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INVESTING COMMENTARY

Don't Sell That Stock!

By Selena Maranjian
July 2, 2009

One of the most challenging moments in investing is deciding when to sell stocks out of your portfolio. But did you know that you're probably selling stocks without even realizing it?

When not buying is selling
At last year's annual meeting, Chris Davis, manager of the Clipper Fund (CFIMX), argued that mutual funds essentially sell some of their holdings in a company when they choose not to buy more, and instead add a different holding to the portfolio.

He used Warren Buffett's Berkshire Hathaway as an example, saying, "Every year that they didn't buy Coca-Cola , they sold Coca-Cola. Coke became a smaller percentage of their assets as new money came in and didn't go into Coke."

In other words, as new money comes in and is allocated to new positions, old positions have a smaller and smaller share of the investment pie. So the influence an old position can have on returns gets smaller and smaller, just as if some of that position had been sold.

If you've ever added new money to your portfolio by buying new holdings, the same thing has happened to you.

The big picture
Although we tend to talk about stocks one by one, how they're combined in your portfolio is an important part of investing. It's not enough to just add stocks to your portfolio whenever you run across compelling ones -- you should also be taking into account other factors, such as your overall diversification and the size of various stakes.

Fail to pay attention to the overall makeup of your portfolio, and you might end up with a large chunk of your portfolio in, say, oil-related companies, or pharmaceutical firms -- and if something happens in the industry (imagine the price of oil plunging, for example, or unwelcome health-care reforms), they could all take a big hit together.

But you don't want your portfolio to get too big, either. If you've added so many companies that each one makes up just 1% or 2% of your portfolio, a big home run from one stock isn't likely to make a huge difference to your bottom line.

That's why, as Chris Davis suggested, adding more money and companies to your portfolio, and therefore shrinking the power of your existing holdings, matters.

Perfect your portfolio
Instead of distributing your dollars between the stock that seems most promising, the 56th most promising stock, and all the stocks in between, you want to concentrate your investments on your very best ideas -- even when you add money.

Advisors often recommend holding between eight and 12 (sometimes as many as 20) companies in your portfolio. And that means making sure that every investment in your portfolio really is one of your very best ideas.

What constitutes a very best idea? For my part, it means stocks with strong prospects and strong growth. For example, here are some companies that popped up when I screened at Motley Fool CAPS for large-cap companies rated four or five stars (out of five), with revenue and earnings growth rates of at least 10%, and returns on equity (ROE) of at least 15%:

Company

CAPS Stars
(out of 5)

3-Year Rev. Growth Rate

3-Year Earnings Growth Rate

ROE

Abbott Labs (NYSE: ABT)

****

10%

23%

30%

Transocean

*****

56%

69%

24%

Garmin (Nasdaq: GRMN)

****

39%

24%

28%

Fluor (NYSE: FLR)

*****

17%

40%

29%

Vale S.A. (Nasdaq: VALE)

*****

41%

42%

26%

Sohu.com (Nasdaq: SOHU)

****

52%

75%

42%

U.S.Steel (NYSE: X)

****

16%

29%

33%

Intuitive Surgical (Nasdaq: ISRG)

****

45%

29%

16%

Source: Motley Fool CAPS.

The Foolish bottom line
You should always be putting your money into your very best ideas -- and if a new idea supersedes an old one, selling a less-good idea to put that money in the very best idea is the right move. But whatever you do, don't sell your stocks without knowing it.

If you'd rather not hunt for promising companies on your own, let us help you. I invite you to check out our Motley Fool Inside Value newsletter, which seeks out undervalued companies to hold for the long term. A free, no-obligation trial will give you full access to all past issues and all recommended stocks. Just click here to get started -- there's no obligation to subscribe.

Already subscribe to Inside Value? Log in here.

This article was originally published on June 1, 2009. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway, Intuitive Surgical, and Coca-Cola. Intuitive Surgical and Sohu.com are Motley Fool Rule Breakers picks. Berkshire Hathaway is a Stock Advisor selection. Berkshire Hathaway and Coca-Cola are Inside Value recommendations. Coca-Cola is an Income Investor recommendation. Garmin is a Global Gains pick. The Fool owns shares of Berkshire Hathaway. The Motley Fool is Fools writing for Fools.

3 Investing Tips You Need Right Now

By Matt Koppenheffer
July 2, 2009

Investing in stocks is simple, but far from easy.

Conceptually, most people intuitively understand investing -- you exchange your money today for a piece of a company that will hopefully earn you more money over the years to come. And thanks to discount brokers like TradeStation (Nasdaq: TRAD) and larger firms like Bank of America (NYSE: BAC), the execution is easier than it's ever been.

But actually doing it "right" and being successful over the long term, well, that can be another story completely. Some folks -- such as Vanguard's John Bogle -- think that most investors are better off skipping individual stocks altogether and opting for a low-cost index fund.

Meanwhile, we get quips from Berkshire Hathaway 's Warren Buffett like "be fearful when others are greedy and be greedy when others are fearful" and opposing thoughts like "the trend is your friend" from trader-types. Enter the head-scratching.

Having a solid grounding is always a must for anyone who wants to be a successful investor, but with today's markets crazier than a shouting match between John Malkovich and Gary Busey, it's more important than ever. So whether you're a newbie to investing or a seasoned vet, here are three tips to help you make sure you're investing Foolishly and not just foolishly.

1. Know thyself, Fool!
There are few easier ways to land yourself in an investing pickle than to not have a good idea of where you stand when it comes to putting money into the market. This is particularly important because there isn't one right way to succeed -- Buffett, George Soros, and James Simons have all been tremendously successful, but each has had a very different approach.

How do you approach the market? Are you more of a speculator who's looking to capture the movements -- often short term -- of a stock's price? Or are you more of an investor, looking at the nuts and bolts of the underlying business and hoping to profit from its prosperity?

Forget the connotations of the words "investor" and "speculator" for a moment and honestly figure out how you approach your picks. You may well be on the right track by plunking down money for shares of EMC (NYSE: EMC) because of the potential growth from cloud computing, or picking up some UnitedHealth Group (NYSE: UNH) because you think it will benefit from health-care reform.

However, you don't want to shoot yourself in the foot by looking at those investments with the eyes of a speculator and selling just because the stock price has moved against you.

2. If everyone else jumped off a cliff ...
I think most of us are familiar with this fantastic bit of motherly logic. The idea is that just because everyone else is doing something that appears to be misguided, doesn't mean that we have to follow along. This is particularly true of investing, where the focus on short-term results often causes investors to act like a herd of crazed lemmings.

One of the best examples of this that I can think of is the heat that Buffett took back in the late '90s for not jumping on the tech bandwagon. While most investors out there -- institutional and retail alike -- were raking in gains by betting on stocks like Yahoo! (Nasdaq: YHOO) and Qualcomm (Nasdaq: QCOM), Buffett hung onto "boring" long-term holdings like Nike (NYSE: NKE) and listened to investing rookies say that his style was a relic. At this point I think we all know how it worked out for the folks that went crazy over tech stocks.

Keeping a sober, independent view when it comes to the stock market can be one of the hardest things to do, but it can often help you avoid the cliff that the rest of the lemmings are preparing to march off of.

3. Tips are for waiters
When I started writing for The Motley Fool, I figured I would forever be running into people who would want stock tips from me. In fact, it's been quite the opposite -- most of the folks who want to talk stocks have tips for me!

Of course, it's after hearing many of these tips -- which often amount to something like "my uncle thinks XYZ is poised to break out!" -- that I realized the wisdom of Jesse Livermore's supposed admonition that tips are for waiters.

Watching Jim Cramer scream out a boatload of tickers or jawing about stocks with friends can be fun, but when it comes to actually plunking down hard-earned money to buy stock, be sure to have your own thinking behind the purchase. A good way to do this is to write down the reasons for your investment. This doesn't have to be a doctoral dissertation, but it ensures that you're going on more than "Bob at the gym said it was a sure thing."

Putting it to practice
Every investment you make -- or decide not to make -- is more practice under your belt. Just like anything else, the more practice you get, the better you get -- provided, of course, that it's good practice.

Making sure that these three items are baked into your decision-making can help you get the most out of your investments and become a better investor. To recap, what we're looking for is:

You can certainly take off now and put these ideas to work on your own, but sometimes bringing the right coach into the equation can help you progress even faster. The advisors at the Motley Fool Hidden Gems newsletter are all seasoned investors that I see putting these ideas to practice all the time.

With a subscription to Hidden Gems, you not only get stock recommendations from these stock market vets, but you get their thought process and philosophy on investing. And you can check out exactly what I'm talking about by taking a free 30-day trial of the newsletter.

Already subscribe to Hidden Gems? Log in here.

This article was originally published on April 29, 2009. It has been updated.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway and Bank of America. Berkshire Hathaway and UnitedHealth Group are Motley Fool Stock Advisor recommendations. Berkshire Hathaway and UnitedHealth Group are Inside Value picks. The Fool owns shares of Berkshire Hathaway and UnitedHealth Group. The Fool's disclosure policy loved that computer game about lemmings; whatever happened to that?

Stocks as Good as Gold

By Dave Mock
July 2, 2009

At the very mention of gold, images of value, stability, and growth pop into my head.

It's not hard to understand why. For decades, the precious metal has been marketed as an attractive investment and a great way to hedge inflation, recession, and almost every other economic bogeyman.

In spite of gold's allure in volatile times such as these, the true long-term performance of gold lags stocks by a significant margin. But investors don't need to give up the shiny lure of stability to earn better returns in stocks. Some stocks out there are as good as gold -- and many are even better.

Chasing shiny trinkets
As a new investor, I was drawn to growth. This led me to buy -- or seriously consider buying -- shares in tech darlings such as Ericsson in the 1990s or Palm (Nasdaq: PALM) at its IPO in 2000. But while these stocks were shinier than gold for a while, the luster wore off after the bubble burst in 2000. Each stock shed more than 80% of its value in the ensuing years.

Ericsson and Palm weren't necessarily poor businesses -- though Palm started to show its competitive weakness soon after its debut. But the fundamental conditions just didn't support their stratospheric share prices at the time. I would have been far better off had I understood what demented guru Jeremy Siegel pointed out in his book, The Future for Investors: Regular investments in stable, dividend-paying stocks are ultimately the best place for long-term cash.

You can have it all
Dividend payments to shareholders are a significant stabilizing factor in a stock's return. They help smooth out the ups and downs of the market over time, and they indicate that the company is generating cash. Just like gold, steady dividends protect investors from bear markets. But even better than gold, dividends also help boost returns.

For instance, look at the long-haul performance of these dividend-paying stocks:

Company

15-Year Performance

Merck (NYSE: MRK)

206%

Energy Transfer Partners* (NYSE: ETP)

1,268%

Valero Energy (NYSE: VLO)

1,464%

Avon Products (NYSE: AVP)

449%

Manulife Financial ** (NYSE: MFC)

261%

Chevron (NYSE: CVX)

412%

S&P 500

106%

Gold

143%

*Return since 1997. **Return since 1999.

Now, lest I be accused of cherry-picking these examples, consider this: The Vanguard Windsor II (VWNFX) fund, our proxy for stocks with above-average yields, returned a market-beating 200% over the trailing 15 years.

Each company above had a long operating history in a relatively stable sector, providing investors a defensive edge with low long-term risk. Even with the dramatic increase in the price of gold in the past few years -- and the pummeling of stocks across the board -- the table above shows that dividend-paying stocks leave gold in the dust over extended time frames. And the difference is even more dramatic as you look at longer time frames.

Consistent dividend payments to shareholders, even during the sort of economic tough times we're enduring today, have made many of these companies long-term winners. This cash yield helps boost shareholder returns in the company, because more shares are purchased when the stock is depressed. One crucial point, though: To realize the full benefits these stocks provide, investors must reinvest the dividends.

Regain your luster
Dividend-paying stocks give investors the ability to survive years of market turmoil, and through reinvesting, to make more money along the way. That's about the best hedge imaginable against economic bogeymen.

With many solid stocks being beaten down with the market, the Motley Fool Income Investor service is awash with great stock ideas. The average active recommendation is beating the S&P by more than five percentage points, while offering more than a 5% yield. Before you cash out your portfolio and stuff it all into gold, click here for a free 30-day trial of the service. There's nothing to lose. I'm betting you'll take a shine to at least a few high-yielding recommendations.

Already subscribe to Income Investor? Log in at the top of this page.

This article was originally published on July 18, 2007. It has been updated.

Fool contributor Dave Mock still has a soft spot for gold, but satisfies it with dividend stocks. The longtime Fool owns no shares of companies mentioned here. Vanguard Windsor II is a Champion Funds pick. The Motley Fool's disclosure policy is pure 24-karat, through and through.

5-Star Stocks Poised to Pop: VASCO

By Brian D. Pacampara
July 2, 2009

Based on the aggregated intelligence of 135,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, security software specialist VASCO Data Security International (Nasdaq: VDSI) has earned a coveted five-star ranking.

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

VASCO facts

Headquarters (founded)

Terrace, Ill. (1996)

Market Cap

$280.03 million

Industry

Security software and services

Trailing-12-Month Revenue

$127.2 million

Management

CEO Kendall Hunt (since 2002)
COO Jan Valcke (since 2002)

Compound Annual Revenue and Net Income Growth (over last five years)

39.9% and 51.6%

Competitors

ActivIdentity (Nasdaq: ACTI)
Entrust

CAPS Members Bullish on VDSI Also Bullish on

Apple (Nasdaq: AAPL)
General Electric (NYSE: GE)
Cemex (NYSE: CX)

CAPS Members Bearish on VDSI Also Bearish on

Ford (NYSE: F)
First Marblehead (NYSE: FMD)

Sources: Capital IQ (a division of Standard & Poor's), and Motley Fool CAPS.

Over on CAPS, 658 of the 665 members who have rated VASCO -- or 99% -- believe the stock will outperform the S&P 500 going forward. These bulls include tmarkjones and Babachrono, both of whom are ranked in the top 20% of our community.

Just yesterday, tmarkjones reminded our community that VASCO "is a growth company in a market that will soon be growing again." Our CAPS All-Star concludes: "We're on the backend of the banking crisis and [VASCO] is well positioned to take advantage of the resumption of economic growth in 2010."

In a pitch from last month, Babachrono helped Fools feel even more secure:

25% insider and only 38% institutional ownership. No LT debt and a huge cash reserve, paid off a large chunk of payables and still have over $50M cash on hand is 1/6 of their market cap. They have good products and total security solutions from software/programs to the servers that they all run on. Many companies have been cutting spending, and I feel several will find their decision to cut in security will bit them and force them to come running to [VASCO] as the economy turns and they find themselves in need up updates and making cash again.

What do you think about VASCO, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 135,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

Will Activision Kill Sony?

By Anders Bylund (TMF Zahrim)
July 2, 2009

The Sony (NYSE: SNE) PlayStation 3 is starting to look shaky in an otherwise brilliant video game market. I'm not sure the console will survive another year.

Despite being the most impressive technical specimen on the market, with unique Blu-Ray playback features and custom-built IBM (NYSE: IBM) chips that also can power supercomputers, the PS3 has failed to impress a nitpicky gaming market. Microsoft 's (Nasdaq: MSFT) Xbox 360 and the Nintendo (OTC BB: NTDOY.PK) Wii keep running circles around the PS3, saleswise. The system's unique hardware also makes it harder and more expensive for game designers to bring their wares to the PS3.

The PS3 was always meant to last for a very long time. It took about five years for Sony to start making a profit from the PlayStation 2, and the PS3 was supposed to follow the same path as a media-center powerhouse with gaming roots. Three years into the system's life cycle, Sony's gaming division is still bleeding cash every quarter. And now the industry itself is starting to lose patience with Sony.

"Games generate a better return on invested capital on the Xbox than on the PlayStation," says Activision Blizzard (Nasdaq: ATVI) CEO Bobby Kotick. "They have to cut the price, because if they don't, the attach rates [of game sales for the PS3] are likely to slow. If we are being realistic, we might have to stop supporting Sony."

Ouch. Kotick is wielding a big stick, because Activision has leapfrogged Electronic Arts (Nasdaq: ERTS) to become the biggest video game producer in the world. And he ain't speaking softly to Sony.

Reports of new upgrades to the PS3 ecosystem are coming in, but they seem to indicate the wrong kind of changes. The systems are getting bigger and stronger, but not necessarily cheaper. Sony couldn't have predicted the global economic downturn any more than you, I, or the competition -- but the company sure could have handled it better.

Unless the PS3 finds some way to entice more consumers to pay up for its classy but expensive wares, Kotick might take Guitar Hero, Tony Hawk, Call Of Duty, and a host of other crowd-pleasing franchises -- and go home. And if the biggest producer can't afford to make PS3 titles, the smaller players could soon follow suit. By the time Take-Two Interactive (Nasdaq: TTWO) announces an Xbox-only Grand Theft Auto title, it'll be too late.

The time to act is now, Sony. Give me cheaper systems or give me death. For your sake, I hope that the rumors of a less expensive PS3 Slim model are correct.

Game on, Fool:

Sony Phones In a Strategy 5-Star Stocks Begging to Be Bought The One Industry You Must Own

5-Star Stocks Poised to Pop: Waste Management

By Brian D. Pacampara
July 2, 2009

Based on the aggregated intelligence of 135,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, Waste Management (NYSE: WMI), the nation's top trash hauler, has earned a coveted five-star ranking.

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

Waste Management facts

Headquarters (founded)

Houston, Texas (1894)

Market Cap

$13.79 billion

Industry

Environmental and facilities services

Trailing-12-Month Revenue

$12.93 billion

Management

CEO David Steiner (since 2004)
CFO Robert Simpson (since 2004)

Return on Equity (average, last three years)

19.4%

Dividend Yield

4.1%

Competitors

Republic Services (NYSE: RSG)
Casella Waste Systems

CAPS members bullish on WMI also bullish on:

General Electric (NYSE: GE)
Johnson & Johnson (NYSE: JNJ)
Apple (Nasdaq: AAPL)

CAPS members bearish on WMI also bearish on:

Starbucks (Nasdaq: SBUX)
Lennar (NYSE: LEN)

Sources: Capital IQ (a division of Standard & Poor's), and Motley Fool CAPS.

Over on CAPS, 454 of the 465 All-Star members who have rated Waste Management -- some 98% -- believe the stock will outperform the S&P 500 going forward. These bulls include freestate80 and dhd1491, both of whom are ranked in the top 10% of our community.

Just last month, freestate80 urged Fools not to waste the opportunity: "Trash. Not the sexiest of industries. Plenty of trash and will continue to be so. Sells methane gas from its landfills. Looking for expansion opportunities. Shareholder friendly management."

In a pitch from one month earlier, dhd1491 taps the stock as a dirty way to make some income, to boot:

Trash will be with us always; so [Waste Management's] revenue stream is inherently safe, forever.

The business is capital-intensive, which is a double-edged sword, of course. It provides a barrier to entry (good) but incremental growth is expensive (bad). In this type of business, you want economies of scale on your side, which [Waste Management] has in spades.

Due to the severe recession we're in, landfill volumes are off in a huge way, YOY, yet [Waste Management] is still solidly profitable. … The upside, of course, is that when the economy improves, so will [Waste Management's] business. Meanwhile, you can bank those dividend checks with no fear of a cut.

In my portfolio, [Waste Management] is one of a handful of cash cows that relentlessly spit out dividends that I can re-invest. A rock-solid core holding.

What do you think about Waste Management, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 135,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

Dangerously Delaying the Inevitable

By Morgan Housel
July 2, 2009

The Obama administration relaxed the requirements for government-backed mortgage modifications yesterday. The program, a $75 billion assistance plan announced earlier this year, originally allowed homeowners with loan-to-value ratios up to 105% qualify for refinancing, provided the loan is backed by Fannie Mae (NYSE: FNM) or Freddie Mac (NYSE: FRE). That limit has now been upped to 125%.

