Weaker Than Expected Chinese PMI

For all the talk of an overheating economy in China, today's release of the PMI manufacturing index came in weaker than expected for the second straight month. Over the last two months, the index has declined from 55.2 down to 52.9 forming what is increasingly beginning to look like a downtrend in the indicator. To be sure, it's still positive but based on this indicator at least, it appears that the Chinese government's efforts to slow down economic growth are having at least some effect.

(Click to enlarge)

Why Corning Will Surge 32% And Danaher Will Not

Many investors are more hesitant than ever about Corning (GLW) after a continued decline in pricing and the release of a report indicating that inventories were actually more elevated than what some expected. 21 revisions to EPS estimates have now all gone down for a staggering net change of -17.3%. Even still, I remain confident about the attractive value play that can be found in this tech firm. Based on my multiples analysis, review of the fundamentals, and DCF model, I find that it will outperform Danaher (DHR).

From a multiples perspective, we have a tale of two different worlds. Corning is by far the cheaper of the two, trading well below historical levels while its competitor is at an irrational premium. Corning trades at a respective 7.8x and 9x past and forward earnings when it has historically hovered between 15x and 20x with a dividend yield of 2.2%. Danaher, on the other hand, trades at a respective 19.1x and 14.4x past and forward earnings. In light of the contrast, I believe the market will eventually close the discount. The Street currently rates Corning a "buy" versus a "strong buy" for Danaher.

At the recent fourth quarter earnings call, Corning's CFO, Jim Flaws, noted strong fundamentals that are being masked by investor fear over pricing trends:

Looking back at 2011, it was a year when the company achieved many milestones but encountered significant headwinds. From a financial standpoint, Corning had an outstanding year. In 2011, the company set records for sales, gross margin and operating income without specials. All of our businesses achieved increased sales year-over-year, sales of Corning Gorilla Glass almost tripled. We achieved our eighth year in a row of positive free cash flow, we maintained our very strong balance sheet, raised our dividend and initiated a sizable share repurchase program. We also brought significant new innovations to the market as our patient investments in research are paying off. Newer products, such as Lotus Glass for OLEDs and now a new, much thinner cover glass in Gorilla Glass 2 have been very well received by customers. We believe this is an outstanding list of achievements, despite less-than-robust growth in the developed economies around the world. However, it does not tell the entire story.

Fourth quarter results suffered from dramatic declines in price due largely to poor bottom-line momentum among panel makers. This trend is expected to continue over the next few quarters. But, perhaps miraculously, gross margins were meaningfully above consensus at 43.7%. Fiber & Cable further performed well with revenues of $252M even as Dow Corning's equity income experienced a 35% sequential decline. Management is getting more aggressive on capital allocation while reigning in capex. Moreover the firm has plenty to return with its solid free cash flow generation that is modeled to rise at least over the next two years.

Consensus estimates for Corning's EPS forecast that it will decline by 19.3% to $1.42 in 2012, grow by 7% in 2013, and then hold flat in 2014. Assuming a multiple of 12.5x - well below historical levels and that of Danaher - and a conservative 2013 EPS of $1.45, the rough intrinsic value of the stock is $18.13, implying 32% upside.

Danaher, on the other hand, will have to focus more on cleaning up its balance sheet following the takeover of Beckman Coulter. Its payout ratio is abysmal--accordingly, investors can benefit off of a likely capital allocation hike. The firm, however, is well exposed to EE/MI, and growth appears to be decelerating at a quicker speed than that of peers. While Danaher certainly merits a premium due to its record of execution, multiples are likely to contract given greater to healthcare where ROIC is lowest.

Consensus estimates for Danaher's EPS forecast that it will grow by 17% to $3.31 in 2012 and then by 11.2% and 12.8% in the following two years. Modeling a CAGR of 13.6% for EPS over the next three years and then discounting backwards by a WACC of 9% implies that the market has properly assessed Danaher's value.

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

Price Targets For 5 Major Tech Picks From MFC Global Investment Management

In this installment of my analysis of recent purchases made by renowned investment management firms, I will look at five major tech stocks bought by MFC Global Investment Management (MFC), the asset management arm of Manulife Financial, using the latest available SEC filings of the fund.

1) Qualcomm (QCOM)

MFC increased its position in QCOM by 4% during Q4 2011 by acquiring approximately 227,000 shares. The stock traded in the range of $47 and $57, and is up 13% over the last one year.

QCOM is expected to grow its earnings at an annual rate of 16% slightly faster than the projected 15% growth rate of the industry. Applying my estimated P/E of 18 to calendar year 2012 EPS estimate of $3.85, my initial price target of $73 a share is obtained. A return of 20% (including dividends) is possible from current levels.

2) Cisco (CSCO)

MFC added approximately 482,000 shares of CSCO stock, an increase of 20%, during the last quarter of 2011. The stock currently trades for $19.9 after trading in the range of $16 and $19 during Q4.

The company recently released its earnings for the last quarter beating analyst expectations. The revenue guidance met expecatations, but was a bit subdued. The stock fell 2% the next day. The company increased its quarterly dividend from 6 cents a share to 8 cents a share yielding 1.5%. Overall, although upside remains in CSCO, I am disappointed with the direction in which CSCO is headed with its planned resumption of acquisitions and continued share buybacks.

I expect the company to grow at an annual rate of 7%-9% over the long term compared with the 15% growth rate of the broader industry. Applying a P/E of 14 to my calendar year 2012 EPS estimate of $1.85, my price target of $25 is obtained.

3) Amazon (AMZN)

MFC more than doubled its position in AMZN by purchasing approximately 544,000 shares. The stock is down 2% during the last one year compared with the 3.3% gain of the NASDAQ index.

I am very bullish on the e-commerce industry in general, but Amazon is grossly overvalued at these levels in my opinion. The better play in this sector in eBay (EBAY). My price targets for AMZN and EBAY are $146 and $38, respectively. AMZN currently trades at $180 while EBAY last changed hands at $33 a share. Please visit my recent article on AMZN comparing its valuation with that of some of its competitors including eBay, Overstock (OSTK), and Mercado Libre (MELI).

4) Oracle (ORCL)

MFC increased its position in ORCL by 203% by acquiring 3.16 million shares during Q4 of last year. The stock traded predominantly in the range of $28 and $33 and currently trades at $28.5.

ORCL increased its earnings at an annual rate of 19% during the last five years and is now projected to grow at an annual rate of 12%. My target of $37 is obtained by applying a P/E of 15 to calendar year 2012 EPS estimate of $2.46. A return of 29% is possible from current levels.

5) FactSet Research Systems (FDS)

FDS is a $4.13 billion company by market cap and primarily serves the global investment community by providing integrated financial information and analytical applications. The stock is up 54% over the last five years. During this time period, the company grew its earnings at an annual rate of 15% and is expected to grow at a very similar rate over the next five years.

MFC added approximately 450,000 million shares of FDS stock, an increase of 203%. The stock primarily traded in the range of $86 and $101 during Q4 2011 and currently trades at $91.48. Applying a P/E of 23.1 to calendar year 2012 EPS estimate of $4.24, my price target of $98 is obtained. The stock is fairly valued in my opinion.

FDS is one of my favorite names on this list and it's a stock that I have been following for a very long time. The company is best-in-class; however, the stock has never been cheap in my opinion. I would look to open a position in FDS if and when it trades below $78 a share.

As always, please do not consider this list as a "buy" or "sell" list, rather use this list as a starting point for your research. Based on my preliminary research, QCOM, CSCO and ORCL are undervalued and make good long candidates. AMZN is an obvious short candidate trading at a multiple of 135 and at a premium of approximately 20% to fair value.

Disclosure: I am long CSCO.

House to Explore Reforming Fannie Mae, Freddie Mac

Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Committee’s Subcommittee on Capital Markets announced Thursday that he would hold a hearing on Feb. 9 on reforming Fannie Mae and Freddie Mac.

“This hearing will be the first in a series of hearings to examine the steps Congress can take right now to protect taxpayers from the ongoing bailout of Fannie Mae and Freddie Mac,” Garrett said in a statement announcing the hearing. “With a price tag of $150 billion and counting, Congress must take immediate measures to minimize this cost and ensure taxpayers are never put in this situation again. The status quo is unacceptable, which is why we will continue to seek alternative solutions to housing finance in the United States that decrease the government’s exposure and get private capital off the sidelines.”

The hearing, entitled GSE Reform: Immediate Steps to Protect Taxpayers and End the Bailout, will focus on immediate steps that Congress can take to begin Fannie Mae’s and Freddie Mac’s transition out of Federal conservatorship and examine ways to end the $150 billion--and growing--bailout of Fannie Mae and Freddie Mac, Garrett’s subcommittee said in the release.

House Financial Services Committee Chairman Spencer Bachus, R-Ala., said in the same release that “just because the Administration is not prepared to act on GSE reform does not mean that House Republicans will not take action. This is the beginning of our efforts to wind down the operations of Fannie Mae and Freddie Mac in order to protect taxpayers from having even more of their hard-earned money thrown at these two companies.”

How to buy stock like a company insider

SAN FRANCISCO (MarketWatch) � When CEOs or corporate directors plunk down cash to buy shares of their company, it can speak volumes.

Such insider buying can mean executives believe their company�s shares are undervalued or its future is brighter than people realize. Or the insider believes this is the best use of their money compared to other investments.

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The U.S. stock market is undervalued and poised for above-average longer-term returns, Mark Hulbert contends on Markets Hub. Photo: Reuters.

For investors, insider buying is reassuring. The motives are more apparent, much more so than insider sales.

An executive can sell stock for reasons that investors may never know. Perhaps they want to build their dream mansion or purchase a luxury yacht. A bigger fear for investors is the company will report poor results or the shares are overpriced. When an executive sells, the company rarely says why.

Purchasing power

Insider buying at Russell 2000 RUT �and Standard & Poor�s 500 SPX �companies perked up during April and May, according to InsiderScore, which analyzes stock purchases and sales by executives and directors for money-management firms.

