trouble facing high-end discretionary companies.

Colgate is in the same boat, with its shares currently trading at approximately 17 times 2009 earnings. That might seem absurd for this market, but perspective is in order. Going back to 1992, Colgate has commanded an average earnings multiple greater than 27. The nature of its products is both nondiscretionary and highly brand-sensitive in good times and bad. As CAPS member samstevens writes:  

solid company with a pretty safe market. no one's gonna stop buying toothpaste. Their customers will probably stick with them, i mean, people have their favorite toothpaste, its not like they're gonna just switch. They've also been really strong this past year.

CAPS member STOCKBUSTER1 seems to agree, writing:  

Good company which makes products used everyday in everyday life. Recession resistant and recent raise of the dividend assures this company isn't going anywhere anytime soon. Buy for the long term!

A Big Upgrade for Interactive Brokers Group

Every day, the sun rises on Wall Street, and a plethora of professional analysts wake to issue new opinions on stocks. Here at the Fool, we use our "This Just In" column to examine some of these picks-- and the track records of the firms behind them -- so individuals can make better investing decisions.

In addition to following professional banks, anyone can use Motley Fool CAPS to monitor the collective opinions of more than 135,000 members, many of whom demonstrate better investing insight than published analysts do.

More top-performing CAPS members are feeling bullish on Interactive Brokers Group (Nasdaq: IBKR) lately, enough, in fact, to upgrade it from the three- and four-star rank it has held for nearly a year to a more formidable five stars. A total of 361 members have given their opinion on the electronic trading firm, with many of them offering analysis and commentary explaining the recent optimism.

Despite a significant drop in revenue in the first quarter, many CAPS members see big potential for the electronic market maker and broker that some see as unfairly lumped in with banks and other financial institutions. While Interactive Brokers competes with large banks like Citigroup (NYSE: C), UBS (NYSE: UBS), and Morgan Stanley (NYSE: MS), it doesn't carry all the financial baggage as it simply provides access to more than 577,000 securities, options, and futures products. In June, the company had 18% more accounts than the previous year, with more than 121,000 now, and its ending customer equity grew 13% to $11.5 billion among fierce competition in the industry.

While E*TRADE (Nasdaq: ETFC) has been struggling with debt and losses, Interactive Brokers and peers like optionsXpress are still in the black. Large discount brokers like TD AMERITRADE (Nasdaq: AMTD) and Charles Schwab (Nasdaq: SCHW) have remained profitable also, even with discount services aimed at individuals. With Interactive Brokers' history of achieving strong returns on its equity and conservatively capitalized balance sheet, many CAPS members are warming up to the stock.

To see what the very best CAPS analysts are saying now about Interactive Brokers Group -- as well as other winning stocks they are picking -- head on over to CAPS and have a look. The community research and resources in CAPS are totally free, unlike analyst opinions reserved for paying clients.

It's Finally Time to Buy These Stocks

Stay away from small-cap bank stocks.

It was nearly 18 months ago now that Tim first dished out that advice. Though those stocks looked cheap at the time, writedowns were happening across the industry, making financial institutions nearly impossible to value. On top of that, the economy was showing signs of sputtering with no resolution in sight.

Not much has changed
It's hard to believe, but the current economic downturn is nearly two years old now -- and it's gone from bad to worse. Notwithstanding the recent rising tide in the market, stocks have gotten "cheaper," writedowns have gotten bigger, and the federal government is throwing Hail Mary passes in the hopes of averting further crisis.

And while big financials such as Lehman, AIG, Fannie (NYSE: FNM) and Freddie, and Goldman Sachs (NYSE: GS) have dominated the headlines, small financials have been hit just as hard. In fact, it's gotten so bad that former mid-cap banks are now de facto small caps: Regions Financial (NYSE: RF) and Huntington Bancshares (Nasdaq: HBAN) have lost 75% or more of their value since this crisis began in late 2007!

All of this is to say, it's still not time to start buying small-cap banks.

It may, however, be time to start looking hard at something a little off the beaten path: small-cap value.

What's the difference?
Small-cap value and small-cap banks often get conflated -- and for good reason. As Brian noted last year, the Vanguard Small-Cap Value ETF (VBR), like most small-cap value indexes, has substantial exposure to small banks. For the quarter ended March 31, small financial services companies accounted for 34% of the fund's holdings.

