Saturday, November 3, 2012

Amgen, Abbott, Teva All Incredibly Undervalued Stocks

In this article, I will run you through my DCF model on Amgen (AMGN) and then triangulate the result with an exit multiple calculation and a review of the fundamentals compared to Abbott (ABT) and Teva Pharmaceutical (TEVA). I find that these companies are significantly undervalued.

First, let's begin with an assumption about the top-line. Amgen finished FY2011 with $15.6B in revenue, which represented a 3.5% gain off of the preceding year: acceleration. I model growth trending from 4% to 1% in the 2014 - 2016 period and then bounding back to 3%.

Moving onto the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures, and taxes. I model cost of goods sold eating 14.8% of revenue versus 18.5% for SG&A, 20% for R&D, and 4.5% for capex. Taxes are estimated at 15% of adjusted EBIT (ie. excluding non-cash depreciation charges to keep this a pure operating model).

We then need to subtract out net increases in working capital. I expect this to hover around 1% of revenue.

Taking a perpetual growth rate of 2.5% and discounting backwards by a WACC of 10% yields a fair value figure of $92.59, implying 36% upside. DCF models are often criticized for the "discount" part, so it is important to consider the sensitivity of the input figures. My sensitivity analysis that considers a variety of perpetual growth and WACC inputs yields a standard deviation of $13.14 - 14.2% of the intrinsic value result. This indicates that the DCF model is reliable in this instance.

All of this falls within the context of strong momentum:

"As you've seen from our results for the fourth quarter, we ended the year with momentum, and we expect 2012 to be even stronger. I'll touch on some of the highlights. We entered 2012 with our Neulasta franchise growing, with Enbrel maintaining its market leadership and more stable outlook for EPOGEN, particularly now that we have long-term contracts in place. Prolia and XGEVA are obviously the important part of our outlook for 2012 and beyond".

From a multiples perspective, Amgen is equally attractive. It trades at a respective 16.8x and 10.1x past and forward earnings versus 20.5x and 11.5x for Abbott and 14.5x and 7.4x for Teva. Assuming a multiple of 14x and a conservative 2013 EPS of $6.65, the rough intrinsic value of Amgen's stock is $93.10 - virtually in-line with my DCF result. What's more, the historical 5-year average PE multiple of Amgen is 14.2. The historical 5-year average low PE multiple is 11.7. Amgen only requires 10.1x to appreciate!

Consensus estimates for Abbott's EPS forecast that it will grow by 7.5% to $5.01 in 2012 and then by 6.6% and 5.2% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $73.92, the rough intrinsic value of the stock is $73.92, implying 20.6% upside. The company delivered strong performance in 2011 with sales growth of 10% and double-digit momentum in a variety of segments. HUMIRA, in particular, has done far better than what I expected.

Teva is similarly significantly undervalued. Consensus estimates are that its EPS will grow by 12.7% to $5.60 in 2012 and then by 8.2% and 7.4% in the following two years. Assuming a multiple of just 11x and a conservative 2013 EPS of $6, the stock will rise 46.5%. Investors have overly lamented the slow momentum in generics. I am optimistic about the company's M&A strategy exciting back investors. Towards that end, management's hiring of Jeremy Levin as CEO, who comes with a history of overseeing takeovers at Bristol Myers (BMY), is a solid step in the right direction. It is thus only a matter of time before Teva's multiples return to normalized industry levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Apple’s New OS: Will Mobile Users Miss Google Maps?

Apple’s new mobile operating system and updated personal computer OS revealed Wednesday do a better job of� integrating� Facebook (FB), whose shares are off 34 cents, or 1.46%, to $22.95 in pre-market trading.

Facebook got a nice pop Wednesday, up $1.42, or 6.4%,to $23.29. Shares of Apple (AAPL) were down $2.35, or 0.32%, to $699.84 pre-market.

The OS X Mountain Lion 10.8.2 is a significant update for Apple computers.

The new mobile software is compatible with the iPhone 3S, iPhone 4, iPhone 4S, the iPad 2, the new iPad and newer iPod Touches.

The abrupt disappearance of mobile maps from� Google (GOOG) is a downside. As Walt Mossberg noted in a review Wednesday night, the Apple map app lacks public transit routing and lacks ground-level photos of the street. On the plus side, it brags of 3D mapping and turn-by-turn directions.� For those who love to read flat maps, even on a small screen, the wonders of multiple dimensions may be muted. So far, critics say street-level data is not as plentiful – and presumably that’s commentary from people looking at big cities in the United States.

The new desktop software has a number of changes and a long list of fixes, and CNET’s Josh Lowensohn points out that 10.8.2 may improve battery life (one example: power naps for MacBook Air.)

For insights on some of the iOS 6 features for mobile users, read more from�Katherine Boehret, who has been testing the iPhone5 and iOS 6 over atWSJ’s All Things D.

User experiences with the new operating systems welcome in comments!

Choose Food Over Beverages: Goldman Picks Winners and Downgrades Coke

Beverage companies have been outperforming food companies in the past few months, as concerns about high grain prices have sunk numerous stocks. The divergence presents a buying opportunity, argues Goldman Sachs analyst Judy Hong.

“Recent concern over grain inflation has driven a further widening of Beverage and Food group multiples and high-multiple versus low multiple stocks within our Consumer Staples coverage. We recommend taking advantage of this valuation dispersion by increasing exposure to the Food sector and buying select ‘laggards,’” Hong wrote.

Hong upgraded the food sector to Buy, and downgraded beverages to Neutral.

“There has been a rotation into Beverages through much of 2012 with the group exhibiting stronger fundamentals versus Food, resulting in Beverage sector P/E valuation expanding to a 20% premium to the Food group after the two were near parity in 2011,” she wrote.

While companies with large grain exposure could feel pressure from the spike in prices in coming months, many companies that have lagged don’t depend as much on grain.

Hong upgraded Campbell Soup (CPB) to Buy from Sell as it stabilizes its soup portfolio and reinvests in its snack and beverage business, and JM Smucker (SJM) to Buy from Neutral� as it returns more cash to shareholders and expands margins.

Coca-Cola (KO), however, may have limited upside ahead, argues Hong.

“We expect KO will still deliver above-average fundamental performance, however, relative valuation is at peak levels and a tough macro backdrop and FX will limit EPS upside,” Hong wrote.

But what of Pepsico (PEP), which makes both snacks and beverages? Hong doesn’t say.

5 Growth Plays: 4 Great And One Mediocre

Market volatility and economic uncertainty are driving more individuals into stocks that pay dividends. Investors who are new to the concept of dividend investing should take the time to understand the following ratios as they could prove to be very useful in spotting future champions.

Long-term debt-to-equity ratio - Is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balances sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long-term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Free cash flow yield is obtained by dividing free cash flow per share by the current price of each share. Generally lower ratios are associated with an unattractive investment and vice versa. Free cash flow takes into account capital expenditures and other ongoing costs associated with the day to day to functions of the business. In our view free cash flow yield is a better valuation metric than earnings yield because of the above factor.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making. This situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. Individuals searching for other ideas might find this article to be of interest A Look At 5 Growth Plays: 4 Great, 1 Mediocre.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher.

Price to cash flow ratio is obtained by dividing the share price by cash flow per share. It is a measure of the market's expectations of a company's future financial health. The effects of depreciation and other non cash factors are removed, and this makes it easier for investors to assess foreign companies in the same industry. This ratio also provides a measure of relative value like the price to earnings ratio.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Asset turnover is calculated by dividing revenues by assets. It measures a firm's effectiveness at using its assets in generating revenue. Higher numbers are generally better and vice versa. In general companies with low profit.

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article 5 Great Plays With Yields In Excess Of 10%.

Atlas Pipeline Partners is our favorite play on the list for the following reasons:

It has a strong five-year dividend average of 9.48%.

It has a strong quarterly revenue growth of 32%.

Sales have jumped from $900 million in 2009 to 1.2 billion in 2011.

A good total debt to equity ratio of 0.41.

Adjusted EBITDA for the 4th quarter came in at $49 million, an increase of 15% Y-O-Y (year over year) increase.

It has a very strong three-year dividend growth rate of 150%.

A 3 year total return of almost 800%.

Net income has been trending upwards for the past three years.

Gross profits have surged from $90 million in 2009 to $197 million in 2011.

It has a good interest coverage ratio of 9.47.

It has a decent free cash flow yield of 7.21%

The current $600 million organic growth program is running ahead of schedule.

Distributable cash flow surged to $36.0 million in the 4th quarter; this represents an increase of 62% Y-O-Y.

Adjusted EBITDA was $181.00 million for the full 2011 year compared to 2010 when the adjusted EBITA came in at $175 million.

Distributed cash flow for 2011 was 50% higher than distributable cash in 2010.

APL increased the distribution from 54 cents to 55 cents per unit, a 49% increase Y-O-Y.

In the 4th quarter volume of processed gas moved up to 601 MMCFD, an increase of 23% Y-O-Y.

Management forecast an Adjusted EBITDA of $200-$225 million for 2012. This is based on adjusted average natural gas price of $2.92 per MMbtu, a weighted average NGL price of $1.06 per gallon and an average crude oil price of $102.84 per barrel. Management is forecasting distributable cash flow of $130-$165 million based on the same assumptions.

If the above stated commodities trade in a similar price range management expects even stronger growth in 2013 as the result of organic expansions that are already in progress. Under this scenario, management anticipates that total 2013 adjusted EBITDA could range from $250-$300 million, which translates into a 66% increase over 2011 Adjusted EBITDA results.

