Nokia and Linux Make a Good-Looking Couple

Pop quiz: What does the Linux operating system have in common with telecom giant Nokia (NYSE: NOK)?

1.     High technology.
2.     It's everywhere, and you don't know it.
3.     Finland.
4.     All of the above!

The correct answer is, of course, D: all of the above. Nokia and Linux are national treasures of Finland, sweeping the globe with high technology you never knew you needed. Thus, it's about time that Nokia got serious about making smartphones based on a mobile version of Linux.

Nokia has been selling "internet tablets" built on the Maemo Linux platform for years. Never seen one? Me neither. These gadgets fall one voice connection short of being a phone, so consumers who wanted an Internet-browsing doohickey in their pocket have chosen alternatives like the Apple (Nasdaq: AAPL) iPhone and high-end BlackBerry models from Research In Motion (Nasdaq: RIMM). It's kind of handy to be able to make a good old-fashioned voice call from time to time.

Now Reuters says that Nokia will move Maemo Linux into actual smartphones. "We have proven it really can be made," said Kai Oistamo, who heads up Nokia's phone division. "You can take desktop Linux and make it work on mobile." And I think it's a good idea, too.

The company's current top-of-the-line phones, like the N97 smartphone, all run Symbian, which is an entirely different animal wholly owned by Nokia, although even Symbian itself is slated to go open-source in the not-too-distant future. The Google (Nasdaq: GOOG) Android software platform is another Linux-based variant, but Maemo has been around for years, and Nokia never signed on with the Android steering community. So, Maemo it is.

Linux is a low-cost alternative to license-laden third-party solutions like Microsoft's (Nasdaq: MSFT) Windows Mobile. Cost savings isn't a good reason for Nokia to go with Linux, since it already has Symbian in-house. But with a global user and developer community behind it, any Linux-based product will have thousands of powerful applications available, including the Sun Microsystems (Nasdaq: JAVA) office suite OpenOffice and upstart Web browser Firefox. It's a fast-train ticket to Flexible City that promises to unleash the full power of the phone's hardware.

Nokia has seen Apple, RIM, and Google eating into its once-dominant smartphone market share, and the company now owns just 13% of the global smartphone revenue pot for phones costing more than $350. Two years ago, its market share stood at a robust 33% in this segment, according to estimates from Goldman Sachs. Maemo-based phones could be Nokia's best chance to get back in this lucrative race for top-of-the-line high-margin smartphones.

Nokia plus Linux is not just a matter of Finnish sisu. It's a perfectly sensible business decision. Maemo phones might not kill the iPhone, but they should be able to carve out a comfortable slice of market space, partly thanks to Nokia's worldwide name recognition. Would you buy a Linux-powered Nokia phone? Share your thoughts in the comments box below.

 

 

This IPO Won't Happen Soon

Forget it, Fool. Google (Nasdaq: GOOG) won't touch Twitter. Neither will Microsoft (Nasdaq: MSFT), nor Apple (Nasdaq: AAPL). David Naylor, a U.K.-based search marketing expert, on Tuesday showed how an enterprising hacker might distribute malicious code via tweets.

The trick, Naylor said in a blog post, is to change the reference links Twitter inserts into applications that access its API. Instead of a simple administrative command, a hacker could change the link to a site that downloads digital devilry. Yuck.

"If you change the link in the application settings, it affects all of the historical tweets generated by the application. So it's pretty quick and easy to experiment with different URLs and see what happens," Naylor wrote.

Translation: We're all one sneaky link away from losing control of our Twitter accounts.

This isn't the first time Twitter's had issues. A massive data breach exposed sensitive documents. Profile updates have been wiped clean without warning. And lately, downtime has occurred weekly, and sometimes daily.

All of which is unfortunate. Twitter would add heft to an IPO class whose best prospects seem to be OpenTable (Nasdaq: OPEN), Changyou (Nasdaq: CYOU), Rosetta Stone (NYSE: RST), and SolarWinds (NYSE: SWI). Good businesses all, but they're lightweights compared to social-networking superstars such as Facebook, LinkedIn, and yes, Twitter.

But you can forget a Twitter IPO. Forget an M&A deal, too. So long as miscreants have it this easy, Twitter will remain exactly as it is: private and under assault.

 

 

Why Apple Is Cheaper Than You Think

 

Today's Apple (Nasdaq: AAPL) is priced as if it were the next Microsoft (Nasdaq: MSFT). Not the Mr. Softy of the mid-90s, but the Microsoft of today, the one that just finished with what might be the worst quarter in its history.

Really?
Yes, really. My math shows that investors price the iEmpire as if it were on track to grow free cash flow by roughly 6% annually till 2014, and 3% thereafter. Here are all the numbers as I entered them into the DCF calculator we offer to Motley Fool Hidden Gems subscribers:

Metric	Value
Discount rate	12%
Free cash flow	$10.3 billion
Assumed FCF growth for next 5 years	6%
Assumed FCF growth for years 6-10	3%
Assumed FCF growth after 10 years	3%
Shares outstanding	896 million
Excess cash and equivalents	$24.2 billion
All debt	$0
Debt equivalent value of operating leases	$1.7 billion
Estimated value of outstanding stock options	$1.5 billion
FAIR VALUE OF APPLE SHARES	$171.65 per share

Source: Capital IQ, SEC filings, and author's estimates.

There are a lot of assumptions cooked into each of these data points. Let's tackle the most important ones.

Discount rate . Sometimes also known as the required rate of return to hold a stock, the discount rate is the rate at which future cash flows are discounted to their present value. The higher the rate, the riskier the stock.

To some, 12% might seem more appropriate for small caps such as TASER (Nasdaq: TASR) or Palm (Nasdaq: PALM) than a $150 billion company such as Apple. Fair point. There's little risk of bankruptcy. Plus, we've seen the iEmpire survive just fine for six months without its iconic and once-believed-to-be-indispensable CEO Steve Jobs. I've set it this high merely to be conservative, to reflect the company's relatively volatile stock price movements, and because Apple's board hasn't exactly proven to be trustworthy.

Free cash flow . I've opted for the classic formula here. Why not be more conservative and take a three-year average? I think doing so would understate the impact of the iPhone and the huge subsidies AT&T (NYSE: T) provides.

What's more, we're now in year three of iPhone sales and are still seeing growing sales, even as Research In Motion (Nasdaq: RIMM) and Palm introduce new handsets. I suspect Apple's days of producing $10 billion or more in FCF annually are just beginning.

Debt equivalent value of operating leases. This number is calculated by the good folks at Capital IQ and is current as of Dec. 31, so it may very well be low. I include it in this calculation because Apple is more than just a seller of hardware and software, it's also an upscale retailer that, like Tiffany & Co. (NYSE: TIF), leases a bounty of well-placed properties at fixed rates, much like interest on debt.

Estimated value of outstanding employee stock options. According to its latest 10-Q quarterly report, Apple had $1.5 billion in unrealized compensation expense related to stock options and restricted stock units. Exercises of these derivatives would have a dilutive impact on us as shareholders and, therefore, ought to be accounted for in the valuation equation.

Foolish final thoughts
The key drivers in this equation are free cash flow (FCF) and cash and equivalents. Reduce growth to zero -- that's right, zilch -- but preserve the FCF and cash numbers, and intrinsic value falls to $118.90 per share. The implication? Apple's existing FCF and cash assets account for over 70% of its market value at today's prices.

Welcome Back, Free Money

The recent derailing of our economy has obliterated jobs, tightened credit availability, and, for employees at many companies, dried up 401(k) matching funds. Even the AARP, an advocacy organization for the retired and pre-retired, suspended its 401(k) matches. That's the bad news -- but it may be getting better.

As traditional pensions fade away, 401(k)s have become critical parts of many people's retirements. A 50% match of contributions up to 6% of a $60,000 salary amounts to as much as $1,800 of free money for an employee each year. If you get that $1,800 year after year for 25 years, and invest it at 8%, you'll end up with more than $142,000.

But recently, many employers cut back on those matching contributions for some or all employees, including Ford (NYSE: F), United Parcel Service (NYSE: UPS), and FedEx (NYSE: FDX).

Return of the missing match
There's good news around the bend, though. Recessions end. Things improve. In a Watson Wyatt survey of HR execs at 175 companies, 64% planned to restore matches within 18 months, while 43% expected them to return between six and 12 months from now. 

This might surprise some cynics, who expected the companies to make the cuts permanent. Such a cost-saving measure makes some sense, but it's also true that companies rely on benefits such as 401(k) matches to attract and retain employees. Expect more matching funds to reappear (along with a thaw in frozen salaries).

The right response
Unfortunately, not all bad trends will reverse themselves. For instance, the majority of employers plan to continue asking workers to shoulder more of the burden of health-care costs.

The key is not to rely too much on your employer for your retirement. If you're the victim of a match cut, consider upping your contribution to make up for it. Even if you're not, consider contributing more to help your nest egg grow.

