Why Houston Wire & Cable's Earnings May Not Be So Hot

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Houston Wire & Cable (Nasdaq: HWCC  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Houston Wire & Cable generated $12.8 million cash while it booked net income of $16.9 million. That means it turned 3.3% of its revenue into FCF. That sounds OK. However, FCF is less than net income. Ideally, we'd like to see the opposite.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Houston Wire & Cable look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With questionable cash flows amounting to only 6.2% of operating cash flow, Houston Wire & Cable's cash flows look clean. Within the questionable cash flow figure plotted in the TTM period above, changes in taxes payable provided the biggest boost, at 11.4% of cash flow from operations. Overall, the biggest drag on FCF came from changes in accounts payable, which represented 30.8% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

If you're interested in companies like Houston Wire & Cable, you might want to check out the jaw-dropping technology that's about to put 100 million Chinese factory workers out on the street – and the 3 companies that control it. We'll tell you all about them in "The Future is Made in America." Click here for instant access to this free report.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Add Houston Wire & Cable to My Watchlist.

It's Showtime for Autoliv

Autoliv (NYSE: ALV  ) is expected to report Q1 earnings on April 26. Here's what Wall Street wants to see:

The 10-second takeaway
Comparing the upcoming quarter to the prior-year quarter, average analyst estimates predict Autoliv's revenues will shrink -4.1% and EPS will wane -21.2%.

The average estimate for revenue is $2.09 billion. On the bottom line, the average EPS estimate is $1.23.

Revenue details
Last quarter, Autoliv reported revenue of $2.05 billion. GAAP reported sales were 0.4% higher than the prior-year quarter's $2.04 billion.

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

EPS details
Last quarter, non-GAAP EPS came in at $1.58. GAAP EPS of $1.45 for Q4 were 15% lower than the prior-year quarter's $1.70 per share.

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

Recent performance
For the preceding quarter, gross margin was 19.3%, 170 basis points worse than the prior-year quarter. Operating margin was 9.4%, 180 basis points worse than the prior-year quarter. Net margin was 6.8%, 100 basis points worse than the prior-year quarter.

Looking ahead

The full year's average estimate for revenue is $8.43 billion. The average EPS estimate is $5.60.

Investor sentiment
The stock has a five-star rating (out of five) at Motley Fool CAPS, with 374 members out of 392 rating the stock outperform, and 18 members rating it underperform. Among 142 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 138 give Autoliv a green thumbs-up, and four give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on Autoliv is hold, with an average price target of $65.37.

Can your portfolio provide you with enough income to last through retirement? You'll need more than Autoliv. Learn how to maximize your investment income and "Secure Your Future With 9 Rock-Solid Dividend Stocks." Click here for instant access to this free report.

Add Autoliv to My Watchlist.

What to watch: Plunging gold prices

The price of gold got hammered Thursday, as the yellow metal fell $36.20 to $1,195 per ounce, the lowest since August 2010.

Jeff Nichols, editor of NicholsOnGold.com, says that the selling stemmed from the Federal Reserve's decision to buy $10 billion fewer bonds each month than it has been, starting in January. The decision signals that the Fed thinks the economy is recovering.

MORE: 5 reasons stocks didn't suffer a 'taper tantrum'

Gold typically rises on fears of economic instability and monetary inflation. When investors worry that paper money may lose its value, they buy gold, which has been used as currency for hundreds of years.

"The Fed announcement was a bit of a surprise in the precious metals world," Nichols says. "It was a reflex sell-off from institutional traders who know how to make a profit from such a move."

FIRST TAKE: Fed's decision shows it believes in economy's strength

Gold's sell-off has left a psychological mark on investors, Nichols says. A close below $1,180 on the spot market could trigger another sell-off, before the market stabilizes, he says. "The market will recover, but it could be a good way off," Nichols says.

Top Gold Stocks To Watch For 2014

Frank Holmes, CEO of U.S. Global Investors, says that demand from China and India, where gold is a traditional store of value, has been soft. If Chinese gross domestic product per capita starts to rise, demand for gold should rise as well, he says.

Holmes recommends a 10% stake in gold-mining stocks. If you bought now, you'd be taking profits from the Standard & Poor's 500 index and buying at a historical low in gold stocks, he says.

New Mexico AG sues to stop horse slaughter

ALBUQUERQUE, N.M. (AP) — New Mexico's top prosecutor filed a lawsuit Thursday in state district court in an attempt to block a planned horse slaughter plant from opening in less than two weeks.

The move by Attorney General Gary King comes after a federal appeals court rolled back a court order that had kept Valley Meat Co. from starting operations earlier this fall. Owner Rick De Los Santos has been making plans to open Jan. 1, and his attorney said Thursday that those plans haven't changed.

MORE: Appeals court rules horse slaughterhouses can reopen

Attorney Blair Dunn called King's lawsuit frivolous and a waste of taxpayer money. Under state law, he said if a judge issues a restraining order or preliminary injunction, a security bond would have to be posted by the state while the legal challenge winds its way through the court. That could cost New Mexico as much as $435,000 a month, he said.

"As a New Mexican, as a taxpayer, I'm beyond offended and I think it's almost criminal what they're doing. They're wasting everybody's money," Dunn said.

King defended the lawsuit, saying Valley Meat stands to violate state laws related to food safety, water quality and unfair business practices.

"I believe that the operation of this plant in New Mexico is antithetical to the way we do business in New Mexico," King said. "We don't eat horses in New Mexico, and we think this is an inappropriate use of this plant."

King's office also disputed claims that it would have to pay any kind of bond because the lawsuit involves alleged violations of the state's Unfair Practices Act.

Valley Meat and proposed plants in Missouri and Iowa have been the targets of animal protection groups trying to block the slaughtering of horses.

Valley Meat began leading the effort to resume domestic horse slaughter two years ago after Congress lifted its ban on the practice. In August, as plants in the three states were preparing to open, The Humane Society of the United States and other! animal protection groups sued to contest the Department of Agriculture's permitting process.

A federal judge in Albuquerque issued a temporary restraining order, prompting the Iowa company to convert its operations to beef. U.S. District Judge Christine Armijo threw out the lawsuit in November, allowing all three companies to proceed.

Top 5 Medical Companies To Own For 2014

The animal protection groups appealed to the 10th U.S. Circuit Court of Appeals, which issued an emergency motion that again blocked the plants from opening. The appellate court lifted that order last week, saying the groups "failed to meet their burden for an injunction pending appeal."

Animal Protection of New Mexico and Front Range Equine Rescue were among the groups throwing their support behind King's lawsuit on Thursday.

According to the lawsuit, Valley Meat has a history of violating state and federal environmental and safety laws while operating as a beef slaughterhouse. The state says Valley Meat's failure to monitor and test water samples as part of its past discharge permits dates back decades. The company is also accused of disposing of carcasses illegally.

