Saturday, December 1, 2012

Is Chimera Liquidating?

Something odd is going on at Chimera Investment Corp. (NYSE: CIM  ) .

At the beginning of August, the struggling mortgage REIT published a press release announcing that it plans to initiate a "regular quarterly dividend of $0.09 per share for each of the third quarter and fourth quarter of 2012."

While I didn't think anything of it at the time, the company announced today that its board decided to "maintain a quarterly dividend of $0.09 per share for each of the first quarter and second quarter of 2013." And in the same release, Chimera said that its independent board members have "agreed with the Company's manager, Fixed Income Discount Advisory Company," a wholly owned subsidiary of Annaly Capital Management (NYSE: NLY  ) , "to reduce the management fee to 0.75% from 1.50% per annum."

Why this is odd
This is odd is for two reasons. First, as you can see in the chart below, neither Annaly nor Chimera have a history of paying stable dividends. This is because, as Chimera has stated in previous press releases, most recently this one: "the Company distributes dividends based on its current estimate of taxable earnings per common share," which vary depending on any number of variables including prepayment rates, net interest margin, and funding costs.

NLY Dividend data by YCharts.

And second, because of the following seemingly innocuous clause that many of analysts had overlooked in the last three press releases (here, here, and here, respectively) announcing dividends, "portions of which may be ordinary income, capital gains, or a return of capital." For the sake of clarity, it's the latter two, and particularly the intimation that it's returning capital, that are especially troublesome. As the company goes on to note: "For the first three quarters of 2012, Chimera has paid cash dividends totaling $0.29 per common share. Of this amount, $0.06 is currently expected to be characterized as a return of capital for federal income tax purposes."

So what does this mean?

The honest answer is: Nobody but executives at Chimera and Annaly know -- though, I think it's safe to say it isn't good. As I've discussed on multiple previous occasions, such as here and here, Chimera hasn't filed its annual and quarterly statements with the SEC for well over a year now. In addition, it's restating every previous financial statement it's filed since September of 2008, which, by the company's own admission, can "no longer be relied upon." For those of you who haven't followed this story, that's effectively every financial statement that it's filed as a public company, since the company didn't take shape until the end of 2007.

The issue has to do with how it accounted for the deterioration in the value of its non-agency mortgage-backed securities. Chimera previously recorded the unrealized losses in its shareholders equity account. However, it claims to have since come to the conclusion that it should have been recognizing the losses on its income statement. The estimated net result is to decrease Chimera's net income over the period between 2008 and 2011 by a staggering 66%, from $1.06 billion down to $367 million.

To make matters more interesting, the purported errors seem to have occurred right under the nose of Chimera's CFO, A. Alexandra Dehahan, who is perhaps not coincidentally the sister of Annaly's CEO Wellington J. Denahan. As a side note, Chimera has an unfortunate tendency to hire relatives of its managing company's executives and board members -- that is, Annaly. And to add insult to injury, in the middle of March, Chimera fired its independent auditor Deloitte & Touche, which had been with the mortgage REIT since its inception.

Indeed, literally the only tidbits of current information we have to go off are irregular updates announcing the company's GAAP and economic book values. Most recently, the figures came in at $3.08 per share and $2.87 per share, respectively.

So, is Chimera liquidating?
With the above discussion in mind, and as I alluded to in the title, you'd be excused for concluding that Chimera is having serious financial problems and may have chosen to liquidate -- and thus the recent moves to return capital -- as opposed to fight it out.

For those of you who either own shares in Chimera or are possibly thinking about buying them, I implore you to read our new, in-depth report on Annaly Capital Management, the parent company of Chimera's external manager, FIDAC. In it, our top financial analysts detail both the risks and benefits associated with owning shares in these companies. To download this report instantly, simply click here now.

Profiting From Chaos: The Fiscal Cliff

The nation is facing a dramatic and perilous economic binary event: the fiscal cliff. Do we plunge over, or do we find a compromise? According to Motley Fool analyst Blake Bos, sometimes taking the plunge isn't so bad for your investments. He discusses which companies may lose a lot of valuation as shares sell off because of fears of spending cuts, and why that may be just the right time to dig through the rubble and get in on great companies, before they inevitably rise back up. He also gives us some indicators that could show that some companies with big post-apocalyptic sell-offs may be best left alone.

For General Electric, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, we're offering comprehensive coverage for investors in a premium report on General Electric, in which our industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year. To get started, click here now.

Is Extreme Networks Going to Burn You?

There's no foolproof way to know the future for Extreme Networks (Nasdaq: EXTR  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.

A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Extreme Networks do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Extreme Networks sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. Extreme Networks's latest average DSO stands at 45.8 days, and the end-of-quarter figure is 41.9 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does Extreme Networks look like it might miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Extreme Networks's year-over-year revenue shrank 3.5%, and its AR grew 21.2%. That's a yellow flag. End-of-quarter DSO increased 27.0% over the prior-year quarter. It was about the same as the prior quarter. That demands a good explanation. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

  • Add Extreme Networks to My Watchlist.

3 Things to Watch With Wynn Resorts

Operating conditions can change quickly for Wynn Resorts (NASDAQ: WYNN  ) . The recession in the U.S. a few years ago nearly left the company in ruin, policy changes in China impact growth, and growth opportunities are emerging all over the world. Investors need to know what to look for, so I've created a premium report that covers the company's opportunity, risks, leadership, and the key areas you must watch for. Below is a preview; find out more about this valuable report by clicking here.�

The 3 areas you must watch
Considering the fact that Wynn has only two resorts (with a third on the way), it's important to keep an eye on the factors that drive these markets. Here are the most important areas to watch.

1. Macau gaming growth (particularly VIP):
Growth in Macau will drive the trajectory of gaming companies just as it has in the past few years. Supply is limited, so any increase in gaming traffic is good for casino operators, especially before 2016, when supply will increase again. VIP play, which drives 70% of Macau's gaming revenue, is a key thing to watch for Wynn going forward. Play has slowed for the VIP market in 2012 while mass-market play has picked up. More mass-market play in Macau isn't bad for Wynn, but with a focus on VIPs it will be key to watch trends at the top of the market.

2. Growth in Las Vegas:
Las Vegas is slowly but surely returning to form after being pummeled during the recession. Gaming suffered, but so did non-gaming revenue from rooms, nightclubs, and restaurants, which represents more than half of Wynn's revenue. Like other operators, Wynn lost a lot of business but is slowly beginning to win it back in gaming and non-gaming. This is a big positive because Wynn cut costs as far as it could during the recession and it has a leveraged upside in any recovery. For example, in third-quarter 2012, Las Vegas revenue rose 11.8% but EBITDA grew 29.7% from a year earlier, so more money is flowing to the bottom line. To get an idea of where these trends are headed, investors need to keep an eye on Las Vegas visitation levels and gaming revenue for the Strip. Las Vegas may not generate most of the company's revenue, but it still contributes to the bottom line, and any improvement in Las Vegas from gaming or non-gaming is good for Wynn.

3. Growth opportunities:
Once Wynn's Cotai resort is complete, the company will be out of major expansion opportunities for the first time in its history. This could very well change by 2016, but unlike Las Vegas Sands and Melco Crown, which are aggressively expanding, Wynn does not currently have plans to build another casino. Keep an eye on new gaming markets like Japan, South Korea, and the Philippines opening up in coming years as Wynn looks for growth. We know that Wynn has its sights set on Singapore, but the country will be closed to new gaming until at least 2017.

If Macau and Las Vegas continue to grow and the company finds some new growth opportunities, the stock will continue to perform well.

Learn more
Want more info about Wynn Resorts? Check out our�in-depth research�on the stock.�Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

Nokia Unveils New Phones

Nokia (NOK) today unveiled a group of new smart phones, as it pushes to improves its competitive position against Apple (AAPL), Android and Research In Motion (RIMM) phones.

The new phones include the E7, C7 and C6 models.

  • Nokia calls the E7 “the ultimate business smart phone,” with a 4-inch touch screen, a full keyboard and Exchange ActiveSync. The phone has an expected retail price of 495 Euros, not including taxes or subsidies.
  • The C7, the company says, is a “sleek social networking smart phone.” It has a 3.5-inch AMOLED display, and has an estimated price of 335 Euros.
  • The C6 has a 3.2-inch AMOLED touch-screen display, with a suggested price of 260 Euros.

All of the new phones use the latest version of the company’s Symbian OS software.

The new phones are all expected to start shipping before year end.

NOK today is down 34 cents, or 3.4%, to $9.79.

Coal in Focus; Will Oil Spoil the Recovery?

Here’s a premise for you: it’s all about energy this morning.

The Financial Times runs an interesting piece on how the disaster that killed 25 miners at a Massey Energy (MEE) mine in West Virginia this week is destined to increase scrutiny of coal operations in the US, with the FT’s Kate Mackenzie pointing out that “Now that natural gas, which burns cleaner than coal, is looking increasingly abundant, not to mention cheap the last thing the coal industry will want is a bout of bad publicity on safety.”

The FT’s Peter Smyth makes the connection to China’s own mining disasters, of which there was one just days before the Massey incident that cost 32 lives. As a result of mine problems, China shut down numerous mines last year, with he result at China became a net importer of coal for the first time ever. That’s prompted he $3.6 billion hostile bid by the US’s Peabody Energy (BTU) for Australia’s MacArthur Coal, which is a leader in coal used in the coking process for making steel, which is obviously of interest if China’s factories are the dominant consumer in the region.