Among other steps you can take to strengthen your retirement:

Open and fund a Roth IRA
You won't get a tax break up front, but you'll be able to withdraw the money tax-free in retirement. If your investments grow at a good clip, like these stocks have historically, that could be an excellent trade-off:

Company	20-Year Average Annual Return
Best Buy (NYSE: BBY)	30%
Intel (Nasdaq: INTC)	17%
Johnson & Johnson (NYSE: JNJ)	14%
Automatic Data Processing (Nasdaq: ADP)	12%

Data: Yahoo! Finance.

Investing $10,000 in a Roth IRA for 20 years, at an average of 12% growth, would yield almost $100,000. In a Roth IRA, you'd keep that entire amount without forfeiting any of the gain to taxes. In a traditional IRA or 401(k), you'd face a big tax liability.

Increase your contribution if you're 50 or older
Beyond that age, you can contribute more to your IRAs and 401(k)s -- several thousand dollars more per year, with 401(k)s. These "catch-up contributions" can make a huge difference.

Investigate a Roth 401(k)
Your employer may also offer these plans, which combine features of Roth IRAs and 401(k)s. You can typically invest much more in them each year than in IRAs, and you can eventually make withdrawals from them tax-free, if you follow the rules.

Whether or not you're headed for a joyous reunion with your absent matching funds, these steps can help firm up the foundation of your financial future.

 

 

6 All-Star Stocks to Make Your Portfolio Shine

The market has roared by a hefty 52% since its March low. While rising prices wiped out some of the most appealing valuations seen in decades, this surge in stock prices doesn't mean you've missed the boat. And it shouldn't deter you from making a wish list of stocks you'd like to snag for your own portfolio.

If this truly is the beginning of a new bull market, then there's still more room to run from here. And if it's simply a fierce bear-market rally, then a pullback will correct prices. Despite a mixed bag of economic news, the market keeps treading higher, as investors who were sitting on the sidelines since financial Armageddon last fall use every pullback to get back in the market. That's a good sign, because it means the unprecedented amount of cash that was on the sidelines is now being put back to work.

Either way, if you research and build a list of stocks you'd want to own, you'll simply need to wait until each stock reaches your preferred price before you pounce. The volatility in this environment should provide you opportunities to do exactly that.

To start assembling my very own stock wish list, I used the Fool's CAPS screener to find premium companies such as Apple (Nasdaq: AAPL), which has outperformed the market by over a hefty annual 27 percentage points over the past 10 years.

To screen for some of the market's best stocks, I used the following criteria:

• Market caps greater than $10 billion, which suggests stability.
• A current ratio of at least 1, to ensure sufficient liquidity to meet current liabilities.
• Return on equity north of 15%, to demonstrate efficiency and profitability.
• Five-star ratings, our CAPS community's highest ranking.

You can review my results in full if you like, but here are some of the highlights:

Company	Market Cap (in Billions)	Current Ratio	Return on Equity (Trailing 12 Months)
Diamond Offshore Drilling (NYSE: DO)	$12.7	3.7	37.8
Johnson & Johnson (NYSE: JNJ)	$168.9	1.8	27.5
Philip Morris International (NYSE: PM)	$91.7	1.5	64.7
PepsiCo (NYSE: PEP)	$89.5	1.3	36.3
Petrobras (NYSE: PBR)	$158.7	1.1	30.5
Transocean (NYSE: RIG)	$25.1	2.0	23.9

Data from Motley Fool CAPS as of Aug. 25, 2009.

While the CAPS screen can suggest all kinds of promising companies, running a screen should be only the first step in your stock research. Investors should be mindful of the industry the company operates in, and whether that industry has growth prospects. From there you'll need to assess the company's products, positioning in the market, and market share, as well as its "financial vitals" -- what it has in terms of cash, revenue and earnings growth, free cash flow, and so on. Come and join our CAPS online investment community to delve further into these companies, and see whether they're right for your portfolio.

 

 

3 China Profit Plays

 

 

If you're like most U.S. investors I meet, you want to invest in China, but you don't know how. You also fret about the quality of corporate governance, a lack of internal controls, and loose enforcement of accounting standards.

So you've decided that despite the incredible long-term growth opportunity it offers, China is not worth the hassle. Either that or you settled for an exchange-traded fund that makes China a part of its portfolio ... like the Xinhua 25 Index (FXI).

Let's be frank: Neither of these solutions is a good one. But if you read to the end of this article, I guarantee that you'll be a little more comfortable with investing in China, and more importantly, you'll know three key niches where you should be looking to buy stocks.

But first, why you don't want FXI
The problem with the FXI is that it owns 25 enormous, mature, and generally state-owned Chinese companies such as PetroChina (NYSE: PTR). Thus, they're highly regulated, have little room to grow, and aren't run by executives who are known for their entrepreneurial spirit.

Buying these stocks in the hopes of profiting from China's development would be like buying Johnson & Johnson (NYSE: JNJ), Novartis (NYSE: NVS), and Teva (Nasdaq: TEVA) in the hopes of profiting from a breakthrough cancer or AIDS drug.

Sure, you could end up making a little money, but you'd be better off finding the specific biotechs that are focused on the project.

Further, fully one-third of FXI is exposed to Chinese banks. These banks, as directed by the government in order to stimulate the Chinese economy, loaned out more money in the first four months of 2009 than in all of 2008. It's difficult to see growth like that and not conclude that underwriting standards were compromised, which could lead to significant profit hits down the line.

Thus, FXI is the wrong choice when it comes to investing in China. But the good news for you is that I have three far more promising alternatives.

China profit play No. 1: rural China
The Chinese government, if nothing else, is focused on self-preservation. That means keeping most of their people content most of the time. And since most Chinese are still rural Chinese, recent government policies have focused on keeping them content amid the economic downturn. These have included raising the minimum purchasing prices for rice, wheat, and soybeans, as well as introducing a new national health-care plan to strengthen the social safety net.

Thus far, these measures are working. The government expects rural incomes in China to rise 6% this year. That optimism has been corroborated by recent results from fertilizer companies such as China Green Agriculture and Yongye International that have topped all expectations due in part to farmers' increasing purchasing power. At Motley Fool Global Gains, we expect these companies and others that sell directly into rural China to continue to post good results.

China profit play No. 2: tier 2 infrastructure
Quick! Name a city in China!

Chances are you said Beijing or Shanghai, and not Xian, Harbin, or Tianjin, despite the fact that all five have populations in the multimillions. That's because while the former are world-famous tier 1 cities in China, the latter are relatively unknown tier 2 cities. But in order to even out development in China, the government has made it a priority to build infrastructure in these tier 2 cities and make them attractive places to do business. For tier 2, this means more roads, power plants, subways, etc.

But rather than pick a company that builds subways or coal-fired power plants or roads or nuclear power plants, at Global Gains we like companies that work across these niches. That's something like General Steel (NYSE: GSI), which supplies the rebar for use in overpasses, subways, and buildings in Xi'an.

China profit play No. 3: SSE-led consolidation
The fact is that while China's economy has been growing at a near-10% annual rate for the past 25 years, growth is slowing and the low-hanging fruit when it comes to spurring growth has long since been plucked from the tree. Thus, the government is focused on ways to make the economy ever more efficient. One of the strategies they've hit on is the forced consolidation of small, inefficient state-owned enterprises (SOEs) under private companies that they can count on to do right by workers and wring inefficiency out of operations.

We discovered some of these "chosen few" in the health-care and steel sectors during our last research trip to China, and we dubbed them SSEs, or state-sponsored entrepreneurs. We're keen to invest alongside them because of their good relations with the government and their advantaged position when it comes to acquiring new assets, products, or distribution capacity.

Is Apple Making a Huge Mistake?

The kids are headed back to college, but with fewer Macs.

A recent survey from consumer electronics website Retrevo says that 49% of students plan to buy Windows laptops and 34% want netbooks. Only 17% said they would buy Macs.

What happened, Apple (Nasdaq: AAPL)? Last March, a Morgan Stanley study found that 40% of college students planned to buy a Mac. Sure, these are different surveys from different providers with different methodologies, but the gulf is enough to suggest there's been movement in market sentiment. What gives?

Retrevo's answer is, not surprisingly, the economy. Kids or their parents aren't willing to pay $1,000 for a new Mac when they can get a comparable PC from Dell (Nasdaq: DELL) or Hewlett-Packard (NYSE: HPQ) for much less. Or better still, a netbook for as little as $200.

There are plenty to choose from, thanks to increasing interest in this form factor among chip makers and hardware and software suppliers. Intel (Nasdaq: INTC) was an early adopter, but now NVIDIA (Nasdaq: NVDA), Nokia (NYSE: NOK), and Sony (NYSE: SNE) also want in on this market.

Apple is one of the few that doesn't, if the public statements of CEO Steve Jobs and COO Tim Cook are to be believed. I've backed that decision more than once. Apple doesn't do well playing follow-the-leader.

