A major risk for the outlook is that aerospace backlogs are making up an unusually high proportion of total backlogs, now at 43 percent vs. 35 percent only four years ago before recovery in the airline sector began to feed a rush of Boeing and Airbus orders. But the airline sector is, as are many other sectors, now slowing, putting pressure on the finances of airlines and raising questions over their commitment to prior orders. To close, the graph below tracks year-on-year percentage changes between unfilled orders for aircraft (black) and total unfilled orders (red). –Mark Pender, Econoday senior financial writer

Owens & Minor (OMI) is the nation’s leading distributor of medical and surgical supplies to the acute-care market. It’s also a health care supply-chain management company and a national direct-to-consumer supplier of testing and monitoring supplies for diabetics.

Most of its revenue is derived from fees based on a percentage of the value of products distributed, but 32% of its revenue is contracted on the basis of the company’s costs. Its primary competitor in medical/surgical distribution is Cardinal Health (CAH) . In the direct-to-consumer diabetes supply business, its largest competitor is Liberty Medical, a subsidiary of MedcoHealth Solutions (MHS) .

Owens & Minor has been establishing a track record of earnings surprises, beating analysts’ estimates in each of the last three quarters. Analysts are beginning to reward the company with higher full-year 2008 and 2009 estimates, which now stand at $2.36 and $2.64, respectively. By contrast, estimates for MedcoHealth have been steady, and those for Cardinal are falling. Owens is expected to post higher revenue growth than its peers, and that may account for the differential in earnings trends.

Over the next three to five years, the consensus among analysts is that OMI earnings per share can grow 18% annually. Much of this growth is likely to come from acquisitions, such as its recent agreement to purchase privately held Burrows. Given the uncertainties surrounding the timing of acquisitions and the fact that they will likely require additional investor financing, my valuations are based on a more conservative 10% growth rate, in line with the company’s sustainable growth rate. Combined with a 1.7% dividend yield, the double-digit total return potential isn’t too shabby — and the acquisitions could provide a boost to that, if and when they materialize.

Better still, the growth has a backstop in the form of strong cash-flow generation. Over the last 12 months, Owens & Minor generated free cash flow (cash flow from operations less expenditures on capital assets and software) of $190 million — a whopping 10.5% of the company’s market capitalization. Over the last year, most of the free cash flow has been used to pay down debt. Long-term debt was $369 million in June 2007, but it declined to $221 million by June 2008. The debt reductions free borrowing capacity for larger acquisitions, or alternatively the company could turn to share repurchases as debt levels decline further.

For a company growing 10% annually, I believe the 10.5% free cash flow yield represents a huge risk premium. By contrast, the free cash flow yields at Medco and Cardinal are less than 5%. I don’t see why a company with this growth profile should yield more than 6%, which would still be twice the current yield on five-year Treasuries and a premium to the cash flow yields of its peers. Were it to trade at a 6% free cash flow yield, the shares would be at $75, which is 65% above the current level.

That’s not the kind of valuation change I’d expect to see overnight. Over the next few years, however, I believe it is likely. Even if it took five years for the valuation to converge with that of its peers, the total return would exceed 20% per year.

Overnight or over time, those kinds of returns look good to me.

Disclosure: At the time of publication, William Trent has no financial position in the companies mentioned in this article.

Sponsor: Financial Education Everything you need to know about finance

Tomorrow happens to be the day before a holiday weekend.  The last time this happened was July 3rd, one of the best buying opportunities I've ever had.  Volume will be light, so volatility will be heavy.  Traders don't want to hold over holiday weekends, oil prices will be up because of the Hurricane Gustav, and end of the month profit taking will be present. 

A lot of selling pressure will exist, in my opinion, and selling has an extreme magnified effect in a low-volume environment,  which likely will create even greater buying opportunities.  The recent weak, low-volume rally could easily reverse.  All of the top market worries over the last few months have not been resolved, so a rally seems silly to me.

If I'm wrong, no loss for me, but if I'm right then I will be prepared to pounce on any surprisingly good buys that appear.

Since 2001, hospital stocks have been looking green around the gills. Shares of LifePoint (LPNT) , Universal Health Services (UHS) and Community Health (CYH) have pretty much gone nowhere. Tenet Healthcare (THC) and Health Management Associates (HMA) look even worse, having lost more than 50% of their value.

That may be about to change. As I have noted before, employment statistics show hospitals as being one of the few industries reporting significant hiring. Unfortunately, I believe the lean years have left analysts who are covering the stocks too shell-shocked to notice improving fundamentals.

Evidence of the high degree of skepticism can be found in a Forbes article published on Aug. 8, when LifePoint issued a positive earnings report and raised guidance. The article focused on declining admissions and fears that a sinking economy could increase bad-debt expense. JPMorgan analyst Dawn Brock was quoted as saying, “We are concerned about the sustainability of margins given the weak admissions growth, especially as we do not believe the company can continue to see bad debt improvement given the overall macro environment.” Stifel Nicolaus analyst Robert Hawkins said the company had done a poor job of managing its expenses.

