What's GM worth?

NEW YORK (CNNMoney.com) -- Once the bankruptcy process at General Motors plays itself out, what will the company be worth?

It's more than an academic question of interest only to Wall Street traders. It will determine how much money taxpayers can expect to recoup from multiple bailouts of GM. When all is said and done, the Treasury Department is likely to pump more than $50 billion into GM (GM, Fortune 500) -- including loans made to the automaker last year.

It is also key to determining the level of future health insurance benefits for hundreds of thousands of GM retirees and how much money holders of $27 billion on GM bonds, including pension funds and individual investors, will be able to recover.

GM is widely expected to file for Chapter 11 bankruptcy protection on Monday. As a result, the government, bondholders and a trust fund controlled by the United Auto Workers union will wind up owning virtually all the stock in a reorganized GM. (Current GM shareholders will essentially have their holdings wiped out through bankruptcy.)

So taxpayers, retirees and bondholders need for shares of a new, leaner GM (GM, Fortune 500) to start trading for them to stand any chance of benefiting from the company's emergence from bankruptcy. Unfortunately, these new owners probably won't know until at least 2010 just how much money, if any, they will recover.

GM's most efficient plants, dealerships, brands and other assets could exit bankruptcy within two to three months.

0:00 /02:46Coming to U.S.: GM's Chinese cars

However, it will take at least 6 to 18 months for the bankruptcy court to wade through the company's unprofitable plants, most of its debts and other liabilities, according to a senior Obama administration official. During that time GM stock is unlikely to be publicly traded.

But even once shares of GM do begin trading again, it's highly uncertain what the company could be worth.

$25 billion: too high or unreasonably low?

According to a filing by General Motors late last month, the company estimated the equity value of its common stock would be about $25 billion once it completed a reorganization.

That's substantially higher than the market value of about $450 million that GM was worth based on Friday's closing stock price of just 75 cents a share. But the last time GM was worth as much as $25 billion was late 2007.

A new company, with a greatly reduced debt burden, fewer plants and lower labor costs, could end up being an attractive investment. But auto analysts and other experts are reluctant to speculate on exactly what GM's value could be following bankruptcy.

Len Blum, managing director of Westwood Capital, an investment bank, said he thinks there's a better chance for taxpayers to recover money from their investment in GM than with insurer AIG. Taxpayers also have a majority stake in that company, and the government has kicked in more than $180 billion so far to keep AIG afloat.

Blum said that given the reduction in GM's debt level and operating costs that are being planned, there could be "some real value" in a new GM, but that there was still great risk for all shareholders.

"If it was a slam dunk, the union would have wanted more common equity," he said. The UAW wound up agreeing to a 17.5% stake.

Other experts question whether cost cutting and a lower debt load are enough to make the company attractive to investors, even if it they enable GM to earn its first profit on its auto operations since 2004.

"Back in 2007 GM was being valued on its future prospects and its assets, not its profitability," said Chris Jadro, an equity strategist focusing on distressed companies for Jefferies & Co. "But it's just hard to imagine that GM will be worth what it was a year ago coming out of this down cycle."

The two biggest shareholders of the new company also expressed doubts about how quickly the stock will recover.

A senior Obama administration official speaking to reporters Thursday conceded it is unlikely that the government can get back its entire investment in GM. The official said the government hopes "to recover as many taxpayer dollars as we can," and that it expects to sell the shares as soon as possible.

UAW President Ron Gettelfinger, who also said he would like to sell the union's stake in GM as soon as possible to have money available in the trust fund, downplayed expectations about the company's value going forward.

Although he said Friday that the union believes "the stock should be worth a lot more a lot quicker," he added that "right now, we realize the value is zero."

Some auto industry experts believe that the changes made by GM could position it for a level of profit it hasn't earned in decades. David Cole, chairman of the Center for Automotive Research, said GM is well-positioned for even a modest rebound in industrywide sales.

Carr said the $25 billion market value estimate "is pretty reasonable and it could even be conservative." He said that profits for GM and the rest of the industry could be robust in the next few years due to reductions in capacity and pent up demand for autos.

But a number of experts doubt that GM's market value will get anywhere near the $25 billion figure in the next few years. They point out that GM will face a difficult competitive position compared to cash-rich Toyota Motor (TM) and even U.S. rival Ford Motor (F, Fortune 500), both of which could pass it in terms of U.S. sales in the coming years as GM sheds brands and dealers.

Sean Egan, managing director of rating agency Egan-Jones Group, said he's not sure GM can generate a profit even with all the cost concessions they've received from the union.

"In almost every competitive front, GM is being beaten. People who see strong profits for GM are being delusional," Egan said.

But Susan Helper, an economics professor at Case Western Reserve University in Cleveland and expert on the auto industry, worries that even if GM does return to profitability following bankruptcy, investors could penalize the stock due to the company's previous problems and doubts about its future.

"It's tough to see there being a line of investors looking to get into the stock," Helper said.

Stock market encourages investors to stick around till rally's end

One of the oldest adages on Wall Street is "Buy in October, sell in May." However, investors who followed that logic this time around may have left the game a bit too early.

The rally that began in early March has now extended for three months. That includes gains in May of 3.7 percent for the Nasdaq composite index, 2.6 percent for the S&P 500 stock index and 1.8 percent for the Dow Jones Industrial Average.

One analyst says there is a historical precedence for the rally to continue, pointing to a surprisingly similar scenario in 1982.

"In August 1982, as today, the unemployment rate was very high and would rise for several more months before peaking close to 11 percent. The economy was embroiled in the second-leg of back to back recessions, which many felt represented the worst economy since the Great Depression," said James Paulsen, chief investment strategist at Wells Capital Management.

He also pointed out that the government was "awash in red ink, the size of which was never seen before outside of war times."

And, the banking industry was in shambles and the household sector was "widely felt to be overextended after a decade of massive consumer spending."

But it was at the bleakest moment that a powerful stock market rally began.

"It rose by more than 35 percent in the first 44 days off its lows. It rose inexplicably and unbelievably and indeed, like today, most were highly suspicious of its advance. Yet, in 1982, the first 35 percent stock market advance would be followed by another 35 percent advance in the ensuing six months," said Paulsen.

Often forgotten is the fact that the stock market is a leading economic indicator. As was the case in 1982 and today, current conditions look quite bleak. But, looking down the road six to nine months, stocks are suggesting better times to come.

Back in March of this year, confidence levels had cratered. Yet, it was precisely at that time the stock market rally began. Now, consumer confidence is beginning to change as well.

The Conference Board reported on Tuesday that its Consumer Confidence Index rose in May much more than had been expected.

"Consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months. While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us," said Lynn Franco, director of the Conference Board Consumer Research Center.

Of course, the stock market began telling us that was the case in March.

Correspondingly, a survey by the National Association of Business Economics found that 90 percent of economists believe the current U.S. recession will officially end before the finish of 2009.

Again, that is what the stock market began indicating back in March.

However, it is important to note that a stock market rally and rising consumer confidence does not suggest the economy will improve at a corresponding rate. The economists surveyed by the NABE believe that the unemployment rate probably won't peak until some time in the second quarter of next year.

That opinion is shared by Professor Alan Gin of the University of San Diego. Gin released his most recent reading on the local economy last week. The Index of Leading Economic Indicators for San Diego County rose by 0.2 percent in April. It doesn't sound like much, but it was only the second time in the past 37 months that the indicator was positive.

Yet, despite the April advance, Gin is not sold on the possibility that the worst is behind us.

"Since economists typically look for three consecutive moves in one direction for a leading index to signal a turning point, it remains to be seen if a turnaround is in sight. Even if a bottom is reached, it is likely that the rebound from there will be weak. Indeed, there could be a significant period where the local economy remains flat after reaching that bottom," said Gin.

But, in the meantime, the stock market is still encouraging investors to stick around. Only time will tell how long the rally lasts.

Vanguard’s Bogle says time is on investors’ side

CHICAGO - Jack Bogle is still holding court, and his message has not changed.

Buy and hold domestic stocks and bonds, cheaply, in an asset allocation that's appropriate for your age. Then let it play out, over time, so that it ultimately works in your favor.

The founder of the Vanguard Group, the man behind the first retail index fund and a longtime champion of the small investor, Bogle is now 80, and his health has been poor of late. He had a heart transplant 13 years ago and has spent "the extra time I've been given" as something of the people's champion, taking on the investment community's flawed thinking and bad behavior, and calling out individual investors for making the entire investment too hard by shooting for the moon, rather than going for steadier returns over time.

Before speaking at the Morningstar Investor Conference here last Thursday, Bogle warmed up in an interview that covered a wide range of topics. Here are the highlights:

On what he has heard from investors:

"It depends on whether they simply heard "Buy an index fund" or if they got it right and listened to the whole story. I have been saying for more years than I care to count not to forget bonds. And start to think about it as a rule of thumb, having your bond holdings equal your age.

"I followed my own advice," Bogle noted. "I did that a little bit late in my own life, because when I was 50, I was probably 75 percent in stocks, instead of 50-50, but when I got to 65, I was 65 percent in bonds. Since then, with the bond market rising and the stock market down, I am now very close to 80 percent bonds and 20 percent stocks, and I'm 80. . . . Now I had the benefit of nearly perfect timing in my life. Had I turned 80 in 1982, it would have been much different. There are certainly times when the formula will not work as well, but for me it has worked nearly to perfection.

"So investors come to me and generally say one of two things, either 'Thank God I followed your advice,' or 'I really feel stupid for not having followed your advice.' "

On the economy:

"We can't fix our economy now, today. We can move in a direction of fixing it, but when you think about what is happening it's very obvious: We have to save more.

