One Outrageously Cheap Stock

You know that political bumper sticker that goes, "If you're not outraged, you're not paying attention"? It might as well apply to the market these days. Last year was a terrible, awful, and downright painful year to be an investor.

Good -- even great -- companies were sold down to levels far below their true worth, and investors are losing their savings. And even after the recent run-up, some outrageous bargains remain.

A shocking and somewhat interesting statistic
See, a whopping 88% of all stocks traded on the major U.S. exchanges were down in 2008. That's 5,369 names in the red. Of those, 4,407 dropped 25% or more -- a list that includes seemingly "defensive" stocks such as PepsiCo (NYSE: PEP), Altria (NYSE: MO), SYSCO (NYSE: SYY), and Ameren (NYSE: AEE).

So if you lost money last year, don't feel bad. There was no hiding from this downturn.

But it probably hurts more if you pulled money from the market and missed out on this recovery. The good news is there are still some cheap stocks out there.

Case in point
Take Barrett Business Services, for example. I found this tiny West Coast professional-employer organization and staffing company during my work as the micro-cap analyst for our Motley Fool Hidden Gems service. At the time, it was trading for a little more than $20 per share. I liked the CEO, I liked the balance sheet, I liked the track record, and I thought it looked cheap. So I told people to buy it.

What happened next was frustrating: It dropped to $17, then to $14, and today sits around $10.

What's your next move?
What's more, Barrett Business Services stock has pretty much stayed put while other names such as Bank of America (NYSE: BAC) and Chipotle (NYSE: CMG) have rocketed back up. This presents us with an opportunity.

That's because Barrett still has a strong balance sheet, it has increased its share repurchase program, and it's paying shareholders a nice 3.2% dividend. Could the stock drop further from here? Of course, but as the employment picture improves, Barrett should rebound strong.

But regardless of whether the market is rising or falling, it's always a good time to buy excellent companies on the cheap. That's what we're all about at Hidden Gems, and even though it's gotten harder to find cheap stocks, we're still building our portfolio of small-cap bargains.

The Top 10 Recession Stocks

Over a year ago, when signs were starting to point to a recession, my colleague John Reeves and I compiled a list of the previous recession's top 10 stocks to discover any patterns that would help our investing this time around. That list provided a number of fascinating insights, some of which we had expected, while others surprised us.

While their names may have changed from a year ago, the general lessons remain the same.

Our screen looked for domestic and Canadian stocks that were valued above $250 million and traded on major exchanges -- stocks the individual American investor would have been likely to actually buy.

Drumroll, please ...
The top 10 performers since the start of the last recession are listed below, with their performances during the recession listed in the fourth column:

Company	Industry	Market Cap on March 1, 2001 (in millions)	Return March 2001 to November 2001*	Total Return 2001-2008
Southwestern Energy	Oil & Gas Exploration	$262	14%	2,134%
Goldcorp	Gold	$274	81%	1,551%
Apple (Nasdaq: AAPL)	Computer Hardware	$6,489	(1%)	1,048%
Gilead Sciences (Nasdaq: GILD)	Biotechnology	$3,314	80%	887%
priceline.com	Internet Retail	$432	72%	835%
ITT Educational Services	Education Services	$721	23%	764%
Strayer Education	Education Services	$454	64%	739%
McAfee	Systems Software	$929	191%	726%
Flowers Foods	Food	$1,728	139%	683%
Range Resources	Oil & Gas Exploration	$298	(24%)	650%

Data from Capital IQ, a division of Standard & Poor's.
*Duration of recession, according to the National Bureau of Economic Research.

Every one of the top 10 stocks was either a small or a mid cap. This shouldn't be surprising, as small caps not only outperform during recessions, but are also overrepresented among the highest-performing stocks in general.

Last year, we were surprised that three of the top 10 stocks hailed from the energy sector -- conventional wisdom, after all, holds that energy companies will be hurt by falling demand during a downturn. This year, two energy stocks remain on the list, while technology stocks have the most representation.

Given that these computer-related firms were pummeled during the Nasdaq crash, it wouldn't have seemed the most likely area for investors to have bet on. For instance, look at the prerecession (January 2000 to February 2001) returns for those three companies:

• Apple: (64%)
• Priceline: (95%)
• McAfee: (75%)

The collapse of the Internet bubble made it a brutal time for many high-tech companies, so investors were justifiably panicked. But those who sold or were too afraid to buy missed out on incredible long-term growth stories.

But back to that table above. What are the major lessons from the top 10 stocks since the last recession?

1. Today's "high-tech" companies
Just as three of the top 10 recession stocks hailed from a beaten-down sector (technology), we shouldn't be surprised if there are a select few financials that will outperform over the next eight years. Apple and Priceline posted losses in 2001, so, based on a casual glance at their financials, it was undoubtedly difficult to separate them from the countless tech companies that went bust.

Similarly, there will be winners amid today's beaten-down financial stocks, but they won't necessarily be the big names. To pick the right ones, you'll need a rock-solid understanding of the business, accounting statements, and management team.

2. No time for timing
It's very difficult to accurately time sector bets. During downturns, many investors flee to "recession-resistant" industries and companies -- for example, conglomerates like General Electric (NYSE: GE), drug manufacturers such as Pfizer (NYSE: PFE), and silver miners like Coeur d'Alene (NYSE: CDE).

It's not necessarily a bad idea to allocate somewhat defensively, but the cleverest investors don't throw all their money into a small number of industries with the expectation that they will be able to reallocate to bull market favorites right before everyone else does.

Over the past year, each of the aforementioned defensive stocks and industries underperformed Home Depot (NYSE: HD), McDonald's (NYSE: MCD), and AutoZone as well as their respective industries -- home supply, restaurants, and auto parts stores (of all things).

In addition to the unlikely energy and tech winners from the lists above, this surprise underscores just how unpredictable the market is in the short term, and thus how difficult it is to make accurate sector bets, much less to time them appropriately.

3. Still no time for timing
It's also very difficult to correctly time individual stock picks. Professors Barber and Odean confirmed this point in a massive study of more than 66,000 household brokerage accounts. The duo concluded that "overconfidence can explain high trading levels ... [which is] hazardous to your wealth."

According to their extensive data, as trading activity increased, performance declined, with the most active traders underperforming the average household by five percentage points annually!

In the cases of Apple, Priceline, and McAfee, investors who sold out at a huge loss or were too afraid to buy missed out on enormous gains over the following several years. And in eight of the 10 cases in our table above, penny-pinchers who waited until the end of the recession for a slightly cheaper entry price never got one.

That's why when John Bogle recently visited us at Fool HQ, he remarked that the first question each of us must ask ourselves is, "Am I an investor, or am I a speculator?" Speculators waste their energies trying to forecast short-term price movements. Investors recognize that it's impossible to know when the market will turn, so they focus on minimizing transaction costs and buying great businesses to own for the long term.

How to invest in recessions
The list above, along with the examples of the savviest investors (Buffett, Marty Whitman, Chuck Royce) suggest that the smart thing to do right now is to continue to invest in great companies at reasonable prices. The market could remain volatile and even irrational in the short run, so it makes sense to gradually add money (assuming you don't need it for the next three to five years) to the strongest companies across a variety of sectors.

Diamonds Might Be Forever, but Few Stocks Are

I dislike most stock-trading strategies, especially day trading, which I liken to betting on where a butterfly is going and when it's going to get there. The stock market should be simply about investing, because investing is about the noble endeavor of turning human capital into financial capital, and that requires years of commitment.

Yet that doesn't mean you have to hold a stock forever. Nothing is forever -- not you, not me, not even the Sun. Change is constant. Consider that more than half of the 30 Dow Jones Industrial Average stocks weren't components before 1991, and six of the stocks became components in 2004 or later.

Many investors speak of durable quality and staying power when they invest for the long term, but more often than not, they overestimate both items. A decade ago, for example, an investor could have persuasively made an argument for the durable quality and staying power of former DJIA members Eastman Kodak (NYSE: EK), American International Group (NYSE: AIG), and General Motors.

The history of the DJIA in particular and the stock market in general suggests that selling is not a consideration to take lightly, given the ephemeral nature of stocks' staying power. So when should an investor consider selling? Werner DeBondt and Richard Thaler noted in a Journal of Finance article titled "Does the Market Overreact?" that three years is a relevant time frame, based on Ben Graham's contention that the interval for a substantial undervaluation to correct itself was one-and-a-half to two-and-a-half years.