The volume of buying activity prompted InsiderScore to issue an �industry buy inflection� indicator for the first time since August 2011. When it comes to insider buying, this is InsiderScore�s strongest quantitative macro signal.

�Insiders as a group are very predictive when it comes to buying. When we see widespread buying across sectors, it�s a good indication,� said Ben Silverman, InsiderScore�s director of research.

Executives moves following a sharp drop are particularly interesting, though of course they�re no guarantee a stock will rebound. Bed-mattress maker Tempur-Pedic TPX �, whose shares dove 49% June 6 when it slashed its outlook, said Friday �certain executives� intend to buy the company�s shares in the open market.

To be sure, current insider buying doesn�t have the intensity of last August, a time when insider buys climbed to a multi-year high and insider stock sales were extremely low, according to Silverman. Since Jan. 1, there�s been enough insider selling to mute the bull horn on U.S. stocks.

MarketWatch asked InsiderScore to mine its database for 2012 buys made by executives or directors who have demonstrated a knack for making timely purchases or continue to build positions in companies they are involved with. Interestingly, no CEOs made the cut.

Here are the people InsiderScore found:

Barry Diller: Coca-Cola

Talk about buying with conviction. Coca-Cola Co. director Barry Diller has been buying shares of the beverage giant as if there will be a run on Coke KO �at the supermarket. Diller, who runs media conglomerate InterActive Corp., has dropped $114 million to acquire nearly 2 million shares in a series of transactions since March 2009. Read more: Diller's Coca-Cola Form 4 SEC filing.

Those buys have earned a 32% return, according to InsiderScore. With each transaction, Diller has bought Coke shares at an even higher price � his latest being a 264,000-share purchase on April 27 for $20.3 million. Coke was trading near a 52-week high at the time.

Is This Time Different for the Dollar and Precious Metals?

The recent correction in precious metals and miners has led some investors to question whether they missed the ultimate top in the bull market for gold and silver. Conversely, this would lead to the question of whether the dollar and other fiat currencies have bottomed.

According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency that has succeeded in holding its value. 20 percent failed through hyperinflation, 21 percent were destroyed by war, 12 percent destroyed by independence, 24 percent were monetarily reformed, and 23 percent are still in circulation approaching one of the other outcomes.

The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British Pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it's worth less than 1/200 or 0.5 percent of its original value. In other words, the most successful long standing currency in existence has lost 99.5 percent of its value.

Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero. Fiat currency bulls will probably not argue with this fact, but the remaining argument to hold fiat cash is that the decline of fiat currencies is manageable to such an extent that the loss in purchasing power will have a minimal or unnoticeable impact. The purchasing power of the British Pound has eroded by a seemingly manageable 3 percent average annual rate.

The US Dollar was taken off of the gold standard in 1971 when it was 1/35th an ounce of gold. At 40 years old, it has already lost 97 percent of its value. Yet it has lasted longer than the average fiat currency so perhaps its performance should be labeled "better than expected". The US Dollar has fallen by an average 9 percent annually over this 40 year period when measured against gold. As such, investment advisers may want to readjust their inflation expectations when projecting dollar based investments. The S&P 500 appreciated at 7 percent over the same 40 year period - not even keeping pace with the decline in purchasing power of the dollar.

Gold and silver have outperformed the S&P 500 and held their purchasing power since the inception of the US dollar fiat currency. Despite this excellent track record, the question remains as to whether this trend will continue. While investors can be confident that over a lifetime, precious metals will hold their value most are wary of volatility in the markets that may take gold and silver years to recover from. The obvious example of this is the commodity bear market that began in 1980 with gold peaking at $800 and falling to $250. This leads to the only remaining argument against precious metals investing based on the premise that currency flaws can be prolonged into the future:

Yes, the dollar will continue to lose substantial purchasing power and is terribly flawed. However it will bounce for several years through austerity measures and in the process push precious metals prices lower for an interim period. After all, currencies have bounced as they stair step lower over the years.

In order for such an event to occur Federal budgets would have to be reduced by $1 trillion annually and Paul Volcker, or a new version of him, would have to raise nominal interest rates above inflation rates such that real interest rates are positive by multiple percentage points. In 1981, federal funds rates exceeded 19 percent. Since the US dollar and economy is much further along its terminal decline it would take even more extreme action to create a recovery for the dollar. Considering that Volcker has resigned from being an economic adviser to the White House, and that the federal funds rates ate flat lined at zero, the odds of any such action are astronomical. The financial industry and economy clearly could not sustain such an interest rate shock today. Any rise in interest rates would exponentially increase US debt carrying obligations pushing it even further into insolvency and have the reverse effect on the currency by devaluing it at an even faster pace. Europe is a living example of this.

The implication from the above is that the worst case scenario for gold and silver would be a 2-5 year correction followed by even higher prices. The fiat currency decline will become increasing pronounced until a resolution event occurs such as a replacement of the dollar or reinstatement of an asset backed currency.

Is this time different? We don't think so.


Disclosure: I am long SLW, PAAS, SSRI, SIL.

3 Blue Chip Stocks Still Worth Buying

United Technologies Corporation (NYSE: UTX) has been one of my top-ten picks for 11 of the past 18 months. You can see on my relative-strength chart that UTX has beaten the S&P 500 by 50% over the last five years.

Innovation is what keeps UTX ahead of its competitors — innovations like the record-breaking Sikorsky Aircraft X2 Technology Demonstrator. The X2, built by Sikorsky, a UTX subsidiary, has broken the unofficial helicopter speed record, flying at 250 knots. The X2 uses two sets of rigid blades stacked atop one another and a propulsion propeller that achieves amazing hover and speed capabilities. Look for X2-inspired helicopters in the air soon.

�McDonald’s Corporation�(NYSE: MCD) banged out substantial sales growth in all its major markets during October, with 6.5% comparable sales growth worldwide. The sales were driven by McDonald’s deep knowledge of each individual market.

In the U.S., core menu items like Chicken McNuggets ruled the day. In Europe, customers were drawn to wide menu variety and updated restaurants. And, in Asia and the Pacific, McDonald’s drew in business by mixing special local menu items and traditional golden-arches fare.

Determining customer expectations and performing to those expectations seems to be easy for McDonald’s today. My long-term chart shows McDonald’s narrowly below trend. Buy below trend while you still can.

Coke is a branding story. The people at The Coca-Cola Company (NYSE: KO) are masters at building brand recognition. Coke has topped Interbrand’s ranking of the world’s most valuable brands since 2001 when the rankings began. Interbrand estimates that the Coke brand is worth more than those of McDonald’s and Disney combined.

Coke is poised to break out above its previous peak price near $65. Add to or initiate your position today.

Catch a Buzz With These 4 Dividend-Paying Stocks

Ever wish you could get paid to drink? Well, in a roundabout way, you can! If you buy stock in one of the four breweries or distillers I'll discuss here, you're investing not only in a fundamentally sound company but also one that gives back to shareholders in the form of a dividend.

Taste the Rockies
Molson Coors Brewing's (NYSE: TAP  ) brands include Miller Genuine Draft, Molson Canadian, and Blue Moon. The company recently paid a quarterly dividend of $0.32, up $0.04 from the same quarter last year. If this trend continues, the total dividend for the year will end up at $1.28. The company has a yield of 3.40%, while the industry average sits at 1.80%.

Molson has a price-to-earnings ratio of 11.88, which is below the industry average of 17.9. It also has a PEG ratio of 0.93, while the average PEG for the industry is 1.31. The PEG ratio is a calculation that takes into account the current P/E and divides the result by future growth estimates. Many investors prefer this metric because it attempts to look into the future, as opposed to always focusing on past performance. A number less than 1 indicates that the stock is undervalued, while a PEG of 1 indicates fair value.

These are not the only numbers indicating that it might be time to buy. Our 180,000-member Motley Fool CAPS community believes Molson can beat the market and have stamped a five-star rating (out of a possible five) on the stock.

Not all investors are as confident, though, because of the 16% net-income drop for the first three quarters of 2011 compared with the same time frame in 2010. A few one-time charges have assisted in lowering net income, but net sales were also lower overall. These numbers all suggest that the Silver Bullet is a slightly risky train ride but still a cheap date for investors who are confident about the long-term prospects.

Walking toward dividends
Diageo (NYSE: DEO  ) , producer of such brands as Johnnie Walker, Smirnoff, and Guinness, to name a few, is another company that both the professional and the amateur investors within our CAPS community seem to like, giving it a four-star rating. Diageo boasts a high dividend yield of 3.80%. The dividend amount has increased for the past 12 years, and over the past three years it's grown at a rate of 5.6%.

Diageo also has solid return on equity, currently at 37.45%. Management has been making good decisions with the extra cash the company isn't paying out to shareholders. It's constantly buying smaller regional brewers and distilleries to help expand its global reach.

One thing that might worry shareholders, however, is that Diageo currently has an earnings payout ratio -- the percentage of earnings per share paid out in dividends -- of more than 50%. With constant growth and a strong brand, this number should not be too much of a concern, but investors should keep an eye on it. If Johnnie Walker keeps walking, he'll soon have cut out a clear path all around the world.

King of Beers
Anheuser-Busch Inbev (NYSE: BUD  ) , brewer of such brands as Budweiser, Stella Artois, Beck's, and Michelob Ultra, is paying owners $0.97 for every share, resulting in a yield of 1.60%. With the current earnings payout ratio of only 31%, the dividend should be safe if revenue growth begins to slow down.

As it stands now, Anheuser-Busch is the largest brewer by market cap at $95.35 billion -- but the company also holds the most debt, totaling $45.4 billion. That debt may be one reason the CAPS community has given Anheuser only three stars, but it shouldn't be a major concern, since annual revenue is $38.64 billion and the company's brand name is extremely strong. U.S. market share is more than 48%, and it can boast about having the No. 1 or No. 2 market positions in 18 other countries. I can't even imagine how strong the brand image would look if I had beer goggles on.

