• 4 Stocks to Play China's Dot-Com Boom
• 5-Star Stocks Poised to Pop: EMC
• 5 Stocks in a Tailspin
• Another Crocs Shocker
• Another Shoe Company Stubs Its Toe
• AOL Rides Into the Sunset
• Don't Bank on These Funds
• Driller Selloff? Sweet!
• EMC's Centripetal Force
• General Dynamics: Still Too Expensive?
• Is Congress Helping or Hurting?
• Kimberly-Clark Going Back to the Well
• Netflix Defies Gravity
• Never Take a Stock to Bed
• News Flash: You Can Lose Money
• One Man's Secret to Crazy Wealth
• The Last Straw for Suffering Homeowners
• Thursday's Biggest Stock Stars
• Travelzoo's Menagerie of Bad News
• Your Move, Noble

4 Stocks to Play China's Dot-Com Boom

It's official, my fellow Americans. We are no longer the nation with the largest population of Internet users.

There are now 253 million Chinese citizens who routinely surf the Web, according to the China Internet Network Information Center. Nielsen Online pegs the American audience at 223 million.

It was really just a matter of time. China has 1.3 billion people, or roughly four times the population of the United States. It won't be long before India -- with 1.2 billion residents -- laps us, too.

Perhaps the most eye-opening aspect of stepping down to the silver medal podium is that China is really just getting started. Web use soared a whopping 56% over the past year in China, and 253 million is actually less than a fifth of the country's citizenry. It's a far cry from our country's more mature 71% penetration rate. 

This naturally creates investing opportunities. Growth investors can't ignore the usage surge and the market penetration upside. Although China is restrictive, and many of its Web users who lack home or office connections are down to hitting the roughly 100,000 Internet cafes for access, this is a market that will grow exponentially as the economic boom continues.

A few ways to play the game
So where does an investor turn to get some skin in this game? Thankfully, there are plenty of fast-growing companies that trade on stateside exchanges. Here are a few:

Baidu.com (Nasdaq: BIDU)
It is often described as China's Google (Nasdaq: GOOG) and with good reason. China's leading search engine's market share slice is roughly the same as Google's cut in the United States.

This week's quarterly report was a beauty. Revenue doubled. Earnings shot up by 87% and would have actually more than doubled if not for the company's overseas investment in its new Japanese search engine.

Given all this, why is Google's market cap 14 times greater than Baidu's valuation? Slow down there, grasshopper. There are good plenty of good reasons:

This doesn't mean that a risk-tolerant growth investor should ignore Baidu -- it's an especially good way to diversify from the stateside malaise that has plagued Google and its peers in this softening ad market.

Sohu.com (Nasdaq: SOHU)
Sohu's Sogou search engine isn't as popular as Baidu or even Google, but the company offers another pure play on China's Web boom. The company reports earnings next week, and it should be a solid report if it follows Baidu's healthy lead.

Sohu did take a hit last month, when it warned that Internet advertising would grow by just 20% to 30% next year, after climbing by as much as 45% this year. However, the market still has a long way to go before it matures. Do you remember when the stateside market penetration ran at 19%? Was Google even public then?

As a bonus, Sohu is the official Internet company of the upcoming Olympic Games in Beijing. Even if many will prefer to see the games on television, Sohu is bound to be a hotbed of traffic as folks stay abreast of result throughout the hometown events.

China Finance Online (Nasdaq: JRJC)
Serving up stock market subscription services is familiar territory for me, but China Finance Online is scoring big in China. When you couple China's Internet revolution with the stock market appetite for more than just hot tips on cocktail napkins, here's a company that is gracefully riding both trends.  

Just take a peek at the company's most recent quarter. Even as the Shanghai market suffered its biggest quarterly hit in 15 years, China Finance Online saw its earnings nearly quadruple on a 177% spike in revenue. The market's turbulence actually helped the company land budding investors seeking premium due diligence.

AsiaInfo (Nasdaq: ASIA)
There is no such thing as showing up too early. AsiaInfo moved to China in 1995, helping set up the Internet infrastructure for the country's major telecom carriers. Yes, AsiaInfo also has its hands in more ho-hum telecom services these days, but it's still there to beef up corporate IT solutions as Chinese companies go online.

AsiaInfo is no slouch. The company exceeded its guidance in last night's report, with profits more than doubling as revenue inched 42% higher in its latest quarter.

Just show up
Naturally there are many other ways to play the online boom. You have online gaming companies like The9 (Nasdaq: NCTY) entertaining China's youth with multiplayer fantasy games. You have the telecomm companies like China Netcom (NYSE: CN) that are providing broadband access to the country's companies and residences. The market also offers opportunities to ride online travel booking sites, Web-based job listings providers, and more conventional Web portals in China.

The point is that you can't ignore the news. We've been lapped, kid. As long as you can stomach the geopolitical risk of a hotbed country like China, there's a world of investing opportunities out there to explore.

Other ways to stamp your passport:

5-Star Stocks Poised to Pop: EMC

Based on the aggregated intelligence of 110,000 investors participating in Motley Fool CAPS, the Fool's free investing community, data storage specialist EMC (NYSE: EMC) has earned a coveted five-star ranking. Our data has shown that five-star stocks outperform the market by a significant margin; conversely, one-star stocks have woefully lagged the market average.

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

EMC facts

Market Cap

$29.13 billion

Industry

Computer Storage & Peripherals

TTM Revenue

$13.73 billion

Management

CEO Joseph Tucci (since 2001)

CFO David Goulden (since 2006)

Return on Equity (avg. last three years)

11.7%

CAPS members bullish on EMC also bullish on

Apple (Nasdaq: AAPL)

Cisco Systems (Nasdaq: CSCO)

Microsoft (Nasdaq: MSFT)

CAPS members bearish on EMC also bearish on

Ford Motor (NYSE: F)

Citigroup (NYSE: C)

General Motors (NYSE: GM)

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

Over on CAPS, fully 641 of 659 of the All-Star members who have rated EMC -- some 97% -- believe the stock will outperform the S&P 500 going forward. These All-Star bulls include gunark and falcon2382, both of whom are ranked in the top 10% of our community.

In February 2007, gunark noted that "Virtualization is the way of the future, and EMC is by far the leader here with its VMware division. In the next two to three years you will see the vast majority of data centers and in-house server farms switching to virtualization."

A more recent pitch from falcon2382 three months ago agreed with that positive sentiment, highlighting EMC as a particularly timely opportunity:

I don't think there's ever been a better time to buy the master of storage. Recession or no recession, we are not in the beginning stages of a tech boom where companies bought storage because it offered them POTENTIAL growth. We are now in a situation where companies DEPEND on storage capacity to stay alive. The cutting of costs for major companies during the past several years has put off technology spending (including storage) for too long. The viability of many companies (especially financial, pharma, energy, aerospace, and any other major tech realm) remains integrally connected to its information storage capacity.

