Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

As I wrote in the prior entry, I am still trying to catch up with my trading activity from last week.  This entry should bring the blog up to date with all of my recent trades accounted for.  I apologize once again for letting my blogging lag behind my trading.  It is all a part of being an amateur I guess :).

As I reported previously, I sold my 161 shares of Genoptix (GXDX) on the same day I purchased them--August 14, 2008.  On that same day as well, I checked the list of top % gainers on the NYSE and noted that Estee Lauder (EL) had made the list.  After a quick review of some of the data I use to screen stocks, I felt that Estee Lauder was an appropriate, and probably a less volatile, investment for me.  

I purchased 140 shares of Estee Lauder (EL) on 8/14/08 at a price of $49.87.  EL closed at $50.44 on 8/22/08. With this entry, I would like to share with you why I feel that

ESTEE LAUDER (EL) IS RATED A BUY

First of all, what does this company actually do?

According to the Yahoo "Profile" on Estee Lauder, the company

"...engages in the manufacture, marketing, and sale of skin care, makeup, fragrance, and hair care products. Its products include moisturizers, creams, lotions, cleansers, sun screens, and self-tanning products; lipsticks, lip glosses, mascaras, foundations, eyeshadows, nail polishes, and powders; fragrance products for women and men; and hair color and styling products, shampoos, conditioners, and finishing sprays. The company offers its products under the Estee Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, MzAzC, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble and bumble, Darphin, American Beauty, Flirt!, Good Skin, and Grassroots brand names. It also manufactures and sells Kiton and Toni Gard products as a licensee."

In my family, I can tell you that it is Clinique that is the most popular of the Estee Lauder brands.

How did they do in the latest quarter?

It was actually, as is often the case, the announcement of fourth quarter earnings on Thursday, August 14, 2008, prior to the opening of trading, that drove the stock higher in trading and led to it being on the 'top % gainers list' where it caught my own attention and landed it in my portfolio.

For the quarter ended June 30, 2008, the company reported net sales of $2.01 billion, up 14% from $1.76 billion the prior year.  Even without the effect of currency exchange rates, the company reported an adjusted sales increase of 9% year-over-year.  Net earnings for the quarter climbed 36% to $120.2 million, up from $88.6 million the prior year.  On a diluted earnings per share basis, this worked out to $.61/share this year, a 38% increase over the $.45/share reported last year.

These results were strong even more than just because they were solid results; that is, they also beat expectations.  Analysts polled by Thomson Reuters had expected a profit of $.56/share (the company came in at $.61) on revenue of $1.93 billion (they came in at $2.01 billion).

The company appeared to have reassured skittish investors regarding 2009 results guiding to a sales growth of 6 to 8% (adjusted for exchange rates) to $8.39 to $8.54 billion in 2009.  They expect profits between $2.57 and $2.72/share.  Earnings guidance was within expectations but revenue guidance was above expectations according to analysts polled by Thomson Reuters.

With these strong results exceeding expectations and guidance for 2009 with earnings at expectations and revenue above expectations, the stock moved ahead in price enough to make the top % gainers list where it caught my own attention and interest.

How about longer-term results?

What caught my attention with this stock was the strong earnings report.  What 'clinched the deal' was the superb longer-term record as reported on the Morningstar.com '5-Yr Restated' financials page for Estee Lauder (EL).

Revenue growth has been steady since at least 2003 when the company reported $5.05 billion in revenue, increasing each year to $7.04 billion in 2007 and $7.66 billion in the trailing twelve months (TTM).

Earnings, except for a dip between 205 and 2006, have also shown steady growth with $1.26/share reported in 2003, increasing to $1.78 in 2005, dipping to $1.12/share in 2006, only to rebound to $2.16/share in 2007 and $2.25/share in the TTM.

The company does pay a dividend and has been increasing it almost yearly from $.20/share in 2003 to $.50/share in 2007 and $.55/share in the TTM.  Outstanding shares were 235 million in 2003 and the company has been retiring shares to 208 million in 2007 and 205 million in the TTM.

Free cash flow has been positive if a bit erratic with $249 million in 2005, $449 million in 2006, $350 million in 2007 and $379 million in the TTM.

The balance sheet appears solid with $410 million in cash and $2.4 billion in other current assets.  This total of $2.81 billion, when compared to the $1.77 billion in current liabilities yields a current ratio of 1.59.  The company has an additional $1.729 billion in long-term liabilities.

What about some valuation numbers?

Reviewing the Yahoo "Key Statistics" on Estee Lauder (EL), we can see that this is a large cap stock with a market capitalization of $9.81 billion.  The trailing p/e is a very reasonable 20.98 with a forward p/e even nicer at 16.81 (fye 30-Jun-2010).  However, the PEG ratio is a bit rich (I like to see ratios of 1.0 to 1.5 or less) with a result of 1.70.

As reported by the Fidelity.com eresearch website, EL is a good value as measured by the Price/Sales (TTM) ratio with Estee Lauder coming in at 1.23 with an industry average of 1.58.  In terms of profitability, as measured by the Return on Equity (TTM), EL doesn't do quite as well with a figure of 32.63% compared to the industry average of 50.12%.

Returning to Yahoo, we find that there are 194.4 million shares outstanding.  As of 7/28/08, there were 10.14 million shares out short representing a 5 day short interest ratio.  With the outstanding earnings report, we may have been witnessing a bit of a 'squeeze' as short-sellers scrambled to cover their 'pessimistic'wagers and instead rushed to cover their short sales by purchasing stock.

As noted above, the company pays a forward dividend of $.55/share, yielding 1.10%.  The last stock split was a 2:1 split back on June 3, 1999.

What does the chart look like?

Examining the 'point & figure' chart on Estee Lauder (EL) from StockCharts.com, we can see the dip in price in 2005/2006 coinciding with the dip in earnings per share.  Otherwise the chart appears quite strong with the price staying above the support lines and breaking through resistance earlier this year when it passed through $45/share. This chart looks nice to me!

Summary:  What do I think about this stock?

I really like this stock pick a lot.  In fact, I liked it enough that I bought shares :).  

This isn't about the Peter Lynch aspect of this investment---you know with my wife and daughters supporting the Clinique brand of EL--but more about all of the usual factors I use to 'pick' a stock.  

The company moved strongly higher on the 14th of August after announcing a strong earnings report that beat expectations.  Longer-term, this company has been reporting steady revenue and earnings growth (even after adjusted for currency effects).  They pay a dividend and they are increasing it.  They have a decreasing number of outstanding shares, the free cash flow is strongly positive and the balance sheet looks solid.

What is there not to like about this stock?

Valuation-wise, the P/E is just over 20, the PEG is a bit rich,  the Price/Sales ratio compares favorably with its peers, and the Return on Equity is solidly positive if a bit under where its peers are trading.

Thanks again for stopping by and visiting!  If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you can, be sure and visit my Covestor Page where my actual trading portfoli is monitored and evaluated, my SocialPicks page where my stock picks from early 2007 on are monitored, and my Podcast Page where you can download an mp3 or two of me discussing some of my favorite investments from the blog.

Wishing you all a wonderful weekend!

Yours in investing,

Bob 

Related Stocks:  EL, GXDX, MER

Valuation Completed: 8/21/08

Rating: Avoid

Comments:  A classic example of a great stock versus a great company.  AAPL the company is fantastic.  Their products excel, the balance sheet is strong and the operation is very well run.  Management does an excellent job growing sales and earnings.  While doing so they also main excellent margins with nice return ratios.

When it comes to valuation, the stock is stretched as can be.  Their use of options is absurd.  Each year, the employees receive nearly 2% of shares outstanding in the form of new grants.  When you look at the value to AAPL of buying back shares from employees, it constantly runs well over $1B per year,  This phenomenon occurs at many technology companies, but AAPL is among the worst when it comes to transferring wealth from shareholders to employees.

Even if you are unconcerned with the option issue, you should pay notice to the valuation.  I think one could easily justify a 22-23 P/E on these shares.  Currently, AAPL trades near a 35 P/E.  Therefore, you would need to see a 30% drop in share price before you can entertain buying the shares.  Personally, I would like to see a much steeper drop before committing to the stock.  When comparing the stock valuation to the broad market,  I have assumed that AAPL can grow earnings at a 20% rate indefinitely (very aggressive assumption) and that the market will grow at a 8% rate.  If this relationship holds, it will take AAPL 13 years to justify the current stock price.  Simply, aggressive growth is priced into this stock for many years to come.

Given my view that the company is overvalued, what should an investor do?  I have traded this stock frequently over the years.  AAPL shows great volatility and offers traders a nice vehicle to book P&L.  Given their dominant products and market position, I also understand how people would be willing to own these shares as a long term holding.  For each investor a decision must be made as to why and how to hold any position going forward.  While I respect and understand those who stay long of AAPL as either a trade or a core holdings, I cannot own the stock on a valuation basis.  I will continue to rent the shares with the goal of realizing short term gains, but positions will be small and my eyes will always be on the exit. 

