What to Expect from Ingersoll-Rand Plc

Ingersoll-Rand Plc (NYSE: IR  ) is expected to report Q3 earnings on Oct. 19. Here's what Wall Street wants to see:

The 10-second takeaway
Comparing the upcoming quarter to the prior-year quarter, average analyst estimates predict Ingersoll-Rand Plc's revenues will contract -7.1% and EPS will increase 21.0%.

The average estimate for revenue is $3.65 billion. On the bottom line, the average EPS estimate is $0.98.

Revenue details
Last quarter, Ingersoll-Rand Plc chalked up revenue of $3.82 billion. GAAP reported sales were 6.6% lower than the prior-year quarter's $4.09 billion.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
Last quarter, non-GAAP EPS came in at $1.15. GAAP EPS of $1.16 for Q2 were 346% higher than the prior-year quarter's $0.26 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Recent performance
For the preceding quarter, gross margin was 30.9%, 90 basis points better than the prior-year quarter. Operating margin was 12.6%, 30 basis points better than the prior-year quarter. Net margin was 9.6%, 730 basis points better than the prior-year quarter.

Looking ahead

The full year's average estimate for revenue is $14.12 billion. The average EPS estimate is $3.21.

Investor sentiment
The stock has a five-star rating (out of five) at Motley Fool CAPS, with 975 members out of 1,005 rating the stock outperform, and 30 members rating it underperform. Among 305 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 300 give Ingersoll-Rand Plc a green thumbs-up, and five give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on Ingersoll-Rand Plc is outperform, with an average price target of $45.95.

  • Add Ingersoll-Rand Plc to My Watchlist.

Momentum Ideas: 17 Cash-Rich Companies Hitting New Highs

If you're a momentum investor looking for potentially undervalued names, the following list might offer an interesting starting point for your own analysis.

All the companies mentioned below have hit new 52-week highs in recent sessions. Interestingly, these companies also have high trailing twelve month levered free cash flows (expressed as a percentage of market cap).

Levered free cash flow is the free cash flow available to the company after paying interest on outstanding debt. It is the cash flow available for operating expenses, which is what drives future returns.

Consider their cash holdings, do you consider these companies undervalued? Full details below.

Levered FCF sourced from Yahoo Finance, all other data sourced from Finviz.

click for expanded image

List sorted by levered FCF as a percentage of market cap.

1. AmSurg Corp. (AMSG): Hospitals Industry. Market cap of $742.01M. Levered FCF is 18.53% of market cap (TTM levered FCF at $137.52M). The stock is a short squeeze candidate, with a short float at 6.3% (equivalent to 13.33 days of average volume). The stock has had a good month, gaining 11.69%.

2. Photronics Inc. (PLAB): Semiconductor Industry. Market cap of $530.72M. Levered FCF is 15.08% of market cap (TTM levered FCF at $80.04M). This is a risky stock that is significantly more volatile than the overall market (beta = 3.17). It is exhibiting strong upside momentum--currently trading 18.73% above its SMA20, 41.1% above its SMA50, and 74.64% above its SMA200.

3. Deluxe Corp. (DLX): Business Services Industry. Market cap of $1.36B. Levered FCF is 13.46% of market cap (TTM levered FCF at $182.96M). This stock is significantly more volatile than the overall market (beta = 2.05). It is also a short squeeze candidate, with a short float at 5.27% (equivalent to 6.11 days of average volume), and the stock has gained 6.83% over the last week.

4. KBR, Inc. (KBR): Technical Services Industry. Market cap of $5.37B. Levered FCF is 9.89% of market cap (TTM levered FCF at $530.75M). It is exhibiting strong upside momentum--currently trading 6.72% above its SMA20, 11.88% above its SMA50, and 37.55% above its SMA200. The stock has also gained 11.43% over the last week.

5. ConocoPhillips (COP): Major Integrated Oil & Gas Industry. Market cap of $113.73B. Levered FCF is 9.29% of market cap (TTM levered FCF at $10.57B). The stock has had a good month, gaining 11.92%.

6. Teradyne Inc. (TER): Semiconductor Equipment & Materials Industry. Market cap of $3.46B. Levered FCF is 8.12% of market cap (TTM levered FCF at $280.97M). Might be undervalued at current levels, with a PEG ratio at 0.72, and P/FCF ratio at 7.05. The stock has had a couple of great days, gaining 5.01% over the last week.

7. Hercules Offshore, Inc. (HERO): Oil & Gas Drilling & Exploration Industry. Market cap of $671.46M. Levered FCF is 7.83% of market cap (TTM levered FCF at $52.60M). The stock has also gained 38.3% over the last week.

8. Dresser-Rand Group Inc. (DRC): Diversified Machinery Industry. Market cap of $4.06B. Levered FCF is 7.39% of market cap (TTM levered FCF at $299.84M). The stock has had a couple of great days, gaining 9.28% over the last week.

9. Brady Corp. (BRC): Technical Services Industry. Market cap of $1.90B. Levered FCF is 6.17% of market cap (TTM levered FCF at $117.07M). The stock has gained 26.67% over the last year.

10. PSS World Medical Inc. (PSSI): Medical Equipment Wholesale Industry. Market cap of $1.44B. Levered FCF is 6.02% of market cap (TTM levered FCF at $86.85M). The stock has a relatively low correlation to the market (beta = 0.7), which may be appealing to risk-averse investors. The stock is also a short squeeze candidate, with a short float at 12.32% (equivalent to 12.71 days of average volume).

11. Genesco Inc. (GCO): Apparel Stores Industry. Market cap of $965.11M. Levered FCF is 5.77% of market cap (TTM levered FCF at $55.65M). Short float at 12.72% (equivalent to 9.65 days of average volume) indicates the stock is a short squeeze candidate. The stock has gained 47.99% over the last year.

12. Hershey Co. (HSY): Confectioners Industry. Market cap of $12.05B. Levered FCF is 5.76% of market cap (TTM levered FCF at $694.01M). It has a relatively low correlation to the market (beta = 0.3), which may be appealing to risk-averse investors. Also, the stock has had a good month, gaining 13.26%.

13. MAXIMUS, Inc. (MMS): Business Services Industry. Market cap of $1.30B. Levered FCF is 5.48% of market cap (TTM levered FCF at $71.02M). Risk-averse investors may appreciate that the stock has a relatively low correlation to the market (beta = 0.73). The stock has had a good month, gaining 10.68%.

14. The Cooper Companies Inc. (COO): Medical Instruments & Supplies Industry. Market cap of $2.96B. Levered FCF is 5.31% of market cap (TTM levered FCF at $156.99M). The stock is a short squeeze candidate, with a short float at 8.89% (equivalent to 8.04 days of average volume).

15. Marathon Oil Corporation (MRO): Oil & Gas Refining & Marketing Industry. Market cap of $37.38B. Levered FCF is 5.24% of market cap (TTM levered FCF at $1.96B). The stock has been exhibiting strong upside momentum--currently trading 7.69% above its SMA20, 19.66% above its SMA50, and 47.05% above its SMA200. The stock has gained 9.41% over the last week.

16. Novellus Systems, Inc. (NVLS): Semiconductor Equipment & Materials Industry. Market cap of $3.76B. Levered FCF is 5.11% of market cap (TTM levered FCF at $192.10M). It has been seeing strong upside momentum--currently trading 5.13% above its SMA20, 14.72% above its SMA50, and 40.91% above its SMA200. The stock has had a couple of great days, gaining 7.39% over the last week.

17. Assisted Living Concepts Inc. (ALC): Long-Term Care Facilities Industry. Market cap of $430.40M. Levered FCF is 5.09% of market cap (TTM levered FCF at $21.91M). The stock has gained 11.9% over the last week.

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

Top Stocks For 2012-1-5-20

DrStockPick.com Stock Report!

Friday August 14, 2009


Stocks Upgraded Today

CompanyTickerBrokerage FirmRatings ChangePrice Target
Advance AutoAAPMorgan JosephHold � Buy$52
Phillips-Van HeusenPVHJP MorganNeutral � Overweight$27 � $37
E-House ChinaEJOppenheimerPerform � Outperform$27
Avery DennisonAVYJP MorganNeutral � Overweight$25 � $33
Columbia SportswearCOLMBarclays CapitalEqual Weight � Overweight$38 � $45
Tenet HealthcareTHCRobert W. BairdNeutral � Outperform$5 � $6
Minntech CorpMNTXRoth CapitalHold � Buy$1 � $3

Stocks Downgraded Today

CompanyTickerBrokerage FirmRatings ChangePrice Target
CardicaCRDCBrean MurrayBuy � Hold
Barnes & NobleBKSCredit SuisseNeutral � Underperform
Equity ResEQRUBSNeutral � Sell
Taubman CentersTCOUBSNeutral � Sell
Weingarten RealtyWRIUBSNeutral � Sell
UBS AGUBSUBSNeutral � Sell
AmgenAMGNCitigroupBuy � Hold$71 � $68
JA SolarJASOBarclays CapitalOverweight � Equal Weight$5 � $4

Bright Morning For Teen Apparel: ARO, ZUMZ ANF Rise

Not a bad performance for a snowy February.

With 28 companies reporting, about 70% of chain retail outlets have beaten estimates for February’s sales for stores open a year or more, counting the change year over year.

The average comp- or same-store increase was 4%, beating the average estimate of Thomson Reuters of a 2.9% increase. And that’s a big improvement from the 4.7% decline, on average, in February of last year.