"When you see the savings rate going from 0 percent a year and a half or two years ago to 4 percent or 5 percent today, well we're not actually saving that much more money today. We're un-dis-saving - paying off credit cards and mortgages. That's not the same thing as adding to the amount you have to spend. It counts as savings and should count as savings, but the economy is crying out for us as consumers to spend more collectively, and we're not about to do that individually because we don't know where our job is going to be in the next year. It is what economist John Maynard Keynes called the paradox of thrift. It is good for us to do what we are doing, saving money, but it's bad for the economy.

". . . I'm not saying the economy won't grow, starting maybe in a year from now. I'm no expert, but as far as I can tell the economy is leveling off right now and may have a little further to go down, but when it comes back, the old 3 percent real growth, which is the rate the economy has grown at, well I think that is too aggressive. We're looking at much slower economic times."

On what a slower economy means for investors:

"The first thing they must realize is that the stock market tends to anticipate things. We have had a stock market crash of the largest proportions probably of the last century, with the possible exception of 1929 to 1933. We have had a big stock market crash. Do we have to have another one? I don't think so.

"The market has either exactly got it right and is therefore valued in the proper levels; has overestimated the dangers that lie ahead and is, therefore, cheap; or has underestimated the dangers that lie ahead and is, therefore, expensive. Those are the three options. And I would guess the market probably has it about right. I would guess that we have seen the low for the year and maybe the low for this cycle."

On how the fund industry responded to financial crisis:

"I'd say we did a bad job. Embarrassment is right. Annoyance, even anger, that the industry turned out not to be this wonderful stewardship business, but a great big salesmanship business of new products.

"We had absolute return funds - heaven help us all - and then a choice of funds that offer 1 percent, 3 percent, 5 percent or 7 percent above the Treasury bill, and all kinds of things that just can not work."

Commodity shares, Coca-Cola lift Wall Street

NEW YORK (Reuters) - Stocks rose on Friday, capping their third straight monthly advance, as rising commodity prices lifted shares of natural resource companies, while a sliding dollar boosted the allure of multinationals, including Coca-Cola Co (KO.N).

Investors were encouraged by a report showing in May consumer confidence hit its highest in eight months, while the run-up in commodities fueled bets that overseas demand would underpin a recovery in the global economy.

U.S. front-month crude oil futures rose $1.23 percent, or 1.8 percent, to $66.31 a barrel, supporting gains in such stocks as Chevron (CVX.N), Exxon Mobil (XOM.N) and ConocoPhillips (COP.N). The S&P energy index .GSPE rose 1.2 percent.

Shares of Coca-Cola, which gets the bulk of its sales from abroad, jumped almost 5 percent after the dollar slid to five-month lows against a basket of currencies.

The beverage maker was the Dow's top boost, followed by technology services company International Business Machines Corp (IBM.N), up 1.5 percent to $106.28.

"It's clear to me, based on the market action, that we've turned a corner in this economy," said Sasha Kostadinov, portfolio manager and research analyst at Shaker Investments in Cleveland.

"The question that I have is, when we get a clear view of what's around the corner, is it going to be better growth and moderate inflation, or is it going to be slow growth and bad inflation?"

The Dow Jones industrial average .DJI gained 96.53 points, or 1.15 percent, to 8,500.33. The Standard & Poor's 500 Index .SPX climbed 12.31 points, or 1.36 percent, to 919.14. The Nasdaq Composite Index .IXIC rose 22.54 points, or 1.29 percent, to 1,774.33.

Since hitting a 12-year low in early March, the S&P 500 has risen 35.9 percent. The third straight monthly advance is the index's longest monthly winning streak since fall 2007.

In May, the S&P 500 rose 5.3 percent, the Dow gained 4.1 percent and the Nasdaq advanced 3.3 percent.

While rising oil prices are a boon for energy companies and a harbinger of improved worldwide demand, a jump in energy costs could present a significant headwind for consumers and businesses at a time when investors are looking for a spending recovery to fuel an economic revival.

In addition, a surge in commodity prices heightens the specter of inflationary pressures in the long run.

The slumping dollar lifted prices of other commodities, sending August gold futures as high as $982 an ounce, the highest since late February. Shares of miner Freeport-McMoran Copper and Gold Inc (FCX.N) rose 4.3 percent to $54.43 and the gold BUGS index .HUI gained 3.3 percent.

Chevron shares finished up 1.3 percent at $66.67, while ConocoPhillips climbed 0.5 percent to $45.84, and Exxon Mobil gained 0.2 percent to $69.35.

Shares of Caterpillar Inc (CAT.N), a maker of bulldozers and excavators, whose customers include mining companies, jumped 2.5 percent to $35.46. On Nasdaq, shares of software maker Microsoft Corp (MSFT.O) were a top boost, rising 2.2 percent to $20.89. 

Among declining stocks, General Motors Corp (GM.N) plunged 33 percent to 75 cents as the beleaguered automaker drew closer to filing for bankruptcy protection.

While the bankruptcy has been expected, analysts say there are worries about the implications for jobs, business and consumer sentiment in the months ahead. GM's bankruptcy petition is expected to occur on Sunday or Monday.

Trading was active on the New York Stock Exchange with about 1.86 billion shares changing hands, above last year's estimated daily average of 1.49 billion. On Nasdaq, about 2.59 billion shares traded, above last year's daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of more than 8 to 3 and by about 7 to 3 on the Nasdaq.

Best Stocks: Why are NASCAR's ratings dropping?

So, why aren't you watching NASCAR? According to USA Today, NASCAR "solicited opinions from drivers and team owners in a 'town hall'-style meeting" earlier this week on why attendance and television ratings have dropped.

I know that I haven't watched NASCAR since Rusty Wallace made his last call and pulled off the track into the broadcasting booth. So, why am I not watching?

It is simple, I am now a tad busier (with a 4-year-old, a 2-year-old, and a newborn) on a daily basis, and I can't (and won't) carve out the time to spend a Sunday afternoon watching a NASCAR race. I'm not alone, as Fox has seen ratings drop 13% compared to a year ago.

So why has NASCAR nation contracted? One theory is that the poster boy for racing isn't doing that well. Dale Earnhardt Jr. has not won a race in a while and some believe that this is impacting NASCAR viewership. Fox Sports chairman David Hill noted, "I'm told by our research guys that if Dale won, more people would watch . . . I guess in a way because he hasn't, Elvis has left the building. I would love to see him win at Dover [this weekend's race]."

Want the funniest and, possibly, most absurd theory? Blame it on Digger. Digger is Fox's animated gopher who pops up in Fox's pre-race programming, and some believe that disdain for the gopher has hurt ratings -- seriously. Hill said that he received a recent email from a "high-ranking NASCAR official" blaming Digger for the poor ratings. Hill said the email claimed, "It was because of Digger that people were turning off in droves because they couldn't stand it . . . I said, 'I'm so sorry. If I'd known, I never would have created him. I didn't realize how insidious he was . . . It's the biggest crock of (stuff) I've ever heard."

Yes, some want to blame the drop in ratings on an animated gopher. I don't think that is the case, and I truly pray that was a joke.

In fact, Hill notes that the gopher (who was created during a rain delay a year ago) has sold $500,000-worth of items at its 53-foot merchandise trailer. This would rank Digger among the top 15 drivers in terms of sales. Does a gopher really impact whether or not you watch a NASCAR race?

One suggestion was to keep a consistent start time, beginning every race at 1 PM Eastern Time -- though this could cause some confusion on the West Coast.

Hill then turned philosophical, "Nothing goes up forever . . . Every sport has a correction. We've had the most unbelievable run with NASCAR. Because of that, and maybe quite rightly, people think it'll keep going. If it had gone down 50 to 60%, there's something wrong. But 13% is no time (for) alarm."

It isn't time to panic, honestly, as NASCAR Cup races continue to pull in more than the average network audience for the NBA postseason -- and I don't see NBA Commissioner David Stern blaming the problem on any animated gopher. Of course, the NBA doesn't use an animated gopher.

5 hot summer stocks for cool profits

Before you retreat to your favorite summer locale with the perfect book, let's take a look at the stocks set to profit as consumers look to enjoy the fruits of their labor over the next several months.

For me, summer means lots of boating, fishing, and time with my family. And this year I'll be doing more of each to make up for lost time spent hunkering down during the downturn.

As such, companies that make the goods in each of these categories should do well. That's how it goes during a recession. Demand builds as we retreat to preserve cash and fix balance sheets.

Here then are five companies set to sizzle this summer.

Click on each stock to learn more:

Stock #1: Marine Products Corp. (NYSE: MPX)

Stock #2: Quicksilver Inc. (NYSE: ZQK)

Stock #3: Winnebago Industries Inc. (NYSE: WGO)

Stock #4: Vail Resorts Inc. (NYSE: MTN)

Stock #5: Cabela's Inc. (NYSE: CAB)

You Simply Can't Ignore These Stocks

Traditional investing logic tells us that, when the economy turns sour like it has, we ought to flock to undervalued large-cap stocks because they not only have better access to capital than smaller companies do, but they also attract the smartest and brightest business minds.

If the recent market implosion has taught us anything, though, it's that a poorly run large company can fall harder than a poorly run small company in an unforgiving market. In fact, some small companies have adjusted much better than their larger counterparts.

Castles made of sand
Certainly there's still some merit in the conventional approach -- one could do far worse than buying quality names such as Intel (Nasdaq: INTC) and Chevron (NYSE: CVX) at current prices, as both of these blue chips have sterling balance sheets and continue to attract top talent.