Speaking from a value perspective, I prefer a longer time frame, though -- one based on the ebb and flow of the business cycle. From 1945 through 2001, there were 10 business cycles, according to the National Bureau of Economic Research. The average time it took to get from the previous trough to peak was 57 months. I'm willing to give a company five years to right itself.

Of course, selling has its costs; nothing gets the teeth gnashing quicker than seeing a stock you sold double in price. Still, selling improves the odds of missing the sudden collapse of an AIG or a Bear Stearns and minimizing the damage of a slow, seemingly permanent descent of a Kodak. Both trips are often impossible to portend.

Selling also shields investors from those decades-long round trips. Of the handful of DJIA stocks that have been components for 50 years or more, three -- General Electric (NYSE: GE), DuPont (NYSE: DD), and Alcoa (NYSE: AA) -- are trading at 1995 levels.

In other words, if you are a long-term investor, it's worth vetting your portfolio from time to time. Consider selling issues that are becoming a little long in the tooth. The longer the times are good, the greater the odds they will turn bad.

 

A Massive Bet on Bank of America

John Paulson, the head honcho at Paulson & Co. (not to be confused with ex-Treasury chief Hank Paulson), invested $2.2 billion in the bank during the second quarter, at an average buy price of $13.20 a share.

The investment is somewhat shocking, given that Paulson bathed in a significant amount of limelight for making boatloads of money by betting against a host of things related to mortgage, housing, and banking. And I do mean boatloads; reportedly, he personally pocketed $3.7 billion in 2007 as his funds skyrocketed.

Interestingly, while B of A was Paulson's largest banking investment of the quarter (and his second-largest equity investment overall), he also picked up shares of a host of other financial stocks, including JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), Capital One (NYSE: COF), and Fifth Third Bancorp (Nasdaq: FITB).

But there's another twist here. Paulson's investments during the quarter also maintained a healthy amount of exposure to gold-producing companies, including the SPDR Gold Shares (NYSE: GLD) exchange-traded fund, AngloGold Ashanti, and Kinross Gold (NYSE: KGC).

So on the one hand, we've got a big bet on the banking system and financials, while on the other hand we've seemingly got a big bet against the dollar and financial system. Why would Paulson do this? I've got several ideas:

1. The financials are a short-term bet, assuming that shares are underpriced and will charge back with the economy, while the gold holdings are a longer-term purchase to profit from inflation and a weak dollar.
2. One of Paulson's traders brought her kids to the office and they ran amok, making billions of dollars of random trades.
3. Paulson is now bullish on the financial system, and the gold holdings are a hedge on that bet.
4. He did this just to mess with all of us.
5. Paulson is brilliant, and if he told us the reasoning behind these trades, our lesser brains would implode from the sheer genius.

Confessions of a Large-Cap Chauvinist

Last week, I warned people not to make dumb decisions in the face of financial pressure. Many readers took issue with me for warning people about penny stocks, accusing me of "large-cap chauvinism."

Here's my scathing condemnation: "Even people who love penny stocks often end up burned by them; these tiny equities can be easily manipulated by hypesters, and the companies to which they're tied often lack established track records."

The Securities & Exchange Commission (SEC) has some cautions of its own: "Before a broker-dealer can sell a penny stock ... The firm must furnish the customer a document describing the risks of investing in penny stocks." It adds, with its own italics: "Investors in penny stocks should be prepared for the possibility that they may lose their whole investment."

The researchers have spoken
Financial researchers have known for years that penny stocks carry above-average risk with no guarantee of good returns. A 1998 study by researchers P.J. Seguin and M.M. Smoller looked at nearly 6,000 Nasdaq stocks between 1974 and 1988, and found not only that lower-priced stocks were more likely to fail than higher-priced ones, but also that investors earn lower returns on lower-priced stock portfolios, once you adjust for risk.

Penny stocks are so risky in part because their prices are more subject to manipulation. In a 2006 study, Rainer Bohme and Thorsten Holz found that penny-stock spam e-mails could significantly affect share prices, at least on a short-term basis.

These aren't pennies...
You might think that all stocks started out as penny stocks. But don't let the historical prices of strong performers fool you. Take a look at these stocks:

Company	20-year avg. annual return	Split-adjusted closing price, 8/11/1989	Actual closing price, 8/11/1989
Target (NYSE: TGT)	13%	$3.82	$60.00
Best Buy (NYSE: BBY)	29%	$0.22	$6.38
CVS Caremark (NYSE: CVS)	10%	$4.88	$33.83
Wal-Mart (NYSE: WMT)	13%	$4.32	$41.00
EMC (NYSE: EMC)	29%	$0.10	$5.13
Oracle (Nasdaq: ORCL)	22%	$0.44	$17.87
US Bancorp (NYSE: USB)	10%	$3.21	$25.62
Microsoft (Nasdaq: MSFT)	24%	$0.33	$57.75

Data: Yahoo! Finance.

It might look like Target was a penny stock way back when. But that $3.82 has been adjusted to reflect stock splits. The shares were actually trading at $60 then -- far from penny territory.

Plenty of high-quality small-cap stocks trade at respectable prices. But when it comes to penny stocks, regardless of how big the company may be, you can count me out.

Do you agree or disagree? Let me know by leaving a comment in the box below.

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.

Better yet, 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 3.4 million picks and growing):

• Johnson & Johnson (NYSE: JNJ) -- Diversified consumer, pharmaceutical, and medical devices producer.
• Chesapeake Energy (NYSE: CHK) -- Largest producer of natural gas in the United States.
• Procter & Gamble (NYSE: PG) -- Consumer-goods megacap.
• Berkshire Hathaway -- "It's hard to go wrong with Warren."
• Novartis (NYSE: NVS) -- Solid, growing dividend payer.

Do your own research on these stocks, 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, which our community does not believe will beat the market going forward:

• Blockbuster -- Bricks-and-mortar business model to match for Netflix's (Nasdaq: NFLX) centralized distribution.
• Palm (Nasdaq: PALM) -- Tough competition from the iPhone and Research In Motion's (Nasdaq: RIMM) BlackBerry.

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.

A Big Upgrade for Hasbro

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 Hasbro (NYSE: HAS) these days -- the stock has methodically worked its way from a mediocre three-star rank several months ago to a chart-topping five stars lately. A total of 768 members have given their opinion on Hasbro, with many of them offering analysis and commentary explaining the recent optimism.

Hasbro impressed investors and inched its earnings per share higher in its recent quarterly report, while competitor Mattel reported a sales decline. If not for a strengthening dollar affecting revenue, sales would have grown by 7% over last year. Similar to Marvel Entertainment (NYSE: MVL) banking on its hit movie titles, Hasbro got a boost out of strong box office showings from the recent Transformer and G.I. Joe branded summer movies and it expects the two brands to continue to perform well next year as toys and merchandise line the shelves of Wal-Mart (NYSE: WMT) and Target (NYSE: TGT).

Not one to play favorites, the company also has a line of toys lined up for movie releases from Marvel and Disney (NYSE: DIS). In addition, it expects to continue growing its digital gaming revenue this year through its gaming partnerships and a full slate of Hasbro-branded games on all major gaming platforms like Microsoft's (Nasdaq: MSFT) Xbox 360 and Sony's PlayStation.

Investors are also excited about Hasbro's joint venture to launch a new kids cable TV network with Discovery Communications. It's brought an industry vet on board to run the new network, which will be alongside the Disney Channel, Viacom's Nickelodeon, and Time Warner's (NYSE: TWX) Cartoon Network in cable TV channel lineups.

This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Shareholders of salesforce.com (NYSE: CRM) received a double confidence bump yesterday, when a pair of Wall Street analysts voiced strong support for the "on-demand" software provider. Morgan Stanley praised salesforce as "one of the best secular growth stories in software, and ... one of the companies [that will] grow earnings per share through the downturn."

Interestingly, Morgan Stanley had been advising investors to sell salesforce up until yesterday. But with business ticking up, the on-demand software market "expanding," and salesforce "broadening" its own offerings for this market, Morgan Stanley now thinks it's safe to own the shares once more, rating them "equal-weight."