Dalhman Rose analysts this morning released a report on coal noting that the market for coal used in steel production has been “astonishing” in the past month, with a $200 price tag per metric ton of the stuff, something once unheard of.

Meantime, the FT’s Gregory Meyer and Michael Mackenzie wonder if triple-digit oil prices will soon become the kiss of death for nascent global economic recovery. One saving grace for the US: increased refining capacity in this country in recent years could prevent prices from soaring at the pump.

May futures for light sweet crude oil are up 29 cents, at $85.68 par barrel. October futures are up 90 cents at $88.99 per barrel. None of the contracts show a three-digit price, yet.

Friday, November 30, 2012

The Most Important Trading Day of the Year

Monday marks the last trading day for October. How the market closes on that day will tell us a lot about where we're headed for the next several months. Longtime readers know I use the 20-month exponential moving average (EMA) to identify bull and bear markets. If the S&P 500 is trading above its 20-month EMA, stocks are in a bull market. If the index is trading below it, the bear is in control. As you can tell from the following chart... last month, the S&P 500 closed below its 20-month EMA...

Even though, according to this chart, stocks entered a bear market at the end of September, I was still willing to buy into the stock market in early October in anticipation of a year-end rally. You see, each of the previous times the S&P broke the line to the downside, stocks always rallied back up to "kiss" the line from below. I expected we'd get that "kiss" this time as well, and it could lead to powerful gains in just a few months.  It only took three weeks. Now we're at a critical point again. The S&P 500 is currently trading about 20 points above its 20-month EMA. If it can hold this level until Monday and close above the line, all the stock market weakness of the past few months is likely to turn out to be just another "whipsaw" moment – similar to what we saw last year – and we can look forward to higher stock prices over the next several months. On the other hand, if the S&P 500 closes below its 20-month EMA on Monday, the chart is going to look horrifically similar to the action in 2001 and 2008.

French voters head to the polls


French voters headed to the polls Sunday to cast ballots in the first round of the country�s presidential elections. See full story.

5 stocks market detectives have locked up

Many stock investors focus on quarterly earnings expectations. But for veteran stock-market detectives, the 10-Q holds more meaningful clues to a company�s health, writes Matt Andrejczak. See full story.

5 stocks market detectives have locked up

Many stock investors focus on quarterly earnings expectations. But for veteran stock-market detectives, the 10-Q holds more meaningful clues to a company�s health, writes Matt Andrejczak. See full story.

Investors turned traders give up their edge

The trading mentality prevalent in today�s stock markets has converted Wall Street fundamental analysts to reaching conclusions and giving advice based on short-term technical factors. See full story.

Growth, deals key for Australian copper firms

Growth is the key to smart exposure to the Australian copper sector amid dwindling global supplies, while takeover rumbles suggest now may be the time to get a foothold in select stocks, fund managers say. See full story.


Instead of acknowledging that banks have become a part of government, we keep pretending they are private institutions, writes David Weidner. See full story.


A few years ago, experts warned Americans against counting on the equity in their home to fund their expenses in retirement. But six years later, some are telling retirees and pre-retirees they should consider many tactics, including reverse mortgages. See full story.

Chop! Chop! Benihana Cut 33%

Shares of storied eatery Benihana (BNHNA) are being sliced and diced this morning, falling almost a third to $3.50 after the company last night reported a 1% drop in sales for its fiscal Q2, and swung to a loss from a year-earlier profit where analysts were expecting 4 cents in EPS. Profit was weighed down by costs to retrofit Benihana restaurants with a new menu of dishes. The restaurant withdrew its forecast for the remainder of the year, citing economic uncertainty.

In a note to clients this morning, CL King analyst Michael Gallo notes the loss of 7 cents would have actually been a 12-cent loss if not for a tax benefit. The results put Benihana out of compliance with loan covenants, reducing its borrowing power to $40.5 million from $60 million, writes Gallo, with further reductions to come over the next year. Benihana has net debt of $27 million. Gallo reduced his earnings estimate to 1 penny for this year from 28 cents, writing that it “looks like a tough road ahead for Benihana given the high price point for the concet and the potential challenges ahead.” Gallo has a “Neutral” rating on the shares and a

Best Comeback Stock: BP, Netflix, or Bank of America?

In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.

Today's matchup is a knock-down, drag out among three completely different companies that have one thing in common: the market has beaten down their stock prices.

We're pitting Big Oil company BP (NYSE: BP  ) vs. movie slinger Netflix (Nasdaq: NFLX  ) vs. megabank Bank of America (NYSE: BAC  ) .

BP is still reeling from its 2010 Deepwater Horizon oil spill in the Gulf of Mexico. More recently, Netflix is reeling from its Qwikster incident, and Bank of America is working through issues borne of the financial crisis and bad press from Occupy Wall Street and moves like charging a monthly fee for debit cards.

By using five short-of-scientific-but-carefully-chosen criteria, let's determine which of these three stocks is most poised for a comeback (assuming we have to buy one).

Round 1: Balance sheet
This one is actually pretty easy. Netflix has more cash than debt on its balance sheet, so it's the runaway winner here. BP employs a reasonable amount of debt (30% of capital), but it still faces regulatory and litigation uncertainty from its oil spill. Bank of America is leveraged at 10:1 on an assets/equity basis, which is actually pretty common and reasonable for a bank, but as we learned during the financial crisis, the balance sheets of the largest banks like B of A, Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) are pretty much impossible to fully grasp. Some amount of faith in management has to be used to invest in the banks. Rank: (1) Netflix, (2) BP, (3) Bank of America.

Round 2: Operations
When looking at return on equity or net margins, Netflix is tops, but we also have to factor in the fact that Netflix competes in the most fluid, unknowable market. Energy and banking can be disrupted, but Netflix needs to pay up for content and the threat from (Nasdaq: AMZN  ) , Apple, Google, Hulu, and upstarts make its operations future hard to predict. BP is the winner here because it's profitable (Bank of America isn't on a trailing-12-months basis) and its competitive landscape is relatively stable. Rank: (1) BP, (2) Netflix, (3) Bank of America.

Round 3: Biggest upside
A catalyst for BP is the resolution of litigation, which will play itself out over years (or decades), but more immediately BP can curry favor with investors with strong performance and by raising its dividend, which already yields 4.1%.

We saw how quickly investor sentiment could shift on Netflix, as it fell from $300 a share to the low-$100s in just months when the business fundamentals really didn't change much. Good news or consistent performance could spur the opposite. You can see this in Starbucks (Nasdaq: SBUX  ) , whose stock plummeted to the single digits a few years ago. A lot of that was the financial crisis, but investors were also fearful on growth prospects. Starbucks has done enough through operations to rebound strongly back above $40 a share.

Bank of America has too many possible catalysts to list them all. But they include getting some better clarity on its exposure to bad past lending, resolution on mortgage-related litigation, a strong quarter or two, better public relations, or the ability to raise its dividend.

Bank of America is the most beaten-down of the stocks (it's trading at well less than half of its book value), and it proportionally has the biggest upside. Meanwhile, Netflix's growth-stock status (it still trades at a P/E of 30) means we could see wild swings from here. That goes for both the short and long terms. I believe, rather surprisingly, that BP has the least upside here. Stay tuned for the next category, though.

Rank: (1) Bank of America, (2) Netflix, (3) BP.

Round 4: Safest bet
Although I believe BP has the smallest upside, I also think it is the safest bet of a decidedly risky bunch. Oil majors like BP and ExxonMobil (NYSE: XOM  ) periodically face issues like oil spills, difficulties with foreign governments, and tightening regulations. However, until or unless viable energy alternatives mature, fossil fuels will continue to be needed to sustain and grow the world's economic output.

Banking will also be around for a long time, but the long-term future of Bank of America isn't so ironclad. Sometimes too-big-to-fail can be failed (see Lehman Brothers).

As we discussed earlier, the future for Netflix is, in my mind, the most tenuous because it's competing with major players that are all quite competent. As content is increasingly delivered over the Internet, differentiation will become harder (read: more costly) to achieve. The power of a red envelope could crumple on the Web.

Rank: (1) BP, (2) Bank of America, (3) Netflix.

Round 5: CAPS rating
Out of a maximum of five stars, our CAPS community rates BP four stars, Bank of America three stars, and Netflix two stars. Rank: (1) BP, (2) Bank of America, (3) Netflix.

The summary rankings




Bank of America

Balance sheet 2 1 3
Operations 1 2 3
Biggest upside 3 2 1
Safest bet 1 3 2
CAPS rating 1 3 2
Average finish 1.6 2.2 2.2

BP wins, with Netflix and Bank of America tying for second. I found this exercise interesting, because I own two of the three stocks: BP and Bank of America. Both seem like good bets to me if you've done your due diligence and can handle the risk. I haven't been a big fan of Netflix the stock, but it's a longtime Motley Fool Stock Advisor recommendation of Fool co-founder David Gardner, and it's still up more than 600% from when he first recommended it.

File any of these three stocks under the riskier side of your portfolio. For some safer alternatives, I invite you to take a copy of our brand new free report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." Although no investment is surefire, the stocks in this report were picked to require a lot less guessing about future prospects. Get your copy today -- it's free!

China Information Security Technology Secures GIS Contract in China; Shares Jump

Breaking news out of China regarding a new contract award sent shares of China Information Security Technology Inc. (NASDAQ: CPBY) up sharply Tuesday, nearly a 32% gain for the day.