What do you think about EMC, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 110,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

5 Stocks in a Tailspin

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, shares of SanDisk (Nasdaq: SNDK) dropped more than 20% in a single day after a lackluster earnings release from the memory maker this week.

Big drops in share price can sometimes signal material defects or new risks. But at other times, they're simply pullbacks after a long run-up. 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 110,000 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 25% in the last four weeks, and which have a market cap greater than $100 million and a beta of less than 3. Here's a sample of stocks our CAPS screen returned:

Company

CAPS Rating
(out of 5)

4-Week
Price Change

ArthroCare (Nasdaq: ARTC)

*

(38.4%)

Clearwire (Nasdaq: CLWR)

**

(26.5%)

ValueClick (Nasdaq: VCLK)

***

(29.5%)

Office Depot (NYSE: ODP)

****

(33.7%)

Interactive Intelligence (Nasdaq: ININ)

*****

(25.7%)

Source: Motley Fool CAPS. Price change from Jun. 27 through Jul. 23.

ArthroCare
Investors showed little mercy when ArthroCare said it needed to restate financials due to some faulty sales calculations, sending shares down more than 40%. The restatement could reduce reported revenue by as much as $25 million in 2007 and up to $5 million from the first quarter of this year as well. With investors also concerned about higher legal expenses, shareholder lawsuits, and an informal SEC inquiry, it's no surprise to see 59% of the 287 CAPS members rating ArthroCare to underperform the market.

Clearwire
With a major reorganization underway and tight credit conditions in the market, wireless broadband service provider Clearwire’s shares haven’t been able to gain traction lately. Increased lease expenses and debt service hit the company for a $176.4 million loss in the first quarter.  Along with the deal to reform the company with components of Sprint Nextel , Clearwire has held back on launching new markets in order to conserve cash. All the moving parts and uncertainty about Clearwire's future has only 83% of the 374 CAPS members rating the company giving it the thumbs up.

ValueClick
Earlier this year, Web advertising firm ValueClick showed signs of life as it closed the door on a nine-month FTC investigation regarding deceptive marketing practices -- but it didn't last. Shares of ValueClick fell 20% a week ago yesterday when the company cut its revenue and earnings guidance for the year due to the weak economy. As painful as it has been for investors, many still see potential in the company by itself or even as a takeover target. Either way, a total of 95% of the 569 CAPS members rating ValueClick believe it will outperform the market.

Office Depot
Office Depot has been suffering for a while now due to lower small business spending and a depressed housing market. Most recently, the dour economic environment was blamed for same store sales that have dropped 9% in the second quarter. With many consumers deciding to go the bargain route and shop at places like Wal-Mart Stores (NYSE: WMT), CAPS members are split as to when fortunes will turn around for the office supply chain. As such, a less-than-unanimous 341 out of 396 CAPS members rating Office Depot expect it to outperform the market.

Interactive Intelligence
Interactive Intelligence expects to report second quarter earnings results $0.03 to $0.05 per share below Wall Street's earlier expectations next week. The company is having a tough time getting customers to commit the high up-front cost for its call center software, even though it will save more money over time.. But with its shares down some 60% this past year, some investors smell a stock on sale. A solid contingent of CAPS members see it that way, too, with 95% of the 364 members rating Interactive Intelligence expecting it to outperform the S&P going forward.

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 5,500 stocks that 110,000-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.

Another Crocs Shocker

Yesterday afternoon, I asked how low Crocs (Nasdaq: CROX) stock could go. I certainly didn't expect that after market close, it would take a bazooka to its quarterly and yearly guidance, and see its share price cut in half in after-hours trading. In my article, I cautioned Fools to stay away from the stock, even though it was pretty hard to imagine things could get much worse. But lo and behold, they have.

Crocs slashed its second-quarter earnings guidance to between $0.03 and $0.07 per share. Compare that to previous expectations for earnings of $0.42 to $0.47 per share in the quarter (analysts had expected $0.41 per share). Now look at those figures one more time. That is one MAJOR revision, people (and I don't use the caps lock frivolously)! For the year, Crocs now expects only to break even; analysts had expected earnings of $1.52 per share.   

You know the saying, "Waiting for the other shoe to drop"? Well, Crocs apparently has had a lot of shoes to drop, perhaps in every imaginable color.

Crocs blamed the weak U.S. market, as retailers like Nordstrom (NYSE: JWN), Macy’s (NYSE: M) and Dillard’s (NYSE: DDS) move to leaner inventories. True, many companies are struggling with weak consumer spending here in the U.S. However, it's difficult to imagine that Crocs' guidance could be that out of whack, given the huge discrepancy.

I forgot to mention in my article yesterday that I'm beginning to wonder whether Crocs' management is sketchy, incompetent, inexperienced, or what: Insiders dumped shares at the stocks' highs, management simply called its inventory build-up "aggressive" last fall, and recently restated some financials. Those events don't exactly build my confidence in the company -- if anything, they make me suspect that things are, at the very least, sorely amiss.    

Yesterday, before this news broke, I admitted that Crocs might be cheap -- if you believed analysts' expectations. We already have solid evidence that those analysts remained far too optimistic (as did management's guidance, of course). So now we know it wasn't as cheap as it appeared -- in fact, it was downright pricey.

Some people out there are still counting on Crocs as a good value stock. Personally, I'm thinking that Crocs is most certainly not a Deckers (Nasdaq: DECK), but more like a Heelys (Nasdaq: HLYS), with a product that quickly rolled into fashion and then fell off a cliff.

Another Shoe Company Stubs Its Toe

For the most part, shoe stocks seem down at the heels lately, as anyone familiar with Crocs (Nasdaq: CROX), Timberland (NYSE: TBL), and Heelys (Nasdaq: HLYS) can attest. Skechers (NYSE: SKX) reported second-quarter earnings yesterday, and let's just say that investors reacted as if they'd stepped in something unpleasant.

Second-quarter net income fell 2% to $14.6 million, or $0.31 per share. Revenue almost increased 1% to $354.6 million. Even though the company was able to boost gross margin, it just wasn't enough with such weakness in sales.  

The results -- and expectations -- for the third quarter fell quite short of what Wall Street analysts expected. Their consensus estimate called for earnings of $0.34 per share, on revenue of $360.3 million.

Skechers' third-quarter outlook wasn't heartening, either. The company expects earnings of $0.57 to $0.65 per share in the third quarter, on revenue of $425 million to $440 million. Analysts expected earnings of $0.66 per share on revenue of $447.2 million.

