Are the Earnings at Lear Hiding Something?

Here at The Motley Fool, I've long cautioned investors to keep a close eye on inventory levels. It's a part of my standard diligence when searching for the market's best stocks. I think a quarterly checkup can help you spot potential problems. For many companies, products that sit on the shelves too long can become big trouble. Stale inventory may be sold for lower prices, hurting profitability. In extreme cases, it may be written off completely and sent to the shredder.

Basic guidelines
In this series, I examine inventory using a simple rule of thumb: Inventory increases ought to roughly parallel revenue increases. If inventory bloats more quickly than sales grow, this might be a sign that expected sales haven't materialized. Is the current inventory situation at Lear (NYSE: LEA  ) out of line? To figure that out, start by comparing the company's inventory growth to sales growth. How is Lear doing by this quick checkup? At first glance, OK, it seems. Trailing-12-month revenue increased 18.4%, and inventory increased 15.1%. Comparing the latest quarter to the prior-year quarter, the story looks decent. Revenue increased 11.2%, and inventory expanded 15.1%. Over the sequential quarterly period, the trend looks healthy. Revenue grew 1.4%, and inventory dropped 10.0%.

Advanced inventory
I don't stop my checkup there, because the type of inventory can matter even more than the overall quantity. There's even one type of inventory bulge we sometimes like to see. You can check for it by examining the quarterly filings to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a single category.)

A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it "positive inventory divergence."

On the other hand, if we see a big increase in finished goods, that often means product isn't moving as well as expected, and it's time to hunker down with the filings and conference calls to find out why.

What's going on with the inventory at Lear? I chart the details below for both quarterly and 12-month periods.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FQ = fiscal quarter.

Let's dig into the inventory specifics. On a trailing-12-month basis, raw materials inventory was the fastest-growing segment, up 15.9%. On a sequential-quarter basis, each segment of inventory decreased. With inventory segments moving opposite directions for the periods we're considering, this one is a toss-up.

Foolish bottom line
When you're doing your research, remember that aggregate numbers such as inventory balances often mask situations that are more complex than they appear. Even the detailed numbers don't give us the final word. When in doubt, listen to the conference call, or contact investor relations. What at first looks like a problem may actually signal a stock that will provide the market's best returns. And what might look hunky-dory at first glance could actually be warning you to cut your losses before the rest of the Street wises up.

I run these quick inventory checks every quarter. To stay on top of inventory and other tell-tale metrics at your favorite companies, add them to your free watchlist, and we'll deliver our latest coverage right to your inbox.

• Add Lear to My Watchlist.

9 Stocks With CEO Buys of Over $100,000 in the Past Week

Below are 9 stocks where the CEO has bought company stock in the past week. Each of these purchases are of a significant enough size to attract attention in the market and two, in my opinion, are particularly noteworthy. Chesapeake Energy (CHK) CEO Aubrey McClendon almost went broke when he owned stock on margin in 2008. He’s back this week with a major purchase. In addition, new Sears (SHLD) CEO Lou D’Ambrosio ponied up $1 million for company shares last week.

Here are the 9 stocks from the past week with CEO buys of at least $100,000:

Chesapeake Midstream Partners (CHKM): This company was formed last year from Chesapeake Energy and Global Infrastructure Partners as a Master Limited Partnership (MLP). CHKM operates pipelines and is 84% owned by the two companies above. If you’re interested in learning more, there was a good article written recently entitled Chespeake Midstream: Problems with Potential. CHKM obviously is heavily dependent on Chesepeake Energy. CEO Michael Stice bought $100,000 worth of shares on March 7 and now owns more than 12,000 shares.

Chesapeake Energy (CHK): Joining Stice in his bullishness was CEO Aubrey McClendon. He bought nearly $500,000 of company stock on the open market on March 8. CHK’s board has been under pressure for giving huge bonuses and options to McClendon since a margin call in 2008 wiped him out. You may remember that they even purchased his vintage maps. Carl Icahn’s recent stock purchases seem to be sobering CHK up a bit. Let’s just hope that McClendon didn’t use leverage for this purchase.

Western Asset Emerging Markets Income Fund II (EDF): EDF is a closed end fund focusing on emerging markets. CEO Peter Wilby bought 5,000 shares on March 8 totaling about $120,000.

The Bancorp (TBBK): This cleverly named bank held a public offering on March 2 and raised $50 million. CEO Betsy Cohen participated in the offering by purchasing 97,500 shares, totaling about $804,000. The Bancorp serves small and medium size businesses in the Philadelphia and Wilmington, DE area.

Western Gas Partners, LP (WES): Western Gas Partners is an MLP formed by Anadarko Petroleum. They priced a public offering at $35.15 on March 1 and CEO Donald Sinclair participated by purchasing 11,380 shares. The proceeds are being used to pay down a line of credit. Their dividend yield is currently 4.4%.

Cenevo (CVO): CEO Robert Burton purchased $387,000 worth of shares on March 4. He currently owns almost 5% of the company. Cenevo makes envelopes, forms, and labels, and does commercial printing. The company recently announced a quarterly loss of $0.16 and made two acquisitions last quarter, including buying the envelopes products group from MeadWestvaco.

China TransInfo Technology (CTFO): After making two recent purchases, CEO Xia Shudong made another purchase on March 3. This time he bought about $104,000 worth of shares. I discussed his purchases last week. CTFO is a Chinese technology company that focuses on transportation planning, toll collection, taxi monitoring and other related applications.

CleanTech Innovations (CTEK.PK): CleanTech is another stock I mentioned last week. CEO Lu Bei bought $240,000 of shares on March 3 after also buying $240,000 of shares on March 1. He owns more than 50% of the outstanding shares.

Sears Holdings (SHLD): Eddie Lampert released the company’s annual letter two weeks ago and announced that Lou D’Ambrosio would be taking over as CEO. D’Ambrosio immediately purchased about $1 million worth of stock. Previous CEO Bruce Johnson had served as the interim CEO for three years. Sears' stock ran up above $120 per share in May last year, but recently has traded in the $85 range. It has been incredibly volatile through the years, but apparently D’Ambrosio feels comfortable making this substantial investment now.

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

Oil Falls Hard on Dollar’s Strength, OPEC Move

Crude oil futures fell more than $3 on Wednesday morning, dropping below $97 per barrel, as the dollar surged against the Euro. The dollar’s strength helped drive oil buyers away and depressed oil prices. OPEC also agreed today to keep its current output steady. The group also said that “world oil demand is forecast to increase slightly” next year, but “this rise is expected to be partially offset by a projected increase in non-OPEC supply,” the Wall Street Journal reported.

In addition, the American Petroleum Institute said late Tuesday that crude stocks rose by 462,000 barrels.

Oil service stocks fell, with Schlumberger (SLB) falling 3.9% and Halliburton (HAL) dropping 2.8%. Hess (HES) fell 3.1%. Most of the major integrated companies like Chevron (CVX) were down between 1% and 2%.

Losses on RMBS Set to Rise as Support Programs Expire

Loss severities on distressed U.S. residential mortgage loans are likely to rise this year as several key government support programs expire, according to Fitch Ratings.

Low mortgage rates, homebuyer tax credits and government directed loan-modification programs have led to an improvement in home prices and loss severities since second quarter-2009. But the expiration in the coming months of both the homebuyer tax credit and the Federal Reserve’s $1.25 trillion MBS purchase program will increase negative pressure on home prices and loss severities, according to Senior Director Grant Bailey.

Additionally, an increase in the liquidation of loans with unsuccessful loan modifications is expected to add to the supply of distressed inventory in the housing market. ‘Servicers are further along in identifying borrowers ineligible for modifications and will likely be more aggressive in liquidating those loans this year compared to last,’ said Bailey. ‘Less costly alternatives to foreclosure, such as short-sales, should help stem rising loss severities due to the lower costs and speed of the resolution.’

Loss severities on loans resolved through short-sales are approximately 10% lower than loss severities on loans in which the servicer takes possession of the property. Additionally, the seasonal increase in housing activity through the summer may delay the full impact of the withdrawal of the government support programs until later this year.

In the two years prior to the recent improvement, national home prices dropped approximately 30% while loss severities on loans which incurred losses doubled to record highs of 43% for private-label Prime loans, 58% for Alt-A loans and 72% for Subprime loans.

Will ePlus Whiff on Revenues Next Quarter?

There's no foolproof way to know the future for ePlus (Nasdaq: PLUS  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.

A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like ePlus do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is ePlus sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. ePlus's latest average DSO stands at 227.0 days, and the end-of-quarter figure is 202.2 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does ePlus look like it might miss its numbers in the next quarter or two?

