PE.com | Business | Motley Fool

INVESTING COMMENTARY

Is MICROS Systems Going to Burn You?

By Seth Jayson
January 12, 2011

There's no foolproof way to know the future for MICROS Systems (Nasdaq: MCRS) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

A cloudy crystal ball
I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks.Alone, AR -- the amount of money owed the company -- and DSO -- days worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like MICROS Systems do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is MICROS Systems sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.

Company

LFQ Revenue

DSO

$233

Radiant Systems (Nasdaq: RADS)

$89

JDA Software Group (Nasdaq: JDAS)

$158

Epicor Software (Nasdaq: EPIC)

$115

Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of last fully reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.

Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will MICROS Systems miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, MICROS Systems's year-over-year revenue grew 10.4%, and its AR dropped 8%. That looks OK. End-of-quarter DSO decreased 16.7% from the prior-year quarter. It was up 10.1% versus the prior quarter. That demands a good explanation. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns.However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

Add MICROS Systemsto My Watchlist. Add Radiant Systemsto My Watchlist. Add JDA Software Groupto My Watchlist. Add Epicor Softwareto My Watchlist.

This article was originally published as Is MICROS Systems Going to Burn You?on Fool.com

Wednesday's ETF to Watch: United States Oil Fund (USO)

By Jared Cummans, ETF Database
January 12, 2011

April of 2010 brought the worst environmental disaster in U.S. history, with the Deepwater Horizon Oil Spill in the Gulf of Mexico. While the majority of the nation has put the spill behind in the past thanks to the capping of the leak late last year, oil continues to make headlines for all the wrong reasons. Late last week, a leak was detected in the 800 mile Trans-Alaskan Pipeline, forcing British Petroleum (NYSE: BP) -- the largest shareholder of the line -- to temporarily shut down the crucial source of crude oil. Along with a major pipeline currently out of operation, numerous other factors have combined to put oil into focus this week, as crude prices continue to march higher to start the new year [see also Five ETFs Heavily Dependent on China].

The Trans-Alaska pipeline transports oil from the Prudhoe Bay oilfield to Valdex and on to the continental U.S. It represents one of the nation's most important sources of the fuel, carrying around 12%of our total output as a country. Upon the release of the news of the leak, crude prices jumped as a major supply bottleneck was suddenly created. This, along with a government report that investigated the Deepwater spill, helped to push oil above the $91 per barrel mark yesterday, within striking distance of its 52-week high [see also Inside Five Surging Commodity ETFs].

But the issues with this major pipeline are not the only thing that is built into the current price of oil. Winter storms continue to batter the east coast, as the third major storm system in three weeks is threatening the Northeast. With adverse winter weather conditions, heating oil prices have shot up, as the demand continues to increase from New York City and the East Coast.

Oil prices have also been moving parallel to news out of the eurozoneas of late. Whenever there is good news from the debt-stricken European nations, oil prices surge, but bad news sends prices plummeting. Japan's recent promise to buy bonds from the highly indebted nations of Europe helped to create strong tailwinds for the oil industry and euro-zone alike [see also Ten Commandments of ETF Investing].

With all of these factors lining up, and a crucial EIA petroleum status report due out later, today's ETF to watch will be the United States Oil Fund (NYSE: USO) . The commodity fund tracks light, sweet crude oil, and the investment objective of USO is to reflect the change in percentage terms of light, sweet crude oil futures on the New York Mercantile Exchange. If no good news comes from the Alaskan pipeline situation and if the large winter storm hits the East, expect oil to experience another strong day, but if the pipeline's flow is restored, or the eurozone outlook is downgraded, USO will endure a rough trading day, capping its recent rally.

More from ETFdb.com:

Five ETFs Heavily Dependent on China Inside Five Surging Commodity ETFs Pipeline Worries Give Oil ETFs a Boost

Disclosure: Photo courtesy of Luca Galuzzi. Long BP

ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here .

This article was originally published as Wednesday's ETF to Watch: United States Oil Fund (USO)on Fool.com

3 Ways Scared Savers Can Tiptoe Into Stocks

By Dan Caplinger
January 12, 2011

The first decade of the new millennium is over, but it's left a lasting impression on an entire generation of young investors. Although older folks clearly remember long periods of huge gains for the stock market, those who started investing at or after the tech bubble peak in 1999 and 2000 aren't sold on the theoretical idea that stocks are always the best investment for the long haul. In fact, many younger investors have steered clear of the stock market entirely.

But regardless of what you think of the future of the stock market, one thing is pretty clear: Earning 1% in your bank savings account isn't likely to get you any closer to retiring. Smart investing requires taking some risk-- and even if you're scared of the recent history of the stock market, you can find ways to get exposure to stocks without taking on the full brunt of stock risk.

A generation at risk
You can't blame younger investors for hesitating before putting themselves back in the line of fire. Having seen stock investors get seriously burned not once but twice during the 2000s, no one has seen the risk side of the risk-reward equation more intimately than those who started investing in the past 10 years.

In addition, since younger investors typically have the longest time horizons before needing their money for long-term financial goals like retirement, they often invest extremely aggressively. Unlike those approaching retirement age, who need to have the protection of lower-risk investmentslike bonds to protect against severe downturns, younger investors can theoretically afford to take massive risks with all-stock portfolios. That can lead to superior long-term returns during good times, but as many discovered in 2008's market meltdown, it can also leave your portfolio completely vulnerable to severe bear markets.

As a result, some investors saw their account values cut in half during the worst of the financial crisis. And in response, some of them are calling it quits for stocks.

Get back in -- carefully
The problem younger investors face is that their alternatives won't let them get away with long-term, low-risk investing. Even long-term bank CDs only pay around 2.25% on average. That's not even enough to cover taxes and inflation, let alone give you any real progress toward your financial goals. And while it's better than losing your shirt, conservative investments give you absolutely no chance to participate in the growth that promising stocks offer.

