HOT ARTICLES

Tuesday, May 5, 2009

BEST STOCKS Investment:Google and Apple face antitrust probe

The two high-tech companies share board members, and the government says that could be unfair to competitors. 10 banks may need to raise capital after stress tests. Chrysler's creditors challenge the Chapter 11 filing.
Apple and Google are under investigation by the Federal Trade Commission for allegedly unfair competitive practices, The New York Times reported late Monday. Both companies have received official notice of the inquiry.

Google CEO Eric Schmidt and former Genentech CEO Arthur Levinson are directors at both companies. Under federal antitrust law, a person is not allowed to sit on the board of two companies if that contributes to reducing competition between them.

Google and Apple compete in a number of areas, ones that represent a significant amount of revenue.

The news could hit tech stocks today, and stock index futures indicate that U.S. markets will open lower. But they could turn around fast; after an eight-week long rally, sentiment is clearly more bullish than it has been for a long time.

Stocks face some hurdles today: News that many banks will need more capital after the stress tests and a threat to the Chrysler bankruptcy could send stocks lower.

But a report on service sector activity, which is expected to be positive, could help stocks.

Kraft Foods released a strong earnings report today; Archer Daniels Midland 's report due before the bell, is expected to be strong.Disney will report earnings after the bell.

"Investors are eyeing some solid gains, so expect some profit-taking," said Anthony Grech, market strategist at the London brokerage IG Index, "but there is still a stockpile of positive sentiment."

Investors cheer rally on in Asia and Europe

Stocks were higher again today in Asia and Europe; investors seem ready to take on risk again on the belief that the economy is improving.

Japanese markets were still closed today for the "Golden Week" holiday, but, in Hong Kong, the Hang Seng Index ($HSIX) rose 0.3% to hit a six-month high of 16,430.

The MSCI Asia Pacific Index was up 0.6%.

Mining stocks led European markets higher. An earnings report from the troubled Swiss bank UBS met analyst estimates with a loss of $1.75 billion, and its shares rose 0.2% in trading on the exchange at Zurich, Switzerland. Gains were impressive in London where investors showed regained confidence in bank stocks.

The Dow Jones Stoxx 600 Index rose 1.3%, the FTSE Eurofirst Index was up 1.1%, and London's FTSE 100 Index ($GB:UKX) climbed 3%.

US investors set to take profits after massive rally

U.S. markets enjoyed a substantial rally on Monday after a report on pending-home sales was far better than expected.

The Dow Jones industrials ($INDU) closed up 214 points to 8,427. The Standard & Poor's 500 Index ($INX) rose 30 points to 907, and the Nasdaq Composite Index ($COMPX) finished up 44 points to 1,764.

The S&P 500 is now up 0.4% for the year. This index is carefully watched by investors because it represents roughly 75% of the total capitalization of U.S. stock markets.

The Nasdaq, which has shown a gain for the year for the last four weeks, is up 11.8%.

Since the March 9 market bottom, the S&P 500 has risen 34.1%, the Nasdaq is up 39%, and the Dow is up 28.7%.

How far will this rally go? Some analysts say that the critical number to watch for now is 934 on the S&P 500. That was the close on Jan. 6, the high off the worst low seen on Nov. 20.

"The Dow may hit resistance around 8,400," warned Carley Garner, a technical analyst with DeCarley Trading in her Stock Index Report. That would suggest a pullback today. Garner thinks there will be a pullback anyway in the near term.

FTC questions board makeup at Google and Apple

Google and Apple offer competing Web browsers and systems for mobile phones.

In many cases, directors resign from boards when it becomes apparent that they could be accused of conflict of interest.

On the other hand, it is possible for a director to forego participation in discussions regarding areas where the two companies compete. Schmidt has reportedly taken this step on several occasions.

Neither company would comment on the report.

Google faces another inquiry. The Justice Department is reportedly also looking into a class action settlement that Google reached giving it the right to digitize and sell entire libraries of books, according to industry sources.

10 banks threatened by stress-test results

Federal Reserve stress-test results, due on Thursday, will show that ten major U.S. banks require substantial capital increases, The Wall Street Journal reported today.

Both Citigroup and Bank of America were reportedly in need of large amounts of capital for reserves, but B of A has denied the report, while Citigroup has refused to comment.

Citigroup is reportedly trying to raise capital from private investors to avoid taking further government loans.

Some of the ten banks may choose to allow the government to convert loans into equity stakes as a means of providing the necessary capital. This would make the government a major shareholder in these banks.

Banks are expected to maintain higher capital reserves than they did in the past to ensure that they can weather crises in the future without government help.

Results of the tests are to be made available to executives at the banks involved today.

On Monday, investors showed that they were relatively unconcerned about the stress-test results.

The KBW Bank Index ($BKX), which tracks the sector, closed up 14.5%.

Chrysler fights creditors in Chapter 11

Chrysler battled with its creditors in its Chapter 11 filing on Monday.

The company did win the right to access $4.5 billion in loans from the government to pay suppliers with pressing bills in the next 48 hours. That move may enable many of the company's suppliers to avoid bankruptcies themselves.

But creditors, who own a large part of Chrysler's $6.9 billion in debt, tried to block the creation of a new company to which Chrysler's best assets would be sold.

If the creditors succeed, they could make hash of the Obama Administration's plan to allow Italy's Fiat to take over the U.S. automaker and attempt to turn it around.

The government would like the hearing to end quickly with Chrysler reorganized in the new company, but creditors may succeed in disputing the move for a long time.

That would materially hurt the chances for the new company to succeed.

On Monday, Judge Arthur Gonzalez, who is hearing the case, ordered the creditors to reveal their names by noon ET today.

Kraft Foods sees strong quarter

Kraft Foods showed a strong first-quarter earnings report today.

The maker of Velveeta cheese spread, Oreo cookies and Maxwell House coffee reported earnings of 45 cents per share on revenue of $9.4 billion.

The forecast was for profit of 40 cents per share on revenue of $9.7 billion.

Net income was $660 million, up 15.3% from $559 million in the same quarter of 2008.

Kraft has seen sales remain steady in the recession as consumers eat more at home, and scale back from luxury products.

But consumers are now trading down to private label goods which are cheaper than those of branded manufacturers.

With basic food commodities like corn moving lower in price, Kraft can get its ingredients for less and be price competitive with the private label products.

Kraft 's revenues were not reduced as much as had been expected by foreign exchange costs due to the stronger dollar.

The company has been successful at cost-cutting, and its strategy of introducing cheaper new products has been praised by analysts.

Kraft predicted revenue growth of 3% for 2009.

Archer Daniels Midland could beat the Street

Agribusiness giant Archer Daniels Midland has surprised analysts with exceptionally strong revenue growth this year. It may well do so again in its fiscal-second-quarter earnings report today before the bell.

While sales of foodstuffs continue strong, there are challenges for the company's corn-based ethanol products and its agricultural services business.

Some analysts say that volumes will be lower this quarter for the company than in the recent past.

The company is expected to show a profit of 68 cents per share on revenue of $17 billion.

Service industry activity set for increase

Economists forecast growth in the services sector after six straight months of decline.

That is expected from the release, due at 10 a.m. ET, of the Institute for Supply Management's report on activity in the services sector in March.

That sector fell back in March to 40.8% from 41.6% in February. The reading was 50 in March 2008.

The report is compiled from surveys of industry executives.

These hot stocks can make you rich

3 hot stocks for frightened bears

Admit it. You thought the sky was falling, and stock values were sure to plummet with it!

If so, you were dead wrong, and now you are running scared. The rally from the early March lows has been more than impressive. In fact, it's been spectacular -- if you're a bull.

If you're a bear, you're likely downright frightened and shaking in your boots. Your sale of stock short or your move to cash has cost you real money.

But if you're a bull, you can sit back and enjoy the ride. Economic data suggests that the economy is recovering. Corporate earnings in the second quarter thus far are beating expectations by more than 10%.

Historically, owning stocks at these inflection points has been very lucrative. Which stocks then should investors own when the bears are running scared?

The answer is momentum or growth stocks. In just the last two months since the market bottomed, the returns on momentum and growth stocks have crushed that which could be earned by owning classic value stocks.

Here are three momentum trades to consider, starting with Amazon.com:

Hot stocks 1: Amazon.com (AMZN)

I remember the 2002 recession very well. Seared into my memory is my gutsy call to buy stocks, mostly momentum stocks, at noon on Oct. 9, 2002. That was a mere three hours before the market bottomed during that bear run. What I remember most about that time is that if you blinked, you missed it.

That recession was a mere blip. Today's is much different. Pain has been felt across the spectrum. The one exception is Amazon.com (AMZN). The company easily beat expectations during the very difficult fourth quarter last year and did so again during the first quarter this year. As a result, the stock is on fire as short players cover their positions. AMZN is one of the hottest momentum stocks out there today.

Hot stocks 2 : Gilead Sciences (GILD)

I love the ticker for biotechnology company Gilead Sciences (GILD). I'd buy the stock on that basis alone. (Well, not really, but it sure does seem like this company can mint gold.)

GILD participates in the hottest growth segment of the market, and the swine flu scare has raised it to red-hot status. From a technical standpoint, GILD is producing an interesting triangle pattern. A breakout above $48 per share puts the next target at $75. If you are short GILD, you should be shaking in your boots!

Hot stocks 3 : Netease.com (NTES)

If you think the rally in the U.S. is impressive, take a look at China. The opportunity in buying domestic shares is huge, but in China, the possibilities are gigantic. Shares of Netease.com (NTES) have gained 40% this year.

The global slowdown in China translates into growth of 6%. We would be thrilled with that type of growth here in the U.S. If you like stocks busting through their 52-week highs, NTES is right up your alley. Even with all of the gains, NTES trades for a reasonable multiple of earnings. In other words, profits are keeping up with stock appreciation. As the bears run for cover, stocks like NTES can be expected to move even higher.

5 Top Stocks at Half Price

You love buying your shirts when they go on sale. And who can resist a buy-one-get-one-free offer? So when our stocks go on sale, why do we bemoan their low prices?

Smart investors like Warren Buffett or Marty Whitman love it when their stocks are suddenly selling at bargain-basement prices. For them, these companies become no-brainer buys.

The investors who populate the Motley Fool CAPS community also like a bargain, apparently. Below, you'll find five stocks whose shares are selling at least 50% below their 52-week highs, but which still earn top honors from our investor-intelligence database. Consider it a BOGO sale on top stocks.

Stock

CAPS Rating

% Off 52-Week High

Agria (NYSE: GRO)

*****

78%

Dynamic Materials (Nasdaq: BOOM)

*****

61%

Graham (NYSE: GHM)

*****

77%

Immersion (Nasdaq: IMMR)

*****

61%

Quest Capital (NYSE: QCC)

*****

70%

Naturally, we want you to look a bit closer at these stocks before buying. You can get low-priced appliances in the dent-and-ding section of your home-remodeling superstore, but their quality might not be so good. Same thing here: Make sure there's nothing seriously wrong with the company before you plug it into your portfolio.

Take two, they're small
With everyone crossing his or her fingers, economic data seems to suggest that the recession has reached a bottom. The Chicago Purchasing Managers Index showed business activity picking up more than expected, while the prices paid index surprised analysts by falling for the fifth consecutive month. Even so, with a PMI at 40.1 in April, we're still looking at an economy in contraction, even if it's shrinking less than it was before. Similarly, the ISM Manufacturing Survey also indicated the decline is moderating.

All of this is being achieved without the benefit of any so-called stimulus spending on the part of the government, which is destined to be too little, too late to be of any help -- though it won't stop the politicians from claiming credit for the U-turn.

Yet as the economy improves and manufacturing demand hardens, we'll see metals manufacturing businesses like Dynamic Materials, Reliance Steel (NYSE: RS), and Olympic Steel (Nasdaq: ZEUS) improve their bottom line.

Dynamic Materials, for example, reported first-quarter revenues and profits that were down as its explosion-welded clad metal plate segment fell 16%, but much of the loss was due to unfavorable currency exchange rates. Nevertheless, management expects the business they're pursuing will eventually pay off, even though they've had to scale back guidance for the year.

That could spell a booming opportunity for investors in the Motley Fool Hidden Gems recommendation. Even though Dynamic Materials' stock has tripled off the lows reached back in March, it still trades well below the highs of last year, and it may have more chances for explosive growth. CAPS member notzia evaluated the specialty metals company using several methods and found good reasons to believe it will outperform the market:

To ascertain that the price is attractive to me, I take one more thing into consideration. At the current price, would I expect an immediate 15% return on my investment (ROI) based on earnings and dividends? In this, the EPS represents about 14.6% of the share price by itself, so the 1.1% dividend yield is needed. However, because the dividend was needed to achieve the desired 15%, I also consider the risk that the dividend may be cut. This risk is assessed by evaluating several factors (Current Price, Current Yield, Current Payout Factor, Gross Margin, Operating Margin, Financial Leverage, EPS Growth). Based on this assessment, there is a low (most recent fiscal year) to moderate (TTM) risk that the dividend may be cut. Although greater weight is given to a TTM assessment, there is still enough certainty that the dividend will still support a 15% ROI.

Although I am not certain enough about the magnitude of my returns to actually invest in [Dynamic Materials] at this time, I feel that it will outperform the market as a whole.

Best stocks for today

Stocks climbing to 10 times their original price are rare breeds -- but they're not impossible to find. Especially when you have Fools for friends.

The market's best stocks include companies that have risen dozens of times in value over the past decade. These aren't penny stocks; they're viable companies with sound prospects, achieving phenomenal returns every year. Finding just one or two of these monstrously successful companies can help you establish a winning portfolio.

Stalking the monster
To help us find tomorrow's big winners, we'll enlist the more than 130,000 trackers at Motley Fool CAPS. We've compiled a list of the most successful CAPS members, dubbed All-Stars because they have made picks that have doubled, tripled, or even quadrupled in price. Then we've selected some of the latest stocks they've found equally promising:

Player

CAPS Member Rating

Monster Stock

CAPS Score

Recent Stock Pick

CAPS Rating (out of 5 max)

portefeuille

99.99

Hartford Financial

133.42

Arena Pharmaceuticals (Nasdaq: ARNA)

***

fransgeraedts

99.99

Las Vegas Sands (NYSE: LVS)

287.55

Celgene (Nasdaq: CELG)

****

hdgf2

99.98

MGM Mirage (NYSE: MGM)

370.51

Sequenom (Nasdaq: SQNM)

***

translator999

99.96

XL Capital

275.48

CME Group (NYSE: CME)

****

anticitrade

99.95

Bare Escentuals

254.55

BP (NYSE: BP)

*****

Of course, this is not a list of best stocks to buy -- or, for those monster stocks that our CAPS All-Stars have already found, to sell. Just consider them starting points for your own research on extreme buying opportunities.

In search of Bigfoot
Trial lawyers are nothing if not predictable. Thus, when Sequenom announced that the data for its prenatal Down syndrome test couldn't be relied on any longer because of improper actions by employees, causing shares to plummet 75%, observers expected that lawsuits would be filed en masse. The lawyers haven't disappointed.

Shareholders might be sitting on some pretty steep losses right now, having believed -- as everyone else did -- that Sequenom's test was valid, and that it had huge potential for growth once it was released this summer. But the stock market may have overreacted.

Sequenom's management has indicated that it still believes in the SEQureDx test, but it's not going to release it until two large independent clinical tests are completed, which might not be until the first half of 2010. Those tests could end up confirming the accuracy of the SEQureDx, a test that was seen as just as effective as amniocentesis, but without the risks. The company, once unloved, became a star but is once again suffering from don't-want-itis.

CAPS All-Star member JakilaTheHun admits choosing Sequenom may be questionable, but also says management may be vindicated.

This is a somewhat speculative pick. I believe the market has overreacted to the revelation that Sequenom's Down Syndrome test had flaws due to employee mishandling of data. The stock was worth $15 before that and even that might have been low. Investors regularly overreact to news in the biotech sector and I believe that to be the case here as well. The only thing that gives me pause, however, is that Sequenom's cash situation is not all that great and they are going [to] need more of it at some point. Even if the market is overreacting, that doesn't change the fact that [Sequenom] needs "the market" to sustain itself. We'll see how this plays out, but I'll take a gamble on the long side because risk-reward greatly favors that side.

Hot stocks for 2009:50 hot stocks for may

Stocks jump on hopes home sales are starting to recover. A government report on construction spending shows an unexpected gain. Upgrades of Research In Motion and Intel boost tech stocks. Warren Buffett dismisses bank 'stress tests.' Sprint Nextel earnings beat estimates.

The big 2009 stock market rally hit a new milestone today when the Standard & Poor's 500 Index($INX) surged more than 3% and finished recovering all of the 25% loss it saw between the start of the year and early March.

The index, widely watched by investors because it represents roughly 75% of the capitalization of the U.S. stock market, closed up 30 points, or 3.4%, to 907, its best close since Jan. 8. The index is now up 0.5% on the year.

The strong finish was part of a broad rally that saw the Dow Jones Industrial Average ($INDU) jump 214 points, or 2.6%, to 8,427, its best close since Jan. 13. The Nasdaq Composite Index ($COMPX) had added 44 points, or 2.6%, to 1,764, its highest close since Nov. 4. The Nasdaq-100 Index

The rally was set off by a better-than-expected report on pending home sales -- a suggestion that the U.S. housing market has hit bottom -- and a surprising gain in construction spending.

With the S&P 500 moving into positive territory, the Dow is the only one of the three major indexes still showing a loss in 2009. The blue-chip index is off 350 points, or about 4%.

The Nasdaq, which has shown a gain for the year for the last four weeks, is up 11.8%.

Since the March 9 market bottom, the S&P 500 has risen 34.1%; the Nasdaq is up 39%. The Dow is up 28.7%.

The market's big finish comes in a week expected to be filled with drama, including earnings reports from Walt Disney after Tuesday's close and Cisco Systems after Wednesday's close.

The big news will come after Thursday's close when the government issues its report on the financial health of 19 of the biggest banks and Friday, with the Labor Department's unemployment and payroll employment report.

Major indexes in 2009: A tale of 2 markets
Index Today Ytd. chg. Chg. since 3/9 Loss through 3/9
Dow Jones Industrial Average 8,426.74 -3.98% 28.71% -25.40%
Standard & Poor's 500 Index 907.24 0.44% 34.10% -25.10%
Nasdaq Composite Index 1,763.56 11.83% 39.01% -19.56%
Nasdaq-100 Index 1,427.96 17.85% 36.79% -13.85%
Russell 2000 Index 506.82 1.48% 47.65% -31.27%

Banks power the rally

Bank stocks led today's rally in anticipation that Thursday's release of government stress test results won't cause havoc among banking companies. Bank of America was up 19.3% to $10.28. Wells Fargo jumped 23.7% to $24.25. The closing prices for both stocks were their best since Jan. 13.

In addition, a Bloomberg report that American International Group's first-quarter earnings won't require additional government support also improved moods. AIG rose 5.8% to $1.46 and an additional after hours 6.2% to $1.55 after hours.

Crude oil rose $1.27 a barrel, or 2.4%, to $54.47 in New York and pushed energy stocks generally higher.

In addition to the real estate news, materials and construction stocks were rising on news that industrial production in China rebounded in March for the first time in nine months.

The report sent aluminum, copper and steel prices higher. Alcoa was up 6.9% to $10.36. U.S. Steel was up 10.2% to $31.46. Freeport-McMoRan Copper & Gold jumped 9.4% to $48.64.

Remarkably, the rally had little effect on interest rates; a stock rally often pulls money from bonds and pushes rates higher. The 10-year Treasury note was yielding 3.16%, down from3.17% on Friday.

Twenty-seven of the 30 Dow stocks were higher today, along with 447 S&P stocks and 84 Nasdaq-100 stocks.

Energy prices -- New York close
Fri. Thur. Chg. Month chg. YTD chg.
Crude oil (NYMEX) (per barrel) $54.47 $53.20 $1.27 6.55% 22.13%
Heating oil (per gallon) $1.4345 $1.3884 $0.0461 9.11% 2.05%
Natural gas (per million BTU) $3.7250 $3.5460 $0.1790 10.44% -33.74%
Unleaded gasoline (per gallon) $1.5860 $1.5174 $0.0686 7.58% 57.31%

Good news for housing

Pending home sales rose 3.2% to a level of 83.7 in March from February, the National Association of Realtors reported . The month to month gain was better than the 0.4%-to-0.6% increase economists had expected. More importantly, the year-over-year gain was 1.1% in March.

Meanwhile, the government said that construction spending rose 0.3% in March, after a 0.9% decrease in February. Economists were looking for a 1% to 1.5% drop in March.

The pending home sales index report looks at signed contracts for sales that will be closed in six weeks.

"This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit," said Lawrence Yun, chief economist for the NAR.