Yet there was no shortage of talent wanting to get in the doors of Lehman Brothers, Wachovia, and Bear Stearns -- in fact, all three employers were among the 100 "most desirable" MBA employers in 2008, according to a Fortune survey. If traditional logic held true, this high-caliber talent should have been able to recognize the firms' problems and correct them more quickly than a smaller company. As we all know, that reasoning failed many investors.

In fact, it's been a number of smaller financial firms -- like Great Southern Bancorp, a Midwestern bank with $3.4 billion in assets -- that have proven to be nimbler than Goliath-sized competitors like Bank of America and Citigroup. Well-positioned financial firms like Great Southern can capitalize on adverse market conditions by sweeping up other troubled companies' assets, as Great Southern did with Kansas-based TeamBank on March 20, 2009. Shares of Great Southern have doubled over the past year.

Titanic flops
But it's not just the financials -- consistently poor execution at iconic American businesses like General Motors (NYSE: GM) and Gannett (NYSE: GCI) has sent both stocks down to single digits, with few signs of them returning to their former glory. These century-old companies employ tens of thousands and had plenty of access to capital, but simply failed to perform well over the years.

Now compare those giant tales of woe to the success of PetMed Express, a $350 million pet drug prescription company that employs just over 250 people. It recently reported revenue growth of 17% year over year, remained free-cash-flow positive, and kept long-term debt off its balance sheet. Because of this, the company was able to fund itself through its own operations and had no need to beg (pun intended) for loans. As you might imagine, investors rewarded PetMed even in this merciless market -- shares are up 14% over the past year, while the S&P 500 is down over 30%.

Bucking the dividend trend
Another reason investors traditionally turned to large caps in this type of environment was for their consistent and reliable dividends, but after 62 S&P 500 companies cut their payouts in 2008 -- followed by another 62 so far in 2009, including Macy's, SunTrust (NYSE: STI), and BB&T (NYSE: BBT) -- it's clear (or more clear than usual) that no dividend is guaranteed.

Indeed, in a conference call after the dividend cut, Macy's Chief Executive Terry J. Lundgren said, "We just believe that this is a time when nothing should be considered a sacred cow."

It's discouraging to see so many blue-chip companies that have paid or raised dividends for decades suddenly changing course and blaming their mistakes on the macroeconomic picture, but there are still companies out there -- large and small -- staying true to shareholders with dividend increases in this market.

One of those companies is $1.7 billion clothing retailer Buckle, which in November 2008 -- despite operating in the same consumer spending environment as the aforementioned Macy's -- paid its shareholders a special one-time $3-per-share dividend and increased the quarterly dividend by 20%. Buckle is able to do this because it isn't burdened by debt (it has no long-term debt whatsoever), and it generates plenty of free cash flow, giving it plenty of room to raise dividends or reinvest in the business for the benefit of its shareholders.

Choose your weapons wisely
In a market where economic agility and strong management matter more than ever, make sure you're studying well-run small companies alongside larger companies. For my money, I want to own companies, regardless of size, that have a strong management team, have a rock-solid balance sheet, and dominate their market niche.

One of the companies I've been researching recently is Darling International, a $600 million company that fills a niche not many others want to fill: collecting food service waste (i.e., grease and discarded meat) and rendering or recycling the waste into usable by-products like animal feed, industrial oils, and even biofuel.

It's not only the largest company in this field (and the only one that's publicly traded), but it also has contractual relationships with big names like McDonald's and Costco (Nasdaq: COST). It's a cyclical business to be sure, but Darling is free-cash-flow positive, has more cash than long-term debt, and has tenured management -- which means it's worth your time to research.

Drink In These 5 Top Stocks

Whether it's the corporate lunchroom, your cubicle, 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.

Members of our 130,000-strong CAPS community -- where investors give the thumbs-up or thumbs-down to about 5,200 stocks -- earn points by seeking out the businesses they think will outperform the market. We'll take a look at some of the most talked-about top stocks in CAPS and whether or not you think they'll continue their winning ways.

Stock	CAPS Rating (5 Stars Max)	Number of Calls	% Outperform Calls
Archer Daniels Midland (NYSE: ADM)	****	1,851	93%
Barrick Gold (NYSE: ABX)	****	1,812	94%
CapitalSource	****	1,892	95%
Morgan Stanley (NYSE: MS)	**	1,777	74%
Qualcomm (Nasdaq: QCOM)	****	1,499	92%

A tall drink of water
The same creative geniuses who brought you our financial mess are showing they haven't lost their ingenuity. After the outcry about obscene bonuses granted to executives at American International Group (NYSE: AIG), compensation practices at companies operating on the public dole have drawn closer scrutiny.

Treasury Secretary Timothy Geithner has said that substantial change is needed in compensation, but President Obama's attempt at dictating all pay practices from the White House was met by a chorus of jeers. Caps are coming; we just have to wait to see what form they'll take.

That hasn't kept Wall Street from revamping things on its own. So you've got a problem with bonuses? OK, Morgan Stanley has said it's going to limit them, but only after increasing base salaries. The crib notes to the plan say the outsized pay for failure Wall Street's wizards enjoyed remains essentially unchanged, but allow Morgan Stanley to say it is doing something.

That's good enough for Citigroup (NYSE: C) and Bank of America (NYSE: BAC), who are following right along after Morgan Stanley's lead, initiating their own compensation "reform."

Investors at CAPS remain convinced that Morgan Stanley will emerge as a stronger institution, with 75% of those rating the company indicating that it will outperform the markets. All-Star members are a little less sanguine about Morgan Stanley's prospects, with a little more than two-thirds of them suggesting it will continue to exceed expectations.

5 Stocks With a Little Magic

When fund manager Joel Greenblatt published his investing tome, The Little Book That Beats the Market, in 2005, it marked a unique point for investors. Suddenly, investors had access to investing strategies that a value investing master used and that could be easily replicated. Greenblatt has achieved phenomenal results over the past two decades -- he's beaten even Warren Buffett's performance.

His strategy is deceptively simple: Buy undervalued, high-performing companies and hold for a year. Wash, rinse, and repeat.

But what if we can augment Greenblatt's methodology? Below we've used a "magic formula"-like screen that approximates the criteria he lays out for pre-tax earnings and return on capital, but it also adds the ratings from our Motley Fool CAPS investor-intelligence database. Combining those rankings with Greenblatt's standards should give us winning investments that may just produce some outsized returns.

Here are a few companies that showed up when I ran this screen recently.

Stock	Pre-Tax Earnings Yield %	Pre-Tax Return on Capital %	Recent Stock Price	CAPS Rating (Out of 5)
Adaptec (Nasdaq: ADPT)	28%	>100%	$2.69	***
China Sky One Medical (Nasdaq: CSKI)	21%	>100%	$14.68	****
NutriSystem (Nasdaq: NTRI)	23%	>100%	$13.88	***
Primus Guaranty (NYSE: PRS)	67%	>100%	$2.50	****
Time Warner (NYSE: TWX)	22%	>100%	$23.00	**

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS. Pre-tax earnings yield is inverse of EV/EBIT. Pre-tax ROC is EBIT divided by tangible capital employed.

Don't consider this a list of companies to buy. Due diligence on this narrowly focused list of companies is always a smart requirement. So let's see what CAPS members have to say about one of these magical companies.

A little bit of pixie dust
Easy come, easy go. Bringing to a close the eight year-long saga of trying to create a new-media giant, the anchor that was AOL is finally being untethered from Time Warner. Sometimes, one plus one just doesn't equal two. It ends up becoming much, much less.

Time Warner purchased AOL for $147 billion, and only a year after the deal was completed, shareholders ended up having to eat some $100 billion in writeoffs. The service has occasionally enjoyed some hits -- AOL welcomes 107 million unique visitors every month, while AOL Mail saw a 31% increase in traffic last year, and AOL Music has continued to be a draw -- but membership in the service continues to dwindle, partially by design.

By year's end, though, Time Warner will spin off AOL to trade as a separate entity, after it purchases back the 5% stake Google (Nasdaq: GOOG) has in the Internet portal.

The remaining media giant, however, will still be a formidable business to contend with. It owns both the CNN and HBO networks, as well as the Warner Brothers movie studio. It's that latter asset, with its deep cast of characters to exploit, that has some investors believing it will be able to grow smartly from here.

Like Marvel (NYSE: MVL) and Universal Studios, which have been churning out movies based on Marvel's stable of comic book heroes, Time Warner has its own DC Comics heroes, and CAPS member SneakyFerry says it would be a good idea to delve further into the roster.

Warner (DC) has a deep well of big-screen characters from which to draw. Marvel has shown that there are big bucks to be made in turning comic heroes into movie giants -- Spider-Man, X-Men, Iron Man, etc. TWX, however, has been slow to the game. Batman, Superman, Watchmen -- nice, but ya know. ... However, there are plenty more characters who could use some Hollywood treatment. Warner appears to be waking up to the possibility. (A Green Arrow film? Green Lantern? Justice League?) Also, filmmakers are learning how to make these movies well -- attracting huge audiences and dollars. (The Dark Knight, for example -- or Marvel's Iron Man, which took a not-quite-A-list character and made him into a box-office smash.) Over coming years, TWX should enjoy a lift from superhero movies. If they don't, they're missing a golden opportunity.

Of course, an AOL spinoff -- a seemingly destitute business on the verge of failure -- brings to mind another Joel Greenblatt investing classic, You Can Be a Stock Market Genius, which focused on such special situations.

Beat the street
While he's provided an interesting magic formula, you'll need to read more than a few pages of Greenblatt's book to make your buy or sell decisions. So start your own research on these stocks on Motley Fool CAPS, where your opinion can still save the day. While you're there, you can 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.

Aflac's recent stock price rise is no accident

The market's flight-to-safety in late 2008/early 2009 spared few sectors, and it did not exempt the insurance sector, the upside of which is an insurance value or two for investors, and Aflac is one.