If you know you should invest in stocks but are still scared, there areways to ease yourself back into the market. Here are a few of them:

Steer clear of volatility. The scariest thing about stocks is just how quickly they can move down during bad times. But some stocks don't move as much as others. Large-cap stocks with low betaswon't give you the supersized returns that more aggressive growth stocks will, but they'll help you sleep at night. Altria (NYSE: MO) , General Mills (NYSE: GIS) , and Colgate-Palmolive (NYSE: CL) are well-known companies with less than half of the volatility of the market, yet they've all provided cumulative returns of at least 50% over the past five years -- far exceeding the broader market's return. Stick with value. Stocks with cheap valuations offer a margin of safety for investors, as long as those valuations don't reflect inherent problems with the stocks in question. Abbott Labs (NYSE: ABT) and Intel (Nasdaq: INTC) trade at low multiples to earnings, and fellow Fool Matt Koppenheffer believes their shares are really worth quite a bit morethan their current share price. Take an option. Options are often seen as the riskiest way to invest, but in reality, they let you tailor your risk precisely to your own preferences. For instance, if international stocks appeal to you but buying shares of international ETFs iShares MSCI EAFE (NYSE: EFA) and iShares MSCI Emerging Markets (NYSE: EEM) make you nervous, buying call optionson those ETFs will cost you just a fraction of what you'd pay for shares, limiting your downside but still giving you most of the upside potential from a bull market.

Do it soon
Already, those who were spooked out of stocks by the bear market have missed out on a huge rally. That just proves how difficult it is to time the market -- and how important it is to stay invested. By dialing up exactly the right risk level for your stocks, even skittish investors can feel comfortable taking positive steps toward reaching their financial goals.

Dividend stocks are also a fairly low-risk way to play stocks. In this free report on dividend stocks, our Motley Fool analysts have identified 13 dividend-paying stocks that are good long-term plays. To download for free now, just click here.

This article was originally published as 3 Ways Scared Savers Can Tiptoe Into Stockson Fool.com

Top Fund Gurus Love These Stocks

By Dan Caplinger
January 12, 2011

Blindly following someone else's investing lead can lead to devastating results. But over the years, some fund managers prove themselves as superior long-term investors. If you take the time to discover and understand their investing methods, and the stocks they choose for their fund shareholders, you'll learn a lot of valuable things -- and in the process, you'll become a better investor yourself.

Morningstar's best of the best
Last week, Morningstar continued its annual tradition of naming the past year's top mutual fund managers. Each year, Morningstar breaks the fund universe down into three broad categories: U.S. stocks, international stocks, and fixed-income. The fund research company then looks for funds that have performed well not just during the previous year, but also over the long run.

This year's winners include David Poppe and Bob Goldfarb of Sequoia Fund, Brent Lynn of Janus Overseas Fund, and Michael Hasenstab of Templeton Global Bond Fund. Let's take a closer look at what each of these fund managers has been doing right, and what we can learn from their moves.

Sequoia
Among the thousands of mutual funds in existence, it's hard to find one with a more impressive pedigree than Sequoia Fund. Founded by original managers Bill Ruane and Richard Cunniff back in 1970, Sequoia received a direct recommendation from Warren Buffettas a possible place for exiting partners of his original investment partnership to redeploy their capital.

Current co-manager Bob Goldfarb has been on Sequoia's research team since 1971, and since taking his position in 1998, he's helped lead Sequoia to strong gains during his tenure. Over the past 15 years, Sequoia has gained about 9.7% annually, with a rise of almost 20% in 2010 that handily beat the S&P 500.

The Sequoia team believes in making concentrated long-term bets. One of its longest-held stocks is Berkshire Hathaway (NYSE: BRK-B) , but the fund has diversified away from that core holding over the years. As Morningstar's director of fund research Karen Dolan pointed out, strong performance from long-held Idexx Labs (Nasdaq: IDXX) , TJX (NYSE: TJX) , and O'Reilly Automotive (Nasdaq: ORLY) supported the fund's big returns last year, as the three stocks made up about 16% of the fund's total portfolio. Although the fund has a historical value bent, Goldfarb and Poppe aren't hesitant to buy growth-oriented stocks when the price is right.

Janus Overseas
Brent Lynn isn't afraid to do what many international money managers won't: tread into emerging markets. While plenty of core foreign stock funds languished through Europe's woes, Lynn hasn't hesitated to look to China, India, and Brazil for great investment ideas. Many of those stocks aren't easily accessible to U.S. investors, making the fund even more valuable for its shareholders.

What's most surprising about the fund, though, is that it understands the role that U.S. companies play in international markets. Yahoo! (Nasdaq: YHOO) , for instance, appears in the portfolio, likely because of its big position in privately held Alibaba Group. You'll also find Ford Motor (NYSE: F) , which historically has earned more than half its revenue from outside the U.S.; and Valero Energy (NYSE: VLO) , a big refiner of oil from both domestic and foreign sources.

That understanding of the global market has helped Janus Overseas put up numbers in the top 4% of foreign growth funds in the past 10 years. It hasn't been immune to drops, losing over half its value in 2008's market meltdown, but it's made up those declines during good years.

Templeton Global Bond
Many see bond funds as boring, and their performance often matches up with that expectation. That's part of what makes Michael Hasenstab stand out from the crowd, as his fund's return nearly doubled the category average.

Hasenstab prefers to stick with debt from countries in good fiscal shape. That's why you'll find bonds from places like Australia, Sweden, and Norway near the top of its portfolio, as all of those countries have benefited from global growth trends and avoided many of the mistakes other countries have made. In addition, you'll find higher-yielding debt from emerging markets like Brazil, Russia, Mexico, and more recently, even frontier-market Egypt. That willingness to go beyond global bond indexes has fueled the fund's outperformance.

Go beyond the crowd
Award-winning fund managers have much to teach investors. Whether you choose to invest in their funds or simply watch their moves, you can use what top fund gurus have to say to get better results from your investments.

ETFs can help you find the way to better investing results. To find some great ETF investing ideas, take a look at The Motley Fool's special free report, " 3 ETFs Set to Soar During the Recovery."

This article was originally published as Top Fund Gurus Love These Stockson Fool.com

4-Star Stocks Poised to Pop: Denison Mines

By Brian D. Pacampara
January 12, 2011

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, uranium explorer Denison Mines (NYSE: DNN) has earned a respected four-star ranking.

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

Denison facts

Headquarters (Founded) Toronto, Canada (1996) Market Cap $1.1 billion Industry Industrial metals and minerals Trailing-12-Month Revenue $120.14 million Management

CEO Ronald Hochstein (since 2009)

CEO James Anderson (since 2006)

Return on Equity (Average, Past 3 Years) (9.3%) Cash/Debt $33.1 million / $331 thousand Competitors

BHP Billiton (NYSE: BHP)

Rio Tinto (NYSE: RIO)

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

On CAPS, 97% of the 680 members who have rated Denison believe the stock will outperform the S&P 500 going forward. These bulls include azift1and cosgrave2.