But although small-cap value stocks have been the worst performers in 2009, Russell Investments recently released a report suggesting that "they could emerge as the frontrunners if the economy stages a recovery."

So while you don't want to buy small-cap banks, you do want to buy small-cap value net of banks because, as Mark Hulbert noted in a New York Times article at the end of 2008, these historical outperformers "produce their most explosive gains right at the start of a bull market."

But let us be clear
Neither we nor Mr. Hulbert are predicting that we're at the start of a bull market. Rather, we're noting that:

• Small-cap value generally outperforms
• Small-cap value outperforms by a particularly wide margin coming out of a bear market
• This is certainly a bear market

And thus: Now is a good time to start buying small-cap exposure for the long term.

After all, a little exposure to this market segment gives you the chance to take advantage of this historical trend and puts you in the position for significant outperformance whenever this bear market turns for good.

What next?
But Mr. Hulbert's recommended small-cap value investment vehicle, while low-cost, is imperfect -- because he advised investors to "buy and hold an index fund benchmarked to the sector and to ride out the market's turbulence."

We see two main issues with that approach. First, as we mentioned previously, your run-of-the-mill small-cap value index has nearly 35% exposure to financial companies -- a sector that has been and will continue to be rocked by government intervention, regulatory changes, and low interest rates.

Second, just as the SPDRs (NYSE: SPY) S&P-tracking exchange-traded fund is skewed toward the largest of companies, like $140 billion telecom giant AT&T (NYSE: T), small-cap value indexes are heavily weighted toward the larger likes of $2.6 billion OGE Group (NYSE: OGE), limiting the ability of smaller -- but perhaps better -- companies to have an effect on your returns.

Here's what we'd do
If you want to take advantage of this sector -- and we think you should -- then you ought to build your own diversified collection of superior small-cap value stocks that don't carry dangerous financial liabilities on their books.

That way, you can weight your portfolio toward high-quality businesses with entrepreneurial managers who treat their shareholders with respect rather than to either small-cap banks or the small-cap value stocks with the largest market caps, as any passive index fund will do.

4-Star Stocks on the Upswing

Sadly, there's no such thing as an ultimate buy signal when it comes to investing in stocks. Identifying companies with the wind at their backs takes time, patience, and a good dose of due diligence.

There is, however, an easy way to increase your odds of finding the stocks that will beat the market. At Motley Fool CAPS, the Fool's investing community of more than 135,000 members, we've found that our "five-star portfolio" is up 15.31% between January 2007 and April 2009, compared to a loss of 40.6% for the S&P 500.

To fully capture the upside potential of those highly rated stocks, it makes sense to identify them just as soon as they are upgraded to four- and five-star status. Fortunately, our CAPS screener now makes it possible to do this. Below, for example, is a list of companies that have been upgraded to four-star status from three stars just yesterday. These stock ideas are only a starting point, of course. Be sure to join us on CAPS to dig in even further.

Company	All-Stars Saying Outperform
Xcel Energy, Inc. (NYSE: XEL)	256 of 272
CTC Media, Inc. (Nasdaq: CTCM)	168 of 182
Lloyds TSB Group plc (ADR) (NYSE: LYG)	709 of 761
Complete Production Services, Inc. (NYSE: CPX)	291 of 304
Marvell Technology Group Ltd. (Nasdaq: MRVL)	1084 of 1155
Century Aluminum Company (Nasdaq: CENX)	346 of 368

Data from Motley Fool CAPS, July 9, 2009.

Our Supercomputer Loves These Stocks

When former World Chess Champion Garry Kasparov lost to IBM's Deep Blue chess computer more than a decade ago, we at The Motley Fool had our own particular insight into what had just happened. And even better, the insight -- translated into action -- has led us to pick numerous winning stocks in the years since. Below, I'm going to share with you five stocks our supercomputer predicts will beat the market going forward, and two that will not.