Old No. 7
The last company on my list is Brown-Forman (NYSE: BF-B  ) , who makes brands such as Jack Daniel's, Southern Comfort, and Woodford Reserve. Brown currently raised its most recent quarterly dividend by 7% year over year, which makes the current dividend per share $1.40, a yield of 1.80%.

If you were frightened by Anheuser-Busch's debt, you'll be relieved to know that Brown has a rather low debt-to-equity ratio of only 36.78. An increasingly higher number generally means a company is borrowing more money to finance its growth. The current industry average sits at 137, which indicates that the company's competitors are heavily indebted to lenders.

The lack of debt also makes the earnings payout ratio of 35% very sustainable in the future. The CAPS community hands out five stars to Brown-Forman, and with that, I think I can confidently say I'm not the only one who likes a little Jack.

Of these four companies, I prefer Diageo and have recently given it a thumbs-up in CAPS because of its concentration on global growth and its above-average dividend yield. If you'd like to know about more dividend-paying stocks, check out our free article, "13 High-Yielding Stocks to Buy Today."

LOW, HD Point to DIY Comeback

Earnings and sales from clothing and department stores have been merely okay, and management is reluctant to look ahead with much positive feeling about the consumer spending. This morning’s earnings report from Lowe’s Companies, Inc. (NYSE:LOW) follows that pattern. Tomorrow we’ll get earnings from Home Depot Inc. (NYSE:HD) and Wal-Mart Stores, Inc. (NYSE:WMT), the industry leaders in home improvement and retailing, respectively.

Lowe’s posted second quarter earnings of $832 million, or diluted EPS of $0.58, up from $759 million in profits and diluted EPS of $0.51 in the second quarter of 2009. Sales were up 3.7%, to $14.4 billion. Analysts had been expecting EPS of $0.59 and revenue of $14.52 billion.

The company blamed everything but the kitchen sink — literally. Kitchen cabinets were a bright spot, even though sales were “not as strong as we would like to see,” according to the Lowe’s COO. Same store sales rose marginally by 1.6%. The company’s CEO said that Lowe’s “[doesn't] expect consistent improvement in core demand until the fundamentals of the labor and housing markets improve.” No kidding.

As a result of the weak outlook, Lowe’s cut its 2010 revenue guidance from growth of 5%-7% to about 4%, or from $49.58-$50.53 billion to $49.11 billion. The company raised the bottom of its expected EPS range by a penny, and lowered the top by two pennies. The forecast for full-year EPS went from $1.38-$1.45 to $1.37-$1.47.

EPS and revenue for the third quarter is mostly in line with estimates of EPS at $0.31 on revenue of $11.94 billion. Lowe’s forecast EPS for the third quarter is $0.28-$0.32 on revenue of $11.72-$11.97 billion.

Home Depot is expected to report EPS of $0.71 on revenue of $19.59 billion tomorrow. The second quarter is typically the biggest for home improvement stores, and Home Depot, like Lowe’s, should see a rise in sales and profits. But, also like Lowe’s, Home Depot is recovering slowly from nearly a three-year dip in business, so what might otherwise be regarded as a weak quarter will look good because the bar is not set very high.

Wal-Mart is expected to report EPS of $0.97 on revenue of $105.4 billion. The company raised its annual dividend to $1.21 earlier this year, nearly 20%, which may make investors more patient with the struggling behemoth. Still, there’s no reason to expect Wal-Mart earnings to provide a brighter outlook for the rest of the year than have other retailer earnings.

Lowe’s shares are up about 2% this morning, mainly because earnings weren’t as bad as traders had feared. That’s not much to build on though.

5 Small Cap Stocks to Buy Now. Small, innovative companies are watching their earnings explode — and they are the next ten-baggers. Investing pro Louis Navellier reveals his secrets to identifying these small cap innovators, plus five of his favorite small cap stocks — download your FREE profit guide here.

Fed Near Communications Overhaul: Report

The Federal Reserve is close to finishing an overhaul of its communications strategy, according to a published media report.

The overhaul aims to make the central bank's communications about its goals for inflation and employment more explicit, and to explain more clearly what interest rates are needed to meet those goals, said the report, on The Wall Street Journal's Web site.

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Fed officials are likely to spend a lot of time at the Dec. 13 Federal Open Market Committee meeting working out unresolved pieces of the new strategy, the report added. The FOMC is the central bank's policy-setting group.> > Bull or Bear? Vote in Our Poll

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A Home Run Stock for 2012

I always love a healthy debate, so when my Foolish colleague Travis Hoium wrote that Solazyme (Nasdaq: SZYM  ) was a "green-energy money pit," I couldn't resist taking the bait.

While I certainly agree with Travis -- there will be obstacles along the way -- I'm willing to dub Solazyme as my home run stock for 2012. Read below to find out why, and get access to another alternative energy play I'm excited about.

What they do
I've written about the specifics of Solazyme's business model before, but here's the view from 30,000 feet: The company can take a number of inputs (corn, switchgrass, sugarcane, waste streams), feed it to their patented microalgae, and those microalgae can produce different types of oils for different industries.

The company is specifically developing three different revenue streams moving forward. The first is to use the oil to produce biofuel. The company already has a partnership in place with Chevron (NYSE: CVX  ) , and its fuel was successfully tested on a United Continental (NYSE: UAL  ) flight earlier this year.

Solazyme also tailors its oils for healthy dietary products available at both Whole Foods (Nasdaq: WFM  ) and GNC stores.

The company's last revenue stream is in producing industrial chemicals for larger companies. Solazyme already has partnerships in place with Dow Chemicals (NYSE: DOW  ) and Unilever to help the company test its products in this market.

Here's what to focus on
As Travis rightly points out in his piece, securing feedstock (the sugarcane, corn, etc. that is fed to the microalgae) is the key to this company's future. �Drawing from our past experience with ethanol, Travis states: "Moving to a large scale means sourcing more fuel and building larger plants. When it became time for corn ethanol to make that jump the increased demand for corn resulted in higher prices and any advantage ethanol had evaporated."

It is here that I believe Solazyme has an upper hand over both those who tried and failed to use ethanol, and rival Amyris (Nasdaq: AMRS  ) . Amyris produces biofuels using plant-sourced sugars as feedstock. Solazyme, much like Rentech (AMEX: RTK  ) , has multiple inputs for its feedstock -- not just plant-sourced sugars -- including several forms of biomass, and even waste streams.

This means that whereas ethanol failed when its popularity raised the price of corn to a point where it was no longer cost effective, Solazyme and Rentech can spread their feedstock across many sources, including human waste streams, which I'm sure we'd be OK with using up altogether.

As things stand now, it seems that Rentech is more focused on their fertilizer business, and Solazyme already has feedstock agreements in place to meet 90% of expected capacity through 2015.

As I reported in August: A joint venture with French Roquette Freres has ensured that feedstock will be provided for Solazyme's food brands. A similar venture with Bunge Limited in Brazil promises to provide Solazyme with access to the sugarcane in a new 100,000 metric-ton facility.

And adding to the string of good news that's been coming from the company lately, the Navy just announced it'll be buying $12 million of advanced biofuels in an agreement that includes Solazyme.

These trends, both in terms of gaining customers and securing feedstocks, clearly put Solazyme in the driver's seat among biofuel producers.

Tread carefully
As any baseball fan knows, your favorite home run hitter is usually the one who leads the team in strikeouts as well. The same goes for the stock market. The companies with the greatest potential are often the riskiest.

Travis is right to point out that if Solazyme (or its competitors) don't secure sustainable feedstock streams as they ramp up their production and scale, they will join the long list of has-been green energy stocks. If, however, they continue to innovate and find ways to take the things we truly consider garbage (landfills, anyone?) and turn it into oil, then the sky could be the limit. That's why I've initiated a green-thumb on my CAPS profile for the company.

I currently hold about 1.4% of my portfolio in Solazyme, so I'm not placing heavy bets here. I will, however, be following the company's progress closely. Add Solazyme to your Watchlist, and you'll be able to do the same.

Finally, if you'd like to find out about another alternative energy play that I've actually put more of my money into than Solazyme, I suggest you check out our special free report: "One Stock to Own Before the Nat Gas Act Becomes Law."

Inside you'll find out about a company that can benefit from the natural-gas movement without having to actually extract the stuff from the earth. I've already put twice as much of my money into this company as I have into Solazyme. Get your report today to find out which company this is; it's absolutely free!

Renren: Social Networking Top Pick; Initiating With $6 Target

I initiate coverage on Renren (RENN) with Equal weight rating and a DCF-based priced target of $6.

Investment Thesis

• China's largest real-name social networking service site with first-mover advantage, broad product offering and superior user experience that translate to strong brand equity and network effect

• Biggest beneficiary of social network advertising, acting as a "one-stop-shop" that features sponsored stories, demographic-driven display ads and corporate fan-sites

• Location-based-services (LBS) and group-buying to drive further growth as Renren enters the untapped market of mobile social network advertising

• Valuation: Renren is currently valued at 15x EV/revenue, on par with its closest SNS peer LinkedIn (LNKD).

• Recommendation: I initiate coverage on Renren with an equal weight rating and a DCF-based price target of $6, which values it at 6x 2012e EV/revenue. The key risks include: (1) regulatory risks; (2) slowdown of Chinese economy; (3) competition from microblogs; (4) rising cost of Nuomi.

• Why not Overweight: Since Wall Street Journal reported Facebook's $10 billion IPO that would value the firm at $100 billion, Renren's shares have jumped over 40% the past three days. I feel that Renren's valuation has gone ahead of itself and the stock could take a breather in the near-medium term.

Business Model

Renren generates revenue from online advertising, online games, other internet-value-added-services (IVAS) and Nuomi.

Online advertising include display ads, promotions, in-game advertising and fan-pages. Some of Renren's top advertising clients include Coca-Cola (KO), Adidas (ADDDY.PK), HP (HPQ), Nokia (NOK), Motorola (MMI) and McDonald's (MCD).