100K invested in APL for 10 years would have grown to $245. 9K

Company: Costco Whole (COST)

Levered Free Cash Flow = N/A

Basic Key ratios

Percentage Held by Insiders = 0.95

Market Cap ($mil) = 38857

Number of Institutional Sellers 12 Weeks = 3


Net Income ($mil) 12/2011 = 1462

Net Income ($mil) 12/2010 = 1303

Net Income ($mil) 12/2009 = 1086

12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 8.44

Quarterly Net Income this Quarterly/ same Quarter year ago = 13.22

EBITDA ($mil) 12/2011 = 3354

EBITDA ($mil) 12/2010 = 2960

EBITDA ($mil) 12/2009 = 2563

Net Income Reported Quarterly tr ($mil) = 394

Annual Net Income this Yr/ Net Income last Yr = 12.2

Cash Flow ($/sh) 12/2011 = 5.29

Cash Flow ($/sh) 12/2010 = 4.81

Cash Flow ($/sh) 12/2009 = 4.25

Sales ($mil) 12/2011 = 88915

Sales ($mil) 12/2010 = 77946

Sales ($mil) 12/2009 = 71422

Annual EPS before NRI 12/2007 = 2.63

Annual EPS before NRI 12/2008 = 2.91

Annual EPS before NRI 12/2009 = 2.54

Annual EPS before NRI 12/2010 = 2.95

Annual EPS before NRI 12/2011 = 3.3

Dividend history

Dividend Yield = 1.07

Annual Dividend 12/2011 = 0.89

Annual Dividend 12/2010 = 0.77

Forward Yield = 1.08

Dividend sustainability

Payout Ratio 09/2011 = 0.27

Payout Ratio 06/2011 = 0.28

Payout Ratio 5 Year Average 12/2011 = 0.26

Payout Ratio 5 Year Average 09/2011 = 0.26

Payout Ratio 5 Year Average 06/2011 = 0.25

Change in Payout Ratio = 0.01


Percentage Change Price 52 Weeks Relative to S&P 500 = 17.16

Next 3-5 Year Estimate EPS Growth rate = 13.97

EPS Growth Quarterly(1)/Q(-3) = -113.92

5 Year History EPS Growth 12/2011 = 5.61

5 Year History EPS Growth 09/2011 = 5.61

ROE 5 Year Average 12/2011 = 12.88

ROE 5 Year Average 09/2011 = 12.88

ROE 5 Year Average 06/2011 = 12.88

Return on Investment 12/2011 = 11.35

Return on Investment 09/2011 = 11.35

Return on Investment 06/2011 = 11

Debt/Total Cap 5 Year Average 12/2011 = 16.63

Debt/Total Cap 5 Year Average 09/2011 = 16.63

Debt/Total Cap 5 Year Average 06/2011 = 16.27

Current Ratio 12/2011 = 1.16

Current Ratio 09/2011 = 1.16

Current Ratio 06/2011 = 1.13

Current Ratio 5 Year Average = 1.12

Quick Ratio = 0.59

Cash Ratio = 0.51

Interest Coverage Quarterly = 24.22


Book Value Quarterly = 29.47

Price/ Book = 3.03

Price/ Cash Flow = 16.88

Price/ Sales = 0.42

EV/EBITDA 12 Mo = 10.27

R-squared EPS Growth 12/2011 = 0.56

R-squared EPS Growth 09/2011 = 0.56

Potash Corp. of Saskatchewan (POT)

Industry: Agricultural Chemicals

Free cash flow=f $472.25 million


Total return for the past 3 years = 71.43%

Total return for the past 5 years = 162.29%

Total return for the past 12 months = -15.87%

Consecutive dividend increases = 1 years


Net income for the past three years

Net Income - 2009 = $981 million

Net Income - 2010 = $1806 million

Net Income - 2011 = $3081 million

Total cash flow from operating activities

2009 = $923.9 million

2010 = $923.9 million

2010 = $3 billion

Gross profit for the past 3 years

2009= $1.01 billion

2010= $2.69 billion

2011= $4.3 billion

Operating income for the past 3 years

2009= $1.18 billion

2010= $2.59 billion

2011= $4.28 billion

EBITDA ($mil) 12/2011 = $N/A

EBITDA ($mil) 12/2010 = $2967

EBITDA ($mil) 12/2009 = $1503

Sales ($mil) 12/2011 = $8715

Sales ($mil) 12/2010 = $6539

Sales ($mil) 12/2009 = $3977

Dividend Sustainability

Total cash flow from operating activities

2009 = $923.9 million

2010 = $923.9 million

2010 = $3 billion

Payout Ratio = 11%

Other Key Important Ratios

Price to Sales = 4.66

Price to Book = 5.17

Price to Tangible Book = 5.52

Price to Cash Flow = 18.66

Price to Free Cash Flow = 36.6

Quick Ratio = 0.76

Current Ratio = 1.1

LT Debt to Equity = 0.5

Total Debt to Equity = 0.47

Interest Coverage = 11.18

Inventory Turnover = 7.07

Asset Turnover = 0.54

Dividend yield 5 year average = 0.38

Dividend rate = $ 0.56

Dividend growth rate 3 year avg = 36.67%

Dividend growth rate 5 year avg = 20.79

Consecutive dividend increases = 1 years

Paying dividends since = 1990

Total return last 3 years = 71.43%

Total return last 5 years = 162.29%

Company: Visa Inc-A (V)

Levered Free Cash Flow = 1.71B

Basic Key ratios

Percentage Held by Insiders = 0.04

Market Cap ($mil) = 95271

Number of Institutional Sellers 12 Weeks = 1


Net Income ($mil) 12/2011 = 3650

Net Income ($mil) 12/2010 = 2966

Net Income ($mil) 12/2009 = 2353

12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 22.94

Quarterly Net Income this Quarterly/ same Quarter year ago = 16.4

EBITDA ($mil) 12/2011 = 7856

EBITDA ($mil) 12/2010 = 6535

EBITDA ($mil) 12/2009 = 5575

Net Income Reported Quarterly tr ($mil) = 1029

Annual Net Income this Yr/ Net Income last Yr = 23.06

Cash Flow ($/sh) 12/2011 = 6.97

Cash Flow ($/sh) 12/2010 = 5.65

Cash Flow ($/sh) 12/2009 = 4.34

Sales ($mil) 12/2011 = 9188

Sales ($mil) 12/2010 = 8065

Sales ($mil) 12/2009 = 6911

Annual EPS before NRI 12/2008 = 2.25

Annual EPS before NRI 12/2009 = 2.92

Annual EPS before NRI 12/2010 = 3.91

Annual EPS before NRI 12/2011 = 4.99

Dividend history

Dividend Yield = 0.75

Annual Dividend 12/2011 = 0.6

Annual Dividend 12/2010 = 0.5

Forward Yield = 0.75

Dividend 3 year Growth =30%

Dividend sustainability

ayout Ratio 06/2011 = 0.17

Payout Ratio 5 Year Average 06/2011 = 0.15

Change in Payout Ratio = 0.02


Percentage Change Price 52 Weeks Relative to S&P 500 = 53.74

Next 3-5 Year Estimate EPS Growth rate = 16.43

EPS Growth Quarterly(1)/Q(-3) = -121.14

ROE 5 Year Average 06/2011 = 11.12

Return on Investment 06/2011 = 13.86

Debt/Total Cap 5 Year Average 06/2011 = 0.47

Current Ratio 06/2011 = 2.82

Current Ratio 5 Year Average = 2.15

Quick Ratio = 2.66

Cash Ratio = 2.38

Interest Coverage Quarterly = 162.7


Book Value Quarterly = 33.58

Price/ Book = 3.49

Price/ Cash Flow = 16.81

Price/ Sales = 10.03

EV/EBITDA 12 Mo = 11.22

Company: Paramount Gold (PZG)

Levered Free Cash Flow = -22.51M

Basic Key ratios

Percentage Held by Insiders = 4.99

Market Cap ($mil) = 349

Number of Institutional Sellers 12 Weeks = N/A


Net Income ($mil) 12/2011 = -28

Net Income ($mil) 12/2010 = -15

Net Income ($mil) 12/2009 = -7

EBITDA ($mil) 12/2011 = -28

EBITDA ($mil) 12/2010 = -15

EBITDA ($mil) 12/2009 = -7

Cash Flow ($/sh) 12/2011 = -0.09

Cash Flow ($/sh) 12/2010 = -0.14

Cash Flow ($/sh) 12/2009 = N/A

Sales ($mil) 12/2011 = 0

Sales ($mil) 12/2010 = 0

Sales ($mil) 12/2009 = 0


Percentage change Price 52 Wks Relative to S&P 500 = -40.77

EPS Growth Q(1)/Q(-3) = 150

Current Ratio 06/2011 = 1.02

Current Ratio 5 Yr A Average1 = 9

Quick Ratio = 0.96

Cash Ratio = 0.87

Interest Coverage 06/2011 = 310.8


Book Value Qtr ($/share) 12/2011 = N/A

Book Value Qtr ($/share) 09/2011 = N/A

Book Value Qtr ($/share) 06/2011 = 0.39

Anl EPS before NRI 12/2007 = N/A

Anl EPS before NRI 12/2008 = N/A

Anl EPS before NRI 12/2009 = N/A

Anl EPS before NRI 12/2010 = N/A

Anl EPS before NRI 12/2011 = -0.08

Price/ Book = 6.52

Price/ Cash Flow = N/A

Price/ Sales = 1074.04

EV/EBITDA 12 Mo = -11.93

P/E/G F1 = N/A


This play would fall under the mediocre category.

Company : Atlas Pipln Ptr (APL)

Levered Free Cash Flow = -118.20M

Basic Key ratios

Percentage Held by Insiders = 0.37

Market Cap ($mil) = 1984


Net Income ($mil) 12/2011 = 289

Net Income ($mil) 12/2010 = 276

Net Income ($mil) 12/2009 = 60

EBITDA ($mil) 12/2011 = 409

EBITDA ($mil) 12/2010 = 128

EBITDA ($mil) 12/2009 = 171

Cash Flow ($/share) 12/2011 = 3.01

Cash Flow ($/share) 12/2010 = 0.87

Cash Flow ($/share) 12/2009 = 1.79

Sales ($mil) 12/2011 = 1303

Sales ($mil) 12/2010 = 936

Sales ($mil) 12/2009 = 904

Dividend history =

Dividend Yield = 5.95

Dividend Yield 5 Yr Average 0909/2011 = 9.48

Annual Dividend 12/2011 = 1.78

Annual Dividend 12/2010 = 0.35

Forward Yield = 5.95

R-squared Div Growth 09/2011 = 0.35

Dividend sustainability

Payout Ratio 09/2011 = 0.77

Payout Ratio 06/2011 = 0.78

Payout Ratio 5 Yr Average 09 09/2011 = 1.79

Change in Payout Ratio = -1.02


Percentage Change Price 52 Wks Relative to S&P 500 = 23.43

Average EPS Surprise Last 4 Qtr = 168.66

EPS % Change F2/F1 = 83.05

EPS Growth Q(1)/Q(-3) = 10-100.00

5 Yr Historical EPS Growth 09/2011 = 5.98

ROE 5 Yr Average 0909/2011 = 6.98

Return on Investment 09/2011 = 9.37

Return on Investment 06/2011 = 8.31

Debt/Total Capitalization 5 Yr Average 09/2011 = 49.19

Current Ratio 09/2011 = 0.77

Current Ratio 06/2011 = 0.83

Current Ratio 5 Yr Avg = 0.73

Quick Ratio = 0.77

Cash Ratio = 0.1

Interest Coverage 09/2011 = 0.26

Interest Coverage 06/2011 = 9.47


Book Value Qtr ($/sh) 09/2011 = 23.06

Book Value Qtr ($/sh) 06/2011 = 23.71

Annual EPS before NRI 12/2007 = 1.76

Annual EPS before NRI 12/2008 = 2.41

Annual EPS before NRI 12/2009 = -0.13

Annual EPS before NRI 12/2010 = -0.65

Annual EPS before NRI 12/2011 = 1.3

Price/ Book = 1.61

Price/ Cash Flow = 12.28

Price/ Sales = 1.52

EV/EBITDA 12 Mo = 6.13

Q1 Std Dev/ Consensus = 0.26

R-squared EPS Growth 09/2011 = 0.01

Number of Anlayst in Consensus Q3 = 4


Long-term investors would be best served by waiting for a strong pullback before committing funds to this market.