The home sales report supports comments from Warren Buffett this weekend that there are some signs of stabilization in the housing market. "In the last few months you've seen a real pickup in activity although at much lower prices," Buffett said.

Existing-home sales have slumped about 30% from their high in 2006.

Homebuilding stocks rose on the news. Lennar rose 9.3%to $10.34; Pulte Homes was up 9.2% to $12.16. The Philadelphia Housing Sector Index ($HGX.X) was up 7.5% to 97.60.

Meanwhile, investors are waiting for Friday's April jobs report from the Labor Department.

Economists expect the jobless rate to rise to 8.9% in April, up from 8.5% in March. They predict a loss of 600,000 jobs last month, which would bring the total number of jobs lost since the recession officially began in December 2007 to 5.7 million -- the most of any economic slump since World War II.

Intel, Research In Motion get upgrades

Techs received a boost from Research In Motion and Intel, both of which received positive comments from analysts this morning.

Goldman Sachs added Research In Motion to its "Americas Conviction" buy list. "We expect the stock to outperform due to upward estimate revisions and the multiple to expand as a result of robust smartphone demand, further market share gains, and a bottoming in the handset market," analyst Simona Jankowski said in a research note.

Research In Motion Co-Chief Executive Officer Jim Balsillie also had some optimistic comments about its BlackBerry smartphone this morning.

"We see this very large and untapped consumer market," Balsillie said during a presentation to analysts and investors. More than half of Research In Motion's 25 million subscribers now fall into the non-corporate category.

Intel was upgraded to "overweight" from "equal weight" at Morgan Stanley, which said orders are set to grow and analysts' earnings estimates are too low.

Research In Motion shares rose 2.8% to $74.30; Intel shares were up 5.4% to $16.66. The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, including Intel and Research In Motion, was up 2.2% to 1,428. Since March 9, the index has jumped 36.8%.

Buffett criticizes 'stress tests'

Investors and bank executives are most likely fretting this week about the results of the Treasury Department's "stress tests" on the 19 biggest U.S. banks, but Buffett isn't worried.

"I think I know their future, frankly, better than somebody that comes in to take a look," Buffett said Sunday at a press conference after Berkshire Hathaway's annual meeting in Omaha, Neb.

Buffett dismissed the government's method of "a checklist-type approach," saying that he judges banks' health and strength based on their "dynamism" and ability to attract deposits.

The Associated Press reported that regulators told Wells Fargo that it needs to shore up its finances. But the Oracle of Omaha told CNBC this weekend that he applied his own stress test to Wells Fargo, in which Buffett's Berkshire Hathaway has a stake, and that it "passed with flying colors."

He also praised U.S. Bancorp and M&T Bank, saying that none of the three banks needs more capital. U.S. Bancorp rose13.2% to $20.33; M&T Bank was up 14% to $56.29.

"The bank stress test is very likely to be done poorly," Berkshire Vice Chairman Charlie Munger added on Sunday. "Maybe the whole idea was not such a good idea."

The comments from Berkshire's chiefs come as a weekend report in The Wall Street Journal said Citigroup could need to raise up to an additional $10 billion in new capital. The Financial Times this morning said Citigroup and Bank of America are both working on plans to raise $10 billion in new capital. Bank of America has denied the report.

Buffett acknowledged that he would not be surprised if Citigroup needing more capital, but he told CNBC that "nothing bad is going to happen to people who have their money with Citi. Nothing is going to happen bad with any of the big banks. Or the small banks," Buffett said. "How much capital the people who supervise them want them to have is up to the supervisors."

But Citigroup's massive losses have painted a dismal picture for the overall banking sector, Buffett said at Sunday's press conference. The Oracle of Omaha also said that only four of the banks the government is testing are "too big to fail."

The stress test results were supposed to have been released today, but bank executives have been negotiating with the Treasury Department about its preliminary findings, prompting Treasury to delay the results until Thursday.

Citigroup was up 7.7% to $3.20 this afternoon.

Separately, Standard & Poor's put 23 banks on credit watch with negative implications. The list includes BBT Corp. Regions Financial, U.S. Bancorp, KeyCorp and PNC Financial.

The move had little effect on the companies' share prices.

Record attendance at Berkshire meeting

Buffett had a pretty busy weekend: A record 35,000 people came to Omaha for Berkshire's annual meeting, 4,000 more than last year's record.Buffett said that Berkshire earned $1.7 billion in the first quarter, down from the $1.9 billion the company earned in the same period last year. The company will officially post its results on Friday.

Buffett offered a gloomy outlook for the newspaper business.

"For most newspapers in the United states, we would not buy them at any price," Buffett said. "They have the possibility of going to just unending losses."

Obama pushes new international tax code

President Barack Obama this morning outlined proposals to make it harder for U.S. multinational companies to use overseas tax havens.

The president's plan includes reforms that ensure the tax code does not handicap companies seeking to create jobs in the U.S., as well as reforms that reduce the amount of tax revenue lost to tax havens. The overhaul is part of the government's plan to raise an additional $210 billion in tax revenue over the next 10 years.

Sprint Nextel's loss widens; Street sees progress

Sprint Nextel this morning said that it lost $594 million, or 21 cents per share, a bigger loss than the $505 million, or 18 cents per share, it posted in the same quarter last year.

But, excluding one-time items, the telecom company said it would have earned 3 cents per share; analysts were looking for a loss of 4 cents per share. Shares jumped 7.1% to $5.

Net operating revenue fell 12% to $8.21 billion. Sprint is currently negotiating with Sweden's LM Ericsson to outsource management of its cellular network, a move that would mean 20% cost savings on total operating expenses, The Wall Street Journal reported today.

Fiat eyes GM's Opel

Just after signing a deal with Chrysler on Thursday, Italy's Fiat announced today that it is in negotiations to take over General Motors'European division, Opel.

In an interview with the Financial Times, Fiat CEO Sergio Marchionne said that a tie-up among Fiat, Chrysler and Opel would be a merger made in heaven. Marchionne seeks to build a global auto powerhouse with sales of about $100 billion per year, but he faces challenges. Chrysler is suffering through a Chapter 11 filing, and Opel's fate is in the hands of the German government, which must agree to provide aid if Fiat is to acquire the company.

Marchionne wants Fiat to separate Fiat Auto from its other divisions, join them with Opel and Fiat's prospective stake in Chrysler to create a company with sales of 6 million to 7 million vehicles a year. It would be second only to Toyota in global sales.

But Fiat will need aid from the German government, and loan guarantees from the U.K. and several other countries where Opel has plants, to complete the deal.

Andrew Rosenbaum contributed to this report.

Short hits from the markets -- New York close
Mon. Fri. Chg. Month chg. YTD chg.
Treasurys
13-week Treasury bill 0.175% 0.145% 0.030 40.00% 52.17%
5-year Treasury note yield 2.031% 2.031% 0.000 0.69% 30.95%
10-year Treasury note yield 3.157% 3.174% -0.017 1.06% 40.69%
30-year Treasury bond yield 4.065% 4.088% -0.023 0.52% 51.06%
Currencies
U.S. Dollar Index 84.115 84.705 -0.590 -0.78% 2.39%
British pound in dollars $1.4990 $1.4928 0.0063 1.36% 1.74%
Dollar in British pounds £0.6671 £0.6699 -0.0028 -1.35% -1.71%
Euro in dollars $1.3382 $1.3286 0.0096 1.14% -4.48%
Dollar in euros �0.7473 �0.7527 -0.0054 -1.12% 4.69%
Dollar in yen 98.94 99.26 -0.32 0.42% 9.15%
Canadian dollar in U.S. dollars $0.850 $0.843 $0.0071 1.43% 3.89%
U.S. dollar in Canadian dollars $1.178 $1.187 -$0.0091 -1.34% -3.75%
Commodities
Gold $902.20 $888.20 $14.00 1.23% 2.02%
Copper $2.1440 $2.1010 $0.04 4.71% 52.06%
Silver $13.1130 $12.5000 $0.61 6.39% 10.67%
Corn $3.9800 $4.0625 -$0.08 0.44% -2.21%
Crude oil (NYMEX) (per barrel) $54.47 $53.20 $1.27 6.55% 22.13%

Hot stocks for May

TiVo, now a hot stock, is a small company that's been in business barely 11 years. It is behind big changes in Americans' relationship to their TVs. It's also rattling the mighty media and advertising industries.

That's because, with a TiVo digital video recorder (DVR), prime time can be anytime, and commercials are easily skipped.

The Alviso, Calif., company has about 4 million subscribers who own TiVo-branded DVRs and pay the company about $12 a month to use them to record TV shows that can be viewed later.

TiVo also gets monthly fees from DirecTV Group, which offers TiVo-branded DVRs to subscribers to its satellite TV services. More than half of TiVo's subscriber base was acquired through its decade-old marketing agreement with DirecTV.

TiVo is also up to its eyeballs in efforts to deliver content over the Internet and into consumers' living rooms.

The company in March announced a deal that will allow customers to download movies from Blockbuster. It struck earlier deals to provide access to movies and TV shows distributed over the Internet from Netflix and Amazon.com.

TiVo and DirecTV are planning the launch of a broadband-enabled high-definition DVR that will be available to DirecTV subscribers later this year. TiVo also has distribution deals with two of the nation's biggest cable TV providers -- Comcast and Cox Communications.

The nationwide transition to digital TV signals from analog, slated to begin in June, could be a boon for DVR providers like TiVo. That's because people who use videocassette recorders (VCRs) to record over-the-air or cable channels will find their devices less useful after analog transmissions are shut off.

At least 70% of U.S. households with a TV also have a VCR, according to research group Nielsen. Estimates of the percentage of households with DVRs range from under 25% to about 33%.

TiVo is also encroaching on Nielsen's turf; it has developed an audience research tool designed to find patterns in viewers' commercial-watching behavior. It plans to begin peddling to advertisers second-by-second details about what its subscribers watch, and don't watch, in each of the top 20 U.S. television markets, Dow Jones reported.

TiVo, which in January reported its first profitable year, appears on a monthly list of stocks created with the MSN Money StockScouter tool, which since 2001 has helped investors assess a stock's likelihood of outperforming the broad market.

Investment research firm Gradient Analytics uses StockScouter to create daily and monthly stock lists. MSN Money columnist Jon Markman collaborated with the company to devise strategies for putting the tool to work.

One of Markman's investment strategies involves investing an equal amount of money in each of the stocks in the computer-generated portfolio at the start of the month, selling them at the end of the month, then beginning the process again the next month. An investor who followed Markman's strategy since it was launched would have realized a gain of 150% through March, according to Gradient Analytics.

The chart at the bottom of this page represents the benchmark StockScouter portfolio for May.

Cheaper batteries

Energizer Holdings appears on the May list. The 9-year-old company is one of the world's biggest makers of batteries and flashlights, sold under the Energizer and Eveready brands.

The St. Louis company acquired the Schick-Wilkinson Sword shaving products business from Pfizer six years ago and in 2007 bought Playtex Products, a maker of tampons, baby wipes, Hawaiian Tropic sunscreen and other products.

Diversification beyond batteries has made Energizer more like a mini-version of its toughest rival, Procter & Gamble, the owner of dozens of brands, including Duracell, Gillette, Tampax and Tide.

Belt-cinching consumers are trading down to cheaper batteries. Energizer, which does business in 160 countries, cited the dollar's strength and weak battery sales in reporting that first-quarter revenue fell 7%. Cost cuts allowed the company to exceed Wall Street expectations.

The moribund economy should keep the company under pressure throughout 2009, said UBS analyst Nik Modi on April 20 as he downgraded this hot stock to "sell" from "neutral." Modi was urging shareholders to take profits from the stock's recent run-up. The analyst raised his 12-month price target by $13 to $53 a share.

In the know

If the beleaguered news business has a sweet spot, Thomson Reuters just might be in middle of it, according to the Financial Times. The London newspaper reports that wire services are expanding and hiring journalists as newspapers continue to shrink.

The New York company sells information to businesses professionals in media, legal services, finance, health care and science. It also provides information and trading services to buy-side and sell-side customers engaged in such markets as energy, commodities, equities, foreign exchange, fixed-income and exchange-traded instruments.

The banking crisis is hurting Thomson Reuters, as companies in the financial sector have pared their information budgets by 20%, the FT reported. But the crisis could exact a bigger toll on rival Bloomberg, which is more reliant on hedge funds and other fixed-income investors and less competitive in the forex and commodities markets.

Analyst Jeffrey Fan at UBS thinks bank spending on market data will continue to contract, a trend that would hurt both companies. But Fan, who has a "sell" rating on Thomson Reuters, thinks the recent decision by privately held Bloomberg to boost its head count this year by 950, including 100 journalists, should allow it to improve its offerings and expand its market share.

Quality-of-life megatrends

National Semiconductor has benefited from recent optimism that the global slide in chip demand has bottomed out. The stock is up 22% over the past three months.

Sluggish demand forced the Silicon Valley company in March to slash its work force by 26%, one of the chip sector's most dire responses to the recession.

The 50-year-old company is trying to control costs as it shifts focus away from a broad line of low-cost chips for everything from cell phones to cars and toward leading-edge products for energy management and other applications.

Refocusing the company has been a priority of CEO Brian Halla since he took over the company in 1996. National Semiconductor spun off its logic, memory and other commodity-type components as a separate company, Fairchild Semiconductor, in 1996 to put greater emphasis on high-end analog chips, the San Jose Mercury News reported.

Halla wants the company to focus on what he calls "emerging qualify-of-life megatrends, " such as improved solar panels, innovative medical diagnostics and sensors that can spot terrorists trying to sneak themselves or weapons of mass destruction into the country.

here is the list of 50 hot stocks for May:

StockScouter picks for May
Company Industry April 30 close Scouter score

Amerisafe

Insurance

$15.36

10

Comfort Systems USA

Heating, air conditioning

$10.79

10

Southside Bancshares

Banking

$21.30

10

ProAssurance

Insurance

$43.94

10

Computer Programs and Systems

Health care information

$34.99

10

Dolby Laboratories

Electronics

$40.13

10

Cerner

Health care information

$53.80

10

Factset Research Systems

Financial information

$53.59

10

National Semiconductor

Semiconductors

$12.37

10

Community Trust Bancorp

Banking

$30.26

10

Waters

Technical instruments

$44.17

10

SonicWALL

Software

$5.43

10

CenturyTel

Telecommunications

$27.15

10

United Natural Foods

Organic foods

$22.78

10

Digital River

Online commerce

$38.42

10

Volterra Semiconductor

Semiconductors

$11.49

10

Essex Property Trust

Real estate investments

$63.49

10

Novellus Systems

Semiconductor materials

$18.06

10

Weis Markets

Grocery stores

$36.99

10

Syntel

Information technology

$27.72

10

Ritchie Bros. Auctioneers

Auctions

$22.40

10

TC Pipelines

Natural gas pipelines

$30.06

10

Henry Bros. Electronics

Security systems

$7.34

10

Hittite Microwave

Semiconductors

$37.16

10

Thomson Reuters

Publishing

$154.65

10

Navigant Consulting

Staffing services

$14.71

10

Tech Data

Computer products

$28.79

10

Concur Technologies

Technical software

$27.07

10

Red Hat

Software

$17.27

10

Pactiv

Packaging

$21.86

10

Salesforce.com

Software

$42.81

10

Core Laboratories

Oil-field services

$83.23

10

Donaldson

Filtration systems

$32.99

10

GATX

Leasing services

$30.11

10

Ansys

Software

$27.62

10

Tidewater

Shipping

$43.25

10

TradeStation Group

Online brokerage

$8.11

10

TiVo

Digital video recorders

$7.50

10

Akamai Technologies

Online content delivery

$22.02

10

Energizer Holdings

Consumer products

$57.30

10

Netease

Online communities

$30.18

10

FMC Technologies

Oil and gas services

$34.23

10

Carter's

Children's apparel

$21.38

10

CNX Gas

Natural gas

$25.75

10

Aarons

Rental and leasing services

$33.56

10

Amphenol

Electronics

$33.84

10

Compuware

Software

$7.48

10

Cameron International

Oil and gas services

$25.58

10

Genesee & Wyoming

Railroads

$30.00

10

Stepan

Chemicals

$39.57

10

An innovative mix

StockScouter depends on advanced mathematics, software and an innovative mix of measurements and historical testing to forecast the short- and long-term outlook for all U.S. companies that have traded on the three major exchanges for at least the past six months. The analytical tools are applied to score stocks on fundamental, valuation, technical and ownership components.

This score is combined with each company's StockScouter rating to come up with the list in the above chart. Only stocks with a final closing price above $3 are eligible for the list.

May 4, 2009

Stock Investment: Can Your Portfolio Survive This Bailout?

"Will I be broke soon?"

We're hearing that question far too often lately. It takes different forms. Sometimes it's "when will the U.S. go bankrupt?" or "when will China call in the $2 trillion in U.S. Treasuries that it has stockpiled?" or "when will Steve Wozniak get kicked off Dancing With the Stars?"

We're consumed with signs of the apocalypse.

Why the end may be near
And why not? In the past year, we've

  • Endured two market panics that torpedoed a number of banks.
  • Watched as Warren Buffett helped shore up Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE).
  • Seen Bernie Madoff confess to an estimated $65 billion ponzi scheme that ruined some investors -- even as his wife, Ruth, socked away millions before the fall.
  • Allowed the federal government to commit about $1 trillion to bail out banks through acronyms like TARP, TALF, and PPIP.

And let's not forget the bailouts that give the government a big say in General Motors (NYSE: GM) and Chrysler. In Chrysler's case, the government's failure to achieve sufficient concessions from bondholders forced the company into bankruptcy.

Combined, the U.S. government has committed more than $8 trillion to stabilize the financial system and stimulate the economy. How can we know we're done?

Consider health care. The President's budget sets aside $634 billion over 10 years to move the nation toward universal coverage. Trouble is, the administration calls this spending a "down payment." Most experts believe the total cost will ultimately reach one trillion dollars.

At the very least, Social Security spending will rise with the pending retirement of more than 75 million Baby Boomers. What's more, Social Security entitlements could be underfunded by many, many trillions.

How are we going to pay for all this? Cutting spending in other areas is an option. So is raising taxes. Trouble is, I've a hard time imagining either strategy raising enough capital to keep Uncle Sam flush. If I'm right, the only answer is the printing press. Just churn out greenbacks till there's enough to pay for everything -- inflation be damned.

That's a huge problem. Earlier administrations were crippled by inflation -- the Ford and Carter administrations, notably -- causing years of deep recession, sluggish consumer confidence, and lagging growth.

More fervent supporters of government intervention will argue that some intervention was necessary because the credit crunch forced the Feds' hand. They have a point. The problem isn't that the Feds took needless action, but that their actions will balloon federal debt, will likely cause inflation, and were performed in an arbitrary, and -- in some cases -- sloppy fashion. That makes for a very uncertain environment in which to invest.

Why the end isn't near
Knowing all that, how could anyone be optimistic? I suppose because history says to be. Presidents come and go, but stocks, usually, persist.

Don't get me wrong; I'm not arguing that you needn't be concerned about the President's policies. Or, as my Foolish friend Alyce Lomax calls them, "Obamanomics." To the contrary -- I believe that outrage is good. We've been idle as a people for far too long. I'm encouraged to see us taking to the streets, to blogs, to Twitter.

But my personal political views -- Rocky Mountain independent, yet closer to the president than to his opponents, for the record -- don't much matter when it comes to picking top stocks.

Again, turning to history: Costco was founded during the stagflationary Ford years. Wal-Mart (NYSE: WMT) went public just before a recession during the Nixon administration. Hewlett-Packard was founded during the Great Depression, during the throes of a government spending pig-out known as The New Deal.

Each of these businesses has multiplied the initial investments of their early backers through careful capital management and steady growth. Each has enjoyed outstanding, engaged leadership. They employ timeless principles that still work today.

How to beat Obamanomics
Will the Obama administration destroy your portfolio? Only if you're failing to routinely invest in the very best businesses -- the Costcos, Wal-Marts, and HPs of today. Here are three I particularly like right now, and why.

Google (Nasdaq: GOOG). One of the clear leaders in cloud computing and the dominant provider of search advertising, the Big G is positioned to disrupt any number of existing industries. Mix in a $15 billion cash hoard, healthy cash flow, and committed management, and you've a formula for long-term success.

Taiwan Semiconductor (NYSE: TSM). The world's largest foundry manufactures chips that others design. It, too, has a very healthy balance sheet and more than enough cash flow to fund its 4.3% dividend yield.

Netflix (Nasdaq: NFLX). Far and away the leader in mail-order DVD rentals, it's been gaining share in the overall rental market for years. An ailing competitor in Blockbuster suggests this trend will continue and provide time to carve a niche in the still-nascent business of streaming video delivery.

Short of an economic collapse, I expect each of these businesses to beat the stock market over the next five years. So convinced am I that I own shares in two -- Google and Taiwan Semiconductor. I believe in buying and holding superior franchises.

