  |
|
 |
|
|
 |
|
|
|
|
|
|
 INVESTING COMMENTARY
3 Stocks Hitting Low NotesBy Motley Fool StaffAugust 21, 2008 When a stock hits a fresh low, it can either signal a dirt cheap dream stock or a dreadful stock to avoid. Separating the wheat from the chaff is difficult, but finding well-run companies at bargain-basement prices is a great way to accumulate a fortune over the long run. With that in mind, we'll use the aggregate intelligence of the 115,000-plus investors participating in Motley Fool CAPS to see what the community is saying about stocks hitting 52-week lows today. The community's approval (signified by four- and five-star ratings) could indicate that further research is in order. Here are three such stocks: Today’s Low Industry CAPS Rating (out of 5) Fools Saying Outperform BT Group plc (ADR) (NYSE: BT) $30.71 Telecom Services - Foreign 102 of 113 iStar Financial, Inc. (NYSE: SFI) $6.09 Credit Services 224 of 248 Tongjitang Chinese Medicines Co. (ADR) (NYSE: TCM) $3.56 Biotechnology 270 of 284 Source: Motley Fool CAPS, as of Aug. 21, 2008. Five-star telecom services - foreign companies: Brasil Telecom Part. S.A. (ADR) (NYSE: BRP): Stock price is 23% higher than last year.Tele Norte Leste Participacoes SA (ADR) (NYSE: TNE): Stock price is 20% higher than last year.Join us on CAPS to learn more about these and countless other interesting stock ideas. 5 More Top Growth StocksBy Tim BeyersAugust 21, 2008 Are you really a growth investor? It's worth asking. Fast-moving tech stocks have taken a beating recently, leading to a slew of bargains for those with the guts to buy. No surprises there. Market panics occur daily. Just ask investors who hold shares of Orthovita (Nasdaq: VITA), which on Wednesday fell nearly 5% on no news whatsoever. Sheesh. That's why all-star investors bet on growth over the very long term. They know that: make investors billions always begin as growth stocks.The best of them feature massive and identifiable competitive advantages.Growth as a strategy has the capacity to deliver 20% or greater annual returns for decades at a time.How we do it Specifically, we're looking for stocks that have earned a five-star rating in CAPS and which are expected to grow their earnings by at least 20% annually over the next five years. Five-star stocks are those that the community, on the whole, believes will outperform the S&P 500. Let's have the list Company No. of CAPS Ratings Percent Bulls 5-Year Growth Estimate Suntech Power (NYSE: STP) 3,778 96.9% 37.6% Manitowoc (NYSE: MTW) 1,171 98% 32.3% Quicksilver Resources (NYSE: KWK) 616 98% 27.5% Cognizant Technology (Nasdaq: CTSH) 798 96.7% 26.2% Core Laboratories (NYSE: CLB) 476 97.9% 22% Sources: Motley Fool CAPS, Yahoo! Finance. Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research. We've got some great companies to work with. Cognizant Technology has been an aggressive buyer of its own shares. Manitowoc just shipped out its smallest and least profitable business. Quicksilver Resources is a five-star mover. Here comes the Suntech "Suntech ... has dropped about 19% since last month, largely on concerns about solar panel sales in Spain. That's one of Suntech's major markets, and the Spanish government has discussed reducing subsidies in 2009. That's unlikely to happen, but the company has the backlog to make up for the loss even if it does," wrote Foolish colleague Karl Thiel recently. And the numbers look good. Suntech trades for 17 times forward earnings, for a 0.70 PEG ratio. That's a good sign, as is its rising return on equity. But don't take my word for it: The market-thumpers at Vanguard Explorer (VEXPX) have been buying shares recently. So has CAPS All-Star TMFSinchiruna. "I might be in the red on this one for a while, but this is a great company in a sector that makes just too much sense in a rising oil price environment," he wrote in March. "I believe solar will be a big part of the planet's solution to its energy woes, and China is th most de-coupled of all foreign economies... so I'm staying with [Suntech] for the long haul!!" Agreed, but I'm more interested to know what you think. Would you buy Suntech Power at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate. See you back here next week with five more top growth stocks. Fool on! 5-Star Stocks on the UpswingBy Ilan MoscovitzAugust 21, 2008 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 115,000-member investing community, we've found that five-star stocks, as a group, substantially outperform the broader market -- to the tune of 12 percentage points on an annualized basis from November 2006 to July 2008. 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 recently been upgraded to five-star stocks. 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 Anadarko Petroleum (NYSE: APC) 412 / 419 Baker Hughes (NYSE: BHI) 365 / 374 CryptoLogic (Nasdaq: CRYP) 364 / 383 Cypress Semiconductor (NYSE: CY) 189 / 197 Denbury Resources (NYSE: DNR) 150 / 152 Mechel (NYSE: MTL) 342 / 350 Schlumberger (NYSE: SLB) 782 / 796 Data from Motley Fool CAPS, Aug. 20, 2008. Come and join us on CAPS to learn more about these and countless other interesting stock ideas. Sign up for free. 5-Star Stocks Poised to Pop: CopartBy Brian D. PacamparaAugust 21, 2008 Based on the aggregated intelligence of 115,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, vehicle-salvage service provider Copart (Nasdaq: CPRT) 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 Copart's business, and see what CAPS investors are saying about the stock right now. Copart facts Headquarters (Founded) Fairfield, Calif. (1982) Market Cap $3.75 billion Industry Diversified Commercial Services TTM Revenue $732.55 million Management Founder and CEO Willis Johnson CFO William Franklin Return on Equity (avg. last three yrs.) 15.7% Major Competitor LKQ (Nasdaq: LKQX) CAPS members bullish on CPRT also bullish on Apple (Nasdaq: AAPL), Marvel Entertainment (NYSE: MVL) Cemex (NYSE: CX) CAPS members bearish on CPRT also bearish on Honda Motor (NYSE: HMC), Freddie Mac (NYSE: FRE), First Solar Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS. TTM = trailing 12 months. Over on CAPS, fully 273 of 280 of the All-Star members who have rated Copart -- some 98% -- believe the stock will outperform the S&P 500 going forward. These All-Star bulls include FAOFool and hey4ndr3w, both of whom are ranked in the top 10% of our community. In April, FAOFool reminded our community that Copart provides "a great service to insurance companies, while providing cheaper cars for average people trying to save money on their next car ... just what the current economy is asking for." An earlier pitch from hey4ndr3w in October 2007 follows that bullish line of thinking, elaborating on the stock's downturn-defending qualities: Copart strikes me as a great stock to own during a down market, which I believe is where we are headed. I agree with those who foresee a prolonged consumer credit crisis as a result of the subprime mortgage meltdown. People feel less rich when their primary asset-their home-loses value. They will be postponing new car purchases, which bodes well both for direct sales of salvage cars to consumers, and to parts remanufacturers. What do you think about Copart, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 115,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started. 