After 5 Years, Google Is Cheap

It seems as if Google (Nasdaq: GOOG) has been trading forever, but it's a lot younger than you might think.

The world's leading search engine went public five years ago today.

The initial demand was surprisingly weak. Google was hoping to price its shares as high as $135 apiece. It had to settle for $85. The stock opened at $100, and for the most part, it hasn't looked back.

Online advertising has been a winner for Big G, but it's not some magical ingredient, either. If paid search were the investing equivalent of the Midas touch, rivals Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) would have come along for the ride.

They didn't.

	8/19/2004	8/18/2009	Change
Google	$100.34	$445.28	344%
Yahoo!	$28.11	$14.75	(48%)
Microsoft	$22.59	$23.58	4%

Source: Yahoo! Finance. (Microsoft's quote is adjusted for dividends.)

Investors who missed out are probably kicking themselves, and rightfully so. Google even reached out to lay investors through a quasi-IPO that allocated some shares to individual investors who bid on the stock through a Dutch auction. It obviously wasn't enough to lift Google from settling for its original $85 price tag, but Morningstar (Nasdaq: MORN) and NetSuite (NYSE: N) went on to follow suit.

Google's success has come as a result of exploiting its strengths. As the world's most popular search engine, Google has made an easy sell of its contextual-marketing AdWords program, which is attractive to any advertiser that wants to drum up keyword-targeted leads. As a result of AdWords' success, Google was able to parlay its booming ad inventory into its AdSense syndication program, dynamically populating third-party sites with AdWords ad blocks.

The only downer is that Google traded as high as $747.24 two year ago. Investors who showed up unfashionably late are celebrating the terrible twos instead of the fabulous fives.

The upside, regardless of an investor's entry point, is that Google is surprisingly cheap. The shares have run up a bit lately, but Google is still fetching a reasonable 21 times this year's projected profitability and just 18 times next year's earnings target. China's Baidu.com (Nasdaq: BIDU) is growing more quickly than Google is overseas, but Google is the rare stateside player that's actually growing during the recession.

 

 

Microsoft's Bing Hit With Illegal Pharmacy Ads

 

It's usually a compliment to be compared to China's fast-growing Baidu (Nasdaq: BIDU), but Microsoft's (Nasdaq: MSFT) Bing is being compared in a notorious way.

According to a study conducted by an online compliance and Web-based pharmacy verification service, 89.7% of the reviewed drugstore ads on Microsoft's Bing came from illegal pharmacies.

The study, released Aug. 4, scoured the paid search ads delivered when queries for prescription-based pain medications and erectile dysfunction drugs were submitted. Most of the top advertisers proved to be bogus, often-offshore pharmacies that don't ask for prescriptions or perform age verification checks.

This should all bring Baidu investors back to last November, when a scorching Chinese television expose revealed that China's leading search engine was accepting ads from unlicensed medical companies.

Baidu vowed to clean up its act, and the stock has more than tripled since bottoming out eight months ago.

Baidu's blunder of not having licenses on file for all of its medical sponsors didn't hit home at the time. It felt like a China-specific problem, given the nascent nature of Internet usage in the world's most populous nation. The Microsoft study hits close to home, and leads one to wonder if regulators need to do a better job in watching over the online advertising practices at Yahoo! (Nasdaq: YHOO), Google (Nasdaq: GOOG), and Bing.

Microsoft's spunky search engine doesn't want to be killed in the crib, so the company probably will follow Baidu's example and vow to clean up its marketing platform if the groundswell builds.

And that would be the right way to earn a comparison to Baidu.  

 

Should Oil and Gas Investors Fear the FRAC Act?

 

In June, Democrats introduced the FRAC (Fracturing Responsibility and Awareness of Chemicals) Act via companion bills in the House and Senate. The FRAC Act seeks to amend the Safe Drinking Water Act so that hydraulic fracturing would be regulated on a federal level.

Hydraulic fracturing is the technique that, combined with horizontal drilling, has allowed domestic E&Ps like Devon Energy (NYSE: DVN), Southwestern Energy (NYSE: SWN), and XTO Energy (NYSE: XTO) to unlock massive shale deposits like the Barnett and the Fayetteville.

Big Oil's lobbyist, the API, has been hootin' and hollerin' about the implications of federal frac fluid oversight, saying that domestic production would drop "significantly" if servicers like Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI) had to report the chemical components added to the water that's pumped downhole and used to fracture hydrocarbon-bearing rock. One industry estimate puts the additional cost of compliance at $100,000 for each new natural gas well.

Big Oil (and especially Small Oil), you know I often stick up for you, but I suspect you're crying wolf this time.

The oil patch is an extraordinarily entrepreneurial place. If certain chemicals are banned from frac fluid, I have every confidence that the contractors will be able to formulate an alternative that doesn't break the economics of the stimulation job. Further, that compliance estimate sounds like a serious exaggeration.

Why am I sympathetic to this legislation? For one, state regulatory bodies can become quite cozy with industries that drive the local economy. Second, while the risk of polluting an aquifer seems remote, given that most horizontal drilling occurs much deeper in the earth, I do recognize that there are some rather nasty chemicals involved here, and they have been and will continue to be spilled on the surface. That poses enough of a threat to drinking water to get me concerned.

According to local media reports, a recent frac job performed by Schlumberger (NYSE: SLB) for Chesapeake Energy (NYSE: CHK) in the Haynesville shale play saw some frac fluid spilled, and 17 cows died.

To be clear, the outright ban of hydrofracking would strike an incredibly damaging blow to the industry and to our domestic energy supply (hello, Russian gas imports!), but I don't foresee such a threat to the overall practice. No matter what your opinion of members of Congress, I don't think any of them are that stupid.

As far as better chemical disclosure goes, I'm all for it. Let's just make sure that our representatives realize what a good thing we have going with shale gas, and that they don't strangle the goose that's laying golden energy eggs.

 

HP's Numbers Aren't as Good as They Look

Man, Hewlett-Packard (NYSE: HPQ) couldn't have timed its acquisition of consulting firm EDS any better.

That $14 billion barnstormer deal closed Aug. 26, 2008. Since then, HP has been happy to report relatively strong year-over-year sales, because the extra cash from old EDS customers has been enough to outweigh slower sales elsewhere in the massive HP machine.

And next quarter, when HP gets to compare apples to apples once again, the results will overlap with the start of the Great Panic of 2008. The numbers won't be that hard to beat. If HP had placed that cut-over point any closer to late September, it would just have looked suspiciously good.

So with the help of EDS, HP reported $27.5 billion of third-quarter revenue. That's down 2% from the year-ago period. Oops, silly me -- adjust for currency effects and you get 4% growth instead. There, that's much better. Non-GAAP earnings per share bounced up by $0.05 to $0.91.

CEO Mark Hurd said that "HP's performance this quarter is a result of our strong business portfolio, efficient cost structure and scale." Back out the hefty but unspecified contributions from EDS, and he'd be singing a different song. HP is practicing "growth by acquisition" in the grand tradition of Oracle (Nasdaq: ORCL) and Cisco Systems (Nasdaq: CSCO).

When you break HP down into its component parts, you have to wonder about the company's strength in each sector. The enterprise storage and servers segment saw 23% lower sales than in 2008, while chief storage rival EMC (NYSE: EMC) dropped just 11%. IBM's (NYSE: IBM) equivalent segment lost 25% of its sales, so all is not lost. But IBM beats up on HP in the software segment with a mere 8% annual drop against HP's 22%.

The consumer-oriented computer business fell just 18% to $8.4 billion, despite a small uptick in unit volumes and a global market-leading stature. We'll have to wait another week to see how Dell (Nasdaq: DELL) stacks up there -- but third-party reports say that Dell shipped fewer systems this summer, so things are looking up for HP here.

HP remains a colossus of the technology industry, but its feet may be made of clay. If you held a gun to my head and told me to pick a tech giant to buy today, I'd probably go with EMC or Google (Nasdaq: GOOG), simply because their businesses seem much more stable than HP's.

 

 

Copper's David and Goliaths

 

If you've ever stood beneath Michelangelo's sculpture of David in Florence, you know that the commensurate underdog is anything but a pipsqueak. Taseko Mines (AMEX: TGB), the micro-cap copper miner with larger-than-life mineral reserves, may see itself in a similar light.

Although true industry goliaths such as Freeport McMoRan Copper & Gold (NYSE: FCX) and diversified miner BHP Billiton (NYSE: BHP) won't discern a threat from the 19.1 million pounds of copper concentrate produced at Taseko's Gibraltar mine in the second quarter, this smaller operator with big plans will continue firing its slingshot. If outperforming shares are the key to slaying a goliath, Taseko may indeed have a serious shot at victory.