But there's also little doubt that high-function, lower-cost, small form factor machines are here to stay -- at least for a while. Apple needs an answer for this market; it needs to ship the iTablet. Soon.

 

 

Will P&G Ever Turn Around?

 

Amid sagging sales and falling volumes, consumer-staples giant Procter & Gamble (NYSE: PG) has done little lately to earn its reputation as one of the best-run companies in the world. Will the recently announced sale of its pharmaceutical business to specialty-drugs developer Warner Chilcott (Nasdaq: WCRX) mark a turning point?

Premium brands lose appeal
First, let's understand that the global recession has been tough on P&G. Price increases on items ranging from Tide and Era to home- and dish-care products have turned away budget-conscious consumers. Meanwhile, competitors such as Unilever (NYSE: UL) and Colgate-Palmolive (NYSE: CL) have been able to keep a tighter grip on volumes. That puts any move Procter & Gamble makes under the microscope.

The Warner Chilcott deal is expected to net P&G $1.4 billion after tax, or about $0.44 per share. In exchange, P&G will relinquish its prescription drug product pipeline, along with established treatments such as osteoporosis drug Actonel. The logic, according to CEO Bob McDonald, is that P&G will be able to focus on its consumer health care business, where brands include Crest, Tampax, and Prilosec OTC.

Growth ahead?
It's difficult to know what form such focus will take. Some investors would undoubtedly like to see the company innovate on higher-margin premium brands. However, the better strategy may be to broaden the product portfolio into the value-price segment -- even if lower prices mean slimmer margins -- thus winning over more cautious consumers. Should P&G decide to compete on a price and value platform, look for new products in the OTC pain relief, cold, and flu remedy categories, where consumers are most likely to trade down to store brands, versus greater brand loyalty in the areas of cosmetic and skin and hair care.

In the meantime, I'd caution against unwarranted optimism. Management's move to open Mr. Clean-branded car washes doesn't exactly smack of a laser-like focus on its core business. Speaking specifically of divestitures, in past years, the company sold food brands Folgers, Jif, and Crisco to J.M. Smucker (NYSE: SJM). Given Smucker's recent quarter, holding onto those brands might've boosted P&G's recession-era performance.

The market gets it right
A common argument for buying P&G shares is that they're undervalued. Sure, the stock's P/E is low compared to historical averages, not mention many competitors' shares. Still, respected consumer names such as Kimberly-Clark (NYSE: KMB) and ConAgra (NYSE: CAG) go for lower forward multiples. Given that P&G is, from a certain perspective, a turnaround story that's yet to turn, this pricing appears warranted to me.

But if you do decide to jump in with a wad of dough and yellow rubber gloves, keep a close eye on company developments. This isn't the blue-chip company that your mother told you to buy and forget for 10 years. At least, not anymore.

 

Medtronic Takes the Road Less Traveled

Medtronic (NYSE: MDT) just has to be special. It doesn't follow the typical fiscal year, which ends Dec. 31. It doesn't even end its fiscal year in June (or March or October). No, its fiscal year ends in April, making comparisons to other medical-device companies a little tricky.

This quarter -- that would be its first quarter ended July 31 -- even comparisons with the company's historical quarters are difficult, because the quarter had 14 weeks instead of the typical 13. So rather than taking a typical look at the year-over-year sales comparisons, let's join Medtronic in being different and take a more generalized look at the company.

Medtronic hit a rough patch in 2007 after problems with the leads on its implantable cardioverter-defibrillator (ICD) resulted in a recall, but the company thinks it has finally stabilized its market share against Boston Scientific (NYSE: BSX) and St. Jude Medical (NYSE: STJ). Even if Medtronic can't regain its lost market share, it may be able to increase sales: There should be increased demand for heart rhythm devices after a study by Boston Scientific showed that more expensive ones that include a cardiac resynchronization therapy function (CRT-Ds) can help patients in earlier stages of heart failure.

Spinal and cardiovascular products, Medtronic's second- and third-largest segments, are both looking good. The acquisition of Kyphon is helping the spinal division, and the launch of Medtronic's drug-eluting stent, Endeavor, in Japan is helping the cardiovascular division.

Taking a page from Johnson & Johnson's (NYSE: JNJ) playbook of trying to grow earnings faster than revenue by cutting costs, Medtronic has slimmed down (it announced in May that it was cutting its workforce by 1,500 to 1,800 employees). A charge for letting employees go and a settlement of a patent dispute with Abbott Labs (NYSE: ABT) hurt earnings this quarter, but excluding those charges and convertible debt expenses, the company earned $0.79 per share. It's well on its way to making its full-year guidance of $3.10 to $3.20 in earnings, excluding items.

With a forward P/E of about 12 and a quarter into its fiscal year, Medtronic isn't insanely cheap, but it's not overly expensive, either. Investors in for the long haul could buy now, but if you'd like to be different, a put strategy might be a good alternative.

 

 

Winn-Dixie Does an Earnings Two-Step

If we're smart, we'll learn to take reversals of fortune like the one Winn-Dixie (Nasdaq: WINN) experienced today with a grain of salt.

Between yesterday afternoon and this morning, shares of Winn-Dixie traded in a huge range, rising by more than 4% last night but losing those gains to drop as much as 9% within the first hour of trading today.

Shares hit new 52-week highs in after-hours trading yesterday after the company announced solid fiscal-fourth-quarter and fiscal-year results. Then, just as quickly, investors sent shares plummeting this morning after management's before-the-bell earnings conference call. The selling continued when markets opened, putting a damper on a would-be day of celebration for the company.

Cost-cutting in conjunction with Winn-Dixie's remodeling strategy helped the official supermarket of the Jacksonville Jaguars and New Orleans Saints beat analyst estimates by a penny to post a fourth-quarter profit of $9.4 million and $0.17 per share. Same-store sales grew by 1.6% and total revenue landed at $1.72 billion. Given that the company emerged from bankruptcy just two years ago, sustained profitability and sales growth are quite meaningful results for the grocer.

What happened?
The supermarket business is notoriously competitive, as Winn-Dixie faces competition on two fronts. Other grocery specialists, including Publix, Ingles (Nasdaq: IMKTA), and Kroger (NYSE: KR), constantly put pressure on margins. Meanwhile, superstores such as Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and even Costco (Nasdaq: COST) also lure away potential customers. In addition, while remodeling stores makes sense to try to retain and attract customers, a company has to draw the right balance to maintain profits. But nothing in the announcement changed what investors should already have known on those fronts.

The real answer?
What I think precipitated the move is a difference in tone between the earnings release and the conference call; 2009 has been a great success for the company, and in yesterday's press release, management reiterated 2010 guidance and pointed to positive signs during the first eight weeks of the new fiscal year.

Yet in this morning's conference call, Winn-Dixie's  president and CEO suggested that the new fiscal year is actually off to a somewhat rocky start. Its summer and weekend sales have been relatively soft, and during the earnings conference call, the president and CEO gently pointed investors toward the lower end of next year's guidance.

So as I see it, the market got ahead of itself last night when it saw that the grocer had topped earnings. Then, when management wasn't as glowing with its forward-looking statements, investors panicked. Yet even after the haircut, Winn-Dixie is weighing on the expensive side at more than 30 times trailing earnings. Investors should keep their eyes peeled for better bargains.

Disagree? Share your thoughts below in the comments section, and explain your take on investors' change of heart regarding Winn-Dixie's shares.

 

 

8 Winning Stock Ideas From Buffett's Disciples

Many investors hang on every word that Warren Buffett says. But if you're looking for interesting stock ideas based on Buffett's principles, you don't have to settle for just the stocks he owns. It's also worth taking a look at successful money managers who've invested substantial assets into Berkshire Hathaway (NYSE: BRK-A).

Following the Oracle
By now, everybody knows what moves Berkshire made during the second quarter. Sales of shares in oil company ConocoPhillips (NYSE: COP) gave Buffett enough cash to add to holdings of Johnson & Johnson (NYSE: JNJ). If you make moves based on Buffett's, then you're already way late to the game.

A number of mutual funds, however, hold substantial amounts of Berkshire stock. Here are just a few:

Fund	Assets in Berkshire Hathaway	1-Year Return	10-Year Average Annualized Return
Sequoia Fund (SEQUX)	23%	(12%)	3.6%
Clipper Fund (CFIMX)	12%	(16.8%)	1.7%
Oak Value (OAKVX)	7%	(11.4%)	1.1%
Weitz Partners Value (WPVLX)	10%	(5.6%)	2.1%

Source: Morningstar.

Since each of these four funds follows a distinctly different path in emulating the Oracle of Omaha, let's take a closer look to see what investing secrets they may hold.

Comparing the funds
Sequoia's ties with Buffett go way back, as longtime friend Bill Ruane managed the fund until his death in 2005. Ruane is reputedly the only money manager to whom Buffett ever referred his own former clients. After the fund started in 1970, Ruane did phenomenally, and the fund closed to new investors in 1982. The fund stayed closed for more than 25 years before reopening just last year. After outperforming the S&P by 10 percentage points in 2008, the fund has lagged a bit so far this year. But holding a wide variety of stocks like The TJX Companies and Whole Foods Market (Nasdaq: WFMI) certainly hasn't hurt Sequoia's performance lately.

