3 Insider Stocks That Could Pop

November 12th, 2010

3 Insider Stocks That Could Pop

As earnings season winds down, insider activity heats up. That's because insiders (classified as company executives, directors and beneficial owners) get the green light to buy or sell their company's stock on the open market once earnings have been released. (That window remains open until the quarter has ended). So it's no surprise to see a recent sharp spike in insider buying.

Earlier this week, I noted that Bill Gates, classified as an insider at AutoNation (NYSE: AN) because of his large investment in the company, has continued to aggressively purchase shares. [Read the article here.]

Let's take a look at three other stocks with heavy recent insider buying.

Devon Energy (NYSE: DVN)
This oil and gas driller always seems to raise investor concerns. In 2008, investors shunned its shares since Devon lacked exposure to the sudden plethora of emerging natural gas fields found in the U.S. Southwest and in Appalachia. In 2009, investors fretted that Devon wasn't investing enough money to boost output in coming years. Then, when Devon announced a plan for major asset sales later in 2009, investors feared that management would simply use that cash to make unproductive acquisitions.

Yet as we sit here in late 2010, Devon is looking far wiser than investors assumed. The company's lack of exposure to those promising natural gas fields now looks savvy, considering natural gas prices are so low. The company's asset sales came in at prices higher than most expected, yielding $8 billion in cash for the company. And instead of using that cash to make new deals, management is boosting internal investments in existing properties — especially those that have a higher exposure to oil than gas.

Most importantly, Devon is focusing on boosting shares, paying off $1.7 billion in debt and buying back $1 billion in stock (with plans to buy $2.5 billion more in 2011). UBS thinks Devon will buy back lots more stock in 2012 and 2013 as well, as its balance sheet is now one of the strongest in the industry.

All these moves should ultimately boost per share profits. “With the completion of the asset sale program, Devon has repositioned its operations to have a lower risk profile and a lower cost structure, as well as materially strengthening its balance sheet. This should boost Devon's long-term production growth,” note analysts at UBS. And rising production growth, which management recently outlined for 2011, could be a key catalyst for shares. Rising production should help boost cash flow from $6.8 billion in 2011 to $8.5 billion in 2012, according to Goldman Sachs. Throw in a lower share count, and that growth should be more evident on a per share basis. And with oil prices on the rise, cash flow projections could move yet higher. ["Why 2011 Could be the Year of the Oil Comeback"]

Meanwhile, shares trade for less than five times projected 2011 cash flow. That's too low a multiple, according to company CEO John Richels, who recently increased his ownership stake by 53,000 shares.

PharmAthene (AMEX: PIP)
When this small biotech recently decided to raise $15 million, insiders and other large shareholders didn't hesitate to pull out their checkbooks. (That qualifies as an insider buy according to those that watch insider moves). Their bullishness is understandable. For starters, the company looks increasingly likely to prevail in a lawsuit against SIGA Technologies (Nasdaq: SIGA) regarding marketing rights to a drug that treats smallpox — yielding a potential massive windfall. (SIGA recently received a $2.8 billion order from Uncle Sam, and PharmAthene may be legally due some of that money due to a 2006 agreement that is being contested).

Secondly, PharmAthene is also vying to become a key provider of a next generation anti-anthrax drug to the U.S. military. The U.S. government has been helping to fund development of this drug, which would likely sell for a third of the price of an existing drug sold by Emerging BioSciences (AMEX: EBS).

A positive resolution to either of these drugs would likely be worth at least $6 to $7 to shareholders. If PharmAthene scores on both counts, then shares could zoom to $15 from a current $3. To be sure, the current weak share price implies investor cynicism on these developments. But shares certainly look to be a worth a modest position in light of the considerable potential upside.

QLT (Nasdaq: QLTI)
Major investors in this small firm focused on eye disorders continue to increase their positions. Nearly two million shares have been acquired by two outside investors and three insiders in the past six months, capped off by a recent $1 million purchase by Axial Capital Management. Those purchases were purchased in the $5 to $6 range.

C.K. Cooper's Jeff Cohen thinks that may be a wise move. He thinks the stock is worth $12 on a sum-of-the-parts basis, noting the company's nearly $200 million in cash accounts for nearly two-thirds of the company's market value. Throw in royalties due to QLT, along with an estimated value of drugs and medical devices in its pipeline, and Cohen thinks the stock is a double. Those insiders presumably share that view.

Action to Take –> Of these plays, Devon Energy is the “safe” play, with potential +20% to +40% upside in the next year or two. QLT could be a potential double and even comes with impressive downside support, thanks to that hefty cash balance. PharmAthene looks quite risky, but could really take off if it benefits from its small pox or anthrax drugs.


– David Sterman

P.S. –

Uncategorized

3 Insider Stocks That Could Pop

November 12th, 2010

3 Insider Stocks That Could Pop

As earnings season winds down, insider activity heats up. That's because insiders (classified as company executives, directors and beneficial owners) get the green light to buy or sell their company's stock on the open market once earnings have been released. (That window remains open until the quarter has ended). So it's no surprise to see a recent sharp spike in insider buying.

Earlier this week, I noted that Bill Gates, classified as an insider at AutoNation (NYSE: AN) because of his large investment in the company, has continued to aggressively purchase shares. [Read the article here.]

Let's take a look at three other stocks with heavy recent insider buying.