The Shenzhen, China-based company said it was awarded one of two contracts from State Grid Corporation of China (SGCC) to help develop China’s nationwide smart electricity grid.

SGCC is state-owned of the People’s Republic of China. SGCC has registered capital of more than USD$15 billion, and services 26 provinces, or nearly 90% of the country’s territory, of the People’s Republic of China.

China Information Security Technology (CIST) said that its proprietary GeoStar and GeoGlobe geographic information systems (GIS) were chosen to be part of China’s smart grid system. CIST –the provider of digital security, geographic information and hospital information systems in China– is expected to be the sole domestic provider for the project.

Analysts speculate that CIST may become the sole provider of GIS provider for the electric grid project, as its proprietary technology appears to lead within the space.

�This win not only demonstrates the Company�s unmatched technological leading position in Chinese GIS sector, but it is also a testament to the quality of our proprietary GeoStar and GeoGlobe GIS applications, and will lead to a broader use of GIS in many provincial and municipal level grid companies throughout China. We believe that by leveraging our strong R&D capabilities and solid industry reputation together with the Chinese government�s support for domestic GIS products, we will be able to capture important market opportunities related to GIS applications in China,� a company spokesman was quoted in the announcement.

CIST’s large China contract comes on the heals of favorable financial results filed with the Securities and Exchange Commission (SEC) in March, which revealed a better-than-expects revenue and earnings results despite the global financial crisis.

Revenue for the fiscal year ended December 31, 2009, totaled $101 million, an 18.40% jump from $85.3 million for fiscal 2008.

Net income per share from continuing operations reached 62 cents per share for the fiscal year 2009, compared with 49 cents per share for fiscal 2008. The company cited strong demand for its products for its earnings growth from last year.

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Friday Feb. 12, 2010 Stock Report!

Consorteum Holdings, Inc. (OTCBB:CSRH) has signed a management agreement with UK based Blue Sea Manning Ltd. to provide integrated payroll and multi-currency settlement solutions. Currently, Blue Sea Manning receives wire transfers for invoice payments in numerous foreign currencies from all over the world. Consorteum�s custom tailored solution will manage all incoming global payment tenders, currency conversion functionality and administrative tools for payroll settlement to staff members in their preferred currency; directly into a bank account or onto a payroll card.

Intellipharmaceutics International Inc. (Nasdaq:IPCI), a specialty pharmaceutical company focused on difficult-to-formulate drugs, today announced the appointment of Graham Neil, CA, as Chief Financial Officer and Vice-President, Finance

TaxMasters, Inc. (OTC Bulletin Board: TAXS), the IRS tax relief company has completed the initial phase of moving to its new corporate headquarters. The six-story, 107,000 sq. ft. facility, located at 2020 Dairy Ashford, in Houston, TX, currently houses all TaxMasters� operations staff, including TaxMasters� tax preparers, financial analysts, enrolled agents, resolution experts, case managers and client service representatives. Plans are to move the remaining company employees, including tax consultants, quality control staff and corporate management, into the new facility as soon as construction is finalized. Coming off of a record year of growth for the company in new customers and revenue, TaxMasters secured expanded space in the fourth quarter of 2009 to house its growing staff and projected growth in 2010. The company reported an increase of 53% in its headcount in 2009, creating 107 new jobs in total in 2009.

Echo Global Logistics, Inc. (Nasdaq:ECHO), a leading provider of technology enabled transportation and supply chain management services, today announced that it has joined the U.S. Environmental Protection Agency’s (EPA) SmartWay(SM) Transport Partnership, an initiative with the goal of environmentally cleaner, more fuel efficient transportation options.

The Airborne Laser Testbed (ALTB) transitioned from science fiction to directed energy fact Feb. 11 when it put a lethal amount of ‘light on target’ to destroy a boosting ballistic missile with help from a megawatt-class laser developed by Northrop Grumman Corporation (NYSE:NOC).

Community Financial Corporation (Nasdaq:CFFC), a holding company whose sole subsidiary is Community Bank, Staunton, Virginia, today reported earnings for the quarter and nine months ended December 31, 2009. For the quarter ended December 31, 2009, Community Financial reported earnings of $832,000 or $.15 per diluted share, compared to $4,239,000 or $.97 per diluted share for the same period last year.� Net income for the current quarter compared to the December 31, 2008 quarter decreased due to the tax benefit of $4,384,000 on the other than temporary impairment (OTTI) non-cash charge of $11,535,000 related to Fannie Mae and Freddie Mac preferred stock in the 2008 quarter, an increase in the provision for loan losses of $473,000 in the 2009 quarter partially offset by an increase in net interest income of $1.0 million and an increase in non-interest income of $598,000.

I’m a a Real Estate Investor

Of all of the jobs I’ve tried, analyzed, pondered, and read about over time, there are none which compares to mine. My work is lots of fun. I’m taking ugly houses and make them beautiful.

I help folks out of difficult situations.

I am a Real Estate Investor.

I’m my own boss. I often work in my pajamas from the comfort of my home. I don’t have any staff to baby sit, no perishable inventory to move, no franchise fees to pay, and no store to maintain. Still, I’m in the top 5% of all income earners.

I am a Real Estate Investor.

I now enjoy freedoms I’ve never had before. I am the master of my day. I select who to work with. I choose my hours,

and I decide if I will work 20 hours or 40 hours this week. I am able to also opt to take the day off, without getting anyones authorization. I am able to take a month-long vacation. I can sleep in, or take a power nap after lunch if I want.

I can review my notes and return my calls while lounging in my jacuzzi. I don’t have to commute during rush hour.

I have the liberty to spend plenty of time with my better half and kids. I don’t have the stress and pressure of having to close my next deal by the end of the week, by the end of this month, or even by the end of this year. I’m living in one of the nicest neighborhoods, in one of the loveliest states, in the best country that has ever existed on this Earth.

I am a Real Estate Investor.

There are plenty who want to be like me; many who are learning to be like me; and lots more who would be like me, but

are just waiting for this chance to appear or that circumstance to change At the end of the day, very few actually are like me.

I have been really lucky and blessed. I am ultimately living my dream. I like doing what I do and I would not trade places with anyone, nor trade my life experiences for anyone elses. I am driven by the belief that life is short, and we need to make a contribution in the brief time that we re here, because after all is said and done, it s

really not about us.

I am a Real Estate Investor.

Michael Mazzella, a nationally known Real Estate Investor has been successfully and actively flipping houses in the Hawaii Market since 1993. He has been mentoring other investors to do the same through his mentoring company, Honolulu Mentor since 2006.

categories: Real Estate Investing,House Flipping,Hawaii Real Estate,Hawaii Real Estate Investing,Michael Mazzella

Thursday, November 29, 2012

International Rectifier Goes Negative

International Rectifier (NYSE: IRF  ) reported earnings on Feb. 2. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended Dec. 25 (Q2), International Rectifier met expectations on revenue and missed expectations on earnings per share.

Compared to the prior-year quarter, revenue dropped significantly and GAAP earnings per share contracted to a loss.

Margins contracted across the board.

Revenue details
International Rectifier logged revenue of $230.1 million. The seven analysts polled by S&P Capital IQ expected to see sales of $229.5 million. Sales were 18% lower than the prior-year quarter's $281.7 million.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions.

EPS details
EPS came in at -$0.09. The 10 earnings estimates compiled by S&P Capital IQ forecast -$0.04 per share. GAAP EPS were -$0.09 for Q2 versus $0.62 per share for the prior-year quarter.

Source: S&P Capital IQ. Quarterly periods. Figures may be non-GAAP to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 35.4%, 760 basis points worse than the prior-year quarter. Operating margin was -1.4%, 1,730 basis points worse than the prior-year quarter. Net margin was -2.8%, 1,840 basis points worse than the prior-year quarter.

Looking ahead
Next quarter's average estimate for revenue is $237.0 million. On the bottom line, the average EPS estimate is -$0.13.

Next year's average estimate for revenue is $1.03 billion. The average EPS estimate is $0.23.

Investor sentiment
The stock has a two-star rating (out of five) at Motley Fool CAPS, with 153 members out of 169 rating the stock outperform, and 16 members rating it underperform. Among 57 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 55 give International Rectifier a green thumbs-up, and two give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on International Rectifier is outperform, with an average price target of $25.14.

New mobile devices are changing the game -- and potential profitability -- at many semiconductor companies. Some will fail, some will tread water, and those in the right devices will shine. Where does International Rectifier fit in? Who will lead going forward? Check out our free report: "3 Hidden Winners of the iPhone, iPad, and Android Revolution." Click here for instant access to this free report.

  • Add International Rectifier to My Watchlist.

Upcoming Dividend Increase For AT&T: Is This High Yielder Still A Buy?

It is the usual practice of AT&T (T) to increase the dividend during the first several weeks of December. This year should be no exception and the amount of the dividend increase should roughly equal the past two years' amount. The street guess is for a 1 to 1.5 cent per share increase pushing the yield above 6% based on current prices. This article will examine the current valuation of the shares for investors.

AT&T is the largest telecommunications company in the United States offering land, wireless and internet services through out the country.

One of the keys for dividend investors is the yield level of shares and the future earnings and dividend growth rates. In the case of AT&T the company is expected to grow both in the 2-4% range for the next several years. With growth rates at levels around the historical annual inflation rates, investor should be able to maintain their investment in today's value.

The following chart (click on all charts to enlarge) shows the dividend and PE ratio for the shares since 1983. The current yield, while not as high as the early 1980's is in the upper boundaries of historical yields, making the shares a decent income purchase at current prices. The PE lies in the lower levels of historical levels as well. The shares are attractive by both levels of yield and PE, but neither are at rock bottom levels.