EPS, Price, EPS surprise charts obtained from Dividend history charts sourced from Free cash flow yield, income from continuing operations and revenue growth charts sourced from Earnings estimates and growth rate charts for sourced from A major portion of the historical data used in this article as obtained from

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

U.S. stocks are investors’ best bet

NEW YORK (MarketWatch) � Investors may have a decent opportunity to make money right under their noses and they don�t want to hear about it.

I�m talking about U.S. stocks, which have very quietly put up decent numbers. I�m not talking shoot-the-lights-out returns; if that�s what you�re looking for, you really need to get a grip.

Click to Play Obama on insourcing American jobs

The president spoke at the White House with business and labor leaders, arguing that the time is ripe for bringing jobs back to America.

But those few investors who have stuck it out in U.S. equities have managed to do OK over the last couple of years and certainly much better than those who took fliers in �sure growth bets� like emerging markets.

Read Howard�s 2011 column on why emerging markets have had their day in

Only U.S. Treasury bonds are hated more, and they were by far the best performing asset class last year. �The entire market has been wrong about fixed income for the last five years,� says Jay Kloepfer, director of capital markets and alternatives research at Callan Associates in San Francisco.

Callan is the creator of the well-known Periodic Table of Investment Returns, which shows graphically which asset classes were the best and worst performers every year.

The firm hasn�t published its latest version (including 2011) yet but preliminary data suggest U.S. stocks ranked near the top last year. The Standard & Poor�s 500 index just about broke even in a year when markets like China�s lost 20%.

Now before you start firing off comments, let me assure you I don�t work for Wall Street, the mutual fund industry or the U.S. government, and I don�t make money if you follow my advice.

But I happen to think investing in U.S. stocks is a good idea for any U.S.-based investor who wants to grow his or her nest egg. And though I don�t recommend a big stock position for anyone (no more than 50% of your assets), I would keep two-thirds of your equity holdings in U.S. stocks.

U.S. economy not so bad off

Why? Mostly because the U.S. economy isn�t as bad as so many people think it is. Yes, unemployment is going to remain high for years to come, and that will hurt a lot of people. But investing is all about change, specifically the direction of that change, and from that standpoint the economy and employment are moving in the right direction.

We�ve had private-sector job growth for 22 consecutive months, manufacturing is rebounding and consumer spending is pretty strong.

�The U.S. economy is improving. It�s improving very slowly,� says Richard Bernstein, former chief investment strategist for Merrill Lynch who is now CEO of Richard Bernstein Advisors in New York. �Ultimately the trend is in the U.S.�s favor.�

Bernstein has preferred U.S. equities to emerging-market stocks for some time. In fact, he says the S&P 500 has outperformed the BRICs (Brazil, Russia, India and China) over the last four years, from 2008 to 2011.

U.S. companies are starting to bring jobs back to the U.S. because the total costs of making goods here are lower and the American work force is so productive. Last week the Wall Street Journal reported that wage and benefit costs at a Caterpillar plant in Illinois are less than half of what they are at another plant across the border in Ontario, Canada.

Wednesday’s ETF To Watch: MSCI United Kingdom Index Fund (EWU)

Amid all of the issues plaguing Europe, the U.K. has been�struggling�to find its footing, despite isolating itself from the flailing�currency. The U.K. has been faced with high unemployment rates and a shrinking economy for some time now, as�fourth�quarter GDP recently came in at an unimpressive -0.2%. Though the British equity market would like to get back on track, many analysts agree that it could be years before things start to look up. But for now, economic data and guidance will provide key insight on how well the�economy�is�performing�and what it may do in the future [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].

Today will see a major economic indicator from the U.K. as jobless claims for the month of February will be officially released. Last month’s report left something to be desired, as “U.K. jobless claims rose more than economists forecast in January and unemployment held at the highest rate for 16 years in the fourth quarter as the economy contracted” writes Scott Hamilton. Lowering unemployment is key to any economic recovery and that process starts by lowering jobless claims for the country [see also Brent Crude vs. WTI: The Best Performing Commodity].

Unfortunately�for the U.K., today’s�report�is slated to come in higher than last month, with jobless claims expected to jump to 5,000 for the month. Just to be clear, jobless claims are defined as those who have filed for unemployment benefits, but are actively seeking a job. If the report comes in higher than expected, look for U.K. equities to take a dive on the day, but a lower than expected report could spark signs of an economic recovery, which would likely give tailwinds to British markets.

In light of this major report, today’s ETF to watch will be the�MSCI United Kingdom Index Fund (EWU). This ETF, which was brought to market in 1996, tracks the performance of British equities with big name holdings like Vodafone, Rio Tinto, and BHP Billiton making their way into the top securities of the product. EWU has enjoyed a relatively strong year, gaining more than 7% while maintaining a handsome dividend yield. A miss in jobless claims will likely be this fund’s demise, but a surprise dip will give traders an opportunity to profit from long positions in EWU [see also Five ETFs George Washington Probably Would Have Liked].

Intel Formally Cancels Larrabee Discrete Graphics Chip Project

Back in December, Intel (INTC) said it was giving up on plans to develop a discrete graphics chip which had been code-named Larrabee. The move was seen as a boon to Nvidia (NVDA) and Advanced Micro Devices (AMD), which would have had a new rival if the project had gone forward.

In a blog post yesterday, the chip maker confirmed that it has abandoned the project.

“We will not bring a discrete graphics product to market, at least in the short-term,” the company said in the post. “As we said in December, we missed some key product milestones. Upon further assessment … we are focused on processor graphics, and we believe media/HD video and mobile computing are the most important areas to focus on moving forward.”

Chris Caso, an analyst with Susquehanna Financial Group, asserts in a research note that the news could be seen as a positive for Nvidia – for the same reason the market liked the news the first time around.

In today’s trading:

  • NVDA is up 35 cents, or 2.8%, to $13.04.
  • AMD is up 36 cents, or 4.4%, to $8.51.
  • INTC is up 33 cents, or 1.6%, to $21.18.

Homebuilders Jump On Wells Fargo Survey, 2012 Is Recovery Year

Homebuilder stocks were rallying this morning, outpacing the broader market’s gains following an upbeat Wells Fargo survey.

The survey, which polled managers in 20 major markets, found that sales rates are at their strongest levels since the firm began its survey in 2001. The company said that pricing last month�improved from February, and predicted that 2012 may finally be the recovery year for the housing sector.

Pulte Homes’ (PHM) lead the pack with a�9% jump. Hovnanian (HOV) added 6%,�Toll Brothers (TOL) was moving up 4%, �D.R. Horton (DHI)�gained 5.3% and KB Home (KBH) gained 5%.

Friday, November 2, 2012

PAYX Slips on FYQ4 Rev Miss; Year View Light

Shares of payroll processing firm Paychex (PAYX) are down 17 cents, or half a percent, at $31.76 in late trading after the company this afternoon reported fiscal Q4 revenue slightly below analysts’ estimates while meeting consensus on the bottom line.

Revenue in the three months ended in May rose 6%, year over year, to $551 million, yielding 34 cents in profit per share.

Analysts had been modeling $557.6 million and 34 cents.

For this year, the company sees payroll revenue rising from 3% to 4% from last year’s level. That projection is slightly light compared to the average Street estimate for 4.5% payroll revenue growth this year, according to data from FactSet.

The company said the outlook was based upon “anticipated client base growth, offset by an expected lower rate of growth in checks per payroll, and modest increases in revenue per check.”

Shares of Paychex competitor Automatic Data Processing (ADP) are up a penny at $54.49.

The way to Land an Entry Levels Bookkeeper Job

Current economic realities have generated fewer entry level accounting jobs available for fresh graduates. Those who anticipate to get employment will encounter many difficulties. If they will rise above these difficulties through perseverance, hard work and a positive disposition, then a fruitful career will definitely await them.

The toughest hurdle experiencing students and prospective accountants is the severely limited number of open elementary accounting positions to that they can apply for. Still, like at any some other time, it cannot be denied that openings remain even in this organization climate. Although fewer new jobs are now being generated, continuous attrition as a result of resignations, promotions, dismissals and retirements means that we now have always some opportunities for others to intensify to the plate along with prove their worth. It is up to the aspirants to seek them out with passion to reinforce their chances of landing an accounting job. Thorough preparation and razor-sharp focus is necessary to achieve this given the fierce levels of competition.

In order to get basic level accounting jobs, applicants must be prepared to make a new compelling case for themselves during interviews. They must manage to convince hiring managers actually above all the others who’re after the same objective. The stiffest competition lies in the private sector, specially the large corporations. Junior accountants possess a better chance getting straight into government agencies, non-profit organizations and small business owners. The main qualification for acceptance is really a proper educational background, but other things can help applicants land their dream jobs and commence promising careers in the profession.

There are many career sites listing opportunities with regard to fresh graduates, some of them for individuals who took up accountancy with college. It’s imperative to generate accounts on the most significant sites but don’t miss small ones as well, especially those who concentrate on the regional scene. Community boards may be great sources of data for accounting job posts. It might also help send CVs CPA organizations for his or her considerations. The point is to be able to cast the widest online possible to enhance the chances of getting a good get.

Create a Formidable Community of Contacts Sometimes the top sources of leads usually are friends and acquaintances, especially people who find themselves within the same sector. They are in the very best position to know whether there are openings in various organizations, and a few advisors may indeed be searching for people to fill basic accounting positions.

The initial thing hiring managers see are resumes on their desks. These can make or break their impression of applicants and for that reason should be written together with utmost care, like a succinct bookkeeper job explanation. If the resume is sufficiently remarkable, then a call for an interview shall be scheduled. Lack of interview requests can be indicative of a lackluster resume.

Once an meeting is scheduled, be happy to be there on period. Nothing looks more of little substance than being late for just a job interview. Answer concerns with candor and self confidence. Rehearse probable questions with a friend to get used to the process.

If fortunate enough to be selected on an accounting job internship, take advantage of out of the opportunity by learning the practical facets of the job and making plenty of friends who will be valuable industry contacts. These will pay dividends sometime soon.

For more helpful tidbits, please go to online bookkeeping. Or instead you could take a look at the bookkeeping job website for a differing review on this theme.