Just last month, azift1 tapped Denison as an atomic opportunity:

Denison's attractive uranium assets, solid financial position, and cheapish valuation have made it an increasingly popular play on the renewed interest in nuclear energy. Currently, Denison even trades at a clear price-to-book (1.4) discount to listed rivals BHP (5.1) and Rio Tinto (3.2), as well as other uranium stocks like Cameco (NYSE: CCJ) (3.0), Uranium Resources (Nasdaq: URRE) (10.8), and Uranerz Energy (NYSE: URZ) (10.8).

CAPS member cosgrave2 elaborates on the bull case:

This company holds a 60% interest in the Wheeler River property which is estimated to be one of the largest uranium deposits on Earth. ...

Demand for uranium has already been mentioned by other Fools but it must be reiterated that uranium is in demand. When China shops for resources, it stocks up and then some. The global demand is there and uranium is still catching up in regards to the bullish increases on other commodities. ...

[Denison] Management is being aggressive drilling operations at the Wheeler River Project to realize its revenue potential. [Denison's] finances are also significantly better than what they were last year and that trend will only continue.

What do you think about Denison, or any other stock for that matter? If you want to retire rich, you need to put together the best portfolio you can. Owning exceptional stocks is a surefire way to secure your financial future, and on Motley Fool CAPS, thousands of investors are working every day to find them. CAPS is 100% free, so get started!

This article was originally published as 4-Star Stocks Poised to Pop: Denison Mineson Fool.com

4-Star Stocks Poised to Pop: Suntech Power

By Brian D. Pacampara
January 12, 2011

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, solar module maker Suntech Power (NYSE: STP) has earned a respected four-star ranking.

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

Suntech facts

Headquarters (founded)

Wuxi, China

Market Cap

$1.62 billion

Industry

Semiconductors

Trailing-12-Month Revenue

$2.54 billion

Management

Founder/CEO Zhengrong Shi

CFO Amy Yi Zhang

Return on Equity (average, past 3 years)

3.5%

Cash/Debt

$946.2 million / $1.7 billion

Competitors

JA Solar (Nasdaq: JASO)

Trina Solar (NYSE: TSL)

Solarfun (Nasdaq: SOLF)

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

On CAPS, 97% of the 4,362 members who have rated Suntech believe the stock will outperform the S&P 500 going forward. These bulls include bemccormand MikeBobulinksi.

Late last week , bemccorn helped our community see Suntech's bright side: "They stumbled last year with the release of Pluto, but the brand still has good recognition and they are poised to rebound with the extension of the tax credits."

Shares of Suntech are down 50%over the past year, severely lagging most of its peers, but many Fools think they're just too cheap to ignore. Currently, Suntech even trades at a price-to-cash flow (5.5) discount to fellow low-cost Chinese solar panel plays like JA (7.4), Trina (18.9), and Solarfun (6.8), as well as U.S. counterparts First Solar (Nasdaq: FSLR) (15.3) and SunPower (Nasdaq: SPWRA) (217.4).

CAPS member MikeBobulinski also sees sunny daysahead:

Another China play that shows more upward than downward potential. Add the fact that it is in a growth industry with a great future and almost limitless growth within a country that needs a bottomless pit of energy and you have a recipe for good things. Am not saying to bet the farm here, but now is a good time to buy in while the price is low.

What do you think about Suntech, or any other stock for that matter? If you want to retire rich, you need to put together the best portfolio you can. Owning exceptional stocks is a surefire way to secure your financial future, and on Motley Fool CAPS, thousands of investors are working every day to find them. CAPS is 100% free, so get started!

This article was originally published as 4-Star Stocks Poised to Pop: Suntech Poweron Fool.com

The Amusement Park Ride Isn't Over

By Rick Aristotle Munarriz
January 12, 2011

The past year has been a good one for the amusement park industry.

Shares of Six Flags (NYSE: SIX) have soared roughly 60% since emerging from bankruptcy this summer. Analysts now see a profitable operator after its burdensome debt has been largely lifted, and Six Flags even initiated its first common stock dividend last month.

Universal Orlando's Islands of Adventure -- jointly owned by Blackstone (NYSE: BX) and General Electric 's (NYSE: GE) NBC Universal -- is basking in the success of its new Harry Potter attraction. The park actually had to lock its entry turnstiles during several days over the holidays because it was at capacity, something that had yet to happen in the park's 11-year history.

Cedar Fair (NYSE: FUN) beat the market in 2010 and recently announced an 8% uptick in attendance at its regional attractions on the year.

It may all add up to a good year for the industry, but Cedar Fair investors aren't impressed.

In a humbling vote yesterday, unit holders voted to strip CEO Dick Kinzel of his chairmanship. An independent chairperson will now be required. The second matter put to a vote -- incredulously proposing that Cedar Fair's emphasis should be on restoring its once chunky yield over paying down its debt -- is actually too close to call as of last night.

Yes, investors haven't exactly forgiven Cedar Fair since it accepted a buyout proposal13 months ago. It represented a 27% premium at the time, but the price is far lower than where Cedar Fair is today. Unit holders voted down the offer under activist prodding, and it turned out to be the right call. Winning back trust has been a challenge ever since.

Making high quarterly disbursements a priority is nonsense, though. The thrill-park specialist recently reinitiated its distributions. Didn't these investors learn from Six Flags investors that were wiped out when its burdensome debt forced it into bankruptcy reorganization?

Despite the seemingly good year for regional operators, the coast isn't exactly clear. Bellwether Disney (NYSE: DIS) posted flat results at its theme parks in fiscal 2010. Great Wolf Resorts (Nasdaq: WOLF) is trading at a fraction of its post-IPO highs, as the operator of resorts with gargantuan indoor water parks is fighting a losing battle with its equally massive debt load.

Cedar Fair's investors appear to be getting the last laugh. Their message is being heard loud and clear. However, yield-chasing investors better be careful if they get what they wish for.

Regional parks taking on too much debt often leads to locked turnstiles -- and not in the Islands of Adventure "at capacity" way.

Are amusement park operators a good bet for 2011? Share your thoughts in the comment box below.

This article was originally published as The Amusement Park Ride Isn't Overon Fool.com

Apple and Verizon Team Up on iPhone: How Will ETFs Respond?

By Jared Cummans, ETF Database
January 12, 2011

Finally, no more rumors, no more speculation, Verizon (NYSE: VZ) Wireless has officially announced they will be servicing the iPhone come February 10th of this year. Apple 's (Nasdaq: AAPL) iPhone broke ground for the smartphone industry four years ago, and it quickly became the poster child for the new generation of mobile devices. For years, the iPhone has been offered exclusively through AT&T (NYSE: T) , a partnership that has been rumored to end for quite some time, but now a confirmation that the partnership has been dissolved has the Street up in arms. From a consumer standpoint, the news is fantastic; users will now have the choice between two networks with the iPhone, allowing many to stay with Verizon if they so choose. But from an investment standpoint, the news may not be as good as some might have you believe [see also Ten Commandments of ETF Investing].