And so do David and Tom Gardner. Each has singled out Netflix at least once for Motley Fool Stock Advisor and, combined, they're beating the market by more than 40 percentage points. Click here to try the service free for 30 days.

Finally, in answer to the question asked at the outset: No, you won't be broke soon. Not if you buy to hold superior businesses led by excellent managers. Nothing President Obama does will keep them from outperforming.

Hot stocks With Room to Run

The "Rule of 72" is a great way to calculate compounding interest in your head. To find the number of years it would take a figure to double, simply divide the number 72 by the assumed growth rate. For example, if you think your stock will grow at a rate of 7.2% per year, it will take roughly 10 years for it to double (72 / 7.2 = 10).

If that 7.2% long-term equity growth rate seems too slow, consider that the Vanguard Total Bond Market Index (VBMFX) returned about 5.4% per year on average over the past 10 years, while the S&P 500 has had an annualized return of negative 2.5% over that same time period.

It's been a disappointing decade, to be sure, and many notable companies not only underperformed the bond market, but also posted negative 10-year returns.

Of the 500 companies currently in the S&P 500, 167 -- 33% -- have failed to break even since April 1999. Some of those dreary investments include:

Company

Trailing 10-Year Annualized Return

Intel (Nasdaq: INTC)

(5.4%)

Comcast (Nasdaq: CMCSA)

(2.8%)

Pfizer (NYSE: PFE)

(7.5%)

Carnival (NYSE: CCL)

(2.4%)

Makes you want to take a closer look at your index fund, doesn't it?

Lean on me
The good news? For each of the aforementioned underperforming large caps, there were 130 current S&P 500 members that more than doubled and held the fort over the past decade. Without these companies, the index may have fared even worse than it did. This list includes:

Company

Trailing 10-Year Annualized Return

Oracle (Nasdaq: ORCL)

11.1%

ConocoPhillips (NYSE: COP)

7.6%

Exelon (NYSE: EXC)

10.1%

Now we're talking. This is the kind of growth you expect to see from your stocks. This is why you take the extra risk by investing in stocks instead of Treasuries or CDs.

But is the best good enough?
Yet these were among the best-performing megacaps of the past 10 years, and I consider a 15% annualized return to be about the most any megacap investor can hope for over the long run. Why? Simply put: The Law of Diminishing Returns.

As it becomes big, a company's growth begins to plateau. Microsoft, after all, was once a tremendous growth stock -- averaging greater than 90% annual returns from 1986 to 2000 -- before it got so big that it became difficult for its growth efforts to drive the bottom line.

Furthermore, according to Professor Jeremy Siegel's research, only 11 S&P stocks were able to sustain more than 14.7% annual returns from 1957 to 2003, even after we include dividend reinvestment! As companies mature, your returns diminish.

You can do better
Small-cap stocks, on the other hand, have much more room to grow than their larger counterparts. For instance, Hansen Natural has gained about 7,800% since March 1999, when it was just a $36 million company. Indeed, all of the market's 10 best stocks of the past 10 years were small caps.

This isn't to say you should scrap your large caps -- diversification is important -- but if you're looking for a few great growth stocks to add to your portfolio, you might want to consider a small company instead of an S&P giant.

The Best Companies on Earth

Let's get one thing straight: To get obscenely rich in the stock market with a buy-and-hold strategy, you need to own the best companies. There's no other way around it. But how can you determine what the truly best companies are?

I'm here to tell you that there are five simple characteristics shared by every single one of the best companies on Earth. If you can identify these five traits and have the discipline to invest at the right times (and perhaps sell if things change), you'll never have to worry about money again.

The fab five
Without further ado, the five traits are:

  • Creation of high utility for customers
  • Something special
  • High rate of innovation
  • Excellent managers
  • Efficient operations

It sounds like a basic list, but when you come down to it, business is basic -- the production of a good or service for a customer. The quality of a company depends on how useful its product is, how defendable its markets are, and how fast it can produce new and better products. Solid management and cost-effectiveness are musts as well.

The fab five, one by one
Let's examine each trait and look at some examples:

"Creation of high utility for customers" means producing a good or service that customers value very highly, or literally can't live without. A perfect example is Rockwell Collins, which produces navigation and landing guidance systems for airplanes. I don't know about you, but I'd say any piece of equipment that allows a plane to land creates a lot of value for airlines and passengers. This, in turn, creates steady demand for Rockwell Collins' products.

"Something special" is intentionally broad, because this trait comes in many forms. The company needs this little bit extra to maintain its advantage and inhibit competition. It could be a patent, a secret formula like that of Diageo's (NYSE: DEO) Johnnie Walker scotch, or a valuable network, where more advantages flow to the company the bigger the network gets. A special manufacturing process or distribution network that allows a company to be the lowest cost provider could be a significant advantage. Look no further than warehouse operator Costco Wholesale (NYSE: COST), which has an enduring low-cost advantage that's tough for traditional competitors like Safeway (NYSE: SWY) to match.

"High rate of innovation" relates to how a business must constantly improve to stay ahead of its rivals. An excellent example is Apple. I recently dug my first iPod out of a box and was amazed at how clunky it is. Plus, it only has 10 gigabytes, whereas the new models have 120 gigabytes -- 12 times as much, and, I'm embarrassed to say, more than my home laptop. Almost all businesses have to innovate to survive and grow, so an ability to do this effectively, a la Apple or even Nike (NYSE: NKE), is crucial.

"Excellent managers" is self-explanatory. A company is only as good as its assets and the people using them. General Electric is a great example; it spends an estimated $800 million every year on educating its employees and managers. As a result, GE enjoys dominant market positions and boasts highly regarded managers, who rank among the most sought-after executives to lead other companies. One of those managers, Mark Donegan, left to work for Precision Castparts (NYSE: PCP), an aerospace and industrial manufacturer. Under his leadership, Precision Castparts has produced an impressive track record of increasing the performance of acquisitions and its own operations through a vigilant focus on costs and quality control.

Finally, the company needs to "operate efficiently." This enables the business to earn enough money to focus on the first three traits. The pioneer of efficient manufacturing is Toyota, which was the early adopter of lean manufacturing and kaizen techniques. Other companies, such as industrial suppliers Danaher (NYSE: DHR) and filtration systems provider Donaldson (NYSE: DCI) have excelled at lowering costs by using the same techniques.

Start investing
That's it. The five characteristics of each truly brilliant business on this planet. They are self-evident, yet ever-so-difficult to obtain and hold.

I encourage you to think about every company in this light. How much value does it really create for the customer? Can it do something no one else can do? Is it well-managed? These questions are simple, but the implications are very deep, and if you can check off even four out of five boxes, you'll likely have a winner on your hands.

This is all we do -- focus on identifying companies with these characteristics, and pick our spots to invest in them. We're extremely pleased that many of the world's best businesses are on sale now.

Asian stocks rise on US hopes; Taiwan jumps 6 pct

SEOUL, South Korea (AP) - Asian stock markets rose Monday on optimism about emerging strength in the U.S. economy and easing fears about swine flu.

Taiwan's market led the region on hopes for improved business ties with China. The benchmark index surged 360.77 points, or 6 percent, to 6,353.38, building on strong gains last week, when the island's government decided to allow mainland institutional investors to invest in the Taiwan stock market.

South Korea's Kospi index rose 1.6 percent to its highest level this year, led by gains in local banks including KB Financial Group, the holding company for top South Korean lender Kookmin Bank.

Wall Street advanced modestly Friday, but closed out their best one-month performance in nine years amid hopes that the American economy — a vital export market for Asia — might be stabilizing.

"There are hopeful signs that the U.S. will weather the financial crisis," said Francis Lun, general manager at Fulbright Securities in Hong Kong.

U.S. manufacturing activity in April posted its best showing since September, when the financial crisis erupted. The performance was driven by a rise in new orders reflecting higher business and consumer spending. U.S. stock index futures were also higher, pointing to more gains Monday.

Hong Kong's Hang Seng index gained 604.06 points, or 3.9 percent, to 16,124.94. Australia's key index rose 2.3 percent, while the Shanghai Composite index in mainland China rose 2.3 percent.

"The stock market's perhaps turned a corner," said Burrell Stockbroking director Richard Herring in Brisbane, Australia. "A few months ago, it was just looking for bad news and now it's looking for more positive news."

Japan's financial markets will be closed Monday through Wednesday for the "Golden Week" holidays.

Taiwan shares soared following the signing of a financial cooperation agreement last week with China that will pave the way for banks in Taiwan and China to set up branches in each other's territory. Taiwan will also allow mainland institutional investors to invest in the Taiwan market for the first time. Individuals, however, will still be barred.

The gains were led by financial and electronics. Cathay Financial Holdings rose 6.9 percent, close to the 7 percent daily limit.

Asia reported no new confirmed cases of swine flu on Sunday, indicating the virus's spread may be slowing, but 350 people remained under quarantine in a downtown Hong Kong hotel as a precaution.

Authorities in Mexico, the epicenter of the disease, indicated that the epidemic was easing, and the World Health Organization decided not to raise its alert, though officials warned people against letting their guard down.

Dr. Richard Besser, acting chief of the U.S. Centers for Disease Control and Prevention, said swine flu is spreading just as easily as regular winter flu, but said he was encouraged that "we're not seeing some of the things in the virus that have been associated in the past with more severe flu."

On Friday, the Dow Jones industrial average rose 44.29, or 0.5 percent, to 8,212.41. Broader market measures also posted gains. Dow futures were up 29 points, or 0.4 percent, to 8,210, while S&P futures were up 2.9 points, or 0.3 percent, to 879.

The Federal Reserve said last week that the U.S. recession is starting to ease and signs emerged of a rebound in consumer spending and decline in business inventories even though gross domestic product contracted at a worse-than-expected annual rate of 6.1 percent.

Oil prices were flat, with benchmark crude for June delivery down 3 cents at $53.17 a barrel in Asian electronic trading on the New York Mercantile Exchange.

In currencies, the dollar rose to 99.47 yen from 99.10 yen late Friday in New York. The euro rose to $1.3322 from $1.3268.

The best stocks? Is that really what I'm going to write about after a year in which the S&P 500 dropped by more than 40%?

It is, actually, because you learn pretty rapidly in this business that the best way to make money in the market is to invest for the long term and recognize that volatility is part of the ride. And when you commit to the long term, you find out quickly the best stocks that offer the best returns today aren't the well-known, widely owned names such as Intel and General Electric.

But I'm getting ahead of myself. Before I can get to the takeaway, I have to show you the data. And the data is a simple list of the top-performing stocks of the past 10 years. I compile this list at the end of every year, and every year it yields the same fascinating insight:

Company

Return, 1999-2008

Jan 1, 1999 Market Cap

Hansen Natural (Nasdaq: HANS)

4,801%

$53 million

Celgene (Nasdaq: CELG)

4,167%

$252 million

Quality Systems

4,002%

$26 million

Clean Harbors

3,953%

$16 million

Green Mountain Coffee Roasters (Nasdaq: GMCR)

3,786%

$19 million

Deckers Outdoor (Nasdaq: DECK)

3,374%

$19 million

Almost Family (Nasdaq: AFAM)

3,122%

$9 million

XTO Energy (NYSE: XTO)

2,992%

$343 million

Southwestern Energy (NYSE: SWN)

2,911%

$187 million

FTI Consulting

2,907%

$16 million

Data from Capital IQ, a division of Standard & Poor's. Includes only U.S.-listed stocks with verifiable stock price histories on major exchanges.

The trait that sets these hot stocks apart

What does an energy-drink maker (Hansen) have in common with a biotechnology leader (Celgene)? A home-nursing practitioner (Almost Family) with the makers of Ugg boots (Deckers)? A natural-gas driller (XTO) with some guys who sell java (Green Mountain)?

On the face of it, not much. But if you look closely, you'll see that these were all very small companies when their amazing stock market runs began.

Here's what's special about very small companies
And although companies such as Celgene and XTO are big-cap market darlings today that are tracked and owned by big institutions such as Citigroup, Goldman Sachs, TIAA-CREF, and the New York State Common Retirement System, the next Celgene and the next XTO are being ignored and undervalued -- just as Celgene and XTO were 10 years ago! That's because companies like these are too small and too obscure to be worth Wall Street's "valuable" time.

So if you want to buy the best returns, you have to look at stocks today that are:

  1. Ignored.
  2. Obscure.

And, most of all:

  1. Small.

That was the case at the end of 2005, 2006, and 2007 as well

They're out there
These are precisely the types of companies we spend our time looking for. Rather than track $24 billion Celgene, we follow American Oriental Bioengineering, a $500 million maker of traditional medicines in China. Instead of $20 billion XTO, we've recommended that you get energy exposure by buying $120 million Dawson Geophysical.

Though AOB and Dawson are small, we believe they're well managed, cash-conscious, and poised to take advantage of enormous market opportunities. That last point, after all, is what spurs the best small companies to grow big, and that's what we believe our Hidden Gems recommendations can do for your portfolio.

Top stocks investment: tech stocks and penny stocks

Why Penny Stocks can Give you Returns of 300% or More

HENDERSON, NV, May 2 /PRNewswire/ - Investing in today's stock market is harder than ever. The stocks that were once considered stable long-term investments have crumbled from their highs. The risks related to big cap stocks have increased tremendously in the last couple of months. But the risks related to small-cap or penny stocks are still the same in our opinion. In fact, some penny stocks have increased over 500% in the last couple of weeks.

TitanStocks.com is a team of experienced Traders who keep track of hot stocks in the market. One of our trader recently alerted us on CTIC which went up over 500% from 5 cents to over 70 cents. The huge gains from penny stocks are still available for investors who are active in the market. Investors interested in receiving FREE stock alerts can join us at: titanstocks

CTIC is one example of a huge winner. Other penny stocks that went crazy lately includes: LPJC (up over 250%), PGYC (up over 300%), and EESO (up over 500%). Trading penny stocks can be extremely lucrative for the astute investors. Instead of receiving 10-15% return per year, an investor who is active in the penny stock market can receive a return of over 100% per month by trading penny stocks. The risks are obviously different but the game is still the same.

Investing in big cap stocks like: PACCAR, Inc. (NASDASQ:PCAR),CA, Inc.CA,Celgene Corp.CELG,Microsoft Corp.MSFT,Palm, Inc.PALM, or Apple, Inc.AAPLcan be good for 10-20% or sometimes 30% return but investors shouldn't expect higher return then that with big cap stocks. However, investing in penny stocks can give you return of over 100% within a few weeks.

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Why Tech Stocks Are on a Tear

The Dow Jones Industrial Average has bounced from its early March lows, but it remains down for the year. The past few weeks have shown the major market measures bickering about whether or not they should head higher or once again retreat.

[Getting Going] Joel Castillo

That ambivalence is absent in the technology sector. The tech-rich Nasdaq Composite has quietly continued to rise even as broader market measures have stagnated. The Nasdaq is up eight straight weeks and now trades at its highest level since November.

So far this year, the Nasdaq is up 9% while the Dow Jones U.S. Technology Index is up about 18%, led by strong gains in nearly every subsector.

Betting Tech to Lead a Recovery

While there are many questions about the economic situation, analysts believe that technology shares will play a leading role in an eventual recovery.

Also, technology companies often have very little debt, which is a good thing in these financially troubled times. And, lastly, technology companies play a key role in making other companies more efficient. These are all reasons why investors should consider a bit more exposure to the tech sector in their portfolios.

To be certain, technology shares are still well off their late-2007 highs. Most technology stocks also are far below record levels reached at the height of the Internet boom in the late 1990s. Even after a sustained run since late last year, that means that technology shares aren't terribly expensive. Many of the top companies in the sector still sport relatively modest valuations.

Microsoft, for instance, trades with a price/earning ratio of 10.8. International Business Machines has a P/E of 9. Other bellwethers aren't nearly as cheap, but they're not wildly overvalued either. Intel sports a P/E of 19, Oracle a P/E of 17 and Cisco Systems a P/E of 14. By comparison, the average P/E of the 30 companies that make up the Dow is about 27, and the components of the Standard & Poor's 500-stock index average 13.

Underpinning the recent gains, bellwether companies are starting to sound a tad more optimistic. Intel, the chip maker, sees personal-computer sales bottoming out. Cisco has been using its cash hoard to aggressively expand into new markets. IBM's shares have soared 30% since late 2008, and it recently affirmed its guidance for the year, which investors viewed positively.

Animal spirits are also alive, with Oracle recently announcing plans to acquire Sun Microsystems for $7.4 billion. Sun had previously flirted with a sale to IBM. Oracle's shares have also been on a tear, rising more than 30% since early March.

Technology firms used to be considered "growth" stocks, thereby mostly immune to the vagaries of the economic cycle. Recent history, however, has made it clear that the sector is more like modern-day manufacturers, geared to the economy.

That means that this sector should start to outperform as the recession abates. Indeed, the recent performance in technology shares may be one reason that economists have become a bit less glum in recent weeks.

The government estimated last week that the gross domestic product fell at an annual rate of 6.1% in the first quarter. Now, some economists have declared that the first quarter will mark the end of the recession. That may be optimistic, but it underscores the reality that the recession will indeed end at some point.

But given expectations of a slow recovery, companies will focus more intently on wringing efficiencies out of their businesses, rather than quickly expanding and hiring new people.

That will mean an outsized role for technology as companies spend money to stretch the productivity of the people they already have on staff. This is a trend that has been in place for some time and a sluggish recovery would amplify this notion.

Brian Belski, a market strategist at Oppenheimer, recently argued that investors should overweight technology (along with health care and telecommunications) because of the sector's strong financial position and its prospects for growth.

Higher Earnings Expected

Ed Yardeni, head of Yardeni Research, notes that earnings expectations for technology companies have started to improve. In April, forward earnings estimates for technology companies in the S&P 500 rose for the second straight month. This upgrade comes as the overall earnings expectations for S&P 500 companies continue to decline.

Despite growing optimism about technology shares, it's important to remember that this is a volatile sector. If the economic situation worsens, corporate capital expenditures would surely suffer. And that would disproportionately hurt the technology sector.

Indeed, given the still fragile economic situation, many economists have raised questions about the prospects for meaningful corporate capital spending.

Given the still uncertain environment, that would argue for a modest overweighting in technology shares in your stock portfolio. It would be a mistake to abandon diversification to completely focus on technology.

These best stock worth buying

Welcome to Maiden Lane, where the tripe vendors of Wall Street hawk their wares.

Maiden Lane runs right past the foot of the N.Y. Fed, and this address hosts the most poisonous assets on its balance sheet.

As any anti-Fed Reservist among you will agree, the Reserve's balance sheet is nothing but the stomach lining of the poorly run banks…only there's no acid (free-roaming liquidity) left to do any digesting.

Before I tell you what this costs us to hold this stuff, let's take a look at what it is.

Meet Maiden Lane I, Maiden Lane II, and Maiden Lane III…some of the ugliest portfolios you may ever meet.

In Maiden Lane I, we've got the commercial and residential mortgages that JPMorgan didn't want. That's right, when the guv'ment colluded in the hookup, it didn't throw the baby out with the bathwater. It rescued the baby to spare JP from being a new surrogate father dupe. JP, you see, knew enough about the Florida and California housing markets to want no part in shouldering that burden. It was already nursing too many of its own sunny-state-sour-mortgage bastards. Too bad banks aren't more like rats, hamsters, and other rodent ilk that can just swallow the unwanted babies up.

Maiden Lane II, a wily female with a lotta curves, has more Alt-A mortgages and subprimes than she can sell. In fact, she's in hot water with her pimp right now. We're talking $937 million as of Dec. 31, 2008. I don't see her working that debt off anytime soon — nor paying back the $180 million she's already lost — no matter how many PPIP pimping sessions happen with the Wells Fargos and hedge funds hard by the ol' Sunset Strip. The Fed says she's worth a whopping $11.4 billion, but we expect the private market will treat the Fed like a huckster selling a kneecapped racehorse. You're lucky to get 25 cents on the dollar for this.

The newest balance sheet abomination, little Maiden Lane III, was born on Oct. 31. The genes, if you will, are the worst recessives: asset-backed securities issued circa 2006 and commercial CDOs circa 2007. A third of this baby's "silver spoon" worth is pure speculation grade, viz. most likely to default. All told, $26.65 billion of this $26.8 billion problem child are valued using mathematical models — not tangible market prices. We're afraid of what will happen when this tyke hits the "terrible 2s."

Somehow I have trouble seeing who will want to buy the bowls of porridge these Maiden Laners make. In the meantime, just cross your fingers that the principal on these things gets returned.

How Much Does Top Stocks Market Cost You?

In just taking the sop from AIG and Bear Stearns — the cream of the failed capitalist crop — the Federal Reserve took on $74 billion in subprime and bad lease refuse. On April 23, it reported a yet-unrealized loss of $9.6 billion.