Related Stocks:  AAPL

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

First of all I would like to apologize for the paucity of posts on the blog the last week or two.  I would encourage you all to utilize my Covestor Page to find out how my actual holdings are doing when I am not blogging.  And I shall try to get back 'in the saddle' once again, and catch all of you up on my latest thoughts and observations.

I have been making some adjustments to my trading strategy without really changing the mechanics underlying my approach.  What I am trying to say is that I have chosen to sell some positions that appear to be in the wrong 'groups' or 'industries' and switch to other companies that appear to be acting 'healthier'.  

Concerned that my Morningstar (MORN) stock was acting 'sickly', I chose to switch out of this pseudo-financial stock and try something else for my holding.  Looking through the list of top percentage gainers on the NASDAQ, I came across Genoptix (GXDX) that appeared to fit the bill. 

I went ahead and purchased 161 shares of GXDX on August 14, 2008, (a peculiar number but divisible by 7--my first partial sale amount) at $38.328/share.  However, GXDX immediately started to trade weakly, and not wanting to move from one weak stock to another, I went ahead and sold my 161 shares the same day (!) at $37.028.  Looking at the list of top % gainers on the NYSE that afternoon, I found Estee Lauder (EL) and purchased 140 shares at $49.87---but that is the subject of another blog entry.

Genoptix (GXDX) continued to trade poorly and actually closed at $33.53, down $1.66 or (4.72)% on the day yesterday (8/21/08).  However, I like the numbers on this stock, I do believe it deserves a place on the blog for continued monitoring.  With my own sale of the stock, and the technical weakness, the best I can do is

GENOPTIX (GXDX) IS RATED A HOLD

But let's take a closer look at this stock.  First of all,

What exactly does the company do?

According to the Yahoo "Profile" on Genoptix, the company

"...provides specialized laboratory service that focus on delivering customized and collaborative diagnostic services. Its services include COMPASS service offering, in which the company's hematopathologists determine the appropriate diagnostic tests to be performed, and then integrates patient history and all previous and current test results into a comprehensive diagnostic report; and CHART service offering, in which the hematologists and oncologists receives a detailed assessment of a patient's disease progression over time. The company also offers multiple diagnostic services, such as professional interpretation by its hematopathologists."

How did they do in the latest quarter?

On July 31, 2008, Genoptix (GXDX) reported 2nd quarter 2008 results.  Revenues for the quarter came in at $27.8 million, up from $13.9 million the prior year.  GAAP net income for the quarter was $5.6 million, compared to $3.8 million the prior year.  This worked out to $.32/share vs. the $.03/share reported the prior year.

The company also raised guidance with Medicare reimbursement rates confirmed, to $105 to $108 million in revenue for the year, up from prior guidance of $90 to $95 million in revenue.  Net income figures were also raised from $15 to $17 million to approximately $20 million for the year.

Seeking Alpha has the Conference Call Transcript on this quarterly result for your further review.

What about Longer-Term Results?

Reviewing the Morningstar.com "5-Yr Restated" financials, we can see that this company has grown rapidly from its $200,000 in revenue in 2003 to $59.3 million in 2007 and $84.9 million in the trailing twelve months (TTM).

Earnings have improved from a $(184.35)/share loss (!) in 2003 to a loss of $(33.74)/share in 2006, turning to a profit of $.78/share in 2007 and $1.35/share in the TTM.

Morningstar shows 4 million shares in 2007.  According to Yahoo, there are currently 16.5 million shares outstanding--and also according to the latest quarterly report, there are 17.5 million shares when the full "dilution" is considered.

Free cash flow has improved recently from $(10) million in 2005, to $(4) million in 2006, $12 million in 2007 and $18 million in the TTM.

The Balance Sheet on Morningstar.com appears solid with $51.0 million in cash and $60 million in other current assets.  Compared to the $10.9 million in current liabilities, this yields a current ratio of 10.2.  The company has virtually no long-term debt with $300,000 in long-term liabilities reported.

What about some Valuation Numbers?

Reviewing the numbers from Yahoo "Key Statistics" on Genoptix (GXDX), we can see that this is a small cap stock with a market capitalization of only $554.28 million.  The trailing p/e is a moderately rich 30.18, with a forward p/e (fye 31-Dec-09) of 30.21.  However, the '5 yr expected' growth is substantial enough that the PEG is estimated at 0.64.

Reviewing the Fidelity.com eresearch website, we can see that the stock is still rather richly valued with a Price/Sales (TTM) of 6.38, compared to the industry average of 0.89. Fidelity does suggest that the company is quite profitable, however, with a Return on Equity (TTM) of 24.76% compared to the industry average of 18.77%.

Returning to Yahoo, we can see that there are 16.53 million shares outstanding and currently there are 994,320 shares out short (as of July 28, 2008), representing 7.2 days of average volume (the short ratio).  This exceeds my own '3 day rule' making the short interest significant from my perspective.  No dividends are paid, and no stock splits are reported on Yahoo.

What does the chart look like?

When we examine the 'point & figure' chart on Genoptix (GXDX) from StockCharts.com, we see that the chart is relatively optimistic yet showing some signs of fairly significant volatility. Since coming public in October 2007, the stock has traded from $24 to $37 in January, 2008, only to dip to $21 and start its move higher once again.  The stock recently peaked at $39 in August, 2008, but has now dipped back to $33.  Overall, the chart appears to be intact with the stock trading through resistance and above support levels.

Summary:  What do I think?

Overall, I still like this stock.  It is a bit small and very volatile trader, but the prospects appear to be good with the company reporting solid earnings and revenue results and raising guidance on both.  

My own short-term ownership of this stock was limited likely to my own poor timing of my purchase in a stock that was a bit 'over-extended' technically.  Valuation is a bit rich but the stock is just currently turning profitable and this is to be expected.

Thanks so much for stopping by and visiting my blog.  If you have any comments or questions, please feel to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Covestor Page, where you can review my continuously updated trading portfolio results and performance, my SocialPicks page which monitors my stock picks from early 2007 through current posts, and my Podcast Page where you can listen to me discuss some of my picks from this blog.

Wishing you all a wonderful Friday and weekend!

Yours in investing,

Bob

Valuation Completed: 8/20/08

Rating: Neutral

Comments: It is easy to see why the stock price has crashed.  CROX was never prepared for the increase in business they received during 2007.  Internal controls were incomplete and  operational problems surfaced.  As the economy has cooled and discount versions of their product arrived,  CROX is left with a high cost structure, high inventory levels and questions over their future.

The positive for this company are that their core product is better quality than any of the discount versions on the market.  For people who desire the better quality, CROX will be the option (thus creating a permanent client base).  Further, the balance sheet is clean with solid liquid.  Making a series a fair value adjustments, book value is in excess of $3 (vs. a reported book value of $5.40).

When deciding how to manage an investment in CROX, there is a great deal of uncertainty.  The business outlook is opaque.  As quarterly results come in, I see a number of accounting issues that make me uncomfortable.  The lack of comfort raises red flags and suggests extreme caution.  For these who already established a position, the book value of $3.25 should act as a floor.  Coincidently,  this same price is inline with a pessimistic outlook that does not see them reaching their 2005 income level (long before they became a hit shoe company) until  2011.  A more reasonable yet cautious outlook has them losing money this year and not bettering their 2006 EPS until 2011.  With that approach the shares are worth $7.50. 

Therefore, for a current investor I recommend holding the shares, watching the business evolve and determining if fair value increases with improved prospects.  For risk seekers looking to take a position, the current price level offers a reasonable chance for nice gains.  Finally, the cautious should remain on the sidelines and attempt to buy the shares below $3.50.

Related Stocks:  CROX

Valuation Completed: 8/16/08

Rating: Buy

Comments: The stock is incredibly cheap.  The business is well run and management has executed their strategy.  While the cost to produce from the oil sands exceeds more traditional methods, an elevated oil price provides excellent margins.  The stock has dropped nearly 35% since May and I think we are now presented an opportunity to buy oil assets in safe countries at a huge discount.

Assuming a 25% drop in earnings this year, that 2007 will serve as the peak earnings number, and applying a 3% terminal growth rate, I derive fair value of $68.  From an asset value perspective, the stock is worth much more.  I will use fair value of $68 and look to buy at a 20% discount.  Therefore, I am a buyer below $54

Related Stocks:  SU

                When making investment decisions, I consider two distinct time periods.  The first is a long-term view of where I think our economy is headed, what the implications are for the financial markets and what actions can be taken to profit from the events that will unfold.  As mentioned last week, over the next 3-5 years, I expect the general market to show little to no return.  With the economy weak and credit limited, dominant firms with positive cash flow will have the ability to fund innovation and increase their dominance.  Weak companies with limited access to credit will see growth drop, innovation stall and market share lost.  For me, the implication is clear.  Focus on large cap stocks with dominant market share.  Avoid small cap stocks, companies carrying heavy debt loads and those who are struggling in weak industries.

                By constructing a portfolio using these criteria, I search for undervalued companies with large dividend yields and sustainable business models.  When I buy these stocks, I am not sure of where prices are headed over the next 3-6 months.  Instead, I focus upon where the value will be 2-3 years from now.  Having completed my due diligence, I am comfortable knowing that short term volatility may occur yet long term gains will soon follow.  Going forward, I focus upon how the business evolves, what changes have occurred and how that affects the company's intrinsic value.