Online games include in-house developed, licensed and third-party developed social games. Currently, Renren has over 400 in-house developed and license games ranging from action shooters for the serious gamers to role-play for casual gamers, and over 900 games from third-party developers.

click to enlarge

Other IVAS revenue consists of the sale of virtual items and paid accounts that grant users additional features, such as larger friend lists, bigger photo albums, free MP3 streaming and customized profile pages.

Finally, Nuomi is Renren's group-buying service that was launched in June 2010 and operates in similar fashion to Groupon (GRPM). The unit is one of the top 10 group-buying sites and advertises local deals in 60 cities across China.

Investment Highlights

The leading real-name SNS platform in China. Renren.com is China's largest "real-name" social networking site. The company operates in similar fashion to Facebook (FB) in which users can set up their own profiles, post updates, upload pictures and send messages to other users in their network.

Renren's competitive advantage lies in its first-mover advantage and superior user experience and value propositions that resulted in strong network effect.

Established in Tsinghua University one year after the founding of Facebook, Renren became the first real-name SNS platform in China and immediately gained popularity among college students as its real-name feature met their need of keeping touch and communicate with close friends over the internet.

Aside from traditional SNS offerings of user profiles, messaging, photos and updates, Renren quickly expanded its product offerings which include online social games, e-commerce, third-party apps and online videos. The broad products and services improved user experience and stickiness, and expanded its presence among the Chinese universities and young urban professional communities.

Because Renren's real-name platform allows users to search for friends, build an extensive contact database and meet their social networking needs, Renren experienced tremendous growth in total activated users over the past five years. From 2007 to the end of 3Q11, Renren's total activated user base grew from 30 million to over 137 million. Over the past year, Renren has been adding 2.8 million users per month. Assuming a conservative 2 million per month net additions, Renren's total activated user base could reach 400 million+ by 2022.

Renren's large user base, strong brand equity, and innovative products and services allow the company to establish presence in other social networking verticals. In addition to its flagship real-name SNS platform, Renren also operates Jingwei.com, a professional social networking site similar to LinkedIn, and Chewen.com, a car enthusiast social networking site.

Currently, both sites are still under beta testing. However, I believe that they will be highly successful once operational because:

Renren users can access both platforms using their Renren log-in and consolidate multiple platforms (eg. social, professional, and interests) that result in low switching cost and better user experience.

Jingwei will likely become the preferred professional networking platform over LinkedIn due to established user stickiness of Renren's brand, products and services. The increasing adoption of Jingwei by young urban professionals will result in greater network effect for the platform.

Growing interest of automobiles among Chinese consumers has created thousands of local car clubs where enthusiasts share information on vehicles, insurance, maintenance and related topics. Chewen connects enthusiasts at both the local and the national level as young urban professionals and internet users pursue their aspiration of car ownership.

Jingwei and Chewen will greatly enhance Renren's value proposition and open additional monetization channels for the company.

The "one-stop shop" for social network advertising in China. Social network advertising is gaining significance because it is likely to revolutionize online advertising by leveraging word-of-mouth, which is widely considered the most effective marketing tool. In a 1955 book titled "Personal Influence: The Part Played by People in the Flow of Mass Communication", authors Paul Lazarsfeld and Elihu Katz pointed out that advertisers broadcast their messages to certain individuals, such as opinion leaders, so they can spread the message via word of mouth to their own social networks. Personal influence is an important part of consumers' decision making process, and advertisers seek to capitalize on the social action of internet users to drive future sale.

According to Global Industry Analysts, the social network advertising market is expected to reach $14.8 billion by 2017. While the majority of the growth will be in the US, low internet penetration and minimal adoption of social network advertising in China implies greater upside than the developed markets.

Social network advertising consists of:

• Sponsored story. This type of advertising involves broadcasting a news feed onto the user's social network profile based on his action. For example, if a user uploads a feed involving Starbucks (SBUX), then a Starbucks logo would instantly show on the user's profile.
• Display ads. This involves placing traditional banner and display ads onto an user's profile. Advertisers can utilize the demographic data in the profile page to target consumers more directly, allowing for greater effectiveness of the promotional messages.
• Fan-sites. This method involves advertisers setting up fan-sites that followers can join. The increased number of "fans" or "followers" allows the advertisers to develop its network effect and promote its products and services.

Of the three social network advertising methods, sponsored ads are considered most effective due to the influence the user has over his network, followed by fan-sites. Pseudonym SNS platforms operated by Tencent (TCEHY.PK), Sina (SINA) and Sohu (SOHU) utilize the first two methods because they are effective in a follower-based environment in which consumers receives an advertising broadcast from a known source, such as a friend or a fan-page. However, display ads on the pseudonym SNS platform are ineffective because user data are either unreliable or nonexistent. For example, Sina's Weibo "certifies" the user's real identity by placing a "Sina Certified" badge in the user's profile page.

Renren's real-name SNS platform can effectively deliver all three social network advertising methods because advertisers can not only set up sponsored ads and fan-pages but also rely on the real user profiles to deliver display and banner ads. The ability to present three, rather than two, options to the advertisers allows Renren to become a one-stop shop for social network advertising. Renren can also establish a tier-pricing mechanism that showcases the different channels to attract the 40 million SMEs that have different advertising budget.

Currently, Renren is building a new advertising system similar to Facebook's Beacon Project, which helps advertisers target consumers by age, education, language, employer, location and interest, and leverage the network effect to broadcast messages. Advertisers can also manage their budget by choosing CPC or CPM, and obtain detailed analysis on their ads in regards to impressions, clicks and demographics on the audience. According to management, the new ad system is currently undergoing beta testing.

As of 3Q11, online advertising accounts for 57% of net revenue. I expect it to account for 70% of net revenue by 2015 as advertisers increasingly adopt SNS to better target consumers and achieve higher effectiveness on their ad budget. We could see the launch of the new ad system in 2H12.

Mobile initiative and group-buying expands market opportunities. As of 3Q11, Renren's mobile penetration reached 13.3 million users, or 35% of its total monthly unique users. Half of the mobile users access Renren through smartphones and I believe this trend is likely to continue as low-end smartphones become increasingly affordable and as feature phone users trade up to low-end smartphones. According to DCCI, mobile internet users in China are expected to outnumber desktop internet users by 2013.

Renren officially entered the mobile social networking market with the introduction of HTC Daren, an Android-based device that incorporates many of Renren's core functions and location-based-service (LBS) features. The device will be selling for Rmb 2,000, which is a cost considerably less than its peers.

HTC Daren will greatly enhance user stickiness for the device features an easy to access menu that allows users to update their social feeds on the main interface. It can also sync contacts with their respective Renren accounts so the address book automatically display status updates. Other features include a 5MP camera and app store.

HTC Daren entered the market well before the Facebook Phone, code named "Buffy", which is also developed by HTC and expected to be launched this year. I believe that this validates Renren's mobile strategy and highlights the forward-thinking nature of management.

Nuomi is also a critical component of Renren's mobile and LBS strategy. According to a CNNIC report published in January 2012, group-buying is the second fastest growing segment in China's internet industry with 64 million users (+245% y/y) but accounts for just a 12.6% penetration rate, implying significant upside.

Nuomi can benefit from HTC Daren's LBS feature as it delivers coupons, discounts and promotions to users whenever they log into their Renren account. It can also deliver group discounts to multiple users when it detects a sufficient number of Renren users are within close proximity to the deal source.

To fully solidify its nationwide coverage, Nuomi partnered with Focus Media (FMCN) to run promotions and discounts on Focus Media's next generation interactive LCD screens. The new advertising device features a large screen for video ads and three smaller screens for flash ads. Sensors located at the bottom of the smaller screens allow consumers to receive promotion by using Q-cards or near-field-communication features in their mobile device.

Renren's LBS platform currently delivers over 30,000 daily deals and protmotions. With only one year of operational history, Nuomi already ranks as one of the top ten among the 5,000 group-buying sites in China. I expect Nuomi to continue to grab market share from smaller rivals and improve its sector leading 8% conversion rate as it leverages HTC Daren and Focus Media's interactive LCD screens amid industry consolidation.

Experienced Management Team

Joseph Chen, Founder, Chairman, Chief Executive Officer:

• Co-founder of ChinaRen.com, China's first-generation SNS
• Senior vice president of Sohu.com
• Bachelor of Science from University of Delaware, Masters of Engineering from MIT and MBA from Stanford University.

Hui Huang, Chief Financial Officer:

• CFO of Cathay Industrial Biotech
• Executive director at Johnson Electric Capital Limited
• Bachelor of Science from Shanghai Jiaotong University and MBA from Wharton School at University of Pennsylvania

James Liu, Chief Operating Officer:

• Co-founder of UUMe.com, one of China's earliest SNS
• Product management direct at Fortinet (FTNT)
• Bachelor of Science from Shanghai Jiaotong University and MBA from Stanford

Alvin Chiang, Chief Marketing Officer:

• Vice president at Alibaba (ALBCF.PK)
• Vice president of sales at NetEase (NTES)
• Bachelor of Management Science from National Chiao Tung University

Financial Outlook

I forecast net revenue to grow at a CAGR of 44% from 2012e - 2016e, driven by advertisers' growing adoption of real-name social networking sites to better target consumers based on demographics such as age, gender, geography, education level, interest and networks. In addition, Nuomi will continue to expand market share by leveraging Renren's large user base and brand equity as the industry consolidates. In the subsequent five years from 2017e - 2021e, I forecast net revenue to grow at a CAGR of 25% as online advertising based on SNS approaches maturity.

I expect the gross margin to be 80% for the foreseeable future as bandwidth cost, which accounts for the majority of COGS, to remain relatively flat at 12% of sales.

Operating expenses are expected to be on above 80% of sales in the next two years as Renren ramps up marketing expenses to promote Nuomi. The company will also continue to invest heavily on R&D to improve the user experience in its SNS platform.

EBITDA margin is forecasted to increase to 14% by 2015 and to 23% by 2021 as less marketing expense is required to promote Renren and Nuomi's brand. R&D expenses are also expected to decline after Renren improves the SNS user interface and bridges the gap it has with Facebook.

