Saturday, April 27, 2013

S&P buys that pass the Buffett test

S&P The OutlookThe following stocks meet the criteria that Warren Buffett has emphasized in the past.  As such, these stocks might satisfy the "Oracle of Omaha."

How does Buffett make his picks? In short, he uses the following five investment criteria.

● Free cash flow of at least $250 million.

● Net profit margin of 15% or more.

● Return on equity of at least 15% for each of the past three years and the most recent quarter.

● One dollar's worth of shareholder equity created for every dollar of retained earnings over the past five years.

● Market capitalization of at least $500 million.

The "Warren Buffett" portfolio is maintained by S&P Dow Jones Indices, which operates independently from S&P Capital IQ.

One more criterion is added to eliminate overvalued stocks: comparing our five-year discounted cash flow estimate with the current price.

Year to date through February, the Buffett portfolio gained 5.7% vs. a 6.2% increase for the S&P 500 on a capital appreciation basis.

Since inception on February 13, 1995 through February 28, 2013, the portfolio posted an average annual gain of 10.8% vs. 6.6% for the benchmark.

It is important to note these are not stocks Buffett has purchased or announced plans to purchase.

Below are the 6 stocks that pass the above list of criteria and also have a buy-rating from S&P Capital IQ.

Apple (AAPL)
Coach (COH)
Coca-Cola (KO)
Covidien (COV)
Qualcomm (QCOM)
T. Rowe Price Group (TROW)

Why On Assignment Shares Surged

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 professional staffing firm On Assignment (NYSE: ASGN  ) popped 11% today after its quarterly results and guidance topped Wall Street expectations.

So what: On Assignment's first-quarter results -- adjusted EPS of $0.35 on a revenue spike of 148% -- and current-quarter guidance were so strong, that analysts have no choice but to raise their valuation estimates, yet again. In fact, adjusted EBITDA expanded 50 basis points, to 8.8% from the year-ago period, fueling investor optimism over management's ability to sustain profitable growth.

Now what: Management now sees second-quarter EPS of $0.27-$0.29 on revenue of $410 million-$414 million, nicely ahead of Wall Street's view of $0.26 and $402 million. "We believe we are well positioned to meet or exceed our financial targets for the full year," President and CEO Peter Dameris said in a statement. "Demand for our services is strong and in most of our segments our growth is outpacing the market." With the stock hitting a new 52-week high today, and trading at a 25-plus P/E, however, much of that growth might already be baked into the valuation.

Interested in more info On Assignment? Add it to your watchlist.

More Expert Advice from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock 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.

Simple Innovations Can Have Huge Consequences

On this day in economic and business history ...

Several innovations reached critical milestones in their development on April 27. All three of those we'll examine today have affected the companies on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , but the effect isn't always straightforward, nor is it always positive. In fact, the first development on our list never added much at all to its creator's bottom line -- but its influence on the computing industry (which has placed five companies on the Dow) is undeniable. Let's take a closer look at these three developments, to better understand how they've helped shape the business world as it exists today.

Point and click, day one
Xerox (NYSE: XRX  ) introduced the world's first commercially available computer mouse on April 27, 1981. The mouse had been invented way back in the 1960s by Douglas Englebart and his team of researchers at Stanford, but it would take many years for technologists to translate his innovations into commercially successful products. In fact, until the mouse was released as part of the Xerox Star workstation package, there had been no computers with graphical interfaces available for public purchase. Without graphical interfaces, there simply hadn't been a reason for anyone to use a mouse.

The Star's graphical interface and its mouse were both descendants of the legendary Xerox Alto, an experimental computer developed by Xerox's Palo Alto Research Center that is largely known now for its influence on young entrepreneurs Steve Jobs and Bill Gates. However, like the Alto, the Star was too far ahead of its time and wound up quickly eclipsed by a lower-cost but less-functional computer released later in 1981: the PC.

It was not until 1984, when Apple launched the Macintosh, that a computer purpose-built for mouse controls caught on with the public. By the time Dow component Microsoft's (NASDAQ: MSFT  ) Windows 1.0 hit the market in 1985, the mouse era had taken hold. The combination of a mouse with a graphical user interface could have propelled Xerox ahead of PC creator (and longtime Dow component) IBM, but Xerox's inability to capitalize on advanced technology is the stuff of corporate legend. IBM is no less to blame for its inability to maintain control of the standard it created. By allowing Microsoft to control the PC's operating software, IBM missed a golden chance to leverage its scale and technological expertise into a fully proprietary mouse-based computing experience.

How much longer will the mouse era last? The mouse may soon find itself relegated to technology's dustbin as touchscreen devices gain prominence with the public. That won't happen for some time, but it's interesting to think about what our next control scheme will be. Beyond touch, will we move things on the screen with our eyes? Will our brainwaves be the next control scheme? The answer may be just around the corner.

The 747's biggest threat
The world's largest passenger aircraft took off for the first time on April 27, 2005. The Airbus A380 was built as Europe's answer to Boeing's (NYSE: BA  ) long dominance of the large-body aircraft market -- the 747 had dominated large-scale long-haul flights for decades since its introduction in the late 1960s. Airbus didn't skimp on size, as the A380 boasted about 50% more floor space than the largest 747 model on the airline market. More than 850 people can cram into an all-economy A380 configuration, but it more typically carries about 525 people between the standard three-class configuration of first, business, and economy. The A380 is apparently so well designed that test pilot Jacques Rosay, who took the bigger-than-big bird on its April 27 first flight, told the press it was "like handling a bicycle."

There aren't that many of these super-jumbo jets in service yet, but Airbus is working hard at its backlog of over 250 A380s, which will join more than 100 already in service by the eighth anniversary of its first flight. That doesn't quite compare with the backlog of more than 800 787s Boeing has amassed since announcing its next-gen jet, which only flew for the first time in 2009. Of course, if mechanical problems continue to plague the 787, Airbus might see a few more orders roll in.

A child-rearing revolution
The worst part of child-rearing is undoubtedly the constant need to change diapers, a task made all the worse by the fact that, until quite recently, there was no such thing as a disposable diaper. That all changed in the 1960s, when longtime Dow component Procter & Gamble (NYSE: PG  ) sought new uses for a paper pulp plant that it had bought in 1956. The man in charge, Victor Mills, set about using the mill's absorbent paper to create the world's first fully disposable diaper. A patent was sought in 1961, and finally, on April 27, 1965, Pampers disposable diapers gained their patent, legitimizing (but not necessarily protecting) P&G's huge leap forward for diaper-weary young families everywhere.