The following chart shows the cash flow of the shares compared to the current dividend payment. The cash flow is quite adequate to fund the dividend payments since it is over three times as much as the dividend payment.

The shares however are not a bargain when compared to the market as measured on a relative basis against the S&P 500. The red line below shows the relative PE that is now located in the upper levels of its historical range. Whenever the relative PE is below 0.75 the shares are at the best value. Levels above 1 usually signal an over valued situation that often precedes price declines. Clearly, it is more advantageous to buy shares when the relative PE is 0.75 or less and not when the ratio is above 1.

Conclusion: The shares represent a good high yield but do not promise future growth in earning or dividend increases much above 3%. The relative PE signals overvalued shares. However, the current yield above 6% coupled with the expected upcoming dividend increase offers investors a very attractive yield.

Disclosure: I am long T.

How to Tell If Lockheed Martin Is Hiding Weakness

Lockheed Martin (NYSE: LMT  ) carries $9.6 billion of goodwill and other intangibles on its balance sheet. Sometimes goodwill, especially when it's excessive, can foreshadow problems down the road. Could this be the case with Lockheed Martin?

Before we answer that, let's look at what could go wrong.

AOL blows up
In early 2002, AOL Time Warner was trading for $66.27 per share. It had $209 billion of assets on its balance sheet, and $128 billion of that was in the form of goodwill and other intangible assets. Goodwill is simply the difference between the price paid for a company during an acquisition and the net assets of the acquired company. The $128 billion of goodwill in this case was created when AOL and Time Warner merged in 2000.

The problem with inflating your net assets with goodwill is that it can -- being intangible, after all -- go away if the acquisition or merger doesn't create the amount of value that was expected. That's what happened in AOL Time Warner's case. It had to write off most of the goodwill over the next few months, and one year later that line item had shrunk to $37 billion. Investors punished the stock along the way, sending it down to $27.04 -- or nearly a 60% loss.

In his fine book It's Earnings That Count, Hewitt Heiserman explains the AOL situation and how two simple metrics can help minimize your risk of owning a company that may blow up like this. Let's see how Lockheed Martin holds up using his two metrics.

Intangible assets ratio
This ratio shows us the percentage of total assets made up by goodwill and other intangibles. Heiserman says he views anything over 20% as worrisome, "because management might be overpaying for the acquisition or acquisitions that gave rise to the goodwill."

Lockheed Martin has an intangible assets ratio of 27%. This is not so far over Heiserman's threshold as to cause panic, but you'll want to keep an eye on this number over the next few quarters. It's also useful to compare it to tangible book value.

Tangible book value
Tangible book value is simply what remains after subtracting goodwill and other intangibles from shareholders' equity (also known as book value). If this is not a positive value, Heiserman advises you to avoid the company because it may "lack the balance sheet muscle to protect [itself] in a recession or from better-financed competitors."

Lockheed Martin's tangible book value is -$6.7 billion, so we have another yellow flag.

I asked Heiserman about the tendency for some large-cap blue chips -- names like Procter & Gamble, IBM, and Altria -- to have a high intangible assets ratio and negative tangible book value. He says this can be OK, provided the company has (1) modest or no net debt, (2) persistent and rising levels of free cash flow, and (3) stock buybacks at a discount to intrinsic value.

Lockheed Martin fares well in all but its debt load. Because of its strong history -- and research I've done indicating negative book value may not be detrimental to large caps -- I give this company the benefit of the doubt.

Lockheed Martin Stock Chart by YCharts

Foolish bottom line
To recap, here are Lockheed Martin's numbers, as well as a bonus look at a few other companies in its industry.



Book Value�

Lockheed Martin 27% ($6,663)
Boeing (NYSE: BA  ) 11% ($2,067)
Northrop Grumman (NYSE: NOC  ) 50% ($589)
Raytheon (NYSE: RTN  ) 52% ($2,213)

Data provided by S&P Capital IQ.

If you own Lockheed Martin, or any other company that fails one of these checks, make sure you understand the business model and management's objectives. You can never base an entire investment thesis on one or two metrics, but there is a yellow flag here. I'll help you keep a close eye on these ratios over the next few quarters by updating them soon after each earnings report.

Banks Decline After S&P Report

With little actual news today, bank stocks are losing ground this afternoon, following a Standard & Poor’s study published earlier this week warning some institutions capital is weaker than it appears.

Goldman Sachs (GS) lost $1.85, or 1%, falling to $169.28, Morgan Stanley (MS) fell 63 cents, or 2%, to $31.50, Citigroup (C) lost 5 cents, or 1%, for $4.16, UBS AG (UBS), one of the weakest banks in S&P’s report, was down 11 cents, or .7%, at $15.99, and JP Morgan (JPM) fell 48 cents, or 1%, to $42.00.

In an article discussing the S&P report today, the Financial Times said numerous banks complained S&P had not taken into account recent capital-raising efforts, though S&P stood by its findings.

JP Morgan Chase: King of Junk

Nice piece byBloomberg’s Caroline Salastoday detailing JP Morgan Chase’s (JPM) triumph in boosting junk bond writing fees 18% last year, with the top spot in the business, putting Citigroup (C) at number two for a second year.

Junk soared 181% as companies didn’t care how much they had to pay to get liquidity, Salas notes, setting a new record for junk issuance.

And according to Bank of America’s (BAC) high-yield strategist, John Cokinos, junk issuance may hit $175 billion this year, writes Salas.

Total haul in junk underwriting for JP Morgan and others was $4.1 billion last year, more than three times 2008′s level.

Bill Gates Just Spent $150 Million on these 2 Stocks

Financial media firm Forbes just came out with the Forbes 400, which ranks the 400 richest Americans. Bill Gates topped the list with an estimated net worth of $59 billion. This impressive amount of wealth also qualified him for second in the world, behind only telecom mogul Carlos Slim of Mexico and his net worth of $74 billion.

Gates' fortune, of course, stems Microsoft (Nasdaq: MSFT), which grew to dominate the market for computer software across the globe. But a significant portion of Gates' wealth has shifted to the Bill & Melinda Gates Foundation Trust. The foundation received significant further support when Gates' long-time friend and fellow billionaire Warren Buffett committed to donating a significant portion of his $47 billion net worth to the foundation.
  The Gates Foundation has a mission to fund grants to support causes such as global health and related charitable gifting for many years to come. And given the serious commitments and long-term goals the foundation has set, it must be careful with its endowment, investing in such a way as to grow the portfolio significantly while also limiting risk. As such, it represents the ideal long-term portfolio individual investors may want to emulate. The foundation recently established several notable new positions, all of which represented a bold move into the cable television industry.

The largest new position was in cable operator Liberty Global. Liberty is the largest cable television company outside of the United States. It operates in 14 countries (primarily in Europe, Chile and Australia) and serves 31.4 million homes, offering a combination of video, voice and Internet services.

The company is growing rapidly. Revenue reached $6.7 billion last year, up close to 40% from $4.9 billion five years ago. The company generated $365 million, or $1.44 per share last year in free cash flow, up 30% from $281 million five years ago.
Liberty Global offers three different share classes. The foundation bought a 2.1 million share position in Liberty Global Class A (Nasdaq: LBTYA), which have shareholder voting rights, and a 706,507 share position in Liberty Global Class C (Nasdaq: LBTYK), which do not have voting rights. The quarter end market value of these two positions was $125.5 million, or less than 1% of the total foundation. Despite being small initial position sizes, they still represent a substantial sum by most measures. Also, the foundation has been known to build its stakes over time and hold onto its positions for a very long time.

Overall, Liberty represents a great way to play the growing market for cable TV internationally, and few players have its expertise to gain market share overseas. Last year, for example, it acquired Unitymedia to enter the German market. Management has experience in boosting subscribers in the markets in which it operates, serving to boost profitability and the ability to generate capital for future growth and acquisitions.

Given Gates' ties to Buffett, his foundation is certain to find Liberty's cash flow generation capabilities very appealing. Most investors likely miss Liberty's profit appeal, given reported earnings tend to be low.  Last year, the company reported decent earnings of $1.15 per share, but each of the last three years saw earnings losses, even though free cash flow was positive in all these periods. This is because running a cable TV firm requires high fixed costs. This comes in the form of high depreciation and amortization expenses, which reduces earnings, but is considered a non-cash charge, meaning cash flow generation is actually high.    
Continuing on this theme, the Gates Foundation also bought stakes in domestic cable operator Comcast. Comcast also has multiple share classes. The foundation acquired nearly $23 million of class A shares of Comcast Corp. (Nasdaq: CMCSK), which don't carry any voting rights, and a smaller $1.5 million stake in special class A Comcast Corp. (Nasdaq: CMCSA), which have some voting rights.

Comcast is the largest cable provider in the United States, boasting 23 million cable customers at the end of 2010. It also reported 17 million Internet users and 9 million phone customers to offer what has become an appealing offering of a "triple-play" of services. Domestic cable has proven surprisingly resilient in the face of a down economy and with growing competition from television programming from the Internet.

Comcast has also moved aggressively into owning its own content. Last year, it acquired a controlling stake in NBC Universal, which owns the NBC and Telemundo networks, the Universal Pictures film studio, and cable networks including E!, Golf Channel and VERSUS. Total company growth has been impressive. Sales through last year were up 52% to $38 billion, up from $25 billion five years ago. Free cash flow has more than tripled during this period, from $2 billion to $6.2 billion, or $2.20 per share. 