Trading in EGPT Halted - 4 Other ETFs With Significant Egypt Exposure

By Robert Goldsborough

Monday, Van Eck Global announced that owing to the current turmoil in Egypt (and the closure of the country's equity exchange), Van Eck has suspended creation orders in Market Vectors Egypt Index ETF (EGPT). However, Van Eck also announced today that it is continuing to allow investors to redeem their shares in EGPT (which as of this writing was up about 6% on the day, on heavy volumes), per the fund's prospectus.

"Van Eck Global will exercise its right to suspend creation orders of Market Vectors Egypt Index ETF," the firm said in a press release. "This follows the firm's normal policy of suspending creation orders when the underlying market is closed for an extended period thereby helping to prevent the costs of creation activity to be borne by existing shareholders."

What does this mean for investors? As we have seen in previous (but very different) situations in which ETF providers allow redemptions while halting creation orders, it typically prevents an ETF from trading at a large discount, but it does allow an ETF to trade at an at-times substantial premium to the value of its underlying stock holdings (as no authorized participants can arbitrage away the premium by creating new shares and selling them until the premium disappears). Such has been happening recently, so EGPT is effectively functioning as a closed-end fund.

With between $11 million and $12 million in assets, EGPT ordinarily is a fairly thinly traded ETF.

The NYSE Arca halted trading in EGPT before the market open on Monday, on news pending, which turned out to be Van Eck's announcement. The NYSE Arca allowed trading to resume at 11:30 a.m. Eastern time.

Van Eck also noted that EGPT "expects to resume normal operations once the Egyptian Stock Exchange reopens."

Trading has not been halted in other ETFs with meaningful exposures to Egypt, including PowerShares MENA Frontier Countries Portfolio (PMNA), which has more than 16% of its assets invested in companies based in Egypt; Guggenheim Frontier Markets (FRN), which has a nearly 13% exposure to Egypt; Market Vectors Africa Index ETF (AFK), which has more than 20% exposure to Egyptian companies; or WisdomTree Middle East Dividend (GULF), which has a nearly 10% exposure to Egypt.

Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.

Brady Earnings Preview

Brady (NYSE: BRC  ) hasn't been able to establish an earnings trend, bouncing between beating and falling short of estimates during the past fiscal year. The company will unveil its latest earnings on Thursday, Feb. 16. Brady is an international manufacturer and marketer of identification solutions and products which identify and protect premises, products, and people.

What analysts say:

  • Buy, sell, or hold?: Analysts think investors should stand pat on Brady with five of seven analysts rating it hold. Analysts don't like Brady as much as competitor Checkpoint Systems overall. Two out of two analysts rate Checkpoint Systems a buy compared to two of seven for Brady.
  • Revenue Forecasts: On average, analysts predict $330.7 million in revenue this quarter. That would represent a rise of 0.5% from the year-ago quarter.
  • Wall Street Earnings Expectations: The average analyst estimate is earnings of $0.49 per share. Estimates range from $0.43 to $0.53.

What our community says:
CAPS All-Stars are strongly supporting the stock, with 96.4% assigning it an "outperform" rating. The community at large backs the All-Stars, with 93.5% giving it a rating of "outperform." Fools are bullish on Brady, though the message boards have been quiet lately with only 42 posts in the past 30 days. Even with a robust four out of five stars, Brady's CAPS rating falls a little short of the community's upbeat outlook.

Brady's profit has risen year-over-year by an average of 35.9% over the past five quarters. Revenue has now gone up for three straight quarters.

Now let's look at how efficient management is at running the business. Traditionally, margins represent the efficiency with which companies capture portions of sales dollars. The company's net margins have been increasing year-over-year for the last four quarters. Net margins reflect what percentage of revenue becomes profit. See how Brady has been doing for the last four quarters:






Gross Margin





Operating Margin





Net Margin





We can help you keep tabs on your companies with My Watchlist, our free, personalized service. Add Brady now.

iShares Rolls Out Commodity-Focused Equity ETFs

iShares, the largest U.S. ETF issuer in terms of both assets and number of funds, continued the aggressive expansion of its product lineup this week with five new products offering exposure to commodity-related stocks. Each of the new ETFs will compete with existing products offering indirect exposure to natural resources through stocks of companies that are engaged in the exploration, production, and sale of various commodities [for updates on all new ETFs, sign up for the free ETFdb newsletter].�

MSCI Global Agriculture Producers Fund (VEGI)

This ETF seeks to replicate a benchmark that consists of global agribusiness stocks, including fertilizer and chemical companies, farm machinery manufacturers, and food and meat packagers. The underlying index consists of about 170 different stocks from a number of developed and emerging markets, with the top country allocations being the U.S. (42%), Canada (14%), and Switzerland (8%). Agribusiness stocks have seen significant interest in recent years amidst intensifying concerns about food shortages in the future as the world population continues to climb. Moreover, emerging markets such as China have aggressively pursued investments in agribusiness as a way to feed increasingly large and wealthy populations [see Commodity Guru ETFdb Portfolio].

VEGI joins a number of other agribusiness ETFs, including the ultra-popular Market Vectors Agribusiness ETF (MOO has grown to almost $6 billion), PowerShares Global Agribusiness Portfolio (PAGG), and IQ Global Agribusiness �Small Cap ETF (CROP). The new iShares has a considerable edge in one key area; the expense ratio of just 0.39% beats all of the competing funds by at least 20 basis points.

MSCI Global Energy Producers Fund (FILL)

This ETF offers exposure to the global energy sector, specifically targeting energy and exploration companies. The underlying index explicitly excludes companies that derive their revenues primarily from marketing, storage, or transportation of oil and gas, as well as alternative fuel companies. FILL’s index consists of more than 300 individual stocks from around the globe, though U.S. companies account for about 46% of assets. Other large country allocations are made to the UK (19%) and Canada (11%). The largest holdings in FILL include several well known oil firms, such as Exxon, Chevron, BP, Shell, Total, and ConocoPhillips.

There are now more than two dozen ETFs in the Energy Equities ETFdb Category, with combined assets of more than $15 billion. FILL will also charge 0.39%, which puts it well below the category average of 0.51% [see ratings for energy ETFs].

MSCI Global Select Metals & Mining Producers Fund (PICK)

This ETF offers exposure to the global mining sector; the underlying MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index includes companies engaged in the extraction and production of diversified metals (about 62% of holdings), aluminum (3%), steel (33%), and precious metals and minerals excluding gold and silver (3%). PICK consists primarily of international companies, with the U.S. making up just about 11% of holdings. The largest country allocations include the UK (25%), Australia (19%), Brazil (10%), and Japan (6%).

The largest individual holdings of PICK are all well known mining giants, including BHP Billiton, Rio Tinto, Vale, XStrata, Rio Tinto, and Freeport McMoran. This ETF also charges an expense ratio of just 0.39%, which makes it just a bit more expensive than the SPDR S&P Metals & Mining ETF (XME charges just 0.35%). The appeal of PICK may lie in the depth of holdings; the new iShares ETF is linked to an index consisting of more than 360 individual stocks, while XME has only about 40 components and focuses only on U.S.-listed securities.

MSCI Global Gold Miners Fund (RING)

This ETF is linked to an index that consists of companies that derive the majority of their revenues from gold mining and do not hedge their gold exposure–a feature that could help to strengthen the correlation to spot gold prices [see our GLD-Free Gold Bug ETFdb Portfolio]. RING has about 40 holdings in total, with the largest weights going to gold mining giants Barrick Gold (16%), Goldcorp (12%) and Newmont Mining (9%).

The gold mining ETF space is already quite crowded; RING will be competing with products such as the Market Vectors Gold Miners ETF (GDX has about $7.5 billion in assets and ADV of almost 7 million shares) and the Global X Pure Gold Miners ETF (GGGG). The new iShares ETF could compete on expenses; at just 39 basis points it is by far the cheapest option on the market.

MSCI Global Silver Miners Fund (SLVP)

This ETF offers exposure to a basket of about 30 global silver mining companies, including Silver Wheaton (19% of assets) and Cia de Minas Buenaventuras (11%). Not surprisingly, Canada (58%) and Peru (12%) are the largest country allocations in the underlying portfolio. SLVP isn’t necessarily a “pure play” on silver, since a number of the component firms generate significant chunks of revenue from gold as well as various industrial metals. According to the SLVP fact sheet, about a quarter of the underlying index consists of gold miners.�It is interesting to note that both RING and SLVP count Peruvian mining giant Cia de Minas Buenaventura among their ten largest individual holdings.

The Global X Silver Miners ETF (SIL), which debuted in 2010 and has assets of more than $350 million, focuses more specifically on companies that derive revenues primarily from silver.

NYT On Future Of Government Safety Net: Misses Growth, Health Care Stories

The NYT had a thoughtful piece on the public's greater reliance on Social Security, Medicare and other benefits. While the piece provides many useful insights into the increasing importance of these programs in people's lives and their attitudes toward them, it does miss a few key points.

First, it implies that the growth of government programs, rather than the economic downturn, is the main factor behind the current deficit:

Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt.

In fact, the country would be facing very small deficits at present had it not been for the recession. Part of the rise in the deficit in the last four years has been due to the expansion of unemployment benefits, food stamps and other government programs, but this was a response to the recession, not a sudden urge on the part of politicians to increase the generosity and scope of these programs.

A second point that deserved more emphasis is the extent to which the projected budget problems in future years are the result of a broken health care system. The United States already spends more than twice as much per person for its health care as do people in other wealthy countries with little obvious benefit in outcomes. This gap is projected to grow rapidly in the decades ahead. If U.S. health care costs were in line with costs in other countries, then the country would be looking at long-term surpluses, not deficits.

A third factor that provides an important backdrop to this discussion is the path of wage growth. The people interviewed for this piece expressed concern for their children and grandchildren's living standards based on the possibility that they would face higher taxes. However, the extent to which taxes impose a burden depends hugely on workers' before tax income.

If workers get their share of projected productivity growth, then real wages will rise by roughly 1.3 percent a year, even assuming a higher portion of compensation going to pay health care benefits. This growth rate implies that wages will be nearly 40 percent higher after 25 years, roughly a generation. This would mean that if most workers got their share of productivity gains, then after-tax wages would be far higher for the next generation than for current workers even if the tax rate they paid increased substantially.

This brings home the point that the real problem faced by the people interviewed for this piece and elsewhere in the country is that they have not been sharing in the gains of economic growth. If the current policies that enforce this pattern of income distribution persist, then workers in the future will find their taxes to be a serious burden, however the core problem is the set of polices (e.g. trade, Fed policy, patent policy etc.) that lead to an upward redistribution of income, not taxes.

Thursday, November 1, 2012

Two Simple Money Rules All "20-Somethings" Should Know

Editor's note: Today's piece is a little different. It's an edited transcript from a recent episode of Stansberry Radio, a weekly show hosted by Porter Stansberry and his longtime friend Aaron Brabham. As it turns out, a younger audience is tuning in. Porter offered them a few common-sense tips... And whether you're 20 or 80, we think they're worth noting...