Devon Energy (NYSE: DVN)
This oil and gas driller always seems to raise investor concerns. In 2008, investors shunned its shares since Devon lacked exposure to the sudden plethora of emerging natural gas fields found in the U.S. Southwest and in Appalachia. In 2009, investors fretted that Devon wasn't investing enough money to boost output in coming years. Then, when Devon announced a plan for major asset sales later in 2009, investors feared that management would simply use that cash to make unproductive acquisitions.

Yet as we sit here in late 2010, Devon is looking far wiser than investors assumed. The company's lack of exposure to those promising natural gas fields now looks savvy, considering natural gas prices are so low. The company's asset sales came in at prices higher than most expected, yielding $8 billion in cash for the company. And instead of using that cash to make new deals, management is boosting internal investments in existing properties — especially those that have a higher exposure to oil than gas.

Most importantly, Devon is focusing on boosting shares, paying off $1.7 billion in debt and buying back $1 billion in stock (with plans to buy $2.5 billion more in 2011). UBS thinks Devon will buy back lots more stock in 2012 and 2013 as well, as its balance sheet is now one of the strongest in the industry.

All these moves should ultimately boost per share profits. “With the completion of the asset sale program, Devon has repositioned its operations to have a lower risk profile and a lower cost structure, as well as materially strengthening its balance sheet. This should boost Devon's long-term production growth,” note analysts at UBS. And rising production growth, which management recently outlined for 2011, could be a key catalyst for shares. Rising production should help boost cash flow from $6.8 billion in 2011 to $8.5 billion in 2012, according to Goldman Sachs. Throw in a lower share count, and that growth should be more evident on a per share basis. And with oil prices on the rise, cash flow projections could move yet higher. ["Why 2011 Could be the Year of the Oil Comeback"]

Meanwhile, shares trade for less than five times projected 2011 cash flow. That's too low a multiple, according to company CEO John Richels, who recently increased his ownership stake by 53,000 shares.

PharmAthene (AMEX: PIP)
When this small biotech recently decided to raise $15 million, insiders and other large shareholders didn't hesitate to pull out their checkbooks. (That qualifies as an insider buy according to those that watch insider moves). Their bullishness is understandable. For starters, the company looks increasingly likely to prevail in a lawsuit against SIGA Technologies (Nasdaq: SIGA) regarding marketing rights to a drug that treats smallpox — yielding a potential massive windfall. (SIGA recently received a $2.8 billion order from Uncle Sam, and PharmAthene may be legally due some of that money due to a 2006 agreement that is being contested).

Secondly, PharmAthene is also vying to become a key provider of a next generation anti-anthrax drug to the U.S. military. The U.S. government has been helping to fund development of this drug, which would likely sell for a third of the price of an existing drug sold by Emerging BioSciences (AMEX: EBS).

A positive resolution to either of these drugs would likely be worth at least $6 to $7 to shareholders. If PharmAthene scores on both counts, then shares could zoom to $15 from a current $3. To be sure, the current weak share price implies investor cynicism on these developments. But shares certainly look to be a worth a modest position in light of the considerable potential upside.

QLT (Nasdaq: QLTI)
Major investors in this small firm focused on eye disorders continue to increase their positions. Nearly two million shares have been acquired by two outside investors and three insiders in the past six months, capped off by a recent $1 million purchase by Axial Capital Management. Those purchases were purchased in the $5 to $6 range.

C.K. Cooper's Jeff Cohen thinks that may be a wise move. He thinks the stock is worth $12 on a sum-of-the-parts basis, noting the company's nearly $200 million in cash accounts for nearly two-thirds of the company's market value. Throw in royalties due to QLT, along with an estimated value of drugs and medical devices in its pipeline, and Cohen thinks the stock is a double. Those insiders presumably share that view.

Action to Take –> Of these plays, Devon Energy is the “safe” play, with potential +20% to +40% upside in the next year or two. QLT could be a potential double and even comes with impressive downside support, thanks to that hefty cash balance. PharmAthene looks quite risky, but could really take off if it benefits from its small pox or anthrax drugs.


– David Sterman

P.S. –

Uncategorized

Avoid Big Oil — Here’s a Better Option

November 12th, 2010

Avoid Big Oil -- Here's a Better Option

$138 billion — that's the enormous sum earned by the five largest oil companies back in 2008 when crude oil prices surged to all-time highs near $150 per barrel. Exxon Mobil (NYSE: XOM) alone earned more than $45 billion, a figure which now stands as the record for profit earned by any U.S. corporation in history.

But that's the past, and as any seasoned investor is well aware, markets are forward-looking. What matters isn't the $150 oil price of 2008 or the $85 price of today, but rather the price several months or even several years down the line, depending on your investment timeframe.

With that in mind, there are many reasons to believe oil prices will be higher in the future than they are today. But I'm not here to repeat the bullish oil thesis that some of my colleagues and I have already made. Instead, I want to explain why an investment in the largest oil companies is one of the worst ways to profit from a move higher in crude oil prices.

At first glance, this may seem counterintuitive. How could a company that produces a lot of oil be a bad way to cash in on rising oil prices? To understand why, investors need to consider that bigger is not necessarily better in the oil industry. In fact, it is a handicap in a world in which oil reserves are becoming scarcer.

Let me explain. As oil companies produce crude, two things happen: reserves are depleted and overall output declines. This phenomenon is often referred to in the industry as a treadmill in which companies must continuously drill more wells to maintain production, while finding new reserves to replace depleted reserves.

When oil is abundant and easily accessible, this is no problem. But in today's environment, when companies have to look in some of the most volatile regions of the globe to find new oil reserves, this becomes a real burden — and the bigger the oil producer, the bigger the burden.