                While this long term view makes sense to most, the implementation of it is very difficult.  Firstly, exhaustive research is needed to understand both the company and its fair value. The second challenge is to buy the stocks when they meet your valuation threshold.  Since I like to buy at a large discount to fair value, I am often the one picking up shares of stocks that everyone else has discarded.  Consider two of my recent purchases - XTO Energy (XTO) and General Electric (GE).  XTO is down 38% over the past 8 weeks.  GE is 33% off the high reached last October and now trades at the same price it fetched in 1998.  With drops these large most investors begin questioning the logic of buying a stock that has fallen so far.  Instead, I attempt to ignore the market movement, focus on value and act when the price is attractive.  This process is never easy yet yields gains over various business cycles.

                Having implemented a long term investment strategy, we must also focus on what the markets are doing now.  After all, short term volatility can cause one to make long term decisions at the worst possible time.

                With the Dow nearly 3.50% lower over the past 7 trading days, we find ourselves in a dangerous position.  My timing model is currently overbought with 80% of the stocks rated buy.  VIX is trading below 22 and few other sentiment indicators are bearish.   Instead, many pundits are saying the bottom occurred in July and that we will move higher from here.  Personally, I do not buy it.

                As I predicted, the Dow rallied from an oversold condition and bounced nearly 7% over a four week period.  At that time, we quickly approached a long-term downtrend that had been in place since the market's peak in October.  Facing resistance, the market broke down, has violated all support and now trades below all key moving averages.  Looking at my timing model, a further 6-8% down move is needed to restore an oversold condition that could serve as the prelude to a rally.  Such a move would violate the prior lows and add considerable questions about the future path of the market.

                While the rally from mid-July was welcome, it also appears over.  I never believed July represented the low of this bear market.  Instead it was a tradable bottom that allowed for one to rebalance their portfolio and position for the more difficult markets that lie ahead.  While I remain fairly long of stocks, my positions are concentrated in names that I think will prosper over the coming years.  I am using market volatility to generate trading gains and hedge my long positions with selective short exposure.  By doing so, I look to control some of the short term pain while I await the market's recognition of my core portfolio's embedded value.

Related Stocks:  GE, XTO

     Buy 100 shares of NOK @ 25

     Sell 1 NOK September 25 Call for $1.65

Doing this trade lowers your cost basis on NOK to 23.35 - 2.7% below our target entry price.  If NOK closes below $24 on September 20th, you own the shares at a large discount to fair value.  If NOK remains above $24 on that date, you pocket a 2.6% gain on the covered call for 1 month of trading.  The risk is if NOK trades below $23.35 you have paid more than you could by waiting for the share price to decline.

Note: This trade can be scaled, but make sure to byu shares in increments of 100 in order to keep the option trade fully hedged.

Related Stocks:  NOK

Valuation Completed: 8/18/08

Rating: Neutral

Comments:  NOK is a well run company with  a solid balance sheet and good business prospects.  They are often ignored in the cell phone space because their products are not as flashy or dynamic as some competitors.  However, NOK has consistently maintained a dominant mark share and has pushed their presence in emerging  markets.  The result is a predictable growth rate without the risk of financial excess.

The share price has been battered this year as NOK has seen their average sales price (ASP) decline.  Declining ASP leads a to lower margins, but the offset will be new users coming online and higher volume.  All in, NOK should maintain their market share dominance and grow their presence in the emerging markets.  While I forecast operating margins to decline 1.50% from prior years, the long term benefits of having dominant market share will accrue to shareholders in the future.

Personally, I think the sell-off in NOK is overdone.  Investors have become to pessimistic and have pushed the stock down.  Finally, I am seeing a strong company with a dominant market position trading near a price I find attractive.  From an earnings yield perspective, I think the share are worth $28.  Using various other models, I derive fair value between $32-$34.  as always , I will use the lower number and apply a 20% discount.  Therefore, look to establish a position below $24.

Related Stocks:  NOK

Valuation Completed: 8/18/08

Rating: Buy

Comments:  XTO portrays impressive profitability and growth.  By focusing on buying wells that others had previously founded/developed, management can reduce costs and increase returns.  Their balance sheet show a trend of improved strength.  While debt is still high, their asset base more than offsets this risk. 

One of their main attractions is that they are an energy play with all of their assets in politically safe areas (most other companies have oil interests in politically sensitive areas).  This fact would lead to a margin of safety with XTO.  Since they hedge a portion of their production, XTO does not show the pure reserve value of others companies.   Discounting their earnings gives a stock price of $60 and discounted reserves show a value of $69.  I will use the lower amount for a fair value estimate , will apply a 20% haircut and look to enter below $48

Related Stocks:  XTO

Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice! As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

Last week, on August 14, 2008, I chose to replace what I felt was a relatively weakly performing stock with something acting healthier.  This is certainly outside of my "rules" for trading, but I am trying to enhance the performance of my portfolio by trying to identify similar stocks that do meet my criteria as well but are technically, from my perspective, appear to be trading better in the market.  I am not sure if this will be a successful intervention but as I have always done on this blog, I wanted to share with you my thoughts and observations.

It is possible that I acted merely by 'chasing performance' and shall actually underperform the market in the days ahead instead of accomplishing my own goal of outperformance.  In so many ways, after these many years of trading, I remain an amateur.  So bear with me and I shall explain the 'lateral' move I made.

First of all, I sold my 103 shares of Morningstar (MORN) from my trading account at a price of $64.794.   These shares were initially purchased 11/22/05 at a cost basis of $32.57, so I had a realized gain of $32.22 or 98.9% since purchase--so it isn't like I had a loss on this stock or anything!

But if we take a look at the Morningstar "point & figure" chart from StockCharts.com, we can see the relatively anemic performance of this stock after hitting $86 in December, 2007.

Since I do not have any problem at all with Morningstar as a company.  They reported an outstanding earnings report just a couple of weeks ago, their 5-Yr Restated Financials page is solid, and I only have some concerns about the relative weakness of the stock, which I believe is because it is being lumped into the 'financials' group.  Thus my sale.  So, with my own sale, I cannot leave Morningstar (MORN) at "BUY" and am reducing my rating:

MORNINGSTAR (MORN) IS RATED A HOLD

Initially, I purchased shares of Genoptix (GXDX), but with the same-day weakness in THAT stock, I sold shares and settled on Estee Lauder (EL).  More details to follow.

Yours in investing.

Bob

                The second, more standard approach is to follow the path of compounding.  Under a compounding program, we aim to generate consistent returns, reinvest the gains into our portfolio and then earn income off an ever increasing capital base.  As the capital base rises, the dollar gain increases tremendously.  Running a compounding program for years offers a path that is powerful, predictable and easily understandable.

                This appears to be a simple answer.  All you need to do is pick a rate of return, plug it into a financial calculator, check back in twenty years and start spending your gains.  The average financial advisor will use this approach to manage their client's money.  Using compounding tables and the long-term average of US equity market returns, financial advisors devise plans where a client can earn 8% per year and achieve all of the predetermined goals.  The advisor takes the money, invests in index funds, pockets a fee and hunts for the next client.  That is pretty good work if you can find it.  What most do not realize is the analysis is incredibly sensitive to rates of return.  Any variance to the return number plugged into the calculator causes major differences.

                As an example, assume you invested $10,000 and expected to earn a consistent 8% per year for each of the next 20 years.  At the end of 20 years, your initial investment would have grown to $46,610.  If the return actually was 7%, your investment grows to $38,697 - 17% less than planned.  Most people would not be upset about their investment missing its target return by 1%.  After all, you still made money and the dollar loss in the first year is only $100.  Even if we miss every year, it would only be $2,000, right ($100 per year * 20 years)?  Wrong.  The success of compounding arises because the equity base grows and dollar returns increase.  A seemingly insignificant 1% return miss reduces your expected net worth by 17% at retirement.  For most, this is a material miss that will cause them to rethink their plans, postpone retirement or make life altering decisions.

                If a 1% miss causes so much pain, how about a dramatic miss?  As mentioned earlier, the typical advisor will assume somewhere between an 8-10% annual rate of return based on long term market assumptions.  By trying to get you to focus on the long term, they can use these rates and then explain away poor performance as a need to wait out down periods and focus on the future.  For investors during the 1990s, this approach appeared overly conservative.  As the market routinely generated double digit gains, the 8-10% benchmark was achieved and the advisors appeared brilliant. 

                Recent history has not been as kind.  With the S&P 500 currently trading at 1,289, the index is at the same level as January 1999.  In nearly 10 years, an investor purchasing the S&P 500 index fund for broad market exposure has made no money.  Anyone who invested $10,000 in 1999 with an 8% return assumption would expect to have $21,589.  Depending upon fees, they are most likely in negative territory.  To achieve their initial goal, this investor would need to earn nearly 17% per year for the next 10 years.  While this rate of return is achievable, I do not think a passive index exposure will get there.