Buffett has reportedly said that the Clipper Fund comes close to his own investing style. But unlike Sequoia, Clipper Fund's Chris Davis hasn't shied away from financial stocks lately. Alongside his share in Berkshire, you'll also find American Express (NYSE: AXP) and Goldman Sachs (NYSE: GS) among top-performing holdings this year. With a relatively concentrated portfolio, it's clear that Clipper is abandoning neither Buffett's philosophies nor its own value principles.

The Oak Value fund may not be as well-known as some of the other Buffett followers, but its managers still follow his teachings closely. The fund's managers first look for businesses with sustainable competitive advantages, and only then drill down to compare intrinsic value with current share prices. Currently, Oak Value is finding opportunities in consumer goods stocks, with big holdings in several high-end companies including Tiffany and Coach (NYSE: COH).

Finally, Weitz Partners Value, which is also based in Omaha, is managed by Wally Weitz. Like Buffett, Weitz got started by creating private investment partnerships. But rather than building his own corporate empire, Weitz opened several mutual funds to broaden his offerings to share his investment success. Investments in Cabela's and Liberty Media have vaulted the fund higher in 2009.

Similar, but not the same
The nice thing about all these funds is that while each one shares an interest in Berkshire Hathaway and the investment style of Warren Buffett, they also take unique approaches to the way they invest. That serves as an excellent reminder that while value investing may seem like a simple, easy-to-follow strategy, there are actually a huge number of different ways you can structure a value-based portfolio.

If you follow what Warren Buffett says and does -- and I think it's a good idea -- it's always nice to see how others are reacting to the same things you see and hear. By considering the alternative opinions of the fund managers who believe Buffett's philosophy strongly enough to invest substantial portions of their clients' assets in Berkshire stock, you'll get a gut-check on the strength of your own value investing convictions.

 

 

Cashing In on Obamacare

I know, I know. Obamacare is the worst idea since the Spice Girls reunion tour. It will stifle competition and kill capitalism. It will bankrupt the country and have us eating cat food in retirement. We'll all have to submit to the presidential death panel our DNA plus a 1,000-word essay on "What I Would Like to Do Next Summer" in order to decide who gets an insulin prescription and who gets a sympathy card. Hey, did I mention the entire country's going commie?

Oh, I'm sorry. My mistake. You're a fan of Obamacare? Then rest assured, I understand your enthusiasm for the subject. Wringing costs out of the health-care system is vital. Clearly, the only way to do that is a government-run reform program. Government being known for its efficiency and lean operations, a pillar of the reform must be a public insurance option. This is the only way to shake the existing health-care establishment out of its complacency. If that means a few less ivory backscratchers for those Wall Street fat cats (who, by the way, have more money than you do. I'm just sayin'), then so be it. Also, did I mention that those fat cats are rich?

Step away from the talk radio.
Sorry if that sounded flip, but frankly, I'm amazed at the vitriol that's been whipped up -- on both sides -- of this debate. And I'm tired of being amazed. I acknowledge that this is an important debate for our country, but I'm not spending anymore energy getting worked up about it. The misinformation spouted by health-care reform's detractors (i.e. "death panels!") and proponents (i.e. "record profits at insurance companies!") is too pervasive to amaze me any longer.

Besides, I think there's a better way for us investor types to spend our limited energy on Obamacare: We should be figuring out how to make a buck in health-care stocks.

The unloved sector
Some of you are no doubt thinking, "Make money in health care? This guy had better hope Obama includes major psychological benefits in his plan." But if so, you probably thought the same thing back in January when I recommended Autoliv to members of Motley Fool Hidden Gems. At the time, it was well known that no one would ever buy a car again, therefore all carmakers, along with car suppliers like Autoliv, were investments to be avoided like swine flu.

Of course, Autoliv returned more than 100% from that point because what everyone "knew," and feared, turned out to be worse than what actually happened. Ford (NYSE: F) and even the-company-formerly-known-as-GM have had to increase production to deal with an uptick in car buying. Sure, sales are still below the boom time's high-water mark, but companies like Autoliv were priced for death, and when they didn't flatline on the table (maybe they wrote a really good essay to the death panel), the stocks came charging back.

Same story, different sector
I was recently asked to talk Google (Nasdaq: GOOG) and tech stocks on CNBC's "Closing Bell," because tech stocks are currently hot, I guess. As one member of the parade of bland men in suits, I was hoping to distinguish myself -- at least somewhat -- from the crowd by refusing to play the hot-sector game. In fact, as I explained to "Money Honey" Maria Bartiromo, the concept of the hot sector makes me uneasy. By the time a sector has attracted attention, many of the stocks in it have risen, some nonsensically, and bargains are harder to find. Enthusiasm for what's already popular might get you face time on CNBC, but it's likely to put your portfolio on long-term life support.

As Buffett has put it, you pay a high price for a cheery consensus. Luckily, the opposite is also true. You get a bargain price for fear and loathing. That's why, to the extent that a "trees-not-forest" investor like me is interested in sectors at all, I'm much more interested in groups of companies that are feared or openly reviled. And right now, I'm having a hard time thinking of a sector that is as maligned as health care.

Health-care stocks, as a sector group, have not been as well treated as most other sectors during the market rebound of the past six months, as investors are uncertain how health-care reform could affect different companies.

Sector ETF	6-Month Return
Financials	79%
Materials	51%
Consumer Discretionary	44%
Industrials	39%
Technology	41%
Energy	27%
Consumer Staples	17%
Utilities	13%
Health Care	12%

Data from Yahoo! Finance. Dividends not included.

However, that bottom-of-the-heap index-ETF return looks positively excellent compared with the results from some of the losers in this space. A few big names like UnitedHealth Group (NYSE: UNH) and WellPoint (NYSE: WLP) have seen their shares rally along with the market, but health care can be a tough sector for many companies:

Company Name	6-Month Return
Amedisys (Nasdaq: AMED)	(58%)
Immucor	(28%)
Sun Healthcare Group	(27%)
Genzyme	(24%)
Hansen Medical (Nasdaq: HNSN)	(23%)
Gilead Sciences (Nasdaq: GILD)	(9%)

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

 

 

Discover Royal Returns in Natural Gas

While the investment world clamors and claws for natural gas exposure, the well-informed Fool drills deeper into the space for the path less traveled.

Natural gas prices dipped to a seven-year low last week, beneath $3 per MMBtu, even as oil retained strength above $70 per barrel. While a barrel of oil has historically equated in price to between 6 and 12 times that of natural gas, this relationship has now reached a crude extreme of 24.5 to 1. Seasoned energy traders know that something has to give.

Bullish indicators for a looming price recovery have gained clarity even as prices have continued to deteriorate. Undoubtedly, it will take time to absorb the 3.2 trillion cubic feet of available product presently in storage (19% above the five-year average), but bullish longer-term indicators include:

• Some stabilization of U.S. domestic industrial activity
• An abrupt reduction in the total number drills operating in the sector
• A palpable move by utilities to burn less coal in favor of cheaper natural gas

Future shock
Futures reflect a clearly bullish sentiment, projecting $5 natural gas by December 2009, and moving above $6 for the October 2010 contracts. Before you ponder diving into futures, however, consider yourself Foolishly forewarned: The market for natural gas futures appears far from natural at the moment.

With more than 40 million shares changing hands daily, United States Natural Gas Fund (NYSE: UNG) has seen no shortage of interest from investors trying to time a bottom in natural gas. Unfortunately, in their collective stampede they created an untenable condition, whereby the fund holds some 30% of the futures market, potentially distorting natural gas prices as it rolls contracts. The fund trades at a double-digit premium to its net asset value, has shifted some assets away from futures into unregulated over-the-counter derivatives, and in short, cannot be considered a safe investment vehicle.

The storm before the calm
Fellow contributor Toby Shute is my go-to Fool for insights into the natural gas space, and his expectation for still-lower natural gas prices is based upon well-researched observations of supply-and-demand dynamics. When Toby points to producers like Chesapeake Energy (NYSE: CHK) and XTO Energy (NYSE: XTO) keeping the gas flowing, even while projecting forced curtailments by storage providers like Kinder Morgan (NYSE: KMP), Fools are advised to take note.

Between possible reverberations in the futures market from the ailing futures ETF, and the aggressive production stance of key producers in the face of massive stored supplies, the potential for further near-term price weakness to precede an eventual long-term recovery appears entirely plausible.

Natural choices for investors
Investors looking to profit from an eventual natural gas recovery may not have as many compelling options to choose from as they might expect. In addition to troubles with the futures ETF, shares of producers like Chesapeake Energy have rallied impressively from their 52-week lows, moving in the opposite direction of the underlying commodity price for several months running.