In the past several years almost all of the oil majors have struggled to replace their reserves and maintain output levels. The best performer, Chevron (NYSE: CVX), has seen its production grow by an average of +1.9% in the past five years. Exxon Mobil, by contrast, has seen production fall by an average of -1.8%.

Uncategorized

Avoid Big Oil — Here’s a Better Option

November 12th, 2010

Avoid Big Oil -- Here's a Better Option

$138 billion — that's the enormous sum earned by the five largest oil companies back in 2008 when crude oil prices surged to all-time highs near $150 per barrel. Exxon Mobil (NYSE: XOM) alone earned more than $45 billion, a figure which now stands as the record for profit earned by any U.S. corporation in history.

But that's the past, and as any seasoned investor is well aware, markets are forward-looking. What matters isn't the $150 oil price of 2008 or the $85 price of today, but rather the price several months or even several years down the line, depending on your investment timeframe.

With that in mind, there are many reasons to believe oil prices will be higher in the future than they are today. But I'm not here to repeat the bullish oil thesis that some of my colleagues and I have already made. Instead, I want to explain why an investment in the largest oil companies is one of the worst ways to profit from a move higher in crude oil prices.

At first glance, this may seem counterintuitive. How could a company that produces a lot of oil be a bad way to cash in on rising oil prices? To understand why, investors need to consider that bigger is not necessarily better in the oil industry. In fact, it is a handicap in a world in which oil reserves are becoming scarcer.

Let me explain. As oil companies produce crude, two things happen: reserves are depleted and overall output declines. This phenomenon is often referred to in the industry as a treadmill in which companies must continuously drill more wells to maintain production, while finding new reserves to replace depleted reserves.

When oil is abundant and easily accessible, this is no problem. But in today's environment, when companies have to look in some of the most volatile regions of the globe to find new oil reserves, this becomes a real burden — and the bigger the oil producer, the bigger the burden.

In the past several years almost all of the oil majors have struggled to replace their reserves and maintain output levels. The best performer, Chevron (NYSE: CVX), has seen its production grow by an average of +1.9% in the past five years. Exxon Mobil, by contrast, has seen production fall by an average of -1.8%.

Uncategorized

The Best Income Stocks to Hold Forever

November 12th, 2010

The Best Income Stocks to Hold Forever

The numbers have grown so large over the years, it's hard for me to believe sometimes.

Uncategorized

The Best Income Stocks to Hold Forever

November 12th, 2010

The Best Income Stocks to Hold Forever

The numbers have grown so large over the years, it's hard for me to believe sometimes.

Uncategorized

3 Consumer Rebound Stocks to Own Now

November 12th, 2010

3 Consumer Rebound Stocks to Own Now

The fact that 151,000 jobs were created in October is impressive. The fact that August and September jobs numbers were upwardly revised by a collective 110,000 was even more impressive, as it underscores that things were not quite so bleak as had been feared a few months ago.

Could we now be on the cusp of a robust and sustained upturn in jobs? It's too soon to say. Employment numbers for November and December are hard to handicap, especially since most major companies will hold off on any significant changes in hiring until after we are done with 2010.

Looking into next year, a real case can be made for an improving job picture. Corporations are now flush with cash after a string of highly profitable quarters, existing workers are being pressed to shoulder an unsustainably heavy load, and companies are less likely to fret that we're headed back toward the dreaded “double-dip” recession.

All signs point to “help wanted” signs popping up with more frequency next year. My colleague Nathan Slaughter has taken a more in-depth look at the employment picture, and has a pair of intriguing staffing stocks he's getting behind. [Read Nathan's article here]

You also can't forget the retail angle. As employment picks up, new hires will begin to have more cash to spend, which should help retail stocks. Here are three companies that would clearly benefit…

Best Buy (NYSE: BBY)
Shares of this electronics retailer have rebounded roughly +30% since I wrote about it back in mid-September, but I see another similar-sized move coming this winter, pushing shares from a current $45 closer to the $60 mark.

When I looked at Best Buy in September, I focused on the catalysts for the upcoming holiday shopping season. Yet as the calendar flips to 2011, the investment thesis shifts from an impressive product assortment this year to higher consumer spending next year. Let's face it: many of us splurged on consumer electronics a few years ago, but have had to make do with what we have the past two years. A $1,000 spending spree at places like Best Buy was replaced by a $100 DVD player here, a $200 camera there. But an emboldened consumer that is less worried about losing their job in 2011 will have reason to treat themselves or their loved ones. And to my mind, few retailers can excite a newly-enthused consumer as a place like Best Buy, truly a toy store for adults.

Analysts have started to raise their forecasts for Best Buy, and now think the retailer will boost sales +5% in the next fiscal year (which ends February, 2012) and that per share profits will approach $4. Yet that growth rate really just reflects the company's international expansion plans, coupled with a very modest expansion in its domestic store base and minimal same-store sales growth. Yet that last factor is the wildcard. If consumers are feeling more emboldened, then same-store sales could easily rise at a +5% pace, pushing total company sales +10% higher, and EPS closer to $4.50. Shares trade for about 10 times that admittedly bullish view, but that's far too cheap a multiple for a retailer with such a tremendous track record. Move that multiple up to 13, and shares would rise +30%.