Taseko recorded a 200% increase in net earnings over the second quarter of 2008, but those results were heavily influenced by a foreign-exchange gain of $7.9 million (compared to a corresponding $600,000 loss in the prior-year period). Notwithstanding the impressive strength of copper's price recovery in recent months, the average realized price dropped 46% from the prior year, offsetting a 69% increase in copper concentrate sales volume.

When we look to mining costs, Taseko starts to increase in stature. The miner's operating cash costs, net of by-product credits, came in at just $0.96 per pound. Of course, goliath Southern Copper (NYSE: PCU) can more easily harness economies of scale to deliver a comparable cost of $0.51 per pound, but Taseko's margin strength remains a well-chiseled feature as Gibraltar moves closer to a giant capacity expansion.

Taseko's golden bullet
With less than 10% the production scale of Southern Copper, Taseko possesses a secret weapon to slay the competition. The pending Prosperity project, which Taseko is "extremely confident" will clear regulatory hurdles, offers not only 2 billion pounds of copper, but a large-scale gold reserve of 4.7 million ounces.

Whereas copper giant Teck Resources (NYSE: TCK) recently divested gold assets to the likes of Kinross Gold (NYSE: KGC), Taseko retains a buried treasure that shareholders are eager to unearth. Taseko's smaller scale and financial constraints leave this Fool questioning whether it can build the mine on its own in a timely fashion, fueling speculation that Taseko may ultimately attract a buyer. I offered Yamana Gold (NYSE: AUY) as a potential suitor, but relative giants may flock to Taseko like visitors to Michelangelo's marble masterpiece.

Copper has been on a tear lately, reaching more than $2.80 per pound as China continues to build stockpiles, invest abroad, and foment commodity speculation. As a result, I perceive a near-term price correction on the horizon, with the potential for more favorable entry points ahead.

 

10 Stocks Shaking the Market

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

Today, we've compiled 10 stocks that made some of the biggest upward moves over the past month. We'll then pair that list with the ratings issued by our Motley Fool CAPS community. The higher each stock's rating, the greater CAPS members' faith in that company's ability to keep on beating the market.

Stock	30-Day % Change	CAPS Rating
Gastar Exploration (NYSE: GST)	492.19%	****
Rentech (NYSE: RTK)	421.74%	**
American Axle & Manufacturing (NYSE: AXL)	319.12%	*
Select Comfort	215.79%	***
Radian Group	214.80%	**
ArvinMeritor (NYSE: ARM)	129.21%	**
Crocs	105.48%	*
Boise (Nasdaq: BZ)	96.76%	****
Century Aluminum (Nasdaq: CENX)	88.56%	****
UAL (Nasdaq: UAUA)	70.21%	*

30-day % change from July 17 to Aug. 18.

As the markets whipsaw to changes in consumer sentiment, there will be weeks like this one, in which we see gains that are exceptionally ahead of the pace of prior weeks' movers and shakers. So before we get shaken out again, let's see why the CAPS community thinks some of these companies might outperform the market.

A mighty temblor
Your first profitable quarter ever is bound to make the market enthusiastic, and such was the case for Rentech, which benefited from lower natural gas prices and larger sales of synthetic jet fuels as it posted record profits in the second quarter. It followed that up with a deal to supply airlines with synthetic jet fuel made from waste such as yard clippings. Rentech says the deal is the first of its kind to supply several airlines with the renewable diesel fuel.

Rentech is brimming with confidence now. It raised guidance for the year, assured that natural gas prices will remain below the levels it budgeted for and on being able to sell more jet fuel. CAPS member hatchjcp thinks the company is big news:

Huge growth story. Fertilizer stock that is just starting to make alternative fuel such as jet fuel. They supply the air force and just got a contract for eight airlines at the LA airport on Aug. 18, 2009.

Strong as steel
News that Aluminum Corp of China, China's largest alumina producer, was raising prices didn't hurt the cause of Century Aluminum. The latter company has been striving to bolster its financial position by selling assets, but its stock had already made a big move upward before Chinalco's big announcement. Despite reporting its third consecutive quarterly loss, a stronger-than-expected surge in June's housing numbers, combined with the company's own position that aluminum demand was ticking northwards, were enough to send Century Aluminum's shares higher.

CAPS members remain bullish on Century; 93% of those rating it think it will outperform the market. Though DaveZzzz3 thinks it remains at depressed levels, it has still outperformed the other 190 or so stocks in the CAPS Metals & Mining sector, which rose just 6% on average over the past 30 days.

Still feeling the aftershocks
American Axle & Manufacturing was a one-day marvel the other day, more than doubling in value after General Motors agreed to infuse it with $210 million to help it restructure. Of that sum, $110 million is related to costs associated with GM's own bankruptcy, while the other $100 million is a term loan facility. Highly rated CAPS All-Star member TSIF finds it difficult to generate any enthusiasm for American Axle's situation:

This rally the past few months has, unfortunately, way too much basis in companies with minimal outlook, just because they were beaten to a pulp. American Axle if/when, they get their credit in shape stands to gain from a $110 Million "gift" from GM for behaving during their bankruptcy, but debt is over $1B and rising. Even if AXL is successful in debt restructuring, covenants, and avoiding Bankruptcy, they still have YEARS to go to be profitable. Book value per share is NEGATIVE $13.00, net tangible assests are negative by over $800 Million, and quarterly revenue off by over 50% yoy. Where does an extension on a credit overhaul warrant a share price double???

 

TJX Still Loves the Briar-Patch

 

Some might say that the prevailing economic climate over the past several months has been torture, but TJX (NYSE: TJX) wouldn't use that word to describe the environment. The recession has been more like tickle-torture than anything else for the discount retailer of apparel and home fashions. The company reported impressive results for its fiscal second quarter, but whether you should buy TJX depends on a few key factors about the future.

Sales grew by 4% to $4.7 billion on higher foot traffic. President and CEO Carol Meyrowitz declared, "We saw strength across the board, with virtually all of our divisions either meeting or exceeding our second quarter targets." Sales for its stores in Europe and Canada suffered from foreign currency exchange rate fluctuations, but even so, earnings landed at $0.61 per share, an improvement of 27% compared with the same quarter last year.

TJX vs. the Street
However, management provided conservative full-year guidance of $2.26 to $2.38 per share, which is more or less in line with analysts' expectations. Quarterly earnings beat consensus estimates by a penny -- driven by fundamental improvements in TJX's gross and operating margins. That's promising because it's pretty easy to take action on below-the-line items like overhead, but it's no small feat to exceed expectations through key-margin expansions and top-line growth.

Still, because of its off-price nature, TJX has relatively lackluster gross margins compared with some of its key competitors.

Company (Ticker)	Gross Margin (TTM):
Macy's (NYSE: M)	40%
J.C. Penney (NYSE: JCP)	38%
Kohl's (NYSE: KSS)	37%
Target (NYSE: TGT)	28%
TJX Companies	24%

Source: Yahoo! Finance. TTM = Trailing 12 Months.

Since it relies on attracting customers by offering comparable goods at lower prices than its peers, TJX's stores don't capture the big markups that higher-priced competitors earn. But the retailer does hold its own with competitive operating margins.

Gluttons for punishment
That brings us to the primary question that investors in TJX and other discount retailers are now asking themselves: Will the recovery come sooner or later? If the macroeconomic environment improves in the near future, unemployment will decrease, and consumer spending will increase. Individuals -- like most companies -- have done their own cost-cutting in recent months, which has provided a boost to TJX's core business.

But if the economy turns around soon, people will likely forget their short-lived strife, and bargain shopping might slow to a trickle. If you believe that's a likely scenario, then TJX has dwindling appeal as a defensive play. On the other hand, if things stay bad, shares could continue appreciating.

 

PROspecting for Stock Gold: Wal-Mart Stores

Building a successful stock portfolio starts with finding great businesses. And finding great businesses requires digging through financial statements, news, and other information to find companies with leading growth rates, strong margins, and healthy financials.  

In our PROspecting Stocks screen, we evaluate proprietary community intelligence from the 135,000-plus investors participating in Motley Fool CAPS as well as four key, handpicked fundamental criteria.

Our goal is to accelerate your research, and find the stocks that are worth a closer look. So get out your shovel and pickax as we start digging for gold!

Wal-Mart vs. Industry Peers

	Wal-Mart Stores	(NYSE: WMT)	Target	(NYSE: TGT)	Kohl's	(NYSE: KSS)	J.C. Penney	(NYSE: JCP)
CAPS Community Rating We prefer 4-star or 5-star stocks.	***		***		**		**
CAPS 1000 We like stocks rated "outperform" by 80% of top CAPS members.	91.5% Outperform	Yes	85.9% Outperform	Yes	35.7% Outperform		52.9% Outperform
Five-Year Revenue Growth We like to see five-year revenue growth of at least 10%.	7.9%		6.9%		8.3%		(1.3%)
Gross Margin (TTM) We like to see gross margins of 35% or higher.	25.7%		31.4%		37.4%	Yes	36.3%	Yes
Total Debt-to-Equity A total debt-to-equity ratio of 0.50 or less gets a check.	0.7		1.3		0.3	Yes	0.8
Return on Equity We look for a minimum of 14% return on equity.	21.3%	Yes	15.1%	Yes	12.5%		8.6%

 

 

 

PROspecting for Stocks: Coach

Building a successful stock portfolio starts with finding great businesses. And finding great businesses requires digging through financial statements, news, and other information sources to find companies with leading growth rates, strong margins, and healthy financials.  