What we have here, Fools, is a crowded trade. I believe investors have been catching a falling knife for months, building downside risk into related equities that could manifest as this acute oversupply condition continues to unfold. Under such circumstances, I seek scour a sector for high-quality, overlooked equities with an income boost to help absorb some potential downside.

I recently highlighted midstream operators like Kinder Morgan and Energy Transfer Partners (NYSE: ETP) as solid choices, but even these lesser-known names are not the overlooked industry laggards I seek. For my latest pick, I dug a horizontal well clear into Canada.

The royal flush of royalty trusts
I have owned a basket of Canadian energy income trusts, with Enerplus Resources Fund (NYSE: ERF) among them, since the Halloween Massacre of 2006 decimated shares with a new tax structure to take effect in 2011. I consider the entire group relatively overlooked, including even large-cap offerings like Penn West Energy (NYSE: PWE).

With natural gas representing 60% of production, Enerplus Resources Fund is this Fool's top choice for natural gas exposure. The company pays a monthly dividend with a nearly 10% annualized yield, and has committed to retaining its income-oriented structure even after converting to a non-trust corporation late in 2010. Thanks to an effective hedging program, the company recorded only a slight loss of $3.3 million.

Enerplus boasts an attractive debt to trailing 12-month cash flow ratio of 0.7, and a conservative payout ratio of just 43%. Meanwhile, with a 22% increase to reserves at the Kirby oil sands project, and a key acquisition of natural gas acreage in the promising Marcellus shale, I consider Enerplus well-positioned for a prosperous future. Meanwhile, the stock has been a notable laggard in 2009 compared with all the operators noted above.

Fewer than 600 of the nearly 140,000 investors at Motley Fool CAPS have added Enerplus Resources Fund to their CAPS portfolios, though 96% of those picks were bullish. I've cast my vote, have you?

 

 

Bernanke Is Sentenced to 4 More Years

 

Speaking from his holiday location of Martha's Vineyard this morning, President Obama announced his nomination of "Helicopter" Ben Bernanke to a second term as chairman of the Fed. Under normal circumstances, this is a great honor; in a crisis, a second term may feel more like being sentenced to hard labor. Nevertheless, Bernanke is game -- but is he the right choice?

Ben faces old risks and new ones
Ben Bernanke is an expert on the Great Depression, and his knowledge has been critical in guiding his actions during the current crisis. The unprecedented scope and vigor of the Fed's response prevented the U.S. from slipping into depression; however, it has also created unprecedented risks. Timing the Fed's exit strategy and walking the tightrope between deflation and inflation in the coming years will be extremely tricky.

Bernanke's actions haven't been without some controversy -- there are legitimate questions concerning whether he and then-Treasury Secretary Hank Paulson were too aggressive in prodding Bank of America (NYSE: BAC) to complete its takeover of Merrill Lynch, for example. The decision to allow Lehman to fail was also questionable -- particularly after having steered Bear Stearns into the arms of JPMorgan Chase (NYSE: JPM).

The Fed was also instrumental in the rescues of Fannie Mae (NYSE: FNM) and AIG (NYSE: AIG). Meanwhile, its purview grew as firms including American Express (NYSE: AXP), Morgan Stanley (NYSE: MS), and Goldman Sachs (NYSE: GS) converted to bank holding companies.

Ben and the bubbles
I think Bernanke's re-appointment is probably the right decision -- he appears fully cognizant of the risks the Fed now faces, and there is arguably no one better qualified to manage them. During his second term as Fed chairman, I'd like to see him disavow Greenspan's doctrine that the central bank can't identify or resist the formation of asset bubbles. All bubbles are fuelled by credit -- the Fed has the means to act when an asset market becomes too frothy. Establishing such guidelines might seal his legacy as the man who fought one crisis and prevented future ones.

 

America's Next Top Value Sto

Although value investors have been some of the market's greatest successes, finding good stocks at bargain prices is far from easy. Markets aren't as efficient as some university professors may tell you, but they generally do a pretty good job pricing stocks. So while there are good deals out there, you're going to have to break a bit of a mental sweat if you want to make sure that you're investing in the stock equivalent of Brad Pitt, rather than Kato Kaelin.

Fortunately for us, in the search for stock market values, we have the 135,000 members of The Motley Fool's CAPS community voting on which stocks are true stars, and which are just posers. To gather some ideas, I've dug up a handful of companies valued at less than twice their book value -- a measure often used by value investors. Below is a selection of companies that fall into this category. (You can run the same screen that I did on the CAPS screener.)

Company	Book Value Multiple	1-Year Stock Performance	CAPS Rating (Out of 5)
PNC Financial Services (NYSE: PNC)	1.0	(39.0%)	**
MetLife (NYSE: MET)	1.0	(23.9%)	**
Toyota Motor (NYSE: TM)	1.2	(2.2%)	***
United States Steel (NYSE: X)	1.3	(67.8%)	****
Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)	1.4	(11.8%)	*****

Source: Capital IQ, a division of Standard & Poor's; Yahoo! Finance; and CAPS as of Aug. 21.

As you can see by their star ratings, though these stocks all carry value-like multiples, the CAPS community doesn't think that all are worthy of your investment dollars.

No twinkle in these stars
The banking industry is about as popular as Kim Jong-Il -- at least if you ask the CAPS community. Sure, a few banks, like US Bancorp (NYSE: USB), have received high marks from the community, but most of the major banks are limping along with a two-star rating, similar to PNC.

MetLife may not be a bank, but its investment choices have won it enough detractors on CAPS that it carries a lowly two stars. And as for Toyota, it may be no General Motors, but its three-star CAPS rating keeps it well out of the running for the top value stock title.

A five-star is born!
You wouldn't think that there'd be much interest in a company that reported a $392 million loss in the second quarter and expects another loss in the upcoming quarter. But the CAPS community has taken a liking to U.S. Steel. Perhaps it's the stock's low valuation, or the signs of improvement that management noted. Either way, members have given the stock 1,849 outperform ratings, compared with just 134 underperforms.

However, its four-star rating wasn't quite enough to put U.S. Steel in this week's top spot.

So who snagged the coveted top value stock crown this week? None other than Berkshire Hathaway. CAPS members may not have much love for the MetLife, but Berkshire Hathaway -- which is primarily driven by insurance -- has garnered the CAPS community's top rating. 

Of course there's much more to Berkshire Hathaway than its insurance operations. Chief among its notable assets is its chief -- Warren Buffett. CAPS All-Star dbhealy became one of the many Berkshire bulls back in August 2007:

When the market is down, the Oracle of Omaha always manages to find a bargain. The recent downturn has presented some unbelievable opportunities to get in cheap on fundamentally sound companies. No doubt Buffett and Munger have been anticipating this for awhile, and won't miss the boat!!

Make your vote count!
I've already given Berkshire Hathaway an outperform rating in my CAPS portfolio, and I want to know what you think? Do you agree that Berkshire could be America's next top value stock? Click over to CAPS and let the rest of the community know what you think. While you're there, log your vote for the other stocks that you think should be in the running.

 

 

Rhapsody Keeps It Real -- for Paying Subscribers

It's not just Sirius XM Radio (Nasdaq: SIRI) that sees an opportunity in premium streaming on Apple's (Nasdaq: AAPL) iPhone and Wi-Fi-friendly iPod touch. RealNetworks (Nasdaq: RNWK) is submitting its on-demand streaming app so it can undergo Apple's notorious review process this week, according to the company's official blog.

Subscribers to RealNetworks' Rhapsody will be able to stream all of the 8 million-plus songs in the service's library through the app. Unlike Sirius XM's app -- with which subscribers pay between $2.99 and $12.95 for access -- the RealNetworks app is being made available at no additional charge to its paying members. Rhapsody To Go subscribers who are already paying $14.99 a month for the service will simply have one more appliance to access their queues, saved playlists, and personal libraries.

This is obviously great news for current Rhapsody subscribers with iPhones, but will it help drum up new leads? Doing so won't be easy. App Store shoppers appear to be a thrifty bunch. The most popular applications are the ad-supported freebies. When they do shell out for a download, it's typically a one-time $0.99 purchase.

Sirius XM knows this all too well. It was quick to brag about notching a million downloads within its first two weeks of availability. However, when it came time to respond to how many of those free downloads are resulting in paying subscribers, CEO Mel Karmazin broke out the fire hose.

"The numbers -- and breaking it down -- is not something that we're doing," he noted earlier this month, during the company's second-quarter conference call. "You should not consider them to be a very significant number related to our number of subscribers."

Rhapsody is going to have an even trickier challenge, because at least Sirius XM offers more than just music. Rhapsody's ability to check out the latest music charts guarantees fresh music, but it's still competing against ad-supported App Store favorites Pandora, Slacker Radio, Yahoo!'s (Nasdaq: YHOO) Y! Music, and CBS' (NYSE: CBS) Last.fm.

The silver lining is that Rhapsody has been battling against these same sources of free Web radio for years, and it has survived as a premium service. It's also been at the forefront of convergence. It turned heads when its service became available on TiVo (Nasdaq: TIVO) boxes two years ago.