Winnebago (NYSE: WGO)
Even in a lousy economic environment, this maker of recreational vehicles is seeing signs of a solid rebound. The company has blown past estimates for each of the last three quarters and is on track to boost sales +25% in fiscal (August) 2011. Then again, projected sales of $560 million are a far cry from $1 billion in revenue seen in 2004 and 2005.

Per share profits are unlikely to top $0.50 next year, but as investors start to think about the impact of rebounding consumer sentiment, they'd do well to remember that Winnebago earned more than $4 a share when times were good. The stock rallied to $17 earlier this year but has since pulled back to around $11. Shares look like quite the bargain now — if you believe the consumer will start to stir back to life in 2011.

Citi Trends (Nasdaq: CTRN)

Shares of this retailer, which targets lower-income inner city consumers, has seen its stock fall roughly -45% in the last six months as rising unemployment has been most deeply felt in this target demographic. The company badly lagged profit forecasts for the quarter ended in August and the current quarter, which ends in a few weeks, is likely to be similarly weak.

Yet those trends are obscuring a broader expansion plan that is increasing the company's footprint in major markets.

Uncategorized

3 Consumer Rebound Stocks to Own Now

November 12th, 2010

3 Consumer Rebound Stocks to Own Now

The fact that 151,000 jobs were created in October is impressive. The fact that August and September jobs numbers were upwardly revised by a collective 110,000 was even more impressive, as it underscores that things were not quite so bleak as had been feared a few months ago.

Could we now be on the cusp of a robust and sustained upturn in jobs? It's too soon to say. Employment numbers for November and December are hard to handicap, especially since most major companies will hold off on any significant changes in hiring until after we are done with 2010.

Looking into next year, a real case can be made for an improving job picture. Corporations are now flush with cash after a string of highly profitable quarters, existing workers are being pressed to shoulder an unsustainably heavy load, and companies are less likely to fret that we're headed back toward the dreaded “double-dip” recession.

All signs point to “help wanted” signs popping up with more frequency next year. My colleague Nathan Slaughter has taken a more in-depth look at the employment picture, and has a pair of intriguing staffing stocks he's getting behind. [Read Nathan's article here]

You also can't forget the retail angle. As employment picks up, new hires will begin to have more cash to spend, which should help retail stocks. Here are three companies that would clearly benefit…

Best Buy (NYSE: BBY)
Shares of this electronics retailer have rebounded roughly +30% since I wrote about it back in mid-September, but I see another similar-sized move coming this winter, pushing shares from a current $45 closer to the $60 mark.

When I looked at Best Buy in September, I focused on the catalysts for the upcoming holiday shopping season. Yet as the calendar flips to 2011, the investment thesis shifts from an impressive product assortment this year to higher consumer spending next year. Let's face it: many of us splurged on consumer electronics a few years ago, but have had to make do with what we have the past two years. A $1,000 spending spree at places like Best Buy was replaced by a $100 DVD player here, a $200 camera there. But an emboldened consumer that is less worried about losing their job in 2011 will have reason to treat themselves or their loved ones. And to my mind, few retailers can excite a newly-enthused consumer as a place like Best Buy, truly a toy store for adults.

Analysts have started to raise their forecasts for Best Buy, and now think the retailer will boost sales +5% in the next fiscal year (which ends February, 2012) and that per share profits will approach $4. Yet that growth rate really just reflects the company's international expansion plans, coupled with a very modest expansion in its domestic store base and minimal same-store sales growth. Yet that last factor is the wildcard. If consumers are feeling more emboldened, then same-store sales could easily rise at a +5% pace, pushing total company sales +10% higher, and EPS closer to $4.50. Shares trade for about 10 times that admittedly bullish view, but that's far too cheap a multiple for a retailer with such a tremendous track record. Move that multiple up to 13, and shares would rise +30%.

Winnebago (NYSE: WGO)
Even in a lousy economic environment, this maker of recreational vehicles is seeing signs of a solid rebound. The company has blown past estimates for each of the last three quarters and is on track to boost sales +25% in fiscal (August) 2011. Then again, projected sales of $560 million are a far cry from $1 billion in revenue seen in 2004 and 2005.

Per share profits are unlikely to top $0.50 next year, but as investors start to think about the impact of rebounding consumer sentiment, they'd do well to remember that Winnebago earned more than $4 a share when times were good. The stock rallied to $17 earlier this year but has since pulled back to around $11. Shares look like quite the bargain now — if you believe the consumer will start to stir back to life in 2011.

Citi Trends (Nasdaq: CTRN)

Shares of this retailer, which targets lower-income inner city consumers, has seen its stock fall roughly -45% in the last six months as rising unemployment has been most deeply felt in this target demographic. The company badly lagged profit forecasts for the quarter ended in August and the current quarter, which ends in a few weeks, is likely to be similarly weak.

Yet those trends are obscuring a broader expansion plan that is increasing the company's footprint in major markets.

Uncategorized

Forget Apple, Buy this Stock Instead

November 12th, 2010

Forget Apple, Buy this Stock Instead

In a recent interview with Money magazine, finance guru Roger Ibbotson stated that, as an investor, what is “most relevant to you is whether and how you're doing something different from what everybody else is doing.”

For those not familiar with Roger Ibbotson, he is worth getting to know, as he is one of the foremost authorities on the market. The firm he founded, Ibbotson Associates, publishes an annual edition of a yearbook that has become the primary resource for historical returns for stocks, bonds and other securities.