7 Must-Read Stock BlogsBy Matt KoppenhefferAugust 21, 2008 The Motley Fool's CAPS community is a great way for investors to work together to beat the market -- and maybe get famous while they're at it. Among its features, CAPS enables members to blog about their picks, investing strategy, market view, yesterday's lunch ... or whatever else floats their boat. As the CAPS blogosphere continues to grow, members are adding more great content on a daily basis. To make it easier to find some of the gems out there, I've dug through the past week's posts to find some of CAPS' best insights. Of course, with room for only seven posts here I can't possibly cover all of the great stuff in the CAPS blogosphere. So when you're done here I highly recommend heading over to CAPS and checking out what some of the other investors have to say. Buffett and Gates tour Alberta oil sands Attention Facebook and MySpace Fools Wind is blowing in Why you should take a look at gasoline Waste Management The SEC is putting EDGAR out to pasture What I've learned And that's our roundup for this week. Be sure to check back next week for more great blogging action. In the meantime, why not head over to CAPS and add your two cents to the community pool? More CAPS Foolishness: 7 Highly Rated Stocks on SaleGreat Call on U.S. Steel! What's Next?5 All-Star Stocks on Fire7 Stocks PEG-ed to SoarBy Dan DzombakAugust 21, 2008 Now is a fantastic time to be a value investor, and it's an even better time to be a growth investor. Super investors such as Buffett, Greenblatt, and Fisher did well buying growing companies for rock-bottom prices. These guys weren't just buying outrageously cheap stocks; they bought growth potential on the cheap. But how do you find them? Now, the fun part These stocks have: ratings (four or five out of five stars) from our community of investors
Estimated 5-Year Annual Growth PEG Ratio CAPS Rating Fools Saying Outperform American Oriental Bioengineering (NYSE: AOB) 32% 0.35 **** 1682 of 1737 Gushan Environmental Energy (NYSE: GU) 20.5% 0.55 **** 420 of 437 China Fire & Security Group (NYSE: CFSG) 31.2% 0.45 ***** 1630 of 1665 Netgear (NYSE: NTGR) 15.2% 0.69 ***** 2179 of 2240 Transocean (NYSE: RIG) 21% 0.43 ***** 4171 of 4275 National Oilwell Varco (NYSE: NOV) 23% 0.61 ***** 1743 of 1785 Manitowoc (NYSE: MTW) 32.3% 0.22 ***** 1148 of 1171 Data from Yahoo! Finance and Motley Fool CAPS. While these aren't recommendations, they are a great starting point for future research. Finding value in growth stocks 7 Stocks to Doom Your PortfolioBy Wade MichelsAugust 21, 2008 Earlier this month, WCI Communities succumbed to the inevitable and filed for bankruptcy protection. In a previous article, I used CAPS, the Motley Fool's investing community, to highlight seven builders that could wreck your portfolio. WCI Communities was one of the stocks that popped up on that screen. Now, some would argue that was just luck, a hole in one, something that will never happen again. But, as the Roman philosopher Lucius Seneca once said, "Luck is what happens when opportunity meets preparation." A bit of research before you invest can give you a critical competitive advantage, and vastly improve your chances for success. Motley Fool CAPS can help, especially when it comes to helping you avoid the worst businesses the market has to offer. Stocks like these will almost certainly become potholes, if not outright roadblocks, on your path to riches. Being able to spot them in advance will give you plenty of time to steer clear. To find these, we'll screen for a few simple criteria: rating that also have at least 100 All-Star underperform picks. All-Stars are our highest-scoring members, having earned their ratings through Foolish picks that have outperformed the market.Insiders of sinking ships usually couldn't care less about shareholders. One way to check this is to look for companies with very low levels of insider ownership -- in this case, below 3%. However, for really large companies, this can sometimes be difficult, so don't use this criterion by itself.Finally, a return on equity of less than 5% is an indicator of a tough and potentially failing business. As the screen will show, most of these companies won't be profitable at all.Here's what the screen came up with. Most of the names probably won't surprise you. Company All-Star Underperforms Insider Ownership Return on Equity (TTM) Delta Air Lines (NYSE: DAL) 136 0.5% Not Profitable Fannie Mae (NYSE: FNM) 292 0.3% Not Profitable Krispy Kreme Doughnuts (NYSE: KKD) 143 1.4% Not Profitable MBIA (NYSE: MBI) 266 1.4% Not Profitable National City (NYSE: NCC) 185 1.1% Not Profitable Northwest Airlines (NYSE: NWA) 128 2.26% Not Profitable Wachovia (NYSE: WB) 298 2.82% Not Profitable Source: Motley Fool CAPS as of 8/18/08. TTM = trailing 12 months. Please note that these companies could be deep values -- or value traps. As always, before you go long or short, it's important to do your own due diligence. That said, here's what a few CAPS community members have to say about these businesses. In June, joker245 wrote this about Northwest Airlines: With the FAA cracking down and inspecting more, you'll see many of [Northwest]'s planes grounded and/or decommissioned. On 4/24 they got a waiver from their banks when they blew the Fixed Charge Coverage Ratio covenant on their credit facility. For those that don't know, what that means in this case is that their entire cash flow for the last 12 months (EBITDAR) is less than their fixed charges. ... The way these waivers tend to go, this is a conservative estimate of when [Northwest] will get back into compliance. The banks like to keep a short leash and don't like to give defaulting companies a waiver for more than a year. ww2004 made a good point about Wachovia back in May: There is a lot of speculation that the worst of the credit crisis is over. If sub-prime were the only concern that might be true but the next wave will be prime borrowers with option ARM loans. As average house prices continue to fall and option ARM rates begin to reset, over the next year banks like [Wachovia] and [Washington Mutual ] will continue to perform poorly. Golden West, now part of Wachovia, created the option arm and has billions of dollars of exposure, much of it concentrated in hard hit California. Early in 2007, CAPS community member FoolishChemist was on record with this delicious tidbit: The local Krispy Kreme's sign has said "Hot Doug nuts now" for the past five months. Now the sign says "Hot Doug now" Doesn't fill me with confidence. Then, in January, he followed it up with: "The store is now closed." Regardless of where you sit on the fence of luck, there is no denying that CAPS helped me to locate (and avoid) a seriously distressed asset like WCI Communities, and it could do the same for you! Go ahead and sign up -- it's 100% free. Our CAPS community of more than 115,000 investors -- made up of some of the brightest minds around -- would like to know what you think. More CAPS content and general Foolishness: lesson from an investing genius.Don't ignore this market indicator.Who let the dogs out?A Gardasil GotchaBy Brian OrelliAugust 21, 2008 Getting a drug through the FDA often isn't enough for drug companies. To make money, they've also got to persuade someone -- usually health insurers like UnitedHealth Group (NYSE: UNH) or Aetna (NYSE: AET) -- to pay for the product. That's what makes this week's article and editorial in The New England Journal of Medicine about Merck 's (NYSE: MRK) Gardasil so worrisome for Merck and GlaxoSmithKline (NYSE: GSK). Glaxo is hoping to bring its own human papillomavirus (HPV) vaccine, Cervarix, to the U.S. market. The article basically concludes that the vaccination is worth the money -- about $360 to $400 for a three-dose series -- for young girls, but not for women in their 20s. One of the authors said that "the vaccine becomes less cost-effective" for older women. The problem is that Gardasil is approved for females aged 9 through 26. That's fine as far as it goes, but Merck has been trying to get it approved for women through age 45. Even if it succeeds in getting the label expanded, it might be difficult to get insurers and