In our PROspecting Stocks screen, we evaluate proprietary community intelligence from the 135,000-plus investors participating in Motley Fool CAPS, as well as four key, hand-picked fundamental criteria. 

Our goal is to accelerate your research, and find the stocks that are worth a closer look. So get out your shovel and pick axe as we start digging for gold!

Coach  vs. Industry Peers

	Coach (NYSE: COH)	Coach	Target (NYSE: TGT)	Target	Kohl's (NYSE: KSS)	Kohl's	J.C. Penney (NYSE: JCP)	J.C. Penney
CAPS Community Rating We prefer 4-star or 5-star stocks.	***	no	***	no	**	no	**	no
CAPS 1000 We like stocks rated "outperform" by 80% of top CAPS members.	87.1% Outperform	YES	85.9% Outperform	YES	35.7% Outperform	no	52.9% Outperform	no
Five-Year Revenue Growth We like to see five-year revenue growth of at least 10%.	20.6%	YES	6.9%	no	8.3%	no	(1.3%)	no
Gross Margin (TTM) We like to see gross margins of 35% or higher.	76.8%	YES	31.4%	no	37.4%	YES	36.3%	YES
Total Debt-to-Equity A total debt-to-equity ratio of 0.50 or less gets a check.	0.02	YES	1.3	no	0.3	YES	0.8	no
Return on Equity We look for a minimum of 14% return on equity.	40.4%	YES	15.1%	YES	12.5%	no	8.6%	no

 

 

These 5 Stocks Have a Little Magic

When fund manager Joel Greenblatt published his investing tome, The Little Book That Beats the Market, in 2005, it marked a unique point for investors. They now had insights into easily replicated investing strategies developed by a value investing master. Greenblatt has achieved phenomenal results over the past two decades, besting even the performance of Warren Buffett.

His strategy is deceptively simple: Buy undervalued, high-performing companies and hold for a year. Wash, rinse, and repeat. But what if we could augment Greenblatt's methodology?

Below, we've used a "magic formula"-like screen that approximates the pre-tax earnings and return on capital criteria he lays out, but adds the ratings from our Motley Fool CAPS investor-intelligence database. Combining those rankings with the criteria that Greenblatt suggests should give us winning investments that may just produce some outsized returns.

Here are a few companies that showed up when I ran this screen recently.

Stock	Pre-Tax Earnings Yield %	Pre-Tax Return on Capital %	Recent Stock Price	CAPS Rating
American Physicians Capital (Nasdaq: ACAP)	25%	>100%	$31.73	**
Claymore Dividend & Income Fund (NYSE: DCS)	20%	>100%	$12.18	**
HealthTronics (Nasdaq: HTRN)	33%	>100%	$2.55	*****
USA Mobility (Nasdaq: USMO)	34%	>100%	$12.81	**
Vaalco Energy (NYSE: EGY)	36%	>100%	$4.83	****

Source: Yahoo! Finance CapitalIQ, a division of Standard & Poor's; Motley Fool CAPS. Pre-tax earnings yield is inverse of EV/EBIT. Pre-tax ROC is EBIT divided by tangible capital employed.

Although Greenblatt's strategy is a mechanical one, we don't think you should just rely upon this as a simple list of companies to buy. Due diligence on this narrowly focused list of companies is always a smart requirement. Let's see what CAPS members have to say about these magical companies.

A little bit of pixie dust
West African oil producer Vaalco Energy reported a loss of $1.7 million or $0.03 per diluted share in the second quarter, compared with a $13 million, $0.22-per-diluted-share profit a year ago. The major contributing factor: fallen oil prices.

Given the rocky road crude oil has taken this year, it's not surprising to see these kinds of results. After all, oil behemoth ExxonMobil (NYSE: XOM) recorded record profits last year, only to post its worst earnings results in years just last month. ConocoPhillips (NYSE: COP) hit a gusher when oil was soaring last year, but saw earnings plummet 76% this quarter, even though it produced more oil this quarter than in the same period last year.

For its part, Vaalco pumped 24,000 barrels of oil per day in the quarter, a record for the oil producer. Now, that's nothing when stacked against ConocoPhillips' 1.87 billion per day, but Vaalco is still moving in the right direction. It has eight producing wells offshore of Gabon, and it's producing more oil all the time. It sold 80,000 more barrels of oil this quarter than a year ago, but with oil at an average of $59 a barrel, compared with $119 last year, the hit its earnings took was not unexpected.

CAPS member cheatcountry likes Vaalco Energy's market value and low debt levels. It has more than $88 million in cash and just $5 million in long term debt, placing it in a strong financial position to grow out its operations. Highly rated CAPS All-Star member becon800 figures history is on Vaalco's side:

[Vaalco Energy] never stays below $4 for long, and when it does dip below, it bounces back quickly. Oil has gone up in the last quarter, so look for increased revs and earnings. Sell at $4.50 to $4.60.

The volatility of oil prices will continue to make it difficult to evaluate year-over-year financials accurately. While oil currently trades at about $70 a barrel, a future increase in price will surely make it easier to construct apples-to-apples comparisons, providing firmer ground from which to assess companies like Vaalco Energy.

 

 

What's Inside Comcast's Shopping Bag?

Comcast (Nasdaq: CMCSA) is saving its pennies for a rainy day, but some see a torrential downpour coming.

Reuters put out an interesting piece of analysis over the weekend, when it speculated that the country's leading cable provider is about to go on a shopping spree.

Poor Comcast. It will never be able to live down its failed bid to buy Disney (NYSE: DIS) five years ago. Now that Comcast is focused and generating billions in annual free cash flow, some are assuming that it's building up a war chest.

Since when has passively padding a balance sheet been a vile thing to do? Just because Comcast can jack up its dividend or aggressively ramp up its share repurchases, that doesn't mean that it has to, just to please the bloodlust of its "buy, buy, buy" cheerleaders.

In short, I don't think Comcast has to do a single thing with its healthy coffers. This is a perk, not an ailment.

I'm also surprised at some of the buyout candidates that the Reuters article is throwing out. Viacom (NYSE: VIA)? Time Warner (NYSE: TWX)?

I get the logic behind the cable-channel purchases. If Comcast owns Viacom's MTV and Nickelodeon -- or Time Warner's HBO and CNN -- it wouldn't have to worry about contractual wrangling whenever subscription rates are being hammered out.

Unfortunately, Comcast doesn't operate in a vacuum.

• Do you think regulators would let Comcast get away with owning many of its channels?
• Wouldn't rival cable and satellite television companies be less likely to offer these channels, since the move would fatten a competitor?
• Isn't this one of the many reasons Time Warner spun out its Time Warner Cable (NYSE: TWC) arm?

There are more logical buyout possibilities, beyond simply buying its original TV Everywhere partner in Time Warner.

Why not TiVo (Nasdaq: TIVO)? The DVR pioneer also has licensing deals and legal tussles with Comcast rivals, but it's a patent-rich company that competitors can't necessarily work their way around.

Why not Netflix (Nasdaq: NFLX)? The model may seem counterproductive to Comcast's pay-per-view emphasis, but it's a growing service and a smart bet on a different platform for video distribution.

In the end, Comcast doesn't have to buy a single thing. It made one glorious splash with 2004's hostile bid for Disney. There's nothing wrong with keeping its balance sheet strong and making sure that it will be the last company standing if cable empires begin to crumble, as viewer trends change.

 

 

Eye on Insiders: Microsoft

Watching insiders is like participating in a weeks-long stakeout. You expect something to happen, but you don't know what. So you settle in, sip your coffee, and wait for clues to solving the big case.

Here, the "case" is direction: Which way is your stock headed? The "clues" come in the form of insider buying and selling action. Have a look at Microsoft (Nasdaq: MSFT) over the past year.