Aflac Incorporated (NYSE: AFL) is another one of those insurers that was rudely treated by Wall Street during the panic and paranoia that gripped markets with the onset of the global financial crisis. And it was rude: the Street took AFL's shares from a high of $68 to about $11, basically on the fear that Alfac would incur major losses from European bank hybrid bonds, including the threat of bank nationalization. To be sure, given the opaqueness surrounding much of the financial crisis, an AFL hair-cut was in order, but an 80% price drop? Please.

Let's systematically look at AFL's holdings: top-grade corporate debt, no subprime holdings, and low commercial MBS and residential MBS holdings. Fort Knox it isn't, but the aforementioned holdings are more than adequate for an insurer.

Some bond risk exists, but the above does not justify ignoring the company's demonstrated supplemental health and life insurance businesses. Aflac is one of the largest sellers of supplemental insurance in the U.S. and is a major cancer-insurance company in Japan (14 million policies).

In general, analysts see AFL's revenue rising 10-12% in FY 2009, driven by increased distribution outlets in Japan, and higher investment income. The First Call FY 2009/FY 2010 EPS estimates for AFL are $4.66 to $5.08.

True, AFL is likely to struggle to meet U.S. sales growth targets in FY 2009 as it did in FY 2008, but recent sales force recruitment and training programs should begin to bear fruit by late FY 2009.

Stock Analysis: Aflac is a moderate-risk stock. Consider buying a 25% position in AFL now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your AFL position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $17.

BEST STOCKS: News Highlights

INVESTMENT RESEARCH

Private companies controlled by Genting Bhd (GENT MK, Buy, TP: RM5.30) chief executive officer Tan Sri Lim Kok Thay's family disposed of a 9.5% stake in Genting Singapore plc, the proceeds of which may be used by the family to invest in MGM Mirage's Macau casino. The 9.5% stake was placed out for a total of S$658.71m (RM1.59bn) of at S$0.72 each, which was at a 16.7% discount to the closing price on Tuesday. (Financial Daily)
* * * * *
Telekom Malaysia Bhd (T MK, Buy, TP: RM4.90) signed a sale and purchase agreement with AmMortgage One Bhd, a wholly-owned subsidiary of AmBank (M) Bhd, for the sale of its employees' residential loans. TM said the residential loans would be sold to AmMortgage One with the first series of the sale having an outstanding principal value of RM348.9m. AmMortgage One will issue medium term notes to raise sufficient proceeds to satisfy the purchase consideration of the first series of the mortgage assets from TM. (Financial Daily)
* * * * *
KNM Group Bhd (KNMG MK, Sell, TP: RM0.67) said there are signs demand is picking up after a crude-price rally triggered a revival of exploration projects. "Our guys are becoming busy again," managing director Lee Swee Eng said in a phone interview on Tuesday. "Not busy taking orders, but busy starting to discuss. Customers are starting to restart their projects." It's not clear now long it will take for these new oil and gas exploration proposals to translate into new contracts, Lee said. He declined to disclose the value of KNM's order book, which in March was at RM3.9bn. (BT)
* * * * *
Tenaga Nasional Bhd (TNB MK, Hold, TP: RM7.00) is expected to issue the tender document for the submarine transmission line by year-end, said chief financial officer Datuk Izzaddin Idris. He said that the bids were expected to be very competitive given that metal prices are at their lows in the current times. Aluminium and copper, which are the main metals used, are much cheaper than before. (StarBiz)
* * * * *
YTL Corp Bhd's (YTL MK, Buy, TP: RM8.00) wholly-owned subsidiary YTL Hotels & Properties Sdn Bhd has entered into a sale and purchase agreement with Vun Vui Heung and Melinda Voon Ching Mee to acquire 80% of the issued and paid-up capital of Borneo Island Villas Sdn Bhd for RM77.5m cash. Upon completion of the proposed acquisition, Borneo Island will become an 80% owned subsidiary of YTL Hotels & Properties and indirect subsidiary of YTL Corp. (StarBiz)
* * * * *
IGB Corp Bhd is in talks with 10 parties on developing hotels in Vietnam, China, Thailand and Australia. Group managing director Robert Tan said the development might be in the form of joint venture, asset management or to wholly-own the entity itself. The hotels will carry the brand of either St Giles or Cititel but no deals have been closed at the moment. (StarBiz)
* * * * *
Dutch Lady Milk Industries Bhd expects 2009 to be challenging year as the current economic slowdown continues to impact consumer spending. It's managing director, Hans Laarakker said that he expect this year to be tougher than 2008, but despite the many challenges faced by the dairy industry, he was confident that Dutch Lady would be able to maintain last year's sales figures. (StarBiz)
* * * * *
Scomi Engineering Bhd is about to embark on the second phase of a feasibility study for a US$3bn (RM10.5bn) monorail system in Bahrain. The Middle Eastern state's Works Minister Fahmi Al Jowder was reported as saying that Scomi Engineering had embarked on preliminary engineering studies on available lines for its first monorail network. (BT)
* * * * *
INVESTMENT RESEARCH
Malaysia
Parkson Holdings's sub-unit Serbadagang Holdings Sdn Bhd is suing Chinese firms Dalian Tianhe Parkson Shopping enter Co Ltd, and Dalian Tianhe Plaza Co Ltd for RM26.6m and interests for its share of profits. Serbadagang is a wholly-owned subsidiary of East Crest International Ltd, a Parkson unit. Dalian Tianhe is 60% owned by Serbadagang and 40% owned by Dalian Tianhe Plaza. Parkson said Serbadagang had made full provisions for its investment costs in the first defendant and that the suit would not give rise to adverse financial or operational impact on the company. (Malaysian Reserve)
* * * * *
Proton Holdings Bhd is open to any form of partnership, including with China's Chery Automobile Co Ltd, as long as it benefits both itself and the country. Proton's MD said that if there was interest from any company, including Chery, they have to approach them first. Only then would Proton make their own fair assesment. He went on to say that Proton needed to be more forward looking and consider other markets than Malaysia. Also from next year onwards, Proton will be offering turbo version of its new models as it keeps tabs on customer preferences. (Malaysian Reserve)
* * * * *
The Malaysian economy contracted 6.2% y-o-y in the first quarter of 2009, the worst quarterly reversal since the 1997-98 Asian financial crisis, following a sharp drop in manufacturing output and exports. Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz warned that similar conditions prevailed in 2Q09. The central bank said yesterday that manufacturing shrank 17.6%, mining 5.2% and agriculture 4.3% in 1Q09. It also said services slipped 0.1% while construction expanded 0.6%. Zeti said the economy was expected to stablise in the second half of 2009, supported by fiscal stimulus measures and steps to enhance access to financing. Inflation rate moderated to 3.7% in 1Q due mainly to lower inflation in the food and nonalcoholic
beverages and transport categories. Headline inflation continued to moderate to 3% in April. (Financial Daily)
* * * * *
Malaysia's central bank chief has dismissed the possible downgrade of local banks by Moody's Investors Service, saying that it was wrong in its assessment during the Asian financial crisis. Moody's may downgrade the credit ratings of Malaysian banks as part of a global review on the weakening ability of governments to support their banking system. But local banks have enough capital and are not under financial stress, said Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz.
(BT)
* * * * *
INVESTMENT RESEARCH
Stocks fell Wednesday, giving back gains from the previous session, after a sharp rise in Treasury yields added to jitters over a looming bankruptcy for General Motors. Stocks had traded mixed for most of the session as concerns that GM will not be able to avoid bankruptcy overshadowed an encouraging housing report. But the sell-off gained momentum in the afternoon as the yield on the benchmark 10-year bond jumped to a 6-month high. The Dow Jones industrial average lost 2.1% (-173.5 pts, close 8,300.0). The Standard & Poor's 500 index lost 1.9% (-17.3 pts, close 893.1) and the Nasdaq composite lost 1.1% (-19.4 pts, close 1,747.6). In currency trading, the dollar rose against the euro and the yen. It slipped against the pound, with the U.K. currency rising above US$1.60. U.S. light crude oil for July delivery rose US$1 to settle at US$63.45 a barrel on the New York Mercantile Exchange. (CNNmoney)
* * * * *
Home resales in the U.S. rose for the second time in three months in April as foreclosure auctions and cheaper prices spurred bargain hunters, buttressing the case for an end to the industry's slump this year. Purchases increased 2.9% to an annual rate of 4.68m, in line with forecasts, from 4.55m in March, National Association of Realtors figures showed in Washington. The median price slumped 15% y-o-y, the second-biggest drop on record. A separate report indicated that the slump in home values eased in 1Q09. The average price of a U.S. home fell 7.1% in 1Q09, slower than the 4Q08 8.3% drop that was the largest on record, the Federal Housing Finance Agency said. (Bloomberg)
* * * * *
U.K. banks granted more mortgages in April than a month earlier, a sign the market for home loans is stabilizing, the British Bankers Association said. Banks approved 27,685 loans for house purchase, the London-based BBA, which represents the U.K.'s biggest banks, said yesterday. That compares with 26,671 loans in March. "The house purchase part of the mortgage market appears to have stabilized, with slightly more approvals coming through, although April's weak net mortgage lending reflects the lower number of approvals in previous months," David Dooks, director of statistics at the BBA, said. (Bloomberg)
* * * * *
German consumer prices unexpectedly dropped y-o-y in May, the first annual decline since at least 1996, after energy costs retreated. Prices fell 0.1% when calculated using a harmonized European Union method after rising an annual 0.8% in April, the Federal Statistics Office in Wiesbaden said yesterday. It's the first negative inflation reading since harmonized data were first compiled in 1996. Economists predicted inflation would slow to 0.2%, according to the median of 18 forecasts in a Bloomberg News survey. A 55% drop in crude oil prices over the past year is pushing down inflation just as companies cut jobs and spending to stem the deepest recession since World War II. While some economists argue that deflationary pressures are
building across the 16-nation euro region, Germany's Bundesbank says those concerns are unfounded. (Bloomberg)
* * * * *
French consumer and manufacturer confidence rose in May and optimism among Italian executives held at the
highest in more than year on expectations the worst of the recession is over. French manufacturing confidence gained for a second month, while consumer optimism advanced to highest in 13 months, Insee, the national statistics office said. In Italy, household confidence matched the April reading, the highest since December 2007, the country's national statistics institute reported. Both economies remain mired in the worst recession in more than half a century. Still, lower borrowing costs and falling prices are providing some respite from the slump. The French economy is set to contract for a fifth straight quarter in the three months through June and unemployment will reach 9.6% this year, the European Commission forecast on May 4. Italy contracted 2.4% in 1Q09, the most since at least 1980 and the commission expects Europe's fourth-biggest economy to shrink 4.4% this year. (Bloomberg)
* * * * *
Japan's export slump moderated in April, helping the country post an unexpected trade surplus and adding to signs the worst recession since World War II is easing. Shipments abroad fell 39.1% y-o-y, after dropping 45.5% in March and a record 49.4% in February, the Finance Ministry said yesterday in Tokyo. From a month earlier, exports rose 1.9%, a second straight gain. Exports to the U.S., China and Europe all fell at the slowest pace this year, adding weight to Bank of Japan Governor Masaaki Shirakawa's contention that the economy will resume growing this quarter. Imports fell 35.8% y-o-y, the ministry said, and the trade surplus narrowed 85% to 69bn yen (US$725m). (Bloomberg)
* * * * *
Global
INVESTMENT RESEARCH
China said it was cutting capital requirements for some fixed-asset investment projects to spur growth in the world's third-biggest economy. "The government will appropriately lower the minimum capital requirement ratio for important state projects," the State Council said in a statement posted on a government web site yesterday. The council, China's cabinet, said requirements were being "adjusted" across industries, then specified levels without saying whether they were increases or decreases. Projects involving coal, air or sea ports, property and railways had previously been tagged by the government for reductions. Minimum capital requirements include funds from the government and retained profits and exclude bank loans and dxebt. (Bloomberg)
* * * * *
The global air travel slump eased in April, with passenger traffic falling 3.1% from a year earlier, even after an outbreak of swine flu discouraged travel, the International Air Transport Association (IATA) said. The traffic drop compared with an 11% decrease in March, which marked the sixth month of successively steeper declines. "We are not out of the woods yet," Giovanni Bisignani, chief executive officer of IATA, said in the statement. (BT)
* * * * *