But first, let's go back to May 11, 1997
In an historic six-game match, Deep Blue and Kasparov were tied after five games. But in the closing Game 6, in springtime in New York City, the computer absolutely crushed the chess expert -- in less than an hour, it ran Kasparov off the board in just 19 moves. Kasparov had officially lost the storied showdown. Extremely ill-tempered afterward, he accused the IBM team of cheating. To his credit, he also asked for a rematch ... which has never happened to this day.

But back to the investment insight. The headlines after the match all basically read like so: "Machine Beats Man." To which we at The Motley Fool said: Yeah, right.

Because it wasn't really "the machine" that beat the man. It was dozens of IBM programmers and world-class chess experts all working together who programmed the machine that beat the man. Key difference. It was a whole bunch of humans all ganging up on Kasparov -- and even worse for him, they were harnessing the power of a supercomputer! Game over, baby. Looked at this way, you can see how it was really an unfair fight.

A few years later, in July 2001, I wrote an eight-page Word document that laid out how The Motley Fool could create an identical solution for investors. Start with the Fool community and its millions of visitors. From that, I hypothesized we could locate tens of thousands of superior investors. We would then build our own supercomputer, a database very similar to Deep Blue, except that ours would be filled with stock picks, not chess moves. By combining our human intelligence with our computer's great big brain, I believed we could program it to beat The Man.

Who's the man?
Who's Garry Kasparov in this metaphor? Take your pick: Either it's the S&P 500 market average, or a Wall Street analyst, or both. We believed that The Motley Fool community, working together with the help of a massive community intelligence database constantly refreshing itself with new data like a Doppler radar, would enable us to outperform Wall Street.

In October 2004, we began building it. We alpha-tested it privately for two years. We then launched it to a free public beta test in October 2006.

The stocks our supercomputer loves today
So, what does the world's greatest investment community favor going forward? You'd probably like to know which moves Deep Blue is planning to unleash against Kasparov in their next game, if it ever happens. I can't tell you that. But I can tell you five stocks that Motley Fool CAPS believes will beat The Man over the next one to three years, with a line or two about why.

Here you are, in order of popularity on our system (measured by the number of stock picks made -- the database is now over 3.3 million picks and growing):

• Vale (NYSE: VALE) -- Diversified Brazilian mining giant provides raw materials for economies that are continuing to grow.
• Berkshire Hathaway (NYSE: BRK-B) -- Undervalued because of an overreaction to mark-to-market accounting. Plus, "it's hard to go wrong with Warren."
• NVIDIA (Nasdaq: NVDA) -- Major graphics card supplier to video game consoles with good management team and strong balance sheet.
• Southern Copper (NYSE: PCU) -- Solid management, good margins, strong cash flows.
• Gigamedia (Nasdaq: GIGM) -- Online gaming company whose popularity continues to increase in Asia. Possibly cheap valuation.

Do your own research on these and decide whether you agree with "Deep Fool." And while you're deciding, here's my other promised freebie -- two popular stocks you may have looked at before that our community does not believe will beat the market going forward:

• Capital One (NYSE: COF) -- Large exposure to credit card defaults.
• AMR (NYSE: AMR) -- Recession, high overhead costs.

On whom would you bet your money today? Kasparov, or Deep Blue?

From whom would you take your stock market advice today? A Wall Street broker, or The Motley Fool community?

But wait!
Before you answer, how promising might it be if I told you that at Fool HQ, we have experts like Garry Kasparov walking around using our own Deep Blue (CAPS) to pick stocks?

That's right. The advisors who oversee our services at The Motley Fool -- people like, well, me, for instance -- actively use CAPS to help research our stock recommendations. We're shooting for the best of both worlds. As much as we may admire Kasparov, or love the story of Deep Blue, we don't want to go with just one or the other. We hire Kasparovs to use Deep Blue to play chess.

No wonder services like Motley Fool Rule Breakers are beating the market. Of course, we're measuring our gains over years, so a few really bad months don't significantly affect our temperament or our investment approach. Sure, they may pull down our profits for a while, but we accept the occasional bear, and we try to take advantage of it by getting our favorite stocks at lower prices.

3 Reasons to Be Scared of These Stocks

Veteran Global Gains members know what we love about China. There's tremendous potential upside there, with many cheap stocks ready to explode in value -- especially among smaller companies.

We can never emphasize enough, however, the dangers that lurk in the world's most populous country -- the nasty traits of some Chinese businesses that make us fear and loathe them.