Top Stocks For 2/29/2012-14

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Monday October 5, 2009 Stock Report!

Procera Networks Inc. (NYSE Amex: PKT), a developer of Evolved Deep Packet Inspection (DPI) solutions providing traffic awareness, control and protection for complex networks, today announced that James Brear, chief executive officer, will be presenting at the America’s Growth Capital 6th Annual East Coast Emerging Growth Conference.

Frontier Financial Corporation (NASDAQ: FTBK) and SP Acquisition Holdings, Inc. (NYSE Amex: DSP) today jointly announced that they have mutually agreed to terminate the Agreement and Plan of Merger, dated as of July 30, 2009, by and between SPAH and Frontier, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of August 10, 2009, effective immediately, due to the fact that certain closing conditions contained in the merger agreement could not be met. As a result, the special meetings of SPAH’s stockholders and warrant holders and Frontier’s shareholders scheduled to be held on October 8, 2009 have been cancelled.

API Nanotronics Corp. (OTCBB: APIA), a leading supplier of electronic systems, components, emanation security, TEMPEST, secure communications, ruggedization, and nano-optics to the defense, aerospace and communications sectors today announced that Emcon Emanation (”Emcon”), the Canadian Division of API Cryptek, secured five new contracts for secure communications equipment from the Canadian Government.

Gen2Media (OTCBB: GTWO), a full-service video technology and production company, has been selected to provide the high definition video playback system for the nation-wide tour of “Star Wars: In Concert.” Gen2Media teamed with NEP Screenworks, which provided a giant high-definition LED screen that is one of the largest ever taken on tour. The video, provided by LucasFilms, Ltd, contains clips of fan-favorite scenes from all six of the legendary movies and accompanies the stirring orchestral creations of legendary composer John Williams.

Cinedigm Digital Cinema Corp. (NASDAQ: CIDM) (formerly AccessIT), the global leader in the digital cinema industry, today announced Georgia Theatre Company (”Georgia”), a Georgia-based cinema chain, will participate in Cinedigm’s Phase 2 digital cinema deployment program. Georgia will purchase its own equipment and Cinedigm will manage the Virtual Print Fees (VPFs) for a ten-year term for 257 screens at 23 locations.

Wednesday, November 28, 2012

3 Smoking-Hot Options Plays

I�m not a smoker, but unlike many nonsmokers I have no animus toward those who partake in tobacco products.

I also don�t harbor any kind of grudge toward tobacco companies, as they provide a legal product that consumers demand. In fact, I embrace the industry for being able to deliver consistent profits, outstanding share price performance and significant income streams to shareholders via high dividend yields.

In particular, I like the recent uptrend in many of the standout companies in the sector, as it represents an opportunity to bank some smoking-hot profits using out-of-the-money call options.

Three stocks with the potential to ignite your portfolio with call options are Lorillard (NYSE:LO), Philip Morris International (NYSE:PM) and Reynolds American, Inc. (NYSE:RAI). Let�s take a closer look at each one, along with their out-of-the-money calls.

  • Yield: 4.48%
  • Year-to-date gain: 41%

Lorillard is a U.S.-based cigarette maker, offering 43 different products under the Newport, True, Maverick and Old Gold brand names. Lorillard sells its products primarily to wholesale distributors, who then service retail outlets and chain-store organizations.

The stock has a hefty dividend yield of 4.48% (based on the Oct. 13 share price). But the stunning thing about LO stock is that its yield comes with a 41% year-to-date gain in the stock. Intrepid investors who think the stock�s upside isn�t finished yet should check out the LO Nov 120 Calls.

Philip Morris International
  • Yield: 4.68%
  • Year-to-date gain: 13%

Philip Morris International is a name synonymous with tobacco products, and for good reason. The company�s portfolio of international and local brands includes Marlboro, Merit, Parliament and Virginia Slims.

Philip Morris� global reach extends to approximately 180 countries in the European Union, Eastern Europe, the Middle East, Africa, Asia, Latin America and Canada. At a dividend yield of 4.68%, and a year-to-date gain of 13%, PM has certainly lit up investors� portfolios. Get an enhanced dose of PM upside by buying the PM Nov 67.50 Calls.

Reynolds American, Inc.
  • Yield: 5.42%
  • Year-to-date gain: 19%

Reynolds American, Inc. sells its cigarettes under the Camel, Pall Mall, Winston and KOOL brands. The company also sells a lot of smokeless tobacco products, such as the Grizzly and Kodiak snuff brands.

The tobacco giant�s red-hot yield of 5.42% puts it near the top of the three tobacco stocks listed here. And with that yield, shareholders have also captured a year-to-date gain of 19%. That combination makes RAI one great stock for capturing both dividends and share price appreciation, but options players can possibly add to that upside via the RAI Nov 40 Calls.

All three of these out-of-the-money call options are bullish bets on the continued upside in the tobacco sector. So, if you�re ready to light up your portfolio (and you�re willing to take the risk), then go big on big tobacco.

At the time of publication, Jim Woods did not hold a position in any of the aforementioned stocks.

5 Best Positive Cash-Flow Oil Companies

Millions of acres in oil shale prospects ... production continues to expand ... good times are just beginning ...

You've heard the stories. Almost every exploration and production company seems to have at least one. Here are 5 of the better ones. For this article, let's just stick with the stuff that really matters: Cash income, specifically free cash flow. I screened a dozen or more energy companies looking for those with the best market capitalization/levered free cash flow -- call it MC/LFCF -- over the last 12 months. This information is readily available in Yahoo Finance's Key Statistics. The lower the number, the more undervalued the equity.

Of the couple dozen energy companies I looked at, the following five had the best MC/LFCF -- all under 20. I also noted PEG (price/earnings to growth) ratio, when available, to see what analysts think earnings growth will be for the next five years -- admittedly at best an educated guess. The lower the PEG, the higher the earnings growth. I've also noted Libyan production exposure (source here). Libyan oil production losses (now shut down?) may not yet be reflected in the statistics.

Repsol YPF S.A. (REPYY.PK) -- Market Cap: $42 billion, MC/LFCF: 8.9

Headquartered in Spain, Repsol is an integrated oil and gas firm with a global presence. The company is concentrated in South America, through its majority-owned Argentine subsidiary YPF S.A. (YPF). The company, in addition to exploration and production, has interests in refineries and over 4,400 service stations. It's also involved in LNG and petroleum derived chemicals such as propane and butane.

Repsol pays a 3.6% dividend, while YPF pays a 6.9% dividend. PEG ratio was not available.

Repsol derives much of its revenue from YPF, a company far from Mediterranean troubles (Spanish debt and North African unrest). YPF is Argentina's largest oil company. Like Brazil, Argentina seems to have significant undeveloped oil and gas resources. Repsol is also seeking to expand into Brazil's offshore Santos basin. Repsol has been receiving 3.8% of its production from Libyan fields.

Statoil (STO) -- Market Cap: $88.0 billion, MC/LFCF: 10.2

This international Norwegian energy company was originally based in the North Sea fields. It's also involved in LNG and operates over 2,000 service stations in Scandinavia, the Baltics, and Russia. The company pays a 4.0% dividend. PEG is 2.38.

Statoil now gets 25% of it production from non-North Sea sources. In addition to new investments in the North Sea, it's investing in the U.S. (Marcellus and Eagle Ford Shales), Angola off shore, Indonesia, the far arctic north, and other areas (see here). Statioil only gets 0.2% of its production from Libya.

ConocoPhillips (COP) -- Market Cap: $111 billion, MC/LFCF: 10.5

This international company is an integrated, large international. In addition to exploration and production, it transports, refines and markets petroleum products worldwide. It also has a presence in the Canadian Oil Sands and produces petroleum-derived chemicals.

The company pays a 3.3% dividend. The PEG ratio is slightly negative, meaning earnings are expected to decline somewhat over the next five years.

ConocoPhillips at one time had a 20% interest in LUKOY (LUKOY.PK), Russia's second-largest oil producer. Russia (not Saudi Arabia) is the largest oil producer in the world. The company has now sold off the LUKOY investment, using the cash for capital expenditures, dividend payments, and debt reduction. ConocoPhillips has been getting 3.3% of its production from Libya.

Total S.A. (TOT) -- Market Cap: $135 billion, MC/LFCF: 18.0

France-based Total is the world's fifth-largest publicly-traded international oil company. The company operates worldwide as an integrated oil and gas company -- exploration, production, LNG operations, refineries, chemicals, and over 16,000 service stations. Its French origin has given it a large presence in Africa and the Middle East.

The company pays a 5.2% dividend. PEG is 2.67.

Since France was the first country to attack Gaddafi's forces, Total may be company non grata if the dictator manages to hang on to power. Libyan exposure is 2.6% of revenue. On the plus side: Thanks to the oil sands, the Bakken is increasing oil production.

Marathon Oil (MRO) -- Market Cap: $36 billion, MC/LFCF: 18.5

U.S.-based Marathon is also in exploration, refining and marketing. It has an oil sands presence in Canada and also (unfortunately) a significant presence in Libya -- 12% of revenue. Marathon operates in Africa, Europe, the U.S. and Canada. It is the largest refiner in the U.S. midwest.

The company pays a 1.9% dividend. PEG is a low 1.05.

Marathon has been doing well. The stock is up 65% YOY. The 12% Libyan production exposure, so far, has not impacted price -- not sure why.