Dunn challenged the state's claims and accused King, a Democrat who is running for governor, of politicizing the case.

While it could be weeks before the state district court rules on King's request, Dunn said Valley Meat will continue to prepare for operations to begin. The company says it has multiple international contracts lined up.

2 Tech Stocks Rising on Unusual Volume

DELAFIELD, Wis. (Stockpickr) -- Professional traders running mutual funds and hedge funds don't just look at a stock's price moves; they also track big changes in volume activity. Often when above-average volume moves into an equity, it precedes a large spike in volatility.

>>5 Stocks With Big Insider Buying

Major moves in volume can signal unusual activity, such as insider buying or selling -- or buying or selling by "superinvestors."

Unusual volume can also be a major signal that hedge funds and momentum traders are piling into a stock ahead of a catalyst. These types of traders like to get in well before a large spike, so it's always a smart move to monitor unusual volume. That said, remember to combine trend and price action with unusual volume. Put them all together to help you decipher the next big trend for any stock.

>>5 Hated Earnings Stocks You Should Love

With that in mind, let's take a look at several stocks rising on unusual volume today.

Autobytel

Autobytel (ABTL) is an automotive marketing services company that helps automotive retail dealers and automotive manufacturers market and sell new and used vehicles through its internet referral and online advertising programs. This stock closed up 13.9% at $14.08 in Wednesday's trading session.

Wednesday's Volume: 1.07 million

Three-Month Average Volume: 166,350

Volume % Change: 442%

From a technical perspective, ABTL soared higher here and entered new 52-week-high territory after it took out some near-term overhead resistance at $13 with heavy upside volume. This stock has been uptrending strong for the last six months, with shares ripping higher from its low of $4.56 to its intraday high of $14.40. During that move, shares of ABTL have been consistently making higher lows and higher highs, which is bullish technical price action. Market players should now look for a continuation move higher in the short-term if ABTL manages to take out Wednesday's high of $14.40 with strong volume.

Traders should now look for long-biased trades in ABTL as long as it's trending above Wednesday's low of $12.42 or above $12 and then once it sustains a move or close above $14.40 with volume that this near or above 166,350 shares. If we get that move soon, then ABTL will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $17 to $18.

21Vianet Group

21Vianet Group (VNET) provides carrier-neutral Internet data center services in the Peoples Republic of China. This stock closed up 6.6% to $21.85 in Wednesday's trading session.

Wednesday's Volume: 2.12 million

Three-Month Average Volume: 594,394

Volume % Change: 223%

From a technical perspective, VNET ripped higher here and broke out into new 52-week high territory above some near-term overhead resistance at $21.09 with heavy upside volume. This stock has been uptrending strong for the last month, with shares moving higher from its low of $16.27 to its intraday high of $22.28. During that move, shares of VENT have been consistently making higher lows and higher highs, which is bullish technical price action. Market players should now look for a continuation move higher in the short-term if VNET manages to take out Wednesday's high of $22.28 with high volume.

Traders should now look for long-biased trades in VNET as long as it's trending above Wednesday's low of $20.14 or above its 50-day at $18.86, and then once it sustains a move or close above $22.28 with volume that hits near or above 594,394 shares. If we get that move soon, then VNET will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $24 to $25.

To see more stocks rising on unusual volume, check out the Stocks Rising on Unusual Volume portfolio on Stockpickr.

-- Written by Roberto Pedone in Delafield, Wis.

RELATED LINKS:

>>4 Hot Stocks to Trade (or Not)

>>5 Stocks Ready to Break Out

>>5 Rocket Stocks Worth Buying This Week

Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.

Bitcoin, Gold, And Silver Bubbles Go Bust -- Are Treasuries And Stocks Next?

Bitcoin investors have had a rough time lately. The digital currency dropped more than 35% in five days, and more than 50% from its all-time high two weeks ago.

Precious metals investors (on the long side of the market) suffered a similar fate, though the drop in gold and silver was modest.  iShares Silver Trust (NYSE:SLV) was down near 1.6% in the last five days, while SPDR Gold Shares (NYSE:GLD) was down 1.7% near an 18-month low.

Major Precious Metals ETF Performance On Friday

ETF	5-day Performance (%)
SPDR Gold Shares	-1.70
iShares Silver Trust	-1.60

Investors concerned about the effects of aggressive monetary easing by the Federal Reserve and other central banks have been amassing Bitcoin and precious metals— seeing the two investment vehicles as alternatives to traditional currencies, which are undermined by monetary easing.

So far, however, these policies have blown all sorts of bubbles — like the Bitcoins and the precious metals that went bust — as investor sentiment shifted from greed to fear.

That's certainly old news. The new question is which bubble is next next to burst?

It is hard to say, as liquidity around the world continues to provide cheap money to risk-takers, especially after the launching of Japan's ambitious plan to reflate its economy.  Nevertheless, investors should keep an eye on the US Treasury market, as the Fed is getting ready to taper, and high dividend stocks. Rising Treasury yields or a big earnings disappointment could ignite a massive exit across the board, bursting the dividend trade bubble.

This was the case with shipping companies a few years ago. Frontline's stock, for instance, descended from $70 down to $ 2.05, once the company could no longer produce the earnings to support its hefty dividend.

For the rest of the equity markets, the bubble may get bigger before it goes bust, as we wrote in a previous piece, due to the fear of missing out on potential gains. That's an "emotional button" which is usually turned on in bull markets, as investors score a string of quick gains — turning the bull market into a bubble.

While a quick gain evokes excitement, a string of quick gains turns excitement into euphoria, which feeds into greed. That can become contagious with human interactions, as investors race to copy each others' behavior.

That may prove to be the case again, in early 2014.

Can JPMorgan Chase Surge Higher?

With shares of JPMorgan Chase & Co. (NYSE:JPM) trading around $55, is JPM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

JPMorgan Chase is a financial holding company that provides various financial services worldwide. The company is engaged in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management, and private equity. Financial services companies like JPMorgan Chase are essential for well-functioning economies around the world.

JPMorgan is suing the Federal Deposit Insurance Corp. to recover more than $1 billion tied to its purchase of Washington Mutual when that bank failed in 2008. In a federal court complaint, the biggest U.S. bank said that the FDIC failed to honor obligations under the Washington Mutual agreement, and that has subjected JP Morgan to massive liability. The FDIC became the receiver for Seattle-based Washington Mutual when it collapsed during the height of the financial crisis in September 2008. It was the largest bank failure in U.S. history. The FDIC brokered the sale of Washington Mutual’s assets to JP Morgan for $1.9 billion. JPMorgan said the FDIC made promises to indemnify or protect the bank against liabilities if it stepped in.

