Don't Miss This Cheap Stock

Unfortunately, "cheap" is a relative term. Precious few stocks that trade for low price-to-earnings ratios or below book value are real bargains. They look enticing, but instead, they're value traps -- stocks that deserve the multiples for which they trade, and punish the garbage-grabbers who buy them.

But don't take my word for it. Here are five "cheap" stocks that trapped bargain-hunting prey:

Company	CAPS Stars (Out of 5)	Book Value on July 16, 2004	Return Since
ArvinMeritor (NYSE: ARM)	**	1.30	(77.8%)
Gibraltar Industries (Nasdaq: ROCK)	**	1.58	(65.2%)
Quantum (NYSE: QTM)	**	1.59	(62.2%)
MBIA (NYSE: MBI)	*	1.23	(92.2%)
Lennar (NYSE: LEN)	*	1.94	(75.8%)

Sources: Motley Fool CAPS, Capital IQ, Yahoo! Finance.

Watch out!
How can you avoid value traps like these? My favorite method is borrowed from Prof. Aswath Damodaran. In his book Investment Fables, he counsels investors to measure low price-to-book stocks by their returns on equity (ROE).

Makes sense to me. Book value is shorthand for equity. A low price-to-book stock is priced as if management won't produce high returns from the equity capital afforded it. Find a stock that defies this maxim -- a stock with an above-average and rising ROE -- and you may have found a bargain.

A machete for when you're in the weeds
Our 135,000-member-strong Motley Fool CAPS database is a great place to start your search. I ran a screen for well-respected stocks trading for less than twice book value, and whose returns on equity were 10% or more. Qualifiers were also trading no more than 25% above their 52-week low, leaving plenty of room for further gains.

Of the 38 stocks that CAPS found hiding in the weeds, National HealthCare (NYSE: NHC) intrigues me the most this week. The details:

Metric	National HealthCare
Recent price	$38.30
CAPS stars (5 max)	*****
Total ratings	72
Percent bulls	91.7%
Percent bears	8.3%
Price-to-book	1.60
ROE	11.4%
% Above 52-week low	12.3%

Source: CAPS. Data current as of July 17, 2009.

This underfollowed operator of senior care and assisted-living facilities differs from peers such as Healthcare Realty Trust (NYSE: HR), in that it isn't structured as a REIT. But it nevertheless pays a healthy dividend, yielding 2.7% as of this writing.

Most intriguingly to me, those few who do follow National HealthCare love it. All 16 All-Star CAPS investors who follow the stock rate it to outperform, and insiders still own more than one-quarter of the business.

Others simply like the economics of a business that caters to our aging population. "The growing need for senior healthcare in our country is the best reason for this rationale," wrote CAPS investor drcurt in February. "This company is very well run and will continue to be well run for many years to come. The recent change in management will assure this. Demand for expansion in the senior healthcare industry will mean that [National HealthCare] will continue to grow."

I agree -- but that's just my opinion. Would you buy shares of National HealthCare at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

4-Star Stocks Poised to Pop: Elbit

Based on the aggregated intelligence of 135,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, Israeli defense contractor Elbit Systems (Nasdaq: ESLT) has earned a respected four-star ranking.

With that in mind, let's take a closer look at Elbit's business and see what CAPS investors are saying about the stock right now.

Elbit facts 

Headquarters (founded)	Haifa, Israel (1966)
Market Cap	$2.75 billion
Industry	Aerospace and Defense
Trailing-12-Month Revenue	$2.68 billion
Management	President/CEO Joseph Ackerman (since 1996) CFO Joseph Gaspar (since 2001)
Compound Annual Revenue and Net Income Growth (over last five years)	24.1% and 36.2%
Dividend Yield	1.8%
Competitors	Boeing (NYSE: BA) Lockheed Martin (NYSE: LMT)
CAPS Members Bullish on ESLT Also Bullish on	Vale (NYSE: VALE) Google (Nasdaq: GOOG)
CAPS Members Bearish on ESLT Also Bearish on	Chevron (NYSE: CVX) Procter & Gamble (NYSE: PG)

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS.

Over on CAPS, fully 231 of the 236 All-Star members who have rated Elbit -- some 98% -- believe the stock will outperform the S&P 500 going forward. These bulls include hhasia and All-Star SarahGen, who is ranked in the top 0.2% of our community.

Last month, hhasia highlighted Elbit's home as a profitable place to play defense: "Haifa! No surprise that a defence player from this place would be producing solid earnings. This will be more important as security needs grow."

In an earlier pitch, SarahGen elaborates on the stock's Middle Eastern edge:

[Elbit] is a diversified military supplier based in Israel. They're supplying standard military needs, but also on the cutting edge with [unmanned aerial vehicles] -- they're one of [AeroVironment's] biggest competitors in the small UAV space. Because of the very tight laws in America about selling to "friendlies", [AeroVironment] can't sell to many countries - or would have to jump through many hoops to do so. [Elbit] is rapidly expanding all over the world with recent wins from South America to Asia.

5 Deathbed Stocks?

We've all heard of the "death rattle," the last gasp from a lost soul's lungs. Sometimes, we seem to hear it from the companies in which we invest. Revenues dry up. Margins contract. Profits evaporate. All of these signs suggest that their condition is worsening -- a financial death rattle, if you will.

Stocks in sickbay
Not all such companies are goners, but here we're seeking companies that have virtually given up the ghost. For help, we'll turn to the clever coroners at our 135,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,300 stocks. We've unearthed a handful of stocks that look like they might be headed for the grave based on their one-star ratings, but we'll head over to CAPS to measure our members' opinions on a company's prospects.

Then we'll palpate the pulses of the companies in question with some quick tests for liquidity. The current ratio and quick ratio (also called the "acid test" ratio) give us an idea of a company's ability to pay its bills, and the Altman Z-Score suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, while those falling between 2.70 and 2.99 are "yellow flags." Companies between 1.80 and 2.70 have a good chance of going bankrupt within two years, and those with scores below 1.80 mean the cryptkeeper is waiting.

Here's today's list.

Stock	CAPS Rating (Out of 5)	Current Ratio	Acid-Test Ratio	Altman Z-Score	Recent Price
CBL & Associates Properties (NYSE: CBL)	*	0.1	0.1	N/A	$5.20
Con-Way (NYSE: CNW)	*	1.5	1.3	2.73	$34.76
Sanmina-SCI (Nasdaq: SANM)	*	2.6	1.7	0.78*	$0.45
Utek (NYSE: UTK)	*	2.3	2.0	2.64	$4.00
Zion Oil & Gas (NYSE: ZN)	*	1.8	1.5	N/A	$9.15

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's. *As of 9/27/08.

We obviously don't know for certain whether these companies are headed six feet under, so don't short them based on their appearance here. Moreover, some companies, such as software makers and financials, don't neatly fit into the Altman Z-Score scale. Yet like the mythological figure of Charon conducting souls across the River Styx to the netherworld, we'll use the CAPS community as our guide to determine whether these stocks are destined to seriously underperform the market.

Whistling past the graveyard
With the economy still struggling to extricate itself from a recession, it's understandable that the trucking industry remains up on blocks. Industry fundamentals don't seem to be on the mend, and for its part, Con-Way lost money in two of the last four quarters. At more than 20 times forward earnings estimates, Con-Way's shares look overvalued, even though the company doesn't otherwise seem to be in danger of going bankrupt. Still, it's hard to understand investor any attraction in Con-Way and other truckers.

Trucker YRC Worldwide (Nasdaq: YRCW) had to obtain approval from its largest pension fund to defer payments and had mulled over the possibility of applying for $1 billion of TARP funding. And JB Hunt Transport Services (Nasdaq: JBHT) reported that second-quarter earnings were sliced in half, with the result that the company significantly missed analyst expectations.

Even so, the Road and Rail sector in CAPS has risen by more than 5% over the past month and Con-Way is up by more than 10%. Indeed, its shares have improved by more than 50% over the past quarter, and since its shares hit a low point in March, they've more than doubled in value.