government agencies to pay for the vaccine. There's certainly precedent for payers rejecting drugs that don't have a large enough benefit. For instance, the UK's National Institute for Health and Clinical Excellence is considering not paying for kidney cancer treatments like Pfizer 's (NYSE: PFE) Sutent and Onyx Pharmaceuticals ' (Nasdaq: ONXX) Nexavar because the drugs extend patients' lives by only a few weeks to a few months, on average. To combat a similar possibility, Merck is offering doctors a free replacement dose when a dose is given to a patient who then finds out that her insurance won't cover it. This might lead to patients deciding to finish the three-dose regimen and pay for the remainder out of pocket. With Merck and Schering-Plough (NYSE: SGP) having so much trouble with Vytorin, they're both in desperate need of replacements for the lost growth. Merck is counting on continued growth from Gardasil as well as fellow newcomer diabetes treatments Januvia and Janumet, and HIV treatment Isentress. Loss of sales of Gardasil to older women won't be the end of the world for Merck, but it certainly isn't going to help with a comeback. Apple's Unlimited AppealBy Rick Aristotle MunarrizAugust 21, 2008 Don your bibs. It seems as if Apple (Nasdaq: AAPL) may be gearing up to offer iTunes fans the earbud buffet that many have been craving. An "anonymous tipster" is telling MacDailyNews that Apple will unveil a music subscription plan within the next two months. iTunes Unlimited would let users pay a flat rate of $129.99 a year for top-quality streaming access to millions of the tracks in the iTunes library. Trust me, I know the differences between a company spokesman, a credible unnamed source, and an "anonymous tipster." This may very well be a hoax, a competitive shot, or simply wishful thinking. However, it's really just a matter of time before Apple follows pioneers like Napster (Nasdaq: NAPS) and RealNetworks ' (Nasdaq: RNWK) Rhapsody into this space. It may not be revolutionary, but Apple has a habit of settling for evolutionary in its place. Torpedoing the subs This doesn't mean that the premium unlimited model is broken. There are simply too many options out there. Apple certainly has had no problem growing its iPod user base; its recent iPod sales slowdown simply owes to the iPhone -- which is also an iPod player -- taking the baton. Sirius XM Radio (Nasdaq: SIRI) is now at 18.6 million subscribers, and satellite radio members can stream many of their provider's channels online at no additional cost. The plethora of premium subscription alternatives -- and its perfectly popular a la carte approach -- may explain why Apple has taken so long to enter this market. But it might as well jump in before top-tier companies with digital music interests like Amazon.com (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT) dive in and educate the market. Major opportunities for major labels Portable streaming services don't seem to get in the way of piecemeal purchases. If the struggling major labels play their sound cards right, this could be another attractive incremental revenue stream, in the same vein as digital downloads and ringtones. The high-margin splendor of inventory-free distribution is lost on the majors, because they still have chunky, old-school overhead to tackle. Only the nimble players like Orchard (Nasdaq: ORCD) are making the most of these digital opportunities, applauding the CD's slow death as a platform for distribution. You go, Apple The industry may not have changed much in that time, but now that Apple is the country's leading music retailer -- and Amazon's virtual storefront is now good enough to clock in fourth -- the labels really have little choice but to cave in to the digital demands of its distributors and consumers. An anonymous tipster says it's coming. This not-so-anonymous analyst says it's about time. Hit play to continue: Apple Rocks, As UsualWhy Can't They Be More Like Apple?The Greatest Secret of AllA Steel of a Chinese StockBy David Lee SmithAugust 21, 2008 Fools, I promise that what follows is devoid of an Olympic theme, having nothing to do with my fascination for sports events currently being contested in China. I do, however, come bearing the name of a company that's headquartered in Beijing, just a stone's throw from the Olympic "Bird's Nest," and it appears worth a look for several reasons. I won't beat around the bougainvillea, making you guess the company of which I write. It's General Steel Holdings (NYSE: GSI), and it's a holding company that operates a group of steel companies in the People's Republic of China. Its hot-rolled carbon and silicon steel sheets find their way into agricultural vehicles, shipping containers, and other specialty products. Its spiral-weld pipes transport natural gas and oil, and its bars are used in the building of China's expanding infrastructure. Have we found enough major themes to make this company interesting? How's General Steel doing? Well, if you realize that accounting is sometimes an impediment to judging corporate strength, it's doing nicely, thank you. Not long ago it reported a loss for the June quarter. But if you back out a charge "for the recalculation of the fair value of derivative liabilities" -- a line item that wouldn't be less decipherable if it were written in Chinese -- its net income jumped from $1.9 million to $4.5 million. General Steel has generated four stars among the 360 Fools venturing CAPS opinions on the company. Perhaps more interesting: Bill Mann has recommended this stock to his Global Gains subscribers. Try the market-beating international stock service free for 30 days. For related Foolishness: Great Call on U.S. Steel! What's Next?7 Ways to Get Rich at the OlympicsA Big Upgrade for NucorAvoid the Mistake That Cost Buffett 8 Years of Better ReturnsBy Richard GibbonsAugust 21, 2008 There's one investment strategy you won't read much about on Fool.com, even though many have tried it. In fact, Warren Buffett spent eight years working with it before discarding it as worthless. What investment strategy is that? Technical analysis. Invest like a lemming It's an attractive idea. 3M (NYSE: MMM) has bounced between $70 and $85 quite a few times in the past five years. Why not buy at the low, and sell at the high? Or look at PotashCorp 's (NYSE: POT) chart. Clearly, investors love the stock. Its rise from $28 to $178 seems unstoppable. Why not jump aboard and profit? Technical analysis is a simple yet compelling strategy. You can see why Buffett spent years early in his career trying to master it. An expensive mistake After eight years of trying, he concluded that it was the wrong way to invest. Then he focused on the teachings of Ben Graham, which stressed business fundamentals, finding a strategy that both made sense and, more important, worked. Three simple rules 1. Buy stocks with a margin of safety. 2. A stock is part of a business. 