Insider Rating	Modestly Bearish No purchases, but also no high-volume sales relative to holdings. Co-founder Bill Gates is the principal seller of shares, yet remains a major stockholder.
Business Description	Maker of the dominant Windows PC and server operating system and the Microsoft Office productivity suite. Its recently released Bing search engine is beginning to gain traction against incumbents.
Recent Price	$23.25
CAPS Stars (Out of 5)	***
Percentage of Shares Owned by Insiders	4.74%
Net Buying (Selling)*	($1.66 billion)
Last Buyer (% Increase)	No purchases over the prior 12 months.
Last Seller (% Decrease)	Bill Gates, director 2 million shares at $23.61 apiece on Aug. 13, 2009 (Sale represented less than 1% of remaining direct holdings)
Competitors	Apple (Nasdaq: AAPL) Google (Nasdaq: GOOG)
CAPS Members Bullish on MSFT Also Bullish on	Apple
CAPS Members Bearish on MSFT Also Bearish on	Dell (Nasdaq: DELL) Ford (NYSE: F)
Recent Foolish Coverage of MSFT	A Double in 3 Months 3 Reasons Why the New Zune Will Fail 3 Buyouts That Need to Happen Now

Sources: Form 4 Oracle, Capital IQ, and Motley Fool CAPS. (Data current as of Aug. 18, 2009.)
*Open-market sales and purchases only.

What we're tracking here, and why
Insider buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times, they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.

Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.

The Foolish view: modestly bearish
Now is an interesting time in Mr. Softy's history. No longer a pure force of nature, Microsoft is partnering with Yahoo! (Nasdaq: YHOO) and Nokia (NYSE: NOK), among others, to try to beat Google.

We're years from knowing whether these efforts will be successful, but at least Mr. Softy is trying. What's troubling for a long-termer like me is Windows; it's the golden pair of handcuffs that Microsoft can't, but must, escape. A broad-based push towards cloud computing platforms and software makes Mr. Softy's Azure experiment a must-have.

Investors don't believe CEO Steve Ballmer will deliver. "While I own all the products, the lack of success in innovation with operating systems is worrisome," wrote CAPS investor Bartanen earlier this month. "Also, unclear what their 'cloud' strategy is and whether they can pivot from 'desk-based' computing to 'cloud.'"

If insiders aren't concerned, they aren't saying so -- but their actions might worry some. Gates has been a huge seller, but he's only one of five sellers over the past 12 months. Others include Chief Financial Officer Chris Liddell, director David Marquardt, Chief Accounting Officer Frank Brod, and Chief Operating Officer Kevin Turner.

I'm not sure there's good reason to worry. Microsoft's insiders own more than Apple's and Google's insiders do -- 0.75% and 0.47%, respectively. Also, most of the past year's sales by Mr. Softy's executives and board members have been small relative to their overall holdings. My gut tells me we're witnessing diversification -- nothing more.

 

 

Did Apple Do Dell Another Favor?

China was supposed to belong to the iPhone. Sorry, Apple (Nasdaq: AAPL); Dell (Nasdaq: DELL) beat you to it.

According to The Wall Street Journal, China Mobile (NYSE: CHL) has brokered a deal to introduce a Dell-branded smartphone within the borders of the Sino superpower soon. The phone, dubbed the "mini3i," will support music, games, and software sold through China Mobile's version of Apple's iTunes.

Anyone else see this as a huge loss for Apple? Notice I didn't say that this is a huge win for Dell. Perhaps it could become one over time, but we have yet to see what Dell's smartphone can do. We don't know how it will be positioned to compete against Research In Motion's (Nasdaq: RIMM) BlackBerry, which China Telecom is negotiating to carry.

If I'm not optimistic that Dell will create a globally competitive smartphone, it's because software is increasingly what distinguishes the great handsets from the good, and the good from the bad. For the iPhone, it's the iTunes App Store. For the BlackBerry, it's push email. For Nokia (NYSE: NOK), it's the market-leading Symbian OS today, and Microsoft's (Nasdaq: MSFT) Office Mobile tomorrow. Dell has zero experience with software.

What's that? Dell doesn't need software, thanks to Android? Fine, but how would an Android-powered mini3i set itself apart from other Android handsets? How would it beat HTC's touch-screen phones? How would it compete with the feature-rich Palm (Nasdaq: PALM) Pre on our shores?

That's assuming Dell even gets a chance to sell a smartphone here in the U.S. -- it may not. The "mini3i" is for China, and that's bad news for Apple. Hundreds of millions of would-be iPhoners will now get a Dell, or a BlackBerry, or avoid smartphones altogether.

Dell didn't win this round. Apple lost it.

 

 

What the Zune HD Can Do for NVIDIA

OK, Microsoft (Nasdaq: MSFT) won't do much damage to the Apple (Nasdaq: AAPL) iPhone with the release of the Zune HD media player. In fact, it probably won't even dent the iPod Touch, which is a closer rival in the pure media-player space.

Nonetheless, the Zune HD will serve as an important showcase for chip designer NVIDIA (Nasdaq: NVDA). It's the first gadget built around NVIDIA's Tegra chip, which squeezes specialized audio and video processing processors onto the same piece of silicon as the central processing unit (CPU). Tight integration makes for smaller, sleeker, and less battery-draining gadgets, so the Tegra comes with built-in selling points.

The Tegra chip is positioned to become a major revenue driver for the plucky chip designer, if you listen to CEO Jen-Hsun Huang. NVIDIA says that there are "more than 50" Tegra-based consumer products in the works, including netbooks, smartphones, and portable navigation devices.

In the future, some of these devices will run the Android software platform, backed by Google (Nasdaq: GOOG) and a wide supporting cast. The Open Handset Alliance, which is the official steering committee for Android, is a "who's who" of technology that includes NVIDIA, handset maker Motorola (NYSE: MOT), GPS expert Garmin (Nasdaq: GRMN), and overall gadget guru Samsung, just to name a few.

In other words, I wouldn't be surprised to see the next generation of Garmin navigation devices and Motorola smartphones rocking a Tegra chip from NVIDIA. NVIDIA is facing a tough battle to win contracts away from incumbents like the Qualcomm (Nasdaq: QCOM) SnapDragon and Texas Instruments' OMAP chips, but NVIDIA's products come with brand-new graphics processing powers that could set the Tegra apart from the competition.

 

 

The Greatest Company in the History of the World

 

It's the world's greatest company, period."
 -- Arjun Murti, Goldman Sachs analyst

I'm what a lot of folks would call "obsessed" with finding great stocks. So when I heard Goldman Sachs oil oracle Arjun Murti boldly label a company as the world's greatest, you'd best believe I paid attention.

That's pretty high praise, but the facts speak for themselves. In fact, my research led me to take Murti's claim one step further: This is the greatest company in the history of the world.

The corporate titan in question produced modern-day history's greatest fortune, and earned double the combined 2008 profits of Oracle (Nasdaq: ORCL) and General Electric (NYSE: GE). If you'd invested $1,000 in this company in 1950, your shares would now be worth about $2.3 million. And incredibly, this giant still has decades of slick profits ahead of it.

The greatest
Meet the world's greatest company: ExxonMobil. Biggest, strongest, most efficient, most evil -- there's hardly a superlative that hasn't been applied to this most successful of the Standard Oil grandchildren. But while much is made of just how great or how evil folks peg Exxon to be, there's strangely little discussion over the core drivers of why its stock has been a huge success.

It would be easy to say that Exxon's success, and that of Standard Oil's lineage -- Chevron, ConocoPhillips, etc. -- was just a function of being in the right place at the right time. Hawking oil and gasoline at the dawn of the Industrial Revolution, after all, is a Category 5 tailwind.

But there's much more to Exxon's success. Fortunately, we can also spot those discernible traits in other opportunities.

1. An owner-operator culture
John Rockefeller didn't run an infamously efficient organization just for kicks. As the largest shareholder, he had a vested interest in the success of Standard Oil. When managers and employees are shareholders alongside you, they share your desire to manage the business for the long term.

Take a look at the cutthroat world of big-box retail, where smart growth and a fanatical focus on controlling costs are crucial to long-term success. Which companies in this space have ranked among the biggest winners for investors over the past 20 years? Costco and Wal-Mart. Both are known as much for their insider ownership as for their tenacious zeal for efficiency and maximum value.

By the way, there's still plenty of alignment between Exxon's leadership and outside shareholders. The company consistently posts better margins and returns on capital than its Big Oil brethren. CEO and Chairman Rex Tillerson has plenty of incentive to keep it that way; he owns 1.1 million Exxon shares.

2. Enduring demand
Demand for oil is strikingly consistent. For most companies, steady demand equates to steady cash generation. But for Exxon, the consistency of demand for oil is just as important as the duration of that demand. Constant doubts about the staying power of oil have helped keep Exxon's shares perpetually undervalued, allowing Exxon and dividend reinvestors to steadily gobble up shares at attractive prices.

For another case study in the importance of demand, consider Procter & Gamble, which I recently recommended to Income Investor members. P&G's core products (razor blades, toilet paper, disposable diapers, etc.) all face little chance of technological obsolescence. Better yet, demand is regular and firmly entrenched. Maybe I'm just a pretty boy, but I'd be living in my car before I stopped buying razors.