Investors weren’t listening to the analysts. LifePoint shares soared 10% on the increased guidance and have held steady since. I believe the company’s strategy may finally get the shares out of their multiyear rut. If I’m right, the analysts covering the name will probably be the last to hear about it.

Better Than Its Price

LifePoint operates hospitals in non-urban communities in 17 states. Of the company’s 48 hospitals, 44 are in communities where LifePoint is the sole community hospital provider. Its strategy is to increase the services available at such hospitals to capture more of the revenue opportunity in these communities. On the recent conference call, LifePoint CEO Bill Carpenter said that “early deep dive hospitals have already through the first six months of the year met or exceeded their full year 2008 targets.”

Even after the 10%, rally the shares certainly don’t seem excessively priced. At less than 13 times the 2009 consensus earnings estimates, many would likely consider them cheap. Given that the company has exceeded earnings estimates in three of the last four quarters, the current consensus estimates could be too low. That would make the shares cheaper still.

The earnings also translate into strong free cash flow, measured as cash from operations less capital expenditures. Over the last 12 months, LifePoint’s free cash flow totaled $127 million, or 6.9% of the company’s market capitalization. With five-year Treasuries yielding barely more than 3%, that represents a pretty healthy risk premium, even before considering growth opportunities due to the company’s strategy.

Analysts expect LifePoint to increase earnings by 10% annually over the next three to five years, a rate that is in line with the company’s sustainable growth rate on the basis of fundamentals. Meanwhile, at 1.2 times book value, it is trading well below the industry average of 2.1 times.

If earnings grow as expected and the price/book multiple expands to the industry average multiple over the next five years, total returns could approach 25% per year.

Maybe by then the analysts will have caught up to the story.

Sponsor: Financial Education Everything you need to know about finance

Related Stocks:  ACN

Stops are a new way for me to show my incompetence as a trader.

On a positive note, the sale price I did get put my portfolio dollar value at a new all-time high.  I am now 6 for 6 when averaging down on multi-day slides in APWR during the last 6 weeks, with the end result being a great profit.  A 7th try might cause me a nervous breakdown.  I am considering a self-imposed suspension from the market until next week to collect my thoughts.

Chances are, another price dip will lure me in again.  How can I resist what has become almost a sure-thing?  APWR has now passed AMZN on the Covestor top 100 buy trades for the last month, which is shocking to me, and mostly my fault.

Source: U.S. Census Bureau, Durable Goods Report

Source: U.S. Census Bureau, Durable Goods Report

Can a market leader in clothespins hang short-sellers out to dry? Investors in Jarden (JAH) may soon find out. The company has acquired a portfolio of leading brands in outdoor and consumer products that includes Sunbeam, Oster, Coleman, Rawlings and Mr. Coffee. I think these market leaders, sold in a wide range of stores, are generating more than enough cash flow to service debt and fuel additional growth, making life uncomfortable for their considerable short float.

According to its latest 10K, Jarden is now a leader in a variety of categories, including (deep breath) alpine skis and bindings, snowboarding and snowshoeing, baseballs, bats, softballs and gloves, camping gear, cordage, firelogs and firestarters, soft baits, rods, reels and combos, home canning, home vacuum packaging, matches and toothpicks, personal flotation devices, playing cards, boxed plastic cutlery, selected small kitchen appliances, warming blankets and a number of other branded consumer products. (Does that give you an idea of the breadth of their product lines?)

The 2007 acquisitions of K2 and Pure Fishing helped make outdoor solutions the company’s largest business segment. Unfortunately, they also helped saddle the company with $2.8 billion in total debt just as the consumer slowdown began in earnest. Investors headed for the exits, sending the shares down by nearly half since last summer’s peak. Short-interest stands at nearly 23% of the floating shares.

I think the shorts may now be pressing their luck. For example, some investors consider Jarden’s high exposure to Wal-Mart (WMT - Annual Report) a cause for concern. However, judging from last week’s earnings report, Wal-Mart looks like exactly the place to be supplying these days.

Meanwhile, I think the same credit crunch that is giving investors such concern is likely to prove the remedy for their concerns. If Jarden does not have additional access to debt, obviously the debt load won’t get any bigger — and they can use their cash flow to reduce the current debt load while waiting for the market to improve.

And quite a flow of cash it is. Over the last 12 months, the company’s operations generated $402 million in cash flow and required just $89 million to build and maintain productive capacity. The remaining $313 million can be used for anything the company wants. Historically, it has been acquisitions, but in the current environment, I’m betting they will clean up the balance sheet.