Investors should watch the top line carefully during the next quarter or two. For the last fully reported fiscal quarter, ePlus's year-over-year revenue grew 18.2%, and its AR grew 43.4%. That's a yellow flag. End-of-quarter DSO increased 22.7% over the prior-year quarter. It was up 249.0% versus the prior quarter. That demands a good explanation. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

• Add ePlus to My Watchlist.

Inflation, Job Woes Weigh on ETFs

Exchange traded funds (ETFs) turned flat on Thursday after mixed economic data raised concerns about the labor market and higher inflation.

• The Labor Department report said the number of U.S. workers who filed new applications for jobless benefits surged by 35,000 last week to 445,000. The four-week average of new claims rose a much smaller 5,500 to 416,500. The moving average is considered a more accurate measure of employment trends because it evens out fluctuations in the weekly data that can give a distorted picture of the labor market. The number of people who continue to receive unemployment checks, meanwhile, dropped. As workers become more discerning about spending investors can consider the First Trust Consumer Staples AlphaDEX (FXG), which is up 0.6% so far today.

• U.S. wholesale prices climbed 1.1% in December, largely reflecting a spike in gasoline, the Labor Department reported. The seasonally adjusted increase in producer prices last month was the biggest since last January, according to government data. Wholesale prices have climbed 4% over the past 12 months, but the core rate has risen at a much slower pace — 1.3%. Low inflation is generally viewed positively, but sometimes it reflects weak economic conditions. United States Gasoline (UGA) is down today, but in the last three months it has gained nearly 20%.
• The U.S. trade deficit narrowed for a fourth straight month in November, confounding economists who had expected a rebound, government data showed Thursday. The nation’s trade deficit contracted a slight 0.3% to $38.3 billion from a revised $38.4 billion in October, the Commerce Department said. This marked the smallest trade gap since January. The last time the deficit shrank for four months in a row was during the global financial crisis — from late 2008 into early 2009. Both exports and imports rose in November, but exports expanded at a slightly faster pace. iShares Dow Jones U.S. Industrials (IYJ) is flat today in the wake of the news.
• Shares of Marathon Oil Corp. (MRO) surged more than 8% in early trading after the company said its board of directors has approved a plan to split the company in two. The Houston-based energy company said it would spin off its refinery business, which would become the fifth-largest U.S. producer of gasoline and other fuels, in order to focus on oil and gas exploration. PowerShares Dynamic Energy (PXE), which counts Marathon as 5.4% of its total holdings, is up a moderate 0.3% so far today.

Disclosure: No positions

First Steps Toward A European Banking Union

Did Europe really take its first steps toward a banking union?

It appears that they did, in an all-night session of eurozone officials at the EU summit. An agreement was reached concerning the creation of a single bank supervisor, under the charter of the European Central Bank.

The “change in banking supervision could be the most far-reaching of all the decisions taken. Instead of the hotchpotch of 17 different bank supervisors, there will now only be one for all eurozone banks, a major step towards a so-called banking union banking union that is arguably the most significant change to the single currency area since it was created.”

This would be significant step. It would be significant because you now have 17 different sovereignties, 17 different banking regimes, and 17 different regulatory bodies.

Going to a single banking union would be very similar to going to a single currency ... with all the problems of managing a single currency.

Given the current system, many of the sovereign governments in the EU have used their banking to support their undisciplined fiscal policies. Up until recently, all sovereign debt was considered to be riskless, so the banks were able to buy up lots and lots of this sovereign debt and use it in a way that allowed them to meet regulatory capital requirements.

As a consequence, these unconstrained national governments could rely on the banks to buy their debt and the banks could rely on national regulatory bodies to uphold their capital positions because they held this “riskless” national debt. On and on it went in a vicious circle between the banks and the sovereigns. And the affected national governments “talked up” their banks as the banks drifted more and more into trouble with some becoming insolvent.

In order to get through the current banking crisis, eurozone officials agreed to “radically restructure” the €100 billion recapitalization plan requested by Spain. Under the new agreement the funds would go directly into Spanish financial institutions, removing the responsibility for administering the bailout from the Spanish government itself.

Also, in the agreement, Italy will get some concessions in how it is treated in the upcoming plans and further review will be given to Ireland, consistent with these efforts.

Bottom line, the eurozone nations will no longer have the responsibility for bailing out their own banks. The fund that will be used to provide the pool of funds for these bailouts will be the European Stability Mechanism (ESM). Currently, this fund has €500 billion in resources.

Timing becomes all-important in the creation of this central banking supervisory authority, because the situation, as it stands, is unsettled. The ECB is to have plans for this banking authority “before the end of the year” because the creation of this banking supervision is “a matter of urgency.” Spain’s bank bailout will take place immediately under the new guidelines and then could be switched to the new supervisory authority when it is in place.

The problem faced by those attempting to create the new eurozone banking union is that times have changed and the world is constantly moving into an electronic future. The eurozone cannot just set up a regulatory system to just deal with current problems!

This is a problem that has been highlighted in the United States by the recent JPMorgan Chase losses. Financial institutions have moved into a new world order, driven by the attributes of information technology. Financial institutions are scaling up to operate within this virtual world. The smaller banks will not be able to compete in this technology space and hence the average size of a financial institution is going to increase.

According to FDIC statistics, there are 525 banks in the United States that have assets in excess of $1.0 billion. The average size of these 525 banks is over $22.0 billion. According to Federal Reserve statistics, the 25 largest domestically chartered banks in the United States average $290.0 billion in total assets. Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC) have $8.0 trillion in total assets divided among them - an average of $2.0 trillion each.

The largest 25 domestically chartered banks plus the offices of foreign-related banks control more than 70 percent of all commercial banking assets in the United States. It is these organizations that will be driving the introduction of the new technology. Folks, this is what the future is going to look like ... and the regulators, in my mind, cannot stop it from happening.

Technology is driving this scaling up. I call your attention to an edition of a journal published by the Institute of Electrical and Electronics Engineers called IEEE Spectrum. The cover story of the June issue is “The Beginning of the End of Cash”. Let me tell you, if the electrical and electronic engineers devote a full issue of their journal to this subject - you better watch out! How about this article: ”Quantum Cash and the End of Counterfeiting.”

This is why, to me, an article like the one written by Philip Augar in the Financial Times is scary. The title of the essay is “Too big to manage or regulate are what matter now.” His suggestions are: one, to break up the banks along Glass-Steagall lines; two, for banking supervisors “to leave as little as possible to management discretion and to go for bold, simple rules that are easy to understand and possible to enforce"; and three, to remove the grotesque incentives that encourage corrupt behavior.

What universe does Augar inhabit?

The problem is that many suggestions about the banking system are along these lines today. Yesterday, the officials of the eurozone took a bold, initial step in creating a new banking structure for Europe. We all hope that they will continue along this road, and will continue at a fairly rapid pace. However, it will not do anybody any good if those creating the new banking structure look solely at the past. Finance is just information and the use of information is going to adapt to the technology available to it.

Banks -- financial institutions --are getting better and better at using the new information technology.

Bank managements -- and the managements of financial institutions -- have not caught up with these new advances in information technology. Their ability to judge and control risk is just one place where these managements fall short of where they need to be.

Yet, I would suggest that these bank managements are light years ahead of where the regulators are in terms of understanding and managing the use of information in this modern era. Creating a banking union and a regulatory structure that does not accommodate this fact is either going to fail, or, and this I believe, is going to drive all the technologically savvy organizations out of their sphere. That is, the banks will find a way to leave the industry.

There is no question in my mind that these banks will do it -- and leave the new banking union with just the “dogs.” This possibility will become more of a reality if the European banking union is formed. But, I believe, the European banking union must be formed. (By the way, if you have not been reading my blog over time…I believe that the United States is leading this charge.)

Who needs a commercial bank? I don’t!

Why the Dow Is Eu(ro)phoric This Morning

Sometimes, surprises are good things. Today, the U.S. stock market got a gift from Europe, where leaders agreed to allow the use of bailout funds for direct recapitalizations of banks -- similar to what the TARP bailout program did four years ago. The euro soared against the dollar, stock markets in Europe moved sharply higher, and just before 10:45 a.m. EDT, the Dow Jones Industrials (INDEX: ^DJI  ) were up 214 points to 12,817, recovering almost all of the ground they lost in the past week and a half. All 30 Dow stocks were up on the day.

Predictably, Bank of America (NYSE: BAC  ) led the Dow higher, rising by almost 4%. The bank arguably has the most to gain from a healthy Europe and the most to lose if things go badly there. Despite U.S. banks having reduced their direct exposure to Europe, a more stable European banking system can only be good news for B of A and all of its stateside financial peers.