Now consider companies whose fates hinge on innovation, such as an Advanced Micro Devices (NYSE: AMD), Evergreen Solar (Nasdaq: ESLR), or LDK Solar (NYSE: LDK). As anyone who once relied on Alta Vista or Yahoo!'s (Nasdaq: YHOO) search engines can attest, staying on top in a cutting-edge industry is exceedingly difficult. And in the case of the names above, even staying competitive in their respective spheres is a serious challenge.

Again, historical results say it all here. According to dividend guru Jeremy Siegel, among the highest-returning S&P 500 stocks from 1957 to 2003 were:

1. Kraft Foods
2. R.J. Reynolds Tobacco (now owned by Reynolds American)
3. Standard Oil of New Jersey (ExxonMobil)
4. Coca-Cola

Cheese. Tobacco. Oil. Coke. I think you get the picture.

3. No one loves a sinner
Some folks feel a bit queasy about investing in so-called sin stocks: tobacco companies, brewers, Big Oil, etc. Just like the long-standing (and false) belief that oil demand will dry up in the not-so-distant future, many investors' aversion to investing in sin stocks just leaves the stocks that much cheaper for the rest of us. Their loss. Our gain.

As an investor, you'd rather laugh with the sinners than cry with the saints. Again, consider the primo status of oil and tobacco on the above list. Care to guess the best-performing survivor of the S&P 500 from 1957 to 2003? None other than Philip Morris, former behemoth parent of what are now known as Altria, Kraft, and Philip Morris International.

Smokin' returns
And here you thought Exxon's secret sauce was a blend of industrialization and cold-blooded ruthlessness. OK, sure, maybe there's a pinch of both in there, but plenty more was involved in the company's success. Take that knowledge forth, Fool, and:

1. Look for owner-operator cultures and management teams motivated to focus on long-term results.
2. Know that steady, lasting demand helps deliver expectation-beating results over time.
3. Don't be afraid to snuggle up with sin stocks.

James Early is looking for similar opportunities over at our dividend-focused newsletter service, Income Investor. Specifically, he's searching for undervalued stocks boasting impressive, durable competitive advantages with a nice dividend to boot.

 

China's Weak Iron Gambit

 

 

The commodities world has been watching the iron ore pricing skirmishes in Asia between the largest Chinese steelmakers and the likes of BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP), and Brazil's Vale (NYSE: VALE).

These big miners supply the iron ore that is vital to the manufacture of steel. If you have kept up, you also realize there's been a new, unexpected, and goofy twist in the situation.

The new twist involves a number of Chinese steelmakers signing on for iron ore supplies with Australia's Fortescue Metals, that country's third largest ore producer. In exchange the Chinese would lend Fortescue up to $6 billion. The funding is intended to set the company on the road to the increased size and importance it is targeting.

There are two major problems in this new deal, however. The first is that its price works out to a reduction of about 35% from last year's level -- less than the Chinese had been demanding of the bigger suppliers. And beyond that, it appears that Fortescue will supply about 20 million tons of ore to China, or a piddling portion of the nation's needs.

As you know, the prices of most commodities ran like scalded dogs last year. In the process, the big three iron ore suppliers raised their prices to the steelmakers substantially. But this year, with commodities prices having tanked, iron ore levels were bound to dip.

And dip they have. The first shot out of the gun was a 33% reduction from last year's level, negotiated between Rio Tinto and Japan's Nippon Steel. That level was intended to serve as a benchmark for subsequent contracts. And indeed, most Japanese and South Korean manufacturers did follow along. But the bigger Chinese producers held out for a larger cut, at least 40% off the 2008 level.

You have to believe that the Chinese remain miffed about their inability to double their stake in Rio through their Aluminum Corp. of China (NYSE: ACH). Rio was seeking funds for debt repayment, but found the money elsewhere. Hence China's recalcitrance.

From a Foolish investment perspective, I continue to like the big three miners, especially given a longer-than-normal investment time horizon. And of that threesome, I'm especially a fan of BHP for several reasons, including its active and promising oil and gas operations.

You Should Sell These 7 Stocks Right Now

 

 

There's only one thing better than finding a stock that gives you outstanding returns: turning your paper profits into cold, hard cash before the bottom falls out of the market.

One day certainly won't single-handedly turn one of the strongest rallies in stock market history into the next wave of the bear market. But anytime you see a major pullback in stocks -- like you did on Monday -- you'll start wondering whether it's time to take some money off of the table.

Still, the big question is what you should sell. In a nutshell, the answer is simple: Sell stocks that have gotten overvalued in the most recent rally. How, though, can you tell which stocks those are?

Bullish beyond belief
The interesting thing about the rally is just how indiscriminate it has been. Good companies and bad alike have seen their share prices lofted into the stratosphere. Many of the stocks that got hit the hardest, including Ford Motor (NYSE: F), Sirius XM Radio (Nasdaq: SIRI), and Wells Fargo (NYSE: WFC), have seen their shares triple or more in value. In some cases, those moves were justified by the fact that they got beaten down so far.

Yet other companies that haven't seen such big moves still look pricey. Many companies not only have inferior reputations based on the opinions of members of our Motley Fool CAPS community, but they also sport valuations that no longer make sense given their modest growth prospects. Check out this sample:

Stock	CAPS Rating	6-Month Return	Forward P/E	5-Year Forward Growth Estimate
Wynn Resorts (Nasdaq: WYNN)	*	119.5%	72.7	7.8%
Masco (NYSE: MAS)	**	126.5%	39.0	12%
Monster Worldwide	**	87.0%	119.8	20.4%
Ryder System	**	34.7%	18.6	1.6%
Marriott (NYSE: MAR)	*	56.5%	28.2	3.8%
MeadWestVaco	**	106.9%	31.0	10%
Robert Half	**	57.0%	71.6	12.7%

Source: Yahoo! Finance, Motley Fool CAPS.

What's holding these stocks up? Clearly, many investors expect the eventual economic recovery to create profits for these companies. But even if analysts' expectations prove to be correct -- something you always have to watch out for, given the potential bias toward overestimating future growth -- that growth won't justify the big jump in valuations that these stocks have seen.

But they're still cheap!
Of course, when you look at these stocks over a longer time horizon, you might not think they're so overvalued. Look what happens when you expand that look back from six months to a year:

Stock	1-Year Return
Wynn Resorts	(47.3%)
Masco	(22.5%)
Monster Worldwide	(27.6%)
Ryder System	(43.2%)
Marriott	(17.1%)
MeadWestVaco	(17.3%)
Robert Half	(0.7%)

Source: Yahoo! Finance.

Contrary to stocks like Green Mountain Coffee Roasters (Nasdaq: GMCR) and Shanda Interactive, which have been on a tear for years, all of the above stocks are net losers over the past year. Undoubtedly, many investors are still sitting on significant losses from these stocks, hoping that if they can just wait for the stock to rise enough to give them a small profit, then they'll happily sell. They just don't want to take a loss.

That line of thinking, though, will get you in trouble. Fixating on a particular price is a phenomenon known as anchoring, and it's almost entirely irrational -- the shares will move independently from the price at which you bought them, so there's no reason to assign any particular significance to that price. If you're fortunate enough to see your shares rise substantially, it's an opportunity you may need to jump on -- even if it means selling at a loss.

It isn't different this time
Unfortunately, not every stock will recover all of its losses. Even once the economy recovers, some companies may find that their own particular businesses won't follow suit. Just as dozens of Internet companies never emerged from the tech bust, we've already seen many companies fall prey to the financial crisis -- and even the survivors will have to deal with the effects of the crisis for years to come.

Under normal circumstances, finding stocks that you can buy and hold for the long term makes things simpler for investors. Yet as volatile as the markets have been lately, overvalued stocks create profitable opportunities to sell. Take a close look at your stocks and see if you think they justify their current valuations. If not, you can find better places to put your money.

This Web Icon Is Fading Fast

 

"You've got mail!"

(click)

From: AOL, a Time Warner (NYSE: TWX) company

To: You

Greetings, loyal AOL Mail user. Your email service of choice is fading into obscurity as many of your fellow AOLers are jumping ship. Just thought you should know.

Big love,

AOL

Yep, AOL sure is fading fast. While every major rival in the Web-based email game gained ground over the past year, AOL's once-ubiquitous mail service is losing customers.

Provider	U.S. Users	Year-Over-Year Change
Yahoo! (Nasdaq: YHOO) Mail	106 million	16%
Microsoft (Nasdaq: MSFT) Hotmail	47 million	8%
Google (Nasdaq: GOOG) Gmail	37 million	25%
AOL Mail	36.4 million	(22%)

Data from ComScore by way of TechCrunch.

