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Great Call on Marvel! What's Next?

2009-09-01T22:52:00.003-07:00

Ahead of Monday's big buyout announcement, Marvel Entertainment's (NYSE: MVL) stock had collected well more than 3,500 outperform ratings from The Motley Fool's CAPS community.

There's little doubt why the community was so excited about the company. It controls more than 5,000 superheroes and villains (including the likes of Spider-Man and the X-Men), it delivers a huge return on shareholder equity, and just a few years back it launched a production studio to make its own movies.

While the collective opinion of the CAPS community wasn't quite high enough to earn Marvel a perfect five-star rating, there have been a lot of CAPS members who have racked up significant points by betting on this comic powerhouse. One is TMFMuse, who scored 167 points by picking Marvel to outperform back in May 2006.

TMFMuse is one of CAPS' All-Stars -- players with a rating of 80 or greater -- and has managed a stock-picking accuracy of 49% while racking up more than 1,000 points. Marvel isn't his only great call. Here's a look at a few of his other prescient picks:

Company	Date Picked	Date Ended	Call	Points	CAPS Rating (out of 5)
Green Mountain Coffee Roasters (Nasdaq: GMCR)	9/7/06	Still Open	Outperform	641	*
Netflix (Nasdaq: NFLX)	8/25/06	Still Open	Outperform	157	**
Chipotle Mexican Grill (NYSE: CMG)	11/17/08	Still Open	Outperform	70	***

Data from CAPS.

So what is this investor looking at these days? Here are a few of the most recent calls on CAPS:

Company	Date Picked	Call	CAPS Rating (out of 5)
Blackboard (Nasdaq: BBBB)	8/20/09	Outperform	***
Costco (Nasdaq: COST)	5/13/09	Outperform	****
Toyota (NYSE: TM)	5/13/09	Outperform	***

Data from CAPS.

While not all of these picks may pan out, they could be a good place to start further research. I decided to take a closer look at Toyota.

Puttering through the recession
There's nothing particularly impressive about the state of Toyota right now. Recession has taken the edge off the world's appetite to buy cars and has whacked Toyota's financial results.

When the company reported its first fiscal quarter in late June, it showed a near-40% drop in revenue and its bottom line swung from a profit to a sizable loss. The reduction in demand has been bad enough that the company decided to cut its capacity by 10%.

But let's not write Toyota off quite so fast. First off, remember that the auto business is cyclical and lean times are par for the course. The key issue -- as the hapless General Motors and Chrysler highlighted -- is whether the company has the financial wherewithal to survive the lean times.

While Toyota's balance sheet is hardly "spick and span," it does have a $33 billion cash hoard, which will come in very handy if we don't quickly pull out of this recession. It's also notable that though the company has been reporting losses since December 2008, it has produced positive cash flow from operations in the past two quarters.

And while it's hard to expect that "Cash for Clunkers" sales will turn the tides for the auto industry, Toyota claimed the crown for the most cars sold under the program, grabbing nearly 20% of total program sales.

While more than 3,000 CAPS members have rated Toyota's stock an outperformer, there have been enough detractors to keep the stock idled at a middling three-star rating. CAPS member torufii, one of the many Toyota bulls, weighed in last month with a tongue-in-cheek take on the auto industry's future:

It is hard to imagine that cars will be obsolete. The general concept of a mobile system is hard to take away, unless we find a totally different paradigm of mobility. It is not impossible but I would say the odds are low.

To take torufii's stance once step further, as long as autos continue to be the primary form of transportation, there will be plenty of customers for Toyota to sell to.

Wal-Mart Is No Amazon.com

2009-09-01T22:52:00.001-07:00

Don't believe the headlines.

A recent upgrade at Wal-Mart's (NYSE: WMT) online shop has the financial press christening it the new Amazon.com (Nasdaq: AMZN).

Just check out some of the headlines.

"Wal-Mart Pushes Deeper Into Amazon E-commerce Territory" -- San Francisco Business Times
"Wal-Mart Stakes a Claim to Amazon's Turf " -- TheStreet.com
"WalMart.com Bulks Up, Takes Aim at Amazon, eBay" -- All Things Digital

Given the challenges mentioned in these headlines, you might expect to see Amazon CEO Jeff Bezos quivering on the ground in a fetal position, his chattering teeth biting down on a first-generation Kindle.

Don't bet on it.

Let's analyze Wal-Mart's breakthrough announcement yesterday. The world's largest offline retailer is adding a million items to its site with the launch of "Walmart Marketplace."

It all sounds impressive, until you realize that Wal-Mart is simply listing the items of a few third-party retailers -- eBags, CSN Stores, and Dreams' (AMEX: DRJ) Pro Team -- to its own listings.

Orders will be placed through Walmart.com's checkout platform, but they then get routed to the individual retailers that are responsible for the fulfillment and support. So any shipping complaints, exchange requests, and general customer-service matters are out of Wal-Mart's hands. This is just a glorified drop shipment service.

Serving as a hub for third-party merchants isn't new, of course. Sellers can also set up shop on Yahoo!'s (Nasdaq: YHOO) hosted storefront solution or sell directly through eBay (Nasdaq: EBAY). Overstock.com (Nasdaq: OSTK) has a "Cars" tab on its site, but the page itself tells you that "Overstock.com does not operate this Web site or broker, sell, or lease motor vehicles." It is simply an information publisher powered by Zag.com.

Retailers can also reach out to customers on Amazon the Walmart Marketplace way, but the real convenience comes when third-party merchants truly hand Amazon the keys and let the leading online retailer warehouse their merchandise and handle all of the nitty-gritty stuff.

See, there are two things that Wal-Mart will have to do if it ever wants to compete with Amazon.com:

It needs to roll up its sleeves and commit to fulfilling third-party orders.
It needs to launch a clone of Amazon's Prime, with which shoppers pay $79 a year for free two-day shipping or deeply discounted overnight deliveries.

I don't think Wal-Mart has it in its DNA to compete. It may be a turnover tornado in the real world, but it's never made the commitment to truly compete in cyberspace. Walmart.com is popular, but mostly as an informational site for local shoppers.

Remember when Wal-Mart wanted to take on Netflix (Nasdaq: NFLX)? It didn't have the dedication to open the regional distribution centers necessary to take on Netflix, so it handed over its 100,000 subscribers.

That's what will happen here, too. Wal-Mart may add merchants, but doing so will prove to be confusing over time. A real-world shopper will wonder why he or she just can't place an eBags order and have it waiting at the local Wal-Mart for pickup an hour later. The tangled nature of the offerings will make it difficult to offer a consistent Prime knockoff.

As usual, Wal-Mart's heart is in the right place, but its feet are too timid to take the next logical step.

"Pushes deeper"? "Stakes a claim"? "Takes aim"?

Wake up, my headline-scribbling peers. If anything, Wal-Mart is further distancing itself from Amazon this week.

PetroChina Pumps Up Growth Plans

2009-09-01T22:51:00.001-07:00

PetroChina (NYSE: PTR) may have been the reporting caboose among international oil companies, but it certainly wasn't bringing up the rear when it came to quarterly earnings.

For the first half of 2009, PetroChina's profits dropped 7.2% year over year, on a top line that plunged 25%. Yet the company actually increased second-quarter net income by more than 25%! At the same time, it disclosed ambitious plans for growth in refining and other areas, enabling the company to more effectively complete with international rivals such as ExxonMobil (NYSE: XOM), BP (NYSE: BP), and Chevron (NYSE: CVX).

For the first half of the year, PetroChina recorded a gain of $7.39 billion. It blamed the decline from last year, which was far less severe than those experienced by most other integrated companies, on collapsed oil prices and depressed domestic demand.

The company remains particularly successful on the natural gas front. During the six-month period, gas output increased by 10.6% to 1.2 trillion cubic feet. This double-digit growth in gas production is rapidly becoming a tradition at PetroChina.

In addition, the refining business generated a profit of CNY 17.19 billion, improving from an operating loss of CNY 59.02 billion last year. However, PetroChina's production of crude oil for the first half of 2009 declined to 417.7 million barrels, or 4.8% below the same period a year ago.

PetroChina has unveiled several plans to foster its growth, including acquiring a production sharing stake from its parent company, China National Petroleum Corp., in a Turkmenistan gas field. In addition, it plans to substantially increase its refining capacity by 2017, and it's seeking downstream acquisition opportunities internationally.

Chinese petroleum companies' results have been spotty during the most recent six-month reporting period. Refiner Sinopec (NYSE: SNP) unleashed record profits, while offshore operator CNOOC's (NYSE: CEO) results declined 55%. Nevertheless, if the government raises petroleum product prices (as expected), PetroChina could be looking at a very positive second half.

Blue Nile's Extreme Makeover

2009-09-01T22:49:00.001-07:00

For its 10th birthday, what do you give the e-commerce site that has everything? If you're Blue Nile (Nasdaq: NILE), you indulge yourself with the first extreme makeover since your 1999 launch.

The upscale jeweler is beefing up its site, presumably in an effort to make it easier to use and more attractive to female shoppers. Among BlueNile.com's new features:

Product images are now more than four times larger than they used to be, giving big-ticket buyers a healthier representation of what they're ordering.
The "build your own ring" feature now sports a friendly user interface, more customizable features, and a visual representation of the ring as it is being built in the virtual shopping cart.
Hovering the mouse over a product will generate a description bubble, keeping browsers on the same page instead of forcing users to click and go elsewhere for the detailed information.

This morning's Wall Street Journal claims that the changes aim to make the site more appealing to women. That's an odd goal. This isn't Lowe's (NYSE: LOW), which set itself apart from larger rival Home Depot (NYSE: HD) by toning down the sawdust and testosterone. Lowe's penchant for clean aisles, cheery associates, and well-lit stores eroded Home Depot's market share back when the going was good, before the housing bubble burst.

Does Blue Nile really have to play the gender card? Most fine-jewelry customers are men shopping for their wives, girlfriends, or, uh, people who are not wives or girlfriends. Does Blue Nile really need to impress the ladies with high-res snapshots?