Of course, many shoe stocks have suffered similar fates. Deckers (Nasdaq: DECK) has bucked the trend thus far (although its stock price has receded somewhat), and Nike (NYSE: NKE) seems to be holding strong, but many have simply gotten trashed over the last year or so.

Perhaps everybody feels like they've got plenty of shoes in their closets already, and given economic pressures, they'll make do with what they already have. (Then again, maybe in a few months, when everybody's worn out their shoeleather walking because of high gas prices, some of these shoe companies will start to see signs of life.)

I named Skechers a Stock of the Week back in February. At the time, it looked to me like a solid company that had gotten beaten down to value levels. (Investors took last quarter's tidings much better than this one's.)

Given yesterday's bloodbath, Skechers now looks even cheaper, trading at just 11 times trailing earnings. Compare that to Deckers' P/E ratio of 23, Nike's 15, Timberland's 19, and of course, Crocs' P/E of 6. Even with its apparent cheapness, I still can't quite fathom investing in Crocs.

I don't foresee an entirely shoeless future, so I suspect the current slowdown gives watchful investors opportunities to buy some of these stocks on the cheap. Although Skechers faces near-term challenges, it's a good stock for value-oriented, long-term investors to consider.

AOL Rides Into the Sunset

AOL is scaling back on some of its features.

In a memo to his staff, AOL Products head Kevin Conroy explained that "BlueString, Xdrive, and AOL Pictures will be sunset." The company will also "sunset" MyMobile and "halt further investment" in AIMWorld.

By "sunset," Conroy means that they will be riding off into the sunset, pushing up daisies, and checking into Obit City.

Time Warner 's (NYSE: TWX) online subsidiary has spent the past couple of years transforming itself into a portal for the general public. The company's original access provider service peaked six years ago, and AOL's response has been to tear down the wall, opening up its offerings to the Web at large, with dreams of making up the difference in online advertising revenue.

The data-storage services being axed are bandwidth-intensive and difficult to monetize, so it's understandable why their heads would be on the block. They don't lend themselves easily to ad-supported profitability, and few customers are tempted to pay for premium subscription plans when free alternatives are plentiful.

However, shelving features angers users. It also inconveniences them, as they migrate their data over to a new provider. In short, this is the kind of shattered trust that AOL might not be able to win back, if it ever does decide to give such services another go.

It certainly didn't give some of the features much of a chance. BlueString -- a media-sharing service -- was launched just 10 months ago. The move came shortly after News Corp. 's (NYSE: NWS) acquired Photobucket to pacify its MySpace users. Since AOL now owns the Bebo social networking site, it would seem that AOL might want a hand in storing the kegstand snapshots of Bebo's playful audience.

Xdrive is a more heavy-duty drive-backup service, and it's a surprise to see AOL kill it. It was originally positioned as a perk for access subscribers, who would get additional storage capacity. Does AOL really want to make its dial-up service less valuable to its dwindling base of paying subscribers?

AOL Pictures wasn't burdened by large files, but I guess it's hard to compete against sites like Yahoo! 's (Nasdaq: YHOO) Flickr and Photobucket.

The company isn't throwing in the towel. It does see growth opportunities in areas like streaming video, toolbars, desktop applications, and e-mail. However, by trimming off the capital-intensive fat of these money-gobbling features, isn't AOL really just dolling itself up for the buyout ball? These moves are little more than a tightened girdle before it sashays onto the floor, hoping Google (Nasdaq: GOOG), Yahoo!, or Microsoft (Nasdaq: MSFT) asks it to dance.

Why dance now? Because the sun sets on fading good looks, too.

The sun also rises on further Foolishness:

Don't Bank on These Funds

Returns and prices in the financial services sector have been pounded down severely, and although there's plenty of danger among financials, savvy investors are looking for opportunities to profit.

The returns of the three funds outlined below are symptomatic of the abysmal performance in the sector overall. Each has lost 40% or more of its value over the past three years. Although contrarian investors may be tempted to use these unloved funds as a potential way to profit from a turnaround, some of them have risks that go beyond their exposure to financials.

Fund specifics
Rydex Banking Fund Investor Class (RYKIX) is a team-managed fund that invests in companies in the much-maligned banking sector. The fund invests in a variety of commercial banks, thrifts, and beleaguered mortgage finance stocks. JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), and HSBC (NYSE: HBC) are top holdings in the portfolio of slightly more than 70 stocks.

ProFunds Banks UltraSector Fund (BKPSX) provides leveraged exposure to the Dow Jones U.S. Banks Index. This index includes all regional and major U.S. domiciled international banks, savings and loans, savings banks, and thrifts. Although there are roughly 280 stocks in the index, the fund owns about 80 stocks. Three of these, JPMorgan Chase, Bank of America (NYSE: BAC), and Citigroup (NYSE: C) account for over a third of the fund's assets.

Fidelity Select Home Finance (FSVLX) invests in companies providing mortgages and other consumer loans and related services associated with home finance. The fund has its heaviest exposure to mortgage giants Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM), which has driven down returns sharply in the past year. Fidelity has the smallest number of holdings of the three funds -- just under 60 securities -- and it also has the lowest fees and investment minimums. But the ease of access should not blind investors to the volatility of this fund.

Fund facts

Fund

3-Year Annualized Return

Net Expense Ratio

Total Assets as of 6/30/2008

RYKIX

(16.6%)

1.37%

$11 million

BKPSX

(23%)

2.57%

$8 million

FSVLX

(24%)

0.92%

$110 million

Source: Morningstar.

Fund prospects and risks
The financial services sector has been in a downward spiral, and the ever-worsening credit crisis has helped to make this sector one of the worst performers. Market sentiment has been decidedly negative for stocks in this sector, and an investor should expect volatile markets and wide fluctuations in price.

Although storm clouds over financials have far from disappeared, it's possible that most of the bad news might be incorporated in share prices, limiting any further downside for these funds. With the sector so beaten down, there is the potential for overreaction on the upside to positive news, which could be a boon to holders in this sector -- and especially for ProFunds owners, because of the fund's 150% leveraged positions.

Unfortunately for fund investors, that rebound may come too late. Of these three funds, Fidelity Select still has enough assets to give it a good chance of surviving. The other two funds, on the other hand, have shrunk to the point where it's uncertain how long they'll be able to continue operating.

Portfolio fit?
Contrarian investing does not always pay off; sometimes, the market takes its own sweet time recovering from a downturn. Investors unable to withstand the extreme volatility of the financial sector may want to look elsewhere for investment opportunities. For those able to put up with short-term fluctuations or extended periods of negative returns, financials may pay significant rewards over the long run -- but don't bank on it happening tomorrow.