But strength showed up in other parts of the Dow as well. United Technologies (NYSE: UTX  ) rose more than 3%, as Japan agreed to buy four Lockheed Martin (NYSE: LMT  ) F-35 fighters, for which United Tech makes the aircraft engines. The move reversed the stock's losses yesterday, which came after United Tech's guilty plea in connection with criminal charges for improperly sending sensitive technology to China. If Japan's decision marks just the beginning of a longer-term commitment, which the deal allows for, then it could signal a revival for Lockheed, United Tech, and their defense peers more broadly. Boeing also rose more than 3% in apparent sympathy.

Lagging behind was McDonald's (NYSE: MCD  ) , which rose only about a quarter-percent. Despite today's challenges, though, Fool analyst Morgan Housel points to the fast-food giant as a perfect example of how simple concepts often produce the biggest long-term profits for a portfolio. The key, though, is valuation, and at more than 16 times trailing earnings, McDonald's needs global growth to not slow down as much as some now project it will.

Don't lose your cool!
Gains like today's are nice for shareholders, but you still have to think about what to do for the long haul. Stick with the stocks that are best-positioned to profit for years to come, and you'll often find big success. If you like Dow stocks for your portfolio, you have to read the Fool's latest special report, where you'll find revealed three Dow stocks with dividend strength and growth potential. The report is absolutely free, so get your copy today.

The Great Paradox: Why Stocks Aren’t Getting Respect

Investors love to imagine their decisions are based on logic and foresight. But by using inconsistent arguments, investors have fooled themselves yet again, and created what I call the “Great Paradox.”

For example, stocks have become the Rodney Dangerfield of investments: They can’t get no respect. Despite corporate earnings increasing 125 percent since 2009, many investors remain skeptical of the outlook for stocks. Bloomberg News reported recently that valuations for U.S. equities have been stuck in a remarkably long-running slump that hasn’t responded to this surge in profits, suggesting that investors don’t trust the growth to continue.

That lack of trust is evident in the low Price-to-Earnings (P/E) ratio of the S&P 500, currently less than 13 times the 2012 earnings forecast. Compare that to the average historical P/E ratio of 16.4 times. If investors valued companies in the S&P 500 according to the historical average P/E, the S&P 500 would be 30 percent higher. But no such luck.

Corporations proved their flexibility and adaptability during the Great Recession. Corporate profits have been very strong, rebounding much faster than GDP. Corporations now run leaner than they did a few years ago and will benefit greatly from any economic tailwind. Yet many remain skeptical that this profit resurgence will be sustained.

On the other hand, bonds have performed extraordinarily well in recent years – so well, in fact, that many (myself included) see limited remaining upside. There’s not much of anywhere for long-term bond prices to go other than down, since those values run directly inverse to interest rates, which are currently nearly as low as they can be. Meanwhile, despite a worsening fiscal government outlook, U.S. Treasury bonds have done so well over the last 30 years that they have outperformed stocks. The last time that happened was prior to the Civil War.

Still, investors have poured billions into bond mutual funds over the last five years, and have removed billions from stock mutual funds. According to data aggregated by TrimTabs, investors have removed money from U.S. stock mutual funds in each of the last five years, including approximately $100 billion last year alone. Meanwhile, investors have added money to bond mutual funds in each of the last six years, including more than $110 billion into bond mutual funds last year. Investors seem to think that bonds will continue to appreciate indefinitely; at the same time, they distrust that current corporate earnings will continue. They have fallen into the Great Paradox.

Call me crazy, but I believe fundamentals matter. As Warren Buffett observed, “In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”

There’s no reason to think stocks won’t perform well in a slow-growth economic environment and even better in a good environment. And unlike for bonds, being a strong performer isn’t an anomaly for stocks. For those with a sufficiently long-term perspective, clinging to bonds isn’t a position that makes sense. As Jeremy Siegel, finance professor at the University of Pennsylvania’s Wharton School in Philadelphia, told Bloomberg News, “The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform. If you missed the rally in bonds, well, then that’s it.” (1)

Why are so many people tempted to keep favoring bonds and avoiding stocks, ignoring solid reasons to do the reverse? One reason could be herd mentality. As my colleague Benjamin Sullivan observed, many investors follow the crowd, buying overvalued stocks when the financial media and Main Street are optimistic about the market, and shunning stocks when prices ebb, despite the fact that it makes more sense to buy low and sell high.

Think about it. Should you buy stocks when everyone thinks the world is ending – say in March 2009, when the S&P 500 closed as low as 677 – or when everything is Pollyannaish – say in October 2007, when the S&P 500 closed as high as 1565?

Though the timing is difficult to pinpoint, one should to try to buy near the height of pessimism and sell or reduce close to the height of optimism. As legendary investor Sir John Templeton once said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Investors may also be tempted to let past performance overly determine their expectations for future behavior. However, while it’s smart to glance in the rearview mirror from time to time, looking only backwards and ignoring the path ahead will inevitably lead to messy smash-ups.

No one can forecast exactly what the market will do in the short term. But there’s no reason for the excessive pessimism that investors seem to apply only to stocks. This summer, Burton G. Malkiel, a professor of economics at Princeton, wrote in The Wall Street Journal: “We have abundant evidence that the average investor tends to put money into the market at or near the top and tends to sell out during periods of extreme decline or volatility. Over long periods of time, the U.S. equity market has provided generous average annual returns. But the average investor has earned substantially less than the market return, in part from bad timing decisions.” (2)

Uncertainty is frightening, and it isn’t surprising that investors are tempted to cut and run at the first sign of trouble. Investors have clearly lost confidence in stocks in recent years. But post-recession, it seems many investors have gone a step farther than caution. I suppose two bear markets during the same decade are enough to make investors jumpy. Meanwhile, investors pile into a bond market with limited upside and considerable downside.

Warren Buffet made the following analogy: “I’m going to buy hamburgers for the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up, we weep. For most people, it’s the same way with everything in life they will be buying – except stocks. When stocks go down, you can get more for your money, but people don’t like them any more. That sort of behavior is especially puzzling.” It’s not only puzzling; it’s costly.

Hockey legend Wayne Gretzsky put it best when he said, “I skate to where the puck is going to be, not where it has been.” The puck has spent the last five-, 10-, and 30-year periods making money for bond investors. I suspect the next five, 10, and 30 years are going to be in stocks’ end of the rink.

Sources:

1) Bloomberg, “Say What? In 30-Year Race, Bonds Beat Stocks”

2) The Wall Street Journal, “Don’t Panic About the Stock Market “

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10 Long Hedges for a Net Short Position on the Market

Over the past year I have argued that stocks are overvalued, but the fall in the dollar and the incredibly massive printing scheme of Ben Bernanke could push overvalued markets to new nominal highs versus our flawed currency. I have also argued that Silver and other hard assets would outperform stocks, which has also happened, although not to the degree I had previously imagined.

So what is in store for the remainder of 2011? I think it is safe to say that stock markets will sell off at some point, while oil and commodities could continue to spike higher if a QE3 program is undertaken. I would position myself long commodities through an RJI type vehicle with a 7% below the market stop loss order (or buy call options that are 7% in the money) and would buy put options on the Russell 2000, which I view as 50-60% overvalued.

What is clear is that the economy stinks while stocks are skyrocketing-- clearly a disconnect in the markets. One way investors can make money in today's environment is to buy farmland and real estate that is cash flow positive. In other words, buying rental properties in South Florida seems interesting, as many homeowners walk away from their underwater properties and prices for real estate can be had for less than 7X cash flow earnings from rental payments. Farming seems like a no brainer as an inflation hedge for both food and for farm prices in general.

There are not too many public farming companies, but there are a few stocks that can hedge investors against inflation while providing a long hedge for your short positions in the Russell 2000 and in the overvalued pockets of the market. I do not recommend REITS at all, but I do recommend actual property at this point, where a cash flow stream can be earned.

Here are 10 stocks that make good hedges on the long side for a net short position on the stock market:

Potash (POT) is likely a good way to hedge your risks of inflation. I like the name personally because well known value guru Mohnish Pabrai holds a large, concentrated position in the stock and clearly believes the company to be undervalued. POT offers options investors interesting opportunities in the put selling arena as the option premiums for POT are quite large. Selling an at the money January 2012 put seems like a good way to buy the stock at a much cheaper price.

Bunge (BG) is a farming and commodities operation located in South America which provides investors with a dual hedge against a collapsing dollar. BG is not as cheap as it once was when I first discovered it, however the stock is trading below book value-- for a PE under 12X-- and has a large position in the global commodities boom. Investors should consider selling the January 2012 $70 put options instead of buying the stock.