T = Technicals on the Stock Chart Are Strong

JPMorgan Chase stock has done relatively well in the past couple of years. The stock is currently trading sideways. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, JPMorgan Chase is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of JPMorgan Chase options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
JPMorgan Chase options	27.35%	93%	90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
January Options	Flat	Average
February Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on JPMorgan Chase’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for JPMorgan Chase look like and more importantly, how did the markets like these numbers?

	2013 Q3	2013 Q2	2013 Q1	2012 Q4
Earnings Growth (Y-O-Y)	-112.14%	32.23%	33.61%	54.89%
Revenue Growth (Y-O-Y)	-7.67%	13.67%	-3.57%	10.16%
Earnings Reaction	-0.01%	-0.30%	-0.60%	1.01%

JPMorgan Chase has seen increasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about JPMorgan Chase’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has JPMorgan Chase stock done relative to its peers, Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and sector?

	JPMorgan Chase	Bank of America	Citigroup	Wells Fargo	Sector
Year-to-Date Return	26.84%	30.36%	27.73%	28.47%	29.35%

JPMorgan Chase has been a poor relative performer, year-to-date.

Conclusion

JPMorgan Chase is a bellwether in the banking space that forms an essential part of the United States financial system. The company is suing the Federal Deposit Insurance Corp. to recover more than $1 billion tied to its purchase of Washington Mutual when that bank failed in 2008. The stock has done relatively well in recent months, but is now trading sideways. Over the last four quarters, earnings have been increasing while revenues have been mixed, which has produced conflicting feelings among investors. Relative to its peers and sector, JPMorgan Chase has been a poor year-to-date performer. WAIT AND SEE what JPMorgan Chase does this quarter.

OppenheimerFunds Names New CEO, CIO

Best Warren Buffett Companies To Own For 2014

OppenheimerFunds says that Arthur P. Steinmetz will become CEO on July 1, replacing William F. Glavin, Jr., who will stay on as chairman. It also announced other changes as a result of this leadership move.

On Jan. 1, the chief investment officer of fixed-income products, Krishna Memani, will take over the role of chief investment officer for the full suite of OppenheimerFunds from Steinmetz. Steinmetz will be in charge of investments, distribution and marketing.

“Bill Glavin joined OppenheimerFunds during the depths of the financial crisis to guide OppenheimerFunds through a very challenging period for the company and the industry in general,” said Steinmetz, in a press release. “Bill’s immeasurable contributions to the firm’s success during this time, and the impact of his leadership in steering the company on a path of sustainable growth, cannot be overstated.

Also at the start of 2014, John McDonough, now director of national sales, will be tapped as head of distribution. He will replace Philipp Hensler, who is set to leave the firm for an executive post at another financial services organization.

“Art Steinmetz is a proven leader and passionate steward of the four beliefs that lie at the heart of the firm’s investment culture, namely that active management can deliver better outcomes, independent investment boutiques lead to better ideas, a global perspective is critical, and knowing the difference between risk and risky is tantamount to investment success,” said Glavin, in a statement.

As of Sept. 30, OppenheimerFunds--which is owned by Massachusetts Mutual Life Insurance Co.--has some $222 billion in assets with over 12 million shareholder accounts.

“Further, I want to thank Philipp Hensler for his great vision and unbridled enthusiasm in motivating our distribution organization to embrace new ways of thinking and new technologies, and for expanding our reach into the institutional and international markets,” Glavin explained. “Under Philipp’s leadership, our distribution team has had a record year.”

The YieldCo: Return of the Utility Spin-off

Major utilities and various renewable companies are planning to create spin-offs structured as yield companies (YieldCo) or master limited partnerships (MLP) that promise to pay higher yields by offering direct exposure to stable, cash-generating assets.

The launch of these investment vehicles has been a source of excitement in the power industry, particularly with NRG Energy Inc’s (NYSE: NRG) successful initial public offering (IPO) of NRG Yield Inc (NYSE: NYLD), the firm’s YieldCo. That’s prompted a number of utilities to announce similar plans. The question is whether these new securities offer enduring value, similar to what’s happened in the traditional MLP space, or whether they’re just another way for firms to raise cash by making a cynical play for yield-starved income investors.

From a taxation standpoint, dividends paid by YieldCos are generally taxable as ordinary income, though dividends may be qualified under certain conditions. Some YieldCos are shielded from corporate-level taxes from net operating losses (NOL) generated by wind and solar assets. By contrast, the majority of an MLP’s distribution is typically treated as a return of capital, which serves to lower an investor’s cost basis and, therefore, shields income from taxation until the units are sold.

But even as we share the industry’s enthusiasm for these new investment vehicles and the potential for superior high-yield opportunities, there is much investors need to know about the history and potential risk implications of these transactions, to the utility company and its new subsidiary. This is particularly important, as past spin-off efforts have met with mixed success.

Innovation and Risk

These new investment vehicles do offer some innovations. For the first time, investors will be able to have a direct stake in electric utility-owned natural gas subsidiaries through MLPs. Meanwhile, Congress is working on legislation that would allow renewable assets to enjoy the same tax treatment as natural gas assets, which means they could also be included in these MLPs.

And the YieldCo is a new variation on previous utility spin-off strategies of the early 2000s. Rather than offer exposure to high-risk, high-growth assets, which is what investors sought during the early part of the last decade, this new structure will offer investors exposure to low-risk, high-yield assets, as well as the aforementioned favorable tax treatment.

Clearly, these attributes are an improvement from previous initiatives. But in considering such an investment, there still are risks that must be scrutinized.

For example, a company’s choice to spin off a set of high-quality, income-producing assets raises the question of whether it will be weakened from a credit and earnings standpoint, thus undermining its value as an investment.

According to a Moody’s Investors Service report, “YieldCos permanently transfer a portion of the parent’s most reliable cash-flow-producing assets to another entity resulting in residual cash flow that is materially less to support the parent’s credit profile. In the best case scenario, this form of financial engineering could be considered credit neutral if all or a substantial portion of the IPO cash proceeds are used for parent company debt reduction …”

But given NRG’s example, Moody’s suspects that companies will use the proceeds from such offerings for ends other than debt reduction. The rating agency concludes, “YieldCos are growth vehicles, and we suspect that, in most cases, net proceeds will not be used in this manner. Rather, they will be used for higher return, higher risk investments or used by the parent company for share repurchases.”

Beyond our concerns about the effect on the legacy companies, the proposed size of some of these subsidiaries would be miniscule compared to behemoth MLPs such as Kinder Morgan Energy Partners LP (NYSE: KMP), and thus possibly more risky. These entities would have capitalizations in the small- to mid-cap range, which means they would lose the economies of scale they previously enjoyed from being part of a larger integrated company.