Blue Nile seems to think so. It feels that a slicker site will enhance its brand. There may not be much of a difference between a diamond ring from Tiffany (NYSE: TIF) and one from a rival real-world jeweler, but there's prestige in that Tiffany box.

Blue Nile also needs to keep an eye on rival online discounters. It doesn't necessarily compete for business with auctioneer Bidz.com (Nasdaq: BIDZ) or most of Amazon.com's (Nasdaq: AMZN) offerings, but if a discounter comes up with an engaging tweak to the selling process, Blue Nile has to pay attention or seem behind the times.

Any makeover is risky, but Blue Nile is smart enough to mix things up during the seasonally sleepy part of the year. It's also shrewd timing to break out the makeover at a time when the jewelry market is in a funk. When the economy does bounce back -- and with it, shoppers' appetite for shiny new jewelry -- Blue Nile will be sitting on a spruced-up site that's already been broken in.

Blue Nile's giving itself a makeover that may not pay off right away. But for a 10-year-old, it's surprisingly patient.

Another Sign of Life in the Oil Sands

2009-09-01T22:48:00.000-07:00

About a week ago, Imperial Oil signaled that all was not stalled in Canada's oil sands. Yesterday, a fresh face joined the fray.

PetroChina (NYSE: PTR) announced that it's taking a 60% interest in two projects controlled by privately held Athabasca Oil Sands. The price tag? A touch more than $1.7 billion.

This is hardly China's first brush with bitumen. Back in 2005, CNOOC (NYSE: CEO) bought a chunk of MEG Energy, and Sinopec (NYSE: SNP) more recently took a 50% stake in Total's (NYSE: TOT) Northern Lights project. PetroChina itself has tried to secure Canadian heavy crude supply, though it dropped its commitment to Enbridge's (NYSE: ENB) Northern Gateway pipeline project in 2007.

It will be interesting to see whether the Canadian government clears this deal. Like the Unocal flap here in the United States, in which CNOOC was rebuffed and Chevron (NYSE: CVX) kept key assets in domestic hands, Canada may play the protectionist card as well. One fund manager told me he suspects the merger between Suncor Energy (NYSE: SU) and Petro-Canada was motivated by fears of the former slipping into foreign hands.

With Mexican production looking perilous, Canada will likely become an increasingly important source of incremental crude supply for the United States. I wouldn't be surprised if Alberta receives some sharply worded phone calls from area code 202 (Washington).

As for the Chinese, this move follows a series of similar pushes into regions ranging from West Africa to the Middle East. The country is taking energy security matters very seriously and is systematically strengthening its import supply by the day.

This Is Why AIG Is Up? Really?

2009-09-01T21:13:00.001-07:00

By now, you've probably seen your fair share of articles on AIG's (NYSE: AIG) speculative run. Although no one is certain how effective AIG's underlying business remains, how much coming asset sales will net the company, or how much damage its remaining asset-backed securities will wreak, the stock continues to plow upward. The chief reasons cited for its recent run-up include:

Confidence that former MetLife (NYSE: MET) CEO Robert Benmosche can use his expertise to turn the company around.
Short-sellers being squeezed out of their positions as AIG continues its upward trend.
A vague comment from Benmosche that the company will be able to pay back the government and that he "hope[s] we will be able to do something for our shareholders as well." At this point I should note that Benmosche has only been the CEO of AIG for mere weeks, and has been on vacation for most of that time. Not that I'm trying to take a cheap shot at him for the vacation (OK, maybe just a little), but it's pretty clear he has little knowledge of the complexities inherent in AIG repaying the government, or the status of its complicated balance sheet. Effectively, all this means his words should carry little to no value.

But here's the really absurd part
However, I don’t want to deconstruct the horrid financials underlying AIG's business -- I'll let resident financials expert Morgan Housel do that. What I am more upset about is another reason being tossed around for AIG's recent upward trend: a possible reconciliation with former CEO Hank Greenberg.

Most reports on Greenberg will breezily introduce him as having built AIG into the indomitable insurance giant it was earlier in the decade. Yet, as much as Greenberg has worked PR channels to define himself as a steady force within the company during his tenure, a man who worked to keep risk exposure down, I don't buy it.

In a Washington Post series detailing the company's downfall, Greenberg said he kept its financial products division, which was the one writing the destructive credit default swaps, under tight control. In fact, he went so far as to say his research shows the company had only written $7 billion in swaps on subprime CDOs (collateralized debt obligations) during his tenure.

Balderdash
However, reality begs to differ with Hank Greenberg. According to statements from risk-monger Joe Cassano's lawyer, AIG exited the mortgage underwriting business in late 2005, mere months after Greenberg's departure. While Cassano's lawyer might not be the ideal source for reliable information on who's to blame for AIG's collapse, company spokesman Nicholas Ashooh endorsed his statement by saying, "About half [of the swaps on subprime CDOs] had been issued before Greenberg's ouster."

While Greenberg deserves some credit for building AIG over his long tenure, the facts speak for themselves, and his final legacy is one of failure: He enabled the division that sunk the company. As a central figure in its collapse, why is there any reason to cheer his coming back?

Final thoughts
As much as Fools debate the merits of run-ups in Bank of America (NYSE: BAC) and other financial stocks like Wells Fargo (NYSE: WFC) and Goldman Sachs (NYSE: GS), AIG is in a speculative league of its own. For example, while Bank of America took out $45 billion in government funds, it hasn't had to shed core businesses, or take in as much dilutive government funding as AIG.

Ultimately, AIG has a lot in common with majority government-owned buddy Citigroup (NYSE: C). They're both practically impossible to value and face huge dilutive aspects. Yet, while both stocks have been trading manically in recent weeks, the events causing AIG's price bumps are too bizarre and insignificant to take seriously. Would Citigroup suddenly shoot up in price if its equally blameworthy former CEO, Chuck Prince, came back?

Could the stock still be a screaming buy? Well, I suppose stranger things have happened, but there have been almost zero material changes in the company to justify its recent surge. If investors are so hungry for any shred of good news from AIG that they'll wildly bid up shares on the return of a fallen CEO, then I fear for those jumping into this game of musical chairs. AIG's riding a wave of general optimism and risk-hungry investors looking to earn back losses in a hurry, but I fear for the investor left holding the bag when it becomes clear there’s nothing but hot air in this stock's sails.

Dell Wants to Be Cisco

2009-09-01T21:12:00.003-07:00

The data center is confusing these days.

First, software vendor Oracle (Nasdaq: ORCL) decided to buy servers-and-software seller Sun Microsystems (Nasdaq: JAVA). Then, networking giant Cisco (Nasdaq: CSCO) announced a server platform of its own. And now server supplier Dell (Nasdaq: DELL) is reaching right back -- the company will sell Dell-branded networking gear for the enterprise data center.

The rebadged hardware comes from Brocade Communications Systems (Nasdaq: BRCD), and is designed to boost the performance of large clusters of virtual machines.

I've been out of corporate data centers since quitting my computer-support day job to become a full-time Fool three years ago. For a while, I could have gone back with hardly a hiccup -- but enterprise computing is changing so fast right now that the next computing hub I see might feel as alien as a breakfast on Saturn.

Virtual computing has taken off like a rocket, led by pioneer VMware (NYSE: VMW) and me-too wannabe Microsoft (Nasdaq: MSFT). In turn, that lift-off fuels the cloud computing revolution. A traditional server rack could house maybe a dozen production-class servers on a good day. With today's virtual machines and blade servers, the same rack could be home to hundreds of servers.

Both Cisco and Dell are attacking the new complexities of this ultra-dense environment, each starting from their own areas of expertise and co-opting the other's market. And it makes no sense to me. I'd rather see a tight-knit partnership between each industry's leaders, such as Dell and Cisco co-selling each other's solutions or even putting both names on a co-branded line of end-to-end equipment.

Even better, Cisco could take Sun's server division off Oracle's hands. That would give Cisco the larger data-center footprint it clearly craves while preserving whatever value may be left in Sun's once-dominant brand name. I'd be surprised to see this happen, of course -- but that deal would actually make sense. The only real winner in today's cross-sector deal would be Brocade, because it's always nice for a small hardware provider to win another distribution channel.

Will Baker Hughes Jump-Start Oil Patch Acquisitions?

2009-09-01T21:12:00.001-07:00

On Monday morning, with Mr. Market feeling glum, even the announcement that oilfield services company Baker Hughes (NYSE: BHI) intended to buy its former spinoff BJ Services (NYSE: BJS) for $5.5 billion couldn't turn the mood around.

BJ's shareholders will receive about a 16% premium over what the company's shares closed at last Friday. Specifically, they will get 0.40035 shares of Houston-based Baker Hughes, along with $2.69 in cash for each share of BJ held. Once the acquisition is completed, BJ Services stockholders will hold about 27.5% of Baker Hughes shares. Baker Hughes has forecast $75 million in annual cost savings for 2010 and twice that amount in 2011. The combination is expected to add to Baker Hughes' earnings that same year.

I wouldn't be at all surprised if this first major services combination of 2009 weren't simply the initial shot out of the gun for other purchases in the oilfield services group.

But the key for now is the "fit" between Baker and BJ and the "why" of the merger. From my perspective, the key is the increased integration that BJ's pressure pumping operation affords to Baker Hughes, an area that it currently can't really offer, but the two largest oilfield service companies, Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL), can.

Indeed, last year pressure pumping represented a minuscule 1% of Baker Hughes' business. But after the companies merge, that relative weighting should increase to about 20%. Besides allowing Baker Hughes to compete for projects that require pressure pumping, one additional result should be an increase with which Baker is able to garner contracts from the operators that want to see one company handle a project from beginning to end.

In the meantime, I'm inclined to suggest that Fools watch Baker Hughes very carefully. I won't admit to the number of years I've followed the company, but it has typically been a top-notch organization. I only see that categorization improving with its new acquisition.

Boeing Crashes, CEO Burns

2009-09-01T21:11:00.001-07:00

Boeing (NYSE: BA) just ousted the man who bungled the 787. I suppose I should be happy. I'm not.

As a Boeing shareholder myself, I've railed for months over the company's inexplicable (and indefensible) inability to come to a fair agreement with its workers. I've warned of the company's looming cash crisis. Criticized management's failure to execute. Blasted the firm for its failure to keep its promises. And now the man responsible for this mess -- Boeing Commercial Airplanes (BCA) CEO Scott Carson -- is getting the boot.