Finance theory says there shouldn’t be a difference in the value of a firm based on whether it is financed by debt or by equity. But we all know that theory and reality don’t always mesh. Last year when debt was cheap, the sensible thing to do was to grow by borrowing money to acquire other companies, and that’s what the company did. This year, with the debt load higher by $1 billion, and the market capitalization $1.5 billion lower, the debt/equity ratio is all out of whack. I think nervous investors have taken the market cap lower than is justified by the cash flow, and that each dollar used to repay debt will increase the value of the company by more than one dollar as investor concerns subside.

Without any further growth in cash flow, I think a strong debt reduction effort could increase the market capitalization from $1.9 billion today to at least $2.2 billion next year and $2.5 billion the following. While that would not be sufficient to restore the stock to its previous highs, the 15% annual returns and $33 potential value after two years are well worth the effort. Jarden management did the right thing in last year’s credit environment, which leads me to believe they will do the same in this one.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this column.

Related Stocks:  WMT

Since 2001, hospital stocks have been looking green around the gills. Shares of LifePoint (LPNT) , Universal Health Services (UHS) and Community Health (CYH) have pretty much gone nowhere. Tenet Healthcare (THC) and Health Management Associates (HMA) look even worse, having lost more than 50% of their value.

That may be about to change. As I have noted before, employment statistics show hospitals as being one of the few industries reporting significant hiring. Unfortunately, I believe the lean years have left analysts who are covering the stocks too shell-shocked to notice improving fundamentals.

Evidence of the high degree of skepticism can be found in a Forbes article published on Aug. 8, when LifePoint issued a positive earnings report and raised guidance. The article focused on declining admissions and fears that a sinking economy could increase bad-debt expense. JPMorgan analyst Dawn Brock was quoted as saying, “We are concerned about the sustainability of margins given the weak admissions growth, especially as we do not believe the company can continue to see bad debt improvement given the overall macro environment.” Stifel Nicolaus analyst Robert Hawkins said the company had done a poor job of managing its expenses.

Investors weren’t listening to the analysts. LifePoint shares soared 10% on the increased guidance and have held steady since. I believe the company’s strategy may finally get the shares out of their multiyear rut. If I’m right, the analysts covering the name will probably be the last to hear about it.

Better Than Its Price

LifePoint operates hospitals in non-urban communities in 17 states. Of the company’s 48 hospitals, 44 are in communities where LifePoint is the sole community hospital provider. Its strategy is to increase the services available at such hospitals to capture more of the revenue opportunity in these communities. On the recent conference call, LifePoint CEO Bill Carpenter said that “early deep dive hospitals have already through the first six months of the year met or exceeded their full year 2008 targets.”

Even after the 10%, rally the shares certainly don’t seem excessively priced. At less than 13 times the 2009 consensus earnings estimates, many would likely consider them cheap. Given that the company has exceeded earnings estimates in three of the last four quarters, the current consensus estimates could be too low. That would make the shares cheaper still.

The earnings also translate into strong free cash flow, measured as cash from operations less capital expenditures. Over the last 12 months, LifePoint’s free cash flow totaled $127 million, or 6.9% of the company’s market capitalization. With five-year Treasuries yielding barely more than 3%, that represents a pretty healthy risk premium, even before considering growth opportunities due to the company’s strategy.

Analysts expect LifePoint to increase earnings by 10% annually over the next three to five years, a rate that is in line with the company’s sustainable growth rate on the basis of fundamentals. Meanwhile, at 1.2 times book value, it is trading well below the industry average of 2.1 times.

If earnings grow as expected and the price/book multiple expands to the industry average multiple over the next five years, total returns could approach 25% per year.

Maybe by then the analysts will have caught up to the story.

Sponsor: Financial Education Everything you need to know about finance

The wild swings in the price are not good for my portfolio's risk rating, but I am not going to worry about that.

Related Stocks:  APWR

I know, I know … the construction industry should not be touched with a 10-foot pole right now. But the depth of conviction investors have in that belief sends my contrarian side looking for names that might buck conventional wisdom. I didn’t have to look far to find one.

Despite a market capitalization under $800 million, NCI Building Systems (NCS) is one of North America’s largest integrated manufacturers and marketers of metal products for the nonresidential construction industry. With 44 manufacturing facilities located in 18 states and Mexico it sells metal coil coating services, metal components and engineered building systems, offering one of the most extensive metal product lines in the building industry.

The metal-coil-coating segment cleans, treats, paints and slits continuous steel coils before the steel is fabricated for end use. The metal-components segment sells metal roof and wall systems, metal partitions, metal trim, doors and other related accessories. The engineered building systems segment manufactures mainframes and Long Bay Systems, and includes value-added engineering and drafting. This last segment is both the largest and the highest-margin business for NCI.

NCI management pursues a four-pronged strategy of (1) developing new markets and products; (2) successfully identifying strategic growth opportunities; (3) controlling operating and administrative costs; and (4) managing working capital and fixed assets. The limited focus seems to be working.