Related articles:

Driller Selloff? Sweet!

I'm so happy to see the offshore drillers selling off with the rest of the energy sector this past month.

No, I'm not being sarcastic again. I really mean it -- I'm thrilled!

I've been praising these contract drillers for well over a year now, yet I haven't gotten around to actually buying shares. If you haven't either, it's time to get greedy.

Why? Just look at the comments from ENSCO International (NYSE: ESV) on Wednesday. The company reported some killer quarterly results, but the outlook is even brighter.

The company's current cash creator is mainly its high-quality fleet of jackup rigs, which operate in relatively shallow water. Dayrates strengthened a tad, and utilization was a dreamy 95%. For now, ENSCO has only one deepwater asset, working for Chevron (NYSE: CVX) in the Gulf, but that will soon change.

Let's go back to the shallow water for a moment. So many jackups have fled the Gulf of Mexico, locally known as the Dead Sea, that ENSCO's pricing power has begun to strengthen there. Further, the company notes that it put in the effort to maintain and upgrade its fleet before the market upturn, and competitors with old iron may find it prohibitively expensive to put the money in at this point in the cycle. That spells attrition, and it means more share for ENSCO in an increasingly busy basin.

As for the deepwater, ENSCO has certainly seen the light. Along with Atwood Oceanics (NYSE: ATW), the company has been bulking up its order book lately. Two new semisubmersible orders this quarter ratcheted the newbuild program to six vessels, to be delivered from this fall through 2012. ENSCO has had no problem signing contracts on these vessels, with Anadarko (NYSE: APC) and Nexen (NYSE: NXY) among the awardees.

Petrobras (NYSE: PBR), with its staggering development ambitions, looms ever larger in the global deepwater market and is making other operators worry about where their next rig is going to come from. Management noted that "you can throw all the money in the world you want at it and you can't speed up shipyard deliveries at this point, so there's a finite amount of capacity that can be added there."

Blistering demand meets finite supply. Feeling greedy yet?

ENSCO is rated a full five stars in Motley Fool CAPS. Share your own perspective with the rest of the Fool community.

Related Foolishness:

EMC's Centripetal Force

What a difference a quarter makes.

Actually, not even a quarter. Just two months ago, EMC (NYSE: EMC) CEO Joe Tucci told investors he had "absolutely no interest" in spinning off its remaining 85% interest in software virtualization subsidiary VMware (NYSE: VMW). A few weeks and a single disastrous day's worth of miserable news out of the latter, however, and Tucci is already sounding as though he may be ready to deal.

Interviewed by Reuters post-earnings, Tucci opened the door to a spinoff. He's backtracking from his "absolutely no interest" position of yester-month.

So that's good news?
Not if you're a VMware shareholder, it isn't. After all, the stock's low float and high demand act in tandem to support VMware's share price. Add more shares to the float by spinning off the stock, and you knock out one of the legs supporting the stock. (Incidentally, VMware shed 6% of its value yesterday -- but its own earnings report may have had something to do with that.)

Parent company EMC fared better, with shares up more than 12% since reporting a mammoth 18% leap in Q2 sales. But does EMC deserve to rise while its subsidiary takes a dive?

I think not
And here's why. EMC tacked on 80 basis points' worth of gross margin this past quarter, grossing 55.2% of sales. But what lower cost of goods sold (COGS) gave, operating costs took away.

Selling, general, and administrative expenses surged, and even a reduction in research-and-development expenditures still left the company with a lower operating margin this year than last -- ahead of Hewlett-Packard (NYSE: HPQ), still lagging IBM (NYSE: IBM), and way behind Vasco Data Security (Nasdaq: VDSI), with which EMC's RSA division competes. In the end, EMC ended the quarter with profits up just 12% at $0.18 per share. Meanwhile, free cash flow so far this year is up just 8% -- less than half the pace of sales growth -- at $1.1 billion.

Yet …
So this is the point where I tell you to sell EMC, right? Not quite. Although profits growth is a mite short of "robust," this stock still looks fairly priced to me. Valued on its trailing-12-month free cash flow of around $2.3 billion, I see EMC as priced at about 13 times free cash flow, which is not an unreasonable price for a predicted 12% grower. Now all EMC needs to do is produce the growth.

Tick-tock.

General Dynamics: Still Too Expensive?

After charging ahead 7% in response to a bumper crop of profits Wednesday, shares of defense contractor General Dynamics (NYSE: GD) beat a hasty retreat yesterday and left nearly half of their gains upon a battlefield littered with the corpses of several NYSE comrades. Should Foolish investors view the pullback as a chance to rifle through the bodies for loose change and cheap shares? That's what we're here to find out.

Despite the post-earnings bump, we're still looking at a stock priced 4% cheaper than when I warned against buying it three months ago. Yet by all indications, General Dynamics is firing on all cylinders and even better positioned at the end of Q2, than it was at the end of Q1:

What's more, far from taking a breather, General Dynamics is revving its growth engine. Management puts the total backlog of work in its pipeline north of $55 billion, which means the General is booking new orders more than twice as quickly as it's fulfilling the old. Nor need you worry that a change in administration at the White House will cut into the General's stipend. Funded backlog is rising even more rapidly than total backlog -- up 28% year over year.

Yet for all this, I still don't own the stock myself, despite having loaded up my shopping cart with other defense contractors over the past several months. Why not?

Valuation
Down 4% over the past three months, General D's stock is headed in the right direction from a prospective buyer's point of view. But with its price-to-earnings ratio of 16, and its price-to-free cash flow ratio of 12, the shares still don't look attractive when weighed against projections of sub-10% long-term growth.

On the other hand, if backlog keeps growing at its present torrid pace and growth estimates get kicked higher as a consequence ... well, then we just might have found ourselves a buy thesis, Fools.

Read more dispatches from the investing front:

Is Congress Helping or Hurting?

Let's give Congress some credit -- our lawmakers want to help. Thousands of Americans are facing foreclosures because of the subprime lending mess. Many had secured home loans with little or no money down, and with teasingly low initial interest rates. All of a sudden, they find their interest rates up and their mortgage obligations out of reach. What to do?

A lot of those desperate folks have tapped -- or drained -- their 401(k) plans or other retirement accounts to keep a roof over their heads. But if you're considering doing the same, bear in mind you'll face a 10% penalty for early withdrawal. For a withdrawal of $40,000, for example, expect a penalty fee of $4,000 -- on top of paying income tax on the full $40,000. If that seems unfair, rest assured that Congress is considering waiving that penalty to help people hang on to their homes. That may sound nice to you, but it scares me.

