Friday, November 30, 2012

These 4 Companies Could Get Acquired Very Soon

Earlier this week, I looked at a range of commodity stocks that look quite attractive in relation to the value of their assets.

I focused on Freeport McMoran (NYSE: FCX) as a clear example of a stock that looks quite appealing in the context of its balance sheet, if not its income statement.

Yet other investors are focusing on Freeport McMoran for an entirely different reason. A recent article on suggested that a major mining firm such as Rio Tinto (NYSE: RIO) could take advantage of share-price weakness and make a move to acquire the copper and gold miner.


The article quickly reminded me of a lesson I learned from a mentor nearly 20 years ago: "Never ever pursue a stock simply on the basis of a buyout rumor." He correctly noted that few rumored deals actually come to pass.

Since then, I've added my own addendum to his dictum: If a stock is reasonably-priced or downright inexpensive -- even after buyout rumors have circulated -- then you could look at the potential deal as another catalyst for the stock.

In that context, Freeport McMoran is already quite attractive on its own merits, and a bid from Rio or BHP Billiton (NYSE: BHP) would just get you to your eventual target price that much more quickly. The fact that Freeport McMoran's stock has risen only modestly since the story ran only reinforces the notion that you are not chasing someone else's "pump-and-dump" scheme.

Of course, there are many examples where investors foolishly chase a stock ever higher on buyout rumors, only to get burned when those rumors die down. This happened recently with drugstore chain Rite-Aid (NYSE: RAD). Shares moved up from a $1 to $1.50 this past winter on improving results. To most analysts, $1.50 looked like fair value. So when the stock shot past $2 on buyout rumors, the stock suddenly became very risky. Indeed, that kind of move often means it's a good time to sell.

Right now, the rumor mill is churning with talk of a merger between Kroger (NYSE: KR) and Safeway (NYSE: SWY). Analysts at BMO took a deep look at the logic behind such rumors, and came away impressed. Their key conclusion: the combined entity would reap considerable synergies, so a deal could be priced that provides 30% to 40% upside for shareholders of both grocers. (Kroger would likely be the surviving entity, so Safeway's upside would come sooner and Kroger's would come later.) The buying power that a combined platform could muster with suppliers would finally match up with the purchasing strength that has propelled Wal-Mart (NYSE: WMT) to overpower the grocery space.

More to the point, if the merger doesn't happen, then both of these stocks still look reasonably valued on a standalone basis. Each stock trades for less than 10 times projected 2013 profits. This isn't an endorsement of these stocks, but a framework through which you can look at them.

Yet investors should note that Safeway reports earnings on Thursday, April 26, and the results are likely to be mediocre at best due to some near-term headwinds. It may pay to wait until after the news is digested to play the merger and acquisition (M&A) angle on this stock.

All that cash -- looking for a home
Frankly, it's fairly surprising how little buyout activity we've seen in recent quarters. The ever-rising cash balances at many companies, the low cost of borrowing and the need to find growth opportunities in this tepid economy should be fueling a furious bout of deal-making. Private-equity firms, with more than $400 billion in cash could also be looking at breaking out their checkbooks, according to Goldman Sachs. Though it hasn't been much in evidence yet, I remain convinced that robust M&A activity will turn out to be one of the key investing themes when 2012 comes to a close.

So what other companies could be in play? Well, the key is to focus on companies that are already so cheap based on their current cash flow, that they would both appeal to potential acquirers and have solid downside support in terms of valuation -- in case a deal never happened.

In play yet again -- but this time, with downside support
Unfortunately, this means companies that are deeply out of favor should be the focus. Take Radio Shack (NYSE: RSH) as an example. Its stock has slumped from $20 in late 2010 to a recent $6 on a string of weak quarterly results. Indeed, you can probably assume that the electronics retailer will disappoint investors yet again when quarterly results are released this Tuesday, April 24.

But here's the rub: this stock has fallen so sharp, that a financial or strategic buyer could offer a 50% premium and still pay a low price for this company. RadioShack has generated an average of $150 million in annual free cash flow -- on average -- during the past eight years. The company is now valued at just $600 million, and its fairly strong balance sheet (with $592 million in gross cash) is precisely the kind of weapon that private-equity firms like to target.

RadioShack was the subject of buyout rumors when its stock was at $20 -- and investors got burned. Now, with shares off 70%, those rumors are back, though this time the downside risk in the stock seems much lower. Again, it's foolish to own a stock like this in hopes of a buyout, but the dowdy valuation means it's already a bargain on the fundamentals.

Could this be the next big energy deal?
Investors may also seek continued M&A in the energy sector, especially as natural gas-focused firms are short of funds to exploit their assets. As an example, Chesapeake Energy (NYSE: CHK) is scrambling to raise cash to meet its 2012 capital spending plans, and fears of balance sheet troubles have pushed this stock below $20 for the first time since 2009. (Behind-the-scenes dealings by CEO Aubrey McClendon that have raised conflict-of-interest concerns have also pressured shares.)

Chesapeake is now worth less than $12 billion. Note that Exxon Mobil (NYSE: XOM) paid more than $40 billion to acquire XTO Energy in 2010, and Chesapeake's current energy assets are even more extensive than XTO's were. To be sure, natural gas prices are now much lower, but strategic investors such as ExxonMobil know this won't last and may well conclude that Chesapeake is too much of a bargain to pass up.

Risks to Consider: Companies such as RadioShack, Chesapeake Energy, Best Buy (NYSE: BBY), Nokia (NYSE: NOK) and many others have made a series of missteps to find themselves in the bargain bin, and further missteps can't be ruled out. That's why you must stress-test a company in terms of its downside support.

Banks Threaten More Homeowners With Foreclosure

Mortgage delinquencies are falling and the demand for real estate is on the rise due to record-low borrowing costs and tight inventories, according to Bloomberg.

The bad news for homeowners is that banks are now notifying more households that they face foreclosure in a final attempt to further accelerate a rebound in the housing market.

Economics professor at George Mason University Anthony B. Sanders said, “You have to get to the point where the market can heal itself and foreclosures and price adjustments are the only way that can happen.”

Foreclosures have been stalled since the end of 2010 when federal regulators and state attorneys general began investigating alleged bank abuses. After a $25 billion settlement from the nation's five largest banks this past February, foreclosures have picked up the pace again.

Daren Blomquist, a spokesman for Irvine – a California-based RealtyTrac said that the latest slew of foreclosures don't necessarily represent a bad omen for the housing market. Blomquist says the market has strengthened to the point where it is better “equipped to absorb this additional foreclosure inventory.” 

From Bloomberg:

“More price weakness could ignite more defaults as more underwater homeowners think that prices aren’t going to rise anytime soon,” Zandi said yesterday in an e-mail. “The threat is that a vicious cycle is re-ignited. I don’t expect this to happen, but it is a risk.”

Another dip in home prices could push more homeowners underwater just as a recovery was starting to take hold. In the first quarter, about 11.4 million properties, or 23.7 percent of homes with a mortgage, had negative equity, CoreLogic said in a report today. That was down from 12.1 million, or 25.2 percent, in the fourth quarter, as prices began to rise in hard hit areas such as Arizona, the Santa Ana, California-based company said.

Analysts say this will hurt for the next year, but is the only way to insure the housing market and our nation's economy will be able to return to a firm foundation.


3 Keys to Playing the Underground Small-cap Rally

It takes just ten minutes to prepare for a major market rally. By following my three simple steps, you can quickly find a handful of small-cap stocks that will outperform the market over the next 3 months.

But before I reveal my screen criteria, I want to show you why I believe we�re entering an important moment for small stock investors…

Right now, the market is beginning a powerful underground rally, boosting small-cap stocks close to their pre-correction highs. The Russell 2000 is up more than 11% year-to-date, easily topping large-caps in the S&P 500 and the Dow.

Small-caps are winning the race right now because they are the most potent stocks to own during the early stages of a rally. As you probably know, investors see small-caps as riskier investments. That�s why they are the first to be sold off after a long bull market.

But small-caps are also the first stocks to rise once the market has bottomed out. The rush to get back into smaller names pushes these same stocks up farther and faster than their larger counterparts.

Even though small-caps are outperforming the S&P 500 and the Dow so far this year, we haven�t seen a watershed buying moment just yet. That�s why I�m still calling this an �underground� rally. But with every passing day, I think we�re getting closer to that powerful breakout. All that�s left to do is to coax investors on the sidelines back into small stocks.

Retail investors have pulled almost $18 billion out of small-cap funds over the 36 of the last 39 weeks, according to data from J.P. Morgan. This shows us that a great deal of Main Street�s money is still in cash, waiting until the investing waters are declared safe before buying smaller stocks. All we need is volatility to remain low and the market to remain stable for these market watchers to dive back into stocks.

That�s where my 3-part screen comes into play. Follow these easy steps, and you will be able to track down the small stocks that are the best candidates to beat the market. If you do it today, you�ll even have the chance to get in on these names before the next leg of the rally begins to take off…

To begin, go to your favorite free financial website. Google Finance, Yahoo or any of the other major sites will do. If you want a more comprehensive list of screening tools, just search for �stock screeners� online. There are plenty of viable options out there. You don�t even need a subscription or any special software.