3. The market is there to serve you, not instruct you. The first lesson usually makes the headlines. It means that you should buy stocks for less than they're worth. But when Buffett talks about the second and third lessons, he's basically admitting that he wasted eight years of his investing life. Buying a business In Graham's second lesson, stocks are far more than just pieces of paper or lines on graphs, and to understand them, you need to understand the business. If you're looking at UnitedHealth Group (NYSE: UNH), ignore whether the stock has been up three days in a row, and focus instead on how the company is working to address rising medical costs. Ways to serve man When SAP (NYSE: SAP) fell to $10 per share in 2002, the market was saying that IBM and Oracle (Nasdaq: ORCL) would eat the German company's wienerschnitzel. When McDonald's hit $13 in 2003, the market was announcing that the Big Mac would end up in the Museum of Neat Ideas Gone Wrong, alongside the tapeworm diet, land wars in Asia, and Paris Hilton's home videos. But in both cases, the market was wrong. So, instead of listening to the market, Buffett seeks to take advantage of it. Sometimes, the market will offer to buy a stock for far more than it's actually worth. Other times, it'll offer you the chance to buy shares of a great company for far less than its fair value. An investor who understands the true value of a business will be able to profit when the market offers great companies on sale. The Foolish bottom line Our Inside Value team is working to take advantage of the situation, and we've identified several stocks we think will post some of those amazing returns. If you're interested in reading about them, click here for a 30-day free trial. This article was first published June 16, 2008. It has been updated. Fool contributor Richard Gibbons should not be used as a dessert topping. He owns shares of UnitedHealth. The Motley Fool owns shares of Berkshire Hathaway. Berkshire, 3M, and UnitedHealth are Inside Value recommendations. Berkshire and UnitedHealth are Stock Advisor picks. JPMorgan Chase is an Income Investor selection. The Fool's disclosure policy bears an eerie resemblance to Charlie Munger. BJ's: Better Than It SeemsBy Timothy M. OtteAugust 21, 2008 Executives at BJ's Wholesale Club (NYSE: BJ) must be wondering what happened on their second-quarter earnings conference call yesterday. Same store sales were up 15.5%, earnings per share increased 25.5% (excluding one-time items), and the company beat analyst expectations by $0.02 per share. Yet the stock sank more than 7%. Um ... do we have bad breath all of a sudden? Turns out investors weren't thrilled that, amid so much success, management didn't raise its earnings expectations for the back half of the year. Investors can be a fickle bunch. By the numbers, I see very few flaws in BJ's Q2 results. Higher gas prices added 8.1% to comp sales; excluding fuel, comps rose a still-healthy 7.4%. That compares favorably to the most recent U.S. quarterly (fuel adjusted) comps of 4.6% from Wal-Mart Stores (NYSE: WMT) and 4% from Costco (Nasdaq: COST), and beats the heck out of anything we've seen recently from Target (NYSE: TGT). Gross margin declined 55 basis points, but operating margin only declined three basis points, thanks to slower-growing operating expenses. The company continues to deliver impressive free cash flow, cranking out $56 million during the 2nd quarter -- much more than its $36 million of net income. The stock price drop may also have stemmed from a quote from CEO Herb Zarkin, "No rational retailer can accept these kinds of increases and expect to make a profit," which was picked up by some of the wire services. This quote was taken out of context. Mr. Zarkin was predicting that competitors would raise prices, allowing BJ's to do the same. But on a stand-alone basis, the quote sounds like the company sees trouble ahead. After reviewing the conference call, I think management is taking a conservative line. Gas prices are very volatile. Consumer-products companies like Procter & Gamble (NYSE: PG) and Kraft Foods (NYSE: KFT) are raising prices, which retailers must decide whether they can pass on to shoppers. And the all-important holiday season still awaits us. I don't blame the company for taking a wait-and-see attitude. Fellow Fool Rich Smith noted last April a bear case for BJ's from among CAPS' members, but after taking a closer look, he concluded the stock was fairly priced at a P/E of 20. I say "ditto" today at 19 times trailing earnings. Longtime Motley Fool readers will remember that I consider BJ's to be the third-best warehouse club player, after Sam's Club and Costco. But the company has been on a roll for more than a year now, and I see no reason to believe the fun will stop here. Fill your cart with further Foolishness: Inflation Hurts Costco, TooIs It Time to Put Wal-Mart on Pause?In Retail, It's a Buyers MarketConsider This Before You Buy Another StockBy Julie ClarenbachAugust 21, 2008 Milton Friedman famously popularized the notion that there's no such thing as a free lunch. According to Harvard economics professor John Campbell, however, there's exactly one: diversification. Finance theory does offer a free lunch: the reduction in risk that is obtainable through diversification. An investor who spreads her wealth among many investments can reduce the volatility of her portfolio. ... There need be no reduction in average return and thus no bill for the lunch.[emphasis in original] According to a Motley Fool poll taken last year, the majority of investors owned "16 or more" stocks. Which raises the questions: How many stocks do you own? How many should you own? Eating your cake and having it, too When you're invested in only -- or largely -- one company, turns of events you never expected can out your investment in a matter of days. Liquidity dries up in the credit markets, and one of the world's largest investment banks is sold to another in a matter of days for pennies on the dollar. The economy hits the skids, and automakers riding the wave of SUV sales are suddenly flirting with bankruptcy. And before you know it, your portfolio is a whole lot leaner. When you're diversified broadly, however, any given set of stocks taking a beating is likely to be balanced out by a group that's riding high. It's that lack of correlation -- the fact that stocks don't all move in the same direction at the same time -- that allows diversification to reduce your risk. In fact, according to Frank Armstrong III, an independent investment advisor writing in The CPA Journal, "In both theory and practice, the portfolio with the widest diversification will have the lowest risk. The ... optimum equity portfolio is the whole market. It's the one with the highest return per unit of risk. Anything less than the global portfolio is a bet against the efficient market and subjects an investor to uncompensated risk." But Warren Buffett disagrees Although the market is largely efficient over the long term, it's more variable in the short term -- and that creates opportunities for the savvy investor. Academics frequently support indexing as a means to diversify, but the best investors know that over-diversification actually lowers returns. Think about it: If the portion of the portfolio filled by any high-performing stock is extremely small, its overall effect will likely be negligible. A global portfolio will have returns that track the global market -- and no more. A portfolio concentrated around a smaller group of stocks, on the other hand, has the opportunity to outperform the market. A concentrated strategy has paid off handsomely for Buffett and Berkshire Hathaway . In the 1970s, he invested $11 million in The Washington Post (NYSE: WPO), which has turned into more than $1 billion. In the wake of Black Monday in the late 1980s, Buffett started buying Coca-Cola (NYSE: KO) -- an investment that has earned some 15% annual returns since, cementing the Oracle of Omaha's reputation. Buffett -- who may be the greatest investor of our time -- invests like this to this day. He's recently been adding to his positions in Ingersoll-Rand (NYSE: IR) and Sanofi-Aventis (NYSE: SNY). The ability to create a concentrated portfolio, in fact, is an advantage the individual investor has over most professionals. As Peter Lynch, onetime head of Fidelity Magellan , argued, "The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile." Lynch's big winners included Altria (NYSE: MO) (when it was still called Philip Morris), Ford (NYSE: F) and General Electric (NYSE: GE) -- but he's not against