What's Happening
RESULTS
Company Quarter Date
Sunway City 3Q 28 May
KNM 1Q 28 May
Plus 1Q 28 May
AirAsia 1Q 28 May
MAS 1Q 29 May
Muhibbah 1Q 29 May
NEW LISTING
Companies Prospectus Date
Listing Date
Samchem Holdings Bhd 22 May 23 June
INVESTMENT RESEARCH
Reports Published
Company Title Target Price Rec Date
Bumiputra Commerce (RM8.00) Completes Bank of Yingkou purchase RM7.70 Hold 21 Apr
SunCity (RM1.99) Still some shine to it RM2.96 Buy 22 Apr
British American Tobacco (RM45.00) 1QFY09 Results RM47.00 Hold 23 Apr
Plantations Sector Weekly Review - Overweight 27 Apr
Banking Sector Weekly Review - Neutral 27 Apr
Construction Sector Weekly Review - Neutral 27 Apr
Oil & Gas Sector Weekly Review - Neutral 27 Apr
Property Sector Weekly Review - Neutral 27 Apr
Telco Sector Weekly Review - Neutral 27 Apr
Banking Financial sector liberalization - Neutral 28 Apr
Market Strategy Khazanah's Malaysian investments: Time to
deliver
- - 28 Apr
Banking April 2009: March numbers holding steady Neutral 30 Apr
Property Strong uptick in property loan approval Neutral 30 Apr
DiGi.Com (RM22.30) 1QFY09 Results RM22.60 Hold 4 May
Plantations Sector Monthly Review - Overweight 4 May
Telco Sector Monthly Review - Neutral 4 May
Construction Sector Monthly Review - Neutral 4 May
Oil & Gas Sector Monthly Review - Neutral 4 May
Property Sector Monthly Review - Neutral 4 May
Sime Darby (RM6.70) More than doubling yard space RM6.40 Hold 5 May
IJM Corp (RM5.30) Water tunnel job flowed in RM5.10 Hold 5 May
Hong Leong Bank (RM5.70) 3QFY09 Results RM5.80 Hold 7 May
Sunrise (RM1.46) 3QFY09 Results RM2.17 Buy 8 May
Plantations Sector Weekly Review - Overweight 11 May
Banking Sector Weekly Review - Neutral 11 May
Construction Sector Weekly Review - Neutral 11 May
Oil & Gas Sector Weekly Review - Neutral 11 May
Property Sector Weekly Review - Neutral 11 May
Telco Sector Weekly Review - Neutral 11 May
Building Materials Sector Weekly Review - Neutral 11 May
Bumiputra Commerce (RM8.85) 1QFY09 Results RM8.80 Hold 15 May
Heavy Industries (RM3.26) New JV signed with DNCS Under review Hold 15 May
AMMB Holding (RM3.18) 4QFY09 Results RM4.00 Buy 18 May
IOI Corp (RM4.44) 3QFY09 Results RM4.00 Sell 18 May
Media Prima (RM1.34) 1QFY09 Results RM1.25 Hold 18 May
Boustead Heavy Ind (RM3.30) 1QFY09 Results RM3.30 Hold 18 May
Banking Sector Weekly Review - Neutral 18 May
Building Materials Sector Weekly Review - Neutral 18 May
Oil & Gas Sector Weekly Review - Neutral 18 May
Property Sector Weekly Review - Neutral 18 May
Telco Sector Weekly Review - Neutral 18 May
Plantation Sector Weekly Review - Overweight 18 May
Construction Sector Weekly Review - Neutral 18 May
Boustead Holdings (RM3.54) 1QFY09 Results RM3.60 Hold 19 May
YNH (RM1.47) 1QFY09 Results RM2.02 Buy 20 May
Axiata (RM2.32) 1QFY09 Results RM3.12 Buy 20 May
TSH Resources (RM1.74) 1QFY09 Results RM2.05 Buy 21 May
UMW Holdings (RM5.80) 1QFY09 Results RM5.65 Hold 21 May
DiGi.Com (RM22.50) Enters the MVNO market with Baraka RM22.60 Hold 22 May
Litrak (RM2.30) 4QFY09 Results RM2.22 Buy 22 May
Maybank (RM5.20) 3QFY09 Results RM6.40 Buy 22 May
Telekom (RM3.80) 1QFY09 Results RM4.90 Buy 22 May
YTL Corp (RM7.05) 3QFY09 Results RM8.00 Buy 22 May
YTL Power (RM2.09) 3QFY09 Results RM2.50 Buy 22 May
YTL Cement (RM3.36) 3QFY09 Results RM4.50 Buy 22 May
Tenaga Nasional (RM7.65) Plans to boost hydro power RM7.00) Hold 25 May
Banking Sector Weekly Review - Neutral 25 May
Building Materials Sector Weekly Review - Neutral 25 May
Oil & Gas Sector Weekly Review - Neutral 25 May
Property Sector Weekly Review - Neutral 25 May
Telco Sector Weekly Review - Neutral 25 May
Plantation Sector Weekly Review - Overweight 25 May
Sime Darby (RM6.95) 3QFY09 Results RM7.70 Buy 26 May
Puncak Niaga (RM2.85) 1QFY09 Results RM3.00 Hold 26 may
Sapura Crest (RM1.40) Nippon Steel contract for Sapura 3000 RM0.67 Sell 26 May
Macro Views May 2009 : Liquidity-driven markets - - 26 May
IJM Corp (RM5.70) 3QFY09 Results RM5.10 Hold 27 May
Sunway Holdings (RM1.04) 3QFY09 Results RM10.9 Hold 27 May
Star Pub (RM3.20) 1QFY09 Results RM3.36 Hold 27 May

The One Stock You Must Buy

Stop me if you've heard this one. The one stock you must buy is ... the next Costco (Nasdaq: COST), TD Ameritrade (Nasdaq: AMTD), Yahoo! (Nasdaq: YHOO), and Intuit (Nasdaq: INTU), all rolled into one.

That's a pitch I'm sure you've heard some semblance of at cocktail parties, golf outings, weddings, and of course, on the Internet.

It's a fairly appealing enticement. After all, Costco, TD Ameritrade, Yahoo!, and Intuit are some of the stock market's great success stories. These companies earned early investors mind-boggling returns.

The secrets of success
Does that one stock you must buy exist? Of course it does. But can you find it? That's a different matter.

However, here's a litmus test to gauge every stock tip you come across. Simply ask: Does this company bear any resemblance at all to Costco, Ameritrade, Yahoo!, and Intuit before they were big names?

We're not saying that your one stock will be a big-box store or a tech superstar. But Costco, Ameritrade, Yahoo!, and Intuit all share a set of remarkable traits that characterized them when their amazing runs began. All were:

1. Small.
2. Led by a dedicated founder(s).
3. Fiscally conservative.
4. Profiting from a wide market opportunity.

If the next stock that's pitched to you doesn't possess these traits, it may not be the "sure thing" it's advertised as.