Granted to several executives at P&G's Cincinnati headquarters, the patent laid out a few basic principles of disposable diapers that still hold true today. The design, an hourglass shape with a waterproof edge lining, is still used in the manufacture of disposable diapers today, which have grown to dominate more than 90% of the diaper market in the present day. Within a few years, Kimberly-Clark came out with its own disposable diaper under the Huggies brand. Since Huggies was never sued into oblivion and now controls nearly twice as much of the disposable-diaper market as Pampers, it's safe to assume that P&G's patent didn't give it any sort of competitive advantage.

Although disposable diapers have made life easier for millions of parents, there have been certain environmental drawbacks. In his book American Inventions, Stephen Dulken points out that "the average child will use about 5,000 diapers, and it takes some 800 pounds of fluff pulp and 280 pounds of plastic (including packaging) to supply one baby for a year." That's a lot of extra trash when added up over the course of millions of children across five decades of use.

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ABB to Acquire Power-One for $1 Billion

The boards of Switzerland-based ABB (NYSE: ABB  ) and U.S.-based Power-One (NASDAQ: PWER  ) have come to terms on an agreement in which ABB will pay $6.35 per outstanding share of Power-One stock to acquire the company, valuing the deal at approximately $1 billion, the companies announced today.

ABB plans to utilize Power-One's position in the rapidly growing solar inverter market, which the companies deem the "intelligence" behind solar photovoltaic (PV) systems. In 2012, Power-One generated earnings of about $120 million, on approximately $1 billion in revenues. Power-One currently employs nearly 3,300 people, primarily located in China, Slovakia, Italy, and the U.S., and it will be integrated into ABB's existing Discrete Automation and Motion unit. ABB operates in more than 100 countries, employing a total of 145,000 globally, including nearly 20,000 in the U.S.

"The combination of Power-One and ABB is fully in line with our 2015 strategy and would create a global player with the scale to compete successfully and create value for customers, employees and shareholders," ABB CEO Joe Hogan said.

The agreement between ABB and Power-One is structured as a merger, and is subject to shareholder approval and standard closing conditions. ABB will finance the deal using existing funds, and expects it will close by the second half of 2013.


Friday, April 26, 2013

PETA Aims to Free Willie

This oughta be interesting. 

With the successful IPO of SeaWorld Entertainment (NYSE: SEAS  ) , the company will now have to jump through hoops for the People for the Ethical Treatment of Animals, which took advantage of the public offering and bought a stake in the company. As PETA tells it, it did so for the express purpose of ending the "suffering endured by the orcas, dolphins, and other animals" at SeaWorld facilities.

By owning shares in the sea mammal entertainment provider, PETA can not only protest actions it thinks are cruel but it now has a voice at company shareholder meetings and can even submit resolutions for stockholders to vote on. Its first order of business, however, will be to free the orcas and dolphins "to coastal sanctuaries and, where possible, have them rehabilitated and released into the ocean."

SeaWorld, which is based in Orlando, Fla., went public at $27 a share and raised about $700 million. With the stock closing on Friday at $33.52, it has a market value north of $3 billion. The entertainment leader will still be majority-owned by private equity firm Blackstone  (NYSE: BX  ) , which retained 10 million shares.

Although it's probably best known for its public stunts such as throwing paint on furs and having supermodels and celebrities pose nude, it's not the first time PETA has bought shares in a company in an effort to have an impact on company policy. Previously it bought a stake in McDonald's and promptly introduced a resolution to require its suppliers to upgrade their outdated slaughter practices. It's purchased shares in Kraft Foods, to pressure the company to phase in the purchase of pig meat from suppliers that don't confine pregnant sows to gestation crates, and in Philip Morris International to prevent testing on animals by having them forced to inhale smoke for months at a time. PETA owns stock in more than 80 meat producers, clothing retailers, fast-food and grocery chains, and pharmaceutical companies.

Besides three SeaWorld parks, the company owns two Busch Gardens parks, several water parks, and Sesame Place, an amusement park based on the children's TV show Sesame Street.

It seems doubtful that SeaWorld will free Willie, Shamu, or any other orca it has in its shows, but it's likely we'll see PETA force the theme park operator to jump through a few hoops of its own.

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

Googorola Fails to Take Microsoft Hostage

Search titan Google (NASDAQ: GOOG  ) may have just detailed a new open-source patent initiative aimed at facilitating IP cease fires, but those good intentions don't apply to a long-standing legal battle between subsidiary Motorola and Microsoft (NASDAQ: MSFT  ) . Google did say it would only return fire if "first attacked," and Motorola and Microsoft have been going at it for years.

The pair has been duking it out in a patent court of law since 2010 over numerous standards-essential patents that Motorola is required to license to Microsoft. At issue is how much the software giant should pay for access to these patents, since standards-essential patents must be licensed at fair, reasonable, and non-discriminatory, or FRAND, rates. Trouble is that there's plenty of wiggle room, since FRAND is a somewhat objective description.

The IP in question relates to 802.11 Wi-Fi and H.264 video encoding standards, both of which are virtually unavoidable in today's gadgets. Motorola has been trying to finagle an outrageous 2.25% royalty rate from both Microsoft and Apple for years. Such a high rate would effectively take related products hostage, since that's a huge cut to send to Moto. That would include all Xbox 360 gaming consoles and all PCs running Windows 7.

The total annual royalty revenue stream that Motorola was originally hoping to extract from Microsoft was an incredible $4 billion. Microsoft maintained that it shouldn't have to pay a penny more than $1.2 million per year. To put Motorola's figure into perspective, that's nearly a fifth of Microsoft's operating income over the past four quarters from all segments.

Suffice it to say, that's hardly reasonable (the "R" in "FRAND").

The U.S. District Court for the Western District of Washington is siding with the software giant, and has determined appropriate FRAND rates for the dispute. The court's total was just under $1.8 million, or 99.96% less than what Motorola was asking for. Sorry, Moto.

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Why LogMeIn Shares Soared

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 software company LogMeIn (NASDAQ: LOGM  ) soared 21% today after its quarterly results and outlook topped Wall Street expectations.

So what: The stock has been crushed over the past year on weak revenue growth, but a first-quarter beat -- adjusted EPS of $0.12 on revenue of $37.4 million versus the consensus of $0.10 and $36.3 million -- combined with upbeat guidance suggests that things are starting to turn around. In fact, the company drew in a record 2.7 million first-time users, and 37,000 new premium subscribers during the quarter, allaying some of the concern recently over intensifying competitive pressure.

Now what: Management now sees full-year adjusted EPS of $0.46-$0.50 on revenue of $157 million-$160 million, nicely ahead of Wall Street's view of $0.46 and $155.1 million. "[W]e expect to build on this momentum by introducing two new cloud offerings -- developed on our proven Gravity cloud platform -- that we believe will provide a catalyst for accelerating growth in 2013 and beyond," said CEO Michael Simon. "As a result, we've increased our full-year outlook." When you couple today's price surge with the company's still-speculative nature, however, buying into that bull talk doesn't seem prudent at this point.  