[Editor�s note: For a more in-depth piece on free stock screening sites, click here.]

Now you�re ready to begin your search.

1. First, drill down to the most viable sectors: Right now, the investing environment is most suited for consumer stocks, tech names, and pharmaceuticals. These are the types of small-cap stocks that are looking strong right now. Get rid of stocks in the utilities, energy and financial sectors. These are the names that aren�t showing strong earnings or growth at the moment. There�s no point in wasting your time sifting through stocks in a lagging sector. Cut them, and move on.

Setting up the screen is simple. Just adjust your market cap parameters to find stocks in the $300 million – $2 billion range. Then you can enter your sector of choice…

2. Find the profitable companies trading at a low price-to-earnings ratio: The next metric you need to add is price-to-earnings ratio. Investing in companies that are cheap compared to how much money they are earning is a great way to prepare for a rally. Filtering out stocks with P/E ratios higher than 15 is the perfect way to narrow your search. When stocks are moving higher, bargain hunters will swoop in and bid up these �cheap stocks� to more reasonable levels.

Now that you�ve added this second key metric, you can begin searching your selected sectors for cheap plays. Make a list of all the companies that interest you. Now you�re ready for the final step…

3. Finally, select the stocks with the most momentum potential: Your final step involves some quick chart analysis. But don�t worry�you do not have to be seasoned market technician to complete this task. Simply take your list and look at each company�s daily chart. Then ask yourself one simple question: What is the primary direction of this stock?

There are three answers to this question: up, down, and sideways. Get rid of any stock that looks like it is moving lower. That will leave you with names that have bottomed out and are moving sideways, and stocks that are moving higher. As you narrow your list, you can use these charts to separate your best ideas. If you have two stocks you really like, compare charts. Unless you have a compelling reason to pick one name over another, I would recommend going with the stock in an uptrend every time.

Here are a couple of examples I found after searching for only 10 minutes:

Iconix Brand Group Inc. (NASDAQ:ICON): Iconix owns a large portfolio of apparel brands. Its P/E comes in at about 13, and the company has proven it can steadily increase its sales and earnings. The stock has also moved steadily higher since it bottomed in early October.

Greatbatch Inc. (NYSE:GB): Greatbach is in the medical device sector. Its P/E comes in at 14. The stock is also only slightly above sales�another sign of a cheap name. GB is also recovering from last year�s slump. Shares are quickly approaching pre-correction highs.

Of course, this lightning-fast analysis just scratches the surface of these two companies. Still, you can see how a quick search yielded two strong possible investments.

Thursday, November 29, 2012

Top Stocks For 5/3/2012-19

Blue Gold Beverages, Inc. (BGBV)

Carbonated water serves as a great drink and a good substitute in the absence of water. Carbonated water is among favorites when preparing hard drinks. Carbonated water adds pleasant taste to the hard alcoholic drinks, making it fun and fizzy. You can also create a flavored drink out of the same. Just add the syrup of your choice to carbonated water and enjoy flavored carbonated drinks. If you use carbonated water that is rich in minerals and low on calories, you can easily make a low calorie mineral enriched drink for parties or occasions.

Blue Gold Beverages, Inc. is a leading high end producer of private label water and specialty beverages in North America. Some of our products include all natural sodas, teas, non-alcoholic wine coolers and energy drinks. Blue Gold Beverages head office situated in Montreal, Quebec, Canada, we use 3rd party bottling plants strategically located across North America depending on the geographical location of our clients. With the recent acquisition of TY Recycling, Blue Gold Beverages has entered into the polymer recycling business, selling PET and Nylon waste. This is in-line with the company’s strategy of becoming environmentally responsible by eliminating its carbon footprint, and increasing shareholder value.

Blue Gold Beverages, Inc. (BGBV) is pleased to announce its wholly owned subsidiary EPIC Nutrition, Inc. has signed an exclusive distribution agreement with Contemporary Marketing, Inc. (”CMI”) one of the leading National Sales and Marketing companies in the USA. The agreement provides for CMI to be the exclusive broker for EPIC’s NRG�, Goodnight� and COLDsense� brands for key retailers Walgreens, CVS, Target, GNC and Stop & Shop resulting in thousands of potential points of distribution at these retail outlets.

CMI will spearhead the new product launches of EPIC’s new NRG Pro-N-Go�, a nationally branded energy shot infused with 25g of bioavailable protein and Goodnight�, a proprietary 2.5 fl oz shot targeted at the rapidly expanding $521m US sleep and relaxation category (Zenith International 1/20/11) and COLDsense�, a natural cold and flu remedy into the $2.6b US Cold/Allergy/Sinus tablet market (SymphonyIRI Group, Inc 9/5/10).

For more information BGBV, please visit:

Charter Communications Inc. (Nasdaq:CHTR) announced a definitive agreement to acquire cable television systems from US Cable of Coastal Texas, LP serving, in aggregate, approximately 16,000 customers in Missouri, including the communities of Hannibal, Mexico and Moberly.

Charter Communications, Inc. provides cable services to residential and commercial customers in the United States.

National Health Partners, Inc. (NHPR)

National Health Partners, Inc. is a national healthcare savings organization that provides discount healthcare membership programs to uninsured and underinsured people through a national healthcare savings network called “CARExpress.” CARExpress is one of the largest networks of hospitals, doctors, dentists, pharmacists and other healthcare providers in the country and is comprised of over 1,000,000 medical professionals that belong to such PPOs as CareMark and Aetna. The company’s primary target customer group is the 47 million Americans who have no health insurance of any kind. The company’s secondary target customer group includes the millions of Americans who lack complete health insurance coverage. The company is headquartered in Horsham, Pennsylvania.

Tooth decay is caused by a variety of things; in medical terms, cavities are called caries, which are caused by long-term destructive forces acting on tooth structures such as enamel and the tooth’s inner dentin material. These destructive forces include frequent exposure to foods rich in sugar and carbohydrates; soda, candy, ice cream-even milk-are the common culprits.

Left inside your mouth from non-brushing and flossing, these materials break down quickly, allowing bacteria to do their dirty work in the form of a harmful, colorless sticky substance called plaque. The plaque works in concert with leftover food particles in your mouth to form harmful acids that destroy enamel and other tooth structures. If cavities aren’t treated early enough, they can lead to more serious problems requiring treatments such as root canal therapy.

The CARExpress dental program gives you immediate savings. There are no limits to your visits and as a member of CARExpress you can save between 15% - 50% off your dental services through our participating network of 76,000 dentists and specialists nationwide including:

� General Dentists
� Endodontists
� Orthodontist
� Periodontists
� Oral Surgeons

National Health Partners, Inc., a leading provider of discount healthcare membership programs, announced the recent signing of two new significant marketing agreements. These two clients provide very different opportunities and continue to expand the reach of CARExpress into new marketplaces.

By launching their own unique internet marketing program, the first group should be able to provide a widespread push into the on-line market to produce an excellent volume of new CARExpress sales into the pipeline. In addition, the second group offers a reach into the wholesale marketplace where CARExpress will be wrapped into other programs to enhance the value of the overall package to the consumer. We would consider this non-traditional business and a great opportunity to expand our reach as well as recognition of the CARExpress program nationwide.

“Both of these clients will be launching in the next few weeks and we anticipate an excellent response to their campaign rollouts,” stated David M. Daniels, National Health Partners’ President and CEO. “I am very excited about the new opportunities that these two new clients provide to CARExpress. In addition to the new campaign that was launched just a few weeks ago, all of these new client opportunities will offer a sharp increase in CARExpress memberships and have a major impact on our overall sales for 2011.”

The company plans to announce the rollout of these new marketing campaigns as well as several others over the next few weeks.

Please visit its website at

NXP Semiconductors NV (Nasdaq:NXPI) announced the availability of its production-ready single-chip solution for multifunction car keys — the NCF2970 (KEyLink Lite). Enhancing the functionality of car keys by supporting Near Field Communications (NFC) technology, NXP’s KEyLink Lite enables car manufacturers to offer a new driving experience with keys that connect to external NFC-compliant devices, such as mobile phones, tablets and laptops.

NXP Semiconductors N.V., through its subsidiary NXP B.V., provides mixed signal solutions and semiconductor components primarily in Japan, Europe, South Korea, Rest of Asia Pacific, and the Americas.

Warner Chilcott plc (Nasdaq:WCRX) announced that Dr. Mahdi Fawzi, the Company’s President, Research and Development, will be leaving the Company to pursue other interests. Dr. Fawzi joined the Company in October 2009 as the head of Research and Development and has overseen the group’s expansion through the 2009 acquisition of the global branded prescription pharmaceuticals business of The Procter & Gamble Company. It is expected that Dr. Fawzi will remain with the Company until the end of the year to assist with transitional matters.