New market opportunities include the shift toward metal roofing systems from conventional tar and gravel systems. Though more expensive to install, metal roofing systems are more durable and require less maintenance. As a result, they are gaining share in commercial-building applications.

For NCI, “strategic opportunities” means just that. The 1998 acquisition of Metal Building Components Inc. doubled its revenue base, making the company the largest domestic manufacturer of nonresidential metal components. The 2006 acquisition of Robertson-Ceco II Corporation resulted in product and geographic diversification, a stronger customer base and a more extensive distribution network.

Control over operating and administrative costs is exemplified by the fact that SG&A expense declined from 18.1% of revenue in the first half of 2007 to 17.7% in the same period this year. Meanwhile, working capital has been reduced, as have expenditures on fixed capital.

The operational discipline is translating into financial success. Sales in the second quarter grew 13.1% from the year-ago period. The $0.76 in earnings per share reported far exceeded the consensus analyst expectation. The company also narrowed its guidance for full-year 2008 earnings per diluted share to $3.19 to $3.44, compared to the prior consensus estimate of $2.90 per share. Estimates for 2009 were subsequently boosted from $2.88 to $3.39.

Over the last 12 months, NCI has generated $114 million in free cash flow (measured as cash from operations less capital expenditures). At 14.6% of market capitalization, the free-cash-flow yield is enticing enough that I don’t really require any growth to justify an investment. I could even tolerate some declines in cash flow, particularly if they were of a temporary nature related to the economic cycle.

Analysts, however, expect the company to grow 13% annually over the next three to five years. I think that estimate is probably too high — at least without tapping external financing. The sustainable earnings growth rate based on ROE is closer to 11%. With a 1.3 price/book multiple (in line with the industry average) and a P/E of just 11.5, I think the valuation is more than reasonable.

I think the shares could trade to a free-cash-flow yield of 10%, which would ultimately justify a $58 share price (45% above the current level), based on the most recent year’s free cash flow. While this may take some time to play out, I think double-digit returns over the next three to five years are quite possible.

Disclosure: At the time of publication, William Trent has no financial position in the companies mentioned in this article. 

Sometimes you have to wait for a bit of bad news to get a stock at the price you want. I think that is the case with Chattem (CHTT) , a leading niche provider of over-the-counter health care products, toiletries and dietary supplements.

Chattem’s brands include Pamprin, Gold Bond, Selsun Blue, Dexatrim and Bullfrog. About one-third of its sales are to Wal-Mart (WMT - Annual Report) stores. Chattem’s share price has fallen more than 10% since the company was forced to recall several Icy-Hot Heat Therapy products that were providing too much heat and causing burns. With that episode resolved, I think the lower price represents a buying opportunity.

By focusing on niche market segments outside the core product areas of larger consumer product companies, Chattem has built brand equity and leveraged its distribution capabilities, which has resulted in increased profit margins. The strong brands also allow for multiple brand extensions, such as Gold Bond Restoring, Cortizone Intensive Healing, Icy Hot PM and Aspercreme Heat.

When Johnson & Johnson (JNJ) bought Pfizer’s (PFE - Annual Report) consumer products division in 2007, regulators required it to divest certain brands. Chattem swooped in. For $410 million, the company added ACT, an anti-cavity mouthwash/mouth rinse; Unisom, an OTC sleep aid; Cortizone-10, a hydrocortisone anti-itch product; Kaopectate, an anti-diarrhea product; and Balmex, a diaper-rash product. The new products increased Chattem’s revenue base by more than a third.

While such acquisition opportunities arise only occasionally, Chattem’s focus strategy and brand extensions should allow for strong organic growth as well. For 2009, the company expects organic sales to grow at a high-single-digit rate or higher. As the acquired JNJ products reached their anniversary this year, Chattem has continued to exceed earnings expectations.

For the full-year 2008, analysts have ticked their estimates up slightly, and the consensus for 2009 per-share estimates has risen from $4.47 to $4.54 over the last month. Chattem management expects the firm to generate $90 million to $95 million in free cash flow this year, which amounts to a 7.25% free cash flow yield based on the current market capitalization.

At more than twice the yield on five-year Treasuries, the cash flow offers investors both a risk premium and a margin of safety. The cash is also being put to good use. So far this year, the company has repurchased 418,000 shares at an average price of about $63 a share. The company also reduced its total debt load by $50 million over the last year. The risk premium is further enhanced by the 15% earnings growth expected over the next three to five years. That growth rate is below the sustainable rate based on ROE, and given the company’s history of share repurchases, I think there could be room for upside EPS surprises.

I don’t see the need for such a high free cash flow yield when the cash flow is growing so quickly. When you combine 15% annual growth with a 6.3% terminal free cash flow yield (100% of the current Treasury yield), you get the equivalent of 18.5% annual returns over the next five years.