A case study
Consider, for example, the cases of HLTH (Nasdaq: HLTH) and Lululemon Athletica (Nasdaq: LULU) -- an Internet health-care company and a yoga apparel maker, respectively, that have recently been pitched to me at cocktail parties, golf outings, weddings, and of course, on the Internet.

Are they small? Sure. HLTH is worth around $1.2 billion, and Lululemon is valued at $870 million.

Are they led by dedicated founders? No and yes. While HLTH has a fair dose of insider ownership (more than 8%), there's been some movement in and out of the CEO's office. Lululemon founder Dennis Wilson, on the other hand, serves as the company's chairman and chief product designer and owns 7% of the company (though that ownership stake has been declining).

Are they fiscally conservative? While both companies are profitable and cash-flow positive, Lululemon needs to keep an eye on its SG&A expenses, and HLTH has had some lumpy operating performance.

Do they have wide market opportunities? That answer gets a little cloudy. While both companies' products have received good reviews, both also face significant competition going forward. Furthermore, Lululemon may have been benefiting from a short-term yoga fad that could get pinched in a down economy.

The Foolish final word
I'm not here to be negative about either HLTH or Lululemon. Both have positive traits that could make them good investments.

Is Your Home a Good Investment?

There's the usual talk about what the latest Case-Shiller house price data mean for the next short term move in the real estate market. Has housing bottomed? If not, has the rate of decline slowed? And when will we see an upturn?

Human nature likes the short term. Which is why so little attention is paid to something that is probably more important, if less urgent: What the latest data show about the long-term of the real estate market.

And it's startling.

We have just been through the biggest boom in real estate in American history. The subsequent bust surely hasn't finished.

Yet look at the numbers. Since 1987, when the Case-Shiller index of 10 major cities begins, it's risen from an index value of 63 to 151. Annual return: Just 4.1% a year. During that period, according to the Bureau of Labor Statistics, consumer prices rose by 3% a year. Net result: Home prices produced a real return of just 1.15% a year over inflation over that time.

Critics may point out that the analysis is unfair -- after all, it starts counting near the peak of the 1980s housing boom. Fair enough. Look at the performance since, say, early 1994, when home prices were near a historic trough. Surely someone who bought then has made a bundle.

Not necessarily. Since then the ten-city index has risen from a value of 76 to 151. Annual return: 4.7%. Inflation over that period: 2.5%. That's still only a real return of 2.2% a year above inflation.

You can often do better on long-term inflation protected government bonds.

And real estate often costs 2% or more a year in property taxes, condo fees, maintenance, insurance and the like.

Conventional wisdom long held that home ownership was a route to wealth, and the imputed rent -- in other words, the right to live in your home -- was just part of the value you got from it. Under that widespread view, the recent housing bust was simply a temporary, though deep, pothole.

Yet for very many people, even over the past 15 or 20 years, the imputed rent may have been all, or nearly all, the real value they actually got from their home.

Yes, it's only recent data. And it's only ten cities. But there's some reason to suspect these numbers may, if anything, flatter real estate performance. After all, it's hard to look at the data and figure the bust is now over. And if they fall further, those long-term return figures will fall too.

Prices weren't just down 19% over the past year. They fell 2% just between February and March. And it's not the worst-hit markets that worry me the most -- Phoenix is down 53% from its peak, Miami 47%. That smells of capitulation. It's the other markets. New York and Boston are only down 20%. Denver's only down 14%.

Overall the ten- and 20-city Case-Shiller indices are merely back to mid-2003 levels. After the biggest boom and bust on record, history suggests things don't stop getting worse until they've gotten a lot worse than that.

5 Stocks Poised to Shine This Summer

Memorial Day weekend is the unofficial start of summer and traditionally the beginning of a quieter period for equities. But recent gains and increased optimism in a second-half recovery mean that just because school's out for summer, the stock market most certainly is not.

"The old adage 'Sell in May and Go Away' is a very dangerous proposition this year," says Brett D'Arcy, director of investment and research at CBIZ Financial Solutions (CBZ: 7.22, +0.22, +3.14%). "Given the recent trajectory of the market and the timing of the stimulus funds into the economy, I think the summer could turn out to be a very profitable time for investors."

True, there is something to the Sell-in-May saying: Plexus Asset Management crunched the average monthly total return of the S&P 500 from January 1950 to April 2009. Sure enough, only September and October produced lower results than June, July or August.

See 5 stocks set to shine this summer

There are other caveats with seasonal investing, the most salient being that the market knows that summer comes every year. As such, expected gains in sales and earnings tend to get baked into share prices months in advance.

But that doesn't mean there aren't some solid summer stocks out there that could offer upside surprise by autumn, thanks to larger macro trends or company-specific strengths. From energy to lawn care to summer blockbusters, here, then, is a look at five stocks for summer.

Hansen Natural 

The maker of Monster energy drink has been one of the best-performing stocks of the last decade and now it looks set to have a monster summer, too. "They're taking market share in the one category in the beverage space that is actually still growing -- energy drinks," says Damian Witkowski, an analyst with Gabelli & Co., who rates shares at Buy. Hansen (HANS) is rolling out two new products -- Hammer X-Presso Monster and Monster Import -- just in time for the all-important summer beverage season. Moreover, the company is expanding in international markets and raw material costs are coming down, "which should be a nice tailwind for them over the next year," Witkowski says. Shares are trading at a deep discount to their own five-year average on a forward earnings basis, according to Thomson Reuters.

Diamond Offshore Drilling 

Don't look now but oil prices are roaring back ahead of the summer driving season. Just a few months ago black gold struggled to break past $40 a barrel. Now it's fetching $60, and this is only the beginning, says Rob Lutts, chief investment officer at Cabot Money Management. "With the global downturn you had a huge abrupt stop in energy exploration and development," Lutts says. "We've got a big crunch coming when the economy recovers. That's why oil can't go below $50 and I think it's going to $70." Diamond Offshore Drilling (DO: 78.47, +2.18, +2.85%) is one of Lutts's top picks, partly because it's a deep-water driller and that's where the oil is. Year over year, earnings per share are forecast to grow nearly 10% in 2009 to $10.33, according to Thomson Reuters.

TJX 

The operator of the T.J. Maxx and Marshall's off-price chain stores looks to be well-poised for the critical back-to-school shopping season, says Patrick McKeever, an analyst at MKM Partners, who rates shares at Buy. Indeed, lower-price chains like Wal-Mart (WMT) and T.J. Maxx have been gaining traffic at the expense of midpriced and specialty players such as Hot Topic (HOTT). And it's not just that budget-conscious consumers are searching for brand names at deep discounts; TJX (TJX) has also developed tremendous efficiencies. "They're in the process of taking $150 million out of their cost structure," McKeever says. "And they've got such an efficient distribution system that they can buy inventory in some instances just two to three weeks out." Tight inventory control means that gross margin -- any retailer's Achilles' heel -- should remain resilient. "Unless the consumer environment just takes another tumble, they are well positioned," says McKeever. Analysts' average price target stands at $34.50, according to Thomson Reuters, implying upside of 22% in the next 12 months or so.

Scotts Miracle-Gro

The world's largest maker of lawn- and garden-care products has shown remarkable strength in its critical global consumer business. And although the seasonal planting season is already about halfway done, cash-strapped consumers are shifting to "do it yourself" lawn and garden care from "do it for me," notes Douglas Lane, an analyst at Jefferies who rates shares at Buy. More consumers are also planting vegetable gardens in these tough times, Lane says, and points out that better-than-expected results from Home Depot (HD) and Lowe's (LOW) -- big sellers of Scotts's (SMG) products -- bodes well. Shares are cheaper than the market and their own five-year average on a forward basis, according to Thomson Reuters.

Walt Disney 

For a higher stakes seasonal play, look no farther than entertainment giant Walt Disney (DIS: 24.54, +0.84, +3.54%). Better-than-expected results from theme parks and films could cause shares to pop. "You are not going to see the high-dollar trips away from home this summer," Brett D'Arcy of CBIZ says. "I could imagine a good year for theme parks and local attractions and I think it's going to be a good movie season." Disney's theme-park business has been hurt by the economic downtown, but strong promotional efforts appear to have put the worst behind it. Meanwhile, the film slate could be boffo at the box office. "Up," Disney-owned Pixar's first 3D movie, kicks off the summer blockbuster season on May 29. Jerry Bruckheimer's "G-Force" (3D animated guinea pigs) comes out in late July. With a forward price/earnings multiple of 12, shares offer a 20% discount to the S&P 500.

World stocks continue to rally on US economy hopes

LONDON (AP) -- World stock markets rose Wednesday despite mounting tensions in the Korean peninsula, as investors continued to warm to hopes that the U.S. economy has seen off the worst of the economic recession and may start to grow later this year.

The FTSE 100 index of leading British shares was up 2.76 points, or 0.1 percent, at 4,414.48 while Germany's DAX rose 14.12 points, or 0.3 percent, to 4,999.72. The CAC-40 in France was 17.82 points, or 0.5 percent, higher at 3,287.91.

The gains in Asia earlier were more substantial as investors played catch-up following Tuesday's turnaround in Europe and the big advance on Wall Street. Japan's benchmark Nikkei 225 stock average rose 127.96 points, or 1.4 percent, to 9,438.77 while Hong Kong's Hang Seng surged 893.71, or 5.3 percent, to 17,885.27.

The catalyst to this week's turnaround in market sentiment was a report Tuesday showing that U.S. consumer confidence jumped in May to its highest level since September. The Conference Board said its main consumer confidence index surged to 54.9 from a revised 40.8 in April, way ahead of analysts' expectations for a more modest rise to 42.3.