Good news, right? Well, maybe it is, in a sense. Over his 40-plus years at Boeing, Carson has had his share of successes and failures. He proved an incredible salesman, selling nearly 1000 Dreamliners to customers around the globe while heading up the sales force from 2004 to 2006.

But once charged with actually building the thing, Carson dropped the ball. Delta (NYSE: DAL), Continental (NYSE: CAL), AMR (NYSE: AMR) -- all these customers and more stepped up to the plate and offered to deliver Boeing a home run. Their reward has been two years of delays and excuses. Similarly, suppliers Honeywell (NYSE: HON), United Tech (NYSE: UTX), Spirit AeroSystems (NYSE: SPR) and others have been left twiddling their thumbs, waiting on Boeing, which failed to get its house in order.

And now Carson's gone. Allegedly, he left of his own accord (Boeing praised Carson for his "long record of accomplishment" and described the departure as a voluntary "retirement"). But as Fool member memoandstich quipped last night: "no one wants to retire before the most ambitious commercial project is completed ... unless you fear you'll never be able to retire."

I agree. Carson got the boot.

And we got ...
... Boeing Integrated Defense Solutions boss Jim Albaugh, who will move over to run BCA in Carson's stead.

Now, you can argue that this is an improvement. Albaugh's defense unit has done a fine job navigating the new Pentagon world order in recent months. Faced with defense program cuts here at home, he's fought tooth and nail to shoehorn Boeing's F/A-18 Super Hornet into the Navy's budget, and helped open the Indian market to Boeing defense products as well.

Choose your babysitter wisely
But here at the Fool, our memories are longer than that. Albaugh headed Boeing IDS, and was allegedly involved (a charge he disputes) in Boeing's 2003 tanker-leasing scandal, which ended up costing the company millions in fines paid to the government -- and no leasing contract.

In Round 2 of the tanker saga, he came within a whisker of handing the KC-X contract to its archrival last year. Albaugh's fumble landed the company in the middle of an expensive PR war with Northrop Grumman, costing the company additional millions, achieving nothing more than a stalemate and ... so far, again resulting in no contract win.

Now, maybe Carson didn't do the best job raising the 787 from infancy to adulthood, but he's spent five years living, eating, and breathing this project. There's no one who knows it better. Yet now, Boeing's decided to take away Carson's baby and give it to Albaugh.

I have to admit, Fools, that while I agree a change was in order, I'm not sure this is the right one. Putting Albaugh in charge of the 787 is like hiring Octomom to watch your kids.

A better choice
But assuming Carson has to go -- that he's lost control of the program (and he has), and that investors have lost faith in him (which we have), then who is the right man for the job?

The short answer is: "I don't know." I don't have access to Boeing's HR records. I don't know who's in the lineup. But I'll tell you this, if it were up to me, I'd suggest Boeing hire somebody like Tom Buffenbarger to run the 787 program. The president of Boeing's International Association of Machinists and Aerospace Workers (IAM) has made a lot of noise about how, if Boeing would only let the union do its job, everything would go swimmingly at the 787 program.

So give someone like Buffenbarger a chance to put up or shut up. Pick a genius from the management ranks to serve as his lieutenant, identify the problems, and handle the actual work of fixing them. But give the union a figurehead to rally around and get the 787 done right.

Simply put, if Boeing wants to get the 787 program back on track, hiring Octomom shouldn't even be on the table. It's time to change the game. Is this scenario horribly unlikely? Sure, but it's time to swing for the fences.

Is now the time to take a gamble and buy Boeing? On Fool.com, we report, but at Motley Fool CAPS you decide. Click on over and tell us what you think.

How Cheap Is Apple, Really?

2009-08-30T17:59:00.001-07:00

Apple (Nasdaq: AAPL) is trading for 30 times trailing earnings. Some would argue that this makes the gadget guru an entirely unsuitable investment vehicle. Others like to point out the flaws of the P/E valuation metric, and blithely buy the stock anyway. Fellow Fool Tim Beyers argues that the company is cheaper than you think. Tim is a genius, but this time, I think he's wrong.

Let's have a closer look at Apple, and compare and contrast it to the competition:

Company	EV/FCF	LTM P/E	Forward P/E	PEG
Apple	12.4	29.6	25.1	1.7
International Business Machines (NYSE: IBM)	10.8	12.7	11.2	1.2
Microsoft (Nasdaq: MSFT)	12.3	15.2	12.9	1.5
Google (Nasdaq: GOOG)	18.6	32.5	19.1	1.2
Dell (Nasdaq: DELL)	10.1	14.6	12.1	1.6
Hewlett-Packard (NYSE: HPQ)	11.7	15.1	10.6	1.2
Garmin (Nasdaq: GRMN)	4.7	11.2	13.4	1.0

Data from Capital IQ (a division of Standard & Poor's) and Yahoo! Finance. Data current as of Aug. 26.

Price to earnings
All sorts of P/E ratios will make Apple look bad here. On a trailing basis, only Google looks more expensive -- but then again, who wants to base investment decisions on an accounting metric that is prone to manipulation and paints an incomplete picture? When you use forward estimates instead, in order to iron out some of the inconsistencies, Apple becomes the priciest stock of the whole bunch.

Of course, analysts have a tendency to underestimate Apple's growth -- the company has never missed an analyst consensus target since Thomson started tracking estimates for Apple. For that reason, I tend to knock a couple of points off whenever I'm thinking about Apple's forward P/E figures. But it'd take at least six bonus points to dive below Google's supposedly pricey valuation, and much more to reach the industry average. Yep, Apple looks expensive on a price-to-earnings basis, any way you wrangle the numbers. Let's move on.

The Fool Ratio
The same dynamics play into the price-to-earnings-to-growth ratio as well. Apple comes out looking expensive thanks to stingy forecasts and tricky earnings accounting. Google and IBM start to smell like roses, and Garmin might even be on sale at a discount.

As beloved as the PEG ratio has been in Fooldom -- heck we sometimes call it the Fool Ratio -- this metric has shortcomings of its own. Like the P/E, it's useful as a starting point before diving deeper, but it's not a silver bullet to cure valuation lunacy. Also, Apple's accounting for iPhone sales means that its revenue isn't fully realized in the quarter the phones are sold. Instead, the company recognizes revenue and cost of goods sold across each phone's estimated 24-month lifespan. So earnings simply don't tell the whole story here. Fair enough. Let's try a measure that backs out these accounting effects.

Break out the cash flows!
OK, now we're talking. If the proper value of a given company equals discounted future cash flows, it follows that any quick-and-dirty metric worth its salt should depend on the company's powers of cash generation. Also, we account for Apple's large cash hoard by using its enterprise value instead of its market cap.

From this angle, Apple is a superstar. Apple pulled in $10.3 billion of free cash flow over the last 12 months. That's about five times Dell's respectable cash bonanza, and nearly twice the cash mighty Google created. Heck, Apple even beats tech giant HP.

But Apple is also considerably more expensive than most of these high-tech peers. Looking over the cash flow metrics in the table above, Apple comes out looking fairly valued at best, and a bargain only if you put it next to Google. That's sort of like bringing an ugly friend along on a date, just to make yourself look better. In fact, if you're looking for an affordable gadget designer, Garmin might be your best bet. The company's lowly cash flow multiple likely results from poor growth projections as smartphones encroach upon its GPS-navigation turf.

It all boils down to growth
We've examined Apple from four different angles, and found its valuation relative to its peers lacking every time. Clearly, the market expects Apple's growth engine to remain far more revved-up than competitors'. So if you own this stock, you'd better have a firm conviction that the company will grow fast enough to leave analyst expectations eating dust for years to come.

Will the iPhone still be a hit in 2013? Can the Mac steal any more market share from Microsoft's PC hegemony? Is the iTunes-iPod symbiosis immune to new upstarts and counterattacks from a resurgent old-line music industry? For today's share price to make any sense, the answer to all of these questions must be a resounding "Heck yes!" I don't think it'd be good enough if one or two of those dream scenarios play out, and not even Babe Ruth expected a home run on every swing.

Could Apple succeed on every front? Sure. Will it? Highly doubtful. For one thing, Apple's absolutely crushing the high-end market for computers. NPD reports that it has more than a 90% market share on computers costing more than $1,000. To Apple's credit, this is an amazing statistic, but it also limits the growth of its computing business.

In addition, we're starting to see the iPod sales slowing down as iPhones and other convergence devices with built-in MP3 players take their place. The rise of the iPhone has been impressive by all measures, but its ascent will most likely be paired with continued declines in iPod sales. Finally, Apple's forthcoming rumored tablet will probably be the hardest sell of its recent "game-changing" products. I wish Apple all the best in its efforts, but persuading consumers to buy what will probably amount to an eReader/oversized iPhone will be a much tougher job than storming the MP3 player market ever was.

If I owned any Apple stock, I'd sell today and lock in some profits -- because these prices can't last.

5 Reasons to Love Marvell

2009-08-30T17:58:00.001-07:00

Some company names seem based on a true story. Case in point: Marvell Technology Group (Nasdaq: MRVL).

Marvell's second quarter was indeed a marvel. Sales jumped 23% from last quarter but fell 24% year over year for a total of $641 million. GAAP earnings landed at $0.09 per share -- down from $0.11 per share a year ago but way better than last quarter's $0.18 loss per share.

So far, so blah, right? But Marvell's cash flow and gross margin performances shine a whole new light on the situation: The GAAP gross margin widened from 51.8% last year to 55% this time. If Marvell can keep this pricing power while re-growing sales, the bottom line will multiply like an unsupervised rabbit colony. And I see no reason why Marvell would give up its grossly profitable new habit, now that the company has gotten a taste of it.

And Marvell's free cash flow increased 6% over last year's pre-crash period to $182.3 million. For those of you playing along at home, that's a 27.4% FCF margin, and represents an astonishing 26% sequential increase. The new level makes Marvell a more efficient cash machine than proven cash kings like Cisco Systems (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT), and within shouting distance of Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG). This achievement is particularly impressive when you consider that some of these cash-generating machines are software companies or Internet services, with low overhead and manufacturing costs.