Mosaic (MOS), like Potash, is a good play on the commodity cycle and as a hedge against future inflation. Although the end of QE2 is being priced into the market and crushing commodity stocks right now, the future will likely see more money printing by central banks globally, which should provide a bid for the stock over time.

Union Pacific (UNP) is a large holding of value guru David Williams and has a reasonable price to free cash flow ratio. After Buffett wisely purchased Burlington Northern, Union Pacific is a good investment for the long term if M&A activity continues in the space.

Another cheap Williams pick is ACE, which sells for less than 8X earnings and a little under book value. ACE can be bought using leap call options (I prefer the January 2012 in the money calls) and investors can further protect their investment by selling at the money front month calls as a hedge. If the market tanks, you can only lose a fixed amount of money that represents a much smaller amount of capital at risk.

Coca Cola (KO) is running a bit lately and is slowly getting out of my buy price target zone, but the stock is still reasonable at current levels. I will continue beating the Leap Calendar Call spread drum for my readers as long as the stock remains below $70 per share. KO is one of the best managed businesses on Earth. As the company grows in emerging markets, I expect earnings and cash flows to grow at a nice rate over time.

John B. Sanfilippo & Son, Inc. (JBSS), the maker of Fischer Nuts, is a cheap stock at current prices. This peanut champ gets hurt with higher commodity prices, but I feel it has some pricing power after its large restructuring in recent years. At a price around half of tangible book value, JBSS appears to be a good value.

Another half price stock that trades for nearly 50% of tangible book is Kansas City Life (KCLI). I like this stock as part of a larger hedged portfolio of below book value names, but would caution investors that small cap value tends to lack liquidity, and often times sells off hard in market corrections. Because of this, look to add capital to these type of stocks during corrections in a dollar cost averaging strategy.

National Western (NWLI) is cheap and getting cheaper. At 45% of tangible book, the stock looks interesting, but when you add the fact that the company is also dirt cheap on a PE basis, NWLI looks like a good place to invest over the longer term.

Presidential Life (PLFE) is another dirt cheap insurer trading below tangible book value. The stock, like KCLI, is a holding of ABC Funds and is a long term type investment that should be sold after a 50% gain or after holding it for two years if you believe in Ben Graham's methodology for low price to book investing.

For the short side of your book, I suggest shorting the IWM or buying longer dated IWM put options for a hedge.


Disclosure: I am long MOS, NWLI, KO, ACE.

This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Give MannKind a boost
After watching their stock lose two-thirds of its market cap, there's no doubt about it: Investors in diabetes and cancer researcher MannKind (Nasdaq: MNKD  ) had a rough year in 2011. But according to at least one Wall Street analyst, 2012's going to be different. Yesterday, the friendly folks at Piper Jaffray lent MannKind a hand. Predicting the shares will hit $4 within a year, Piper initiated the stock at "overweight," moving the shares 2% toward the analyst's ultimate goal.

What sparked Piper's sudden onset of enthusiasm for MannKind? Did rivals Novo Nordisk (NYSE: NVO  ) , Eli Lilly (NYSE: LLY  ) , or Sanofi (NYSE: SNY  ) suddenly decide to abandon the market for injected insulin, despite its still being profitable? Did Pfizer (NYSE: PFE  ) flub another attempt at debuting a rival inhaled insulin product? Did MannKind itself finally win approval from the FDA for its own Afrezza?

No. Nothing so dramatic as that. Instead, it appears that Piper's support for MannKind comes down to the most basic of reasons: money.

Last week, MannKind completed its previously announced share issuance, floating just under 36 million new shares (and an attached 21.5 million warrants to buy additional stock) at $2.40 per "unit." The issuance netted MannKind something under $86 million in new capital, which will help the researcher keep its doors open and the lights on for a bit longer. In the context of Piper's buy recommendation, though, what's most interesting about this share offering is the names of the bankers who helped the company sell the shares.

These lucky souls were Jefferies & Co., Cowen & Co., JMP Securities, and -- you guessed it -- Piper Jaffray.

"I'm shocked, shocked, to find conflict of interest going on in this establishment!"
And I'm certain you're shocked, too, to learn that a banker who just helped MannKind sell $86 million worth of stock to the public -- and got in on the firm's 4.7 million share "overallotment" as part of the offering -- now publicly recommends that investors run right out and load up on MannKind shares. But this is actually a bit more interesting than a run-of-the-mill "Wall Street stinks" story.

As big of a deal as "36 million shares" sounds like, it actually doesn't improve MannKind's financial situation much at all.

Consider: Before the offering, MannKind was a company facing entrenched, profitable competition in the form of Lilly, Novo, and Sanofi, multibillion-dollar businesses that vastly outweigh MannKind in scale of operation. A company with:

• No revenues.
• No profits.
• Only about $23 million in cash, and more than $460 million in net debt.
• And burning cash at the rate of more than $150 million a year.

Post-issuance, MannKind is a company that still has neither revenues nor profit. It still has about $380 million in net debt. And at the rate it's burning cash, the proceeds of last week's share issuance will suffice to keep it in business for only about another six months.

Yet despite all these strikes against it, Piper tells us MannKind is the kind of company you should buy? Pardon my skepticism, but that seems a bit difficult to believe. Remember that MannKind is not Pfizer. Pfizer could afford to field an inhalable insulin product, fail at the FDA, and survive just fine on the $67 billion in annual revenues from products it does have approval to sell. MannKind can't. If the FDA doesn't approve Afrezza, MannKind's very survival as a company could be at stake. And even if the FDA does ultimately approve Afrezza, analysts say this could take two years to happen.

What happens between now and then? The company's going to run out of money, for one thing. It will probably have to take on more debt and issue more shares, diluting today's shareholders even more in the process.

But don't worry. It's all good. When that happens, I'm sure Piper will be there to recommend buying the shares again.

Looking for a better way to make money in health care? Read the Fool's new -- and free! -- report on the industry's "Next Rule-Breaking Multibagger."

Do You Need a Covered Call ETF?

Mounting fiscal problems in Europe finally spilled over into global markets last week, sending shares plunging sharply lower. At one point on Thursday, the Dow was down close to 1,000 points, with several stocks and ETFs rendered nearly worthless by a still-unexplained “flash crash” began.

Then on Monday, investors awoke to news that the eurozone was authorizing a trillion dollar bailout plan to help stop the contagion from spreading to other weaker markets like Spain and Portugal, giving markets a big boost. With the chaos of late 2008 still fresh in their minds, some investors have tweaked their portfolios in light of recent developments, seeking out safe havens such as gold and Treasuries or sliding into less volatile equities.

Other investors are taking a renewed interest in a strategy abandoned during the recent recovery; the covered call. A covered call consists of going long on an underlying security while selling call options on the same underlying security. This has the effect of generating additional income (the premiums received from selling options), which helps to offset some losses when markets are falling.

When markets are rising, however, the call options sold can come “in-the-money,” offsetting gains generated by the long position in the underlying security. This lower-risk, lower-reward strategy can be difficult to implement in traditional accounts; investors usually must apply for approval to trade options and some brokerage firms do not even offer the service. But there are multiple ETF options for investors looking to gain exposure to a covered call strategy.

There are two indexes that are currently linked to covered call ETFs: the S&P 500 and the Nasdaq. ETFs employing the covered call strategy have lagged behind traditional beta funds over the last year as markets headed higher, but have sharply outperformed the broad market during the recent period volatility and declining equity prices.

Last week, the SPDR S&P 500 ETF (SPY) was down about 6.4%, while the PowerShares S&P 500 BuyWrite Portfolio (PBP) lost only 5.8%. It was the same story for the PowerShares QQQ Trust (QQQQ) and Nasdaq-100 BuyWrite Portfolio (PQBW); the covered call ETF posted a big loss on the week, but was well ahead of the QQQQ.

It is important to remember that while covered call funds tend to outperform when the market is declining, they often underperform when prices are soaring. Over the past 52 weeks QQQQ has significantly outperformed PQBW while SPY has outgained PBP by a wide margin.

There’s one more factor that’s worth considering when looking into covered call ETFs; they often pay a robust dividend yield related to both the underlying long positions and the premium they receive from writing call options. In the case of PBP, this works out to a yield that is more than twice as high as SPY; 4.5% compared to 1.9%. PQBW pays out a dividend yield of almost 5%, compared to just 0.6% for QQQQ.

These figures suggest that the covered call strategy may be more appropriate for investors who are seeking to reduce their volatility and increase their current income levels while the pure play options may be better for those with a longer time horizon that are better able to weather the recent market volatility.