The rationale here is simple: As home prices keep nosediving, more and more homeowners are grossly underwater (they owe more than their home is worth). The original mortgage modification program was failing to help as many people as Washington wanted.

And focusing on housing makes sense from a recovery standpoint. This mess started in housing, and it'll surely end there. The root pain of everyone from Citigroup (NYSE: C) to Best Buy (NYSE: BBY) to Home Depot (NYSE: HD) is all linked back to housing in one way or another. As Warren Buffett recently noted, fix housing and "the world will change in a big way."

But -- and this is a very significant but -- past evidence of the effectiveness of mortgage modifications is really, really atrocious. A recent report by the Office of Thrift Supervision and the Comptroller of the Currency detailing the amount of redefaults, or troubled loans that find their way back into default after modification, shows just what I'm talkin' about.

Of the modified loans 30 or more days delinquent, here's what it found:

Modification Date (2008)

Three Months After Modification

Six Months After Modification

Nine Months After Modification

12 Months After Modification

40.4%

53.0%

59.9%

63.3%

46.6%

58.8%

61.1%

50.4%

59.5%

45.9%

Source: Comptroller of the Currency, Office of Thrift Supervision, June 2009.

One year out, over 60% of modified mortgages end up where they started … in default. What's really amazing is how quickly things reverted: Just 90 days after modification, almost half of mortgages were back in default. That's utterly pathetic.

Rising joblessness is the most obvious answer to why so many modifications fail. But that alone hardly accounts for the ungodly redefault rate. When unemployment goes up a few percentage points while redefaults hit 60%, something else is surely at play.

And it is
One of the big factors fueling redefaults is just what the Obama administration seems to be pooh-poohing: underwater homeowners.

When your house is worth less than your mortgage, there's a huge incentive to give up and walk away even if you can make your monthly payments. The logic here is simple: The beauty of homeownership is based on a saying that goes something like "with every mortgage payment, you'll own a little bit more of your house." But when you're underwater, the only thing you "own" is the liability. Monthly payments decrease your debt, but you still don't own one inch of the house. The bank does.

Taking away this fundamental sense of ownership zaps the incentive to keep making payments. The sensible thing to do, many find, is to stop paying and walk away. This is suicide on your credit rating and a nightmare for housing-heavy banks like Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC), but the pros often outweigh the cons. When the job market is this tight, becoming mobile again is worth its weight in gold.

When it comes down to it, high monthly payments aren't what are pushing many homeowners into default. It's the fact that their mortgage balances are so high that it doesn't make sense to keep making payments.

Moving on
Now back to our Office of Thrift Supervision report. In the first quarter, a scant 1.8% of modifications actually reduced mortgage principal -- the kind of alteration that entices underwater homeowners to keep making payments. Most were interest rate reductions, or capitalizations of missed payments and fees. The latter is literally just taking debt you owed yesterday and tacking it on to what you'll owe tomorrow. Sober people think this is an effective way to solve an excessive debt problem. Honestly.

And that's why the redefault rate is so high: Underwater homeowners are still highly incentivized to default, even with reduced monthly payments. And as home prices fall, their ranks are growing by the day. Modifications in their current form are, more often than not, just delaying the inevitable.

This all loops back to a painful reality: The only way to climb out of the housing mess is to let prices find a true bottom. Ultimately, that means those who bought homes they could never afford will have to bite the bullet and move on. There's really no way around that.

For related Foolishness:

Here's How Messed Up Our Financial System Is Homeowners Hit the Lottery Why It Could Take Years to Recover

4-Star Stocks Poised to Pop: Eaton

By Brian D. Pacampara
July 2, 2009

Based on the aggregated intelligence of 135,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, industrial parts provider Eaton (NYSE: ETN) has earned a respected four-star ranking.

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

Eaton facts

Headquarters (founded)

Cleveland (1916)

Market Cap

$7.5 billion

Industry

Industrial Machinery

TTM Revenue

$14.7 billion

Management

Chairman/CEO Alexander Cutler (since 2000)

CFO Richard Fearon (since 2002)

Return on Equity (average, last three years)

18.4%

Dividend Yield

4.5%

Competitors

Emerson Electric (NYSE: EMR)

General Electric (NYSE: GE)

CAPS members bullish on ETN also bullish on

Johnson & Johnson (NYSE: JNJ)

Apple (Nasdaq: AAPL)

CAPS members bearish on ETN also bearish on

Caterpillar (NYSE: CAT)

Chesapeake Energy (NYSE: CHK)

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS. TTM = trailing 12 months.

Over on CAPS, fully 717 of the 735 members who have rated Eaton -- some 98% -- believe the stock will outperform the S&P 500 going forward. These bulls include mtinvest and bubbasuth.

Two months ago, mtinvest followed the lead of two leaders and looked into the stock:

Buffett and Obama like Eaton. Currently their electrical business unit is generating almost half of their revenue. But their automotive and truck business units could grow very fast in the future. Their plug-in hybrid electric utility truck will be very interesting to follow in the future.

In a pitch from one week later, bubbasuth elaborates on the electric opportunity:

A primary focus for all power electronics (i.e. motors used in fluid, motion, HVAC, etc.) is efficiency. Eaton has an ongoing positive presence in this field and will see expansion of demand under the Obama administration.

Vertical integration allows for higher margin operations, as well, and Eaton has a high profile in these complex systems. Again, for high efficiency systems, the market will tend to grow and ASPs will remain high because the alternative is low efficiency 'commodity' suppliers leveraging off of Chinese manufacturing.

What do you think about Eaton, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 135,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

Wednesday's Biggest Stock Stars

By Brian D. Pacampara
July 2, 2009

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Wednesday's biggest winners among the stocks with a top rating of four or five stars.

Without further ado:

Company

Yesterday's % Gain

Oshkosh (NYSE: OSK)

26.75%

Elan (NYSE: ELN)

9.89%

Yamana Gold (NYSE: AUY)

7.13%

Akamai Tech

5.53%

Kraft Foods

5.01%

There's a reason why I selected those notable gainers, as opposed to other winners making noise on Wednesday, like low-rated STEC (Nasdaq: STEC). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 135,000 CAPS Fools considers its "high-star" stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 94% of the 758 members who've rated Oshkosh have a bullish opinion of the stock. In late April, one of those Fools, GimliJan, explained why the specialty vehicle maker looked all ready to roll:

[Oshkosh] is a large vehicle manufacturer of specialty vehicles, like fire trucks, ambulances, military vehicles, snow plows, ice scrapers, etc. I bought to get exposure to military vehicle market and feel the specialty vehicle market will be a better investment than the consumer auto industry segment. Governments still have to budget and buy vehicles for essential services and the military still needs vehicles.

Shares of Oshkosh are up more than 60% since that call. In fact, yesterday's surge came after the company scored a $1 billion contract with the Pentagon to build MRAP armored vehicles for ground forces in Afghanistan -- just as GimliJan had predicted.

The bullish lesson?
Pay attention to small caps that make a habit of landing big deals. As CAPS' GimliJan understands, just a couple of major contract wins can have a huge impact on a small business, so focus on the market leaders with massive trends working in their favor. If those tailwinds are indeed strong enough, blockbuster deals will probably keep blowing in that company's direction.

And now for the losers ...
Of course, winning isn't everything in the stock market. Here are five of Wednesday's biggest decliners with a one- or two-star rating:

Company

Yesterday's % Loss

AIG (NYSE: AIG)

22.07%

Novavax

11.28%

Raser Technologies

7.86%

First Solar (Nasdaq: FSLR)

4.26%

Sprint Nextel (NYSE: S)

4.16%

While yesterday's plunge in five-star stock Immersion may have caught our community off-guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Last month, for instance, CAPS All-Star TMFGalagan shared a common-sense call on AIG's common stock: "Re-upping here, as I still don't see the company recovering enough in its orderly liquidation to leave anything for shareholders."

Not surprisingly, shares of the embattled insurance giant are down 42% since that warning. In fact, AIG plunged more than 20% yesterday after shareholders approved a 1-for-20 reverse split to help prop up the price and protect its listing on the NYSE.

The bearish takeaway?
Never bet on a stock simply because it was "bailed out." As CAPS' TMFGalagan understands, assistance from the government doesn't necessarily mean that common shareholders stand to benefit. Unless you're truly able to discount the massive dilution effects and operating risks that still remain, buying into "zombie" institutions might end with horrifying returns.

The final Foolish move
Investors often focus strictly on stock price movements without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, thousands of investors are Foolishly sharing insightful investment tips to help, above all else, identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you become a more Foolish investor.

2-Star Stocks Poised to Plunge: TiVo?

By Brian D. Pacampara
July 2, 2009

Based on the aggregated intelligence of 135,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, digital video recorder company TiVo (NYSE: TIVO) has received a distressing two-star ranking.

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

TiVo facts

Headquarters (founded)

Alviso, Calif. (1997)

Market Cap

$1.13 billion

Industry

Application Software

Trailing-12-Month Revenue

$243.8 million

Management

President/CEO Thomas Rogers

Co-Founder/Chief Technical Officer James Barton

Return on Capital (average, last two years)

(42.2%)

1-Month Return

54%

Competitors

Dell (Nasdaq: DELL)

Microsoft (Nasdaq: MSFT)

CAPS members bearish on TIVO also bearish on

Palm (Nasdaq: PALM)

Amazon.com (Nasdaq: AMZN)

CAPS members bullish on TIVO also bullish on

Apple (Nasdaq: AAPL)

Google (Nasdaq: GOOG)

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS.

Over on CAPS, fully 214 of the 982 members who have rated TiVo -- some 22% -- believe the stock will underperform the S&P 500 going forward. These bears include my Foolish colleague Rick Munarriz (TMFBreakerRick) and All-Star gaamuol.

Just last month, Rick showed some skepticism over the stock's recent surge (fueled by its patent-related court win over rival Dish Network ): “I own TiVo shares. I own a TiVo box. I'm a fan of TiVo. However, I've watched it long enough to see that it eventually gives away a good chunk of the big gains it gets after winning a patent fight. Here we go again.”

In an earlier pitch, gaamuol recorded some bearish thoughts of his own:

This cutting edge company has lost the edge to its competitors. Although it holds many patents on technology some are in contention and some will prove to be unenforceable. Despite its victory over EchoStar (Dish Network) … I fear that TiVo is undercapitalized and playing in a market which it cannot hope to prevail. It is possible that some of the "big boys" may just buy the company to obtain the patents; however, I am not sure how such actions may be viewed by the board of TiVo.

What do you think about TiVo, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 135,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

Is Microsoft Cisco's Next Target?

By Anders Bylund (TMF Zahrim)
July 2, 2009

Cisco Systems (Nasdaq: CSCO) is picking its battles these days. That doesn't mean that the company is getting shy, though -- Cisco is simply tackling hand-picked 900-pound gorillas.

Cisco is thinking about how to stretch its dollar, specifically the return on $3.2 billion invested in online communicator WebEx. The WebEx platform seems ideal for building online collaboration products, so Cisco SVP Doug Dennerline and his team told attendees at this year's Cisco Live conference that they're thinking about a WebEx-fueled office suite.

That could mean that we're about to get a Cisco-powered online office suite to rival the best that Microsoft (Nasdaq: MSFT) Office can offer. Add one more serious rival to the time-honored office suite, alongside Google (Nasdaq: GOOG) with its Google Apps, the privately backed Zoho suite, IBM's (NYSE: IBM) Lotus Symphony, and many more. This market looks ripe for the picking, and a WebEx-powered incarnation of word processors and spreadsheet apps would bring intriguing possibilities.

WebEx has always been great at online messaging and information-sharing, so it's not a large leap to make. I'd imagine that this product, if it comes to market, would compete more with the Google Wave messaging portal than with Docs -- or perhaps tie into it under Wave's wide-open platform. Together, they'll keep putting the screws to Microsoft Office; threatening its near-monopoly on business users and introducing new collaboration features it currently lacks.

And of course, Cisco isn't above buying its way into new markets. Imagine the fireworks you'd get if Cisco paired WebEx up with Zoho, or perhaps took OpenOffice off Sun Microsystems' (Nasdaq: JAVA) hands so Oracle (Nasdaq: ORCL) can wash its hands of that open-source suite. Smiles all around, I'm sure.

Don't expect Cisco to start renting out computing power, though. Cloud-based infrastructure is all the rage at IBM and Amazon.com (Nasdaq: AMZN), but Cisco isn't interested in following them to Cloud Nine. CTO Padmasree Warrior noted that Cisco is happy to become a partner in cloud-building projects, but isn't interested in hosting its own pay-as-you-go computing cloud service. The opportunity isn't big enough for Cisco.

I don't agree with that assessment at all, but it's easy to see why Cisco would prefer selling servers and routers into these clouds instead of hosting them internally. You're getting fewer headaches that way, Cisco, but you're also passing up some stellar opportunities here. You can help me tell Cisco why they're wrong in the comments box below -- or take the company's side if you want.

Further Foolishness:

Rocket Stock or Dud?Can This Scam Save Your Portfolio?Why You Shouldn't Listen to Jim Cramer

Sirius XM: 90% Stock Decline? Here's a Raise!

By Rick Aristotle Munarriz
July 2, 2009

Sirius XM Radio (Nasdaq: SIRI) is locking up CEO Mel Karmazin for a few more years, regardless of the sorry performance of the satellite radio provider's stock under his reign.

Sirius XM isn't simply extending Karmazin's contract through the end of 2012. It's also bumping his annual salary 20% higher to $1.5 million and granting him a whopping 120 million options that will begin vesting at the end of next year at a strike price of $0.43 a share.

Shares of Sirius XM closed at $4.72 the day before he was introduced as CEO nearly five years ago. Yesterday's close is 90% lower than Karmazin's starting line at the company. The options can be exercised at a cruel 91% discount to the $4.72 price tag.

In short, if Karmazin is able to elevate Sirius XM's share price simply to where it was when he took over as CEO, he'll be looking at a $514.8 million profit on the options.

It doesn't seem fair, does it? Why are we rewarding failure? He's actually benefitting from the pocket-change price that creates a dirt cheap exercise price on the options, right?

Oh, please.

Karmazin is still the right guy for the job. Can you think of any seasoned radio vet who would have even attempted to merge Sirius with XM? Without the combination, one -- or perhaps both -- of the companies would have probably wiped out common stock investors in a bankruptcy reorganization.

The 90% plunge is painful, but have you scoured the handful of survivors in terrestrial radio? Shares of Cumulus Media (Nasdaq: CMLS) and Entercom (NYSE: ETM) have fallen 94% and 95%, respectively, since Karmazin was tapped to head up Sirius XM.

No, this isn't a good time to be a broadcaster.

Did Sirius overpay for Howard Stern or the NFL? It's debatable, but it's moot. Those deals were struck before Karmazin joined the company. Ultimately, the merger will make it easier to negotiate better content deals. It no longer has to bid against itself for exclusive satellite radio rights.

Did Karmazin fumble the hyped Apple (Nasdaq: AAPL) application? Yes. It's overpriced in the streaming niche, and launching without Howard Stern is a mistake.

Still, who would you prefer running Sirius XM? Former XM chief Hugh Panero? Liberty 's (Nasdaq: LCAPA) John Malone, with his 40% stake in the company? Any of Karmazin's cronies from Viacom (NYSE: VIA) or CBS (NYSE: CBS)?

Perish those thoughts. Karmazin's the right man for this turnaround job, especially now that Sirius XM is becoming more of a nitty-gritty operating-margins improvement story than a growth stock.

If Karmazin's able to cash in those options in a few years for hundreds of millions of dollars, there will be plenty of Sirius XM investors who will be too busy counting their own profits to care.

Well played, Sirius XM.

Other ways to slice and dice satellite radio fandom:

Michael Jackson Leaves a Money Mess Your Move, Howard Stern It's So Much Worse Than You Think

Beware of These Cheap Stocks

By Tim Hanson
July 2, 2009

Not too long ago, one of our Motley Fool Global Gains subscribers emailed me and asked me to take a look at a company called Orient Paper (OPAI.OB). Though the stock was Chinese, small, and traded over the counter, it had piqued his interest because it looked so darn cheap.

As I began my own research, I quickly confirmed that yes, this stock looked darn cheap. At $0.55 per share (its price at that point), it had a $25 million market cap and was trading for less than 1 times sales and 2 times EBITDA.

The story does not end there
After studying Orient Paper's SEC filings, however, I came away with five troubling questions:

First, until just last month, the company had a 25-year-old CFO who had worked in that position since she was 23 or so. That seems like an awfully young and inexperienced C-level officer for a publicly traded company. Given that so many small public Chinese companies struggle with internal controls even after they’ve hired qualified CFOs and auditors, one has to wonder if Orient Paper has the same issues.

Second, the company keeps extraordinarily low levels of inventory (just 2% of sales) while larger peers such as International Paper (NYSE: IP) and Boise (NYSE: BZ) keep 9% to 13% of sales in inventory. How can Orient Paper maintain such small inventories and produce such significant sales growth, and what does that mean for the sustainability of the growth story here?

Third, the company has a volatile customer list (with major customers appearing and then disappearing from one year to the next), yet has no advertising expenses and extremely low SG&A expenses. If the company is not keeping customers and not spending to promote itself to new customers, how is it getting business? The 10-K tells us that the company relies on its CEO for his "personal and business contacts." But while contacts are a very good thing to have in China, you don't ever want to be part-owner of a company that relies entirely on the relationships of one key individual.

Fourth, the company seems content to use its shares as currency, despite its seemingly low valuation. For evidence of that, note the 5 million shares the company issued to pay a $500,000 consulting bill in 2008. What does this mean for how it will treat outside shareholders going forward?

Finally, multiple insiders have loaned money to the company at charitably low rates to fund working capital. If this company is financially strong, why can't it source bank debt or, better, self-fund?

Nor does it end there
After posting these questions on my blog, I received a response from Orient Paper's new CFO, Winston Yen. While you can read his full response for yourself, he confirmed that the company is very good at managing its inventories, turning pulp into finished customer orders within days. He also noted that the company used the proceeds from its related-party loans to add a production line and that the company would not have been able to do so otherwise. And he asserted that the company's consistently low levels of accounts receivable show an operation that is legitimate and efficient.

On the other hand, we have to take his word that the financial compliance in place at the company is solid, he had no explanation for why the company can't get bank debt to fund growth, and he had "no comment" on the bizarre share issuance to former consultants.

The point of this story
Now, if you find Mr. Yen's answers to be satisfactory, then buy Orient Paper because, yes, it does look cheap. I, however, will be watching and waiting for at least a little while longer to try and verify the quality of the business.

See, high-quality businesses don't normally sell for dirt-cheap valuations -- note Google 's (Nasdaq: GOOG) enterprise value-to-EBITDA ratio of 13. That's particularly true of high-quality businesses in a fast-growing economy like China's -- Baidu.com (Nasdaq: BIDU) trades for 46 times EBITDA. But it's also not impossible. Thanks to the recent market downturn, there are more than 100 Chinese companies trading on the U.S. exchanges today for less than 5 times EBITDA.

Are they all bargains? Of course not. But at Global Gains, we think there will be significant long-term rewards for investors who are willing to be patient and carefully study the likes of Orient Paper, SORL Auto Parts (Nasdaq: SORL), Noah Education (NYSE: NED), and Linktone (Nasdaq: LTON) among others.

The key, though, is that you don't just want to find a cheap stock. You want to find a cheap stock that aligns you with a high-quality, scalable business whose management team you trust to allocate capital effectively.