                If the long run return is 8% and the S&P 500 has not moved for ten years, won't mean reversion ensure higher return over the coming years?  This argument is logical, yet flawed.  On October 10^th, 1928, the Dow Jones Industrial Average (DJIA) closed at 353.  On September 16, 1954 the DJIA closed at 353.  This was a period of 27 years with no change in the index.  In January 1964, the (DJIA) traded at 785.  In April 1980, the DJIA changed hands at 785 - no return over 17 years.  Looking at history, many years of no movement in the broad market are not unprecedented.  They have happened before and will happen again.  What makes today more risky is that many investors have their futures tied to broad index movement of domestic and international equities.

                With such a sobering view of how missed estimates can derail a compounding plan, two main questions arise.  The first is are we entering a prolonged period of flat market returns (we have already gone 10 years with no movement in the S&P 500) and what can be done to earn return on our money.

                Personally, I think the next 3-5 years in the market will be very difficult.  The world economy has morphed into a mechanism that is highly depended on borrowed money and cheap access to capital.  As the credit markets continue unwinding, interest rates have been lowered.  However, banks have reacted in typical fashion and are punishing today's borrowers for yesterday's sins.  Banks have tightened credit to all and made the ability to fund consumption via new debt extremely difficult.  With the debt spigot off, consumption and investment will drop.  Going forward, it will be hard for the economy to generate incremental growth and for companies to garner the investment that is needed to innovate.  The end result will be strong companies in leading industries will have the internal cash flow and access to capital that is needed to grow.  This will allow these companies to increase their economic moat and dominate their respective industries.  Weak companies will not have access to capital, will see their competitive positions eroded and will fade into history.  Within this environment, some companies do well, others will do poorly, yet the broad market will not move materially higher (in fact I think the more likely outcome is more losses for the broad market).  Therefore, a heavily weighted index position will ensure low growth and high frustration.

                To make money in such an environment, the value of solid research will be accorded a premium.  As markets routinely thrash with no direction, good and bad companies see their stock prices rise and fall in tandem.  By having the knowledge of what each company is worth, we buy the companies who are inexpensive and well positioned in their industry, short the overvalued companies who are destined to fail and reap the benefits.  By actively searching for new ideas, we create a universe of stocks that offer the ability to generate return regardless of market direction.

                Using this thinking, we have made a significant change to our portfolio management approach.  Typically, we focus 50%of our portfolio on our research and then a combination of index funds and various trading ideas to round out our exposure.  Assuming the broad market will be flat for years to come, we are now allocating 70% to our best research ideas, removing index exposure and focusing the remaining portfolio on our best trading ideas.  Taking this approach will allow us to leverage the ideas we feel have the most profit potential and avoid committing capital to parts of the market that will not pay a decent rate of return.

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

I have been doing a little bit of "micro-managing" of my portfolio.  I swapped out my VIVO for RMD hoping to catch a bit more momentum, and now, noting that my Lufkin (LUFK) stock, which I just recently purchased 7/16/08 at a cost basis of $91.10 has been struggling while the rest of the market has been rallying, I chose to sell my shares.

They really hadn't hit a sale point, and we shall need to see if this is a reasonable decision or whether by ignoring my own 'trading rules' I was a bit hasty, lost patience with a great company, and instead jumped on a stock that was heading towards a correction.

However, in light of my own sale of Lufkin (LUFK), I am reducing my rating.

LUFKIN (LUFK) IS RATED A HOLD

What has been driving this market higher recently has been the relative collapse in the price of oil.  However, what is good for the market, may not be good for Lufkin (LUFK), which otherwise has superb fundamentals.  The market paints stocks with a very broad stroke, so that the "baby is frequently thrown out with the bathwater".  My approach to investing is strongly related to earnings growth and fundamental performance reflected in a higher stock price.  When a stock starts trading in a fashion tied to a commodity, whether that commodity be oil, gold, or pork bellies, then all bets are off.

I decided to move on.

As reported:

"A strengthening dollar helped lower the price of a barrel of oil. Light, sweet crude fell $4.91 a barrel to $115.11 on the New York Mercantile Exchange, bringing its decline over the past four weeks to more than $30."

That's right.  $30 drop in four weeks.  Virtually a collapse.

Will oil move higher next week or next month?  Will it trade instead closer to $80/barrel than $140 or is it going to trade at the same price?  Frankly, I don't know.  And I am not sure anyone knows for sure anyhow.  But I want to be investing in some sort of rational fashion.  I am not interested in speculating on stocks based on the movement of commodities. 

I suppose it is also just sour grapes.  After all, I wouldn't be complaining if Lufkin was moving higher today instead of being slightly lower while most of the rest of the market powered ahead.

So earlier today, I sold my 70 shares of Lufkin (LUFK) at $89.76.  These shares, as I have noted, were purchased 7/16/08 at a cost basis of $91.10/share.  Thus I had a loss of $(1.34) or (1.5)% on this purchase. 

Generally I wait for a loss to build to (8)% before initiating a sale after a purchase of a new position.  However, as I have said many times, I reserve the right to sell a stock based on any 'fundamental' issues.  With the oil market correcting, I wanted to step aside.  To make sure that my own holdings would not be overly impacted by a correction in a commodity as significant as oil.

With the sale completed, I turned to the list of top % gainers on the NASDAQ where I found an 'old favorite' of mine, Quality Systems (QSII) on the list.

I reviewed the information on QSII and went ahead and purchased 182 shares at $38.1324/share.  I would like to share with you my thoughts on QSII, why I made this purchase, and why

QUALITY SYSTEMS (QSII) IS RATED A BUY

After purchasing shares at $38.13, the stock did decline slightly and closed at $37.80, up $4.51 or 13.55% on the day.

Quality Systems is involved in assisting healthcare facilities implement electronic medical records.  As explained by the Yahoo Finance "Profile" on QSII, the company

"...engages in the development and marketing of healthcare information systems in the United States. Its system automates various aspects of medical and dental practices, and networks of practices, such as physician hospital organizations and management service organizations, ambulatory care centers, community health centers, and medical and dental schools. The company offers proprietary electronic medical records software and practice management systems under the NextGen3 product name."

If you are not familiar with the market potential to electronic medical records, note what this article had to say: 

"The cost for the packaged electronic medical record (EMR) systems for a large teaching hospital is $1.95 million. The number sold at 126 in 2006 is anticipated to grow to 177 in 2013. The replacement cycle is generally six years for these electronic medical record (EMR) systems packages. Rather than rip and replace, systems tend to be upgraded to new versions.

Electronic medical record markets are very significant. All facilities and all medical practices need to move to automated process that replaces manual handling of written patient records. The top 800 facilities worldwide are anticipated to spend hundreds of millions of dollars each to implement electronic patient records. While a lot of that spending will be on proprietary software, a lot of it will be for packaged software solutions."

There is a very large potential market for electronic medical records (EMR):

"Enterprise electronic medical record (EMR) market forecast analysis indicates that the future of care delivery depends on automation of process. The ability to quickly get a picture of patient condition depends on dashboards prepared by the primary care physician that quickly illustrate any noteworthy conditions that a patient may present.

Markets at $1.8 billion in 2006 are anticipated to reach $3.2 billion by 2013.

Worldwide enterprise electronic medical record (EMR) software markets will grow substantially as vendors are able to leverage the EMR expertise to provide competitive advantage from automation of process using IT infrastructure."

But back to Quality Systems (QSII).

It was the announcement of 1st Quarter 2009 earnings after the close of trading yesterday that drove the stock higher in trading today.  Revenue for the quarter ended June 30, 2008, came in at $55.2 million, up 31% from the $42.0 million in the same quarter the prior year.  Net income worked out to $11.1 million, up 40% over the $7.9 million last year.  Fully diluted earnings per share were $.40, up 38% from the $.29/share last year.

As 'icing on the cake' the company announced a 20% increase in the cash dividend to $.30/share from the prior $.25/share payment. 

QSII beat expectations--analysts had been expecting earnings of $.37/share (they came in at $.40), on revenue of $51.9 million (they came in at $55.2 million).   

Regarding longer-term results, we can review the Morningstar.com "5-Yr Restated" financials on QSII and see that we had a reason why we have liked this stock in the past! 

Revenue growth has been steady from $71 million in 2004 to $187 million in 2008.

Earnings have grown without interruption from $.40/share in 2004 to $1.40/share in 2008.  The company initiated a dividend in 2008 at $1.00/share and now have increased it to a $1.20/share rate.

Outstanding shares are quite stable with 26 million in 2004 increasing less than 10% to 28 million in 2008.  (During this same period sales increased by over 100%, earnings by over 200%---so this share dilution is quite modest in comparison.)

Free cash flow is positive and overall growing from $28 million in 2006 to $41 million in 2008.

The balance sheet is solid.  As reported by Morningstar.com, the company has $59 million in cash and $91 million in other current assets.  This total of $150 million in current assets yields a current ratio over just over 2 when compared to the $70.2 million in current liabilities.  Long-term liabilities are quite modest at only $4 million.