We're not down the toilet yet, but we may have to use TARP money just to pay back our own central bank. Is this really what Mr. Treasury Secretary wanted?

Meanwhile, we who are on the hook — despite the best efforts of the Freedom of Information Act and a Bloomberg News lawsuit — are not allowed to see the names of the banks involved, the specific amounts they requested, or the "assets" the banks are offering as collateral. The only reason we know anything about AIG is that the Fed owns 80% of it.

Why aren't we allowed to know? Not some kind of "It's unconstitutional" argument. Simply this. The government, trying really hard to paint the pig, doesn't want to a) trigger a bank run or b) ruffle the shareholders' feathers one bit.

But the big thing to note here is that the Treasury is now bailing the Fed out. Meanwhile, it'll try to distract you by drawing out this "bank industry stress test" to maximum media effect.

The Stress Test of Top Stocks

On Friday, we learned what methods the Fed regulators employed to test the top 19 banks in the United States. Meanwhile, it tells the banks privately whether the institution merited a "pass" or "fail" grade. And the regulators, despite the Obama-Geithner injunction to transparency, are asking the banks to stay on the QT and very hush-hush.

Only on May 4, will we, the Treasury shareholders, be told the results.

The whole dog-and-pony show was for us and us alone, and we'll be the last to learn the truth. The information, they say, "could alarm depositors and investors."

What does it matter if the stock market drops 300 points in one day or over the course of a week? Joe the average shareholder isn't a day trader and will still be either up on a passed bank or down on a failed one. End of story.

This consolation just in from Northwestern University researchers: An upcoming article in the journal Psychological Science touts: "Denial Can Bring Marital Bliss."

Its concluding point: "If denial paints a partner better than they really are, the relationship is bound to be satisfying, as long as no one is slapped in the face with reality."

We've been slapped in the face with reality. And when the government botches its delivery of denial, like a nurse bad with the needle, we know the drawing of cash to come is really going to hurt.

How did we fall so low? Wasn't there a time when we loved Wall Street?

When the Romance of the Street Stocks Market Went Sour

From our long-suffering, early-rising coffee drinker Eric Fry, over at Rude Awakening:

"Specifically, the Paulson bailouts sought to divert hundreds of billions of taxpayer dollars toward Wall Street finance companies, and to do so as secretly as possible. In the name of 'systemic risk,' the former Treasury secretary dispensed hundreds of billions of dollars to the likes of AIG, Citigroup, and his former employer, Goldman Sachs, without ever seeking or receiving a single vote from an elected official. Thus, as it turns out, the only system genuinely at risk during Paulson's tenure was the American system of honest and transparent financial markets."

Yes, Eric, that was the great problem. And this same man asked for a lighter whip to be laid on the back of Wall Street…by lobbying the rule change that let banks leverage themselves to the hilt — eating their own tripe, the same they were selling to everyone else. (We'll leave aside his role in the Bank of America/Merrill Lynch morass, for now).

But we still don't get at the true root of the problem until we look at another revenue stream. Because, let's face it, what marriage doesn't come down to finances?

This cash flow doesn't come from the central bank. It's the one that flows straight into political action committees and individual campaign coffers.

Federal Election Commission Pulls Back the Curtain

In a lovely snippet on the threat of a full-scale Senate probe, in the penetrating Ferdinand Pecora style of the 1930s, we found a treasure trove of good stuff already uncovered.

Consider this.

In the past 20 years of elections, who do you think came out as the biggest political contributor?

The energy companies, yesterday's super villain?

Nope. Guess again.

How about the pharmaceutical industry?

No dice.

Financial services topped the charts.

Just looking at the past two years alone, we see sobering numbers.

The financial giants in grey bespoke largess donated $463.5 million. The energy companies, the ones Congress was just scolding when oil ran up over $100 a barrel, donated only $75.6 million.

Breaking it down to our two initial banking survivors of the subprime fallout, Citibank and Goldman Sachs, gets even fishier.

In 20 years, Goldman Sachs foisted over $30.9 million in donation dough. Citibank was almost as generous, at $25.8 million. The only company who rained down more congressional support? AT&T, which always seems to be keeping pesky antitrust cases at bay.

But use your imagination and think about it for a sec. If you're the CFO for a large financial outfit, doesn't $30.9 million spread out over 20 years seem like the best insurance policy you could ask for?

That's a measly $1.545 million per year in premium.

Heck, that's proved way more functional than AIG's great insurance policies for Wall Street! Was not Goldman Sachs one of AIG's biggest counterparties? Our money's on Maiden Lane III being created especially to honor it.

Good thing Goldman Sachs is doing so well, and is ready to pay back that TARP money, eh? It may well be why it was in such a rush to be the first to give bailout money back. But you may be amused to learn that the payback date depends in part on the results of those so-secretive stress tests.

From our vantage point, GS can't be as healthy as it appears. By changing the calendar month of reporting, it erased the reality of a $1.5 billion loss, for example. That wasn't illegal, and it was the result of its bank holding company conversion, but it was extremely convenient — destroying any easy attempt of shareholders to compare quarters.

There has also been suggestion that Goldman's Q1 2009 was so plump and juicy thanks to AIG transfer payments, but we've not yet run the fine-toothed comb over that Goldman 10-Q to qualify the speculation. However, either way you cut it, there were some big one-time hedges that paid out, but there's no reason to think they'll pay again.

There's always the ever-paying hedge — or should we said hegemony — of letting the government just pick a little out of your pocket.

May 3, 2009

The Best Stock to Own

Do you have a very best stock? A stock that brings you closer to retirement year in and year out? One like Kraft, formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years, with dividend reinvestment?

You might have guessed General Electric or maybe Exxon-Mobil (NYSE: XOM) with their respective traditions of long-term success, but in terms of returns, Kraft has been among the very best stocks of the past half-century.

I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.

A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.

Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!

The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?

A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads.

And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders such as Cisco (Nasdaq: CSCO) -- which has $30 billion in cash -- are under-serving their owners. It's time to share the wealth, guys.

In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As the co-advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.

Like Kraft, Walt Disney (Nasdaq: DIS) has an enormous portfolio of highly recognizable brands. In addition to the obvious Mickey Mouse names, Disney also owns high value properties like ABC/ESPN, Touchstone Pictures, and Internet properties like movies.com, in addition to many more. While the media/entertainment industry is rife with competition from the likes of CBS (NYSE: CBS) and Time Warner (NYSE: TWX) and others, Disney's strong array of premium products allows it to thrive throughout the years. The company has a solid 1.7% yield in addition to decent long-term growth opportunities.

But you needn't limit yourself to the world of the well known if you're thirsty for some action. Examine Cellcom Israel, a big name in the Israeli cellular market. Sporting a $2.2 billion market cap, the company certainly does not operate on the same scale as a Verizon (NYSE: VZ). But with a 12.1% annual dividend yield, you can really afford to wait while this company continues to grow.

Finally, check out the world's steel businesses as a place for solid dividend income. The steel industry is a mature cash-rich business that should see some decent growth in the future, despite short-term headwinds. Examine names like Arcelor Mittal with a 2.8% yield and South Korean firm POSCO, a hot stock that yields 2% in addition to tremendous potential for capital appreciation. You can also examine the more stodgy American firm Nucor (NYSE: NUE) which yields a solid 3.6%.

The Foolish bottom line
These companies aren't perfect for everyone; they're ideas to jump-start your research. The best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.

Top Stocks That Will Love You Back

Now and then I hold on to articles I've run across, thinking that it will be interesting to revisit them after a year or two. That's what I did with an early 2007 Kiplinger article by Jeffrey Kosnett entitled "Stocks to Love Forever."

The author made some excellent points, such as how dangerous it can be to just buy a stock and hold it "'til death do you part." He suggested that if we bought and blindly held on to stocks such as Wal-Mart (NYSE: WMT) and Ford (NYSE: F), we'd end up sorry. (Why? Because Wal-Mart is a slow grower these days, and Ford operates in the troubled auto industry.)

How'd that go?
Well, it's been a little over two years since he wrote that, but Wal-Mart stock is up 4% since his article was published. Ford, unfortunately, has met a different fate.

I agree with Kosnett, actually, that the idea of uncritically holding a stock forever is a bad one. But in his article, he went on to note, "That said, every stock picker is entitled to get hitched at least once." Huh?!

This apparent contradiction leaves a big loophole to permit possibly lots of buying and blindly holding onto stocks forever. In fact, he went on to name names, suggesting that the following were good long-term bets: Goldman Sachs (NYSE: GS), Starbucks (Nasdaq: SBUX), Steel Dynamics, Stryker, and York Water.

And their performances?

Company

Return Since Feb. 7, 2007

York Water

(20%)

Steel Dynamics

(32%)

S&P 500

(37%)

Stryker

(37%)

Goldman Sachs

(39%)

Starbucks

(57%)

Data from Yahoo! Finance.

Time isn't always kind
Kosnett's argument for Goldman Sachs shows us how seemingly sure things can be anything but. He explained that the economic environment at the time was "golden for investment bankers." (Of course, we now know that the golden age of investment banks is probably over, and Goldman Sachs will be transitioning into a bank holding company, subject to much more regulation.)

He noted that, "Only a sudden economic downturn, a series of breathtaking trading breakdowns, or a Federal Reserve interest rate surprise would seem to be in Goldman's way." Hello, sudden economic breakdown! He uttered these words, too, which I suspect he may now regret: "This is one of those rare stocks that never breaks down, unless you count a sluggish period during the recession year of 2002."

Maybe I'm not being fair
I don't mean to disparage Mr. Kosnett too much, though, because back when he wrote those words, it would have been difficult to imagine a financial panic and brutal recession. Moreover, many of these investments could turn around; not all fallen stocks are mistakes. I mainly want to point out how dangerous it can be to become complacent about pretty much any stock.

The lessons here are:

  • There are no sure things in the stock market.
  • Short-term performances can be all over the map. The long term is what matters.
  • Do your own thinking and deciding.

When marrying works
I'll also concede that marrying a hot stock can work. Sort of. You can invest in a company with the intention of holding on for decades, as long as you keep tabs on it. If you approach your investing with a long-term view, it can help you to zero in on the truly impressive companies, and it may help you refrain from driving up transaction costs by trading too frequently.

Warren Buffett, for example, essentially marries the businesses he buys -- so you can be sure that he maintains high standards. When investing, he likes to see (among other things) sustainable competitive advantages, such as economies of scale, network effects, intellectual property rights, brand strength, and high switching costs.

To understand the power of competitive advantages, think of the world's leading soft drink company -- I know you can do it without my even naming it. Buffett has said that if you offered him $100 billion to take away its dominance, he'd refuse, saying it can't be done.

Find best stocks
You stand a good chance of doing well by looking for companies that interest you, instead of those that interest financial writers like Mr. Kosnett and myself. If water and steel companies make your eyes glaze over, then some of Kosnett's picks were probably not for you.

To help you zero in on promising companies, perhaps use a screener, looking for robust growth rates, strong profit margins, and dividends as a way to start. I did that recently and selected a few:

Company

5-Year Revenue Growth

Net Income Margin

Dividend Yield

Competitive Advantage

Procter & Gamble (NYSE: PG)

13%

17%

3.5%

Brand

Southern Copper (NYSE: PCU)

25%

29%

1%

Economies of scale

AT&T (NYSE: T)

25%

10%

6.4%

Switching costs

Quality Systems

28%

20%

2.2%

Intellectual property

Abbott Labs

11%

18%

3.8%

Intellectual property

Data from Yahoo! Finance and Capital IQ, a division of Standard & Poor's.

Remember: Screens should only be a starting point for further research. After you get your initial results, pick companies you know and like already, ones you'd be most likely to follow over the coming years. (If you want to have a chance of loving it forever, it would help to like it at first.) Research contenders further, checking out debt levels, management communications, and valuation.

However you do it, it's smart to think about buying into companies these days, taking advantage of what might be the best investing opportunity in 35 years.

You can fill your portfolio with top stocks you can hope to love forever. Just don't count on any of them being a sure thing.

Stock Investment: 5 things to know for the week ahead

Think twice before you act, this is always in stock investment. here are 5 things to know for the week ahead before your investment

1.Chrysler gets a "new lease on life"

President Barack Obama on Thursday pledged to give Chrysler LLC "a new lease on life," by which he meant ushering the automaker into a bankruptcy reorganization that essentially puts Italy's Fiat SpA in charge.

It was a classic case of government coercion and arm-twisting. And here's what really happened: The lenders with Chrysler exposure who have received Troubled Asset Relief Program (TARP) money -- lenders the government now basically controls as a result of their agreeing to accept that money -- all agreed to essentially give up their rights as secured lenders to allow the "surgical bankruptcy" to proceed.

What does that mean for the other lenders? Independent lenders, mostly institutions and hedge fends, however, did not agree to allow this to happen, and so this "bankruptcy" will most likely wind up in court and drag on for years and years.

2. Meanwhile . . . reality

Meanwhile, in the real world, despite the pie-in-the-sky promise of a "new lease on life" for Chrysler, and presumably the economy, we still have the following:

One, too much debt in an economy that is not producing enough real income to service it, while two, the government, doing its level best to ignore number one, continues to try to force still more debt into a system that is both unable (and unwilling) to accept it, even as three, the government is attacking lenders and bondholders for standing up for their rights to be paid back.

3. Stress test?

On top of all that, what should have been the one slam dunk for the government among all the weirdness, the farce that is known as "stress tests" for the banks, has been delayed. What has the world come to when federal regulators and bank examiners can't agree on the right fictional outcome for these fictional bank "stress tests"? It's the movie equivalent of a major studio delaying its summer blockbuster until the fall so they can reshoot the ending to appeal to early screening focus groups.

4. RIMM developers conference

Most technology companies do some sort of conference or presentation to announce new products: Apple (AAPL) has Macworld, Research In Motion (RIMM) has a developers conference that starts on Monday.

Analysts are expecting RIMM to announce some new products. Last year the company announced the Storm and Bold phones. This year the company is expected to announce the Niagara, a phone similar to the Bold but made for the Verizon network. According to tech geeks, this phone is supposed to be pretty sweet as it will use the Storm's operating system and it should be ready for shipment in June.

Research firm AmTech expects RIMM will get a positive response from this conference. Now if they could only name the conference something catchy: RIMM World, Around the RIMM, On the RIMM, Circling the RIMM . . . you get the idea.

5. 'Sell in May and go away'

There's a popular saying on Wall Street, "Sell in May and go away." This year it seems to be picking up steam among market pundits. Why? Because the market has just had its best two-month run since 1938.

Minyanville's chief Todd Harrison wrote a column this week: "Sell in May and Go Away." Here is an excerpt from that:

"I believe the current rally will prove to be a massive stock tease. We monitored the cumulative imbalances as they built through the years, and it would be myopic to assume we've swallowed the bitter pill in its entirety. While there are two sides to every trade, we must remember that social mood and risk appetites shape financial markets."

Harrison went on to list five things that worry him for the month: swine flu, technical factors, problems in Pakistan, Ken Lewis and the stress test results.

Meanwhile, Minyanville Professor Prieur du Plessis also took a look at the old "sell in May and go away" axiom in his piece, "The Best Time to Invest in Equities."

"A study of the pattern in monthly returns reveals that the 'bad' periods of the S&P 500 Index are quite distinct, with five of the six months from May to October having lower average monthly returns than the six months of the good periods. Interestingly, May -- the first month of the bad patch -- is the only exception."

A great April for hot stocks also made some history

Here's what we can say about April. It was a lovely month for investors. Actually, we can truly say March and April combined were terrific.

Which means May will be hard-pressed to beat it.

The Dow Jones industrials, up 7.4%, enjoyed nearly the same performance as its March performance of 7.7%.

The 9.4% gain for the Standard & Poor's 500 Index was its best monthly performance since March 2000.

The Nasdaq Composite Index's 12.4% return was its best since November 2001, when the market saw a big rally after the Sept. 11, 2001, terror attacks. The Nasdaq-100 Index jumped 12.7%, its best month since November 2002. The Russell 2000 Index was up 15.3%, its best showing since February 2000.

So, why were the two months terrific?

Consider: The Dow, the Nasdaq and Nasdaq-100 had their best two-month gains since November 2002 -- 17.2%, 24.4% and 24.8%, respectively.

The Russell 2000's two-month gain of 25% was its best two-month gain ever. And check this: The S&P 500's 20% gain over the two months is its best since July 1938.

Obviously, the gains don't bring the market back to its October 2007 highs. The Dow is still down 42.3% from its peak. But at least it isn't down 53.8%, which was the loss at the March 9 low.

So, what's brung the stock market back? Financial stocks were the Dow's strength in April, with American Express the leader up a whopping 85%. But the rest of the 30 Dow stocks did fairly well. Only nine had losses, with Merck the loser, down 9.4%.

Here are the results.

How the Dow Jones industrials fared in April
Company Thur. April chg. YTD chg. Company Thur. April chg. YTD chg.
American Express $25.22 85.03% 35.96% IBM $103.21 6.52% 22.64%
Bank of America $8.93 30.94% -36.58% Procter & Gamble $49.44 4.99% -20.03%
Caterpillar $35.58 27.25% -20.35% Intel $15.78 4.99% 7.64%
General Electric $12.65 25.12% -21.91% Kraft Foods $23.40 4.98% -12.85%
DuPont $27.90 24.94% 10.28% AT&T $25.62 1.67% -10.11%
JPMorgan Chase $33.00 24.15% 4.66% Verizon $30.34 0.46% -10.50%
Alcoa $9.07 23.57% -19.45% Johnson & Johnson $52.36 -0.46% -12.49%
Walt Disney Co. $21.90 20.59% -3.48% General Motors $1.92 -1.03% -40.00%
Citigroup $3.05 20.55% -54.55% Chevron $66.10 -1.70% -10.64%
3M $57.60 15.85% 0.10% Pfizer $13.36 -1.91% -24.56%
United Technologies $48.84 13.63% -8.88% Coca-Cola $43.05 -2.05% -4.90%
Boeing $40.05 12.56% -6.14% Exxon Mobil $66.67 -2.10% -16.49%
Hewlett-Packard $35.98 12.23% -0.85% McDonald's $53.29 -2.35% -14.31%
Home Depot $26.32 11.71% 14.34% Wal-Mart Stores $50.40 -3.26% -10.10%
Microsoft $20.26 10.29% 4.22% Merck $24.24 -9.38% -20.26%

The S&P 500 had an equally robust ratio of winners to losers: About 4-to-1. The winners were a diverse group, including Wyndham Worldwide, the hotel company; Ford Motor; and Dow Chemical. Here are the top 10 winners and losers for the month.

Losers included pharmaceutical companies, insurance companies and an old smokestack company, Eastman Kodak.

April winners and losers for the S&P 500 Index
Company Thur. April chg. YTD chg. Company Thur. April chg. YTD chg.
Winners Losers
Wyndham Worldwide $11.68 178.10% 78.32% Archer Daniels Midland $24.62 -11.38% -14.60%
Goodyear Tire & Rubber $10.99 161.67% 84.09% Abbott Laboratories $41.85 -12.26% -21.59%
Ford Motor $5.98 118.25% 161.14% Bristol-Myers Squibb $19.20 -12.41% -17.42%
Principal Financial Group $16.34 99.76% -27.60% Peoples United Financial $15.62 -13.08% -12.39%
Office Depot $2.59 97.71% -13.09% Ball $37.72 -13.09% -9.31%
Wynn Resorts $39.23 96.44% -7.17% Intuit $23.13 -14.33% -2.77%
Host Hotels & Resorts $7.69 96.17% 1.59% H&R Block $15.14 -16.77% -33.36%
Tenet Healthcare $2.25 93.97% 95.65% Eastman Kodak $3.05 -19.74% -53.65%
Dow Chemical $16.00 89.80% 6.03% KeyCorp $6.15 -21.86% -27.82%
Textron $10.73 86.93% -22.64% CIT Group $2.22 -22.11% -51.10%

I included the year-to-date results as well so you can see the residual damage from the first quarter.

Lastly, 85 stocks in the Nasdaq-100 Index were in the black in April. This shouldn't surprise. Tech stocks, which dominate the index, have been the power in the U.S. stock market this year. Here are the top 10 stocks and losers among Nasdaq-100 stocks.