His stance definitely qualifies him as a contrarian investor. As a fellow contrarian, I find it difficult to determine how investors believe they can make money by owning a stock like Apple Inc. (Nasdaq: AAPL). Sure, I'm kicking myself for not owning any shares as they made their meteoric rise from below $8 per share in early 2003, but, as the saying goes, past returns are certainly not a guarantee of future returns.

At current prices, Apple will need to grow sales and profits in the double digits for another decade. I came to this conclusion by using a discounted cash flow analysis to back the growth expectations baked into the stock at the current price. This also takes into consideration the recent cash flow levels generated by the company and my need to make at least +10% on a stock annually in order to considerate it a buy.

This means that Apple's stock market capitalization will need to grow from just under $300 billion to almost $900 billion within a decade. Soon after that it will become a trillion dollar firm. If you believe that will happen, then be my guest in remaining or becoming a shareholder. In my mind, Apple's recent level of growth will be very difficult to repeat in the years ahead. And the fact that investor sentiment is almost unanimously bullish (out of 53 analysts, 49 have “buy” recommendations) means there is much more downside risk than upside potential.

Nokia (NYSE: NOK), on the other hand, only has nine “buy” recommendations out of the 33 analysts currently covering the stock. There is no question that this bearishness is warranted, even though Nokia has the highest market share of the global cell phone market, because Apple and other smart phone providers are literally eating Nokia's lunch.

Nokia controls about a third of the market worldwide but is lagging badly in the smart phone space. However, its recent product offering in the space , the N8, has received positive reviews, and new CEO Stephen Elop is said to be streamlining a corporate culture known for being overly bureaucratic and subsequently too slow in introducing new phones and operating systems to market. Recent data points suggest he is already starting to right the ship, as the latest quarter saw Nokia post the highest growth in terms of smart phone shipments during the quarter. Its Ovi operating system is also getting positive reviews.

Nokia also has its sights set on a mass market that few in the industry will be able to profitably exploit: developing markets. The company's global distribution network will allow it to reach international markets that don't currently have the means to afford smart phones and similar high-tech gadgets. A recent study estimated that two thirds of the world's 4.6 billion cell phone users live in emerging markets. Nokia already controls 34% of the market and can turn a profit on a huge market by charging only a few of dollars per monthly subscription.

Action to Take —> A big investment merit for Nokia is that the bar is set low in terms of its future success. At a current share price under $11, the market is only discounting a little over +5% annual profit growth during the next decade. I find this much easier to digest than Apple's double-digit expectations. If Nokia can return to double-digit growth reminiscent of its heyday as it grew to be the most dominant firm in the industry, then its shares can appreciate at least +50%.

The downside risk for Nokia is also much more limited. The market isn't currently projecting much success for the company's smart phones or overall growth going forward, so about the worst that can happen is the stock remains flat while investors collect a hefty current dividend yield of about 3.8%. For Apple, the downside is a double-whammy — profit slides and the earnings multiple swiftly contracts as growth and momentum investors flee the stock as fast as they can.

The upside for Nokia is no guarantee, but the reasons are compelling. And going against conventional wisdom is the only way you're going to make money over the long haul in the market.

Uncategorized

Forget Apple, Buy this Stock Instead

November 12th, 2010

Forget Apple, Buy this Stock Instead

In a recent interview with Money magazine, finance guru Roger Ibbotson stated that, as an investor, what is “most relevant to you is whether and how you're doing something different from what everybody else is doing.”

For those not familiar with Roger Ibbotson, he is worth getting to know, as he is one of the foremost authorities on the market. The firm he founded, Ibbotson Associates, publishes an annual edition of a yearbook that has become the primary resource for historical returns for stocks, bonds and other securities.

His stance definitely qualifies him as a contrarian investor. As a fellow contrarian, I find it difficult to determine how investors believe they can make money by owning a stock like Apple Inc. (Nasdaq: AAPL). Sure, I'm kicking myself for not owning any shares as they made their meteoric rise from below $8 per share in early 2003, but, as the saying goes, past returns are certainly not a guarantee of future returns.

At current prices, Apple will need to grow sales and profits in the double digits for another decade. I came to this conclusion by using a discounted cash flow analysis to back the growth expectations baked into the stock at the current price. This also takes into consideration the recent cash flow levels generated by the company and my need to make at least +10% on a stock annually in order to considerate it a buy.

This means that Apple's stock market capitalization will need to grow from just under $300 billion to almost $900 billion within a decade. Soon after that it will become a trillion dollar firm. If you believe that will happen, then be my guest in remaining or becoming a shareholder. In my mind, Apple's recent level of growth will be very difficult to repeat in the years ahead. And the fact that investor sentiment is almost unanimously bullish (out of 53 analysts, 49 have “buy” recommendations) means there is much more downside risk than upside potential.

Nokia (NYSE: NOK), on the other hand, only has nine “buy” recommendations out of the 33 analysts currently covering the stock. There is no question that this bearishness is warranted, even though Nokia has the highest market share of the global cell phone market, because Apple and other smart phone providers are literally eating Nokia's lunch.

Nokia controls about a third of the market worldwide but is lagging badly in the smart phone space. However, its recent product offering in the space , the N8, has received positive reviews, and new CEO Stephen Elop is said to be streamlining a corporate culture known for being overly bureaucratic and subsequently too slow in introducing new phones and operating systems to market. Recent data points suggest he is already starting to right the ship, as the latest quarter saw Nokia post the highest growth in terms of smart phone shipments during the quarter. Its Ovi operating system is also getting positive reviews.