CAPS member JerryDreamer is expecting shares to pull back based mostly on personal market expectations:

Volume is super low on the stock market and there's no volatility, which means a lot of players are sitting on the sidelines, waiting for the market to move up or down. I'm picking DOWN and taking action! The S&P will soon fall below its 20 day and 200 day moving averages. In addition, the earnings reports of banks and retailers will be dismal.

Rattling the cage

 

The Next 3 Dividend Dynamos

Pop quiz: Which major event helped some investors to quadruple their returns over the 25-year period from 1929 to 1954?

Ding! Ding! Ding!
You guessed it: the Great Depression.

Wait, huh?
Data from renowned dividend scholar Jeremy Siegel shows that although it took 25 years for the S&P 500 to return to its 1929 levels, those who reinvested their dividends earned a total return of 334%. How did that happen?

As Siegel explains, dividends are "bear market protectors and return accelerators," because falling stock prices lead to higher dividend yields ... and higher dividend yields allow for reinvested dividends to accumulate tons of new shares at lower prices.

And that isn't the only time dividend stocks have boosted returns for investors during bear markets.

For instance ...
When I ran the numbers over the 2000-2002 bear market, I found that dividend-paying stocks outperformed non-dividend-paying stocks by an incredible 47 percentage points on average. Granted, that particular time frame is known for the bursting of the dot-com bubble, when many non-dividend-paying tech companies crashed and burned. But over longer periods, the thesis holds.

In fact, according to research from professors Fuller and Goldstein, from 1970 to 2000, dividend-paying stocks outperformed non-dividend payers during down markets by an average of 1.5% per month!

But simply picking the highest-yielding stocks is not a recipe for success. As I've noted in a previous article, high yields often signal danger, and when blowups do occur, the fallout isn't pretty: Companies that cut their dividends in 2008 fell by 57% on average for the year.

A year ago, General Motors and Wachovia were "yielding" about 10% when they announced a dividend cut and suspension, respectively. General Motors has filed for bankruptcy, and Wachovia was bought out by Wells Fargo (NYSE: WFC) for a fraction of what it had been worth. So it's critical to make sure your yield is safe.

How you should play it
Last year, our own dividend guru, Motley Fool Income Investor advisor James Early, revealed his basic three-part screen for how to get started researching dividend stocks in a bear market.

I was curious to see how well James' strategy works, so I conducted a study using data from the most recent recession -- which, according to the National Bureau of Economic Research, began in March 2001.

The results were impressive: Stocks with James' criteria that were bought at the beginning of the recession and held for five years -- what I deem a reasonable holding period -- would have netted investors 122% on average, versus just 12% for the S&P 500!

So what were his criteria? James insisted on stocks that had:

• Yields greater than 3%.
• Dividends that had been increased over the previous 12 months.
• Growing revenues.

Here's a sampling of some of the stocks that fit those specifications back in 2001 -- even one that had mediocre returns over the five-year period:

Company	Yield	2000 Dividend Growth	2000 Revenue Growth	Return, March 2001-March 2006
Sasol (NYSE: SSL)	6.0%	64%	42%	337%
Caterpillar (NYSE: CAT)	3.8%	6%	2%	299%
Chevron (NYSE: CVX)	5.4%	5%	42%	56%

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

Why it works
Generally speaking, companies won't cut their dividend right after they've raised it, so a dividend increase during a recession is an especially strong sign that you can trust a tasty yield.

Unfortunately, there are some less savory reasons why management would raise a dividend during difficult times, such as a myopic desire to provide stock-price support, an inability to anticipate market conditions, or general incompetence.

Growing revenue is one objective sign that your investment candidates are improving their economic performance even in the face of a tough market -- a difficult hurdle to clear. More recently, insisting on growing revenue in addition to growing payouts would have helped investors to avoid disappointments like Citigroup (NYSE: C), which raised its dividend in 2007 amid declining revenue, and has since had to take a massive cut (to $0.01 a share) in accordance with its bailout terms.

Drum roll, please ...
So which three dividend dynamos might help you to take advantage of rising yields today? Of the companies that match James' strategy, I chose three for you.

To review, each of these stocks has:

• A greater-than-3% yield.
• A recent dividend increase.
• Growing revenues.

In addition, I wanted to make sure these stocks have:

• Less than 80% free cash flow payout ratios.
• Four- and five-star ratings from our Motley Fool CAPS investing community.

Here are the results:

Company	Yield	Dividend Growth	Revenue Growth	Free Cash Flow Payout Ratio
Procter & Gamble (NYSE: PG)	3.2%	14%	4%	50%
Bristol-Myers Squibb	6.2%	5%	10%	63%
China Mobile (NYSE: CHL)	3.6%	27%	16%	72%

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

Despite the recession that began in December 2007, each of these companies has managed to expand its business and has enough confidence in its ability to pay a dividend that it was willing to raise the payout. And they offer tasty yields to boot.

Even more ideas
While studies such as Siegel's and Fuller and Goldstein's, as well as my own research, prove that dividend investing is an excellent strategy in down markets, the increased possibility of dividend reductions means you need to be extra-selective in your investments.

The Best Small Companies ... Exposed

It's hardly breaking news at this point, but it bears repeating: Small-cap stocks are your best bet for superior returns. After all, small-cap stocks have trounced their larger brethren over the past 80 years -- and over the past three decades, the competition hasn't even been close:

Annualized Return	Small Caps	Large Caps
1926 to 2006	12.7%	10.4%
1976 to 2006	17.5%	12.8%

Data from Ibbotson Associates.

Meanwhile, a recent study by Jeff Anderson and Gary Smith from Pomona College shows that America's most admired companies also have a tendency to beat the market. Anderson and Smith analyzed the returns of Fortune's list of the 10 most admired companies from 1983 to 2004. They found that a portfolio of these stocks outperformed the S&P 500 by "a substantial and statistically significant margin."

By the power of the transitive property
So it stands to reason:

A. If investing in small-cap stocks generates market-beating returns, and ...
B. If investing in the market's best companies generates market-beating returns ...
C. Then investing in the market's best small-cap companies should generate market-annihilating returns.

If only there were a list of the best small-cap companies ...
Fortunately, the folks over at Forbes magazine compile an annual list of the 200 best small companies in America. According to Forbes, companies "must pass through a gauntlet to qualify for the list," so you know you're getting the cream of the crop.

To make Forbes' list, a company must have revenue between $5 million and $750 million and a share price higher than $5, and must also clear certain thresholds for returns on equity, sales, and income.

That's some list
As you might expect, Forbes' list boasts some impressive names and more than a few familiar faces. The list successfully identified small-cap stalwarts such as Buckle (NYSE: BKE), Green Mountain Coffee Roasters (Nasdaq: GMCR), and Strayer Education (Nasdaq: STRA) long before they emerged from the pack.

Forbes was also early to the party on success stories such as Copart (Nasdaq: CPRT), Citrix Systems (Nasdaq: CTXS), and Fastenal (Nasdaq: FAST). Look at the returns:

Company	First Appeared on the Forbes List	Return Since First Appearance*
Buckle	Oct. 3, 1996	693%
Citrix Systems	Sept. 26, 2002	472%
Copart	Oct. 1, 2000	266%
Fastenal	Oct. 3, 1996	193%
Green Mountain Coffee Roasters	Oct. 1, 2000	2,789%
Strayer Education	Oct. 2, 1998	736%

*Returns through July 16, 2009.

But you can only look backward through a screen
Forbes' list does an excellent job of identifying the hottest small-cap companies -- at the moment the list is released. After all, the data Forbes is taking into account is primarily backward-looking.

Clearly, some of these companies continue to excel long after they're featured in the magazine. But for every Green Mountain Coffee Roasters, there's a company likeNutriSystem (Nasdaq: NTRI), which debuted at No. 1 on Forbes' 2006 list and ranked second in 2007.

Although NutriSystem has been in business since 1972, the company only began to capture investors' attention after executing a successful turnaround earlier this decade. Thanks to a reinvigorated brand and an increased marketing presence, NutriSystem has grown revenue at a compound annual growth rate of 114% over the past five years. However, a recent slowdown in sales has the Street seeing signs of another Atkins-style fad diet flameout. NutriSystem shares are down 67% from when they appeared on Forbes' 2007 list.