More on that last point
This is why we travel to China every year at Global Gains to investigate and meet a collection of promising companies and management teams. And while some scare us away, others make us that much more confident. In fact, during each of our past two trips, we uncovered a stock that's since more than doubled. (Read more about that here.)

We leave for this year's trip next week, and we're more excited than ever about the meetings we have lined up. If you'd like to get our free notes from those meetings sent in real-time to your inbox, simply provide your email in the box below.

Wall Street's Buy List

By Rich Smith (TMF Ditty)
July 2, 2009

Actions speak louder than words, as the old saying goes. So why does the media focus so much attention on what Wall Street says about companies, instead of what it does with them?

Luckily for Wall Street watchers, the Internet brings us MSN Money's list of which companies the institutions are buying. True, we should be as skeptical of Wall Street's actions as we are of its words. But when the 135,000-plus lay and professional investors on Motley Fool CAPS agree with Wall Street's opinions, it just might be time for some buying.

Here's the latest edition of Wall Street's Buy List, alongside our investors' opinions of the companies involved:

Stock

Recent Price

CAPS Rating
(out of 5)

OYO Geospace (Nasdaq: OYOG)

$24.50

*****

Xyratex (Nasdaq: XRTX)

$4.96

*****

China Housing and Land (Nasdaq: CHLN)

$5.55

****

Metalico (AMEX: MEA)

$5.26

****

Atlantic Tele-Network (Nasdaq: ATNI)

$39.83

****

Companies are selected from the "Institutional Ownership Up Last Month" list published on MSN Money on the Saturday following close of trading last week. 6/26/09 price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Wall Street demonstrates an eclectic taste in stocks this week, as professional stock traders buy shares in everything from a Massachusetts telecom servicer (Atlantic), to a UK-based data storage company (Xyratex), to a U.S. scrap-metal recycler (Metalico) and finally to Chinese real estate (three guesses).

As far out as some of these ideas seem, CAPS members generally agree that these stocks will go far ... but only one of them's going to shoot into space ...

The bull case for OYO Geospace
Don't let the name Fool you. OYO Geospace's business isn't nearly as cosmic as it sounds. In fact, it's downright down-to-earth -- and even under. This Motley Fool Hidden Gems recommendation manufactures seismic equipment that helps oil majors like BP (NYSE: BP) more profitably locate and drill for oil and gas.

4thRockFool introduced us to OYO Geospace last April as a provider of: "seismic services that can help its clients get more oil out of existing fields." 4thRockFool argues that: "The recent slump in energy prices will not last - global economic growth will return and that will put continual upward pressure on energy prices for years to come. Even if prices fall further from here, OYOG's customers must continue to look for oil and gas or find another business model."

Around the same time, CAPS All-Star falcon2382 argued that OYO Geospace has at least two big things going for it: "[N]ot only has the products OYOG produces gotten better, but the ones from two, three, and certainly five years ago will need to be replaced soon." Falcon also likes the company's "insider purchasing record."

Nor is he alone. Fellow All-Star investor Beebzer recently became attracted to OYO Geospace after seeing an additional "large numbers of insider buys" in December and January. (In more recent weeks, we've seen OYO Geospace's CFO cashing out of stock options, however. But we've also seen the CEO start another buying spree.)

Trouble in the oil patch
Plummeting oil prices earlier this year helped to take OYO Geospace's stock price down with 'em. As a result, this profitable (but small -- much smaller than rival CGG Veritas (NYSE: CGV)) little shop sells for just 16 times trailing profits, despite consensus analyst estimates that predict 37% annual earnings growth over the next five years. Fools, this looks almost too cheap.

Low oil prices alone can't explain the extremity of OYO Geospace's apparent undervaluation, however. Every company has its flaws, and at OYO Geospace, the most serious issue I see is a pronounced lack of free cash flow. The company burnt through some $18 million in cash last fiscal year and has had trouble staying cash flow positive since 2004. That said, the company has reined in capital expenditures in recent quarters, with the result that it's finally within spitting distance of free cash flow-breakeven.

Also worth considering is that OYO Geospace sells for just a little more than its own book value. This could possibly suggest it could become a takeover target for a larger operator looking to fold in its technology and capture OYO Geospace's growth prospects on the cheap.

Time to chime in
Of course, that's just my opinion -- there's no guarantee that a buyer would agree, or that there even are any buyers out there with the economic situation looking so precarious.

So what do you say, Fool? Is OYO Geospace worth a gamble based on its valuation or its prospects for a buyout, either one? Or is this just another tiny dog of a cash-burner, doomed to flounder? Click on over to Motley Fool CAPS, and tell us what you think.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.

Today's 5-Star Movers

By Motley Fool Staff
July 2, 2009

As fundamentals-focused long-term investors, Fools never base an investment decision on the daily gyrations of the market. But the market's daily price movements can be useful when looking for new stock ideas for further research, or to keep tabs on watch-list stocks.

Below you'll find today's biggest movers among our five-star stocks -- the highest rating awarded by our CAPS community of more than 135,000 investors. Have a look, and then visit us on CAPS to dig in further on each of them.

Up Today

Sector

Sector Past 30 Days

Fools Saying Outperform

Research

Siliconware Precision Industries (ADR)

(Nasdaq: SPIL)

4.72%

Semiconductors and Semiconductor Equipment

2.16%

589 of 606

Research

MSC Industrial Direct Co., Inc.

(NYSE: MSM)

3.94%

Trading Companies and Distributors

3.36%

472 of 484

Research

Varian Medical Systems, Inc.

(NYSE: VAR)

3.55%

Health-Care Equipment and Supplies

7.81%

362 of 374

Research

Other Five-Star Semiconductors and Semiconductor Equipment FormFactor, Inc. (Nasdaq: FORM) up 1.33%Intellon (Nasdaq: ITLN) up 0.66%Other Five-Star Trading Companies and Distributors Wolseley plc (ADR) (OTC BB: WOSLY) no changeAceto Corp (Nasdaq: ACET) down 1.46%Other Five-Star Health-Care Equipment and Supplies Bovie Medical Corp (AMEX: BVX) down 0.89%Natus Medical, Inc. (Nasdaq: BABY) down 1.04%

Come join us on CAPS to learn more about these and countless other interesting stock ideas. Click here for a free sign-up.

7 Reasons to Worry About Next Week

By Rick Aristotle Munarriz
July 2, 2009

We may be several decades away from a time when Bernard Madoff can hurt you again, but that doesn't necessarily mean it's safe to tiptoe back into the market.

Despite the nearly incessant market rallies since mid-March, not every company is living up to the market's enthusiastic rise. If improving prospects elevate stock prices, why are so many companies' shares headed in the opposite direction? Looking over the meager list of companies slated to post their quarterly results at the other end of this holiday weekend, you'll notice that most of the widely followed equities are projected to announce lower net income year over year.

Let's go over a few of the companies whose quarterly date with Mr. Market may leave investors dismayed:

Company

Latest Quarter EPS (Estimated)

Year-Ago Quarter EPS

PriceSmart (Nasdaq: PSMT)

$0.33

$0.36

Alcoa (NYSE: AA)

($0.34)

$0.66

International Speedway (Nasdaq: ISCA)

$0.32

$0.54

WD-40 (Nasdaq: WDFC)

$0.38

$0.49

Chevron (NYSE: CVX)

$1.22

$2.90

3Com (Nasdaq: COMS)

$0.05

$0.09

Shaw Group (NYSE: SGR)

$0.60

$0.70

Source: Yahoo! Finance.

Clearing the table
There will likely be many more companies posting lower earnings next week, but these are just a few of the names that really jump out at me.

PriceSmart runs a chain of warehouse clubs throughout the Caribbean and Central America. Isn't this a global recession? Aren't shoppers seeking out bulk-sized bargains worldwide? Yes, and comps and sales were up at PriceSmart for the month of May, as they have been for the retailer's entire fiscal year. Unfortunately, analysts don't see profitability moving in the same direction.

Alcoa, on the other hand, isn't supposed to be doing well. Aluminum demand is a slave to the economy. FBR Capital Markets downgraded the stock earlier this week. However, Alcoa isn't just seeing a drop in profits. All 16 major analysts tracking the company see red ink at Alcoa come Wednesday.

International Speedway is a motorsports promoter -- the company behind the Daytona 500. The economy is in a funk, but folks are still splurging for affordable escapes like multiplex outings. International Speedway, unfortunately, doesn't appear to be going along for the ride.

WD-40 is a surprising name. Recession or not, are you really going to put up with a squeaky door? Beyond its signature all-purpose lubricant, WD-40's other brands include Lava cleanser and 2000 Flushes toilet deodorizer. This should be a recession-resistant company, but clearly "the can with thousands of uses" can't restore growth to its maker's bottom line.

Chevron's a petroleum giant. Prices at the pump have been inching higher heading into the summer travel season, but that's not improving Chevron's prospects for its latest quarter, apparently.

3Com is no longer the tech bellwether it once was. Wall Street sees a fiscal fourth-quarter profit of barely half what 3Com brought home last year. Investors may want to take heart here, though. Analysts also figured that 3Com was only good for a nickel a year ago, too.

Shaw is a Fortune 500 conglomerate. Cost overruns at a coal plant stung the engineering and construction heavyweight three months ago. The prognosis doesn't look good as we barrel toward next week's quarterly numbers.

Why the long face, short-seller?
If these sound like seven sob stories, they're largely indicative of the many companies with shrinking bottom lines. The upside for investors here is that Wall Street is realistic. It's expecting bad news. The real surprise here would be healthy reports.

That's not an entirely impossible feat, and it wouldn't take much of a positive surprise for some of the companies like PriceSmart or Shaw to post year-over-year improvement next week. 3Com has blown past Wall Street's profit targets for seven consecutive quarters.

The more I think about it, the less worried I become.

Some other reads to get you through the weekend:

Roundtable: Lessons From the Madoff Mess 4 Warning Signs of Dying Companies The Easiest Money You'll Ever Make

The Most Candid CEO

By Selena Maranjian
July 2, 2009

You know that when looking for companies for your portfolio, you should consider some key qualitative factors, such as competitive advantages and the quality of management. Unfortunately, it can be hard to determine management's quality. But one place you can learn about character is by reading CEOs' letters to shareholders.

One analyst, Laura Rittenhouse, actually uses these letters to prepare an annual survey of CEO candor. The 2008 results were recently released, and this year's top three CEOs were Christopher Connor of Sherwin-Williams (NYSE: SHW), Wayne Leonard of Entergy , and 3M 's (NYSE: MMM) George Buckley. Meanwhile, among the least candid were Citigroup (NYSE: C) CEO Vikram Pandit, Humana 's Michael McCallister, and Rex Tillerson of ExxonMobil (NYSE: XOM).

The how and why
What would put a CEO near the top or bottom of the list? Rittenhouse looks for things like jargon, cliches, spin, and other confusing language, which she refers to as "fog." Her measure of fog rose 12 percentage points in 2008, with 80% of letters having highly confusing statements, while only 16% of letters provided "meaningful near-term direction."

Candid CEOs give shareholders an honest review of company performance, even when things aren't going well. But candor among CEOs may also be an indicator of good prospects for future performance as well. For instance, compare how the top companies of the 2007 list did against the bottom-ranked ones:

Company

2007 Candor Rank

2008 Return

Percentage Points Better (or Worse) Than the S&P 500

Eaton

(47%)

(8)

Entergy

(28%)

Wells Fargo

Novartis (NYSE: NVS)

(6%)

Target (NYSE: TGT)

(30%)

News Corp.

#96

(54%)

(16)

Estee Lauder

#97

(28%)

Boeing (NYSE: BA)

#98

(49%)

(11)

ServiceMaster

#99

N/A*

Humana

#100

(51%)

(12)

Source: Yahoo! Finance. *ServiceMaster became a privately held company in 2007.

What CEOs said
Strong CEOs don't shy away from bad results, but they do address what steps they'll take to solve problems. For instance, Sherwin-Williams CEO Christopher Connor said, "We are not satisfied with our results over this past year, but the decisive actions we took in response to rapidly deteriorating market conditions made us a stronger and more competitive company. ... As a result, we gained share in most segments of the market."

Meanwhile, George Buckley of 3M was also rather frank in his most recent letter: "I want you to be reassured that no matter how long its duration, 3M is well prepared to overcome the economic difficulties that face us all." He outlined plans for layoffs that would number "as many as necessary but as few as possible," as well as how the company has "used furloughs, pay cuts, overtime bans, mandatory vacations and stringent incidental cost control to limit the number of layoffs, but in the end some were needed." Despite all his discussion about belt-tightening, he remained optimistic: "In a 5% recession there is still 95% of the business left and winning an increasing share of that business has to be our focus."

And the not so impressive ...
Meanwhile, the latest letter to shareholders from Citigroup's Vikram Pandit offered many vague statements that probably didn't reassure investors, who've seen their shares fall sharply. The letter's four "enduring truths" didn't exactly show that the company is ready to move beyond its past mistakes -- especially the company's commitment to "our rich legacy of innovation." Some might point out that a little too much financial innovation got them in trouble in the first place.

Similarly, ExxonMobil's shareholder letter makes broad claims without much detail. CEO Rex Tillerson says that "ExxonMobil is improving energy efficiency and taking effective steps to curb emissions in our operations." On the surface, that sounds wonderful, but Tillerson wasn't clear about how the company is doing this, and he didn't offer statistics to demonstrate just how effective its steps have been.

So, next time you're looking into a company, read its CEO's letters to shareholders and see what they really tell you. More candor can translate into better returns.

Learn more:

This Bailout Is Terrible!The Top 10 Recession Stocks The Good Word From Buffett

This Just In: Upgrades and Downgrades

By Rich Smith (TMF Ditty)
July 2, 2009

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Fire in the hole!
By now you've heard the news: Wisconsin-based heavy industrialist Oshkosh (NYSE: OSK) won the right to build upwards of 2200 All-Terrain MRAPs for the U.S. Army yesterday -- a contract valued at anywhere from $1 billion for the initial installment, to $2.5 billion if the full complement of 5244 vehicles gets built, to perhaps as much as $12 billion if the program is expanded even further.

Tuesday's bombshell echoed along Wall Street, where the same analysts who argued that Force Protection (Nasdaq: FRPT) would win the contract earlier this month played a madcap game of duck-and-cover yesterday. Dougherty & Co. ditched its buy rating on the stock in a hurry, and yanked its recommendation on Spartan Motors (Nasdaq: SPAR) motors for good measure (on the theory that Spartan had been hoping to build MRAP chassis for Force if its bid had won the day -- and now won't.)

Collins Stewart, which had gained notoriety for its abrupt changes of position on Force Protection previously, pulled its buy rating on the stock once again, saying it no longer sees any "catalysts" that could push the stock higher. (A point on which I differ, as I'll explain in a moment.) Meanwhile, a third analyst that had previously stayed out of the Force debate, Sterne Agee, made the logical choice to upgrade the contract's winner, Oshkosh.

Discretion is the better part of investing
But I don't mean to mock Sterne Agee for stating the obvious -- fact is, this analyst is developing a decent reputation in the heavy industrial space. Not only does Sterne Agee's Oshkosh optimism seem sound, but it's also racking up a 57% win-record in the "Machinery" sector. A few representative picks:

Stock

Sterne Agee Says

CAPS Says

Sterne Agee's Picks Beating
(Lagging) S&P By

Deere (NYSE: DE)

Underperform

****

18 points

Navistar (NYSE: NAV)

Outperform

7 points

Caterpillar (NYSE: CAT)

Underperform

****

6 points

Manitowoc Company (NYSE: MTW)

Outperform

*****

(10 points)

Sterne Agee's record makes a lot of sense to me -- and it's also worth mentioning that of the three analysts who shifted their ratings around yesterday, Sterne has the best record by far, boasting 53% accuracy on its recommendations overall, and outperforming 90% of the investors we track on CAPS. But what about the folks downgrading Force Protection?

With them, I politely beg to differ. Collins Stewart (rated 45% accuracy) and Dougherty (outperforming the market less than 40% of the time) both seem to think that absent a clear win in the "M-ATV" competition, Force is not worth owning. Collins in particular laments the lack of a catalyst that could send the shares shooting higher ...

Of catalysts and valuation
... which is fine by me. Thanks to yesterday's sell-off, Force Protection shares are selling for rock-bottom prices today. The last thing I want to see -- and the last thing you should want to see if you're looking to buy into this company -- is for these shares to rocket in price on a "catalyst" before we have a chance to buy them on the cheap. Valuation matters.

You see, over the past 12 months, Force Protection generated $34.9 million in free cash flow. It did this without the benefit of an M-ATV contract. In fact, according to CEO Michael Moody, it did this without making any "significant number of MRAP vehicle sales" at all.

Even lacking such "catalysts," most analysts believe that Force can grow its profits sustainably over the future. Force's CEO agrees, arguing that Force's "ability to ... generate growth and value for our shareholders was not dependent upon winning the M-ATV program," and that the firm will continue growing through:

Foolish takeaway
Will all this amount to Wall Street's expected 20% growth? I honestly don't know. Fact is, we don't know what factors were baked into this growth rate. We'll have to let the dust settle to see how much recurring service and support revenue Force can generate in coming quarters and whether it gets subcontracting work from M-ATV winner Oshkosh. But with the stock selling for less than 11 times its annual cash profits after yesterday's sell-off, the analysts could be wrong (again) -- and this stock would still be fairly priced at half that expected growth rate.

So my response to the analysts is this: Keep your catalysts. Me, I'd rather have the cheap stock.

America's Next Top Growth Stock

By Matt Koppenheffer
July 2, 2009

Growth stocks are the beauties of the stock world, plain and simple. They're exciting, they have good stories, and they can make you a lot of money.

But for all their beauty, growth stocks are also the prima donnas of the market. They can be erratic, they don't always live up to their billing, and they tend to attract a shareholder base that's ready and willing to run at the first signs of slowdown. For those reasons, caution is certainly in order when you enter the world of growth investing.

Fortunately, The Motley Fool's CAPS service brings us the collective intelligence of a community of more than 135,000 investors and is a great resource for separating the Jessica Albas from the Jabba the Hutts. Each of the stocks competing for this week's top spot has a market cap of at least $100 million and grew its net profit per share by an average of 20% or more per year over the past three years. (You can rerun the screen for yourself.) So let's go ahead and meet our contestants.

Baidu
I might be able to get away with simply describing Baidu (Nasdaq: BIDU) as China's Google (Nasdaq: GOOG). Now, the real Google does have a foothold in China, but it's a relationship that's been tenuous at best and has only gotten more so lately.

This is good news for Baidu, which naturally benefits when the local government stiff-arms the global search king. Not that Baidu has had much trouble putting up stellar numbers to date. For the three years ending in 2008, the company managed to grow revenue an unbelievable 1,000%.

VMware
If the notion of cloud computing seems like science fiction to you, then consider VMware (NYSE: VMW) as Isaac Asimov. Formerly a subsidiary of EMC , VMware has been all over the advent of the cloud, offering virtualization software that allows many users to share hardware resources. Customers have jumped on VMware's wares, and the company has put up some pretty scorching growth, including a 37% jump in earnings per share over the past year.

Dolby
Unless you live deep in the New Jersey Pine Barrens and consider tea with the Jersey Devil to be your primary form of entertainment, you probably run across Dolby (NYSE: DLB) products fairly regularly. Dolby creates and licenses sound technologies that are used in home entertainment equipment, movies, cars, and computers.

These technologies go by names like Pro Logic, Digital Surround, and TrueHD, and have become a must for nearly every type of entertainment. Selling a must-have product like this is rarely a bad thing for your bottom line, and Dolby's 400% growth of net income between 2004 and 2008 shows that the company has been making the most of its leadership position.