April winners and losers among Nasdaq-100 stocks
Company Thur. April chg. YTD chg. Company Thur. April chg. YTD chg.
Winners Losers
Wynn Resorts $39.23 96.44% -7.17% Cephalon $65.61 -3.66% -14.84%
Liberty Media $5.30 82.76% 69.87% Celgene $42.72 -3.78% -22.72%
Research In Motion $69.50 61.22% 71.27% Linear Technology $21.78 -5.22% -1.54%
Intuitive Surgical $143.73 50.72% 13.18% Warner Chilcott $9.79 -6.94% -32.48%
Expedia $13.61 49.89% 65.17% Altera $16.31 -7.07% -2.39%
Juniper Networks $21.65 43.85% 23.64% Biogen Idec $48.34 -7.78% 1.49%
Steel Dynamics $12.45 41.32% 11.36% Genzyme $53.33 -10.20% -19.65%
First Solar $187.29 41.14% 35.76% Intuit $23.13 -14.33% -2.77%
KLA-Tencor $27.74 38.70% 27.31% Pharmaceutical Product Development $19.61 -17.33% -32.40%
Express Scripts $63.97 38.55% 16.35% Apollo Group $62.95 -19.63% -17.84%

A warning: It will be hard for the market to continue the rally. The gains have just been too big. More importantly, investors who pushed the market because it became so badly sold off are now going to want to see evidence that something resembling a recovery is going to emerge.

Four factors may give stocks some oomph:

The Federal Reserve. The Fed has said it will continue its efforts to pump cash into the economy and keep interest rates low.

Stimulus. Big, often dumb and ungainly, the stimulus package that Congress passed this winter will start to have an impact.

Housing. That big supply of homes for sale in many markets will start to get sopped up as first-time buyers and others take advantage of much lower prices. That will justify the higher prices we've seen for such key building materials as lumber and copper.

Oil prices. Last year's big run-up in gasoline prices is under-appreciated among the forces that caused this recession, I've now lived through three oil shocks. Each was a frightening event because they threatened to stop many daily activities cold. It looks now that we'll see some stability for a while. That will be good for the economy.

Housing is the key. The recession we're suffering through is nasty. It is especially nasty because the housing market got entirely out of control. There was too much building. There were too many bad mortgages foisted on buyers. Regulators ignored the risks and ignored the loud-and-very-clear history of the early 1980s that many of the wacky mortgages would go bad rapidly.

So, the first task is to reduce the glut. That's occuring. The next task is to rebuild confidence in the broad swath of consumers that they will have jobs. In some markets, this is occuring. My guess is that more time is needed to see a real flowering of confidence, especially in the Midwest. Look for it late this year or early 2010.

Then, we need to ensure that they can afford the payments on mortgages that have stable, predictable terms.

May 2, 2009

Buying these hot stocks today

These hot Tech Stocks Will Make Me Rich

Welcome to week 38 of my stock-picking throwdown with Mr. Market. Let's get right to the numbers the hot stocks:

Company

Starting Price*

Recent Price

Total Return

Akamai (Nasdaq: AKAM)

$22.23

$22.02

(0.9%)

Harris & Harris

$6.22

$4.84

(22.2%)

IBM (NYSE: IBM)

$127.64**

$103.21

(19.1%)

Oracle

$22.69**

$19.34

(14.8%)

Taiwan Semiconductor

$10.34

$10.57

2.2%

AVERAGE RETURN

--

--

(10.96%)

S&P 500 SPDR

$124.37**

$87.42

(29.71%)

DIFFERENCE

--

--

18.75

Source: Yahoo! Finance.
* Tracking began on Aug. 7, 2008.
** Adjusted for dividends and other returns of capital.

Welcome to yet another interesting week. Only this time, Mr. Market gave up a lot of ground in our three-year contest -- a whopping 365 basis points, specifically.

Swine flu fears didn't help. Which, frankly, is unfortunate. I agree with my Foolish colleague Seth Jayson on this one. As much as I sympathize with those who've been afflicted, and even more with those who have lost loved ones to the virus, it takes a special sort of cognitive dissonance to sell stocks based on nothing more than the unknown odds of a global pandemic.

On the other hand, it's creepy to watch stonehearted speculators load up on shares of GlaxoSmithKline (NYSE: GSK) and Gilead Sciences (Nasdaq: GILD), among others, just because of the possibility of increased demand for their vaccines. Yeah, I know, you can say it -- I'm a sissy, a compassionate capitalist.

You want to profit from the swine flu? Fine. Buy shares of quality businesses that have sold off during this week's manic market gyrations. Hold for the long haul. Rinse. Repeat.

The week in tech
In tech, an awful report from Sun Microsystems (Nasdaq: JAVA) confirms that the one-time server superstar had been suffering at the twin altars of intense competition and commodity pricing. Related stocks such as Dell (Nasdaq: DELL) were largely unaffected by the news, but tech, as a whole, remains an uncertain bet.

"Can the sector keep it up? I'm not convinced," wrote Pat Dorsey, Morningstar's director of research, in a recent Money column. "Large software companies, for instance, are likely to be hurt by corporate America's reluctance to lay out cash for big-ticket upgrades in such an uncertain economy."

The industry is also changing. Competition is fiercer. Just this week, Big Blue said it was preparing an intelligent indexing program called "Watson" that IBM scientists believe will compete successfully against human contestants on the game show Jeopardy!. Beneath the hyperbole is a system that could very well disrupt Google (Nasdaq: GOOG) in search.

Disruption is the coin of the realm in tech. Investors are therefore best served by exercising prudence in picking stocks -- stick to the very best -- and patience in waiting for gains. That's how David Gardner produced a decade of 20% returns in the real-money Rule Breaker portfolio. Tom Gardner's "simpleton portfolio" was also a 10-year winner. I believe that, with these five tech stocks, I will achieve similar success.

Checkup time!
Now let's move on to the rest of today's update:

  • Akamai suffered a legal setback in its patent tussle with Limelight Networks. But then, on Wednesday evening, it reported expectations-shattering revenue and earnings. The stock is still rising as I write today.
  • On Tuesday, IBM raised its dividend 10% to $0.55 per share, per quarter. This quarter's ex-dividend date is May 6.

There's your checkup. See you back here next week for more tech stock talk.

3 Steps to Start Investing Today

As April comes to a close, so does our series for Financial Literacy Month. Over the past two weeks, we've shared 10 essential money lessons to help shape up your finances and portfolio. To recap a few, you've learned how to save some extra money, visited a place to learn more about different companies, and gotten some clues on what type of investor you might be.

So now what? With the S&P 500 having risen 29% off its low in March, is now the time to get in? How do you go about it? And how fast should you move? Our 10 essential money lessons have readied you to dive into investing, and this bonus article will help you do just that.

How can I invest?
If you're brand new to investing -- and at some point, we all are -- that whole world of Wall Street is pretty intimidating. Terms like enterprise value, return on equity, even P/E, are extremely confusing, often turning potential investors away. And we want it that way!

No, just kidding. Actually, like any field of activity, investing has its own special vocabulary that requires some exposure to it, and practice with it, in order to become familiar. If you're a car buff who likes working on your Ford (NYSE: F) Mustang convertible, did you know everything about replacing piston rings when you started? (And what does a piston ring do, anyway?) I bet not, and it's the same principle at work here. Eventually, you learned about piston rings, or how to cook (what's the difference between beat and fold?), or play poker (five-card draw? Texas hold-'em?). You learned that the best way to learn is by doing.

So find yourself a discount broker (the ones who actually buy or sell the stocks on your behalf, following your directions), open an account (visit their website, or give them a call to find out how), and buy a few shares of your first stock (after some due diligence, of course).

You might want to start by thinking of companies and products that you're familiar with, like Coca-Cola (NYSE: KO) or Wal-Mart Stores (NYSE: WMT). It's much easier to understand their business models. Or you could start with a company that serves one of your interests. If you're into cooking and food, consider a restaurant company like Darden Restaurants (NYSE: DRI), operator of Red Lobster. Or perhaps culinary equipment company Williams-Sonoma would be to your taste.

But don't expect to get wealthy overnight. It takes time for companies to grow, and for your investment to grow with them. Plus, bad things can happen --the value of your investment can drop, as has definitely happened during this recession. So only use money you've saved and don't need for at least the next five years. Over that time period, short-term movements tend to be dampened out, letting the long-term success of companies shine through. Success is not guaranteed, but it's more likely to happen over a longer time frame.

How diversified should I be?
If you're at least passingly familiar with investing at all, you've probably come across the term "diversification." That simply means, "Don't put all your eggs in one basket." If something bad happens to one company you've bought into, you should also have money invested elsewhere, so that you aren't wiped out from that one event.

One easy way to get diversification is to buy a broad-market index fund, such as Vanguard's S&P 500 index fund (VFINX). That gives you a portion of the 500 companies making up the S&P 500 stock market index, including biggies like Johnson & Johnson (NYSE: JNJ) and not-so-biggies like GameStop (NYSE: GME). Then, you can add shares of individual companies in which you are particularly interested in, to provide an extra boost. This strategy is sometimes called "index plus a few," and it's a great way to start investing.

How fast should I make stock investment?
You may be concerned that if you put all your money into the stock market today, it will drop tomorrow. But if you let that fear rule you, you'll never start investing. Instead, try the following approach.

First, if you can, determine what your "full" position size is in any given company -- that is, how much you want to invest in total. Say you decided to invest $1,000 into Amazon.com (Nasdaq: AMZN) in early January at about $57 per share, because you think that on-line ordering will become even more a part of life than it is today, and you also happen to be crazy about the Kindle. Begin with one-third or one-half of that. If the price drops, as it did later that month to the $50 range, fine, go ahead and buy another third. If the price rises, as it did at the end of January, now you've got a stake and could get some more on the way up, too. We call this "investing in thirds" and we like it because it imposes some discipline on the process.

Second, invest your money no more quickly than about twice as fast as it would take you to replenish it. So, if you have saved $5,000 and can add to that at about $500 a month, don't put more than about $1,000 per month into stocks. That would take about five months, by which time, you'd have another $2,500 for a couple more months, and so on. By doing this, you again avoid the risk of going "all in" just at the market's peak or before a major downdraft. Plus, it slows you down, and decreases the likelihood that your emotions will rule your decisions -- a pitfall that can be harmful to your financial health.

Final thoughts
So there you have it -- three steps to help you start investing today. To recap:

  • Start with a company you're familiar with, or have an interest in.
  • Use the index-plus-a-few strategy.
  • Invest in thirds, and spread your purchases over time.

By following these, whether you're a new investor or one who's been in the trenches for a while, you'll be well on your way to that golden retirement.

Don't Make This Life-Changing Mistake

With the economy struggling, promises of financial security look especially attractive right now. But now more than ever, you have to look at such promises with a skeptical eye -- before you make an irreversible mistake that could ruin the rest of your life.

Unfortunately, it isn't too hard to find disreputable professionals who are willing to go to great lengths to take advantage of people's lack of financial expertise. Although the Bernie Madoff Ponzi scheme case is an extreme example, less dramatic situations can cause just as much damage to unsuspecting investors.

Unreasonable expectations
One common way that unscrupulous advisors trick people is by using numbers that are simply too good to be true. For instance, the Financial Industry Regulatory Authority (FINRA) recently imposed a fine of over $7 million on Morgan Stanley (NYSE: MS). FINRA alleged that Morgan Stanley brokers in upstate New York targeted workers at Xerox (NYSE: XRX) and Eastman Kodak (NYSE: EK), recommending that they take early retirement and allegedly promising safe annual returns of 10% or more to finance living expense withdrawals that wouldn't require them to dip into principal. Of course, when the bear market came, they lost huge amounts of their life savings.

You might wonder how someone might get duped into believing that they could count on double-digit returns with no risk. Historically, going after such high returns would generally force you to put almost all your money into stocks -- something that's far riskier than most new retirees would ever want to do.

Desperate times, desperate measures
Yet to understand how someone could get tricked like this, consider the lack of investing background that many people have. If you're a long-time worker at a company that has a traditional pension plan, you may never have had to manage your retirement savings at all. Yet you might be tempted by the opportunity to take a lump-sum withdrawal at retirement -- especially with incentives for workers to take early retirement packages, such as severance payments or other perks to sweeten the deal.

And with big employers like General Motors (NYSE: GM) and Ford (NYSE: F) struggling to survive a tough auto market, you can imagine that their workers wouldn't need much enticement to take an early-retirement package. Those workers would be especially vulnerable to puffed-up claims from financial advisors, especially if those claims allowed workers to do what they already believed was their best option in a bad situation.

Protect yourself
The majority of financial professionals do their best for their clients. But given the rash of abuses lately, you won't offend anyone by taking some steps to verify any advice you get from an advisor. Here are some things to keep in mind:

  • Watch out for historical returns. Because the stock market as a whole has performed so badly even when you look back 10 years or more, you're likely to see return projections that are either based on longer periods or taken from certain periods. If you see an optimistic return projection on an investment, make sure you find out how it has performed during the bear market -- and in the years preceding it.
  • Know your time horizon. To invest in stocks, you should expect to hold onto your shares for a relatively long time -- 5-10 years is a good range -- before you need the money. If you expect to use it before that, you shouldn't invest in stocks, even if they might give you better returns. You can't afford the risk of an ill-timed downturn.
  • Don't swing for the fences. As a new retiree, the lump-sum payment you just got may be the last money you ever get from your former employer. So if you're considering individual stocks with part of that money, you should stick with relatively conservative companies like Microsoft (Nasdaq: MSFT) and Johnson & Johnson (NYSE: JNJ). Don't bet your life savings on a stock tip, no matter how attractive it may sound.

Plenty of intelligent people have been taken advantage of by convincing pitches from people who turned out to be crooks. If you're careful, though, you don't have to become the next victim.

Buy These Stocks and Make Money

True story: The other day, I (Brian) received an email with this as a subject line: "Buy these hot stocks and make money."

Of course, the email ended up touting a $0.04 penny stock with an un-pronounceable name (it looked fake). Apparently, an "analyst" somewhere assigned a short-term "price target" of $1.10 to this hot stock.

We're liberally applying quotation marks here to reiterate the obvious absurdity of The Stock That Will Return 2,650% in One Month.

Back to real life
Ridiculous claims in the stock market are nothing new, of course, and ridiculous claims from analysts are especially old hat. (Just ask the analysts who pegged Countrywide Financial "outperform," with a $45 price target, in the fall of 2007.)

We'll even go so far as to advise you to fight -- violently, if necessary -- whatever urge you may have to click on the "analyst opinions" tab at Yahoo! Finance. While it may seem prudent to see what the "smart money" thinks of your stock, this page is one of the most dangerous places on the Internet -- truly NSFW, as the tech-savvy say. It's not even worth the five seconds it takes for your browser to load the page.

That's because (1) you get no context and (2) nearly every single stock -- surprise, surprise for an industry that makes money by convincing you to buy stocks -- is considered "undervalued." Here are a few notable examples:

Company Yesterday's Closing Price Analyst Target Price (Mean) Analyst Target Price (Low)

Chevron (NYSE: CVX)

$65.99

$78.38

$61.00

McDonald's (NYSE: MCD)

$54.53

$64.40

$58.00

Wal-Mart (NYSE: WMT)

$48.47

$59.94

$53.00

PotashCorp (NYSE: POT)

$82.12

$99.72

$83.00

Pfizer (NYSE: PFE)

$13.39

$18.50

$14.00

Accenture (NYSE: ACN)

$28.91

$35.35

$31.00

Data from Yahoo! Finance.

While we each see the merits of an investment in Wal-Mart, McDonald's, and so forth, it's preposterous to assume that every single one of our random sampling of stocks is, on average, undervalued by some 20%.

Please.

But let's talk about you
You opened this article for the same reason Brian opened the email with the same headline: to see which stocks you should buy to make money.

After all, it is a good headline -- direct, relevant, practical, and appears to offer applicable advice. And it plays to a core human emotion: the quick, easy buck.

Yet if it's a quick, easy buck you're after, there are no stocks you can buy to make money. At least, not reliably. And that, to bring us full circle, is the problem with sell-side analyst research. While these five- to 20-page reports can often provide useful insights, they're not reproduced on Yahoo! Finance. Instead, individual investors who won't pay up for premium research are left to divine meaning out of useless, optimistic, one-year price targets.

Again, don't bother.

Buy these hot stocks and make money
If you're willing to change your mind-set, however, then there are stocks you can buy to make money. These are hot stocks in companies that ...

  1. Have a sustainable competitive advantage such as economies of scale, high switching costs, or network effects.
  2. Treat all of their constituents -- customers, employees, and shareholders -- as partners in the business.
  3. Are financially strong enough to take advantage of down economies like this one to expand market share, buy up valuable assets on the cheap, and enhance their competitive position.

And we'll add a new trait to that list amid this paralyzing downturn: Exposure to multiple foreign markets, which provide diversification and the potential for faster growth.

One hot stock to make money
Of course, we'd be remiss, after promising so much in the headline, not to give you at least one stock idea straight from our Motley Fool Global Gains investing service, so here it is: America Movil.

This company is the dominant cellular provider in Mexico and one that's actually seen subscriber numbers increase with new number portability (indicating a significant competitive advantage). It's also shown a willingness to repurchase shares and pay a dividend to shareholders. And it continues to grab market share in Mexico, Brazil, and elsewhere, given that it has a much stronger balance sheet than its competitors and has already established 3G networks in most of its markets. It even issued impressive earnings yesterday after market close.

The catch is that while America Movil looks like a promising long-term opportunity, we have no idea if it will make you a quick, easy buck. But if anyone tells you they can do that, they're lying.

In sum
When it comes to investing successfully, look for the four traits above in any stock idea and commit to putting money in the market for the long haul. And take seriously the opportunities abroad. As co-advisor of our Motley Fool Global Gains service (Tim) and a contributing author to the international investing chapter of our most recent book (Brian), we believe that the growth potential of many foreign stocks -- even some of the stalwarts -- could lead to multibagger returns at today's prices.

How Low Can Stocks Go?

Sure, the rally over the past few weeks has been a fun ride, but how quickly we forget: Between Feb. 9 and March 9, the Dow Jones Industrial Average dropped over 1,700 points. Repeat another of those plunges, and the "Dow's going to zero" camp might start gaining attention again.

Of course, we're not going to zero. No matter how ugly the markets get, the ferocity of what we've been through over the past few months can't continue for long.

But here's the bad news: That zero is out of the question doesn't mean stocks won't plummet from here. In fact, they could fall much, much further.

And history agrees.

What goes up ...
The history of long-term market downturns is hideous. When times are bad, markets don't just get drunk with fear -- they start downing vodka shots of fear. When panic sets in, nobody wants to own stocks at any price. Investors' palms begin to sweat every time they watch CNBC. They bury their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, things get really, really ugly.

Just how ugly? Have a look at the average price-to-earnings ratio of the entire S&P 500 index over these three periods of market mayhem:

Period Average S&P 500 P/E Ratio

1977-1982

8.27

1947-1951

7.78

1940-1942

9.01

And while stocks have plummeted over the past year, so have corporate earnings: With Standard & Poor's predicting the S&P 500 will earn $28.51 per share in 2009, the index currently trades at almost 30 times earnings. Compare that with the above table, it's pretty apparent that stocks could fall much, much further than they already have, just by returning to the lows they historically hover around during downturns.

Assuming earnings stay flat, revisiting those historically low levels could easily mean a 50% decline from here. For the Dow Jones Industrial Average, that could easily mean Dow 5,000, or worse. Now, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.

But what if it did happen?
What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:

Company One-Year Return Decline From Current Levels With P/E of 8

Costco (Nasdaq: COST)

(36%)

(54%)

Cisco (Nasdaq: CSCO)

(26%)

(46%)

American Express (NYSE: AXP)

(50%)

(23%)

Google (Nasdaq: GOOG)

(31%)

(72%)

Procter & Gamble (NYSE: PG)

(26%)

(30%)

Baidu (Nasdaq: BIDU)

(39%)

(84%)

Johnson & Johnson (NYSE: JNJ)

(25%)

(28%)

Look scary? It is. And it could easily happen.

But here's the silver lining: Every one of those stocks -- heck, the overwhelming majority of stocks -- are worth much more than a pitiful 8 times earnings. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth.

Be brave
As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. Those brave enough to dive in when no one else dares to touch stocks are the ones who end up scoring the multibagger returns.

Need proof? Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.

And that's exactly where we are today.

Pick what side you'd like to be on
The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.

Why You Shouldn't Follow Warren Buffett

Have you ever bought a stock because Warren Buffett bought a stock? You know, like Coca-Cola (NYSE: KO) or Wells Fargo (NYSE: WFC)?

If so, you're not alone. In fact, thousands of investors follow Buffett's every move, and that's such a hassle for the Oracle of Omaha that he has actually (unsuccessfully) lobbied the SEC to give him a dispensation from disclosing his stock picks.

Heck, it got so bad that in 1999, Coca-Cola was trading for as much as 40 times earnings -- an unbelievably high number for a steady consumer staple that sells sugar water.

Yet, if you believe Alice Schroeder's account in her Buffett biography The Snowball, Buffett wouldn't sell Coca-Cola even then because "the price of Coca-Cola could plunge as a result."

After all, if folks had mindlessly followed Buffett in, thereby driving up the price, they would just as surely follow him out.

This has a name
When investors follow other investors into and out of stocks, or use another investor's decision to buy or sell to justify their own decision to buy or sell, you have a phenomenon called "herding."