And given their relatively high yields and the resulting demands these payouts place on cash flow, these smaller YieldCos and MLPs may not be able to weather an unforeseen economic or market shock, especially if they have to compete for new projects against much larger firms. One approach that might increase the possibility of success for these new structures would be for several utilities to work together to create a single vehicle comprised of asset drop-downs from each participant. This would help the new entity achieve greater economies of scale and make it more competitive in the marketplace.

In fact, the most successful spin-offs in the utilities industry have typically been very, very large, such as transmission systems that have themselves achieved better economies of scale by integrating with larger regional transmission organizations. That’s a marked contrast to what happened in the last decade to some small- and mid-size companies that were spun off from the merchant power divisions of utilities and subsequently wound up in bankruptcy when market dynamics suddenly changed.

Furthermore, non-arms-length transactions can be a recipe for disaster, given examples from the recent past where parent companies negotiated advantageous agreements at the expense of subsidiaries. In some cases, the parent company even dumped non-performing assets into a subsidiary or off-balance sheet partnership to improve the optics of the legacy company’s financials. The question here is how to know whether the YieldCo is getting good assets for its money, when the controlling parent is on the other side of the deal.

Various credit-rating agencies have also identified this potential governance risk. For example, according to a report by Moody’s, “All the senior officers of [NRG Yield] hold a similar position at NRG, and four of the seven board members have a direct senior management position with NRG, with one of the three independent directors being a former NRG director.”

YieldCos: The Shape of Things to Come?

Source: Company presentation

The rating agency concludes, “The interrelationship between the parent sponsor and the YieldCo, while understandable, raises several levels of potential conflicts of interest from a corporate governance perspective.”

In the final analysis, whether an investor should consider a YieldCo or utility MLP comes down to the perennial question of whether value can best be achieved through a diversified conglomerate or a pure-play model.

The Anatomy of a Spin-off

While various studies on electric utility diversification strategies have found moderate diversification can be beneficial to creating shareholder value, the overall industry result has been mixed. The only consistent trend is that ventures financed with high levels of debt are prone to disaster, regardless of whether they’re related to the core utility business. Historically, firms that tried to grow too broadly, too fast, and with too much leverage seemed to suffer.

That’s the general risk of any type of financial engineering: These structures, which typically create new external financing options, sometimes tempt a parent company’s management to use the proceeds to pursue growth projects at a time when the balance sheet is already stretched to the limit. Indeed, utilities such as Dominion Resources Inc (NYSE: D and NextEra Energy Inc (NYSE: NEE), which already have debt-to-equity ratios in excess of 100 percent, are currently contemplating spinning off certain assets in the form of a YieldCo or MLP. We can only hope their respective management teams will do the right thing with the proceeds.

Top Growth Companies To Watch For 2014

As a result, investors will have to monitor how the parent company uses these funds, as it would also have implications for the value proposition of owning the YieldCo itself.

And while the yields on some of these spin-offs will be enticing, parent companies will still have to periodically add new assets to their subsidiaries in order for them to produce steady dividend growth over time. The rating agency says, “Incremental contractual investments need to be added or ‘dropped in’ on a regular basis. As such, YieldCos’ sponsors need to have an active development program or need to augment the potential YieldCo backlog with regular acquisitions.”

But securing incremental long-term contracts often depends on factors outside management’s control. “Recent events at Atlantic Power Corp (NYSE: AT) demonstrate the shortcoming of a YieldCo strategy, ” the report states, noting the now infamous dividend cut that the firm had to make because of the firm’s “inability to extend expiring contracts and to secure sufficient long-term replacement contracts.”

Nevertheless, Wall Street investment bankers have been pushing these types of deals for years. The pitch by bankers has always been the same: A spin-off can help the utility raise cheap capital, boost the valuation of a diversified company, or cover a failed merger. In the case of a YieldCo, the intent is to raise cheap capital by unlocking the value of a business that management feels is not being recognized by the market.

But some executives have been skeptical of these deals because they believe they can erode the benefits achieved by economies of scale or integration. Back in 2007, when your correspondent was executive editor of Public Utilities Fortnightly, the utilities industry’s journal of record, he spoke about this topic with Michael Morris, former CEO and presently non-executive chairman of American Electric Power Co Inc (NYSE: AEP).

As Mr. Morris succinctly put it, “We don’t see a need for that. If you are an integrated utility today, unless you have huge capital needs or a state law that causes you to break apart your asset base, I don’t see the logic behind it.” Back then, he predicted the industry would see few such transactions because the vertically integrated model made so much sense.

He also had strong words for the Wall Street bankers that kept proposing these deals. “I’m always intrigued by those of you in New York, particularly those of you involved in the investment-banking business. You talk all of us into merging and cross functionalization and how wise that was. Then you come back four years later and say the market can’t understand the stock and you have to break the company apart.” Apparently, this time around, the bankers waited almost seven years to return with the same pitch.

In sum, financial innovations, if implemented properly and with the right safeguards, can be a source of greater shareholder value, as we’ve seen in the traditional MLP space.

But given low power-demand growth fundamentals, technological disruption from renewables, and changing market fundamentals, power utilities might be better served by keeping their most stable, income-producing assets in house.

We recommend holding off on investing in electric utility industry YieldCos or MLPs until their management teams build a longer-term track record, at which time these investments can be properly evaluated.

Where Will Starbucks Go Next?

With shares of Starbucks (NASDAQ:SBUX) trading around $76, is SBUX an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Starbucks is a roaster, marketer, and retailer of coffee operating worldwide. The company purchases and roasts the coffees it sells along with handcrafted tea and other beverages, as well as a variety of fresh food items through its stores. Starbucks sells a variety of coffee and tea products and licenses its trademarks through other channels such as stores and national food service accounts. In addition to its flagship Starbucks brand, the company's portfolio features Tazo Tea, Seattle's Best Coffee, Starbucks VIA Ready Brew, Starbucks Refreshers beverages, and the Verismo System by Starbucks. Starbucks has developed a solid reputation over the past several years, which has generated a lot of buzz for its products.

It's understood that when customers go to Starbucks in the morning they want to get caffeinated, but did you know that some go to get carbonated, too? A recent report from Quartz reveals that the coffee giant has been secretly testing out a new market since last spring, one for "handcrafted sodas." According to Quartz, Starbucks baristas in certain locations have been letting customers choose to carbonate juices, sodas, and a selection of coffee and tea beverages, and the company has been happy with the consumer feedback.

T = Technicals on the Stock Chart Are Mixed

Starbucks stock has been exploding to the upside in recent years. The stock is currently pulling back and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Starbucks is trading between its rising key averages, which signals neutral price action in the near term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Starbucks options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Starbucks options	25.99%	96%	93%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
January Options	Average	Average
February Options	Average	Average

As of Tuesday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Starbucks’ stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Starbucks look like and more importantly, how did the markets like these numbers?