Nokia also has its sights set on a mass market that few in the industry will be able to profitably exploit: developing markets. The company's global distribution network will allow it to reach international markets that don't currently have the means to afford smart phones and similar high-tech gadgets. A recent study estimated that two thirds of the world's 4.6 billion cell phone users live in emerging markets. Nokia already controls 34% of the market and can turn a profit on a huge market by charging only a few of dollars per monthly subscription.

Action to Take —> A big investment merit for Nokia is that the bar is set low in terms of its future success. At a current share price under $11, the market is only discounting a little over +5% annual profit growth during the next decade. I find this much easier to digest than Apple's double-digit expectations. If Nokia can return to double-digit growth reminiscent of its heyday as it grew to be the most dominant firm in the industry, then its shares can appreciate at least +50%.

The downside risk for Nokia is also much more limited. The market isn't currently projecting much success for the company's smart phones or overall growth going forward, so about the worst that can happen is the stock remains flat while investors collect a hefty current dividend yield of about 3.8%. For Apple, the downside is a double-whammy — profit slides and the earnings multiple swiftly contracts as growth and momentum investors flee the stock as fast as they can.

The upside for Nokia is no guarantee, but the reasons are compelling. And going against conventional wisdom is the only way you're going to make money over the long haul in the market.

Uncategorized

Health Care Reform Won’t Stop This Medical Device Stock

November 12th, 2010

Health Care Reform Won't Stop This Medical Device Stock

Health care reform is going to be unimaginably expensive, costing roughly $1 trillion in the next decade. One of the many ways Uncle Sam plans to raise the necessary cash is with a 2.3% tax on the sale of all medical devices, starting in 2013.

That's obviously unwelcome news for the medical device industry, which makes all sorts of gadgets — from blood sugar meters and thermometers to x-ray machines and artificial hearts — for use by patients, doctors, nurses and other health care professionals. Global medical device sales surpassed $220 billion in 2009, with U.S. medical device firms accounting for more than 40% of that business.

While medical devices are big money, it would be a mistake to underestimate the burden of the new sales

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This Could be a Surprise Sector for Stocks Next Year

November 12th, 2010

This Could be a Surprise Sector for Stocks Next Year

There are so many reasons to dislike housing stocks. Foreclosures continue at an alarming rate, and with a rising tide of empty existing homes, who needs to buy a newly-built home? Yet while the gloomy headlines rule the day, the Philadelphia Housing Sector Index (HGX), which was stuck in a tight trading range for the past three months, is suddenly on the march, rising nearly +8% since the middle of last week. The index actually spiked a day before last week's monthly jobs report, which Nathan Slaughter recently discussed. [Read why he thinks the U.S. will add two million jobs next year -- and how you can profit]

Rising employment is seen by many as a panacea for this long-suffering sector. Yet we've already seen a few false dawns already: The Philly index surged from 95 in late 2009 to 130 in April, only to fall back below 100 a few months later. Now that's it back just above 100, might we re-visit those April highs? And if so, what are the best stocks to play in a resurgent housing sector?

Another lost year for housing
It sure has been a tough six months for the major players: Shares of PulteGroup (NYSE: PHM) are off more than -40%, while Beazer Homes (NYSE: BZH), M/I Homes (NYSE: MHO), Ryland Group (NYSE: RYL) and KB Home (NYSE: KBH) all shed more than -25%. To be clear, few expect to see the housing market post a major upturn next year. Instead, industry bulls would like to see only modest improvements in hopes that the stage would be set for a more sustained in advance in 2012 and 2013.

And there's no doubt that current sector share prices are very cheap in the context of such a possible rebound in 2012 or 2013. We don't need to see the white-hot conditions of 2005, 2006 and 2007 — just a normal healthy housing market. The key would be tame interest rates. Current low mortgage rates, combined with currently low housing prices make home ownership an awfully compelling option — if consumers are feeling more confident, and if interest rates stay low.

If you believe that such a scenario will play out, here are two names to focus on…

Toll Brothers (NYSE: TOL)
This homebuilder may have started to turn the tide, thanks to its exposure to the higher end of the housing market. Toll delivered an unexpected profit in the quarter ended July, and though a seasonal slowdown is expected to lead to more red ink for the October and January (2011) quarters, analysts increasingly think that Toll can stay in the black after that as sales and profits start to steadily rebound.

It will be some time before this or any other housing stock looks cheap on a price-to-earnings (P/E) basis, as industry as profits will be uninspiring until at least 2012 if not 2013. Instead, analysts measure these stocks in relation to book value, and shares, which currently trade at around 1.2 times book value, are likely to rally up to 1.5 times book value according to analysts at UBS — good for a +30% gain from current levels.

That's just a near-term target. If and when the housing rebound is truly underway, shares have considerably more upside, but that may not come before 2012.

D.R. Horton (NYSE: DHI)
Investors have started to bid up shares of this homebuilder in anticipation of this Friday's earnings release. If the last quarter is any guide, D.R. Horton should deliver a rare bit of cheer in the sector. In the quarter that ended in June, the company announced a modest uptick in demand for homes in its medium-priced communities.

D.R. Horton is surprisingly looking to build more houses “on spec,” which means they are starting to build without a firm buyer in hand for each house. It may seem like a risky move, but the company has ample cash to both invest in growth while also pay down debt. The company has paid back $1 billion in debt in the past year.