I don't think you can find better, even more conservative, investments than some of the above companies. Dividends, inflation protection, cash generation now -- what more do you want? This isn't a "pie in the sky" story. It's profits now! It's true the Middle East could explode. That may hurt some of the above companies, but rapidly escalating oil prices would compensate.

These companies have made good money over the last 12 months. With oil prices continuing to go up, they will probably make even more in the future. Do take into consieration the loss of Libyan oil for at least several months.

Could the price of oil crash? Of course it could -- anything can happen in the markets. But don't worry, the Fed has your back. Crashing commodities and markets will set off massive dollar printing, which will push commodity markets right back up. Of course, it would be a wild ride.

The views in this article are just my thoughts and should not be construed as recommendations; investors should, as always, perform their own due diligence in consideration of their particular situation.

Disclosure: I am long STO.

Chubb: Earnings Preview

Property and Casualty insurer Chubb Corp. (CB) is slated to release its first quarter earnings on April 19, after the markets close. The current Zacks Consensus Estimate is $1.49 per share for the quarter, projecting a year-over-year expected growth of 10.4%.

Revenue estimates for the quarter, as per the Zacks Consensus, stands at $3.4 billion, representing a revenue growth of 2.1% year over year.

Previous Quarter Performance

In the fourth quarter of 2011, Chubb's operating earnings of $1.63 per share were ahead of the Zacks Consensus Estimate of $1.60 per share.

The better-than-expected earnings stemmed from higher premium written, favorable reserve release, and a lower share count, partly offset by lower investment income and high cat loss. Earnings were, however, lower than $1.69 per share reported during the prior-year quarter, a period marked by benign cat activity.

Chubb reported net written premiums of $3.0 billion, up 4% year over year, reflecting rate improvements in all three of its business lines.

The company's combined ratio for the quarter deteriorated to 89.9%, compared with 87.0% in the prior-year quarter. Adjusting for cat losses, combined ratio was 89.5% in 2011 compared with 85.6% in fiscal 2010.

Earnings Estimate Revisions: Overview

Ahead of the earnings release, Zacks Consensus Estimate for the first quarter witnessed a upward estimate revision over the past 7 and 30 days,

A complete absence of any downward trend in estimate revision is also palpable, making the strength in the stock more obvious.

We will now discuss the details of earnings estimate revisions to validate the strength of the stock, justifying its place in an investment portfolio.

Agreement of Estimate Revisions

9 out of 18 analysts covering the stock have raised their estimates for the first quarter over the last 30 days while 3 of them have increased the estimates over the past 7 days. Given the absence of any downward estimate earnings revision and an upward revision bias, it is quite clear that analysts are in agreement with the bullish first-quarter earnings outlook for the property and casualty insurer.

Moreover, for fiscal year 2012, 7 of the total 19 analysts covering the stock have raised their estimates over the last 30 days while 2 analysts have raised the same over the past 7 days. Again the absence of any downward revision over both the time periods indicates an expected earnings outperformance from the company.

The overall upward earnings estimate revisions prove that the analysts are in agreement with the company's above-the-line earnings expectations. Analysts expect the company to beat the estimates on the back of modestly improving insurance rates and adequate reserves.

Magnitude of Estimate Revisions

The magnitude of revisions has been modest over the past 7 days with estimates for the first quarter inched up by a penny to $1.49 per share and from $1.45 over the past 30 days.

For fiscal 2012, earnings estimates moved up to $5.75 per share from $5.74 over the past 7 days and from $5.71 per share over the past 30 days.

Earnings Surprise

With respect to earnings surprise, Chubb has consistently outperformed the respective Zacks Consensus Estimates, over the trailing four quarters. The average earnings surprise was 13.6%, implying that Chubb has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Our Recommendation

We believe Chubb will live up to the expectations of the investors helped by the gradually improving insurance pricing.

Its Commercial segment has been reporting a reversal of trend or stabilization after declining continuously since the fourth quarter of 2008. The segment has been witnessing low single-digits increase in average renewal rates. Retention ratio is also stable. The segment's International business is also experiencing rate hikes owing to the recent catastrophes, which have increased the demand for insurance. Along with the rate increases and stable retention, additional premium received via mid-term endorsement activity and premium audits also point toward an improving market environment.

Chubb's Personal Insurance segment is also witnessing a gradual market improvement. In the fourth quarter of 2011, the segment recorded a 3% increase in net premium written. This represented the ninth consecutive quarter of growth, primarily led by strong premium increases from international business. Management continues to witness a general rate hike in the industry for both auto and homeowners. We have a favorable view of business expansion (homeowner sand personal auto) into West and Southwest U.S., which is otherwise concentrated in the Northeast region, a cat prone area.

Chubb also stands to gain from its international business, which benefits from better pricing conditions than the domestic market.

But Chubb's Specialty insurance business has been suffering from rate reductions over the past several years. The company's surety, professional liability and personal lines of business are expected to remain under some pressure as new business pricing remains negative or at low-single digits. Combined with the sustained discipline in underwriting, these challenges will continue to put pressure on premiums in the near term.

Nevertheless, a strong capital with low reliance on debt and solid capital management has acted as a cushion to earnings. The company also qualifies as a dividend aristocrat having increased dividend every year for the past 28 years. For a value investor, this stock can be a safe bet.

Based in New Jersey, Chubb closely competes with a host of other property and casualty carriers such as W.R. Berkley Corp. (WRB), The Travelers Companies, Inc. (TRV), and The Allstate Corp. (ALL), Cincinnati Financial Corp. (CINF), and XL Group Inc. (XL).

Cyber Monday Sales Tax Free for Many - But For How Long?


I don�t do the whole Black Friday thing. There is nothing (and I mean nothing) that I want/need/crave/desire enough to stand in line with a bunch of total strangers � who may or may not have showered recently � to buy.

I do, however, do Cyber Monday, the online version of Black Friday. I�m not alone: according to a survey conducted for by BIGresearch, 106.9 million Americans plan to shop on Cyber Monday this year. Cyber Monday, or the Monday after Thanksgiving, is considered the biggest online shopping day of the year. Stores offer bargains and deals and I can shop while sitting at the comfort of my office desk, sipping on a mug of coffee.

All of that shopping will translate to about $1 billion in online shopping on one day of the year. Much of that shopping will be sales tax free. A boon for shoppers, perhaps, but is it fair to brick and mortar retailers � not just the big box stores but Mom and Pop corner stores? Most Americans, believe it or not, say no.

Despite the fact that most Americans (and shoppers) understand the disparity, retailers are not quick to embrace the notion of collecting sales tax with leading the charge. The online retail giant has made no secret of its efforts (shored up with a number of lobbyists and legal teams) to avoid collecting sales tax at the state level. Other retailers which rely on an online presence have entered the fray while traditional big box retailers like Best Buy and Wal-Mart have joined forces with smaller retailers to protest what they view as an inequity., for its part, supports an alternative, the Marketplace Fairness Act. The bill, which is currently in Congress, has been referred to the Senate Finance Committee, and would essentially control the ability of individual states to collect sales tax. Interestingly, the wording purports to bolster the authority of states to collect by saying:

It is the sense of Congress that States should have the ability to enforce their existing sales and use tax laws and to treat similar sales transactions equally, without regard to the manner in which the sale is transacted, and the right to collect�or decide not to collect�taxes that are already owed under State law.

It starts off, good, right? It confirms that states should have some control over enforcement of their own tax laws. However, the bill goes on to require states that wish to collect sales tax online join the Streamlined Sales and Use Tax Agreement and follow a set of prescribed rules.

Hmm. More federal regulation? It seems antithetical to the states� ability to set their own rules with respect to collecting tax. And allowing Congress just one more iota of control over how the individual states are taxed � when they can�t even agree on a federal income tax � isn�t appealing.

I get that the current hodgepodge of laws can be confusing for taxpayers. And I�m not saying that a consistent set of laws is a bad thing. To the contrary, I think it�s a good thing for retailers and consumers to have a sense of rational, logical tax laws. It�s the drafting and implementation that worries me. Common sense? Consensus? Fairness? I just don�t know that I trust Congress to make that happen. Anyone else?

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Earnings Report Could Rally This Cheap $4 Tech Stock

Mitel Networks (MITL) posted earnings after the bell Tuesday. Earnings beat estimates and offered several positive highlights that investors should weigh as they look at this very cheap $4 tech stock. I think this earnings report could signal a long overdue rally in these undervalued shares.

Key highlights from MITL's earnings report:

  • Earnings came in for the quarter at 30 cents a share, beating estimates of 24 cents a share. Revenues also beat estimates by $3 million.
  • Gross margins from continuing operations were 55.6%, up from 52.2% in the fourth quarter of fiscal 2011.
  • Adjusted EBITDA from continuing operations for the fourth quarter of fiscal 2012 was $27.3 million, up 43% from the prior year quarter.

As per the business description from Yahoo Finance, "Mitel Networks Corporation provides integrated communications solutions to the small- to medium-sized enterprise market in the United States, Europe, the Middle East, Africa, Canada, Caribbean, Latin America, and the Asia Pacific."

Here are four reasons why MITL looks like good value at just over $4 a share:

  • The company has now beat earnings estimates for the fifth time in the last six quarters, and the stock now sells at a minuscule 4 times forward earnings.
  • The market is undervaluing MITL's revenue streams. The stock is priced at just 33% of annual revenues and has a five-year projected PEG way below 1 (0.33).
  • The company more than tripled operating cash flow from FY 2009 to FY 2011 and sells at just over 5 times current operating cash flow.
  • The stock looks like it put it a bottom at just under $4 a share (see chart below).
  • Click to enlarge image.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MITL over the next 72 hours.