While Buffett has been wary of passing along his stock ideas since the 1950s and '60s, it wasn't until 1990 or so that financial research established herding as a prevalent and powerful day-to-day force in the stock market's gyrations.

And recent research from professors Amil Dasgupta, Andrea Prat, and Michela Verardo of the London School of Economics allows us to quantify how herding affects stock prices over both the short and long terms.

We'll spoil the ending for you: Herding isn't much benefit to anyone.

Survey says ...
It turns out that institutional herding around a few supposedly great ideas ultimately leads to overvaluation and underperformance.

Money managers -- in trying to avoid being outdone by their colleagues -- flock to the same sets of stocks. In the words of the professors, "money managers tend to imitate past trades (i.e., herd) due to their reputational concerns, despite the fact that such herding behavior has a first-order impact on the prices of assets that they trade."

It's a broken system that punishes investors who aren't courageous enough to think on their own.

But wait!
Not everyone agrees that herding depresses the returns investors can look forward to. Just look at "Imitation Is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway."

The authors studied Berkshire Hathaway from 1976 to 2006 and found that "a hypothetical portfolio that mimics [Berkshire's] investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 index." Wow.

So, we should all be poring over Berkshire's 13-F filings and buying what Buffett and team did, right? Not so fast.

Those findings are eye-opening and impressive, but in our view, they don't offer much for prospective investors for two reasons:

  1. Berkshire circa 2009 is much different than the Berkshire of the 1970s, 1980s, and 1990s. For one, Berkshire is huge now and can only trade in mega-liquid, mega-cap stocks. More important, because of this herding behavior and its effect on top stocks he likes, Buffett now favors private deals or full acquisitions over common stock purchases.
  2. The Internet has revolutionized stock investing, making more information more readily available -- at a faster pace. In other words, informational advantages are likely lessened in the digital era.

It's this latter point that got us to thinking about one of our favorite Web resources, GuruFocus.

What now?
GuruFocus is a website that tracks "the buys, sells, and insights" of the world's "investment gurus." This is a list that includes long-term outperformers like Warren Buffett, Wally Weitz, and Seth Klarman.

It's a neat website that sends out neat monthly emails, but we waver on this question: Is it a truly valuable service, or is it merely an interesting service?

After all, you shouldn't be buying or selling stocks because other investors are, and doing so may give you a false sense of security about your decision. As Ben Graham once said, "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." And that's true even if it's a really smart crowd.

So, what are the current "Consensus Picks of Gurus" (i.e., the stocks the most gurus are buying)? The list includes MasterCard (NYSE: MA), Walgreens (NYSE: WAG), Best Buy (NYSE: BBY), Sun Microsystems (Nasdaq: JAVA), and Canadian Natural Resources (NYSE: CNQ) -- a nice list of businesses, to be sure.

But are these sure winners over the next year, or five, or 10? No.

Who knows why these gurus bought them, or when or why they'll sell them? Was it macro opportunities/concerns? Bottom-up fundamental insights? Something they saw during a meeting with management? Are they selling because of investor redemptions?

Heck, it may be that Ron Muhlenkamp bought MasterCard because he saw that Steve Mandel bought it, or that John Hussman got Best Buy because he figured George Soros knew something.

Again, who knows?
The point is: Don't buy stocks because others are buying the same stocks. Don't simply follow Warren Buffett's publicly disclosed stock trades -- following the Oracle's moves, herd-like, is likely to lead you down an unprofitable road.

If you want to profit from Buffett's brain, you have two choices.

  1. Buy shares of Berkshire Hathaway.
  2. Study Buffett's shareholder letters, magazine articles, and body of work, and apply those lessons to your investing.

Both are good courses of action
While buying a share or two of Berkshire is a prudent course of action (Tim added to his position just a few months ago), it is worth noting that Berkshire today is very different from the more nimble version that bought shares in tiny companies such as Blue Chip Stamps, Associated Retail Stores, and Illinois National Bank.

Back then, Buffett was able to focus on good businesses at great prices regardless of size, industry, or geography -- and thus got some great deals on the very small-cap end of the spectrum.

we believe the good businesses at great prices are the small and foreign companies that American investors largely don't think are worth their time.

Stock Investment: Should You Quit Buying Stocks?

More than 2 million people saw Jon Stewart clobber CNBC's Jim Cramer during his now-famous appearance on The Daily Show.

Stewart the comedian became Stewart the commentator -- and he sounded a lot like former presidential candidate John Edwards, who talked about "two Americas," one for the rich and one for the poor. Stewart said:

One [market] has been sold to us as long-term. Put your money in 401(k)s. Put your money in pensions and just leave it there. Don't worry about it. It's all doing fine. Then, there's this other market -- this real market that is occurring in the back room, where giant piles of money are going in and out and people are trading them, and it's transactional and it's fast. But it's dangerous, it's ethically dubious, and it hurts that long-term market.

Stewart and his righteous outrage were speaking for a lot of people that night. Most of us lost money in the market recently, and nearly every day brings new tales of outright deception, monetary malfeasance, and just plain unethical behavior.

It's enough to make you wonder whether you should just get out.

How about an Ethics 101 course?
Cramer is better than most. At least the guy admits he's bent (but not broken, he says) the rules for personal gain. Many of the Wall Street players at the heart of this mess still want to claim a measure of innocence.

Ethics have never seemed to matter on the Street; apparently, they still don't. How else do you explain Goldman Sachs (NYSE: GS) deciding it's OK to calendar-shift December into 2009 when reporting results recently? Sure, it's legal, but it feels like a shell game.

Stupid really is as stupid does
Mind-numbing stupidity really does appear to be the coin of the realm when it comes to banking, brokering, and regulating. Consider the FDIC. Created to protect depositors after earlier meltdowns, we're now learning that the agency failed to collect premiums from Bank of America (NYSE: BAC) and its peers for a decade.

So Stewart is right to at least question the fairness of the financial system as we know it. But is there really one stock market for those "in the know," and another for the suckers who aren't?

Ignorance is, in fact, bliss
Only the insiders can say for sure, but history paints a reassuring picture for those of us not "in the know" -- at least if you're committed to long-term investing:

Year Index Return Market Beaters* Winners As a % of All Stocks

2008

(38.49%)

1,501

43.2%

2007

3.53%

1,223

36.2%

2006

13.62%

1,417

46.9%

2005

3.51%

1,340

47.2%

2004

9.13%

1,347

53.9%

2003

26.10%

1,107

57.7%

2002

(23.75%)

1,225

61.5%

2001

(12.36%)

1,175

64.1%

Source: Capital IQ, a division of Standard & Poor's.
*Includes only those stock trading on major U.S. exchanges that began the year worth at least $250 million in market cap.

Notice the pattern. In most years, those who held individual stocks saw an average of 40% of their picks beat the market. In two of the three worst years, six out of 10 were market-beaters.

Sometimes, the gains were huge. Ceradyne (Nasdaq: CRDN) doubled in 2004. Guess? (NYSE: GES) nearly tripled in 2005. And in 2007, Mosaic (NYSE: MOS) quadrupled. You didn't need to be an insider to get those gains. You only needed to examine the fundamentals and be brave enough to buy, and then hold.

There are risks to buying and holding, of course. Consider tax titan H&R Block (NYSE: HRB). Had you bought at the dawn of 2001 and held till today, you'd be up more than 80%. But you'd have more than doubled your money had you sold at the end of the year.

Either way, though, you'd have won. The market has lost more than 23% of its value over the past eight years.

Kick the market when it's down
The lesson? The way to beat a broken market -- the sort that Stewart so viscerally fears -- is still to bet on the best businesses over the very long term, businesses that resemble the best stock idea I've ever seen. These companies:

  • Produce abundant free cash flow.
  • Sustain high rates of revenue growth.
  • Demonstrate sustainable advantages by way of expanding gross margin.

Marvel Entertainment (NYSE: MVL) is a good example. Combined, his picks and those of his brother Tom are up more than 39% on the market as of this writing.

Best Stock for 2009 to make you rich

Making money through stock investment

Have you made the mistake of opening your retirement plan statements lately?

According to researchers at the Urban Institute, retirement accounts have lost a collective $3.4 trillion since October 2007. As a result, people are pulling money out of the market -- stock mutual funds lost $5.2 billion in the week ending April 15 alone.

It's understandable if you've been tossing those statements unopened. It's certainly ugly out there, but consider this: Where would you be right now if you hadn't been saving for retirement at all?

All the difference in the world
The thing is, the very act of saving money for your retirement matters far more than the rate of return you get on that invested cash. If you save a large enough chunk of your salary, even at very modest rates of returns, you can wind up with more money than if you saved a smaller amount yet enjoyed higher returns.

Over 50 years, for instance, saving 15% of a $50,000 salary but earning a 3% annualized return handily beats saving 1% of that same salary but earning a 10% annualized return.

Save 1% per Year

Save 15% per Year

3% Annual Return

$56,398.43

$845,976.50

5% Annual Return

$104,674.00

$1,570,109.97

10% Annual Return

$581,954.26

$8,729,313.97

Assumes smooth returns and no raises.

Saving a significant chunk of your salary across your entire career means you're practically guaranteed to wind up better off than someone who saved virtually nothing at all. And if you do manage to see returns that approach the market's historical long-run 10% per year, just check out how very large the difference can be.

So, if you're hoping to wind up wealthy, the first step is to start saving as much as possible as soon as possible. Without that strong foundation of savings, there's virtually no way the market will get you there. With it, you're simply that much more likely to amass a significant chunk of money.

If you don't happen to have your whole career ahead of you, you may still wind up wealthy -- but since you won't have as many years for compounding to work its magic, it's even more critical for you to save a larger chunk of your cash.

Is it safe to invest yet?
As the chart above demonstrates, the more you save, the more that compounds -- but the higher the rate of return that applies to that savings, the more you'll end up with in the end.

The stock market has been a tremendous tool for building wealth over the long term -- despite its abysmal performance since the end of 2007, or, for that matter, during the Great Depression.

But even if the market never again provides double-digit annual returns, the fundamental truth from that first chart still applies. The more you're able to save, the more you'll end up with, regardless of your returns. That holds true regardless of whether you wind up earning 10% annually or 3%.

Additionally, at some point, the stock market is going to reflect business realities. While the market and the overall economy may be contracting, not every company is on the verge of failing. Just take a look at these companies and how they've performed this year,they may turn out to be the hot stocks worthing to buy:

Company

TTM Net Earnings
(in Millions)

AT&T (NYSE: T)

$12,530

Microsoft (Nasdaq: MSFT)

$17,230

Wal-Mart (NYSE: WMT)

$13,250

Verizon (NYSE: VZ)

$6,430

McDonald's (NYSE: MCD)

$4,350

CVS/Caremark (NYSE: CVS)

$3,330

Kraft Foods (NYSE: KFT)

$1,850

With earnings like that amid a deep recession, there's good reason to believe they'll survive this mess and once again thrive as the economy recovers.

With the right long-term perspective and an investing strategy that's centered on a commitment to savings, you can still wind up wealthy over time.

The long term, one day at a time
Whatever your long-run returns, the most important piece is saving the money in the first place. Once you have retirement savings, you can make smart choices that will make sure you can retire in style -- but it won't happen unless you save.

top stocks as good as gold

At the very mention of gold, images of value, stability, and growth pop into my head.

It's not hard to understand why. For decades, the precious metal has been marketed as an attractive investment, and a great way to hedge inflation, recession, and almost every other economic bogeyman.

In spite of gold's allure in volatile times such as these, the true long-term performance of gold lags stocks by a significant margin. But investors don't need to give up the shiny lure of stability to earn better returns in stocks. Some hot stocks out there are as good as gold -- and many are even better.

Chasing shiny trinkets
As a new investor, I was drawn to growth. This led me to buy -- or seriously consider buying -- shares in tech darlings such as Juniper Networks (Nasdaq: JNPR) and Nortel Networks (NYSE: NT) in the 1990s.

But while these top stocks were shinier than gold for a while, the luster wore off after the bubble burst in 2000. Each stock shed more than 80% of its value in the ensuing years. Juniper is slowly coming back to life, but Nortel is still trading in the pennies.

These companies aren't necessarily poor businesses -- the fundamental conditions just didn't support the share price. I would have been far better off had I understood what demented guru Jeremy Siegel pointed out in his book The Future for Investors: Regular investments in stable, dividend-paying stocks are ultimately the best place for long-term cash.

You can have it all
Dividend payments to shareholders are a significant stabilizing factor in a stock's return. They help smooth out the ups and downs of the market over time, and they indicate that the company is generating cash. Just like gold, steady dividends protect investors from bear markets. But even better than gold, dividends also help boost returns.

For instance, look at the long-haul performance of these dividend-paying stocks:

Company

20-Year Performance

Allergan (NYSE: AGN)

1,131%*

First American (NYSE: FAF)

1,514%

3M (NYSE: MMM)

472%

Pfizer (NYSE: PFE)

756%

Wells Fargo (NYSE: WFC)

1,439%

S&P 500

182%

Gold

134%

*Return since May 22, 1989.

Now, lest I be accused of cherry-picking these examples, consider this: The Vanguard Windsor II (VWNFX) fund, our proxy for stocks with above-average yields, returned a market-beating 362% over the trailing 20 years.

Each company above had a long operating history in a relatively stable sector, providing investors a defensive edge with low long-term risk. Even with the dramatic increase in the price of gold in the past few years -- and the pummeling of banks like Wells Fargo -- the table above shows that dividend-paying stocks leave gold in the dust over extended time frames. And the difference is even more dramatic as you look at longer time frames.

Consistent dividend payments to shareholders, even during the sort of economic tough times we're enduring today, have made many of these companies long-term winners. This cash yield helps boost shareholder returns in the company, because more shares are purchased when the stock is depressed. One crucial point, though: To realize the full benefits these hot stocks provide, investors must reinvest the dividends.

Regain your luster
Dividend-paying stocks give investors the ability to survive years of market turmoil, and through reinvesting, to make more money along the way. That's about the best hedge imaginable against economic bogeymen.

May 1, 2009

Stocks worth watching again

Deathbed Stocks Revisited

Over the past year, we've been chronicling companies that seem mere inches away from going six feet under. As we've noted, not every company will give up the ghost. But since our original column, quite a few have either disappeared entirely, or seen huge drops in their share prices: Fannie Mae, Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, and XM Satellite Radio (now half of Sirius XM Radio (Nasdaq: SIRI)), to name just a few.

To compile our ghoulish list, we check for hot stocks that have earned a minimum one-star rating from the more than 130,000 savvy investors in our Motley Fool CAPS community. Then we pair that information with various financial ratios that signal the Grim Reaper's approach as clearly as a pack of circling vultures.

Let's look back at some of the hot stocks we previously deposited at death's door:

Stock

Price at First Appearance

Price Today

% Chg

Lee Enterprises

$2.87

$0.39

(86.4%)

MiddleBrook Pharmaceuticals (Nasdaq: MBRK)

$2.08

$1.48

(28.8%)

Nortel Networks

$6.15

-

*

Standard Register

$9.35

$5.51

(41.1%)

Unisys (NYSE: UIS)

$3.82

$1.17

(69.4%)

CA

$23.89

$17.35

(27.4%)

Daimler (NYSE: DAI)

$59.54

$35.95

(39.6%)

Raser Technologies (NYSE: RZ)

$8.39

$3.92

(56.2%)

Knology

$9.64

$6.83

(30.6%)

Ryland Homes

$20.15

$24.04

19.3%

Auxilium Pharmaceuticals

$39.86

$23.51

(40.1%)

Columbia Labs

$3.58

$1.45

(59.5%)

EMCORE (Nasdaq: EMKR)

$5.42

$1.23

(77.3%)

Empire Resorts

$3.41

$1.50

(56%)

Mentor Graphics

$12.48

$6.86

(45%)

*Filed for bankruptcy on Jan. 24, 2009.

Over the months since these companies first appeared, Nortel Networks filed for bankruptcy, while newspaper publisher Lee Enterprises hangs on by the slimmest of margins, in the hopes that some new plan saves the industry.

Whistling past the graveyard
Living well is said to be the best revenge; similarly, successful proofs of concept could be the best retorts for critics of your company. Raser Technologies is hoping it can survive the credit crunch to show up those who mocked its geothermal-power efforts as no more than smoke and mirrors.

Raser has a couple of irons in the fire to stoke its future growth. It develops both geothermal power and alternative forms of energy to power extended-range plug-in hybrid vehicles. Its 10-megawatt geothermal plant in Utah recently began delivering electricity to power 7,000 homes in Anaheim, Calif. Utah's governor has also signed bills to help companies tap the state's vast geothermal resources, demonstrating that Raser has the potential to get things done.

The unveiling of a prototype plug-in hybrid version of General Motors (NYSE: GM) Hummer, however, is less remarkable. Sure, SUVs are a popular choice of car buyers (at least when gas isn't hovering at $4 a gallon), but the automaker is already doing away with the Hummer model and killing other next-generation big SUVs like the Tahoe and Suburban. When GM's already having difficulty selling low-priced fuel-efficient cars, allocating scarce resources to expensive, hulking machines like a Cadillac Escalade or a Hummer that will "go green" at just 20 mpg doesn't make any sense.

Yet much of Raser's business depends on access to capital, and the ability to finance construction of facilities. At the end of last year, it had only $1.5 million in cash available, while its operating activities consumed nearly $23 million for 2008. The dearth of credit in the market could make future successes for Raser tough to come by.

5 Cold Stocks Heating Up

Think of investor sentiment as a pendulum that swings in tandem with a company's share price. When investors begin to think highly of your company, its stock might also start heading in the right direction. Alas, you can rarely tell when investors are warming to a stock until after it has made that upward swing.

An astrolabe for investors
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions and accuracy of 130,000-plus members, offer a great way to monitor investor sentiment. Like astronomers scanning the skies, investors can follow a stock's stars through its CAPS rating trend, tracking investor sentiment to help determine the best time to invest. So let's look at companies previously rated one or two stars that recently enjoyed a bump in investor confidence to see whether the stars are aligning in their favor.

here are the hot stocks in the near future:

Company

CAPS Rating (out of 5 max)

Recent Price

Next-Year EPS Growth

Estimate

Cenveo (NYSE: CVO)

***

$4.87

50%

Hospitality Properties Trust (NYSE: HPT)

***

$11.97

(4%)

Ligand Pharmaceuticals (Nasdaq: LGND)

***

$3.00

23%

PIMCO Corporate Opportunity Fund (NYSE: PTY)

****

$8.98

NA

Progenics Pharmaceuticals (Nasdaq: PGNX)

***

$5.71

12%

Source: Motley Fool CAPS.

Obviously, this is not a list of stocks to buy -- just a starting point for further research. Yet if some investors are taking notice of these stocks, maybe we should, too.

The sun's always shining somewhere
Ligand Pharmaceuticals has gotten a boost from a number of positive developments from its therapies. Its partner Pfizer (NYSE: PFE) received European approval for the osteoporosis treatment Fablyn, earning Ligand a $3 million milestone payment, and an alliance with GlaxoSmithKline (NYSE: GSK) earned Ligand half a million dollars after it identified something that could lead to a new drug being developed. It has earned more than $18 million in milestone payments thus far because of its collaboration with Glaxo.

Such achievements continue to attract investors like CAPS All-Star zzlangerhans, who follows drug stocks and notes Ligand's strong cash position.

I've been looking for a bigger pullback in Ligand given weak knees in the past but I'm getting tired of standing on the sidelines as the company continues to progress its pipeline. Mixed news on Fablyn since my last pitch-a Complete Response from the FDA but [European] approval. I was expecting negative news from the FDA which is part of the reason I kept my green thumb off the stock in recent weeks. They should start booking Promacta royalty revenue within the next quarter or two. … Despite positive developments the share price remains well below year-ago levels. A strong cash position gives the company time to prove they can book revenues and continue to make deals with large pharma on late stage pipeline candidates.

Stock investment: Make Money in Any Stocks Market

You may have noticed The Daily Reckoning has run several keen insights from Barry Ritholtz over the past few weeks, including his essay, "Downsizing America."

Barry's a regular on CNBC's Squawk Box, Kudlow & Company, Power Lunch, and Fast Money; as well as on Bloomberg, CNN, Fox, and PBS.

His blog, The Big Picture, has been read by over 40 million readers. But, that's not why we're writing to you today...

In his soon to be released book, Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy, Barry, among other scandals, uncovers the dirty truth behind the AAA ratings that Wall Street's agencies continued to give toxic subprime assets - even after the credit crisis began.

In an effort to quash the truth, McGraw-Hill - the original publisher - dropped Barry's book contract. McGraw-Hill, as it turns out, also owns S&P... one of the companies Mr. Ritholtz takes aim at in the book.

Who knows what kind of back room panic his insights caused up the ladder. Fact is, you'd be hard pressed to find in recent history a more blatant attempt to strong arm a writer into silence.