Warner Chilcott plc, a specialty pharmaceutical company, focuses on the development, manufacture, and promotion of branded pharmaceutical products in women’s healthcare, gastroenterology, dermatology, and urology segments in North America and western Europe markets.

S&P 500 Earnings Estimates and Direction of the Market

We're now at the threshold of the Q4 earnings season. While we await the individual reports over the next several weeks, let's have a look at earnings forecasts for the S&P 500 index for 2011 and 2012.

One of my favorite sources of market data is the spreadsheet on the Standard & Poor's website maintained by Senior Index Analyst Howard Silverblatt (see my instructions at the bottom of this post for accessing the data).

The table below illustrates the forecast trailing twelve month (TTM) "As Reported" earnings estimates for the S&P 500. The values in the TTM Earnings column are the sums of the trailing four quarterly estimates from column D in Silverblatt's spreadsheet (as of 12/31/2010). The % Change column uses the TTM earnings estimate for through Q4 2010 as the baseline and shows quarterly earnings growth estimates through 2012.

Now let's look at the three forecast columns based on P/E ratios. Even if you're on a low-sodium diet, take these with a grain of salt. The middle of the three is calculated using a P/E of 15.5 — the historical average TTM P/E ratio for the S&P Composite over the past 139 years. I've multiplied the TTM earnings estimates by this number. Thus, the earnings forecasts using this ratio would put the S&P 500 at 1346 at the end of this year and 1395 at the end of 2012.

The rightmost column uses the TTM P/E at the end of 2010 (December's close of 1257.64 divided by the 74.57 estimate rounded to one decimal place). The earnings forecasts at this ratio would put the S&P 500 at 1468 at the end of this year and 1521 at the end of 2012.

The pink column is based on an arbitrary P/E ratio of 14.1 — the same distance below the average P/E as 16.9 is above it.

Of course, this is merely playful exercise with earnings estimates that will change. Moreover, as the history of P/E ratios suggest, the S&P 500 price oscillates wildly above and below the average P/E multiple.

I'll revisit the table above as the forecasts change, as they inevitably will, over the months ahead.

Disclosure: No position

3 Stocks With Scattered Earnings Estimates; Hough: As earnings season approaches, forecasts for these companies are all over the place.

Earnings season kicks off next week amid high uncertainty on Wall Street--especially concerning the companies below.

More From Jack Hough
  • 3 Stocks Short-Sellers Are Targeting
  • Why it's Time to De-Risk

Analysts have spent more than seven months steadily lowering their first-quarter earnings forecasts for the broad market. Earnings for the S&P 500 index are now expected to rise 5% from the first quarter of last year, according to S&P. A year ago, the growth rate was 16%.

What remains to be seen is whether estimates have come down far enough for companies to beat them, and how stocks will respond.

The companies below present a different dilemma for investors. The analysts who forecast their earnings show unusually wide disagreement in their numbers. Estimates, in other words, are all over the place.

High levels of "estimate dispersion", as it's called, are generally a negative sign for investors, but not always. Research by Anna Scherbina at the University of California at Davis and others has shown a link between widely scattered estimates and sub-par future stock returns and earnings growth. Companies that have little good news to share tend to give little guidance, the thinking goes, leaving analysts to guess.

Of course, there are other reasons analysts might disagree on their forecasts. Companies that are in a state of rapid change, or whose profits are affected by volatile commodity prices, can produce wide earnings swings that are difficult to predict.

  • Earnings date: April 19
  • Consensus estimate: 71 cents
  • High estimate: $1.00
  • Low estimate: 57 cents

SanDisk (SNDK) on Tuesday lowered its first-quarter guidance for revenues and margins, citing weak demand and pricing for its flash memory. Shares tumbled about 12% since then, and earnings estimates plunged. Sandisk counts thriving electronics makers like Apple (AAPL) as customers, but also struggling ones like Nokia (NOK) and Research in Motion (RIMM) .

Goldman Sachs
  • Earnings date: April 17
  • Consensus estimate: $3.38
  • High estimate: $4.00
  • Low estimate: $2.03

First-quarter profits for Goldman Sachs (GS) are expected to more than double from a year ago. And whereas most earnings estimates have been trimmed of late, those for Goldman and other banks have risen on improvements in trading, mortgage banking and loan growth. For Goldman in particular, derivatives profits in Europe have soared from clients seeking to hedge risk, Reuters reported in late March, citing internal Goldman documents. The broader U.S. financial sector has been the stock market's top performer this year, rising 20%.

Newfield Exploration
  • Earnings date: April 25
  • Consensus estimate: 77 cents
  • High estimate: $1.10
  • Low estimate: 47 cents

Newfield Exploration (NFX) produces more natural gas than oil, but it's working to reverse that. The reason: U.S. natural gas prices have tumbled to nearly a 10-year low while oil prices remain high. New drilling technologies in the U.S. have unlocked vast supplies of both, but because oil is more easily exported overseas, it continues to fetch high prices. First-quarter profits for Newfield are expected to fall 21%.

REIT Stocks Could Deliver Strong Dividends

We continue to look for stock ideas that provide stability and income to help offset the pressure of low interest rates. Recently, Dan Caplinger of the Motley Fool noted that real estate investment trusts have become a popular income-oriented investment. As there is increasing focus on dividends, it is likely that a number of companies are looking at the hoops through which they would have to jump to qualify to be a REIT.

Dan then looks a three companies that have completed this step.

Looking back at REIT conversions

  • Forest-products supplier Weyerhaeuser (WY)
  • Plum Creek Timber (PCL)
  • Sabra Health Care (SBRA)
  • American Tower (AMT) -- mobile-transmission tower company

I thought that I would put these together and see whether the combination of different market segments would provide both income and diversification. Note that I will combine WY and PCL as they are in the same space -- i.e. they will have 1/6 of the investment each.

I hope this will be an interesting selection and worthy of comparison with our broadly diversified dividend bearing ETF portfolio. It will be interesting to see how they compare with our reference dividend bearing ETF portfolio.

AssetFund in this portfolio
REAL ESTATE(ICF) iShares Cohen & Steers Realty Majors
FIXED INCOME(TIP) iShares Barclays TIPS Bond
Emerging Market(VWO) Vanguard Emerging Markets Stock ETF
US EQUITY(DVY) iShares Dow Jones Select Dividend Index
US EQUITY(VIG) Vanguard Dividend Appreciation ETF
INTERNATIONAL EQUITY(IDV) iShares Dow Jones Intl Select Div Idx
High Yield Bond(HYG) iShares iBoxx $ High Yield Corporate Bd
INTERNATIONAL BONDS(EMB) iShares JPMorgan USD Emerg Markets Bond
  • REIT Stocks Could Deliver Strong Dividends -- Total of $10K invested equally in each stock
  • Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
  • Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)

Portfolio Performance Comparison

Portfolio/Fund NameYTD
1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate2%6%66%12%110%7%57%
Retirement Income ETFs Strategic Asset Allocation Moderate2%-1%-3%10%95%1%4%
REIT Stocks Could Deliver Strong Dividends8%5%21%11%52%-1%-6%

I think it is worth having access to real estate trusts -- I have Vanguard REIT Index ETF (VNQ) and SPDR Dow Jones REIT (RWR) which I use as a comparison. In my view, the ETFs win out in terms of returns and volatility. It's hard for me to see a reason to go with this selection over having an ETF unless you have some detailed knowledge which I don't.

Three Month Chart

One Year Chart

Three Year Chart

Five Year Chart

The charts tell me the same thing. I am happy with my ETF selection and so this is of no further interest.

More analysis...

Disclosure: I am long VNQ, RWR.

S&P Target 1600: The P/E Decompression Stampede - Part IV

The first time I thought about the P/E Decompression Stampede scenario was on October 12, 2011. We were at S&P 1198 intraday, right around my favorite pivot point of 1190. I reread this article today, and quite frankly, there is nothing much to add. Earnings have come through, Europe is working out its problems, the U.S. economy may be perking up, the political scene in the U.S. is not clearer, and the deficit is getting bigger. Mix it all up, there is no real reason for stocks to be up 12% since then. Except for liquidity.

Liquidity is a very subjective notion. When stocks go down, one is never liquid enough. When stocks go up, one is always too liquid. I measure it several ways, from macro to micro, but as far as stocks are concerned, my best test has always been price reaction to the news, usually earnings. Whatever the news is, if stocks exhibit an overall tendency to either go up or down, I'll infer the market is either liquid or not for this particular asset class.

There have been many stocks going up 10% on earnings this quarter - United Rentals (URI), Cintas (CTAS), Wesco (WCC), Sanmina (SANM), to name a few of my favorites. And if this is not enough, just look at Microsoft (MSFT), Apple (AAPL), and Exxon Mobil (XOM): In a couple of months, their cumulative market cap increase is some $150 billion. That's liquidity.