Aaron Brabham: So Porter, it turns out we have a new demographic that we never sought to attract... the 20- to 25-year-olds.

I love it, personally, because I feel like this could be the next generation of conscientious voters and good investors. These people could have some good sense about them if they keep listening to Stansberry Radio... 

Porter: I think it's great. The young people I correspond with seem to be extremely smart, very normal people... 

For the young folks out there, the single most important thing you can learn at your age has nothing to do with investing, per se... 

It's simply this: 

Live beneath your means. 

Do not borrow money. 

It's that simple.

If you just go to work every day, try your best, build a career, save money – save 20%-25% of your income – and don't get into debt, then by the time you are 35 years old, you will be well ahead of the game. 

By the time you're 40, you can be a millionaire, easily. And you don't have to do anything with investing beyond corporate bonds, municipal bonds, local real estate deals. There is no reason for you to become a stock trader or an options seller or anything like that. You don't have to do that, and I wouldn't recommend you do it until you can do it full time.

Now, let's say you're 55 years old, you're retiring. You've got 40 hours a week to spend on your investments. Fantastic! You can do the options stuff. You can start getting into the junk bonds. You can learn to trade the junior mining stocks, which is hard to do but can be very lucrative.   

But if you're 20-something right now, don't waste your time and energy with all that stuff...

You can read about it, you can learn about it. That's great. But just focus on increasing your income by building a career and/or having a part-time business of your own and living beneath your means. 

Now here are some easy things to avoid: Don't ever borrow money to go to college. College is a waste of time to start with... why would you borrow money to waste time? It makes no sense. 

Secondly – and this is the trap that a lot of people fall into, Aaron – they want a huge house. They're 28 years old, they're 30 years old, they get married. They have a kid, and they believe, therefore, they've got to have a house, the house, and they go crazy into debt to buy it. 

Don't do it. I swear, you don't have to do that. If you just focus, instead, on living within your means, you can buy a small condo. You can live there for five years until you can afford to buy a small house. And by the way, I said buy. I didn't say mortgage. I said buy.

If you become dedicated to never getting into debt, your entire financial life will be brilliantly successful. If you can't avoid the temptation to get into debt, there's a 50/50 chance that you'll never make it. So what's the best thing you can do to increase your odds at financial success? 

Simple. Live within your means... avoid debt. But guess how many listeners will follow that advice...

Aaron: I hope at least one does... because guess who didn't do that? This guy. Two thumbs pointing up at myself...   

I was in a sales career path. And sales dangles the carrot in front of you because you can make some good money. Man, it is nice to get those big checks, but then... you want to keep up with the Joneses. You've always got somebody – maybe one of your friends – who's a little bit better off than you, who you're chasing after. It will get you off-track quick...

But I'm a minimalist now. You know this, Porter. Now, I save like crazy. I live way below my means. I have zero debt, and I've never felt better. I sleep better now than I've ever slept in my entire life.

Porter: The thing I want to tell young people is that unless you can do it on a full-time basis, you don't need to start investing yet...  

Sure, some of your money should go into high-quality, blue-chip, dividend-growing stocks. Absolutely. That's part of your savings program. You can do it via your 401(k). You can do it with an IRA. I'm not saying avoid stocks all together. But I'm saying most of your money should be in corporate bonds, municipal bonds, gold, silver, and rental real estate. 

More importantly, figure out how to avoid being in debt. There is an easy way to do it. Just say, "I'm not going to borrow money." Then everything else in your life will become a lot more simple... You're not going to be shopping for a new car, for example. You could buy a decent car for $2,000. Why would you borrow $20,000 to buy a new one? It makes no sense. 

If you really want to be rich, the first step is: Don't ever borrow a penny. As soon as you understand interest, you will only be a lender. You will never be a borrower. Out of all the things I did right financially, that was the most important one.

The second step was I was dedicated to always working for myself. And if you can put those two things together, you can be rich by the time you're 30. 

But I'll tell you this. There is more to life than being rich. And, Aaron, you know me... you know my story. I gave up on lots of other things in my life... for many, many years. 

Aaron: A decade. 

Porter: But this is what I wanted. I wanted to be rich, and I sacrificed everything else to get it. There are people out there, who are 20 years old who are listening, who say, "Yeah, that's what I want to do, too." 

Aaron: But they're not willing to make the sacrifices or have the dedication to achieve it.

Porter: Right.

5-Star Stocks Poised to Pop: Graham

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, vacuum and heat transfer equipment manufacturer Graham (AMEX: GHM  ) has earned a coveted five-star ranking.

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

Graham facts

Headquarters (Founded) Batavia, N.Y. (1936)
Market Cap $233.3 million
Industry Industrial machinery
Trailing-12-Month Revenue $108.9 million
Management CEO James Lines (since 2008)
CFO Jeffrey Glajch (since 2009)
Return on Equity (Average, Past 3 Years) 12.1%
Cash/Debt $44.5 million / $311 thousand
Dividend Yield 0.4%
Competitors Alfa Laval
Gardner Denver
Kemco Systems

Sources: S&P Capital IQ and Motley Fool CAPS.

On CAPS, 97% of the 1,100 members who have rated Graham believe the stock will outperform the S&P 500 going forward.

Late last year, one of those bulls, All-Star ikkyu2, touched on the tailwinds working in Graham's favor:

World economy will get back on its feet; [Graham] is positioned in a sweet little niche for the next wave of the energy services business.

E.g.: How do we make our refinery process crude that's more sour than our usual feedstock? Call [Graham]. How do we extend the life of our current nuke plant? Call [Graham]. How do we improve efficiencies at the pump and conversion stages of our solar plant? Call [Graham]. How do we maintain our nuke sub and carrier fleets' nuke-steam motors? Call [Graham].

Everything that matters, worldwide. Nothing that doesn't. I'm so bullish on this company, I could moo.

What do you think about Graham, or any other stock for that matter? If you want to retire rich, you need to put together the best portfolio you can. Owning exceptional stocks is a surefire way to secure your financial future, and on Motley Fool CAPS, thousands of investors are working every day to find them. CAPS is 100% free, so get started!

Want to see how well (or not so well) the stocks in this series are performing? Follow the new TrackPoisedTo CAPS account.

Thursday’s Stocks to Watch: Weight Watchers, NetApp

Here are the stocks to keep on your radar Thursday:

  • Shares of Weight Watchers (NYSE:WTW)�jumped�32% in early Thursday trading after the company blew away analysts’ fourth-quarter profit and revenue estimates. The company also guided the Street higher for its full-year 2011 earnings expectations.
  • NetApp (NASDAQ:NTAP) was�9% lower after the company beat third-quarter earnings expectations late Wednesday, but missed with its fourth-quarter forecast. The stock was downgraded to neutral from overweight by Piper Jaffray.
  • CBS (NYSE:CBS) shares added�nearly 3% to $21.48�after the company beat fourth-quarter estimates late Wednesday. Wedbush raised its price target on the stock to $21 from $19.
  • Williams Cos. (NYSE:WMB) was�10% higher after a slew of news. After Wednesday’s closing bell, the company said it plans to pursue splitting into two separate public companies, spinning off its production and exploration business with an IPO in the third quarter. The company also boosted its quarterly dividend by 20%, and, for a kicker, it beat fourth-quarter earnings estimates early Thursday.
  • Timberland (NYSE:TBL) shares�shot nearly 23% higher�after the company beat fourth-quarter estimates on the strength of global footwear revenue, which rose more than 31%.

Solar Surges: LDK, STP, JASO, CSIQ Rise Despite Deep Losses

Investors seem to be calling a bottom, at least for the moment, in the fortunes of solar energy technology providers, with the stocks rising nicely despite a slew of earnings this morning that fell short of expectations.

The combination of terrible results that were, however, somewhat foreshadowed by preannouncements, plus “guidance” that in many cases agrees with the Street’s diminished expectations, and the beaten-down state of the stocks, may be acting as a relief of sorts to some investors, suggesting to them the worst about the industry is on the table and priced in the stocks.�

SunTech Power Holdings (STP), based in Wuxi, China, reported revenue of$809.8 million and a loss of 64 cents a share. The revenue result was better than the expected $776 million,�but the net loss was worse than the 26 cents the Street was looking for. For the year, the company cut its outlook to a range of $3 billion to $3.1 billion in revenue from a prior range of $3.2 billion to $3.4 billion. That is in line with the $3.1 billion analysts have been modeling.�

STP shares are up 39 cents, or almost 18%, at�$2.62.

Zhabei, China-based JA Solar (JASO) also beat revenue estimates for its Q3, reporting $388 million versus �$379 million expected, but reported a net loss of 36 cents, well below the 1-cent-per-share expected. The company cut its full-year solar cell and module shipment forecast to 1.6 gigawatts from a prior 1.8-gigawatt forecast.

JASO stock is up 3 cents, or 2%, at $1.55.

Canadian Solar (CSIQ), based in�Kitchener, Ontario, reported revenue of $499 million, above the $496 million expected, but delivered a net loss of $1.02 per share versus a consensus estimate for a 39-cent loss. The company reiterated its year shipment view, but also said it would cut its Q4 capital expenditure forecast by about a third.�

Canadian Solar shares are up 21 cents, almost 10%, at $2.41.�

And Xinyu, China-based LDK Solar (LDK) turned in revenue and earnings below expectations, reporting $472 million and a net loss of 87 cents a share, worse than the $499 million and 46-cent loss analysts were expecting. The company forecast Q4 revenue in a range of $440 million to $520 million, below the average $507 million estimate.�

LDK shares are up 19 cents, almost 7%, at $3.02.

AT&T And Sprint: First Move Towards Cutting Smartphone Subsidies

The market for smartphones is hugely reliant on mobile carrier subsidies, and a good part of this market is upgrades for existing customers. Thus, when AT&T (T) decides to double its upgrade free from $18 to $36, much like Sprint (S) did on September 9, 2011, the operator is giving a first step towards raising the cost for the customer to upgrade, and as such, lowering the incentive and probability that the customer will do so.

Fewer upgrades, in turn, will quickly turn into less smartphone sales. After all, almost the entire market already carries a mobile phone, so except for new entrants and people switching operators, the overwhelming majority must be getting their phones through upgrades.

This is a logical step for the mobile phone operators - if the customer is simply upgrading his phone, the operator gains nothing, and picks up an added cost as mostly every smartphone is heavily subsidized, so the mobile operator has to eat a loss on almost every upgrade. On the other hand, these fees cannot be so high as to incentivize the customer to switch carriers to get the new smartphone, so there's a limit on how high they can go.