I won't bore you with Forbes' other big misses, but suffice it to say, there have been more than a few. In fact, six of Forbes' top 10 stocks from 2008 are in the red, and four of those stocks are down more than 30%!

Don't send a screen to do an investor's job
A stock screen is a great tool for identifying prospective opportunities, but it's no substitute for good old-fashioned due diligence. At Motley Fool Hidden Gems, our team advises investors against searching for winning small-cap investment ideas by seeking out the hottest companies of the past 12 months. Instead, the HG team focuses on companies with:

• Solid free cash flow
• Strong balance sheets
• High insider ownership
• Market-beating potential over the next three to five years

Furthermore, the HG team prefers small companies that are obscured from Wall Street and ignored by the financial media. It's far more profitable to unearth quality companies before they become household names than after they grace the cover of a magazine.

5 Stocks You Should Avoid Right Now

Back in March, we profiled five unbelievably solid stocks -- companies that have been paying uninterrupted dividends to shareholders for more than 45 years. That consistency is incredible.

Today, we thought we'd take the flip side of that coin and examine five stocks that are anything but incredible.

Why they are so dangerous
What first caught our eye about these five dogs is that they are among the most heavily traded stocks on our major exchanges:

Company	Average Daily Trading Volume, Past 3 Months	Recent Share Price
Citigroup	317 million	$3.03
Bank of America	446 million	$13.17
Ford	97 million	$6.13
Fannie Mae	17 million	$0.56
AIG	11 million	$12.75

Source: Yahoo! Finance.

Millions upon millions of these shares have traded hands -- on a daily basis -- over the past three months. That might make sense; after all, every one of these stocks has headlined the nightly news at least once in recent months.

Now, we have to acknowledge that many of these transactions were from the big-money institutions or the short-term day-trading crowd. But somewhere in there is the little guy.

And you should stay away
We believe long-term investors should avoid these stocks. Why? Because these five stocks have three troubling commonalities:

1. Convoluted relationship with the government.
According to the Center for Responsive Politics, the "Finance, Insurance, and Real Estate" industry spent more than $3.4 billion on lobbyists between 1998 and 2008 -- more than any other industry. Over that same time span, Ford and other automakers "donated" nearly $200 million to Washington.

What did those five companies get for all of those political contributions? All but Ford have received well-publicized bailout funds. And while the taxpayer money will be used to save these companies from a far worse fate (we hope), Uncle Sam's money comes with strings attached.

Under normal circumstances, businesses are accountable to three constituencies: their customers, shareholders, and employees. Businesses will do well when they do right by all of them. These five companies, however, are now accountable to a supra-constituency: the federal government. That frightens us, because it's unclear how customers, shareholders, and employees will fare when these companies try to do right by the feds. That's no doubt one of the major reasons why TARP recipients like JPMorgan (NYSE: JPM) and State Street (NYSE: STT) wanted to repay TARP funds so promptly.

2. Gordian knot-like financials.
Take a look at Citigroup's balance sheet. For all of the information, for all of the numbers, it's among the most confusing documents we've ever examined. Call us when you figure out what it owns and what it owes. Heck, call Citi CEO Vikram Pandit first. He may benefit from the knowledge.

See, it's seemed to us that as the credit crisis persists, insiders haven't been totally clear about what's on their books. Though some have a vague sense that mark-to-market accounting has forced them to write down asset values too far, only time will tell ... and time may not be on these firms' sides right now.

The auto companies have some of these same issues -- they have consumer finance/lending divisions -- but their pension obligations present an entirely different yet similarly complicated set of problems.

3. No near-term catalysts.
The financial companies will survive in some form -- our government has committed to that. But their future will be unlike their past. Regulation will be stricter. The massive 30-plus-times leverage that drove outperformance earlier this decade will be a dark relic of a bygone era. And now, skeptical investors may never ascribe the same market multiple to profits.

We just can't see a world in which these companies post the same kind of profits that we saw for the past 10 to 15 years.

What you shouldn't avoid right now
Contrast the future of Citigroup or AIG with, say, the future of these efficiently run blue chips, each of which is trading at a discount to its five-year average:

Company	Current P/E	5-Year Average P/E	Motley Fool CAPS Rating
Johnson & Johnson (NYSE: JNJ)	13.0	17.8	*****
McDonald's (NYSE: MCD)	14.9	20.2	****
United Technologies (NYSE: UTX)	11.5	16.5	****
National Oilwell Varco (NYSE: NOV)	6.9	20.5	*****
Baker Hughes (NYSE: BHI)	8.2	16.9	*****

Source: Morningstar and Motley Fool CAPS. CAPS rating out of a possible five stars.

This isn't a formal recommendation of these five companies -- and it's not to say that they each don't face challenges. But at least they're not encumbered by convoluted relationships with the government and convoluted financials. And they can continue with business as usual while the stocks listed above are figuring out ways just to maintain.

Buy one-foot bars
Heck, there may be value in one or all five of the stocks we've advised you to avoid -- in some cases, they've more than doubled from their lows. But given their complexity, they're the proverbial "seven-foot bars" that Warren Buffett says he avoids in investing.

Instead, Buffett looks for "one-foot bars that I can step over." In other words, lay-ups, short putts, or fastballs down the middle (to diversify our sports analogy). These are easy investments where the reward profile far outweighs the risk profile.

7 Stocks Attracting Top Investors

There's a reason why more than 30,000 investors flock to Omaha each May, and millions more rummage through the Berkshire Hathaway annual reports: Gleaning knowledge from proven investors is one way to find the stocks that will make you rich.

Using Motley Fool CAPS, the Fool's 135,000-plus-member investing community, we can see which stocks are receiving a boost in attention from CAPS All-Star players each week. A sudden increase in bullish interest from top-rated investors could signal that the stock deserves further research.

Here are seven stocks receiving more support from CAPS All-Stars over the past month:

Company	Industry	% Change in All-Star Bulls From 6/15 to 7/15	CAPS Rating (out of 5)	CAPS Research
Cardionet (Nasdaq: BEAT)	Health-Care Providers and Services	100%		BEAT
LivePerson, Inc. (Nasdaq: LPSN)	Internet Software and Services	65%		LPSN
Antigenics, Inc. (Nasdaq: AGEN)	Biotechnology	50%		AGEN
PriceSmart, Inc. (Nasdaq: PSMT)	Food and Staples Retailing	42%		PSMT
BJ's Restaurants, Inc. (Nasdaq: BJRI)	Hotels, Restaurants and Leisure	39%		BJRI
Interactive Brokers Group, Inc. (Nasdaq: IBKR)	Diversified Financial Services	33%		IBKR
Peet's Coffee & Tea, Inc. (Nasdaq: PEET)	Hotels, Restaurants and Leisure	31%		PEET

 

 

4 Stocks Losing Top Investor Support

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." -- Sir John Templeton

Just as it makes sense to research the stocks attracting top investors, it's equally important to figure out why smart money is leaving other investments. Using Motley Fool CAPS, the Fool's 135,000-member-strong investing community, we can see which stocks are losing support from CAPS All-Star players.

A sudden decrease in interest from top-rated investors could signal that the stock is losing steam, which might make it an awful stock to avoid for now. At the very least, such drops should signal that further research is in order.

Here are four stocks receiving less support from CAPS All-Stars over the past month:

Company	Industry	% Change in All-Star Bulls From 6/15 to 7/15	CAPS Rating (out of 5)	CAPS Research
Madeco S.A. (ADR) (NYSE: MAD)	Electrical Equipment	(25%)		MAD
Beckman Coulter, Inc. (NYSE: BEC)	Health-Care Equipment and Supplies	(20%)		BEC
Dorchester Minerals L.P. (Nasdaq: DMLP)	Oil, Gas and Consumable Fuels	(20%)		DMLP
Tenneco, Inc. (NYSE: TEN)	Auto Components	(20%)

 

 

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
Magellan Midstream Holdings, L.P. (NYSE: MGG)	142 of 148
Burlington Northern Santa Fe Corp (NYSE: BNI)	2192 of 2250
Cincinnati Financial Corp (Nasdaq: CINF)	149 of 163
SEI Investments Company (Nasdaq: SEIC)	238 of 250
ChinaCast Education (Nasdaq: CAST)	149 of 153

Data from Motley Fool CAPS, July 15, 2009

 

 

Does Good Governance Make Great Stocks?