RealNetworks also has to be commended for following the Netflix (Nasdaq: NFLX) roadmap. It doesn't charge extra for streaming, yet it continues to expand the breadth of consumer devices that can do exactly that.

This service may not help land too many new subscribers, but it's a great way to retain the Rhapsody fans it already has. 

 

 

A Sign of Life in the Oil Sands

To put it mildly, the recession has not been kind to oil sands projects. These massive operations, in which an extremely thick, heavy crude oil is typically dug out of the earth and trucked to an upgrader for processing, are hugely capital intensive. Just last year, Teck Resources (NYSE: TCK) and Petro-Canada (now part of Suncor (NYSE: SU)) saw the estimated cost for their Fort Hills project balloon to roughly $20 billion.

That kind of money isn't so easy to come by these days. Combine that price tag with a knocked-down oil price and uncertainty about the macro economy, and it's suddenly very hard to justify a giant oil sands investment. Even smaller projects, like Enerplus Resources Fund's planned in-situ operation at Kirby, have been shelved.

That's why it was interesting to see Imperial Oil (AMEX: IMO) talking last week about expanding its Cold Lake operations. The expansion, if embarked upon, would mark phases 14 through 16 of a multi-stage development that stretches back to the early 1980's. Like Enerplus' Kirby and Devon Energy's (NYSE: DVN) Jackfish assets, Cold Lake is an in-situ project that uses steam injection, rather than big shovels, to recover oil.

A Cold Lake expansion wouldn't even be Imperial's boldest move this year. The firm's Kearl oil sands mining project is even bigger potatoes. Fluor (NYSE: FLR) recently announced that it will book $1.5 billion in revenue for early-stage work on the project in 2009. Imperial's partner at Kearl? None other than majority owner ExxonMobil (NYSE: XOM).

Ah. That explains quite a lot. Between moving forward with major investments while other Canadian operators cower, and repurchasing a slew of shares to boot, Imperial is rather reminiscent of the greatest company in the history of the world.

So does this signal some movement in the oil sands business? Keep an eye on oil sands players like Suncor and Total SA (NYSE: TOT), and decisions regarding their stalled projects, for further confirmation.

 

 

Morgan Stanley Wants Back in the Game

 

Back in May, Berkshire Hathaway (NYSE: BRK-A) co-chairman Charlie Munger remarked:

Banks that are 'too big to fail' shouldn't be allowed to be anything but boring. And that's how it used to be. Investment banking used to be a consulting business. It was extremely boring. The partners didn't make nearly the kind of money they do today. They were very conservative businesses.

There's no reason to have a system where every young man has $8 billion to play with and buy whatever he wants. It's incredibly stupid. It's absolutely crazy. If I were in charge, I'd take away everything from banks that wasn't boring.

Seems fair. Banks took on too much risk during the boom years, and it came back to bite 'em last fall. Naturally, we'd hope they'd move toward becoming stable, sustainable, conservative shops.

But don't tell that to Morgan Stanley (NYSE: MS). After dramatically scaling back its risk exposure after Lehman Brothers collapsed last fall, the bank's profits lagged those of Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM). Frustrated, Morgan Stanley's now hiring 400 people to reenergize its sales and trading operations.

While sales and trading can take on many different forms -- including some, like market making, that are virtually risk-free -- it is, on the whole, the segment that transformed old-school Wall Street banks into the explosive giants we now know them as. It turns Munger's old "consulting businesses" into incredibly large, too-big-to-fail hedge funds.

Trading in fixed-income securities became quite lucrative after Bear Stearns and Lehman blew up, since the reduced competition benefited the survivors. Banks' current rush to cash in on trading profits isn't surprising; it's capitalism at work. More importantly, if Morgan Stanley didn't jump back into the trading game while competitors prospered, shareholders would likely oust management in favor of someone who would.

But as my colleague Matt Koppenheffer warned last month, nothing has changed in banking. That bothers us, and it should bother you, too. No one can argue that the old Wall Street model isn't both dangerous and unsustainable. Yet the remaining survivors seem to be clinging to that model in an attempt to keep up with their neighbors.  

In the summer of 2007, then-Citigroup (NYSE: C) CEO Chuck Prince famously said, "As long as the music is playing, you've got to get up and dance. We're still dancing."

How'd that dance end up again?

 

J&J Would Rather Not Say

On Friday night, after the markets closed, Johnson & Johnson (NYSE: JNJ) issued a press release announcing that the Food and Drug Administration had sent the company a Complete Response Letter for its epilepsy drug candidate, carisbamate.

Should shareholders be worried? It's hard to tell. In typical pharma fashion -- yeah, I'm looking at you, GlaxoSmithKline (NYSE: GSK) -- Johnson & Johnson gave little information about why the FDA didn't approve the drug.

If you read between the lines, this could be bad news for Johnson & Johnson. When the FDA turned down the marketing application for its anticoagulant Xarelto in May, Johnson & Johnson didn't say exactly what additional information the FDA wanted, but did mention that no additional clinical trials were needed. Friday's press release about carisbamate had no such clause, leading me to wonder whether the FDA will require further testing.

It's a stretch, but what else do investors have to go on? Especially when J&J's press release includes useless comments like this one: "The company is currently evaluating the FDA's complete response letter, and will respond to the agency's questions as quickly as possible."

We should hope so.

Carisbamate failed one of its clinical trials, which tested its ability to lower the frequency of seizure when added to other epilepsy drugs. The class includes Abbott Labs' (NYSE: ABT) Depakene, Cephalon's (Nasdaq: CEPH) Gabitril, and Pfizer's (NYSE: PFE) Lyrica. Johnson & Johnson thinks the type of drug may have an effect on the efficacy of carisbamate. But it's possible that the FDA may not buy that explanation, and wants a trial to prove it.

With U.S. sales of its blockbuster epilepsy drug, Topamax, down 86% last quarter after Topamax started facing generic competition, Johnson & Johnson could really use an approval to replace it. Unfortunately, the FDA may try to squeeze a little more data out of Johnson & Johnson, and responding "as quickly as possible" may take some time.

 

 

Big Beer Is the Next Big Growth

As iconic American brands like Budweiser and Miller are acquired by foreign companies, U.S. investors are embracing (Latin) America's Team. Large Latin American brewers have corporate names that roll off the tongue and stock prices that have rolled up impressive long-term gains. What they have in common is U.S. listings, large market caps, and stock performances that have easily surpassed the S&P 500 index over the last five years.

From Brazil, there's Companhia de Bebidas das Americas, better known in the U.S. as AmBev (NYSE: ABV), the maker of Brahma. From Mexico, there's Fomento Economico Mexicano, also known as FEMSA (NYSE: FMX), which offers Dos Equis. From Chile, there's Compania Cervecerias Unidas, or United Breweries (NYSE: CCU), with its signature brand, Cristal.

As a long-term investment, they've outperformed the last of the big U.S.-based brewers, Molson Coors (NYSE: TAP), which is half-Canadian. Over the past 12 months, the Chilean and Brazilian brewers have been the big winners versus the broad market index and Molson Coors.

Strategic advantages
The Latin brew kings have succeeded because they dominate the beer business in their respective countries and/or have strong showings in their own country and other selected markets. Their principal markets offer greater potential growth than the mature markets in the U.S., Canada, and Western Europe, and their success has been aided by diversifying outside the beer business.

For example, FEMSA operates a chain of convenience stores called Oxxo. For the second quarter, income from operations for this division rose 40.9% versus the year-ago period, far outpacing the company's performance in its beer division.

FEMSA is also in the soft-drink business. It owns 53.7% of Coca-Cola FEMSA (NYSE: KOF), the second-largest Coca-Cola bottler in the world. Coca-Cola (NYSE: KO) owns 31.6% of Coca-Cola FEMSA, which accounts for nearly 10% of Coke's worldwide sales. For the second quarter, this nonbeer beverage business posted a 30.4% gain in sales and a 16% gain in operating income versus the year-ago quarter.

As the worldwide beer business continues to consolidate, some companies could be attractive to giants such as SABMiller that have demonstrated a thirst for expansion. Four years ago, SABMiller bought a major Colombia brewer, giving it a strong presence in Colombia, Panama, Peru, and Ecuador.

The boys from Brazil and Belgium
AmBev epitomizes worldwide beer consolidation. It was formed by the merger of two giant Brazilian brewers in 1999. It has acquired Quinsa, a Luxembourg-based holding company that owned most of a Bermuda-based company that controls beer and/or soft-drink businesses in five South American countries.

AmBev also owns big Canadian brewer Labatt. Gaining control of Labatt in 2004 was part of a complex deal that enabled the Belgian brewer InBev to buy a majority stake in AmBev. U.S. beer drinkers know InBev as the acquirer of Anheuser-Busch. The beverage behemoth is now called Anheuser-Busch InBev (OTC BB: AHBIY.PK).