The decision to keep building has surely paid off, as the company is expected to report full year earnings of $0.73 a share this Friday. (Most other homebuilders continue to shoulder losses). Profits may cool a bit in fiscal 2011, but analysts thinks D.R. Horton's earnings power could approach $2 a share in a few years once housing is back on the mend. EPS averaged $4 in the middle of the past decade, but investors would cheer a rebound to just half that level. If that happens, shares would trade up from a current $12 to around $20.

Action to Take –> It seems counter-intuitive to seek out value in housing stocks when the sector is in such a deep slump. But sector shares have pulled back sharply in the past six months, creating fresh value, and would rotate back into favor if employment trends continue to strengthen on the heels of last Friday's jobs report. In truth, all housing stocks would gain in a housing recovery scenario, but Toll Brothers and D.R. Horton look to be best able to hold their own if 2011 and 2012 bring more of the same.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
This Could be a Surprise Sector for Stocks Next Year

Read more here:
This Could be a Surprise Sector for Stocks Next Year

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Health Care Reform Won’t Stop This Medical Device Stock

November 12th, 2010

Health Care Reform Won't Stop This Medical Device Stock

Health care reform is going to be unimaginably expensive, costing roughly $1 trillion in the next decade. One of the many ways Uncle Sam plans to raise the necessary cash is with a 2.3% tax on the sale of all medical devices, starting in 2013.

That's obviously unwelcome news for the medical device industry, which makes all sorts of gadgets — from blood sugar meters and thermometers to x-ray machines and artificial hearts — for use by patients, doctors, nurses and other health care professionals. Global medical device sales surpassed $220 billion in 2009, with U.S. medical device firms accounting for more than 40% of that business.

While medical devices are big money, it would be a mistake to underestimate the burden of the new sales

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This Could be a Surprise Sector for Stocks Next Year

November 12th, 2010

This Could be a Surprise Sector for Stocks Next Year

There are so many reasons to dislike housing stocks. Foreclosures continue at an alarming rate, and with a rising tide of empty existing homes, who needs to buy a newly-built home? Yet while the gloomy headlines rule the day, the Philadelphia Housing Sector Index (HGX), which was stuck in a tight trading range for the past three months, is suddenly on the march, rising nearly +8% since the middle of last week. The index actually spiked a day before last week's monthly jobs report, which Nathan Slaughter recently discussed. [Read why he thinks the U.S. will add two million jobs next year -- and how you can profit]

Rising employment is seen by many as a panacea for this long-suffering sector. Yet we've already seen a few false dawns already: The Philly index surged from 95 in late 2009 to 130 in April, only to fall back below 100 a few months later. Now that's it back just above 100, might we re-visit those April highs? And if so, what are the best stocks to play in a resurgent housing sector?

Another lost year for housing
It sure has been a tough six months for the major players: Shares of PulteGroup (NYSE: PHM) are off more than -40%, while Beazer Homes (NYSE: BZH), M/I Homes (NYSE: MHO), Ryland Group (NYSE: RYL) and KB Home (NYSE: KBH) all shed more than -25%. To be clear, few expect to see the housing market post a major upturn next year. Instead, industry bulls would like to see only modest improvements in hopes that the stage would be set for a more sustained in advance in 2012 and 2013.

And there's no doubt that current sector share prices are very cheap in the context of such a possible rebound in 2012 or 2013. We don't need to see the white-hot conditions of 2005, 2006 and 2007 — just a normal healthy housing market. The key would be tame interest rates. Current low mortgage rates, combined with currently low housing prices make home ownership an awfully compelling option — if consumers are feeling more confident, and if interest rates stay low.

If you believe that such a scenario will play out, here are two names to focus on…

Toll Brothers (NYSE: TOL)
This homebuilder may have started to turn the tide, thanks to its exposure to the higher end of the housing market. Toll delivered an unexpected profit in the quarter ended July, and though a seasonal slowdown is expected to lead to more red ink for the October and January (2011) quarters, analysts increasingly think that Toll can stay in the black after that as sales and profits start to steadily rebound.

It will be some time before this or any other housing stock looks cheap on a price-to-earnings (P/E) basis, as industry as profits will be uninspiring until at least 2012 if not 2013. Instead, analysts measure these stocks in relation to book value, and shares, which currently trade at around 1.2 times book value, are likely to rally up to 1.5 times book value according to analysts at UBS — good for a +30% gain from current levels.

That's just a near-term target. If and when the housing rebound is truly underway, shares have considerably more upside, but that may not come before 2012.

D.R. Horton (NYSE: DHI)
Investors have started to bid up shares of this homebuilder in anticipation of this Friday's earnings release. If the last quarter is any guide, D.R. Horton should deliver a rare bit of cheer in the sector. In the quarter that ended in June, the company announced a modest uptick in demand for homes in its medium-priced communities.

D.R. Horton is surprisingly looking to build more houses “on spec,” which means they are starting to build without a firm buyer in hand for each house. It may seem like a risky move, but the company has ample cash to both invest in growth while also pay down debt. The company has paid back $1 billion in debt in the past year.

The decision to keep building has surely paid off, as the company is expected to report full year earnings of $0.73 a share this Friday. (Most other homebuilders continue to shoulder losses). Profits may cool a bit in fiscal 2011, but analysts thinks D.R. Horton's earnings power could approach $2 a share in a few years once housing is back on the mend. EPS averaged $4 in the middle of the past decade, but investors would cheer a rebound to just half that level. If that happens, shares would trade up from a current $12 to around $20.