Stock investing takes guts. When you buy stocks, investors entrust a company's management with their money, counting on leaders to do right by common shareholders. Ideally, the market should reward good governance and punish shady behavior. Institutional investors respect this relationship, and so should you.

How will I know (if management really loves me)?
Astute in her questioning of whether certain men had genuine concern for her emotional well-being, Whitney Houston was on the right track. And you are too, if corporate governance scandals like Enron, Parmalat, and Adelphia give you the willies. You'd scrutinize a potential mutual fund manager before investing, so why not look into the leadership practices of the individual companies in which you want to invest?

There's a lot of widely accepted evidence that good corporate governance pays off. If you're still skeptical, consider these points:

• Back in 2001, some folks from Harvard and the University of Pennsylvania did a study on 1,500 U.S.-based companies. They came up with a strategy in which you bought companies with strong shareowner rights protections, and sold short companies with weak protections. Such a strategy yielded additional returns of 8.5 percentage points per year over the market's average return.
• More recently, to determine the reasons for the improved performance of more democratic companies, Institutional Shareholder Services and Georgia State University produced a joint study aimed at dissecting the findings of said Harvard publication. That study found that the best-governed companies achieved higher average returns on equity by 23.8%.
• The CFA Institute, which traces its existence back to Benjamin Graham's words when he proposed a rating system for financial analysts, believes that the evidence adamantly supports the direct link between good corporate governance practices and higher valuations for businesses.

If you're able to suspend disbelief long enough to accept that governance is tied to performance, you're probably wondering how to gauge a company's governance quality without having a brain aneurysm. It can be done a few ways.

Rating governance
The most convenient assessment of a company's corporate governance quality is probably obtained via the Corporate Governance Quotient (CGQ) data from Institutional Shareholder Services, a RiskMetrics Group subsidiary. Those subscriptions aren't free, but you can get some information on Yahoo! Finance and other free news sources. Also, ISS makes its top 10 governance quotient rankings for several indexes available online.

But the ratings don't always make much intuitive sense. For instance, General Motors is currently ranked second in the Russell 3000, despite its trip into bankruptcy protection. ISS also gave Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) low marks for its lack of board independence and once campaigned for Coca-Cola's (NYSE: KO) removal of Warren Buffett from its board.

So, good governance obviously doesn't guarantee success, and success doesn't guarantee a good governance rating. Furthermore, great companies sometimes won't fit the ISS mold. The metric clearly has some validity, though, and while you'll need more than the CGQ data to make an intelligent investment decision, owning shares of healthy companies with strong shareholder protections has clear advantages. Institutional investors and the corporations themselves listen to the ratings agencies, so it won't hurt you to do the same.

After running a screen for companies with improving growth prospects, I've listed a few with above-average CGQ scores here:

Company	Industry CGQ Rating (out of 100%)	Index CGQ Rating (out of 100%)	Expected 5-Year EPS Growth (%)	52-Week Change (%)
Family Dollar (NYSE: FDO)	99.0	96.1	12.2%	41.9%
UnitedHealth Group (NYSE: UNH)	99.2	96.9	9.3%	11.1%
MBIA (NYSE: MBI)	100.0	99.8	10.0%	(9.1%)
Public Service Enterprise Group (NYSE: PEG)	93.7	86.9	5.7%	(25.2%)
Arena Pharmaceuticals	87.9	82.9	21.0%	(32.5%)

Sources: Yahoo! Finance.

As you can see, some of these well-governed companies have been doing better than others in the recent market environment.

Elephant in the room
Arguably, there are just as many excuses for retail investors to dismiss corporate governance ratings as there are reasons to support their importance with regard to firm valuation. The data is expensive, and the alternative -- digging through stacks of proxies and old footnote disclosures -- is hardly appealing.

But seeking out good governance and strong shareholder rights could mean the difference between your portfolio returns soaring like the U.S.S. Enterprise versus sinking like the Titanic. For buy-and-hold investors, you have to count on owning a stock for a long time, so by seeking out the very best stewardship, you'll improve your chances of sailing to glory.

 

 

Wal-Mart’s Warm Welcome in India

By offering bargain pricing in a difficult environment, Wal-Mart Stores (NYSE: WMT) has been gaining a lot of ground here in the U.S. But rather than rest on its laurels, the retailing behemoth has reportedly been enjoying a warm reception from consumers in India, too.

A newly opened Wal-Mart, created in a joint venture with Bharti Group, has been drawing crowds at its location on the historic Grand Trunk Road. The opening follows indications from the country's government that it would welcome more foreign investment, as noted by our Motley Fool CAPS TMF Newsdesk blog.

A Wal-Mart in India might seem a bit out of place. The nation's retail industry is heavily fragmented, with much of its commerce taking place in open-air markets where haggling over prices is common. Much like the megaretailer's U.S. critics, some observers reportedly fear that Wal-Mart will disrupt India's homegrown retail system. Still, other shoppers seem to find it a refreshing change from the norm.

But don't assume the Bentonville Behemoth is doing business in India the same way it does in the States. India's government is allowing Wal-Mart to sell only to wholesalers, or business owners and their family and friends, a limitation specifically meant to protect smaller merchants. The "membership cards" Wal-Mart's issuing to these customers sound less like its usual stores here, and more like its Sam's Club warehouses, or those of its domestic rival Costco (Nasdaq: COST).

Buyer beware
While Wal-Mart investors may welcome the move into India, they shouldn't underestimate the risks of opening stores in emerging markets. Ikea recently made a big mistake in trying to operate in Russia, and it's also called off a plan to invest $1 billion in India. Starbucks (Nasdaq: SBUX) has experienced its share of troubles entering India, and was forced to close its store in China's Forbidden City.

India may be no China, but investors do need to realize that international expansion isn't as easy as plopping down stores and waiting for customers to show up in droves. (Unless you're Yum! Brands (NYSE: YUM), apparently, judging from its success in China.) Differences in cultures and politics are serious risks, especially if you're investing in vastly dissimilar places.  Investing in India is simply not the same as buying a stake in Canada's PotashCorp (NYSE: POT) or the U.K.'s Unilever (NYSE: UL).

In short, given the relatively slow pace of change in India, Wal-Mart's first store there may not be as huge a growth driver as it first appears.

 

 

3 Stocks Ready to Roar

There are plenty of strategies for picking stock winners: low P/E stocks, companies selling at a discount to their future cash flows, and more. At the small-cap stock-picking service Motley Fool Hidden Gems, even in this tough market, our analysts can get ahead by finding undervalued stocks that Wall Street and investors have ignored.

Yet what if we could find a way to whittle down our list of prospects beforehand? To discover stocks 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 rise. These stocks have posted strong gains in the past three months, while the rest of the market moved significantly higher, then essentially traded sideways. My screen returned 111 stocks when I ran it, including these recent winners:

Stock	CAPS Rating, Jan. 14, 2009	CAPS Rating, April 14, 2009	Trailing 13-Week Performance
MAP Pharmaceuticals (Nasdaq: MAPP)	**	***	227.0%
National Financial Partners (NYSE: NFP)	**	***	36.4%
Office Depot (NYSE: ODP)	**	***	101.9%

Source: Motley Fool CAPS Screener. Trailing performance from April 17 to July 14.

National Financial Partners, in fact, was previously featured here in February. So while this screen might tell us which stocks we should have looked at three months ago, we'd rather discover which 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, sported valuations lower than the market's average, and hadn't appreciated by more than 10% over the past month.

Out of the 35 stocks the screen returned, here are three attractively priced ideas that investors think are ready to run today!