Why not "buy," you ask? Morgan Stanley worries that the attractive economics of this market will draw increased competition from the likes of Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL), while a continuing recession could put a lid on potential gains. None of this seems to worry Lazard Capital Markets, however. This banker, which had already rated salesforce a "buy," now thinks it's seeing a spike in demand for salesforce's products, and predicted we will see a 14% uptick in sales for fiscal 2010.

Great news, right? Now's the time to pile back into salesforce.com? Not so fast, Fool. First, let's check the stats, and find out if these analysts are "all that."

Because as it turns out, they're not. Oh, I admit that Morgan Stanley might be a great analyst. It could be the best banker that ever boosted a stock, or dumped a dog ... but if so, we'd never hear of it. Morgan Stanley does not report its ratings to Briefing.com, and so simply has no track record by which to judge it. Lazard, in contrast, does -- and that's the problem.

Let's go to the tape
Of the two analysts rating salesforce this week, Lazard is the more bullish banker. Yet over the past three years, only 47% of Lazard's picks have outperformed the market, placing this banker in the bottom quintile of the investors we track on CAPS. Lazard performs especially poorly when picking software stocks:

Stock	Lazard Says:	CAPS Says:	Lazard's Picks Beating (Lagging) S&P by:
CDC Corp (Nasdaq: CHINA)	Outperform	****	1 point
Electronic Arts (Nasdaq: ERTS)	Outperform	***	(32 points)
VMware (NYSE: VMW)	Outperform	***	(43 points)
VASCO Data Security  (Nasdaq: VDSI)	Underperform	*****	(135! points)

On average, Lazard's batting only .400 in the software space -- great stats in baseball, not so hot in investing. Seeing these statistics, an investor would have to feel just a little bit uncomfortable following Lazard's lead on this week's recommendation, even with (the unknown quantity of) a Morgan Stanley upgrade supporting Lazard's pick.

And yet ...
And yet, that's exactly what I'm going to do -- echo these analysts' recommendation of salesforce.com.

Why? So help me, because the numbers here are just too good to resist. Sure, with a P/E stuck in the triple digits, salesforce doesn't look like much of a bargain at first glance. But remember that salesforce has always looked expensive from a P/E perspective. Meanwhile, under the surface, the company just keeps on churning out more and more cash. As the free cash flow swells, salesforce's P/E shrinks -- and the stock looks cheaper by the day.

Right now, salesforce is generating cash profits in excess of $190 million per year -- nearly four times what it reports as "net earnings" under GAAP. The company sells for about 30 times these cash profits, which seems appropriate in a stock that Wall Street has pegged for 41% annual long-term growth. Yet its balance sheet is bursting at the seams with more than $500 million in net cash and nearly another $500 million in long-term investments.

Will 2010 Be Capstone's Turnaround Year?

Less than nine years ago, shares of Capstone Turbine (Nasdaq: CPST) crested at almost $100 on hopes that the California-based microturbine maker would revolutionize ultra-low-emission, ultra-low-maintenance power generation technology. When things didn't quite work out that way, shares plummeted. Since those heady days, the stock has dropped a staggering 99%. But a turnaround could be in the making.

In its most recent quarter, Capstone's sales grew by 83% to $13.7 million, due largely to higher prices for its products, while total operating expenses fell significantly due to reductions in research and development and general overhead. Until taking a hit for changes in the fair value of its warrant liability, Capstone had everything in place for a good quarter. However, after the $5.2 million charge, net losses landed at $15.3 million, or $0.08 per share, missing analysts' estimates by $0.03 per share.

Turnaround time?
Despite the charge, it was an eventful quarter for Capstone, and it marks the start of what could be a historic year for the clean energy corporation that has never earned a profit since it became a publicly listed company. CEO Darren Jamison declared: "I believe fiscal 2009 was best described as Capstone's year of growth, while I believe fiscal 2010 will best be described as Capstone's year of cost reduction, working capital improvement, and positive cash flow."

These words are nothing trivial to anyone familiar with the Capstone story, especially in a calendar year its strategic partnership with United Technologies (NYSE: UTX) ended. United Technologies wasn't just one of its biggest customers -- its UTC Power subsidiary also provided Capstone with R&D funding benefits through its cost-sharing program.

Politics or profit
Jamison's words might be rhetoric aimed at rekindling downtrodden investors' hope in the company's future, but I believe they hold merit. Capstone's overall backlog has only decreased by 6% in the past three months to about 67.4 megawatts, which means that while the weak economy is dragging down spending across the board, Capstone's products continue to get support from its customers.

Meanwhile, over the next three quarters, management is confident in its plans to increase its average selling prices, as its price hike of 14% on its C1000 model fully takes effect. Furthermore, the company will take action to achieve 30% cost reduction. All of this is obviously very exciting news for Capstone.

And like other alternative energy investments like First Solar (Nasdaq: FSLR) or Energy Conversion Devices (Nasdaq: ENER), Capstone stands for something in which you can believe: a cleaner tomorrow. So if you're in the market for a speculative stock that's overdue for a turnaround, consider Capstone Turbine.

 

 

Holly Dances Through a Tight Spot

To better know a company, gauge how it responds to adversity.

The insight into a company's management culture and competitive capacity made visible by the largest financial upheaval of our lifetimes provides an endless source of fascination for this market-watching Fool.

The refining industry certainly has not been spared the rod, what with dizzying fluctuations in oil prices and weakened demand for refined products. Shunning adverse conditions with counter-cyclical growth, Holly (NYSE: HOC) distinguished itself from peers with a 28% increase in net earnings to $14.6 million. Although gross refining margins of just $7.82 per barrel whittled revenue down 41% to $1.04 billion, the corresponding 41% increase in production volume offset much of the impact.

Rendering the accomplishment more remarkable, sector giant Valero (NYSE: VLO) lost $317 million for the quarter, and Tesoro (NYSE: TSO) lost $45 million despite a gross margin that outperformed Holly's by $0.70 per refined barrel. Smaller operators failed to find profitability as well, including Western Refining (NYSE: WNR) and Calumet Specialty Products (Nasdaq: CLMT).

Thanks to completed capacity expansions at both of Holly's flagship facilities, and the 85,000 barrels-per-day Tulsa refinery purchased from Sunoco (NYSE: SUN) in June, Holly succeeded in growing its way through a very difficult quarter. Holly intends to increase throughput at Tulsa to about 85% of capacity by September, pushing beyond the 78% company-wide utilization targeted by Valero.

Record results from Holly's midstream spinoff Holly Energy Partners (NYSE: HEP), in which Holly holds a 46% interest, also bolstered results. To fuel further growth in this high-yielding income equity, Holly sold a pipeline and transportation loading facilities at Tulsa to Holly Energy Partners during the quarter. Since I last urged Fools to examine Holly Energy Partners in November, shares have appreciated more than 40%, while the company's five-year track record of increasing dividends has continued.

 

 

This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the worst ...
Shares of Chipotle Mexican Grill (NYSE: CMG) (NYSE: CMG-B) are sitting out of the market rally today. The apparent reason: A bearish note issued this morning by investment banker Jesup & Lamont. Initiating coverage on the stock with a "sell" rating, Jesup worried aloud over the stock's 39% rally off its March lows. Jesup suggested it would only like Chipotle at a price of 20 times next year's earnings, which it estimates at about $3.75. Jesup's key concerns are:

• New store growth might "moderate" as the recession creeps along.
• Comps have been weakening due to negative foot traffic growth.
• Restaurant-level profit margins may have peaked, at least until comps can pick up the slack.

In this banker's view, the stock has become priced for perfection, with investors assuming that the company will produce "continued positive EPS surprises" -- a dangerous assumption. Long story short, unless Chipotle hands it a 20%-off coupon, Jesup's not eatin'.

Let's go to the tape
Curiously, however, this may be good news for Chipotle investors. Why? Because among the professional investors we track, Jesup & Lamont consistently proves itself to be among "Wall Street's Worst".