Interested in more info on LogMeIn? Add it to your watchlist.

More Expert Advice from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock 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.

3 Not-So-Surprising Takeaways From Netflix's Fantastic Report

Netflix (NASDAQ: NFLX  ) sure shocked Wall Street with its first-quarter report. Shares jumped 25% the next day. But many of the key drivers for this crazy jump should have been obvious to most investors. Seeing these signs in advance would have helped you invest in Netflix with confidence as this report approached.

In this video, Fool contributor Anders Bylund walks you through these patently obvious catalysts. In his eyes, this stock is still too cheap.

The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

Booze -- A Business Built for Any Occasion

Alcohol is the only thing I can think of that's used in excess both in good times and in bad. A long day at work? Grab a drink. Got a promotion? Grab some friends and get a drink. Just received a big bonus? Buy the house a round.

Alcohol is on tap for every occasion, and Diageo (NYSE: DEO  ) plays a central roll. The good news for investors is that roll may be getting even better.

Follow the trends
Craft beer was the big trend to follow in the late '90s and early 2000s. Boston Beer (NYSE: SAM  ) went from a local craft beer to the largest craft brewer in the country. The company really hit its stride in 2005 when both revenue and its stock price went on a tear that continues today.

SAM Total Return Price Chart

SAM Total Return Price data by YCharts

The success of Boston Beer and other craft brewers has brought in giants like Anheuser-Busch InBev and Molson Coors, who are buying or developing smaller brands to compete in the space. As the craft beer space becomes more crowded, and the big boys push their way in, the opportunity begins to shrink. Plus, it's not as "cool" to drink a craft brew when everyone is drinking them, and I'm starting to see a new trend emerge.

The latest trend is toward higher-end liquors, which have become the drink of choice among the elite and young professionals. Beam's Maker's Mark had so much demand, it tried to pull the wool over consumers' eyes earlier this year by diluting the beverage. Scotch, which can only be made in Scotland, has seen exports grow 87% over the past decade, rising for eight consecutive years. Diageo is seeing these trends on its income statement, with organic sales growth in its strategic spirits brands up 8% over last year.

Beam and Brown-Forman are both benefiting from the growth in spirits demand; but when you look up and down the list of brands, Diageo comes out on top.

To buy or not to buy?
The question now is whether or not Diageo is a buy? When I think about the steady demand, strong brands, and improving trends, I think Diageo's best comparison is Coca-Cola rather than Anheuser-Busch or Molson Coors. Like Coke, Diageo has relatively inelastic demand, high margins, and a brand presence that's difficult to duplicate.

I don't normally like a stock that trades at 18.6 times earnings in a relatively slow -growing market, but when there's a lot of upside and little downside, that's a reasonable price. The 1.8% dividend yield is also a plus because I think that will continue to grow nicely in coming years.

When it's all said and done, I like Deageo enough to give an outperform call, something we can all drink to.

A few great stock picks

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Thursday, April 25, 2013

General Dynamics Stock Gets Promoted

Perhaps appropriately for an arms merchant, General Dynamics (NYSE: GD  ) stock is exploding this week, up nearly 8.8% since reporting earnings Wednesday morning -- and up about twice as much as the gains o fellow defense contractor Boeing (NYSE: BA  ) , which also reported Wednesday.

What's behind General D's surprising strength? In its famously pithy style, the General laid out its results in a press release just 15 sentences long (plus a few tables). Now here's an even more condensed summary of the results:

Revenues for the first quarter of 2013 declined 2%, reflecting some impact from the Sequester. However, operating profit margins grew a modest 10 basis points, mitigating the slowdown. Interest payments on debts and tax payments to the feds both shrank, helping further. Result: Net profits actually grew a bit, and when combined with the beneficial effect of share buybacks, General D emerged from the quarter with a small gain to earnings per share -- $1.62, up 3% from last year.

So all in all, not a half bad performance in a quarter when defense contractors were supposed to be hurting from a sudden slowdown in Pentagon spending. But are these numbers good enough to justify a more than $2 billion increase in GD's market cap?

Possibly. In addition to all the good news on the "GAAP" front, General Dynamics also executed where it really counts, increasing the amount of free cash flow that its business churned out by a staggering 32% -- to $429 million. As a result, General Dynamics stock now carries less than an 11-times free cash flow valuation, which looks entirely appropriate in light of its projected 7.1% profits growth rate, and generous 3.3% dividend yield.

The big risk here, of course -- and the single biggest risk to General Dynamics' stock price -- is the risk of a slowdown in defense spending. You see, General D's funded backlog number has dropped to $42.4 billion post-sequester. On the one hand, that's enough work to keep GD busy building tanks, missiles, and warships for at least the next 16 straight months. On the other hand, the number's moving in the wrong direction, and is down more than 8% in comparison to this time, last year.

All this suggests that the well of work GD draws from, if not exactly dry, is starting to dry up. This suggests that the growth rate this stock's valuation depends upon -- 7% -- is a rate that wasn't all that strong to begin with, and could weaken even further. 

Boeing operates as a major player in a multi-billion-dollar defense market in which the opportunities and responsibilities are absolutely massive. However, emerging competitors, and the company's execution problems, have investors wondering whether Boeing will live up to its shareholder responsibilities. In our premium research report on the company, two of The Motley Fool's best minds on industrials have collaborated to provide investors with the key, must-know issues surrounding Boeing. They'll be updating the report as key news hits, so don't miss out — simply click here now to claim your copy today.

Why Buying Johnson & Johnson Stock Isn't for Growth Investors

If there's one health-care stock every investor knows by name, it's Johnson & Johnson (NYSE: JNJ  ) . This industry titan makes everything from consumer health products to medical devices to pharmaceuticals, reaching into every niche of the medical sector. It's a strong dividend stock with a history of stability -- there's seemingly some perk for every  J&J investor.

However, growth investors might want to take a look elsewhere. For all J&J does right, it's anything but a fast-growing, chart-topping stock for those looking for the best possible annual returns. While J&J isn't short on financial growth and makes a great foundation for any portfolio, a few key trends should make growth investors think twice before doubling up on shares.

Core businesses, slow growth
J&J is much more than a medicine company, and is far more diverse than its Big Pharma rivals. It is heavily reliant on sales of consumer health products and medical devices. In 2012, these two segments made up more than 62% of all revenue.

