Saturday, February 9, 2013

Compass Minerals International Misses on the Top and Bottom Lines

Compass Minerals International (NYSE: CMP  ) reported earnings on Feb. 6. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended Dec. 31 (Q4), Compass Minerals International missed slightly on revenues and missed estimates on earnings per share.

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

Gross margins increased, operating margins shrank, net margins contracted.

Revenue details
Compass Minerals International recorded revenue of $267.1 million. The six analysts polled by S&P Capital IQ predicted net sales of $271.4 million on the same basis. GAAP reported sales were 13% lower than the prior-year quarter's $306.1 million.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
EPS came in at $1.02. The eight earnings estimates compiled by S&P Capital IQ predicted $1.05 per share. GAAP EPS of $0.90 for Q4 were 31% lower than the prior-year quarter's $1.31 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 26.1%, 90 basis points better than the prior-year quarter. Operating margin was 15.8%, 60 basis points worse than the prior-year quarter. Net margin was 11.3%, 300 basis points worse than the prior-year quarter.

Looking ahead
Next quarter's average estimate for revenue is $313.6 million. On the bottom line, the average EPS estimate is $1.43.

Next year's average estimate for revenue is $1.09 billion. The average EPS estimate is $4.58.

Investor sentiment
The stock has a four-star rating (out of five) at Motley Fool CAPS, with 760 members out of 787 rating the stock outperform, and 27 members rating it underperform. Among 183 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 175 give Compass Minerals International a green thumbs-up, and eight give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on Compass Minerals International is hold, with an average price target of $77.43.

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WMS Industries Misses on Both Revenue and Earnings

WMS Industries (NYSE: WMS  ) reported earnings on Feb. 6. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended Dec. 31 (Q2), WMS Industries missed estimates on revenues and missed estimates on earnings per share.

Compared to the prior-year quarter, revenue dropped slightly and GAAP earnings per share shrank significantly.

Gross margins grew, operating margins shrank, net margins contracted.

Revenue details
WMS Industries logged revenue of $157.5 million. The 12 analysts polled by S&P Capital IQ anticipated a top line of $165.7 million on the same basis. GAAP reported sales were the same as the prior-year quarter's.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
EPS came in at $0.15. The 14 earnings estimates compiled by S&P Capital IQ predicted $0.16 per share. GAAP EPS of $0.08 for Q2 were 72% lower than the prior-year quarter's $0.29 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 63.9%, 280 basis points better than the prior-year quarter. Operating margin was 4.4%, 850 basis points worse than the prior-year quarter. Net margin was 2.7%, 720 basis points worse than the prior-year quarter.

Looking ahead
Next quarter's average estimate for revenue is $184.5 million. On the bottom line, the average EPS estimate is $0.30.

Next year's average estimate for revenue is $710.2 million. The average EPS estimate is $1.01.

Investor sentiment
The stock has a three-star rating (out of five) at Motley Fool CAPS, with 171 members out of 196 rating the stock outperform, and 25 members rating it underperform. Among 57 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 50 give WMS Industries a green thumbs-up, and seven give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on WMS Industries is hold, with an average price target of $17.53.

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Has Skechers Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Skechers (NYSE: SKX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Skechers.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

0.8%

Fail

1-year revenue growth > 12%

(18.4%)

Fail

Margins

Gross margin > 35%

43.6%

Pass

Net margin > 15%

(3.6%)

Fail

Balance sheet

Debt to equity < 50%

15.1%

Pass

Current ratio > 1.3

2.83

Pass

Opportunities

Return on equity > 15%

(5.5%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

5-year dividend growth > 10%

0%

Fail

Total score

3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Skechers last year, the company hasn't been able to earn back any of the three points it lost from 2011 to 2012. But the stock has done quite well, climbing about 40% over the past year as investors hope the worst for the company is over.

The biggest news for Skechers over the past year involved the aftermath of the toning-shoe craze, which was based on the idea that wearing certain types of shoes could help you lose weight, build muscle, and generally improve health. Competitors Crocs (NASDAQ: CROX  ) and Collective Brands (NYSE: PSS  ) as well as athletic-shoe specialists Reebok and Puma followed suit with their own versions of the shoes, but the Federal Trade Commission ended up calling out Skechers for what it called the shoe company's "unfounded claims" and settled with Skechers for $40 million for misleading advertising.

After it got its litigation uncertainty behind it, though, Skechers' stock soared. Even when the company posted a loss in the second quarter of 2012, it was a small enough loss to send shares up strongly, simply because expectations for the company had gotten so low. Now, analysts are getting more optimistic, with upgrades pointing to the potential for Skechers to earn a substantial profit this year.

The big question is whether Skechers can avoid the downward cycle that seems to plague shoemakers. Last year, Deckers Outdoor (NASDAQ: DECK  ) was on the outs, with its dependence on Uggs making it vulnerable when they fell out of style. But bulls believe that Skechers has broken that cycle, diversifying just like Crocs did and finding more sustainable growth.

For Skechers to improve, it needs to make its way back to profitability. With that appearing increasingly likely this year, Skechers could well make a move closer to perfection in the near future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

The best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of.�Click here now�to keep reading.

Click here to add Skechers to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Why Universal Display Still Has Plenty of Room to Run

Universal Display (NASDAQ: PANL  ) is a company with a lot of potential disruptive power. It owns patents to the new OLED display technology, and many investors are looking to the smartphone and tablet space for where this technology is going to take off first. In this video, Motley Fool tech and telecom analyst Andrew Tonner highlights a conference call from Cowen, saying that Samsung will begin producing full HD AMOLED displays this month for use in its next version of the Galaxy 5 phone. This sent shares of Universal Display up by more than 10%. Andrew tells us why he thinks the stock can go much further in the long run.

Universal Display has a powerful patent portfolio behind OLEDs, a technology poised to dominate the displays of the future. Its placement at the center of OLEDs makes the company an underappreciated way to play the enormous sales growth in tablets and smartphones. However, like any new technology, there are plenty of risks to Universal Display. Motley Fool analyst Evan Niu, CFA, has authored a new premium report that dives into reasons to buy the company as well as the challenges facing it. For access to this comprehensive report, simply click here now.

Top Stocks For 2/9/2013-3

PROTEONOMIX, INC. (OTC.BB:PROT), a biotechnology company focused on developing therapeutics based upon the use of human cells and their derivatives, has executed a joint venture agreement with a group of investors that will create a new stem cell treatment and research facility in the United Arab Emirates (U.A.E.). The Investor Group has committed to invest $5 million on or before September 10, 2010. The Joint Venture company, XGen Medical LLC (“XGen”), a Nevis Island limited liability company, will be owned 51% by Proteonomix and 49% by the Investor Group. Due to confidentiality and competitive reasons, the Investor Group has requested to remain anonymous for the present. The Investor Group is not related directly and/or indirectly to the Company, its management, its board of directors and/or its current shareholders.

The Investor Group assumes a variety of operational duties under the agreement, including some regulatory responsibility in the U.A.E., physician recruitment and cooperative management of the local entity. The Investor Group $5 million cash investment includes the purchase of $1 million of cellular material from Proteonomix.

Additionally, as part of the agreement, Proteonomix will license to XGen (the joint venture), both a use and treatment license in the UAE, as well as a license to manufacture the cellular material. The agreement also anticipates the formation of treatment facilities in other locations to be jointly agreed upon between the Company and the Investor Group. Each new facility would require the Investor Group to contribute a minimum investment of $5 million.

The agreement calls for Proteonomix, Inc., through its wholly owned subsidiary, StromaCel, Inc., to receive $ 7,500 per treated patient.

Additionally, the agreement calls for XGen, the joint venture, to market and distribute Proteoderm, including the Matrix NC-138 anti-aging products.