Not much better at making airline picks than acting the restaurant critic, Jesup at least has some familiarity with meals delivered via heated tins than plastic bins:

Stock	Jesup Says:	CAPS says:	Jesup's Picks Beating (Lagging) S&P By:
AirTran Holdings	Outperform	*	36 points
Delta Air Lines (NYSE: DAL)	Outperform	*	(37 points)
Continental Airlines (NYSE: CAL)	Outperform	*	(41 points)
US Airways  (NYSE: LCC)	Outperform	*	(73 points)

Moreover, according to our CAPS records, along with its simultaneous recommendation of Starbucks (Nasdaq: SBUX) this morning, Chipotle became the very first restaurant recommendation Jesup has made public since we began tracking the analyst two years ago. The closest recommendations elsewhere reside in the Specialty Retail sector, often grouped with "restaurants" due to each business model's reliance on same-store sales to drive growth. But even there, Jesup's record is sparse ... and uninspiring:

Stock	Jesup Says:	CAPS says:	Jesup's Picks Beating (Lagging) S&P By:
Lowe's  (NYSE: LOW)	Outperform	***	12 points
Pier One	Outperform	*	(37 points)

All of which adds up to a chance that when Jesup tells us today that Chipotle will under-perform the market, the stock could very well outperform the market instead.

Surprises abound
Now, personally -- and notwithstanding its reputation -- I happen to agree with some of the points that Jesup makes. Jesup's 100% right that Chipotle looks downright expensive at its current valuation of more than 30 times trailing earnings. In my mind, the 22% five-year earnings growth that most analysts posit for Chipotle just doesn't justify today's price.

But I've got a sneaking suspicion that I -- and Jesup -- might be wrong about this. So for the Chipotle bulls out there, let me sketch out a hypothesis showing how Chipotle just might beat the odds and outperform after all.

Start with Jesup's assumption that Chipotle is only worth a "20x target multiple" to next year's earnings. If the company's growing at 22% per year, it would seem that the stock should fetch a 22 P/E multiple at worst. Consider too that Jesup's concern

that investors are counting on "continued positive EPS surprises" out of Chipotle. Well, why shouldn't they? Chipotle has beaten earnings estimates in each of the last three quarters.

I also cannot help but notice that Chipotle's free cash flow continues to lag its reported earnings. But there's a good reason for this. The company has been using cash flow to build out its new stores. Open 136 new stores using internally generated cash, like Chipotle did last year, and that uses up cash flow pretty handily.

Foolish takeaway
Make no mistake -- the valuation on Chipotle looks high to me, and I have no plans to buy the stock myself. Meanwhile, Jesup & Lamont worry that this stock is on an unsustainable trend of outperformance and earnings beats.

But from where I sit, there may be good reason to wonder if the trend is actually Chipotle's friend. With a rock solid balance sheet, improving cash flows, and a stellar growth rate, Chipotle just might surprise us -- by continuing to surprise us.

 

 

These 5 Underdogs Are No Dogs

 

Short-sellers and hedge funds, though sometimes shadowy, are also sometimes seen as the smartest investors in the room. They did their homework and will bet their capital against the crowd. It's not the most popular way to go, but the rewards can be quite lucrative.

On Motley Fool CAPS, we've got our own brand of leading analysts who found the chinks in a company's armor and correctly called its fall. "Underdogs" are investors who earned 100 or more CAPS points correctly predicting one or more stocks would underperform the market.

Let's look at some of the recent calls these All-Star investors have made. Yet, just as hedge fund operators don't always go short, we're going to focus on the picks these top members are looking at to outperform the market. If they've been making their points being bearish on stocks, it may be worth our while to see which ones they think will succeed.

Underdog	Member Rating	Company	CAPS Rating (out of 5)
cobradon	98.98	Silver Wheaton (NYSE: SLW)	****
VeniVidiVeci	97.80	Las Vegas Sands (NYSE: LVS)	**
ilovestocks	96.12	Boston Scientific	***
bigbenjewell	93.03	Alcoa (NYSE: AA)	****
vierlierer	92.76	Visa (NYSE: V)	***

Not every short sale goes as planned, so it's a risky position to hold. Stock prices can be irrational for longer than you have money to stay in the game. So don't use this as a list of stocks to sell or buy, but rather as the launching pad for further research.

Underdogs still wag their tails
Remember when George Clooney played the Caped Crusader in Batman & Robin and flashed his Bat credit card ("Good Thru FOREVER!") to bid $5 million on Uma Thurman's Poison Ivy character? Yeah, the part right before you got up and walked out of the theater because your limit for good sense had been reached? Well, Visa is counting on us to maintain our addiction to credit to finance the things we want, need, and gotta have.

It took the recession to make many of us realize that we don't have spending limits like the one Gothcard bestowed on Batman. Ever since, we've been shoveling money into our piggy banks like we're afraid we're going to have to grocery shop in garbage cans. As a result, the nation's savings rate has soared.

That's not good for Visa or MasterCard (NYSE: MA), because if we're not spending, they're not raking in the fees from transactions. Visa's latest results showed that even though we're using our debit cards more than credit cards, it's not nearly enough to offset the decline in overall payment volume.

Yet there are still opportunities for growth. Visa generates only 42% of its trailing $6.7 billion in revenues from sources outside the U.S., compared with American Express (NYSE: AXP), which generated more than $9 billion in 2008. By gaining a larger international presence, Visa could get Europeans to rack up more spending.

CAPS member bobbyabull figures that as we transition to a cashless society, it's going to be Visa's paid-by-the-swipe business model that will succeed:

Long term trend - cashless society. I haven't had a Mastercard in a long time and have never bothered to sign up for American Express. Discover seems lame. Visa is the clear leader in a space with few players. Additionally, defaults mean squat to them. They simply provide the infrastructure. They get paid by the swipe!

No fleas here
It has better margin advantages than its rivals as it purchases and re-sells byproduct silver produced by other mining companies, so Silver Wheaton should see sales volumes soar when a new mining operation by Goldcorp (NYSE: GG) gets under way, since it will be selling the silver Goldcorp brings up. The silver miner's fortunes these days are such that it might even start paying a dividend within the next few years, although it's more focused recently on scoring more acquisitions. CAPS member pwrstrk1 thinks Silver Wheaton's future is as bright as the metal it sells:

Metals futures are bright, with very questionable dollar values. You do not have to own gold to make a money in valued metals. Buy a thousand shares of silver and make 1K every dollar it goes up, instead of a few ounces of gold for a lot more, with less value rise.

 

Ditch This Overpriced Retail Stock

The market's recent rally has sent many retail stocks on a wild ride. But their lofty new heights have left many vastly overpriced, especially in a market full of fickle shoppers. As one of the priciest stocks in the retail sector, I think buyers should beware J. Crew (NYSE: JCG).

J. Crew's stock has skyrocketed more than 60% over the last six months. Perhaps investors have been heartened by first lady Michelle Obama's apparent fondness for J. Crew outfits. However nice that may be for the retailer's brand, it's still no reason for the stock to trade at a nosebleed-inducing 44 times earnings.

Though J. Crew has remained profitable, it hasn't been doing that well. Let's compare its actual performance with that of a few other mall-based retailers:

Company	Earnings-Per-Share Growth (TTM)	Sales Growth (TTM)	Price-to-Earnings Ratio
J. Crew	(57.1%)	4.0%	44
Aeropostale (NYSE: ARO)	31.1%	18.5%	15
Buckle (NYSE: BKE)	36.7%	26.2%	11
Hot Topic (Nasdaq: HOTT)	44.6%	6.5%	16
American Eagle Outfitters (NYSE: AEO)	(55.2%)	(4.0%)	20

All data from Yahoo! Finance and Capital IQ as of Aug. 12, 2009.

As you can tell, J. Crew's trading at a major premium to the retail peers outlined above, especially given its declining profitability and staid single-digit revenue growth. The premium that investors have given J. Crew seems better suited to a gold-standard tech stock such as Amazon.com (Nasdaq: AMZN), which has proven its power to generate unprecedented levels of growth in online retail.

Remember, Hot Topic also traded at dizzying premiums not too long ago. Now that it's losing business momentum, its share price has cooled off considerably. Meanwhile, Buckle and Aeropostale look incredibly appetizing, with their relatively low P/E ratios and debt-free balance sheets.

J. Crew doesn't belong on a retail deathwatch, unlike some of the market's more debt-laden and struggling retailers. Still, the company's stock looks way too expensive when compared with bargain-priced retail rivals with impressively resilient performance.

If you think J. Crew's enough of a class act to warrant its crazy stock price, we'd like to hear your thesis. Feel free to sound off in the comments box below.

 

 

Are You Neglecting This Group's Potential?