And Marvell isn't done yet. The company has a finger in lots of tasty pies:

Marvell is a leader in solid-state drive controllers and will benefit as that nascent market matures.
The SheevaPlug AC-adapter-sized computer platform promises to open whole new markets in media servers, storage networks, and other new, cheap, exciting technologies for the modern home. Marvell management can't disclose any partners yet, but OEM developer interest is "expanding at a viral rate." That's a term normally reserved for YouTube videos of dancing cats.
Wireless networking continues to explode, now in sectors like wireless printers and enterprise networks, and Marvell can sling an 802.11n networking chip just as well as Atheros (Nasdaq: ATHR) or Broadcom (Nasdaq: BRCM).

If only one of these markets lives up to its promise, Marvell should do fine. And all three look ready to emerge.

Three markets and two stellar metrics make five good reasons to love Marvell. This is a respectable four-star CAPS stock, but I think it deserves a fifth star to match those opportunities. Send an "outperform" rating Marvell's way today, and justice will be done. Or give Marvell a thumbs-down rating if you think I'm wrong.

Dell Looks Like a Winner Again

2009-08-30T17:57:00.001-07:00

Rumors of a dying Dell (Nasdaq: DELL) were greatly exaggerated.

The computer wrangler just shocked the Street with stronger second-quarter results than expected -- and an early release of the information. Earnings fell 23% to $0.24 and sales swooned 22%, or $12.8 billion, as compared to the year-ago quarter. But revenue, unit shipments, and earnings all improved from the previous quarter, and Dell saw $1.1 billion of operating cash flow.

Third-party reports that Dell's consumer division wasn't moving units turned out to be mistaken, that segment saw 17% higher unit volumes than last year and only 9% lower dollar sales, which beats market leader Hewlett-Packard's (NYSE: HPQ) performance. In fact, consumer systems turned out to be Dell's strongest division this time.

Corporate accounts, large and small, still seem to be holding back on their IT infrastructure buys. If they're just waiting for Microsoft (Nasdaq: MSFT) to release Windows 7, that pent-up demand should turn into torrential sales once each company puts the new platform through its testing procedures. But fiscal issues also play into that equation, of course. I don't expect Citigroup to build out its data centers anytime soon, for example, and small businesses that use a lot of Dell's systems have been pushed to the brink of extinction by this recession.

So the road to recovery for corporate accounts could very well be much longer than for the consumer business -- with or without Microsoft's help. Government sales are holding up much better than the business-to-business sales. That's how Dell sees the markets playing out this fall, and I concur.

Dell's stock jumped about 14% between 3:30 yesterday and today’s opening, including a 7% pop in the minutes between Dell sharing the information prematurely and yesterday's market close. However, the stock has since settled at around $16 a share, still a tidy gain. All told, Dell has just about doubled since bottoming out in March, keeping pace even with bitter rival and habitual growth champion Apple (Nasdaq: AAPL).

Dell will certainly survive, and is still an amazing cash machine -- but are these results enough to make you want to buy the stock today? Some winners just keep winning, you know. Share your thoughts in the comments box below.

Eye on Insiders: Yahoo!

2009-08-30T17:56:00.001-07:00

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 Yahoo! (Nasdaq: YHOO) over the past year.

Insider Rating	Bearish Many sales at prices below where the stock trades for presently. Buys at levels well below where the stock trades for today.
Business Description	An early pioneer in Web search, Yahoo! may have already seen its best days, at least in many investors' opinions.
Recent Price	$14.93
CAPS Stars (out of 5)	**
Percentage of Shares Owned by Insiders	9.34%
Net Buying (Selling)*	$66.9 million
Last Buyer (% Increase)	John Chapple, director 6,000 shares at $12.07 apiece on Feb. 18 (Purchase bolstered direct holdings by 42%)
Last Seller (% Decrease)	Michael John Callahan, EVP and general counsel 20,000 shares at $14.63 apiece on Aug. 7 (Sale represented 7% of remaining direct holdings)
Competitors	Google (Nasdaq: GOOG) Time Warner (NYSE: TWX)
CAPS Members Bullish on YHOO Also Bullish on	Apple (Nasdaq: AAPL)
CAPS Members Bearish on YHOO Also Bearish on	Microsoft (Nasdaq: MSFT)
Recent Foolish Coverage of YHOO	The Next Leap Forward in Search The Slap Heard 'Round the World Yahoo!'s Arabian Bet

Sources: Form 4 Oracle, Capital IQ, and Motley Fool CAPS. (Data current as of Aug. 28.)
*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: Bearish
CAPS investors have been skeptical of Yahoo! for a while now, granting the search laggard just two out of five stars over the past year. I've been a skeptic, too. When my editors asked which stock I'd name the most frightening for last year's Halloween special, I chose Yahoo!.

I'm not alone. Investors seem to think of Yahoo! as they do eBay (Nasdaq: EBAY) or Overstock.com (Nasdaq: OSTK): once-sexy dot com businesses that have long since lost their sizzle. This is especially true of Yahoo!, which may as well have gutted itself when it asked Microsoft and Bing to take over the heavy lifting in its search business.

Social search is still a possibility, sure, but few Fools seem confident. "If it wasn't for Yahoo! Finance I would have forgotten all about them," wrote CAPS investor sempire in a bearish pitch from earlier this month. "Sure, Yahoo! was great in the 90's, and Yahoo! mail was a great solution to Hotmail, but now is Yahoo! even relevant?"

No Yahoo! insider would ever say that about their business. Not on the record, at least. Nevertheless, the action looks very bearish to me. Carl Icahn was responsible for the vast majority of the buying, and at prices lower than we're seeing today. The sellers, meanwhile, have also sold at lower prices than we're seeing today, a combination that suggests lower prices are still ahead.

But that's also just my take. Do you agree? Disagree? Log into CAPS today and tell us how you would rate Yahoo!.

The Bell Tolls for the Housing Crisis

2009-08-30T17:55:00.003-07:00

I can just hear housing optimists singing this rendition of Handel's "Messiah" after Toll Brothers (NYSE: TOL) CEO Bob Toll's remarks in recent weeks. Luxury homebuyers are purportedly easing back into the market. With more new deposits, fewer cancellations, and cutbacks on incentives and price reductions, is it possible we've already hit bottom? Mr. Toll certainly thinks we have.

Toll Brothers' fiscal third-quarter results weren't exactly pretty. Non-cash writedowns and big deferred tax asset valuation allowances did some damage, but the company should get some of it back in future years.

Toll Brothers lost $472.3 million, or $2.93 per share, in its third quarter, versus analyst estimates of a loss of $1.79. That compares with a loss of $29.3 million, or $0.18 per share, in the same period last year. Revenues were down 42% to $461.1 million, and home deliveries fell 36% to 792 units.

Finally
Still, the report supported Mr. Toll's preliminary reports two weeks ago of higher year-over-year order volume. The release gives a glimmer of hope for a market niche that has seen its share of suffering. If true, the allegations that home buying is on its way back could mean better results for builders like the ones mentioned below.

Company	Avg. Home Price (MRQ)	Profit Margin (TTM)
Toll Brothers	$535,000	(12.2%)
D.R. Horton (NYSE: DHI)	$211,000	(25.2%)
KB Home (NYSE: KBH)	$216,000	(25.7%)
Pulte Homes (NYSE: PHM)	$261,000	(29.6%)
Lennar (NYSE: LEN)	$251,000	(30.5%)

Sources: Individual company press releases, Yahoo! Finance. MRQ = most recent quarter. TTM = trailing 12 months.

But before you break out the choir robes and caviar, remember that the broader economy still has a few hurdles to jump.

Stormy waters
Toll Brothers' status as a luxury builder differentiates it from many of its competitors. Unfortunately, that luxury focus may work against Toll Brothers unless the recovery is particularly strong.

According to statistics from the New York Fed, credit conditions, especially with regard to mortgage delinquencies, foreclosures, and their impacts on communities, are still far from optimal throughout much of the nation. Even though Toll Brothers has available financing and a knack for exploiting distressed asset buying opportunities, its shares are already up 70% from their lows. Toll Brothers also presents a potentially expensive risk to investors if these signs of recovery turn out to be a false alarm.

As I see it, the real takeaway from Toll Brothers' quarter is that some key industry participants are seeing tangible signs of a turnaround. If those trends continue, it could mean that we've finally seen the worst of the recession. Yet even if housing does rebound, the boom that drove so much demand for luxury homes may not return anytime soon.

Is it really over? What's your strategy for taking advantage of the end of the housing crisis? Share your opinions in the comments section below.

Follow the Yellow Brick Gold to China

2009-08-30T17:55:00.001-07:00

A new extension of the yellow brick road leads beyond the Emerald City, and tunnels clear through to China.

Although China staked its claim as the world's leading producer of gold in 2007, opportunities for global investors to participate in this industry remain few. With the consolidation announced this week, the field grows smaller still.

Vancouver-based Eldorado Gold (AMEX: EGO) launched a friendly all-stock acquisition of Australia's Sino Gold, creating a formidable intermediate gold producer with a combined market capitalization of about $5.9 billion and gold reserves of 12.7 million ounces.

The deal is a clear-cut feather in both miners' caps. Sino shareholders will receive a 21% premium to the pre-announcement valuation in the conversion of their shares to Eldorado, and will benefit from geographical diversification of assets beyond China through Eldorado's projects in Turkey, Greece, and Brazil. These include Eldorado's flagship Kisladag mine in Turkey, weighing in at 5.5 million ounces of gold reserves.

Eldorado also brings attractive iron ore assets to the table, with 9.3 million tonnes of iron ore at the Villa Nova project in Brazil. Located in the same province as Anglo American's Amapa joint venture with Cliffs Natural Resources (NYSE: CLF), Eldorado's iron ore mine joins a small subset of Brazilian production not controlled by Vale (NYSE: VALE). Commissioned just during the second quarter, Villa Nova has been placed on care and maintenance until iron ore demand recovers in earnest.