Investors have awarded Chattem an average P/E ratio of 20.7 over the last five years. If shares trade back up to that historical multiple, then you are looking at 30% to 34% share price appreciation, based on 2009 estimates. That multiple of the $4.54 consensus 2009 estimate suggests the shares could increase 34% to $94 a share over the next year or so.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article. 

Related Stocks:  JNJ, PFE, PM, WMT

When it comes to “Hyping” a product, it is clear to most people that Apple has no peers.  Long before people knew the total functionality of an iPod, they knew that they had to have one.  In my opinion, this was the most successful product launch in recent memory, and was only topped by their next product……the iPhone.

Companies do their best to ensure that Consumers (and, Investors) are aware of what is coming out.  This helps their business in several ways.  One, it provides a level of “excitement” for their company.  Two, it helps to ensure that people know that they are on the “cutting edge”.  Three, it can help to deflect away from a current offering in market from one of their competitors.  Finally, if done right, it can ensure that the product has a strong demand at the time of launch, ensuring a good success.

This begs a few questions…..

Ø  Which Industries are most likely to “Hype” a product that has not been released?

Ø  At what stage should you “Buy into the Hype”?

Ø  How can an investor profit from all of this?

1) Which Industries are most likely to “Hype” a product that has not been released?

Among a list of the most likely Industries to hype a product, one might find think of Entertainment, Consumer Discretionary and some parts of Consumer Staples market, Pharmaceutical, Technology and Automotive.

For Consumer-related products, it make sense to have a big splash, as you want to ensure that the public is well aware of what you are releasing, and what it can bring.  This would hold true for Cars, MP3 players, movies and even disposable Razors (can’t think of a better way to hype your product than Tiger Woods, right Proctor and Gamble?)

For Big-Pharma and for larger Technology purchases, one would not expect that there would be such a need to drive up consumer demand.  Sure, letting people know that there is a new drug for blocked arteries or a new add-on for your SAP system will create some demand, but this is not likely the main reason. 

Big Pharma companies are usually marketing to Doctors and other areas of the Medical system, and not so much to the patients themselves.  They need to be considered on the Cutting Edge of Health care, to maintain their stature in the minds of the Medical community.  As well, much attention is being paid to the “Drug Pipeline” of Big Pharma by the analysts at Wall Street, so they need to ensure that news of how new medicines are progressing are well known, even if they are not coming out for several years. 

In terms of Technology, pre-announcing new technology products or upgrades can serve a few purposes.  First, it helps to protect brand loyalty, as people who are already your customers can feel comforted in knowing that you are advancing the product that they are using, and that they will be able to upgrade without having to install a brand new system.  Next, one of the biggest fears about buying a Technology product, especially on a large scale, is that something better will come along before I finish rolling out.  Companies who are savvy can play up this aspect to successfully disrupt the sales of their competitor’s products that are currently in market.  One has to be careful with this tactic, however, as it can unsettle customers to the point that they never make a decision.

Finally, like Pharma, Technology companies need have all IT departments to think of them as being on the “Bleeding Edge”.  By constantly announcing new products, you can appear to be ahead of your competitors.

2)   At what stage should you “Buy into the Hype”?

Buying a company’s stock based on what might come out can be a very lucrative, yet extremely risky proposition.  The level of risk seems to be based on the following factors:

Ø  How “established” is the company?

Ø  How “buggy” have their products been at the time of launch on previous product launches?

Ø  How far in advance are they pre-announcing a product?

Ø  How far are they “pushing the envelope” with this new product?

First, most Start-up companies are looking for a way to get their product offering known.  One of the easiest ways to do this is to announce an incredible finding or a product that pushes so far ahead of what is currently on the market.  Don’t get me wrong, some of these products do eventually come to market, and those who bought into the story early are generally extremely rewarded (just ask early shareholders of Microsoft, Wal-Mart and Google).  However, more often than not, the average investor is better off staying out of these types of investments, unless it falls within an area of your expertise.  If this is the case, it may be worth a small portion of your investments.

There is an old expression that you shouldn’t buy a car in the first year of its production, as they likely haven’t gotten the “kinks” out of it yet.  For many years, this was probably extremely accurate, and it still may be somewhat accurate today.  For this reason, Automotive is one area of the market that a smart investor might want to avoid some of the hype (As an exception to this rule, Hybrid and Electric car manufacturers may be a good place to look, even at the time of launch).  Another one where people might want to be cautious is in the Corporate IT world, where large companies are showing some recent reluctance to invest in new technology upon its release, as there will inevitably be a few “Service Packs or Bug Fixes” over the first 6 months to fix glitches.   The same issues do affect Consumer IT products, however, they do not ever seem to have the same impact on sales.  This is evidenced by some of Apple’s issues with the iPhone, but it doesn’t seem to have hurt their sales very much.