diversification. "It's best to own as many stocks as there are situations in which: (a) you've got an edge; and (b) you've uncovered an exciting prospect that passes all the tests of research," he writes in One Up on Wall Street. That doesn't mean buying just to fill a niche: "There's no use diversifying into unknown companies just for the sake of diversity. A foolish diversity is the hobgoblin of small investors." What about a Foolish diversity? So before you buy another stock, consider this: Will you still have that sweet spot between risk and reward? I'd argue that a portfolio of less than 10 stocks brings too much risk, while a portfolio of more than 30 stocks will likely dilute the reward. The sweet spot, then, is somewhere in between. If you'd like more information about the Million Dollar Portfolio philosophy, or if you'd like to learn about our stock picks and optimal allocation for each new company, just click here to tell us where to send the info. At the time of publication, Julie Clarenbach owned shares of Berkshire Hathaway, but no other companies mentioned here. Berkshire Hathaway and Coca-Cola are Motley Fool Inside Value recommendations. Berkshire Hathaway is also a Stock Advisor choice. The Motley Fool owns shares of Berkshire Hathaway. The Fool's disclosure policy is concentrated goodness. Dear FDIC: I Want a Better Mortgage, TooBy Dan CaplingerAugust 21, 2008 In real estate, you typically see cycles between buyer's markets and seller's markets. But the credit crunch has brought a new term to the forefront: a borrower's market. The Federal Deposit Insurance Corporation, which is responsible for insuring bank deposits across the country, announced yesterday that thousands of IndyMac borrowers who are delinquent or in default on their mortgage loans could expect to see their loan terms modified in the near future. According to the FDIC, the modifications are designed both "to achieve affordable and sustainable mortgage payments for borrowers and increase the value of distressed mortgages by rehabilitating them into performing loans." As a homeowner, that sounds like a nice deal to me. Sign me up. So much for fiscal responsibility Talk about a strange set of incentives. You don't just get rewarded for being personally irresponsible; you also benefit when your bank acts irresponsibly. A sweet deal for borrowers But the terms on the FDIC's modifications are pretty nice. Loan rates will be capped at the going rate for fully conforming loans -- currently 6.5%. Given that most of these borrowers couldn't dream of getting such a mortgage right now, this is a great deal for them. Nevertheless, if that rate reduction isn't enough to make the mortgage affordable for a given borrower, then an even sweeter deal is available. The FDIC can offer an even lower rate for up to five years, which will then slowly adjust back upward to that 6.5% rate. The lesser of two evils It's all part of the painful process of deleveraging the economy. For investment in housing, that process promises to be long and drawn-out, involving give and take among borrowers, financial institutions, and the federal government. The main question for investors, however, is whether the trend toward less leverage will spread further beyond the financial industry. Look at some non-financial companies with high debt-to-equity ratios: Company Debt-to-Equity Ratio Tenet Healthcare (NYSE: THC) 164.7 Western Union (NYSE: WU) 132.1 Embarq (NYSE: EQ) 66.2 Qwest Communications (NYSE: Q) 26.6 Source: Motley Fool CAPS. As Motley Fool Inside Value lead analyst Philip Durell has explained, the debt-to-equity ratio isn't always a perfect measure of whether a company is overleveraged. But in general, with debt a necessary component of business operations throughout the economy, an already iffy business environment can ill afford to see contraction in corporate lending capacity. With many banks already straining to raise needed capital, however, leverage remains a threat to future economic growth. For more on the housing crisis, read about: still going to get worse.How one stock guru predicted the mortgage crisis.What you can do with your own mortgage.Don't Give In to This FearBy Adam J. WiedermanAugust 21, 2008 Here's a couple of predictions I recently came across: Where'd I find these bearish remarks? They weren't part of a Jim Cramer rant or a Barack Obama speech. In fact, they weren't made by anyone contemplating recent headlines. Nope -- these are from the pages of Howard Ruff's 1981 book, Survive & Win in the Inflationary Eighties. These eerie predictions -- which sound like they were stripped from the front page of a recent Wall Street Journal -- are nearly 30 years old! You'd think that after 30 years, we'd have moved on. Unfortunately, we haven't Sometimes it's true -- but often it isn't. And then you end up like the tragic John Marcher in Henry James' The Beast in the Jungle, missing out on everything good that life has to offer simply because you were paralyzed by a fear of the unknown future. And that would be a shame. As we (and, unfortunately, the adopters of Mr. Ruff's advice) now know, inflation didn't reach unimaginable heights. Rather, it peaked in 1980 at 13.6%, and then hovered around 4% for the rest of the 1980s. The "energy crisis" of the 1970s (which people argued was brought on by high domestic consumption and low domestic production -- sounds familiar, don't you think?) didn't end the American Dream -- nor did an economic bomb explode. In fact, if you'd followed Mr. Ruff's doomsaying advice to load up on a precious metal like gold, your annualized returns on that investment from 1981 through today would have been a measly 1.2%, meaning your investment would have lost money due to the effects of inflation. However, if you instead ignored such bad advice, sat tight, and kept your money in stocks, you would have made much more. Over that same time period, which includes the recent market volatility, the S&P 500 has risen by an annualized 8.4%. Beating the bear Things always could get worse -- I don't want to downplay that. But it's not inevitable that things will worsen, which is where folks like Mr. Ruff and Mr. Marcher -- and those fleeing investors -- go wrong. Just as it was when Mr. Ruff wrote his book, the best way to invest in a market like this is not to abandon stocks in favor of commodities, which are now trading at historic highs. Rather, it's to take advantage of rock-bottom pricing on the world's top companies -- companies with strong brands, wide moats, and attractive growth prospects. Take a look at these high-growth companies trading at historically low multiples: Company 5-Year Per Annum Analyst Growth Estimates Current Price-to-Earnings Ratio 5-Year Average Normalized Price-to-Earnings Ratio Google (Nasdaq: GOOG) 29.7% 32.1 85.2* Yahoo! (Nasdaq: YHOO) 18.2% 26.4 84.6 Infosys Technologies (Nasdaq: INFY) 21.5% 18.5 44.5 Wipro (NYSE: WIT) 20.1% 22.0 45.8 Akamai Technologies (Nasdaq: AKAM) 20.7% 31.7 117.4* Hansen Natural (Nasdaq: HANS) 13.5% 17.1 34.3 Tessera Technologies (Nasdaq: TSRA) 26.0% 43.0 73.6 Data from Yahoo! Finance and Capital IQ, a division of Standard & Poor's. While I can't predict the future any better than Mr. Ruff can, I'd argue that in another 27 years, betting on opportunities like these will have been the right choice. Growing your wealth Need proof that those criteria lead to market-beating investments? The Rule Breakers service has outperformed the S&P 500 by more than 11 percentage points since inception in 2004. If you'd like to see what companies the team likes today, click here to try the service completely free for 30 days. Adam J. Wiederman owns no shares of any company mentioned above. Google and Akamai Technologies are Motley Fool Rule Breakers recommendations. Tessera