The improvement suggests Americans are more likely to shop, particularly on bigger items such as cars and homes.

Without the support of the U.S. consumer, which accounts for around 70 percent of the world's largest economy and 20 percent of the global economy, any global economic recovery will soon fizzle out.

"There had certainly been some concern that the nuclear tests in North Korea would unsettle financial markets but this isn't proving to be the case and traders are instead jumping on numbers such as U.S. consumer sentiment as testament that the fundamentals are starting to improve, even if we do have a long way still to go," said Matt Buckland, a dealer at CMC Markets.

Despite a recent lull, stocks around the world have rallied strongly over the last few weeks -- with some major indexes moving into positive territory for the year -- prompting some investors to claim the markets are over the worst.

The trigger for the gains has been better than expected economic news, particularly in the U.S., which has fueled an increase in appetite for risk on hopes that the global recession is receding. Stock markets usually start recovering between 6-9 months before an actual economic recovery emerges.

There are some concerns that the markets, having rallied since March, are now being largely driven by hot money and that the liquidity boost from the world's central banks over the last few months has pushed stock prices above what many companies can actually earn without a dramatic pick up in economic activity in the coming months.

"The recovery that we have seen in the market so far has surpassed expectations and it remains to be seen if this trend will continue," said John Mar, co-head of sales trading at Daiwa Securities SMBC Co. in Hong Kong.

"Finding investment ideas with lucrative upside is becoming far more difficult by the day. Current valuations are reflecting a very rapid global economic recovery and that seems unlikely," he said.

For now though, the improvement was set to continue in the U.S. Dow futures rose 12, or 0.1 percent, to 8,473 while the broader Standard & Poor's 500 futures were up 1 point, or 0.1 percent, at 909.70. On Tuesday, the consumer confidence news helped the Dow Jones industrial average rise 2.4 percent and the S&P 500 push up 2.6 percent.

Elsewhere in Asia, Shanghai's index added 1.7 percent while Australia's benchmark was up 0.3 percent. Taiwan's stock measure gained 3.1 percent, and Singapore's index added 2.8 percent.

But South Korea's Kospi slipped 0.7 percent to 1,362.02, overshadowed by the rising tension on the Korean peninsula. In a sign of North Korea's increasingly aggressive posture, Pyongyang reportedly restarted a weapons-grade nuclear plant as world powers moved Wednesday to punish the regime, possibly with new sanctions.

Oil prices were higher, with benchmark crude for July delivery up 74 cents to $63.24 a barrel. On Tuesday, the contract rose 78 cents to settle at $62.45.

In currencies, the dollar inched higher to 95.36 yen from 95.26 yen. The euro was lower at $1.3966 from $1.3997.

Common Stocks and Uncommon Profits - 15 Investment Secrets to Help Make You Rich

Philip Fisher (1907-2004) was one of the greatest investment minds in history. Working from a modest office on the West Coast in the aftermath of the Great Depression, he developed a buy-and-hold value and growth model for investments that has been considered on par with Benjamin Graham's The Intelligent Investor by no less a giant as Warren Buffett. In addition to teaching at the Stanford School of Business, he authored several books including the watershed Common Stocks and Uncommon Profits. It was this text that introduced the now-famous "scuttlebutt" approach that encouraged investors to develop a deep understanding of his or her investments by thoroughly analyzing the financial statements, interviewing managers, competitors, employees, vendors, and customers.

Philip Fisher was extremely successful at selecting a core portfolio of seven or eight stocks with above average potential at attractive prices. According to Andrew Kilpatrick in Of Permanent Value, "Fisher always said to think of the long-term and have low turnover in your portfolio. Fisher bought Motorola in 1955, back when mobile telecom signified radio systems for police cars. In the Investment course McDonald [the long-time resident value investor at Stanford] took in 1956, Fisher talked about Motorola as a 'great growth company' when Motorola's market capitalization was $300 million. As a long-term investor, Fisher still owned Motorola 43 years later when he died in 2004."

Going on, he said, "Fisher told McDonald's class in 2000, 'I believe strongly in diversification,' and by that he meant seven or eight stocks � a concentrated portfolio in today's parlance. Importantly, Fisher himself did the lion's share of the investment research on companies owned by the clients of Fisher & Company, so that he had a high level of knowledge and conviction on each of the seven or eight companies … 'I do not believe in over-diversifying … My basic theory is to know a few companies and know them really well � and be sure your diversification is real diversification. Having Ford and General Motors is not diversification. Diversification means owning companies that do not sell into the same markets � companies with real differences."

The Investment Secrets in Common Stocks and Uncommon Profits

In his book, Fisher laid out fifteen things that a successful investor should look for in his or her common stock investments. Here's a rundown of what they are. (Do yourself a favor. Run out to your local store or navigate to your favorite online book retailer and pick up a copy of Common Stocks and Uncommon Profits � this basic summary of the book can't possibly do justice to all of the excellent information in its pages.)

1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potential of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business somewhat peculiar to the industry involved that will give the investor important clues as to how the company will be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future, will the growth of the company require sufficient financing so that the large number of shares then outstanding will largely cancel existing shareholders' benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well and "clam up" when troubles or disappointments occur?
15. Does the company have a management of unquestioned integrity?

Fisher also had five "don't" rules for investors, which were:

1. Don't buy into promotional companies
2. Don't ignore a good stock just because it is traded over-the-counter
3. Don't buy a stock just because you like the tone of its annual report.
4. Don't assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price?
5. Don't quibble over eighths and quarters

Avoiding Companies with No Earnings is Good Idea

Is the company making money and does it have a history of making money?

Some investors may find this question obvious, but it never hurts to be reminded that one of the most important qualifications to check is this simple question.

Good companies make money and they consistently earn a profit, even in difficult times. Sure there may be quarters where the company doesn't live up to this standard, but for the most part companies with a solid record of earnings are clearly a better investment than those that don't.

This exercise is helpful when looking for investment candidates among the thousands of possibilities.

Use this parameter to eliminate sub-par candidates before you begin a serious analysis and you will save yourself a lot of time.

Missing Google

Of course, you will almost certainly eliminate young companies with the potential to become the next Google.

The problem is identifying those companies that are will become winners. The odds are highly stacked against young companies becoming super-powers.

For every Google and Microsoft, there are thousands of young companies that fail or never reach a significant level of success.

The risk of investing in these young companies is significant. You could hit one that goes on to become a real winner, but it is highly improbable and the potential reward may not outweigh the risk.

Do you want to take on this level of risk?

Just Say No

Most investors who think this through would say no. Investing is about earning the maximum return within your risk comfort zone.

If you want to gamble, don't use your retirement portfolio - the odds are not good.

However, the earnings test is just one way to eliminate potential investment candidates. We all know that past performance is no guarantee of the future.

Companies that were once among the biggest and most profitable in the world can and do come crashing down. Just take a look at domestic automobile producers as proof.

Markets change, competition changes, and consumer preferences change. All of these factors can be a death sentence for companies that do not evolve.

Still, you have to start somewhere. Eliminating companies with little or no earnings history is one way to begin the investment process at a solid point.

Companies are supposed to earn profits for their owners. Those that don't, no matter how exciting their products, will ultimately fail.

Oil above $62 amid rising US consumer confidence

SINGAPORE -Oil prices hovered above $62 a barrel Wednesday in Asia as a report of increased consumer confidence fueled investor optimism that the U.S. is emerging from a severe recession.

Benchmark crude for July delivery was up 2 cents to $62.47 a barrel by midday in Singapore in electronic trading on the New York Mercantile Exchange. On Tuesday, the contract rose 78 cents to settle at $62.45.

Oil prices have jumped from below $35 a barrel in March to six-month highs above $62 last week on investor expectations that the worst of the global economic slowdown is over.

Oil and stock investors took heart from Tuesday's report from private research group The Conference Board that showed U.S. consumer confidence in May soared to the highest level since last September. Stock indexes jumpe on the news, with the Dow Jones industrial average gaining 2.4 percent.

Some analysts are concerned the quick recovery of oil prices will boost gasoline prices and threaten to undermine consumer demand. Oil prices between $70 and $80 a barrel would hurt growth in developed countries while crude between $90 and $100 would slow emerging market economies, Bank of America  Merrill Lynch  said in a report Tuesday.

"A very fast increase in oil prices in the coming months could put the embryonic economic recovery at risk," the report said.

Traders will be eyeing an OPEC meeting in Vienna on Thursday. Saudi Arabian Oil Minister Ali al-Naimi has said the Organization of Petroleum Exporting Countries is unlikely to add to 4.2 million barrels a day of production cuts the cartel has announced since September.

The group's leaders have said they want oil prices above $70 a barrel.

The OPEC supply cutbacks, along with massive fiscal stimulus packages by governments around the world, could send prices higher, the Bank of America Merrill Lynch report said.

In other Nymex trading, gasoline for June delivery rose 1.47 cents to $1.81 a gallon and heating oil was steady at 1.54 cent to $1.52 a gallon. Natural gas for June delivery jumped 4.1 cents to $3.58 per 1,000 cubic feet.

In London, Brent prices rose 13 cents to $61.37 a barrel on the ICE Futures exchange.

Seven signs you should short sell a stock

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These are not the only signs, just a few examples of when to bet against a company, all of which would have worked out great over the past year:

1. Right when management admits a massive fraud over many years, Satyam Computer Services (SAY)

2. Companies lie about the health of management: Apple Inc. (NASDAQ: AAPL)

3. Arrogance and greed blinds management to excessive risk-taking: General Electric Co. (NYSE: GE), Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), Bank of America (NYSE: BAC), General Motors Corp. (NYSE: GM)-pick an over-leveraged financial, any financial...and yes, considering all the messy financial instruments these companies took on, they are all financial stocks.