Which makes it extremely difficult to stay the course. The stock is up 10%, the market is flat, there is no news really, sell the stock! Well, usually, this is the right move. However, let me reflect on some recent history. From the 2009 March lows: Ion Geophysical (IO) is up 8 times; United Rentals up 12 times; Farmer Mac (AGM) up 7 times; Sanmina up 11 times; and so forth. Selling these stocks after a 10% move left you real sorry.

The bad news: The bottom is behind us. The good news: Don't get impressed by the moves off the bottom. Focus on valuation, and on P/Es that have room to expand. For the record, we are at S&P 1350, 2/8/2012 pm.

Disclosure: I am long AGM, BCS, MYE, IR, ORBK.

Disclaimer:As a Registered Investment Advisor, there are a few things we must tell you. We at Capital Max do not know your personal financial situation or investment objectives, so this article does not constitute a solicitation to purchase or sell any of the securities mentioned, nor is it intended to provide specific investment advice. Past performance is no guarantee of future performance. We live this every day, and you should know it too. The value of the securities mentioned herein may fall or rise and are not insured by any government or private company, even if it meant something. We believe what we write, and we take your audience quite seriously. However, since we cannot be held responsible for any loss or damage caused by reliance on the information and data herein, you should consult with your own advisor and/or do your own research before acting on any of our opinions, which we change without notice.

Tech Stocks: JPMorgan’s Top Tech Stocks for 2012

There are a large number of analysts who believe technology stocks are undervalued -- if you associate with that belief you may be interested in JPMorgan's top tech stock picks for 2012.

J.P Morgan's Noelle V. Grainger published a report on December 9th that took a look at top stocks in several technology sectors, such as software, computer services & IT consulting, semiconductor capital equipment, and alternative energy.

Each sector faces its own set of challenges in today's market.

An example of the sectors JP Morgan thinks are on the fence is software technology. The sector did very well in 2010 but was relatively flat in 2011. Performance in 2012 will depend largely upon investor confidence in earnings growth estimates and macroeconomic uncertainties, according to Insider Monkey.

Some of the sectors expected to excel are Communications Equipment & Data Networking and SMid Semiconductors, which are linked to high growth in communication infrastructure.

One sector JP Morgan feels has more downside than upside is solar. Subsidies for solar energy are expected to be reduced in 2012, and most companies are already struggling to keep their prices affordable.

J.P. Morgan has buy recommendations for the following -- do you agree that these names have the potential to grow in 2012?

List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)

1. Oracle Corp.� (Nasdaq: ORCL  ) : Develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide. Market cap of $129.60B.� The stock is currently stuck in a downtrend, trading -13.09% below its SMA20, -16.36% below its SMA50, and -16.5% below its SMA200. It's been a rough couple of days for the stock, losing 11.51% over the last week.

2. MasterCard Inc. � (NYSE: MA  ) : Provides transaction processing and related services to customers principally in support of their credit, deposit access, electronic cash and automated teller machine payment card programs, and travelers' cheque programs. Market cap of $47.12B.� The stock has gained 70.44% over the last year.

3. Texas Instruments Inc. � (NYSE: TXN  ) : Engages in the design and sale of semiconductors to electronics designers and manufacturers worldwide. Market cap of $33.71B.� The stock has lost 7.26% over the last year.

4. Broadcom Corp.� (Nasdaq: BRCM  ) : Designs and develops semiconductors for wired and wireless communications. Market cap of $16.05B.� The stock has had a couple of great days, gaining 5.72% over the last week.

5. Equinix Inc.� (Nasdaq: EQIX  ) : Provides data center services for the protection and connection of information assets to enterprises, content providers, financial companies, network service providers, and cloud and IT services companies. Market cap of $4.83B.� The stock is a short squeeze candidate, with a short float at 10.08% (equivalent to 6.75 days of average volume). The stock has gained 25.85% over the last year.

6. Lam Research Corp.� (Nasdaq: LRCX  ) : Engages in designing, manufacturing, marketing, and servicing semiconductor processing equipment used in the fabrication of integrated circuits. Market cap of $4.39B. Might be undervalued at current levels, with a PEG ratio at 0.76, and P/FCF ratio at 7.47. The stock is currently stuck in a downtrend, trading -6.29% below its SMA20, -10.42% below its SMA50, and -15.16% below its SMA200. The stock has lost 29.48% over the last year.

7. Jabil Circuit Inc. (NYSE: JBL  ) : Provides electronic manufacturing services and solutions in the Americas, Europe, and Asia. Market cap of $4.14B.� This is a risky stock that is significantly more volatile than the overall market (beta = 2.01). Might be undervalued at current levels, with a PEG ratio at 0.91, and P/FCF ratio at 13.42. The stock has gained 0.71% over the last year.

8. Robert Half International Inc.� (NYSE: RHI  ) : Provides staffing and risk consulting services in North America, South America, Europe, Asia, and Australia. Market cap of $4.05B.� The stock has had a couple of great days, gaining 6.1% over the last week.

9. Riverbed Technology, Inc. � (Nasdaq: RVBD  ) : Provides solutions to the fundamental problems associated with information technology (IT) performance across wide area networks (WANs) in the United States and internationally. Market cap of $3.71B.� The stock has lost 31.23% over the last year.

10. Cree, Inc.� (Nasdaq: CREE  ) : Develops and manufactures light emitting diode (LED) products, silicon carbide (SiC) and gallium nitride (GaN) material products, and power and radio frequency (RF) products. Market cap of $2.54B.� The stock is a short squeeze candidate, with a short float at 15.51% (equivalent to 5.12 days of average volume). The stock is currently stuck in a downtrend, trading -6.86% below its SMA20, -15.72% below its SMA50, and -16.08% below its SMA200. The stock has performed poorly over the last month, losing 13.11%.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

List compiled by Eben Esterhuizen, CFA. Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Data sourced from Finviz.

Not So Fast–ISM Service Gauge Shows Contraction

Stocks are surrendering their gains after the Institution for Supply Management said its non-manufacturing index dipped below the 50 line, to 48.7 in November from 50.6 in October, indicating the service sector has reverted to contracting. Consensus forecasts called for the ISM non-manufacturing gauge to rise to 51.5.

Major indices, which opened fractionally higher, relinquished those gains with the Dow off about eight points. Treasuries, by contrast, pared their losses that came in the wake of a further drop of unemployment claims.

Leading equities lower are retailers, which are reporting lackluster November sales as Black Friday’s spurt couldn’t overcome a slow start to the month. Costco (COST), a winner among value-conscious consumers, reported flat same-store sales (excluding gasoline.) Its shares were trading down nearly 2.9%, at 59.13. Macy’s (M), which reported a 6.1% plunge in November same-store sales, was trading down 3.7%, at 15.70.

Wednesday, November 28, 2012

Analyzing Intel Corp.: A Dividend Challenger

A Dividend Challenger is defined as a company that has increased its dividend every year for 5-9 straight years. Intel Corp. (INTC) is a Dividend Challenger that has raised its dividend every year for 8 consecutive years. The complete Dividend Challengers list is compiled courtesy of David Fish. (Open as an excel spreadsheet and look at the tabs on the bottom to find the Dividend Challengers list).

About Intel Corp. (INTC): from the company website

"Intel is a world leader in computing innovation. The company designs and builds the essential technologies that serve as the foundation for the world's computing devices."

Intel Corp. : A Dividend Challenger with 8 Consecutive Years of Dividend Increases

Since dividends are paid out of earnings, a clear perspective of a company's historical earnings growth record is a vital component of a dividend investor's prudent due diligence process. The following graph plots Intel Corp.'s earnings per share since 2003. A quick glance to the right of the graph shows that Intel Corp. has increased earnings at a compounded rate of 17.6% (see purple circle on graph) per annum.

Dividend Challengers 5-9 Years Straight of Dividend Increases

With interest rates hovering near all-time lows, investors seeking income are faced with very limited choices. The traditional high yield available from bonds and other fixed income vehicles are no longer available to meet the goals of retirees needing income to live off of. Moreover, it is almost a certainty that today's low yields are not adequate enough to fight inflation. Consequently, there is a growing investor interest in dividend paying common stocks, especially those that have a long record of increasing their dividends every year.

Earnings Determine Market Price and Dividend Income: The following earnings and price correlated F.A.S.T. Graph clearly illustrates the importance of earnings to both price movement and dividend income. The earnings growth rate line or True Worth ™ line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Since dividends are paid out of earnings, and therefore represent additional return on top of what the market capitalizes earnings at, they are depicted by the light blue shaded area and stacked on top of the earnings line. Therefore, a quick visual of these two important components is simultaneously revealed: The additional return that dividend paying stocks provide, plus the percentage of earnings paid to shareholders as dividends (payout ratio).

Performance Table: Capital Appreciation and Dividend Income Intel Corp.

The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two components of total return: Capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 6.1% capital appreciation (Closing Annualized ROR), long-term shareholders of Intel Corp. would have received an additional $25,241.75 in dividends that increased their total return from 6.1% to 7.7% per annum.

(Note: Since this is a Dividend Challenger it has raised its dividend every year for at least 5-9 years, therefore, negative dividend growth rates shown, if any, will be attributed to special additional dividends paid in excess of the company's regularly reported dividend rate.)