Stock	CAPS Rating, April 14, 2009	CAPS Rating, July 14, 2009	Trailing 4-Week Performance	P/E Ratio
The Buckle (NYSE: BKE)	**	***	(1.2%)	12.7
Fuel Systems Solutions (Nasdaq: FSYS)	**	***	(17.1%)	13.1
VisionChina Media (Nasdaq: VISN)	**	***	(0.5%)	8.4

Source: Motley Fool CAPS Screener. Price return from June 19 to July 14.

You can run your own version of this screen; bear in mind that the results you get may be different, since the data is dynamically updated in real time. Let's examine why investors think these companies might go on to beat the market.

The Buckle
Along with Aeropostale (NYSE: ARO), fellow teen retailer The Buckle was able to buck the trend of soggy June comps and turn in impressive same-store sale numbers. Top-rated CAPS All-Star member JRtrader08 has a number of great things to say about the company: 

Somebody forgot to tell The Buckle there is a recession: Simply the best apparel retailer around - consistent top & bottom line growth, conservative store growth, and an unbelievable run of 22 consecutive months of double digit same-store sales growth, with 33 straight month of same-store sales gains overall.

Fuel Systems Solutions
With oil prices remaining stubbornly high -- if well below their latest peak -- the alternative-fuel systems sector is attracting CAPS member k007005, who's driving off with Fuel Systems Solutions: "Leader in green engine in a market where every car producers is looking for this kind of technology."

VisionChina Media
Displaying advertising to a captive audience can be a lucrative business for VisionChina. The company shows ads on mass transit, a popular and growing means of travel in China's most populous cities. Better yet, the country is investing even greater amounts in such transit programs, potentially expanding the number of waiting viewers for VisionChina's ads. As CAPS member hurdithere noted: "Growth in advertising and mass transit in China. Huge first mover advantage."

 

 

2 Smart Ways to Profit From ETFs

Exchange-traded funds have taken the investing world by storm. Their flexibility and cost-effectiveness can make your portfolio both simpler and better performing. But with hundreds of different ETFs to choose from, how do you decide the best way to incorporate ETFs into your overall portfolio?

The number of different ways you can use ETFs as part of your investing is as vast as the universe of ETFs itself. But when you boil down most strategies, you come up with two primary situations in which ETFs can really help you achieve your financial goals.

Method 1: Building the core
It may seem downright quaint now, given how specialized ETFs have become in recent years, but the first ETFs focused on giving investors broad exposure to large portions of the stock market.

Just as Vanguard's flagship 500 Index Fund (VFINX) pioneered index mutual funds by seeking to track the broad S&P 500 stock index, so too did the SPDR Trust ETF use an S&P 500-tracking strategy in order to gain market share and introduce a new way of investing to the public.

Nowadays you can get a wide selection of broad ETFs. Funds that cover small-cap, mid-cap, and large-cap U.S. stocks are plentiful, with various ETFs using different methods to identify potential losers and boost holdings of promising stocks. International ETFs of various flavors make it easy to invest across the world, often in hard-to-buy securities of foreign companies. Broad-market exposure to entire other asset classes, such as bonds and commodities, is also available through ETFs.

For perhaps the ultimate in one-stop shopping, global ETFs like the Vanguard Total World Stock Fund (VT) offer a selection of stocks from around the globe. This Vanguard ETF tracks the FTSE All-World index, which includes 2,900 companies. Stocks from the U.S. make up over 40% of the fund's assets, with ExxonMobil (NYSE: XOM) and Microsoft (Nasdaq: MSFT) predictably leading the fund's holdings. But foreign companies like BP (NYSE: BP), Nestle, and Mitsubishi UFJ Financial Group also play prominent roles in the ETF's portfolio.

The core method works well, especially for investors who aren't looking to invest in individual stocks. But if you plan to also own individual stocks within a larger portfolio, then ETFs can play a much different but equally valuable role.

Method 2: Filling in the gaps
If you like investing in individual stocks, chances are that you have a particular circle of competence in which your experience pays off the most. Whether it's stocks in a certain industry, companies in a particular location, or certain-sized businesses that define your area of expertise, you may find yourself with a portfolio that's overly concentrated within a narrow swath of the overall market.

In some cases, that may be just fine with you -- as long as you're prepared to handle the risks of a concentrated portfolio. But if you're looking for a quick way to diversify your portfolio without a lot of extra effort, ETFs can act as a stopgap measure unless or until you decide to find individual stocks to take their place.

For instance, say your specialty is recognizing traditional value stocks. You may feel most comfortable researching classic large-cap value plays like Chevron (NYSE: CVX). But you also want some growth stock exposure without having to research an unfamiliar area. In that case, a growth-oriented ETF like iShares Russell 1000 Growth (IWF) would easily get you into companies like Apple (Nasdaq: AAPL).

Similarly, looking through your portfolio, you can identify missing sectors and fill in gaps using ETFs. For example, if you found yourself without any utility stocks, you could buy an ETF like the SPDR Utilities ETF (XLU) and own interests in Exelon (NYSE: EXC) and Dominion Resources (NYSE: D) to round out your portfolio.

 

 

5 Stocks Approaching Greatness

Some companies are obviously great investments -- in hindsight. Yet for every stock out there screaming "buy me," others simply give us a nudge and a nod. How can we tell tomorrow's obviously great investments from the thousands of pretenders?

The stars' walk of fame
On Motley Fool CAPS, these opportunities can be found among our four-star stocks. In CAPS' proprietary ratings system, they rank higher than most of the other 5,300 rated companies, but they're just shy of superstardom. While all the attention might be focused on their five-star peers, we can find four-star companies that might be approaching greatness, including this handful:

• China Sky One Medical (Nasdaq: CSKI)
• China Yuchai International (NYSE: CYD)
• Hudson City Bancorp (Nasdaq: HCBK)
• Mirant (NYSE: MIR)
• SuperGen (Nasdaq: SUPG)

Some of these names might surprise you. Hudson City Bancorp, for example, has been serving depositors in the tri-state area including New York, New Jersey, and Connecticut for more than 140 years. It was where I opened up my very first savings account many years ago. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold. However, the 135,000-plus CAPS members chose these companies as less obvious sources for tomorrow's great buys, so let's see why they might merit your attention.

In the sight of greatness?
It has been little more than 20 years since Kentucky Fried Chicken dunked its first drumstick into a vat of grease just outside of Tiananmen Square, becoming the first American fast-food restaurant to upset the delicate balance that had ruled the Chinese diet for thousands of years. And it wasn't long after that when McDonald's erected its Golden Arches to serve double cheeseburgers and gut-busting Big Macs. According to one medical researcher, from 1985 to 2000, the number of overweight and obese Chinese children increased 28-fold, while an estimated one-fifth of the world's population that shops for extra-extra-large-sized clothes lives in China now. Coincidence?

Americans know a thing or two about obesity. The Centers for Disease Control says that on average we weigh 25 pounds more today than we did in 1960, but we also had a head start on the Chinese: Ray Kroc opened his first McDonald's in Des Plaines, Illinois, in 1955. I'm beginning to see a pattern here.

Though the Chinese might raise an eyebrow at how we sweat to the oldies with Richard Simmons videos, many Westerners might do the same at how the Chinese rely on traditional herbal remedies. But China Sky One Medical finds great success in traditional Chinese medicine, particularly with its four patch products that brought revenue growth of 240% for the latest quarter.

One of those patches is used for weight control: The patch is infused with saponin, a traditional therapy believed to regulate the excessive secretion of certain hormones while promoting others. Saponin gets its name from the soapwort plant, which is typically used to make soap. In the U.S., however, the Federal Trade Commission has waged a campaign against similar transdermal weight-loss patches that use sea kelp as their main ingredient and claim to "melt away" pounds. The FTC considers it a "red flag" for consumers when a company suggests you can lose weight by wearing a skin patch.

Yet China Sky One Medical, like American Oriental Bioengineering (NYSE: AOB) and Tongjitang Chinese Medicines (NYSE: TCM), sells its products primarily in China. China Sky One Medical has enjoyed greater than 100% compounded annual growth in sales over the past three years, while American Oriental Bioengineering has enjoyed similarly strong gains.