The group with the biggest surprise were the teen apparel retailers, which had a 7.3% jump, with Abercrombie (ANF) posting a 5% rise versus and expected 6.9% decline; American Eagle Outfitters (AEO) had a 6% rise versus 2% expected; Aeropostale (ARO) saw a 7% rise versus 4% expected; and Zumiez (ZUMZ), as I mentioned last night, had a whopping 11% increase versus 1.2% expected.

The stocks are certainly showing their strength, with Zumiez rising $3.67, or 22%, at $19.68; Aeropostale up $1.93, or 6%, at $37.14; Abercrombie & Fitch up $3.41, or 9.4%, at $39.65; American Eagle Outfitters, however, is off 48 cents, or 2.8%, at $16.98.

U.S. manufacturing growth picks up in April

MARKETWATCH FRONT PAGE

U.S. manufacturers continue their strong stretch of growth in April, as the See full story.

The VIX in presidential election years

After a spike in volatility prior to the 2008 presidential election, the idea became popular that election years were more volatile than others. Does the data prove that to be true? See full story.

Bears of May have come to play

With a year�s worth of gains already logged in the first quarter and technical deterioration across the board it looks like the bears are poised to take control, writes Michael Kahn. See full story.

3 ways to buy into a German recovery

Continuing problems in Europe have kept investors cautious, but just because there are problems in one part of the continent, doesn�t mean there aren�t good investments in another. See full story.

Sell Europe, buy Japan

Now that May is here, we�re hearing a lot in the investment wilds about cashing out. It�s not that simple, writes Jim Lowell. See full story.

MARKETWATCH COMMENTARY

Instead of acknowledging that banks have become a part of government, we keep pretending they are private institutions, writes David Weidner. See full story.

MARKETWATCH PERSONAL FINANCE

Home prices in a majority of the markets covered in Zillow�s Home Value Forecast are set to bottom this year � if they haven�t already, according to a Zillow report released on Wednesday. See full story.

TD Ameritrade to Launch API

TD Ameritrade Institutional announced Jan. 6 that the firm would launch an application programming interface (API) to allow advisors to integrate their back office technology with TD Ameritrade's Veo trading and account management platform.

“Open access will allow advisors to exchange data with Veo from various systems, such as their CRM program, and initiate tasks that will automatically pull client data and aggregate information from other platforms ultimately streamlining common processes such as opening new accounts and quarterly reporting,” Jon Patullo, director of technology product management for TD Ameritrade Institutional, said in a press release.

Over a dozen technology providers have been involved in the development of the API, according to the company. Initial integration will include accessing client balances, positions and account alerts. Trading capabilities will follow in a later phase of integration.

"Releasing the API in December was the first and an instrumental step in opening up new opportunities for technology providers to integrate with TD Ameritrade. By opening up our API, we believe we can help speed the rate of innovation across the industry. We are currently collaborating with leading technology providers and will be announcing new integrated functionality starting in February," Patullo said by e-mail.

“Taking an open approach to technology integration supports our commitment to help advisors run more efficient and profitable practices by allowing them to use the software and tools that meet the unique needs of their firms,” Tom Bradley, president of TD Ameritrade Institutional, said in a press release. “We are excited to lead this industry-changing effort to create a flexible advisor platform that will be able to integrate nearly any technology system available to advisors.”

Forget the Big Banks: 5 Regional Banks With High Yields

Banks are among the most hated institutions in the world, seen by many as the epitome of corporate greed. Investors have no love to spare for banks, either. Financials were the worst-performing sector in the S&P 500 in 2011, with losses of more than 20%, compared with about 2% for the overall market. But the sector is diverse, from big money centers such as Bank of America (NYSE: BAC) to smaller regional banks such as Huntington Bancshares (Nasdaq: HBAN). There's a big difference between these two groups, and it's not just in their size. While both groups are federally chartered, they operate under different legislation. As a result, most regional banks focus on the traditional banking activities of savings deposits and mortgages and other loans. They devote little, if any, resources to securitizing mortgage loans or hedging with derivatives, as the big banks do. Most regional banks also aren't exposed to risky euro-zone debt or faced with the massive mortgage lawsuits of their bigger brethren. With little exposure to subprime mortgages, regional banks largely dodged the debt crisis of 2008. These banks, as represented by the SPDR S&P Regional Banking ETF (NYSE: KRE), lost 18% in 2008. In contrast, their big-cap brethren, represented by the SPDR S&P Bank ETF (NYSE: KBE), swooned with a loss of more than 47%. Regional banks didn't fare as well as their large-cap counterparts in 2009, however, amid concerns that the weak real estate market would affect their residential and commercial real-estate loans. As of March 2010, 54% of the assets of smaller banks were related to real estate, compared with 43% of the 25 largest U.S. banks, according to Bruce Tuckman, author of Fixed Income Securities. But now they are back on the radar screen and starting to attract investor attention. Regional banks gained close to 15% in the past three months, compared with less than 5% for large-cap bank stocks.

  What's driving their recent outperformance? With fewer issues on their plate than the larger money centers, regional banks are benefitting from stronger industry fundamentals. While revenue is being pressured by near record-low interest rates on their loans, loan volume is picking up. U.S. Federal Reserve data for the third quarter of this 2011 showed that business loans rose 2.4% from the second quarter to just over $1 trillion. Consumer credit-card loans also rose slightly (0.7%) from the second quarter. Credit quality is also improving. Careful credit checks are resulting in fewer delinquent loans, and banks don't need to set aside as much money to cover bad loans, so costs are lower and earnings are higher. Consider Huntington Bancshares, one of the nation's largest regional banks. A 5.3% increase in consumer loans in the third quarter helped increase total loans and leases by 4%. The quality of the loan book also improved, as problem loans were just 0.92% of average loans, down from 1.98% a year-ago. As a result, loan-loss provisions dropped from $119 million to $44 million, and net income rose 42%. It's the same story with BB&T (NYSE: BBT) and Fifth Third (Nasdaq: FITB), two other large regionals. While these stocks have been strong performers this year, they carry yields of less than 3%. After a bit of digging, I found five market-beating regional bank stocks with yields of around 5%. Here they are...   These stocks offer a rich yield, even after delivering double-digit returns during the past year. Moreover, with dividend payout ratios of 80% of earnings or less, these companies can afford to keep paying high yields. All of them kept their dividend intact, without skipping a beat, during the financial crisis of 2008. Fundamentally, the companies look healthy. All are consistently profitable and maintain a loan-to-deposit ratio of 100% or less, allowing them to internally generate the funds needed for loan growth. Priced at less than 17 times earnings and less than 2.5 times their tangible book value (which excludes goodwill), the shares offer good value, and some offer exceptional value at today's prices. Risks to Consider: Remember, these ideas are merely a good starting point for further research. Some of these securities may make better investments than others. You should evaluate the fundamental characteristics of each stock in this table and assess how well it matches your portfolio needs. Tips>> All of these stocks look worthy of further analysis, but Commercial National Financial (Nasdaq: CNAF) sports some of the most impressive metrics. It has delivered the best annual total returns of the group and still enjoys yield near 5%. It's also the fastest dividend grower in the group with a five-year average rate of 3.3%.

The 1 Retail Stock Most Investors Are Missing

The following video is part of today's MarketFoolery podcast, in which host Chris Hill, advisor Andy Cross, and senior analyst Jason Moser discuss the latest business news. With November's retail numbers coming in weaker than expected, the guys analyze Best Buy's latest quarter as the company challenges Amazon and Wal-Mart, and identify a retailer many investors are ignoring.

Please enable Javascript to view this video.

Interested in another retail stock most investors are missing? The Motley Fool's brand new report, "The Motley Fool's Top Stock for 2012," highlights a Costco-like company that is revolutionizing commerce in Latin America. You can get instant access to the name of this company by clicking here � it's free.

Looking for Profits with Valspar Covered Calls

With the economy recovering at a slower pace than predicted and people not able to buy new homes, homeowners have turned instead to fixing up their current dwellings. One of the easiest and most popular ways to spruce up a drab home is to slap a fresh coat of paint on it. Valspar (NYSE:VAL) is a company that can take advantage of the demand for paint and give traders and investors a chance to profit from the company�s growth.

VAL makes paints, coatings and polymers for the do-it-yourself and industrial markets. Even though the company�s sales gains have slowed a tad over the last few quarters, first-quarter sales were up more than 5% from 2011. The company remains fundamentally strong in terms of revenue growth, increasing net income and growth in earnings per share. Many analysts have the stock rated as a �buy.�

The stock just recently set its all-time high just below $50 back in March. Since then the stock has traded in a range between about $48 and $50. For the last three months, VAL has slowly trended higher by about $10, which makes it an excellent candidate for a covered call. A nice slow trending stock can be ideal and if the $48 support area can hold, VAL may be able to continue its trend higher again.

The Trade Idea � Covered Call�

Buy 100 shares of VAL at $49.46 and simultaneously sell the April 50 call for a credit of $1.10 or better. The overall debit for the trade is $4,836, with $4,946 spent on the shares and $110 collected from selling the call.

The maximum potential profit is $164, if the stock advances from $49.46 to $50. Profit peaks if VAL finishes at or above the 50 strike at May expiration. The maximum loss, in the unlikely event that VAL drops all the way to zero by the time the options expire, is $4,836. Breakeven for this strategy is $48.36. The trade will be profitable at expiration as long as VAL is trading north of this level.

Trade Management

The best-possible outcome and maximum profit potential for a covered call is for the stock to rise up to the sold call�s strike price at expiration, which in this case is $50. The shares move up the maximum amount without being called away and gains are enjoyed on the stock as well as the worthless call option.