CAPEX is expected to be 9% of revenue for 2012e as Renren ramps up spending on servers and equipment to meet the growing user base. From 2017e onward, CAPEX is expected to decline to 3 - 4% of revenue as the business matures and the spending is geared toward maintenance of equipment.

EPS is expected to be $1.00 by 2016, compared to my estimate of $0.13 per share loss for 2011.

DCF Summary

My DCF analysis derives a price target of $6.

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

5 Stocks Setting New 52-Week Highs

There’s a theory on Wall Street that a stock setting new high will continue to do so for a while — and that stocks setting new 52-week lows will continue to plumb the depths. This kind of momentum is partially technical but also largely driven by big news including buyouts, big sales deals or other attention-grabbing headlines.

To help you get on the right side of these momentum plays, here’s a list of five big name stocks setting new 52-week highs lately.

But please note than when it comes to 52-week highs there are sometimes as many reasons to be wary as there are reasons to think the profits will keep flowing. Some stocks surge after an acquisition and will soon stop trading. Others have big short interest, which means many are betting on a flop to occur soon. Keep in mind that these stocks here are not recommendations, just picks up against new highs as of this writing.

BJ’s Wholesale Club (BJ)

Industry: Retail
Market cap: $2.4 billion
52-week high: $45.00
Price as of 7/20 close: $44.91

BJ’s Wholesale Club (NYSE: BJ) operates 187 discount warehouse clubs in 15 states in the eastern U.S. The retailer also offers numerous specialty services, including optical centers, food courts, auto services and electronics departments to name a few. BJ’s stock is up +37% year-to-date, and has fared better than the Dow Jones Industrial Average and S&P 500 which are down -1.9% and -2.8% respectively. BJ’s stock has been climbing as of late due to renewed buyout chatter, although there are no formal suitors yet as of this writing.

Hospira Inc. (HSP)

Industry: Healthcare
Market cap: $9.5 billion
52-week high: $59.75
Price as of 7/20 close: $57.46

Hospira Inc. (NYSE: HSP) is a healthcare company specializing in the delivery of various pharmaceutical products and medications. Some of its most profitable designs and products deal with acute care and oncology (that’s cancer care). Hospira operates all over the world and has seen its stock rise +12.7% since the start of 2010 — significantly better than the market. Biotech giant Genzyme (NASDAQ: GENZ) recently expanded its manufacturing deal with Hospira, lending strength to shares.

Edwards Lifesciences Corp. (EW)

Industry: Healthcare
Market cap: $6.3 billion
52-week high: $57.22
Price as of 7/20 close: $55.58

Edwards Lifesciences Corp (NYSE: EW) is a leading global company in the development of products and technologies for the treatment of advanced cardiovascular disease. Its four main categories of product design are: Heart Valve Therapy, Critical Care, Cardiac Surgery Systems and Vascular. Edwards Lifesciences rallied about 7% from its previous earnings report, and it appears shares are showing strength in anticipation of the next EW earnings after the bell on July 21. As of July 20, EW’s shares had gained +27.4% year-to-date, outperforming the broader markets, which are down slightly on the year.

Alliance Holdings (AHGP)

Industry: Energy
Market cap: $2.1 billion
52-week high: $36.00
Price as of 7/20 close: $35.47

Alliance Holdings (NASDAQ: AHGP) is a Delaware limited partnership, which produces and sells coal to major U.S. utilities. Shares are up +27% so far this year on strong earnings, optimism of an economic recovery boosting coal demand and general investor demand for a stock with a plush 5.4% dividend yield. The stock is showing strength in anticipation of its July 26 earnings report, and could continue to push higher in the weeks ahead if results are good.

Plains All American Pipeline (PAA)

Industry: Energy
Market cap: $8.6
52-week high: $63.97
Price as of 7/20 close: $63.34

Plains All American Pipeline (NYSE: PAA) is engaged in the transportation, storage, and sale of crude oil and other natural gas. The company completed public offering of senior notes at the beginning of July, raising $400 million, and it’s been off to the races from there with shares up +8% so far on the month. Like Alliance, PAA has seen strong demand not only due to optimism over energy demand but because of strong buying pressure due to a big dividend. PAA stock currently yields nearly 6%.

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Rising Stock Prices and the Economy

On February 18 I wrote a post concerning Alan Greenspan's comments regarding the stock market "as a stimulus."

In this post, I would like to highlight comments made by Federal Reserve officials (Bernanke and Sack) as well as another made by Greenspan, as I believe that these official comments regarding the stock market's "wealth effect" and related themes deserve recognition and scrutiny.

From Bernanke's November 4 Washington Post Op-ed "What the Fed Did and Why...", in which he is commenting upon the Fed's plans to buy $600 Billion in long-term Treasuries (i.e. QE2):

"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

From Brian Sack of the New York Fed, in an October 4 speech titled "Managing The Federal Reserve's Balance Sheet" :

"Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be."

From Alan Greenspan's “Activism.” (pdf) :

"Equity values, in my experience, have been an underappreciated force driving market economies. Only in recent years has their impact been recognized in terms of ‘wealth effects’. This is one form of stimulus that does not require increased debt to fund it. I suspect that equity prices, whether they go up or down from here, will be a major component, along with the degree of activist government, in shaping the U.S. and world economy in the years immediately ahead."

My comments:

I could write extensively about this collection of comments. For now, I will say that until recently, the idea of prominent Federal Reserve officials publicly talking of the stock market as an instrument for creating a "wealth effect" would have seemed rather foreign. I see considerable peril, for a variety of reasons, in having officials make these types of comments.

Can an asset class such as the stock market be reliably counted upon as a means unto itself to create sustainable, broad-based wealth? Especially if, as I believe, the stock market is currently a bubble? I think we should reflect upon our (national) experience in housing before answering this question.

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

Housing in 2011: Will Prices Fall Further?

Nouriel Roubini and Peter Schiff recently posted articles suggesting that housing prices will fall by another 20% (see here and here). My suggestion is that whether this is correct or not is likely to have very much to do with inflation because as you will see:

The real, median price is above historical levels

If the Fed creates a higher inflation rate, as they apparently are trying to do, real prices in most areas are likely to fall even if they rise nominally.

According to the latest Case Shiller HPI report:

The S&P/Case-ShillerHome Price Indices for October showed a deceleration in the annual growth rates in 18 of the 20 MSAs and the 10- and 20-City Composites in October compared to what was reported for September 2010.

The 10-City Composite was up only 0.2% and the 20-City Composite fell 0.8% from their levels in October 2009. Home prices decreased in all 20 MSAs and both Composites in October from their September levels.

In October, only the 10-City Composite and four MSAs – Los Angeles, San Diego, San Francisco and Washington DC – showed year-over-year gains. While the composite housing prices are still above their spring 2009 lows, six markets – Atlanta,Charlotte, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices started to fall in 2006 and 2007, meaning that average home prices in those markets have fallen beyond the recent lows seen in most other markets in the spring of 2009.

As the chart below shows, the median price when adjusted for CPI is still well above the historical range, suggesting that the real median price still needs to decline if the nominal gains made as a result of the housing bubble are to fully retrace.

click to enlarge images

What also is interesting about this chart is that it shows how steady the real median price was for over 50 years. Except to two periods in the early 1980′s and 1990′s (which adjusted back both times), from about 1947 until about 2000 the rise in nominal prices was almost entirely due to inflation alone.This is true because in order for real prices to remain constant, the percentage increase in nominal prices must be offset by the inflation rate.

The S&P CS HPI is indexed (year 2000 = 100) but price changes are reported on a nominal basis. The 10 city and 20 city indices are currently 159.03 and 145.32 respectively, meaning that prices are up 59.03% and 45.32% since 2000 before inflation. In CPI terms, the dollar's purchasing power has declined by 21.3% since 2000 ($100 today buys only $78.70 then). So, adjusted for inflation, the indices are up 37.7% and 24% respectively.

Taking inflation into account, when looking at each city's current index, a reading equal to 121.3 means that prices have exactly kept up with inflation since 2000.

Of the 30 cities making up both indices, 6 are currently below that level. Detroit has the lowest index at 68.86, meaning the nominal price is now 31.14% below where it was in 2000. But in real terms, price has declined by 52.4% since then (and obvioulsy by a much larger amount off the 2007 peak).

Minneapolis is exactly even with inflation and the remaining 23 are above. D.C. leads the way here, with prices up 86.67% nominally and by 65.37% in real terms.

So the question now is, what might happen going forward? The answer to that lies in part with how successful the Fed will be in its quest to create a higher inflation rate. If the overall median price is to return to its historical (pre-bubble) norm, any nominal price increases must be offset by a higher rate of inflation.

The 10 city composite had a nominal 0.2% YoY increase in Ocotober but in real terms, there was a 1% decline (October's unadjusted CPI-U was 1.2%). For the 20 city composite, the real YoY decline was 2%. Just 4 markets (D.C., L.A.,San Diego and San Francisco) had nominal increases greater than CPI, meaning they experienced real appreciation.

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

10 Overvalued Stocks Analyzed by Discounted Future Cash Flows

In my last article, I wrote about 20 statistically cheap names for possible long term investment. In this article, I am evaluating 10 stocks which appear to make poor longer investments according to our analysis of current growth rates, DCF valuations, and industry dynamics. All stocks listed will be valued using the past trailing twelve month earnings growth rate or the analysts' projected growth rate over the next five years, and a 1% terminal growth rate after that. I am using an 11% discount rate, which may be a bit high, to discount future cash flows back to their net present value.

Although many momentum investors own the stocks I'm about to discuss, once the buying frenzy ends, these names could actually trend much lower in the coming years and quarters despite their market leading positions and best of breed business models. Most investors seem to be riding a wave of rising prices without paying attention to earnings. As Buffett says, price is what you pay, value is what you get.

OPEN – Opentable.com is trading at 158X earnings, 73X forward earnings, and boasts 44% sales growth. If investors assume that OPEN will grow EPS of $.51 at a 50% growth rate over five years with growth of 1% thereafter, OPEN is currently worth only $30 per share. Open has a PEG ratio of around 2, meaning my 50% earnings growth rate is likely more conservative than most Wall Street analysis. Growth in earnings at a higher than 50% rate would better justify current prices.