Companies that announce that they have a new product coming out on the day of launch are likely taking a very conservative approach.  While there are no assurances, it is likely that the product will have been thoroughly Market-tested, and should be ready to go.  On the other hand, companies that announce a new drug or car that is coming out in 2013 may be a more risky adventure.  Many things can happen in a 5-year period (Government regulation changes, Increased competition, Increased prices in Commodities or other inputs and more) to make this a more risky venture.

Finally, the riskier the product, the more likelihood for glory and for failure.  As mentioned before, Gillette is announcing its new razor with great fanfare.  Since they have been making razors for years, and since it is a fairly basic product, there is little risk in such a product failing.  However, someone who is developing a Hydrogen fuel cell might have great technology and ideas, but is also just as likely to lose your entire investment.

3) How can an investor benefit from the “Hype”?

1) Invest in those companies who help other companies bring their products to market faster and cheaper

Ø         One such example is Pharmaceutical Product Development (PPDI).  Their main role is to assist Pharma companies in running the required trials for new medications.  One caution is that this is not a pure play, as they also have some development efforts for new drugs of their own.  Trading at just under 20x its forecasted 2009 earnings, this one is definitely not cheap, but it is expected to grow its earnings by about 20% annually over the next 5 years, making it fairly valued here.

2) Invest in those companies who supply parts or services for Hyped products

Ø        Companies whose products/services that have been chosen to be part of a new “hyped” product may also benefit (in the short-term, especially) from an uptick in earnings and visibility.  This is especially true if this new business will make up a significant part of their overall revenue base.

Ø  In the iPod example, it is believed that the following companies were significant suppliers to Apple: Sony (Battery), Wolfson (CODEC),  Storage (Toshiba), Firewire (Texas Instruments) and Power Management (Linear). 

Ø  While the overall impact of the iPod might not have been significant for Mega-Caps like Sony, Toshiba and Texas Instruments, it would have had more of an impact on Wolfson, a company with under $1B in revenue in 2007.  **Please note that it is likely too late to get on the iPod suppliers “train”, and this was only an example.

Other suppliers to look for include those who supply for:

Ø  Green Technology products

Ø  Hydrid Vehicles

Ø  Aerospace

Ø  Infrastructure

One that looks promising is Precision Castparts (PCP).   This company supplies many specialty parts to Airplane manufacturers and to the manufacturers of Plane engines (GE is one of their customers).   Their components are quite specialized, so companies would be reluctant to switch to an alternative supplier.

The movement towards more fuel-efficient planes means that the usual turnover of planes may be accelerated.  Combining this with the expected uptick in travel by Emerging markets means that there should be further demand for their products.  Down about 35% from its 52-week high, this one is now trading at less than 13x 2009 earnings (fiscal year ends March 2009).  With a strong RoE of over 25%, strong cash flow, and the ability to greatly raise its small dividend, this one looks like a good bet to soar.

3) Invest in the Retailer who might benefit from the uptick in Sales.

Ø   This point is especially true if the retailer sells products that are likely to be aimed at the 12-21 year old consumer.

Ø        The first example is book resellers.   Whenever a new Harry Potter book would hit the shelves, there would be an incredible traffic spike to the stores (or, in the case of Amazon, to their web page).  This not only resulted in higher sales directly from that book, but also from extra purchases from parents who were at the store, including high margin items such as Lattes.  While this spike is almost for sure temporary, it would be a profitable time for those who followed this trend.  Barnes and Noble (BKS) and Amazon (AMZN) are two ways to play this future trend.

Ø         The second would be the Electronics retailers, during a release of an extremely hot game, such as Halo III.  The resulting game may also result in sales of other components, such as new PCs / Video Game Consoles and Accessories.  While the impact might not have a huge impact on the bottom line for long, it will also drive huge volumes of people to the store.  For those retailers who excel at Marketing and Customer service, this extra traffic could prove to be quite profitable if capitalized on correctly.  I would stick with quality here, and the one that comes to mind is Best Buy (BBY).

Disclosure -- no positions in any of these companies.

Related Stocks:  AAPL, AMZN, BBY, BKS, PCP, PPDI

My average R for the year is 0.15, so with every trade, my account grows my 0.15%. With 20 trades per month, I'm talking about 3% monthly return. (The actual number is smaller, since I tend to take smaller risks than what my model tells me, I plan to change that in the future)

Some intersting points:

- In fact, 25% of losses are 1R losses (Point 1 on the chart). Maximum loss is 2R. This shows the effect of stop loss points during trading. I am using 'mental stops' and as you can see, I almost religiously execute them.

- There are some high wins between 2 and 4R (Point 2). One of the trading rules says "let your profits run". As you can see, I'm doing that (to a certain exent). I think 'let the profits run' is the wrong wording in my case (Sounds like holding positions for a long time). I prefer Sorros who talks about the need for 'home runs'.