Disclosure: No positions

Google’s Rubin Says Android Will Beat iPhone, BlackBerry

Google (GOOG) Engineering VP Andy Rubin thinks Android phones will eventually have more of the mobile phone market than either Apple (AAPL) or Research In Motion (RIMM), he told the New York Times. Rubin said that it is “just a matter of time,” since there are multiple manufacturers building multiple products on the platform.

Asked when Android units sold will pass those sold by Apple and RIMM, he told the Times: “I don�t know when its might be, but I�m confident it will happen. Open usually wins.”

Is Dell Wising Up With Wyse?

Iconic PC maker Dell (Nasdaq: DELL  ) keeps pushing into software and services. The company has just announced that it intends to acquire Wyse Technology, a company that specializes in cloud software and virtualization.

Wyse also makes "thin-client" hardware and software, which are like terminals that lean on other computers (like servers, for example) for most of the heavy lifting. Dell didn't break out financial details about the transaction, but analysts think it probably fell in the ballpark of $350 million to $400 million.

Dell did say that Wyse should be accretive to non-GAAP earnings by the latter half of fiscal 2013, with the deal expected to close in the second quarter of fiscal 2013.

Wyse already plays nicely with the kingpins of virtualization, Citrix Systems (Nasdaq: CTXS  ) and VMware (NYSE: VMW  ) , which should complement their respective virtual desktop infrastructures. Dell's hoping that the acquisition will help it further tap the datacenter infrastructure market, which is supposed to top $15 billion in the next three years.

The deal follows other software-driven acquisitions in recent times, after Dell formed a new software group two months ago. The company is obviously looking to boost margins and growth through differentiated services and also acquired SonicWall (security software) last month and AppAssure (backup and recovery software) in February.

The Wyse deal bears an uncanny resemblance to when Hewlett-Packard (NYSE: HPQ  ) acquired thin-client specialist and Wyse rival Neoware five years ago. Both HP and Dell have been pretty clear in recent times with their intentions to be like IBM.

HP wanted to spin off its PC business like Big Blue did long ago, while Dell keeps adding pieces to its Big Blue puzzle. It's no wonder when you look at where IBM's profit margin has been going ever since selling its PC business to Lenovo in 2005.

DELL Profit Margin data by YCharts

IBM-esque transformations take time, and until then I still don't see a lot going for Dell. Its mobile strategy is in shambles, as Dell has killed both its domestic smartphone and tablet lineups. There's no doubt that it's trying to regroup with mobile, but the company has mostly missed out so far. While Dell is trying to be like IBM, it's a far cry away from competing, since IBM is IBM.

With more than $62 billion in revenue over the past four quarters, these incremental acquisitions are a long way from reshaping Dell into the spitting image of its Big Blue role model.

At this rate, Dell doesn't look like a stock that will help you retire rich, but these three stocks do. Everyone wants to retire rich, so take a look at this special free report while you still can.

Economic Cans Being Kicked Down the Road - Q3 Dip?

Germany and France seem to have solved their voter marketing problem on Greece by simply guaranteeing the new Greek debt that their home banks take on. This makes an end run around the fact that their voters are absolutely deadset against actually giving any direct aid to Greece. The real beauty is that the actual exposure of Germany and France is not greatly increased as they will have to rescue their home banks if Greece defaults.

Now all we need is a solution to the other half of the problem: Greek citizens are not willing to undertake the austerity measures that are required to repay the existing debt, much less future debt.

If Greece had debt denominated in their own currency then they would simply devalue and solve the problem.

Instead, Greece debt is in Euros, so they need a different solution. In a functioning capitalist world economy Greece would default, banks and investors would be wiped out, but Greece would be able to finance new debt. This is actually the best solution for Greece, Greeks and the world economy as it would minimize the economic depression from the default. As you economics junkies know, it is the solution that most conservative and liberal economic theories advocate.

Unfortunately, we are in something other than a functioning world economy. We are in an evolving economic system, which is another way of saying nobody is sure what is going to happen.

My guess is that Europe is going to practice the childish game of "Kick the Can Down the Road" and hope that they can spread the crisis out enough that time will heal it, just like the Fed and Paulson did in the USA crisis.

Looking at all the Cans being kicked (the rest of the PIIGS, the U.S. residential and commercial real estate market effect on the bank lending, the lack of consumer income growth, rolling over of leading indicators pointing to a slowdown or actual dip in the 3rd quarter, etc.), it looks like they might be forming a pile that we are going to hit at the end of the 2nd Quarter. The solution is not likely to be favorable for banks or bank bondholders as the world's voters are not tolerant of any more of today's "lemon capitalism."

The third quarter looks like it will be time for a new game. I wonder if it will be more regression to economic feudalism (and the slower growth this represents for the world's developed nations) or the beginning of a new, functional world financial system that helps developed nations takes advantage of the growth in modern technology that so far has only helped the investors in the lesser developed countries.

Disclosure: No Positions

Immersion Corporation Revenues Get Boost From Its Mobile Phone Technology

Immersion Corporation's (IMMR) recently released 10K gives some interesting insight into the company's turnaround in 2010 and sheds some light into the drivers that should sustain growth in 2011.

Let's first have a look at Mobile Communications and Consumer Electronics, the fastest growing segment for Immersion and also the one that allowed the company's haptics technology to reach a large number of end-users given the quality of handset partners such as Nokia (NOK), Samsung (SSNLF.PK) and LG (LGERF.PK), with smaller producers like Pantech Co and KFT Technologies playing a more regional role in the Far East.

Here is a quick look at the recent revenue growth in the mobility segment. These numbers include both royalties and development contracts.

(Click charts to enlarge)

The strong increase in mobile phones incorporating Immersion's technology sold in 2010 (over 100 million) compared with 2009 (about 75 million) was the main reason for the strong (40%) increase in revenues (51% on a royalty base only), as other consumer electronics still represent a minimal percentage of revenues in this segment.

The launch of several new smartphones and tablets at the end of 2010, incorporating the company's haptics should bode well for 2011, as Immersion also looks to build a new revenue stream from its MOTIV platform for Android (GOOG).

Gaming is the other segment that performed very well in 2010, although its numbers need a more sophisticated analysis.

Here is a quick look at the last 3 years:

Let's try to break down the numbers. First of all, we should point out that Immersion is still recognizing about $ 750,000 per quarter from the 2007 Sony (SNE) settlement. In 2008, revenues included about $1.1 million from the ISSLC litigation (a one time event). The true-up payments received in Q2 2010 could probably be attributed to the previous year, so that we could speculate that “core” revenues in gaming (excluding Sony and one time events) went from a peak of $ 4.3 million in 2008 to about $ 3.3/3.5 million in 2009 and 2010.

The reconciliation of certain customer reports in the gaming sector in Q2 2010 represented a good part (19%) of Immersion's 40% growth in the segment, and there is no doubt that this data must be taken into consideration when modeling 2011 revenues. During the last conference call Q&A, management made this comment, that makes a lot of sense having examined revenues more in detail:

Aaron Husock – Lanexa Global

What about gaming?

Shum Mukherjee - CFO

Gaming, again, will grow, you know, will be flat to about 5 to 10% growth.

Flat to some growth on a number “inflated” by $ 1,000,000 true-ups would actually represent a good result for 2011. Maybe Immersion is also expecting to benefit from the recent 3M (MMM) launch of new products in the casino gaming vertical that contributed very little to revenues so far.

The annual report also reveals that Immersion is still selling one medical product, The Virtual IV line. In a passage of the 10K, we can read (pg.10):

As a result of this sale of the majority of the medical products business to CAE (CAE) in March 2010, we currently have a single remaining medical simulation product line, the Virtual IV system, which simulates needle-based procedures such as intravenous catheterization and phlebotomy, and is a jointly developed product with our partner Laerdal Medical A/S.

Revenues decreased from $3.9 million in 2009 to $ 2.3 million in 2010, as it may be logical for a company that sold most of its assets (and sales force) in the medical segment. It is difficult to speculate if this level may represent a floor for 2011 or if the company will look to disinvest this product line, too. The partnership with Laerdal Medical A/S was originally meant to leverage Laerdal presence worldwide, while Immersion was promoting the product in the US market.

A bit of “reverse engineering” on the numbers included in the annual report also allows us to speculate a little bit about the importance of each segment – or at least the most important ones; mobility, gaming, automotive, semiconductor and medical – when it comes to Immersion's royalty stream, which is supposed to become the largest majority of its revenues going forward (already about 75% in 2010).