LULU – Lululemon.com trades at 54X trailing earnings, 39X forward earnings, a price to sales of 9X, and a price to book value of 15.83. LULU makes yoga apparel, and while I like the clothing and lifestyle, the company must grow earnings at approximately 47% per year using our DCF model to justify its current valuation.

HDY – Hyper Dynamics trades for 37X book value per share, and has no earnings currently. Valued at $726MM, HDY shares are up because of their land lease deal with Guinea which covers over 10,000 square miles. HDY will likely strike oil and become a larger company in the future, but at today’s prices these potential gains may already be priced into the stock.

CRM – Salesforce.com trades for 262 times trailing twelve month earnings. If we assume CRM will earn $1 next year (up from $.55 this year), and can grow earnings at 50% per year for the next five years, and 1% yearly thereafter, the stock from a DCF perspective is worth $59.00, according to our model. This makes it the most overvalued stock in this list.

CMG – Chipotle Mexican Grill trades for 45X TTM earnings and 9.55X book value. If Chipotle can grow EPS of $5.17 at 30% per year for the next five years and 1% thereafter, CMG is worth $157 per share according to our DCF model.

AMZN – Amazon.com trades for 77.5X earnings on EPS of $2.75 per share. IF AMZN can grow earnings at 40% per year for the next five years, and grows at 1% thereafter, AMZN is worth $117 per share. With the company trading at “just” 2.75X sales and a 2.71 PEG ratio, AMZN will need to aggressively build out their higher margin cloud computing segment just to maintain its current stock price.

NFLX – Netflix trades at a whopping 73.3 times earnings of $2.64 per share. One aspect of NFLX that makes it a bit cheaper than it appears at first are their large cash flows from operating activities, which make this a tough short. NFLX will have to grow earnings by 50% per year in each of the next five years and grow earnings at 1% per year thereafter to maintain its current stock price. Could it happen? I think it's a risky bet, but stranger things have happened.

APKT – Acme Packet, another cloud firm, is a bit cheaper than CRM on earnings with a 59X forward P/E ratio, but more expensive on sales, with a 19X price to sales ratio. If APKT earns $1 next year and continues to grow at 50% over the next five years with a 1% terminal growth rate, APKT is worth $59 per share – which is just a buck below the current stock price, making it a better bargain than CRM on earnings. The numbers don’t always tell the whole story, and CRM is the market leader in the cloud.

SPG – Simon Property Group is a REIT that trades at 59X earnings (although REITs pay out cash flows as dividends) and sports a 3.2% yield. At 6X book value, we have no real way to value their properties as they were booked at cost a long time ago, but we can assume that free cash flow of around 1.3 billion should be worth no more than a 20X multiple to these cash flows, or a 10% discount or so from current prices. SPG is not glaringly overvalued, but if the stock rises 30% or more without a similar gain in free cash flow, the stock will be quite expensive.

IWM – The iShares Russell 2000 trades at over 27X earnings and over 3.47X book value. These are multiples generally found at market tops, or at least in periods of irrational exuberance. Investors putting capital to work at these levels in the IWM should read my article “20 statistically cheap stocks worth researching further” for investments that will grow and not destroy capital investment over time.

So there you have it, 10 highly overvalued stocks that might be used as hedges against long positions when a bear market erupts. Until a bear emerges, selling near month at the money put options against a short position, or buying put spreads on these issues, is likely the most conservative path to gains ahead, as overheated markets can remain overheated longer than most investors imagine.

Here is a link to my favorite DCF site.

Disclosure: I am short OPEN, IWM, LULU, CMG, CRM, HDY, AMZN, NFLX. I am long puts on APKT and short 1.5X that amount of lower strike puts and many times hedge both long and short positions using options.

A Portfolio Named ‘Service’

In an effort to make stock-picking more fun, I thought it would be interesting to create a diversified portfolio of stocks using a randomly selected theme. In addition to creating a diversified portfolio, I’ll find one or two ETFs that own all of the individual stocks in the portfolio. I’ll then report on the performance of the simulated portfolios (both individual stocks and ETFs) on a monthly or quarterly basis to see how they compare. I’m hoping this becomes a regular series. If nothing else, it should be good for a few laughs.

First, the ground rules. The stocks must have a share price greater than $10, a market capitalization of at least $100 million and be traded on the New York Stock Exchange, NASDAQ or American Stock Exchange. There will be no stocks trading over the counter. The portfolios will have a minimum of eight stocks and a maximum of 12, with no fewer than four sectors represented to ensure diversification. Finally, the ETFs should not have an annual expense ratio of more than 0.75% and a turnover above 50%. After all, the point of ETFs is to reduce fees and taxes while delivering good returns through proper diversification.

Today’s theme is service — not companies in the service sector, but rather those stocks whose company name includes the word “service.” A quick search at Yahoo! Finance (NASDAQ:YHOO) produces a list of 48 companies that meet the requirements above and also have the word “service” in their name. Not surprisingly, 14 of the businesses are indeed in the service sector. The financial-services sector is also well-represented. All told, there’s at least one company from each of seven different sectors: health care, industrial goods, basic materials, utilities, technology and the two mentioned previously. So it shouldn’t be difficult to put together a portfolio. The hard part will be finding enough large-caps.

1. The first selection is the easiest: ServiceSource Corporation (NASDAQ:SREV), a small-cap technology company (the only one) that helps companies such as Adobe Systems (NASDAQ:ADBE) and Verizon Communications (NYSE:VZ) grow their service revenue by increasing the number of customers who opt for maintenance, support and subscription agreements. Its current market cap is $1.2 billion, and it’s profitable on an adjusted Non-GAAP basis.

2. Out of a list of four utilities, I’ll go with Public Service Enterprise Group (NYSE:PEG). It has a good dividend yield at 4.5%, it’s a largec-ap and it’s relatively undervalued.

3. In the basic-materials sector, I have a group of seven stocks to select from. I’m going to go with Superior Energy Services (NYSE:SPN), a New Orleans-based oilfield-services company. The stock is down about 18% in the last year through Feb. 10. With an enterprise value of 6.3 times EBITDA, I like it.

4. Next up is the industrial-goods sector, with four choices. Here I’m going to go with another large-cap in Republic Services (NYSE:RSG), the second-largest nonhazardous-waste-management company in the U.S., behind only Waste Management (NYSE:WM). Both companies are held by the Bill and Melinda Gates Foundation. Also,�RSG pays a nice dividend.

5. In the health-care arena, I’ll select Transcend Services (NASDAQ:TRCR), a micro-cap providing transcription services to hospitals across the country. It has pretty good margins and room to grow.

6. As they say in sports, the team that gets the best player in a trade usually wins the trade. Therefore, I’m going to go with PNC Financial Services Group (NYSE:PNC) and Discover Financial Services (NYSE:DFS), the two biggest and arguably best opportunities of the 11 financial-services companies that meet our criteria.

7. On the services front, I’m picking JB Hunt Transport Services (NASDAQ:JBHT), Total System Services (NYSE:TSS) and ITT Educational Services (NYSE:ESI). The first two are mid-caps and the third is a small-cap, providing a trucking, payment-processing and post-secondary technology degrees. I like the services in the services sector.

So the portfolio consists of 10 stocks: four large-caps, three mid-caps, two small-caps and one micro-cap. With an average market cap of $8.94 billion, this “Services” portfolio rocks! Now all I have to do is find some ETFs to cover off all 10 stocks and we’re done.

The two smallest companies, Transcend Services and Superior Energy Services, can be owned through the iShares Russell 2000 Index Fund (NYSE:IWM). The remaining eight companies are all found in Guggenheim’s Wilshire 5000 Total Market ETF (NYSE:WFVK).

The bottom line: If you invested $10,000 in each of these 10 stocks in February 2011, today you would have $114,600. If you invested the same amount in the two ETFs, you would have $102,530. While past performance doesn’t indicate future returns, it will be interesting to see how we do.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

Top Stocks For 2012-1-11-4

DrStockPick.com Stock Report!

Wednesday August 19, 2009

Stocks Upgraded Today

Company	Ticker	Brokerage Firm	Ratings Change	Price Target
Network Appliance	NTAP	BMO Capital Markets	Market Perform � Outperform
Harsco	HSC	KeyBanc Capital Mkts	Hold � Buy	$38
American Axle	AXL	Credit Suisse	Neutral � Outperform
Target	TGT	Piper Jaffray	Neutral � Overweight
Taleo	TLEO	Janney Mntgmy Scott	Neutral � Buy
AnnTaylor	ANN	UBS	Neutral � Buy
Royal Caribbean	RCL	Bernstein	Underperform � Outperform
MPS Group	MPS	Deutsche Securities	Hold � Buy	$10 � $12
Netflix	NFLX	Kaufman Bros	Hold � Buy	$48 � $53
Popular Inc	BPOP	Keefe Bruyette	Mkt Perform � Outperform	$2 � $3.50
Super Micro Computer	SMCI	Merriman	Neutral � Buy

Stocks Downgraded Today

Company	Ticker	Brokerage Firm	Ratings Change	Price Target
Simon Properties	SPG	Argus	Buy � Hold
Abercrombie	ANF	Susquehanna Financial	Positive � Neutral
MedAssets	MDAS	UBS	Buy � Neutral
Robt Half	RHI	Deutsche Securities	Hold � Sell	$21
Shire Plc	SHPGY	JP Morgan	Overweight � Neutral
Seacoast Banking	SBCF	Keefe Bruyette	Outperform � Mkt Perform	$5 � $2.50

Obama says private sector is fine — see the charts

MARKETWATCH FRONT PAGE

During a press conference Friday, President Barack Obama said the private sector �was fine,� a comment that drew immediate scorn from conservatives. The data on the subject however offers multiple interpretations. Here are the charts of the relevant statistics. See full story.