	2013 Q3	2013 Q2	2013 Q1	2012 Q4
Earnings Growth (Y-O-Y)	36.96%	27.91%	27.5%	14%
Revenue Growth (Y-O-Y)	12.81%	13.26%	11.26%	10.59%
Earnings Reaction	0.27%	7.61%	-0.82%	4.1%

Starbucks has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Starbucks’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Starbucks stock done relative to its peers – Dunkin’ Brands (NASDAQ:DNKN), McDonald’s (NYSE:MCD), and Green Mountain Coffee Roasters (NASDAQ:GMCR) — and sector?

	Starbucks	Dunkin’ Brands	McDonald’s	Green Mountain Coffee Roasters	Sector
Year-to-Date Return	42.47%	47.54%	6.3%	85.53%	46.46%

Starbucks has been an average relative performance leader, year-to-date.

Conclusion

Starbucks provides in-demand coffee and tea products and services to consumers around the world. The company has been secretly testing out a new market since last spring, one for "handcrafted sodas." The stock has been exploding to the upside in recent years but is currently pulling back. Over the last four quarters, earnings and revenues have been increasing, which has pleased investors in the company. Relative to its peers and sector, Starbucks has been an average year-to-date performer. Look for Starbucks to continue to OUTPERFORM.

Natural Gas Is Still a Steal

Last week we held the monthly joint web chat for subscribers of The Energy Strategist (TES) and MLP Profits. The chat is conducted by Igor Greenwald, managing editor for TES and chief investment strategist for MLP Profits, and myself.

There was a large spike in interest in the latest chat, and we received a larger than normal number of questions. We place a priority on answering questions about portfolio holdings and recommendations during the chat, but are often asked about other companies in the energy sector. Sometimes we may get questions that require an extended answer, or there may just be so many questions we can’t get to them all. Below I will address three remaining energy sector questions from the chat. (For answers to some remaining MLP questions from the chat, see this week’s MLP Investing Insider.)

Q: The prospect of LNG exports and the trend to convert to NG from coal for electrical generation should put upward pressure on the price of NG. In what time frame do you see this happening?

Some of that is happening now. The price of natural gas has risen to $4.27 per thousand Btu (MMBtu), which is $1 more than it was this time last year, and more than double the price at which it bottomed in 2012. But if you look at the New York Mercantile Exchange (NYMEX) futures, traders are betting that gas will stay below $5/MMBtu for nearly a decade. At last Friday’s close, you had to go all the way to January 2022 to find a contract trading above $5. And contracts expiring five years from now are actually trading at a slight discount to today’s price.

I would be shocked to see US natural gas below $5 in five years. When Cheniere Energy’s (NYSE: LNG)  Sabine Pass Liquefaction Project comes online in 2016 — with competing export terminals close behind pending the addition of two trains to Cheniere’s Sabine Pass facility — I think gas will be priced significantly higher than it is today.

In addition to the five LNG export applications already approved by the DOE — which would represent 6.8 billion cubic feet per day (bcf/d) of natural gas exports — another 23 are under review. Approving all would give the US a total export capacity of 35 bcf/d (equivalent to more than half of the 65.7 bcf/d of US natural gas production in 2012).

Obviously, all of these projects won’t be completed. But the Energy Information Administration (EIA) attempted to quantify the effect of increased exports in a 2012 report. Under the scenarios it modeled, 12 billion cubic feet per day of natural gas exports would increase domestic natural gas prices by $1.58/thousand cubic feet (Mcf; there is roughly 1 MMBtu/Mcf) on the low end to $3.23/Mcf on the high end (36 to 54 percent from their baseline).

Bottom line, I see natural gas prices making a decent move upward over the next three to five years. Traders will begin to bid up contracts as the LNG export facilities move closer to beginning operations. The proposed EPA regulations that would effectively preclude new coal-fired power plants are just icing on the cake.

Q: Statoil has been active in making acquisitions and establishing international partnerships.  Do you think it is in the class of Total and Eni?

Over the past 12 months, domestic integrated oil companies like Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) are up 13 percent and 8 percent respectively, while Statoil (NYSE: STO) is down by 8 percent over the same period. Results were mixed for Statoil’s European peers, with Total (NYSE: TOT) up 11 percent and Eni (NYSE: E) down 6 percent.

But Statoil’s operations are indeed in the class of Total and Eni, and they compare favorably in most categories with these and other European integrated oil companies. Statoil is without question a world class integrated oil company. And if you do stock screens based on the Price to Earnings (P/E) Ratio or Enterprise Value/EBITDA, Statoil perpetually looks cheap relative to most peers. But there are some reasons for this.

Some Statoil performance indicators relative to competitors. Source: Statoil investor presentation.

The biggest thing working against Statoil is that two-thirds of the shares are owned by the Norwegian government. This differs from Eni (~30 percent government-owned) and Total (less than 10 percent government-owned). Statoil’s ownership situation is similar to that of Petrobras (NYSE: PBR). And Petrobras shareholders have learned the hard way what can happen when the government is forced to choose between voters who are unhappy with high fuel prices and the interests of the company. Petrobras was forced to sell fuel at a loss, which was great for Brazil’s citizens but not so good for Petrobras shareholders.

The other issue with Statoil is that the company pays taxes at a far higher rate than most competitors. When the company’s taxes are taken into account and the stocks are screened against net income, Statoil suddenly no longer looks so cheap. So Statoil’s discount to peers is really deceptive. You are probably better off buying a US-based competitor, but if you really want a European-based integrated oil company, you would probably be better off with Total.  

Q: Why did Atlantic Power come down so much? Is it a bargain now?  

We are frequently asked about Atlantic Power (TSX: ATP, NYSE: AT) during the monthly web chats, and our response is generally that we don’t cover the company in The Energy Strategist or in MLP Profits. As a Canadian independent power producer, Atlantic Power is covered by our sister publications Canadian Edge and Utility Forecaster.

Atlantic Power was a long-time favorite in the past, but the company’s fortunes soured over the past year. In February management cut its 2013 project-adjusted EBITDA guidance and the company’s dividend. The share price had already begun to fall, but it plummeted by more than 50 percent when the dividend was slashed by nearly two-thirds. Many who invested in Atlantic Power believing the dividend was secure were painfully reminded that sometimes dividends come with unacceptably high underlying risks.

The company did report solid third-quarter results, but during the conference call management left open the possibility of another dividend cut announcement in early 2014. The stock is now down 70 percent year-to-date, and is presently trading at a 34 percent discount to the $5.23 book value of the company. This will give some comfort to investors searching for a bargain, but I would guess many also felt this book value offered some protection as the share price declined to book value.