In the event VAL goes on a bull run and moves past the $50 area with no signs of slowing down, then the call that was previously sold (May 50) can be bought back and a higher strike can be sold against the position to avoid assignment.

This allows the trader to keep the hares in his portfolio and also gives the position a chance to increase its return. With more than 40 days to go until May expiration, this is a possible scenario if the stock breaks above the $50 resistance level.

The breakeven point of this covered call is at $48.36, which is just above the support area around $48. Over the last several weeks, VAL has rebounded successfully from this support zone the few times is has been tested.

If the stock drops in price more than was anticipated, it probably makes sense to close the entire trade (stock and short call) to possibly avoid additional losses.

As of this writing, John Kmiecik does not own any shares mentioned here.�

Checking an Important Metric at HB Fuller

Here at The Motley Fool, I've long cautioned investors to keep a close eye on inventory levels. It's a part of my standard diligence when searching for the market's best stocks. I think a quarterly checkup can help you spot potential problems. For many companies, products that sit on the shelves too long can become big trouble. Stale inventory may be sold for lower prices, hurting profitability. In extreme cases, it may be written off completely and sent to the shredder.

Basic guidelines
In this series, I examine inventory using a simple rule of thumb: Inventory increases ought to roughly parallel revenue increases. If inventory bloats more quickly than sales grow, this might be a sign that expected sales haven't materialized. Is the current inventory situation at HB Fuller (NYSE: FUL  ) out of line? To figure that out, start by comparing the company's inventory growth to sales growth. How is HB Fuller doing by this quick checkup? At first glance, pretty well. Trailing-12-month revenue increased 14.9%, and inventory increased 11.8%. Over the sequential quarterly period, the trend looks healthy. Revenue grew 12.6%, and inventory dropped 21.4%.

Advanced inventory
I don't stop my checkup there, because the type of inventory can matter even more than the overall quantity. There's even one type of inventory bulge we sometimes like to see. You can check for it by examining the quarterly filings to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a single category.)

A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it "positive inventory divergence."

On the other hand, if we see a big increase in finished goods, that often means product isn't moving as well as expected, and it's time to hunker down with the filings and conference calls to find out why.

What's going on with the inventory at HB Fuller? I chart the details below for both quarterly and 12-month periods.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FQ = fiscal quarter.

Let's dig into the inventory specifics. On a trailing-12-month basis, finished goods inventory was the fastest-growing segment, up 13.2%. On a sequential-quarter basis, finished goods inventory was also the fastest-growing segment, up -13.6%. With inventory segments moving opposite directions for the periods we're considering, this one is a toss-up.

Foolish bottom line
When you're doing your research, remember that aggregate numbers such as inventory balances often mask situations that are more complex than they appear. Even the detailed numbers don't give us the final word. When in doubt, listen to the conference call, or contact investor relations. What at first looks like a problem may actually signal a stock that will provide the market's best returns. And what might look hunky-dory at first glance could actually be warning you to cut your losses before the rest of the Street wises up.

I run these quick inventory checks every quarter. To stay on top of inventory and other tell-tale metrics at your favorite companies, add them to your free watchlist, and we'll deliver our latest coverage right to your inbox.

  • Add HB Fuller �to My Watchlist.

Top Stocks For 2012-1-10-5

 

HAUPPAUGE, NY–(CRWENEWSWIRE) — Globecomm Systems Inc. (NASDAQ:GCOM), a leading global provider of communications solutions and services, announced that the Company has been awarded multiple contracts from US Government Agencies and prime contractors for its Auto Explorer� family of products valued at $3.5 million.

Under the terms set forth in the contracts, Globecomm will supply multiple Auto Explorer� Terminals including its recently announced Auto Explorer� 1.2 meter Lightweight Transport (LT), its WGS-certified Auto Explorer� 1.2 meter multi-band (X/Ku/Ka) terminal, and its Auto Explorer� 0.77M Ku band system. Deliveries will ship within the next 3 months.

Michael Plourde, Vice President Government Programs for Globecomm, said: “These orders continue to confirm customer demand of our entire family of Auto Explorer� products. A key to our success has been our ability to provide flexibility to our customers in terms of performance capabilities, modem technologies, frequency utilization, and transportability-tailored packaging.”

About Globecomm Systems

Globecomm Systems Inc., or Globecomm, is a leading global provider of satellite-based managed network solutions. Employing our expertise in emerging communication technologies we are able to offer a comprehensive suite of system integration, system products, and network services enabling a complete end-to-end solution for our customers. We believe our integrated approach of in-house design and engineering expertise combined with a world-class global network and our 24 by 7 network operating centers provides us a unique competitive advantage. We are now taking this value proposition to selective vertical markets, including government, wireless, media, enterprise, and maritime. As a network solution provider we leverage our global network to provide customers managed access services to the United States Internet backbone, video content, the public switched telephone network or their corporate headquarters, or government offices. We currently have customers for which we are providing such services in the United States, Europe, South America, Africa, the Middle East, and Asia.

Based in Hauppauge, New York, Globecomm Systems also maintains offices in Maryland, New Jersey, Virginia, the Netherlands, South Africa, Hong Kong, Germany, Singapore, the United Arab Emirates and Afghanistan.

This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management’s current expectations and observations. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to certain risks, uncertainties and assumptions that are difficult to predict. Our forward-looking statements are based on the information currently available to us and speak only as of the date of this press release. Over time, our actual results, performance or achievements may differ from those expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our security holders.

We have identified some of the important factors that could cause future events to differ from our current expectations and they are described in our most recent Annual Report on Form 10-K and most recent Quarterly Report of Form 10-Q, including without limitation under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other documents that we may file with the SEC, all of which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this press release.

Source: Globecomm Systems Inc.

Contact:

Globecomm Investor Relations:
Matthew Byron, 631-457-1301
Senior Vice President, Corporate Office
ir@globecommsystems.com
or
Globecomm Public Relations:
pr@globecommsystems.com

 

 

THIS IS NOT A RECOMMENDATION TO BUY OR SELL ANY SECURITY!

Bloomberg: Citi Beefing Up Prop Trading; Stiffer Derivatives Rules Coming?

Nice piece by Bradley Keoun of Bloomberg today on how Citigroup (C) is planning to increase trading limits and add capital in its unit that trades stocks with the banks’ own money, also known as “proprietary trading,” which is at odds with the so-called Volcker Rule included in Senator Chris Dodd’s (Dem., CT) proposed financial overhaul legislation, introduced yesterday. Keoun as talking mostly with anonymous sources.

The prop trading group produces about $100 million a year in revenue, Keoun reports. As one source points out, Why should CEO Vikram Pandit not proceed with an expansion of the unit when it’s as yet unclear whether Dodd’s bill will pass or what the shape of it should be.

In related news, Bloomberg’s Matthew Leising writes that Morgan Stanley analyst Betsy Graseck expects Senators Jack Reed (Dem., Rhode Island) and�Senator Judd Gregg (Rep., New Hampshire) are proposing stiffer rules against banks’ trading in the over-the-counter derivatives market. Dodd’s bill, as Leising notes, excluded that language yesterday.

As Leising notes, however, definitions of “major swap participant” is still unclear in both Dodd’s bill and the House banking reform passed last fall.

Coinstar Shares Popped: 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 Redbox video rental parent Coinstar (Nasdaq: CSTR  ) climbed as high as 10% on Monday after JPMorgan analyst Paul Coster upgraded the stock from neutral to overweight.

So what: Along with the upgrade, Coster reiterated his price target of $50 per share, representing a nice 26% premium to Friday's close. However, he also made sure that investors view the call as a "6-month long trade," as opposed to a long-term, buy-and-hold recommendation.�

Now what: "We believe the DVD kiosk rental opportunity will be saturated by late 2012," Coster wrote in a note to clients. "Furthermore, we believe the DVD (and broader optical disk) category has already entered a long-term decline (analogous with peak-to-trough decline of VHS and CD categories). ..." So while pouncing on a November pullback might be tempting, increasing pressure from digital gorillas like Amazon (Nasdaq: AMZN  ) and Netflix (Nasdaq: NFLX  ) make it an easy pass for conservative investors. As Warren Buffett says, "If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes."

Corning: Jefferies Downgrades; Sees “Supply Chain Correction”

Corning (GLW) shares are trading lower this morning after Jefferies analyst George Notter cut his rating on the stock to Hold from Buy, while reducing his target on the stock to $18.25, from $24. Notter writes in a research note that after conversations with industry contacts this week, he has concerns about a “supply chain correction.”

Notter reports that “based on anecdotes and conversations with industry contacts, we now believe there’s too much inventory out there at the TV manufacturer and panel supplier levels.” He notes that the company on its most recent earnings call said that inventory levels in the supply chain has picked up to 18.5 weeks from 16 weeks; but the analyst ads that “the weight of the evidence shows a more significant inventory issue than Corning is suggesting.” He points out that LCD panel prices fell 7%-10% in early August, “much more” than he had expected.

While GLW is statistically cheap at 7.8x estimated 2011 EPS, he notes that the stock could “languish a bit more” given how the stock has performed in previous period where there were supply chain issues. He contends that “the shares probably can’t work for awhile as investors work through ongoing data points about a potential supply chain correction in coming months.”