An emerging giant
There are more than 2,000 public companies in China. About 450 are listed in the U.S., with that number growing all the time. And many of them are future multibaggers that will make their shareholders rich. Look around and you'll find businesses such as Universal Travel Group up nearly 300% just this year alone.

But we can't pretend these types of winners are easy to find. If you don't know the lay of the land -- the ins and outs of Chinese political structure -- you could quite literally lose a fortune.

Here are just three of the problems to be on the lookout for:

1. Hard-to-decipher financials. The Economist magazine sums it up better than I can:

The financial results of companies that global investors wish to buy into can be as unintelligible as the dialect spoken in the company town. It is said (with apparent sincerity) that some Chinese firms keep several sets of books -- one for the government, one for company records, one for foreigners and one to report what is actually going on.

In fairness, this was written a couple of years ago and Chinese financials are a bit easier to understand now. And there's no doubt that American companies also do not make available the books we'd really like to see. Even the ones we can see aren't necessarily easy to decipher -- look no further than Citigroup (NYSE: C) for a perfect example. I'll never forget one of my colleagues expressing admiration for JPMorgan Chase (NYSE: JPM), while at the same time admitting he didn't know exactly what was on its balance sheet -- and this is one of the few financial giants that held up well in the credit crisis.

But there's little question that we simply can't get the same lucidity and transparency from Chinese companies that we do from domestic firms.

2. Questionable quality of earnings. Quality of earnings refers to the extent to which financial reporting can be trusted. The more conservative management is with its assumptions, the better we feel about the numbers it reports. A 2008 Barron's article relayed a pretty sobering study from RateFinancials, an independent firm that rates financial reports. Looking at the five largest recent Chinese IPOs -- including LDK Solar (NYSE: LDK) and Yingli Green Energy (NYSE: YGE) -- RateFinancials found problems with "big increases in receivables, negative operating and free-cash flows, significant amounts of deferred revenues, major prepayments, and sizable long-term commitments to suppliers."

3. Poor corporate governance. China is "perceived to routinely engage in bribery when doing business abroad," according to Transparency International. And in TI's 2008 corruption report, the country falls well below any comfortable level, ranking 72nd. That doesn't mean every Chinese company is dicey, of course. India ranks 85th on the list, but for every fraudulent Satyam (NYSE: SAY), there's a shareholder-friendly outfit like HDFC Bank. But it's yet another risk to watch out for.

To sum it up, our Global Gains team warns that "Shareholders of Chinese companies should know that there is no real apparatus by which their interests are protected and that they are essentially betting on being on the same side as management and the majority shareholders -- who as often as not are branches of the government, the military, and/or the Communist Party."

And yet ...
Still, China's vast potential cannot be ignored, and investing indirectly through huge multinationals like General Electric (NYSE: GE) and ExxonMobil (NYSE: XOM) won't cut it. China is a small part of these companies' businesses; to realize the greatest potential from China's growth, you'll need to look to the domestic companies.

We recommend some China exposure as a part of any balanced portfolio. That's why we travel to the country yearly and headed off again earlier this week to meet with several companies and some prominent investors. 

These meetings -- the ability to sit at the same table as management and see the business operations with our own eyes -- allow us to separate the good from the bad, and the quality from the corrupt.

Uncovering a double
In 2008, China Fire & Security Group seemed to have it all. Revenue had doubled in two years, the country's market for fire safety products was huge, and several high-profile industrial accidents had pressured the government to crack down on safety violators. To top it off, the government enlisted China Fire itself to help write safety legislation. Talk about the fox guarding the henhouse!

But there was a hitch: The excellent website ShareSleuth.com had blasted China Fire for some less-than-stellar corporate structure and ownership issues, and the share price had cratered 60%.

We were fortunate, however, that our Global Gains analysts had actually visited the China Fire headquarters, touring the factory and chatting in detail with management. They were convinced the company was working earnestly to address the issues, and that the beaten-down stock price was a real bargain rather than a harbinger of further deterioration. They recommended the stock in May 2008, and it more than doubled before it was sold for valuation reasons.