Quality Systems
A constant refrain in the song and dance about health-care reform is that medical practices need to modernize. Fortunately, there are companies like Quality Systems (Nasdaq: QSII) out there that offer products to help physicians do exactly that.

While electronic medical records have often been a tough sell, many investors hope that reform efforts will turbocharge their adoption. This, of course, would be great news for Quality Systems, which has -- until the most recent quarter, at least -- been growing like a weed in magic manure.

Terra Nitrogen
There are three primary nutrients that plants need: phosphorus, potassium, and nitrogen. Fertilizer giants Mosaic (NYSE: MOS) and PotashCorp (NYSE: POT) are well known for being leaders in phosphorus and potassium (mined as potash); Terra Nitrogen is one of the leaders when it comes to nitrogen fertilizers.

The math of Terra Nitrogen's business is pretty simple: When global demand grows, it can sell more fertilizer at higher prices. As has been the case with potash and phosphorus, the global recession appears to be softening the market for nitrogen fertilizers. However, industry experts have been predicting continued steady growth in demand, which should lead to good times for Terra.

The envelope, please ...
The voting is in; the CAPS community members have shared their opinions. In one fell swoop, we're going to guide Baidu, VMware, and Terra Nitrogen away from the winner's circle. CAPS members didn't entirely dismiss any of these stocks, but their three-star ratings put them solidly in our "maybe later" pile.

For Baidu, at least, CAPS members seem to be leery of the competition the company faces, not to mention the different consumer dynamic in the Chinese market versus the U.S. one. Some CAPS members have also balked at the stock's valuation, which is currently 51 times expected 2009 earnings.

With a shiny four-star rating, Quality Systems came darn close to nabbing the top spot this week. CAPS members seem to love the potential marriage of technology and health care and have high hopes for President Obama's reform efforts. The only knock against the stock seems to be its valuation, which is nearly 30 times expected fiscal 2010 earnings per share.

Donning the Top Growth Stock crown is Dolby. Considering that valuation was a key tripping point for some of its competition for the throne, it's notable that Dolby's near-20 current earnings multiple isn't exactly cheap. However, numerous points could justify this above-market valuation.

For one take on why Dolby is a must-have stock, let's see what CAPS member and Dolby bull weberse had to say a few weeks ago:

Dolby Laboratories should gain a great deal of market share in the coming years due to the growing demand for good audio products in PCs, TVs, phones, electronics, cinemas, and other growing media instruments. As more companies try to please the customers with additional features and great sound to go with games, TV, HDTV, and all of the programming that comes along with the gadgets [Dolby] stands as a leader in audio technology and thru its patents it will generate new revenues from other [companies] that want to use its technologies.

Now go vote!
Do you think that Dolby has what it takes to be America's next top growth stock? Head over to CAPS and let the rest of the community know what you think.

Related Foolishness:

Great Call on Home Depot! What's Next?Is salesforce.com Really a Terrible Stock?7 Highly Rated Stocks on Sale

Deal Struck, Shares Stuck

By Brian Orelli
July 2, 2009

Acorda Therapeutics (Nasdaq: ACOR) secured a decent upfront payment to license the ex-U.S. rights to its multiple sclerosis drug, Fampridine-SR, from the perfect partner. Unfortunately, investors still smacked the stock down nearly 15% yesterday.

The reason? It's something that I'm constantly harping on -- here and here and here, for example -- investing on the hopes of a buyout. The problem with that strategy is that investors have very little control over whether a buyout happens; it's management and the board of directors that make the decisions, and sometimes they think partnering is a better move for the company. Acquisitions should be thought of as a fringe benefit, and factoring them into valuations is just plain dangerous.

Rant over. Let's get to the terms of the deal, shall we?

In exchange for giving up its marketing rights outside the U.S., Acorda is getting $110 million upfront from Biogen Idec (Nasdaq: BIIB). There's also another $400 million in payments possible if the drug hits regulatory and sales milestones. Acorda is also due double-digit royalties on sales outside the U.S. It does have to give 7% of these payments to Elan (NYSE: ELN), whom Acorda licensed the drug from, but it still looks like a good deal to me.

Biogen is the perfect partner for Fampridine-SR. The company markets two multiple sclerosis drugs, Avonex and Tysabri, but Fampridine-SR won't really compete with those or other drugs like EMD Serono and Pfizer 's (NYSE: PFE) Rebif or Teva Pharmaceuticals ' (Nasdaq: TEVA) Copaxone. Rather than lowering the severity or frequency of attacks, Fampridine treats one of the most debilitating aspects of the multiple sclerosis: the inability to walk.

Acorda retained the rights to the sales in the U.S. and is looking for a decision from the Food and Drug Administration by Oct. 22. The phase 3 data looked good, and now that it has worked out its hiccup over the formatting issues with its marketing application, I'd expect an approval in the fall.

Walk on to further Foolishness:

what's next after the huge quarter stocks had.These are the stocks you need to own.The ultimate strategy for an individual investor like you.

Deal Struck, Shares Suck

By Brian Orelli
July 2, 2009

Rant over. Let's get to the terms of the deal, shall we?

Walk on to further Foolishness:

what's next after the huge quarter stocks had.These are the stocks you need to own.The ultimate strategy for an individual investor like you.

5 Stocks With a Bright Future

By Matt Koppenheffer
July 2, 2009

Investments that have been successful over the long term almost assuredly share at least one thing in common -- growth. You'll be able to find very few companies that have been unable to increase their earnings and yet still produce good returns for shareholders.

Think about it this way: Dividends aside, investors reap their gains when a company's stock price goes up. The stock price is typically driven by two levers -- earnings and the multiple that investors are willing to pay for those earnings. Since earnings multiples tend to fluctuate within a certain range, long-term investors should have a keen focus on the company's ability to increase earnings.

Does it seem too simple? Maybe keeping it simple is a good plan sometimes. After all, as Third Avenue's Marty Whitman has put it:

Based on my own personal experience -- both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise.

With that in mind, I've kept it simple and dug up five stocks that analysts expect will notch long-term earnings growth of 10% or better. I've also pulled up the CAPS rating for each stock to show what the 135,000-member Motley Fool's CAPS community thinks of the company's prospects.

Company

Expected Long-Term
EPS Growth Rate

Forward P/E

CAPS rating
(out of 5)

Buffalo Wild Wings (Nasdaq: BWLD)

23%

***

Research In Motion (Nasdaq: RIMM)

23%

GameStop (NYSE: GME)

16%

***

Noble Corp. (NYSE: NE)

13%

*****

Wells Fargo (NYSE: WFC)

11%

***

Sources: Capital IQ, a division of Standard & Poor's, Yahoo! Finance, and CAPS. EPS = earnings per share. P/E = price-to-earnings ratio.

Wall Street analysts aren't known for being supernatural in their forecasting skills, so not all of these estimates may pan out. However, this list may be a good place to dig in for further research. I'll get you started with some thoughts on a couple of these stocks.

Cool to the touch
I imagine that most of you already know Research In Motion as the maker of the BlackBerry smartphone, which has the business market on lockdown. If you've somehow missed the BlackBerry phenomenon, let's just say it was one of the first mobile devices to make the "smart" in smartphone seem like more than a clever name.

A host of competitors have caught wind of the massive opportunity in the smartphone market though, and today RIMM faces increasing competition from folks like Apple (Nasdaq: AAPL), Nokia , and Palm (Nasdaq: PALM). Heck, even Google is getting into the mix.

The growing war zone in the smartphone market has spooked enough CAPS members to help sink RIMM's stock to a lackluster two-star rating.

Bringing the heat
But what about high growth and a high rating from the CAPS community? For that we can turn to Noble Corp.

The world needs oil, and the ocean floor has got it. Lucky for us there are companies out there like Noble, which provide offshore drilling services for sites that are anywhere from slightly underwater to thousands of feet below the surface.

While oil prices have been more volatile than an intoxicated Eagles fan at the Meadowlands, CAPS members by and large have stuck to their faith in the long-term potential of oil and related companies.

But why Noble in particular? Let's take a look at what CAPS All-Star MattH42004 had to say earlier this year:

Noble has a lot of things going for it, including a very strong balance sheet. With over 500 million in cash and only 180 million in debt coming due over the next five years, Noble clearly has the financial ability to maneuver through the difficult times ahead. Their [fleet] utilization is still strong, and looking into the future, their deepwater rigs will be able to command a premium when oil prices return back to a normal range.

But what do you think?
Which of these stocks do you think has what it takes to post solid growth in this economy? Or have analysts been too optimistic? More than 135,000 members of the free CAPS community are sharing their opinions on thousands of stocks. Head over to CAPS and let the community know what you think of Research In Motion, Noble, or any of the other stocks listed above.

Related CAPS Foolishness:

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Don't Miss This Cheap Stock

By Tim Beyers
July 2, 2009

Cheap stocks can get cheaper. They often do.

Unfortunately, "cheap" is a relative term. Precious few stocks that trade for low price-to-earnings ratios or below book value are real bargains. They look enticing but are instead value traps -- stocks that deserve the multiples for which they trade and punish the garbage-grabbers who buy them.

But don't take my word for it. Here are five "cheap" stocks that trapped bargain-hunting prey:

Company

CAPS Stars (Out of 5)

2004 Book Value

Return Since

Integrated Device Technology (Nasdaq: IDTI)

*****

1.75

(52%)

IAC (Nasdaq: IACI)

***

1.44

(76%)

Radian Group (NYSE: RDN)

1.34

(94%)

KB Home (NYSE: KBH)

1.56

(56%)

Apartment Investment & Mgmt. (NYSE: AIV)

1.53

(45%)

Sources: Motley Fool CAPS, Capital IQ, Yahoo! Finance.

Watch out!
How can you avoid value traps like these? My favorite method is borrowed from professor Aswath Damodaran, author of Investment Fables. In his book, he counsels investors to measure low price-to-book stocks by their returns on equity (ROE).

Makes sense to me. "Book value" is shorthand for "equity." A low price-to-book stock is priced as if management won't produce high returns from the equity capital afforded it. Find a stock that defies this maxim -- a stock with an above-average and rising ROE -- and you may have found a bargain.

A machete for when you're in the weeds
Our 135,000-member-strong Motley Fool CAPS database is a great place to start your search. I ran a screen for well-respected stocks trading at less than twice book value, whose returns on equity were 10% or more. Another qualifier was that stocks were trading no more than 25% above their 52-week low, leaving plenty of room for further gains.

Of the 38 stocks that CAPS found hiding in the weeds, Interactive Brokers Group (Nasdaq: IBKR) intrigues me this week. The details:

Metric

Interactive Brokers Group

Recent price

$15.77

CAPS stars (5 max)

*****

Total ratings

358

Percent bulls

96.6%

Percent bears

3.4%

Price-to-book

1.23

ROE

16.3%

% Above 52-week low

24.4%

Sources: CAPS, Yahoo! Finance, Capital IQ.
Data current as of July 2, 2009.

In the last year, shares of Interactive Brokers have sold off as if it were a bank, a Citigroup (NYSE: C) in disguise. Nothing could be further from the truth. Interactive Brokers earns the bulk of its revenue from making electronic markets in more than 577,000 securities, options, and futures products. The company also operates a deep-discount brokerage for traders.

Lately, growth hasn't come easy. Interactive Brokers' market-making revenue fell 55% in the first quarter ended March 31. Overall interest in futures was lagging in June. Trading volume on the Chicago Board Options Exchange's Future Exchange fell 33% last month, Reuters reports. Overall volume at CBOE fell 10% in June, but is up a scant 2% year to date.

So why bet on this company? "[Interactive Brokers] has a very low PE. As a market maker and broker, they make money on spreads and commissions. They are not a bank like many bank-brokers," wrote CAPS investor noblepaladin last month.

"While people run away from the market during this downturn, eventually things will stabilize again," this Fool theorizes. "Even if they repeat the most recent quarter of 0.3 EPS for a few more quarters, that is 1.20 EPS per year and their brokerage has good growth."

Interactive Brokers also has a history of expanding its tangible book value via high returns on equity. The stock's current price-to-book ratio -- 1.23 -- could look cheap if this record of asset growth persists.

But that's also just my take. What you do? Would you buy shares of Interactive Brokers at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

Further bargain-basement Foolishness:

last litter of cheapskates.Bargain stocks are still out there.Whatever you do, avoid this Big Mistake.

Want further guidance? Get 30 days of free access to the Fool's Inside Value service, which spotlights stocks that Mr. Market has put on sale. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is also a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is a bargain at any price.

3 Stocks in a Tailspin

By Dave Mock
July 2, 2009

Individual stocks can surge 10%, 25%, or even higher in a short period of time. And they can fall just as far, just as quickly. For example, investors pummeled shares of Raser Technologies (NYSE: RZ) to the tune of 27% on Tuesday after it announced a common stock and warrant offering worth $25.5 million.

Big drops in share price can sometimes signal material defects or new risks. But at other times, they're simply pullbacks along with the larger pessimism facing the market today. Fortunately, we have Motley Fool CAPS, a great resource to help us understand the larger picture behind big price drops.

Is the sky falling?
CAPS contains more than just the crowd's opinions. Its best-performing members' votes count more in shaping each company's rating than do the picks of their poorer-performing peers. That way, investors can intelligently use the collective wisdom of more than 135,000 CAPS members to make better decisions.

We'll use CAPS' handy stock screening tool to quickly zero in on companies that have been slashed by at least 20% in the last four weeks, and which have a market cap greater than $100 million and a beta of less than 3. If you want to run this screen for yourself, please do -- just keep in mind that the results will update with the market.

Company

CAPS Rating
(out of 5)

4-Week
Price Change

Interoil (NYSE: IOC)

(20.4%)

CBS (NYSE: CBS)

***

(21.2%)

Manitowoc (NYSE: MTW)

*****

(23.4%)

Source: Motley Fool CAPS. Price return June 5 through June 30.

Interoil
Stock in Australian oil and gas company Interoil has pulled back from a big run since the start of the year. And just as other energy deals are beginning to flow, investors got a little excited about a report that CNOOC and PetroChina (NYSE: PTR) might bid for a stake in Interoil’s natural gas project in Papua New Guinea. But Interoil hasn’t budged from its one-star status in CAPS and many members remain bearish on the company’s prospects as it’s increased its share count over recent years and continues to burn through cash. Early last month, it sold more than 2 million shares of common stock, and just over 44% of the 435 CAPS members rating Interoil expect it to beat the market.

CBS
CBS didn't have much good news to report with its recent quarterly loss that included revenue coming in short of expectations. Weak advertising sales have led the company to conserve cash and reduce its dividend, but Standard & Poorâs doesn't think that's enough -- the rating firm still expects a difficult recovery in TV and radio advertising and moved to cut CBSâ corporate credit rating. TNS Media Intelligence recently reported that U.S. ad spending on media such as TV, print, and online fell 14% in the first quarter, with the Internet being the only medium to see growth.

Broadcasters like CBS and General Electric ’s NBC have been scrambling to put content online to try to capture ad revenue, while other media companies like Comcast and Time Warner (NYSE: TWX) hope the “TV Everywhere” movement will keep cable subscribers close. With all the competition for eyeballs, many investors are hedging on CBS, with only 80% of the 329 CAPS members rating the company believing it will outperform the S&P going forward.

Manitowoc
Like heavy-equipment peer Caterpillar (NYSE: CAT), Manitowoc has been struggling with lower sales volumes and reduced profitability, as construction firms have cut back on capital spending amid tight credit conditions. It's not a complete disaster, as Manitowoc beat expectations by $0.05 a share, bringing in earnings of $0.18 a share, despite some writedowns in its most recent quarter. But the company will rely heavily on the world economy to improve results, since more than half of sales come from abroad. Still, many CAPS members remain bullish on the company, as it has so far weathered the storm and managed its operations well, including negotiating debt covenant revisions. At this point, more than 97% of the 1,789 CAPS members rating Manitowoc expect it to outperform the broader market.

Ultimately, whether or not you believe a fall in any stock is warranted, your own research is more important than collective opinions. CAPS can help you quickly focus your due diligence, and even point out potential pitfalls you may not have seen.

Add your take on these or any of the 5,300 stocks that 135,000-plus members have covered in Motley Fool CAPS. It's totally free to be a part of the community, and the payback is more than worth it.

One Investment to Avoid in Today's Market

By Todd Wenning
July 2, 2009

Dividend-paying stocks are compelling to investors for many reasons. Not only do they tend to be less volatile as a group, and provide a real cash return right away, but they can also reflect management's long-range visibility on profits and show its commitment to partnering with shareholders.

Back in 2006, WisdomTree Investments presented its concept of weighting some of its equity ETFs not by each company's market value (as was the traditional indexing approach popularized by Vanguard), but rather by total dividends paid. WisdomTree's rationale made some sense -- at least in theory.

Indeed, it supported this theory by back-testing the strategy from 1964 to 2005. It found that not only did the portfolios exhibit lower volatility, but that "four of the six WisdomTree Domestic Dividend Indexes generated greater price appreciation than the S&P 500 Index, even without the reinvestment of dividends."

Unfortunately, this dividend-weighted theory rested on one enormous assumption: that the dividend-paying environment would continue to behave roughly the same way it had for that 41-year testing period.

Oops
As we're all now well aware, the dividend landscape has dramatically changed. The past two years have been the worst stretch for dividend investors in modern history. Sixty-two S&P 500 companies slashed their payouts some $40.6 billion in 2008 alone.

Another $46.2 billion in dividend cuts -- already a full-year record -- came in the first five months of 2009, including cuts from Discover Financial Services (NYSE: DFS) and CBS (NYSE: CBS), while Motorola (NYSE: MOT) suspended its payouts. Standard and Poor's expects S&P 500 dividends to decline some 23% this year -- the worst decline since 1938.

Needless to say, these massive dividend cuts have adversely affected WisdomTree's dividend-weighted strategy. As of May 31, none of the six domestic dividend ETFs had outperformed the S&P 500 since their respective inception dates.

In fact, the worst-performing WisdomTree domestic dividend ETF has been the High-Yielding Equity Index (DHS) -- or as it was recently and curiously renamed, the Equity Income Index. Whatever name it goes by, this dividend-weighted ETF is down 36% since inception in 2006, much worse than the 21% lost by the S&P over the same period.

The wide underperformance of the ETF is largely a result of its dividend-weighted design, which is to "reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share." In other words, if company A is expected to pay $500 in cash dividends next year, it should have a larger weight in the index than company B, which is expected to pay $250.

Handcuffed
Under normal circumstances, that sounds like a nice way to generate extra dividend income and stack your bets behind strong companies. This year, though, has been anything but normal. The higher-yielding stocks have faced the greatest pressure on their dividends.

To illustrate this problem, as of Dec. 31, 2008, the High-Yielding Equity Index's top holdings were:

Company

% of ETF Assets

Current Dividend Status*

General Electric

9.74%

Cut from $0.31 to $0.10

AT&T

7.38%

Raised from $0.40 to $0.41

Pfizer

6.81%

Cut from $0.32 to $0.16

Bank of America

5.02%

Cut from $0.32 to $0.01

JPMorgan Chase

4.50%

Cut from $0.38 to $0.05

Verizon

4.07%

Remains at $0.46

Wells Fargo

3.97%

Cut from $0.34 to $0.05

Philip Morris International

3.53%

Remains at $0.54

Merck

2.64%

Remains at $0.38

US Bancorp

2.32%

Cut from $0.42 to $0.05

*Dividend per share per quarter.

Adding insult to injury, the ETF only rebalances once annually, rendering it effectively helpless in a rapidly changing dividend environment. As dividend-dependent investors flocked out of stocks that dramatically cut their payouts, this ETF has had to sit and grin it out. All 10 of these stocks remain in the ETF's top 15 holdings to this day, despite the massive dividend cuts.