StemCells, Inc. (Nasdaq:STEM) reports the publication of new preclinical data demonstrating that the Company’s proprietary human neural stem cells restore lost motor function in mice with chronic spinal cord injury. This is the first published study to show that human neural stem cells can restore mobility even when administered at time points beyond the acute phase of trauma, suggesting the prospect of treating a much broader population of injured patients than previously demonstrated. This groundbreaking study, entitled “Human Neural Stem Cells Differentiate and Promote Locomotor Recovery in an Early Chronic Spinal Cord Injury NOD-scid Mouse Model,” was led by Dr. Aileen Anderson of the Sue and Bill Gross Stem Cell Research Center at the University of California, Irvine (UCI).

In this latest study, StemCells’ human neural stem cells were transplanted into mice 30 days after a spinal cord injury that results in hind limb paralysis. The transplanted mice demonstrated a significant and persistent recovery of walking ability in two separate tests of motor function when compared to control groups. These results are particularly significant because it is the first time that human neural stem cells have been shown to promote functional recovery in a chronic spinal cord injury setting, which is characterized as a point in time after injury in which inflammation has stabilized and behavioral recovery has reached a plateau. In humans, the chronic phase typically does not set in until several weeks or months following the injury.

StemCells, Inc. is engaged in the research, development, and commercialization of stem cell therapeutics and tools for use in stem cell-based research and drug discovery. In its therapeutic product development programs, StemCells is targeting diseases of the central nervous system and liver. StemCells’ lead product candidate, HuCNS-SC(R) cells (purified human neural stem cells), is in clinical development for the treatment of two fatal neurodegenerative disorders that primarily affect young children. StemCells also markets specialty cell culture products under the SC Proven(R) brand, and is developing stem cell-based assay platforms for use in pharmaceutical research, drug discovery and drug development. The Company has exclusive rights to approximately 55 issued or allowed U.S. patents and over 200 granted or allowed non-U.S. patents.

International Stem Cell Corporation (OTCBB:ISCO), recently reported that its stem cell therapeutic programs focused on protective, transparent corneas (CytoCor) in the front of the eye and the light-sensitive retinal tissue (CytoRet) in the back of the eye will be formalized into a new business unit, Cytovis. Together these programs will leverage external and internal development, regulatory and commercial expertise in cellular ophthalmology to form a focused portfolio of complementary product candidates designed to address high unmet medical needs with apparent pharmacoeconomic and quality of life benefits.

CytoCor is the brand name for ISCO�s corneal tissue that can be derived from the company�s proprietary parthenogenetic stem cells or commonly used embryonic stem cells. Research and development with partners Absorption Systems in the US, Sankara Nethralaya in India and Automation Partnership in the UK continues for the purpose of optimizing the tissue for transplantation in the 10 million people worldwide suffering from corneal vision impairment and as an alternative to the use of live animals and animal eyes in the $500+M market for safety testing of drugs, chemicals and consumer products. ISCO�s goal in the coming months is to establish funding and infrastructure in India for accelerated development of CytoCor for the therapeutic application and to advance and implement the chemical testing application with partners in the US and Europe.

International Stem Cell Corporation is a California-based biotechnology company focused on therapeutic and research products. ISCO’s core technology, parthenogenesis, results in creation of pluripotent human stem cells from unfertilized oocytes (eggs). These proprietary cells avoid ethical issues associated with use or destruction of viable human embryos and, unlike all other major stem cell types, can be immune matched and be a source of therapeutic cells with minimal rejection after transplantation into hundreds of millions of individuals across racial groups. ISCO also produces and markets specialized cells and growth media for therapeutic research worldwide through its subsidiary Lifeline Cell Technology, develops a line of cosmeceutical products via its subsidiary Lifeline Skin Care and advances novel human stem cell-based therapies where cells have been proven to be efficacious but traditional small molecule and protein therapeutics do not.

This Morning: ARM Rising, Will Google Be a Leader, Not a Laggard?

Here are some things going on this morning in your world of tech:

Dell (DELL) shares are higher by 12 cents after the company said it would take itself private in a $13.65 per share offer of cash and debt financed by founder Michael Dell, who remains CEO, and private equity firm Silver Lake, as widely expected. Microsoft (MSFT) is kicking in a $2 billion loan. The deal still requires the approval of shareholders who must vote.

Shares of ARM Holdings (ARMH) are higher by $1.98, or almost 5%, at $43.93 after the chip maker this morning reported�revenue rose 19%, year over year, to �164 million in revenue, yielding 4 pence per share, exceeding the Street’s �151.4 million revenue estimate and meeting its earnings per share expectations. The company projected $250 million in revenue this quarter, which is in line with the Street consensus of $249 million.

The company’s all-important backlog figure hit a record in the quarter, it said.

Gus Richard with Piper Jaffray, reiterating a Neutral view on the stock, called the report “strong” and raised his revenue estimate for this year slightly to $1.09 billion.

Shares of Automatic Data Processing (ADP) are up 91 cents, or 1.5%, at $60.46 after the company reported fiscal Q2 revenue of $2.75 billion and EPS of 80 cents, exceeding the Street’s $2.72 billion and 71 cents.

Pacific Crest’s Evan Wilson this morning reiterates an Outperform rating and an $820 price target on Google (GOOG) shares, writing that the company “will increasingly be viewed as a tech leader instead of a tech laggard” including such things as having its hardware (the Motorola division) show that it “gets” the Post-PC era, and “laughing stock” products gain “traction.”

Google shares are up $10.92, or 1.4%, at $769.94.

Are You Prepared for a 3% Stock Market Return?

Following a day on which stocks were broadly flat, they're sliding this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow (DJINDICES: ^DJI  ) down 0.15% and 0.33%, respectively, as of 10 a.m. EST.

The long view
Investment bank Credit Suisse published its Global Investment Returns Yearbook (link opens PDF) on Tuesday. This is a first-class piece of sell-side research -- virtually unique, in fact. For one thing, the focus is on long-term outcomes, not what the market will do today or next week, which is unknowable. Furthermore, the report's authors aren't even Credit Suisse analysts, but a trio of distinguished London Business School academics: Elroy Dimson, Paul Marsh, and Mike Staunton ("DMS" hereafter), who are authorities on global long-run stock returns.

The report is a trove of interesting research and data, but the title of the first chapter, "The Low Return World" sums up the dilemma investors currently face. DMS estimate that U.S. equities are set to deliver an annualized return, after inflation, in the range of 3% to 4% over the next 20 to 30 years. They obtain their forecast by adding an equity risk premium averaging 3.5% to a real-cash return -- i.e., the return on Treasury bills, adjusted for inflation -- that they expect to be roughly zero. Clearly, if that turns out to be accurate, it will be a problem for individual investors and pension funds that expect to earn 6% or more.

So what's an investor to do? DMS identify some ways that may enable investors to earn an incremental return:

To exploit stock market predictability, investors should take advantage of opportunities when returns are expected to be higher, and hence should buy when prices are low relative to fundamentals. In historical terms, that means buying enthusiastically during the October 1987 crash, during the Lehman crisis, and during other major setbacks; and selling outperforming assets during the 1990s bull market.

Nevertheless, they recognize such a contrarian strategy is difficult to implement. As such, they suggest a mechanical approach as one option: "It can be useful to follow a dollar-cost averaging approach, whereby regular investments are made into a portfolio, so that at least some assets are bought at the bottom (and relatively fewer at the top)."

It's not sexy, but it works.

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3 Stocks Near 52-Week Highs Worth Selling

We may not be better off than we were five years ago, but the investors don't seem to care as the market continues to march higher. For skeptics like me, that's an opportunity to see whether companies have earned their current valuations.

Keep in mind that some companies deserve their current valuations. ARM Holdings (NASDAQ: ARMH  ) , for example, appears well-deserving of a new 52-week high after posting a 19% increase in sales and a 28% increase in year-over-year profits for the fourth-quarter. Furthermore, ARM's first-quarter forecast was ahead of Wall Street's expectations and management also proposed a 35% dividend increase. Game-set-match, ARM!

Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.

Lofty expectations
I freely admit there are a few retailers I've never come around to -- Pier 1 Imports (NYSE: PIR  ) is one of those retailers. Pier 1 has been a big beneficiary from the recent surge in new home sales as new homeowners are turning to the discount store for good deals on home furnishings and accessories. However, I have my own reasons to believe that investors may be getting way ahead of themselves here.

To start with, the housing rebound is really only a few months old, so to assume that it can continue at such a rapid pace with the payroll tax taking around $1,000 out of the average taxpayer's pockets per year is a foolish assumption. Second, same-store sales growth of 8.2% in December, while definitely commendable, is going to be extremely difficult to duplicate or beat next year. There are fewer great deals to be had in the housing market and disposable incomes are shrinking because of higher taxes for many Americans. Finally, Pier 1 is valued at a lofty 22 times cash flow, a level it hasn't seen regularly since 2005, the same year its stock began its multi-year descent from $20 to just $0.11 a few years later.

Unlike in 2009, I'd definitely say the worst is behind Pier 1, but I have a hard time recommending it as a buy anywhere above $15 with so many uncertainties still evident.

Cue the little elephants
I'll give office supply chain OfficeMax (NYSE: OMX  ) credit for some very entertaining commercials depicting small rhinos and elephants, but that won't be enough to distract me from the fact that it's a poor choice for an investment.

OfficeMax has doubled since it announced the extinguishment of $871.5 million in non-recourse debt related to notes backed by Lehman Brothers, which became null and void when Lehman went bankrupt. The result was a far less indebted OfficeMax that glimmered with a one-time profit on its books. But, I'd advise those who've been lucky enough to enjoy the ride to come down from the perch quickly. OfficeMax's sales are projected to contract 2% this year and be flat next year as it closes underperforming stores and attempts to realign its focus toward traffic-driving mobile devices.

The problem with this plan is that Staples (NASDAQ: SPLS  ) , my clear favorite in the office supply sector, beat OfficeMax to the punch by a good year. Staples made plans to reduce its square footage and focus on mobile long before OfficeMax, giving it a better chance at capturing traffic in a highly competitive market. Staples also offers investors much better overall value at just 9.5 times forward earnings and with a yield of 3.3%. OfficeMax shareholders will pay more than 13 times forward earnings for essentially flat growth with a yield of just 0.7%. Thanks, but no thanks, OfficeMax -- you can keep your mini elephants!

Where's the beef?
My kudos and congratulations to staffing company Kforce (NASDAQ: KFRC  ) for trouncing Wall Street's expectations in the fourth-quarter, but where's the beef behind these numbers?

For the quarter, Kforce reported $269.8 million in revenue and a profit of $0.24. Expectations had only called for the company to earn $0.22 on $267.6 million in revenue. However, revenue fell by 5.5% year-over-year and adjusted GAAP earnings sank by 15%�-- hardly a reason for the share price to explode higher by double-digits as my Foolish colleague Travis Hoium so astutely pointed out. Even Kforce's first-quarter forecast of $268 million to $274 million in revenue and a profit of $0.09-$0.12 failed to meet the current consensus of $275.5 million in revenue and $0.14 in EPS.

Staffing companies have been basically battening down the hatches and utilizing share repurchases and cost-cutting tools to artificially boost EPS, and Kforce is no different. On one hand, it is doing what it can to enhance shareholder value through buybacks and a special dividend, but all it's really doing is masking the fact that enterprises aren't hiring much, if at all, and that's bad news for staffing companies like Kforce with shrinking prospects. The risks simply outweigh the rewards with this company.

Foolish roundup
This week it's all about innovation and differentiation -- something I'm inferring none of these three companies possess. Pier 1's close ties to the housing sector and economy, as well as OfficeMax and Kforce's lack of sales growth, make these three stocks portfolio liabilities with far too much risk for my own taste.

I'm so confident in my three calls that I plan to make a CAPScall of underperform on each one. The question is: Would you do the same?

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Friday, February 8, 2013

Why Sychronoss Shares Took Off

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Synchronoss Technologies (NASDAQ: SNCR  ) are soaring 20% higher today after reporting earnings that came in ahead of expectations, combined with a solid set of forward guidance.

So what: Wall Street was looking for $0.25 per share on $70.1 million in revenues for Synchronoss' fourth quarter, but the company surprised on the upside with $73.8 million in revenue and $0.29 per share in adjusted earnings. The company's guidance was in the $330 million to $350 million range for the full year of 2013, and non-GAAP revenue in the $75 million to $78 million range for the current quarter, with EPS in the range of $0.27 to $0.29. The top-line estimate for the current quarter is slightly ahead of the $74.3 million Wall Street sought, but its EPS range only hits the consensus of $0.29 on the high end. For the full year, analysts had expected $330.1 million and $1.29 in EPS.

Now what: Synchronoss has impressed the market today with bullish expectations, and its P/E remains at the lower end of the past year's range. It might be worth keeping an eye on the stock, which is known for wild moves, but I wouldn't jump in after this jump.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

Want more news and updates? Add Synchronoss to your watchlist now.

Do You Trade Like Captain Kirk or Mr. Spock?


In the classic Star Trek movies and television show Captain Kirk believed in his abilities to make the best decisions in the circumstances he found himself in. Mr. Spock contrasted against Kirk’s leadership style by using logic and reason along with probabilities of success to make the best decisions.

These two styles are similiar to the very different strategies of traders, some discretionary traders try to get by with their experience and wits, they relay on their ability to make the right decisions in the heat of the trading battle. Mechanical traders do all their work outside of market hours and are only following a preconceived plan for position sizing and specific entries and exits when the markets are open, no decisions to make in live trading just executing the plan that was already determined to be successful in the long term based on past market behavior and probabilities.

Here are the differences between traders that rely on their instincts, intuition, rules, and chart reading abilities and those who are pure mechanical systematic traders.

Discretionary Traders…

  • …trade information flow.

  • …are trying to anticipate what the market will do.

  • …are subjective; they read their own opinions and past experiences into the current market action.

  • …trade what they want and have rules to govern their trading.

  • …are usually very emotional in their trading and taking their losses personally because their opinion was wrong and their ego is hurt.

  • …use many different indicators to trade at different times. Sometimes it may be macro economic indicators, chart patterns, or even macroeconomic news. Many discretionary traders are trying to game what they believe the majority of other traders will be doing based on market psychology as if it is one big poker game.. They are trying to form an opinion on what the market will do.

  • … generally have a very small watch list of stocks and markets to trade based on their expertise of the markets they trade.

Systematic Traders…

  • …trade price flow.

  • …are participating in what the market is doing.

  • …are objective. They have no opinion about the market and are following what the market is actually doing, i.e. following that trend.

  • …have few but very strict and defined rules to govern their entries and exits, risk management, and position size.

  • …are unemotional because when they lose it is simply that the market was not conducive to their system. They know that they will win over the long term.

  • …always use the exact same technical indicators for their entries and exits. They never change them.

  • …trade many markets and are trading their technical system based on prices and trends so they do not need to be an expert on the fundamentals.

While discretionary traders are busy trying to digest what fundamental news and information mean, systematic traders are taking the signals they are getting from actual price movement in the market. Systematic traders are not thinking and predicting what the market is going to do, they are reacting to what the majority is doing based on their predetermined system’s entry signals.

For the average trader being a 100% Mechanical System Trader usually maximizes the chance of success in the markets, especially if you are using a historically proven profitable system. If you are removing the emotions and ego out of your trading and are controlling your risk of ruin with proper trade size and stop losses, then you have probability on your side of joining the consistently profitable traders in the market.

Now what sort of trader do you want to be?

*Post courtesy of Stephen Burns at New Trader U.