Let's start with the upside: Verizon Wireless will now see a surge in customers who have long been frustrated with the AT&T network, as there are claims that it does not always perform properly. It is estimated that Verizon will sell between 5 and 13 million iPhones this year alone, and some of that figure will come from devices that AT&T would have sold had it been able to keep its exclusive partnership with Apple. Now servicing both Android phones and the iPhone, Verizon Wireless, the nations largest provider, will have an impressive hold on the most sought after devices on today's market. However, many analysts are growing increasingly concerned that the downside may cancel out any surge in new customers [see also Best ETF Performers of 2010: Winners for Every ETFdb Category].

For starters, many fear that the sudden influx of new smartphones will overwhelm the Verizon network, and slow down service for everyone. Currently, many believe that some of the issues that AT&T faces, as far as service is concerned, stems from the large number of iPhone users constantly accessing the web, downloading data, and clogging the network. Next, the first version of the Verizon device will only work on the 3G network, which may put the phone immediately behind the curve, as Verizon has been steadily building a 4G network that it plans to unveil later this year. Also, Apple has released a new iPhone model every summer, meaning that if the iPhone 5 comes out this summer -- as many analysts expect -- Verizon may have to wait until next January to get it, assuming the company is on the same one-year upgrade cycle that Apple instated with AT&T [see also Internet ETFs: Five Ways to Play].

Verizon will also take a hit because it will be forced to pay a subsidy to Apple for every phone it sells, putting a damper on earnings. John Hodulik at UBSestimates that these subsidies alone will "reduce Verizon earnings this year by a net 15 cents per share, or about $425 million." This impact can best be seen with AT&T, who has suffered from its deal with Apple. Thanks to the drag on earnings caused by the hefty subsidies, as well as numerous customers leaving the AT&T network due to frustration with service quality, has led to AT&T underperforming Verizon by almost 20%since the iPhone was unveiled in 2007, and many are now worried that a similar situation may happen with Verizon and their deal with the tech giant.

Network Impact
With AT&T losing exclusivity on their most prized device, investors can expect the company to come out firing in 2011, as the telecom giant will need to innovate in order to stay in the smartphone race. But this move may not be as catastrophic as some think. For starters, AT&T will likely see an improvement in service assuming it loses a large number of customers to Verizon. With less people on the network, AT&T may be able to improve the quality of its service, keeping current customers more satisfied.

And for those worried about the iPhone jamming the Verizon network, knowing how the new Android devices operate on the network may help alleviate these fears. New Android devices, such as the Droid 2 and Droid X, are always connected to the internet no matter what the user is doing (subsequently leading to low battery lives), meaning that they are constantly accessing data, and utilizing the current network without issue so far. Considering this, it may be possible for Verizon to handle the iPhone influx as is, but investors will just have to wait until next month to find out for sure [see also Three ETFs For Smart Phone Exposure].

While there is speculation over how these two telecom giants will perform, there is little doubt that Apple will quietly sit back and reap the benefits of its ever-expanding iPhone. The news is also good for ETF Database, as we recently unveiled our new FREE iPhone App which is now available for download on your smartphone! [see Announcing the FREE ETFdb iPhone App].

Below, we outline two ETFs that will be heavily impacted by the coming Verizon iPhone. Investors with a heavy stake in either of the funds listed below would be wise to keep up-to-date on any new news in the smartphone industry going forward, as it could potentially tip the scales in this ongoing battle between the bitter rivals of AT&T and Verizon.

HOLDRS Merrill Lynch Telecom (AMEX: TTH)
This telecom HOLDR fund contains the who's who of American service providers. The top two holdings include AT&T(51.7%) and Verizon (25.6%), giving this fund huge exposure to the iPhone's move. The fund lost 1.3% in trading Tuesday following Verizon's official announcement, though it does offer a substantial dividend of 5.4%. For the time being, it seems that the general consensus is that AT&T and Verizon will both suffer from this move in the short term, creating major headwinds for this ETF as the year goes on. But, if Verizon is able to handle the iPhone well, look for this fund to remain relatively stable, as any gains in Verizon will likely be offset by losses that AT&T is expected to endure [see also Five Facts About HOLDRS Every ETF Investor Must Know].

PowerShares QQQ Trust (Nasdaq: QQQQ)
This ETF tracks the NASDAQ-100 Index, which includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. Apple comes in as the top holding of the fund, accounting for over 20% of the ETF. QQQQ has had a solid past year, returning over 21% in its last 52 trading weeks. With Apple dominating this fund, QQQQ may see strong gains in the coming weeks as the tech giant boosts its revenues by garnering more subsidies from Verizon and potentially releases a newer version of the phone later this year. Should the iPhone be welcomed on Verizon it could ensure that much like 2010, this year is a solid one for the technology sector and, specifically, Apple.

[For more ETF ideas sign up for our free ETF newsletter.]

More from ETFdb.com:

"Net Neutrality" Court Ruling Puts Telecom ETFs in Focus Will Tax Hikes Slam Telecom ETFs? Tech ETFs in Focus as Apple (AAPL) Reports Earnings

Disclosure: Long VZ.

This article was originally published as Apple and Verizon Team Up on iPhone: How Will ETFs Respond?on Fool.com

4-Star Stocks Poised to Pop: U.S. Steel

By Brian D. Pacampara
January 12, 2011

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, steel producer United States Steel (NYSE: X) has earned a respected four-star ranking.

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

U.S. Steel facts

Headquarters (Founded) Pittsburgh (1901) Market Cap $8.2 billion Industry Steel Trailing-12-Month Revenue $16.46 billion Management CEO John Surma, Jr. (since 2004)
CFO Gretchen Haggerty (since 2003) Return on Equity (Average, Past 3 Years) 2% Cash/Debt $643 million / $3.66 billion Competitors AK Steel (NYSE: AKS)
ArcelorMittal (NYSE: MT)
Nucor (NYSE: NUE)

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

On CAPS, 93% of the 2,060 members who have rated U.S. Steel believe the stock will outperform the S&P 500 going forward. These bulls include TMFDavidRiversand jerry80118.

Just last month, TMFDavidRivers brought U.S. Steel's improving fundamentals to our community's attention: "They seem to be curbing expenses while sustaining an upward trend in revenue."