4. Excessive internet company valuation: Google Inc (NASDAQ: GOOG), Priceline.com (NASDAQ: PCLN), Amazon.com Inc. (NASDAQ: AMZN)

5. Over-aggressive product marketing: Vistaprint Ltd. (NASDAQ: VPRT), Baidu Inc. (NASDAQ: BIDU), China Finance Online Co. (NASDAQ: JRJC)

6. Being the Nasdaq's top annual performer : Travelzoo Inc. (NASDAQ: TZOO), Dell Inc. (NASDAQ: DELL), Hansen Natural (NASDAQ: HANS), Taser International (NASDAQ: TASR) and Nutri Systems (NASDAQ: NTRI).

7. Excessive commodity price runups: Schlumberger Ltd. (NYSE: SLB), Chevron Corp. (NYSE: CVX), NGAS Resources (NASDAQ: NGAS)

And bonus sign--when you think the overall market will tank, because as most of us need to realize--you can make all the assumptions based on all the research you can dig up, but in the end, three out of four stocks follow the market.

5 hot stocks at Big Mac prices

If holiday shopping has blown your budget, here's some relief: Wall Street is offering bargains.

The stocks of many small yet promising companies have been hammered as nervous investors have shifted funds to the perceived safety of big businesses with proven track records.

Here's the upshot: There's a fresh crop of stocks under $5 a share that could double in a year as investors come to their senses and realize the subprime-mortgage debacle won't bring economic Armageddon.

My five favorite stocks selling for less than the price of a Big Mac meal are stem-cell-research company Neuralstem (CUR, news, msgs), flat-panel-TV designer Syntax-Brillian (BRLC, news, msgs) and energy companies Teton Energy (TEC, news, msgs), International Royalty (ROY, news, msgs) and Abraxas Petroleum (ABP, news, msgs).

These stocks may see a bounce soon because of the January effect -- a rebound once the pressure of year-end tax-loss selling abates. But the bigger gains will come after some key changes in investor psychology play out.

"This is a flight-to-quality market, so anything perceived as risky has had a really hard time making headway," observes Eric Barden, a co-portfolio manager of the Texas Capital Value and Growth Fund. "But when this turns, it is going to turn really fast."

When is the turnaround coming?

Barden thinks it could be six months before investors develop an appetite for riskier small-cap stocks.

But I think he may be in for a surprise, and our under-$5 stocks could bounce back sooner than that. Here are four reasons why, thanks to James Paulsen, an economist and market strategist with Wells Capital Management:

• We've been waiting at least six months for the subprime disaster and housing weakness to bring down the economy. So far, they haven't. Employment and wage growth are hanging in there. Consumer spending was solid in November. Foreign demand for the goods we make is healthy. At some point, investors will realize the much-feared economic disaster ain't gonna happen -- and they'll develop a taste for riskier areas of the markets again, such as stocks selling for less than $5. The underlying conditions are still in place for decent economic growth: falling interest rates, government deficit spending, a weaker dollar and a continued expansion in the money supply.

• Fears about shortages of liquidity -- the availability of money -- are overblown. Just look at the record levels of personal net worth in this country, the solid corporate balance sheets, currency reserves held by central banks and the amount of investment cash in the sovereign funds of foreign governments. "It's a preponderance of fear that is keeping liquidity in the closet, not a shortage of liquidity," Paulsen says. "If someone says things are OK, then watch the liquidity come out." Wait for signs that subprime-related write-offs are easing or for signs of continued economic strength to calm jitters. Again, a change in psychology will benefit the least liquid stocks the most, including our under-$5 stocks.

• The weaker dollar helps small-cap stocks as much as big companies, if not more, because the cheap dollar attracts foreign buyers to our shores. Large-cap companies already have an overseas presence.

• Historically, small-cap stocks do well when there is inflation, which is making a comeback.

So now, here's a closer look at five stocks trading for less than $5 that should benefit from these trends, as well as company-specific developments. To find these stocks, I looked for companies where insiders are buying the most, and I consulted with investors with good records who specialize in this part of the market.

Hope for paraplegics?

Researchers working with the tiny biotech company Neuralstem have discovered that if you implant the right human stem cells into the spines of paralyzed rats, the cells take over and regenerate in a way that allow the rats to walk again. This stunning breakthrough shows the promise of a controversial area of medicine known as stem-cell research.

But would this work in humans? The world is about to find out. By March, Neuralstem may begin testing the same science on humans in a study at the University of Pennsylvania. As early as three to six months later, it could start to see results. If this process, known as regenerative medicine, or cell therapy, shows promise in the study, I'd expect nice gains in this under-followed stock, which recently traded for $2.85 a share.

The Pennsylvania study will test the use of stem cells to treat a kind of paralysis called ischemic paraplegia. This occurs when people have a hemorrhage in the spine, typically because doctors had to clamp the aorta, the main artery from the heart, when treating another problem. Strictly speaking, this is just a "feasibility and safety" study.

"But these will be real patients getting the real thing from the beginning, so we expect to see if we have impact," says Neuralstem Chief Executive Richard Garr.

Later next year, Neuralstem will likely begin testing cell therapy on patients with Lou Gehrig's disease or traumatic spinal cord injuries. The technique might also be used to treat other central-nervous-system disorders, such as Parkinson's and Alzheimer's diseases, and even depression.

Neuralstem is a player in this space because it owns technology that allows doctors to reproduce huge amounts of stem cells and to shut off the reproduction process when enough have been made.

Flat-panel play

If you've been shopping for a flat-panel TV this holiday season, chances are your eyes have gazed on the Olevia brand of Syntax-Brillian, a tiny company based in Arizona that outsources manufacturing to Asia.

In the past four months the company has offered shareholders as much unwelcome drama as the flesh-eating zombies tormenting Will Smith in a futuristic Manhattan in the movie "I Am Legend."

Syntax-Brillian stock has tumbled 60% since early September to recently trade at $2.45 a share. But insiders clearly think investors are overreacting to a couple of pieces of bad news. In the past month, they've snapped up $2.2 million worth of stock.

Syntax-Brillian designs and sells high-definition televisions that use liquid-crystal-display (LCD) technology. It also owns camera maker Vivitar, which it bought in November 2006.

In September, Syntax-Brillian stock got hammered when it said the credit crunch was squeezing Asian suppliers and hurting production. Then it announced a move to a royalty model for sales in China, meaning it would take a small cut of sales by licensing its brand instead of managing production itself. There was also a management shakeup that saw the finance chief exit -- rarely a reassuring event.

Investors are understandably unhappy with all of this, but consumers love Syntax-Brillian's flat-panel TVs, and that's what counts for me. Sales were up 54% in the third quarter. The company is in the sweet spot, selling midrange LCD TVs going for $1,000 or more.

"That is where the demand is right now, and these guys are really well-positioned there," says Mark Mowrey, a tech stock analyst who writes the TechValue Report. He thinks the stock will eventually trade up to $7 a share.

3 natural-resource plays

I believe energy and natural resources will continue to be hot sectors, so I'm including three plays from these areas in my under-$5 picks. The first is Teton Energy, a really small (market cap: $74 million) producer of natural gas in the Rockies. Because pipeline constraints make it hard to transport natural gas out of the Rockies, natural gas is cheaper there. This has hurt producers in the Rockies, but that may begin to change starting next year, Teton chief Karl Arleth explains.

The reason: Kinder Morgan Energy Partners (KMP, news, msgs) and ConocoPhillips (COP, news, msgs) are putting in a pipeline that should increase "export" capacity out of the region by 29% over the next two years.

Meanwhile, Teton should double production capacity next year, and it has enough financial strength to do that without issuing new stock, Arleth says. All of this may explain why insiders have purchased $691,000 worth of stock in the past month, according to InsiderScore.com.

International Royalty generates income by purchasing the rights to future royalty payments from mines producing metals such as copper, nickel and gold. It buys the royalty streams from mining companies that need to generate cash or from owners of mineral rights looking to cash out.

"The company is mainly tied to copper and nickel prices, which have gotten hammered in past three months," says Joe Dancy of LSGI Advisors, an investment company. So International Royalty shares have suffered, trading below $5 recently from above $7 in October.

But Dancy thinks copper and nickel prices will improve because of continuing strong demand from China, India and other emerging economies. He agrees that gold prices should go up because of a weakening dollar. So he thinks International Royalty is a buy below $5.

He's worth listening to because his LSGI Advisors has produced annualized returns of 23.7% a year over the past eight years by investing in small-cap stocks.

In early November, Abraxas Petroleum announced production and sales declines for the third quarter, and its stock has fallen 26% to $3.40. But the company says it can get back into growth mode through exploration and more-efficient production at its properties in Texas and Wyoming. It's also buying properties through a subsidiary called Abraxas Energy Partners, which the company hopes to spin out at some point. Insiders are putting their own money behind the plan. They've purchased $1.5 million worth of stock in the past six months, at prices below $4, a convincing vote of confidence.

Some words of caution

As microcap companies with narrow business plans, these five plays under $5 carry greater-than-average risk that something big could go wrong and derail the stocks. The stocks also have limited liquidity, or average daily volume, which means volatility; bad news could have a big downside.

The limited liquidity can also hurt you in another way: If any of these stocks are up more than 10% because of buying interest generated by this column, I strongly advise you to wait a few days and buy when the interest cools off, so you don't end up paying too much.

I like the prospects for all of these, and I believe overly negative sentiment toward small-cap stocks will reverse, so I'm putting all five of these in my model stock portfolio in MSN Money's Expert Picks section.

At the time of publication, Michael Brush owned shares of Neuralstem.