Still, the fact that mobile carriers are waking up to the cost of providing deeply subsidized smartphones to their customers, and trying to, however slightly, put limits and costs on the practice, has to be seen as potentially positive for the mobile operators, and potentially negative for the smartphone makers, including Apple (AAPL), Samsung, Nokia (NOK) and Motorola (MMI), among others.

Impact on Carriers

Taking into account Sprint 's latest quarter, Sprint sold 1.8 million iPhones, but of these only 40% were for new customers. I say "only", but the company actually bragged about there being so many. What this tells us is that 60% of the 1.8 million iPhones were sold to existing customers - that's a full 1.08 million iPhones. While it's hard to know how many of these were subject to the upgrade fee, it does set an upper limit at $18 x 1.08 million = $19.44 million, or just $0.0065 per share in added revenues. However, the largest impact in this scenario would not come from how much more additional revenue Sprint can bring in, but instead on how many existing customers Sprint can discourage from upgrading while still remaining with the company. With subsidization per iPhone running at around $400, even if just 10% of the customers chose not to upgrade, that would represent savings of 1.08 million x 10% x $400 = $43.2 million, or $0.014 per share … and remember, that's just with discouraging 10% of the upgrades.

AT&T would probably see an even greater impact. After all, AT&T sold 9.4 million smartphones (and 7.6 million iPhones), while recording just 2.5 million net new customers. Again, most smartphones were surely upgrades, and AT&T says as much when talking about the cost impact.

Fourth-quarter 2011 reported wireless operating expenses totaled $14.2 billion, up 20.9 percent versus the fourth quarter of 2010, due to record smartphone activations including the October 2011 iPhone 4S launch and customer upgrade levels. AT&T Mobility's operating income margin was 15.2 percent compared to 22.9 percent in the year-ago quarter, reflecting these expense factors and partially offset by further revenue growth from the company's base of high-value smartphone subscribers and cost-savings initiatives.

This points towards more than 73.4% of the smartphone sales being to existing customers, or 6.9 million phones. If all were subject to the upgrade fee, it could mean as much as $124.2 million in additional revenues or $0.021 per share. Again, if just 10% of the customers could be persuaded not to upgrade, that would make for 0.69 million phones, which at $400 a piece in subsidies would mean savings of $276 million … or $0.047 per share.

Impact on Smartphone Makers

The impact of this kind of measure is quite hard to estimate (it basically depends on the demand elasticity that customers will show, because of having to pay a higher price for their upgrades), however, it shouldn't be underestimated.

It's hard to say what the impact of this measure will be - surely, it will lead to fewer upgrades as any increase in price does, but quantitatively it's something that has to be monitored before its impact can be gauged.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Verizon and Leap Trade Spectrum for LTE, EV-DO Buildouts

Verizon (NYSE: VZ  ) Wireless and Cricket provider Leap Wireless (Nasdaq: LEAP  ) announced a significant exchange of spectrum that, if approved by the FCC, will allow Leap to launch LTE service in Chicago and will allow Verizon to bolster its CDMA EV-DO and LTE networks in locations across the country.

The companies filed the spectrum exchange proposal with the FCC last week, arguing the agency should approve the transaction since the spectrum licenses in the transaction mostly haven't been built out and cover a relatively small percentage of the population. The licenses to be acquired by Verizon Wireless cover approximately 18.7 million POPs; the Chicago license to be acquired by Leap covers around 11 million POPs. Such spectrum swaps are relatively common among the nation's wireless carriers, though they can be worth hundreds of millions of dollars.

In the exchange, Leap is to get a 12 MHz 700 MHz A Block license covering Chicago that Verizon paid $152 million for during the FCC's 700 MHz auction in 2008. Leap said it currently owns 10 MHz of spectrum in Chicago and will use the additional spectrum to launch LTE service in the Windy City. Verizon currently offers LTE service in Chicago using its 700 MHz C Block spectrum.

"With carriers worldwide upgrading to faster and more efficient LTE technology, Cricket's deployment of this technology is critical to its ability to deliver competitive services to customers in the coming years," Leap wrote in its FCC filing for the swap.

Leap has said it plans to launch an LTE trial market in Tucson, Ariz., later this year, and will cover a total of 25 million people with LTE by the end of 2012, but it hasn't provided any additional details, including which markets will be built out.

Verizon, meanwhile, will acquire from Leap 23 PCS licenses and 13 AWS-1 licenses covering locations across the country, as well as a handful of other licenses. Verizon said it will use the spectrum to bolster its CDMA EV-DO and LTE networks. Verizon offers EV-DO service over its PCS spectrum across the country and has said it will launch LTE service on its AWS licenses (as a way to supplement its current deployment of LTE on its nationwide 700 MHz spectrum).

Interestingly, in its FCC filing, Verizon said the transaction is necessary for the carrier to continue meeting customer demands for mobile data -- a notable argument considering the enormous swaths of spectrum already owned by the carrier.

"While Verizon Wireless has consistently looked for ways to use spectrum in the most efficient manner, it has already obtained most if not all of the benefits achievable from more efficient use. ... While cell splitting can in some instances help meet increased demand, the benefits of that technology are limited because of the restricted ability to deploy additional towers and cell sites, and substantial costs of deploying additional sites. In short, techniques to enhance the efficient use of the spectrum will not be sufficient alone to meet the accelerating demand for more network capacity," the carrier wrote in its FCC filing. "Verizon Wireless' proposed acquisition of spectrum in the above-listed markets is therefore necessary to supplement the spectrum on which Verizon Wireless currently offers LTE and EV-DO technology to its subscribers."

The financial details of the transaction are unclear. "If both transactions close concurrently, Cricket will make a monetary payment to Verizon Wireless," Leap wrote in the filing. Representatives from both carriers declined to provide details.

This article originally published here. Get your wireless industry briefing here.

Related Articles:

  • Verizon wants to swap spectrum with U.S. Cellular
  • AT&T pays Sprint $59M in spectrum swap
  • AT&T scores 700 MHz spectrum for 3G, 4G from Windstream

Wednesday, October 31, 2012

Is the Baffinland Takeover Saga About to Escalate?

We have been following the takeover saga for Baffinland Iron Mines (BIMGF.PK) since the original $0.80/share (CAD$) offer from Nunavut Iron Ore Acquisitions. (All offering prices are in Canadian Dollars for this article as Baffinland is primarily traded in Canada, currently USD/CAD is trading at approximately par). We have held long positions at different points as arbitrage trades since the original bid by Nunavut, and we think the price action today in the shares of Baffinland Iron Mines indicates a higher bid is coming for the company and its massive Mary River iron ore deposit.

Starting at 11:41 AM yesterday, over 840,000 shares of Baffinland traded at prices above the previous intra-day high in a two minute window and the stock ran all the way up to $1.60 when it had been trading in the $1.50 region during the day up to that point. Based on the closeness of such a massive amount of volume, we have concluded that this was a buy order.

If we are pessimists and assume the lowest price for the stock since 11:41 AM was the price for all those shares ($1.50, the open price at 11:41 AM), then over $1.25 million worth of Baffinland was purchased in a two minute period and that suggests to us that someone is making a major bet on a higher offer coming for the company. We think it is rather significant that this buyer did not choose to space out his purchases and instead chose to apparently clear off the order book for the stock all the way up to $1.60/share.

At the time of this writing, Baffinland is trading at $1.52 which is above the peak offer of $1.45/share from Nunavut for a controlling stake and the $1.40/share offer from Arcelor Mittal for 100% of the company.

We think this block order is a major tell as to how this takeover saga will progress. Bloomberg published an articlequoting a Chinese official as stating that a Chinese firm is involved in bidding for Baffinland. We do note that this article was published one hour after the price action we noticed which suggests the article is not what moved the stock. According to the article:

"As far as I know, global miners including ArcelorMittal, a Texas-based U.S. oil company and others are all bidding forit,” Liu Yikang, who heads the Expert Group for Overseas Resources Projects under China’s Ministry of Land and Resources, said today in a telephone interview. “A Chinese company is also involved."

The interesting part of this story is that only two bids have been made public, the hostile Nunavut bid and the management-backed Arcelor Mittal (MT) bid. Former Baffinland CEO Gordon McCreary has previously mentioned his efforts to bring a Chinese bid to the table, but it has not yet materialized. With a Chinese official publicly stating that he believes all these other groups are involved and that China is involved in the Baffinland bidding process, it is our opinion that the upside to Baffinland shares at these levels are good for those who enjoy a good arbitrage opportunity. In simpler terms, we think a third bidder is going to join the Baffinland takeover talks.

The downside on this trade is that fifty percent of the shares are tendered to Arcelor Mittal (MT) and the stock drops to $1.40 and we would take almost a ten percent loss, but we think the upside is much higher than ten percent. The risk/reward is attractive in our opinion.

Arcelor Mittal and other steel makers desire to not be so dependent on iron ore miners for one of the critical ingredients for steel. The Mary River deposit is one of the largest untouched iron ore deposits in the world and the deposit is of very high quality (see Baffinland website for specifics, we cannot explain it better than the company can). With such a high quality deposit in play, we are further convinced that more suitors will be joining the bidding.

There are issues with the Mary River deposit, and our personal favorite is the fact that the sun does not rise for over a month in the winter because it is in the Arctic. But the quality and size of the deposit in such a politically stable country (Canada) suggests to us that the obstacles are surmountable.

The other major issue is that the capital expenditure to bring the entire Mary River property into production is very high. We have seen a figure of $4.1 billion on the company website pulled from the definitive feasibilty study, but the after-tax net present values for the project was $2.9 billion with a 7% discount rate from the same feasibility study with an after-tax IRR of over 15%.

We note also that this feasibility study does not include all nine deposits that encompass the Mary River property. Just to put these net present value numbers into perspective, the current bids for Baffinland value the company at less than $750 million.

Based on the price action in Baffinland Iron Mines yesterday and supported by the Bloomberg story, our editor has opened a position in Baffinland Iron Mines at $1.52/share and does not intend to tender shares to either existing tender offer. We think a third bid will come to the table in this takeover drama and move the price higher.

Disclosure: I am long BIMGF.PK.

Smart Money Stock Picks in Strong Cash Positions

Since the recession, persistent uncertainty has caused many U.S. companies to stockpile their cash as a way to prepare against future dips in demand. Apple currently has an astonishing $81.6 billion in cash, although CEO Tim Cook said the cash isn't "burning a hole in our pocket." Google also reported $42.6 billion in cash at the end of the third quarter. What does this mean for investors?

Cash is king
High levels of cash mean that a company is in a safer position to endure future lulls in demand -- a great asset at a time when IMF chief Christine Lagarde is warning of the risk of a global "lost decade" amid a quickly evolving European debt crisis.