U.S. Steel's large scale and high degree of operating leverage continue to make it a potent play on the rebound of global steel demand. Over the next five years, U.S. Steel is even expected to grow its bottom line (30% per annum) at a much faster pace than rivals AK Steel (10%), Arcelor (-32.6%), and Nucor (15%), as well as other steel plays like POSCO (NYSE: PKX) (12.5%) and Steel Dynamics (Nasdaq: STLD) (-335.7%).

CAPS member jerry80118 elaborates:

What do you think about U.S. Steel, or any other stock for that matter? If you want to retire rich, you need to put together the best portfolio you can. Owning exceptional stocks is a surefire way to secure your financial future, and on Motley Fool CAPS, thousands of investors are working every day to find them. CAPS is 100% free, so get started!

This article was originally published as 4-Star Stocks Poised to Pop: U.S. Steelon Fool.com

Why the Street Should Love Choice Hotels International's Earnings

By Seth Jayson
January 12, 2011

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

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

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow (FCF) once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That brings us to Choice Hotels International (NYSE: CHH) , whose recent revenue and earnings are plotted below.

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Choice Hotels International generated $119.2 million cash on net income of $106.9 million. That means it turned 20.5% of its revenue into FCF. That sounds pretty impressive. Still, it always pays to compare that figure to sector and industry peers and competitors, to see how your company stacks up.

Company

TTM Revenue

TTM FCF

TTM FCF Margin

Intercontinental Hotels Group (NYSE: IHG) $1,604 $368 22.9% Marriott International (NYSE: MAR) $11,429 $1,002 8.8% Starwood Hotels & Resorts Worldwide (NYSE: HOT) $4,993 $356 7.1%

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. TTM = trailing 12 months.

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

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much.

So how does the cash flow at Choice Hotels International look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

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

With questionable cash flows amounting to only 9.8% of operating cash flow, Choice Hotels International's cash flows look clean. Within the questionable cash flow figure plotted in the TTM period above, stock-based compensation and related tax benefits provided the biggest boost, at 8.5% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 15.1% of cash from operations. Choice Hotels International investors may also want to keep an eye on accounts receivable, because the TTM change is 2.6 times greater the average swing over the past five fiscal years.

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

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

Add Choice Hotels Internationalto My Watchlist. Add Intercontinental Hotels Groupto My Watchlist. Add Marriott Internationalto My Watchlist. Add Starwood Hotels & Resorts Worldwideto My Watchlist.

This article was originally published as Why the Street Should Love Choice Hotels International's Earningson Fool.com

Is Biogen Idec's Stock a Bargain by the Numbers?

By Anand Chokkavelu, CFA
January 12, 2011

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

Let's see what those numbers can tell us about how expensive or cheap Biogen Idec (Nasdaq: BIIB) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buyideally has low multiples on both.

Biogen has a P/E ratio of 15.0 and an EV/FCF ratio of 12.3 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Biogen has a P/E ratio of 23.4 and a five-year EV/FCF ratio of 16.6.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

Biogen has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Bristol-Myers Squibb (NYSE: BMY) 4.1 11.1 9.7 15.8 Cephalon (Nasdaq: CEPH) 10.6 5.3 27.1 11.8 Pfizer (NYSE: PFE) 23.9 17.3 14.0 12.0

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how Biogen's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Biogen's net income margin has ranged from 6.3% to 23.2%. In that same time frame, unlevered free cash flow margin has ranged from 23.1% to 30.7%.

How do those figures compare with those of the company's peers? See for yourself:

Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the last five years, Biogen has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Biogen has put up past EPS growth rates of 60%. Meanwhile, Wall Street's analysts expect future growth rates of 9.3%.

Here's how Biogen compares to its peers for trailing five-year growth (due to losses, Cephalon's growth rate isn't meaningful):

Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Biogen are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 15.0 P/E ratio, and the initial numbers look quite solid, but this is just a start. If you find Biogen's numbers or story compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.

Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis. And for more stock ideas, check out this recent article: 34 Expert Analysts Uncover Outstanding Dividend Plays .

This article was originally published as Is Biogen Idec's Stock a Bargain by the Numbers?on Fool.com

Jack Bogle: "Investments Perform Better Than Investors"

By Padraig O'Hannelly, Fool UK
January 12, 2011

As we look ahead to how 2011 will play out, the bears and bulls are busily voicing their opinions. But it seems that passive investors not only have the lowest expenses, they also have the best metaphors -- or maybe it's just Jack Bogle.

With his latest book, Don't Count on It , hot off the presses, Bogle has been supplying the media with some top-quality sound-bites.

Urging us not to interfere too much, he contends that over the long haul, "investments perform better than investors." Could there possibly be a more concise description of the rationale behind passive investing?

"Stock-picking pros aren't stupid," he argues, "they're just expensive."

Regarding the turmoil in the market in recent years, Bogle predictably takes a long-term view:

Even with his years of experience, he believes "this is the most difficult time to invest in my career."

His friend Burton Malkiel also sees problems ahead. When asked whether the U.S. administration is willing to make the tough decisions yet, Malkiel replied, "We're not even willing to talk about them."

From passive to active
Mark Mobius has similar concerns: "The general attitude of governments toward debt is a big problem that is going to get us into trouble on a global scale."

Despite his recent retirement, value guru David Dreman is still keeping a close eye on the economy:

He's not shy in his criticism of Fed Chairman Ben Bernanke, who he says "has an almost flawless record of poor forecasts and policy decisions since his tenure began in 2006."

Ken Fisher has a more optimistic outlook: "This should be a relatively easy year for stock pickers. There is an abundance of cheap stocks relative to interest rates, especially if you look beyond [U.S.] borders."

Among the stocks he likes are TIM Brasil , Brazil's third-largest mobile phone operator; Tim Hortons , Canada's largest fast-food chain; and Chilean-based Enersis , Latin America's biggest private electrical power generator.

Looking to the market as a whole, Fisher expects 2011 to be "very frustrating" for both bullish and bearish investors. "This is an up-a-little year and down-a-little year -- more likely up a little, but not too much," Fisher told CNBC. "I think the bull market continues, but that will be 2012 ... [2011] is going to be a quiet year."

... Obligatory Hugh Hendry section
Turning finally to the man who describes himself as "the least correlated asset in the world," U.K. hedge fund boss Hugh Hendry sees parallels between the scapegoating of hedge funds and the increasing hostility to minorities such as gypsies in France:

Social mood is hardening, changing, deteriorating: We see that [even] in the very polite, previously libertarian societies. ... Hedge funds are a minority. Guess who else is a minority? People from overseas.