Looking at a few valuation numbers, we can see on the Yahoo "Key Statistics" page on QSII, that the company is a small cap stock with a market capitalization of only $1.04 billion. The trailing p/e is a modest 26.20 with a forward p/e (fye 31-Mar-10) of 18.90.  With the rapid growth in earnings expected, valuation works out to be quite reasonable in terms of the PEG Ratio of .99 (5 yr expected). 

Yahoo reports 27.45 million shares outstanding with 17.70 million that float.  As of 7/10/08, there were 5.77 million shares out short.  Compared to the average trading volume of only 246,872 shares (3 month average), this works out to a short ratio of 31 days!  I personally utilize a '3 day rule' for significance, so this 31 day figure is quite convincing!  With the great results out today, and the stock climbing sharply, this could well represent a short-squeeze for investors. 

In addition to the great financial results, the company now pays over a 3% dividend, and last split its stock 2:1 March 27, 2006.

And a chart?

Looking at the "point & figure" chart on Quality Systems (QSII), we can see that the stock has been trading 'sideways' since February, 2006, when the stock peaked at $42.  The stock has hit that level several times only to pull back to lower levels.  The stock with the current move has broken through resistance once again.  It would be nice seeing this stock trade above $44 to confirm this rally has staying power.

To summarize, I chose to step out of my Lufkin (LUFK) even though I still respect the underlying fundamentals in that stock.  I am concerned about the pressures of a continuing decline in the price of oil.  If oil turns around tomorrow, I shall be demonstrating a public lack of any sense of timing.  In any case, I hate to have any of my holdings to be as tied to a commodity price as I suspect, or fear that this stock has been.

Quality Systems (QSII) beat expectations yesterday and came in with strong revenue growth, earnings growth, and also raised their dividend.  The sharp price appreciation was probably driven in part by the oversized short interest outstanding on this stock.  Meanwhile, QSII demonstrates real quality with steady revenue growth, earnings growth, stable outstanding shares, an increasing dividend, growing free cash flow, and a solid balance sheet.

So this stock isn't a fluke either.

Thanks again for visiting! If you have any comments or questions, please feel free to leave them on this website or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Covestor Page where you can monitor my trading portfolio performance, my SocialPicks page where my stock picks are also followed, and my Podcast Page where you can listen to an mp3 or two about some of the stocks written up on this blog.

Have a wonderful weekend everyone and wish me luck!

Yours in investing,

Bob 

Related Stocks:  LUFK, QSII, RMD, VIVO

Valuation Completed: 8/3/08

Rating: Avoid

Comments: For years I have described WM as the housing bubble stock.  Their lending standards were poor and the portfolio they acquired shows it.  Their $235B  on balance sheet loans show a strong mix of option ARMs. home equity and subprime products.  Further, the loans tend to exist in bubble real estate markets (50% of the option ARMS are in California).  To make matters worse, many loans were underwritten to high LTV ratios. 

Looking back, we now know that housing markets have collapsed around the country and that WM's core markets have performed much worse.  Making the reasonable assumption that every 90%+ LTV loan originated own has negative equity and that 1/2 of the loans with 80-90% LTVs have negative equity, WM is staring at massive losses.  Not accounting for credit deterioration in the remaining portfolio, the group of loan mentioned above could account for up to $20B of loan losses.  As of June 30th, only $10.6 of future losses were on the balance sheet.  If this dire situation were to unfold, WM would have negative book value.

Given the many uncertainties in this business model, I have decided to rate WM avoid as opposed to short sales.  Am I being too conservative on my analysis?  Perhaps.  Factors that could allow WM to regain strength would be an increase in house prices, their current borrowers continuing to make loan payments despite negative equity or a strategic buyer who is willing to ignore the balance sheet issues in order to acquire WM's branch system.  All could happen and would drive the price of the stock higher.  However, I do not wish to commit capital on pure speculation and the hope that a future buyer will bail me out of my position.  Instead,  I will ignore the shares and focus on stronger banks

Related Stocks:  WM

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

I am absolutely in love with Meridian Bioscience (VIVO) but with the latest quarter mildly disappointing, and the stock lagging while the rest of the market moves higher, I grew impatient today. and started looking for another vehicle for my investment purposes. 

O.K. it isn't exactly consistent with my trading 'rules'.   But you might recall, did basically a similar thing with my IHS stock, that I chose to sell when it appeared to be acting sickly and took the proceeds and jumped into Graham (GHM) which was probably the smartest move of mine this year (except for my short-term trades in Meridian recently...which were WAY outside my usual trading actions!)

With all of that in mind, and thinking maybe I could 'fine-tune' my portfolio a little, I sold my 171 shares of Meridian (VIVO) shares today at  $25.4844 and went to the list of top % gainers today to find out if there was a better place to park the proceeds.

In light of my own sale of Meridian (VIVO), I am reducing my rating on the stock:

MERIDIAN BIOSCIENCE (VIVO) IS RATED A HOLD

Reviewing the 'top % gainers', I noted that ResMed (RMD) was on the list!  This stock has been an 'old favorite' of mine and I have owned it in the past as well.  After a review of the news which consisted of a strong earnings report, I thought it might be wise to switch from one medical technology firm to another that was acting a bit healthier.

I went ahead and purchased 140 shares of ResMed (RMD) at $43.269.  ResMed (RMD) actually closed at $43.09, up $4.84 or 12.65% on the day. 

RESMED (RMD) IS RATED A BUY

Let me review with you some of the facts that led to my decision to buy shares in this company which, as I have written, is an 'old favorite' of mine. 

First of all, that earnings report.

Yesterday, after the close of trading, ResMed (RMD) reported 4th quarter 2008 results.  Revenue for the quarter increased 23% to $235.2 million from the prior year same period.  Net income was $29.6 million, up from $27.7 million last year.  Diluted earnings per share came in at $.38/share, up from $.35/share last year.  Excluding some one-time expenses, this would have been $.40/share.

Sometimes just as important as the actual result and comparisons to prior quarters, is the question of expectations.  In other words, the result was impressive because the 'street' had been expecting earnings of $.39/share.  And ResMed beat expectations with its $.40/share result.  In addition, with its revenue of $235.2 million, it beat expectations of revenue of $220.3 million according to analysts polled by Thomson Financial.

Sleep apnea is big business.

As this same Reuters article reports:

"ResMed and bigger rival Respironics Inc control about 80 percent of the $2 billion U.S. market for sleep breathing devices, a rapidly growing market as people become more aware of the links between sleep disorders and heart disease and diabetes."

In America alone, it is estimated that 18 million American may suffer from obstructive sleep apnea.  And of these, 10 million are undiagnosed.

Other 'facts' from that same article:

• "The condition affects about 4 percent of middle-aged men and 2 percent of middle-aged women.
• Men in general suffer from sleep apnea more often than women.
• Children can also have sleep apnea.
• Sleep apnea in children has been linked to attention deficit/hyperactivity disorder, or ADHD.
• Some studies suggest sleep apnea runs in families.
• Studies have linked sleep apnea to high blood pressure, heart attack, and stroke.
• Up to 50 percent of people with sleep apnea also suffer from high blood pressure.
• People with sleep apnea are three times more likely to be involved in motor vehicle accidents.
• People with sleep apnea sometimes fall asleep unexpectedly during the day, such as while talking on the phone or driving.
• Risk factors for sleep apnea include being overweight and having a large neck.
• Losing even 10 percent of body weight can help reduce the number of times a person with sleep apnea stops breathing during sleep.
• African-Americans, Pacific Islanders, and Mexican-Americans may be at increased risk for sleep apnea.
• Smoking and alcohol use increase the risk of sleep apnea.
• Continuous positive airway pressure, or CPAP, is the most common, noninvasive treatment for moderate to severe sleep apnea."

I share these fact with you both as an investor as well as a patient who also hooks himself up to his own CPAP machine for the last several years!  If you or someone you know snores at night, has a large neck size, is a bit overweight....now we are talking about most of us lol....and if your significant other notes that you sometimes stop breathing when you are snoring....well get yourself down to a sleep lab...it could mean the difference between life and death!

But looking at the fundamentals, besides that little health plug, we can check with Morningstar.com "5-Yr Restated" results.  Here we can see the steady pattern of revenue growth, the slight dip in earnings last year and the subsequent rebound, the modest increase in outstanding shares, the recently improved record of free cash flow, and the very strong balance sheet. 

Like many stocks recently, the stock price has been under pressure.  Let's take a look at the "point & figure" chart on ResMed from StockCharts.com:

You can see how after June, 2007, the stock broke through support levels at the $40 level.  Even with today's strong rise, the stock hardly looks over-extended.  In fact, it has some upward price appreciation to do before it even confirms this bullish move.  I hope I haven't moved in prematurely, but I believe that the financial results are once again on track and that usually, the stock price follows along.  At least that is my strategy.

Sometimes you got to just jump from one wave and pick up another.  Of course, I don't surf.  But in my mind, that's what investing in this fashion is all about.

I will keep you posted.  Meanwhile, wish me luck with this new purchase. 

If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Covestor Page where my actual trading portfolio is monitored and evaluated, my SocialPicks Page where my stock picks from the last almost two years are reviewed, and my Podcast Page where you can download an mp3 or two of me discussing some of the many stocks I write about here on this website.