Sure, it's benefitted to some degree from recent dividend hikes from utilities Duke Energy (NYSE: DUK) and Southern Company (NYSE: SO), but this ETF remains heavily invested in real estate investment trusts (REITs) like Simon Property Group (NYSE: SPG) and larger banks like PNC Financial (NYSE: PNC) that have been plagued by dividend cuts. The flaws of the model are becoming more apparent with each successive dividend payout from the fund, which have naturally fallen sharply in the past 12 months.

A better way
For investors seeking to benefit from the advantages of dividend-paying stocks, the WisdomTree Equity Income ETF is one investment to avoid. With dividends being slashed left and right in this market, selectivity is essential, leaving mechanical strategies like this one at a major disadvantage. Among other things, savvy dividend investors will want to look for companies with solid balance sheets, a history of increasing dividend payouts, and plenty of free cash flow to cover the payments.

One company that fits this bill is Johnson & Johnson -- one that our Motley Fool Income Investor team has classified as a "Buy First" stock. At present, Income Investor picks yield 5.4% on average.

A 30-day trial of Income Investor is free. If you'd like to learn more about the service, just click here.

Already subscribed to Income Investor? Log in at the top of this page.

This article was originally published on March 5, 2009. It has been updated.

Todd Wenning congratulates Miami University (Ohio) on its bicentennial year. He owns shares of Philip Morris International, a Motley Fool Global Gains pick, but of no other company mentioned. Johnson & Johnson, Duke Energy, and Southern Company are Motley Fool Income Investor picks. Pfizer and Discover are Inside Value choices. The Fool has a disclosure policy that tells it like it is.

The Buying Opportunity You Won't Want to Miss

By Tim Hanson
July 2, 2009

It didn't happen exactly as I had predicted, but it has finally happened. And it means that the world's fastest-growing stocks are available for cheap.

Before I get to the whos, whys, and wheres, though, let me tell you who we have to thank.

Here comes the cabal
Although certain SEC regulators and owners of heavily shorted stocks such as Ford (NYSE: F), Micron (NYSE: MU), and SLM (NYSE: SLM) may disagree with me, short-sellers are crucial to healthy markets.

By making the case for stocks to fall, short-sellers make the market more efficient. Shorts temper excessive optimism, helping us all avoid the protracted painful corrections that are its consequence.

Where shorts didn't tread
Optimism, however, had been the defining characteristic of Chinese markets until 2008. Chinese stocks gained 130% in 2006, and another 97% in 2007. As a result, money moved into the Chinese markets at a remarkable clip, and stories abounded about Chinese housewives, cab drivers, and fishmongers speculating in the market.

Of course, there was nothing to stop them.

See, you couldn't short stocks in China. Without investors scouring the market for weaknesses, those same housewives, cab drivers, and fishmongers have been treated to nothing but good news. That made them overconfident, overzealous, and now overexposed to an unquestionably richly valued basket of stocks.

It won't be that way for long ...
And China's Security Regulatory Commission -- fearing a stock market crash -- was reluctant to stop them. That's why the country held off for so long on allowing investors to short stocks.

But it's gotten so bad in China that the CSRC finally approved shorting at the end of last year. What this indicates to me is that it believes all optimism has been purged from the marketplace. When that happens, we've reached the point of maximum pessimism -- the precise time that master international investor Sir John Templeton would have told you to invest.

And you should consider that. Because China bellwethers such as CNOOC (NYSE: CEO) are available for lower multiples than we've seen in years. Even once-heady growth stories such as New Oriental Education (NYSE: EDU) have seen the market reassess their prospects.

Get ready to buy
That's why you should be licking your chops.

China's rapid economic growth will be the global economic story of the next 10 to 20 years. The opportunities are huge, and the country is growing richer by the day. In fact, our Motley Fool Global Gains international investing team is about to embark on another research trip to China, where we'll sit down with the CEOs of the companies we're most interested in investing in.

If you'd like to get our notes from those meetings sent in real-time to your inbox, simply provide your email in the box below. Because while there are many companies in China you don't want to own, we think we can do very well by getting on the ground and finding the cream of the crop.

The Next Million-Dollar Penny Stock

By Tim Beyers
July 2, 2009

Penny stocks can make you rich. Need proof? Every one of these multibaggers was once a penny stock:

Company

Recent Price

CAPS Stars (out of 5)

5-Year Return

Dynamic Materials (Nasdaq: BOOM)

$18.20

*****

945.9%

Meridian Bioscience (Nasdaq: VIVO)

$22.86

*****

425.5%

U.S. Global Investors (Nasdaq: GROW)

$9.49

****

508.3%

Iconix Brand Group (Nasdaq: ICON)

$15.87

****

470.9%

SIGA Technologies (Nasdaq: SIGA)

$8.40

508.7%

Sources: Motley Fool CAPS, Yahoo! Finance.

The promise of outrageous returns has periodically made even the world's best stock pickers into penny stock investors. Peter Lynch has enjoyed the stock market's super-cheap seats in the past, and still does on occasion. The Royce Low-Priced Stock fund has beaten the market for a decade by betting on stocks trading near or below $10 a share, including Emulex (NYSE: ELX).

Even the All-Stars in our 135,000-plus Motley Fool CAPS community take to penny stocks. More than a few have been richly rewarded.

Pennies from heaven
So why not invest in penny stocks? Well, the warning the SEC issued about them provides one excellent reason to steer clear. But what if we take the agency's definition literally, and limit our choices to stocks trading between $1.50 and $5 a share? And what if we further seek only four- and five-star stocks with a market cap between $250 million and $2 billion? Surely our CAPS screener would return some winners, right?

This week when I ran that screen, 49 stocks made the cut -- including our previous topper, Alvarion .

My favorite penny stock this week is Silvercorp Metals (AMEX: SVM), a Canadian miner that operates in China. The details:

Metric

Silvercorp Metals

CAPS stars (out of 5)

****

Total ratings

189

Percent bulls

95.8%

Percent bears

4.2%

Bullish pitches

27 out of 27

Data current as of July 2, 2009.

Interestingly, Wall Street can't be bothered with Silvercorp Metals. Analysts haven't issued a rating for the shares since 2005, Yahoo! Finance reports.

Fools take a different view. More than 95% of CAPS All-Stars -- investors who rank in the top 20% in portfolio performance -- support Silvercorp. Why? One of them, bridgeboy0, offered this thesis in April:

When things turn around it will be a result of the governments around the world having pumped money of all kinds into the system. This will cause a surge in inflation as economies start to tick up. That's why I've been and continue to be bullish on precious metals and the miners of said metals. Really, anything that is sensitive to inflation is a good place to be.

Indeed, inflation will remain a risk so long as the Fed and Treasury continue to pump money into the system. But that's also just one Fool's take. I'm more interested to know what you think. Would you buy Silvercorp Metals at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

More millionaire-making Foolishness:

buy oil.Banking may not be as bad off as you think.Why China hates the U.S., and what you should do about it.

Top-Rated Stocks That Treat Shareholders Right

By Rich Duprey
July 2, 2009

The flip side to shareholder-friendly stocks expected to underperform the market? Highfliers that pay little heed to their owners' interests. Conversely, there are top-flight companies that also treat their shareholders with respect.

Institutional Shareholder Services -- the big name in corporate proxies -- measures how well a company performs in as many as 63 categories covering four broad areas. Moreover, each company is scored relative to its market index and its industry group. It assigns the stocks a rating that it calls its corporate governance quotient, or CGQ.

Some evidence supports the notion that companies with weaker governance have higher risk, decreased profitability, and lower valuations. We'll be looking at stocks that Motley Fool CAPS investors have marked to outperform the market and that also sport above-average CGQ scores, either in their index group or among industry peers.

Company

CAPS Rating (out of 5)

Index CGQ Ranking*

Industry CGQ Ranking*

ExxonMobil (NYSE: XOM)

****

67.7%

96.6%

Graham (NYSE: GHM)

*****

91.5%

81.3%

Pfizer (NYSE: PFE)

****

70.8%

98.8%

Stone Energy (NYSE: SGY)

****

66.7%

77.9%

Zix (Nasdaq: ZIXI)

****

91.4%

73.4%

Sources: Yahoo! Finance, Motley Fool CAPS.
*Relative placement when compared with companies in index or industry. Higher is better.

Although finding good companies and holding them for the long term is one of the greatest secrets to success in investing, there are many factors an investor should consider, and how well a company treats shareholders shouldn't be least among them. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies.

Go to the head of the class
According to the nation's largest e-prescription network, Surescripts-RxHub, there were 240 million e-prescriptions filed in 2008, double the amount in 2007. And in just the first quarter of 2009 alone, there were about 134 million e-prescription messages exchanged among e-prescribers, pharmacies, and payers.

With health-care reform at the top of Congress's agenda, now might be the best time for Zix to sell off its e-prescription business. The encryption services specialist hasn't been able to make much of a go of its e-prescription services -- sales have steadily declined over the past year to just $4.5 million, or 16% of trailing revenue, down from 25% last year. But the reforms being bandied about, along with the changes made to HIPAA as part of President Obama's stimulus package in February, could allow the unit to become a key component of someone else's offerings.

Like a doctor's handwriting, HIPAA requires that patient history data be rendered unintelligible while it is being transmitted, and the new reforms call for stricter enforcement, with enhanced penalties of as much as $1.5 million for violations. Encrypting the data as Zix's e-prescription service does would help companies comply. While Allscripts-Misys (Nasdaq: MDRX) would seem a natural buyer here, Misys was criticized for its Allscripts purchase last year because of the debt it took on to buy the company, and it was only just able to refinance that debt. It might be reluctant to go to the well again.

Surescripts itself might also be logical. It recently merged with RxHub -- a service formed by CVS Caremark (NYSE: CVS), Express Scripts, and Medco Health Services -- and says that Medicare reforms are driving more physicians to use e-prescription services. With a portion of $20 billion in stimulus spending targeted toward e-medical record systems, Zix may find its encryption services attractive in the market.

Top-rated CAPS All-Star member TXBuilder thinks Zix's pursuit of "strategic alternatives" is an opportunity to unlock shareholder value: "I think there is a deal in horizon for this company, and the stock is good for at least 200 to 300 percent profit within 8 to 10 month. I am adding this to my personal portfolio."

A Foolish quotient
Many factors go into whether a stock is a buy or a sell, but do corporate governance policies enter into your equation? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page.

Exelon's NRGetic New Bid

By Toby Shute
July 2, 2009

When you pit two power players against one another, there are bound to be sparks.

I haven't had much comment on the drawn-out takeover tussle between Exelon (NYSE: EXC) and NRG Energy (NYSE: NRG) since the former launched its bid back in October. There have been several interesting developments in the interim, however.

At the time of the initial offer, which valued NRG at $6.2 billion, it looked like Constellation Energy was headed to the altar with Berkshire Hathaway 's (NYSE: BRK-A) (NYSE: BRK-B) MidAmerican Energy. Then, in December, France's EDF stepped in with a richer bid and snapped up Constellation for itself.

Constellation's nuclear assets just proved irresistible to its suitors, and that's exactly what's driving Exelon's hot pursuit. And things have gotten heated -- Exelon has launched a proxy contest in order to shake up the Board of Directors of NRG, and the latter brought a lawsuit in federal court in an attempt to fend off Exelon's exchange offer. (The bid is an all-share offer, which requires NRG shareholders to tender into the exchange.) That suit was recently dismissed, but the proxy battle remains.

Another interesting twist of late is that Exelon was passed over in the government's recent allocation of $18.5 billion loan guarantees for the next generation of U.S. nuclear plants. Southern (NYSE: SO) appears to have made the cut, along with Scana (NYSE: SCG), Constellation/EDF's UniStar venture, and most importantly, NRG.

It's not too surprising, then, that Exelon has now sweetened its bid, citing an additional $1.5 billion in synergies. Funny how you can find those in a pinch! My initial reaction was that the new bid, valuing NRG at around $7.7 billion, was probably insufficient to close the deal, given NRG's success in landing government largesse. The shares aren't reacting that way, however, as they're trading at a discount to the value implied by the exchange ratio.

Exelon says this is its final offer. As with the MAG Silver (AMEX: MVG) merger that recently melted away, this bidder may not be bluffing. In that case, this might be as good as it gets for NRG shareholders. We'll soon see.

Consumers Chow Down on General Mills

By Mike Pienciak
July 2, 2009

General Mills (NYSE: GIS) shareholders are feeling a nutritious boost. Fiscal fourth-quarter and full-year 2009 results revealed that the food maker's leading brands, which include Haagen-Dazs, Yoplait, Cheerios, and Progresso, continue to appeal to consumers' sense of taste and value.

Notable increases in full-year operating profit, emerging-market sales, and to a lesser extent, volume, are among the company's earnings highlights. However, much like getting a surprise Lucky Charm mixed in with your milky bowl of Total, the fiscal year included a 53rd week – and as nice as that is for results, it complicates year-over-year comparisons. For the moment, let's pretend that four-leaf clover is really a cornflake.

On a quarterly basis, net sales increased 5% and segment operating profit shot up 29%, with the profit jump mainly due to lower input costs. Excluding divestiture-related losses in the quarter and mark-to-market adjustments in 2008 and 2009, EPS grew 18%, to $0.86.

For the fiscal year, net sales and segment operating profit posted gains of 8% and 10%, respectively. EPS excluding certain items came in at $3.98, up 13% from a comparable $3.52 in the year before.

OK, now for that pesky extra week, which translated into 6% of net sales growth in the quarter. That means, on a comparable basis, that quarterly net sales were actually down 1%. As for earnings, the expanded calendar contributed roughly $0.07 per share.

Moving on to more easily digestible points, the Big G cereal segment was particularly strong, with annual sales growth of 11% and a market-share gain of more than 1%. Volume in the international segment improved by 5%. Consumers in India and China continue to, um, devour General Mills' products: Annual sales were up 37% and 20%, respectively. In China, management sees ample room for additional growth and is working aggressively.

The food-service segment was the one area of weakness, with volume dropping 6% for the year. Given that restaurant traffic was still down through May, this is hardly a surprising performance, and it squares with a similar drag that H.J. Heinz (NYSE: HNZ) reported in its food-service business earlier in the year.

To round out the menu of rib-sticking news, General Mills announced that it would top off its dividend with a 9% increase. That's in the range of dividend hikes announced this year by fellow consumer-goods companies Coca-Cola (NYSE: KO), Colgate-Palmolive (NYSE: CL), and Procter & Gamble (NYSE: PG). Yet, in my assessment, the General has less discretionary/trade-down exposure than the first two names, and it certainly does not face the period of expensive brand investment currently challenging P&G.

Shares aren't the bargain they were a couple of months ago, but for long-term investors, investing now and on potential dips should contribute to years of healthy returns.

Related Foolishness:

4-Star Stocks Poised to Pop: Kellogg Score Fat Profits With Cheap Eats 4-Star Stocks Poised to Pop: McDonald's

4-Star Stocks on the Upswing

By Motley Fool Staff
July 2, 2009

Sadly, there's no such thing as an ultimate buy signal when it comes to investing in stocks. Identifying companies with the wind at their backs takes time, patience, and a good dose of due diligence.

There is, however, an easy way to increase your odds of finding the stocks that will beat the market. At Motley Fool CAPS, the Fool's investing community of more than 135,000 members, we've found that our "five-star portfolio" is up 15.31% between January 2007 and April 2009, compared to a loss of 40.6% for the S&P 500.

To fully capture the upside potential of those highly rated stocks, it makes sense to identify them just as soon as they are upgraded to four- and five-star status. Fortunately, our CAPS screener now makes it possible to do this. Below, for example, is a list of companies that have been upgraded to four-star status from three stars just yesterday. These stock ideas are only a starting point, of course. Be sure to join us on CAPS to dig in even further.

Company

All-Stars Saying Outperform

Federated Investors, Inc. (NYSE: FII)

169 of 180

China GrenTech Corp Limited (ADR) (Nasdaq: GRRF)

379 of 400

Hawaiian Electric Industries, Inc. (NYSE: HE)

121 of 139

ProShares UltraShort Lehman 20+Year Treasury (NYSE: TBT)

608 of 635

W.W. Grainger, Inc. (NYSE: GWW)

155 of 172

Data from Motley Fool CAPS, July 2, 2009

Come join us on CAPS, absolutely free, to learn more about these and countless other interesting stock ideas.

5-Star Stocks on the Upswing

By Motley Fool Staff
July 2, 2009

Sadly, there's no such thing as an ultimate buy signal when it comes to investing in stocks. Identifying companies with the wind at their back takes time, patience, and a good dose of due diligence.

In order to fully capture the upside potential of those five-star stocks, it makes sense to identify them just as soon as they achieve five-star status. Fortunately, our CAPS screener now makes it possible to do this. Below, for example, is a list of companies that have been upgraded to five-star status from four stars just yesterday. These stock ideas are only a starting point, of course. Be sure to join us on CAPS to dig in even further.

Company

All-Stars Saying Outperform

Exterran Holdings, Inc. (NYSE: EXH)

109 of 115

ITT Corp (NYSE: ITT)

288 of 305

Chicago Bridge & Iron Company N.V. (NYSE: CBI)

1249 of 1283

Nabi Biopharmaceuticals (Nasdaq: NABI)

135 of 143

Morgan Stanley India Investment Fund, Inc. (NYSE: IIF)

315 of 328

POWERSHS DB MULTI SECT COMM (NYSE: DBE)

111 of 115

Data from Motley Fool CAPS, July 2, 2009

Come join us on CAPS, absolutely free, to learn more about these and countless other interesting stock ideas.

Is It Time to Sell Boeing?

By Rich Smith (TMF Ditty)
July 2, 2009

In case you couldn't guess from last month's test flight cancellation, or the subsequent cancellation of 15 orders for the 787 Dreamliner, all's not well at Boeing (NYSE: BA). The latest news, that Boeing is in negotiations to take one of its suppliers in-house, just confirms it.

On Wednesday, widespread reports pegged Boeing as closing in on purchasing Vought Aircraft, a South Carolina facility that makes sections of the 787's fuselage. Boeing bulls argue this is good news, with The Wall Street Journal this morning putting on a happy face, arguing that:

Honeywell (NYSE: HON), United Technologies (NYSE: UTX), Spirit AeroSystems (NYSE: SPR) ... and Vought. "Bringing more of the production in-house could increase Boeing's ability to manage the complex project."Buying the South Carolina operation "potentially paves the way for a second 787 assembly line."

I disagree.

The party line
Oh, I admit that the Journal's minor premises have merit. Boeing's troubles with its supply chain are well documented, and berthing suppliers at the mothership could help unkink the chain. Also, seeing as the 787 is already two years behind schedule, opening a second assembly line to accelerate production and delivery to impatient customers like AMR (NYSE: AMR), Delta (NYSE: DAL), and Continental (NYSE: CAL) may be prudent.

But while there's logic to the party line, for my part, I prefer to ...

Read between the lines
And what I see there is Boeing admitting that as bad a state as the 787 program appears to be in, it's in fact quite a bit worse than Boeing lets on. Up until a few weeks ago, we'd been led to believe that Boeing had generally gotten its problems under control. The Dreamliner's maiden voyage was on schedule. Actual delivery of the plane was just around the corner.

Investors who slapped the snooze alarm and dreamed happy dreams through last month's test-flight buzz, however, cannot afford to ignore the resurgent alarm bells today. You need to ask yourself: If all is well, the structural weak spots that forced the test flight's cancellation will soon be fixed, and production put back on track ... then why did Boeing feel it necessary to bring more manufacturing in-house today?