Here is a little chart, showing our breakdown per segment in 2010:

Our speculation seems in line with recent comments at the conference call:

Shum Mukherjee

The mix of business is not going to change that much. Mobility appears to be our largest segment, followed by gaming and then you’ll have a combination of medical, auto and chip.

Medical should benefit in 2011 from a full year of royalties from CAE, while we still believe that automotive will probably start developing its potential in 2012 and beyond. Here is another comment made during the last conference call as to 2011 guidance that gives some additional color on the company's forecast for 2011:

Shum Mukherjee

There is slightly slower growth in the chip business, which as you know started from nothing last year and had a big ramp up this year.

To complete our update, we'd like to quote a few parts of a recent market analysis on haptics and update on Dialectic Capital Management.

As you may remember, Immersion's Board of Directors recently nominated John Fichthorn for election to the Immersion BoD at the company's 2011 annual meeting. Mr. Fichthorn is co-founder of Dialectic Capital Management, which has just filed an increase in ownership of the company to 8.2%, basically acquiring the shares from Ramius, another activist fund that is decreasing its share below the 5% mark (to 1.3% as of March 17), and probably exiting its investment in the company (with a decent profit).

Evaluating Immersion's potential is a bet about the increasing adoption of haptics in touchscreens. An interesting research has just been published by ARCChart: “Next Generation Haptics: Market Analysis and Forecasts”.

Next generation haptics (or HD haptics) will be key to Immersion's success, as it should differentiate the company’s offering from other, simpler “confirmation effects,” that may not need its sophisticated technology and should also allow Immersion to generate higher per-unit royalties from markets like mobile phones or small screens.

Here is a quote from ARCChart's research (emphasis added):

In this study, ARCchart investigates the growing use of haptics on mobile phones, examining solutions in the market today and the host of next generation technologies which will compete for market share over the coming years.

While the level of haptics support amongst mobile devices is currently low, ARCchart forecasts that the technology will be supported by 36% of handsets shipped by 2015.

Today, handsets use the inertia-based vibration motor as the actuation element, but HD haptics will leverage advanced components such as piezo electric materials, electroactive polymers or capacitive electrosensory techniques. Architectures using these various technologies have been developed and patented by both specialist technology firms and by OEMs, each with benefits and drawbacks. So far, Immersion Technology has led this development of haptics intellectual property. However, companies such as Artificial Muscle, Pacinian and Senseg have been pioneering a variety of next generation actuation methods and Maxim recently introduced the first piezo haptics controller.

OEMs like Nokia and Apple (AAPL) are currently conducting evaluations and we expect the first HD solutions to appear in commercial handsets in 2011, however, mass adoption will take a number of years as technical barriers are overcome – haptics’ drain on battery power and implementation issues present significant challenges that need to be addressed.

More specifically, here is a brief quote from the segment dedicated to Immersion Corporation:

In addition to traditional reference designs leveraging actuators and amplifiers currently on the market, Immersion is working on reference designs that will incorporate piezo and EPAM technology. This technology was launched in February of 2010 and the company is testing ICs and actuators to certify the technology with Immersion designs. Immersion expects to have phones with piezo and EAPM high definition haptics on the market in the second half of 2011.

EPAM (electroactive polymer artificial muscle technology) is being developed by Artificial Muscle, a company owned by Bayer MaterialScience AG, which recently signed a licensing agreement with Immersion Corporation.

An increase in royalty rates attributable to HD haptics being implemented by Immersion's handset partners would obviously have a multiplying effect to the company's fastest growing revenue segment. While we believe HD haptics may only start impacting revenues in 2012, there is no doubt that we'll have to carefully watch any future high end range smartphone launch looking for confirmation of the adoption of this new technology.

Disclosure: I am long IMMR.

Sneak Your Way Into Facebook and Twitter

The social media craze has taken flight in the past several years, and the only thing more popular than the social media sites themselves has been their shares. Although not every newly public social media company has managed to stay at its lofty levels in the months after its IPO, most of them have come out to enormous fanfare. Perhaps more than any investment before it, social media company stock has driven growth in alternative markets for privately held shares, as investors seek ways in before companies go public.

One plain-vanilla fund, however, won't make you prove you're a multimillionaire or that you earn enough to be part of the 1% in order to invest in social media companies. With a portfolio that includes Facebook, Yelp (NYSE: YELP  ) , and now Twitter, this fund is clearly trying to jump onto the social media bandwagon. But is it a good buy?

The inside scoop?
The name of the fund is Firsthand Technology Value Fund (Nasdaq: SVVC  ) , and until last year, it was a regular open-ended mutual fund that had sizable investments in well-known publicly traded tech giants as well as certain privately held companies. But the fund chose to change to closed-end status in 2011, meaning that its shares now trade directly on the Nasdaq exchange.

Firsthand Technology Value attracted some attention back when Facebook decided to go public. Before then, demand for Facebook shares was so high that it seemed like everyone was trying to cash in on the craze. An exclusive investment vehicle from Goldman Sachs (NYSE: GS  ) granting access to Facebook went wrong when the investment firm had to pull its offering to U.S. investors in order for Facebook to avoid running afoul of a rule limiting the number of shareholders it could have.

Earlier this week, the fund reported a purchase of 100,000 shares of Twitter for $1.8 million. That's not a huge investment for the fund, which had almost $84 million in assets and almost $64 million in available cash as of the end of 2011. But in adding to its social media reputation, the fund's investment makes perfect sense.

Does it matter to Twitter?
Most social media companies sought out private financing before they went public. Groupon (Nasdaq: GRPN  ) , for instance, solicited several large institutional investors before it went public last year. Moreover, those investments have been lucrative for investors; earlier this year,T. Rowe Price (Nasdaq: TROW  ) boasted a position worth more than $400 million in Facebook.

But with an investment of less than $2 million, Firsthand Technology Value's purchase of Twitter shares probably didn't involve Twitter at all. Instead, it probably represented a third-party transaction.

Is Firsthand a buy?
Firsthand Technology Value's ownership of social media stocks has boosted its valuation through the roof. Shares have traded as high as $46.50 after starting the year around $15, and at its current level of almost $28 per share, the stock trades well in excess of the closed-end fund's net asset value of $24.56 as of March 31. Yet that didn't stop the fund from successfully offering 4.4 million new shares at $27 per share late last month -- raising yet more cash for purposes that are far from clear.

Unfortunately for investors, Firsthand Technology Value comes with a hefty price tag. In its recent prospectus offering new shares, the fund noted its 2% management fee, combined with another 0.75% in estimated other expenses. In addition, the management agreement allows for "incentive" fees of up to 20% of profits on the fund's investments. That closely mirrors the "2 and 20" compensation scheme that many hedge funds use.

Wait for the IPO
Paying 2.75% in annual expenses for a fund that holds the vast majority of its assets in cash and trades well above the actual value of its assets doesn't make much sense to me. With the spotty performance of social media stocks after their IPOs -- including Yelp -- you'd be better off waiting for the froth to dissipate than jumping into Firsthand Technology Value.

The social media movement is part of the next trillion-dollar revolution in mobile technology, but there may be smarter ways to play the investing trend than through social media stocks. Read the Fool's special report on technology to learn more about one company that's poised to take maximum advantage of this important tech trend.

Monsanto, DuPont Will Benefit Once Mississippi Flooding Subsides

The Mississippi River has overflowed its banks and almost non-stop rain has swollen it to an epic size. Memphis barely survived. The land south of there is experiencing serious trouble. We will see exactly how hard the lands along the southern Mississippi are hit as the weekend unfolds. The damage to crops will be in the billions of dollars. The area flooded will be in the millions of acres.

From the pictures of the Morganza Spillway, there is no question they will have to open it soon. Then the entire area south of it will be flooded. That’s a large chunk of the farmland in Louisiana. Arkansas has more than 1500 square miles flooded. They blasted a levee to flood Missouri farmland to avert the flooding of Cairo, Illinois. Mississippi (the state) has considerable flooding. Estimates are for total flooding there to be more than 2100 square miles. In fact, the Mississippi River is backing up the Yazoo River, and it is flooding too. I don’t know the overall totals yet, but this flood is being compared to the epic flood of 1927 (in other words it’s a once in a hundred years phenomenon). The crop damage will be extensive.

Eventually the floodwaters will subside. The farm lands may need some work, but they will go back to being farm land. The farm lands will need to be re-planted. For a shortened season, they will need good seed and likely good fertilizer. The two US companies most famous for their seeds are Monsanto (MON) and DuPont (DD). They should see a nice uptick in sales from this disaster. In addition they may get secondary business from farmers elsewhere in the US and the world who will be trying to take advantage of the now larger shortage in crops. Since the world’s grain stores were already short due to the many disasters last year, the supply will be still shorter.