If you keep your 401(k) intact, you may end up losing the house in favor of an apartment or rental home. But if you drain your 401(k), you may still eventually lose your home, and along the way, you'll have lost your life savings, too. It can take a long time to build a retirement nest egg, and the earlier you can invest any dollars, the more time they'll have to grow.

Even if you empty a retirement account now, and plan to restart it later, you'll lose a lot of ground. Assuming you can even find 10% growth in this market environment, it'll still take about 15 years to turn $1 into $4 -- without considering taxes and inflation. Stocks like these may not be the saviors they seem, despite their strong long-term performance:

Company

10-year annual average return

Costco (Nasdaq: COST)

8%

UnitedHealth Group (NYSE: UNH)

14%

SYSCO (NYSE: SYY)

11%

General Mills (NYSE: GIS)

10%

Kellogg (NYSE: K)

7%

Rohm & Haas (NYSE: ROH)

11%

MGM Mirage (NYSE: MGM)

13%

In addition, although your 401(k) is protected from creditors, your home often isn't. It's just not worth risking your retirement, especially when it may not be enough to prevent foreclosure anyway.

Most of us can't expect employer pensions anymore. Fortunately, we can still secure a comfy retirement. For detailed guidance, consult our Rule Your Retirement newsletter service. A free trial will give you full access to all past issues. Advisor Robert Brokamp regularly recommends promising stocks and mutual funds, too.

Kimberly-Clark Going Back to the Well

Have you noticed that it isn't only gas prices that are heading north? If by chance you haven't been to the grocery store recently, check out any aisle. Energy-cost inflation is rippling through the economy in a big way.

Kimberly-Clark (NYSE: KMB), which makes such consumer staples as Kleenex tissues and Huggies diapers, announced a few weeks ago that it's heading back to the price-increase well for the second time this year. The company's second-quarter earnings release explains why.

Sales growth is tracking at a solid 11% pace, helped by 3% more case volume along with the benefits of previous pricing moves and favorable currency effects. But that sales growth hasn't been enough to offset raw-material and transportation-cost increases, which caused product and manufacturing costs to expand by more than 15%. The upshot was that second-quarter adjusted earnings per share fell to $1.03, a penny less than last year.

Management admitted in the earnings conference call that costs continue to rise faster than forecast -- $180 million in this quarter alone, or $50 million more than they expected just three months ago. That sliced quarterly earnings by $0.08 per share, no small change.

If there's any good news, it's that all the consumer-product giants from Procter & Gamble (NYSE: PG) to Kraft Foods (NYSE: KFT) are taking price increases as quickly as they think the market will reasonably bear. And so far, they aren't seeing a noticeable falloff in volume. While consumers are buying less stuff these days, there still appears to be some elasticity left in their pocketbooks for truly staple products, like toilet paper and laundry detergent.

Meanwhile, could we be starting to see some cracks in the bull thesis for oil prices? Energy prognostication is not my strongest suit, but I've been encouraged to see oil pull back by 10% to 15% the past couple of weeks. If this trend continues, a lot of consumer-product companies -- such as Unilever (NYSE: UL) and Colgate-Palmolive (NYSE: CL) -- could be positioned for earnings improvement.

Perhaps it's too soon to get excited about this safe, defensive, dividend plays sector. But stay tuned -- it may be getting ready to make a move.

For related Foolishness:

Netflix Defies Gravity

We may be tightening our belts in these uncertain times, but don't you dare take our red mailers away.

Netflix (Nasdaq: NFLX) kept growing during its second quarter. The DVD-rental-by-mail maven tacked on another 168,000 net subscribers over the past three months, for a total of more than 8.4 million members -- a 25% increase over last year's roster.

Revenue growth wasn't so kind, inching just 11% higher to $337.6 million. The gap is partly explained by last summer's price cut, but it's also a clear snapshot of the weakening economy. DVD buffs may be switching over to lower-cost plans, in exchange for receiving fewer discs at any one time.

Margins also took a year-over-year dip, but that's the result of the popularity of the company's movie streaming service, which Netflix offers at no additional cost to existing subscribers. That led earnings to grow by just 4% to $26.6 million. The increase looks rosier on a per-share basis, leaping 14% to $0.42 thanks to the company's ambitious share repurchase efforts.

The end result? While Wall Street nailed the company's top line, Netflix clocked in just ahead of the $0.40-a-share profit that analysts were expecting. That left the market more favorably disposed toward Netflix than it had been three months ago. Shares got slammed as the company simply met Mr. Market's profit target, even as its stock approached fresh highs.

Sole survivor
Netflix is succeeding in an industry that has proven problematic for nearly everyone else. Wal-Mart (NYSE: WMT) pulled out three years ago. Amazon.com (Nasdaq: AMZN) sold its European copycat service earlier this year. Blockbuster (NYSE: BBI) is still hacking away, though its Total Access growth has stagnated now that Blockbuster hiked its mail-delivery service's prices to achieve profitability.

Meanwhile, Netflix keeps on rolling. Even offering up its "free" movie streaming service to paying subscribers on computers -- and making the home-theater migration through deals to offer the service on Roku boxes, LG electronics, and eventually Microsoft (Nasdaq: MSFT) Xbox 360 consoles -- isn't getting in the way of earnings, even with the associated studio royalty and chunky bandwidth tabs. That Watch Now service is becoming a juicy carrot for Netflix, at a time when Amazon, Blockbuster, and Apple (Nasdaq: AAPL) are angling to charge for their digital deliveries. How can they compete, even if the Netflix streaming library has a smaller selection of titles?

Set course for tomorrow
The company's guidance for all of 2008 seems fairly consistent with its last prediction in April. Netflix is keeping its year-end subscriber target between 9.1 million to 9.7 million members, and narrowing its revenue range to between $1.364 billion and $1.379 billion. It's slightly raising its profitability projection to between $1.19 a share and $1.31 a share, but that -- again -- is the handiwork of the company's aggressive share-buyback efforts. Netflix is keeping its net income outlook in line with the $75 million to $83 million it targeted three months ago.

There's really no reason for Netflix to put the brakes on its share-buyback joyride. The company's debt-free balance sheet is padded with nearly $5 a share in cash. Its ability to remain cash flow-positive while rolling out its movie-streaming service during a challenging economy is great. Netflix seems to have more than enough confidence in its ability to continue to innovate without having to fall back on its greenbacks.

So what else can it do with that money, beyond buybacks and possibly instituting a cash dividend as it matures? Netflix could go the consolidation route, but who would it buy? It's ripping the competition to shreds. Gamefly may be a tempting target, but Netflix would have been renting video games already if it believed in that niche.