Foolish takeaway
I submit to you: It's because production is not on track. There are more, unannounced problems with production, and another shoe(s) yet to be dropped. There. I said it. You've been warned.

This Week's 5 Dumbest Stock Moves

By Rick Aristotle Munarriz
July 2, 2009

Stupidity is contagious. It gets us all from time to time. Even respectable companies can catch it. As I do every week, let's take a look at five dumb financial events this week that may make your head spin.

1. Sony is more bony than tony
Sony (NYSE: SNE) is celebrating the 30th anniversary of the Sony Walkman this week. Unfortunately, it's not going to like what it sees when it blows out the candles. Where have you gone, Walkman? Heck, where have you gone, PS3?

It seems as if every child of the 1980s grew up with a Walkman. Cassettes yielded to CDs. CDs handed the baton to digital delivery. Where is Sony now? It could have been the leader in digital media players. Instead of Apple 's (Nasdaq: AAPL) iPod, we should be cranking up the Sony iWalkman. We could be downloading content from Sony, which makes sense because Sony already owns a major movie studio and one of the four major labels.

Unfortunately, Sony fumbled away its market dominance. You don't have to even go 30 years to see Sony repeat its mistake. Sony's PlayStation was once the video game platform of choice. These days, the PS3 is a laggard and losing developer support.

So, who is in the mood to celebrate when Sony is coming off its first annual loss in over a decade? Don't get me started on the chatter over a PSP-based smartphone. It's too little, too late from a company that peaked too soon.

2. Now with nearly 30% real banana
You can't blame Starbucks (Nasdaq: SBUX) for trying. The barren barista baron is hoping to jump-start its disintegrating comps with a healthier menu that centers around natural ingredients. The items include a 210-calorie Marshmallow Dream Bar and a slice of banana walnut bread that "is nearly 30 percent real banana."

You may be applauding the move, but I'm shaking my head. Turning to organic Michigan blueberries for its blueberry oat bar may win it style points, but it's not going to win back the long lines it used to command several years ago.

The prevailing bullish argument that Starbucks sells a reasonably priced cup of coffee is fair, but it's still an incremental expense for java junkies who now have cheaper -- and occasionally more convenient -- access to premium bean brews.

Starbucks isn't going to bounce back until it makes a serious dent at meal replacement in the breakfast, lunch, and dinner markets. I don't think a barista-tossed salad or a blended fruit smoothie is going to make "who wants to join me for lunch at Starbucks" a popular water cooler query.

3. Hong Kong phooey
Disney (NYSE: DIS) is finally digging deep into its pockets to fix the moribund Hong Kong Disneyland attraction that it opened, with financial assistance from the Hong Kong government, nearly four years ago.

Disney will be investing roughly $450 million in new themed lands and rides for its gated attraction. In exchange for the necessary infusion, Disney's stake in the park will grow from 43% to 48%. Hong Kong owns the rest.

This is the right move, but it lands the family entertainment giant into the "dumbest stock moves" list because it took so long to address the park's shortcomings. Disney conservatively projected that the park would draw 5.6 million guests in its first year. It only drew 5.2 million. Things got even worse in the second year, attracting a mere 4 million parkgoers. It should not have taken Disney -- and the Hong Kong government -- this long to realize that the park just wasn't appealing enough in its original incarnation.

4. Too big to succeed?
Oracle 's (Nasdaq: ORCL) Larry Ellison may finally be ready to check into Overeaters Anonymous. Regulators are requesting more time to review the software giant's planned purchase of Sun Microsystems (Nasdaq: JAVA).

Ellison knows the drill. He's a serial acquirer, so he knows all about the paperwork you have to fill in as you wait your turn in the Vegas wedding chapel. He's had deals delayed before, but he usually gets his company.

Has Oracle finally eaten too much? Is it finally too big for anything but organic growth? It will be a sad day when Ellison isn't snapping up smaller tech stocks, but it may be coming sooner than we think.

5. Quoth the Maven nevermore
Yahoo! (Nasdaq: YHOO) paid roughly $160 million to buy online video syndicator Maven Networks last year. Now it is shutting down the service and winding down the existing contracts on the platform.

Doesn't Yahoo! want to grow its reach, especially when it comes to Web-based video? Yahoo! isn't very patient with its own properties, but you would think it would have a little more tolerance when it forks over nine figures for an upstart.

Let's beat the dumb drum:

dummies.The previous week's bonehead moves.Last year's silliest CEO quotes.

Investing Lessons From the Horse Track

By Matt Koppenheffer
July 2, 2009

Considering that I live in Las Vegas and report on casino companies for The Motley Fool, it's probably not all that surprising that I've done a bit of wagering at the casinos myself.

Most of what the casinos have to offer I don't bother with. Most games are set up so that no matter what you do, the house always has the edge. Always. Oh, you can win, but stay at the table or the machine long enough and you'll always end up paying it right back.

Horse racing, however, uses a pari-mutuel betting system, which basically means that bettors are competing against each other rather than the house -- so the odds aren't automatically stacked against you. What I've found even more interesting about horse racing, though, is that there are important lessons that we can shovel up and bring over into the investing world.

The best horses usually win
It almost sounds too obvious to mention, but much of the time the best horses take the top spots in their races. These are the horses that have shown the top speed, have previously raced against the toughest competition, and have the best trainers and jockeys working with them.

Similarly, the stocks of the best companies tend to perform well year after year. Berkshire Hathaway 's (NYSE: BRK-A) stock, for instance, is up more than 1,000% over the past 20 years. It's not particularly hard to see why; the company owns a collection of superb operating companies and has Warren Buffett sitting at the helm.

Coca-Cola (NYSE: KO) has provided its shareholders with average annual returns of around 12% over the past three decades. Again, it doesn't take brain-bending analysis to figure out why Coke's stock has been so successful. Coke is simply a great company that sells a product that people around the world can't do without. In other words, it's one of the best horses in the field.

Valuation matters
Now that I've told you that the best horses usually win, it's time to couch that by saying that the best horses don't always win. Sometimes a good horse runs a bad race and ends up in the middle of the pack, or another horse could run the race of its life and edge the favorite by a nose.

For this reason, it's important to make sure that you're getting odds that compensate you for the risk you're taking. If you always settle for low odds, then your winning horses will pay you very little and your losers will sink you.

Horse racing expert Steven Crist spoke at a Legg Mason investing conference in 2007, breaking it down very simply for thoroughbred handicappers -- and investors:

What you really want to do is determine which most-likely winners are good prices and which most-likely winners are bad prices. It is a very simple equation: Price x Probability = Value

Bringing this to the investing world, we can look at Amazon.com (Nasdaq: AMZN), which currently trades at nearly 50 times its estimated 2009 earnings. It's not much of a leap for me to say that Amazon is a great company, but it's highly debatable whether the probability of continued stellar growth justifies that hefty multiple.

On the flip side, UnitedHealth (NYSE: UNH) has seen its stock knocked down to a price-to-earnings ratio of less than 8. There's little doubt that the company faces significant headwinds from the economy, but the stock's valuation is attractive enough that the company doesn't have to grow very much for investors to be handsomely rewarded.

Buying stocks with high valuations will often lead to modest gains from companies that continue to do well, but those wins can be offset by disastrous losses from the stocks of highly valued companies that get tripped up. This is why you'll lose money by betting only on the favorites at the track. Buying stocks with more attractive valuations, on the other hand, offers the potential for larger gains on the upside and more moderated losses on the downside.

Quality, meet value
Putting the two concepts together, we can find an ideal strategy for horse racing or investing: Bet on the best horses (buy the best companies) when the betting public (other investors) has provided attractive odds (low valuations) and watch your bankroll (portfolio) grow.

This quest for quality at an attractive price can be very difficult due to the sheer number of investors following giant companies like ExxonMobil (NYSE: XOM) -- a $300 billion enterprise that sees nearly 30 million shares trade hands every day. It's very difficult to have an informational advantage against the thousands of other investors in this oil behemoth.

However, the advisors at our Motley Fool Hidden Gems newsletter have found that by searching among lesser-known small-cap companies, some sweet price/quality combinations can be found. Just like the sharp railbirds at the track, they do far more research and have much better information than most small-cap players.

Over Hidden Gems' six-year existence, the team has identified companies such as commercial food service equipment specialist Middleby (Nasdaq: MIDD) and seat belt and airbag king Autoliv (NYSE: ALV). While both companies are leaders in their respective niches, their small size allowed them to fly under the radar and sell at attractive valuations.

And if you like the look of those two, you can check out the rest of the Hidden Gems picks by taking a 30-day free trial of the service.

Even if you decide not to check out Hidden Gems, you can still take away this great lesson from the race track: You'll find the most investing success by searching out the highest-quality companies sporting the most attractive valuations. It's as simple as that.

Amazon.com, Berkshire Hathaway, and UnitedHealth Group are Motley Fool Stock Advisor selections. Berkshire Hathaway, Coca-Cola, and UnitedHealth Group are Motley Fool Inside Value selections. Coca-Cola is a Motley Fool Income Investor recommendation. Autoliv and Middleby are Motley Fool Hidden Gems recommendations. The Fool owns shares of Middleby, Berkshire Hathaway, and UnitedHealth Group.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway and Coca-Cola, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy thinks Matt was crazy for going with Chocolate Candy at the Belmont Stakes -- Dunkirk was the obvious pick.

Do Reverse Splits Ever Work?

By Dan Caplinger
July 2, 2009

When stocks perform well, an announcement of a coming stock split can make investors even more optimistic about the future. In the uncertain market environment we're facing now, however, many companies either have already made or are considering reverse stock splits to boost their share prices from extremely low levels.

Still, investors have to wonder: Will reverse splits do any good, or are they basically the kiss of death for a company?

A sordid history
AIG (NYSE: AIG) is the latest company to implement a reverse split, but it won't be the last. With many major companies trading in the single digits, reverse splits may be necessary to boost stock prices back up to a level at which they don't look like penny stocks.

By themselves, splits shouldn't make any real difference. Whether regular or reverse, a split simply changes the number of shares outstanding. Offer two shares for every one existing share, and the price for each should get cut in half. Issue one new share for every 10 currently outstanding, and each share's price should multiply by 10. The net value should remain the same.

Nevertheless, reverse splits have not worked out well for many companies that have used them in the past. Sun Microsystems (Nasdaq: JAVA), for instance, did a 1-for-4 reverse stock split back in November 2007. A year later, the stock had dropped more than 85% before it turned around. Even after Oracle 's (Nasdaq: ORCL) takeover bid for the stock, shareholders stand to receive less than half of what shares traded for at the time of the reverse split.

Similarly, in September 2006, Ciena (Nasdaq: CIEN) made a 1-for-7 reverse split. Although shares are currently back in the double digits, they're still down more than 65% from when the split took place.

Bright spots
As it turns out, not all reverse splits have been failures. Take a look at these stocks, which successfully recovered from reverse splits:

Stock

Date of Reverse Split

Return Since Reverse Split

Palm (Nasdaq: PALM)

Oct. 15, 2002 (1-for-20)

633%

priceline.com (Nasdaq: PCLN)

June 16, 2003 (1-for-6)

347%

Laboratory Corporation of America (NYSE: LH)

May 4, 2000 (1-for-10)

330%

Corrections Corporation of America

May 18, 2001 (1-for-10)

483%

Brightpoint

June 27, 2002 (1-for-7)

1,788%

Source: Yahoo! Finance.

More broadly, however, recent research suggests that investing in a company that has just done a reverse split is a losing proposition. According to a 2006 paper that looked at 1,600 reverse-split stocks between 1962 and 2001, such stocks substantially underperformed the overall market during the three-year period following the reverse split -- by an average of 1.3 percentage points per month.

Focus on fundamentals
None of this should come as any great surprise. For a company's stock to trade low enough that it'll even consider a reverse split, it typically has to endure a terrible period of financial results. The split itself doesn't solve the operational problems a company faces, so companies that can't find a way to recover simply fail. The few that do find permanent solutions to their problems may have spectacular runs, but from an overall return perspective, they simply can't outweigh the vast majority of firms that fail.

Stocks that choose to undertake reverse splits brand themselves with a red flag. Given their reputation as wealth-killers, reverse splits simply drive away many investors from ever considering a given stock. If that aversion proves to be irrational -- that is, if investors abandon the stock for dead, even after its business prospects revive -- then it can be potentially quite lucrative for those who keep their eyes open to the opportunities it presents.

All other things being equal, though, companies that get themselves into a position where they need a reverse split have a lot against them from the start. Except in the most extraordinary cases, therefore, investors may be smarter to seek better investments elsewhere.

More advice for today's challenging stock markets:

three cheap stocks.Could this stock be a triple in the making?Here how to earn the highest possible returns, period.

The Best Stock to Own

By James Early
July 2, 2009

Do you have a very best stock? A stock that brings you closer to retirement year in and year out? One like Kraft , formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years with dividend reinvestment? In terms of returns, Kraft has quite literally been the very best stock of the past half-century.

I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.

A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.

Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!

The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?

A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads. And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft 's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders like Oracle (Nasdaq: ORCL) are underserving their owners.

In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As co-advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.

Like Kraft, Procter & Gamble (NYSE: PG) has an enormous portfolio of well-branded products that a lot of people use. Its brands include Pringles, Crest, Duracell, and Bounty. At 3.4%, its yield isn't enormous, but its ability to generate free cash flow is quite impressive.

Speaking of companies with strong brands, I'm taking a hard look at Mattel , which manufactures a portfolio of iconic toys, including Barbie, Hot Wheels, Fisher-Price, and Matchbox. Competitor Hasbro (NYSE: HAS) is generating a lot of press with its Transformers franchise. But I believe Mattel has the stronger position when it comes to products and is very well-situated to market them with A-list partners like Dreamworks (NYSE: DWA). The 4.7% dividend yield should make the wait that much easier.

But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine StatoilHydro (NYSE: STO), a big name in North Sea energy exploration and distribution. The company has been battered by declining energy prices across the world, but remains well-positioned to serve energy-thirsty consumers in Norway, the U.S., and the rest of Europe. Like competitors British Petroleum (NYSE: BP) or ExxonMobil (NYSE: XOM), StatoilHydro should benefit from a long-term increase in fossil-fuel demand. Plus, you’ll be collecting a healthy 3% dividend yield along the way.

The Foolish bottom line
These stocks aren't companies that are perfect for everyone; they're ideas to jump-start your research. The best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.

Looking for more stock ideas? Income Investor is beating the market by more than five percentage points -- and I'm offering a free guest pass. Simply click here to learn more.

This article was originally published Nov. 14, 2006. It has been updated.

James EarlyÂ does not own shares of any company mentioned in this article. StatoilHydro and Procter & Gamble are Income Investor recommendations. Microsoft is an Inside Value pick. Hasbro and Dreamworks are Stock Advisor selections. The Fool owns shares of Hasbro and P&G. The Motley Fool has a disclosure policy.

Squeezing Blood From a Half-Dollar

By Brian Orelli
July 2, 2009

Thank goodness. After months of soap-opera rumors, including potential deals with Pfizer (NYSE: PFE), Lundbeck, Bristol-Myers Squibb (NYSE: BMY), and Novartis (NYSE: NVS), we finally have a definitive close to Elan 's (NYSE: ELN) strategic review.

Apparently Johnson & Johnson (NYSE: JNJ) beat out at least 30 other companies to get a portion of Elan. With that much competition, you'd think the deal would have had insanely good terms, but they just don't look that special to me.

Johnson & Johnson is investing $1 billion in Elan in exchange for an 18.4% stake in the company. That works out to $9.32 per share -- considerably higher than yesterday's close, but Elan traded above $37 per share a year ago, so the dilution is coming at a tough price for investors.

The other part of the deal involves Johnson & Johnson setting up a joint venture seeded with Elan's Alzheimer's disease program, including its phase 3 candidate, bapineuzumab, which is partnered with Wyeth (NYSE: WYE). Essentially the deal works out so that Johnson & Johnson picks up the next $500 million in expenses and then Elan will begin to incur 49.9% of the costs. After that, Elan is entitled to 49.9% of the profits or losses and some royalties once sales hit certain undisclosed thresholds.

So Elan gets an infusion of cash and lowers its burn rate for the next few years until the $500 million is used up, which it desperately needed to do, considering it has over $1.76 billion in debt.

But it's also giving up a lot. As any third grader can tell you, half of a half is a quarter, and that's now how much of bapineuzumab Elan owns. Considering the drug's multi-billion potential, going down to a 25% stake could be a big mistake.

And that's the ironic part about this. If bapineuzumab fails, Elan's management will look like geniuses, but, if it succeeds, the tight spot they worked the company into that led to these less-than-favorable terms will come back to bite them.

More Foolishness:

deal-making roll.Rick picked Elan as one of his 5 stocks for under $10 back in February.Bargain stocks are everywhere.

Prep for the Pullback Now

By Shannon Zimmerman
July 2, 2009

Sure, we all feel like geniuses now, right? We stuck it out -- "it" being the worst economic crisis since the Great Depression -- and have now enjoyed fat and happy double-digit gains over the past three months.

There's surely more to come, right? Right?!

Survey says!
Who knows? We Fools pride ourselves not on making market calls, which is a great way to get slapped silly by the market's invisible hand, but rather on our fundamental focus. Is a company's market share likely to shrink or grow? Has its management team delivered the goods over the long haul while deftly navigating up markets and down? And in terms of valuation, does the firm's stock look like a blue-light special or a high-end luxury item?

In my experience, it's that last element -- valuation -- that's often the toughest taco to crack. Some companies never look cheap, after all, while others that appear to be bargains may turn out to be value traps instead. Still, in general terms, one thing remains true: When a company sports moon-shot multiples, there's little opportunity to cushion the blow when the overall market hits the skids or when the company itself blows up.

The higher they fly, the harder they fall
Take, for example, Research In Motion and Google . The former has gained more than 70% year to date, while the latter has increased by roughly 30% over the period. Yet sneaking a peek at this illustration of recent history should be instructive for folks who may currently own either company's shares, as well as Fools who may be considering a purchase.

Yikes, that's a long way down. But, to be fair, that kind of rearview analysis always begs the question of whether investors could have -- or should have -- seen the writing on the wall. My take: Perhaps not, but if they'd tuned into each firm's valuation, savvy investors might have gotten an early warning.

Shortly before its slide began, after all, Research In Motion traded at a level that priced in more than 60 times the previous year's earnings. Google, meanwhile, sported a P/E in the 50s back when we were celebrating New Year's 2008.

Bottom line: Be afraid of these kinds of stocks. Be very afraid. When an all-but-inevitable market pullback arrives, they are sitting -- or in this case flying -- ducks.

Good company, lousy investment
JPMorgan Chase (NYSE: JPM) and Qualcomm (Nasdaq: QCOM) look priced to fall just now, too. And that goes double for the likes of Visa (NYSE: V) and Amazon.com (Nasdaq: AMZN), which sport P/Es north of 40. That's right: Current purchasers are apparently willing to pay more than 40 times earnings for the privilege of owning their shares.

Make no mistake. Like Google and RIMM, these are fine businesses; their stocks are just not finely priced. Indeed, with their swollen multiples, the downside risk of dreaded "multiple compression" is just too great, particularly when long-haul overachievers like Microsoft (Nasdaq: MSFT) and Wal-Mart (NYSE: WMT) are trading for a proverbial song.

And if those discounted cash-cow gushers aren't the 'droids you're looking for -- and if you're really focused on high-flying heavyweights with ample room to run -- consider Berkshire Hathaway (NYSE: BRK-B), a concern that comes with a Grade A equity portfolio, not to mention CEO Warren Buffett. I believe Berkshire to be basically a bargain at any price, even one that, as it currently does, reflects a hefty premium relative to earnings.