AmBev's second-quarter performance illustrates the benefits of Latin American beer investing. Its profit rose 34%, and its revenue climbed 13% from the year-ago period.

But AmBev comes with a bunch of warnings, too. It reminded investors in a recent SEC filing that Brazil has "periodically experienced extremely high rates of inflation." Don't forget the stronger U.S. dollar that has buffeted dollar-reported earnings of foreign companies. Last year, Brazil's real depreciated 24.2% versus the dollar. And thanks to its market dominance in Brazil, AmBev has tilted with that country's antitrust regulators.

Risks and rewards
United Breweries also illustrates the value of diversity. It is the largest brewer in Chile, the second-largest brewer in Argentina, the third-largest soft-drink company in Chile, and the largest mineral water company in Chile. Its licensing agreements range from Nestle to Guinness, the latter of which is owned by Diageo (NYSE: DEO).

United posted a 3.5% gain in second-quarter revenue because gains in its Chilean beer, nonalcoholic beverage, and wine businesses offset declines in its Argentina beer and its spirits businesses. Operating profit fell 5%.

Risk factors include volatility in Chile's securities markets, erratic foreign exchange rates over time, and industry consolidation that toughens competition.

Other ways to invest
U.S. investors uncertain about taking the plunge with a Latin American beer giant can dip their toes in in other ways.

A small toe might be Constellation Brands, which has a joint venture, Crown Imports, with Mexico's leading brewer, Grupo Modelo, to sell the popular Corona brand in the U.S. Last year, Crown had the third-largest beer shipments in the U.S. behind Anheuser-Busch InBev and the joint venture of SABMiller and Molson Coors, according to Beer Marketer's Insights. The Corona Extra brand had the sixth-biggest market share.

If you invest in Anheuser-Busch InBev, you get exposure not only to AmBev but also to Grupo Modelo. When InBev bought Anheuser-Busch, the deal included the St. Louis brewer's 50.2% stake in Grupo Modelo. Operational control remains in the hands of Grupo Modelo.

Amidst these choices, Foolish investors know that past results can't guarantee future performance. There are potential impediments to these brewing giants continuing their torrid pace in the short run.

However, for the long run, keep an eye on the companies, their diversification strategies, and industry consolidation trends to find investing opportunities. You wouldn't want to look back and cry in your beer.

 

 

Why Banks Are Jumping For Joy

Earlier this year, new credit card laws promised to protect cardholders at the expense of the financial institutions that lend to them. But even as some of these rules took effect last week, banks have already taken several steps to ensure that they'll actually improve their profits going forward.

A little help for borrowers
To be fair, the credit card law did manage to solve many existing problems that credit card borrowers faced. Particularly egregious practices, including double-cycle billing and universal default, will disappear when the rules take effect. Card companies will have to give more notice of interest rate increases and other changes, and borrowers will be able to pay down high-interest balances before tackling outstanding amounts on low promotional-rate offers.

All of those provisions will give cash-strapped cardholders a bit more breathing room, especially those who regularly carry significant balances on their cards. Yet while those customers have traditionally been extremely lucrative for the banks that issue cards, card issuers are taking steps to shore up profits from their credit card divisions as much as possible before the new law fully takes effect.

How banks answered the call
In response to the implementation of the credit card law, banks have tried to do as much as they can before it takes effect. Since companies will have to give notice of rate increases after the law kicks in, many are moving to boost their rates now.

Some are doing so by raising rates directly, while others are taking cards that used to offer fixed rates and are replacing them with variable-rate cards whose rates will rise automatically with increases in the card's rate benchmark. In addition, to raise more income, some card companies are starting to charge annual fees on cards that didn't have them in the past, and paring back on the cash and other rewards they offer as incentives to borrowers.

Here's what various banks and other financial institutions that issue credit cards have done recently:

Issuer	Action
American Express (NYSE: AXP)	Higher rates on card balances and cash advances; higher late payment fees
Bank of America (NYSE: BAC)	Moved fixed-rate borrowers to variable rates
Discover Financial (NYSE: DFS)	Lowered cap on purchases eligible for cashback bonus; switched fixed-rate cards to variable
JP Morgan Chase (NYSE: JPM)	Reduced bonus and/or started charging annual fee on rewards cards
Citigroup (NYSE: C)	Added annual fees to certain cards

Source: WSJ.

Now, given how bad credit card default rates have been lately, some interest rate increases probably make sense. And since higher rates have the largest impact on those who carry balances, plenty of people who pay off their balances every month don't really need to worry about them.

What you can do
On the other hand, as banks target their more responsible customers, they're playing with fire. Most savvy cardholders who seek out the best deals aren't stuck with any card company; their stellar credit ratings ensure that they can get nearly any card they want. You can always vote with your feet.

Moreover, even if perfect-credit cardholders can't pressure banks enough to keep them from alienating their strongest customers, you can expect to get help from an unlikely source: card network companies Visa (NYSE: V) and MasterCard (NYSE: MA). Because they don't have any credit risk, MasterCard and Visa don't care about who uses their cards; they just want to increase volume. Attacking well-established customers with annual fees and reduced rewards will threaten industry growth. It's in Visa and MasterCard's best interest not to let that happen.

It's up to you
In the end, the focus on the credit card law has been misplaced. The true solution to solving credit card problems can't come from the government or any other third party. Instead, customers have to realize just how harmful credit cards can be to their financial health, and either learn to use them more effectively or give them up entirely.

Those looking for the credit card law to bring back the days of easy borrowing will be disappointed. However, if it proves to cardholders once and for all that they need to take control of their own destiny, the end result will be far better for them and the economy as a whole.

 

 

Should Pickens Raise His Oil Price Target?

Energy fund guru T. Boone Pickens at one point predicted that oil prices would hit $75 a barrel this year and add another $10 to reach $85 next year. It looks from recent activity that a revision may be called for in those forecasts.

This year, crude prices have doubled to the mid-$70s, or about where Pickens thought they'd end up. That movement has occurred in the face of a decline in demand throughout much of the world and inventory that has remained relatively stable despite OPEC production cuts. Frankly, crude seems to be moving more on economic optimism than on traditional supply and demand considerations.

Despite the dip in crude prices from last summer's $147 high and the resultant cancellation of numerous energy projects, the world of oil and gas has remained wild and woolly during 2009. Let's take a quick world tour:

Nigeria
In Nigeria, the militant group MEND has attacked oil companies' operations throughout the year. Among those victimized by the group have been ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS-A), and France's Total (NYSE: TOT).

Angola
As a result, Angola has passed Nigeria as the top African oil producer. When noting the companies that have been laboring successfully in the newly canonized OPEC country, you can include BP (NYSE: BP) and the second-largest member of the oilfield services contingent, Halliburton (NYSE: HAL).

Iraq
And then there's Iraq, which several weeks ago held an auction to work its previously developed fields. Because the Iraqi government was stingy in accepting bids, only a BP-led group was successful in receiving a single award for one of the six oilfields up for bid. The government is now planning a similar bidding process for undeveloped fields. The result will tell us a lot about how fast the nation's vast reserves will be developed.

Brazil
Last but not least is Brazil, where deepwater discoveries have come fast and furiously from the likes of Petrobras (NYSE: PBR), Repsol (NYSE: REP), and others. Now the government is considering putting all deepwater operations under direct state control. The result will be another matinee for us to watch carefully.

So Pickens isn't wrong or low in his forecasts. He's just trying to call something with too many moving parts. I could mention oodles of other oil-producing countries in disarray.

Given the world's dependence on oil and oil's potential for volatility, Fools would be wise to include energy representation among their investments. A good place to start is with ExxonMobil, which is successfully involved in a variety of projects all across the globe.

 

 

Is Mall-Based Retail Dead?

 

So far this earnings season, retailers' quarterly results have been far less than inspiring, as consumers remain deeply uninterested in opening their wallets. But amid the carnage, one retailer stands head and shoulders above the competition.

Which of these is not like the others?
After the most recent quarter's dismal results, investors clearly hope that shoppers perk up for the back-to-school season:

Company	CAPS rating (Out of 5)	Quarterly Earnings/Loss Per Share	Quarterly Sales Increase/Decrease	Same-Store Sales
Aeropostale (NYSE: ARO)	**	$0.57	20%	12%
Hot Topic (Nasdaq: HOTT)	*	($0.07)	(5.4%)	(7.7%)
Citi Trends (Nasdaq: CTRN)	*	($0.00)	(3.5%)	(12.4%)
Gap (NYSE: GPS)	*	$0.33	(7.1%)	(8%)

*All data from CAPS and Yahoo! Finance as of Aug. 24.

Gap managed to beat analysts' expectations by a penny, and its improved margins may have jazzed some investors. But come on -- Gap's one of retail's worst offenders, spending years on a supposed turnaround that just won't turn around. Same goes for long-suffering Talbots (NYSE: TLB).

Judging by the one-star ratings that our CAPS community affixes to Gap, Hot Topic, and Citi Trends, mall-based retailers aren't exactly popular among investors. However, the oddly pessimistic two-star rating on Aeropostale might reveal an opportunity for savvy investors.