Referring to his bearish position on Japan, he says:

I see Japan as a nuclear bomb strapped onto the chest of the global economy. They've got uranium -- which is, they sell credit protection: CDSes. I'm the other side of that.

As Liam Halligan, chief economist at Prosperity Capital Management, said, "Hugh is very smart and is always worth listening to -- even when he turns out to be wrong."

More from Fool UK's Padraig O'Hannelly:

Investment Greats: Burton Malkiel How the Mighty Have Fallen The Taste of an Asset Allocator This article was adapted from our sister site across the pond, Fool UK . Padraig doesn't own shares of any stocks mentioned. Tim Hortons is a pick. The Motley Fool has a disclosure policy .

This article was originally published as Jack Bogle: "Investments Perform Better Than Investors"on Fool.com

Will Cantel Medical's Next Quarter Be a Bomb?

By Seth Jayson
January 12, 2011

There's no foolproof way to know the future for Cantel Medical (NYSE: CMN) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

Why might an upstanding firm like Cantel Medical do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Cantel Medical sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.

Company

LFQ Revenue

DSO

Rockwell Medical Technologies (Nasdaq: RMTI) $15 29 Steris (NYSE: STE) $312 57 DENTSPLY International (Nasdaq: XRAY) $542 61

Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of last fully reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.

Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will Cantel Medical miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Cantel Medical's year-over-year revenue grew 1.4%, and its AR grew 7%. That looks OK. End-of-quarter DSO increased 5.5% over the prior-year quarter. It was up 3.7% versus the prior quarter. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

Add Cantel Medicalto My Watchlist. Add Rockwell Medical Technologiesto My Watchlist. Add Steristo My Watchlist. Add DENTSPLY Internationalto My Watchlist.

This article was originally published as Will Cantel Medical's Next Quarter Be a Bomb?on Fool.com

Foolanthropy's 14th Year Is a Success!

By Maryam Zaidi
January 12, 2011

Working at the Fool, there are so many things that bring a smile to my face on a daily basis. Today, my smiles are thanks to you, our Foolish community. Over the past 13 years, you've helped us donate more than $3 million to worthy organizations. We just wrapped up our 14th Foolanthropy campaign, and it was, as always, a success!

How did we do it?
Last year, we continued our focus on financial literacy, with an added emphasis on volunteerism. The Fool "adopted" local public charter school Thurgood Marshall Academy.

The school, located in one of D.C.'s most impoverished neighborhoods, first opened its doors in 2001. Ten years later, it stands as a pillar of strength and promise for both current and prospective students. With a 100% college acceptance rate six years in a row, the academy continues to grow and succeed as the District's first law-themed public charter school.

This year, we continued to embrace the theme of volunteerism. We pledged $0.10 for every community comment, discussion board post, and blog post throughout Fool.com, as well as for Facebook actions (likes and comments) and new Twitter followers. Thanks to your efforts, we raised $14,088 ! In addition to our donation, Fools will be volunteering at Thurgood Marshall Academy in various ways throughout the year. Opportunities range from teaching financial literacy and budgeting workshops to helping parents file their taxes or becoming mentors to the students.

What's next?
As we continue our work with Thurgood Marshall Academy, we encourage you to seek out volunteer opportunities in your own community. Spend some time helping out at a local shelter, mentor a child, or keep your elderly neighbor company on a rainy afternoon. As Mahatma Gandhi wisely said, "Be the change you want to see in the world."

To learn more about Foolanthropy and Thurgood Marshall Academy:

The Motley Fool Chooses Thurgood Marshall Academy for Foolanthropy 2010 About Thurgood Marshall Academy Thurgood Marshall Academy Donation Page

The Fool has a disclosure policy .

This article was originally published as Foolanthropy's 14th Year Is a Success!on Fool.com

Is Almost Family's Stock Cheap by the Numbers?

By Anand Chokkavelu, CFA
January 12, 2011

Let's see what those numbers can tell us about how expensive or cheap Almost Family (Nasdaq: AFAM) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buyideally has low multiples on both.

Almost Family has a P/E ratio of 12.1 and an EV/FCF ratio of 9.4 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Almost Family has a P/E ratio of 23.7 and a five-year EV/FCF ratio of 27.5.

A one-year ratio of less than 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

Almost Family has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Amedisys (Nasdaq: AMED) 7.9 6.7 11.9 9.2 Gentiva Health Services (Nasdaq: GTIV) 17.5 15.3 12.7 26.0 LHC Group (Nasdaq: LHCG) 11.2 9.6 18.1 14.4

Source: Capital IQ, a division of Standard & Poor's.

Numerically, we've seen how Almost Family's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Almost Family's net income margin has ranged from 5.1% to 9.2%. In that same time frame, unlevered free cash flow margin has ranged from (9.5%) to 10.7%.

How do those figures compare with those of the company's peers? See for yourself:

Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the last five years, Almost Family has tallied up five years of positive earnings and four years of positive free cash flow.

Next, let's figure out...

Let's start by seeing what this company's done over the past five years. In that time period, Almost Family has put up past EPS growth rates of 49.8%. Meanwhile, Wall Street's analysts expect future growth rates of 15.8%.

Here's how Almost Family compares to its peers for trailing five-year growth:

Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Almost Family are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 12.1 P/E ratio, and though the initial growth and price multiple numbers look promising, this is just a start. If you find Almost Family's numbers or story compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.

Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis. And for more stock ideas, check out this recent article: " 34 Expert Analysts Uncover Outstanding Dividend Plays ."

This article was originally published as Is Almost Family's Stock Cheap by the Numbers?on Fool.com

4-Star Stocks Poised to Pop: Magna International

By Brian D. Pacampara
January 12, 2011

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, diversified auto supplier Magna International (NYSE: MGA) earned a respected four-star ranking.

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

Magna facts

Headquarters (Founded)

Aurora, Canada (1957)

Market Cap

$14.57 billion

Industry

Auto parts and equipment

Trailing-12-Month Revenue

$22.92 billion

Management

CEO Donald Walker (since 2005)

CFO Vincent Galifi (since 1997)

Return on Equity (Average, Past 3 Years)

1.5%

Cash/Debt

$1.66 billion / $120 million

Dividend Yield

1.2%

Competitors

BorgWarner (NYSE: BWA)

Johnson Controls (NYSE: JCI)

Lear (NYSE: LEA)

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

On CAPS, 90% of the 182 members who have rated Magna believe the stock will outperform the S&P 500 going forward. These bulls include All-Stars turtle286and pickemblind, both of whom are ranked in the top 16% of our community.