Its best buys would be popular entertainment content sites, but most of the good ones, like Rotten Tomatoes, IMDB, and Movies.com, are already owned by much larger companies than Netflix. The company could always approach Hollywood Media (Nasdaq: HOLL) to acquire movie hub Hollywood.com, but since Netflix has been reluctant to run other sites, perhaps that money is best used to bankroll indie flicks, which it can then serve up as exclusive Netflix rentals.

Either way, Netflix is a survivor, mastering the art of profitable DVD lending as it positions itself for a post-optical-disc future.

Be kind, rewind these earlier stories:  

Never Take a Stock to Bed

I'll admit it. I blew it when I bought shares of Select Comfort (Nasdaq: SCSS) a couple of years ago, after a few nights of peaceful slumber in my new Sleep Number bed.

Yet that was when the company was growing, coming out consistently profitable, and making other mattress rivals, such as pressure-relieving Tempur-Pedic (NYSE: TPX) and innerspring titan Sealy (NYSE: ZZ), seem like slowpokes in comparison.

I still love my bed. I just hate the stock. I should have sold it at the first whiff of deteriorating fundamentals, but I guess I slept through that, too.

Anyway, my point is that I was surprised to see Select Comfort thrive in yesterday's bloodbath of a market, after posting its second-quarter results. Shares rose by as much as 13% after the company posted better-than-expected results, before getting caught in the market's spiral. It still managed to close out the day with a 4% uptick.

The key phrase there is "better than expected," because, on an absolute basis, the quarter was atrocious.

Net sales fell by 15% to $152.1 million. Comps fell by a steep 20%, and that's after falling by 14% during last year's second quarter. In other words, sales at the store level are coming in 31% below where they were two years ago. The company posted a loss of $0.15 a share, a reversal from a year-ago profit.

You know how some companies are riding their online sales growth to offset retail weakness? That's not Select Comfort, where e-commerce actually dragged down performance with a head-scratching 27% year-over-year plunge.

Yes, Select Comfort is that ugly these days. However, the stock rallied since Wall Street had been looking for a $0.17-per-share deficit. After missing analyst expectations in the two previous quarters, Select Comfort finally scored a relative victory.

The company also offered up encouragement -- it's positioned to return to profitability during the second half of the year. Select Comfort is doing all of the right things. It's cutting costs, closing stores, and even raising prices. Yes, it's true -- the average mattress sold for $1,831 during the quarter, a lot more than the $1,688 it averaged a year ago. The grim but logical implication, of course, is that mattress-unit growth fell by more than the 20% dip in comps.

Select Comfort understands the challenges of this tricky environment. It is dusting off a new marketing campaign, introducing a new mattress, and even emphasizing its lower-priced accessories, such as pillows, in an effort to appeal to penny-pinching consumers.

It's not Select Comfort's fault that the economy hit the skids and that it began outfitting beds in Winnebago (NYSE: WGO) RVs just as soaring gas prices and stingy financing were nibbling at that niche. However, Select Comfortcan be held accountable for yielding market share to its peers.

Select Comfort may have finally bottomed out earlier this week. But at least if you fall out of bed, you're not all that far from the floor.

More bedtime reading:

News Flash: You Can Lose Money

I've told you about many of my investing blunders over the years, including the tale of how I lost $200,000 of my own money. Investing in the stock market can bring lots of rewards, but I certainly hope I haven't suggested that it'll always be easy.

Reader Rich Hill recently wrote: "I read your article about retirement and you make it sound like if you invest in the market, you will do well. ... I hate to think of the people who started investing a year ago and are now down 30% to 50%."

Good point, not to mention a good reminder that stock investing involves risk. In fact, people can suffer losses over much longer periods than a single year. Again, I can point to myself as an example:

Words to my mother
Rich also wrote: "We have entered into some very scary times and I would be curious what you would have your mother invest in today??? I will bet you would advise her to stay out of the market altogether."

No, I wouldn't tell her to avoid the stock market. It's true that since she's retired, she might not want to put all of her money in stocks, because she might want to tap some funds to live off in the coming years. But then, I'd tell anyone of any age to keep all short-term money out of the stock market -- because of what can happen with great names such as Coke, Wal-Mart, and Home Depot. In the long run, stocks tend to go up, but in the short term, no one knows what will happen.

Yet even if she's in her 70s, your mom may well have several decades ahead of her. To cover rising living expenses, she'll need some of her money to grow -- and she'll need some time to let the stock market recover from recent losses.

The good news is that our volatile market is offering bargains to investors. If you think stocks such as Home Depot or Wynn Resorts (Nasdaq: WYNN) have a promising future, you're getting a chance to buy them for less than you would have paid last year.

Point by point
Rich made a few other points, and I doubt he's the only one with such sentiments:

So don't give up on the stock market. Learn about it -- but do so with your eyes open, with the knowledge that you can indeed lose some money.

One Man's Secret to Crazy Wealth

Among the best lessons you can learn from the investing success of the one and only Warren Buffett is this one: Read ... a lot.

Indeed, Buffett's business partner Charlie Munger told an audience last year that the best way to succeed in the stock market was to "sit down ... and read -- and do it all the time."

Buffett was all the evidence Munger needed to support this claim. "An observer," he noted, "would find that Warren spent most of his time sitting on his [rear end] and reading."

You never know what you'll find
I like this advice. It's easy to follow, generally enjoyable, and as an English major-turned-senior stock analyst, it gets me my language fix in what can easily turn into a numbers-based career.

Thus, just last Friday I found myself reading about nightclub-turned-casino "impresario" Sam Nazarian in The Wall Street Journal.

Mr. Nazarian's story is an interesting one. Though part of a wealthy family, the 32-year-old has already made his own fortune by buying up unwanted buildings in sketchier parts of Los Angeles and turning them into nighttime hotspots. Now, with his purchase of the over-the-hill Sahara hotel and casino, Mr. Nazarian looks to do the same in Las Vegas.

This is not an article about casino redevelopment
If you want to read more about Mr. Nazarian, WSJ has the scoop. I won't rehash the rest of the story here. Instead, I want to talk about an epiphany I had about 600 words into Tamara Audi's article: No one gets rich by doing what everyone else is doing.

Perhaps this is an obvious point
To an extent, this was also the central lesson of Michael Lewis' fabulous 2003 book Moneyball (another worthy read) about the success of the Oakland A's baseball franchise. One of the reasons the A's were able to compete in the Major League on a comparatively shoestring budget is that they were willing to sign baseball players who -- in the eyes of scouts -- didn't "look" like baseball players.

That could mean they were a little overweight, or slow, or just plain goofy-looking. But the stats said these guys could play ball ... and the A's gave them the chance to prove it.