Obama takes more strident tone with Europe

President Barack Obama urges European leaders to take specific steps to end the debt crisis. His comments are in contrast to two years of quiet prodding of European leaders. See full story.

Friday�s biggest gaining and declining stocks

MarketWatch�s daily rundown of shares making sizable moves in the U.S. stock market. See full story.

Gold suffers weekly loss, but ends session higher

Gold futures finish lower for the week Friday, as recent comments by the top U.S. central banker squashed hopes of immediate stimulus, lifting the dollar and sinking prices a day earlier, but the metal ended the session on a positive note. See full story.

Dollar pares gain as investors look to Spain

The U.S. dollar pares gains Friday, getting a safe-haven lift from concerns over global economic growth, but losing some ground against the euro as investors anticipated a possible weekend move to bail out Spanish banks. See full story.

MARKETWATCH COMMENTARY

Everyone knows America has too much debt. What they don�t know is that things are getting better, not worse. Little by little, our economy is reducing its debt burden, writes Rex Nutting. See full story.

MARKETWATCH PERSONAL FINANCE

When it comes to IRAs, timing is everything. Robert Powell looks at five rules that could derail your retirement-savings plans. See full story.

Did the Stimulus Do Its Job?

The rationale for the $787 billion stimulus legislation enacted in February 2009 is that government spending is necessary for juicing economic activity that would otherwise lie fallow. The idea comes from The General Theory of Employment, Interest and Money, the 1936 tome by Keynes that put macroeconomics on the map and launched a debate about the role of the state in managing the business cycle.

Economics being economics, definitive answers are forever lacking. We have only one run of history to analyze and so it's never clear what might have transpired if we tried x vs. y. Such is life in the dismal science, leaving mere mortals to argue over the scraps of evidence dispensed in the numbers. With that in mind, we offer the following statistical crumbs, fully aware that there are a billion or so other perspectives one might conjure from the sea of data.

Let's recognize that any stimulus plan worthy of the name should focus on raising consumption, which arguably leads to an expansion in the labor market. But first things first. For our purposes here, let's define consumption by three metrics:

1)personal consumption expenditures, a broad measure of consumer spending
2)retail sales, a somewhat more granular gauge of Joe Sixpack's spending habits
3)new orders for durable goods, which measures the business sector's consumption appetite.

Collectively, this trio represents a broad measure of the spending trend in the U.S. The following chart indexes these three metrics to 100 for November 2007, a month before the Great Recession began, according to NBER. It's clear from our chart below that the contraction in spending in the consumer and business sectors ended in January 2009. (Well, almost. Durable goods slipped again in March 2009, although the general trend for all three has otherwise been rising since the start of 2009.) We can debate if the consumption rebound has legs, but it's clear that the retreat hit bottom as this year opened. That brings us to the question: Was the bounce that began in January due to the fiscal stimulus? (Click to enlarge)

The answer is an emphatic "no," for reasons that require only a calendar and a news archive. The stimulus package was enacted in February, a month after the consumption rebound began. And as of October 30, only a fraction of the stimulus funds had been spent or "awarded"—roughly 20% of the total, according to Recovery.gov.

One can, of course, argue that the fiscal package has helped strengthen the recovery. But the recovery was arguably underway before the fiscal dollars hit the street.

If any aspect of government intervention deserves praise for ending the Great Recession, monetary policy is the leading candidate. The smoking guns are the explosion in the Federal Reserve's balance sheet and a Fed funds target rate of 0% to 0.25%.

But we should be cautious in congratulating the central bank. For one thing, the Fed's near-zero policy rate didn't arrive until September 2008, when the financial crisis metastasized into a far deeper problem. Some argue that had the Fed acted earlier, the worst of the fallout in late-2008 could have been avoided. Economist Scott Sumner, for instance, argues that the Fed "misdiagnosed" the economic challenge and thereby allowed the crisis to fester and build momentum.

Whether or not you agree with Sumner's thesis, there's still reason to wonder how much of the January 2009 bounce is due to monetary policy. Many economists argue that even under the best of circumstances, the influence of monetary policy has a 12-to-24-month lag. By that standard, an optimistic view of the Fed's influence on the January 2009 bounce means that policy choices in early 2008 are responsible for the revival. Yet that view is suspect, considering that the effective Fed funds rate was 4%-plus when 2008 opened. As late as September 1, 2008, the effective Fed funds was still roughly 2%. The Great Stimulus, in other words, arrived too late to influence the January bounce.

What about all the extracurricular quantitative easing engineered by the Fed? That too is debatable as a cause for the January 2009 revival depicted in our chart above. In the final months of 2008, most if not all of the Fed's monetary stimulus came from traditional policy adjustments, i.e., cutting interest rates, according to James Bullard, president of the St. Louis Fed.

What, then, accounts for the January 2009 bounce back? Perhaps the answer is simply that the natural forces of the business cycle brought on the revival. Have the liquidity injections by the Fed been worthless? No, not at all. Indeed, there are other measures of economic activity beyond the trio noted above. That includes the risk of deflation, which is almost surely lower these days thanks to central bank policy decisions in the fall of 2008. But deciding on how much is too much is certainly a valid topic. Alas, we'll never know for sure. We can't rerun economic history with an alternative policy.

What we do know is the consumption in U.S. stopped contracting in January 2009. A portion of the rebound, perhaps most of it, is due to the natural forces of the business cycle.

TheStreet Ratings Top 10 Rating Changes

Every trading day TheStreet Ratings' stock model reviews the investment ratings on around 4,800 U.S. traded stocks for potential upgrades or downgrades based on the latest available financial results and trading activity.

TheStreet Ratings released rating changes on 133 U.S. common stocks for week ending November 4, 2011. 89 stocks were upgraded and 44 stocks were downgraded by our stock model.

See if (APC) is in our portfolio

Rating Change #10Anadarko Petroleum (APC) has been downgraded by TheStreet Ratings from buy to hold. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income and disappointing return on equity.Highlights from the ratings report include:

• APC's revenue growth has slightly outpaced the industry average of 30.0%. Since the same quarter one year prior, revenues rose by 34.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
• Compared to its closing price of one year ago, APC's share price has jumped by 27.49%, exceeding the performance of the broader market during that same time frame. Although APC had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
• ANADARKO PETROLEUM CORP has exprienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ANADARKO PETROLEUM CORP turned its bottom line around by earning $1.52 versus -$0.34 in the prior year. This year, the market expects an improvement in earnings ($3.22 versus $1.52).
• Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, ANADARKO PETROLEUM CORP's return on equity significantly trails that of both the industry average and the S&P 500.
• The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 11634.6% when compared to the same quarter one year ago, falling from -$26.00 million to -$3,051.00 million.

Anadarko Petroleum Corporation engages in the exploration and production of oil and gas properties primarily in the United States, the deepwater of the Gulf of Mexico, and Algeria. The company has a P/E ratio of 49.6, below the average energy industry P/E ratio of 49.8 and above the S&P 500 P/E ratio of 17.7. Anadarko has a market cap of $41.7 billion and is part of the basic materials sector and energy industry. Shares are up 3.1% year to date as of the close of trading on Tuesday.You can view the full Anadarko Ratings Report or get investment ideas from our investment research center.

Rating Change #9

Telefonos De Mexico S.A.B. De C.V. (TFONY) has been downgraded by TheStreet Ratings from buy to hold. The company's strengths can be seen in multiple areas, such as its expanding profit margins, increase in stock price during the past year and notable return on equity. However, as a counter to these strengths, we also find weaknesses including generally poor debt management, weak operating cash flow and deteriorating net income.

Highlights from the ratings report include:

• The gross profit margin for TELMEX-TELEFONOS DE MEXICO is rather high; currently it is at 61.30%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 13.20% is above that of the industry average.
• After a year of stock price fluctuations, the net result is that TFONY's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
• The revenue fell significantly faster than the industry average of 7.3%. Since the same quarter one year prior, revenues fell by 43.7%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
• The debt-to-equity ratio of 1.26 is relatively high when compared with the industry average, suggesting a need for better debt level management. To add to this, TFONY has a quick ratio of 0.57, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
• Net operating cash flow has significantly decreased to $238.53 million or 69.64% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

Telefonos de Mexico, S.A.B. de C.V. provides telecommunications services primarily in Mexico. It offers local telephone service; domestic and international long distance services; and interconnection services to long-distance, local, and mobile phone carriers. The company has a P/E ratio of 0.9, below the S&P 500 P/E ratio of 17.7. Telefonos de Mexico S.A.B. de C.V has a market cap of $14.3 billion and is part of the technology sector and telecommunications industry. Shares are down 2.8% year to date as of the close of trading on Tuesday.You can view the full Telefonos de Mexico S.A.B. de C.V Ratings Report or get investment ideas from our investment research center.

Rating Change #8

Cimarex Energy Company (XEC) has been downgraded by TheStreet Ratings from buy to hold. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and a generally disappointing performance in the stock itself.

Highlights from the ratings report include:

• XEC's revenue growth trails the industry average of 35.5%. Since the same quarter one year prior, revenues rose by 14.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
• The gross profit margin for CIMAREX ENERGY CO is currently very high, coming in at 72.40%. Regardless of XEC's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, XEC's net profit margin of 29.50% significantly outperformed against the industry.
• Net operating cash flow has slightly increased to $332.43 million or 5.73% when compared to the same quarter last year. Despite an increase in cash flow, CIMAREX ENERGY CO's average is still marginally south of the industry average growth rate of 7.26%.
• Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, XEC has underperformed the S&P 500 Index, declining 19.97% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
• The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Oil, Gas & Consumable Fuels industry average. The net income has decreased by 0.0% when compared to the same quarter one year ago, dropping from $128.22 million to $128.15 million.

Cimarex Energy Co. operates as an independent oil and gas exploration and production company primarily in Texas, Oklahoma, New Mexico, Kansas, and Wyoming. The company has a P/E ratio of 10, below the average energy industry P/E ratio of 10.9 and below the S&P 500 P/E ratio of 17.7. Cimarex Energy has a market cap of $5.8 billion and is part of the basic materials sector and energy industry. Shares are down 29.6% year to date as of the close of trading on Friday.You can view the full Cimarex Energy Ratings Report or get investment ideas from our investment research center.