As an income investor, I wouldn’t go near this company. The future is still far too uncertain, and management has made decisions that seriously harmed dividend investors without providing adequate guidance that would have warned of impending problems. Very aggressive investors could profit from a short-term rebound at some point, but there have been false starts in the recent past. Shares rallied 25 percent in October, before proceeding to fall 40 percent. Buyer beware.

Next week I will address the remaining three or four energy sector questions.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

OWW – Book Orbitz Stock for Your Portfolio Today

Popular Posts: 3 ‘Best of the Best’ Stock Picks for 20143 Tobacco Stocks Lighting Up Dividend PayoutsYHOO – Yahoo Stock Has Room to Run Under Mayer’s Leadership Recent Posts: The Fed, the Froth, and the Future Of the Market OWW – Book Orbitz Stock for Your Portfolio Today 3 Bank Stocks Crushing Earnings View All Posts

Welcome to the Stock of the Day!

Travelers are getting ready to hit the roads and the skies for the upcoming holiday. If you haven’t booked your tickets, you may have to pay a hefty price. But are shares of Orbitz Worldwide (OWW) overpriced?

Let’s find out today.

Company Profile

Headquartered in Chicago, Orbitz Worldwide is best known for operating online travel booking website Orbitz.com. This website alone facilitates 1.5 million flight searches and one million hotel searches each day! On top of this, the company also operates online travel companies CheapTickets and ebookers in Europe.

The company’s next big push is to continue to go mobile. Buoyed by its success with its award-winning Orbitz iPhone app, the company recently launched the Orbitz Flights, Hotels, Cars app for the Apple (AAPL) iPad. The company also unveiled similar iPhone and iPad apps for its ebookers site.

Earnings Rundown

In its most-recent report, Orbitz Worldwide reported that revenues grew 11% to $220.9 million and that net income came in at $13.0 million. The company missed earnings estimates by 15% coming in 2 cents per share under expectations. Not a stellar report for the company.

Competition Breakdown

In the online travel booking business, three big names come to mind: Orbitz, Priceline.com (PCLN) and Expedia (EXPE). And when you run these three companies through Portfolio Grader, you see that bigger isn’t necessarily better.

PCLN, which commands nearly five times the market cap of EXPE and over forty times that of OWW, gets about the same grades as OWW and is a B rated buy And EXPE is currently rated a C (or hold) because of weak buying pressure.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. The stock has held steady in my screening tool over the past several months. But, as recently as last January, OWW was a D-rated sell. Back then, the main issue was anemic buying pressure, but institutional investors have since started to take notice of OWW. So this stock receives an A for its Quantitative Grade.

However, there is still work left to be done regarding Orbitz Worldwide’s balance sheet. Of the eight fundamental metrics I graded this stock on, just one metric—earnings momentum—received an A-rating. The company gets a B for sales growth, a C for operating margin growth and Ds or Fs for the remaining fundamentals. So overall, OWW receives a C for its Fundamental Grade.

Bottom Line: As of this posting, December 16, I consider OWW a B-rated (cautious) Buy. Shares are up slightly Monday, and with holiday travel reaching its peak, if you’re looking to buy I would nibble cautiously.

Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!

Rieder: A major bet on print journalism in LA

Aaron Kushner, whose enthusiastic commitment to investing heavily in print journalism in the digital age gives new meaning to the term "counterintuitive," is making his boldest bet yet.

The budding newspaper mogul, who got into the newspaper business in July 2012 when he acquired Freedom Communications and its flagship Orange County Register, says he's about to launch a new paper in Los Angeles.

Simply buying a newspaper at a time when print circulation and ad dollars are declining and executives are frantically struggling to plot a future in the digital world is an act of courage. Fresh from buying the Register, Kushner doubled down in November when he acquired the Press-Enterprise in Riverside, which like the Register is based in Southern California, from A.H. Belo Corp.

Challenging an existing paper on its home turf, even in much headier times, is a whole other level of audacious. Hardly anyone tries it, and virtually no one pulls it off. Yet Kushner showed his eagerness to do just that in August when he started up the Long Beach Register to challenge the Long Beach Press-Telegram in that Southern California city.

But that's child's play compared with starting up a paper in the nation's second-largest city, sprawling, complex L.A. And taking on the Los Angeles Times — which remains one of the nation's best dailies despite years of devastating budget cuts and the massive financial problems of its parent Tribune Co. — doesn't make things any easier. Not to mention the presence of MediaNews' Los Angeles News Group and its nine dailies.

Longtime newspaper analyst John Morton makes clear the enormity of the challenge Kushner is undertaking.

"The newspaper graveyard is full of start-ups that attempted to establish a competitor for an entrenched daily, especially in cases where the established daily is of reasonably high quality, like the Los Angeles Times," he says.

Morton says start-ups in competitive markets that have endured "usually have done so because the! ir owners have great financial resources and are willing to lose money indefinitely for reasons of ideology or some other compulsion; The Washington Times is an example."

In one rare instance, the insurgent Anchorage Daily News put the lackluster Anchorage Times out of business, but only after years of bleeding tens of millions of dollars.

Despite the grim history, the irrepressible Kushner downplays the immensity of his latest foray. He portrays it rather as a natural evolution of what he has done so far.

After buying the Register, Kushner opened up his wallet, adding an astonishing 200 journalists to the roster and significantly beefing up the size of the print paper. He says his papers are all about community building. And he believes that if you have a strong product, readers and advertisers will come.

While many legacy news outlets have cut back on their print offerings to concentrate on their digital operations, Kushner sees that as a mistake, given that the lion's share of revenue continues to come from the retro old print product.

The next step was launching the new paper in Long Beach, about 20 miles from the Register's home base in Santa Ana. And, significantly, located in Los Angeles County. Soon, all of Los Angeles County will targeted by the new Los Angeles Register.

"We're in growth mode," Kushner says. "We look forward to bringing our political perspective and model of community-building journalism to Los Angeles County." The Register's editorial page philosophy is all about free markets and personal freedoms and is well to the right of the Times'.

Kushner plays down the possibility that his ambitious plans could seriously overextend his empire.

"We have a very strong core in Orange County," the former greeting-card magnate says. "Building on that foundation is how you build a business."

The Register has a bit of a head start since it already covers the L.A. sports teams. But to wage a serious battle in a market as large and diverse a! s the Cit! y of Angels will require a substantial commitment of firepower. Asked how big a staff he anticipates, Kushner responds that the "logistics" remain to be worked out. The invasion force will be a mix of current staffers and new hires.

But one thing's for sure: A guy who has added 200 journalists to the staff of an existing newspaper is not addicted to small ball.

John Paton, the CEO of Digital First Media, which oversees the operations of the Long Beach Press-Telegram and the rest of the Los Angeles News Group, is an outspoken skeptic when it comes to Kushner's approach.

When I asked him what he thought about Project L.A., Paton responded via e-mail with pointed questions.