Another factor in all of this is that the flooding will cost economies along the Mississippi huge amounts of money each day. When the port of New Orleans closed down due to an oil spill in 2008, the estimated cost of the port shutdown was $275M/day. This is just one of the instances of economic impact. The flood may have a negative effects on the US equities markets. With this in mind, investors will want to be a little defensive.

Both of these companies meet that need. The are both solid multi-national large cap names with great fundamentals. DD has beat estimates each of the quarters since its still relatively new CEO has been at the helm. In addition, its chemicals business has benefited recently from the low natural gas prices. Monsanto’s performance has been somewhat less sterling, but it is a fundamentally strong stock.

The table below contains a lot of the relevant fundamental information about the two stocks. The data are from Yahoo Finance and TD Ameritrade.

Stock	DD	MON
Price	$52.91	$63.79
1 yr. Analysts’ Price Target	$63.18	$75.17
PE	14.79	27.47
FPE	12.16	18.99
Avg. Analysts Recommendation	1.9	2.5
Price/Book	4.73	3.12
Price/Cash Flow	10.59	17.92
Short Interest as a% of Float	0.90%	1.00%
Beta	1.50	0.82
Cash per Share (mrq)	$5.19	$3.74
Market Cap	$49.14B	$34.19B
Enterprise Value	$57.71B	$34.45B
5 yr. EPS Growth Estimate per annum	10.35%	15.13%
Total Debt/Total Capital (mrq)	52.07%	16.11%
Quick Ratio (mrq)	1.53	1.24
Interest Coverage (mrq)	18.02	74.25
Return on Equity (ttm)	36.29%	11.64%
EPS Growth (mrq)	22.91%	16.64%
EPS Growth (ttm)	36.72%	-2.73%
Revenue Growth (mrq)	13.74%	6.14%
Revenue Growth (ttm)	17.46%	2.32%
Annual Dividend Rate	$1.64	$1.12
Gross Profit Margin (ttm)	26.85%	49.42%
Operating Profit Margin (ttm)	11.27%	17.56%
Net Profit Margin (ttm)	9.89%	11.93%

Each stock above has its good points. MON has the lower price/book, the lower total debt/total capital, and the higher 5yr. EPS growth estimate. However, it trades at higher PE and FPE multiples. Plus its performance of late has been spottier than DD‘s. DD has consistently beaten EPS estimates for 2+years. DD has a higher dividend. In its own way each stock is a worthy investment.

The charts below show some of the technicals of each stock.

The 1 year chart of DD:

The chart of DD indicates the stock has very strong price performance. Exceeding expectations continually can have that effect on a stock. The fast stochastic and the Williams %R both indicate the stock is currently oversold. The overall market is in a very uncertain state, but the stock itself can be bought at this time. A check on the overall market, as viewed via the SPY chart below, will give you an indication of how strongly you may wish to consider the overall market.

The 1 year chart of MON:

The chart of MON indicates it has been in a downtrend for the last several months. Recent events may make it more of a buy, but I would feel better about buying it after it had achieved a more discernible upturn. The fast stochastic and the Williams %R both indicate that MON is oversold. On that basis it can be bought. I would be more hesitant to buy MON at this time than DD, but you could start to average in if you are daring.

The 1 year chart of the SPY:

The SPY chart indicates it is a strong, but weakening entity. The fast stochastic and the Williams %R both indicate that SPY is approaching oversold territory. Chart theory would indicate that it may go farther toward oversold territory before it bounces upward. According to this chart, it may be best to wait a day or more before investing in either MON or DD.

The USD Index has been rallying. It may rally to 77-78 or 79-81. If it does this, it may cause a significant unwind of the USD carry trade. This in turn may cause the equities markets and commodities to sell off. This is a possible negative to consider before buying either DD or MON. It probably means you want to average in at most.

Finally the southern Mississippi River is not supposed to crest until Tuesday. This means it may be doing significant damage early next week. Even though Monday is known as "Mutual Fund Monday", it may be a down day given the EU credit crisis, the SPY chart, the US debt ceiling crisis, and the further bad problems to come in the Mississippi disaster.

Good luck trading.

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

Stocks end higher on upbeat report

NEW YORK (CNNMoney) -- U.S. stocks finished higher Tuesday, but the gains were limited as investors weighed an upbeat U.S. economic report against Europe's ongoing debt problems.

The Dow Jones industrial average (INDU) rose 26 points, or 0.2%, snapping a four-session losing streak. The S&P 500 (SPX) added 7 points, or 0.6%, and the Nasdaq (COMP) rose 18 points, or 0.7%.

A better-than-expected reading of the ISM Services index gave markets a lift. The index for May rose to 53.7, surprising economists who had forecast the index would fall to 53.1 from April's 53.5. Any reading above 50 indicates growth in the service sector, which makes up the majority of the U.S. economy.

But ongoing concerns about Europe's debt problems kept the gains in check, as the Spanish banking system teeters on the edge of collapse and Greece comes closer to a possible exit from the euro. CNNMoney's Fear & Greed Index remained in extreme fear territory Tuesday.

Spanish Treasury Minister Cristobal Montoro told a Spanish radio network Tuesday that the country has been nearly shut out of global finance markets, and that its banking system would need help from other European countries. Yields on Spain's 10-year bond jumped as high as 6.5% before pulling back.

Spain warns of credit freeze

Meanwhile, credit rating agency Standard & Poor's said Monday that there is a one-in-three chance Greece will leave the euro currency union in the coming months.

Despite the gloomy news, investors were somewhat encouraged as finance officials of the world's seven largest economies, the G-7, held an emergency call Tuesday to discuss the region's crisis.

"They're talking about what can be done to throw a safety net or build a ring fence around some of the banks in southern Europe, so we don't see a flight of deposits," said Art Hogan, managing director at Lazard Capital Markets. "The fact that they're talking about it means something is in the works, and will come to fruition sooner rather than later."

According to a statement from the U.S. Treasury, the G-7 will continue to "monitor developments closely" ahead of the G-20 summit later this month in Mexico.

U.S. financial stocks were among the biggest gainers on the news. Shares of JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Morgan Stanley (MS, Fortune 500) gained between 3% and 4%.

U.S. stocks finished little changed on Monday after a choppy trading session.

World markets: European stocks closed mixed. The DAX (DAX) in Germany slipped 0.2%, while France's CAC 40 (CAC40) rose 1.1%. London's stock market was shut in celebration of the Queen's Diamond Jubilee.

Asian markets ended on a higher note. The Shanghai Composite (SHCOMP) ended up about 0.2%, while the Hang Seng (HSI) in Hong Kong added 0.4% and Japan's Nikkei (N225) rose 1%.

Companies: Shares of Starbucks (SBUX, Fortune 500) fell a day after the company announced plans to buy a bakery chain.

Post-Facebook IPO market frozen

Facebook (FB) shares turned lower Tuesday afternoon and hit a new low of $25.75. Shares are now more than 30% below the IPO price of $38. Reports Monday that Facebook is looking at ways to allow children younger than 13 to use the site is prompting new criticism of the social networking company.

Netflix (NFLX) shares slipped after the company announced late Monday that it would start its own content delivery network to provide its streaming service to customers. Shares of Akamai (AKAM), a tech company that currently provides some of that service to Netflix, slid.

Shares of Research in Motion (RIMM) rebounded slightly Tuesday. The BlackBerry maker closed below $10 a share on Monday -- the lowest level since December 2003.

Currencies and commodities: The dollar rose against the euro, British pound and the Japanese yen.

Oil for July delivery rose 31 cents to settle at $84.29 a barrel.

Gold futures for August delivery rose $3 to $1,616.90 an ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury fell, pushing the yield up to 1.58% from 1.53% late Monday. 

What American Eagle Outfitters Does With Its Cash

In the quest to find great investments, most investors focus on earnings to gauge a company's financial strength. This is a good start, but earnings can be misleading and incomplete. To get a clearer understanding of a company's ability to earn money and reward you, the shareholder, it's often better to focus on cash flow. In this series, we tear apart a company's cash flow statement to see how much money is truly being earned and, more importantly, what management is doing with that cash.

Step on up, American Eagle Outfitters (NYSE: AEO  ) .

The first step in analyzing cash flow is to look at net income. American Eagle Outfitters' net income over the last five years has been all over the place:

�	2011	2010	2009	2008	2007
Normalized Net Income	$161 million	$202 million	$194 million	$254 million	$403 million

Source: S&P Capital IQ.