China Sky One Medical's success, particularly while the Chinese are becoming more concerned about their health and well-being, plus its latest acquisition means CAPS member DavidBear likes it as a stock to hold well into the future.

Chinese Medicine Company operating in China. Recently (December) took advantage of the economic crisis to buy a smaller drug company for ~$7M. I take this to indicate that the management is engaged. The P/E seems pretty low for an actively growing company. I like [the company] in the long term.

BCCanuckEST1980 believes the company offers a fundamentally cheap valuation without too much risk.

China Sky One develops and sells over-the-counter nutritional supplements and over the counter plant and herb based medicinal products in PRChina. The products have a range of uses from weight loss to pain relief to skin sanitization.

Stock is currently cheap based on fundamentals. Medium risk stock as you can expect wide swings in price range

 

 

How to Make the Most of Your Biggest Opportunities

If you're smart about using your 401(k) plan at work, you'll probably face a few occasions when you'll have to figure out what to do with good-sized chunks of retirement money when you switch jobs. How you handle those opportunities will make a big difference to your lifestyle after you retire.

The good old days
In generations past, workers didn't have to worry too much about investing -- typically working for the same employer throughout their careers, they earned themselves a pension that, when combined with Social Security, kept many retirees financially comfortable throughout their golden years.

Those days are gone. With defined-contribution plans like 401(k)s, you're responsible for your own money, and you have to stay on your toes in order to invest intelligently. Moreover, even those who have traditional pension plans sometimes find themselves with the choice to take a lump-sum distribution -- an option that may seem appealing, especially as struggling companies make retirees increasingly leery of their former employer's ability to meet their future pension obligations.

What most people do
A recently released study from the Employee Benefits Research Institute shows that a substantial number of people do the smart thing with their old retirement plan money: They roll it over, either into an IRA or into another employer-sponsored retirement account with their new employer. For distributions greater than $50,000, nearly three-quarters of those who took lump sums rolled them into another tax-favored account.

Yet for smaller amounts, people are more likely to use those funds for other purposes. Buying a home, starting a business, or paying down debt are all popular choices for using those funds, but a significant fraction of those getting $20,000 or less from a retirement plan decide to simply spend the money on personal consumption.

Dealing with real money
Those smaller amounts along the way add up; you shouldn't just treat them as spending money. But the biggest decision most people face comes further down the road, when you're much closer to retirement. By then, you may be dealing with how to invest hundreds of thousands, or even $1 million or more -- and you may need to decide whether to accept monthly payments for the rest of your life, or take a lump sum and invest it on your own.

It's a huge decision that will have a substantial lasting impact, so before you decide, consider the pros and cons. If you choose a monthly pension, you won't have to worry about investing; you'll just get checks in the mail month after month. But if that amount proves insufficient, you won't have any flexibility to dip into future payments to spend beyond your means. And once you die, all that pension money may well be gone and unavailable to your family, depending on which payout option you chose.

In contrast, investing a lump sum carries a lot of responsibility, but you get some freedom out of it, too. You can determine your own risk profile to match your comfort level and financial needs. For instance, to provide the income a pension would pay, you may be able to use a combination of an immediate annuity and dividend-paying stocks.

You can find attractive yields even among the Dow Industrials, although some have high payout ratios that suggest that those dividends might not be sustainable:

Stock	Dividend Yield	Payout Ratio
AT&T (NYSE: T)	7.0%	76%
DuPont (NYSE: DD)	6.4%	115%
Verizon (NYSE: VZ)	6.4%	78%
Merck (NYSE: MRK)	5.6%	55%
Caterpillar (NYSE: CAT)	5.3%	40%
Pfizer (NYSE: PFE)	4.3%	108%
Kraft Foods (NYSE: KFT)	4.3%	57%

Source: Yahoo! Finance, DividendInvestor.com.

Bear in mind that you don't want to focus solely on producing income. In order to protect yourself from potential inflation, you'll want some investments with growth prospects in your portfolio, as well as inflation hedges such as TIPS.

Don't blow it
Whichever decision you make, don't be hasty. If the idea of investing a big chunk of money on your own sounds too daunting, then find a reputable financial planner and get the help you need. Beware of potential con artists and schemers -- big lump sums are particularly attractive targets -- and get second opinions if you're not comfortable with the advice you get the first time around.

When the time comes for you to deal with a large amount of money, realize that it could be one of the most important financial decisions you ever make. Before you jump the gun, stop to consider all the ramifications of whatever choices you're given. Doing so will help you make the most informed decision possible.

 

 

4 Reasons Why Netflix Will Say No

 

Amaflix? Netazon? The Microhoo-esque amalgamations don't quite fit, and neither do yesterday's rumors that Amazon.com (Nasdaq: AMZN) might want to acquire Netflix (Nasdaq: NFLX).

Investors still bought the bogus chatter, sending shares of Netflix 5% higher on the day.

The deal won't happen. Well, just to be on the safe side, it probably won't happen. There are several reasons why Amazon won't bother to bid a meaty premium to get its hands on Netflix.

1. Thinking inside the Unbox
Amazon and Netflix have taken different paths to digital distribution. Amazon is following in the footsteps of Blockbuster (NYSE: BBI) and Apple (Nasdaq: AAPL), offering piecemeal digital rentals and outright purchases.

Netflix, on the other hand, wants you to subscribe to the cow and get the milk for free. It doesn't charge subscribers to its unlimited plans any additional fees to access the 12,000 titles it makes available digitally. That's a far cry from its content library of more than 100,000 DVDs, but its online offerings are steadily (if slowly) growing.

Amazon and Netflix may seem like a perfect partnership. If a Netflix subscriber wants to see a newer release that isn't even available in DVD form -- as demand typically outstrips supply during the first few weeks of a new release -- it can offer an a la carte digital purchase through Amazon.

Of course, Netflix could easily offer this service if it wanted to. It hasn't, one would think, because that would destroy the value illusion that Netflix might ultimately offer its entire library digitally for a single subscription fee. Sure, we all know that the major studios will never practically give away their hottest releases. Nonetheless, the moment that Netflix begins charging extra, Instant Watching's value proposition is shot forever. Netflix will become like everybody else. That's not a good place to be when you're the industry leader.

2. Amazon has loved and lost before
Retailers once wanted some skin in the Netflix game. Wal-Mart (NYSE: WMT) launched a DVD-rentals-by-mail knockoff, growing it to a user base of 100,000 before realizing that it would never catch up to Netflix. The Bentonville Behemoth handed over the keys to Netflix four years ago.

Amazon also wanted in on the fun at the time. Netflix alertly launched a proactive price war, spooking Amazon all the way across the pond, where it launched a similar service in the United Kingdom.

If Amazon could get its feet wet in the Thames, the e-tailer may have thought it could come back and take on Netflix closer to home. That never happened. Amazon couldn't even be the market leader in the Netflix-less U.K. It cashed out to the larger Lovefilm in Europe, settling for a minority stake instead.

Clearly, Amazon has regrets. But publicly paying a princely sum for Netflix today -- when it could have made its move several years ago, while Netflix was significantly smaller and cheaper -- would only remind investors about its failures in a game it has long stopped playing.

3. Buying Netflix is not in Amazon's DNA
Amazon's all over digital distribution these days. It sells music, books, movies, and even video games as downloads. It has approached these fields organically. Did it snap up a popular music-streaming subscription service when it began offering tunes online? No. It could have bought Napster for nearly the amount of cash on Napster's balance sheet, but instead it let a rival retailer steal it. Rhapsody parent RealNetworks (Nasdaq: RNWK), another easy target, is still rocking on as a solo project.

Amazon could have snapped up e-book specialist Fictionwise, but instead saw the company go to Barnes & Noble (NYSE: BKS). 

In fact, the only deal that comes close to matching a play on Netflix would be its purchase of digital audiobook leader Audible. However, the $300 million deal was one that Audible couldn't refuse. If it did, Amazon could have just pushed hard into the market with its own offerings, until Audible was marginalized.