The Foolish bottom line
To be sure, there's more to uncovering values than just parsing price multiples. Indeed, separating the wheat from the proverbial chaff -- i.e. stocks that merely look cheap -- is a full-time job.

If you'd like some assistance when it comes to avoiding value traps, be sure to check out the Fool's Inside Value service, where the emphasis is squarely on rock-solid companies trading for a song. Click here and you'll have 30 no-risk days to decide if Inside Value is for you. There's no obligation to subscribe and your guest pass is absolutely free. Give it a go now.

Already subscribe to Inside Value? Log in at the top of this page.

This article was first published June 2, 2009. It has been updated.

Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire and Duke Street services and doesn't own shares of any of the companies mentioned in this article. Google is a Motley Fool Rule Breakers recommendation. Wal-Mart, Berkshire, and Microsoft are Inside Value selections. Berkshire and Amazon are Stock Advisor picks. The Fool owns shares of Berkshire Hathaway and has a strict disclosure policy.

Will Renewable Energy Be the Equivalent of Tech in the Go-Go '90s?

By Jennifer Schonberger
July 2, 2009

Investors are constantly searching for the next "it" space. Could renewable energy be the one?

Brad Nordholm, CEO of Starwood Energy, the energy investment affiliate of private equity firm Starwood Capital, said in a recent interview that renewable energy has "huge" growth prospects.

"The next couple of years I think we're going to go through a process that you see with any rapidly growing area -- Internet in the late 90s, for example," Nordholm said. "Like any process, there are going to be winners and losers, but for the well-capitalized companies that have experience in this space, we think the opportunities are great."

A "sunny" spot
The economics of solar power are becoming very attractive in the United States, according to Nordholm. "The technology is improving and the pricing for solar power is decreasing," he said.

"We see solar power as becoming increasingly competitive with other sources of renewable power generation as well as conventional power generation." Nordholm says he expects solar power to reach "grid parity" -- when solar power is on par with conventional forms of generation -- in three to five years.

Specifically, he points to a combination of (1) improved competitiveness in pricing of wholesale energy and (2) the mandate for renewable energy that comes from state and federal renewable portfolio standards (RPSs) as the driving force behind utilities that seek renewable energy.

In the first five months of this year alone, U.S. utilities issued requests for proposals for over five gigawatts (GW) of renewable wholesale energy, according to Nordholm. About half the states have RPSs, which set goals for the percentage of electricity that must come from renewable sources by a future date. Nordholm also said that for these RPSs to be met, new renewable energy will need to be developed in the next 10 years to satisfy the existing renewable portfolio standards.

The federal climate energy bill that sets the federal RPS has currently passed the House, but remains in the Senate. Nordholm says the pace for adoption of renewable energy may accelerate (the federal RPS standard is being proposed at lower levels).

Nordholm's private equity firm has teamed up with Lockheed Martin (NYSE: LMT) to pursue solar generation projects in North America. The two companies signed a deal in May with Arizona Public Service to build the world's largest dispatchable solar energy plant. Nordholm says Starwood Energy is currently working on solar plant configurations that range from 75 MW to 290 MW and expects more deals to materialize in the second half of 2009 and into 2010.

Takeaways
I spoke with Nordholm about areas other than solar. Though he runs a private equity outfit, his thoughts can apply to retail investors. I've tried to distill some of his key takeaways:

Traditional forms of energy aren't passe investments.
Nordholm says significant firms are making investments in oil and gas exploration and production and other areas right now. As oil prices have recovered, Nordholm says smart people are reemerging to invest in that space.

"Oil prices have rallied substantially, while natural gas in contrast has remained rather flat," he said. "As the economy improves, the demand for these commodities will also increase, and I would expect to see some further recovery of those prices." Well-positioned traditional energy concerns could still make for good investments.

Europe isn't as attractive as it used to be.
Europe has been significantly ahead of the U.S. in terms of investing in renewable energy, including solar. According to Nordholm, Europe obtains more than 25% of its energy from renewable sources.

As a result, now that Europe has reached some of its goals, he says the market is slowing down a little but generally remains very favorable. For prospective solar investors, take note that the upside in profitability for European solar is good, but it may not be as good as before.

China is poised to post explosive growth in the renewables area.
China has just announced huge policies to promote the utilization of photovoltaic solar in communities across China. "It's very quickly going to become the largest photovoltaic solar market in the world," Nordholm told me.

Nuclear energy will experience a renaissance.
Nuclear will enjoy somewhat of a renaissance, Nordholm says, but it will be done by very large firms that have the operating history and expertise necessary to operate nuclear power plants.

What to do with this info
While you and I probably don't have our own private investment pool of dollars, it's definitely worth paying attention to the renewable energy "megatrend."

Investors seeking exposure to the solar space broadly should consider Claymore/MAC Global Solar Energy (NYSE: TAN) or Market Vectors Solar Energy ETF (NYSE: KWT).

Major holdings of these ETFs, including SunPower (Nasdaq: SPWRA), First Solar (Nasdaq: FSLR), Suntech Power (NYSE: STP), and Yingli Green Energy (NYSE: YGE), are expected to gobble up a piece of the utility-scale solar market.

But beware if you're looking at individual companies: If you invest in them for the solar projects they're currently taking on, be careful that those companies have their financing secured. Nordholm says that some of the new renewable technologies are not yet financeable by banks.

For Related Foolishness:

An Unexpected Player in the Solar Market Roundtable: Will Cap and Trade Hurt America?This Week in Solar

This Week's 5 Smartest Stock Moves

By Rick Aristotle Munarriz
July 2, 2009

If you're feeling good about the market, you're not alone. Take my hand as we go over some of this week's more uplifting headlines.

1. Amazon knows how to cross the state line
First it was North Carolina. Now it's Rhode Island and Hawaii. Amazon.com (Nasdaq: AMZN) is booting affiliates in states that are threatening to pass legislation that would force Amazon to charge and collect taxes at the state level.

The bills suggest that Amazon has a presence in their states, even if it's just a hobbyist train collector who uses Amazon ads on his free-hosted blog to earn a little commissionable revenue from the world's leading online retailer.

My heart goes out to members of the Amazon Associates program in North Carolina and Rhode Island, but the e-tailer is doing the right thing. Competition is cutthroat in cyberspace, and delivered pricing is everything. Besides, unlike smaller chains that live and die by affiliate marketing, Amazon has evolved over the years. Shoppers go to Amazon.com directly because they know it carries just about anything. It won't lose out on a whole lot of revenue. The only real losers are the states that figured they would fatten their collections, only to realize that they will actually shrink as web-entrepreneurs residing in their states earn less taxable income.

2. Netflix is one in a million
Three years after daring data-hungry developers to top its proprietary Cinematch flick-recommendation platform, Netflix (Nasdaq: NFLX) may finally have a winner. A multi-national team has apparently topped the requirement to nab a $1 million award from Netflix, besting the Cinematch system baseline by 10% or better.

Thousands of teams have been trying to improve on the Netflix data-mining functionality that spits out DVD recommendations based on rental histories and star ratings. Whether it's the money or the academia, the challenge has generated a lot of publicity for Netflix.

For starters, the fact that it's taken roughly three years is a testament to the original Cinematch platform. If thousands of frenzied teams of brainiacs took this long to improve it, how will any other company rival Netflix for getting into the psyche of the couch potato and knowing just what they'll want to see next?

Well played, Netflix. It's a million bucks well spent.

3. Satellite radio: Born to run
You know you're nimble when you're able to launch a 24/7 Michael Jackson tribute channel less than two days after the iconic pop singer died. Sirius XM Radio (Nasdaq: SIRI) then kept the event-driven programming coming, announcing 4th of July content that includes a Bruce Springsteen concert (that will be recorded today in Germany), a live Jamie Foxx Independence Day show from Las Vegas, and a child psychiatry marathon on its health and medical channel.

Is it any surprise that the company also decided to extend CEO Mel Karmazin's term this week, bumping up his pay in the process? Shares of Sirius XM may be trading for jukebox change, but it's hard to fathom the merger between Sirius and XM even being attempted by anyone other than the bold Karmazin at the helm.

4. Let's go logrolling
After a dozen mostly successful IPOs during the second quarter, the third quarter got off to a strong start with yesterday's debut LogMeIn (Nasdaq: LOGM). The remote connectivity specialist priced its IPO at $16. It popped at the open to $20, closing at $20.02.

Is a market cap of nearly $430 million justifiable for a company that has posted annual losses in each of the past three years, clocking in with revenue of just $51.7 million last year? Mr. Market seems to think so.

It certainly helps that LogMeIn is growing quickly, with 22.1 million registered users and counting. It also began 2009 with a healthy first quarter profit.

5. Gosh, Oshkosh
Shares of Oshkosh (NYSE: OSK) soared 27% yesterday, after the company was awarded a $1 billion military contract for its armored mine-resistant vehicles. It's not every day that a company wins an order that is roughly the size of its market cap.

Oshkosh beat out larger contractors like General Dynamics (NYSE: GD) and Navistar (NYSE: NAV) for the order, but it's willing to share the love. Oshkosh plans to subcontract some of the work to its disappointed rivals.

The real winner, of course, will be the military personnel who will soon be able to get around in sturdier trucks.

This Week in Solar

By Toby Shute
July 2, 2009

Canadian Solar (Nasdaq: CSIQ) kicked the week off on a positive note, with an announcement that the firm had "recently signed or reconfirmed sales contracts, contract extensions or received purchase orders for delivery of about 120MW of solar module products." Of course, that was too wordy for the press release's headline, which simply read "Canadian Solar Announces 120MW of Recent Sales Orders." Same difference, right?

Rather than slam CSI for this bit of spin, I will point out that this announcement follows the firm's decision a few weeks ago to restart its module expansion program. Further, one of CSI's customers, an integrator by the name of Systaic, spoke in the release of the improving financing environment in its native Germany, and the bankability of CSI-powered solar plants. That's more than PR fluff.

On Tuesday, Suntech Power (NYSE: STP) pulled down a $50 million loan from the IFC, a division of the World Bank. I'm not sure if it was this financing, or the rumors of a giant new solar project in the Sichuan province of China, but some analysts hiked their ratings on the solar slugger the following day.

By Friday, it was confirmed by Suntech reps that the firm had indeed entered into "a non-binding strategic agreement similar to our agreement with the Qinghai government," referring to an equally mammoth 500-megawatt project that came to light earlier this month.

Also seeing some Chinese love this week was Yingli Green Energy (NYSE: YGE), which pulled down a much more modest 10MW project. I'm increasingly getting the sense that hometown heroes are going to have a near-lock on the Chinese market for the foreseeable future, which poses an interesting medium-term challenge for outsiders like SunPower (Nasdaq: SPWRA)(Nasdaq: SPWRB) and First Solar (Nasdaq: FSLR).

5 Stocks Geared for Growth

By Rich Duprey
July 2, 2009

A stock's price follows its earnings, which in turn follow its sales. A company needs only to take care of its business for investors to profit in the long run.

With that in mind, examining companies whose revenues and profits are rising -- and which inspire analysts' confidence in continued future growth -- should give us a fertile field in which to discover solid candidates for long-term outperformance.

The roaring 20s
Below are a handful of companies that have enjoyed 20% or more annual growth in sales and earnings over the past three years, and for which analysts forecast total growth of 20% or more over the next two years. We'll then pair up those predictions with the community stock research at Motley Fool CAPS, to get an idea of which companies the 135,000-plus members think have the best chances of beating the market over the long haul.

Company

3-Year Past Revenue Annual Growth %

3-Year Past EPS Annual Growth%

Est. 2-Year Future EPS Growth

Est. 2-Year Future Revenue Growth

CAPS Rating (out of 5)

Concur Technologies
(Nasdaq: CNQR)

42.2%

45.4%

28%

34%

HMS Holdings
(Nasdaq: HMSY)

44.8%

31.5%

72%

45%

****

HQ Sustainable Maritime Industries
(NYSE: HQS)

30.2%

26.6%

52%

63%

*****

InnerWorkings
(Nasdaq: INWK)

69.9%

29.3%

37%

29%

Phase Forward
(Nasdaq: PFWD)

26.2%

41.2%

34%

43%

****

Source: Capital IQ, a division of Standard & Poor's; Motley Fool CAPS.

Just because an analyst predicts that a company will feature healthy growth opportunities doesn't mean those predictions will become reality. But their preferred picks do offer an excellent starting place for your own research into extreme buying opportunities. Below, we'll look at the best rated stock on today's list to see why it rose highest in investor's estimation, despite not having the highest EPS growth rate.

Tippling at the speakeasy
Consumers are taking the bait from HQ Sustainable Maritime hook, line, and sinker. Revenues for the Seattle-based fish grower and processor jumped 18% in the first quarter, rising to $10.8 million, while it reeled in a 22% jump in gross profits. Net income wriggled higher to $1.1 million compared to a $1 million net loss a year ago. With almost $55 million in cash and equivalents it remains long-term debt free.

HQ Sustainable purchases and processes farm-bred tilapia in China. North America remains a large market for the fish, both fresh and frozen. That represents a potential growth market for the company as the bulk of China's tilapia exports are primarily in frozen fillet form, representing about 73% of all tilapia exported from China. Restaurants like McCormick & Schmick have turned to tilapia as a cost-saving item. Yum! Brands ' (NYSE: YUM) Long John Silvers unit and Darden Restaurants (NYSE: DRI) Red Lobster regularly feature tilapia dishes.

CAPS member jerseytix sees HQ Sustainable Maritime becoming a big fish in a small pond: "Small, well-run company with good growth, excellent fundamentals, and interesting business model. Commercial fisheries are getting pounded which will limit competition."

HQ Sustainable wasn't able to hook its performance last month as it dropped 4% while the other 95 companies comprising the CAPS Food Products sector rose 4% over that same period.

No Great Depression
It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page. Why not head over to the completely free CAPS service and let us hear what you've got to say about these or any other stocks that you think we should fill up our dance card with?

3 Stocks on Our Radar

By Chris Hill
July 2, 2009

In the latest installment of our Motley Fool Money podcast, advisors Seth Jayson, James Early, and Shannon Zimmerman discuss some of the big questions of the week.

With unemployment hitting a 26-year high, is now the time to look at stocks like IBM (NYSE: IBM) and Johnson & Johnson (NYSE: JNJ)? Why would Wal-Mart (NYSE: WMT), the nation's largest employer, support a government plan for employer-mandated health insurance? If we're at the bottom of the auto sales market, is it time to look at companies like Ford (NYSE: F) and Toyota (NYSE: TM)? And would Bernie Madoff have avoided a 150-year prison sentence if he'd simply taken up tap-dancing in his youth?

All that, plus hear why Wal-Mart, Lowe's (NYSE: LOW), and AutoLiv (NYSE: ALV) are the stocks our panel is eyeing this week.

Listen now at www.motleyfoolmoney.com, or subscribe through iTunes.

The One Security You Must Not Buy

By Tim Hanson
July 2, 2009

Remember The One Stock You Must Buy? It was:

And while it's always a good time to buy a stock that possesses those four core traits -- think of big winners such as Home Depot (NYSE: HD) or Urban Outfitters (Nasdaq: URBN) back in the day -- the problem recently has been that due to the crippling downturn, investors aren't interested in buying any stocks at all.

Is that you?
A recent BusinessWeek article declared it loud and clear: "More investors are shunning stocks." And what are they doing instead? The anecdotal answer from the BW article was cash, and that's backed up by hard data. According to the Investment Company Institute (ICI), equity mutual funds saw net cash outflows of more than $20 billion at the beginning of March -- money that only now (after the recent rally) is starting to move back into stocks.

Now, depending on your individual situation, moving from stocks to cash can be a savvy move. That's particularly true if you're in or within five years of retirement, unable to sleep at night because of stock market volatility, or looking to spend some of that cash in the near term on a home or tuition and need to keep its value stable.

Know, however, that not all cash is created equal.

Say what?
First, if you're hoarding your cash in small bills in your mattress, you're earning no return (and that lumpiness could be what's keeping you up at night). Factor in inflation, and those dollars in your pocket are actually losing value over time.

Now, we've been "lucky" since November in that the current economic downturn has caused almost zero inflation. But given the fact that our government is currently printing copious sums of money to pay for stimulus spending, I do not believe that low inflation rates can last.

That fact also makes owning long-term Treasuries a dicey proposition; 30-year Treasury bonds are yielding an absurdly low 4.3% at present. Given historical inflation rates, that means that if you buy one, you're probably dooming yourself to 30 years of 1% annual real returns.

Is that a number you're willing to accept for the next three decades?

Warren Buffett wouldn't
Writing in his recent letter to shareholders, Buffett noted, "The investment world has gone from underpricing risk to overpricing it. ... When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

What he means here is that investors -- individual and institutional alike -- have grown so concerned about protecting their principal that they're paying enormous premiums (in the form of paltry rates of return) to own government debt. This is particularly dangerous at the 30-year end of the yield curve, because as soon as interest rates rise or investors get comfortable with stocks and corporate bonds again, the values of these Treasuries will plummet and you'll be locked in to 30 years of awful returns.

So there you have it: The 30-year Treasury, the one security you must not buy.

But you said
Earlier, however, I noted that you should consider cash if you're in or nearing retirement, fretting about volatility, or looking to spend cash in the near term and need it to hold its value. If that's you, continue to stay away from the 30-year end of the yield curve. Instead, buy something like Vanguard Short-Term Bond (BSV), a liquid ETF that holds Treasuries with maturities that do not exceed three years. Though you'll sacrifice some yield here, you will protect the value of your cash and retain flexibility relative to interest and inflation rates.

After all, your goal in going to cash today is not to earn 4% for the next 30 years, but rather to insulate yourself from some of today's wild swings. Short-term bonds will do that without tying up your capital.

One bold prediction for 2039
Because think about what will happen in the world over the next 30 years. We'll pull out of this economic crisis and experience several more bull and bear markets. There will be new technologies and significant changes in the global economy. Fortunes will be made.

At Motley Fool Global Gains, we believe you can earn far better than 4% annual returns by focusing on a few obvious, long-term themes like this one: In 30 years, the size of the middle class in China will be far larger than it is today.

We can't find anyone, anywhere who will refute that. And given that the Chinese middle class today numbers somewhere between 100 million and 150 million, that means we're staring down a spending class of (to take a shot in the dark) some 300 million to 500 million people -- a number greater than the current U.S. population.

What companies will benefit from this societal shift? Here are a few we're watching at Global Gains:

Company

Will Benefit Because ...

Perfect World (Nasdaq: PWRD)

China already has the world's greatest number of Internet users, and that number will increase as more and more Chinese citizens make money and move online.

Luxottica (NYSE: LUX)

Designer sunglasses are the first step toward luxury living.

Best Buy (NYSE: BBY)

It’s a growing player in China that should benefit as consumer electronics demand in the country increases.

You know what to do next
Neither predicting an increase in the size of China's middle class nor finding the companies that will benefit is rocket science, but it will take a disciplined investor like yourself to buy these stocks amid the current volatility and stick with them over the next three decades. Yet if these three stocks on average don't outperform the 30-year Treasury bond through March 2039, I'll eat an entire bowl of "tongue-torching" Sichuan peppers (and we'll post the video here on Fool.com).

If you're looking for some help navigating the current volatility, I encourage you to sign up to receive all of our free dispatches that we'll mail back during our upcoming Global Gains research trip to China. Simply enter your email address in the box below.

Health Insurance: The New Competitive Advantage

By Alyce Lomax
July 2, 2009

Retail giant Wal-Mart Stores (NYSE: WMT) has long seen its reputation tarnished by allegations that it mistreats employees. But now, the company is spearheading a government-backed effort to create an "employer mandate," which would force most companies to provide health insurance to employees. Wal-Mart's tack may not be as bizarre as it sounds -- nor as commendable.