Notter cut his 2010 EPS estimate to $2.08 from $2.15, on lower sales and margin assumptions for both the company’s wholly owned glass business and for its joint venture with Samsung. “We recognize that
current supply chain issues are shorter term in nature,” he writes. “Moreover, our larger thesis on Corning still hasn’t changed � based on our prior analysis of global TV penetration rates, we believe that the size and trajectory of LCD TV market will ultimately be larger than investors expect. Also, we still think our model is still on the conservative side regarding potential Gorilla Glass sales in 2011.”

But for now, he suggests stepping away from the stock.

GLW this morning is down 28 cents, or 1.8%, to $15.75.

Has Pan American Silver Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Pan American Silver (Nasdaq: PAAS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Pan American Silver.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 27.3% Pass
1-Year Revenue Growth > 12% 35.3% Pass
Margins Gross Margin > 35% 57.5% Pass
Net Margin > 15% 41.2% Pass
Balance Sheet Debt to Equity < 50% 2.0% Pass
Current Ratio > 1.3 4.22 Pass
Opportunities Return on Equity > 15% 22.6% Pass
Valuation Normalized P/E < 20 7.76 Pass
Dividends Current Yield > 2% 0.7% Fail
5-Year Dividend Growth > 10% NM NM
Total Score 8 out of 9

Source: S&P Capital IQ. NM = not meaningful; Pan American started paying a dividend in 2010. Total score = number of passes.

Since we looked at Pan American Silver last year, the stock has picked up a couple points. A huge drop in price, continuing revenue growth, and better returns on equity have made the silver miner look a lot more attractive.

Gold gets most of the attention among precious metals, but silver has made an equally impressive bull run over the past decade. Pan American has taken maximum advantage of those favorable conditions, with huge increases in revenue and profits for the miner last year. Although it has to share some of those profits with Silver Wheaton (NYSE: SLW  ) , which has a silver-streaming agreement with Pan American, the miner has made out well in the silver boom.

Yet Pan American isn't standing still. It's buying fellow miner Minefinders (AMEX: MFN  ) for about $1.5 billion, which will substantially boost its silver production and add some gold to the mix. Moreover, Pan American has had an interesting relationship with Fortuna Silver (NYSE: FSM  ) , as the companies have made claims around each other's properties as recognition of their joint abilities to find lucrative opportunities.

One challenge Pan American faces is that an Argentine provincial government ban on open-pit mining has stymied its Navidad mine project. Given Navidad's massive estimated reserves, any favorable resolution to the issue could immediately vault the stock higher.

To keep improving its score, Pan American needs only to pay a more meaningful dividend. Rival Hecla (NYSE: HL  ) linked its payout to silver prices recently, and such a move could help earn Pan American those last two points. In the meantime, I'm making a positive CAPScall on Pan American and think that it could reach perfection in the near future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to sift out the best investments.

Precious metals investors need to be aware of another opportunity that could have even more potential than Pan American Silver. Read the Motley Fool's latest special report on gold to discover the tiny gold stock digging up massive profits. It's free but only available for a limited time.

Click here to add Pan American Silver to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

How Low Can This Patent War Go?

Last week, Apple�? (Nasdaq: AAPL  ) got its clock cleaned by Swiss Federal Railways. The release of the iPhone 5 came with a lot of changes, including the design of the phone's timepiece. With striking similarity to the Swiss Federal Railways' station clocks, the company contacted Apple to let them know that the design was created (and trademarked) by the rail company in 1944.

??Subsequently, Apple announced last Friday that it will pay a licensing fee to the rail company for the continued use of its design. The exact details will remain confidential, but this most recent patent piddle points to a larger trend in the technology sector.

With proponents and critics on both sides, the fundamental question remains: At what point to do patents stop supporting innovation and start preventing it instead? Fool contributor Justin Loiseau reports from Geneva, Switzerland.

Patent wars aren't going away anytime soon -- even for Apple. This tech company has delivered market-smashing returns for those lucky enough to invest in the company. However, maintaing that torrid pace will only get more difficult. If you're looking for a recommendation on how to play Apple along with continuing updates and guidance on the company whenever news breaks, we�ve created a brand new report that details when to buy and sell Apple. To get started, just click here now.

Leveraged ETF to Play the Fed Sell-off

ProShares UltraShort Basic Materials Fund�(NYSE:SMN) — This leveraged ETF seeks daily investment results (minus fees and expenses) of twice (200%) the inverse of the Dow Jones U.S. Basic Materials Index.

SMN had a major breakout when stocks plunged yesterday in response to the Fed�s new quantitative easing plan, Operation Twist. If stocks continue to fall and the major indices plunge through support, this inverse fund could rise to new highs. The trading target is $28. Use stop-loss orders to protect against a large loss.

Leveraged ETFs are not for everyone. The buyer should be a seasoned trader with a record of success trading highly leveraged investments

  • See Sam Collins� Daily Market Outlook: How Low Will the Dow Go?
  • See Serge Berger�s Daily Market Outlook: The Charts Have Spoken� And It Doesn�t Sound Good

Yahoo: Wedbush Launches At Underperform; $13.25 Target

Wedbush analyst Lou Kerner this morning launched coverage of Yahoo (YHOO) with an Underperform rating and $13.25 price target.

“While we�re impressed with the strategy outlined by [CEO] Carol Bartz, Yahoo is a massive ship to turn around, and competitors are moving forward at a rapid clip,” Kerner writes in a research note. “With page views decreasing and uncertainty surrounding the timing and impact of the transition of the search business to Microsoft, we believe that Yahoo is now an execution story, with no catalysts on the near-term horizon.”

Kerner notes that display advertising is “emerging as the largest part of Yahoo,” but he notes that monthly visitor levels have been decreasing on a year-over-year basis in 11 of its 16 major content and communications properties. “While Yahoo is well positioned to leverage ‘science, art, and scale’ to drive higher pricing, without an ability to organically grow traffic, we believe that Yahoo will be limited in its ability to create shareholder value.”

The analyst contends that the rapid growth of Facebook and other new content sites poses a serious challenge for the company. He says Yahoo is going to have to combine acquisitions with innovation, – “not a Yahoo strength of late” – to maintain the scale needed to drive pricing and revenue growth. “Yahoo�s increasing focus on innovation is to be applauded, but results, not strategies, are needed to drive shares higher,” he writes.

YHOO is down 8 cents, to $13.77.

Eli Lilly Rises as Cancer Drug Shows Positive Results

Another week, another promising drug result from Eli Lilly (LLY). The market’s hottest pharmaceutical company is rising again today after announcing that in a Phase III trial its cancer drug ramucirumab “met its primary endpoint of improved overall survival and also showed prolonged progression-free survival.”

“We are pleased with this data of ramucirumab used as monotherapy in a second-line setting in this difficult-to-treat disease. It reinforces our confidence in the ramucirumab development program, in which we currently have six Phase III studies ongoing in five tumor types � breast, colorectal, gastric, hepatocellular and lung cancer,” said Richard Gaynor, M.D., vice president, product development and medical affairs for Lilly Oncology.

The Street continues to warm to Lilly’s prospects, following promising results from the company’s experimental Alzheimer’s drug solanezumab.

Lilly shares were up 4.5% in midday trading. The company’s shares are trading near four-year highs.

How to Invest Like Mitt Romney and Bain Capital

[Editor's note: This article was originally published on Sept. 5, 2012.]

The rich are different -- they invest in better companies than the average investor.

But exactly how do they do this?

Well, rather than buying shares on the stock exchange, savvy big hitters write a very large check to a very special kind of firm. To be eligible to invest like this, federal law stipulates that an investor needs to have at least $200,000 a year in annual income ($300,000 for a couple) and more than $1 million in net worth, excluding a primary residence.

That is a very high bar. Those rules block 94% of investors.

And in reality, the entry point is much higher. A million dollars isn't what it used to be. I don't say that to be glib: The law that created these rules was passed in 1933, when $1 million was the equivalent of $17.2 million in today's terms. When this law was passed, a $200,000 annual salary was enough to keep a Rockefeller -- or Mae West -- very happy.

While the law hasn't been updated, the marketplace has kept pace with the times. Today, the unofficial minimum investment with these special firms is typically $15 million to $20 million. 

The "relationship" only increases from there...

The official name for these highly-exclusive firms is "private equity." 

That term probably sounds familiar. It's the area of the business world where Gov. Mitt Romney, the Republican nominee for president, made his fortune. Mr. Romney earned his paycheck by helping companies expand, gain efficiency and increase profitability. As the value of these companies grew under his leadership, so did Romney's own net worth.  

A private-equity firm has more than a pile of investor cash to offer. It also provides executive mentoring and business advice -- often from some of the biggest names in corporate America. The smartest, most capable finance geniuses and managerial wizards go to work for companies like Bain Capital, which over the years has invested in companies as diverse as the office products store Staples and fast-food giant Burger King.

As these businesses grow, private-equity backers get phenomenally rich. In some cases, the private equity firm is more than happy to collect rich dividends from the company's profitable operations. In other cases, the private equity firm sells its stake in the company, sometimes to another corporation, sometimes to investors. These can be, and often are, billion-dollar payoffs.   

Readers of my Game-Changing Stocks newsletter pay me to read the fine print, and I love doing it. Let me share with you something I've shared with them. It's something I have seen in dozens of multi-hundred-page prospectuses of any recent initial public stock offering. After the description of the business, a discussion of the risks of investing in the shares and tons of financial charts, there is always a list of the major shareholders. There is always -- and I mean always -- a private equity company that is raking in an enormous pile of cash. It's not uncommon at all for a $20 million investment to turn into a ten-figure sum in just a few years.