    Can WinARM Beat Wintel?

    Windows on ARM is coming. I've been bullish on Microsoft (Nasdaq: MSFT  ) Windows 8 since it was detailed at the BUILD Windows developer conference in September.

    The aspect I'm probably most excited about is the long-heralded inclusion of support for ARM Holdings (Nasdaq: ARMH  ) -based processors, which is one aspect of my thesis for picking up shares myself. Even as Forrester Research has just said it believes Windows 8 may be too late to the tablet party, the laptop arena is a different story.

    A recent Digitimes report now details a potential timeframe on when to expect Windows on ARM laptops. The report mentions that ARM chipmakers like NVIDIA (Nasdaq: NVDA  ) and Qualcomm (Nasdaq: QCOM  ) are pairing up with notebook manufacturers like Asustek and Lenovo to hit the market in 2013 after potentially making appearances in late 2012. They expect the WinARM platform to expand further in 2014 and chip away at Wintel's lead.

    ARM chips will take on Intel (Nasdaq: INTC  ) and Advanced Micro Devices (NYSE: AMD  ) chips as they improve performance and get Microsoft's blessings. Although don't expect Intel to sit idly by; the chip mammoth is working on its new Ivy Bridge and Haswell next-generation architectures featuring significant power-efficiency improvements in preparation of a hopefully cold reception for ARM chips.

    The two largest hurdles that ARM has faced in the laptop market have been software support and collaboration with notebook makers. Windows 8's ARM support addresses the former, and cooperation with Asustek and Lenovo potentially handle the latter.

    NVIDIA is particularly excited about Windows on ARM, since the company increasingly has mobile on its mind, and its quad-core ARM-based Tegra 3 processor that just landed already promises "PC-class performance levels."

    Talk of ARM-based laptops has been escalating lately, in part because of official Microsoft support. There have been rumors that Apple (Nasdaq: AAPL  ) has tested ARM-based MacBook Airs, and support for quad-core ARM chips was found in Apple's Xcode. While there are plenty of possible explanations that don't include ARM-based Macs, it's still a possibility worth entertaining.

    WinARM has some exciting prospects for numerous involved tech companies. Will the gang of ARM supporters be enough to topple Wintel? Share your thoughts in the comments box below.

    Add Microsoft and ARM Holdings to your Watchlist to see how WinARM does. Get access to this free report on one stock set to ride the waves of the mobile revolution.

    Top Stocks For 2011-12-24-5

    CSRH, Consorteum Holdings Inc, CSRH.OB

    DrStockPick Stock Report!

    DrStockPick News Report!

    “My Golf Rewards Canada Inc. Introduces a New Rewards Program

    for the U.S. and Canadian Golfing Industry”

    DrStockPick News Report!

    Tuesday August 4, 2009

    My Golf Rewards Canada Inc. Introduces a New Rewards Program for the U.S. and Canadian Golfing Industry

    Consorteum Holdings Inc.�s business strategy is to build on extensive expertise within the Payments and Transaction Industry in North America, Europe and Internationally. By identifying new technologies and trends in the changing global marketplace, Consorteum Holdings Inc. aims to increase revenues in existing markets, enter new markets, and deliver unique products and services more effectively and efficiently. Consorteum Holdings Inc. has built its reputation with one goal, �For our customers to look at us as partners, not just a technology provider.�

    My Golf Rewards Canada Inc. is a joint venture company between Consorteum Holdings Inc. and Innovative Loyalty Solutions (ILS). The My Golf Rewards program is a state of the art loyalty system designed specifically for the Golf Industry. The program is designed to stimulate frequency of play and incremental spending within the golf course. Using advanced software capabilities, our card-based program tracks the golfers� playing and spending habits throughout the golf course when the member presents their membership card. This valuable information is then leveraged by the golf course to offer further value and incentives to the members to drive incremental spend. The focus of the program is public and semi-private golf facilities whose participation in the My Golf Rewards program will drive new revenues to the golf industry within North America.

    My Golf Rewards Canada Inc., a majority owned subsidiary of Consorteum Holdings, Inc. (CSRH.OB), has launched a revolutionary new loyalty, rewards and retention program for the North American golf industry.

    My Golf Rewards recently announced it has established a licensing agreement with Fidelisoft Inc., to use their software technology to offer a loyalty, rewards and retention program to the North American Golfing industry. The technology has been developed to allow cardholders to instantly receive and redeem reward dollars for their participation in the My Golf Rewards program at any participating course.

    All golf courses in the My Golf Rewards program can anticipate increased revenues and profits opportunities, while decreasing their costs of operating a traditional coupon based discount program. The program will enable golf courses to establish long-term relationships with their members and directly market to the golfers� preferences based on their identified spending habits.

    Quent Rickerby, President & COO of Consorteum Holdings Inc., said, �My Golf Rewards offers the golf industry a new and innovative way to better serve and reward its members, while exposing new revenue and profit opportunities within the golf facilities. During this difficult economic time, golf course owners need better ways to entice increased frequency of played rounds and drive consumer loyalty to their course.�

    The My Golf Rewards cardholders can expect to receive rewards based on purchasing goods and services throughout the golf course facility. Each participating golf course can choose to issue rewards dollars to their members for green fees, pro-shop purchases or at the food and beverage area. Cardholder members will also be able to redeem their point dollars instantly at any of these locations within the facility or at any other participating golf course within the program.

    Bill Mathews, President of My Golf Rewards added, �Our new rewards program will provide cardholders the unique benefit of being �Paid to Play�. Every time you spend money at the course you earn dollars to redeem for more rounds of golf. This program was designed to be a win-win for both the player and the golf course.�


    Consorteum Holdings Inc.

    2900 John Street, Suite 202,
    Markham, Ontario, Canada L3R 5G3

    Telephone: +1 866 824 8854


    More about CSRH at

    Keep a close eye on CSRH, do your homework, and like always BE READY for the ACTION!

    For-Profit Education Mea Culpa

    I need to take a moment to apologize for some inaccuracies in Monday’s post titled “For Profit Education Disaster”. In my haste, and misunderstanding of what I had read, I made a few important blunders in the text. Notably, the fact that it was not the department of education but the GAO which had said certain schools had committed fraudulent acts. There are other slight missteps in the text as well, including the fact that the threshold for repayment rate qualification was 35% and not 40%, so in fact it’s even lower than I posted.

    As I said, I am certainly not a for profit education equity analyst, but that said, I expect more out of myself, and I know you expect more out of me. There is a large difference between grammatical errors which frankly I could care less about given that I publish this blog for free, and factual errors which could sway someone in their decision making. The thesis of the post is unaltered, but I am rather ashamed that certain facts were wrong, and for that I apologize.

    8 Food Frauds on Your Shopping List

    Most consumers know to ignore emails alerting them to foreign lottery winnings and to steer clear of "designer" bags sold on street corners. But experts say even scam-savvy shoppers may be falling prey to fraud at a surprising place: the grocery store.

    Food fraud -- the adulteration, dilution or mislabeling of goods stocked on the shelf -- is part of a growing trend of faux household goods. Although there is little data on the frequency of food fakery, experts say there's growing awareness of the problem. The lack of information on the subject recently prompted the U.S. Pharmacopeial Convention -- a nonprofit that sets standards used by the FDA -- to establish a Food Fraud Database. And a new study in the Journal of Food Science analyzed the top offenders identified by the database, including olive oil, milk and honey. "We're seeing similar trends in food to other items -- if it can be faked, it probably is," says Tara Steketee, the senior manager for brand protection at OpSec Security, an anti-counterfeiting consulting firm. "There are actually counterfeit tomatoes, believe it or not." (In that example, she says, garden-variety tomatoes get marketed as the more expensive heirloom ones.)

    Also See
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    The growing number of imported foods consumed by Americans makes it harder to identify the frauds, experts say. A recent FDA-commissioned Institute of Medicine study found the quantity of imported foods and drugs nearly tripled over the past 10 years. Currently, imports account for 85% of seafood, 39% of fruits and nuts and 18% of vegetables. That leads to great variety, but also increased risk from less rigorous food safety practices in other countries, says Clare Narrod, the risk analysis program manager for the University of Maryland's Joint Institute for Food Safety and Applied Nutrition, who served on the committee preparing the Institute of Medicine study. Criminals may also re-route a problem product through other countries in an attempt to evade U.S. bans.

    Food is also one of the easier products to fake because the distinctions from the real deal are often subtle. "The biggest challenge with food products is that they're natural, and there's an infinite number of variation in natural products," says John Spink, associate director of the Anti-Counterfeiting and Product Protection Program at Michigan State University, who authored the new Journal of Food Science study. Criminals are counting on shoppers not tasting differences between wines, and not noticing that their supposedly wild salmon isn't quite as pink as it should be when cooked. As more cooks experiment with high-end olive oils, artisanal meats and heirloom produce, passing off a cheap ingredient as its fancier counterpart grows more profitable, too.

    Avoiding fakes comes down largely to being an informed shopper and buying from trustworthy sources. Branded products tend to have more supply-chain safeguards, says Narrod. "It's their reputation on the line, so they have things in place," she says. It can also help to buy products with shorter supply chains which tend to be local or minimally processed, Spink says. And if the taste of an item seems off, or you get sick, it's worth alerting both the store and the local public health department.