Of course, Web-based mail isn't for everyone. A mail address from work, based on Microsoft Exchange or IBM (NYSE: IBM) Lotus Notes, is the main digital lifeline for lots of Americans. Many more are using the address that comes with a Comcast (Nasdaq: CMCSA) cable modem or an AT&T (NYSE: T) DSL line. Right now, Yahoo! and Microsoft are winning the race to make Web-mail converts out of these untold millions of Web denizens. And AOL is losing, big time.

This is very, very bad news for AOL. As fellow Fool Rick Munarriz said earlier this year, "The problem with AOL is that there doesn't seem to be a whole lot of growth beyond its free web-based email service."

When growth is dead even in that crucial eyeball-magnet department, I don't know how Time Warner expects to make money off this former blue-chip brand. Neither does Rick, and the mother ship is officially giving up on AOL. If you're a Time Warner shareholder today, I hope your investment thesis rests on the company's media assets. If you're hoping for a healthy return from the company's Internet ventures, well, I think you should get out right away.

 

The Easy Way to Find Big Dividends

If you want to be prepared for whatever the future may bring, you owe it to yourself to invest in stocks that pay dividends.

Dividend-paying stocks are offering a unique two-sided opportunity right now. Not only can they help protect you from a double-dip recession, but many of them are still priced at such bargain levels that their yields are still well above their historical averages.

The big question is what's the best way to find the strong dividend stocks you want. Do you need to do your own research, or can you simply rely on investing experts to do all your work for you?

Specialty dividend ETFs
Today, more investors than ever rely on exchange-traded funds to simplify their portfolios. In addition to giving you access to a huge array of assets from around the world, ETFs also let you drill down on certain market segments using different strategies.

One particular strategy that caught on in a hurry was the dividend-focused ETF. After several years of competition, here are four ETFs that have established niches for themselves and collected enough assets to make them viable for the foreseeable future:

• The iShares Dow Jones Select Dividend Index ETF (DVY) has over $3 billion in net assets. The index it tracks chooses 100 stocks that have certain characteristics, including healthy dividend growth rates, sustainable payout ratios, and substantial dividend yields. Its current top holdings include Eastman Chemical and Centurytel (NYSE: CTL).
• The Vanguard Dividend Appreciation ETF (VIG), with about $1.2 billion under management, tracks an index of stocks that have historically raised their dividends consistently over time. Its holdings include well-known names like Wells Fargo (NYSE: WFC), IBM (NYSE: IBM), and Coca-Cola (NYSE: KO), along with other actively traded blue-chip stocks.
• The SPDR S&P Dividend ETF (SDY) tracks S&P's High Yield Dividend Aristocrats index, which identifies top-yielding stocks that have at least a 25-year history of annual dividend increases. The index is designed to give broader diversification across sectors, potentially avoiding the sector concentration in financials and utilities that left many dividend investors reeling during last year's financial crisis. The ETF has about $800 million under management, with the biggest holdings being Integrys Energy Group and Black Hills.
• WisdomTree LargeCap Dividend ETF (DLN), with roughly $380 million in assets, tracks an index with a twist. The index takes the 300 biggest companies from a broader index of dividend-paying stocks, but it then weights those stocks by the value of their dividends rather than their market cap. Despite that fact, top names like General Electric (NYSE: GE), Bank of America (NYSE: BAC), and AT&T (NYSE: T) dominate the ETF's top holdings, with dividend-cutters GE and B of A remaining in the top spots only because the weightings are changed just once each year.

So how have all of these ETFs performed? Let's take a look at their returns.

Dividend ETF	YTD Return	1-Year Return	3-Year Avg. Annualized Return
iShares	(3.6%)	(23.7%)	(12.6%)
Vanguard	5.9%	(17.8%)	(3.9%)
SPDR	4.7%	(11.4%)	(6.6%)
WisdomTree	3.6%	(22.5%)	(8.8%)

Source: Morningstar.

Which to pick
In comparing all four funds, it's interesting that the largest one, the iShares fund, has also performed the worst over all three periods. The Vanguard and SPDR funds, on the other hand, seem to have done better by focusing more on consistent dividend increases rather than the magnitude of dividend growth over the years.

WisdomTree prides itself on fundamentally weighted indexes like the one its dividend ETF follows, but so far, the fund hasn't distinguished itself among its peers. One reason may be that dividend weighting matches market capitalization fairly closely -- a stock that supports a $100 billion market cap will be in a better position to pay more out in dividends than a $10 billion stock.

For my money, the Vanguard dividend ETF looks the best for most investors who just want a solid dividend ETF. In addition to having good performance, it also clocks in with the lowest annual expense ratio of the four at 0.24%.

Go with dividends
Lately, trying to pick individual dividend stocks has been a risky proposition. Choosing a solid dividend ETF can help you diversify your portfolio while giving you the benefits that dividend-payers offer.

 

 

When Will Consumer Spending Really Recover?

 

Recent quarterly earnings from several big-box retailers seem to confirm that spending money is no longer the national pastime. That may be good news for baseball, but it's bound to spook anyone worried about the health of the consumer sector of our economy.

No house party here
Lowe's (NYSE: LOW) disappointed investors yesterday; its second-quarter net income fell 19% to $759 million, or $0.51 per share. Total sales dropped 4.6% to $13.8 billion, and same-store sales plunged 9.5%. Faced with brutal same-store sales numbers that suggest a lengthy turnaround ahead, Lowe's has notably decided to shelve some 2010 expansion plans.

Both Lowe's rival Home Depot (NYSE: HD) and Target (NYSE: TGT) reported better-than-expected quarterly results, but on closer inspection, the apparently rosy numbers are no exception in this earnings season. Most companies have suffered particularly sorry top-line results as consumers balk at buying unless they're offered major markdowns.

Home Depot's second-quarter net income fell 8% to $1.1 billion, or $0.66 per share. Sales fell 9.1% to $19.1 billion, and same-store sales plunged 8.5%.

Target's second-quarter net income likewise decreased 6.4% to $594 million, or $0.79 per share. Sales dipped 2.7%, to $14.6 billion, and same-store sales fell 6.2%.

Of the three, only Home Depot raised guidance for the year -- and just marginally. These companies' outperformance on the bottom line isn't due to returning shoppers bolstering the top line; instead, it stems from cost-cutting.

Shrinking forces at big boxes
There are pockets of unique retail strength even in discretionary companies, such as the ongoing top- and bottom-line successes of Buckle (NYSE: BKE) and Aeropostale (NYSE: ARO). But in general, Lowe's, Home Depot, and Target aren't alone in their woes. Wal-Mart Stores (NYSE: WMT) may be the king of cheap, but its recent quarter showed that sometimes, even discounts aren't enough.

In the past, Lowe's, Home Depot, and Target clearly benefited from the housing bubble, as owners renovated and decorated their homes. Today, the housing market can't help any of them. Target, at least, sells more than decorations and home improvement items. In an apparent effort to keep up with customers' shifting spending trends, it's also supplementing its traditionally discretionary offerings with key staples such as foodstuffs.

I'm not big on snapping up shares in Lowe's or Home Depot right now. I'd need a better sense that consumer spending and the housing market are truly healing. I favor Target a bit more than either of those two stocks, but not by much. If I had to buy a big-box retailer, Wal-Mart's the better deal, especially when consumers are hot for bargains. Target's trading at about 16 times earnings, versus Wal-Mart's 15.

Companies can only cut costs for so long. Until flagging sales begin to revive, investors should shop for retail stocks very carefully.

 

Dream Stocks for Growth 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 growth stocks, then get the story behind some of the more highly rated companies. CAPS' nifty screener will help us find stocks with:

• A market cap of at least $500 million.
• A trailing three-year earnings-per-share growth rate of at least 25%.
• A trailing three-year revenue growth rate of at least 25%.
• 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 complete 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 3 Years	Revenue Growth Rate, Past 3 Years	CAPS Rating (out of 5)
Aircastle (NYSE: AYR)	25.5 %	67.9%	*****
MarkWest Energy Partners LP (NYSE: MWE)	59.5%	33.6%	*****
FLIR Systems (Nasdaq: FLIR)	31.4%	26.2%	*****

Data and star rankings from CAPS as of Aug. 14.

Aircastle
Aircastle has a fleet of 131 Boeing and Airbus passenger and freighter aircraft that it leases to operators worldwide, and although the lease market has been challenging, all of its aircraft are currently on lease. Additionally, it has only one unplaced aircraft with a lease expiry this year and just 18 placements in its entire fleet to complete through the end of 2011. In a difficult economy that still pressures major airlines like Southwest (NYSE: LUV) and Continental (NYSE: CAL), Aircastle is managing its portfolio conservatively, and its entire portfolio of planes has long-term financing with no short-term debt maturities. Due to its solid capital structure and ability to access capital markets, the company sees numerous opportunities to grow by picking up aircraft from struggling owners on the cheap. Despite the rough conditions in the airline sector, 93% of the 459 CAPS members rating Aircastle expect it to outperform the market.