 

 

I'm willing to bet that many Fools are ignoring a sector that could show some real solid performance in the months and years ahead. I'm referring to the engineering and construction group, and while its results have been something of a mixed bag this earnings season, I'm convinced that many of the companies are well-positioned to benefit from fundamental changes on the horizon for our country and the entire globe.

Take Houston-based McDermott International (NYSE: MDR), for instance. The company didn't shoot the lights out with its performance for the second quarter, but its backlog is strong, and it appears to have some positive opportunities ahead for it.

For the most recent quarter, McDermott generated net income of $92.6 million, or $0.40 a share, compared with last year's record quarter, in which its income reached $177.5 million, or $0.77 a share.

But before we look at McDermott in somewhat more detail, let's take a quick glance at how some of the other members of the group performed in the quarter. The figures in the two center columns are the companies' quarterly earnings rounded to the nearest million dollars.

Company	Most Recent Qtr.	Year-Ago Qtr.	Difference
Fluor (NYSE: FLR)	$169M	$208M	(19%)
Foster Wheeler (Nasdaq: FWLT)	$122M	$161M	(24%)
Jacobs Engineering (NYSE: JEC)	$95M	$109M	(13%)
McDermott	$93M	$178M	(48%)
Quanta (NYSE: PWR)	$33M	$38M	(13%)
URS (NYSE: URS)	$75M	$49M	53%

The message that some of you may take from this table is that McDermott is the worst performing company listed. But the real takeaway here is that companies in the group are subject to significant earnings changes quarter to quarter as major projects come and go. As indicated, McDermott's most recent numbers are being compared here to the company's strongest quarter ever.

Indeed, the most recent quarter was McDermott's most profitable period since its record was set a year ago, and shares have more than doubled year to date.

Diving into its second-quarter results, McDermott's segment income from its Offshore Oil & Gas group dipped by 31%, and its Power Generation unit's contribution slid by 59%. Income from its Government Operations segment actually increased by 35%. But again, the segments are being compared to a quarter when everything went exactly right for the company.

So the year-on-year decline notwithstanding, my inclination is to suggest that Fools keep a keen eye on McDermott International -- and its entire group. There could be some substantial shekels to be made as our economy regains its sea legs and more big projects come to the fore.  

Dream Stocks for Contrarian Investors

Investors are always hunting for the next big stock -- the dream stock whose price increases several times over when the market finally discovers it. It's easy to look back and discover the 10 best stocks of the past decade. I'm more interested in tools that can help me evaluate tomorrow's greatest companies.

Motley Fool CAPS offers a variety of resources to help Fools find tomorrow's leaders. Our community of 135,000-plus members is full of investors helping one another beat the market.

We'll enlist CAPS to screen for contrarian investments, then get the story behind some of the more highly rated stocks. CAPS' nifty screener will help us find stocks with:

• A market cap of at least $500 million.
• A long-term debt-to-equity ratio of less than 0.5.
• A share price at least 50% below its 12-month high.
• An earnings-per-share growth rate of at least 15% over the past three years.
• A price-to-earnings ratio of less than 25.

Then we'll tap the collective intelligence of our CAPS members to see whether these companies present real opportunities -- or whether the numbers fail to tell the true story.

Opinions with the numbers
Below is a sample of stocks our screen returned. You can run this screen yourself -- remember, though, that your results may differ from ours as the market changes.

Company	EPS Growth Rate, Past Three Years	% Below 12-Month High	CAPS Rating (out of five)
National Oilwell Varco (NYSE: NOV)	42.9%	53.5%	*****
Mahindra Satyam (NYSE: SAY)	24.2%	77.3%	****
Nokia (NYSE: NOK)	20.4%	51.7%	****

Data and star rankings from CAPS as of Aug. 7.

National Oilwell Varco
The earnings of oilfield services company National Oilwell Varco took a hit in the second quarter, yet the company still managed to beat Wall Street expectations amid a weak drilling market that has prompted other players, like Schlumberger, to offer a cautious outlook. Its global rig count dropped in the second quarter compared with the first quarter, and National Oilwell Varco experienced a drop in backlog, but it still maintained its projection of $3 billion to $4 billion in backlog additions for the year. Although the company says it's too early to say we've turned the corner, many CAPS members are bullish on a recovery, anticipating that increased oil demand will bring demand for equipment and services. The company has a strong balance sheet, with more than $2 billion in cash, and expects to emerge strong when drilling activity resumes. 

In CAPS, 98% of the 2,899 members rating National Oilwell Varco expect it to outperform the market.

Mahindra Satyam
Mahindra Satyam (formerly Satyam Computer Services) continues to rebuild its image after the accounting scandal that gouged much of the company's value and cost it customers and market share to rivals like Infosys (Nasdaq: INFY), IBM (NYSE: IBM), and Accenture (NYSE: ACN). While the scandal is still fresh in many investors' minds, more than a few contrarians look for the beaten-down company to make a serious comeback. The company recently signed a five-year contract with GlaxoSmithKline, and Tech Mahindra, which took over Satyam in April, is bringing its long-term partner BT Group on board. 

Many CAPS members anticipate that Mahindra Satyam will be able to regain much of its lost revenue and profits and resume its rapid growth trajectory, with 96% of the 1,205 members rating the stock expecting it to beat the broader market.

Nokia
The world's largest handset maker recently raised concerns among investors when it cut its margins and said it expects market share to remain roughly flat in 2009. But sales and earnings per share grew compared with the first quarter, and the company remains a force to be reckoned with, holding a 41% share of the global smartphone market. It trails the Apple (Nasdaq: AAPL) iPhone and Research In Motion's BlackBerry in the U.S., but shipped more of its N and E series phones worldwide in the latest quarter than those two combined. 

Many CAPS members are attracted to Nokia's valuation compared with its peers, with 93% of the 2,652 members rating the Finnish company giving it a thumbs-up.

 

 

These 6 Winners Won't Send You to Prison

At least in Hollywood's eyes, getting the inside scoop on an attractive investment before anybody else most often leads some lucky investor to riches. But is there any way to benefit from inside information without landing yourself in some deluxe federal accommodations right next to disgraced financier Bernie Madoff?

Fortunately, there are ways to benefit from the knowledge of corporate insiders without earning a prison sentence. Every day, corporate executives, board members, and others with intimate knowledge of the companies we invest in disclose transactions they make with regard to their respective stocks. And if you want to take advantage of that knowledge without having to dig through a bunch of SEC filings, then you may want to check out an ETF that will do your work for you.

Does this ETF know it all?
The Claymore Sabrient Insider ETF (NFO) follows a somewhat unusual strategy. Like most ETFs, its mission is to track an index of stocks. What makes the ETF special, though, is the particular index it tracks. Although its exact selection process is proprietary, the Sabrient Insider Sentiment Index chooses 100 stocks that have healthy signs of insider buying as well as a history of rising analyst earnings estimates.

After a rocky start, the stock market has generally done fairly well so far this year. But the Claymore ETF has succeeded in choosing index components that have put in some truly extraordinary performance. Just take a look at this short list:

Stock	Weighting in ETF	2009 YTD Return
Clearwater Paper	1.65%	457.1%
Whole Foods Market (Nasdaq: WFMI)	1.17%	194.5%
Starbucks (Nasdaq: SBUX)	1.14%	103%
Cabela's (NYSE: CAB)	1.10%	175.1%
Southern Copper (NYSE: PCU)	1.05%	69.3%
Netflix (Nasdaq: NFLX)	1.05%	53.2%

Sources: Claymore, Yahoo! Finance.

Of course, the fund hasn't been so lucky with all of its picks. Other stocks, such as McDonald's (NYSE: MCD) and Myriad Genetics (Nasdaq: MYGN), are down for the year despite the overall market's greater than 10% rise. On the whole, though, the fund's performance in 2009 looks extremely impressive, clocking in with a 33% return so far this year.

Anything but a sure thing
If that's as far as you got with your due diligence, you might conclude that the fund was destined to be a winner. After all, many corporate insiders have a much greater understanding of the companies they work for than the general investing public, so you'd expect the companies that have the most insider support to perform the best.

But even though the Claymore ETF has only been around for a few years, its history shows how mistaken that conclusion is. In 2008, the fund managed to lose nearly 38%, beating its category peers but falling short of the S&P 500's return for the year. Although one could blame the fund's proprietary model for the shortfall, it's more likely that insiders simply didn't fare much better than general investors during the unprecedented financial crisis last year.