As soon as I heard what was going on, I knew Barry was our guy... this is information you can't afford to be without! I ran it up our own flagpole here at The Daily Reckoning and before you know it...we were in full on talks with Mr. Ritholtz.

Since our initial discussions, we've gotten to know Barry pretty well. He's a true "numbers" guy. His predictions have been amazingly accurate over the past few years. It's no surprise to me why he's become one of the most in-demand investors of our time.

Fortunately, Barry has developed what could be one of the most effective tools ever for an individual investor who feels mislead by all the noise coming out of the media during this most challenging market.

And that's the real reason we're writing today. As a result of our interest in his book and his story, we can now offer you an incredible side benefit: Barry's insight on the market at an extremely advantageous price.

In the report below, he'll show you all of his secrets to investment success and help you avoid the pitfalls of investing in this post- bubble environment. Hope you enjoy.

This is one tough market."

I hear that in the office every day - from individual investors, professional traders and money managers alike.

These markets are brutal, and the competition has been relentless.

For the individual investor, it's important to understand exactly who makes up your competition.

Your competition is everyone else who's buying or selling top stocks. They, too, are looking for ways to produce positive returns.

But it's not just people like you who make up your competition...

Consider what Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:

"Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!'

Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared - the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either."

The "institutions" Ellis refers to are mutual funds, hedge funds, and program traders - and all of their professional staff, mathematicians, and researchers assisting them.

These pros deploy every possible tool they can to give them whatever edge they can get. And when even they are having a hard time, that means it's a very tough trading environment.

Despite the stiff competition, many folks step onto the playing field with the pros.

But they're not prepared. Not even close.

That's why we developed a powerful tool that places you on an even footing with the pros.

Here's One Simple Way to Beat the Pros at Their Own Game...

You see, it's an arms race between you and the big boys who have developed very powerful trading tools.

If you want to be a successful trader, you need to be as efficient and productive as possible. Often times, the guy on the other side of your trade is one of those pros. And you better watch out. Because...

I've seen the largest trading floors in the world. The tech the pros have at their disposal, the data they can call up; it's impressive. The pros have spent tens of millions. And they spend years learning their systems in front of a screen.

That's what you're up against. That's your competition

In short - we've found a way to prepare you for any outcome the market can spit out.

It's a software tool called FusionIQ.

It marries fundamental and technical analysis to help you trade better in any market.

FusionIQ helps manage risk. It can also help you find new trading ideas.

This is what Barron's had to say about FusionIQ:

"FUSIONIQ'S MODELS blend fundamental and technical metrics to determine the strength of some 8,000 publicly traded equities. They identify the most tradable issues and sectors with the lowest component of risk. FusionIQ also finds issues with unusual short-term strength or weakness, issuing Buy and Sell signals accordingly. In general, FusionIQ recommends subscribers hold a rolling portfolio of 15 to 20 issues for the intermediate term."

FusionIQ has you covered. Here's how...

The best traders and managers have risk controls and sell disciplines and they stick to them. Period. They don't fall in love with a best stock or a commodity position.

FusionIQ can get you thinking about selling, tightening up stop losses, or hedging positions long before they hit bottom.

If you are going to manage your own portfolio, then you have to learn to manage your risk. Finally, for the regular investor, realize that you are trading against thousands of people and funds that have tools like this. Putting a system like FusionIQ on your side is the least you can do.

Here are the details...

Your Independent Path to Protection AND Profits

I'm Barry Ritholtz. You may know me from my blog, The Big Picture, which has quickly amassed over 40 million visitors, or my upcoming book Bailout Nation.

I've also been profiled in the Wall Street Journal's "Quite Contrary" column. Or, perhaps you have seen me on TV, where I've been appeared on numerous stations, including CNBC, Bloomberg, Fox, and PBS.

Working with my partner, we have been trading these markets for a collective 50 years, we looked at all the ways we can apply technology to tilt odds in our favor.

All the big proprietary trading desks - banks like Goldman Sachs, huge hedge funds like Pequot and SAC - spend tens of millions of dollars to assist their decision making.

We decided some time ago that if we wanted to compete on this playing field, we needed something to even up the odds.

During the tech wreck and dot com collapse of 2000-03, my partner Kevin Lane came up with an idea. What if we could create a database to track various indicators for hot stocks and markets?

The idea was to pull only the most important stock factors into one location. Not to merely screen the market, but to actually rank all of the most hot stocks from worst to best, based on both earnings and ownership metrics, as well as the charts.

This way, we would have a timely method to measure important technical AND fundamental metrics.

After years of brainstorming, we selected and, more importantly, eliminated a variety of stock metrics. Lots of back-testing went into the final product.

We found ourselves using the tool more and more. Kevin had famously recommended shorting both Enron and Tyco during the dot com crash, and the tool had a lot to do with that. (Business Week even wrote an article about it called, "Analysts Who Get It".)

With the goal of making smarter, more informed trading decisions, we sought ways to create better returns with less risk.

By combining good fundamentals and strong technical momentum characteristics, we found we could identify not only what to buy or sell, but when.

That's how FusionIQ was born.

In 2006, we formed Fusion Analytics Investment Partners LLC. We developed our algorithms and beta tested everything throughout 2007. The software was launched at the current site in late 2007.

How Does FusionIQ Work?


The software uses our unique combination of fundamental and technical indicators to rank over 8,000 top stocks, ETFs, and closed-end funds. The rankings range from 0 (worst) to 100 (best).

These provide insight into stocks that are more likely to outperform, as well as identifying what stocks price should be avoided. From there, we apply our proprietary algorithms, generating BUY, SELL, and NEUTRAL signals. For more aggressive traders, the system identifies breakouts and breakdowns, short squeezes, and other trading opportunities.

For long-term investors, we developed a way to help manage risk in your holdings by creating a Portfolio Watchlist. This allows you to enter all of your current holdings, which are automatically ranked and monitored. You can easily keep tabs on your portfolio holdings as their FusionIQ rankings change.

Stocks ranked 70 and higher are candidates to keep, while lower-rated best stocks should be reviewed for removal from a portfolio. For investors who do not like the buy & hold mantra, you can trim your portfolio using our BUY, SELL, and NEUTRAL signals. These signals are generated when specific conditions are met. It is both objective and neutral.

In 2008, the sell signals helped us avoid a lot of trouble. We recommended selling or shorting Bear Stearns when it was over $100. We very publicly said the same about AIG in early 2008 (and Bloomberg wrote a story about it called, "Fusion IQ's Ritholtz Expects More Writedowns at AIG").

We also told readers to sell Fannie Mae (over $40) and Lehman Brothers (over $30). While we caught some grief for these calls early on from fans of the companies, in the end our clients and investors thanked us. All of these calls were made using the FusionIQ system. And I'm sure you know how they ended up playing out...

Here are some recent signals and rankings from the FusionIQ software...

General Motors (GM)

Back in November 2008, we looked again at General Motors as it was under pressure with liquidity concerns. The only hope seemed to be a big-time government bailout, or perhaps consolidation with another automobile or truck manufacturer.

Using FusionIQ screens, however, kept us ahead of the curve.

As seen below on this yearly GM chart, our unbiased screening system has had GM ranked extremely low (an 18 Master, 10 Technical out of 100 as of that November date) with multiple sell Triggers.

These sell alerts would have woken an investor up that something was wrong with the underlying firm. That is something that will not show in the earnings or conference calls until it's too late.

Look at this GM chart on November 10th, 2008. We called it... and protected your investment!

Even more shocking than the GM chart is the AIG yearly chart. In addition to our ranking and timing indicators (see all the sells), Fusion Analytics published a sell on AIG for our institutional clients on 2/13/2008 at $46.14.

The first government bailout of AIG was not good enough, so they had to try, try again. In November, the US government announced that they would sweeten the pot in another attempt to save the firm.

This AIG chart shows the same story...we're safeguarding your assets!

It's not only the sells - we find many buys this way too.

FusionIQ Identifies the Time to Sell - AND The Time to BUY.

Recently Netflix Corp. (NFLX) caught our eye. As the chart below shows, NFLX had a new FusionIQ timing BUY signal in mid-December.

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This Netflix (NFLX) chart shows how you have the chance to profit.

Active traders can use FusionIQ's short-term trading signals. These are mostly technically based, as opposed to the Fusion of technical and fundamental data used to arrive at our scoring system.

These trading signals can be used as a wakeup call that something may be changing and your analysts need to dig deeper.

Also, many clients use these signals as a way to trade around their core holdings (adding alpha).

These charts that follow ... if you were long these names in your portfolio, do you think these heads-ups might have helped? These charts are just a snapshot of what FusionIQ can do for you...

This ALCOA chart shows an early warning of danger lurking ahead!

This Mosaic chart shows you how you can avoid catastrophic losses!

As you can see, with FusionIQ on your side, you would've had the right information at your fingertips months ahead of time.

There's no way you would've experienced the huge down swings some investors saw on Alcoa and Mosaic.

You would've saved money. Saved time. That's why you need FusionIQ...and that's why you can:

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Buys. Sells. FusionIQ can offer you both.

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It could be the edge you need to beat the competition - and turn 2009 into one of your best years ever.

Not Depressed Yet For Stocks Market

When we left three weeks ago, it was cold and rainy in Europe...and the world was in the midst of a terrible financial crisis.

But now we're back...and everything has changed. The trees along the Boulevard de la Villette have leafed out. Flowers are in bloom. People are sitting at sidewalk cafes. Life seems to be returning to normal.

As expected, the financial world seems to be walking with a lighter step. It feels the sun on its face...and guesses that the long winter is behind it.

"Encouraging signs" are everywhere, says Le Monde. In fact, all the news reports say they see them. Consumer sentiment isn't as bad as it used to be. Stocks market are rising. The banks are back in business.

"How to profit from the recovery," says one headline.

"Stocks point to end of downturn," says another.

The Dow rose 119 points on Friday.

Newsweek probably speaks for millions. It looks at the recession so far and thinks: is that all you got? US GDP is contracting at a 6% annual rate. Prices are falling. Unemployment is 8.5% in the whole of the United States...as high as 13% in some areas.

But "if we're in the middle of a new Great Depression," asks the magazine, "why are we still ordering $17 cocktails?"

It may be a depression, in other words, but it doesn't seem like one.

Why?

We can think of two reasons. First, the world is a lot fatter than it was in the '30s. More people have more money - even in a recession. Some of them will want to buy $17 cocktails no matter how bad things get. Today, the Okies have air-conditioning, unemployment comp and Social Security. They won't sweat quite as much as they did 70 years ago. At least, not until the government goes broke.

The basic problem is that too many people lived beyond their means for too long. Now, their means are shrinking and they'll have to live within them. Still, they should be able to earn enough to be comfortable...unless all Hell breaks loose.

The other reason it doesn't seem like a Great Depression is that we are still only in 1930. The stock market crashed in '29. Then, there was a rebound, in which people came to believe they saw "encouraging signs"...and began to look for ways to profit. They bought stocks, hoping to recover what they had lost - only to get hit again - harder. The bottom didn't come until July 8th, 1932, when the Dow hit 41. And the misery didn't reach the news photos until the mid-'30s...after Hoover and Roosevelt had successfully prevented a quick recovery.

If the pattern of the '30s holds, we won't see the stock market bottom until 2011. Then, it will begin to feel like a real depression. And interestingly, The Richebächer Letter's Rob Parenteau notes that 2011 is when the second wave of toxic property loans (Alt-A and Option ARMs, to be exact) is set to reset.

And you will recall what happened when the first peak in subprime loan "resets" arrived smack dab in the middle of 2008: billions in bank write-downs... along with trillions of dollars in market losses immediately followed.

That gives us a good idea of what will happen in 2011... Millions more consumers will freeze up as their finances go over the cliff...more bank losses will drag down even more so-called 'blue chip' retirement portfolios...and the impact of the consumer bust we've been following in these pages will get "multiplied" yet again. Millions more Americans could lose everything.

So, don't be impatient, dear reader. Everything will happen...when it's ready. And hopefully, you'll be ready as well. Rob has been working on a new report for The Richebächer Letter that details how to shield yourself from the next round of market wipeouts. Get it here.

Now, we turn to Addison reporting on the outlook for the U.S. economy:

"The Chicago Fed's latest National Activity Index," writes Addison in today's issue of The 5 Min. Forecast, "which crunches dozens of numbers to come up with a near-term economic forecast with a not-bad track record, shows the economy still hovering near the lows of the 1973-75 recession."

"'The message, as we have seen in other key cyclic indicators," says Rob Parenteau, "is that free-fall phase of the recession appears to be done in the United States. But that should not to be confused with 'the recovery has begun.'"


"'Could this be a head fake?' Rob asks. 'We know that the auto production recovery under way in Q1 will peter out this summer as GM has announced a nine-week furlough to reduce inventory, and set off another round of equity investor fear and uncertainty. We also know Treasury issuance will be ramping up through the rest of the year as fiscal deficit spending increases.

"'Who, besides the Fed, will be willing to take up all these Treasury bonds?'

"Heh. Who indeed. The Chinese? We believe they're now buying gold.

"The president's chief economic advisor, Larry Summers, chimed in with his own near-term outlook yesterday.


"Sleepy figures the U.S. economy will contract 'for some time to come.' The head of the president's National Economic Council also expects 'sharp declines in employment for quite some time this year.' But apparently, that prospect bores him.

"Of course, he is the only member of the Committee to Save the World still collecting a government paycheck."

As the above photo shows, the U.S. government is clearly asleep at the wheel...and you, as a U.S. taxpayer will pay the price for the bamboozles and bailouts. But your bank account doesn't have to reflect the mistakes the government made - in fact, you can find all the resources you need to set up your own 'personal bailout' by clicking here.

Each weekday, Addison brings readers the The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

And back to Bill, with more thoughts:

How about those Chinese? Inscrutable, huh? Well, the world's financial media seems to have 'scruted' them last week, when news came out that our friends in the Far East had quietly increased their gold holdings by 75%.

"China admits to building up a stockpile of gold," says a Reuters report. And the price of gold jumped over $900 - closing at $914 on Friday - on the news.

Remember the Golden Rule? He who holds the gold rules. The Chinese are gaining wealth and power; soon, they will claim their right to make the rules.

Now might be a good time for you grab some of the precious metal to pad your portfolio with - before the price goes even higher. Our intrepid correspondent, Byron King, thinks gold will hit at least $2000 an ounce before this epic run is over...see his full report, here.

The big banks aren't so dumb.

Sure, they built time bombs in their basements, lit the fuses...and then forgot about them...

Sure, the resulting explosion obliterated $50 trillion in wealth...

Sure, the world economy, according to the IMF, is in its worst recession since the Great Depression...

Sure, the banks' shareholders have been killed as their profits and share prices collapsed...

But the bankers themselves? Don't worry about them. The New York Times reports that pay levels in the banking industry are about as high as ever. As a percentage of revenue, pay at Goldman Sachs and Morgan Stanley, for example, are higher than ever. Average pay at Goldman has gone up from $377,000 in 2005 to $569,000 in 2009. At JP Morgan Chase, the average person got $108,000 in 2005. He's up to $138,000 this year. Same thing at Bank of America.

How is this possible?

You can thank their trade association - the Federal Reserve. The big banks can borrow from the government for practically nothing and then lend the money to house buyers for 600 basis points of income. Or, they can lend it back to the government for about 200 basis points.

And now Newsweek reports that the big banks are gaming the bailout programs by buying toxic debt at 20 cents on the dollar and selling it to the government at 60 cents a dollar.

As we said last week: What do you expect? Put food out in the alley and you're bound to attract rats.

"Toro...toro!"

Two Dear Readers came to our aid last week. The word we were looking for was not 'sepa,' but cepo. It means "top stocks" - like the kind of stocks they put the pilgrims in when they were bad. And it's used down on the farm in Argentina for the heavy wood pincers that grab cows by the neck so the cowboys can work on them.

As you will recall from last week, your editor spent his vacation running 1,300 head of cattle through the cepo. It was round-up time down at the ranch. Each animal had to be examined, tagged, vaccinated...and, if they were a young male, usually castrated. Your editor was given the job of closing the back door on the contraption, so the animals couldn't back up after they'd gotten into the box. Seemed simple enough. Indeed, he got the job because Jorge judged it so easy that even a complete greenhorn couldn't mess up. But there were times when brains were called for...and other times when brute force was needed. In both instances, your editor sometimes came up short.

The cows were not always well behaved. Sometimes, they'd refuse to enter the wooden box. Other times, they'd try to jump out...or jump onto the cow in front of them - often getting so tangled up it took four or five men to pry them apart.

And then, there were the bulls.

Bulls are huge, dangerous animals. We gave them special attention. Especially one of them.

"Toro," we yelled when a bull came through the maze and arrived at the sluice gates. The big Braford bulls were gray with stripes on their backs, a little like the pictures of a Tasmanian wolf. Hundreds of small flies lived on the bulls' backs too. The bulls were so big they could barely get through the narrow corridors of the stone maze. Then, when they arrived at the sluice box, where the cepo waited for them, they could barely enter; once inside, they were so long that the rear door couldn't be closed.

If they put their weight into it, they probably could have broken through the cepo. Earlier in the day, a pair of fighting bulls had knocked the front gate off its hinges - a gate of heavy wood reinforced with iron bars.

One of the bulls was especially troublesome. None of the cowboys dared go into the corral with him - he would charge them quickly. And despite their yelling...lashes...and stones (Omar through rocks at him from on top of the wall...) he refused to enter into the maze that led to the cepo.

"He must know we're going to get rid of him," said Jorge.

"Why? He looks like a magnificent animal..."

"He is. But his testicles are too small. He mounts the cows...but they don't get pregnant."

Finally, Jorge got on his horse and entered the corral. The bull watched but did not charge. Jorge is 56 years old. But he must have been born on a horse. He and the horse moved swiftly, together, with no visible sign of communication between them. They pushed the bull from the right...the bull moved to the left. Then, they quickly turned to cut off his retreat...moving back and forth...forcing him toward the gate of the maze.

"Hyyaah....Hyyaah...." Jorge yelled at the bull, waving at him...pushing him back...

The bull seemed to realize his situation was hopeless. He couldn't escape Jorge on his horse...and dared not attack him. He entered the maze.

Once inside, the gate closed behind him and the cowboys on the stonewall urged him forward with sticks, stones and loud whoops...

This time, there was no need to yell 'toro' - everyone knew he was coming - the last of the cattle...and the toughest of them all.

By then, Jorge was back at the side of the sluice box...waiting to get to work on the bull once he was locked in place by the cepo.

"Watch out..." he said.

The big bull hesitated. Then, all of a sudden, he charged into the sluice.

"Grab him! Stop him!" the cries went up all around. Pedro put all his weight on the cepo lever; his feet were in the air, trying to hold onto the bull. Jorge joined him...so that both of them had all their weight on the bar. "Close the gates!" they yelled when they realized they couldn't hold him.

At the other end of the maze was Edward, 15, whose job it was to open and close the gates, depending on which paddock we wanted the cow to go into. He rushed to close all the gates...trying to keep the bull from getting away. He had no time to put the chain on the downhill gate; however, so he and Cosimir stood behind it...putting their weight behind it and hoping the bull wouldn't test it. But a second later, the huge animal pushed against the wooden gate...Cosimir beat a fast retreat... Then, Edward, realizing he was alone against an unstoppable force...stepped aside too. The bull butted open the gate and ran down through the paddock and out into the field. He was free.

"What are we going to do?" we asked Jorge.

"Let him go...he earned it."

April 30, 2009

Shifting Toward an Un-free Stocks Market

Little GTO, you're really lookin' fine
Three deuces and a four-speed and a 389
Listen to her tachin' up now, listen to her why-ee-eye-ine
C'mon and turn it on, wind it up, blow it out GTO

Wa-wa, (mixed with "Yeah, yeah, little GTO") wa, wa, wa, wa, wa, wa
(mixed with "Yeah, yeah, little GTO")
Wa-wa, (mixed with "Yeah, yeah, little GTO") wa, wa, wa, wa, wa, wa
(mixed with "Yeah, yeah, little GTO")
Wa-wa (mixed with "Ahhh, little GTO") wa, wa, wa, wa, wa, wa

You oughta see her on a road course or a quarter mile
This little modified Pon-Pon has got plenty of style
She beats the gassers and the rail jobs, really drives 'em why-eye-ild
C'mon and turn it on, wind it up, blow it out GTO

- Ronnie and the Daytonas
Pontiac is going out of business after 82 years. And General Motors is being taken over by the government.

Here at The Daily Reckoning's office in Paris, we are delighted. It's like being alive when extra-terrestrials finally come calling. Or when the Pope becomes a Mormon. We're getting to see things we never thought we'd see...amazing things.

It must have been about 1960. Our father traded in the old Chevy for a Pontiac. It was an old one - maybe it was a '54 or a '56. But it was heavier, more solidly built, and quieter than the Chevrolet.