 

Apple: Barclays Ups Target, Estimates; Keeps Overweight Rating

Barclays Capital analyst Ben Reitzes this morning repeated his Overweight rating on Apple (AAPL), lifting his target on the stock to $385, from $340. He also increased his EPS forecast for the September quarter to $4.05, from $3.91; for FY 2011 he now sees $17.80, up from $16.92.

“Even at this market cap” – almost $272 billion – “we continue to believe Apple is the best growth play in the IT hardware segment � with prospects for significant double digit organic revenue growth for several more years,” he writes in a research note.

For the September quarter, Reitzes boosts his forecast for iPad unit sales to 4.8 million, from 4.3 million; for the December quarter, he now expects sales of 6 million units, up from 5.1 million. His FY 2011 view is now 21.1 million units, up from 18.9 million; he sees iPad sales jumping to 27.9 million in FY 2012. Reitzes also revised his model for iPhone sales. His new estimates for FY 2011 is 51.7 million units, up from 49.4 million; he thinks the total will reach 64.3 million in FY 2012.

AAPL is up $1.86, or 0.6%, to $297.22.

3 Big Winners This Week

In the following video, Fool.com contributor John Reeves takes us through three stocks that have shown investors big jumps this week. He discusses Netflix (NASDAQ: NFLX  ) , which is up 11% for the week and nearly 100% for the year, and says this most recent pop may be due to the possibility that Netflix will be added to the Nasdaq 100, made more likely by Dell's departure as it plans to go private. John also talks about the 3-D printing world and tells us about 3D Systems (NYSE: DDD  ) , up 13% this week after announcing a three-for-two stock split. Both this stock and its only publicly traded competitor, Stratasys (NASDAQ: SSYS  ) , soared in 2012, leading some investors to see them as a bit frothy. Lastly, John talks about Westport Innovations (NASDAQ: WPRT  ) , maker of natural gas engines. The company has experienced a lot of volatility this past year, but is currently up 7% this week on news that it and its partner Cummins (NYSE: CMI  ) will be supplying engines for two of the largest transit fleets in the U.S.

As the most advanced designer of engines powered by natural gas, Westport Innovations is a small company with a big goal: To lead the world in transitioning from traditional oil-based fossil fuels in favor of abundant, cheap, and clean natural gas. The company has a price tag large enough to match its ambition, and will need to grow revenue quickly in order to justify sky-high expectations. To help you determine whether Westport Innovations is right for your portfolio, The Motley Fool has just released a brand-new premium report breaking down the company's opportunities, competitive advantages, and risks. To get started, simply click here now for instant access.

Hollande: Forex policy must be evaluated over time

BRUSSELS--French President Francois Hollande said Friday that a foreign exchange policy for the euro must be set up and evaluated over time, taking into account the fact that the strength of the currency impacts the economies of euro-zone countries in different ways.

"What count aren't the daily, the weekly change in the euro's value compared to other currencies," Mr. Hollande told a press conference after a meeting of European Union leaders in Brussels. "What counts is to have an exchange target that is realistic over time."

The French President said that the euro group, a monthly meeting of finance ministers from countries in the euro zone, should dictate the strategy that the euro zone should adopt while dealing with other currency zones.

Mr. Hollande said that the increase in the value of the euro hits euro-zone economies in different ways.

"Not all the European economies suffer the same consequences: there are countries that can export even with an expensive currency, and others that don't have this capacity, due to their industrial specialization," Mr. Hollande said.

He denied that the recent appreciation in the common currency is damping growth in France, the euro zone's second-largest economy.

Why Conceptus Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of medical device maker Conceptus (NASDAQ: CPTS  ) jumped as much as 12% following the release of its fourth-quarter results and after announcing an update on its European clinical trial for its next-generation Essure, a surgery-free birth-control device for women.

So what: For the quarter, revenue grew 21.5% to $40.7 million, as gross margin expanded 60 basis points to 84.1%. Net income also demonstrated significant growth, coming in at $0.17 compared to a loss of $0.08 per share in the year-ago period. Wall Street has only been expected $40.2 million in revenue and just $0.11 in EPS. Conceptus' 2013 forecast for $155 million to $159 million in revenue and EBITDA of $34 million to $37 million was pretty much right in line with the consensus. As icing on the cake, the company also announced its first patient enrollment in Europe for testing of Essure.

Now what: If I had a dollar for every time I could say that a company's product makes sense on paper, but its valuation is far from making sense, I'd probably have a lot of dollar and be a lot closer to retirement by now. I have little doubt that Essure will continue to be a growth driver for Conceptus, but I also feel it could be three years or more before revenue and earnings growth catch up with its already frothy valuation. Personally, I'm perfectly happy waiting this one out on the sidelines.

Craving more input? Start by adding Conceptus to your free and personalized watchlist so you can keep up on the latest news with the company.

While you can certainly make huge gains in biotech and medical device companies like Conceptus, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of.�Click here now�to keep reading.

AAPL: Einhorn’s Right, Major Capital Allocation Change Needed, Says Bernstein

Toni Sacconaghi of Bernstein Research, who has an Outperform rating on Apple (AAPL) shares, was on CNBC briefly a short while ago to discuss the interview earlier this morning�with David Einhorn�of Greenlight Capital�who is agitating to have shareholders reject Apple’s proxy vote on blocking preferred shares.

Einhorn thinks Apple needs to issue perpetual preferred shares with a 4% dividend yield to close the enormous valuation gap he sees in Apple.

Sacconaghi was inclined to agree with Einhorn, though he actually thinks the company should take on large amounts of debt:

Look, like any set of calculations, Einhorn’s idea is based on a series of assumptions, and we could bicker with some of them. The broader issue that Einhorn is bringing to the table, and it’s one Bill Miller raised yesterday, is that Apple investors are dissatisfied with Apple’s capital allocation strategy. I fully agree with those views. Others have suggested, and I believe, Apple should take on debt and raise its dividend. The fact is, for a company to have $137 billion and add $40 billion per year, is destroying economic value. The important thing is, Apple is actively talking with major shareholders now about returning incremental cash. They did this a year ago. After that they announced the initial dividend last march. They are now going through a similar process. I don’t think that means anything, but there is a precedent, at least, here. So first and foremost, they are looking at this. The majority of the cash, $85 billion, is off shore. So, to return that cash, they are going to have to pay a tax. The alternative is to take on debt. They don’t want to take on debt, and they don’t want to pay a tax, is the issue.

Asked by the hosts if he was surprised that Apple wants to take away the possibility of preferred shares from its charter, Sacconaghi responded,

It’s hard to say where that notion came from and why Apple wants to eliminate it. In many cases, shareholders actually do want the preferred stock provisions eliminated, because they can be used to avert a takeover. But given Apple’s market cap, they are not going to be taken over. The real reason behind why Apple is proposing to have prop 2 eliminated is not clear at this point.

Sacconaghi said the biggest catalyst to get Apple shares going at this point would be “a major return in cash” to shareholders. “If they raise the dividend 15%, it’s not going to move the stock. They need a major change in capital allocation.”

But will it happen?

I’m not holding my breath on that. Then again, Apple is a company that never returned any money to shareholders, and they took a step a year ago. I’m not betting on significant change in policy in next few months.�To get value investors to own this stock to really move it, you need a dividend in the high 3% range, ideally you need a dividend in the 4% plus range.

Apple stock is up $1.30, at $456.

Why General Electric Is Poised to Outperform

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, industrial behemoth General Electric (NYSE: GE  ) has earned a respected four-star ranking.

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

GE facts

Headquarters (founded)

Fairfield, Conn. (1892)

Market Cap

$234.4 billion

Industry

Industrial conglomerates

Trailing-12-Month Revenue

$147.4 billion

Management

Chairman/CEO Jeffrey Immelt

Vice Chairman/CFO Keith Sherin

Return on Equity (average, past 3 years)

11.5%

Cash/Debt

$125.7 billion / $414.1 billion

Dividend Yield

3.4%

Competitors

Honeywell International (NYSE: HON  )

Siemens (NYSE: SI  )

United Technologies (NYSE: UTX  )

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

On CAPS, 94% of the 16,520 members who have rated GE believe the stock will outperform the S&P 500 going forward.