High cash also puts companies in a strong position to enter a global recovery, allowing for hefty acquisitions that would otherwise not be possible. A great example is Google's plan announced in August to purchase Motorola Mobility for $12.5 billion, allowing Google to enter the mobility hardware business.

Investing ideas
The more volatile markets become, the more comfort investors may find in stocks with large amounts of cash relative to operating expenses.

With that idea in mind, we ran a screen for stocks with the highest amounts of cash relative to their average quarterly operating expenses. We also searched for companies with buying attention from the "smart money" investors: institutional investors and company insiders.

The smart money believes in these cash-comfortable names -- do you? Use this list as a starting point for your own analysis.

List sorted by cash / avg. operating expense. (Click here to access free, interactive tools to analyze these ideas.)

1. Complete Genomics (Nasdaq: GNOM  ) : Develops and commercializes a DNA sequencing platform for human genome sequencing and analysis. Average quarterly operating expense over the last five quarters at $16.42M, vs. most recent cash and short term investments at $126.41M, implies a Cash / Avg. Operating Expense ratio at 7.7. Net institutional purchases in the current quarter at 6.4M shares, which represents about 62.62% of the company's float of 10.22M shares. Over the last six months, insiders were net buyers of 1,650,000 shares, which represents about 16.14% of the company's 10.22M share float.

2. GTX (Nasdaq: GTXI  ) : Engages in the discovery, development, and commercialization of small molecules to treat cancer, osteoporosis and bone loss, muscle loss, and other serious medical conditions. Average quarterly operating expense over the last five quarters at $11.27M, vs. most recent cash and short term investments at $83.01M, implies a Cash / Avg. Operating Expense ratio at 7.37. Net institutional purchases in the current quarter at 11.4M shares, which represents about 53.98% of the company's float of 21.12M shares. Over the last six months, insiders were net buyers of 6,978,510 shares, which represents about 33.04% of the company's 21.12M share float.

3. Alimera Sciences (Nasdaq: ALIM  ) : Engages in the research, development, and commercialization of prescription ophthalmic pharmaceuticals. Average quarterly operating expense over the last five quarters at $5.55M, vs. most recent cash and short term investments at $38.61M, implies a Cash / Avg. Operating Expense ratio at 6.95. Net institutional purchases in the current quarter at 2.0M shares, which represents about 27.25% of the company's float of 7.34M shares. Over the last six months, insiders were net buyers of 7,553 shares, which represents about 0.10% of the company's 7.34M share float.

4. Midway Gold (NYSE: MDW  ) : Engages in the acquisition, exploration, and development of mineral properties in North America. Average quarterly operating expense over the last five quarters at $2.47M, vs. most recent cash and short term investments at $15.26M, implies a Cash / Avg. Operating Expense ratio at 6.17. Net institutional purchases in the current quarter at 7.8M shares, which represents about 10.18% of the company's float of 76.63M shares. Over the last six months, insiders were net buyers of 100,000 shares, which represents about 0.13% of the company's 76.63M share float.

5. Winthrop Realty Trust (NYSE: FUR  ) : Engages in the ownership and management of real property and real estate-related assets. Average quarterly operating expense over the last five quarters at $10.66M, vs. most recent cash and short term investments at $51.34M, implies a Cash / Avg. Operating Expense ratio at 4.82. Net institutional purchases in the current quarter at 4.3M shares, which represents about 14.75% of the company's float of 29.16M shares. Over the last six months, insiders were net buyers of 198,400 shares, which represents about 0.68% of the company's 29.16M share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Your browser does not support iframes.

Kapitall's Alexander Crawford does not own any of the shares mentioned above. Accounting data sourced from Google Finance, institutional data sourced from Fidelity, insider data sourced from Yahoo! Finance.

Cities Where Real Estate Is Ripe For A Rebound

see photosMark Evans/istockphoto

Click for full photo gallery: Cities Where Real Estate Is Ripe For A Rebound

Lately economists and investors have been debating whether the housing market has hit bottom. It�s a complicated picture on a national level, but zoom in and it�s possible to identify cities that have not only reached a bottom, but are beginning to experience a recovery.

Take San Jose, Calif. The Golden State has gotten a lot of attention for its economic woes, but San Jose is a veritable oasis of prosperity. Employment in the capital of Silicon Valley is expected to expand 3.3% this year and it logged net in-migration in 2010 of 4,840 people. Job and population growth are fueling housing demand: New home construction in the area was up a whopping  97% in 2011�s third quarter compared to the year earlier.

San Jose is one of 10 metro areas that Forbes deems ripe for a real estate rebound.  The folks at Local Market Monitor, a Cary, N.C.-based real estate research firm, helped us compile this list, sorting through housing and economic data for the 100 most populous cities and their surrounding suburbs, defined as Metropolitan Statistical Areas and Metropolitan Divisions by the U.S. Office of Management and Budget.  LMM assessed the change in home prices over the past 12 months and three years (on the latter, our reasoning is that markets that lost less value in the housing bust have the potential to recover faster), unemployment rates, 12-month job-growth projections, the change in population from 2006 through 2009 (the most recent data available from the U.S. Census) and new-home construction rates for the third quarter of 2011 as compared to the same quarter in 2010.

Full List: The 10 Cities Where Real Estate Is Ripe For A Rebound

All of the cities that made our list share one common factor: a relatively strong job market. �For real estate to do well you want to see two things: that incomes are growing rapidly like they are in a market like San Jose � and that the growth in jobs attracts other people to that market,� says Ingo Winzer, founder and president of Local Market Monitor. However, job growth should be looked at as a bullish housing indicator only if the unemployment rate is already relatively low � that suggests local companies are creating new jobs rather than rehiring for positions they cut during the recession.

That seems to be the case in Boston. The New England hub has a low 5.7% unemployment rate thanks to the presence of more than 100 universities and colleges in the metro area and a variety of biotech and financial services companies. �Income is well above average. The housing boom was mild, with a 16% rise in prices followed by a 10% drop. The recession also was mild, with jobs down just 2%,� explains Winzer. Clear Capital and Truliaalso have positive forecasts for Beantown this year, and many of its neighborhoods graced Forbes� 2011 Most Expensive ZIP Codes list for the first time.  Other college towns offering real estate promise are Austin, Texas, and Raleigh, N.C.

Oil doesn�t just heat homes, it also heats up a housing market.  Cities where oil and natural gas are key components of the local economy have not only fared well in the downturn, they�ve thrived.  In Houston, where the heavy concentration of energy companies has earned it the nickname �Baghdad on the Bayou,� home prices shot up 21% from 2002 to 2007 and rather than falling, have stayed close to those 2007 levels since.  The population has grown at nearly triple the national rate and median income is above average. Houston and other Lone Star cities also didn�t succumb to the levels of overbuilding that cities in neighboring Sun Belt states did, either.

Two surprising entrants on our list are Pittsburgh, Pa., and Rochester, N.Y., industrial-era boomtowns that went through several decades of economic decline. Pittsburgh has been one of the most stable housing markets over the past five years: Prices have been more or less flat since the market peak in 2007. Home prices in Rochester have dropped 15% since 2007, but its economy has managed to stabilize and hang onto jobs.  �They [Pittsburgh and Rochester] are not high-growth markets yet, and they haven�t attracted new people yet,� says Winzer. �But they are both creating new kinds of jobs � high-tech and medical research-related jobs � and that�s why � they will do better than most markets this year.�

Another city on our list that has gone through tough times is New Orleans. The Big Easy sports a relatively low 6.5% unemployment rate, a forecast for 1.9% job growth this year and a steady influx of newcomers. �It is a really different kind of market because it is still heavily affected by what happened with Hurricane Katrina,� notes Winzer.  The port city boasts an economy fueled by energy, tourism and construction.  �The real estate situation is complicated by the large number of properties destroyed. Now that the economy seems to have stabilized, renewed population growth will spur new construction.�

One of the things to remember when looking at home price data for these recovery-ready markets is that price drops or increases of one, two, or 3% are a pittance compared to the double-digit percentage drops common in recent years. Real estate experts like Winzer agree that price fluctuations of 3% or less generally indicate that a market is stabilizing. If a city hovers within that range for several quarters or a year, it�s probably safe to say that market has found its bottom. All of the metro areas on our list have almost undoubtedly found their bottoms. New home construction, which remains depressed for nearly every market across the country, should take off in these markets later in the year. �Once these markets are truly recovering, you will see a doubling in activity,� asserts Winzer. �It�s the last thing that happens.�

Full List: The 10 Cities Where Real Estate Is Ripe For A Rebound


You can follow me on Twitter or subscribe to my Facebook profile. Read my Forbes blog here.


Dance Ballmer, dance! Microsoft is back

NEW YORK (CNNMoney) -- Perhaps it's time for Microsoft CEO Steve Ballmer to develop a new monkeyboy dance?

Ballmer is set to take the stage at the Consumer Electronics Show in Las Vegas Monday night (for the last time) and he's likely to rave about Microsoft's Xbox and Kinect gaming devices and its upcoming Windows Phone with partner Nokia (NOK).

Cue the Gloria Estefan? (If you haven't seen Ballmer's famous 2001 pep rally speech to developers, please do yourself a favor and click here. It's an amusing 75 seconds.)

Ballmer may finally have plenty of reasons to repeatedly jump up and down again.

While Microsoft's stock has been stuck in the tech version of No Man's Land between value and growth for about a decade, investors have taken a liking to Mister Softee so far in 2012.

Shares of Microsoft (MSFT, Fortune 500) shot up more than 8% last week. The stock is now less than 5% below its 52-week high of $29.46. If the momentum keeps building, it's possible that Microsoft can finally surpass the $30 level that it's flirted with for the past few years but can't seem to crack.

Microsoft still may appeal more to the value crowd than investors craving sexy growth. The stock trades for only about 10 times earnings estimates for this fiscal year -- which ends in July. And earnings per share are only expected to rise 2% this year and 11% in fiscal 2013.

Awesome, unreleased gadgets of CES

There's also that pretty big dividend. Microsoft yields 2.8%, nearly a percentage point higher than a 10-year Treasury if you're keeping score at home.

With $57 billion in cash, Microsoft could easily afford to keep boosting its payout for the foreseeable future.

"The stock is just too cheap and you have the dividend," said Gary Bradshaw, manager of the Hodges Equity Income (HDPEX) fund in Dallas. "It's been a dismal performer but Microsoft has grown earnings over the past few years and there's probably little downside.

The fact that Microsoft has been so unloved for so long could also mean that it may not take much for the stock to move significantly higher. Investors have grown accustomed to new product releases underwhelming the market. A big hit could go a long way.

"People say it's a PC stock and PCs are dead. You can't argue with that," Bradshaw said. "But there's still a lot of growth in emerging markets. And Windows Phone and Windows 8 are coming down the pike. It's got the potential to be a growth stock again."