The move is deeply transformational for Eldorado as well, building the company's gold portfolio in China from just one operating mine with 817,000 ounces of gold, to three working mines chasing approximately 5 million ounces of reserves.

Sino Gold's flagship is the prolific Jinfeng mine, and its White Mountain mine continues to ramp up toward full production. Construction at Sino Gold's Eastern Dragon project is slated to begin in September, and the company also brings a strategic exploration joint venture with major miner Gold Fields (NYSE: GFI) to the table. Prior to this deal, Eldorado acquired Gold Fields' 19.9% ownership stake in Sino Gold in return for Eldorado shares, keeping Gold Fields vested in the new corporation.

For exposure to a producing gold miner within the world's most prolific gold-producing nation, Eldorado Gold will now have no peer. In terms of gold reserves, Eldorado Gold continues to chase fellow low-cost, intermediate-scale producers like Agnico-Eagle Mines (NYSE: AEM) and Yamana Gold (NYSE: AUY), but like China's economy, Eldorado's star is certainly rising.

You Should Watch China's Offshore Star

2009-08-30T17:54:00.001-07:00

And you thought earnings season had run its course. But yesterday, CNOOC (NYSE: CEO), China's largest offshore oil and gas company, showed up fashionably late to report a 55% decline in its income for the first half of 2009.

For the six months ended June 30, the company generated net profits of 1.82 billion U.S. dollars on a revenue decline of 42% for the period. The biggest culprit being crude prices averaging $52 a barrel, or 52% below last year's $109.

So it wasn't only the western likes of ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP), and Shell (NYSE: RDS-A) that turned in earnings declines, versus a year ago, when commodities prices were running up. Indeed, CNOOC's earnings dip occurred in the face of a 15% increase in oil and gas production during its reporting period. That improvement put the company's output at 105.8 million barrels of oil equivalent. And if you look solely at crude oil production, the year-over-year improvement was about 20%, or far higher than any of the bigger western producers.

During a briefing following the release of his company's results, CNOOC's CEO Fu Chengyu tossed something of a curve ball when he stated that CNOOC does not plan to participate in a bid with China National Petroleum Corp. (CNPC) for YPF, Repsol's (NYSE: REP) Argentine unit. Such a combination had been widely discussed a couple of weeks ago. CNPC is the parent of PetroChina (NYSE: PTR).

Beyond that, he emphasized that his company really isn't eager to participate in any big acquisitions at this time. As he noted, "The economic recovery in the U.S. and Europe still needs to take some time. Under this macro environment, we will not do large-scale acquisitions." However, he wouldn't rule out the possibility of forming a joint venture with "any company in the world."

But don't get the idea that CNOOC is sitting along the China coast, forgoing international opportunities. What the company calls a "huge deep-water project" in which it is participating came online in Nigeria during the period. And an Indonesia liquefied natural gas project became productive in July.

From what I can see, Fools would be wise to keep their eyes on CNOOC. Personally, I'm betting that before too many more reporting periods have passed, the company will have spread its (water) wings into a variety of global locations.

Nokia and Linux Make a Good-Looking Couple

2009-08-26T18:17:00.001-07:00

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

High technology.
It's everywhere, and you don't know it.
Finland.
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

2009-08-26T18:16:00.001-07:00

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

2009-08-26T18:15:00.001-07:00

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

2009-08-26T18:14:00.001-07:00

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

2009-08-26T18:13:00.001-07:00

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

2009-08-26T18:06:00.001-07:00

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?

2009-08-25T17:57:00.003-07:00

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?

2009-08-25T17:57:00.001-07:00

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

2009-08-25T17:56:00.001-07:00

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

2009-08-25T17:55:00.002-07:00

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

2009-08-25T17:55:00.001-07:00

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

2009-08-25T17:54:00.001-07:00

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

2009-08-25T17:53:00.003-07:00

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

2009-08-25T17:53:00.001-07:00

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

2009-08-24T17:42:00.001-07:00

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

2009-08-24T17:41:00.001-07:00

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

2009-08-24T17:40:00.001-07:00

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

2009-08-24T17:39:00.003-07:00

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

2009-08-24T17:39:00.001-07:00

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

2009-08-24T17:38:00.001-07:00

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

2009-08-24T17:37:00.001-07:00

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?

2009-08-24T17:36:00.003-07:00

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?

2009-08-24T17:36:00.001-07:00

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

2009-08-23T17:11:00.000-07:00

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

2009-08-23T17:10:00.001-07:00

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.

The Best Stocks for the Next 4 Years

2009-08-23T17:09:00.000-07:00

It sure is starting looks like this bear market is over, isn't it?

We can't be sure just yet, though investors in Crocs (Nasdaq: CROX), American International Group (NYSE: AIG), Fannie Mae (NYSE: FNM) and Conseco (NYSE: CNO) were likely convinced -- each of those stocks is up more than 50% ... over the past month alone!

Some analysts, like PIMCO's Mohamed El-Erian, believe that the rally is over, and that "valuations are ahead of fundamentals."

It's safe to say that negativity still abounds
The late Sir John Templeton called scenarios like we've been in "points of maximum pessimism." He also taught that times of maximum pessimism are the best time to buy -- and he practiced what he preached.

When the Second World War began, and stocks started to fall, he borrowed $10,000 and invested it in 104 companies whose shares were trading for less than $1 -- including 34 that were in bankruptcy. Four years later, he sold his positions for $40,000, booking a 300% gain on stocks the market thought were doomed.

With his example in mind, I believe the pessimism still lurking around continues to signal a buying opportunity.

Stocks to profit from pessimism
We should be buying stocks that, like Templeton's initial bet on pessimism, could become double- or triple-baggers in the four or so years coming out of this bear market.

We know the top stocks since the last recession began were mostly small caps -- albeit with a few mid-cap rock stars like Apple mixed in. Among other things, small companies can more quickly and efficiently cut costs and streamline operations than their larger peers, which maintain employees and resources scattered throughout the country and the world.

But which companies have outperformed since the end of that bear market? I ran a screen to see what kinds of companies were double-, triple-, or even-better-baggers as the recession receded. And sure enough, the best-performing companies over the following four years were all small caps:

Company	4-Year Return from Oct. 9, 2002	Oct. 9, 2002 Market Capitalization (in millions)
AmericaTower	5,137%	$139
YFP	2,857%	$434
Research In Motion	2,422%	$705
Bancolombia	2,067%	$203
WESCO International	2,054%	$142
Corning	1,890%	$1,173
Crown Castle International	1,830%	$373
AES	1,767%	$597
Coldwater Creek	1,670%	$131
McDermott International	1,616%	$232

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

This list merely shows the top 10, but it's also true that small caps as a whole outperformed their larger brethren coming out of the last bear market -- and this phenomenon wasn't unique to that situation. According to T. Rowe Price research, small-cap stocks led the market out of the past 10 recessions, posting an average 28% gain, versus the 19% gain for large caps in the year following the market's recovery.

Given this data, I also ran a screen to see which small caps were dirt cheap right now -- and possibly poised to outperform as the market recovers. I looked for companies down more than 50% over the past year, and trading with price-to-earnings ratios below both that of the S&P 500 and their five-year average -- qualities I believe could make for Templeton-sized gains over the next four years.

Here are three companies from that screen. Not all are formal recommendations, but they're a good place to begin some further research.

Company	Market Capitalization	P/E Ratio
General Maritime (NYSE: GMR)	$406 million	9.5
Huron Consulting Group (Nasdaq: HURN)	$419 million	9.4
Dynamic Materials (Nasdaq: BOOM)	$218 million	11.2

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

After 5 Years, Google Is Cheap

2009-08-19T17:45:00.001-07:00

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

2009-08-19T17:44:00.001-07:00

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?

2009-08-19T17:43:00.003-07:00

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

2009-08-19T17:43:00.001-07:00

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

2009-08-19T17:42:00.001-07:00

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

2009-08-19T17:41:00.003-07:00

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

2009-08-19T17:41:00.001-07:00

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

2009-08-19T17:40:00.002-07:00

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%

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

2009-08-19T17:40:00.000-07:00

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

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.

***

CAPS 1000

We like stocks rated "outperform" by 80% of top CAPS members.

87.1% 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%.

20.6%

YES

6.9%

8.3%

(1.3%)

Gross Margin (TTM)

We like to see gross margins of 35% or higher.

76.8%

YES

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.

0.02

YES

1.3

0.3

YES

0.8

Return on Equity

We look for a minimum of 14% return on equity.

40.4%

YES

15.1%

YES

12.5%

8.6%

These 5 Stocks Have a Little Magic

2009-08-19T17:39:00.001-07:00

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?

2009-08-18T18:09:00.001-07:00

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

2009-08-18T18:08:00.001-07:00

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.

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?

2009-08-18T18:07:00.001-07:00

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

2009-08-18T17:58:00.000-07:00

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

2009-08-18T17:57:00.001-07:00

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:

Kraft Foods
R.J. Reynolds Tobacco (now owned by Reynolds American)
Standard Oil of New Jersey (ExxonMobil)
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:

Look for owner-operator cultures and management teams motivated to focus on long-term results.
Know that steady, lasting demand helps deliver expectation-beating results over time.
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

2009-08-18T17:55:00.003-07:00

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

2009-08-18T17:55:00.001-07:00

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

2009-08-18T17:54:00.001-07:00

"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

2009-08-18T17:53:00.003-07:00

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?

2009-08-18T17:53:00.001-07:00

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

2009-08-18T17:44:00.001-07:00

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

2009-08-17T17:38:00.001-07:00

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

2009-08-17T17:37:00.001-07:00

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

2009-08-17T17:36:00.001-07:00

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

2009-08-17T17:35:00.001-07:00

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

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%)

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

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

The Easy Bet in Today's Market

2009-08-17T17:34:00.001-07:00

Last week, I wrote about the fact that the recent stock market rally was built on the shares of the poorest quality companies, creating a significant risk of a correction. There is, however, a silver lining to that story: Left behind in the euphoria have been the stocks of the highest quality companies, many of which are attractively priced. For investors, high-quality businesses at bargain prices present an exceptional opportunity.