I like private equity because a lot of private-equity firms do the exact same thing I try to do with Game-Changing Stocks. They try to find "the next big thing," and they seek to invest in it before anyone else realizes that they've found the Golden Ticket.

Here's the good news. Private equity doesn't have to be our competitor. It can be our partner. In fact, you and I can put private-equity and its consultants to work for us the same way the billionaires do.

That's because there is a way around the rules that bar ordinary investors like you and me from investing in private-equity deals.

Right now, there are 4,647 stocks on U.S. exchanges with a market capitalization of more than $50 million. Of those, only about two dozen -- less than 1% -- are a special type of entity known as a business development company, or "BDC." 

These companies, which Congress laid out the rules for in 1980, operate in the same manner as private-equity firms: They invest in and advise private companies, typically smaller "middle market" ones, which are generally defined as companies with more than $100 million but less than $1 billion in annual revenue. 

In addition to a BDC's potential for a huge payout -- when they sell a company -- BDCs also pay huge dividends. It's not unusual to see double-digit yields from these companies. 

Here's a list of the Top-10 highest yielding BDCs on the market...

[Note: You can see a complete list of all the BDCs on the market if you're a subscriber to my Game-Changing Stocks advisory]

As a matter of law, BDCs have to have a code of ethics. They're disallowed from certain transactions, they have to maintain diversity in their portfolio and, perhaps best of all, they are limited in the amount of debt they can carry. 

Add it all up, and BDCs offer a surprisingly safe way to invest in high-risk areas on the cutting edge. 

Unlike corporations, which only pay dividends when they want to, BDCs are legally obligated to return cash to shareholders. The reason is because, like a partnership or a trust, the entity itself is not subject to income taxes. Instead, income is passed directly along to shareholders and is then taxed at their ordinary income rate rather than the dividend rate. And not only do almost all BDCs pay a dividend, but many pay monthly rather than quarterly.

> The bottom line is that strong BDCs can deliver a one-two punch: Capital appreciation from harnessing the power of The Next Big Thing and a strong, steady income stream.

The question I'm sure you're dying to ask, then, is this: Just how do I pick the best BDC? 

SM: Reward Points: Getting a Better Deal

As a cheapskate, I live for the bargain find. But sometimes the real deal-seeking comes after you've made your purchase. As I've learned, a smart shopper is also a smart rewards "optimizer."

That's a jargon-y term that retail pros use. But it speaks to a simple reality: Most of us earn lots and lots of miles and points in loyalty programs connected to our preferred airlines, hotels, credit cards and the like. But only a few of us think long and hard about how to get the most bang for our buck with what we accumulate. If anything, a fair number of Americans are inclined to forget about their miles and points altogether -- to the tune of $16 billion's worth of unclaimed rewards annually.

Needless to say, I'm not the forgetful type when it comes to my money -- or my miles. But with some programs, the reward choices are almost overwhelming: Do I get that fancy-schmancy flat-screen television to watch the big game? Or do I get a gift card for an electronics retailer, so I can shop for the same television in the store? Or do I just get a travel package to attend the game in person -- flight, car rental, ticket and all (it's certainly possible -- consider Citibank's ThankYou Rewards "My Wish Fulfilled" option).

"It's about variety," says Bryan Pearson, the chief executive of LoyaltyOne, a consulting firm that advises companies on rewards strategies.

But with more choices comes that quest to optimize. For years, I've used the penny-a-point benchmark when cashing in miles or points -- meaning I've tried to turn 10,000 points into a $100 gift card. But that's not always been easy: When I started accumulating points through American Express for its Membership Rewards program -- I signed up for a card because of a points bonus, in fact -- I realized that I had my work cut out for me.

I knew I didn't want cash (or the near equivalent -- an AmEx gift card), since that's usually among the worst deals with rewards: In this case, 10,000 points would be equivalent to $50 in an AmEx gift card (a half penny-a-point ratio). But I didn't want the store gift cards, either -- the ratio on most of them was still slightly below that desired penny-a-point benchmark. I was just about to give up when I noticed that there was a special offer for Lands' End gift cards -- 8,500 points scored a $100 gift card, a ratio equivalent to slightly more than a penny per point. Now we're talking.

There was just one problem: I don't really shop at Lands' End -- certainly not enough to justify exchanging 59,500 points (yes, I had that many) for $700 in gift cards. So I tweaked the strategy slightly: I ordered the gift cards, then sold them through one of the popular card-exchange companies (I usually find such companies through Gift Card Granny, a site whose mission is to lead shoppers "through the world of discount gift cards.") Granted, the companies never give you the full face value of the card (and they also make you deal with shipping). But remember: I got my cards at a discount, so it all evened out -- my 59,500 points eventually resulted in about a $600 payday, or twice what I would have gotten if I had gone with the AmEx gift card option in the first place. (An AmEx spokesperson conceded that while the AmEx cards may not be the best "value," they are an option for consumers seeking more flexibility than a store-branded gift card offers.)

But as smug as I was about my optimizing success, I soon learned the hard truth: There's always someone out-optimizing you. The cult of miles and points junkies -- the sort of folks you find at FlyerTalk.com and NerdWallet.com -- is such that the obvious or even semi-obvious deals are just the beginning. Get creative and you can be converting at a ratio of 2 pennies a point. Or 3 pennies. Or well, you get the point.

I asked one such guru of optimizing, Brian Kelly of ThePointsGuy.com, what he'd have done in my situation. He responded in an instant: He'd have converted the points to an airline miles program for which AmEx offers the occasional add-on bonus (meaning 10,000 points might equal 12,000 miles). And he'd have made sure it was an airline that offers some good mile-redemption deals as well. Kelly pointed out that a short-hop ticket -- say, from New York to Toronto -- can be garnered through some carriers for as little as 9,000 miles. Given that such a ticket can easily run $225, that meant my points could have yielded $1,350-plus payday (provided I'd be doing that much flying between New York and Toronto).

Mr. Points Guy's best-ever redemption? It turned out to be a first-class ticket from New York to London -- worth at least $5,000 -- that he scored for the equivalent of 75,000 points. That's a ratio of more than 6 cents a point. Oh, and to top it off: He was sitting behind Madonna on his outbound flight. Kinda hard to out-optimize that.

The real lesson, however, is not about scoring plane seats next to Madge. It's about not taking those miles and points for granted. Every reward-seeker has to weigh how much time they want to put into the effort. As a true cheapskate -- or, ahem, "optimizer" -- I can't wait for my next redemption challenge.

J&J Plagued by Product Recalls

Johnson & Johnson (JNJ) took another hit recently with the company announcing yet another product recall. This time round, the company said that it is voluntarily recalling two hip replacement systems - the ASR XL Acetabular System and DePuy ASR Hip Resurfacing System.

The company decided to issue the product recall as it was observed that several patients using the products required a second hip replacement procedure or a revision surgery.

Moreover, new data, which is yet to be published, indicate that the five-year revision rate for people using the ASR XL Resurfacing System was 12%. The five-year revision rate for the DePuy ASR Hip Acetabular System was higher at 13%. The data was generated by the National Joint Registry (NJR) of England and Wales.

Although Johnson & Johnson is yet to update its guidance for 2010 based on the product recall, we do not expect the recall to have a major impact on the company’s financials. The company had decided in 2009 itself that it would discontinue the ASR System due to a lower demand. Moreover, Johnson & Johnson has been focusing on developing the next-generation of hip replacement products.

We are currently more concerned about the impact the latest product recall will have on investor confidence in the company. Johnson & Johnson has been in the news lately for all the wrong reasons. The hip replacement product recall is the latest in a series of recalls conducted over the past few quarters.

Johnson & Johnson’s consumer healthcare segment took a hit in the first half of 2010 with the company recalling medicines, including Benadryl, Tylenol (including children’s Tylenol) and Motrin. Consumer segment sales declined 5.4% in the second quarter to $3.6 billion with OTC pharmaceutical and nutritional sales declining 13.4%.

Johnson & Johnson also received a warning letter from the US Food and Drug Administration (FDA) regarding the marketing of its Corail Hip System for unapproved uses. The company also recalled contact lenses from several countries in Asia and Europe.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson, which is supported by a Zacks #3 Rank (short-term Hold rating). We believe Johnson & Johnson’s diversified business model, lack of cyclicality and strong financial position are helping the company pave its way through tough situations.

6 Utilities Plays For An Overbought Market

In the first part of the article, we looked into five stocks that were making headlines for a variety of reasons. In this article, we are going to look at the concerns surrounding energy and specifically natural gas. The backdrop of these concerns surrounds some of the following macro events that we are about to get into.

The sixth week of trading officially ended Friday with some disappointment. Unlike the prior weeks since the New Year, this week, many of the broader indices lost ground instead of gaining. This reality has caused many investors to wonder if the so called "January effect" that had extended in February is about to come to an end.

Friday brought some profit taking as several of the indices ended lower. It appears that investors seemed undecided which course to take and how to digest the news that the U.S. economy grew more slowly than expected in the last three months, as well as the never ending concerns surrounding Greece. But I think it was the downgrade of nearly three dozen Italian banks that really caused the "slight pause" in the market, as investors started to appreciate the potential magnitude of this event. This is even though it seemed earlier in the week that progress was being made toward an agreement.

As disappointing as all of this seems, along with the fact that U.S. seems to lack some autonomy of its own, I think investors should take solace and continue to feel optimism in the fact that our economy continues to grow and our equity markets are very much alive. The good news is also that the Fed got in on the action and assured investors that short term interest rates will be kept as close to zero as possible at least until the end of 2014. This may or may not be enough to sustain the current momentum, but it certainly can't hurt.