Moreover, the fund hasn't owned all of those stocks since the beginning of the year. As of the fund's Feb. 28 semiannual report, only Netflix was on its holdings list. With annual turnover of 84%, this fund does a lot of trading -- so you can't rely on a stock that's there today still being there tomorrow.

Trouble ahead?
Perhaps of greater concern than the fund's performance track record is its failure to attract substantial amounts of assets. The ETF has just $55 million under management, which doesn't put it among the smallest ETFs, but does make it difficult for the fund to operate economically. With expenses capped at 0.60% annually, that means the ETF utilizes just $330,000 for its operations. And although Claymore offers many different ETFs that can presumably pool their resources to cover administrative overhead and other common costs, the typical business model for most ETFs is either to grow or to die.

 

 

A Drug Stock IPO! Finally!

The drought is over. Except for Bristol-Myers Squibb's (NYSE: BMY) spinoff of Mead Johnson Nutrition (NYSE: MJN), there hasn't been an IPO of a drug company in nearly two years.

The dry streak may be broken, but don't expect this one to signal that there's a flood of interest in baby biotech IPOs quite yet. Today's offering, Cumberland Pharmaceuticals (Nasdaq: CPIX), is in a special breed of small drugmakers: it's actually profitable.

The company has two drugs on the market already, and a third was recently approved by the Food and Drug Administration and should be on the market later this year. Acetadote is an antidote for overdoses of acetaminophen, the active ingredient in Johnson & Johnson's (NYSE: JNJ) Tylenol. The company's other marketed drug, Kristalose, is a laxative, which has the same active ingredient as generic competitors, but has the advantage of being a powder rather than a liquid form, so it doesn't have to be refrigerated and it's easier to transport.

The company's recently approved drug, Caldolor, is an intravenous form of ibuprofen, the active ingredient in Wyeth's (NYSE: WYE) Advil. It won't have to compete directly with Advil, because Caldolor will likely only be given to patients who can't take drugs orally. It'll have to compete with other injectable pain relievers, but considering the mild nature of ibuprofen, Caldolor will find a place in doctors' arsenals and should be able to grab some of the $330-million-plus injectable-pain-reliever market.

With just $35 million in sales last year, Cumberland has a long ways to go before becoming the next Pfizer (NYSE: PFE). The company has been profitable for the last five years, most recently bringing in $4.8 million in earnings last year, so at least it's ahead of a lot of other drugmakers in that quest.

Investors are pricing Cumberland at a market cap of $290 million, which gives it a whopping P/E based on last year's earnings. Somewhere about 60, in fact. But keep in mind that sales of Caldolor should contribute to earnings and it'll realize about $75 million or so from the IPO, which Cumberland can use to license a drug or two to make better use of its sales force.

 

A Crash Course in ADRs

 

Somewhere between a magical disappearing act and a cruel joke lies the untold story of Anglo American's (OTC: AAUKY.PK) ADR shares.

After more than a week of surprising media silence and persistent confusion, the picture is now clear. The American depositary receipts of London-based miner Anglo American were delisted from the Nasdaq exchange after the markets closed on July 31, 2009 ... because they were never sanctioned by the company in the first place.

If that's news to you, it was news to me, too!

Anglo American never authorized the issuance of ADR shares for trade on a U.S. exchange. Instead, the shares were part of a category known as unsponsored ADRs. Banks like JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Bank of New York (NYSE: BK) will sometimes issue securities pegged to foreign shares of a given company without that company's involvement.

I knew that unsponsored ADRs trade over the counter on the Pink Sheets, but I never suspected that these securities could qualify for the Nasdaq OMX Group's (Nasdaq: NDAQ) venerable exchange. As an Anglo American shareholder, the joke is on me. The shares have been removed from key indices, which could cause fluctuations in institutional holdings.

According to an explanation from Anglo American's website, posted to my blog by CAPS member deepminer, the delisting relates to Nasdaq's transition to official designation as a "National Securities Exchange." Aug. 1 marked the end of a grace period for affected securities to comply with relevant SEC regulations. Other affected Nasdaq offerings included Fujifilm Holdings and Nissan Motors. (Although the latter's ADR was sponsored, Nissan chose not to register.)

Collective investigations like this one highlight the extraordinary value of community intelligence that CAPS members routinely enjoy. Since the news media provided no explanation for the delisting whatsoever, with the only initial public announcement a cryptic press release from Standard & Poor's, we Fools fended for ourselves to solve the mystery of the disappearing shares.

Global investors need not be alarmed. ADRs currently listed on the major U.S. exchanges, including Vale (NYSE: VALE), CNOOC (NYSE: CEO), and PetroChina (NYSE: PTR), are not at risk of delisting. If your ADRs trade over the counter, however, you might wish to determine whether the shares are sponsored or unsponsored, since this affects their reporting requirements. Better yet, let the expert team of globetrotting stock pickers at Motley Fool Global Gains (free 30-day trial) assist you in your research.

 

Lions Gate's Numbers Ain't Lyin'

 

With many companies reporting big drops in profits during this earnings season, it's nice to see movie and television producer Lions Gate Entertainment (NYSE: LGF) weigh in with strong results. Maybe there's something to be said for the idea that entertainment is recession-proof after all.

The folks who are paid to know everything about this company predicted that it would post a $0.05-per-share loss on revenues of just over $330 million. In reality, though, Lions Gate came through with a profit of $0.30 per diluted share on $387.7 million in sales during its first quarter, which ended June 30.

Action!
Lions Gate is moving quickly with plans on a number of fronts. Along with Paramount, it agreed to allow DivX (Nasdaq: DIVX) to showcase several of its titles online. Lions Gate will distribute its DVDs through Coinstar's (Nasdaq: CSTR) Redbox.

There's also the ongoing squabble with Carl Icahn over his lack of representation on the company's board of directors. The activist shareholder has been lobbying the company for multiple seats on its 12-member board for quite some time, but to no avail. Right now, the mogul owns about 17% of the company, having bought more shares recently in a possible attempt to pressure management into making concessions.

The big growth drivers for the quarter were film revenue -- especially from Mandate Pictures, which it acquired in 2007 -- and its TV production business.

Entertainment value
Sales attributable to the Mandate Pictures subsidiary jumped sixfold, because of contributions from hits like Sam Raimi's Drag Me to Hell. With its subsidiaries, Lions Gate has established itself as a leader in independent film production, and from Rambo to Hostel to Bratz, its works have always covered a wide array of movie genres.

Television revenue more than doubled on series licensing from its Lionsgate Television subsidiary, which produces shows like Mad Men, Weeds, and Nurse Jackie. Its acquisition of TV Guide earlier this year, as well as its joint venture with ISH Entertainment, also helped. Additionally, in conjunction with Liberty Media (Nasdaq: LCAPA), Lions Gate is co-producing the second season of the popular television series Crash, which will air this fall on Starz.

Decision time
What sets Lions Gate apart from companies like DreamWorks (Nasdaq: DWA), Time Warner (NYSE: TWX), and Walt Disney (NYSE: DIS) is the fact that it's a publicly traded, pure-play movie and television media company. It hasn't matured and gone the way of near-conglomerate Time Warner, and it's not entrenched in kiddie entertainment like DreamWorks and Disney. But unlike privately held Paramount, you can buy shares of Lions Gate.

If Lions Gate continues on this path, it could be one of the better investment turnaround stories of this year. By the time Rambo V comes out in 2011, I expect Lions Gate's shares will be much less affordable.

 

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, you can find these opportunities among our four-star stocks. In CAPS' proprietary ratings system, they rank higher than most of the other 5,300 starred companies, but they're just shy of superstardom. While their five-star peers get all the attention, we can sift through CAPS to find the four-star companies approaching greatness. Here are a handful:

• American Eagle Outfitters (NYSE: AEO)
• Force Protection (Nasdaq: FRPT)
• IntercontinentalExchange (NYSE: ICE)
• Massey Energy (NYSE: MEE)
• SanDisk (Nasdaq: SNDK)

Some of these recognizable companies might surprise you -- yet 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?
The longtime relationship between SanDisk and Samsung almost blossomed into marriage last year, as Samsung made an offer to buy the memory-chip maker. But things got nastier than a snipe-fest between Joy Behar and Elisabeth Hasselbeck on the set of The View, and it all ended with Samsung backing out. Its high-profile, low-road letter did everything but accuse SanDisk of giving it a communicable disease.