Proving quality is going cheap
To show that this is indeed the case, I use return on capital (ROC) as a measure of quality and the forward price-to-earnings (P/E) ratio as a measure of cheapness. Each company in the S&P 500 is assigned to a quintile based on how it ranks by ROC compared to the other companies in its primary sector (this enables us to pick out the highest quality companies in each sector -- different sectors have different levels of intrinsic profitability).

I then calculated how the different ROC quintiles stacked up in terms of their P/E ratio. The following table summarizes some of the results:

Return on Capital Quintile	Average Forward P/E
Top Quintile	17.0
Second Quintile	21.1
Third Quintile	24.5
Fourth Quintile	29.8
Bottom Quintile	14.2

Source: Author's calculations based on data from Capital IQ, a division of Standard & Poor's.

The table shows that the average stock in the top ROC quintile has a lower valuation than the average stock in all but the bottom ROC quintile. (Furthermore, a ranking of the valuations by sector confirms this is not due to the fact that stocks from sectors that normally sport lower valuations are concentrated in the top ROC quintile.)

Here are some examples of stocks in the top ROC quintile which are ranked in the bottom 40% of their sectors in terms of their price-to-earnings ratio:

Stock	LTM Return on Capital (%)	Forward P/E
Pfizer (NYSE: PFE)	11.4%	7.6
Microsoft (Nasdaq: MSFT)	32.1%	14.3
Intel (Nasdaq: INTC)	8.7%	19.2
Oracle (Nasdaq: ORCL)	15.2%	13.6
eBay (Nasdaq: EBAY)	10.0%	13.9
Hewlett-Packard (NYSE: HPQ)	12.7%	11.2
Bristol-Myers Squibb (NYSE: BMY)	16.9%	10.6

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

Of course, a single ROC figure is a highly imperfect indicator of "quality," but these results support Jeremy Grantham's assertion in his latest investor letter that "The easy winner of the cheapest equity sub-category contest is still high quality U.S. blue chips."

The investing recommendation: Long quality
When the broad market looks overvalued (which it does) and the highest quality segment of U.S. companies looks cheap, investors should consider shifting their exposure from the former to the latter. It will be interesting to see how our top quintile ROC stocks perform over the next one, three, and five years. My hunch is that, as a group, they will outperform the S&P 500, perhaps quite significantly.

What Your Stocks Are Really Worth

2009-08-17T17:33:00.001-07:00

In his classic book Margin of Safety, author Seth Klarman defines value investing as "the discipline of buying securities at a significant discount to their underlying value and holding them until more of their value is realized."

His definition points to the key of the value-investing process -- finding bargains. Value investors are always on the hunt for a dollar selling for $0.50. And that means value investors become very attentive during times of uncertainty -- especially after big drops in stock prices.

However, they also won't overlook the need for a margin of safety. In fact, with so many companies earning a spot on the 52-week-low list lately, seeking a margin of safety will determine whether investors ultimately swim or sink.

How to stay afloat
Just look back at the beginning of the mortgage crisis. Countrywide Financial shares traded around $40 each one year before Bank of America bought it out. When the stock's price approached $20, it may have looked like a bargain. After all, the biggest originator of mortgages had to bounce back, right? But the stock kept falling, down to the single digits that Bank of America paid.

Then there's WCI Communities, the luxury Florida homebuilder. After the company rebuffed Carl Icahn's $22-per-share takeover offer in 2007, the stock fell to $10. It now sits in the Pink Sheets at around $0.02.

We've all heard investors rationalizing that when a stock price gets so low, it surely can't go any lower. Thinking about a stock in this manner is misguided, and it usually leads to financial pain. After all, until a stock price has reached zero, it can always go lower. It's crucial to understand that, with a sudden negative fundamental shift in the operating environments of these businesses, their intrinsic values have changed.

Intelligently assessing intrinsic value is difficult, given the current unknowns surrounding the credit markets. Therefore, an investor should demand a greater margin of safety to compensate for the increased uncertainty. If that's not possible, the investor should abandon the security until he or she has a better view of things.

Anyone who was buying homebuilders based on the premise that they were selling for less than their book values realizes my point, because those book values themselves have shrunk precipitously. Pulte Homes (NYSE: PHM) has lost nearly two-thirds of its book value since the end of 2006, while Centex (NYSE: CTX) has dropped 80%, and Beazer Homes' (NYSE: BZH) book value is just a tenth what it was three years ago.

Margin of safety
Investors also need to see the difference between Mr. Market's price and the value of a business. In today's environment, you may or may not be buying at the bottom. But that should be of no concern to you if you are investing with a satisfactory margin of safety.

How do you find an acceptable margin of safety? For one, avoid messy balance sheets. Leave companies with lots of debt to the more sophisticated, deep-pocketed investors. If you don't feel comfortable assessing whether Wells Fargo (NYSE: WFC) has better-quality assets than Citigroup (NYSE: C), then just stay clear.

Two, look at well-known, more-established companies selling cheaply because of temporary problems. For example, home furnishing retailers like Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) have struggled along with the housing market. But they're both well-run companies and stand to recover nicely once real estate rebounds.

Once you have a great business selling at a good price with a satisfactory margin of safety, don't panic if the stock price drops after you buy. Changes in stock price have nothing to do with risk. And if you have indeed secured your margin of safety, you should heed the following words of wisdom from the partners of value investing firm Tweedy Browne:

One of the many unique and advantageous aspects of value investing is that the larger the discount from intrinsic value, the greater the margin of safety and the greater potential return when the stock price moves back to intrinsic value. Contrary to the view of modern portfolio theorists that increased returns can only be achieved by taking greater levels of risk, value investing is predicated on the notion that increased returns are associated with a greater margin of safety, i.e., lower risk.

Time to Buy Middleby?

2009-08-17T17:32:00.001-07:00

If you own shares of oven maker and Motley Fool Hidden Gems recommendation Middleby (Nasdaq: MIDD), you may have noticed that they're not worth quite as much as they were before earnings. And if so, you're probably wondering whether the news was bad, and whether it was sufficiently bad as to justify a sell-off.

I'm here to tell you that yes, it was bad -- but no, it wasn't that bad. Not by half:

Sales slipped nearly 9% in the fiscal second quarter, to $158.6 million.
Profits took even more of a beating, dropping 25% to $0.74 per share.
And as you can guess, profit margins declined as well. So far this year, the company's running on a 17% operating margin, so a full 170 basis points lower than last year.

Yet that 17% operating margin beats out rival restaurant equipment maker Illinois Tool Works (NYSE: ITW) by 710 basis points. Why, even John Bean Technologies (NYSE: JBT), of whom I spoke so highly last week, only pulls down a 10.3% operating margin, or less than two-thirds of what Middleby gets.

Perhaps the most astounding factoid contained in Middleby's report: Since acquiring TurboChef, Middleby hasn't just turned around its historically unprofitable rival, but boosted operating margin there to nearly 20%! We've come a long way from fears that TurboChef would drag down profits at Middleby. With things looking less bleak at Starbucks (Nasdaq: SBUX) and even looking up for Whole Foods (Nasdaq: WFMI) -- two of TurboChef's marquee customers -- it may actually become a profit driver.

Self-cleaning debt oven
Last but not least, Middleby tackled my main reservation about the stock -- its rapid buildup of debt post-TurboChef. Despite spending $11.4 million on two acquisitions in Q2, Middleby knocked $25 million off its debt load last quarter, dropping it to $321 million. And here's where Middleby's prodigious prowess in generating cash comes into play. Free cash flow for the past 12 months amounts to nearly $84 million. Were it to cease acquiring competitors, and focus exclusively on debt elimination, Middleby could pay off its debt in relatively short order.

For J.C. Penney, Just Breaking Even Looks Good

2009-08-17T17:30:00.001-07:00

Even in a good economy, staying afloat in a competitor-saturated industry takes talent. But with the downturn draining consumers' confidence as if through a sieve, J.C. Penney (NYSE: JCP), with its more than 1,100 department stores, continues to stay above water through conservative business practices and savvy inventory management.

It hasn't been an easy fight, though. Much like Macy's (NYSE: M) experienced in its latest quarter, J.C. Penney's same-store sales fell 9.5% from levels achieved last year, while overall net sales dropped 7.9% to $3.9 billion. The company posted a net loss of just $1 million, giving the company break-even earnings per share -- better than the ($0.01) loss analysts had expected, but still far below what it earned one year ago.

Making do
Although those results may not seem like anything to write home about, J.C. Penney made some notable achievements. It stayed on the ball by keeping inventory in line with sales trends, which allowed it to sell more merchandise at regular price instead of having to sell items on clearance. That resulted in wider gross margins.

Perhaps the most impressive aspect of its quarterly results was the fact that total inventories decreased by nearly 12% year-over-year despite the lower sales. Cash flows were also very strong; the company retired $113 million in debt and paid its dividend as usual. With a reasonable amount of debt on the books, J.C. Penny has an enviable cash position.

Company	Market cap (millions)	Quick Ratio	Debt/Equity
J.C. Penney	7,160	0.83	0.84
Kohl's (NYSE: KSS)	15,798	0.64	0.29
TJX (NYSE: TJX)	14,511	0.37	0.49
Saks (NYSE: SKS)	843	0.03	0.64
Macy's	6,438	0.23	1.92
Sears Holdings (Nasdaq: SHLD)	9,247	0.22	0.35
Dillard's (NYSE: DDS)	772	0.22	0.52

Source: Yahoo! Finance; Capital IQ, a division of Standard and Poor's. Market cap as of Aug. 14.

The company did hit a few snags, though. Cost-cutting didn't keep up with sales losses, and a pension-plan charge hurt earnings. Moreover, while the company gave higher earnings guidance of $0.75 to $0.90 per share for the full year, it fell short of the $0.95 figure that analysts had hoped to see.

Boss of the woods
J.C. Penney has been around since 1902, and its management knows a thing or two about staying competitive in the retail business. During the recession, it has adapted quickly to external changes, with innovations like a new Manhattan store, its Sephora cosmetics expansion, and the upcoming Cindy Crawford Style launch seeking to capture market share from competitors.

In its class, which isn't for overly risk-averse investors, I think that J.C. Penney has some of the best prospects. With an attractive valuation at just 14 times earnings, it's also a relative bargain. Whenever the recovery comes, J.C. Penney looks poised to capitalize.