Netflix has no such fears. It has vanquished Wal-Mart, has Blockbuster on the ropes, and sent Amazon off to fail overseas. In short, it has taken on the big boys and won, even if Amazon opens up its wallet for an unprecedented $3 billion-to-$4 billion offer.

4. Enemy of the states
I touched on the state sales tax issue yesterday, but I may as well elaborate. Amazon collects sales tax in five states (New York and four states where it has a physical presence).

In theory, taking on Netflix would tack on sales tax to all Amazon.com orders in states where Netflix has a distribution center. In a cutthroat online world, that would put Amazon at a pricing disadvantage to other out-of-state online retailers.

Are there legal loopholes? If so, trust that hungry state legislators with scary budget deficits will close them. They even went after small blog publishers that belong to Amazon's free affiliate marketing program, forcing the online retailer to boot its boosters in a few states. If Amazon were on the cusp of hooking up with Netflix and forcing most of the country to pay state sales tax, it wouldn't have played hardball with its own backers this summer.

So move along. There's nothing to seize here. Start a buyout rumor where it's actually sensible instead.

 

2-Star Stocks Poised to Plunge: Pool Corporation?

Based on the aggregated intelligence of 135,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, swimming-pool-equipment supplier Pool Corporation (Nasdaq: POOL) has received a distressing two-star ranking.

With that in mind, let's take a closer look at Pool's business and see what CAPS investors are saying about the stock right now.

Pool Corporation facts

Headquarters (founded)	Covington, La. (1993)
Market Cap	$820.3 million
Industry	Leisure products
TTM Revenue	$1.72 billion
Management	CEO Manuel Perez de la Mesa (since 2001) CFO Mark Joslin (since 2004)
4-Month Return	43%
Compound Annual Revenue and Net Income Growth (over last three years)	1.7% and (13.3%)
Competitors	Home Depot (NYSE: HD) Lowe's (NYSE: LOW)
CAPS members bearish on POOL also bearish on	Lennar (NYSE: LEN) Centex (NYSE: CTX)
CAPS members bullish on POOL also bullish on	Apple (Nasdaq: AAPL) General Electric (NYSE: GE)

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS. TTM = trailing 12 months.

Over on CAPS, fully 29 of the 83 All-Star members who have rated Pool Corporaiton -- some 35% -- believe the stock will underperform the S&P 500 going forward. These bears include All-Stars mrindependent and threepaweddog, both of whom are ranked in the top 7% of our community.

Just last month, mrindependent warned that Pool owners would likely have their heads underwater:

I expect the economy to continue to be tough and discretionary spending will be low. A big share of this company's revenues come from new pools, which are the ultimate discretionary item. Recurring revenues from pool supplies will likely enable this company to avert total disaster but year over year sales are down 20% and profits are down accordingly.

In an earlier pitch, threepaweddog also thinks this Pool is headed for a dip:

This one easily gets a red thumb. Three of their four largest markets are in the bubble states of California, Florida, and Arizona. Most new pool construction (where Pool derives 20% of their sales) is financed off of home equity. In the bubble states, even if customers could qualify for a loan, there is no equity left in real estate purchased during the past few years. … If you believe the real estate market will only get worse, then new pool construction will drop further.... If you like their management and their business, wait for the housing market to turn around in the key markets.

 

 

Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Monday's biggest winners among the stocks with top ratings of four or five stars.

Without further ado:

Company	Yesterday's % Gain
Trinity Industries (NYSE: TRN)	12.74%
Allied Irish Banks	12.71%
VAALCO Energy (NYSE: EGY)	8.93%
NYSE Euronext (NYSE: NYX)	6.14%
General Electric (NYSE: GE)	6.31%

There's a reason why I selected those notable gainers as opposed to other winners making noise on Monday, like low-rated financials Morgan Stanley and Citigroup (NYSE: C). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 135,000 CAPS Fools considers its "high-star" stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 98% of the 1,158 members who've rated Trinity Industries have a bullish opinion of the stock. In late February, one of those Fools, my colleague Matt Koppenheffer (TMFKopp), explained why the industrial manufacturer would eventually pick up steam:

I can't see the demand for rail cars to pick up dramatically in the near term, but the company has some interesting diversification in its road construction and energy businesses. Recessions don't last for ever and neither do rail cars, so eventually demand for the main business should come back as well.

Shares of Trinity are already up 67% since that pitch. In fact, yesterday's double-digit pop came after a Wall Street analyst upgraded the stock, citing lower fixed costs in the railcar business and an increase in wind projects -- consistent with Matt's bull call.

The bullish lesson?
Learn to pounce on Mr. Market's short-sightedness. Going against the herd is never easy, but if you truly believe in a company's long-term tailwinds, significant slowdowns offer the very best opportunity to buy. As Warren Buffett once said, "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are five of Monday's biggest decliners with one- or two-star ratings:  

Company	Yesterday's % Loss
DineEquity	3.70%
Osiris Therapeutics (Nasdaq: OSIR)	2.95%
Valence Technology	2.58%
New Oriental Education	2.23%
Raser Technologies	1.96%

While yesterday's drop in highly rated CapitalSource (NYSE: CSE) may have caught our community off-guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Last year, for instance, CAPS member vladdfool offered a dose of reality on Osiris' prospects:

Stem cell space still extremely risky with little hope for improvement over the next few years. Having worked with these cell lines, I can only say, it takes YEARS to get any positive experimental data worth anything, much less FDA approval and market acceptance. ... [T]his company loses lots and lots of money, and will continue to do so for quite some time to come.

After yesterday's market-bucking loss, shares of the stem cell drug maker are down 14% since that call.

The bearish takeaway?
Always invest with a healthy dose of skepticism. There are certainly stocks out there that have the "next big thing" in their pipeline, but unless you have exceptional insight in identifying them, there's really no need to take such long-shot bets. As CAPS' vladdfool understands, any idea can be bid up on enthusiasm, but if the expectations aren't rooted in economic reality, it's just a matter of time before your rocket stock turns torpedo.

The final Foolish move
Investors often focus strictly on stock price movements without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, thousands of investors are Foolishly sharing insightful investment tips to help, above all else, identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you become a more Foolish investor.

 

 

4-Star Stocks Poised to Pop: Delta Petroleum

Based on the aggregated intelligence of 135,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, oil and natural gas provider Delta Petroleum (Nasdaq: DPTR) has earned a respected four-star ranking.

With that in mind, let's take a closer look at Delta's business and see what CAPS investors are saying about the stock right now.

Delta facts

Headquarters (founded)	Denver, Colo. (1984)
Market Cap	$417.2 million
Industry	Independent oil and gas
TTM Revenue	$234.1 million
Management	COO John Wallace (since 2003) CFO Kevin Nanke (since 1999)
Compound Annual Revenue Growth (over last three years)	18%
Competitors	Chesapeake Energy (NYSE: CHK) Denbury Resources (NYSE: DNR)
CAPS members bullish on DPTR also bullish on	General Electric (NYSE: GE) Citigroup (NYSE: C)
CAPS members bearish on DPTR also bearish on	Universal Display (Nasdaq: PANL) Coeur d'Alene Mines (NYSE: CDE)

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS. TTM = trailing 12 months.

Over on CAPS, fully 250 of the 264 members who have rated Delta -- some 95% -- believe the stock will outperform the S&P 500 going forward. These bulls include All-Star 97E3LPL, who is ranked in the top 10% of our community, and dariussale.

In May, 97E3LPL predicted that troubled waters would soon flow out of Delta:

Oil play. Things do seem dire for these guys, but they are clearly putting forth extraordinary effort to meet the challenges. Although I fear a drop to pennies is possible, [my humble opinion] is that oil will rebound soon and these guys will float upward along with everyone else in oil.