Rating Change #7

Regeneron Pharmaceuticals Inc (REGN) has been downgraded by TheStreet Ratings from hold to sell. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity and weak operating cash flow.

Highlights from the ratings report include:

• REGENERON PHARMACEUT has exprienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year. During the past fiscal year, REGENERON PHARMACEUT reported poor results of -$1.27 versus -$0.85 in the prior year. For the next year, the market is expecting a contraction of 122.0% in earnings (-$2.82 versus -$1.27).
• The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Biotechnology industry. The net income has significantly decreased by 84.1% when compared to the same quarter one year ago, falling from -$33.88 million to -$62.37 million.
• Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Biotechnology industry and the overall market, REGENERON PHARMACEUT's return on equity significantly trails that of both the industry average and the S&P 500.
• Net operating cash flow has significantly decreased to -$46.74 million or 129.08% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
• Regardless of the drop in revenue, the company managed to outperform against the industry average of 4.3%. Since the same quarter one year prior, revenues slightly dropped by 3.0%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

Regeneron Pharmaceuticals, Inc., a biopharmaceutical company, discovers, develops, and commercializes pharmaceutical products for the treatment of serious medical conditions in the United States. Regeneron has a market cap of $5 billion and is part of the health care sector and drugs industry. Shares are up 68.4% year to date as of the close of trading on Tuesday.You can view the full Regeneron Ratings Report or get investment ideas from our investment research center.

Rating Change #6

NRG Energy Inc (NRG) has been downgraded by TheStreet Ratings from buy to hold. The company's strengths can be seen in multiple areas, such as its reasonable valuation levels and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and generally poor debt management.

Highlights from the ratings report include:

• Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
• NRG, with its decline in revenue, slightly underperformed the industry average of 0.1%. Since the same quarter one year prior, revenues slightly dropped by 0.4%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
• NRG ENERGY INC has exprienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year. During the past fiscal year, NRG ENERGY INC reported lower earnings of $1.83 versus $3.39 in the prior year. For the next year, the market is expecting a contraction of 66.1% in earnings ($0.62 versus $1.83).
• The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Independent Power Producers & Energy Traders industry. The net income has significantly decreased by 124.7% when compared to the same quarter one year ago, falling from $223.00 million to -$55.00 million.

NRG Energy, Inc., together with its subsidiaries, operates as a wholesale power generation company. The company engages in the ownership, development, construction, and operation of power generation facilities. The company has a P/E ratio of 9.3, above the average utilities industry P/E ratio of 9.2 and below the S&P 500 P/E ratio of 17.7. NRG Energy has a market cap of $5.1 billion and is part of the utilities sector and utilities industry. Shares are up 7.5% year to date as of the close of trading on Friday.You can view the full NRG Energy Ratings Report or get investment ideas from our investment research center.

Rating Change #5

CenturyLink Inc (CTL) has been upgraded by TheStreet Ratings from hold to buy. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Highlights from the ratings report include:

• CTL's very impressive revenue growth greatly exceeded the industry average of 9.3%. Since the same quarter one year prior, revenues leaped by 162.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
• Net operating cash flow has significantly increased by 142.38% to $1,455.00 million when compared to the same quarter last year. In addition, CENTURYLINK INC has also vastly surpassed the industry average cash flow growth rate of 0.70%.
• The gross profit margin for CENTURYLINK INC is rather high; currently it is at 58.00%. Regardless of CTL's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 3.00% trails the industry average.
• Even though the current debt-to-equity ratio is 1.01, it is still below the industry average, suggesting that this level of debt is acceptable within the Diversified Telecommunication Services industry.
• The change in net income from the same quarter one year ago has significantly exceeded that of the Diversified Telecommunication Services industry average, but is less than that of the S&P 500. The net income has significantly decreased by 39.6% when compared to the same quarter one year ago, falling from $232.00 million to $140.00 million.

CenturyLink, Inc., together with its subsidiaries, operates as an integrated communications company. The company provides a range of communications services, including voice, Internet, data, and video services in the continental United States. The company has a P/E ratio of 15.8, above the average telecommunications industry P/E ratio of 14.6 and below the S&P 500 P/E ratio of 17.7. CenturyLink has a market cap of $21.3 billion and is part of the technology sector and telecommunications industry. Shares are down 25.2% year to date as of the close of trading on Thursday.You can view the full CenturyLink Ratings Report or get investment ideas from our investment research center.

Rating Change #4

LyondellBasell Industries (LYB) has been upgraded by TheStreet Ratings from sell to hold. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we find that the company's profit margins have been poor overall.

Highlights from the ratings report include:

• The revenue growth came in higher than the industry average of 13.3%. Since the same quarter one year prior, revenues rose by 29.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
• The current debt-to-equity ratio, 0.42, is low and is below the industry average, implying that there has been successful management of debt levels. To add to this, LYB has a quick ratio of 1.92, which demonstrates the ability of the company to cover short-term liquidity needs.
• Net operating cash flow has increased to $1,531.00 million or 36.08% when compared to the same quarter last year. In addition, LYONDELLBASELL INDUSTRIES NV has also modestly surpassed the industry average cash flow growth rate of 28.43%.
• The gross profit margin for LYONDELLBASELL INDUSTRIES NV is rather low; currently it is at 15.00%. Regardless of LYB's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 6.70% trails the industry average.

LyondellBasell Industries N.V. manufacturers and sells chemicals and polymers, refines crude oil, produces gasoline blending components, and develops and licenses technologies for production of polymers. LyondellBasell has a market cap of $19.2 billion and is part of the basic materials sector and chemicals industry. Shares are up 0.2% year to date as of the close of trading on Friday.You can view the full LyondellBasell Ratings Report or get investment ideas from our investment research center.

Rating Change #3

Loews Corporation (L) has been upgraded by TheStreet Ratings from hold to buy. The company's strengths can be seen in multiple areas, such as its increase in net income, attractive valuation levels, good cash flow from operations, growth in earnings per share and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Highlights from the ratings report include:

• The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Insurance industry. The net income increased by 350.0% when compared to the same quarter one year prior, rising from $36.00 million to $162.00 million.
• Net operating cash flow has significantly increased by 1066.31% to $1,108.00 million when compared to the same quarter last year. In addition, LOEWS CORP has also vastly surpassed the industry average cash flow growth rate of 82.69%.
• LOEWS CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, LOEWS CORP increased its bottom line by earning $3.11 versus $1.31 in the prior year. For the next year, the market is expecting a contraction of 6.1% in earnings ($2.92 versus $3.11).
• L, with its decline in revenue, underperformed when compared the industry average of 20.8%. Since the same quarter one year prior, revenues slightly dropped by 7.1%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

Loews Corporation, through its subsidiaries, operates primarily as a commercial property and casualty insurance company. The company has a P/E ratio of 12.5, below the average insurance industry P/E ratio of 15.1 and below the S&P 500 P/E ratio of 17.7. Loews has a market cap of $16.7 billion and is part of the financial sector and insurance industry. Shares are down 0.1% year to date as of the close of trading on Thursday.You can view the full Loews Ratings Report or get investment ideas from our investment research center.

Rating Change #2

Motorola Solutions Inc (MSI) has been upgraded by TheStreet Ratings from hold to buy. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. We feel these strengths outweigh the fact that the company shows weak operating cash flow.

Highlights from the ratings report include:

• The revenue growth came in higher than the industry average of 9.8%. Since the same quarter one year prior, revenues rose by 10.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
• MOTOROLA SOLUTIONS INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MOTOROLA SOLUTIONS INC turned its bottom line around by earning $0.84 versus -$1.12 in the prior year. This year, the market expects an improvement in earnings ($2.54 versus $0.84).
• The net income growth from the same quarter one year ago has significantly exceeded that of the Communications Equipment industry average, but is less than that of the S&P 500. The net income increased by 16.4% when compared to the same quarter one year prior, going from $110.00 million to $128.00 million.
• Despite currently having a low debt-to-equity ratio of 0.35, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Despite the fact that MSI's debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.89 is high and demonstrates strong liquidity.

Motorola Solutions, Inc. provides business and mission critical communication products and services for enterprise and government customers worldwide. The company has a P/E ratio of 21.8, above the average telecommunications industry P/E ratio of 13.1 and above the S&P 500 P/E ratio of 17.7. Motorola has a market cap of $15.4 billion and is part of the technology sector and telecommunications industry. Shares are up 23.3% year to date as of the close of trading on Tuesday.You can view the full Motorola Ratings Report or get investment ideas from our investment research center.

Rating Change #1

Consol Energy Inc (CNX) has been upgraded by TheStreet Ratings from hold to buy. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, revenue growth, good cash flow from operations, notable return on equity and solid stock price performance. We feel these strengths outweigh the fact that the company shows low profit margins.

Highlights from the ratings report include:

• The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 122.0% when compared to the same quarter one year prior, rising from $75.38 million to $167.33 million.
• CNX's revenue growth trails the industry average of 35.5%. Since the same quarter one year prior, revenues rose by 13.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
• Net operating cash flow has increased to $456.92 million or 22.47% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 7.26%.
• The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market on the basis of return on equity, CONSOL ENERGY INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
• Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.

CONSOL Energy Inc. engages in the production of multi-fuel energy and provision of energy services primarily to the electric power generation industry in the United States. The company has a P/E ratio of 18.1, equal to the average metals & mining industry P/E ratio and above the S&P 500 P/E ratio of 17.7. Consol Energy has a market cap of $9.8 billion and is part of the basic materials sector and metals & mining industry. Shares are down 11.8% year to date as of the close of trading on Friday.You can view the full Consol Energy Ratings Report or get investment ideas from our investment research center.For additional Investment Research check out our Ratings Research Center. For all other upgrades and downgrades made by TheStreet Ratings Model today check out our upgrades and downgrades list.

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