Today, their coexistence is quite cold, but they stick together because there's still money to be made -- only SanDisk won't be getting quite as much as in the past. Its surprise second-quarter profit highlighted just how domineering it had been: It enjoyed 7% of total flash revenue royalties from Samsung, when the industry norm is around 1% to 2%. Now a new contract is set to replace the rapine nature of the old one and cuts the royalty in half. The new Samsung contract also doesn't cover 3-D memory and opens up the possibility that card and USB makers can sidestep SanDisk altogether and brand their own products purchased from Samsung. Still, Samsung remained in the fold -- and at a rate higher than typical for the industry.

What, then, of SanDisk's revenues going forward? NAND flash prices have improved, and manufacturers such as Micron (NYSE: MU) and Toshiba are poised to boost production. Yet if there's not enough demand to support that supply, pressure on average selling prices will begin to pressure SanDisk in turn. On the contrary, if the industry does recover, SanDisk could be well-positioned to capture the uptake. It was a give-a-little-to-get-a-little type of deal, although the tension in the household remains thick.

Investors believe that the memory maker is still on its way to becoming a company you'll remember. CAPS member DWHunt87 thinks SanDisk's SD cards are well on their way to becoming the industry standard, while pbMunkey thinks the royalties are enough to boost its valuation higher:

Still a takeover target. Great intellectual property. Royalties from [Samsung] alone shoul[d] make this stock be $20 / share.

Lumpy performance
The heat and humidity usually boil the inhabitants of the Northeast this time of year, but I've been enjoying the respite from high energy bills as summer temperatures have been cooler than normal. My air conditioners haven't had to come out of storage yet, and assuming I decide to sweat out the next few weeks if temps rise, they may not come out at all.

I suspect I'm not the only one not cranking the AC as much this year. The cooler weather, coupled with a recession causing slack business demand, mean that utilities are expected to see electricity consumption fall by 2% this year. Duke Energy (NYSE: DUK) isn't expecting an increase in industrial demand until 2011. Massey Energy said coal-burn rates at utilities in the Southeast fell 19% last quarter, while central Appalachian coal consumption dropped by 25% -- yet it was still able to turn lemons into lemonade.

With coal providing half of this country's electricity needs, investors think this abundant natural resource will continue to play a role in America's overall energy portfolio. As oil prices continue to creep higher, hovering near $70 a barrel at the moment, CAPS member sindelar14 thinks Massey is one of the industry's premier coal miners that will lead us forward: "With demand for oil going up, and most likely supply for oil dropping (PRICE INCREASE IN OIL), the alternative will be coal. These guys do coal best, and do it as clean as possible."

 

 

VMWare and SpringSource: The Future Is Integrated

 

 

The future is integrated. Cell phones already come with digital cameras and MP3 player functionality. Your next Nokia (NYSE: NOK) might cook dinner for you, and then do the dishes. Wal-Mart's much-copied superstore concept puts car tires next to the milk and cookies, two aisles down from the tax preparation station.

Enterprise software is no different. All-in-one solutions are easy to use and understand, which leads to quicker work and lower staffing levels to support the darn thing. That's why virtual computing giant VMware (NYSE: VMW) is happy to spend $362 million in cash and stock on privately held software development specialist SpringSource.

The acquisition puts VMware way ahead of the competition once again. SpringSource's market-leading tools for writing programs in the Java language plus VMware's dominant virtualization platforms combine to create a whole new market that rivals like Microsoft (Nasdaq: MSFT) and Citrix Systems (Nasdaq: CTXS) haven't yet touched on.

VMware CEO Paul Maritz noted that the "Platform as a Service" (PaaS) market is expected to become a $15 billion annual sales opportunity "over the next several years," and that's exactly the sort of product SpringSource enables. "This is a big step for VMware to become a true data center and cloud automation company," Maritz said. "We believe this will allow us to be a very strong player in this emerging [PaaS] market."

By baking SpringSource's tools into the virtual machine software, VMware makes it easy to do a number of things, including:

• Create software that takes advantage of the virtual platform in new ways.
• Allow the virtual machine to run programs faster and better.
• Give 2 million Java developers a whole new rapid-fire development and testing platform.
• Allow automatic installation and configuration of new software -- and new virtual machines.

Oracle (Nasdaq: ORCL) might be on its way in this direction, if recent acquisitions are any indication. Sun Microsystems (Nasdaq: JAVA) created the Java language in the first place, and its engineers should be able to find ways of juicing up the Virtual Iron platform. But big daddy Oracle has little experience managing either software development tools or virtual machine software in the first place, giving VMware a head start.

Tomorrow's Monster Stock?

Stocks that climb to 10 times their original price are rare breeds. But they're not impossible to find -- especially when you have Fools for friends.

The market's best stocks include companies that have risen dozens of times in value over the past decade. These aren't penny stocks; they're viable companies that have sound business prospects and achieve phenomenal returns. And they happen to share some common traits: They're small, obscure, and ignored. Finding just one or two of these monstrously successful companies can help you establish a winning portfolio.

Stalking the monster
To find tomorrow's winners, we've enlisted the help of more than 135,000 monster trackers at Motley Fool CAPS. We've compiled a list of the most successful CAPS members, dubbed All-Stars, whose picks have doubled, tripled, or even quadrupled in price. Then we've plucked out some of their recent picks for stocks they find equally promising.

Player	CAPS Member Rating	Monster Stock	CAPS Score	Recent Stock Pick	CAPS Rating (Out of five)
BravoBevo	100.00	Fuqi International	231.99	Huron Consulting (Nasdaq: HURN)	**
hdgf2	99.99	Ford	192.03	AMAG Pharmaceuticals (Nasdaq: AMAG)	***
TigerPack	99.99	Gannett	129.84	Dell (Nasdaq: DELL)	**
tenmiles	99.99	Synthesis Energy Systems	138.98	Electro-Optical Sciences (Nasdaq: MELA)	****
bullishbabo	99.98	Sync2 Entertainment	105.45	Pharmaceutical Product Development (Nasdaq: PPDI)	*****

Of course, this is not a list of stocks to buy -- or, for those monster stocks that our CAPS All-Stars have already found, sell. Just consider them starting points for your own further research of extreme buying opportunities.

In search of Bigfoot
You've gotta hand it to Dell. For a company that was once synonymous with computers, it's done a pretty good job of fumbling its good fortune. Now Dell is the runner-up to Hewlett-Packard (NYSE: HPQ), a company that also could teach a class or two on how to screw up big time. 

Dell seems to have been especially adept at tripping over its own motherboard. After squandering the lead in PCs, it thought portable media players and HDTVs provided its next growth opportunity, but not netbooks, thus leaving the field wide open for Acer and Asus. (Granted, I didn't think tiny, underpowered laptops would amount to much either.) Now the company is launching a smartphone. What is Dell thinking? Should you just throw this stock away?

I'd say you should hang on, because Dell just might dial up some serious growth here. The blogosphere is all atwitter that a Dell smartphone running Google's Android is about to drop in China any day now. Smart move, that. China's handset market grew by 9% in the first quarter, according to the market researchers at iSuppli, with as many as 239 million units to be shipped in total this year. If Dell pairs up with China Mobile (NYSE: CHL), as one of the rumors out there claims, then it will be tapping into China's largest operator, with more than 450 million subscribers.

In contrast with its straw-grasping rationale that peripherals would make a logical leap for a computer maker, Dell surely realizes that mobile handsets are very much mini-computers these days. Furthermore, Dell can make a respectable showing with a handset and not have to try to unseat either Nokia or Samsung, which are the largest players in China's market, with a 34% and 21% share, respectively. A Dell cell phone could carve itself a nice niche.

Meanwhile, Gartner says Dell's computers have grabbed an 8.5% share of the Chinese market (it was a late entrant in that arena, too) and that the company was one of 14 to win a spot on China's rural subsidy program for computers. And we also have a new version of Windows 7 set to launch in October. With all of these things in mind, CAPS member kidwolf908 thinks Dell will be able to offer up some fancy footwork again.

Dell has been battered by the economy and the tech slump, but as consumer confidence strengthens and spending increases, people will be looking to pick up new PC's and monitors thanks to the release of Win7. With the netbook craze wearing thin and the ultralight notebook market looking to pick up, I think Dell is in a good position with an array of 12-14" notebooks.