Technologies is a Motley Fool Hidden Gems Pay Dirt pick. The Fool's strict disclosure policy can be found here. Do You Have the Guts to Buy?By Paul ElliottAugust 21, 2008 I'll never forget the day I heard those two words. It was Christmas 1999. I was on the phone with an old pal. That summer, he'd tipped me to a local scientist who was boasting that he could crack the human genome. There was an IPO. I bought in and forgot it. What the heck is going on here? By New Year's, my genome stock was doubling every week. As it turns out, some Fool named David Gardner had bought it for his online "Rule Breaker" portfolio. In December 1999, I had no idea what those two words meant, but I had to find out. This guy was moving the market. You may have heard that Rule Breaker investing is back. But I warn you, it's probably not what you think. It's certainly not what I thought it was when I heard those two words on the phone from my parents' kitchen in Canton, Ohio. For one thing, it's not all tech Southwest Airlines (NYSE: LUV) was a Rule Breaker. Yet founder Herb Kelleher didn't invent the airline. He broke the mold with a no-frills, low-cost structure and by giving a darn about his customers. Of course, you could pay similar compliments to JetBlue (Nasdaq: JBLU). Both were Rule Breakers at one point. Dell (Nasdaq: DELL) didn't invent the computer, either. It just redefined the way computers are sold -- there's the difference. In fact, David Gardner argues that low-tech Starbucks is the consummate Rule Breaker. Who better than Starbucks, he asks, sensed a need, met it, branded it, and then spread it like wildfire from coast to coast? Hardly high-tech, right? But you know what really made Starbucks a Rule Breaker in 1998? There was no precursor and no second fiddle. If you bought Starbucks along with David in 1998, congratulations: You're a Rule Breaker, too. So just what makes a Rule Breaker investor ? As David points out, great growth companies rarely look "cheap," at least when measured by traditional valuation metrics. So you have to pay up. That takes guts, but Rule Breakers are typically worth the gamble. Should you take David's word for it? I would. When David shuttered his real-money Rule Breaker portfolio, he'd managed a 20.1% annualized return. That was in mid-2003, after the bear market. Compare that with 9.1% for the S&P 500 and 7.3% for the Nasdaq over the same period. That's the kind of performance that made legends of Peter Lynch and Bill Miller, and rightfully so. This stuff is not for everyone Then again, Vertex Pharmaceuticals (Nasdaq: VRTX) is up 153%, while Myriad Genetics (Nasdaq: MYGN) is up 250% since David's team told us about it, among nine recommendations that have doubled in value or more. And overall, David's group is soundly beating the market. The trick, of course, is spotting opportunities like these and having the guts to buy when you do. It certainly helps to get your information from someone you can trust -- someone who does the legwork. In other words, not from some wahoo on the phone. So why not go straight to the source? I can't promise you'll get rich. But I can promise you won't be hounded to subscribe. I'm fairly certain you'll learn something new and get some great stock ideas -- including the team's top ultimate growth five stocks for new money right now. If you want to learn more about taking a no-risk free trial, click here. This article was originally published on Dec. 16, 2004. It has been updated. Paul Elliott owns shares of ImClone. Starbucks is a Motley Fool Stock Advisor recommendation. Dell and Starbucks are Inside Value selections. Vertex is a Rule Breakers pick. The Motley Fool owns shares of Starbucks. The Motley Fool has a disclosure policy. EA Plus Take-Two Does Not Equal MicrohooBy Rick Aristotle MunarrizAugust 21, 2008 "Stop me if you've heard this one before," writes Forbes' Chris Morris. "A massive tech company wants to buy a sizable competitor, in hopes of dethroning an even bigger player in the industry. Only, it can't close the deal, because that sizable competitor thinks the offer price is much too low." "At the end of the Microsoft-Yahoo negotiations, Yahoo was left battered, with employee morale low, executives jumping ship, and stockholders unhappy," writes The Industry Standard's Cyndy Aleo-Carreira. "Is that really where Take-Two wants to be?" Is that where we are with central casting? Electronic Arts (Nasdaq: ERTS) is starring as the market share-hungry Microsoft (Nasdaq: MSFT), with a young Take-Two Interactive (Nasdaq: TTWO) filling the role of a headstrong Yahoo! (Nasdaq: YHOO)? It's true. Both EA and Microsoft realize that they lack the organic muscle to become leaders in their respective industries. Take-Two and Yahoo! have rebuffed the amorous advances. The similarities end there, though. Quiet on the set Boo hoo, Microhoo Take-Two is at the top of its game. There is no reason why it should settle for less than an industry multiple. It will take Yahoo! years to approach the $31 to $33 prices that Microsoft was willing to pay. Heelys may not even be around when that happens. However, Take-Two is just a hit title away -- or perhaps just a hit quarter or two away -- from lapping EA's offer. There is no urgency to cash out. Investors won't be dangling battering rams and pitchforks at the next Take-Two shareholder meeting, and not just because they collectively decided the company's fate this summer. So go ahead and rip up that Microhoo script, Take-Two. You're better than that bit part. You're a star, baby. Heelys? Central casting is calling. They want you to read for the part of one Jerry Yang. Skate away, that's all. Other games to play EA Waiting at the Altar4 Things You Need to Know About Video GamesShould You Sell?Find Good Companies at Good PricesBy Todd WenningAugust 21, 2008 You know those great companies you didn't invest in last year, because they were overvalued? Well, the past year's market sell-off may have brought their shares back into value territory. And they're probably not the only values out there. Ron Muhlenkamp, manager of The Muhlenkamp Fund (MUHLX), recently told investors that he saw the best investment values in a decade. One of the screens that Muhlenkamp uses to find good companies at good prices highlights companies generating return-on-equity figures greater than 15%, and price-to-earnings ratios below that figure. Here is a list of five companies that fit these criteria, paired with their respective CAPS rating, as judged by more than 115,000 members of the Motley Fool CAPS community. Those ratings matter -- especially for stocks receiving four or five stars, which have outperformed the market as a group since November 2006. Company P/E Ratio CAPS Rating Vale (NYSE: RIO) 11.4 ***** Devon Energy (NYSE: DVN) 11.4 ***** Deere (NYSE: DE) 13.7 ***** UnitedHealth Group (NYSE: UNH) 10.2 ***** Coventry Health Care (NYSE: CVH) 10.0 ***** Source: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's; and Yahoo! Finance, as of Aug. 20, 2008. Come join us on CAPS, get your free sign-up, and learn more about these and countless other interesting stock ideas. Fool Video: 6 Stocks That PayBy Mac GreerAugust 21, 2008 A study by Ned Davis Research found that, from 1972 to 2006, dividend-paying stocks returned 10.1% annually, compared to a 4.1% return for stocks that didn't pay a dividend. So which dividend stocks will continue to pay off for investors? In this installment of "Fool Video," Motley Fool analyst and Income Investor co-advisor James Early talks with Online Managing Editor LouAnn DiCosmo and gives his take on Procter & Gamble (NYSE: PG), Johnson & Johnson (NYSE: JNJ), Anheuser-Busch (NYSE: BUD), Coca-Cola (NYSE: KO), ConocoPhillips (NYSE: COP), Chevron (NYSE: CVX), and Biovail (NYSE: BVF).