There is, dare I say it, growing excitement about Windows 8, Microsoft's next operating system. That is currently scheduled to debut sometime later this year.

If early reviews of beta versions of Windows 8 for developers are to be believed, Microsoft may finally have some software that can help it in the rapidly growing tablet market. Apple's (AAPL, Fortune 500) iPad and the many devices running on Google's (GOOG, Fortune 500) Android are early leaders in tablets.

The new four horsemen of tech

But hopes are high for Microsoft's tablet-ready Windows. That's because Microsoft has finally agreed to move beyond its heavy reliance on processor leader Intel (INTC, Fortune 500) and also embrace chips designed by ARM Holdings (ARMH), the U.K. company often referred to as the Intel of mobile semiconductors.

"Yes, it's an old stodgy technology company compared to others but you have plenty of exposure to growth areas like mobile, search cloud and gaming with Microsoft," said Ted Parrish, co-manager or the Henssler Equity Fund (HEQFX) in Kennesaw, Ga. "Rumors of Microsoft's demise are always greatly exaggerated."

Parrish owns the stock in his fund and said that he's hopeful Windows 8 will be as successful as Windows 95 was for Microsoft. That may be tough given the increased competition from Apple and others.

But Parrish owns Apple too. So he is hedging his bets in tech ... which is a pretty smart move for anyone looking to invest in a sector that can often be as unpredictable as Ballmer's dance moves.

Best of StockTwits: Alcoa (AA, Fortune 500) kicks off the earnings parade Monday but there's little excitement. And Bristol-Myers Squibb (BMY, Fortune 500) is buying hepatitis C drug developer Inhibitex (INHX) for a huge premium. That's got biotech investors thrilled.

bradloncar: I've never seen a company post decent earnings just a week after announcing a restructuring. Don't expect $AA to be the first today.

Agreed. In fact, I think earnings overall won't be as strong as many hope. For more about that, check out this column I did last week.

Cash_Cow: $BMY buyout of $INHX will get the funds buying up small cap pharmaceuticals trading at dead lows like $ANX $ARNA $HGSI $ABIO $SQNM $POZN

Investors need to be careful. There could be a feeding frenzy in biotech. (See next tweet) But many small cap drug companies are unprofitable and risky. Hence, they deserve to be trading at their lows.

EXPstocktrader: Roche is probably pissed that $BMY has stepped on a deal that they intended to Buy IMO and we may have a horse race here soon.

The BMY deal, combined with last year's purchase of Pharmasset (VRUS) by Gilead Sciences (GILD, Fortune 500), could mean that Big Pharma will try and buy up the other companies working on hep C treatments. Achillion (ACHN) and Idenix (IDIX) both surged Monday.

jfahmy: Movies, Drugs, and iPads are all up this morning...What else do you need really?

Coffee? Starbucks (SBUX, Fortune 500) and Dunkin' Brands (DNKN) are both down though. Oh well.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. 

Tuesday, October 30, 2012

More Hedge Fund Investors? SEC Floats New Accredited Investor Rule

The Securities and Exchange Commission (SEC) has proposed a “Net Worth Standard for Accredited Investors” rule that would amend the Securities Act of 1933. This amendment is required under Section 413 of the Dodd-Frank Act.

The new rule requires the value of a person’s “primary residence” to be excluded when calculating net worth to see if an investor qualifies as “accredited.”

This new net worth standard was effective when Dodd-Frank became law but had required the SEC to revise the Securities Act to reflect this change. The sixth item below in the SEC definition of accredited investor is what the proposed rule would change. 

From the SEC’s website, “federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  • a bank, insurance company, registered investment company, business development company, or small business investment company;
  • an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a charitable organization, corporation, or partnership with assets exceeding $5 million;
  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors;
  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.”
  • The SEC comment period ends March 11.

    Big Pharma, Big Yield: 4 Stock Picks

    If you have been an investor in big pharmaceutical companies over the last several years, you're probably wondering when you will get a return on your investment. The Pharmaceutical Holdrs Trust (PPH) is down approximately 10% over the last five years. Though they are giant cash generators, shares of pharmaceutical companies have remained depressed due to pending patent expirations, anemic pipelines, and a very cautious FDA. It is hard to imagine that all of these worries are not priced into the shares now. If investors begin rotating into defensive sectors, the big pharmaceutical companies may once again have their day in the sun. Did I mention that you'll get paid handsomely to wait?

    I picked four pharmaceutical companies whose shares could benefit when investors warm up to the sector again. To begin my search, I looked for stocks that yield greater than 3%. That search came back with eleven large cap names. I narrowed the search by eliminating companies that have not grown earnings over the last five years. The stock with the largest dividend yield, AstraZeneca (AZN), yields 7.7%. I eliminated it from the list because its payout ratio is over 100%. Coming up with eight names, I picked the stocks with the best combination of price/earnings, price/owner earnings, and growth prospects. Here are my four picks.

    Lilly (LLY)

    Lilly is re-establishing itself as a diabetes company. The company has several promising compounds in the pipeline for treatment of the worldwide epidemic. Lilly has suffered from pipeline setbacks and regulatory violations. However, the company has refocused and has a promising future. Lilly could potentially be acquired or make acquisitions itself.

    The company has a market cap of $39.5 billion. Shares trade at a forward P/E of 8 and yield 5.75%. Lilly has grown revenue at an annualized rate of nearly 10% over the last five years. They have grown earnings at an annual rate of 20% over the same period of time. With shares trading at a price/owner earnings ratio of 8.25, shares look very attractive.

    Bristol-Myers Squibb (BMY)

    Bristol-Myers Squibb is focusing its research efforts on difficult to treat diseases such as cancer and diabetes. The pipeline looks promising with drugs for deep vein thrombosis, cancer, kidney transplant rejection, and diabetes. Shares are up only 4% in the last twelve months, as investors continue to worry about big patent expirations.

    Shares of Bristol-Myers yield just over 5%. With a market cap of $43 billion, BMY could become a take-over target once new compounds are approved. Bristol-Myers trades at a forward P/E ratio of 11.7. The company has grown earnings at a 4% annualized rate over the past five years. Shares look like a value with a price/owner earnings ratio of 10.4.

    Abbott Laboratories (ABT)

    Abbott Laboratories is a leading healthcare company with four main product segments; pharmaceuticals, medical devices, diagnostics, and nutritional products. The company recently won an appeal overturning a $1.67 billion patent-infringement judgment against it. The suit was brought by Johnson & Johnson (JNJ) over Abbott's arthritis drug, Humira. Humira generated $5.5 billion in sales in 2009. Abbott doesn't have the patent expiration cliff that other large pharmaceutical companies have. Yet, the share price has stayed depressed along with the sector. Over the last twelve months, shares are down 12%.

    Abbott has a market cap of $73.7 billion. Shares trade at a forward P/E of 10.3 and yield 4%. Abbott has raised its dividend for 37 consecutive years. The company has grown revenue at an annualized rate of 9.5% and earnings at an annualized 6.6% over the last five years. Abbott's price/owner earnings ratio is a reasonable 14.35. As one of the best run pharmaceutical companies, Abbott's shares are undervalued.

    Johnson & Johnson (JNJ)

    Johnson & Johnson has spent a lot of time in the news recently, and not for positive developments. The company has had a string of recalls affecting a whole line-up of products, including children's. While no person has actually been harmed by the manufacturing flaws, the company's reputation has. Consumers and investors alike have been displeased with the handling of the recalls. Despite being plagued with the problems, the company has continued to produce strong earnings. However, sales were down 5.1% in Q4 2010, due in part to the recalls. Sales should improve now that the company seems to have put the worst of the problems behind it and manufacturing has been shifted to unaffected facilities.

    Now may be the time to pick up shares of the company at a nice discount. Johnson & Johnson's shares trade at a forward P/E ratio of 12.3 and have not participated in this year's stock market rally. Year to date, JNJ is down almost 5%. The stock yields 3.62%. Johnson & Johnson has increased its dividend for 48 consecutive years. The company has grown revenue at an annualized rate of 4% over the last five years. It has grown earnings at an annualized rate of more than 7% over the same period of time. JNJ trades at a price/owner earnings ratio of 11.72. Johnson & Johnson is still a premier company. It will once again find its way, even if that eventually requires a management change. Until then, you can pick up shares at a depressed level and let the dividend pay you.

    Below is a side by side comparison of the valuation metrics for the four companies.

    Metric LLY BMY ABT JNJ
    Market Cap $39.5 B $43.6 B $73.7 B $163.8 B
    Recent Price $34.09 $25.49 $47.64 $59.64
    Forward PE 8.01 11.72 10.36 12.28
    Dividend Yield 5.75% 5.18% 4.03% 3.62%
    5 Year Div. Growth Rate 4.90% 2.90% 9.90% 10.60%
    Payout Ratio 43.00% 54.00% 58.00% 44.00%
    Price/Book 5.13 4.81 3.26 8.47
    Price/Cash Flow 5.89 8.5 10.22 10
    Price/Earnings Growth N/A 31.64 1.73 2.23
    Price/Owner Earnings 8.25 10.4 14.35 11.72
    Return on Equity 68.98% 33.77% N/A 67.90%
    Debt/Equity 0.88 0.59 N/A 0.48
    Revenue TTM $23.10 $19.5 B $35.2 B $61.5 B
    Operating Cash Flow FYE $6.86 B $4.49 B $8.74 B $16.39 B
    Capex FYE $694 M $424 M $1.02 B $2.38 B
    Capex/Cash Flow FYE 0.1 0.09 0.12 0.15
    5 Year Rev. Growth Rate 9.50% 0.90% 9.50% 4.00%
    5 Year Cash Flow Growth Rate 19.10% 3.80% 8.90% 6.20%
    5 Year Earnings Growth Rate 20.10% 4.40% 6.60% 7.30%
    Net Profit Margin 21.97% 15.92% 13.15% 21.65%
    Current Assets $14.84 B $13.27 B $22.32 B $42.72
    Return on Assets 16.35% 9.98% 7.78% 34.65%
    Long-term Debt $6.77 B $5.33 B $12.56 B $9.18 B

    Pfizer (PFE) is one additional stock I like in the sector. It did not make this list because it has failed to grow earnings over the last five years. In fact, they are flat. Pfizer trades at a forward P/E ratio of 8.4 and yields 4.24%. Pfizer has a price/owner earnings ratio of 9.82.

    The fact is that few sectors are as cheap as pharmaceuticals. The problem is they have been cheap for a long time. Investors have left the industry for dead. I argue that it will come back. This is really about as undervalued as these companies have ever been. Despite the patent expiration troubles, I expect there is very little downside risk left in these stocks. I do not know how long these stocks will remain depressed. However, one day investors will come back to this sector. In the meantime, these four solid companies pay big dividends.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.