3 Stocks in a Tailspin

Individual stocks can surge 10%, 25%, or even higher in a short period of time. And they can fall just as far, just as quickly. For example, shares in AIG (NYSE: AIG) fell 22% one day last week just after shareholders approved a 1-for-20 reverse split in an effort to help prop up its share price and protect its listing on the NYSE.

Big drops in share price can sometimes signal material defects or new risks. But at other times, they're simply pullbacks along with the larger pessimism facing the market today. Fortunately, we have Motley Fool CAPS, a great resource to help us understand the larger picture behind big price drops.

Is the sky falling?
CAPS contains more than just the crowd's opinions. Its best-performing members' votes count more in shaping each company's rating than do the picks of their poorer-performing peers. That way, investors can intelligently use the collective wisdom of more than 135,000 CAPS members to make better decisions.

We'll use CAPS' handy stock screening tool to quickly zero in on companies that have been slashed by at least 25% in the last four weeks, and which have a market cap greater than $100 million and a beta of less than 3. If you want to run this screen for yourself, please do -- just keep in mind that the results will update with the market.

Company	CAPS Rating (out of 5)	4-Week Price Change
Alcatel-Lucent (NYSE: ALU)	**	(26.1%)
Force Protection (Nasdaq: FRPT)	***	(43.1%)
Cliffs Natural Resources (NYSE: CLF)	****	(26.2%)

Source: Motley Fool CAPS. Price return June 12 through July 7.

Alcatel-Lucent
Alcatel-Lucent recently signed a worldwide alliance with Hewlett-Packard (NYSE: HPQ), which is a positive for a company that's still losing money and struggling with debt. But some investors fear that Alcatel-Lucent could face some stronger competition now that Nokia Siemens will take hold of the CDMA and 4G assets of fallen Canadian giant Nortel for $650 million. Companies like LM Ericsson and Alcatel-Lucent have a strong position in the North American market today, with Verizon (NYSE: VZ) recently chosing Alcatel-Lucent for part of its next generation network roll-out. But Nokia Siemens has had North America in its sights for a while now, and investors see it as a more credible threat with this new purchase. At this point, only a weak 72% of the 522 CAPS members rating Alcatel-Lucent expect it to outperform the market.

Force Protection
Force Protection's shares recently took a hit when its Force Dynamics venture with partner General Dynamics, and other bidders like Navistar (NYSE: NAV) and BAE Systems, lost out to Oshkosh in the U.S. government's $1.1 billion contract to supply 2,244 MRAP all-terrain vehicles. The company then took a few more blows with a couple of downgrades from Wall Street analysts, as did its chassis supplier Spartan Motors. Although the company said that it expects relatively softer operating profits in the second quarter, it expects a stronger second-half and full-year performance due to strength in other businesses. While the contract loss was a significant setback, nearly 93% of the 837 CAPS members rating Force Protection still see opportunity in the company and expect it to beat the market.

Cliffs Natural Resources
Wall Street analysts recently cut earnings estimates for the next reported fiscal year for Cliffs Natural Resource, taking into account the iron ore miner's scaling back of production. While Rio Tinto has been selling iron ore in record amounts, Cliffs Natural Resources has recently deferred about 1 million tons of customer purchase obligations until the first quarter of 2010 due to weak demand from steelmakers. In April, the company said its iron ore mines were operating at about half of their annual capacity, and that its North American iron ore business is expected to produce about 15 million tons this year at higher costs compared to last year's output of 35.2 million tons. Though the near term offers little excitement for investors, nearly 97% of 1,083 CAPS members rating Cliffs Natural Resources remain bullish.

Ultimately, whether or not you believe a fall in any stock is warranted, your own research is more important than collective opinions. CAPS can help you quickly focus your due diligence and even point out potential pitfalls you may not have seen.

Add your take on these or any of the 5,300 stocks that 135,000-plus members have covered in Motley Fool CAPS. It's totally free to be a part of the community, and the payback is more than worth it.

Where You'll Find Today's Best Value Stocks

Many value investors act as though some rule forbids them from looking at companies with growing businesses. Right now, though, ignoring what some would initially characterize as growth stocks could make you miss out on some of the best values in today's stock market.