I hope the rest of the week goes well and finds you in good health, sleeping well at night without any 'apnea', and finds your portfolio rebounding from the recent correction with profits exceeding losses!

Yours in investing,

Bob 

Related Stocks:  GHM, RMD, VIVO

                In order to grasp the volatility we have witnessed, look at yesterday's activity.  The markets opened higher and stayed at elevated levels.  With the Federal Reserve (Fed) announcing their interest rate decision at 2:15pm, a reasonable expectation would have been for the pre-announcement rally to act as a typical run-up that would be followed by profit taking.  Instead, the market stayed elevated after the interest rate decision and then sprinted higher into the close.  For a market that often failed to maintain bullish momentum, one could argue that the Dow Jones Industrial Average (DJIA) closing 331 points higher (2.94%) on a day when up volume represented 90% of total volume is a sign that we have bottomed and will head higher.  However, when you consider that the DJIA has moved up or down greater than 2% 19 times in 2008(as opposed to large swings 14 times in all of 2007) it becomes clearer that today is an environment where large price changes do not yield immediate trends.  Further with 11 of this year's 19 large moves being down days, one could argue that yesterday's 300 point gain was just a blip in a longer term downtrend.

                As one who studied literature during college, I have always felt I have a grasp over how small subtleties lead to big results.  There is no magic formula that yields consistently strong investment results.  If we have learned anything from the credit crisis, overreliance on black box models leads to disaster.  Initially the outcomes are favorable, but as people put more reliance into methods they cannot fully comprehend, disaster occurs.  From CDOs to various quantitative hedge funds, black box models fail.  The true believers will spin the outcome with the explanation that a billion year event occurred to cause the loss.  In reality, we seemingly experience these statistically impossible events much too frequently for my liking.  Instead of attributing the outcome to a random, unforeseeable event, I find the answer lies in the investment approach.  For me, investing has always been as much art as science.   Granted, hard math is needed to determine how cash flows will develop and what the outcome yields.  However, the choice of growth rates and discount rates has a much larger effect on the ultimate outcome.  By artfully considering multiple scenarios and a range of outcomes, an investor will yield better results than someone who plugs numbers into a model and hopes for the best.

                Considering the need to look at a wide range of outcomes, what thinking can be applied to the current market?  Are the large move of bank stocks and a 3% rally in the DJIA indicative of a major bottom or just another trap being set by the bears?  With the market, the definitive answers to these questions can only be achieved in hindsight.  The post mortem can be handled by the academics in the years to come.  However, as investors we must act today and use those actions to grow our wealth. 

                The DJIA began its most recent decent on May 20^th.  The prior day the DJIA had battled its way back to 13,028.  While this represented a slight loss on the year and a 10% drop from the all-time high, the May 19^th close was an 11% rally from the low of the year recorded only two months earlier.  As the current decline in the DJIA pushed prices lower and into bear market territory, I was looking to my timing model and various other indicators to see if we had reached an oversold bottom.  My timing model became oversold on June 23^rd and quickly reached an extreme oversold scenario on June 26^th.  History had taught me that anytime my model became severely oversold, quick, material gains followed.  Based on this logic, I went very long of the market and awaited the rebound.  That decision turned out to be correct as my portfolio performed well and added a fair amount of alpha over the following month.  However, this high level view obscures what truly happened and following it blindly would lead to poor decision making.

                While performance was strong since I made the decision to go aggressively long, little of the performance is attributed to the market itself.  When I received the extremely oversold reading, the S&P 500 closed at 1,283.  By the moment my timing model had returned to a normal reading, the S&P 500 was trading at 1,260.  For an investors who saw the oversold reading and went long the broad market, a loss of 2% occurred.  This is the first time an extremely oversold market delivered losses to a bullish investor.  As of yesterday, my timing model is now 67% long and on the verge of becoming overbought.  The price of the S&P 500 - 1,286.  Basically, we have gone from oversold to overbought with no movement in the broad market.  Considering that many stocks would need to drop 5-7% in order to return the market to a neutral reading, extreme caution is advised.

                So if the market was flat, how was I up?  The simple answer is stock selection.  In today's environment, solid proprietary research has more value than ever.  Investors are taking a shoot first; ask questions later approach to investing.  The large price swings are selling off good and bad companies alike.  For someone with patience, discipline and faith in their work, you could buy assets at bargain levels and wait for a quick rebound in price.

                As an example, consider Motorola (MOT).  As has been well publicized, their handset business has been weak as new product development stalled.  However, their balance sheet is strong and their other operating businesses have good margins and wide economic moats.  On July 15^th, MOT closed at $6.76.  Knowing they have over $2 of net cash on the balance sheet, I bought the shares understanding that I was getting their operating businesses for just over $4 per share.  This price was incredibly cheap and would eventually reward patient investors.  Luckily, I did not have to wait very long.  Better than expected earnings and new management has allowed the stock to rally 44% in three weeks.  An investor who had done their homework and had the courage to stand by their conviction realized a large gain very quickly.

                Recognizing today's environment as a stock picker's market has large implications for portfolio construction.  To realize gains in the future, less reliance should be placed upon index funds and sector rotation.  Instead, the focus should be on specific, value-added ideas.  By focusing on core research and risk management, we can build a portfolio that is skewed for long term performance while controlling risk.  The opportunities will always exist to find the next Motorola.  Patience and discipline is the recipe needed to search out good ideas while courage and faith in your work is needed to buy those stocks when everyone else says sell.

Related Stocks:  MOT

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

I really hated to do this.  After owning this stock for one whole day (if you don't count the weekend) I am bailing.

I hit my 8% loss limit and sold my shares.  

I know what all of my 'Seeking Alpha' critics will say.  Trading publicly and writing about every one of your trades, including your mistakes, is just something I do around here.  It must be one of my masochistic tendencies :).

But rules are rules, and after a purchase of a position, I sell the shares if they decline 8%.  No matter what.

A few moments ago I sold my 280 shares of comScore (SCOR) at $19.52.  These shares were purchased this past Friday on August 1, 2008, at a cost of $21.505.  Thus, I had a loss of $(1.985) or (9.2)% on this position.

I still like the stock and am selling the stock not because of some fundamental reason that I know about, but rather because the sheer negative price pressure resulted in a loss that triggered my sale.

Thus, I am reducing my rating a notch.

COMSCORE (SCOR) IS RATED A HOLD

Unfortunately, I can already hear the hoots and howls over at SA.  They are well deserved.  

How can I reduce my rating so quickly?  I can only answer, would it be fair to leave my rating as "BUY" when I go and SELL?  

Furthermore, would it be fair to lower my rating to "SELL" just because I have sold my own shares?  Especially when I use my own idiosyncratic approach to buying and selling my shares?

I don't have a good answer for these questions.

I do know that trading in the public's eyes isn't easy.  But I shall be sticking to all of my rules as I try to make heads or tails of investing on my Blog and in my actual trading account.

Wish me luck.  I needed some of that today.

Yours in investing,

Bob

Related Stocks:  SCOR

Valuation Completed: 8/3/08

Rating: Neutral

Comments:  The stock has had a tremendous rally off crisis lows.  Solid earnings and an increased dividend has driven the price higher.   While management has done an excellent job, I fear that their large home equity portfolio will cause more problems.  For credit loss I have used data as of June 30th and applied the following losses:

  1st Mortgage 2% - 1.5B

   Home Equity 12% - 9B

   Credit Card 5% - 1B

   Other 6% - 3.2B

This implies a lifetime loss of $14.7B versus a recognized loss of $10.2B ($2.7B charge off and $7.5B provision).  The main differencel I have with management lies in the home equity business.  My view is that with a dramatic drop in home prices,  nearly every home equity loan that defaults will suffer massive losses as the equity supporting the loan has been eliminated.  WFC's management has a more hopeful view. 

The beauty of investing is that I could be too conservative and this view will cost me nothing.  To paraphrase Warren Buffet, an investor has the luxury of waiting for the pitch they want before swinging.  I will be conservative on loan losses and decide not to buy until the price of the stock meets my conservative view.

Fair value target is $28 with an entry price of $22.

Related Stocks:  WFC

Valuation Completed: 8/03/08

Rating: Buy

Comments:  They are a solid, well run retailer.  Given the housing debacle and the credit crunch, it is easy to see why these shares have underperformed the past few  years.  Given the large decline, HD is approaching a level I like.

Assuming FY2009 earnings approach a level last seen in 2004, I have developed a conservative valuation of $30.  To get to this point, housing will collapse and take years to recover.  During that time period, HD will continue to operate their core business and buy back shares.  Doing so will allow the valuation to develop and for me to profit.  While waiting, I earn a reasonable dividend yield that is inline with a 5yr US Treasury.  Currently, I rate the shares buy and would purchase  at a 20% discount to fair value, thus implying an entry of $24. 

Related Stocks:  HD

Valuation Completed: 8/03/08

Rating: Neutral

Comments: This is a company I have followed for years.  It has always traded at a premium, but has seen its price decimated over the last year.  Management has been firm and it appears that the Street has lost confidence in their numbers.