Unfortunately for growth investors, these two segments aren't exactly setting the markets on fire. Consumer health sales are a great, stable foundation for risk-averse investors, but there's little growth to be had here: Revenue fell at five of the six consumer health businesses last year, with only oral-care sales remaining flat. With tightening consumer wallets and hospital budgets under pressure, expect that trend to keep up in the near future.

Medical devices can be a great growth driver: J&J proved as much when the company bought orthopedics firm Synthes last year in a $12 billion deal. That acquisition sparked a huge jump in the company's orthopedics revenue. Unfortunately, J&J's most recent earnings report has shown that without the Synthes deal, revenue growth has been elusive for the company's medical device segments.

Orthopedics revenue should continue to grow in the future: Rival Stryker recently posted growing orthopedics revenue despite its troubles with hip implant recalls and pricing pressures in the industry, and age and obesity-related trends should keep demand high for years to come. J&J's other medical device segments haven't been so lucky recently, and slow, steady growth outside of orthopedics looks to stick around for some time as the medical device industry struggles.

If medical device revenue and consumer health sales aren't growing at a good clip, pharmaceuticals can always drive growth. Unfortunately, while J&J's drug business is top-notch, it's not lighting up the markets like a fresh, new biotech firm.

Diluting the blockbuster drugs
J&J's pharmaceutical business is massive, covering everything from oncology to immunology and more. That treatment diversity is a blessing for income investors and shareholders seeking stability in a volatile industry like health care, but for growth investors, it can be a curse.

The company reported strong growth in several promising drugs last year, including more than 300% year-over-year sales growth from likely future blockbuster prostate cancer treatment Zytiga. This wasn't enough to ward off falling sales from patent expirations. Growth slipped from 8.8% in 2011 to just 4% last year, and while the future's bright for J&J's pharmaceutical business with potential future blockbusters such as diabetes-fighting Invokana, this segment's diversity of drugs and therapies dilute the effect of up-and-coming drug candidates on overall growth.

This is a problem that affects Big Pharma companies across the sector, but major firms in pharmaceuticals and biotech have managed to grow significantly while concentrating on smaller, more focused drug portfolios. Consider Biogen Idec (NASDAQ: BIIB  ) : The firm's considerable focus on multiple sclerosis drugs exposes it to far more risk than Johnson & Johnson's well-diversified portfolio, but it's still a far safer pick than up-and-coming biotech firms with murky futures. That hasn't stopped Biogen shares from soaring more than 59% over the past year, nearly double J&J's performance.

The problem with diversity
All of this adds up to the most important reason why J&J isn't the best bet for growth investors: This company is simply too broad and diversified to realize chart-topping growth for any long period of time.

Other leading firms in the health-care field have caught on. Pfizer (NYSE: PFE  ) has made some of the strongest moves to concentrate on its core recently, selling its infant nutrition business to Nestle and spinning off its former animal health business, Zoetis (NYSE: ZTS  ) , in order to unlock shareholder value. These moves not only allowed Pfizer to concentrate on its high-growth, boom-or-bust pharmaceutical business, but also, as a secondary effect, made the stock attractive to growth investors by focusing the company's future around a core designed for growth.

J&J's diversification strategy isn't bad business sense, and it's a boon for investors craving stability in a volatile market. The stock's even been one of the best performers on the Dow Jones index this year, as it's outperformed the market. Yet even on the Dow alone, fellow blue-chip health-care rival Pfizer has topped J&J's gains, to say nothing of the many other strong pharmaceutical and biotech companies surging this year. J&J's a great, safe stock for any portfolio to build around, but if you're looking for the best growth in the industry and are willing to take a chance, there are riskier -- and potentially more rewarding -- stocks around the sector than Johnson & Johnson.

Is bigger really better?
Involved in everything from baby powder to biotech, Johnson & Johnson's critics are convinced that the company is spread way too thin. If you want to know if J&J is nothing but a bloated corporate whale -- or a well-diversified giant that's perfect for your portfolio -- check out the Fool's new premium report outlining the Johnson & Johnson story in terms that any investor can understand. Claim your copy by clicking here now. 

On High Short Interest Ratios

Two of my 35 stocks have short interest ratios over 10 days. [Short interest ratio = amount of shares shorted / average daily volume.] I look at this statistic, and force myself to re-examine companies where the ratio is over 10. Maybe there is something that I don't know.

The two stocks in question are Stancorp Financial (SFG) and National Western Life Insurance (NWLI). The short cases for both are based on a naive view of how insurance companies work.

Stancorp is a disability insurer. Disability insurers often do badly in a recession because disability claims increase - people who are unemployed claim they are disabled.

There are two models for disability insurance: 1) Underwrite carefully, and pay all legitimate claims. 2) Accept all business, but when claims come in litigate with vigor.

Stancorp follows the first model. I would never own an insurer that followed the second model, it is dishonest, and it is bad business. Because Stancorp does its risk management up front, it does not get the same degree of unemployment masquerading as disability claims. But the shorts don't get this. Thus the short interest ratio near 20.

Doesn't bother me. This is a undervalued company with a quality management team. Low debt. Sustainable competitive advantages in its niches. One nice thing about being a knowledgeable insurance investor is that you can get a firm grip on the nature of the management teams, and invest in the good ones when they are out of favor.

With National Western, the short interest ratio is near 11. Admittedly, it is an unusual company. No analysts. Large controlling shareholder. Hasn't lost money in over 10 years. Trades at less than 40% of adjusted book value. Sells insurance policies to foreigners who want flight capital.

With interest rates falling, some shorts think some insurers will have difficulty meeting policy interest guarantees. From my view, that is not the case with National Western, they have a large amount of long bonds to pro! tect the guarantees.

Thus I say to the shorts: short all you want. You will be buyers at higher levels.

Disclosure: long NWLI and SFG for my clients and me.

Wednesday, April 24, 2013

Digging in Domestically With the iPhone

Apple (NASDAQ: AAPL  ) just posted its earnings figures last night, almost at the exact same time that domestic main flame AT&T (NYSE: T  ) put up its own digits. Last week, Verizon (NYSE: VZ  ) shared its iPhone figures, and this morning Sprint Nextel (NYSE: S  ) told investors how many iPhones it activated during the quarter.

With all the domestic data in hand, let's dig in.

Data deluge
Apple sold a total of 37.4 million iPhones during the first quarter, representing a moderate beat relative to consensus estimates. That included 4 million iPhones on Verizon, 4.8 million iPhones on AT&T, and 1.5 million iPhones on Sprint.

Technically, Leap Wireless (NASDAQ: LEAP  ) is another iPhone carrier in the U.S. with its Cricket brand, but its iPhone sales haven't been meaningful enough for the carrier to disclose specific figures. What investors do know is that the prepaid carrier is well behind schedule on meeting its purchase commitment, so it's safe to say Cricket iPhones aren't moving the needle meaningfully one way or another. T-Mobile is now an iPhone carrier, but that launched after the quarter closed.