A popular myth makes many believe that only staid, boring, mature companies make good value candidates. Such companies rarely have strong growth prospects, but their stock prices have been beaten down so far that even without future growth, just managing to survive can lift their shares substantially higher and give investors a great return.

But despite prevailing opinions to the contrary, there's nothing that makes value and growth investing mutually exclusive. Occasionally, the stocks that give investors the best value are those that have good growth prospects, while more "traditional" value stocks could in fact be overpriced and therefore not optimal investments.

What's happening now
That's an argument that Shannon Zimmerman develops in greater detail in his latest feature for the Fool's Rule Your Retirement newsletter. Among his comments, he provides several reasons why the average value investor should look beyond the usual value universe to seek out the best bargains in today's market.

To see how that proposition might work, I went to our Motley Fool CAPS community to search out companies that had the characteristics of both value and growth stocks. In particular, I looked for large-cap companies with relatively low P/E ratios and debt levels, as well as strong returns on equity and earnings growth over the past several years. I came up with several dozen promising results, including the following:

Stock	P/E	Long-Term Debt-Equity	Return on Equity	Past 5-Year Earnings Growth
Accenture (NYSE: ACN)	12.0	0	65%	19.1%
Alcon (NYSE: ACL)	16.4	0.01	46%	21%
eBay (Nasdaq: EBAY)	12.7	0	15%	28.2%
CNOOC (NYSE: CEO)	8.1	0.09	30%	31%
National Oilwell Varco (NYSE: NOV)	6.0	0.07	20%	75.9%
Stryker (NYSE: SYK)	13.4	0	20%	17.5%
Procter & Gamble (NYSE: PG)	12.0	0.34	19%	13.6%

Sources: Yahoo! Finance; Capital IQ, a division of Standard and Poor's.

As you can see, stocks that have had strong periods of recent growth aren't always expensive. Right now, in fact, many such stocks are trading at their cheapest levels in years -- possibly because their future five-year growth prospects are less favorable than they have been in the past

Why the disconnect?
Nevertheless, many investors can't get past the idea that value stocks and growth stocks are natural opposites. However, recent events have prompted many value investors to re-evaluate their stock-picking methods.

During 2007 and 2008, many value seekers were trapped by financial stocks, whose initial plunge turned into falling knives as the financial system came to the brink of collapse. Even with strong rebounds in recent months, long-term shareholders of financials have yet to come close to recovering all of their losses -- and many suffered permanent, near-total losses from investments in institutions like Lehman Brothers, Washington Mutual, and Bear Stearns.

The best of both worlds
Now, the right strategy may be to seek out stocks that not only trade at reasonable valuations but also are poised to become even stronger businesses in the future. During most market environments, you'll typically pay up for stocks with good growth prospects -- but the stocks referenced above, and many others like them, illustrate that you now have a unique opportunity to pick up stocks with decent growth on the cheap. That's a better value than you usually get from growing companies.

In particular, Shannon sees a select group of growth stocks outperforming both their value-oriented rivals as well as other stocks in the growth realm. His analysis -- which is available to Rule Your Retirement subscribers -- will put you on the right path to finding some of the best potential value-growth hybrid investments.

Regardless of which stocks you pick, the lesson to take from this is that whenever you arbitrarily narrow down the universe of stocks using certain criteria, you limit how many good stocks you can find. If you can accept the fact that growth stocks can also be good values, you won't miss out on some great investments.

5-Star Stocks on the Upswing

Sadly, there's no such thing as an ultimate buy signal when it comes to investing in stocks. Identifying companies with the wind at their back takes time, patience, and a good dose of due diligence.

There is, however, an easy way to increase your odds of finding the stocks that will beat the market. At Motley Fool CAPS, the Fool's investing community of more than 135,000 members, we've found that our "five-star portfolio" is up 15.31% between January 2007 and April 2009, compared to a loss of 40.6% for the S&P 500.

In order to fully capture the upside potential of those five-star stocks, it makes sense to identify them just as soon as they achieve five-star status. Fortunately, our CAPS screener now makes it possible to do this. Below, for example, is a list of companies that have been upgraded to five-star status from four stars just yesterday. These stock ideas are only a starting point, of course. Be sure to join us on CAPS to dig in even further.