    Because they're ingested, fraudulent foods carry more significant health concerns than other fakes. Consumers with allergies could have a reaction, says Amy Kircher, associate director of the National Center for Food Protection and Defense. Some substituted items aren't meant for human consumption, and others contain toxic ingredients like lead or melamine.

    Here are eight foods researchers say shoppers may unwittingly buy fraudulent versions of.

    Olive Oil

    Getty Images

    Accounting for 16% of the database's recorded cases, olive oil is the food most subject to fraud, according to the Journal of Food Sciences study. In most cases, experts say, consumers are merely getting a bad deal -- regular olive oil instead of pricier extra virgin, say, or a less expensive variety from Greece instead of Italy as the label proclaims. But in rare cases, varieties of non-food-grade oil may be added in, posing a health risk, Steketee says. In one of the more famous cases, more than 600 people in Spain died in 1981 after consuming "olive oil" that was actually a non-food-grade rapeseed oil intended as an industrial lubricant. She suggests sticking to brands you know and sources you trust.


    Getty Images

    Adulterated milk is typically watered down and then laced with melamine, which increases the protein content to hide the dilution, Spink says. "Consumers may consume the product and may not be aware of the quality variation," he says. In fact, milk is the second most common ingredient subject to adulteration, at 14% of cases in the U.S. Pharmacopeial Convention's Food Fraud Database. The 2008 Chinese milk scandal was the most high-profile incident, with the resulting outbreak killing six infants and sickening more than 300,000 consumers. Steketee says the problem is still more widespread abroad, with U.S. consumers needing to be more cautious about powdered milk and similar products of unknown origin.


    Getty Images

    The Journal of Food Sciences study pegged honey as a top fake, representing 7% of food fraud cases. Last year, Food Safety News tests also found that 75% of store honey doesn't contain pollen. People are still buying a bee-made product, but all the pollen has been screened out, says Andrew Schneider, a food safety journalist who wrote the reports for Food Safety News. A lack of pollen makes it tough to determine its geographic origin -- and also means regulators don't recognize the product as honey, he says. Why the misdirection? Separate Food Safety News tests found a third of the faux honey imports from Asia were contaminated with lead and antibiotics. For the real deal, Schneider suggests buying from a local beekeeper. A National Honey Board spokesman says the group disputes the Food Safety News findings, and says regulations do allow for pollen to be filtered out as part of the removal of particles such as bee parts and other organic debris.

    Fruit Juice

    Getty Images

    Fraudsters find it easy to dilute expensive juices without a notable change in taste or consistency, says Kircher. Orange juice represents 4% of cases in the U.S. Pharmacopeial Convention's Food Fraud Database, and apple juice, 2%. Consumers buying one of those common juices might get more water for their money, while an expensive one like pomegranate may be cut with apple juice. Consumers should be especially careful to read labels and pick a trusted brand when buying into the latest super-fruit craze, she says. It takes time to build up supply of a newly hot fruit, so those products are more likely to be adulterated.

    Baby Formula

    Getty Images

    Although not a top offender in the Food Fraud database, experts say baby formula poses considerable food fraud risk. Formula is one of the most common targets for organized retail theft, and criminals often tamper with the sell-by codes to move expired product, Spink says. Adulterated milk, which can make it into formula, also poses a concern here, Steketee says. Parents' best bet, they say, is to buy from a major retailer rather than less-monitored venues such as flea markets and online auctions. And don't buy any package that has a blurred-out expiration date or otherwise looks tampered with, she says.


    Getty Images

    There's ample fraud opportunity in expensive goods that are purchased in small quantities and used in small doses as it's unlikely one's using enough to notice something isn't quite right, Spink says. Saffron represents 5% of food fraud cases and vanilla extract, 2%. Turmeric, star anise, paprika and chili powder each account for another 1%. Some are dangerous swaps, others, a waste of money. Shoppers buying paprika may be getting the flavorless leftovers of spices that have already been processed for extracts. Chinese star anise, for example, may be substituted with toxic Japanese star anise. Experts suggest being cautious about buying from markets or bulk bins without knowing the spice's origin.


    Getty Images

    Just a few weeks ago, a New York wine dealer was arrested for allegedly trying to sell rare -- but counterfeit -- wines for $1.3 million. Collectively, wines, spirits and liquors represent just 2% of cases in the USPC's Food Fraud database. Most faux wines are just a cheaper vintage and a bad bargain, but adulterated spirits are potentially more dangerous, says Steketee. Fake vodkas in particular have made the news in recent months, with contaminants such as anti-freeze and other dangerous chemicals. Counterfeiters are likely to focus most of their attention on the packaging, so consumers should keep an eye out for logos and bottles that don't look quite right, she says.


    Getty Images

    "It's easy to sell a piece of fish as one species when in reality it's another species," says Kircher. Farmed fish also get advertised as more expensive wild versions. Sometimes, it gets even more creative than a simple mislabel. Scallops, for example, might actually be punched out circles from a whitefish fillet, she says. Faux fish represented the top fraud in the Journal of Food Sciences study of media and other public records, at 9% of cases. And some may be unhealthy. A recent Consumer Reports study included a "grouper" sample that was really tilefish, a species that contains enough mercury to make the FDA's list of foods that pregnant women and young children should avoid. Experts suggest buying whole fish when possible which are harder to fake.

    This updated version of the story contains a comment from the National Honey Board.

    A Stock I Warned You About Looks Ready to Nosedive

    Right before the Thanksgiving break, I singled out Barnes & Noble (NYSE: BKS) as a stock that looked vulnerable to overly-optimistic expectations. [Read the original article here.]

    At the time, I noted that an imminent quarterly earnings release merited a great deal of scrutiny. Barnes & Noble had been expected to generate a small $0.02 a share quarterly profit, "but rising expenses may make that impossible."

    I had no idea how prescient that forecast would prove.

    The bookseller indeed went on to post a massive spike in expenses, causing it to register a $6.6 million net loss, or $0.17 a share in its fiscal second quarter ended Oct. 31. In fact, the company has been missing consensus earnings per share (EPS) forecasts by at least a nickel for each of the past four quarters, setting up further pain for the company's supporters.


    Shares reacted as they should, falling nearly $3 on Dec. 1 to $14.59. Yet hope springs eternal, and shares have already made a decent bounce back toward the $16 mark. Importantly, what looked like a reasonable case for short sellers now looks like a powerful one. Simply put, Barnes & Noble may just spend it itself into oblivion as it chases's (Nasdaq: AMZN) increasingly elusive shadow.

    Going the wrong way
    For most business models, rising sales typically yield rising profits. But Barnes & Noble, which is losing money on every Nook e-reader tablet it sells (when hardware and marketing costs are accounted for), is clearly going the wrong way. Management doesn't break down margins on hardware devices, but thanks to Amazon's aggressive pricing of the Amazon Kindle -- which Barnes & Noble must match to stay competitive -- the company is likely yielding a loss on every unit sold.

    Management contends that Nook sales will really take off in the current quarter, in part due to heavy promotional activity. Yet rising sales won't necessarily yield a surge in profits on these  devices.  Besides, it's fair to wonder how much this business can grow anyway because it already faces tough competition from the No. 1 tablet in the market, Apple's (Nasdaq: AAPL) iPad, along with Amazon's Kindle e-reader (not to mention its new Fire tablet computer).

    After all, sales of Nook readers (and associated content) fell sequentially, from $277 million in the fiscal first quarter of 2012 to $220 million in the quarter ended October. That's the first sequential drop in six quarters. Management blames the drop on seasonality, but the rising installed base of hardware should be yielding a fast-growing book download business. This doesn't appear to be the case. (Management doesn't actually break down hardware and software sales for the Nook platform, which strikes me as a red flag.)  

    Baking in the recent data points into fiscal (April) 2012 and 2013 forecasts, it may be some time before this company can show a profit. Barnes & Noble lost $1.19 a share in fiscal 2011, and analysts just expanded their projected per-share loss for fiscal 2012 from ($0.23) to ($0.58). The fiscal 2013 forecasted profit has just been slashed nearly 80% to just $0.10. And I have my doubts that this small profit will even come to pass, as this company serially fails to meet its targets.

    Why do I think losses will continue at least through fiscal 2013? Because many analyst forecasts appear to fail to take into account any cannibalization of traditional book sales by e-readers. Analysts say the combined strength of traditional book sales and digital book sales should push the company's overall sales up 5% by fiscal 2013. Yet it's worth noting Barnes & Noble hasn't posted this kind of growth (on an organic basis) since fiscal 2005. The steady drop in time spent reading traditional books and more time spent surfing the web is a trend that shows no signs of abating.

    And this presents the real challenge to the business model. It costs a lot of money to operate traditional retail stores. Retailers need to generate a certain level of sales at each store to generate an incremental level of profit. Fall below this level, and we're talking about incremental losses. And this is what looks set to happen at an increasing number of stores, as e-reader downloads rise in volume, displacing traditional book sales. Same-store sales in the fiscal second quarter fell 3.3% from a year earlier. A random walk through any Barnes & Noble -- outside of the all-important holiday season -- provides a glimpse of slowing foot traffic. The company operates more than 1,300 stores, and it will be interesting to see how many of them slip from profitable to unprofitable if same-store sales keep dropping .

    Risks to Consider: When shorting stocks like this, you need to stay abreast of intra-quarter data points. If it appears Barnes & Noble's Nook sales start to trend well above expectations, then it would be wise to close your short position and revisit the investment thesis after the holiday selling season.