Between the top three carriers, there were 10.3 million iPhones activated, or 28% of Apple's total. That composition is down sequentially from 36% last quarter, and in line with historical precedent following launch quarters. Each carrier saw a modest downtick in its contribution to total iPhone units.

Sources: SEC filings and conference calls.

The iPhone's composition of total smartphone sales also remained on par with historical levels for each carrier.


iPhone Activations

Total Smartphones

iPhone %


4 million

7.2 million



4.8 million

6 million



1.5 million

5 million



10.3 million

18.2 million


Sources: SEC filings and conference calls.

Keep in mind that Sprint is also on the hook for a $15.5 billion iPhone purchase commitment over four years. Using quarter-specific iPhone average selling prices and Sprint's reported activations implies that the No. 3 carrier has likely fulfilled approximately $6.3 billion of its obligation over the past six quarters. That means Sprint may be 41% through its $15.5 billion commitment through 38% of the time frame -- slightly ahead of schedule. Too bad Leap can't say the same thing.

Apple's domestic domination has been well documented, accounting for over half of all smartphones activated among the top three carriers. Investors still want to know whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

The Roth IRA Rules!

If you're going through life assuming that there isn't much difference between a traditional IRA and a Roth IRA, you're doing yourself a great disservice -- because the Roth IRA rules.

Roth IRAs and traditional IRAs have some key differences, and offer different benefits. With a traditional IRA, you enjoy tax deferral. If, for example, you make the maximum contribution of $5,500 for 2013 (it's $6,500 for those 50 or older), you'll be able to deduct that sum from your income on your 2013 tax return. So if you would have paid a 25% tax rate on that $5,500, you're saving $1,375 -- now. There is a catch, of course. When it comes time to withdraw money from your traditional IRA, your withdrawals will be taxable, at your income-tax rate at the time. (Remember that in retirement, many people are in lower tax brackets.)

Roth IRA rules
With the Roth, you contribute money that is not tax-deferred. Your contribution does not lower your taxable income. Here's the benefit, though: When you withdraw funds from your Roth IRA in retirement, they're tax-free! Your money grows tax-free. There are some other advantages, too, such as not having to take required minimum distributions once you turn 70 1/2, as is required by traditional IRAs. (There are still Roth rules to observe, though, such as, in most cases, not withdrawing funds before age 59 1/2 or before you've had the account for five years, if you want to avoid a penalty.)

The Roth's tax-free status can be a big deal, especially if you make the most of it by loading it up with certain types of investments. Fast-growing companies, for example, are ideal. If they double, triple, or increase tenfold over your holding period, all that gain will be tax-free in the Roth. Think of (NASDAQ: AMZN  ) , which sports an average annual growth rate of more than 27% over the past 15 years. It's almost always considered overvalued, yet it has kept growing. That growth could stop or slow one of these days, but bulls remain hopeful. Some worry about the company having to collect sales tax as governments level the playing field to help brick-and-mortar retailers -- but even that cloud has a silver lining, possibly leading to more distribution centers for Amazon. Amazon stock has grown more than ninefold over the past decade, turning a $10,000 investment into more than $90,000. If you had held the stock in a Roth and withdrew it per the Roth IRA rules, that $80,000 gain would be tax-free!

Companies that stand a good chance of surging in coming years are also good Roth candidates. Exelixis (NASDAQ: EXEL  ) , for example, is a smallish biotech company tackling various cancers. It even has an approved thyroid cancer drug on the market, and the formula may end up approved to treat other conditions, as well. The downside, though, is that the drug is expensive, and the segment of thyroid-cancer patients who might take it is very small.

Beaten-down companies that you think are likely to recover strongly are also good candidates. Molybdenum miner Thompson Creek Metals (NYSE: TC  ) , for example, sports average annual losses of 35% over the past five years, and carries substantial debt, but molybdenum's long-term outlook is promising, with price increases likely, and the company has a promising gold and copper mine on track to start producing by the end of the year. Freeport-McMoRan Copper & Gold (NYSE: FCX  ) is another major molybdenum player, with considerable operations in other metals, as well -- along with new investments in oil and gas production.

Dividend stocks, too, are great candidates, as dividends are typically taxed at ordinary income tax rates, and in a Roth would accumulate tax-free. Intel (NASDAQ: INTC  ) , for example, recently yielded 4%, and though its recent earnings report was disappointing, it expects profit-margin improvements and is making inroads into the booming mobile market.

Learn the rules
It's important to read up on all the Roth IRA rules and traditional IRA rules, and considerations related to both, before you decide between them. For example, if you expect your tax rate to be significantly higher in retirement, a traditional IRA will seem less attractive. And if you only have $5,000 to contribute toward retirement and your employer will match some or much of that in your 401(k), then perhaps an IRA isn't your best bet.

Keep in mind, too, that tax rules do change over time. Some people are wary because they fear that the appealing Roth IRA rules might be changed in the future. Others think it unlikely that Congress will wipe out the benefits of the Roth for those who have been investing with it and counting on it.

Want to learn more about Intel?
When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand about the chip giant. Click here now to learn more.

USANA Health Sciences's Earnings Beat Last Year's by 42%

USANA Health Sciences (NYSE: USNA  ) reported earnings on April 23. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended March 30 (Q1), USANA Health Sciences met expectations on revenues and beat expectations on earnings per share.

Compared to the prior-year quarter, revenue expanded. GAAP earnings per share increased significantly.

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

Revenue details
USANA Health Sciences notched revenue of $169.1 million. The four analysts polled by S&P Capital IQ wanted to see sales of $170.4 million on the same basis. GAAP reported sales were 9.7% higher than the prior-year quarter's $154.1 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 $1.28. The five earnings estimates compiled by S&P Capital IQ averaged $1.16 per share. GAAP EPS of $1.28 for Q1 were 42% higher than the prior-year quarter's $0.90 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 82.1%, 20 basis points worse than the prior-year quarter. Operating margin was 15.7%, 220 basis points better than the prior-year quarter. Net margin was 10.5%, 160 basis points better than the prior-year quarter. (Margins calculated in GAAP terms.)

Looking ahead
Next quarter's average estimate for revenue is $176.1 million. On the bottom line, the average EPS estimate is $1.30.

Next year's average estimate for revenue is $712.2 million. The average EPS estimate is $5.18.

Investor sentiment
The stock has a two-star rating (out of five) at Motley Fool CAPS, with 225 members out of 407 rating the stock outperform, and 182 members rating it underperform. Among 119 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 53 give USANA Health Sciences a green thumbs-up, and 66 give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on USANA Health Sciences is outperform, with an average price target of $57.00.