Company	All-Stars Saying Outperform
Telkom SA Limited (ADR) (NYSE: TKG)	116 of 122
Natural Resource Partners LP (NYSE: NRP)	307 of 318
Koppers Holdings, Inc. (NYSE: KOP)	140 of 151
Manulife Financial Corp (USA ) (NYSE: MFC)	414 of 429
Curtiss-Wright Corp. (NYSE: CW)	140 of 142
National Instruments Corp (Nasdaq: NATI)	362 of 381

Data from Motley Fool CAPS, July 9, 2009.

The Cheapest Stocks I Know

As a member of the Motley Fool Rule Breakers research team, few readers will confuse me for a deep-value investor. I prefer turnover to turnarounds. I define the "C" in DCF as "catalysts." I find more investing ideas in lists of heavily shorted stocks than among the fresh 52-week lows.

Despite all this, I'm no spendthrift. I'm passionately cheap -- and I see great prices in growth stocks.

Value investors may have been jumping all over real estate developers last summer, when they seemed to be trading at single-digit P/E multiples. But earnings crashed, multiples contracted, and homebuilder stocks fell even further.

I prefer to hitch my portfolio's wagon to stocks that are actually growing. You can try your luck at nailing the top and bottom of cyclical stocks, but I won't. Why should I, when there are just way too many bargains out there from stocks that have consistently delivered the goods?

Five for the road
Now that we're done with 2008, we're starting to get a handle on estimates for this year. Let me run a few names past you. Tell me whether their P/E ratios surprise you:

Company	Recent Price	2009 EPS estimate	P/E
Akamai (Nasdaq: AKAM)	$20.32	$1.70	12.0
Google (Nasdaq: GOOG)	$407.98	$21.05	19.4
Research In Motion (Nasdaq: RIMM)	$73.18	$3.91	18.7
Priceline.com (Nasdaq: PCLN)	$108.88	$6.20	17.6
NetScout (Nasdaq: NTCT)	$9.52	$0.85	11.2

Data from Yahoo! Finance.

Finding growth stocks with 2009 profit multiples running in the teens -- and even pre-teens -- isn't necessarily cheap in and of itself. But dig a little deeper and you may start to appreciate what some of these companies are doing.

Akamai is the undisputed champ in content-delivery networks, speeding up the online experience. Google is the world's leading search engine, and by default, Internet advertising. Research In Motion is still the smartphone company to beat with its BlackBerry. Priceline.com continues to shine as a travel portal rising above its meandering rivals. NetScout is a niche tech specialist, boosting uptime in industries where there is zero margin for site outages.

All five companies may not be projected to grow their bottom lines this year, but analysts see healthy advances beyond that. If you're looking for bigger names, networking giant Cisco (Nasdaq: CSCO) is now fetching just 15 times this year's earnings. The world's original tech bellwether -- IBM (NYSE: IBM) -- is now trading at just 11 times this year's projected bottom line, and 10 times next year's profit target. 

These are growth stocks, yet they are fetching multiples that seem a better fit with sleepy utility stocks. So how can these not be the cheapest stocks that you know, too?

Buying the right kind of growth stock
The companies that I consider -- heck, demand to consider -- cheap are growing at incredible rates, yet they're priced as if they were only modestly above average. They also have a history of blowing past analyst profit targets, so the forward-looking estimates have a pretty good chance of being revised higher in the coming quarters.

That's where I want to be. Yes, Rule Breakers is a growth-stock newsletter service. Dig deep into the scorecard and you'll find:

• One of China's fastest-growing Internet companies, with ridiculously wide profit margins, trading for less than 11 times next year's projected earnings.
• A luxurious pampering-services specialist fetching just 13 times forward profitability.
• Two of the five stocks I mentioned earlier -- Akamai and Google -- that actually do look cheap, at least in my book.

Growth stocks are the greatest value stocks I know. Remember when Google went public at $85 in the summer of 2004? Did you think it was overpriced at the time? If so, you weren't alone. But no one knew that the company was positioning itself to earn $23.93 per share come 2010. Those who got into Google early snapped up a stake in the paid-search giant for just 3.6 times 2009 profits.

Getting in early on the right growth stocks is the key. Just your luck -- the growth-stock kissing booth doesn't have much of a line these days. Pucker up, my friend.