In a pitch from late last month, dariussale highlighted billionaire Kirk Kerkorian's big stake as another one of several catalysts:

1. Natural Gas Prices will rebound by end of the year
2. Lots of insider buying including 53 million shares bought by owner of MGM back in May of 2009
3. They are exploring a well called the Grey Well and if something positive comes out of it, it could help the stock price
4. The CEO just left the company, so new blood might reenergize the company and staff

 

 

Fearful Stocks for Greedy Investors

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." -- Warren Buffett

Of all the Oracle of Omaha's orations, this one holds a special place in Foolish investors' hearts. When looking to bag a bargain, a panicked sell-off by jittery investors offers you a great chance to snap up stocks on the cheap.

In the short term, professional traders' pessimism can become a self-fulfilling prophecy. Desperate institutions lower their asking prices to get rid of a stock, prompting buyers' bid prices to fall in tandem, creating the very price decline that both sides feared in the first place -- until the selling stops.

Until it does, savvy investors can "get greedy," snapping up bargains from these fearful sellers. (Assuming they really are bargains.) In today's column, we'll see which stocks Wall Street's motivated sellers are most frantic to unload. Once we've compiled this shopping list of potential picks, we'll check them against the collective intelligence of Motley Fool CAPS.

Today's contenders include:

Stock	Recent Price	CAPS Rating (out of 5)
Quicksilver Resources (NYSE: KWK)	$9.13	*****
JA Solar (Nasdaq: JASO)	$3.95	****
ReneSola (NYSE: SOL)	$4.83	****
Solarfun Power  (Nasdaq: SOLF)	$5.45	***
Canadian Solar (Nasdaq: CSIQ)	$10.13	***

Companies are selected from the "Institutional Ownership Down Last Month" list published on MSN Money on the Saturday following close of trading last week. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Last one out, please turn off the lights ..."
With that line, Wall Street gave up on its dreams of deriving cheap, clean energy from the sun.

Reports of truly massive oversupply in the global silicon market did a number on the solar stocks last week, with prices alternately ... ahem ... flaring up or fading to sunspots (depending on which day you looked at 'em.) Professional investors seem to have lost their taste for the roller coaster, and began selling the industry in droves. It didn't help matters that oil prices have recently tumbled about 15% lower. Or did it?

Because it's just this volatility that's given us a chance to pick up one five-star castoff from Wall Street on the cheap. Its name?

Quicksilver Resources
CAPS All-Star foolergo8888 introduced us to this one earlier in the year as an "Independent oil and gas company, which engaged in the development and production of natural gas, natural gas liquids and crude oil, through a combination of developmental drilling, exploitation and property acquisitions."

In April, fellow All-Star Trimalerus was "loving Oil & Gas stocks ... because they have been trampled down by the market and they should be the first stocks to grow when the world economy recovers. Oil Peak is a beautiful thing if you can use it you your advantage."

But All-Star tobyg74 would argue that you don't even need to wait for peak oil to profit from Quicksilver, saying: "oil, oil, oil. Everyone needs it. Hurricanes make the price go up. Won't be long now for this one." (Because hurricane season is already on the horizon.)

Of course, Quicksilver isn't really much of an oil company. Gas is more its thing. At last report, Quicksilver claimed to have 1,639 billion cubic feet of the stuff in its proven reserves (along with, yes, 2.9 million barrels of black gold).

Convert the oil into "gas" at the standard industry metric, and you're left with total reserves equivalent to 1,656 billion cubic feet. Of course, natural gas is priced not in terms of "cubic feet," but of the BTUs produced by burning these "cubic feet" -- roughly 1,030 BTUs per foot cubed -- and the spot price is about $3.22 per million BTUs. So, the value on these reserves works out to -- let's see ... 1,656 billion cubic feet times 1,030, divided by 1 million, times $3.22 -- about $5.5 billion.

Meanwhile, Quicksilver itself carries an enterprise value of just $4.3 billion -- a 22% discount to the value of its hydrocarbon assets. Sound good?

It did to me, too, until I compared Quicksilver to peer gas producer Chesapeake Energy (NYSE: CHK). You see, Chesapeake's 12 trillion cubic feet worth of equivalent reserves are "worth" $39.8 billion; yet the company is selling for only $24.8 billion -- a 38% discount. Meanwhile, the nat-gas company we looked at last month -- Sandridge Energy (NYSE: SD), sports a ratio of $7.1 billion in reserves to $4 billion in enterprise value -- a 44% discount.

 

 

The Best Way to Invest $5,000 Today

It's not enough to find truly great stocks. To make the most from your investing prowess, you also have to know where to put those stocks once you find them. Otherwise, you could end up losing a big portion of your gains unnecessarily.

Many have found that owning high-performance stocks over the long haul was their key to open the door to substantial wealth. Some stocks, such as PotashCorp (NYSE: POT) and Hansen Natural (Nasdaq: HANS), make explosive moves upward over relatively short periods of five or 10 years. Others, though, such as Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG), take longer, but build inexorably year after year, rarely blowing the market out of the water, but gradually putting together an impressive track record.

Splitting your wealth
Over time, those track records add up. Just take a look at how much money you could have accumulated with those stocks and others like them:

Stock	Time Frame	A $5,000 Initial Investment Is Now Worth
PotashCorp	10 years	$57,096
Hansen Natural	10 years	$245,763
Microsoft (Nasdaq: MSFT)	20 years	$387,167
Dell (Nasdaq: DELL)	20 years	$813,750
Procter & Gamble	30 years	$259,706
Johnson & Johnson	30 years	$360,750
ExxonMobil (NYSE: XOM)	30 years	$386,471

Source: Yahoo! Finance.

But that only tells part of the story. The true measure of investing success isn't how much money your account is worth on paper; it's how much you take home when you sell and use the money, after you pay commissions, taxes, and other investment costs. And as you can see below, that's where using a Roth IRA to hold your stocks can make a huge difference.

Stock	Taxes Paid in Regular Account	Taxes Paid in Traditional IRA	Taxes Paid in Roth IRA
PotashCorp	$7,814	$19,983	$0
Hansen Natural	$36,114	$86,017	$0
Microsoft	$57,325	$135,508	$0
Dell	$121,313	$284,813	$0
Procter & Gamble	$38,206	$90,897	$0
Johnson & Johnson	$53,363	$126,262	$0
ExxonMobil	$57,221	$135,265	$0

Note: Assumes 15% maximum rate on long-term gains, and 35% rate applies to ordinary income and traditional IRA distributions.

If you're not using a Roth IRA to invest up to its current maximum of $5,000 per year -- $6,000 for those 50 or older -- then you should remedy that situation quickly. Your portfolio's depending on it.

Why the Roth rules
There are a number of reasons why a Roth IRA is one of the most powerful tools you can use to save, both for retirement as well as for a number of other financial goals. Here are just a few:

• A great tax break. As you can see from the example above, a Roth IRA can save you thousands of dollars in taxes throughout your lifetime -- all for the price of using after-tax dollars to fund your contributions.
• More flexibility. Unlike some other savings methods, such as 401(k) plans, you retain full control of the investment you choose in a Roth IRA. You can pick from stocks, bonds, mutual funds, and a variety of other eligible investments.
• More access. When it comes to getting at your money, the rules for Roth IRAs aren't as restrictive as for other types of IRAs and 401(k) accounts. Once you meet some simple requirements, you can withdraw the original amount of your Roth contributions without penalty or tax at any time, even before you retire and regardless of how old you are. That compares with full taxation plus 10% penalties that often apply to traditional IRA withdrawals taken before age 59 1/2.
• Fewer requirements. Conversely, if you don't need access to your funds, you don't ever have to make withdrawals from a Roth IRA. That's different from other retirement accounts, where requirements to take minimum distributions usually start at age 70 1/2.

Best of all, high-income taxpayers who've previously been locked out of Roth IRAs will be allowed to convert existing traditional IRAs into Roths beginning next year, without any maximum gross income limit. You'll pay tax upfront on the amount you convert -- but that may pale in comparison to the taxes you save for the rest of your life.

Do it now
If you haven't started using a Roth IRA for your investments thus far, then you really shouldn't delay any longer. The sooner you start, the faster you'll see your tax-free income start to build inside your account. There's no better feeling than seeing your stocks rise when you know you're going to keep every penny for yourself.