MarkWest Energy Partners LP
Just like its E&P partners, midstream natural gas player MarkWest Energy Partners LP has been hammered by lower natural gas prices, but in its most recent quarter it still posted a narrower loss than last year's comparable quarter. It experienced a 38% increase in natural gas liquids sales at its southwest segment, and the company anticipates gas volumes to grow significantly in southwestern Pennsylvania in the second half of this year and into 2010. It's invested a substantial amount in a gathering and processing backbone in the Marcellus Shale that will allow it to significantly expand to meet the expected massive production growth there. In addition to having strong relationships with successful producers such as Range Resources in the Marcellus, it's also positioned well to capture growth in areas such as the Haynesville Shale, the Woodford Shale, and the Granite Wash. With all the gas out there to be had, more than 96% of 268 CAPS members rating MarkWest Energy Partners are bullish.

FLIR Systems
Not all companies have been battered and bruised in the recession. Thermal imaging and infrared camera systems maker FLIR Systems posted a 6.5% increase in year-over-year second-quarter revenue and recently scored a contract to provide infrared optics to the Indian Air Force that will be installed on Lockheed Martin (NYSE: LMT) C-130J surveillance aircraft. CAPS members like FLIR's staying power and future growth potential, and they see long-term demand for its products across multiple industries. The company boasts strong financials and has a five-star CAPS rating similar to its former competitor Axsys Systems, which is set to be acquired by General Dynamics (NYSE: GD), leading some to believe that FLIR could be next. In CAPS, nearly 97% of the 782 members rating FLIR Systems expect it to beat the broader market.

This iPhone Wannabe Might Score for Google

I'm picky about my cell phone. The Apple (Nasdaq: AAPL) iPhone ain't good enough for me. The BlackBerry series from Research In Motion (Nasdaq: RIMM) doesn't make sense to a freelancer like myself. The phone I want doesn't even exist here in the U.S. yet.

What's the big deal?
I'm talking about the Samsung i7500, a.k.a. "Galaxy," smartphone. When the gadget lands on our shores, I don't really care which of the Big Four mobile phone service carriers gets it first. If my current service provider, Deutsche Telekom's (NYSE: DT) T-Mobile, snags it first, I'll stay with them. But if Sprint Nextel (NYSE: S) steps up first, that's where I'm going.

I'm excited about the Galaxy for a number of reasons:

• The OLED screen, likely powered by technology from longtime Rule Breaker Universal Display (Nasdaq: PANL), is gentle on battery drain yet draws rave reviews for its brilliant picture quality.
• The 5-megapixel camera comes with a high-efficiency LED flash and computerized autofocus. Coupled with 8 gigabytes of storage space in the phone, the Galaxy beats the pants off my Sony (NYSE: SNE) digital camera. The Galaxy could store every picture I've taken with the Sony over the past six years -- without adding memory cards.
• And of course, this phone runs the Android operating system with direct hooks into a plethora of services from Google (Nasdaq: GOOG). It's not the first Android phone on the market, but it's the first time I've seen this exciting platform married to a high-powered hardware package.
• Oh, and there's no need to hide in shame from your iPhone-toting friends, because this bad boy even comes with Hollywood good looks.

Investing takeaway
The Galaxy is one of the first truly impressive Android phones, alongside the HTC Magic. Hands-on reviews place these Android handsets in the same rarefied air as the iPhone, which was not the case with early models like the T-Mobile G1. When these phones wash up on American shores in the next few months, I expect them to sell like ice cream on Miami's South Beach.

Google has another winner on its hands here. Android phones like these could become the gold standard of mobile connectivity -- or simply push incumbents like Apple and Research In Motion to do better. Either way, Google wins thanks to its dominating stature in monetization of online traffic.

The phone also presents an opportunity that Samsung desperately needs. While the company quietly controls a hefty 19% of worldwide mobile phone market share, its smartphone market share is below 3%. As Apple and Research In Motion have shown the world, the real way to score outsized profits in the mobile industry is to create a differentiated smartphone that can attract sizeable profit margins. Luckily, the Android presents an opportunity to marry impressive hardware with the compelling software that Samsung has lacked in the past; it's the company's most compelling product to date and should be a good test of whether Android will catch on with consumers.

 

 

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 are instead 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)	2004 Price-to-Book Ratio	Return Since
E*TRADE (Nasdaq: ETFC)	****	1.91	(88.1%)
Flextronics (Nasdaq: FLEX)	****	1.23	(47.4%)
American Capital (Nasdaq: ACAS)	***	1.58	(85.9%)
Saks (NYSE: SKS)	**	0.84	(40.5%)
Ambac Financial (NYSE: ABK)	*	1.71	(98.4%)

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

Watch out!
How can you avoid value traps like these? My favorite method is borrowed from professor Aswath Damodaran. In his book Investment Fables, Damodaran 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 25 stocks that CAPS found hiding in the weeds, Teleflex (NYSE: TFX) intrigues me this week. The details for this Motley Fool Inside Value pick:

Metric	Teleflex
Recent price	$45.73
CAPS stars (out of 5)	*****
Total ratings	84
Percent bulls	91.7%
Percent bears	8.3%
Price-to-book	1.24
ROE	20.1%
% Above 52-week low	22.9%

Sources: CAPS, Yahoo! Finance.
Data current as of Aug. 17, 2009.

Teleflex is an old pick for Inside Value­. Advisor Philip Durell singled out the stock in the August 2006 issue of the newsletter. Fortunately, the thesis is timeless: Teleflex combines modest organic growth with small yet strategic acquisitions, resulting in bountiful free cash flow used for, among other things, generous dividend payments.

The numbers are worth eyeballing. From 1997 to 2007, for example, Teleflex increased its dividend payment 12.38% annually, to $1.25 per share. This year, the company is on track to distribute $1.36 for every share held, up another 8.8% from two years ago.

Contrast that with General Electric (NYSE: GE), a much larger industrial conglomerate, which recently reduced its dividend payment to cut costs. Impressive, no? Mix in a commitment to invest only in its most profitable business units, and Teleflex begins to look like a very attractive long-term holding.

But that's just my take. Would you buy shares of Teleflex at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

 

Stock Smackdown: Cramer vs. CAPS

There's no denying that Mad Money host Jim Cramer is entertaining, popular, and passionate. On many occasions, he's even right. So he's smart, funny, and the closest thing to a stock market rock star -- but is he smarter than you?

Cramming for Cramer
The Fool's free investing community, Motley Fool CAPS, aggregates the opinion of more than 135,000 members to assign ratings for each stock's likelihood of outperforming or underperforming the market.

Below, we look at some top stocks that Cramer picked and panned during last week's "lightning rounds," and compare them to how the CAPS community sees their future.

Stock	Lightning Round Show Day	Cramer's Rating	CAPS Rating
Navistar International (NYSE: NAV)	Monday	Bullish	**
United States Steel (NYSE: X)	Monday	Bearish	****
Archer-Daniels-Midland (NYSE: ADM)	Tuesday	Bearish	****
Bank of America (NYSE: BAC)	Tuesday	Bullish	***
Allegheny Technologies	Tuesday	Bearish	****
Taiwan Semiconductor	Wednesday	Bullish	*****
Alcatel-Lucent (NYSE: ALU)	Wednesday	Bearish	**
United Parcel Service	Thursday	Bullish	**
STEC (Nasdaq: STEC)	Thursday	Bullish	**
Dow Chemical (NYSE: DOW)	Thursday	Bullish	****

Source: MadMoneyRecap and CAPS.

Cramer says ...
According to some, the advent of the biggest technological development since the Internet will drive tech companies in the future. The mobile Internet is said to be the best, long-term play in technology. Jim Cramer likens it to a tidal wave that washes over those companies not fortunate enough to be a part of it -- companies such as Alcatel-Lucent:

No, no, no... we are in a situation where the only one... that one is not part of our Internet mobile tsunami... I could give you CIENA Corp., I could give you Tele Labs, I could give you ADC Telecommunications, I could give you Cisco...all of those are superior to your house of pain... and that has been a multiple year house of pain... remember, Franco American Spaghetti.... throw it away.

CAPS says ...
With just a two-star rating from the CAPS members rating Alcatel, it seems our investor intelligence community would agree. CAPS member georcole, for instance, writes that investing in the telecom player has meant a world of pain for his portfolio:

I bought Lucent in 2002 and hoped that they would improve their financial situation and become profitable shortly thereafter. I watched the value of my investment go way down. They did a reverse stock split to keep from being delisted and later joined Alcatel. I finally decided to cut my losses after being down about 90% and sold. I now have no hope for them to become profitable any time soon.