By continually reducing guidance, profitability is uncertain.  Although the company says 2009 will be profitable, analysts are predicting a loss.  My models have assumed lossed in FY 2009 with a slight profit in 2010 and a resumption of growth in 2010.  One of my concerns is that all of their growth has been via acquisition because same store sales continue to decline.  They have been able to purchase other companies at small premiums, but I would like to see some organic growth.

Currently, the balance sheet is a mess with a massive level of debt.  This eliminates my typical safety net.  However, the company has also dropped to a very cheap level.  On a pessimistic, low growth scenario BONT is worth $6.  I would like to buy at a 25% discount.  Knowing that risk control is key, I would initiate a position below $4.50. 

Related Stocks:  BONT

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice! As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

As I wrote up previously, my shares of Graham (GHM) hit a sale point on the upside (even while the market continued to correct!), and being under my maximum of 20 positions, this trade generated a 'permission slip' entitling me to add a new position.

And add a position is what I did!

Like this Richard Seaman photo of surfers, I try to jump off one wave and catch the next!  O.K., I have NEVER, EVER been surfing, but I have watched surfers :).  

So looking for the next 'wave, I headed to my 'wave chart', that is the stocks making the top percentage gainers list.  

Checking the list of top % gainers from the NASDAQ on Friday, I came across comScore (SCOR), a stock that I have not previously reviewed, and liked what I saw.  I purchased 280 shares of comScore (SCOR) at $21.505.  SCOR traded a bit erratically through the day and closed at $20.60, up $1.52 or 7.97% on the day.  I am a bit 'underwater' on this stock, with an unrealized loss of $(.905) or (4.2)% since my purchase earlier the same day!

Let's go over this stock, and let me explain why

COMSCORE (SCOR) IS RATED A BUY

What exactly does this company do?

According to the Yahoo "Profile" on comScore (SCOR), the company

"...provides a digital marketing intelligence platform that helps customers make informed business decisions and implement digital business strategies in the United States, the United Kingdom, France, Germany, and Canada. Its products and solutions offer insights into consumer behavior, including objective, detailed information regarding usage of their online properties and those of their competitors, coupled with information on consumer demographic characteristics, attitudes, lifestyles, and offline behavior."

How about their latest quarter?

It was the release of 2nd quarter 2008 results after the close of trading that drove the stock higher Friday.  Total revenue for the quarter climbed 38% to $28.8 million, from $20.8 million in the prior year same period.  Net income climbed 38% to $1.7 million from $1.24 million the prior year.  Earnings per share came in at $.06/share compared to $-0- the prior year.  Excluding a recent acquisition of M:Metrics, this was $.09/share.

The company beat analysts' expectations of $.07/share on $27.69 million in revenue according to Thomson Reuters.

Topping off the rest of the good news, the company also raised guidance for the upcoming 3rd quarter.

"For the third quarter, comScore expects a profit of 1 to 2 cents per share, or 13 cents to 14 cents per share when excluding items, on revenue of $30.2 million to $30.7 million.

Analysts, whose estimates typically exclude special items, expect a profit of 8 cents per share on $29.5 million in revenue."

However not all of the news was good as the company, while raising 2008 revenue expectations to $119.7 to $120.4 million (ahead of analysts who were expecting $116 million), did lower earnings to $.22 to $.23/share (or $.71 to $.73/share on an adjusted basis, while analysts had been expecting $.36/share.

One analyst reiterated his "Buy" rating--as reported:

"In a note to investors, Jefferies & Co. analyst Youssef H. Squali reiterated his "Buy" rating for comScore and raised his price target by $1 to $28, saying that demand for the company's products is strong despite a difficult economic environment.

"While not cheap, comSore is a compelling value considering its sound fundamentals, leadership position in a growing segment of the Internet and relative resiliency to a weakening economy," he said."

What about longer-term results?

Examining the Morningstar.com "5-Yr Restated" financials on SCOR, we can see the steady picture of revenue growth from $23 million in 2003 to $87 million in 2007 and $95 million in the trailing twelve months (TTM).

This company is just turning profitable with losses diminishing from $(6.96)/share in 2003 to break-even in 2006, $.88/share in 2007 and $.96/share in the TTM.

No dividends are paid and the company aggressively expanded its shares outstanding in 2007 to 18 million from 4 million in 2006.

Free cash flow is positive and growing with $3 million in 2005, $9 million in 2006, $18 million in 2007 and $22 million in the TTM.  The balance sheet is solid with $54.0 million in cash and $76 million in other current assets, which when compared to the $45.5 milllion in in current liabilities yields a current ratio of 2.86.

What about some valuation numbers?

Checking Yahoo "Key Statistics", we can see that this is a small cap stock with a market capitalization of only $589.63 million.  The trailing p/e is a bit rich at 28.07, with a forward p/e (fye 31-Dec-09) estimated at 39.62.  The PEG (5 yr expected) is also richly priced at 2.29.

Utilizing the Fidelity.com eresearch website for some additional valuation numbers, we can see that the Price/Sales (TTM) is reasonable relative to its peers, with SCOR coming in at 6.03 relative to an industry average of 7.53.

When measured by the Return on Equity (TTM), the company also does well relative to its peers coming in at 41.24% vs. the industry average of 28.31%.

Returning to Yahoo, we can see that there are 28.62 million shares outstanding but only 8.31 million that float.  As of 7/10/08, there were 2.28 million shares out short, representing 5.2 trading days of volume (the short ratio).  This is well above my own '3 day rule' for short interest, so we may have actually been seeing a bit of a short squeeze on Friday.

No cash dividends are paid and no stock dividends are reported on Yahoo.

What does the chart look like?

The chart is actually one of the weakest findings on this particular stock.  Reviewing the 'point & figure' chart on comScore (SCOR) from StockCharts.com, we can see how the stock price actually peaked in October, 2007, at $42/share, before dipping all of the way down to $17.5 in March, 2008.  The stock has recently been attempting to move higher, breaking through resistance and and making higher lows, but the upward move is certainly not confirmed yet.

Summary:  What do I think?

Well, I like this stock enough to buy some shares!  Seriously, they are a very small company in a very interesting niche doing research on internet traffic.  They certainly also have to deal with Google, the '800-pound gorilla' in the field of internet traffic. Their price has been very volatile and recently has been under pressure.

However, the latest quarter was strong, beating expectations and the company also raised guidance.  Their Morningstar.com numbers show a certain consistency in improving financial results that I like.  Valuation appears a bit rich, but the company is just turning profitable.  Finally the chart, while recently a bit more optimistic, is far from being over-extended.

Thanks again for visiting my blog!  If you have any comments or questions, please feel free to leave them on the website or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Covestor Page where you can monitor my actual trading portfolio performance.  In addition, consider dropping by my SocialPicks page where my past stock picks from the last two years are reviewed.  Finally, consider visiting my Podcast Website, where you can download some mp3's of me discussing some of the many stocks reviewed on this website.

Wishing you all a healthy and financially profitable week ahead!

Yours in investing,

Bob

Related Stocks:  GHM, SCOR

Valuation Completed: 8/2/08

Rating: Trading Buy

Comments:  This is an ugly revenue profile.  Most of their businesses have declined or are beginning to decline.  Mtg banking had been a big revenue driver and that is going away.  I don't know how to get any clarity on the revenue front.  The company's stock now sells below the offering price of their IPO five years ago.  Since that time, they have bled money and seen their liquid book value decrease from $11 to $1.50. 

With the lack of clarity, opportunity may exist.  To forecast an income statement using a current run rate approach,  I assume the following:

 Revenue:

   Investment Banking - $150mm

   Institutional Brokerage - $115mm

   Asset Management - $25mm

   Principal Investments - $185mm

 Total Revenue - $475mm

 Less Interest Expense - ($300mm)

 Less Non-interest Expenses - ($565mm)

 Total Operating Loss - ($390mm)

This analysis assumes compensation expense inline with 2007.  If business drops,  that number could be cut sharply and may yield nearly $200mm of cost savings.  With further expense cuts, management may be able to escape the credit crisis near a break even run rate.

If we assume slight losses for the next two years and then minimal profitability, the operating business is worth close to $2.  With the stock trading below $2, I would view FBR as an option on a rebound in the capital markets.  The liquid book value of $1.50 should provide support for the shares.  If the capital markets rebound FBR could easily trade above $5.  If the markets stagnate, $1.50 would be a reasonable downside.  With the potential gain far outstripping the downside, FBR represents a reasonable speculation for risk seekers.

Related Stocks:  FBR

Valuation Completed: 8/2/08

Rating: Neutral

Comments:  The banking industry is shaping up to be the stories of the haves vs. the have nots.  Certain banks are well capitalized, adequately reserved and possess discipline managements.  The others have weak management teams, low credit reserves and are capital restrained.  To me, you would like to buy the strong and either avoid or short the weak. 

JPM is one of the strong.  They possess one of the best management teams in the industry, have ample capital and strong  credit reserves.  As a stress test, I assumed that JPM would suffer a 10% loss on their unrated wholesale lending business and 7% losses on their consumer portfolio.  This would result in a total loss of $19B versus current recognized credit losses of $14B ($4.5B YTD charge offs and $9.5B of consumer reserves).  While the loss would be large, the bank would still be well capitalized.