A few years later, boys from better families bought muscled-up Pontiac GTOs and Grand Prix. We remember, when we graduated from high school, a friend bought a GTO. What a thrill it was just to go for a ride...and turn up the radio!

And then, it must have been in the early '70s, our old friend Doug Casey drove up in a shiny Pontiac Firebird. We still remember the sound of it...deep, resonant...a baritone of an automobile; it probably sucked an entire oil well dry each time it drove up to the pump. Global warming on wheels.

But now... Adieu, Pontiac...

And we can probably say goodbye to GM too.

"US to take majority GM stake in revamp," says the headline in today's Financial Times.

How about that? America's largest car company is going to be state- owned...nationalized...presided over by the federal bureaucrats.

It's just a part of the shift away from the free market and towards an un-free market. Free market capitalism has failed, say the pundits. Let's give the feds a chance.

Even Henry Kaufman, writing in today's Financial Times, says that the Fed's "libertarian dogma" prevented it from controlling the banks properly.

But the Fed is hardly a libertarian organization. It's a banking cartel. As a cartel, it looks out for its member banks - and doesn't hesitate to use state power to do so. There is nothing libertarian about it...and no dogma associated with it - except as Greenspan's eyewash - that is even vaguely libertarian.

The Fed colluded with member banks to fix interest rates. In so doing, it helped create the biggest bubble in credit the world had ever seen. It was a terrible thing for the average fellow - who was lured deep into debt by rising house prices and cheap credit. But it was a great thing for the members of the Federal Reserve cartel. Profits in the financial sector - notably, the big Wall Street investment banks - soared.

But bankers are vulnerable to too much of a good thing - just like everyone else. Soon, they made the classic Wall Street mistake - they came to believe their own hype. Not only did they gin up trillions of dollars' worth of preposterous financial instruments...they actually bought these debt bombs from each other.

This posed a grave danger to the nation's economy...and to the banking system. Henry Kaufman claims the regulators dropped the ball because believed they put too much faith in the free market. But the regulators were little more than front men for the banks themselves. After Alan Greenspan came Henry Paulson as Secretary of the Treasury. He was probably still replying to messages at his old address - HPaulson@goldman.com - when the crisis began. And the head of the New York Fed - now, U.S. Treasury Secretary Tim Geithner - was elected to his post by the very institutions he was supposed to be overseeing.

Neither of them was about to stop the party; they and their friends were having too much fun.

And now, the feds are taking over control of America's largest auto business...

"Consider the risk of General Motors" on the economy, says Strategic Short Report's Dan Amoss.

"If it goes into Chapter 11 bankruptcy, it has the potential to be very disruptive to the economy, despite administration plans for a 'surgical' bankruptcy. Bankruptcies are about as predictable as the weather on the Gulf of Mexico during hurricane season, especially in this type of economy."

As Dan points out below, the rally is "getting tired"...but that doesn't mean there aren't opportunities to make money. When top stocks go down in a bear market, far too many people don't realize that there can be plenty of investing upsides as well. Be sure to read Dan's special report, which will show you how to make some major gains - even after the stock market crashes. Read it here.

Over to Addison, for news from the housing market:

"Only in America, only in 2009, can an annual 18.6% decline in home prices signal 'stabilization' in the housing market," writes Addison in today's issue of The 5 Min. Forecast.

"Just out this morning is the latest Case-Shiller index of housing prices in major U.S. metro areas. The annual 18.6% plunge in February is a teensy improvement from a record 19.0% drop the month before. It's the first time since the index started falling in early 2007 that it did not set a record year-over-year decline."


phpiBcLS0


"The numbers are in line with economists' expectations. All 20 metro areas measured by the index fell during the last year. In the case of Phoenix, Las Vegas, and San Francisco, those drops were more than 30%.

"Overall, home prices, on average, are now back to where they were in 2003."

The news from the housing market may be seen as 'stable' right now...but wait until the second wave of loan resets happens in 2011. If you thought the first wave of subprime defaults was bad - just wait. Millions of consumers will watch their finances go over a cliff...and more bank losses will drag down the entire economy.

But you don't have to be among the millions of Americans that are affected by the coming downturn...there is still time to protect yourself and your assets. The newly revamped Richebächer Letter's latest special report shows you how to shield yourself from the coming meltdown - while managing to turn a profit at the same time. See it here.

Each weekday, Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

The 5 is free to subscribers of our paid publications, including the newly revamped Richebächer Letter.

And back to Bill, with more thoughts:

Swine flu is in the headlines. They say 149 people have died of it in Mexico. Hardly a world-changing event so far, but epidemics have to begin somewhere.

Governments are swinging into action. They're checking their
best stocks investment of vaccinations...and threatening to 'shut down' Mexico City.

Major epidemics come along about as often as new imperial currencies. The French currency - the gold Louis - was the money of choice in the 18th century. In the 19th, it was the pound sterling. The U.S. dollar dominated the 20th century, it took over at about the same time as the Spanish Flu ran wild. The epidemic of 1918-1921 killed 30 million to 100 million people. It was the worst ever.

But this flu seems to move too slowly to be a major threat. People are able to see it coming, and take precautions. The next major epidemic will probably move much faster. When you will see the TV news reporter drop dead in front of your eyes, you will know trouble is coming.

Yesterday, the Dow fell 51 points. Oil stayed at $50. Gold lost $5 to close at $908.

The mood of the market is fairly positive, at least as we hear it. The last few weeks have produced an upward trend on Wall Street. The press is reporting "early signs of a recovery."

Of course, the crisis has to end sometime. But it seems much too early to us. Remember, this is a depression, not a recession. It is not a pause in an otherwise-healthy economic model. This time, the model itself is insolvent. Americans cannot continue going further and further into debt in order to provide huge bonuses for Wall Street and employment for China.

It's over. Fini. Caput.

It will take time to destroy the industries, investments and lifestyles that depended on the old model. And it will take even more time to find new ones.

Corporate earnings this year are expected to come in 35% below last year.

The insiders seem to realize that the game is over. They're selling into this rally - the highest level of insider selling in two years.

As Strategic Short Report's Dan Amoss put it "the rally is getting tired."

Zimbabwe, as long-suffering Dear Readers know, is a monetary pacesetter. It led the world in inflation - with a CPI estimated at 230 million percent. And then, it suddenly took the zeros off its currency - leading the world in deflation.

The latest report from that benighted land tells us that the chief of the Zimbabwe central bank, Gideon Gono, has found even more novel ways to get his economy rolling. Ben Bernanke, are you paying attention?

"Zimbabwe's central bank head admits robbing private bank accounts," says a headline.

Need money? Just take it directly from accounts in the country's banks. Of course, thanks to Mr. Gono and his friends there isn't a lot of money in Zimbabwe's banks. Who would keep money in Zimbabwe's banks, unless they had to? Still, a few international aid agencies had significant accounts - which Mr. Gono cleaned out. He said he only did it because he had to, in order to keep the economy functioning. Besides, he's going to put the money back just as soon as Zimbabwe gets back on its feet.

Finally, we cast a nostalgic look backwards at Argentina, where we spent our recent vacation. Newsweek reports that Buenos Aires seems untouched by the global financial meltdown:

"Take the city of Buenos Aires, capital of an economy built on the export of food and leather, and acutely sensitive to downdrafts in global trade. The sprawling old neighborhood of Palermo and its subsections "Palermo Soho" and "Palermo Hollywood" see new clubs, bars and restaurants opening weekly. Hip spaces are filled nightly with the young and sleek, including young American and European expats with funds to spare."

Making cash with the following best stocks

Had Jerry Maguire been an investor of best stocks making cash instead of a fictional sports agent, he might have become famous for yelling, "Show me the cash flow!"

Earnings come and go, and the green-eyeshade types can legally manipulate that metric to mask a company's true operations. Yet its ability to generate cash -- what comes in the register and goes out the door -- remains the preeminent indicator of company's worth. In short, cash is king.

Below, we'll look at companies that have proven themselves prodigious generators of free cash flow (FCF) -- the amount of money a company has left over that it could potentially pay to its investors. We'll find companies that have generated compounded free cash flow growth rates exceeding 25% annually over the past five years, then pair them with the opinions of the more than 130,000 members of the Motley Fool CAPS investor intelligence community, to see which ones might have the best chance of outperforming the stock market.

Company

Levered FCF 5-Yr. CAGR, %

CAPS Rating (5 Stars Max)

Amazon.com (Nasdaq: AMZN)

38.9%

**

Chemical & Mining Co. of Chile (NYSE: SQM)

40.3%

*****

NetEase.com (Nasdaq: NTES)

41%

****

Take-Two Interactive (Nasdaq: TTWO)

43%

****

Terex (NYSE: TEX)

33.5%

*****

Source: Capital IQ, a division of Standard & Poor's; Motley Fool CAPS.
CAGR=compounded annual growth rate.

Generating copious amounts of cash doesn't make a company an automatic buy. But having looked at Enron's cash flows instead of its earnings would have saved many investors a lot of grief. Warren Buffett understands that the value of a company today is calculated by its discounted future cash flows. Let's use this list as a jumping-off point to dig deeper into these companies and their piles of cash.

Ka-ching!
It's probably most exciting to discuss lithium battery production when considering Chemical & Mining Co. of Chile, or SQM for short. The company definitely stands to benefit from the push for alternative-energy vehicles, and the potential for plug-in cars like the super-sleek Tesla. However, SQM's lithium carbonate production accounts for only about 15% of its revenue. Its potassium production and other specialty plant-nutrition products are much more important, collectively generating half of the company's sales.

SQM's earnings report ought to give some hope to other fertilizer producers such as PotashCorp (NYSE: POT) and Agrium (NYSE: AGU). The potassium producer saw a 33% increase in earnings, with operating profits climbing 39%, despite a slightly lower level of sales volume. In contrast, analysts anticipate that in their current quarters, PotashCorp's profits will drop 47%, and that Agrium will post an 80% drop year over year. SQM was able to command higher prices while lowering costs, and it expects the fertilizer and industrial markets to recover by the second half of the year.

The lithium component of its business has been growing each year, and SQM is the world's largest producer of the mineral. For that reason, CAPS member strat91 thinks the mining company may have the inside track for growth:

If lithium battery technology becomes the favored technology for hybrid vehicles, sqm is in one of the best positions to fill the lithium demand. Lithium batteries weigh considerably less than the NiMH batteries currently used in the Prius. I'm not sure if the hybrid or the electric car is a viable long term solution, but it will be in demand for several years to come.

3 best Stocks Ready to Roar

There are plenty of strategies for picking stock winners. You can seek out low-P/E stocks, for example. Or you can find companies selling at a discount to their future cash flows. At the small-cap stock-picking service Motley Fool Hidden Gems, our analysts look for winners by staying ahead of the market and finding undervalued stocks that have gone overlooked.

Yet what if we could find a way to whittle down our list of prospects beforehand and find those whose engines are just getting warmed up?

Using the investor-intelligence database of Motley Fool CAPS, I screened for best stocks that investors marked up before their stocks began to rise over the past three months in a market that has headed south in a dramatic fashion. My screen returned 114 stocks when I ran it and included these recent winners:

Stock

CAPS Rating 10/28/08

CAPS Rating 1/28/09 (out of 5)

Trailing-13-Week Performance

Wyndham Worldwide (NYSE: WYN)

**

***

46.2%

Nektar Therapeutics (Nasdaq: NKTR)

**

***

33.6%

Century Aluminum (Nasdaq: CENX)

**

***

0.3%

Source: Motley Fool CAPS screener; trailing performance from Jan. 30 to April 27.

Wyndham Worldwide, in fact, was identified as a hot stock ready to run in January and has soared so far. But we want to know what hot stocks we ought to be looking at today. So I went back to the screener and looked for stocks that have just risen to a rating of three stars or better, carry valuations lower than the market's average, and haven't moved up in price over the past month by more than 10%.

Of the 41 the screen returned, here are three that still have attractive prices and that investors think are ready to run today:

Stock

CAPS Rating 1/27/09

CAPS Rating 4/27/09

Trailing-4-Week Performance

P/E Ratio

Vail Resorts (NYSE: MTN)

**

***

9.3%

10.3

Hatteras Financial (NYSE: HTS)

**

***

(5.9%)

6.8

CIBER (NYSE: CBR)

**

***

(1.3%)

6.1

Source: Motley Fool CAPS screener; price return from April 3 to April 27.

Though the results you get may be different, since the data is dynamically updated in real time, you can run your own version of this screen. But let's look at why investors might think these companies will go on to beat the market.

Vail Resorts
With capital projects completed and real estate on new luxury resorts sold out, Vail Resorts didn't take a powder with this past quarter's results. But CAPS All-Star TSIF isn't too sure Vail can avoid a downhill course once the seasonally slow summer months arrive.

Vail resorts is a cyclical stock at best, with the bulk of earnings announced in the lagging summer quarter. The price per share is usually lowest in July. I really don't know what this mountain wonder will do going into this summer under such a negative outlook. Cash on hand is half of what it was a year ago. [Weathered] well on paper, but losing quarters the last two quarters sets things up to look pretty dismal. I suspect the next year will not be as pretty as their real estate and I believe it is down a steep hill from here with [slaloms] mixed in. Jump!

Hatteras Financial
A REIT created for the express purpose of investing in Fannie Mae and Freddie Mac mortgages, Hatteras Financial is attracting investors such as CAPS member normniner, who enjoys the "big dividend yield" that comes from investing in government-insured securities.

CIBER
As a pure-play system-integration consultancy that serves private- and government-sector clients, CIBER may benefit from the return to the U.S. of jobs that had previously been outsourced. Sallie Mae (NYSE: SLM), for example, is repatriating 2,000 jobs from India, Mexico, and the Philippines. The difficult economic environment may still make many companies want to do certain jobs in house. CAPS member perfectblues thinks that CIBER's low valuation may offset some of the negative factors surrounding the industry: "May not be your best long term play, but right now it is looking cheap."

These Are the Market's Best Stocks

The best stocks? Is that really what I'm going to write about, after a year in which the S&P 500 dropped by nearly 40%?

Yes, it is. You learn pretty rapidly in this business that the best way to make money in the market is to invest for the long term, and you recognize that volatility is part of the ride. And when you commit to the long term, you quickly discover that the stocks that offer the best returns today aren't well-known, widely owned names.

But I'm getting ahead of myself. Before I can get to the takeaway, I have to show you the data. This is a simple list of the top-performing stocks of the past 10 years. I compile this list at the end of every year, and every year it yields the same fascinating insight:

Company

Return, 1999-2008

Jan. 1, 1999, Market Cap

Hansen Natural

4,891%

$53 million

Celgene

4,214%

$252 million

Quality Systems

4,130%

$26 million

Clean Harbors

4,129%

$16 million

Green Mountain Coffee Roasters

4,122%

$19 million

Deckers Outdoor

3,551%

$19 million

Almost Family

3,171%

$9 million

Southwestern Energy

2,990%

$187 million

FTI Consulting

2,879%

$16 million

XTO Energy

2,839%

$343 million

Data from Capital IQ, a division of Standard & Poor's. Includes only U.S.-listed stocks with verifiable stock price histories on major exchanges.

The trait that sets these stocks apart
What does an energy-drink maker (Hansen) have in common with a biotechnology leader (Celgene)? A home-nursing practitioner (Almost Family) with the makers of Ugg boots (Deckers)? A natural-gas driller (XTO) with some guys who sell java (Green Mountain)?

On the face of it, not much. But if you look closely, you'll see that these were all very small companies when their amazing stock market runs began.

To see just how important it is to start small in the stock market, take a look at the returns that the 10 best large caps offered over the same period of time:

Company

Return, 1999–2008

Jan. 1, 1999, Market Cap

China Mobile

574%

$20 billion

BHP Billiton

554%

$16 billion

Telmex

546%

$19 billion

Royal Bank of Canada (NYSE: RY)

243%

$15 billion

Southern

237%

$20 billion

Bank of Nova Scotia

232%

$11 billion

ConocoPhillips

143%

$11 billion

Rio Tinto

187%

$16 billion

Nike

184%

$12 billion

ExxonMobil

171%

$178 billion

*Data from Capital IQ, adjusted for dividends.

Or the somewhat more dynamic mid-caps:

Company

Return, 1999– 2008

Jan. 1, 1999, Market Cap

Qualcomm

1,071%

$3.6 billion

Occidental Petroleum

851%

$5.8 billion

Teva Pharmaceutical

781%

$2.5 billion

Apple

734%

$5.5 billion

EOG Resources

707%

$2.6 billion

POSCO (NYSE: PKX)

706%

$4.8 billion

Canadian National Railway (NYSE: CNI)

704%

$4.9 billion

Banco Bradesco (NYSE: BBD)

666%

$6.1 billion

Apache (NYSE: APA)

626%

$2.5 billion

PotashCorp

623%

$3.5 billion

The returns just don't stack up.

Here's what's special about very small companies
And although companies such as Celgene and XTO are big-cap market darlings today, tracked and owned by big institutions such as Goldman Sachs and TIAA-CREF, and the New York State Common Retirement System, the next Celgene and the next XTO are being ignored and undervalued -- just as Celgene and XTO were 10 years ago! That's because companies like these are too small and too obscure to be worth Wall Street's "valuable" time.

So if you want to buy the best returns, you have to look at stocks today that are:

1. Ignored.
2. Obscure.

And, most of all:

3. Small.

That was the case at the end of 2005, 2006, and 2007 as well.

They're out there
At Motley Fool Hidden Gems, these are precisely the types of companies we spend our time looking for. Rather than tracking $22 billion Celgene, we follow Natus Medical, a $240 million maker of health screening products for newborns, in the health-care space.

Though Natus is small, we believe it's well managed, cash-conscious, and poised to take advantage of enormous market opportunities. That last point, after all, spurs the best small companies to grow big, and that's what we believe our Hidden Gems recommendations can do for your portfolio.

Your to-do list
So take this lesson from the market's 10 best stocks, and put it to work in your portfolio this coming year by buying small caps.

Drink In These 5 Top Stocks

Whether in the corporate lunchroom, our cubicles, or the local watering hole after work, there are regular places we gather to discuss news, sports, or -- if you're like us -- stocks. Here at Motley Fool CAPS, we gather around the virtual water cooler daily to rate stocks and delve into their merits as investments.

Our 130,000-strong CAPS community -- where members give the thumbs-up or thumbs-down to some 5,300 stocks -- seeks out the businesses it thinks will outperform the market. Below we'll take a look at some of the highest-ranked, most talked-about top stocks in the CAPS universe, and whether you think they'll continue their winning ways.

Stock

CAPS Rating (5 Stars Max)

No. of Calls

% Outperform Calls

LoopNet (Nasdaq: LOOP)

****

1986

97%

MEMC Electronic Materials (NYSE: WFR)

****

1843

97%

Phillip Morris International (NYSE: PM)

*****

1832

98%

US Steel (NYSE: X)

****

1859

94%

USG (NYSE: USG)

****

1961

93%

A tall drink of water
Like country singer Billy Ray Cyrus's music, Phillip Morris International is a stock that everyone hates to admit they like. Investors just don't want to acknowledge they get an achy-breaky heart for a cigarette manufacturer.

Despite being a pariah here in the U.S., smoking is ascendant around the world, particularly in emerging markets, where Phillip Morris saw strong revenue growth in the first quarter of 2009. Latin America and Canada grew 28% over the year-ago period, excluding currency fluctuations, while Eastern Europe, the Middle East, and Africa saw 6% growth.

However, overall first-quarter sales were off 5.5%, and profit was down 12%, largely because of the volatility of the dollar. As order is restored to economies around the globe, currency stability will enable the cigarette maker to remain a smooth draw, fending off inroads from lower-priced-cigarette makers such as British American Tobacco (NYSE: BTI). Absent the dollar's drama, sales actually rose 6.3%, and earnings per share jumped 12.7% from the year-ago period.

Compare that to Altria (NYSE: MO) and its domestic profit declines, and there's more than one parallel here to Billy Ray Cyrus: Both have offspring that are faring better on the world stage.

Even if you don't smoke, there's no reason you shouldn't enjoy the healthy dividend and growth potential that foreign markets hold for the cigarette maker. CAPS member jigar34 thinks Philip Morris' cash-generating capabilities will ensure that this one doesn't go up in smoke:

Like my other pick [Diageo], I like this one for the great brands it holds and its high dividend yield (5.7%). [Philip Morris] generates a lot of cash and the growth prospects are robust, expecially as the emerging markets turn to brand name smokes. The debt level makes me uneasy, but as long as the sales (and thus cashflow) are there, I expect debt payment and even potential for dividend increases and share repurchases.

Gather 'round
The CAPS community is like trying to take a sip from a fire hose. With so many good opinions about today's top companies, why not grab a pointy paper cup from the dispenser and join us at the Motley Fool CAPS water cooler. Your input can help guide other investors to stocks with bright prospects for growth. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page.

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