 

 

Why Is DISH in Orbit Today?

When good news is scarce, it's best to rejoice in small glories. On that note, shares of conjoined satellite TV twins DISH Network (Nasdaq: DISH) and EchoStar (Nasdaq: SATS) are soaring today on mildly positive news.

After a year of losing subscribers, quarter by quarter, DISH finally managed to eke out a small sample of customer growth in the second quarter. And I do mean small: 26,000 net new subscribers is barely above redline. More than 730,000 gross subscriber lines were added, but 96% of that was canceled out by customers leaving the service, or trial-offer customers who never converted to long-term subscribers. DISH has 13.6 million paying customers now.

To put that performance into perspective, fellow entertainment-by-subscription maven Netflix (Nasdaq: NFLX) added 289,000 net subscribers last quarter to land at 10.6 million customers. Satellite rival DirecTV (Nasdaq: DTV) picked up 224,000 new accounts for a total north of 24 million.

In all fairness, we're comparing DISH going it alone versus last year's distribution partnership with AT&T (NYSE: T). And growth is growth, even if served in minuscule portions. In addition, the quarter treated both DISH and its umbilical infrastructure partner EchoStar pretty well in financial terms. DISH's sales held steady from last year at $2.9 billion, though EchoStar's revenue fell 21% to $383 million. Basic earnings per share stopped at $0.14 per share for DISH and $1.18 per share for EchoStar. Legal costs of the seemingly never-ending patent infringement campaign TiVo (Nasdaq: TIVO) is waging on DISH took a bite out of the bottom line.

Still, if you wanted to invest in a broadcaster today, DISH wouldn't be it. In the immediate family, EchoStar's high-margin business model looks far more attractive. And DirecTV is beating DISH in the satellite arena with another fat-margin strategy that leaves mere table scraps for DISH. Don't forget Verizon (NYSE: VZ), either. The FiOS TV service is just learning to crawl and has a lot of growing up to do.

 

 

This Volatile Stock Has Growth Potential

China has potential, but it can also be a very scary place to invest. For most of us there's an ocean between us and company headquarters, and that can an element of fear to investing in Chinese stocks.

For traditional Chinese medicine-maker American Oriental Bioengineering (NYSE: AOB), you can magnify both of those -- potential and fear -- considerably to get one volatile stock that makes American-born stocks like Sirius XM (Nasdaq: SIRI) or Citigroup (NYSE: C) or even biotech Amgen (Nasdaq: AMGN) look like U.S. treasuries in comparison.

The stock has had a rough year. In January it bought a $70 million building to be used as a "Convention and Training Center," according to its first 8-K filing. Investors didn't take too kindly to spending that kind of cash on a building; they sent the stock down almost 22%. The Global Gains team recently visited the new headquarters, which is capable of hosting meetings with managers of all its subsidiaries -- you can see pictures here -- and concluded that the purchase wasn't all that extravagant and should benefit the company in the long term.

Then, last week, short-seller Asensio accused the company of potentially having an undisclosed relationship with the seller of the new building, causing a more than 16% drop in price. The company cleared up the issue and Asensio seems to be backing away from its accusations. But the damage is already done. If investors weren't fully aware that investing in China has risks, they do now.

But there is potential in American Oriental Bioengineering. On Friday, the company released earnings showing a 21% increase in revenue, thanks in part to acquisitions as the company moves toward being a health-care conglomerate -- a Johnson & Johnson (NYSE: JNJ) of China, if you will. Earnings per share were flat for the quarter, but there's potential for growth once China gets its health-care plan in order, and when research and development pays off down the line.

At less than nine times guided earnings this year, investors aren't putting much confidence in the company. If you've got the guts to buy, there's potential in American Oriental Bioengineering; just remember to tread lightly.

 

 

Chinese Spying Allegations Don't Add Up

 

At this point we can only wonder how absurd the Chinese allegations against Rio Tinto (NYSE: RTP), the big Anglo-Australian miner, ultimately will become.

Thus far, it's hard to even get the math to work. Here's why: China's state secrets agency has accused Rio of spying on Chinese steel mills during the past six years. According to the agency, the results include the mills paying an extra $102 billion for iron ore. The difficulty there is that it's more than double the nearly $43 billion total amount the Chinese have paid the company during that period.

As you probably know, the accusations have been accompanied by the Chinese having snatched four of Rio Tinto's employees, including Stern Hu, who has charge of Rio Tinto's iron ore operations in China. None have been formally charged. Also, reports indicate that the Chinese are questioning at least five of their domestic steel mills.

All this follows an iron ore pricing squabble between Rio, BHP Billiton (NYSE: BHP), and Brazil's Vale (NYSE: VALE) on the one hand, and the major Chinese steelmakers on the other. The miners had been seeking cuts from last year's price closer to 33%, a steeper decline than even ArcelorMittal (NYSE: MT), the world's largest steel manufacturer, accepted for ore. But the Chinese producers are holding out for at least a 40% reduction.

Beyond that, when Rio Tinto was searching for funds to repay a portion of the loan it had borrowed when it acquired Canada's Alcan, the Chinese were willing to make a $19.5 billion investment in the company through their Aluminum Corp. of China (NYSE: ACH). In the end, however, Rio raised what it needed through a rights offering and an agreement to form an iron ore joint venture with BHP. That outcome clearly piqued the Chinese as well.

So the Chinese are demonstrating a willingness to play hardball. One question is what this means longer-term for the likes of Rio, BHP, and even copper producer Freeport-McMoRan (NYSE: FCX), of which the Chinese are major customers.

That's a question that could take a while to answer. My more immediate response is that, today’s slide notwithstanding, Rio's shares have more than doubled since late last year. And since its skirmish with the Chinese is bound to work itself out, I'm betting that there's good money to be made from the company over time.

 

These Dividends Are Safe

In the last year, it's felt like there are two kinds of dividend stocks out there: those that have cut their dividends and those that are about to.

And who can blame them?

In a credit crisis, companies with large dividend yields are quickly reminded that they are giving away their most readily available form of capital. And when companies' shares are priced as if they won't survive the credit crisis, shareholders sometimes see dividend cuts as positive developments. After all, wouldn't you rather own shares in a viable company that pays no dividend than in a bankrupt company that declares high dividends all the way down into oblivion?

As a result, we're on pace for the worst dividend cuts since the 1930s, and earlier this year the stock prices of companies including JPMorgan Chase (NYSE: JPM), CBS, and General Electric actually rose immediately after the news of dividend cuts.

That's all well and good, but what if, like me, you're old-fashioned and want to find some companies that can actually sustain their dividends?

Here's how to find them
We need to identify companies that:

• Still have earnings.
• Are paying less than 50% of those earnings as dividends (through the payout ratio).
• Cover their interest payments many times over with earnings before interest and taxes.

Here are a few that meet those criteria:

Company	Recent Dividend Yield	Payout Ratio	Interest Coverage
Petroleo Brasileiro (NYSE: PBR)	3.5%	7%	13x
Vale (NYSE: VALE)	3.3%	43%	9x
Kellogg (NYSE: K)	3.9%	43%	7x
Wisconsin Energy (NYSE: WEC)	3.0%	37%	4x
FPL Group (NYSE: FPL)	3.3%	39%	4x
CNOOC (NYSE: CEO)	3.8%	33%	>100x

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

You'll notice this list doesn't include any eye-popping, double-digit yields. Frequently, those sexier yields come from companies that are paying out more of their earnings than they can afford. Or they are leveraged up with debt and laboring under onerous interest payments. While such companies may be tempting, they are often ticking dividend time bombs.

So while the dividend yields in the table above aren't in the double digits, all are in the neighborhood of 10-year Treasury yields (currently 3.8%). Stocks that yield like bonds can be beautiful, beautiful things. Not only do you get the current yield, but you also stand to profit from any dividend increases down the road, as well as capital appreciation from currently depressed share prices.

Meanwhile, these companies are easily covering their dividend payments with earnings and aren't straining under ridiculous leverage. This doesn't mean it's impossible these companies will cut their dividends, but they're excellent candidates for further research.

In fact, our dividend experts over at our Motley Fool Income Investor newsletter team have already done their research. They've identified six stocks they believe should lay the foundation for a dividend-rich portfolio. I invite you to see them by taking a free 30-day trial to the service.