Please enable JavaScript to view this video. More Fool fare: The Stock Screaming "Buy Me!" Build a High-Yield Portfolio 7 Stocks Einstein Would LoveGet Ready to BuyBy Paul ElliottAugust 21, 2008 "Small caps squash large caps like grapes!" That's how I planned to open today. By now, I'd be making my case -- dropping obscure references to Nagel and Quigley and citing 70-plus years' of Ibbotson data. So forget the numbers Can you do it? I really think you can, and I'll show you why I say so. But for now, just know that we're going to be looking for smallish companies that are: And there's something else: You want a stock that hasn't hit Wall Street's radar yet. This way, you can benefit from pent-up institutional demand when earnings and revenues do pick up, and the sell-side guys finally do catch on. Now, what do I mean by "zealots"? This is nothing new. Decades before, Walt Disney essentially willed a tiny cartoon studio into a global Disney (NYSE: DIS) empire. Talk about nutty -- I mean, zealous. You sense the same passion in Fred Smith at FedEx (NYSE: FDX), whose stock has risen 30 times in value since 1980. None of which means that finding these companies is easy, but it can be done. More than anything, we need to be patient and pick our spots. Even better, we can steal a page from Motley Fool co-founder Tom Gardner's Motley Fool Hidden Gems playbook, seeking out companies with market caps of less than $2 billion that offer: Just remember those five keys But what are your chances of finding the next home run? Probably not as good or as bad as you may think. Earlier, I mentioned Fool co-founder Tom Gardner. Those five keys led Tom and his team of analysts to better-than-200% profits in less than two years, when Shire (Nasdaq: SHPGY) snapped up a drug company called Transkaryotic. Hidden Gems subscribers locked in another 200% gain whenGlaxoSmithKline (NYSE: GSK) took out tiny CNS, makers of the Breathe Right nasal strips. Already, there is a 450% gainer on the scorecard, and the team has turned up 18 stocks that went on to double or more since 2003. (In the spirit of full disclosure, the Hidden Gems picks are up an average of 25.5%, versus just 2.2% if you'd bought the S&P 500.) Yes, this is a tough market ... If you're short on ideas, you can try out Hidden Gems free for 30 days. You don't have to subscribe to anything, and you can take a whole month to decide if it works for you. Meanwhile, you can check out the entire portfolio of small-cap value picks and download every back issue right now. As investors, it doesn't pay to be proud. We need an edge and there's comfort in numbers, especially in markets like this one. But give up on stocks at your own risk. Instead, learn more about this offer to try Hidden Gems free, simply by clicking here. This article was originally published May 10, 2005. It has been updated. Paul Elliott does not own shares of any company mentioned in this article. You can see the entire Hidden Gems scorecard, including every active and past recommendation, with your free trial. FedEx, Apple, and Disney are Stock Advisor recommendations. Dell and Microsoft are Inside Value picks. GlaxoSmithKline is an Income Investor choice. Intel Wants Its Web TVBy Tim BeyersAugust 21, 2008 Hollywood and Silicon Valley just don't get along. Aside from rare exceptions such as Apple (Nasdaq: AAPL) CEO Steve Jobs, who parlayed his top spot at Pixar into a seat on the Disney (NYSE: DIS) board, the 300 miles between San Jose and L.A. might as well be a continent. Firms that try to cross the chasm often do so at great risk -- but Intel (Nasdaq: INTC) is going for it anyway. On Wednesday, the chipmaker announced a partnership with Yahoo! (Nasdaq: YHOO) to bring Web content to TVs. Yahoo! will contribute software development tools called widgets -- here's one for our Motley Fool CAPS stock-picking community. Intel, meanwhile, is working on technology that it calls "system on a chip." Translated, it's the collection of silicon circuitry that will be programmed to take instructions from Yahoo!'s widgetry, while broadcasting video on a screen. Comcast (Nasdaq: CMCSA), Sony , and Disney have all endorsed the idea. Why WebTV was really TV Web I've got no idea. Yet WebTV still exists as MSN TV, and it's sold as a set-top box. But it's not a leader; TiVo rules the remote for those of us who still think of form factors -- laptops or desktops -- first when it comes to computing. Microsoft knows this all too well. Mr. Softy's no longer actively pushing a Media Center PC, relying instead on the Xbox 360. It's a good move; the Xbox is a living-room device that easily plugs into broadband networks, and a deal with Netflix (Nasdaq: NFLX) allows for movies on demand. For all the talk of Apple winning the living room, Mr. Softy has a comprehensive, if flawed media center for sale right now. Living on Web video Too bad this doesn't seem to be what the duo has in mind. Not yet, at least. Yahoo!'s software, called Widget TV, is designed to access Web content such as photo albums stored in Flickr. That's nice, but it's not what I need. Flickr is best on my Mac, where I can browse, edit, and print the photos I like best. The good news? Widget TV is an interface that software developers will utilize to write code for Intel's chips. This handshake between hardware and software could simplify the process of bringing the Web's best -- movies on demand, multiplayer games, and custom programming -- to life on the tube. Let's hope so. We've already turned the channel on TV Web, a failure of the cultural chasm that separates Hollywood and Silicon Valley. Intel and Yahoo! needn't suffer the same fate; Web TV's time has finally come. Get your clicks with related Foolishness: watch TV her way.Netflix is a TV star.Media giants were tuned into Net TV as far back as 2005.Is It Time to Sell?By Paul ElliottAugust 21, 2008 Lighten up ... rotate out ... take a little off the table. Whatever you call it, it means "selling," and it's tricky business. So before you reach for the rip cord, ask yourself this: "What if I had never sold a stock?" Let's face it, I already knew the answer. If I had never sold a single share of stock, I would be ... richer than I am today. How much richer? Much richer. I can't give you a precise figure, because I knew that once I saw it for myself, I would scream. How about you? It gets worse, and worse and worse Think about it: "I sold Intel in 1987" is a dark secret to have to reveal to another investor -- even if it was for a quick double. Since that first double, Intel is up another two thousand percent in value. I didn't flip chip rival Advanced Micro Devices (NYSE: AMD) for a quick double, either. But I know somebody did. And I know a little how it feels. Pull up a long-term chart for medical waste handler Stericycle and you'll see a 45-degree ramp skyward, connecting the mid-single-digits to the ... top of the freakin' world. You guessed it, I bought Stericycle in the low single digits (split-adjusted) back in 1998. Sold it the next year for a quick double. Now it's near $60. I call that the most painful double of my life. "So what did you do with the cash?" No, I sold my meal ticket to book a nice gain. But what did I really book? Zip. You never do, unless you pull your profits straight out of the market, which is not something you should consider now, especially if you're in your prime investing years. That's right. Tempting as it is, I don't think you should try to time the market. A lot of folks claim to do it -- and a few actually seem to pull it off -- but not me. In fact, you might want to brace yourself, because I'm going to go one giant step further than that. I barely believe in valuation For more recent examples, take a look at some very beaten-down stocks -- Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) in retail or Goldman Sachs (NYSE: GS) in the financials, for instance. My point is, value can work out for you when you're buying stocks you always wanted to own. But the math gets dicey when it comes to selling -- especially winners. Promise me you won't get too cute Plus, they're fishing a rich pond. Wall Street isn't snooping around these smaller stocks yet, which creates inefficiencies and pent-up demand. As I learned the hard way with Stericycle in 1998, these stocks have a lot of room to run. But just so you don't write me off as a cheerleader, I'll let you in on a secret: I use Hidden Gems for help finding undervalued small caps with big potential. From time to time, they tell us to sell, but I typically don't listen -- and I probably won't in the future. Especially not if it's a winner. I never sell on valuation. That's how tragedies happen Know what else looks like that? The S&P 500 -- a.k.a. the market. Granted, when you zoom in, the ride gets bumpy, but the long-term trend is higher. So how do you lose money in the market? Well, you either buy at the top -- and only at the top -- or you get cute and buy and sell along the way. Consider this instead: Sell your stocks to buy a house, furniture, or engagement ring. Sell when you have too much in stocks and you want to buy bonds, gold bars, or Dickensian village