When I look at these home runs, I see that we are talking about just ten trades. Not taking these top ten trades into account results in a return of 0% for 2008! Positive and negative Rs just neutralize each other.

When I thought about this last point, I was quite surprised. What if I would have missed them? It is easy to miss 10 trades if you do 180 of them in a certain period. But then I looked at my system and thought "that's actually great, that is the edge of my strategy: my approach is to find these big swing moves on the long or short side. These moves don't happen very often, but they DO happen. In order to find them , I need to be in the game for all the other moves. Percentage wise, the function of 94% of my trades is to keep the engine running without any return. So with 20 trades per month, I'm trying to capture one or two of these big movers. Since I'm a swing trader, I call these big movers "HyperSwings". Interesing that analyis of my 2007 results revealed the same mechanism with a litte better outcome. 8% of my trades were HyperSwings. The First half of 2007 was a entirely different market, though: trending with low volatility. So my strategy seems to be pretty robust to different market condions.

When I started writing this post, I was a little bit reluctant to discuss the presented topic, since I felt I "give away the farm". On the other side, I saw that key to success of this trading method is persistancy: even after a loosing streak of let's say 7 loosing trades in a row (which is my max loosing streak in 2008) I need to be in the game the same way. Even if I would give away all trading details, many people would trade a different way or sometimes even couldn't invest the time and

So where to go from here? I have a couple of topics I should discuss later:

- a more detailed discussion of the "HyperSwing" trade

- I also plugged my results into a Monte Carlo engine to learn more about the robustness of my strategy. Could be worth a post as well.

I can encourge evey trader to start plotting his results on a PDF (probability distribution fuction) chart. You learn a lot.

Happy trading

Monday's earnings report before market open should provide some fireworks.  Yet another Strong Buy was initiated by another analyst today, although analysts have been completely ignored for the last few weeks, awaiting earnings.

Related Stocks:  APWR

How do you safely play this region?  Below are 3 picks (in three different areas of the economy) which will provide an investor with not only solid growth prospects, but a reasonable margin of safety as well.  All of them trade as ADRs in the US.

1)    America Movil (AMX)

Ok, having one of the richest men in the world as a main investor does give me a slight bit of confidence.  Carlos Slim has made his fortune in many areas of the economy, but a large part of it has been the result of the incredible growth of this company.  Now one of the larger Wireless companies on the planet, America Movil now offers services in 17 countries.  Their growth rate is pretty strong, having added close to 29 Million new subscribers, pushing their total to over 150M total users.  Over half of those users are in Mexico and Brazil, economies that are holding up fairly well in the latest downturn.  Currently, the cellular phone penetration into these areas is fairly strong (69% of the adult population had a cell phone in 2007), but this is still expected to push into the low 90% range in the next 5 years, giving plenty of room for growth.  As well, 3G and 4G services will likely be very popular in these areas, as there is a significant lack of landline infrastructure, leading to a higher ARPU (Average Revenue per user) over the next few years.

Revenues were over $29B US in 2007, and earnings were over $5B.  Amazingly, its RoE is now close to 50%, and has been growing steadily over the years.  With an astute management team that effectively grows through acquisition, as well as through organic growth, America Movil is starting to build an effective moat around its business.

Down from its high of just under $70, AMX likely has most of the downside priced into it at this level.  With expected earnings (in USD, for the ADR) of $4.30 in 2009, this one might see the low $70 range again in 2009, if it regains its normal multiple of 16 to 18x Current year earnings.

2) Cemex (CX)

I can just see how the comments are going to start…..”How on earth could you pick a Cement company that has exposure to the US Housing market?”  To answer this, I have taken this into account (see below).  Cemex does about 40-45% of its business in the US; with the remainder spread out among many other countries (there is also a reasonably high exposure to other “Spanish speaking” countries, such as Spain, Columbia and Venezuela that make up about 25% of its revenue base).

To answer the US Housing question, it is also important to note that while this weakness has hurt the demand for their products, other areas of the economy are using their products like never before.  Emerging Markets expansion and New Infrastructure projects / Existing structure “Up-keep” all over the world means that there is likely going to remain a strong market for Cemex’s diverse product range.  This should only be increased when the US Housing market does start to finally turn up again, probably by mid-2009.

Cemex is now trading in and around its Book Value and at about 0.7x its Sales.  Combining this with decent cash flow and a good RoE of about 17% means that Cemex is likely close to the bottom of this down cycle.

With expected 2009 earnings of about $2.80USD (for the ADR), and a reasonable multiple of 12x Current year earnings (after the housing market starts to turn up next year), this one should easily see the low $30s within the next 12 months.

3)    Banco de Chile (BCH)

Most North Americans know very little about Chile.  I was one of them, until I married a girl born in Chile.  Unlike many countries in South America, Chileans live a high standard of living, boosted by a strong, stable economy.  Strong GDP growth (over 5% in 2007) has boosted the disposable income of many Chileans, increasing their desires for many different types of goods and services.