As disappointing as it is to see the indices down on Friday, it is not a surprise, as I think profit taking at this juncture is indeed the right thing to do, considering that the S&P500 is up 7 percent for the year. So a pullback has to be just around the corner. I'm sure that I am not the first to say this, but the market does indeed appear overbought, and there are several candidates showing such signs that have made some headlines this week - particularly in the utilities sector.

Which stocks looks good which ones don't

We have approached one of the sectors that by and large have not fared particularly well in the market so far this year relative to the others. So it is hard to say with any degree of certainty whether or not this is a good sign, bad sign or merely "table-setting" for what lies ahead. But I suspect for one reason or another, investors have decided to take money out of utilities and placed into those that are riskier yet more profitable.

However, despite the lagging performance of the sector, there are several stocks that have posted significant gains early on in the year. For investors, it would be wise to lock in these gains now if the likelihood exists that market sentiment has indeed begun rotating out. For example, in the water utilities there are names such as Connecticut Water Service (CTWS) that has gained 15 percent on the year thus far. It pays a decent dividend at 3%, which makes it pretty safe; however, it will likely be weighed down if the entire sector makes a turn for the worse. The stock currently trades at $31.21 and is only 5 percent away from its 52-week high. Now may be a time to lock in some gains.

Another name that I have been looking at within gas is Clean Energy Fuels Corp. (CLNE) - for similar reasons to Connecticut Water. The stock has surged on the year with a gain of 30 percent and it is at the cusp of its 52-week high. The balance sheet on this company is not great, but it is improving. According to its website:

The leading provider of natural gas fuel for transportation in North America, Clean Energy is the smart decision for vehicle fleets demanding the most reliable connection to CNG and LNG. With an integrated offering of best-in-market services, we have the flexibility to adapt to your specific fueling needs - from constructing, equipping and maintaining fueling stations to converting vehicles to securing the financing.

There is quite a bit to like here. However, I think for investors it would be more prudent to like and realize a 30 percent YTD gain and wait for the pullback.

Stocks to consider

We are going to reverse course a little bit and discuss stocks within the sector that have not fared as well and yet may see some increase buying since they may have likely hit their bottom.

CenterPoint Energy (CNP) has seen better days. It appears that the stock has not seen any green arrows at any point during the year though the broader market has produced nothing but gains. There is reason to suspect that this trend may change as the stock has climbed 4 percent since reaching a recent low of $18.07 at the end of January. While posting solid earnings relative to its peers, the stock also offers a handsome dividend at 4.3 percent yield.

FirstEnergy Corporation (FE) also deserves some consideration. Aside from the fact that it has traded relatively flat for the past several months, it offers an excellent dividend at 5.1% yield. With a P/E of 17 it might be considered relatively expensive, however, the stock is right at its 50-day moving average and has shown to be pretty resilient of late. Relative to its peers, its underlying fundamentals presents a great opportunity for value investors willing to be patient.

Inergy, L.P. (NRGY) is one stock in this sector that didn't even benefit from the strength this sector had last year. It has been steadily grinding lower since topping out early in 2011 and it has been following a steady pattern of establishing a resistance level before ultimately breaking down. After holding near $24 for two months, it is now starting to set new lows, again continuing the trend.

Public Service Enterprise Group (PEG) is another utility experiencing similar movement as those mentioned above. The company recently fell under some important points of resistance at $31 after having traded flat for a considerable amount of time. But its stock has been slowly building a base that suggests that the stock may begin to move upward. As with the other firms above, PEG pays a respectable dividend of 4.5% and trades at a decent P/E of 10. The stock does present some value at $30, but investors should be patient and realize that it may take the rest of the year for it to regain its previous high of $35.

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

SM: The $4,000 Bulletproof Polo Shirt

The Aim:

Also See
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  • 10 Things Presidential Candidates Won't Say

For the man who lives dangerously -- but still wants to look devil-may-care -- Colombian designer Miguel Caballero offers a polo shirt with a little something extra up its sleeve: It's bulletproof. The 4-pound shirt's antiballistic panels promise to shield the wearer from a range of weaponry, though a version designed to withstand an Uzi costs a bit more than the one made to fend off a 9mm (prices range from $3,000 to $4,000 a shirt). The company, which calls itself the "Armani of bulletproof clothing," says its clothes are proven to work. In fact, most of its employees have been shot at while wearing the garments -- it's part of the orientation process. Don't worry. A spokesperson assures us there have been no work-related casualties.

The Reality:

No doubt even those in the highest-risk professions appreciate casual Fridays, but experts say Caballero wearers are paying dearly for the sartorial flair: Other companies sell vests offering the same level of protection for less than a third of the price. Plus, we can't help but wonder, who wants to spend weekends kicking back in a 4-pound T-shirt? (Caballero says bodyguards, heads of state and other VIPs are its primary market.) Still, even though the company's website declares, "Yes, it's bulletproof," there is a fine distinction here. The National Institute of Justice, which rates body-armor products, actually approves it for protection against some firearms -- but not heavy-duty guns like rifles or AK-47s. A company general manager says, "Bullet-resistant is more accurate."

Photograph by Jorge Vinueza / Archivolation / Redux for SmartMoney

Gilead’s Giant Gamble in Buying Pharmasset

Gilead Sciences (NASDAQ:GILD) shareholders better hope the Foster City, Calif., company�s planned acquisition of Pharmasset (NASDAQ:VRUS) pays off — and in a big way.

After all, Gilead lost more than 10% of its market value Monday after announcing that it was buying Pharmasset for $11 billion. Gilead’s $137-a-share bid represents nearly a 90% premium over Pharmasset�s closing price last Friday. Princeton, N.J.,- based Pharmasset is trading at about $134 today.

Some industry observers think Gilead is overpaying. “Pharmasset was an attractive company,” noted the online site 24/7 Wall St, “but this one seems like Gilead is spending above and beyond a normal amount here to close this deal.” Not surprisingly, Gilead begs to differ, citing the opportunity to �change the treatment paradigm� for patients with infected with hepatitis C, said CEO John C. Martin in a company news release.

Martin was referring to Pharmasset�s hepatitis C treatments that have to potential to do away with the need for interferon and marshal in a new standard of care for a disease that affects an estimated 180 million people worldwide. Pharmasset is studying the first oral treatment for hepatitis C, which would obviate the need for the injections of interferon that accompany current therapy, thus eliminating nasty side effects.

Eyeing a potential 2014 approval, Pharmasset has its oral therapy in two late-stage studies, with a third to begin in the second half of 2012. If the oral therapy does make it to market, look for it to take a huge chunk out of the sales of�Invicek from Vertex Pharmaceuticals (NASDAQ:VRTX). An improved treatment,�Invicek has gobbled up a big share of the market since being approved in the second quarter of 2011. Third-quarter sales of Invicek were $419 million, but that could change dramatically with the introduction of an interferon-free method.

Canaccord Genuity life sciences analyst George Farmer said Monday that an interferon-free competitor to Incivek would blast Vertex’s revenue, according to Fierce Health Care. “We model for a steep decline of Invicek sales from $3.7 billion in 2014 to $500 million in 2015, as a consequence of the first interferon-free regimens expected to hit the market,” he noted. “We anticipate significant threats to Incivek market share from competitive drugs under development in all-oral interferon-sparing regimens. Current innovation leaves Incivek well behind and without a role in future FDA approved all-oral regimens, in our view.”

Vertex investors don�t appear to be panicking, however, as company shares are down about the same as the overall market.

Gilead�s acquisition of Pharmasset has evidently sparked investor speculation that other hepatitis C developers may be targets. Inhibitex (NASDAQ:INHX) is up nearly 20% while Achillion Pharmaceuticals (NASDAQ:ACHN) shares have gained more than 2%. Gilead, Inhibitex, Achillion and a fourth company, Idenix (NASDAQ:IDIX), were all cited as potential takeover targets in a Nov. 8 article on InvestoPlace) (see �Hepatitis C Drug Progress Puts Several Companies on Acquisition Watch�).

Perhaps what�s most surprising about the Pharmasset acquisition is that the suitor isn�t a member of Big Pharma. Given the multibillion market for treating hepatitis C, we speculated the large drugmakers might be thinking about following in the footsteps of Swiss giant Roche (PINK:RHHBY), which last month agreed to buy Anadys Pharmaceuticals (NASDAQ:ANDS) for $230 million in cash.

Guess Gilead just beat Big Pharma to the punch. Investors can only hope the company doesn�t absorb too many blows as a result of its hefty investment.

As of this writing, Barry Cohen in long GILD.

VALUE ADDED: Should You Invest in Akre Focus?

Truth be told, there are only a handful of great fund managers. Chuck Akre, in my view, is one of them. The question is whether his best years are behind him.

SEE ALSO: Our 5 Favorite Mutual Fund Managers

His past returns aren't just good, they're stunning. From the start of 1997 through August 2009, FBR Focus (symbol FBRVX), which Akre ran over that period, returned an annualized 12.3%, putting it in the top 1% among funds that invest mainly in fast-growing midsize companies. By comparison, Standard & Poor's 500-stock index returned an annualized 4.4%, and the average midsize growth fund gained an annualized 4.9%. (Focus invests in companies of any market capitalization, but because Morningstar doesn't have an all-cap benchmark, we compare Focus to an average of mid-cap funds.)