collectibles. Sell when you have too much in any one stock. But sell a stock, or a market like this one, on valuation alone, at your own peril. You don't have to go it alone And when these guys tell you to buy, you'll want to listen. After all, as of today, their recommendations are up 25.1% on average. That's compared with just 2.4% if you'd bought the S&P 500 instead. Are you earning returns like that? You could be. If you're not, it's time to do something about it. Consider a free 30-day trial of Hidden Gems. You can verify everything I've just told you, and you don't have to buy a thing. But whatever you decide, just promise you won't get too cute. For a peek at the team's latest recommendations, including their top five picks for new money right now, and to find out more about accepting a no-risk free trial, click here. This article was originally published on July 22, 2005. It has been updated. Fool writer Paul Elliott promises to keep you posted on the progress at Motley Fool Hidden Gems. All picks and results are posted on the Hidden Gems website, which is yours with a free trial. Paul owns shares of Johnson & Johnson, which is an Income Investor pick. Home Depot and Intel are Inside Value recommendations. The Motley Fool is investors writing for investors. JDS Uniphase Falls off a CliffBy Rich SmithAugust 21, 2008 JDS Uniphase (Nasdaq: JDSU) shares are plunging today, hurt by a sizeable "earnings miss" yesterday, and guidance that didn't quite meet expectations, either. Investors are right to be upset. The sell-off is justified ... but not for the reasons the mainstream press is citing. Listen to the professionals, and you'll assume that JDS's $0.13-per-share loss and 11% sales growth justify Thursday's 13% haircut. But that's just one quarter's news -- a brief speedbump on the highway to JDS's prosperity ... Exit, stage left How did JDS turn better gross margins into an even bigger operating loss? By allowing its costs to run amok. R&D spending increased 12% -- but I've got no objection to that. Tech firms need to invest in their tech. But I don't like that JDS increased its selling, general, and administrative spending at twice that rate -- 24%. This surge in operating costs has JDS now posting an operating margin worse than those of Agilent (NYSE: A), Coherent (Nasdaq: COHR), and Finisar (Nasdaq: FNSR) -- worse, in fact, than almost anyone other than Jim Cramer fave Bookham (Nasdaq: BKHM). And by the way, where's the cash? Well, FCF fell off that cliff. Trending toward $33 million as we headed into Q4, JDS instead generated a bare $9 million for the quarter. (Management has not released the most recent quarter's cash flow statement.) My best estimate now puts free cash flow for the year at $108 million. Simply put, JDS's projected 15% growth rate does not support its new 21-times-FCF valuation. Until it does, I can't support the stock. Related Foolishness: JDS Uniphas-ing Out StockMore Than Momentum: Stocks Rising for a ReasonJDS Uniphase Is Back to NormalMicrosoft Goes After a New JerryBy Rick Aristotle MunarrizAugust 21, 2008 Details of the new Microsoft (Nasdaq: MSFT) "Windows, not walls" ad campaign are trickling out, and it seems as if comedian Jerry Seinfeld will be the cornerstone of the marketing push. On the surface, this is just a matter of Microsoft's getting over one Jerry -- Yahoo! (Nasdaq: YHOO) CEO Jerry Yang -- for another. Dig deeper, and you'll find a Microsoft that is sick of being the butt of the "I'm a Mac, I'm a PC" ads, and is ready to fight back against Apple (Nasdaq: AAPL). Having Seinfeld on board is a win for Microsoft because he had a Mac laptop in his sitcom apartment, back before Apple was cool. This morning's Wall Street Journal is pegging the value of the campaign at a whopping $300 million, with Seinfeld receiving about $10 million of that for his appearance in ads alongside iconic Microsoft chairman Bill Gates. Microsoft isn't above spending aggressively when it comes to marketing. Anyone else remember when the company shelled out roughly $12 million to use The Rolling Stones' "Start Me Up" to launch Windows 95? The marketing likely will be more conventional than Microsoft's Mojave Experiment this summer, the daring campaign that took a group of XP users with strong anti-Vista views and tricked them into seeing Vista with fresh eyes. There's a rub with the guerrilla-marketing tactic. The moral of the Mojave story is that consumers are stupid if they don't upgrade to Vista. The new ads likely will position consumers as smart if they do. Microsoft isn't the only company that needs this strategy to make Mr. Softy cool again. Computer makers like Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ), which have been smarting over Apple's market-share gains and anti-Vista sentiment, could use the boost. Seinfeld may seem like an odd choice. He certainly is no young hipster. His hit sitcom has been off the prime-time airwaves for several years. His Bee Movie didn't do as much for DreamWorks Animation (NYSE: DWA) as the computer animation studio's more recent releases. However, as someone who caught Seinfeld performing at a sold-out arena three weeks ago, I can assure you that hero worship is still alive and well across generations. Microsoft considered younger comedians, including Chris Rock and Will Ferrell, before going with Seinfeld. It settled on a great multigenerational choice. I guess we'll see how it pays off once the ads start in two weeks. But "Windows, not walls?" Sounds hokey. Not that there's anything wrong with that. Related Foolishness: Don't Sell Without Reading This FirstEverybody Hates VistaGoogle Will Eat You AliveMore of the Same From La-Z-BoyBy Rich Smith (TMFDitty)August 21, 2008 No two ways about it: It's not a great time to be in furniture. "Or homebuilding," echo Centex (NYSE: CTX) and Ryland (NYSE: RYL).) "Or home improvement," Lowe's (NYSE: LOW) and Home Depot (NYSE: HD) chime in. "Hey! Don't forget raw materials," shout Weyerhauser (NYSE: WY) and Rayonier (NYSE: RYN). "We're getting killed, out here." It's the economy, Stu ... Yet according to CEO Kurt Darrow, the quarter wasn't all bad. La-Z-Boy "expanded [its] margins on a 6.6% decline in sales." Its "balance sheet and the strength of [its] business model will carry [the company] through this period." True ... ... and false Now, La-Z-Boy might argue that exceptional, non-operating charges for restructuring and goodwill writedowns -- often called "one-time" charges -- explain the company's deteriorating operating margin. I'd agree to an extent, but I'd also point out that such charges appear with discomforting regularity at La-Z-Boy. The company appears to be in an almost constant state of restructuring and has taken such charges in every quarter for the past two years. At some point, though, such regular deductions from profit cease to become "one-time" in nature. Eventually, we're going to have to just consider them part and parcel of La-Z-Boy's business. For further Foolish thoughts on La-Z-Boy, read: La-Z-Boy Says Goodbye to 2008La-Z-Boy UnstuffedLa-Z-Boy Gets a Whippin'Palm's Treo Goes ProBy Tim BeyersAugust 21, 2008 Not many of you agree with me that Palm (Nasdaq: PALM) will burn your portfolio. You may be right: Palm this week bore further fruit from its revamped engineering team with the announcement of the Treo Pro. The Pro is roughly what you'd expect -- a Treo with a thinner frame, a wider screen, and enhanced capabilities, including Wi-Fi and a built-in Global Positioning System. (Does anyone else think that Garmin (Nasdaq: GRMN) may as well be two years late with a GPS-enabled smartphone? But I digress.) It's a nice follow-up to the Centro, a $99 lightweight smartie that has proven to be an unqualified hit. On features, I think the Pro would have a chance to succeed as the Centro has. Certainly the design and feature set suggest to me that hiring Jon Rubinstein, who helped Apple (Nasdaq: AAPL) make the iPod a hit, was a very smart move. And yet I'm bearish on the Pro's prospects; I don't see it improving Palm's position versus Nokia (NYSE: NOK), Research In Motion (Nasdaq: RIMM), and Apple. It's too bad because Palm's timing is perfect. The 3G iPhone has suffered dropped calls, and News.com reports that, while a software patch is helping, German chipmaker Infineon (NYSE: IFX) may also be to blame. If so, it could be months before the problem is eliminated entirely. So, if neither features nor timing is an issue with the Treo Pro, what is? Pricing. Palm is suggesting that retailers sell the device for $549, otherwise known as iPhone territory. Is the Pro really better than the iPhone or the BlackBerry? I say "better" because the Pro is the rebel here. The original iPhone proved that users would dump an incumbent for a rebel when the rebel is the better alternative. History hasn't been as kind to would-be rebels that weren't different enough, or at least differently priced. The Treo Pro is neither, which means that -- in spite of its name -- it's still very much an amateur. Get your clicks with related Foolishness: a killer iPhone strategy.Perhaps someday Palm will create the next iPod.For today, |