Just last month, one of those Fools, djohn1969, succinctly summed up the bull case for our community:

It's official -- GE is back and better than ever, largely due to lessons learned from its painful struggle through the 2008 financial crisis. Even though GE Capital is still a large (and very lucrative) part of the business, the parent company has been successfully shifting resources back toward its traditional industrial expertise with strong footholds in health care, aviation, energy, etc. For example, with its relatively new and already very successful oil and gas services business, GE is very well positioned to be a huge benefactor of the U.S. transition to energy independence.

GE has regained status as one of my core holdings over the past few years and I don't plan to ever sell again. I might consider it if I think we're headed for a 2008 repeat, but I'm confident GE would weather such an event much better from lessons learned and I believe 2008 was a once-in-a-lifetime event anyway.

Of course, that short pitch doesn't even come close to telling the entire story for GE. You're in luck, though. The Fool's brand-new premium report on GE looks at all sides of one of the most compelling and ubiquitous companies in the world. You can grab your copy, which comes with free updates for 12 months.

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

ArcelorMittal Beats on Both Top and Bottom Lines

ArcelorMittal (NYSE: MT  ) reported earnings on Feb. 6. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended Dec. 31 (Q4), ArcelorMittal beat expectations on revenues and beat expectations on earnings per share.

Compared to the prior-year quarter, revenue dropped and GAAP loss per share expanded. The non-GAAP profit was a surprise, as analysts had predicted a loss.

Margins dropped across the board.

Revenue details
ArcelorMittal logged revenue of $19.31 billion. The 14 analysts polled by S&P Capital IQ predicted a top line of $18.90 billion on the same basis. GAAP reported sales were 14% lower than the prior-year quarter's $22.45 billion.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
EPS came in at $0.67. The one earnings estimate compiled by S&P Capital IQ averaged -$2.78 per share. GAAP EPS were -$2.58 for Q4 against -$0.68 per share for the prior-year quarter.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 6.9%, 100 basis points worse than the prior-year quarter. Operating margin was 0.5%, 520 basis points worse than the prior-year quarter. Net margin was -20.6%, 1,610 basis points worse than the prior-year quarter.

Looking ahead
Next quarter's average estimate for revenue is $20.62 billion.

Next year's average estimate for revenue is $86.43 billion. The average EPS estimate is $0.87.

Investor sentiment
The stock has a four-star rating (out of five) at Motley Fool CAPS, with 2,049 members out of 2,111 rating the stock outperform, and 62 members rating it underperform. Among 470 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 461 give ArcelorMittal a green thumbs-up, and nine give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on ArcelorMittal is outperform, with an average price target of $20.49.

Is ArcelorMittal the right metals stock for you? Look beyond the steel mill and find out the best way to profit from inflation and gold with a little-known company we profile in, "The Tiny Gold Stock Digging Up Massive Profits." Click here for instant access to this free report.

  • Add ArcelorMittal to My Watchlist.

Thursday, February 7, 2013

What Wall Street Is Selling

The market for initial public offerings (IPOs) is one I like to watch. Not because I like to buy IPOs, but because what�s hot in the IPO market can give you some clues about what you might not want to buy.

I wrote to my Capital and Crisis readers a couple of weeks ago about Silver Bay Realty, a company dedicated to managing a portfolio of single-family rental homes. It was the first IPO of its kind when it debuted in December. I panned it. But what�s interesting here is there are more Silver Bays in the hopper.

At a recent conference in Las Vegas, Waypoint Homes CEO Gary Beasley said he expects more IPOs of single-family landlords. According to Beasley, there are five-six companies with at least $500 million in assets, including three with at least $1 billion.

So there are several private equity firms that spent the last few years putting together portfolios of single-family homes. Now they are ready to sell them to investors like you.

Buyer beware.

Wall Street serves up whatever it thinks it can sell. What sells now? Ironically, housing stocks sell well. As reviled as they once were, now investors love the idea of a housing recovery. So homebuilder stocks are another example of what�s selling well now.

Not too surprising, because investors tend to chase performance. Homebuilder stocks had a great 2012. PulteGroup Inc., for example, was one of the best performing stocks in the S&P 500 last year, as it nearly tripled. The SPDR Homebuilders Index rose 55% in 2012. So now investors say, �Gimme more!�

Wall Street happily obliges. Now there�s a little boom forming in housing-related IPOs. Taylor Morrison Home Corp. and TRI Pointe Homes Inc. have both filed for IPOs. These are the first homebuilder IPOs since 2004. This follows builders such as Meritage, Beazer Homes and Standard Pacific selling almost $450 million worth of stock in 2012.

Investors want to play the housing recovery, and you can be sure Wall Street will create lots of ways to do that. Just be careful, as they are likely not as good for you as they are for their promoters.

Another area to be careful about is high-yield stocks. With interest rates so low, investors are starved for income on their savings. Hence, the boomlet in IPOs from stocks that pay generous dividends or distribute profits to shareholders, such as master limited partnerships (MLPs). These stocks pay high yields, on average around 6%, which is a lot better than what you can get in a savings account. (They come with lots of extra risk compared with a savings account, too.)

Investors can�t get enough of them, and Wall Street is cooking up new ones. Last year, there were 14 IPOs from MLPs. According to Dealogic, this was the most MLPs raised since 2009. So far in early 2013, it looks like more of the same, with three more already. USA Compression Partners went public, and CVR Refining and SunCoke Energy are in the wings. They will all raise or have raised hundreds of millions of dollars by selling stock in an IPO.

My main point here that I want you to remember is this: An initial public offering is basically a stock that insiders want to sell. It�s a business they don�t want to keep for themselves anymore. If you always remember this, you�ll forever look at an IPO with the proper amount of skepticism. If it is such a great thing, why are they are letting you in on the deal?

Stocks � like stars � are born nearly every day. Yet there is an inner logic that drives the process.

It helps to think about the stock market as just one of the markets for companies. There is also a private market. In other words, there are private companies that get bought and sold too. You don�t see these reported in the stock tables, but they are just as real.

When stock market prices are higher than what is available in the private market, you�ll see lots of IPOs as private investors sell to the public to reap that windfall. When stock market valuations are lower than those of private markets, you�ll see more companies go private as insiders buy them and take them off the exchange.

With this framework in mind, you can see how the many new IPOs in high-yield stocks and housing stocks are likely a sign of a pricey stock market for these assets � not necessarily a sign of good investments on offer.

Of course, there are legitimate reasons for a company to go public. It�s just when we see a spate of similar companies going public at the same time that you should cast a doubtful gaze. And not all IPOs are terrible investments. Investors who bought Google at the IPO are pretty happy today. Still, the odds are against you. Googles don�t happen very often. Most of the time, you are better off avoiding the hot-selling IPOs that Wall Street is serving up.

Put another way, I�d rather align myself with insiders who are buying than those who are selling.

Coinstar Earnings: An Early Look

Earnings season is in full swing, with huge numbers of companies having already given their latest numbers to investors. The key to making smart investment decisions with stocks releasing their quarter reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Let's turn to Coinstar (NASDAQ: CSTR  ) . The company has gone well beyond its change-counting machines to focus on movie rental kiosks, which have opened the door to a huge potential business. Let's take an early look at what's been happening with Coinstar over the past quarter and what we're likely to see in its quarterly report on Thursday.