The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is historically on the low side since 2003.

A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Intel Corp. is 2.49, which is historically low.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns, and the dividend and its growth rate are a function of two critical determinants:

1. The rate of change (growth rate) of the company's earnings

2. The price or valuation you pay to buy those earnings

Therefore, forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.

Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. At its current price, which is attractively aligned with its True Worth™ valuation, Intel Corp. represents a potential opportunity to invest in a Dividend Challenger at a reasonable price. The important factor is that Intel Corp. has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for an increasing dividend income stream and potentially attractive future returns.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 11 leading analysts reporting to Capital IQ forecast Intel Corp.'s long-term earnings growth at 10%. Intel Corp. has low long-term debt at 13% of capital. Intel Corp. is currently trading at a P/E of 10.7, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Intel Corp.'s True Worth valuation would be $60.39 at the end of 2017, which would be a 16.9% annual rate of return from the current price, including assumed dividends.

Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price and dividend income in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Intel Corp. to an equal investment in 10-year Treasury bonds illustrates that Intel Corp.'s expected earnings would be 7.4 times that of the 10-Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Click to enlarge image

Summary & Conclusions

This report presents essential "fundamentals at a glance" on Dividend Challenger Intel Corp., illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conduct his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure: I am long INTC.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

VTI, SPY: Good Additions To A Long-Term Portfolio

From an investor’s point of view, large cap stocks have historically played a very important role in asset allocation for retirement investments such as IRA investments or 401K investments. Most professional portfolio and fund managers use large cap stocks as a cornerstone of their portfolio creation strategy. Large cap stocks are known to offer stability and capital protection to any long-term investment portfolio. In the current parlance, any stock with a market capitalization greater than $10 billion is considered a large cap stock.

Large cap blend ETFs usually consist of high quality stocks that are of reasonable valuation and earnings growth perspective. In the current uncertain economic environment, these ETFs are expected to outperform among other stock style ETFs. For instance, in the last financial year, U.S. large cap blend ETFs have outperformed all asset classes with the exception of gold and treasuries. This can be seen in the following two tables:

Major Asset Classes Trend (as of 11/04/2011)



1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

US Stocks








Emerging Market Stks








International REITs








Frontier Market Stks








International Developed Stks








U.S. Equity Style Trend (as of 11/04/2011)



1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

Russell Largecap Growth








Russell Largecap Index








Russell Largecap Value








Russell Midcap Growth








Russell Midcap Indedx








Russell Midcap Value








Russell Smallcap Growth








Russell Smallcap Index








Russell Smallcap Value








More information about the latest growth numbers for various asset classes can be found here.

Let us now discuss the prominent Large Cap blend ETFs currently trading in the U.S. market.

U.S. Large Cap Blend




1 Yr

3 Yr

5 Yr

Avg. Volume(K)

1 Yr Sharpe

SPDR S&P 500







iShares S&P 500 Index







Vanguard Total Stock Market







iShares Russell 1000







Rydex S&P Equal Weight







iShares S&P 100







Vanguard Large Cap







Schwab U.S. Large Cap







Vanguard S&P 500







Considering the statistics given in the above-given list, it is obvious that the Vanguard Total Stock Market ETF (VTI) is currently the best performing U.S. large cap blend ETF. At the same time, we must not ignore the giant in the room – the SPDR S&P 500 ETF-- which is benchmarked to the S&P 500 index and accounts for a lion’s share of the average trading volume (317,715), currently making it the most liquid U.S. large cap blend ETF .

VTI has given the highest returns for the last one, three and five year periods compared to the other ETFs in the list. Additionally, VTI also has the highest Sharpe ratio (32.3%) making it the best managed ETF in the list. VTI is benchmarked to the MSCI US Broad Market Index; which was specifically formulated to represent the U.S. stock market as a whole.

Please refer to the following table to examine the latest sector-wise portfolio allocation for VTI.

Sector Weightings:

Sector VTI (%)
Basic materials 4.23
Consumer cyclical 10.34
Financial services 13.06
Realestate 2.94
Consumer defensive 9.82
Healthcare 11.32
Utilities 3.33
Communication services 4.04
Energy 11.38
Industrials 13.04
Technology 16.51

VTI has a superb balance of aggressive growth sectors like technology (16.51%), financial services (13.06) and energy (11.38%) along with classic defensives like utilities (3.33%), consumer cyclicals (10.34%) and consumer defensives (9.82%). Additionally, the top ten holdings of VTI represent 17.08% of total assets and they include a mix of energy behemoths like Exxon Mobil (XOM) (2.82%), Chevron Corp. (CVX) (1.44%); technology stocks like Apple Inc. (AAPL) (2.06%), Microsoft Corp. (MSFT) (1.31%), IBM (1.39%) and financials like Bank of America (BAC) (1.25%).

Taking into account VTI’s asset allocation and top holdings, we can conclude that in the current low interest rate environment, VTI will continue to outperform other U.S. large cap blend ETFs as the economy improves and unemployment declines. Both VTI and SPY make great additions to any serious long-term investment portfolio including IRA investments and 401K investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Tuesday ETF Wrap-Up: UNG Slides, China ETFs Surge

After a dull couple of weeks, the action on Wall Street picked up on Tuesday, highlighted by a rare public warning from Berkshire to Kraft. It was an eventful day on the data front as well, with a slip in housing data and solid domestic automotive sales numbers the biggest news of the day. Most benchmarks continued a solid year-to-date period, tacking on smaller gains to Monday’s major rally.

The ETFdb 60 Index, a benchmark measuring the performance of asset classes available through ETFs, added 2.33 points, or 0.2%, to close at 1,050.95. After just two sessions, the multi-asset class index is already up 1.6% on the year.

Leading the way higher Tuesday were Chinese equities, as the iShares FTSE/Xinhua 25 Index Fund (FXI) added 2.1%, fueling hopes that 2010 will be another banner year emerging markets. A recent Goldman Sachs report predicted a rally in China stocks driven by favorable policy and liquidity to unfold throughout the year.

Among the biggest losers was the United States Natural Gas Fund (UNG), which followed a big gain in the year’s first session with a 3% loss Tuesday. Natural gas futures slid nearly 4% as traders took profits following Monday’s run-up and industrial demand, which accounts for a third of U.S. consumption, remained depressed.

Disclosure: No positions at time of writing.

Acme Packet: Raymond James Ups to Strong Buy

Shares of networking gear maker Acme Packet (APKT) rose 50 cents, or 2%, today to close at $26.20 after Raymond James analyst Todd Koffman raised his rating on the stock to Strong Buy from Underperform, with a $34 price target, following the company’s cut in its Q4 revenue outlook amid telecommunications weakness.

Noteworthy, because Koffman has been especially dour on the stock in the last year. He started coverage at Underperform in May of last year, when the stock was trading at $77 or so. At the time he acknowledged the company’s entrenched position in sales of communications equipment for Internet voice telephony networks. But he also said the stock was out of alignment with the company’s addressable market opportunity.

After the latest warning from Acme, Koffman is inclined to argue the company is still a good company, but one whose stock now reflects more realistic expectations: “Recent missteps reflect exaggerated expectations complicated by unusual buying patterns (i.e., U-verse). We believe these potholes will temper management expectations and provide a realistic base for future growth.”

Where Koffman was inclined at one time to see the market opportunity as “exaggerated” for Acme, he now sees plenty of upside in the roll-out of Internet voice:

Line data is difficult to come by, but our estimates suggest less than 10 million of the 60 million business phone lines (U.S. only) have converted from legacy circuit switched voice to native voice over IP (via SIP trunking). We note, international markets are even further behind.

The difference now from last year, to Koffman’s way of thinking, is that while the installed base of Acme gear was already fairly heavy, i.e., saturated, at $77 a share, the available market in terms of business lines having converted to IP telephony is relatively wide open.

rue21 Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of rue21 (Nasdaq: RUE  ) fell 10% briefly this morning after the company released fourth-quarter results.

So what: Revenue rose 16% to $219.9 million, and earnings per share were $0.52, slightly ahead of estimates. It was guidance that investors had their eyes on today. Management said first-quarter earnings per share would be $0.42 to $0.44 next quarter and $1.74 to $1.79 for the full year, near the bottom of analysts' expectations.

Now what: The guidance wasn't all that bad, considering it was still in line with what analysts had expected. But sales at stores open at least a year fell slightly in the fourth quarter, always a warning sign for retail investors. I wouldn't panic-sell here, but I'm also not a buyer considering the same-store sales drop.

Interested in more info on rue21? Add it to your watchlist by clicking here.

Tuesday, November 27, 2012

New Dubai Law Pushes Developers to Deliver

Developers in Dubai have grown too accustomed to leniency when it comes to delivering what they promise in their sales purchase agreements, and a proposed law set to pass in 2012 is designed to remedy that. The new Investor Protection Law states that buyers will be entitled to a full refund if developers fail to hand over property on time, or if the properties’ common amenities (pools, gyms and other contracted facilities) are not complete. Additionally, buyers will be entitled to a full refund if the sale property is 30% smaller in area than the actual net area in the contract. For more on this continue reading the following article from Property Wire.