Keep Your Profits Without Missing the Next Rally

2009-08-16T23:10:00.003-07:00

The big bounce in stocks we've seen recently has given beaten-down investors some relief after seeing their portfolios suffer big losses last year. But now many are concerned that the rally may be ending, and they don't want to lose everything they've earned back.

One simple method that can preserve your wealth against falling stock prices is to buy put options. By owning puts, you can ensure that even if your shares drop in value, you can sell them at the price you pick within a certain period of time.

Time to take profits?
Of course, put options get pricey for volatile stocks. When demand for protection increases, especially during panics like the two we saw this past fall and winter, you'll pay more for puts.

To measure how much options cost, options experts look to the S&P 500 volatility index, or VIX. While the VIX went to unprecedented high levels last October and November, it's now fallen back to its lowest levels in nearly a year. If you want to protect your stocks and lock in the gains in your portfolio from the past five months, then you can do so now without spending as much as you would have to buy puts in the recent past.

Take a look at these examples of stocks on which you can buy puts at reasonable prices right now:

Stock	Recent Share Price	Put Option	Recent Option Cost
Wal-Mart Stores (NYSE: WMT)	50.83	Dec. $47.50	1.45
BP (NYSE: BP)	50.21	Jan. 2010 $45	2.00
Monsanto (NYSE: MON)	83.59	Jan. 2010 $75	4.70
Research In Motion (Nasdaq: RIMM)	71.63	Dec. $60	3.85
United Technologies (NYSE: UTX)	57.59	Jan. 2010 $55	3.70
Microsoft (Nasdaq: MSFT)	23.41	Jan. 2010 $22.50	1.61
Bank of America (NYSE: BAC)	16.23	Jan. 2010 $14	1.33

Source: CBOE. Prices based on bid-ask spreads as of 10 a.m. Aug. 13.

Which option you pick depends on how long you want protection and your willingness to give up some of your profits. You'll pay more to buy puts with more time until expiration, puts on volatile stocks, and puts with higher strike prices. Take care how much you spend on puts, because you may end up not needing that protection at all.

Buying peace of mind
Conceptually, put options are a lot like an insurance policy. If your stocks fall, paying a relatively small amount to limit your losses may well be worth it.

If, however, shares rise or even stay flat, you would lose the entire premium you paid on most of the options listed above. In fact, if your option's strike price is below the stock's current value, you could actually see your shares drop and still suffer a complete loss on your put option.

Puts are expensive enough that you don't want to count on them as a permanent fixture in your portfolio. As you can see from the Bank of America put listed above, you'd pay more than 8% of the current stock price to limit your potential losses to 14% -- and even that option lasts for only five months. Still, if owning a put makes you feel more comfortable staying invested in the market, then your future gains could well make what you spend on puts look like chump change.

You Are About to Make a Bad Investment

2009-08-16T23:10:00.001-07:00

Don't you invest in that just because you think it's a good idea. I'm warning you.

Across 10 asset classes, over a near-40-year time horizon, and in increments of three, five, and 10 years, there's one investment vehicle that made for a total loser -- a dud.

It's gold -- that so-called safe haven for your assets -- and if you're considering it today, let me explain why you need to bypass it and move on. Although gold may well be one of your favorite items in the vault, as a long-term investment, it just doesn't cut the mustard.

Bring on the hate mail
You needn't take my word for it -- Investor's Business Daily pulled the data. Unfortunately, so few have the gumption to say that gold is simply not worth your time. Why?

Perhaps because, as IBD wrote, "in one recent five-year period -- the one ended Feb. 7 -- [gold funds] leave a different impression. Gold funds tracked by Lipper Inc. cranked out an average annual return of 25.45% vs. U.S. diversified stock funds' 12.60%."

You can bet your bottom dollar those returns have a lot to do with the metal's relatively recent surge in popularity. Everyone's jumped on the bandwagon. And, as usual, investors continue to chase performance and follow the herd. To be fair, however, longtime gold bugs will tell you there are more reasons to believe that gold is a worthwhile spot for your money.

With all the chaos in the marketplace right now and the impending threat of economic doom, the investing herd is thinking, "Hey, gold is the perfect option to safeguard money from hyper-inflation and make a good return at the same time." And though I agree that gold funds offer some defensive protection against inflation and I agree that industry giants such as Newmont Mining (NYSE: NEW) can get hot at times, four decades' worth of data demonstrate that gold is a riskier and lower-returning investment than pretty much any other.

Higher risk/lower reward
The IBD article hit the nail right on the head when it said, "Investors often lose sight of longer-term historical investment results, especially during short-term periods of extreme volatility and trending markets."

Bingo!

Short-term, return-chasing thinking is precisely what is driving otherwise crafty investors toward bad decision-making, and that is exactly why you should avoid throwing all your money into a precious metal that has little or no practical application. Before I get to where exactly you should be considering, it is important to understand just what the gold bulls are thinking.

Looking through the other side
Supporters of gold like to note that the past 40 years were an unprecedented period of growth in the American economy. We witnessed the rise of the quintessential American business -- names like Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) and other companies that revolutionized or invented their industries alongside booming growth in our domestic economy -- the likes and returns of which we'll probably not experience again. OK, this may be true.

Gold bulls go on to suggest that there is no reason to believe that the next 40 years of equity returns will look anything like the prior 40. Our economy is too big and too developed ... and that is probably true.

It's all about risk
According to Gold folk, we're entering an era of massive economic risk thanks to our miserable levels of national and personal debt. Sad to say, we know this is true. Titans of our financial markets have dropped like a sack of potatoes in the past months, and now, even after rising like a Phoenix from the ashes, even companies that managed to avoid being bludgeoned by the financial crisis -- like, say, JPMorgan (NYSE: JPM) -- could face the guillotine if a just few things don't go right.

Hey, don't forget about political risk from terrorism, a more competitive China, and the end of cheap fuel. Risk is everywhere, isn't it?

To that I say: Where did the risk ever go?

Wasn't it difficult for Americans to buy shares of General Electric (NYSE: GE) and Coca-Cola (NYSE: KO) during the height of the Cold War and with the underlying threat of nuclear war? Yet investors that stuck with their guns on a stock on these corporate giants have since compounded an astounding 12% and 14% per year compared to a measly 5% on gold since 1975.

With all the bear markets, through the oil crises, Black Monday, the implosion of the dot-coms, stagflation, and our current economic mess (pretty much all the economic risks you can think of), do you know which asset class coupled poor returns with mind-numbing volatility? Yup, our favorite precious metal: gold.

Goldfinger will not be pleased
I'm not bashing gold simply to bash. In fact, it isn't the worst idea to put a small slice of your portfolio in gold to seize some of the benefits of diversification. But there's a better solution for the rest of your money: Go with the asset class that has consistently demonstrated the highest returns on investment with some of the lowest elements of risk -- small-cap stocks.

This isn't my own unproven theory -- the data comes from the same study I mentioned before. Generally, equities trump just about every available investment alternative you have. But small caps, in particular, demonstrate significantly high returns with comparatively low risk.

Remember much of the negative information that we're hearing these days about our economy has already been priced into the markets or is getting priced in as we speak. Don't dwell on hindsight information; look forward to the entities that will drive the world’s future growth.

The truth will make you rich
To find the best of the small-cap world, you've got to think like a great small-cap stock. Remember: the giants of industry you know today once resembled the Netflixes, Chipotles, and Under Armours (NYSE: UA) of the world we know now. And though our economy has matured, great companies will inevitably find their way to the top of the US markets, displacing others if they have to.

That's because many of the world's best businesses -- like Under Armour -- started small with great ideas on top of cash-generating business models with entrepreneurial owners at the helm. And there are plenty more out there where those came from.

If you want to be on the side of returns that smash gold in the long run, then you must allocate toward these types of stocks.

7 Stocks That Are Swimming in Cash

2009-08-16T23:09:00.002-07:00

Some say cash is king.

And today, many (The Economist, for example) are saying it loudly.

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

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

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

Cash helps, no doubt
We can all agree that a good amount of cash on the balance sheet is an excellent defense for a company facing complete, financial destruction. If Bank of America (NYSE: BAC) didn’t have plenty of cash on hand -- it would be in a heck of a pickle right now; the same is true of Goldman Sachs (NYSE: GS), even in spite of its seemingly god-like status. Let’s not forget that Bear Stearns went under not because of insolvency, but because it had no liquidity.

But there's a bigger problem.

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

Not so fast.

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

Show me the money!
I've selected seven companies with market caps larger than $500 million and cash in excess of 15% of that market cap (which is a lot of cash!) to illustrate a simple point:

Company	Market Capitalization (billions)	Cash and Cash Equivalents (billions)
Apple	$150.9	$24.2
Time Warner (NYSE: TWX)	$33.1	$7.0
Merck (NYSE: MRK)	$65.3	$16.9
EMC (NYSE: EMC)	$30.8	$7.3
Las Vegas Sands (NYSE: LVS)	$9.1	$2.6
News Corp (Nasdaq: NWSA)	$29.3	$6.5
Sprint	$11.4	$4.6

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

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

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

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

A tale of two opposites
Take Apple and Sprint Nextel, for example. Both have lots of cash. But Apple has more than $24 billion in cash, no debt, hauled in $10 billion in free cash flow in the past 12 months, and pushes returns on invested capital at rates in the ballpark of 20%.

Sprint, on the other hand, has $4.5 billion in cash, carries a whopping $21 billion in debt, fails to deliver nearly as much cash flow per revenue dollar, and fails to push positive return rates on invested capital. Most of what cash is made just has to go back to debt holders.

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

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

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

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

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

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

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

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

The Coming Financial Time Bomb

2009-08-16T23:09:00.000-07:00

Never, ever, think about something else when you should be thinking about the power of incentives. -- Charlie Munger

Maybe you've heard this popular myth: A major cause of the financial crisis was boneheaded Wall Street compensation packages unaligned with shareholder interests.