Stats on Coinstar

Analyst EPS Estimate

$0.73

Change From Year-Ago EPS

(27%)

Revenue Estimate

$580 million

Change From Year-Ago Revenue

11.5%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Coinstar deliver great results?
Analysts have grown somewhat more optimistic over the past three months about Coinstar's prospects, raising their earnings-per-share estimates by a couple of pennies. The stock has also reflected that enthusiasm, with shares rising about 9% since early November.

The big story with Coinstar has come from its Redbox service, which took on Netflix (NASDAQ: NFLX  ) and its mail-delivery DVD service with 35,000 Redbox kiosks conveniently located in supermarkets and other high-traffic stores. Given Netflix's decision to de-emphasize the DVD side of its business, Coinstar has been able to capitalize, in part by picking up the Blockbuster Express DVD-machine business of NCR (NYSE: NCR  ) last year.

But the future of Coinstar may well depend on its Redbox Instant streaming service. Partnering up with Verizon (NYSE: VZ  ) , the service has been plagued by delays and currently offers only a limited menu of titles, but Coinstar is hoping that providing credits for four kiosk rentals will help make its subscription price a better value proposition than Netflix's streaming-only offering.

The company will have new leadership to see it through the important transition, though, as CEO Paul Davis made a surprise announcement last month that he would retire at the end of March. CFO Scott Di Valerio will take over as CEO, but the move spooked investors, and Coinstar needs to do what it can to bolster investor confidence in light of the move.

Watch closely for Coinstar to reveal details about the Redbox Instant beta release as well as trends in its DVD business. Those two areas should give you more guidance on how much time the company has to make a transition before DVDs become obsolete.

Learn more
To find out more about Coinstar, be sure to check out our premium research report on the DVD rental giant. Inside, we discuss whether now is the right time for investors to grab Coinstar's stock, with an in-depth look at the opportunities, risks, and must-watch areas in Coinstar's future. Simply click here now to claim your copy today.

Click here to add Coinstar to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Top 10 Trends in Wealth Management for 2012

Wealth managers will see radical changes in their industry in 2012, says Aite Group in a new report.

Whither wealth management? The industry will continue to undergo radical changes that began in 2008, according to a detailed, 30-page Aite Group wealth management report released Friday.

In a report that identifies the top 10 trends that Aite foresees for wealth managers in the coming year, the Boston-based research and advisory firm warns that many of those trends will affect business models, profitability pressures, investor requirements and more.

“Wealth management firms will be required to quickly and frugally rethink the way they do business in order to be successful in a challenging market environment," says Aite in the introduction to its “Top 10 Trends in Wealth Management, 2012” impact note.

Here are the Top 10 wealth management trends to expect in 2012:

Read about Aite Group's report on advisors and asset management at AdvisorOne.

1. Market Reshuffle, Continued

Breakaway brokers, acquisitions by broker-dealers and private equity firms and changes in how advisors and investors approach control over their money will affect the market in 2012, Aite says in its wealth management report.

At the beginning of the crisis in 2008, Merrill Lynch and Wachovia Securities had to agree to be acquired, while Morgan Stanley and Smith Barney merged. “Given that these four firms represented around one-third of brokerage and advisory assets in the United States, a major portion of the wealth management market has been in transition ever since,” Aite notes.

The bulk of financial advisors who decided to break away from their firm mostly comprised smaller producers who were unable to obtain a lock-in contract. Meanwhile, independent networks like LPL, Raymond James and Cetera that provided a new home for those advisors “will find plenty of opportunity in 2012,” Aite predicts.

2. Profitability Pressure

The room is getting crowded as it becomes more difficult to maintain profit margins: more firms are entering the wealth management field even as lower activity levels by clients and asset levels that have not risen as hoped squeeze businesses.

Competition, outsourcing and the need for economies of scale will continue to pressure wealth managers, Aite predicts.

“Similarly, regulatory changes require investments in technology, staffing and training,” according to the report. “Large firms that have a tremendous amount of scale, like Merrill Lynch, have an easier time responding to increased client need for direct (i.e., online or mobile) access to their portfolios and financial information, and to justify the spending related to an online brokerage platform.”

3. Wealth Management Revenue for Banks

Banks are retooling to serve high-net-worth and ultra-high-net-worth clients as the asset share held by mass-market and mass-affluent investors has fallen. As banks seek to replace income lost to new regulations, look to see them more determinedly move into the wealth management sector and woo clients to think of them as their primary service providers.

“We expect more of the large banks to retune or rebrand their ultra-high-net worth groups to better capture this growing market, following on the footsteps of U.S. Bank’s and Wells Fargo’s recent re-branding of their ultra-high-net worth organizations (U.S. Bank’s Ascent Private Capital Management and Wells Fargo’s Abbot Downing group),” Aite says.

4. Business Model Changes

Investor behavior is changing, and so is firm behavior as profitability becomes harder to sustain. Another factor sure to exert substantial pressure on the field is the upcoming fiduciary standard, which likely will drive large firms more toward financial planning and fee-based services than a more sales-focused, commission-based approach.

Aite’s analysts believe that more independence on the part of investors will require more accommodation by their advisors for their more autonomous behavior.

“Advisors who can view their clients’ information online can more effectively service and provide the expert advice that investors appear to value,” the Aite report says. “In 2012, we expect firms to expand the role of client portals and to open up Web-based business applications to investors, particularly financial planning applications, in order to improve advisor productivity and investor engagement in the process.”

5. Self-Directed Investing

Part of that more autonomous behavior by investors is self-directed investing, even among older clients and those with greater investable asset balances, says Aite in its “Top 10 Trends in Wealth Management, 2012” impact note. Client desires to control their own investments will require wealth managers to be able to accommodate those wishes, with platforms that allow more activities and provide more transparency on fees and performance.

“Online trading platforms are no longer the bastion of the young and less wealthy,” the report says. “Based on Aite Group’s Q4 2011 survey of 1,010 investors, high-net-worth households with more than $1 million in investable assets were more likely to consider an online brokerage firm their primary investment provider than households holding between $25,000 and $99,000 in investable assets.”

6. A Less-Than-Ideal Investment Climate

Investors have become somewhat disillusioned with conventional investing and have turned more toward gold, the use of exchange traded funds rather than equity shares and more focus on trading and less on buy-and-hold strategies.

“The safest bet, in our view, for 2012 is to invest in online trading capabilities. Investors are clamoring for these services, and online brokerages may see outsized revenue increases in times of high volatility. Retail brokerage income potential serves as a natural hedge to revenue drops experienced by lower fees and net interest income,” Aite says.

7. Copy Trading

Aite Group anticipates that this will be the year when copy trading makes serious inroads into retail investing.

Copy trading is a byproduct of volatility and allows experienced traders to trade their own accounts (the constant), according to Aite. But it also allows retail traders (the multiplier) to tag along. The net effect from a volume perspective is that a trading desk’s copy-trading volumes grow in linear fashion as new traders join.

“Copy trading is one emerging financial service holding promise because it improves the outlook of all three pillars of wealth management (asset gathering, trading volume and fees), particularly during this period of low yields and uncertain economic conditions.”

Of the six leading copy-trading firms evaluated by Aite Group, two firms active in forex markets (Currensee and eToro) “possessed an investor experience and trading expert screening methodology worthy of further study.”

8. Mass-Affluent Retirement-Income Initiatives

With so many investors in the mass-affluent and lower-mass-affluent tiers determined to work longer and defer the need to draw on their retirement assets, opportunities abound to provide planning and rollover opportunities for them—and for higher-asset wealth groups as well.

More annuities and a more holistic approach to financial planning will mark this arena, Aite believes.

“The boomers’ life story offers up seismic opportunities for retirement income planning opportunities for all segments, but real work still needs to be done to provide retirement income planning for those in the lower-mass-affluent region (from $100,000 to $250,000 in investible assets) and beyond (for the $250,000 to $1 million client).”

9. Advisors Seeking More Control

Firms supporting advisors' practices and their more independent business models will find more opportunity as AUM fee-based models increase, says Aite in its “Top 10 Trends in Wealth Management, 2012” impact note.