Late last year, turtle286 brought Magna's improving fundamentals to our community's attention: "With orders increasing, higher EPS estimates, a dividend hike, and share repurchase agreement issued ... what's not to like?!"

Magna's diversified nature, massive scale, and attractive valuation fuel its four-star CAPS status. Currently, Magna even trades at a price-to-cash flow (9.5) discount to main rivals BorgWarner (20.5), Johnson Controls (18.2), and Lear (12.9), as well as smaller auto suppliers like Tenneco (NYSE: TEN) (13.4) and Superior Industries (NYSE: SUP) (36.5).

CAPS member pickemblind expands on the outperform case:

Based in Toronto, Magna designs and [develops] automotive supplies. They build everything from engine parts, to interior and exterior trim. They have a pretty impressive list of customers which includes just about every auto maker that I can think of.

Magna was started in the garage of Frank Stronach back in 1957 and has since grown to become one of the biggest and most diversified auto suppliers in the world. They had the dual class shares for a number of years but have recently converted shares into a single class. ...

The auto industry has been in the turnaround mode for a while now and Magna looks to be able to gain market share during this comeback.

What do you think about Magna, or any other stock for that matter? If you want to retire rich, you need to put together the best portfolio you can. Owning exceptional stocks is a surefire way to secure your financial future, and on Motley Fool CAPS, thousands of investors are working every day to find them. CAPS is 100% free, so get started!

This article was originally published as 4-Star Stocks Poised to Pop: Magna Internationalon Fool.com

The Low-Risk Way to Ride the Rally

By Dan Caplinger
January 12, 2011

If you didn't buy stocks at March's lows, you're probably feeling antsy to get back into the market before you miss anymore of the recent rally. But if you're scared of buying at a potential top, there's a way you can earn potential profits while limiting your losses if the rally reverses itself soon.

Happy days are here again -- but for how long?
After the bear market of 2008 and early 2009, stocks turned the corner and never looked back. The S&P 500 is 90% above its March 2009 lows, and with the recession officially over, many believe that the economy is returning to normal and that stocks can continue to rise from here.

But of course, you've heard all this before. In early 2008, after the fall of Bear Stearns and the opening stages of the subprime mortgage crisis, bears had knocked stocks for a loop, with the S&P dropping 20% from its record highs of October 2007. Many concluded that the worst was over and started piling back into stocks again, pushing the S&P up nearly 15% by May and recovering a good chunk of its previous losses.

Buying in May turned out to be a huge mistake, though, because the biggest losses of the bear market were yet to come. Consider what happened next to these stocks, which proved to be among the 10 largest stocks in the S&P 500 that lost at least half their value over the ensuing 10 months:

Stock

Return March 17, 2008,
to May 19, 2008

Return May 19, 2008,
to March 9, 2009

Schlumberger (NYSE: SLB)

31%

(65%)

ConocoPhillips (NYSE: COP)

22%

(59%)

Goldman Sachs (NYSE: GS)

22%

(60%)

Union Pacific (NYSE: UNP)

26%

(55%)

Apache (NYSE: APA)

27%

(64%)

Morgan Stanley (NYSE: MS)

28%

(63%)

Anadarko Petroleum (NYSE: APC)

26%

(56%)

Source: Capital IQ, a division of Standard and Poor's.

Understanding these huge turnarounds is fairly simple. For financial stocks like Goldman and Morgan Stanley, the credit crisis lopped off billions from the value of toxic assets, impairing balance sheets and threatening their financial stability. At the same time, the markets on which financial companies rely nearly stopped functioning, leaving them in a no-win situation. That did some collateral damage across industry lines. And with energy and commodities, the bursting of the commodity bubble that had sent oil prices to nearly $150 a barrel brought former energy highfliers back down to earth in a hurry -- and did collateral damage to railroads like Union Pacific that help transport those commodities.

So if you're thinking about getting into the market now, you may be feeling understandably nervous about the potential losses if you're wrong. Is there any way to invest so that you'll get the benefits from a rebound without having to take huge risks?

A call for higher profits
If you're looking to limit your downside but keep all the upside for yourself, there's a relatively simple options strategy that may interest you. By using call options, you gain when stock prices move up -- but you also set the maximum amount you can lose.

A call option gives you the right to buy 100 shares of stock at a certain price at any time until the option expires. To buy an option, you pay a fixed amount called a premiumup front. For instance, on Jan. 11, you could have bought a May call option that would let you buy shares of Schlumberger for $80 between now and mid-May. With shares trading around $82.26 at that time, you would have paid a premium of $6.75 per share, or a total of $675 for that option.

Keep your gains, limit your losses
Now let's fast-forward to mid-April, right before your option expires. Consider two possibilities:

If the rally continues, you'll have the right to pay $8,000 for shares worth $10,000, so you'll exercise your option. That gives you an immediate $2,000 gain, less the $675 you paid for the option, for a net profit of $1,325. That's not quite as good as the $1,774 gain you would have had if you'd bought 100 shares outright at $82.26 -- but it's still a sizable profit.

On the other hand, if the rally ends and stocks drop substantially, buying 100 Schlumberger shares outright for $82.26 would've brought you $2,226 in losses. But with the option, you'd just let it expire rather than paying $80 per share for a stock that's now worth $60. You'd lose the $675 you paid for the option, but you'd avoid losing more than three times as much from owning the stock.

Where options get risky
For some, the appeal of options is the leverage they offer. For about the same $8,226 you'd pay for 100 shares of Schlumberger, you could buy 12 options contracts controlling 1,200 shares. That magnifies your potential gains -- but there's also a big chance you'll lose the entire sum if Schlumberger stock falls between now and when your options expire.

The simple answer is not to use options for leverage. In this example, if you have only $8,226 to invest, just buy a single option contract. You'll put less than 10% of your capital at risk, and it makes it a lot easier to exercise your option and buy shares for the long term -- because you haven't overextended your available cash.

Options aren't for the faint of heart. But used wisely, they can be valuable tools to help you enhance your returns. Our Motley Fool Pro service has used options to deliver strong returns since its launch. It's been closed to new subscribers since June, but in January, the service will briefly reopen its doors. As a limited-time offer, though, you'll need to act fast. To learn more about Motley Fool Proand how options and other investing strategies can help you make money, just enter your email address in the box below to get the latest information.

This article was originally published as The Low-Risk Way to Ride the Rallyon Fool.com

Sohu.com: Bargain Buy or Value Trap?