Looking for alternatives to USANA Health Sciences? It takes more than great companies to build a fortune for the future. Learn the basic financial habits of millionaires next door and get focused stock ideas in our free report, "3 Stocks That Will Help You Retire Rich." Click here for instant access to this free report.

Add USANA Health Sciences to My Watchlist.

Tuesday, April 23, 2013

The Bull & the Bear Case for Netflix After Earnings

After Netflix (NASDAQ: NFLX  ) reported strong subscriber growth and revenue in its earnings, shares were up big. But is this growth for the company really sustainable or only short term? In this video, Motley Fool consumer goods analyst Blake Bos gives investors the bull and bear cases for Netflix to highlight both the opportunities and the threats facing this hotly followed stock.

The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

Why Sanmina 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 Sanmina (NASDAQ: SANM  ) have popped today by as much as 16% after the company reported earnings.

So what: Revenue in the fiscal second quarter was $1.43 billion, and non-GAAP earnings per share came in at $0.30. That top-line result was in line with consensus estimates while the bottom-line was a beat relative to estimates. CEO Jure Sola said the company continues to face a "soft market environment" but that Sanmina continues to invest in technology and services, with new program ramps on the horizon.

Now what: The company provided outlook for the coming quarter ending June, with revenue expected in the range of $1.45 billion to $1.5 billion. Non-GAAP earnings per share should be $0.32 to $0.38. Following the results, Needham boosted its price target on the stock from $12 to $13 while keeping its buy rating, citing solid execution amid a tough environment. The analyst believes infrastructure leverage will pay off later in the year along with cost efficiencies.

Interested in more info on Sanmina? Add it to your watchlist by clicking here.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Will Eli Lilly's Big Bets Pay Off?

Price is right: Muni fund bets

Mark SalzingerDespite low yields, municipal bond funds still make sense for conservative investors interested in principal protection, modest income and diversification against their equity portfolios.

Among our favorites are the national funds from T. Rowe Price, which have generated consistently strong tax-free income with superior risk-adjusted returns. All feature a long-tenured manager, an extensive corps of credit analysts, generally mild volatility, and a low expense ratio.


T. Rowe Price Summit Municipal Income (PRINX) and T. Rowe Price Tax-Free Income (PRTAX) are both managed by Konstantine Mallas, who has run the former fund since 1999 and the latter since 2007.

In the 10-year period ended March 31, 2013, Summit Municipal Income produced an annualized total return of 5.4%, vs. 4.5% for its average peer. Over the past five years, Tax-Free Income has returned 6.2% on an annualized basis, vs. 5.8% for its average peer.

Mallas generally attempts to add return by emphasizing credit analysis rather than making interest rate bets in his funds. So, interest rate risk is moderate, while the funds can benefit from the selection of bonds that the research team believes to be undervalued.

Summit Municipal Income and Tax-Free Income have significant overweight positions in bonds rated A and BBB (about 45% and 14%, respectively, in each portfolio), the lowest two tiers of investment-grade ratings.

Mallas has limited the funds' allocations to the longest-term municipals (20 to 30 years until maturity) to about 40% of assets, vs. nearly 60% for the category. This should help limit damage from any rise in very long-term rates.

Both funds emphasize 'revenue bonds' over 'general obligation' (GO) bonds. As a generality, general obligation bonds are safer than revenue bonds. But with funds it makes less difference, thanks to the safety embedded in effective diversification.

Between the two funds, Tax-Free Income courts less risk, with a greater emphasis on investment-grade bonds and slightly less sensitivity to changes in interest rates. It also has a lower minimum initial investment ($2,500, vs. $25,000 for Summit Municipal Income).

Of course, because it has a milder risk profile, it also pays out less income. Recently, Tax-Free Income had an SEC yield of 2.2% (equivalent to a 3.1% yield for an investor in the 28% tax bracket), vs. 2.5% for Summit Municipal Income (3.4% tax-equivalent yield).


Charles Hill has managed T. Rowe Price Price Summit Municipal Intermediate (PRSMX) since 1994 and T. Rowe Price Tax-Free Short-Intermediate (PRFSX) since 1995.

Over the past five years, Summit Municipal Intermediate had a return of 5.5% on an annualized basis, vs. 5.1% for the average intermediate- term municipal bond fund—and with 15% less volatility to boot.

The Short-Intermediate Fund has consistently outperformed the short-term muni average; it has generated a five-year-annualized return of 3.6%, vs. 2.6% for its average peer.

Both funds share an emphasis on quality: virtually all of their holdings are investment-grade, and each has only about 10% of its portfolio in BBB-rated bonds.

To help generate at least some yield, Hill has reduced exposures to the highest rated AAA bonds and invested in bonds with longer maturities—but the funds' overall interest rate sensitivity remains mild.

In Summit Municipal Intermediate, he has added positions in tax-free bonds backed by corporate issuers, citing their generally strong credit and profitability. In both funds, Hill emphasizes revenue bonds in the transportation and healthcare sectors that Price's muni analysts have favored recently.

Summit Municipal Intermediate has a $25,000 minimum initial investment and a 0.50% expense ratio. Its recent SEC yield of 1.3% is equivalent to a 1.8% taxable yield for an investor in the 28% tax bracket.

Tax-Free Short-Intermediate has a $2,500 minimum initial investment and a 0.50% expense ratio. Its recent SEC yield was a tiny 0.4%, which rises to 0.6% on a tax-equivalent basis in the 28% tax bracket.


James Murphy has managed T. Rowe Price Tax-Free High Yield (PRFHX) since 2001. Over the past 10 years, the fund has generated a 5.7% annualized return, vs. 4.9% for its average peer—and, with about 11% less volatility.

High yield municipal bond funds tend to invest in both lower-rated investment-grade and below-investment-grade bonds. Murphy recently had roughly the same exposure to bonds rated below investment grade as his competitors' average (about 14% of the portfolio).

He has recently emphasized bonds rated 'A' and 'BBB,' which together account for about 60% of the portfolio. The fund is heavily invested in healthcare (about 30%), pollution control (25%) and transportation bonds (13%).

Tax-Free High Yield recently yielded 3.3%, equivalent to a 4.6% yield to a taxable investor in the 28% tax bracket. Its expense ratio of 0.68% is significantly lower than its average peer's 1.00%.

This is the riskiest of Price's municipal bond funds: Tax-Free High Yield lost 21.5% in 2008, vs. losses of 8.0% and 5.8% in Spectrum Municipal Income and Tax-Free Income, respectively.