This Fool says ...
Even if Cramer is right about the mobile Internet's potential, I think he may be understating its ability to carry along Alcatel-Lucent for the ride, too. Alcatel has been cementing deals with China's telecom providers to install its equipment as they upgrade their networks. China Mobile and China Telecom have both signed on with Alcatel-Lucent, which should help the company get its foot in the door as China upgrades to fourth-generation equipment next year.

Alcatel-Lucent has undoubtedly been a big disappointment to investors, but they shouldn't dismiss the company out of hand. China may be the biggest investing story yet, and Cramer's mobile Internet is just one part of it.

Have your say
Whether CAPS members stand with Jim Cramer, or on the opposite side of the field, the investor intelligence community is more than the opinions of a handful of All-Stars, even if they are TV personalities. What do you think? Is Cramer right, or off his rocker? Head over to CAPS to sound off on whether Alcatel-Lucent's got Cramer's number, or vice versa.

 

 

6 Stocks That Never Surrender

As we enter Week 6 of the fight, the Defense Portfolio continues its long, hard slog versus Mr. Market. Here at the month-and-a-half mark, we're underperforming the market by 12.2 percentage points, and I have to admit, folks -- morale is at an all-time low.

While I suspect a counterattack is imminent (and the S&P's recent implosion should close the gap considerably) we won't see those results till next week's issue of this column.

Meanwhile, the news circa last Thursday is grim:

Company	Starting Price*	Recent Price	Total Return
General Dynamics (NYSE: GD)	$51.54	$57.08	10.7%
Raytheon (NYSE: RTN)	$42.27	$47.59	12.3%
Lockheed Martin (NYSE: LMT)	$78.28	$75.40	(3.7%)
AeroVironment	$29.96	$29.65	(1%)
iRobot	$11.49	$11.14	(3%)
Force Protection (NYSE: FRPT)	$4.57	$4.68	2.4%
AVERAGE RETURN			3%
S&P Spyder	$88.17	$101.57	15.2%
DIFFERENCE			(12.2%)

Source: Yahoo! Finance. *Tracking began on July 10, 2009. Portfolio is equal-weighted, with "recent price" being set at market close on the Thursday preceding publication, and adjusted for stock splits and dividends.

It's almost enough to make a Fool wave the white flag of surrender. But then I remind myself: These stocks never surrender. Let's take a look at how some of my portfolio fared in the previous week, and also pivot back to look at news in the larger defense field.

Onward, robotic soldiers
Take tiny iRobot (please -- it's lost me 3% since I picked it!)

Just kidding. The stock may be down, but iRobot is still in this fight. Last week, it announced two separate orders from the military. First, the Navy ordered $13.5 million worth of PackBot IED disarming robots, in an indefinite delivery, indefinite quantity contract. No sooner had that news come out than in marched the Army, placing an order for $5 million more PackBots Wednesday.

Nearly $20 million in new orders, for a company that sells barely $300 million in product annually? Not bad for a week's work.

Look north, young aerospace investor ...
But iRobot wasn't the only defense contractor to book big orders last week. Beleaguered Boeing (NYSE: BA), reeling from its latest 787 Nightmare Liner setback, got a big boost from up north, when the Canadian military ordered 15 of its heavy-lift Chinook helicopters for a total price of $1.15 billion. Added bonus for the U.S. industrial sector? They will be equipped with Honeywell (NYSE: HON) engines.

And then Midwest
And speaking of large amounts of cash, the savvy folks over at Oshkosh (NYSE: OSK) grabbed opportunity by the horns last week. After enjoying a post-M-ATV boost that sent the shares soaring north of $32 in the space of a month (a clean double and more), Oshkosh decided to cash in on its hard work -- and cash out some shares. Floating 14.9 million new common shares at an offer price of $25 a pop, Oshkosh raised $358 million net of its bankers' fees.

From the perspective of existing shareholders, this works out to about 20% dilution of their ownership stake -- so it's not unabashedly good news. But on the plus side, $358 million can go a long way toward paying off down Oshkosh's crushing debt load. Here's hoping.

Back to the portfolio
But the biggest news of the week concerned Defense Portfolio stalwart Lockheed Martin. No, I'm not talking about Tuesday's big $140 million deal to sell C-130J transports to Iraq. That was actual news. The bigger story on Lockheed was Thursday's rumor that the F-35 Lightning may not be long for this world.

According to the "Center for Strategic and Budgetary Assessments" (CSBA), a Washington, D.C. think tank with reported close ties to the Obama Administration, Lockheed's newest fighter jet is too expensive, and the Pentagon wants to buy too dang many of the things. CSBA thinks the better idea is to cut orders for F-35s from the budget, buy a handful of long-range bombers to take their place, and fill in any gaps in defense policy with a few flying model airplanes.

I'm simplifying and hyperbolizing, of course, and you can probably guess where I stand in this debate. If you can't, click here to read the whole story. We've got quite a lively discussion going on over whether the CSBA and Congress have any clue whatsoever what they're doing

As we enter Week 6 of the fight, the Defense Portfolio continues its long, hard slog versus Mr. Market. Here at the month-and-a-half mark, we're underperforming the market by 12.2 percentage points, and I have to admit, folks -- morale is at an all-time low.

While I suspect a counterattack is imminent (and the S&P's recent implosion should close the gap considerably) we won't see those results till next week's issue of this column.

Meanwhile, the news circa last Thursday is grim:

Company	Starting Price*	Recent Price	Total Return
General Dynamics (NYSE: GD)	$51.54	$57.08	10.7%
Raytheon (NYSE: RTN)	$42.27	$47.59	12.3%
Lockheed Martin (NYSE: LMT)	$78.28	$75.40	(3.7%)
AeroVironment	$29.96	$29.65	(1%)
iRobot	$11.49	$11.14	(3%)
Force Protection (NYSE: FRPT)	$4.57	$4.68	2.4%
AVERAGE RETURN			3%
S&P Spyder	$88.17	$101.57	15.2%
DIFFERENCE			(12.2%)

Source: Yahoo! Finance. *Tracking began on July 10, 2009. Portfolio is equal-weighted, with "recent price" being set at market close on the Thursday preceding publication, and adjusted for stock splits and dividends.

It's almost enough to make a Fool wave the white flag of surrender. But then I remind myself: These stocks never surrender. Let's take a look at how some of my portfolio fared in the previous week, and also pivot back to look at news in the larger defense field.

Onward, robotic soldiers
Take tiny iRobot (please -- it's lost me 3% since I picked it!)

Just kidding. The stock may be down, but iRobot is still in this fight. Last week, it announced two separate orders from the military. First, the Navy ordered $13.5 million worth of PackBot IED disarming robots, in an indefinite delivery, indefinite quantity contract. No sooner had that news come out than in marched the Army, placing an order for $5 million more PackBots Wednesday.

Nearly $20 million in new orders, for a company that sells barely $300 million in product annually? Not bad for a week's work.

Look north, young aerospace investor ...
But iRobot wasn't the only defense contractor to book big orders last week. Beleaguered Boeing (NYSE: BA), reeling from its latest 787 Nightmare Liner setback, got a big boost from up north, when the Canadian military ordered 15 of its heavy-lift Chinook helicopters for a total price of $1.15 billion. Added bonus for the U.S. industrial sector? They will be equipped with Honeywell (NYSE: HON) engines.

And then Midwest
And speaking of large amounts of cash, the savvy folks over at Oshkosh (NYSE: OSK) grabbed opportunity by the horns last week. After enjoying a post-M-ATV boost that sent the shares soaring north of $32 in the space of a month (a clean double and more), Oshkosh decided to cash in on its hard work -- and cash out some shares. Floating 14.9 million new common shares at an offer price of $25 a pop, Oshkosh raised $358 million net of its bankers' fees.

From the perspective of existing shareholders, this works out to about 20% dilution of their ownership stake -- so it's not unabashedly good news. But on the plus side, $358 million can go a long way toward paying off down Oshkosh's crushing debt load. Here's hoping.

Back to the portfolio
But the biggest news of the week concerned Defense Portfolio stalwart Lockheed Martin. No, I'm not talking about Tuesday's big $140 million deal to sell C-130J transports to Iraq. That was actual news. The bigger story on Lockheed was Thursday's rumor that the F-35 Lightning may not be long for this world.

According to the "Center for Strategic and Budgetary Assessments" (CSBA), a Washington, D.C. think tank with reported close ties to the Obama Administration, Lockheed's newest fighter jet is too expensive, and the Pentagon wants to buy too dang many of the things. CSBA thinks the better idea is to cut orders for F-35s from the budget, buy a handful of long-range bombers to take their place, and fill in any gaps in defense policy with a few flying model airplanes.

I'm simplifying and hyperbolizing, of course, and you can probably guess where I stand in this debate. If you can't, click here to read the whole story. We've got quite a lively discussion going on over whether the CSBA and Congress have any clue whatsoever what they're doing