Many companies naturally oppose Wal-Mart's position; the National Retail Federation said it was "flabbergasted" by the retailer's move. Despite its historically bitter opposition to unions, Wal-Mart's even joined forces with the Service Employees International Union, sending a letter to President Obama in support of an employer mandate. Politics makes strange bedfellows, indeed.

Quit hogging the covers!
True, Wal-Mart's huge size can help it create big benefits for communities and the environment -- when it decides to do so. But let's apply a bit of healthy skepticism to the idea that Wal-Mart has suddenly taken an altruistic interest in its employees' health.

Wal-Mart says the mandate will only be effective if the government commits to reducing health-care costs for companies, so it's clearly hoping for favorable government intervention. Meanwhile, the Senate Finance Committee is considering an alternate plan that might result in more onerous health care requirements for companies hiring lower-wage workers. By backing "employer mandates" instead, Wal-Mart is rooting for the less costly of the two prospective plans.

Beyond its own bottom line, Wal-Mart may also hope that changes to the law will ultimately give it an advantage over its competitors. Consider Wal-Mart's massive size and annual revenue, then imagine the kind of squeeze an employer mandate for health care might place on smaller rivals' profitability and competitiveness. Bad news for them would be great news for Wal-Mart.

This sort of strategy, known as "regulatory capture," is an effective -- if sneaky -- way to get a leg up on rival businesses. For example, advocates of government regulation of tobacco hailed the recent signing of a landmark anti-smoking bill. But Altria (NYSE: MO) lobbied for it, too, since provisions in the law will lock in Marlboro's iron grip on American market share. (Rival Lorillard has reportedly dubbed the bill the "Marlboro Monopoly Act.")

Tobacco's not the only business to benefit from some covert help from Uncle Sam. Witness the former attorney for Monsanto (NYSE: MON) who rather conveniently served as deputy commissioner for policy at the Food & Drug Administration when it issued rules about genetically modified foods. And I suspect Google (Nasdaq: GOOG) may face trouble from Uncle Sam in the near future. A number of former lawyers for the copyright-loving Recording Industry Association of America have since moved into the Justice Department, and I doubt they're too fond of Google's efforts to loosen laws protecting intellectual property.

Far less noble than it sounds
In my opinion, companies shouldn't need government prodding -- or handouts -- to improve their behavior. (More encouragement from consumers wouldn't hurt, though.) Happier employees do better at their jobs and create more satisfied customers, all of which enhances a company's competitive advantage in the long term. Starbucks (Nasdaq: SBUX), Costco (Nasdaq: COST), and Whole Foods Market (Nasdaq: WFMI) have stood out from their retail peers by proactively providing health-care benefits to many of their workers.

When Uncle Sam gets involved, even well-intentioned regulation can fall prey to favoritism toward the powerful and well-connected. That's not true competition, and however much it may boost favored companies' profits, I don't respect it. Despite its altruistic veneer, I think the Bentonville behemoth's being as ruthless as ever -- and hoping the government will lend it a hand.

Do you think Wal-Mart's finally turned toward the side of the angels, or is it just waiting to stick the knife in? Share your thoughts in the comment box below.

Celebrate Independence Day with some related Foolishness:

The Trouble With Regulation Free Markets? What a Joke Trust vs. Antitrust

As Card Losses Hit Record Levels, Banks Hit Back

By Alex Dumortier, CFA
July 2, 2009

Credit card losses reached 10.4% in June -- a record level that is quickly eroding bank profits on these products. That's bad news for large card issuers such as Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM).

The trend has prodded the banks into action. Citi responded by increasing the rates it charges on approximately 14 million cards by almost three full percentage points, according to analysis by Credit Suisse . Meanwhile, JPMorgan Chase announced on Tuesday that it is raising its minimum required payment on unpaid balances from 2% to 5%, beginning in August.

What's the damage?
When the government stress-tested 19 major financial institutions, it estimated losses on credit card loans for 2009-2010. The following table contains the estimates for seven major card issuers under the government's "more adverse" economic scenario. The numbers are eye-watering:

Bank

Estimated 2009-10 Credit Card Losses

Total Loss Rate

Wells Fargo (NYSE: WFC)

$6.1 billion

26.0%

Bank of America

$19.1 billion

23.5%

Citigroup

$19.9 billion

23.0%

JPMorgan Chase

$21.2 billion

22.4%

US Bancorp (NYSE: USB)

$2.8 billion

20.3%

American Express (NYSE: AXP)

$8.5 billion

20.2%

Capital One Financial (NYSE: COF)

$3.6 billion

18.2%

Source: The Supervisory Capital Assessment Program, overview of results, May 9, 2009.

But even those figures don't tell the full story. Under the "more adverse" scenario, average unemployment was considered 8.9% this year and 10.3% in 2010. Unfortunately, the unemployment rate in the first half of the year was already at 8.65%, and it reached 9.5% in June. In that context, I think it's highly likely that reality will turn out to be "even more adverse." Because unemployment is one of the best predictors of credit card losses, we should expect bank losses to exceed initial estimates.

The good news for stock pickers
This suggests that banks could still have some unpleasant surprises in store for us when they announce earnings over the next 18 months. Nevertheless, I continue to think this is one of the most attractive sectors for serious stock pickers. The risk of financial meltdown has receded, but valuations remain depressed due to the uncertainty concerning future profitability, spelling opportunity for investors with cash on hand and a steady temperament.

Looking for specific names? Morgan Housel highlights three high-quality companies that are still cheap.

More Foolishness:

3 Stocks on Buffett's Wish List 10 Dividend Stocks for the Next Decade and Beyond

At Last, a Heartening Drug Approval

By Robert Steyer
July 2, 2009

With a cloud hanging over its Lantus insulin, sanofi-aventis (NYSE: SNY) offered a ray of sunlight to investors this morning when the Food and Drug Administration approved its drug Multaq for restoring the heart's rhythm caused by atrial fibrillation.

The FDA approval, even with certain restrictions on Multaq's use, will mean a boost to revenue and morale for the French drugmaker. Its last major drug submission to the FDA – the weight loss drug Acomplia – was never approved.

In recent days, Lantus has come under criticism for an allegedly increased risk of cancer, although the statistical evidence is murky.

The FDA is examining the allegations that are based on a review of insurance records in four European countries. The company says the drug is safe.

The FDA's approval for Multaq gives CEO Chris Viehbacher something to build upon as he contemplates expanding sanofi-aventis' scope. Although he indicates the company won't act as dramatically as Pfizer (NYSE: PFE), which is buying Wyeth (NYSE: WYE), or Merck (NYSE: MRK), which is acquiring Schering-Plough (NYSE: SGP), Viehbacher says more generic-drug ventures are on the menu.

Measuring Multaq
It will be difficult to immediately assess Multaq's revenue potential due to the many degrees of severity of atrial fibrillation as well as the many treatments that include milder generic and brand-name drugs that slow down a rapid heartbeat, electrical jolts to the heart to restore normal rhythm, atrial pacemakers and surgery.

There's bound to be a growing market because the risk increases with age, according to the American Heart Association, which says about 2.2 million Americans have the disease. Atrial fibrillation, which is the quivering rather than the beating of the two upper chambers of the heart, is dangerous because it leads to the heart's inadequate pumping of blood. If blood coagulates and creates clots inside the heart and then is pumped out, the clots can block an artery and cause a stroke.

Multaq is approved for treating patients with atrial fibrillation and a companion condition called atrial flutter, and whose heart beats have returned to normal or who will undergo drug or electric-shock treatment to restore a normal rhythm. Sanofi-aventis will be banking on clinical trial results that showed the drug reduced cardiac hospitalization or death by 24% when compared to placebo.

This is heartening news for sanofi-aventis investors.

Related Foolishness:

review panel's comments on Multaq.sanofi's CEO and what he can do.Threats to sanofi's Lovenox blockbuster.

Chinese Paying More Than They Should

By David Lee Smith
July 2, 2009

You almost get the impression that the Chinese steelmakers are trying to shoot themselves in the foot.

With most steelmakers in Japan and South Korea having agreed with their big iron ore suppliers -- I'm speaking of the likes of Vale (NYSE: VALE), Rio Tinto (NYSE: RTP), and BHP Billiton (NYSE: BHP) -- on price cuts of 28% to 33%, the Chinese have now passed the expected Tuesday deadline for establishing this year's final benchmark price. At this point, there is no sign of capitulation on the part of the bigger Chinese manufacturers, most of who appear to be holding out for cuts of 40% or more.

The Chinese manufacturers, via the China Iron and Steel Association, began negotiating with the iron ore miners at a time when commodities prices had taken a bath. At that time, the steelmakers were looking for conditions to work to their advantage, such that they might be granted as much as half off last year's prices.

But now, with steel demand having been boosted by China's own stimulus package and Chinese output rebounding, smaller steelmakers have struck side deals while the nation's bigger steelmakers have been forced to access the spot markets. This has led to increases in both ore imports and prices.

This is occurring as Aluminum Corp. of China (NYSE: ACH), or Chinalco, was ready to make a $19.5 billion investment in Rio Tinto in order to help the London-based miner repay some acquisition loans. However, at the 11th hour, Rio Tinto decided to conduct a rights issue and to form an iron ore joint venture with BHP.

In the process, the company raised $21 billion and has obviated the need for help from Chinalco. It now appears, however, that Chinalco has participated in the rights offering to preserve its current 9% stake in Rio Tinto.

I'm a believer that most of the commodities provided by Rio Tinto will slowly return to higher levels. On that basis, I'd carefully watch the company: It's a process that could lead to some Foolish profits.

For related Foolishness:

Rio Tinto's Continuing Chinese Challenges Is Vale Ready to Squeeze the Chinese?Don't Jump Off the Cliff

These 5 Underdogs Are No Dogs

By Rich Duprey
July 2, 2009

Short-sellers and hedge funds, though sometimes shadowy, are sometimes seen as the smartest investors in the room. They did their homework and will bet their capital against the crowd. It's not the most popular way to go, but the rewards can be quite lucrative.

On Motley Fool CAPS, we've got our own brand of leading analysts who found the chinks in a company's armor and correctly called its fall. "Underdogs" are investors who earned 100 or more CAPS points correctly predicting one or more stocks would underperform the market.

Let's look at some of the recent calls these All-Star investors have made. Just as hedge fund operators don't always go short, we're going to look at recent Underdog picks, no matter which way they've been called.

Underdog

Member Rating

Company

CAPS Rating
(Out of 5)

Call

UltraLong

100.00

Diedrich Coffee (Nasdaq: DDRX)

Underperform

dwot

99.98

Dollar Thrifty Group (NYSE: DTG)

Underperform

msIRA

99.84

Valero (NYSE: VLO)

****

Outperform

ElViking

99.81

Activision Blizzard (Nasdaq: ATVI)

*****

Outperform

Pumpstick

99.45

Archer-Daniels-Midland (NYSE: ADM)

****

Underperform

Not every short sale goes as planned, so it's a risky position to hold. Stock prices can be irrational for longer than you have money to stay in the game. So don't use this as a list of stocks to sell or buy, but rather as the launching pad for further research.

Underdogs still wag their tails
Although it's kicking and screaming the entire way, Sony may have no choice but to be dragged to the sacrificial altar of game-console price cuts. Year-over-year sales of its PS3 system have fallen for seven straight months, and with game industry sales dropping 30% to less than $1 billion in May, Sony will be forced to change its hard-line stance. If it fights the inevitable much longer, it faces the risk that top game maker Activision Blizzard will cease production of titles for the system.

A price cut would undoubtedly eat into Sony's margins, but the sales boost it would generate would stave off further market-share losses, and it might even require Microsoft to price its Xbox 360 even more aggressively. Nintendo , with its Wii positioned at the $250 level, remains the top-selling console maker, but has also witnessed declining sales in recent weeks.

A console price war would benefit game makers as well, since they realize higher game sales as more consoles are sold. Leading game retailer GameStop (NYSE: GME) has been agitating for Sony to cut its prices for a while now, and it would also like to see more movement in the market.

Activision Blizzard, however, might be able to move the needle all on its own. In addition to its insanely popular and addicting World of Warcraft franchise, it will be releasing four titles for mobile-phone users, including Guitar Hero 5. A combination of an improved console cycle and its own raft of new or improved game releases puts the joystick in Activision Blizzard's hands.

Watching my own daughter's struggle to go cold turkey with her WoW obsession helps me understand why CAPS member riffle10 believes the game maker will continue to succeed:

Three words: WORLD OF WARCRACK. They have structured this game in a delightfully similar fashion to a drug-dealer's business plan with the caveat that you pay a premium for the title up front. then it's $15 a month from there on. The game is addictive and cannot be beaten (read: it doesn't end) and for some is a real means of social interaction. Toss this in with a huge suite of other world-beating titles in a rapidly expanding industry and there's alot to like about [Activision]

Even though it trades at 19 times future earnings, it's not particularly expensive. While Electronic Arts and Take-Two Interactive (Nasdaq: TTWO) offer lower valuations, Activision Blizzard offers similar or better growth prospects. It trades at 30 times trailing earnings, or 23 times estimated earnings in 2010. With its five-star CAPS rating, it surpasses the average three stars that members have assigned to the 15 companies comprising CAPS' Videogames sector.

There's no need to fear ...
Underdogs are often at their best when they have their backs against the wall, but it takes more than a few All-Star picks and a quick paragraph to make buy or sell decisions. So start your own research on these stocks on Motley Fool CAPS, where your opinion can still save the day. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page.

I Can Make You Rich in 3 Years

By Rick Aristotle Munarriz
July 2, 2009

There are really only two types of companies out there: the disrupters and the disrupted.

What's in your portfolio?

It's not an easy question to answer. Everyone likes to think that their stocks are the lions feasting on the gazelles. They can't even begin to fathom that the speedy gazelles may be the ones turning the tables and gnawing on the overly confident lions. It can be a costly mistake because knowing the difference separates the market beaters from the blindsided and vanquished.

Thankfully, there's an easy exercise that will help you determine if you're holding the prey or the hunter. I call it the three-year test.

How relevant will the companies in which you invest be in three years? If you can drum up an unbiased response, you'll be able to sidestep losers today and load up on winners.

Take three steps back before going three years forward
The hardest step in this exercise is actually approaching your own stocks objectively. Investors are primarily optimists, so the art of detachment and pondering the worst-case scenario are not entirely natural instincts.

Do it, though. You want to make money -- perhaps a whole lot of money -- in this market, don't you?

Let me cut to the chase. You may very well own Warner Music Group (NYSE: WMG). The record label has a great roster of artists like Green Day, Seal, and Nickelback. The stock is trading for a little more than a third of its IPO price four years ago. Labels are winning big legal judgments against folks who make illegal downloads possible. Now, can you honestly explain to me how the prerecorded music giant will be as relevant in 2012 as it is in 2009?

Piracy isn't the industry's killer. The real body blow to the labels is the leveling of the playing field. You no longer need to get "signed by a major" to get noticed. Every new Apple (Nasdaq: AAPL) computer comes with GarageBand, a free home recording program. Is the end result worthy of laying down on a CD? No, but who needs a CD anyway? It's good enough to upload to your free MySpace page as a global demo to draw new fans and sell tickets to an upcoming show.

Bands used to need terrestrial radio, but now you have satellite radio and music discovery sites. More singers have probably emerged as contestants on American Idol than through major label signings. As music choices expand, Warner's market share will contract.

So, how confident should you be buying into a company with an awesome past, a decent present, but a cloudy future? If I were you, I would seek out the companies that will be more relevant in the future.

Dig for disruptors
Every company believes that no one else can build a better mouse trap. Shareholders know better. Disruptors always come along. Heck, even disruptors get disrupted. Remember when AOL owned online connectivity, and Dish Network (Nasdaq: DISH) was the fast-growing player of affordable satellite television? Speedier AOL alternatives and a migration away from "me too" television subscription services turned the hunters into the hunted.

If you want to beat the market, the first step is to stay ahead of the market. Where are the disruptors today? They're everywhere, if you know where to look. Here are four I'm eyeing:

Baidu is China's leading search engine. No one has come even close to challenging the company's market dominance in the world's most populous nation. Internet usage continues to climb. The improving economy finds advertisers willing to spend more to reach quality leads. You have to like Baidu's prospects in that scenario.IMAX (Nasdaq: IMAX) is expanding its empire of proprietary mammoth-sized screens. It's the perfect network effect, as exhibitors worldwide are ramping up their orders for digital systems, just as more movie studios are releasing enhanced IMAX versions of their movies. With the latest installments of Transformers, Harry Potter, and Night at the Museum in its summer pocket, IMAX is definitely popcorn-worthy. As home theaters improve, moviegoers are seeking out the IMAX experience that they can't re-create in their living rooms.E*TRADE (Nasdaq: ETFC) has been neglected in this market rally. Investors prefer its profitable peers, but the discount broker has made inroads in repairing its troubled balance sheet. The E*TRADE Baby is also one of the best discount broker campaigns in years.Home Inns & Hotels (Nasdaq: HMIN) is a fast-growing chain of value-priced lodging in China. The stock has nearly doubled over the past four months, but what will a nation of 1.3 billion people do as discretionary income grows? Travel is going to be a major growth industry, and Home Inns is ramping up its capacity.

How did I come across these disruptors? Well, I'm one of the analysts on the Motley Fool Rule Breakers newsletter team. Two of these stocks -- Baidu and IMAX -- are active recommendations. Subscribers can also unearth superior growth stock ideas on the lively discussion boards, where members pick apart potential winners.

These are companies that I can see mattering a lot more in the future. They specialize in niche industries that can take down -- or revolutionize -- larger sectors. They pass my three-year test.

Sorry, Warner Music Group. You flunked with fading colors.

Join me and my fellow subscribers in sniffing out the next wave of market-thumping disruptors: I invite you to check out Motley Fool Rule Breakers free for the next 30 days. That's less than three years, but it's a great start!

This article was first published March 3, 2009. It has been updated.

Longtime Fool contributor Rick Munarriz is a fan of disruptive growth stocks and has been part of the Rule Breakers analyst team since its inception nearly five years ago. He does not own shares in any of the stocks in this story. Baidu and IMAX are Motley Fool Rule Breakers selections. Apple is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.

E*TRADE Makes a Good Trade

By Rick Aristotle Munarriz
July 2, 2009

E*Trade 's (Nasdaq: ETFC) debt exchange offer is a success. The online discount broker received commitments from its creditors to swap more than $1.8 billion in debt for new convertible bonds.

The healthy reception during the early tender period is the result of several factors.

zero coupons, but the conversion terms are sweet. The Class A debentures can be turned into E*Trade stock, at a rate of just $1.034 per share.Citadel, E*Trade's largest shareholder and creditor, already committed to the deal, leading by example.With fears of even greater capital requirements looming, creditors realize that this is the best move to keep the discounter from buckling.

E*Trade still has a long way to go before it catches up to larger, profitable rivals TD AMERITRADE (Nasdaq: AMTD) and Charles Schwab (Nasdaq: SCHW). All 12 of the major analysts following the company expect E*Trade to post another loss this year. They're all over the map in their expectations for 2010, with a profit target range between a loss of $1.00 a share and a profit of $0.12 a share.

Trading activity has been brisk, and E*Trade continues to pad to its brokerage account totals. The recent rollout of apps for Apple (Nasdaq: AAPL) and Research In Motion (Nasdaq: RIMM) smartphones can only help, making its Web-based trading platform even stickier.

E*Trade's non-brokerage business has been going the other way, but it's hard to win online banking clients when money market yields are pathetic and borrowing standards are tightening.

The road to recovery will be long for E*Trade, but at least the discounter isn't making the dangerous mistake of standing still.

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