Dubai property investors are set to get a full refund if developers default on handover under a proposed new Investor Protection Law that could be in force by the end of June 2012.

The proposal also makes it mandatory for developers to provide all promised common facilities. It means that if there are delays and failures investors will be eligible for cancellation of their contracts and get a full refund.

It also means that swimming pools, gyms or any other promised facilities will have to be ready before officially handing over the keys to the new owners.

This comes as a growing number of developers have failed to provide the facilities mentioned in their sales purchase agreements (SPAs) or marketing material. Until now, buyers did not have much recourse and could only hope that the facilities would get completed at some point in time.

Developers will also face fines if the units they promise are not delivered on time, or to agreed specifications.

A proposed provision of the draft law also says that if a unit turns out to be 30% smaller than the actual net area in the contract, the investor will have the right to cancel the contract and obtain a full refund.


In case of off plan sales, the draft proposes to make it mandatory for a developer to get all approvals from the Real Estate Regulatory Agency (RERA) and to register all saleable units with the Dubai Land Department’s online registration system.

The developer is also obliged to register all contracts with RERA and to provide all information regarding the project’s handover, escrow account, etc.

According to Sultan Bin Mejren, director general of the Dubai Land Department, the new law could be implemented by the end of June.

Following the global economic slowdown of 2008, there are still hundreds of property projects on hold in Dubai. According to the latest figures from 165 projects have been completed since the beginning of 2009, 291 projects are on hold, 291 projects are likely to be completed in due course, and 29 projects have not yet been started.

Triple-Digit Profits from Down and Dirty Drilling

An increasing number of marginal exploration and production projects are being fired up, due to the expectation of a dwindling oil supply. As oil prices rise, it becomes extremely profitable to tease oil out of higher cost reservoirs and reserves. This is the bread and butter of oilfield service providers.

These companies include drillers and drilling rig operators, drilling equipment manufacturers, well service providers and a multitude of other companies tied to the production and distribution of oil—companies that have been sitting on the sidelines for years. Not being truly appreciated for their technologies. Now it is their time to step up to the plate and nail one out of the park.

Not Convinced?

My name is Jon Markman and for the past 16 years, I’ve been helping individual investors build their results with 26% annual returns no matter what the stock market throws at us or what is happening half a world away.

 All this is done by buying dominant companies in overlooked and profitable micro-niche sectors—before Wall Street takes notice and builds up the stock price.

I’ve been telling my subscribers about these types of micro-niche companies in my Strategic Advantage service. And I don’t want you to miss out on these profitable opportunities, because we’ve been raking in the gains.

Oilfield services providers is just one example of a micro-niche sector—but I have many others on my current buy list. But since there is so much money to be made in this area right now—before the rest of the world catches on—that’s where I want to focus today.

Just check out the gains in my top three oilfield services providers that subscribers to my Strategic Advantage service are already sitting on:

  • Oilfield Service Provider #1: 300% in just 11 months
  • Oilfield Service Provider #2: 58% in only one month
  • Oilfield Service Provider #3: 12% in two months
Start Digging

My favorite pick in this energy sector niche is a microcap oilfield service provider that is underappreciated and materially undervalued despite strong growth potential. In just two years, this company has grown revenues fivefold to $100 million and analysts forecast sales of $165 million for this year.

Many companies find one technology that works and build their whole business around it. And if it fails, the company goes under. This oilfield service provider isn’t one of those companies. There are five keys to its growth path and rising stock price:

  • Proprietary chemicals and proprietary “artificial lift” devices
  • Expansion of drilling tool rentals
  • The ability to grow both organically as well as through acquisition
  • The ability to grow its customer base both in number and geographically
  • An expansion of earnings multiple

This company has grown revenues at its chemical and logistics division to an estimated $95 million this year from $12 million in 2003. Most of that growth has been organic, which means it has come as a result of the hard work of its own R&D and sales teams — not from acquisitions. And it believes that it only holds 2% of a $3 billion market for oilfield chemicals, so, as you can see, there is plenty of room for more market share growth.

The company’s key products are called “microemulsion chemistry.” These chemicals help in acidizing, fracturing, cementing and drilling applications. They’re especially helpful to oil companies that are trying to recover more oil from mature fields. An independent study showed that this company’s chemicals improved production rates at 250 test fields by 40%.

One of the cool things about these chemicals is that their main feedstock is citrus oils, known as “terpinenes.” They are literally refined from orange, grapefruit, lemon and lime rinds, much like the ingredients that you will see in many household cleaning products. And because it is made from fruit, it is biodegradable, which means it is environmentally friendly at a time when even the down-and-dirty energy companies care about such things.

So, who uses this stuff? Mainly, it is the large pressure-pumping operators among the oilfield services companies. Halliburton is this company’s largest customer and reportedly uses its fracturing fluids as a key differentiator in its sales pitch to Eastern Hemisphere customers. Schlumberger (SLB) and BJ Services (BJS) are also said to have started using these chemicals after a long test period, and their ramp-up in application will be a big part of a real acceleration in this company’s sales over the next couple of years.

Just to give you an idea of how it’s going: chemical sales are already running $1.8 million per week, compared with $8 million in all of 2005! Plus the firm’s chemistry R&D team has grown to 15 professionals who are working with a budget that is expected to triple to $2.1 million this year.

So Who Is It Already??

My #1 pick in this area has raked in a sweet 300% gain in less than a year. Did we strike black god? You bet. The stock is trading at around $48 with we’re looking at growth expectations north of 50% in 2008. Please don’t be put off by the success we’ve had so far—this stock is still cheap and as more and more investors realize its golden potential, they’re going to pay a premium for its shares!

Click here to learn more about this profitable niche in the energy sector and the name of my favorite company that is gushing black gold!

Sign up for Strategic Advantage today, and get all of Jon Markman’s  most recent buy advice on his #1 pick, in his new report, href="/order/?sid=8UT101"target="_blank">What’s New: A Close Look at 4 Companies Breaking New Ground as well as the names of the other oilfield services providers on his list. And you have direct access to every single one of Jon’s current recommendations. Plus, if during your first three months, his recommendations haven’t made you the profits you’re looking for (15%, 25%, 50%, or more — it’s your call), you can cancel, keep everything sent to you, and get a full refund — no questions asked. Even after your first three months, you’re still covered by this money-back guarantee.  If you’re ever unhappy, just let us know, and we’ll send you a full refund on the balance of your subscription. So what have you got to lose? Try Strategic Advantage for three months risk-free!

Realty Income: A REIT With Consistency

The other day I wrote an article discussing several other REITs to add to a core portfolio. The two REITS I chose were American Capital Agency (AGNC) and Realty Income (O). Since I already own a core position in Annaly Capital Management (NLY) I was looking for another opportunity to add one more REIT to this mix.

My research and evaluation has led me to place Realty Income squarely into my core holdings, and to suggest it for your consideration to own as well.

Basic Fundamentals of O

1) PPS as of 11/15/2011: $33.39/share, dividend yield of 5.27% or $1.74/share annually, and an ESS research rating of neutral.

2) A recent quarterly gross margin of 62.06% vs an industry average of 39.02%.

3) Overall margins are among the highest of any REIT in the sector.

4) It met its latest quarterly earnings target of .27/share as reported on 10/27/2011.

Recent Analyst Upgrades (and one negative)

1) EVA Dimensions gave it an outperform with an overweight rating on 11/01.

2) Thomas White International gave it a buy with a most favorable rating on 11/09.

3) Ativo Research gave it a sell with a most unfavorable rating on 11/11.

Ativo research has the lowest accuracy rating by "Starmine" of virtually any independent research firm, a 1 on a scale of 1-100, while EVA has a 54 rating and Thomas White has a 33 rating.

In addition, several of Starmine's highest rated firms; Thomson Reuters, at 98, and Ford Equity, at 88, both gave O a neutral rating on 11/08 and 11/11 respectively.

The Real Story

I have selected Realty Income as a wonderful fit for myself, as well as many other investors, in a core dividend paying portfolio because of its remarkable track record of 497 CONSECUTIVE months of dividend payments, without missing a single beat, a modest 2.9% average yearly dividend growth rate over the past 5 years, as well as an amazing 63 dividend increases since it became listed on the NYSE in 1994.

Yes, the yield is "only" 5.27% which as you know is small in the world of REITs these days, however, its stability trumps that number by a wide margin, and given the fact that I personally already own a high flyer dividend REIT in my core, Annaly Capital Management, Realty Income seems to be a perfect addition.

Equally important to me is the market that O plays in within the world of REITs. It buys properties and writes long term leases (10-20 years) to financially sound retailer chain operations that have passed O's due diligence for lease stability. Annaly, on the other hand, plays in the MBS market as an mREIT, so their business agendas do not crossover whatsoever in that regard.