Before I can tell you why that story is so misleading, please ask yourself this:

Am I an investor, or am I a speculator?
During his recent visit to Fool HQ, business legend John Bogle argued that this is the very first question you must ask yourself.
The distinction is simple but powerful: Investors buy shares of businesses and prosper over time as the company grows profits. Speculators, on the other hand, trade wiggles on a stock chart, hoping to sell shares at a higher price to other speculators within a few quarters.

Back to the myth
Sadly, shortsighted compensation plans and business strategies are aligned with the time horizons of the vast majority of shareholders. After all, at year-end 2007 (the most recent statistical set), some 80% of all shares were held by financial institutions. And the evidence shows that financial institutions are, by and large, speculators.

Given the explosion of mutual funds, 401(k)s, endowments, and the like, it makes sense that institutional ownership has steadily risen over the years. As institutional ownership has grown, however, the average holding period of stocks has shrunk:

Year	NYSE Turnover	Holding Period
2009 (year-to-date)	145%	8 months
2000	88%	14 months
1990	46%	26 months
1980	36%	33 months
1970	19%	63 months
1960	12%	100 months

Source: NYSE Group Factbook. Turnover = number of shares traded as a percentage of total shares outstanding.

It gets even worse when we look at the overall stock market, according to Bogle. Inclusive of exchange-traded funds, the overall market turned over at 284% in 2007. That means the average holding period for stocks and ETFs was four months!

OK, but how does this speculative frenzy affect you?

Wall Street's very dirty secret
Simply put, when an institutional shareholder has a time horizon of four months, they should want management to pull out the stops right now to hit quarterly earnings targets. If they're not going to own the stock in five years, why would they concern themselves with the long-term effects of today's business decisions?

Consider the average holding period of these stocks in 2007 -- the year before the volatility-inducing financial meltdown:

Company	Holding Period
Bank of America	9.4 months
AIG	9.3 months
Citigroup	5.8 months
Morgan Stanley	5.0 months
Lehman Brothers	2.5 months

Sources: Yahoo! Finance; Capital IQ, a division of Standard & Poor's; and author's calculations. Turnover calculated as total yearly volume divided by average shares outstanding.

One appalling example
From 2000 until the collapse of the firm, former Lehman Brothers CEO Richard Fuld received approximately $350 million in total compensation. In part, he was rewarded for growing the company's earnings at an annual rate of 18% over that time frame ... except that those returns were produced using 30-to-1 leverage on top of a shoddy asset base.

Since it would only take a roughly 3% decline in the value of Lehman's assets to render the firm insolvent, it seems as if Lehman operated with temporary gains in mind, but no thoughtful strategy for how to avoid blowing up. And on Sept. 14, 2008, it did, in the largest bankruptcy ever.

The shock of Lehman's failure froze credit markets, caused huge derivatives losses, and set off bank runs around the world. In just one month, the TED spread shot up to an all-time high. AIG needed to be rescued by taxpayers because of the billions it lost because of Lehman's collapse.

The run on Washington Mutual, which began the day of Lehman's collapse, led to the largest bank failure in U.S. history in mere weeks. One Wells Fargo senior economist estimated the employment fallout from Lehman's bankruptcy at two million job losses. Even strong companies unrelated to the financial industry are suffering from the economic fallout of this crisis -- Medtronic (NYSE: MDT), eBay (Nasdaq: EBAY), Wal-Mart (NYSE: WMT), and Verizon (NYSE: VZ), for example, have been forced to announce layoffs.

No one disputes that the outrageous risks taken at Lehman Brothers and similar institutions have had terrible effects on our economy. But consider this: Despite Lehman's epic collapse, it's probable that most shareholders benefited from Lehman's more than 200% rise over eight years. Refer back to the chart above -- the average holding period of Lehman stocks was less than three months!

Frankly, this upsets me. And I can't blame you if it makes you mad, too. The fact that a majority of business owners' interests are unaligned with the health of their own businesses runs completely counter to the well-being of our economy and the basic tenets of capitalism.

If capitalism is going to work, this ridiculousness needs to change.

Here's my plan
One market-oriented mechanism would be a tax increase on speculation, combined with a tax decrease on investing. If it became less profitable for institutional shareholders to speculate on short-term price movements, and more profitable to invest for the long term, their holding periods might increase, and they'd likely care more about the financial health and compensation structures of the businesses they own.

This could take the form of a graduated 60% speculation tax on stocks and equity-based derivatives held for less than one year, which tapered down to, say, 5% after a few years.

I'm not the only investor who has thought of such a plan. Warren Buffett (perhaps facetiously) once suggested a 100% short-term capital gains tax, while John Bogle has advocated a 50% rate. Former IBM CEO Louis Gerstner recently suggested a similar plan.

Such a move to align institutional shareholders with the long-term health of the companies they own is a necessary step to preventing the next financial time bomb. Without such a shift in incentives, they would have limited reason to demand responsible management, and a crisis like this one would be more likely happen again.

The silver lining ...
To be fair, not every corporation fits the Lehman mold. Berkshire Hathaway's shareholders are owners for more than 30 years on average; they must be happy with Warren Buffett's relatively meager compensation, large stock ownership, and long-term focus.

Nucor's (NYSE: NUE) Daniel DiMicco, Amazon's (Nasdaq: AMZN) Jeff Bezos, and UPS's (NYSE: UPS) Scott Davis have compensation structures that look much more like Buffett's than many of their CEO counterparts.

Just as we saw a number of disasters in the past year, I expect -- and history confirms -- that we will begin to see other companies benefit from their missteps. With stocks so cheap, making money now becomes a matter of examining every facet of a company -- including the competency of its management team, rewards and incentives, business strategy, and market environment.

5 Signs of a Strong Dividend Stock

2009-08-16T23:08:00.001-07:00

After the worst year in more than half a century for dividends, investors need to rethink their strategies for income generation.

Gone are the days when you could buy a dividend-paying stock simply because it's a blue chip and forget about it until retirement. The quick annihilation of dividends at once-reliable companies like Wachovia quickly dispelled that illusion.

For that matter, you'd also be wise to disregard mechanical strategies like dividend-weighted ETFs that might only work under "normal" market conditions.

Instead, it's time to get back to basics.

The keys to success
When researching strong and sustainable dividend-paying stocks for your portfolio, you'll want to focus on those that meet these five criteria.

1. An above-average dividend yield: If you're specifically setting out to find an income-generating stock, make it worth your while. There's no reason to settle for a below-average yield, so use the S&P 500 as a benchmark and screen for stocks with yields above the index's average (currently 1.9%).

2. Sufficient free cash flow cover: It's important that the company generates enough free cash flow (cash from operations minus capital expenditures) to cover its dividend payouts. If the dividend payouts significantly outweigh the free cash flow, the sustainability of the dividend is in question. A reasonable free cash flow payout ratio (dividends paid / free cash flow) should be below 80%.

3. A history of dividend hikes: While a good track record in itself is no guarantee of future payouts, I do like to see a dividend-paying company with a history of rewarding shareholders by increasing its payout in line with earnings growth. Walgreen (NYSE: WAG), for instance, has increased its dividend payout for 35 consecutive years, and Clorox (NYSE: CLX) has done so for 32 years.

4. A solid balance sheet: As we've been reminded over the past 18 months, creditors have a greater claim to a company's earnings and assets than common shareholders. If a company can't repay its creditors, it won't be able to pay you dividends. Look for stocks with interest coverage ratios (EBIT/interest expense) of more than 3.0, but preferably higher. A company with an interest coverage ratio below 1.5 is in danger of being unable to repay its creditors.

5. Undervalued versus the market: You want to buy dividend-paying stocks when they're trading at value prices. Outside of doing a formal discounted cash flow valuation, a good rule of thumb is to look for companies trading at price-to-earnings multiples below the current S&P 500 average (today, it's about 15 times next year's earnings).

There are no hidden tricks or magic formulas here, just reasonable and traditional criteria to help us find strong dividend stocks.

Gimme shelter
Using these five criteria, I screened for stocks trading on a major U.S. exchange with a market cap over $1 billion.

Here are five of the results:

Company	Yield	FCF Payout Ratio	3-Year Dividend Growth Rate	Interest Coverage Ratio	Forward Price-to-Earnings Ratio
Wal-Mart (NYSE: WMT)	2.2%	34%	26%	10.8	14.4
AT&T (NYSE: T)	6.4%	54%	7%	11.9	12.0
McDonald's (NYSE: MCD)	3.6%	57%	41%	12.8	13.6
PepsiCo (NYSE: PEP)	3.2%	66%	17%	19.1	14.7
Kraft Foods (NYSE: KFT)	4.1%	52%	8%	4.2	14.0

Data courtesy of Capital IQ, a division of Standard & Poor’s, as of Aug. 14, 2009.

While no simple screen ensures a good investment, these are five quality names to research further. Each of them has a strong track record of dividend payouts, plenty of free cash flow to continue paying (and even raising) its dividend, and strong competitive advantages within its industry.

Another thing worth noting is these five are all U.S.-based companies, but it would be unwise to limit your search to domestic stocks -- look globally for dividend ideas. Indeed, around 13% of the results of the screen were based outside the U.S., including TELUS Corporation, a Canadian telecommunications company that yields nearly 6%.

Keep the faith
Now that so many weaker dividend payers have either cut or suspended their payouts, the stronger payers are becoming more apparent. Despite the cuts of the past year, the benefits of owning dividend-paying stocks remain intact.

They:

Provide you with a real return right away; with non-dividend-paying stocks, returns aren't realized until you sell.
Allow you to choose what to do with the cash payouts -- reinvest in the stock, put it into savings, or buy groceries. It's up to you.
Offer you an inflation hedge when companies increase their payouts.

With interest rates so low, stock prices still well below last year's highs, and dividend yields higher than they have been in years, now is a great time to double down on dividends. Using the five criteria outlined above, you'll more easily locate the dividend stocks that can improve your portfolio's income-generating capabilities.

One Outrageously Cheap Stock

2009-08-13T16:50:00.002-07:00

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

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

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

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

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

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

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

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

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

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

The Top 10 Recession Stocks

2009-08-13T16:50:00.001-07:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Diamonds Might Be Forever, but Few Stocks Are

2009-08-13T16:45:00.005-07:00

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

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

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

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

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

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

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

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