Assuming a pending $5B write down, I derive a $45 target price based on multiple valuation methods.  With a current earnings' yield of 3.63%, one could make a rational argument that this stock should trade closer to $55.  For me, I will use $45 as my target price and would like to buy the stock at a 20% discount to fair value.  Therefore, I would look to initiate a position near $36.

Related Stocks:  JPM

Valuation Completed: 8/2/08

Rating: Neutral

Comments: As a long standing  owner of PFE, I have suffered as the company continues to disappoint and the share price sinks.  Since 1999 the shares have been going from the upper let to the lower right as the shares dropped from above $45 to the current level.  During this time, there has been business reorganizations, changing management and a failing pipeline.  Since 1999, PFE has spent over $55 Billion on research and development with very little to show for the effort and money spent.   Also, the level of R&D spending has been increasing sharply over the last few years.  For a company with a $125B market cap, this is a stunning amount of money.  Instead of pouring the funds into R&D management could have either retired almost half of this shares outstanding via share buybacks,  bought 50% of Genentech or purchased  80% of Amgen.  Further, with AAA credit rating PFE borrows at a spread of 50bp over treasuries.  If management wishes to continue with the R&D investment, why not borrow in the credit market and use the proceeds to buyback shares at the current low levels?  With only $7B of long term debt, opportunities exist for financial engineering.

Given my frustration with management, what approach does an investor take?  For me, I maintain my position and would encourage others to become buyers.  The pending patent expirations have weighed on the stock.  If you make the assumption that drugs losing patent protection provide no income after the patent expires, the operating business is still worth $25.  If PFE either retains some sales via the generic market or replaces the drugs with new product, the price could easily trade into the $40s.  Also, with a dividend yield over 5% we are paid to be patient.  I have always said that fair value will eventually be recognized by the market.  In time we should see the market recognize the value of this business or await management to realize the steps they could take to enhance shareholder value.

Related Stocks:  PFE

Valuation Completed: 8/2/08

Rating: Neutral

Comments:  Technology stocks rarely pass my value test.  When they do, I pay particular attention.  With MOT, we see a stock where momentum investors rushed in during 2005 as some hoped the handset business would overtake Nokia.  As time passed, the stock fluctuated between $15-20 while Carl Icahn battled the board and attempted to extract value.  As shares passed from momentum traders to short-term traders looking to piggyback on Icahn, MOT has been left with a shareholder base that was more interested in short-term fluctuations than long-term value.  Therefore, when the handset business began to falter, short-term investors went to the exit and the price collapsed.

Within the price collapse is where I find opportunity.  I agree with all who bemoan the problems of the handset business.  For years, MOT has not been able to create  a follow-up to the Razr.  This has caused MOT to morph from  must-have phones into another commodity phone producer.  With this transition, margins and sales drop.  When you have a large internal infrastructure that can not be redeployed quickly, this margin drop creates the losses we witnessed in 2007.

While I agree with the markets pessimism over the handset business, Mr. Market has ignored that MOT's other businesses are profitable, growing and have strong economic moats.   Assuming the handset business remains troubled for the next 2 years and then resumes growth, the operating business is worth $10.  Further, MOT has a liquid book value of  $3 and net cash of $2.  I will use the net cash and operating valuation to derive a fair value target of $12.  As always, buy at a discount to fair value in order to provide a margin of safety.  In this case, I will use a 30% discount and would add to the position below $8.50.

Related Stocks:  MOT

Valuation Completed: 8/1/08

Rating: Buy

Comments:  This a disciplined bank with a strong balance sheet.  However over the past few years, management has done a poor job.  There has been little growth, high expenses and no true focus on corporate strategy.  The share price has been supported by the fact that STI has a banking footprint that would be attractive as a takeover target. 

As the credit crisis unfolds, the takeout premium has vanished.  STI now trades nearly a 50% discount from last year (a few weeks ago it was trading down 65%).  At current prices, STI either represents an ideal investment or is another example of a poor quality bank that was propped up on false takeover expectations.  Which is it?

STI avoided most of the toxic practices that hurt national banks.  Instead, STI is a regional lender who focuses on their core competencies.  This makes the analysis easier as they key variable is assessing the loan portfolio and determining a range of expected future losses.  As of December 31st, STI had a credit reserve of $1.3B.  I think the future loss will be closer to $3.6B,  My loss calculation is based on the following assumptions:

   Residential Mortgage - 10% frequency and 20% severity for 2% loss - $656mm

   Credit Card - 20% frequency and 25% severity for 5% loss - $42mm

   Home Equity - 30% frequency and 40% severity for 12% loss - $1.8B

   Construction - 10% frequency and 40% severity for 4% loss - $550mm

   Commercial - Double current reserve  - $400mm

   All Other - Double current reserve  - $200mm

As of June 30th, STI has recorded $619mm of credit losses and built a credit reserve of $1.8B.  Together, they have recognized future credit losses of $2.4B.  While this is a step in the right direction, it is still short of my expected loss of $3.6B.  Although more credit losses may arise, the bank has created a risk profile where capital ratios are adequate and the dividend should be secure.

Even though STI does not represent the ideal trade I would search for, compelling value exists.  From a valuation perspective, I think STI is worth $60.  This number is consistent across 4 different pricing techniques.  Given my desire to purchase an asset at a 20% discount to fair value, I would look to establish a position at a price below $48.

Related Stocks:  STI

Valuation Completed: 8/1/08

Rating: Buy

Comments: In uncertain markets, we rely upon management to make the proper decisions.  A management team who executes will exit the crisis strong while those who fail will see their competitive advantage drop.  BAC's core strengths are impressive.  They maintain the largest percentage of interest free deposits of any national bank, have a large branch presence and now are the largest mortgage company in the county.  What about management's decisions?  The events of the past year do not paint a pretty picture.  BAC did a terrible job in the investment bank and overpaid for both MBNA and LaSalle.  To be fair, the investment in China Construction Bank was tremendous and I think the purchase of Countrywide will pay large rewards over the years to come.  With the conflicting data, I will judge BAC management as above average, but not superb.  Therefore, I expect the core banking franchise to deliver the bulk of the stock's performance.

Looking at the baking franchise, a few items grab my attention.  First, the business continues to operate well and all new activity is being done at very profitable levels.  While new business is profitable, the looming question surrounds their risk profile and expected future losses.  As of 12/31/07, I find both their credit loss assumption and capital levels to be too low.  The year end credit reserve reflected future expected losses of $12B versus what I think will be future losses of $23B.  I derive my loss number as follows:

   Residential Mortgage - 10% frequency and 20% severity for 2% loss - $5.5B (mgmt at 1%)

   Credit Card - 20% frequency and 25% severity for 5% loss - $4B (inline with mgmt)

   Home Equity - 30% frequency and 40% severity for 12% loss - $11B (mgmt at 1%)

   All Other - Double current reserve  - $2B

While this is an ugly picture, the positive news is that BAC management has addressed the issue.  Through June 30th, BAC has charged off $6.3B and increased their credit reserve to $17.6B.  Therefore, credit losses recognized and reserved for are $23.9B versus my estimate of $23B.

So how do we distill all this data?  BAC has positioned their business where the credit losses on the balance sheet are a fair view of future expected losses.  From here, any additional losses will reflect changes in the credit environment.  With Tier 1 capital over 8%, BAC should be able to avoid issuing new equity or reducing their dividend.  From a valuation perspective, a dividend discount and P/E approach yields fair value of $45.  An earnings yield approach delivers fair value near $60.  I would like to buy at a discount to the lower number and will initiate a position below $40.  At current levels, BAC represents a solid company with a high divided selling

Related Stocks:  BAC

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

The market had another dismal performance today with the Dow closing at 11,326.32, down (51.70), and the Nasdaq down (14.59) at 2,310.96.  The S&P index dipped (7.07) to 1,260.31.  Oil rebounded from the recent correction and climbed $1.02 on the day to $125.10/barrel.

In spite of this miserable trading environment, my shares in Graham (GHM) enjoyed a nice move higher, closing at $101.97, up $12.97/share or 14.57% on the day.

I acquired my original 105 shares of Graham (GHM) 5/30/08 (just two months ago) at a cost basis of $64.48/share.  Two weeks ago, I sold 15 shares of Graham (1/7th of my holding) at $85.46, representing a gain of $20.98/share or 32.5% since purchase.

The 30% appreciation level is, as you may know, my first 'targeted' appreciation level at which time I sell 1/7th of my holding and use this as a "signal" to be buying a new position.  The next appreciation target is at a 60% appreciation level.

Today, after announcing 1st quarter 2009 results with sales climbing 38.3% to $27.6 million from $20.0 million in the year-earlier same period, and net income up over 100% to $5.7 million or $1.11/diluted share compared to earnings of $2.7 million or $.53/diluted share the year earlier, the stock literally exploded on the upside.  And that in the midst of a nasty market environment.

With the stock climbing to the 60% appreciation level, I sold 1/7th of my now 90 share posi