It also means that they do not face the same headwinds as the other mREITS out there in the MBS arena.

My Opinion

For dividend seeking investors who like consistency, and a lower level of risk, Realty Income could fit squarely into a core portfolio. Do your own research of course, however, I have decided that this stock belongs in MY portfolio, sooner rather than later. It goes ex-dividend on 12/01, payable on 12/15.

Disclosure: I am long NLY, O.

A Smart Grid Stock for Years to Come

With the distraction of the massive health care plan behind them, senior members of the Obama administration are gearing up to help modernize our aging and inefficient power grid. New sources of energy, new power lines and enhanced conservation measures should all help reduce our burden on imported oil while cutting greenhouse gas emissions. But to maximize all of the efforts, the entire system will need to make a leap to the 21st century.

That's where Boston-based EnerNOC (Nasdaq: ENOC) comes in. The company uses its Network Operating Center (NOC) to provide energy management and energy efficiency solutions to assist grid operators and utilities. For example, many utilities must invest in excess capacity to handle unusual demand spikes that may only happen a few times a year. By sharing the load with other utilities and working with large customers to agree to curtail usage at peak times, the utility can save a great deal of money by cutting the need for additional power plants.


The International Energy Agency (IEA) refers to this as "cost avoidance," and estimates that by deploying enhanced grid intelligence, utilities can save nearly $60 billion during the next 20 years. Executives at EnerNoc believe that an investment of $1 million in the company's technology can save anywhere between $60 million and $100 million in construction costs. If a utility sees a demand spike coming, it can shed non-critical loads, deploy back-up power and optimize existing current flow -- a far better solution that building more capacity "just in case."

Nearly 3,000 commercial customers use EnerNOC's Demand Response (DR) system to monitor and adjust real-time energy usage, including AT&T (NYSE: T), General Electric (NYSE: GE) and Pfizer (NYSE: PFE), as well as many universities. Those customers, with greater visibility into their power usage at peak times, can reduce power consumption or deploy their own on-site power sources. EnerNOC signs customers to long-term deals, typically three to 10 years in duration, so revenue growth is unlikely to be bumpy.

EnerNoc doesn't directly benefit from stimulus funds earmarked for grid enhancement. Instead, utilities and large corporate power users have tax incentives to deploy grid intelligence products, and should increasingly turn to companies like EnerNOC. Similar efforts are just beginning in the U.K., prompting EnerNOC to pursue that market as well. The company has also recently acquired a pair of small companies to better target the building efficiency market.

EnerNOC is a young company: it had less than $10 million in revenue in 2006, but sales have increased at least +75% every year since. Sales hit $191 million in 2009 and could reach $260 million in 2010.

For many investors, EnerNOC has been a "show-me" story, as the company was hard-pressed to generate a full-year profits off its fast-rising sales base. (The company generates strong profits every third fiscal quarter from demand management during the peak summer season). The company finally generated positive cash flow in 2009, and is set to generate a modest profit this year (though close to $1.00 a share on a non-GAAP basis). The company has an opportunity to keep boosting sales at a fast pace and keep competitors at bay, so management is likely to keep pouring any earned cash flow right back into the business, which could make GAAP profits in 2011 look uninspiring as well. Investors should focus on the company's widening moat in this burgeoning space instead.

Variable annuities: Buyer beware

(MONEY Magazine) -- Chances are, you've already heard the pitch from an insurance agent or a financial adviser. And if you've been feeling anxious about the stock market (who hasn't?), it probably sounded pretty compelling: "Invest in stocks while protecting yourself from another 2008, with a guaranteed minimum return that provides income for the rest of your life!"

This promise propelled sales of variable annuities to $120 billion in the first nine months of 2011, already the highest yearly since 2007. The annuity itself -- a tax-deferred investment account with an insurance wrapper that provides a death benefit -- is only part of the appeal.

What's heating up the market is an optional feature allowing you to draw a minimum income each year until you die, no matter how poorly the market performs. This add-on, called a living benefit rider, also lets you access your account value if you need more money, and leave what's left to your heirs when you pass on.

Insurers have offered the riders for years, but since the 2008 crash, the combination of a shot at stock gains along with a safety net against losses has proved particularly potent. Today nearly nine of 10 variable annuity (VA) buyers elect some form of living benefit rider, research firm LIMRA reports.

The question is, Do they really know what they're buying? Insurers tweak their offerings constantly, and the promises are harder to untangle at every iteration.

What is an annuity?

"The riders have made a complex product more complex," says John Cronin, securities director for Vermont and head of a national regulatory group on VAs. What may be obscured in the fine print -- of which there is a dizzying amount -- is the fact that the VA-rider combo has been growing more costly and less generous.

The product's detractors in the financial planning community argue that there are cheaper ways to achieve similar results, and MONEY generally agrees.

Still, it's hard not to be tempted by the promise of security, especially in insecure times. So if you feel persuaded by the pitch, make sure you know what you're getting into -- and what you're giving up -- before incorporating a VA and rider into your retirement plan.

The guarantees are getting less rich

Living benefit riders make two key promises: You'll earn a minimum return to build your income, and you can withdraw a set percentage each year when you're ready. Before 2008, insurers were competing to be the most generous on both counts. "It truly was an arms race," says Frank O'Connor, insurance division director at Morningstar.

Is a pension a stand-in for bonds?

After the crash, however, the market value of investors' holdings fell, and the bonds insurers owned began producing less income. Consequently, the insurance companies dramatically scaled back their promises.

"Some were providing overly generous benefits and simply not charging enough for that," says Greg Salsbury, an executive at Jackson National, the third-largest seller of variable annuities. A few companies, namely Genworth (GNW, Fortune 500) and Sun Life (SLF), got out of the game altogether in 2011.

To grasp the effects of shrinking guarantees, you first must understand how the accounts work.

Within the VA, which you can buy into all at once or over a period of years, you choose how your money is invested among a selection of mutual funds. The account balance fluctuates with the market value of your holdings.

Meanwhile, a virtual account -- the "benefit base" -- grows at the minimum return. If the market does well and your real portfolio exceeds the benefit base, the value of the virtual account is stepped up to match. You might let that benefit base build for 10 or so years before drawing down. Once you do start taking income, the preset withdrawal rate is applied to the benefit base.

Insurers used to guarantee minimum annual returns of 6% or more on the benefit base. Today the typical roll-up rate, as it's called, is 5%.

Some insurers will dial back even more once you start drawing income, while others link their rate to a benchmark like the 10-year Treasury yield, causing the "guarantee" to fluctuate. Withdrawal rates have come down too. In late 2006, nearly 70% of insurers guaranteed a flat 5%; now only 21% do, reports Morningstar. Most of the rest switched to a sliding scale that rises depending on the age you start drawing -- say, from 4.5% at 59 to 6.5% at 80-plus. Couples may have to settle for an even lower rate.

What look like minor differences can have a big impact on your income, especially in down markets. If you and your spouse had put $300,000 in a VA with a rider offering a 6% return and 5% withdrawal in late 2000, you'd now be getting at least $26,900 a year. Today's 5% roll-up and 4.5% withdrawal for couples, in contrast, provides just $22,000.

What to watch out for

Too-good-to-be-true guarantees. Anything above the standard roll-up of 5% and withdrawal rate of 5% for singles or 4.5% for couples comes with either a higher cost or specific conditions today, says Tamiko Toland, editor of Annuity Insight. For example, you might get a higher rate now, but no guaranteed growth after 10 years. Be sure to read the fine print.

Higher fees get in the way of growth

Variable annuities are expensive to start with, which is why MONEY has been reluctant to recommend them.

Insurers charge a variety of administrative fees to cover their guarantees as well as hefty sales commissions. (Agents collect about 5% of the investment plus 0.5% a year.)

In addition, mutual funds within a typical VA carry expenses of about 1%. The rider, commonly called a guaranteed lifetime withdrawal benefit (GLWB), duns you too, and more than ever. It now adds 1.12% a year, nearly a third more than in 2009, Morningstar reports. All told, fees skim 3.61% off the annual returns of the average VA with a rider.

Over time those charges severely impede the growth of your account value. After a wild bull market like the 1990s, $300,000 in a mutual fund portfolio of 60% large-cap stocks and 40% intermediate-term bonds --assuming low but not rock-bottom fund fees of 0.75% -- would be worth over $1 million. The same investment in the average VA with a rider would have grown to only $783,000.

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Trading Week Outlook: Feb. 6 - 10

As the market still tries to decide how to trade the U.S. dollar while gauging QE3 odds following the better-than-expected employment report, the week ahead will shift the focus back to the euro as traders ponder the next move by the European Central Bank.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1. CHF- Swiss National Bank Foreign Currency Reserves, Mon., Feb. 6, 3:00 am, ET.

Despite the shake-up in leadership at the Swiss National Bank, the interim chief Thomas Jordan once again made it clear last week that the bank “will enforce the minimum exchange rate of 1.20 CHF per euro with the utmost determination.” The reserves report will shed some light on the amount of firepower at the disposal of the Swiss central bank in case the market decides to test their commitment to support the euro’s floor which was established last September.