Action to Take –> It seems counter-intuitive to seek out value in housing stocks when the sector is in such a deep slump. But sector shares have pulled back sharply in the past six months, creating fresh value, and would rotate back into favor if employment trends continue to strengthen on the heels of last Friday's jobs report. In truth, all housing stocks would gain in a housing recovery scenario, but Toll Brothers and D.R. Horton look to be best able to hold their own if 2011 and 2012 bring more of the same.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
This Could be a Surprise Sector for Stocks Next Year

Read more here:
This Could be a Surprise Sector for Stocks Next Year

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3 Stocks You Should Bet Against

November 12th, 2010

3 Stocks You Should Bet Against

Short sellers must always stay on their toes. Any time the market is in rally mode — as it has been the last few months — they need to unwind their short bets, lest the rising market inflict untold pain. They tend to typically pile back into these closed short positions once they think a rally has begun to end. So it pays to take a fresh look at some of the most heavily-shorted stocks, if you believe that the recent rally has grown tired. Renewed short selling in these names could quickly push them back down.

Looking at the most recently available data, I found three heavily-shorted stocks that could be ripe for a fall.

Sprint (NYSE: S)
Simply looking at the recent quarterly results from this mobile telecom service provider, you'd probably think its shares are fairly valued with perhaps a bit of upside. But short sellers see an albatross around this company's neck that threatens to damage its balance sheet or sharply inflate its share count. And either of those events could push the stock, form a current $4, closer to the $3 mark.

Sprint has been heavily investing in an ultra-fast wireless technology through its 54% ownership of Clearwire (Nasdaq: CLWR). Even as Sprint has poured several billion dollars into Clearwire over the years, that might not be enough, as Clearwire just announced that money is quickly running out. That's a risk I highlighted in my negative profile of Clearwire back in August.

It may be hard to find any new investors as Clearwire seeks fresh capital (perhaps up to $3 billion). So to keep it afloat, Sprint may be on the hook to write another large check to partially aid in the capital rescue efforts. Sprint has ample cash, but also has its own debts to think about. The carrier will need to pay off a $1.6 billion bond in January, and has an additional $18 billion in long-term debt to worry about as well.

Short sellers are betting that Sprint will look to issue fresh equity or take on more debt to raise cash for Clearwire, and the potential dilution or increased balance sheet risk would likely put a hurt on Sprint's shares. However, this is a finite short play. Keep an eye on how Clearwire resolves its financing mess. If it can do so — with or without Sprint's help — and Sprint's shares hold their own, then it's likely time to cover the short position.

The St. Joe Company (NYSE: JOE)
This stock was a long-time favorite of value players, as its massive stake of undeveloped real estate in Northwest Florida was a potential gold mine. Many assumed that developers would pay top dollar to create a new Martha's Vineyard in a region known as the “Redneck Riviera.”

Well, St. Joe sat and sat on much of that land, until the Florida housing bubble burst. Now, short sellers think the company's land holdings need to be written down to reflect their current value, and they suspect it will be a very long time before St. Joe will be able to realize any high value for its land. In the mean time, the company is slowly selling off land just to cover operating expenses and may not have nearly as attractive a real estate portfolio down the road if the Florida economy takes a long time to recover.

Yet it's the expectation of the need for write-downs that is the real near-term threat. Short sellers have been piling on to this notion, ever since it was proffered by fund manager David Einhorn at last month's Value Investing Congress. If St. Joe does feel compelled to write down the value of its assets (with some forecasters predicting a -25% haircut), then shares would surely take a hit. So this is a pretty clear short play.

Keep an eye on management's decision. If and when it decides to write down assets, you'd probably want to close out positions. If management doesn't do so by the end of the first quarter, it probably never will. Then again, there's not a lot of risk sitting on this short position, as few positive catalysts exist in the next six months.

Longer term, I tend to disagree with Mr. Einhorn. Florida is on its heels right now, but as I brace for another tough New York state winter, I dream of an eventual stake in Florida, as thousands of other northerners likely do. Down the road, Florida will once again become the real estate development capital of the country, and once the state starts to get back on its feet, St. Joe may be a solid play for longs.

Barnes & Noble (NYSE: BKS)
The bearish bets just keep on rising at the nation's largest bookseller. Shorts boosted their stake in Barnes & Noble roughly +5% in the last two weeks of October to 11.1 million shares, and it would take the equivalent of 29 trading sessions to unwind the bearish positions, the sixth-largest “days to cover” ratio of all publicly-traded companies. [I laid out the bear case against Barnes & Noble back in August. You can read that article here.]

Since then, it has become increasingly clear that e-books are starting to take away market share from traditional paper-based books. And the e-books biz increasingly looks to be dominated by Amazon.com (Nasdaq: AMZN) and Apple (Nasdaq: AAPL), not Barnes & Noble.

Since my last look at Barnes & Noble in August, analysts have subsequently altered their fiscal (April) 2012 outlook from a small profit to a small loss. And since then, no other suitors have emerged for the company, even as it is considered to be “in play.” Netflix (Nasdaq: NFLX) has Blockbuster (OTC: BLOAQ.PK) on the ropes, and rivals look similarly ready to make life just as bad for Barnes & Noble. That's why shares look so ripe to short sellers.

Action to Take –> These three companies are in short sellers' cross hairs, yet each has a specific investment thesis in place. Investors need to stick to that thesis if they choose to short these stocks. If Sprint is able to ride out the Clearwire mess, if St. Joe's indeed writes down its real estate without taking a big hit, and if Barnes & Noble somehow funds a buyer, you'd do well to cover your short positions straight away.


– David Sterman

P.S. –

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