This trend fits well with the rise of fee-based business models, and managed accounts also offer overlay fees.

“As the managed-account industry has evolved, we’ve seen the dominance of wirehouse firms become encroached upon,” Aite says. “Other channels have come to embrace separately managed account concepts due to improved overlay portfolio management and model-based investment management practices.”

10. Mobile Initiatives

Applications that put investors in touch with their accounts anywhere, any time are becoming ever more important, but the segment of the wealth management industry that relies heavily on advisors to work with clients has not adopted such apps as quickly as wirehouses, Aite warns.

But that is changing as both advisors and clients rely more heavily on being connected at all times.

“The leading online brokerage firms?Fidelity Investments, Charles Schwab, TD Ameritrade, and E*Trade?have developed applications that allow individual investors to access their brokerage and banking accounts through mobile devices. These new technologies allow online brokerage firms to move closer to their customers,” Aite reports.

-------------------

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  • Top 10 Richest Colleges: Biggest Endowments
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Buyer Beware: Hidden Debt at Spirit Airlines

Spirit Airlines (NASDAQ: SAVE  ) made a splash a few years ago when it transformed itself into America's first "ultra-low cost carrier." Spirit has very low base fares, but supplements its income with a variety of fees.� Spirit's fees apply to things like checked bags, carry-on bags, advance seat assignment, and even in-flight snacks and beverages. This revolutionary operating model has allowed Spirit to grow revenue by more than 20% per year recently.

Spirit is also profitable, and trades at a very reasonable forward P/E of 10, based on current analyst estimates. Moreover, the company has no debt. Indeed, as my Foolish colleague Sean Williams pointed out last week, both Spirit and fellow niche carrier Allegiant Travel (NASDAQ: ALGT  ) , are net cash positive. At first glance, this would appear to make Spirit a great investment candidate.

However, Spirit's balance sheet is not as pristine as it seems at first glance. The company has avoided taking on debt only by committing to expensive, long-term aircraft leases, which are just as much of an encumbrance as debt. This does not necessarily mean that the stock would be a bad investment, but it shows why investors need to look carefully at a company's business model before investing.

Aircraft financing: two models
Airlines operate in a very capital-intensive industry. This is the main reason why airline stocks are considered risky investments. There are two main ways that airlines can fund new aircraft purchases: debt financing, and lease financing. Debt financing gives the airline ownership of the aircraft and tends to be cheaper over the long term, but requires a large upfront payment, which is covered by issuing debt.

By contrast, in a lease financing arrangement, an aircraft leasing company buys the aircraft and leases it to the airline for a period of time, often eight to 12 years. This tends to be costlier because the leasing company accepts the risk of releasing the aircraft at the end of the initial lease term.

Many airlines use a combination of debt financing and lease financing. However, at present, Spirit Airlines does not own any aircraft; all are leased. Spirit's avoidance of debt financing makes the company appear to have a pristine balance sheet, with zero debt.

No debt but lots of bills...
Spirit Airlines may have no long-term debt, but the company still has substantial long-term obligations. Spirit disclosed its future minimum lease commitments in its most recent 10-Q filing, reproduced below (the reported figures are as of Sept. 30, 2012):

Spirit Airlines Future Lease Obligations:

Source: Spirit Airlines 10-Q for Q3 2012

However, that's not all. Spirit is also in the midst of a massive fleet expansion plan. Between 2013 and 2021, the company plans to add roughly 100 planes at a total cost of approximately $4.7 billion. Those may be debt-financed or lease-financed, but either way they will add significantly to Spirit's future spending commitments.

Squaring the circle
Fortunately, it is possible to create an adjusted net debt figure to account for some airlines' higher reliance on lease financing. Indeed, Delta Air Lines (NYSE: DAL  ) regularly reports such a figure. Delta adds seven times its annual aircraft rent (i.e. lease) expense to its total debt when reporting adjusted net debt. This is generally considered a good approximation of the "exchange rate" between lease financing and debt financing.

Spirit reported aircraft rent expense of $37.5 million in the most recent reported quarter ($150 million annualized), and this has been rising due to the company's fleet expansion. Furthermore Spirit has 2013 lease obligations of $167 million (which may include some non-aircraft related expenses). Based on an approximate figure of $160 million annual aircraft rent expense, and Spirit's recent cash balance of $399 million, Spirit has adjusted net debt of $721 million.

Bottom of the pack
In order to compare the bang for the buck between various airlines, it is useful to adjust for size by reporting adjusted net debt as a percentage of revenue. Here are the results for Spirit and four key competitors: Allegiant, Delta, United Continental Holdings (NYSE: UAL  ) , and Southwest Airlines (NYSE: LUV  ) .

Company Adjusted Net Debt TTM Revenue
(mainline only)
Debt as % of TTM Revenue
Allegiant TravelN/A$880 millionN/A
Spirit Airlines$721 million$1.26 billion57%
Delta Air Lines$11.7 billion$30.1 billion32%
United Continental$12.4 billion$30.4 billion41%
Southwest Airlines$2.5 billion$17.1 billion15%

Source: Airline SEC filings

The surprising result is that while Spirit is the only company with no debt on its balance sheet, it has the heaviest adjusted net debt burden in this group, at 57% of revenue. Allegiant is net cash positive (and owns all of its aircraft), while Southwest has kept its debt and lease obligations very manageable. Even the much-maligned legacy carriers Delta and United have significantly more manageable debt burdens.

Why it matters
So what? Bulls might argue that Spirit has routinely posted a high profit margin in spite of heavy aircraft rent expense. Spirit seems to have no trouble paying its bills.

However, high aircraft rent raises Spirit's fixed cost base, reducing the company's flexibility. Competitors with lower aircraft expense can quickly reduce capacity if industry conditions deteriorate. Allegiant and Delta have used this strategy to great effect in recent years. By contrast, because Spirit must pay high aircraft rent costs regardless of whether its planes are flying, it cannot easily cut capacity. Not surprisingly, the company's aircraft utilization rate is the highest in the industry, at 12.8 hours per day.

While industry conditions remain favorable, high aircraft utilization is not a bad thing. The danger for Spirit Airlines investors is that the company could not afford to cut back even if profitability deteriorated due to a fuel price spike or a sudden drop in demand. High fixed costs (i.e. aircraft rent) leave Spirit with much less flexibility than competitors like Delta and Allegiant, which have older, fully depreciated planes that can be mothballed if necessary.

Conclusion
Spirit's high profit margins and low valuation make the company a reasonable investment candidate. However, investors should be aware that the company has one of the heaviest adjusted net debt burdens in the industry, at 57% of TTM revenue, due to high aircraft rent costs. This diminishes Spirit's flexibility, and could prevent the company from cutting capacity to match demand in a future industry downturn.

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Is CSG Systems International Going to Burn You?

There's no foolproof way to know the future for CSG Systems International (Nasdaq: CSGS  ) 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, at times, 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 CSG Systems International 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 CSG Systems International 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. CSG Systems International's latest average DSO stands at 99.6 days, and the end-of-quarter figure is 104.9 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 CSG Systems International 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, CSG Systems International's year-over-year revenue grew 5.6%, and its AR grew 7.1%. That looks OK. End-of-quarter DSO increased 1.5% over the prior-year quarter. It was up 6.7% versus the prior quarter. 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.

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1-Star ETFs Poised to Plunge: iShares Barclays 20+ Year Treasury Bond Fund?

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, the iShares Barclays 20+ Year Treasury Bond Fund (NYSE: TLT) has received the dreaded one-star ranking.

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

iShares Barclays 20+ Year Treasury Bond Fund�facts

Inception

July 2002

Total Net Assets

$2.9 billion

Investment Approach

Seeks investment results that correspond generally to the Barclays U.S. 20+ Year Treasury Bond Index. The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of 20 or more years.