2. AUD- Reserve Bank of Australia Interest Rate Announcement, Mon., Feb. 6, 10:30 pm, ET.

In the aftermath of another disappointing jobs report from Australia and the unexpected drop in inflation in Q4 2011, the Reserve Bank of Australia should feel comfortable with another 25 bps rate cut which would bring the benchmark interest rate down to 4.0%. The Australian dollar has taken full advantage of the dovish Fed outlook and the broad U.S. dollar weakness, but if not yet fully priced in, a rate cut which erodes some of the Aussie’s yield advantage, could trigger a long due price correction of the Aussie dollar’s recent gains against the greenback.

3. NZD- New Zealand Employment and Unemployment Rate, the main measures of labor market conditions, Wed., Feb. 8, 4:45 pm, ET.

Just as the Aussie dollar, the Kiwi has staged a nice rally against the U.S. dollar in recent weeks, but it looks a bit stretched. Following the less hawkish Reserve Bank of New Zealand statement and outlook, a weaker-than-expected employment report could offer another reason for the New Zealand central bank not to be in a hurry to hike rates, giving traders a reason to take some NZD profits off the table.

4. CNY- China CPI- Consumer Price Index, the main measure of inflation in the world’s second largest economy, Wed., Feb. 8, 8:30 pm, ET.

Inflationary pressures have headed lower as a result of the Chinese government’s attempts to cool things off and the People’s Bank of China’s rate hikes which have been successful in slowing the economy. The inflation report will be an evidence of that as the consumer price index declines for another month to 4.0% y/y from 4.1% y/y. Lower inflation reduces the odds of further tightening by the Chinese central bank, which could give a bit of a boost to the currencies down under, considering that China is Australia’s largest trading partner and the second-largest trading partner of New Zealand.

5. GBP- U.K. Industrial Production, the main gauge of industrial activity measuring the output of factories, mines and utilities, Thurs., Feb. 9, 4:30 am, ET.

The improvement in the manufacturing index should also be reflected in the U.K. industrial production report as the industrial output recovers from the 0.6% m/m drop in November with an increase by 0.2% m/m in December.

6. GBP- Bank of England Interest Rate Announcement, Thurs., Feb. 9, 7:00 am, ET.

With the current asset purchases program concluding in early February, the Bank of England would be likely to keep the benchmark rate unchanged at the record low 0.5% level, but might announce an expansion of its quantitative easing operations which could be set to resume as early as March. The previous 75 billion increase was considered by some as a "vote of no confidence" in the EU leaders' ability to deal with the debt crisis. It would be interesting to see if the Monetary Policy Committee members continue to share that view. As far as currency impact, it would not be shocking to see some selling pressures starting to build on the GBP on expectations for more quantitative easing ahead of the bank's monetary policy meeting.

7. EUR- European Central Bank Interest Rate Announcement, Thurs., Feb. 9, 7:45 am, ET.

Still focused on stimulating growth and with inflation being a non-issue, the European Central Bank could afford to be even more accommodative. Although less likely at the February meeting, another rate cut (or two) in the near term would not be a surprise, especially if the Euro-zone economic conditions deteriorate further. Despite of the recent optimism rally and the market-wide assault on the USD following the dovish Fed statement, debt crisis woes, coupled with expectations for more rate cuts and further expansion of the ECB balance sheet, should weigh on the EUR.

8. CHF- Swiss CPI- Consumer Price Index, the main measure of inflation preferred by the Swiss National Bank, Fri., Feb. 10, 3:15 am, ET.

Deflation and slow economic growth because of the strong franc are the main issues facing the Swiss economy and the Swiss National Bank which had to resort to extraordinary measures to weaken its currency. With the inflation gauge expected to spend another month deeper into deflation territory at -0.8% y/y in January from -0.7% y/y in December, the odds will remain high that the Swiss National Bank might be forced into doing more to weaken the franc in the near future.

9. USD- U.S. Trade Balance of the difference between imports and exports, Fri., Feb. 10, 8:30 am, ET.

The five-month high in the U.S. trade deficit was one of the weak spots in the U.S. economic data last month and this alarming trend could continue with the trade deficit rising for another month to $48 billion in December from $47.8 billion in November.

10. USD- U.S. Consumer Sentiment, the University of Michigan's monthly survey of 500 households on their financial conditions and outlook of the economy, Fri., Feb. 10, 9:55 am, ET.

After a better reading of 75.0 in January, the preliminary estimate for February is forecast to show the U.S. consumer sentiment index retreating to 74.3. Following the surprisingly dovish Fed and the unexpectedly strong jobs report, the U.S. economic data must continue to demonstrate resilience in order to keep QE3 odds reduced. Otherwise, the U.S. dollar could continue to feel the pressure.

China’s hard landing

NEW YORK (MarketWatch) � Hard landing in China? Judging by the crash of a top-performing letter, it�s already happened.

Cabot�s China and Emerging Markets Report [CCEMR] caught the China boom, one of the great thermals of investing history. It racked up a multi-year record of double-digit gains that exceeded both the 15% compounded that the Hulbert Financial Digest, after three decades of monitoring investment letter performance, regards as the practical sustainable upper limit � and also the consecutive five-year streak of success that HFD thought suggested sustainability. I named it Letter of the Year in 2007. See Dec. 30, 2007 column.

Click to Play Asia Week Ahead: Are China banks' profits growing?

Non-performing loans will be in the spotlight in coming days when investors get hold of financial results in the coming days from the Agricultural Bank of China, China Construction Bank and Bank of China. MarketWatch's Rex Crum has a look at the week ahead in Asia.

Specialized letters are like the canaries that coal miners used to take down with them because they were sensitive to poisonous gas. I kept a careful eye on CCCEMR because of my frequently-voiced, typically too-early contention that no-one really knows what�s going on in China. ( See Sept. 1, 2005 column.) And in the last two or three years, it became apparent that CCEMR was in increasing trouble. See Oct. 17, 2011 column.

Over the year to date through February, CCEMR is up 5.5% by Hulbert Financial Digest count vs. 9.37% for the dividend-reinvested Wilshire 5000 Total Stock Market Index XX:W5000FLT .

But over the past 12 months, CCEMR is down negative 24.14% vs. 4.38%. It was on my Terrible Ten list of lowest-ranked performers both last year and in 2010. See Dec. 29, 2011 column.

The impact of CCEMR�s crash has been so great that, although the letter breaks more or less even with the market over the past five years (up an annualized 1.08% vs. 1.88% annualized for the total return Wilshire 5000), over the past ten years its brilliant performance has been wiped out (up an annualized 3.02% vs. 5.08% annualized for the Wilshire.

/quotes/zigman/1859015 000001 2,260.88, -32.00, -1.40%

It�s particularly chastening because CCEMR editor Paul Goodwin had a disciplined approach, judging overall market conditions with a moving average system, which he calls his �China-Timer�, and selecting stocks on rigorously fundamental grounds.

He also made repeated efforts to diversify out of China. For example, CCEMR�s model portfolio currently holds India�s Tata Motors Ltd. TTM �and Argentina�s MercadoLibre Inc. MELI .

But, Goodwin said ruefully, his system kept pushing him back in.

Goodwin does not incline to sweeping statements about overall market and macroeconomic conditions. In his most recent issue, he merely notes that his timing system is currently bullish, although consolidating. He�s 60% invested.

However, Sinoskepticism is now so common that Goodwin does feel obliged to respond. Apparently, his subscribers have been asking him about Michael Schuman�s �Why China Will have an Economic Crisis,� which appeared in the February 27 issue of Time Magazine. See article.

Goodwin summarizes:

Schuman�s argument is that China�s brand of �state capitalism,� while it has produced remarkable results, is pursuing the strategy that built Japan and Korea into Asian powerhouses, and both of those countries experienced major collapses. Government-directed investment can indeed produce results, he says, but this will create industries that are bigger than can be justified by market demand. This will eventually lead to business failures, bad loans and a collapse in the banking sector.

�Schuman makes a powerful argument, and it�s one that we have seen stated elsewhere as �either China will collapse, or 200 years of economic wisdom will be defeated.��

Goodwin�s answer:

�Basically, so what? If a growth investor decides to avoid the market because of what might happen, he will never be in it. Growth investors make money by assuming risk. It�s that simple.�

His conclusion:

�Personally, I trust the Cabot China-Timer to tell us when China turns sour. If China melts down, we get out and move to cash, just as we did last year. There is no crisis that can ruin you if you are willing (and disciplined enough) to end your exposure.�

Well, maybe � but the fact is that CCEMR has nevertheless suffered serious damage.

However, that was then and this is now. CCEMR began suffering when Sinoskepticism was practically unknown. Maybe it will rebound now that Sinoskepticism is rampant.

In its most recent issue, CCEMR sold Arcos Dorados Holdings Inc. ARCO and Zhongpin Inc.HOGS .