Chile boasts a diversified economy, with no sector accounting for more than 20% of its GDP.  Its base includes areas such as Agriculture, Fishing, Mining (Copper mainly), Manufacturing and Financial services.

With the strong increase in Chileans looking to increase their net worth, there has been a large spike in Mortgage applications, Investments and other financial products.  The number of Chequing accounts rose by 11% in 2007, while the number of people who borrowed money rose by almost 13%.  This growth occurred while the percentage of Past Due loans actually decreased dramatically.  These things, along with a growing Chilean economy, have benefited Banco de Chile in a big way.  Earnings have been growing at a 10%+ rate for many years.  Its RoE is over 25%, which is outstanding for any bank.

Like many foreign banks, Banco de Chile pays a strong dividend, now almost 7%.  Providing that the Chilean economy remains strong, this stock should start to attract more foreign investment.  With earnings expected to be in the $4.75US (for the ADR) range for 2009, this one still has some room to grow.  With a conservative multiple of 12x 2009 earnings, this one could very well push into the $58 range in 12 months. 

Disclosure -- I have owned all of these stocks in the past 18mths, but have no current positions in any of them

Related Stocks:  AMX, BCH, CX

I placed a 5% stop which gave the position some breathing room and now today it looks like the recent consolidation has panned out well. The break above $95 today signals a potential long term bottom for Oil and USO. Furthermore, the $90 support trendline held up even better than I expected.

Looking ahead I have now raised my stop to $89.50 to minimize risk and I am still sitting long.

Sean (epicadv) and I have been discussing and with oil heading up there is only room for alternative energy to move as well. Stocks like LDK, SPWR, FSLR, etc. should be on close watch lists.

Related Stocks:  USO

The selloff won, and APWR price dove after being up in pre-market.

Now it was time to decide to wait until after the typical APWR selloff in midmorning, or not wait because APWR announced the earnings conference call would be Monday, only a 2-day notice! 

I decided it was a nice setup with a lot of upward pressure in a market-selloff environment.  My ideal buy-into-fear opportunity.  If I'm wrong I have plenty of room to average down.

Related Stocks:  APWR

Here are some stunning facts (from Wikipedia) about the Oil Sands

Ø      The Athabasca Oil Sands (as they are officially known) contain up to 1.7 Trillion barrels of Bitumen, which is a mixture of Crude Bitumen (a semi-solid form of Crude Oil), Silica Sand, Clay Minerals and Water.

Ø      With a conservative estimate of 10% recoverability, this would place the Economically feasible Reserve total at 170 Billion barrels, making it the 2^nd largest collection of Oil reserves after Saudi Arabia

Ø      The Oil Sands cover an area about of New York State

Ø      Production of the Oil Sands is expected to reach 4 Million Barrels per day in less than 10 years.

Ok, so how do you make money on it.  Most retail investors have heard of large Producers such as Suncor (SU) and Petro-Canada (PCA).  While they are great ways to play this development, I decided to put together a list of 4 companies with unique exposure to Oil Sands that you likely haven’t heard of.

1)      Churchill Corp (CUQ – Toronto)

For those of you whom have never had the privilege of seeing an Oil Sands operation, I can tell you first-hand that it is difficult to not be impressed by the shear magnitude of these projects.  The projects virtually are cities onto themselves.  The amazing part is how little infrastructure was actually there a few years ago.

One of the companies benefiting from these massive projects is Churchill Corp, a diversified Construction company based out of Edmonton, Alberta.  The company is divided into 5 sub-sections:

1)      Fuller Astin (Industrial Insulation, Fireproofing, and Plant Maintenance)

2)      Laird Electric (Electrical Instrumentation, Power-Line construction and Maintenance Services)

3)      Northern Industrial Insulation (Similar to Fuller Astin, including Asbestos Abatement and Sheet Metal)

4)      Stuart Olson (Residential, Light Industrial and Institution building construction)

5)      Triton Projects (Large Mechanical Contractor)

Their expertise plays well into the needs of the growing Northern Alberta communities.  First, with the huge influx of new workers to the area, there is a great shortage of places to live and offices for them to work in.  Next, Oil Sands Projects need a lot of Power, so there is a huge need for their Power-Line division.  Finally, there is a large shortage of staff to perform on-going maintenance, so companies are very willing to farm out this work to companies like Churchill.

With expected earnings of $1.80 CDN for 2008, this company is trading less than 9x its current year earnings.  The company also reports that they have a work backlog that exceeds $700M, which is roughly equal to their entire 2007 Revenue.

Down significantly from its high of close to $30 CDN in November, this stock has likely been hurt by Investors fleeing from Small Caps.

With a conservative 13x 2009 earnings, and an expected 2009 earnings of about $2/share, this one could see the mid-20’s again before long. 

2)      Northern Property REIT (NPR.UN – Toronto)