After falling out with FBR, Akre left the firm in late August 2009. On September 1 of that year, he launched Akre Focus (AKREX). Its returns have been mixed. From its launch through February 6, the fund, a member of the Kiplinger 25, returned 15.4% annualized, precisely the same as the S&P 500. That's hardly top of the charts.

But Akre took time putting cash to work, and cash flooded in. If you exclude the fund's record during its first four months -- a period during which the S&P surged and beat Akre Focus by a whopping 10.9 percentage points -- the record looks good. From the start of 2010 through February 6, the fund returned an annualized 17.1%, compared with 11.6% for the S&P.

Akre uses a combination of growth and value tools to evaluate stocks. He insists on 20% or higher return on equity (a measure of profitability). Companies that profitable tend to have sustainable competitive advantages. He also looks for firms with skilled executives "who treat shareholders as partners" and know how to reinvest corporate profits intelligently. Finally, he only buys when a stock is relatively cheap -- no more than 15 times free cash flow (earnings plus depreciation and other non-cash charges).

Those tough standards lead him to invest in only about two dozen stocks, and more than 60% of the fund's assets are in his top ten holdings.

Akre is a patient investor. On average, he holds a stock for more than five years. "We rarely sell something because the valuation is too great," he says. "The really good companies are too hard to find." He sells because something goes wrong with the business model or the managers.

Akre is a bottom-up stock picker, but he's paying more attention to the big picture following the 2007-09 bear market, during which FBR Focus tumbled 51.0% (the S&P 500 lost 55.3% during the rout).

Believing that U.S. consumers will be constrained by large amounts of debt for years to come, he has loaded his fund with discount retailers. He has 10% of assets in Ross Stores (ROST) and 9% in Dollar Tree (DLTR).

Where is the competitive advantage in this pair? "They have extraordinary marketing and operational skills," Akre says. "Just look at their year-over-year growth in book value [assets minus liabilities]."

Akre's other 10% holding is MasterCard (MA). Along with Visa, Discover and American Express, Master Card "owns and controls the electronic rails that run between retailers and banks." Continuing migration to electronic payments is boosting growth, and net profit margins are north of 40%. Despite my praise, the fund has a couple of big question marks -- above and beyond its 2009 returns. For starters, a lot of people Akre's age, 69, are already retired. But so far he shows no signs of slowing down. "The children are gone, and I love what I'm doing," he says.

The other unknown: When Akre left FBR, the firm made his three former analysts the co-managers of his old fund. Akre then hired three new analysts. It's impossible for an outsider to know how much of the previous fund's success may have been due to his analysts' work, nor how much his current analysts contribute.

Akre Focus's annual expense ratio is 1.45%. If you can, buy the institutional share class (AKRIX), which costs 1.20%. Many online brokerages let you invest in this share class for substantially less than the advertised $250,000 minimum. You just have to pay a small transaction fee.

The fund's assets are still small, at about $700 million. But they're growing rapidly.

My hunch: I think Akre still has his magic. I might buy the fund. But I won't pretend it's an easy call.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Why General Electric Is a Top Dow Stock

In today's edition, consumer goods editor/analyst Austin Smith looks at General Electric (NYSE: GE  ) . The massive conglomerate has a lot going for it right now. A $4.5 billion dividend gift from GE Capital could cause a huge increase in quarterly dividends or a repurchasing of shares at a very reasonable price, and GE stands to benefit from a swelling of the global middle class and the fact that 25% of the world is still without electricity. Most importantly, its responsible management navigated the financial crisis well, making tough decisions that benefited the company for the long term.

For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy.�If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, we're offering comprehensive coverage for investors in�a premium report on General Electric, in which our industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year.�To get started, click here now.�Or, if you'd rather take a look at a high-growth company outside this still-soft sector, check out our special free report, "The Motley Fool's Top Stock for 2012,"�which features a company our chief investment�officer�uncovered that's revolutionizing commerce in Latin America.

Novellus Systems Shares Surged: 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 Novellus Systems (Nasdaq: NVLS  ) are surging today, up by as much as 22%, after it announced it is being acquired by Lam Research (Nasdaq: LRCX  ) .

So what: Lam is acquiring Novellus in an all-stock deal valued near $3.3 billion where Novellus shareholders will receive 1.125 shares of Lam for each Novellus share held. The deal represents a 28% premium over yesterday's close for Novellus.

Now what: The combined company expects to realize roughly $100 million in cost synergies on an annualized basis by the fourth quarter of 2013, and Lam also announced a $1.6 billion stock repurchase program. Lam expects the deal to be accretive to non-GAAP earnings within a year of closing. Lam's leadership in etch and single-wafer cleaning equipment will combine well with Novellus' thin-film deposition and surface preparation technologies, and the combined company hopes to lead the industry's critical technology transitions.

Top Stocks For 4/14/2012-17

Sonus Networks, Inc. (Nasdaq:SONS) announced results for the fourth quarter and full year ended December 31, 2010. Revenue for the fourth quarter of 2010 was $83.0 million, compared to $42.7 million in the third quarter of 2010 and $68.7 million for the fourth quarter of 2009. The Company’s net income on a GAAP basis for the fourth quarter of 2010 was $11.4 million, or $0.04 per diluted share, compared to a net loss of $22.3 million, or $0.08 per share, for the third quarter of 2010, and net income of $10.3 million, or $0.04 per diluted share, for the fourth quarter of 2009.

Sonus Networks, Inc. provides voice, video, and data infrastructure solutions for wireline and wireless telephone service providers.

Access to affordable healthcare in the United States is an entitlement, a perquisite or a fantasy, depending on a seemingly arbitrary matrix of factors. Government insurance programs are available for the elderly, the permanently disabled, people with failing kidneys, the impoverished and children from low-income families. But how poor one has to be to qualify varies from state to state and from year to year. Employees at most large companies and many small ones can take advantage of group insurance plans negotiated by their employers. But millions of people who work in low-paying service, retail or contracting jobs have to seek individual insurance policies, which may be unaffordable or unavailable because of their medical histories. Others obtain insurance with deductibles so high or coverage limits so low that one bad accident or illness could bankrupt them.

How much health insurance will set you back depends on your age, the status of your health (how strong or sick you are), where in the country you live, your income, and your job status.

NATIONAL HEALTH PARTNERS, INC. (NHPR.OB), a national healthcare membership organization, creates, markets, and sells membership programs to underserved markets in the healthcare industry in the United States. Its programs provide an alternative to individuals who seek to reduce their healthcare costs not covered by insurance, or who are unable to obtain healthcare insurance due to their medical history, age, or occupation.

The company, through its CARExpress membership programs, offers CARExpress health discount programs and CARExpress Plus membership programs. National Health Partners CARExpress health discount programs cover various aspects of healthcare, including physicians, hospitals, ancillary services, dentists, prescription drugs, vision care, hearing aids, chiropractic services, alternative care, 24-hour nurseline, medical supplies, and equipment, as well as long-term care facilities, which include skilled nursing facilities, assisted living facilities, respite care, and home health care. These programs include comprehensive care, supplemental care, preferred, dental and vision care, prescription and vision care, and tiered pharmacy discount programs.

National Health Partners CARExpress Plus membership programs offer CARExpress Plus Platinum, CARExpress Plus Gold, and CARExpress Plus Silver programs that provide members point of service discount on their healthcare expenses at the time of service. It markets its membership programs directly to individual consumers through direct sales force, television, radio, newspapers, magazines, and the Internet, as well as through Web site at carexpresshealth.com; and indirectly through brokers and agents, small businesses and trade associations, unions and associations, and marketing companies.

Cardiovascular disease is the main cause of death due to smoking.

Hardening of the arteries is a process that develops over years, when cholesterol and other fats deposit in the arteries, leaving them narrow, blocked or rigid. When the arteries narrow (atherosclerosis), blood clots are likely to form.

Smoking accelerates the hardening and narrowing process in your arteries: it starts earlier and blood clots are two to four times more likely.

Smokefree Innotec, Inc. (SFIO.PK) declared through its President and CEO Thomas Schroepfer, that �With some minor fine tuning, our shopping cart is now fully operational giving our customers the opportunity to purchase the first of our products being offered: Smokers Option, in both Menthol and Cinnamon. The web site itself is undergoing extensive redesign, to include complete product description located in easy to access click through portals. Beginning with Smokers Option presently available, additional products expected to be offered soon include �smokeless REAL e-cigarettes� (pronounced �Re-Al�) with an inventory of redesigned starter kits scheduled for delivery before the end of March. Marking a price reduction from $79 to under $18, the starter kits have been redesigned with our new technology to include the electronic device (�Zig�) and an initial supply of 10 filters, a compact charging unit and power supply, all designed to fit inside a package the size of a cigarette box.�

Smokefree Innotec, Inc. is in the business of designing, developing, manufacturing and marketing hi-tech, nicotine and non-nicotine cigarette-like delivery devices which are completely smoke and vapor-free and tobacco-free. Smokefree Innotec�s products are designed to protect the non-smoker from second hand smoke and all its effects while providing the smoker a way to enjoy a smoke-free cigarette anywhere, including places where smoking tobacco or similar substances is prohibited. Further, our products will allow the smoker to enjoy smoking either nicotine or flavored non-nicotine cigarettes while not having to worry about the offensive dangers and ill effects of regular cigarette smoking. However Smokefree Innotec products are not intended for any prevention or therapeutic treatment of any disease.