Although Tax-Free High Yield has exhibited lower volatility than the high yield municipal average, it has been 60% more volatile over the past five years than Tax-Free Income.

However, investors who fear rising rates should be interested to know that during periods in the past when rates have gone up over several months, Tax-Free High Yield has tended to outperform most investment-grade municipal bond funds.

Monday, April 22, 2013

Ask a Fool: Did Greedy Consumers Sink the U.S.?

In the following video, Motley Fool financial analyst Matt Koppenheffer takes a question from a Fool reader, who asks, "Reports are that the administration is, 'again,' pushing banks to lend to less well-qualified applicants. While many on the right have blamed the bursting bubble on this 'past' practice -- was it broadly a practice or did banks generally exceed just lowering standards to the point of fraudulently punching up applicants to meet standards, issuing the loans, packaging them up, lying about them to investors and getting fat... Debunk the myth that the bubble burst because of greedy consumers."

Is America still on the road to recovery?
Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

Apple and Volkswagen Team Up for iBeetle

German automaker Volkswagen (NASDAQOTH: VLKAY  ) and Apple (NASDAQ: AAPL  ) have partnered to unveil the iBeetle, a model of the former's iconic car that will integrate directly with an iPhone.

Both the Beetle and Beetle Convertible will interface with the iPhone through a specialty app and docking station built directly into the dashboard.

The specialized models will launch in early 2014, and will debut at the 2013 Shanghai Auto Show this month. Once docked, all of the iPhone's functions can be used within the car, including navigation, hands-free calling, and music listening, among others. The Beetle app will allow functions such as measuring oil and coolant temperatures, sending the car's location to friends as a digital postcard, and sending photos taken inside the car directly to social networks.

Volkswagen said the iBeetle is one of the first cars to feature this level of integration with iPhones after collaborating with Apple. The company also said the styling of colors and equipment features would be similar to Apple's design aesthetic.

Source: Volkswagen.



What Type of Consumer are You?

NEW YORK, NY - FEBRUARY 07: A shopper walks down Broadway on February 7, 2013 in New York City. In another indicator of a slowly strengthening economy, chain stores including Macy's Inc., Target Corp and Gap Inc. reported today January sales that exceeded analysts' estimates. (Photo by Spencer Platt/Getty Images) Banana RepublicSpencer Platt/Getty Images

Truckin' & Stylin'. Shooting Stars. Timeless Elders. Based on where you live, how much money you make, and where you shop, you may be classified into one of these categories by one of the country's largest data brokers.

Using its massive database filled with personal data on shoppers and their buying behaviors, data giant Acxiom places each of the U.S. households it tracks into one of 70 categories, ranging from the wealthiest -- dubbed "Summit Estates" -- to the bottom of the income spectrum -- or "Resilient Renters."

According to Acxiom's marketing materials, the "clusters" allow "marketers to better know -- and anticipate -- their customers' demographics and buying behaviors." And the categories help retailers decide the location for a new store, for example, which television stations to advertise on, or which customers they should market a new product line to.

But critics say that the groupings can result in biases toward different shoppers, often based on socioeconomic factors like income.

"It's really being put into a box," said Pam Dixon, executive director of the World Privacy Forum. "And that's the problem."

Wondering where you fall? Here's how Acxiom describes various types of consumer households in its marketing materials:

Married Sophisticates: Truckin' & Stylin': Collegiate Crowd: Shooting Stars: Apple Pie Families: City Mixers: Metro Parents: Timeless Elders: More from CNNMoney:

More from CNNMoney: 101 ways to build wealth Housing is back! Best moves for homebuyers Why Japan's stock market is red hot

Money Conversations: What We Hear Versus What Was Said

What I'm about to relate is a story I suspect many of you have experienced at least once if you're in a relationship.

My wife mentioned that her friend had recently redone her kitchen. As she explained all of the renovations, I started doing mental arithmetic that quickly added up to big dollars, dollars we couldn't afford. Instead of engaging in a fun conversation about why my wife liked the kitchen and what she thought was cool about it, I responded with my typical "We can't afford that."

Of course, when she heard my response, my wife gave me a confused look and said, "What are you talking about?"

Clearly, after 15 years of marriage, I haven't fully learned the lesson that just because my wife is talking about a new kitchen, she's not implying that she wants to remodel her kitchen. She was only discussing something of interest to her and what she thought might be of interest to me.

So why did I make the leap and start to feel tension in my shoulders? After all, my wife is no stranger to money. Her undergraduate degree is in finance, and she served as the chief financial officer of a small development company. More recently she's taken over as our family CFO, which leads me to wonder why I'm assuming she's talking about money when in reality she's just talking about life.

This conversation isn't the first time that I've made the leap to money based on things my wife tells me. For example, every time she mentioned someone she knew that was planning a family trip to Hawaii, I immediately started calculating how much such a trip would cost. Even something as simple as talking about where friends plan to send their children to college makes me start thinking about money.

The reality is that my brain is wired to think differently when it comes to money. Based on my experience, and the stories others have related, it's clear that men and women can have completely different approaches to how they talk about money. What I took as code for "I want a new kitchen" was just my wife talking about something she enjoyed. How many times has this happened between you and your spouse?

Even if it happens a lot, this is not a question of who's right and who's wrong. Rather, it's an opportunity for us to recognize that when we're dealing with people whom we care about, we can't impose our money language and expectations on them.

I will probably continue to do mental arithmetic when I'm chatting with my wife, but if I remember that 99% of the time she's simply talking about subjects that interest her, I can reduce my anxiety over money. How we were raised to view money (let alone all the other influences of gender, experience, and education) plays a role in how we talk and think about money. So it's healthy to recognize that we all bring baggage to these conversations. Hopefully it won't take me another 15 years to put it into practice.

A version of this post appeared previously at The New York Times.

Carl Richards is a financial planner and the director of investor education for the BAM ALLIANCE, a community of more than 130 independent wealth management firms throughout the United States. Visit Behavior Gap for more of Carl's sketches and writings.

The Motley Fool has a disclosure policy.


Sunday, April 21, 2013

5 Leading Companies in Human Rights

Like most investors, you probably aim for the best possible return when picking potential investments. But as consumers increasingly clamor for companies to embrace social responsibility, good corporate citizenship is becoming a vital part of many companies' success. And it can boost the performance of our portfolios, too.

CR magazine recently released its "100 Best Corporate Citizens" list for 2013, in which it rated members of the Russell 1000 large-cap index on 325 different elements related to responsible behavior. In the coming weeks, I'll delve into each of the seven categories that contribute to a company's overall score. Today, we'll look at the human rights category, which gets a 16% weighting. Here are the top-rated companies:

Gap (NYSE: GPS  )

Microsoft (NASDAQ: MSFT  )

Johnson Controls (NYSE: JCI  )

Johnson & Johnson (NYSE: JNJ  )

Northern Trust (NASDAQ: NTRS  )

To earn their high scores, the companies above engaged in a variety of good practices, including applying their human rights policy to their suppliers and vendors, and committing to quantifiable targets and goals.