Expense Ratio

0.15%

1-Year/3-Year/5-Year Returns

2.2%/11.9%/8%

Alternatives

SPDR Barclays Capital Long Term Treasury (NYSE: TLO)

Vanguard Extended Duration Treasury Index ETF (NYSE: EDV)

iShares Core US Total Bond Market ETF (NYSE: AGG)

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

On CAPS, 77% of the 526 members who have rated TLT believe the ETF will underperform the S&P 500 going forward.

Just yesterday, one of those Fools, All-Star TerryHogan, succinctly summed up the TLT bear case for our community:

I think the run of outperformance of bonds is over, I think it actually ended last year sometime. Unless we see sustained negative interest rates (which I think is rather unlikely) bonds should be underperformers for a while, particularly when interest rates start rising (although we could be waiting a while for that). [A]dd in a little expense ratio, and a rising S&P, and you have a nice little red thumb.

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Visa Shares Dip After Earnings

Shares of Visa (V), which are at all-time highs, are down a fraction postmarket after it said its adjusted fourth-quarter profit rose to $1.82 a share and revenue was $2.85 billion. Consensus estimates had forecast a $1.79 profit and $2.82 billion revenue.

Visa also said it was launching a $1.75 billion share repurchase program, having bought back $1.3 billion of shares in the fourth quarter. The new authorization brings the amount on hand to buy shares to $2.9 billion; Visa last week also announced a 33 cents a share quarterly dividend.

From the release:

“Visa again delivered a strong quarter of revenue and earnings driven by success across our global franchise,” said Charlie Scharf, Chief Executive Officer. “Our results include significant continued investments in our core business, accelerating international expansion and the deployment of next-generation payment solutions for the benefit of our financial institution and merchant partners.”

Added Scharf, “We have been committed to using our capital wisely and that includes returning capital to stockholders through dividends and share repurchases. The board’s decision to increase Visa’s repurchase authorization continues that commitment, supported by confidence we have in our future.”

Why Google Is Poised to Outperform

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, Internet search gorilla Google (NASDAQ: GOOG  ) has earned a respected four-star ranking.

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

Google facts

Headquarters (founded)

Mountain View, Calif. (1998)

Market Cap

$252.4 billion

Industry

Internet software and services

Trailing-12-Month Revenue

$50.2 billion

Management

Co-Founder/CEO Larry Page

Co-Founder/Assistant Secretary Sergey Brin

Return on Equity (average, past 3 years)

18.7%

Cash/Debt

$48.1 billion/$7.2 billion

Competitors

Apple (NASDAQ: AAPL  )

Microsoft (NASDAQ: MSFT  )

Yahoo! (NASDAQ: YHOO  )

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

On CAPS, 86% of the 18,029 members who have rated Google believe the stock will outperform the S&P 500 going forward.

Just last month, one of those Fools, All-Star MrOneHundred, succinctly summed up the bull case for our community:

Google has penetrated our lifestyle in nearly limitless ways, is used by almost everyone I know as their home page, has immense cash and political power to maintain its position in the market, and is constantly trying to get more involved with our lives (i.e. tablets). It's very hard to see this company dying away in the next 30 years even. ... [T]his company seems like a good buy and hold for the long run.

If you want market-thumping returns, you need to put together the best portfolio you can. Of course, despite a strong four-star rating, Google may not be your top choice.

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

Wednesday, February 6, 2013

Hungry for growth? Go to Indonesia

It is no secret that growth in developed markets has remarkably slowed. Investors who are looking for growth markets have no choice but to allocate a portion of their portfolios to emerging markets. However, the previously popular BRIC countries have now become too popular and are over-owned. Therefore, astute investors need to look for less-popular emerging markets. I believe Indonesia deserves consideration.

The big news

The big news is that Indonesia grew faster than expectations in the fourth quarter of 2012. Gross Domestic Product (GDP) grew at 6.1% compared to expectations of about 5.8%.

This is significant because the torrid growth in Indonesia took place during a period when China's economy, having gone from 11% growth to 8%, was slowing. China is a big importer of Indonesian commodities such as copper, palm oil, coal and timber.

While many countries in Asia have suffered because of slower growth in China, the Indonesian economy has continued to march forward. One reason is that nearly 60% of GDP in Indonesia is the result of domestic consumption. The latest GDP data shows that the consumer in Indonesia remains strong.

The best way to invest in Indonesia

In my opinion, the best way to invest in Indonesia is through the Market Vectors Indonesia Index ETF IDX . The ETF contains companies that are either based in Indonesia or derive at least 50% of their revenues from Indonesia. In the long run, IDX is likely to prove to be a better investment than the popular China ETF FXI .

Technical perspective

From a technical perspective, the Indonesian market is rangebound.

Please click here for the chart.

The chart shows resistance and support levels. A breakout to the upside in due course is likely, as fundamentals trump technicals.

Our ratings and indicators

ZYX Emerging Market ETF Alert provides ratings on 15 emerging markets in three different time frames, short-term, medium-term and long-term for investors who have different time horizons.

In the medium term, Indonesia remains a strong buy, and in the long term, it remains a buy.

The composite result of our indicators for the short term in 10 different categories is neutral with a positive bias. Here is the breakdown:

  • Economic Indicators: Positive

  • Fund Flows: Positive

Markets Pare Losses Amidst Continued Euro Turmoil

Despite the continued tide of decent earnings reports, U.S. markets continue their slump on Europe’s turmoil.

The Dow Industrials are down 80 points at 10,789. The S&P 500 is off 9 points at 1,156. True, those losses are somewhat improved from a short while ago, when the Dow was off over 100 points.

The FTSE 100 index of London-traded shares fell 0.8% as the Euro continued its descent, now down to $1.2715 from an earlier $1.2731.

Doesn’t help that Rochedale Securities analyst Richard Bove was quoted on CNBC a short while ago saying U.S. banks’ exposure to Europe’s debt woes may be larger than some think.

Nor does it help that this morning’s retail reports showed store sales in April below what some expected, even if the results themselves were not so bad.

Some Numbers at Standex International that Make Your Stock Look Good

There's no foolproof way to know the future for Standex International (NYSE: SXI  ) 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, at times, 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 Standex International 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 Standex International 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. Standex International's latest average DSO stands at 52.9 days, and the end-of-quarter figure is 49.3 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 Standex International look like it might miss its numbers in the next quarter or two?

I don't think so. AR and DSO look healthy. For the last fully reported fiscal quarter, Standex International's year-over-year revenue grew 8.9%, and its AR dropped 1.4%. That looks OK. End-of-quarter DSO decreased 9.4% from the prior-year quarter. It was down 4.9% versus the prior quarter. 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.

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  • Add Standex International to My Watchlist.

Why Revlon Shares Sparkled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of cosmetics-specialist Revlon (NYSE: REV  ) were looking stunning today, jumping 18% after crushing earnings estimates.

So what: Net income moved up 28%, helped by stronger sales in the U.S. and Latin America, but European sales remained weak, falling by 10%. The 15% jump in revenue from the Americas more than made up for it, however. Overall sales increased 9%, aided by the acquisition of Pure Ice, and earnings per share of $0.89 soared past estimates of just $0.73. CEO Allan Ennis said the top-line growth reflects the effectiveness of the company's strategy, which is based on building strong brands and pursuing growth opportunities around the globe.

Now what: The sales increase in the fourth quarter was driven primarily by growth in Revlon color cosmetics and ColorSilk hair color, and since makeup is a discretionary expense, sales tend to be economically sensitive. With the improving economy in the U.S., sales should continue to improve and counteract the slump in Europe. Today's jump may look exaggerated, but the fourth quarter is the most important in the cosmetics industry and delivered more than half of Revlon's earnings for the year. Shares still look affordable, even after the 18% gain.

Want to keep your eye on Revlon? Add the company to your Watchlist by clicking right here.