By Sean Williams
January 12, 2011

To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk versus reward potential of the company you're following. I propose we take a closer look at the good and the bad at Sohu.com (Nasdaq: SOHU) to see if the stock is a good value or a potential money pit.

The good
Sohu owns and operates China's fourth-most-popular search engine, Sogou.com, and owns a majority stake in Changyou.com (Nasdaq: CYOU) , an online games provider. Competing against behemoths like Baidu (Nasdaq: BIDU) and Sina (Nasdaq: SINA) is no easy task, but you'd think it were given the growth that it's exhibiting.

Sohu once again hurdled analyst estimates in the third quarter on the back of sharply higher search revenues, strong advertising, and solid online gaming growth. At the heart of Sohu's stock gains are consistently rising gross margins, which have seen an uptick from 64% to 76% during the past four years. These margins have translated into multiple earnings beats in that time and have allowed Sohu to free itself of any debt while building up a very healthy pile of cash -- currently more than $16 per share. With Google (Nasdaq: GOOG) no longerin the search engine picture in China, Sogou looks poised to gain significant market share.

The bad
No stock is perfect, and for Sohu, most worries stem from its particularly high short interest, which currently sits at 10.3%. Short shares are no guarantee of a drop in the making, but high concentrations of short shares are a clue that a company could be overvalued. In Sohu's case, it is trading over two times its price earnings to growth ratio and well over three times book value. Sohu may have double-digit growth, but investors are paying a premium for it.

It also wouldn't hurt if insiders would give shareholders tangible evidence of their own bullishness. Sohu insiders have not acquired any shares since January 2010 and have logged 12 separate sells since late May.

The takeaway
What investing in Sohu comes down to is exactly how much you're willing to pay for a chance to be a part of the company's growth story. Make no mistake about it, Sohu is not a cheap stock, but given its unique array of revenue streams coupled with its debt-free, yet cash-rich balance sheet, I believe that as long as margins remain above 70% and the company doesn't lose focus on Sogou.com, this should remain a solid long-term buy.

More related Foolishness:

Are Sohu.com's Earnings Worse Than They Look? China's Best-Kept Secret Baidu Won't Buy Sohu.com

This article was originally published as Sohu.com: Bargain Buy or Value Trap?on Fool.com

7 Telecom Dividend Stocks Getting Slammed

By Jordan DiPietro
January 12, 2011

Contrarianinvestors should utilize times like this to differentiate between stocks that are dropping for fundamentally sound reasons -- and those stocks that are simply being dragged down because of general market concerns. Sure, there's plenty to worry about -- gigantic federal deficits, sovereign debt problems in Europe, an economic slowdown in China. But let's not forget that in the midst of all of this volatilitylies the prospect to grab some great companies at dirt cheap prices.

In particular, I'm a huge fan of dividend stocks. Renowned professor Jeremy Siegel has illustrated that from 1957 to 2003, when reinvesting dividends, the S&P's 100 highest-yielding stocks outperformed the market by an average of 3 percentage points. Over a long period of time, 3 percentage points can really add up. So if you can find dividend stocks trading cheaply and can separate the good from the bad, you may have found yourself a real winner.

In this regular series, I run a screen for dividend stocks that have gotten crushed in the past three months, in addition to companies that are trading at low P/Es. Below are the top seven dividend-paying telecom stocks (above 1%) that have gotten beaten down the most, in order, additionally rated by our own 170,000-strong CAPS community.

Company

Dividend Yield

13-Week Price Change

P/E Ratio

CAPS Rating
(out of 5)

Atlantic Tele-Network (Nasdaq: ATNI)

2.3%

(23.5%)

15.0

***

Telefonica (NYSE: TEF)

6.6%

(20.0%)

8.1

****

France Telecom (NYSE: FTE)

6.3%

(11.8%)

12.5

****

Philipine Long Distance (NYSE: PHI)

6.2%

(9.3%)

15.3

****

Turkcell Iletisim (NYSE: TKC)

3.4%

(9.0%)

14.0

****

Tellabs (Nasdaq: TLAB)

1.1%

(7.3%)

11.9

****

China Mobile (NYSE: CHL)

3.3%

(6.8%)

12.0

*****

Source: Motley Fool CAPS. Data current as of Jan. 12.

A Foolish final thought
I don't see an immediate risk of any of the companies mentioned above cutting or suspending their dividends, yet they're being priced at extremely attractive levels. It's no surprise that many of these companies are European, and thanks to the sovereign debt crisis and lower growth expectations, they are certainly taking a hit. It's something important to consider, because trouble in the eurozone obviously affects each individual country. However, this could also be the perfect time to jump in the market and find that outrageous dividend stockyou've been looking for. With the stock market looking up and investors looking for different ways to generate income, dividend-paying stocks such as these could have the potential to give you exactly what you're looking for.

Interested in what our Motley Fool analysts think are the best stocks for 2011 ? Click here to read the free article!

This article was originally published as 7 Telecom Dividend Stocks Getting Slammedon Fool.com

Is Denbury's Stock a Bargain by the Numbers?

By April Taylor
January 12, 2011

Let's see what those numbers can tell us about how expensive or cheap Denbury Resources (NYSE: DNR) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buyideally has low multiples on both.

Denbury has a P/E ratio of 28.2 and a negative EV/FCF ratio over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Denbury has a P/E ratio of 34.4 and a five-year negative EV/FCF ratio.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

Denbury is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates.

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Newfield Exploration (NYSE: NFX) 15.4 NM 58.5 NM Swift Energy (NYSE: SFY) 33.1 143.6 NM NM Pioneer Natural Resources (NYSE: PXD) 17.5 40.3 26.3 NM

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how Denbury's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Denbury's net income margin has ranged from -4.2% to 30.9%. In that same time frame, unlevered free cash flow margin has ranged from -99.4% to -0.8%.

How do those figures compare with those of the company's peers? See for yourself:

Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the last five years, Denbury has tallied up four years of positive earnings and no years of positive free cash flow.

Next, let's figure out ...

Let's start by seeing what this company's done over the past five years. In that time period, Denbury has put up past EPS growth rates of 7.1%. Meanwhile, Wall Street's analysts expect future growth rates of 8.5%.

Here's how Denbury compares to its peers for trailing five-year growth:

Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Denbury are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 28.2 P/E ratio, but this is just a start. If you find Denbury's numbers or story compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.

This article was originally published as Is Denbury's Stock a Bargain by the Numbers?on Fool.com

Published on January 12, 2011

View previous stories