Digging deeper
So what, exactly, are these companies doing right? Here are a few examples of their human rights practices.

Gap's ranking at the top of the list is impressive, as clothing companies have repeatedly been criticized for poor conditions at globally far-flung factories. Gap spells out its thinking and commitment regarding human rights and also notes that it now monitors 99% of the factories that produce its branded apparel. It also breaks out the ratings for its many factories, revealing that the percentage where action is required has fallen from 18.3% in 2009 to 15.6% in 2011, while those rated excellent rose from 14.5% to 15.9%.

Microsoft, in its 2012 Citizenship Report, notes that it's using its "size and leadership to influence government behaviors" around the world. It requires  all of its suppliers to abide by its Vendor Code of Conduct and has been checking for violations against requirements such as no child labor and the presence of humane working conditions. It has also "assisted law enforcement worldwide in their fight against online child pornography by making Microsoft PhotoDNA technology available for free."

Johnson Controls specializes in building efficiency, automotive systems and parts, and power solutions. Its Human Rights and Sustainability policy (link opens PDF file) calls for, among other things, no children working under the age of 16, no "forced, bonded, indentured or involuntary prison labor," no employment discrimination, and supporting the right of collective bargaining. The company expects its suppliers to abide by such principles, too, and includes such language in its contracts.

Johnson & Johnson has a Statement on Human Rights noting, "we believe our most significant opportunities to impact human rights -- and therefore our greatest areas of responsibility -- are in the areas of Human Rights in the Workplace, Access to Health Care, and Clinical Research Ethics." The company supports principles such as non-discrimination, freedom of association and collective bargaining, and freedom from forced and child labor, and expects its suppliers to support them, too.

Northern Trust, a financial services company, notes in its 2011 Corporate Social Responsibility Report that it, too, supports a broad range of human rights and expects its vendors to support them, as well. The company's "responsible investing" products hold more than 5% of their overall "index and multi-manager solutions assets." Northern Trust's RI screen avoids companies with poor records on human rights, among other things, and the company has been involved in socially responsible investing for more than 25 years.

Earning well while doing good
Companies doing good can boost your portfolio's performance. And various other studies have suggested that socially responsible investments are at least competitive with the overall market, if not outperforming it on occasion. That's a solid motivation for even the most coolly rational investors to take social responsibility to heart.

If you're in the market for solid socially responsible candidates for your portfolio, check out the real-money portfolio run by my colleague Alyce Lomax. Out of all the Fool portfolios in the group, hers was recently in first place.

Is bigger really better?
With Johnson & Johnson involved in everything from baby powder to biotech, its critics are convinced that the company is spread way too thin. If you want to know whether J&J is nothing but a bloated corporate whale -- or a well-diversified giant that's perfect for your portfolio -- check out The Fool's new premium report outlining the Johnson & Johnson story in terms that any investor can understand. Claim your copy by clicking here now. 

The S&P's Worst-Performing Sectors in 2013

With gains of more than 9% so far in 2013, the S&P 500 (SNPINDEX: ^GSPC  ) has already posted better returns than it often manages over an entire year. But the past week's downdraft serves as a valuable reminder that you have to be vigilant to spot signs of weakness in the stock market before they blossom into full-fledged corrections. Specifically, looking at particular sectors of the market that are lagging behind the S&P 500's overall performance can help you gauge whether industry-specific trends are holding stocks back or whether those poor conditions are likely to spread into other sectors.

Yesterday's column looked at the best-performing sectors in the S&P so far in 2013. Today, let's turn to the dark side by identifying the laggards in the S&P this year.

XLB Total Return Price Chart

S&P 500 Sectors Total Return Price data by YCharts.

Materials have posted the weakest performance, just barely eking out a gain on the year, with technology and energy also falling behind the overall return of the S&P 500. For materials, the slowdown in China has sent commodity producers of all kinds for a loop. In particular, with slower construction activity, U.S. Steel (NYSE: X  ) and other steel companies have seen their stocks tumble throughout 2013. That in turn has caused a cascade effect, as coal and iron-ore supplier Cliffs Natural Resources (NYSE: CLF  ) has seen less demand for its vital inputs for the steel-making process. Gold's big decline last week only hurt matters by sending precious-metals miners down for the count as well.

Technology, on the other hand, has a more mixed showing of both winners and losers. On one hand, slow PC sales have left older tech companies scrambling to update their offerings and join the mobile revolution, and their stock prices have generally suffered even though they currently trade at unusually low earnings multiples. Yet for more innovative, cutting-edge companies, high valuations have persisted, and the most forward-looking tech players have rewarded their shareholders with solid returns.

Finally, on the energy front, 2013 has been a reversal of fortune, with natural gas prices climbing but oil prices slumping. That trend has been good for more gas-concentrated companies Range Resources (NYSE: RRC  ) and Ultra Petroleum (NYSE: UPL  ) , but for many players that moved away from gas production to stress more lucrative oil, the new environment has them feeling whipsawed. Overall, better global growth will likely be necessary to drive energy prices higher.

Can these sectors bounce back?
Last week's stock market moves called into question whether the bull market will continue, and a reversal could make past trends relatively meaningless. For now, though, materials and energy appear likely to keep suffering from weak economic activity levels around the world, while technology is more of a wildcard and could bounce back more sharply if consumer and business customers feel more confident about investing in new tech products.

Cliffs Natural Resources has reeled from weak demand, with a dramatic 76% dividend cut in February. However, it could now be looked at as a possible value play because of several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's premium research report on the company.

Should Investors Ignore Billionaire Fund Managers?

In this video, Motley Fool analysts Matt Koppenheffer and David Hanson talk about some recent investing decisions made by billionaire fund managers and what individual stock investors can take away from them.

Recently, Bruce Berkowitz of the Fairholme Fund got bullish on financial stocks right around the same time that John Paulson got bearish and sold positions in Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) .

What should investors make of this?

Most of the time, investors are best served by ignoring what fund managers are doing, David says. Selling financial stocks may not mean that they don't like the stocks, but that they see opportunities they like better.

But some fund managers tend to buy stocks for the long haul, and keeping watch on their decisions could benefit investors, David says.

Matt cautions against hero worship of big fund managers. Some of these managers, like Paulson, strike it big with one call and then find legions of fans following their next moves. It's easy to be led astray, Matt says.

Follow their moves for ideas, Matt says, but don't follow them blindly.

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.