So it goes in investing
Similarly, the best investors are those who are willing to buy when others are selling, sell when others are buying, and buy and sell the companies that no one else is willing to look at. That means you need two core competencies:

Given the recent volatility in the market, we've been writing about temperament a lot on Fool.com. And we hope you're reading. After all, when Buffett was asked by a group of business-school students why so few have been able to replicate his investing success, Buffett's reply was simple: "The reason gets down to temperament." That's why Buffett's been such a great investor.

But this article isn't about temperament, either
While temperament is crucial to successful investing, for the purposes of this article, we'll assume you already have it, or are at least working on it. The question is: Where should you put that temperament to work?

The answer gets back to my Nazarian epiphany. Go where no else is: among small- and micro-cap stocks.

Here's why
We all know the market has been down since the beginning of the year. It's worth noting, though, that certain segments are providing more opportunities than others. According to my research, while there are just 167 large caps down more than 20% since the beginning of the year, more than 1,000 small caps are down 20% or more over the same time period.

When you take into account that small companies receive far less analyst coverage than their larger peers, and aren't on the front pages of newspapers or the subject of Congressional hearings, it starts to look to me like:

In other words, investors with the right temperament absolutely must be fishing in these waters. Take a look:

Company

YTD Return

No. of Analysts Covering

Citigroup (NYSE: C)

(27%)

17

Google (Nasdaq: GOOG)

(29%)

37

eBay (Nasdaq: EBAY)

(24%)

29

Amazon.com (Nasdaq: AMZN)

(25%)

28

Borders Group (NYSE: BGP)

(54%)

6

thinkorswim Group (Nasdaq: SWIM)

(57%)

8

Denny's (Nasdaq: DENN)

(32%)

6

Data from Capital IQ and Thomson Financial.

The takeaway
Although it can take some time to wade through all of the small-cap opportunities the market is currently throwing our way, that's exactly what we're dedicated to doing at our Motley Fool Hidden Gems investing service ... because few others are willing to do it. (If Sam Nazarian were a stock analyst, he probably would be).

If you'd like to see what we're researching and recommending today, click here to join Hidden Gems free for 30 days. Though our picks are already ahead of the market by more than 19 percentage points on average, we're more excited about being small-cap investors today than at any other time in our service's history.

Tim Hanson does not own shares of any company mentioned. eBay and Amazon.com are Motley Fool Stock Advisor recommendations. Borders Group is an Inside Value pick. Google is a Rule Breakers selection. The Fool's disclosure policy is nursing a sunburn.

The Last Straw for Suffering Homeowners

Over the past two years, homeowners have had to deal with falling prices, a glut of inventory on the market, and tightening credit standards. This week, though, another threat to home prices has come into view, and it could spell disaster for a housing market struggling to find bottom.

This week, interest rates on mortgages rose toward the highest levels in six years. According to Freddie Mac (NYSE: FRE), the average rate on a 30-year mortgage rose to 6.63%, up sharply from just 6.26% the week before. Similarly, rates on adjustable-rate mortgages (ARMs) rose from 5.10% to 5.49% -- all in just one week.

Tough times, steep moves
Of course, this wasn't just any ordinary week for the home-loan industry. Mortgage market-makers Fannie Mae (NYSE: FNM) and Freddie Mac went to the brink of oblivion and back again, as fears of insolvency were at least temporarily squelched by promises of liquidity from the Federal Reserve and further relief from the federal government.

Financial stocks initially rallied on that news. Banks such as Wells Fargo (NYSE: WFC) and Washington Mutual (NYSE: WM), which both have an extensive presence in the hot housing areas of California and the Southwest, saw their shares recover strongly from recent losses, in hopes that investors could put the worst of the housing crisis behind them.

But the mortgage market reacted to the news with much less enthusiasm. For the most part, the bond markets have been relatively stable since last Thursday, with the 30-year Treasury yield staying in a fairly tight range. Surprisingly, despite the proposed government bailout of Fannie and Freddie, spreads for mortgage-backed securities rose to their highest level since the Bear Stearns crisis in March -- leading to the sharp jump in mortgage rates.

Doubts for the future
Asked to explain the higher rates, Freddie Mac's chief economist argued that fears of inflation, continued housing weakness, and the possibility of a rate increase by the Federal Reserve all helped contribute to the spike. Yet there are a number of reasons that those explanations don't seem to hold water:

What seems the more likely cause is much simpler: Investors are losing confidence in the mortgage-backed-securities market and are demanding a higher reward for their higher perceived risk. And unfortunately, it's everyday average homeowners, along with prospective home buyers, who'll pay the price.

Less buying power, lower prices
High mortgage rates have a number of bad effects on housing. They make it more difficult for existing homeowners to refinance their mortgages, and it could especially hurt those with ARMs set to have their rates adjust upward in the near future. More homeowners could be forced into foreclosure, which could further exacerbate price declines.

For prospective home buyers, high rates on mortgages mean buyers can't afford to pay as much for a home. For instance, buyers who could afford to spend $1,500 per month on a 30-year mortgage could borrow as much as $243,000 with rates at last week's figure of 6.26%. But with rates rising to 6.63%, the same buyers could only afford to borrow about $234,000.

That $9,000 difference isn't huge, but a loss of almost 4% in buying power is significant, especially in higher-priced markets. Moreover, those who stretch their budgets to buy will have less money to spend on related items such as home improvements and furniture, a situation that will further pressure companies such as Home Depot (NYSE: HD), Lowe's (NYSE: LOW), and Ethan Allen (NYSE: ETH).

Watch those rates
The housing market hasn't exactly held up well, even with mortgage rates at reasonably low levels. If recent rises don't reverse themselves quickly, homeowners could easily see a new wave of downward pressure on home prices -- at a time when they can least afford it.

For more on the housing crisis, read about:

Thursday's Biggest Stock Stars

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

Company

Yesterday's % Gain

VASCO Data Security International (Nasdaq: VDSI)

16.72%

Digi International

16.71%

Teledyne Technologies

14.89%

Quidel

12.43%

TriQuint Semiconductor

8.25%

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Thursday, like low-rated online retailers Amazon.com (Nasdaq: AMZN) and Overstock . Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 110,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. Thus far, CAPS has indeed proved its market-beating prowess: Since inception in 2006, its five-star stocks are beating the market by 12%.

Written in the (five) stars?
For example, out of the 537 CAPS All-Stars who've rated Motley Fool Stock Advisor pick VASCO Data Security, 98% have a bullish opinion. Fueled by that Foolish support, the small-cap provider of software security has kept a five-star rating for over six months straight.