"What are the strategic and operating principles that make Mr, Kushner believe he can produce a product in Los Angeles County with more penetration than the Los Angeles Times and all of our dailies combined?" he asked. "Does Mr, Kushner think he can out-cover all of the very distinct communities that make up LA County better than the established and trusted players?"

He added dismissively, "If print first worked, everyone would be doing it."

And that's they key question: Will it work? Kushner's approach is so radically different than what pretty much everyone else is doing. It's refreshing, an exciting gamble. But does it make any sense?

Kushner's company is private, so he doesn't have to release a lot of financial specifics. And while he says "I like the trajectory," he concedes the paper isn't meeting the aggressive budget targets it set for itself. He recently told a town hall meeting that the revenue picture would be brighter in 2014 and the paper will become "permanently profitable."

The Register began charging for digital content in April. A spokesman says there's no word yet on whether a similar approach will be taken in Los Angeles.

As for how it will all play out, newspaper analyst Morton says Kushner has two big things going for him: "his enthusiasm and his deep pockets.! "

"! We'll have to wait and see," he adds, "how long the former lasts as the latter get shallower."

Insteel Industries Beats Analyst Estimates on EPS

Insteel Industries (Nasdaq: IIIN  ) reported earnings on April 18. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended March 30 (Q2), Insteel Industries missed estimates on revenues and beat expectations on earnings per share.

Compared to the prior-year quarter, revenue contracted. GAAP earnings per share grew significantly.

Margins grew across the board.

Revenue details
Insteel Industries recorded revenue of $82.9 million. The three analysts polled by S&P Capital IQ foresaw revenue of $87.7 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 $0.20. The three earnings estimates compiled by S&P Capital IQ averaged $0.12 per share. GAAP EPS of $0.20 for Q2 were much higher than the prior-year quarter's $0.01 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 13.3%, 700 basis points better than the prior-year quarter. Operating margin was 7.0%, 630 basis points better than the prior-year quarter. Net margin was 4.5%, 420 basis points better than the prior-year quarter. (Margins calculated in GAAP terms.)

Looking ahead
Next quarter's average estimate for revenue is $99.8 million. On the bottom line, the average EPS estimate is $0.23.

Next year's average estimate for revenue is $376.3 million. The average EPS estimate is $0.73.

Investor sentiment
The stock has a three-star rating (out of five) at Motley Fool CAPS, with 217 members out of 234 rating the stock outperform, and 17 members rating it underperform. Among 65 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 56 give Insteel Industries 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 Insteel Industries is outperform, with an average price target of $20.00.

Looking for alternatives to Insteel Industries? 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 Insteel Industries to My Watchlist.

The Market Noise Is Just That: Noise

If you keep track of the markets during the average day, it is hard not to get sucked into the vortex of noise.

The media and pundits seem at times to act almost as shills and casino hosts encouraging players to pick up the action and move the money around looking for a win. The constant discussion of short term events that have little to no bearing on the long term goals and objectives can knock the most disciplined investor off their game.

The only two things that really matter to an asset based value investor are price in relation to value and margin of safety.

Nothing else not matter how worked up the talking heads may be at various times of the trading day.

Some of the things that are seriously pondered and considered during the day border on the ridiculous. Right now the talk of the day every day focuses on taper. Traders and money managers wax eloquent and the timing and pace of the Feds winding down of their bond buying program.

See also: Give The Gift Of Value This Holiday Season

The market is addicted to Quantitative Easing programs and the program has been considered by many to be the driving force behind this years market rally. It seems everyone has an opinion and shockingly they seem to be willing to bet real money on the timing and the outcome of the taper.

We know the Fed is going to have to taper their purchases.

This cannot go on forever and they have telegraphed their intentions to do so sooner rather than later. It might start next week, or next month or sometime after Janet Yellen takes control. No one outside of the Federal Reserve Building knows exactly when and confident predictions of timing border on the ludicrous. Even more importantly is that no one knows how the market will react to the announcement.

The consensus is that taper will cause interest rates to rise and stocks to fall. A lot of people are betting that this is the case and we saw some big outflow for both equity and bond funds in the past few weeks as a ! result of taper fears.

Of course the consensus was that stocks would fall during the budget related government shutdown but it never happened.

The consensus was that the President getting reelected would trigger selling in the markets but it never happened. I am hard pressed to think of a time when the consensus was correct about how the market would react to an event.

Whatever happens when the Fed announces they will slow bond purchases the correct strategy for long term investors is to react what the markets does, not bet on what it might do. If we get a huge sell off in stocks that creates additional inventory of cheap stocks with an adequate margin of safety then we should be buyers. If we see a big consensus killing rally and issues we hold rise to a level above their full value as a business we should sell our shares. If we just muddle along and there is no sustained meaningful reaction we should go read a book and ignore the short term noise.

The other huge source of noise at this particular moment in time are the 2014 predictions.

Strategists and gurus are on TV confidently predicting what the stock market, economy and interest rates might do in the year ahead. They make very precise estimates of what the S&P 500 companies will earn and then assign and exact multiple on that number based on their forecasts for economic conditions and interest rates. Anyone who takes these forecasts seriously and invests their money based on the ridiculous forecasts is something of a fool and deserves to lose their money. None of that is knowable in advance and is simply a guess dressed up in pretty clothes.

See also: What's The Hardest Part About Learning To Invest?

Looking at the markets as a long term value investor here is the only prediction that matters At various points in time markets will get panicked by some event, be it political or economic in nature, that causes sustained selling and a large number of bargains will be created.

You will be able to buy a ! lot compa! nies for less than their asset value with a huge margin of safety.

When this happens you should be a buyer of shares. At other times the market will get overly excited for a period of time and stocks will sell well above any rational valuation of the underlying business. When that happens, you should be a seller of stocks. Sometimes the markets will not really do much of anything at all and at those times you should hold safe and cheap stocks and also not really do much of anything at all.

There are only two questions that matter to an asset based value investor. Is it cheap? Is it safe? Everything else is just noise.

Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpeculation.Com as well as several print publication including Active Trader and the Wall Street Digest. Learn which 3 low risk, high yield stocks Tim owns for the trade of the decade.