Most Stocks Are Losers

Are most stocks a loser's bet?

According to a recent Money magazine article, a study from Dimensional Fund Advisors concluded that a mere 25% of the stocks in the U.S. market were responsible for all the gains from 1980 to 2008.

While the U.S. market as a whole generated a 10.4% annualized return, take out these "superstocks" (Money's term), and the remaining 75% of stocks actually generated an annualized loss of 2.1% over these 28 years.

That's right: Three-quarters of U.S. stocks lost value.

And that abundance of market losers actually makes sense -- just look at your local strip mall. As the likes of Wal-Mart (NYSE: WMT), Best Buy (NYSE: BBY) and Home Depot (NYSE: HD) eat up real estate and market share, smaller businesses struggle just to maintain a foothold. Many disappear. It's the nature of a free-market economy (unless you get bailed out by Uncle Sam -- but I digress).

Winning some, losing some
The study goes a long way toward explaining why most investors and mutual fund managers fail to beat the averages. With 75% of stocks losing money, even a skillful stock selector faces formidable odds.

That's why we at The Motley Fool have been saying for years that investors should park at least some of their portfolios in passive index funds. By tracking large baskets of stocks, these funds mirror the market's overall return, mitigating the 75% of losers with the 25% that outperform.

The S&P 500 index, for example, gained an average of approximately 8% a year between 1980 and 2008. Being invested in a low-cost index fund would have given you excellent returns, without the risk of choosing individual stocks.

But the two decades between 1980 and 2000 were some of the best the stock market has ever seen, and since then the overall market has trended down (despite some spectacular bubbles along the way).

If you want to make money in more challenging markets -- like the one we're facing now -- you need to add timely individual stock selections to boost your returns.

And that means learning to tell the outperforming Amazon.coms (Nasdaq: AMZN) from the underperforming Overstock.coms (Nasdaq: OSTK).

Finding the gold among the dross
Some of the most important characteristics to seek when buying individual stocks include:

• A sustainable competitive advantage that protects the company's profits, be it patents, dominant market share, ownership of natural resources or network effects.
• A reasonable start price -- if you overpay, it could be as bad as buying a losing business.
• A management ethos that anticipates and adapts to change.

That last point is key. Johnson & Johnson (NYSE: JNJ), for instance, started 1980 at a split-adjusted $1.66 per share. Today's $56 price tag turned a $10,000 investment in 1980 into more than $335,000 now, and that's before earning or reinvesting a healthy dividend.

On the other hand, Eastman Kodak (NYSE: EK), an equally respected company in 1980, started that year at $21.42. Today, it's below $3. After three decades of exhibiting patience, you'd have lost most of your money.

Over 30 years, $10,000 either became $335,000 or it became $1,400. A key difference between the two? The ability to adapt.

Technology changed beneath Eastman Kodak's feet, and it didn't adapt to the challenges of the Internet and digital photography in time. The landscape changed many times on Johnson & Johnson, too, but management found ways to respond and capitalize -- it anticipated changes and adapted, making key acquisitions and evolving its product lines.

You need to adapt, too
Notice that our key criteria involve investing in the best businesses -- not trading shares month-in and month-out. If you want to outperform, you need to hold core positions for the long term. When buying at good prices, it's only by owning superior companies over many years that you'll compound your invested dollars.

In a volatile market like this one, that challenge can seem insurmountable. But there are sensible ways to make money in flat, down, and sideways markets, too -- ways that provide nearer-term income, complement your core stock holdings, and make it much easier to wait for them to flower.

Options are an excellent -- and even low-risk -- tool for producing steady income on flat or down stocks, rather than merely relying on a stock to go up. And using counter-market exchange-trade funds (ETFs), along with other sensible shorting strategies, can help you to profit on some of those 75% of stocks that ultimately lose money. After all, why pretend stocks only go up?

Even Warren Buffett, the consummate long-term investor, adapts, using options and more sophisticated tools to help tilt the odds in his favor.

Combining long-term investing with strategies like options and ETFs to make money in any market is what our new Motley Fool Pro service is all about. We're a young service, but since October we've produced positive and market-beating returns on more than 80% of our few dozen positions, including both stocks and options.