Two months ago, CAPS member dani4800 brought the stock's weakness to our community's attention:

I think the recent price drop is due to the lack of understanding by the analyst, and the low follow-up by Wall Street. I am usually not a great fan of tech and growth stocks, but VDSI is making money, its market is expanding ... I think it is a great play: earnings in foreign currency act as a shield against falling dollar; and online banking security is something that is only beginning in the USA, which gives them room to grow there as well.

Consistent with that call, shares of VASCO popped yesterday after posting second-quarter revenue and earnings ahead of Wall Street's expectations on strong order flow.

The bullish lesson?
It pays to stay small. By focusing on attractive small caps that are doing big things underneath Wall Street's radar -- like expanding sales channels and steadily signing new business -- you can consistently find stocks that are inefficiently priced. Once that progress translates into "visible" earnings growth, the company's following (and stock price) will probably get a nice boost, too.

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are Thursday's biggest one-star decliners:  

Company

Yesterday's % Loss

Delta Air Lines (NYSE: DAL)

20.93%

Northwest Airlines (NYSE: NWA)

20.75%

UAL (Nasdaq: UAUA)

20.32%

MGIC Investment

20.14%

Fannie Mae (NYSE: FNM)

19.87%

One-star stocks inspire the least confidence from our CAPS members. So although yesterday's drop in highly rated MEMC Electronic Materials (NYSE: WFR) may have caught our community off-guard, one-star stocks are fully expected to fall hard. Since CAPS started, one-star stocks have dropped an average of 11.4%.

Did CAPS call the fall?
Just two days ago, for instance, CAPS All-Star leohaas commented on Tuesday's huge run-up in the airline sector, led by UAL:

Using yesterday's enormous bump up to put my thumbs down again on some airlines ... With fuel prices where they are (OK coming down a little, but that is temporary), service down the drains for all airlines, all of them laying off people, and the dangers of a recession not yet over, I can only see these guys go down again!

In line with that pitch, shares of UAL, along with several other one-star airliners, plunged 20% yesterday on general market weakness and a small rebound in oil prices.

The bearish takeaway?
Keep your portfolio immune from airline sickness. Any sector can pop in the short run, but the dreadful economics of the airline business make it virtually impossible to make a decent long-term profit. In Warren Buffett's words, "The worst sort of business is one that grows rapidly, requires significant capital, and then earns little or no money. Think airlines."

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.

Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!

Travelzoo's Menagerie of Bad News

You may think your tax rate is too high, but poor Travelzoo (Nasdaq: TZOO) probably has it worse. The online travel specialist boasted a 168% effective income tax rate in its second-quarter earnings release.

It looks like folks are catching on to the staycation trend this summer; Travelzoo really had nothing to talk about, other than that ridiculous tax rate. Overall revenue was up 8%, as the company continues efforts to expand internationally. North American sales grew by a meager 3%, and operating profits dropped by 300 basis points year over year. European revenue increased by 71%, but operating losses increased by almost 67% as the company seeks to expand in France. Travelzoo is still looking to take off in Asia, with quarterly revenue of $90,000 and losses of $3.2 million.

As you can imagine, the overall financial picture for Travelzoo is absolutely horrendous. Its cost of goods sold skyrocketed by 183%, general and administration expenses increased by 104%, and sales and marketing costs jumped by 16.5%, with an overall increase in expenses of 37.6% on the 8% revenue increase. These numbers triggered a huge swing in profits per share, moving from a $0.17 profit last year to a $0.08 loss this year. Travelzoo couldn't write off its losses in Asia and Europe, driving taxes to that sky-high 168% effective rate.

Direct online travel providers such as Priceline.com (Nasdaq: PCLN), Orbitz (NYSE: OWW), and Expedia (Nasdaq: EXPE) have experienced ups and downs lately. Even Ctrip.com (Nasdaq: CTRP), China's top online travel agency, has seen its stock drop by more than 40% in the past two months, which brings into question whether international travel will spur Travelzoo's long-term revenue growth. Travelzoo launched its China service in October 2007, and it's still is only generating $90,000 in quarterly revenue for all of Asia. Considering that Olympic preparations would be a big part of this quarter, that's a pretty sad statistic.

Travelzoo's stock price is down more than 70% from its 52-week high, and it isn't clear that the company has any positive growth opportunities in its future. Really, the only good news here is that the company has no long-term debt to weigh it down. Oh, and if you're not an investor, you'll at least be happy to note that Travelzoo is carrying more than its fair share of taxes.

Further globetrotting Foolishness:

Your Move, Noble

OK, so it wasn't the most regal quarter for Noble (NYSE: NE).

In the three months ended June 30, Noble's contract drilling margins were characteristically king-like at around 67%. This is actually pretty surprising, given the various hiccups in the period. One rig dropped a key piece of equipment on the seafloor, there was higher than anticipated downtime associated with several floating rigs, and regulatory delays are holding up some of the firm's West African jack-ups.

All in all, utilization got clipped a few points and daily drilling costs rose 13% sequentially. Core contract drilling revenue declined slightly compared to last quarter, and operating income dipped about 9%.

There are also some challenges on the horizon. Chinese power rationing around the time of the Olympics may introduce some shipyard delays, while labor tightness and equipment deliveries may strain schedules in Singapore. I appreciate how candid Noble is about these possibilities. Of course, you'd have to tune into the conference call to hear about this stuff.

There were a lot of encouraging things said on the call as well. Noble's management, while disappointed that the drillers are trading down in lockstep with commodity prices, is more convinced than ever that the cycle has lengthened. That would mean the good times for Noble, Diamond Offshore (NYSE: DO), and the rest of the contractor crowd aren't ending any time soon.

If Noble is correct about this, the company needs to get creative about where to go from here. Unlike ENSCO International (NYSE: ESV), which keeps topping up its new-build program, Noble's has pretty much run its course.

That leaves the company with a few options. Noble can order up a new deepwater vessel for delivery in 2012. The company notes that customers are willing to talk 2012 -- that shouldn't be too surprising, given Marathon Oil 's (NYSE: MRO) recent extension on the Noble Jim Day out to 2014.

Other options are consolidation (or euthanasia, depending on your opinion of the target company), and more innovative financing schemes such as the one arranged between Transocean (NYSE: RIG), Petrobras (NYSE: PBR), and profitable partner Mitsui & Co (Nasdaq: MITSY).

I wouldn't go so far as to rule out any of the three options. Noble has done well by shareholders over the years, and whatever the company's next step, I'd expect it to prove a rewarding one.

Noble reigns supreme in the court of public opinion, with a five-star rating in Motley Fool CAPS. I've rated the firm to outperform the market, but I'm just one Fool. Have your say, sire.