Top 10 Blue Chip Companies To Watch In Right Now

About the author:Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpecualtion.Com as well as several print publication including Active Trader and the Wall Street Digest. Click to watch Tim Melvin's FREE webinar and learn how to break through volatility using his value stock strategy:

Visit Tim Melvin's Website

Currently 3.40/512345 Rating: 3.4/5 (5 votes)

Subscribe via Email Subscribe RSS Comments Please leave your comment:
More GuruFocus Links

Latest Guru Picks	Value Strategies
Warren Buffett Portfolio	Ben Graham Net-Net
Real Time Picks	Buffett-Munger Screener
Aggregated Portfolio	Undervalued Predictable
ETFs, Options	Low P/S Companies
Insider Trends	10-Year Financials
52-Week Lows	Interactive Charts
Model Portfolios	DCF Calculator
RSS Feed	Monthly Newsletters
The All-In-One Screener	Portfolio Tracking Tool

MORE GURUFOCUS LINKS

Latest Guru Picks	Value Strategies
Warren Buffett Portfolio	Ben Graham Net-Net
Real Time Picks	Buffett-Munger Screener
Aggregated Portfolio	Undervalued Predictable
ETFs, Options	Low P/S Companies
Insider Trends	10-Year Financials
52-Week Lows	Interactive Charts
Model Portfolios	DCF Calculator
RSS Feed	Monthly Newsletters
The All-In-One Screener	Portfolio Tracking Tool

SPY STOCK PRICE CHART 178.11 (1y: +24%) $(function() { var seriesOptions = [], yAxisOptions = [], name = 'SPY', display = ''; Highcharts.setOptions({ global: { useUTC: true } }); var d = new Date(); $current_day = d.getDay(); if ($current_day == 5 || $current_day == 0 || $current_day == 6){ day = 4; } else{ day = 7; } seriesOptions[0] = { id : name, animation:false, color: '#4572A7', lineWidth: 1, name : name.toUpperCase() + ' stock price', threshold : null, data : [[1355724000000,143.77],[1355810400000,145.37],[1355896800000,144.29],[1355983200000,145.12],[1356069600000,142.79],[1356328800000,142.35],[1356501600000,141.75],[1356588000000,141.56],[1356674400000,140.03],[1356933600000,142.41],[1357106400000,146.06],[1357192800000,145.73],[1357279200000,146.37],[1357538400000,145.97],[1357624800000,145.55],[1357711200000,145.92],[1357797600000,147.08],[1357884000000,147.07],[1358143200000,146.97],[1358229600000,147.07],[1358316000000,147.05],[1358402400000,148],[1358488800000,148.33],[1358834400000,149.13],[1358920800000,149.37],[1359007200000,149.41],[1359093600000,150.25],[1359352800000,150.07],[1359439200000,150.66],[1359525600000,150.07],[1359612000000,149.7],[1359698400000,151.24],[1359957600000,149.53],[1360044000000,151.05],[1360130400000,151.16],[1360216800000,150.96],[1360303200000,151.8],[1360562400000,151.77],[1360648800000,152.02],[1360735200000,152.15],[1360821600000,152.29],[1360908000000,152.11],[1361253600000,153.25],[1361340000000,151.34],[1361426400000,150.42],[1361512800000,151.89],[1361772000000,149],[1361858400000,150.02],[1361944800000,151.91],[1362031200000,151.61],[1362117600000,152.11],[1362376800000,152.92],[1362463200000,154.29],[1362549600000,154.5],[1362636000000,154.78],[1362722400000,155.44],[1362978000000,156.03],[1363064400000,155.68],[1363150800000,155.91],[1363237200000,156.73],[1363323600000,155.83],[1363582800000,154.97],[1363669200000,154.61],[1363755600000,155.69],[1363842000000,154.36],[1363928400000,155.6],[1364187600000,154.95],[1364274000000,156.19],[1364360400000,156.19],[1364446800000,156.67],[1364533200000,156.67],[1364792400000,156.05],[1364878800000,156.82],[1364965200000,155.23],[13

A culture clash when Silicon Valley invades San…

SAN FRANCISCO — The culture clash between Silicon Valley and the City by the Bay spilled over from the streets of San Francisco and onto the Web this week, and the results in both cases weren't pretty.

They were, however, quite dramatic.

Last week came the sight of a commuter bus filled with Google employees being blocked by a group of anti-eviction protesters in the city's Mission District.

Onto that scene came a fake Google employee pretending to heckle the real protesters — until he was exposed as a real union organizer and activist from Oakland, across the bay.

Two days later came a real start-up executive whose social-media rant about "the lower part of society" along Market Street here was uglier than any real taunt the fake Googler could come up with.

The fracas might seem absurd if the problem underlying it weren't so serious.

Namely, how to maintain the peace when high-paying tech jobs move into a part of town previously populated mostly by drug dealers, panhandlers, street crime and homelessness.

The incidents gave the industry here such a black eye that San Francisco Mayor Ed Lee on Thursday urged tech companies to step up their charitable and philanthropic efforts.

The influx of new tech start-ups into the city during the past few years has driven median monthly rents to $3,400, according to San Francisco's budget analyst.

The strong demand for high-priced housing is prompting landlords to turn out longtime residents in large numbers using the Ellis Act, a 1986 state law that allows such evictions if apartments are converted into condominiums.

The annual number of evictions in San Francisco soared to more than 1,700 for the 12 months ending in March, says the local chapter of the National Lawyers Guild.

That's the most since 2001, just around the time the dot-com boom was ending.

Half of those evicted have incomes at or below the federal poverty level, according to figures shared by city budget analyst Fred Brousseau! at a public hearing last month.

The sight of having the city's poorest residents thrown out into the street to make way for nouveau-riche tech millionaires has become a hot-button political issue.

Last month, the Board of Supervisors voted to push state lawmakers in Sacramento for changes in the Ellis Act and, if necessary, draft local laws that would make such evictions far more costly for landlords.

Still, it wasn't long before anti-eviction protesters took matters into their own hands by blocking the Google bus before it could head south to Mountain View, Calif.

Into that scene stepped Max Bell Alper, who was first reported to be a Google employee heckling the protesters but was later identified as a union organizer.

Before he was outed, Alper went on a fake rant — which he later called "street theater" — saying, "I can pay my rent. Can you pay your rent? This is a city for the right people who could afford it."

As elitist as that sounds, it was topped on Wednesday by Greg Gopman, founder and CEO of AngelHack, who, on his Facebook feed, described Market Street as "grotesque" and "overrun by crazy, homeless, drug dealers, dropouts and trash."

Perphaps Gopman, whose LinkedIn profile says he was "born and raised in Florida," should read the column I wrote last month predicting that new wealth from Twitter's IPO would likely bring big changes to that very section of Market Street.

But that will take time, so it may behoove him and other tech workers who have recently arrived in the city to have a bit more patience with those who have been here longer.

Patience may also prove useful for those on the other side of the debate.

The history of San Francisco suggests that the new social-media boom, like previous booms built from gold, silver, railroads, World War II and dot-com companies, will someday end.

Hot Biotech Stocks To Watch For 2014

How m! uch more ! comfortable the city's streets will be for people such as Gopman or Alper will likely depend on how long that takes.

John Shinal has covered tech and financial markets for 15 years at Bloomberg, BusinessWeek, the San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others.