About Smokefree Innotec, Inc: www.smokefree-innotec.com

Cambium Learning Group, Inc. (Nasdaq:ABCD) announced offering of $175 million aggregate principal amount of 9.75% senior secured notes due 2017 (the “Notes”). The Company also entered into its previously announced new $40 million asset-based revolving credit facility. The Company used a portion of the net proceeds from the offering to repay in full outstanding indebtedness under its existing secured credit facility and senior unsecured notes and pay related fees and expenses and intends to use the remaining net proceeds for general corporate purposes.

Cambium Learning Group, Inc. provides research-based education solutions for students in the United States. Its Voyager segment provides various reading programs.

Dot Hill Systems Corp. (Nasdaq:HILL) announced that David Zimmer, vice president of worldwide channel sales and marketing, has been named a Channel Chief by Everything Channel’s CRN. Channel Chiefs are leaders in creating effective channel programs for solution providers. They consistently defend, promote and execute effective channel partner programs and strategies.

Dot Hill Systems Corp. provides entry-level and midrange storage systems and enterprise server software for organizations requiring networked storage and data management solutions in open systems architecture.

We Still Think Avon Has Room To Run, Even After Recent Buyout Rumors

As part of our process, we perform a rigorous discounted cash-flow methodology that dives into the true intrinsic worth of companies. In Avon Products' (AVP) case, we think the firm is fairly valued at $25 per share, significantly higher than where it is currently trading.

For some background, we think a comprehensive analysis of a firm's discounted cash-flow valuation, relative valuation versus industry peers, as well as an assessment of technical and momentum indicators is the best way to identify the most attractive stocks at the best time to buy. This process culminates in what we call our Valuentum Buying Index (click here for an in-depth, narrated presentation on our methodology), which ranks stocks on a scale from 1 to 10, with 10 being the best.

If a company is undervalued both on a DCF and on a relative valuation basis and is showing improvement in technical and momentum indicators, it scores high on our scale. Avon Products posts a VBI score of 7 on our scale, reflecting our 'fairly valued' DCF assessment of the company, its attractive relative valuation versus peers, and bullish technicals. Avon Products' has one of the highest VBI score among its peer group and not surprisingly it is also one of the few companies with an attractive relative valuation rating. Companies in this peer group include: Estee Lauder (EL), Coach (COH), Nike (NKE), and VF Corp (VFC).

To show why our VBI rating should be on your radar for companies in your portfolio, we showcase the performance of the metric below:

(click to enlarge)

Our Report on Avon Products

Our report on Avon Products and hundreds of other companies can be found here.

click to enlarge images

Investment Considerations

Investment Highlights

Avon Products earns a ValueCreation™ rating of EXCELLENT, the highest possible mark on our scale. The firm has been generating economic value for shareholders for the past few years, a track record we view very positively. Return on invested capital (excluding goodwill) has averaged 41.5% during the past three years.

The firm is trading at attractive valuation multiples relative to peers, but our DCF process indicates a less compelling opportunity. We'd wait for a clearer signal on valuation before jumping into the firm' shares.

Avon Products' cash flow generation and financial leverage are at decent levels, in our opinion. The firm's free cash flow margin and debt-to-EBITDA metrics are about what we'd expect from an average firm in our coverage universe.

The firm's share price performance has trailed that of the market during the past quarter. However, it is trading within our fair value estimate range, so we don't view such activity as alarming.

The firm sports a very nice dividend yield of 4.8%. We expect the firm to pay out about 60% of next year's earnings to shareholders as dividends. We continue to evaluate Avon for addition to the market-beating portfolio of our Dividend Growth Newsletter.

Economic Profit Analysis

The best measure of a firm's ability to create value for shareholders is expressed by comparing its return on invested capital (ROIC) with its weighted average cost of capital (WACC). The gap or difference between ROIC and WACC is called the firm's economic profit spread. Avon Products' 3-year historical return on invested capital (without goodwill) is 41.5%, which is above the estimate of its cost of capital of 8.9%. As such, we assign the firm a ValueCreation™ rating of EXCELLENT. In the chart below, we show the probable path of ROIC in the years ahead based on the estimated volatility of key drivers behind the measure. The solid grey line reflects the most likely outcome, in our opinion, and represents the scenario that results in our fair value estimate.

Cash Flow Analysis

Firms that generate a free cash flow margin (free cash flow divided by total revenue) above 5% are usually considered cash cows. Avon Products' free cash flow margin has averaged about 3.8% during the past 3 years. As such, we think the firm's cash flow generation is relatively MEDIUM. The free cash flow measure shown above is derived
by taking cash flow from operations less capital expenditures and differs from enterprise free cash flow (FCFF), which we use in deriving our fair value estimate for the company. For more information on the differences between these two measures, please visit our website at Valuentum.com here. At Avon Products, cash flow from operations decreased about 16% from levels registered two years ago, while capital expenditures fell about 7% over the same time period.

Valuation Analysis

Our discounted cash flow model indicates that Avon Products' shares are worth between $19 and $31 each. The margin of safety around our fair value estimate is driven by the firm's MEDIUM ValueRisk™ rating, which is derived from the historical volatility of key valuation drivers. The estimated fair value of $25 per share represents a price-to-earnings (P/E) ratio of about 20.7 times last year's earnings and an implied EV/EBITDA multiple of about 9.5 times last year's EBITDA. Our model reflects a compound annual revenue growth rate of 1.2% during the next five years, a pace that is lower than the firm's 3-year historical compound annual growth rate of 1.8%. Our model reflects a 5-year projected average operating margin of 10.2%, which is above Avon Products' trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 0.9% for the next 15 years and 3% in perpetuity. For Avon Products, we use a 8.9% weighted average cost of capital to discount future free cash flows.

Margin of Safety Analysis

Our discounted cash flow process values each firm on the basis of the present value of all future free cash flows. Although we estimate the firm's fair value at about $25 per share, every company has a range of probable fair values that's created by the uncertainty of key valuation drivers (like future revenue or earnings, for example). After all, if the future was known with certainty, we wouldn't see much volatility in the markets as stocks would trade precisely at their known fair values. Our ValueRisk™ rating sets the margin of safety or the fair value range we assign to each stock. In the graph below, we show this probable range of fair values for Avon Products. We think the firm is attractive below $19 per share (the green line), but quite expensive above $31 per share (the red line). The prices that fall along the yellow line, which includes our fair value estimate, represent a reasonable valuation for the firm, in our opinion.

Future Path of Fair Value

We estimate Avon Products' fair value at this point in time to be about $25 per share. As time passes, however, companies generate cash flow and pay out cash to shareholders in the form of dividends. The chart below compares the firm's current share price with the path of Avon Products' expected equity value per share over the next three years, assuming our long-term projections prove accurate. The range between the resulting downside fair value and upside fair value in Year 3 represents our best estimate of the value of the firm's shares three years hence. This range of potential outcomes is also subject to change over time, should our views on the firm's future cash flow potential change. The expected fair value of $30 per share in Year 3 represents our existing fair value per share of $25 increased at an annual rate of the firm's cost of equity less its dividend yield. The upside and downside ranges are derived in the same way, but from the upper and lower bounds of our fair value estimate range.

Pro Forma Financial Statements

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

Power-One Powers Up As Q1 Tops Street; Shares Skyrocket

Shares of Power-One (PWER), a Camarillo, California-based provider of “renewable energy and energy-efficient power conversion and power management solutions,” are sharply higher on better-than-expected Q1 results.

The company late yesterday posted Q1 revenue of $152.4 million and profits of 4 cents a share, ahead of the Street at $141 million and a penny a share.

PWER said that “consistent with prior quarters,” it isn’t giving any guidance.

That’s not bothering the stock though: PWER is up $1.54, or 26.7%, to $7.30.

Has Cosan Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Cosan (NYSE: CZZ  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Cosan.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 50% Pass
1-Year Revenue Growth > 12% 22.1% Pass
Margins Gross Margin > 35% 15.5% Fail
Net Margin > 15% 7.6% Fail
Balance Sheet Debt to Equity < 50% 46.4% Pass
Current Ratio > 1.3 1.96 Pass
Opportunities Return on Equity > 15% 35.1% Pass
Valuation Normalized P/E < 20 6.80 Pass
Dividends Current Yield > 2% 2.4% Pass
5-Year Dividend Growth > 10% NM NM
Total Score 7 out of 9

Source: S&P Capital IQ. NM = not meaningful; Cosan paid its first dividend in Aug. 2010. Total score = number of passes.

When we looked at Cosan last year, it had the same score of 7. But the company has made impressive moves to cut its debt, and some small improvement in its margins has made a big difference on the bottom line.

Cosan is a Brazilian company that produces sugar. That gives it two attractive but totally different businesses: its refined sugar and related products tap into the same emerging consumer markets that AmBev (NYSE: ABV  ) and Brasil Foods (NYSE: BRFS  ) have found to be profit opportunities, but it also produces sugar-based ethanol.

With Brazilian markets having seen significant drops this year on fears of an overheating economy, the ethanol segment is getting more attention. In the U.S., corn-based ethanol has meant tax credits for domestic refiners Sunoco (NYSE: SUN  ) and Valero (NYSE: VLO  ) as well as ethanol producer Archer Daniels Midland (NYSE: ADM  ) while sticking foreign producers like Cosan with a big import tax. But lately, that subsidy has come under fire over the inefficiency of corn ethanol compared to sugar.

In the end, free markets should prevail, and that will play up Cosan's sugar ethanol business -- especially if energy prices remain high. Meanwhile, with the possibility of a Brazilian slowdown, investors may well get an even bigger bargain on Cosan shares than ever. Cosan may not be perfect, but it represents a great value at today's prices.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Cosan to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.