A solid stock idea
Aeropostale has been on my personal radar for a long time, thoroughly outshining rivals such as Abercrombie & Fitch (NYSE: ANF) and American Eagle Outfitters (NYSE: AEO) in operational success.

In its most recent quarter, Aeropostale increases earnings by 83%, boost sales 20%, and expand comps by 12%. It's trading at 15 times trailing earnings, which isn't too bad, considering that many worse-performing retailers are being exchanged at heftier multiples. Gap's also trading at a price-to-earnings ratio of 15, which seems high, given its business weakness and the related uncertainties; Hot Topic's at nearly 17; and Citi Trends trades at 19 times.

As I said in the Fool's recent sector roundtable, investors certainly can find opportunity in the retail sector, but they must do so carefully. Look for retail leaders with real business strength, a competitive edge, and strong balance sheets.

In those respects, Aeropostale seems like the one stock in retail that actually looks hopeful.

 

7 Great American Stocks on Sale

 

Where the stock market will be tomorrow, next week, or even next year is anyone's guess. But considering the enormous size of the global financial markets and all of their moving parts -- including the new ones coming out of Washington -- such prognostication is about as futile as trying to boil the ocean.

It is apparent, however, that there are some darn fine American companies trading at valuations we haven't seen in a long time. If you've already paid off high-interest credit cards, and you've put away a few months' worth of expenses in a federally insured savings account, now is the time to put money that you won't need for three to five years to work in U.S. stocks.

This isn't to say you should invest all of your cash right now, or that the market couldn't fall further in the short run. A good strategy in today's market is to invest slowly and methodically in undervalued companies, without getting dragged down by commissions. Fortunately, there's a way to do just that -- through a dividend reinvestment plan, or Drip.

In a Drip arrangement, companies allow you to directly buy their shares with as little as $50 to $100 each month, provided you've made a small initial purchase. Thereafter, you can continue to buy as little or as much as you want -- often without having to pay brokerage commissions. Plus, if the company pays a dividend, the plan can automatically reinvest that payout for even more shares, most of the time free of charge.

For patient, long-term investors who care little for daily market movements and want to invest new money bit by bit, it doesn't get much better than a Drip.

What's the catch?
Despite all of the great benefits of Drips, there are a few drawbacks.

While the majority of Drips allow you to make your initial stock purchase through the plan itself (typically called a "direct purchase plan" or DPP), others may require you to first purchase the shares through a broker, and then have the shares' registration transferred into your name. This can get especially confusing if you're doing so with more than one stock at a time. Each Drip has different terms and conditions, so please be sure to read them all before investing.

Second, because you're not paying a broker to administer your investment records, the onus of record-keeping rests on you. Each successive investment and dividend reinvestment in a Drip affects your cost basis, so if you don't like math or aren't very organized, a Drip may not be for you. What's more, if you have more than one Drip, you could face multiple statements and tax forms -- but that's nothing a binder and a three-hole punch can't fix.

Now, the stock ideas I promised
Not all publicly traded companies offer Drips -- including non-dividend payers like Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL) -- but according to DripInvestor.com, more than 1,100 do offer some form of the plan -- so we're not talking about a small opportunity here. In fact, each of the seven great American stocks I mentioned in the title can be directly purchased through a company-sponsored Drip.

These seven stocks not only trade for less than 15 times trailing earnings, but also post a return on capital of more than 10% and yields greater than 2%.

Company	Price-to-Earnings (TTM)	Return on Equity	Dividend Yield
Altria (NYSE: MO)	11.6	86.4%	7.3%
United Technologies (NYSE: UTX)	12.7	20.9%	2.8%
Emerson Electric (NYS: EMR)	13.9	20.7%	3.8%
Boeing (NYSE: BA)	14.0	50.4%	3.9%
Kellogg (NYSE: K)	15.0	53.5%	3.2%
FPL Group	12.1	16.8%	3.3%
H.J. Heinz	13.1	59.4%	4.4%

Source: DripInvestor.com and Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

The volatile market could trend lower in the short term, so I wouldn't recommend buying any of these stocks all at once. But at today's valuations, they're definitely worth considering for an initial investment through a Drip. Once you're enrolled in the plan, you can then add small amounts each month if you decide to, without making a large bet on the current prices.

Foolish bottom line
Despite the recent rally, the market remains well off its 2008 highs, which has left many American companies trading at valuations unseen in years -- and in some cases, more than a decade. Yet the severity of the market's volatility has left investors understandably gun-shy. Fortunately, dividend reinvestment plans can provide you with a great opportunity to slowly and methodically accumulate shares of solid, undervalued companies at little or no cost.

 

Make These Stocks a Part of Your Portfolio

The dollar is doomed. That was the case Brian Richards and I made not too long ago, and though we thought we'd be the targets of patriotic vitriol, it turns out that a lot of you agreed with us. Color us flattered.

We also gave you some advice in that column on how to protect yourself against a falling dollar: buying companies that do big business in other currencies. This is a list that includes multinationals such as Cisco Systems (Nasdaq: CSCO) as well as foreign corporations such as Vodafone (NYSE: VOD).

Today, however, I'd like to take that advice one step further to tell you my favorite way to get exposure to China specifically -- a country and a currency that are both going to strengthen over the long term at the expense of the United States.

But first, the big picture
One of the people we keep in touch with at Motley Fool Global Gains is a guy named Matt Hayden, whose Hayden Communications specializes in doing investor relations for small Chinese companies.

We've discovered over time that a lot of the companies we find interesting end up being Hayden clients and that Matt also does a pretty good job of giving us the heads-up on other companies we might be interested in. (Note to other IR reps: That's because he doesn't bombard us with info on every company he represents -- only carefully selected ones he thinks we might like.)

Anyway, Matt's out on the road now giving a presentation to skeptical American investors about why China remains a good long-term opportunity. Here's the short-short version ...

1. Although Chinese stocks look expensive, they get cheaper if you're willing to look at smaller companies.
Although Chinese stocks now trade on average for more than 30 times earnings, small companies in rural China trade for less than 13 times earnings. Given the long-term growth opportunities in this part of the country, that number still looks pretty good to me.

2. China has upside.
China's GDP is less than one-third that of the United States, despite having four times the population. It also has the lowest debt level (in terms of both government and individual consumers) of any major world economy. That means it has the resources and flexibility to spur further growth -- and one day we should expect the Chinese economy to be as large as or dramatically larger than that of the United States.

3. There are near-term catalysts.
Economic growth in China is not coming to an end. In the near term, we should see infrastructure building, the further emergence of a cash-rich middle class, the encouraged consolidation and privatization of state-owned enterprises in order to make the economy more efficient, and the expansion of social welfare programs to spur the spending of some of those citizen savings.

Put these facts together, and you end up with a long-term growth story selling for cheap -- one that also should have some stability amid 2009's economic turmoil.

And that's why analysts at Paribas, Blackrock, Carlyle, and guys like Jim Rogers have been pounding the table for China in their reports.

Here's what I don't want you to do
Now, a lot of folks get these arguments for investing in China and think to themselves, "Yeah, I should have some China." But then they think, " China's far away, the government is bizarre, and those milk scandals and whatnot have me sketched out about the quality of management." So they either end up doing nothing, or they end up buying an ETF such as the iShares FTSE/Xinhua 25 Index.

If this is you, here's my advice: Do not buy FXI.

There are lots of reasons we have this opinion at Global Gains, and Todd Wenning does a nice job of summarizing our thinking on this matter in an article called "The Wrong Way to Invest in China." If you don't want to click over, the gist is that FXI is dominated by moribund state-owned companies that (1) aren't in China's highest-growth sectors and (2) don't really care about the individual American investor.

In other words, buying FXI would have been akin to buying the Dow 30 in the mid-1990s, when you actually wanted to be making a bet on technology companies such as BMC Software (NYSE: BMC), McAfee (NYSE: MFE), and Daktronics (Nasdaq: DAKT). Sure, you would have had some exposure, and a rising tide does lift all boats, but the Dow would have been a daft and inefficient way to make this investment.

Here's what I do want you to do
Of course, you're right to think that when you invest in China, you should be diversified. After all, there are enormous execution and other risks in the country that we -- as American investors -- can't 100% solve for.

But rather than buy an ETF, I want you to buy a basket of small, non-state-owned Chinese companies. As you might guess from the data above, these companies are selling for much cheaper than their NYSE-listed, state-owned counterparts are, yet they have more upside and are being run more dynamically.

And what I mean by a "basket" is this: You should own five to 10 small, non-SOE Chinese companies that, added together, equal about one or two full positions in your portfolio.

Go out and do it
The best way for American investors to play China for the long term is to create your own diversified basket of small-cap Chinese companies and make these stocks at least a small part of your portfolio today. If you need help filling out that basket, know that our Global Gains team just returned from a research trip to China and released a special report detailing five stocks you should buy today to build a China rural boom basket.