Next, we add back in a few noncash expenses, like the depreciation of assets, and adjust net income for changes in inventory, accounts receivable, and accounts payable -- changes in cash levels that reflect a company either paying its bills, or being paid by customers. This yields a figure called "cash from operating activities" -- the amount of cash a company generates from doing everyday business.

From there, we subtract capital expenditures, or the amount a company spends acquiring or fixing physical assets. This yields one version of a figure called "free cash flow," or the true amount of cash a company has left over for its investors after doing business:

�	2011	2010	2009	2008	2007
Free Cash Flow	$139 million	$297 million	$259 million	$60 million	$214 million

Source: S&P Capital IQ.

Now we know how much cash American Eagle Outfitters is really pulling in each year. Next question: What is it doing with that cash?

There are two ways a company can use free cash flow to directly reward shareholders: dividends and share repurchases. Cash not returned to shareholders can be stashed in the bank, invested in other companies, or used to pay off debt.

Here's how much American Eagle Outfitters has returned to shareholders in recent years:

�	2011	2010	2009	2008	2007
Dividends	$86 million	$85 million	$83 million	$82 million	$81 million
Share Repurchases	$17 million	$234 million	--	$3 million	$451 million
Total Returned to Shareholders	$103 million	$319 million	$83 million	$86 million	$531 million

Source: S&P Capital IQ.

As you can see, the company has repurchased a decent amount of its own stock. That's caused shares outstanding to fall:

�	2011	2010	2009	2008	2007
Shares Outstanding (millions)	194	200	206	205	216

Source: S&P Capital IQ.

Now, companies tend to be fairly poor at repurchasing their own shares, buying feverishly when shares are expensive and backing away when they're cheap. Does American Eagle Outfitters fall into this trap? Let's take a look:

Source: S&P Capital IQ.

Sure enough, American Eagle bought back a lot of stock in 2007 when shares were fairly high, but none in 2009 when they plunged, only to come back with repurchases after shares rebounded. Whether this was a prudent way to save cash when it looked like the economy was about to implode, or a classic example of buying high and panicking low, is up for debate. In general, it doesn't appear management has been the most astute buyer of its own stock.

Finally, I like to look at how dividends have added to total shareholder returns:

Source: S&P Capital IQ.

Shares returned -38% over the last five years, which drops to -48% without dividends -- a small boost to top off otherwise poor performance.

To gauge how well a company is doing, keep an eye on the cash. How much a company earns is not as important as how much cash is actually coming in the door, and how much cash is coming in the door isn't as important as what management actually does with that cash. Remember, you, the shareholder, own the company. Are you happy with the way management has used American Eagle Outfitters' cash? Sound off in the comment section below.

• Add American Eagle Outfitters to�My Watchlist.

China Solars Jump on Tiny U.S. Duty; Street Spins Outcomes

Solar energy stocks responded in mixed fashion today to news that the United States decided to impose import duties of less than 5% on wares coming from Chinese manufacturers of modules and panels, versus expectations for duties of as much as 30%, as reported by Reuters‘s Doug Palmer and Matt Daily.

Shares of China-based vendors were up sharply, including Trina Solar (TSL), up 61 cents, almost 8%, at $8.38; JinkoSolar Holding Co. Ltd. (JKS), up 37 cents, almost 6%, at $6.94; Suntech Power Holdings (STP), up 44 cents, over 14%, at $3.57; JA Solar Holdings (JASO), up 8 cents, or 4.4%, at $1.90; and Yingli Green Energy(YGE), up 46 cents, over 12%, at $4.27.

Shares of U.S.-based First Solar (FSLR), by contrast, fell $1.21, or 4%, to $27.46, while SunPower (SPWR) shares were down 59 cents, or 7.5%, at $7.31.

Cantor Fitzgerald‘s Dale Pfau, who maintains a Sell rating on shares of First Solar, writes this afternoon that the import duty, being far less than expected, ends up being “irrelevant.”

“At these levels, we expect the tariffs to have virtually no effect on the fundamentals of the solar industry,” writes Pfau.

“Massive overcapacity remains in place, and we expect panel prices to continue to fall modestly over the course of the next couple of years. We believe that most panel manufacturers will struggle to show profits.”

Jefferies & Co.‘s Jesse Pichel writes that it’s “premature to call the decision a victory” for Trina, Suntech and the other Chinese names.

1) The more significant duty imposed for anti-dumping will be May 17th, and 2) regardless of the duty the effect is the same, that Chinese firms will incur a higher cost manufacturing outside China to avoid the duty, and that the US market will have higher panel costs � thus lower industry growth.

Pichel maintains an Underperform rating on Suntech shares and a Hold rating on Trina.

And Citigroup‘s Timothy Arcuri wrote that the global impact on module pricing of the new imposition will be “only ~$0.05 per watt [...] assuming no impact from other work-arounds currently being employed by Chinese companies.”

Arcuri ponders what the effect might be further out, beyond today’s obvious win for the Chinese vendors:

The larger issue may be some brand damage for Chinese product in the US, but this remains to be seen as Chinese companies have generally protected buyers from any duty. A potential outcome from here is that the Chinese government increases rhetoric about levying tariffs on imported polysilicon, which we believe could fundamentally hurt companies like WFR and Wacker (covered by Andrew Benson), although this remains to be seen.

Fin

Avis Budget Group Meets on the Top Line, Misses Where It Counts

Avis Budget Group (Nasdaq: CAR  ) reported earnings on Feb. 15. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended Dec. 31 (Q4), Avis Budget Group met expectations on revenues and missed expectations on earnings per share.

Compared to the prior-year quarter, revenue grew significantly and GAAP loss per share increased.

Gross margins expanded, operating margins dropped, net margins shrank.

Revenue details
Avis Budget Group reported revenue of $1.63 billion. The six analysts polled by S&P Capital IQ looked for revenue of $1.65 billion on the same basis. GAAP reported sales were 33% higher than the prior-year quarter's $1.23 billion.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
Non-GAAP EPS came in at -$0.14. The seven earnings estimates compiled by S&P Capital IQ predicted $0.06 per share on the same basis. GAAP EPS were -$1.62 for Q4 against -$0.22 per share for the prior-year quarter.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 23.8%, 410 basis points better than the prior-year quarter. Operating margin was 7.1%, 170 basis points worse than the prior-year quarter. Net margin was -10.4%, 840 basis points worse than the prior-year quarter.

Looking ahead
Next quarter's average estimate for revenue is $1.61 billion. On the bottom line, the average EPS estimate is -$0.09.

Next year's average estimate for revenue is $7.40 billion. The average EPS estimate is $1.56.

Investor sentiment
The stock has a one-star rating (out of five) at Motley Fool CAPS, with 241 members out of 367 rating the stock outperform, and 126 members rating it underperform. Among 97 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 62 give Avis Budget Group a green thumbs-up, and 35 give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on Avis Budget Group is buy, with an average price target of $21.81.

Over the decades, small-cap stocks, like Avis Budget Group have provided market-beating returns, provided they're value priced and have solid businesses. Read about a pair of companies with a lock on their markets in "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke." Click here for instant access to this free report.

• Add Avis Budget Group to My Watchlist.

Research In Motion: Earnings Preview

Research In Motion Ltd. (RIMM) is slated to release its fourth quarter 2011 results on Thursday, March 24, after the closing bell. The current Zacks Consensus Estimate for the fourth quarter is pegged at $1.75, representing an annualized growth of 37.66%.

With respect to earnings surprise, over the trailing four quarters, Research In Motion Ltd. has outperformed the Zacks Consensus Estimate for all the three quarters except one quarter, where the Zacks Consensus Estimate was above the actual earnings by a penny. The average earnings surprise was a positive 4.12%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Third-Quarter Performance

On December 16, 2010, Research In Motion Ltd. reported its third quarter 2011 results. Quarterly net income was $911.1 million or $1.74 per share compared with a net income of $628.4 million or $1.10 per share in the year-ago quarter. Quarterly EPS of $1.74 was well above the Zacks Consensus Estimate of $1.64.

Third quarter 2011 total revenue was $5,495 million, up 40% year over year. This also exceeded the Zacks Consensus Estimate of $4,383 million. The growth in revenue was mainly due to higher Blackberry demand among non-business class people.

Agreement of Estimate Revisions

In the last 30 days, out of the 41 analysts covering the stock, 4 analysts increased their EPS estimates for the fourth quarter 2011 while none moved downward. Similarly, for first quarter of fiscal 2012, out of the 37 analysts covering the stock, 3 analysts increased its EPS estimate upward but 2 decreased it downward.

For fiscal 2011, in the last 30 days, out of the 44 analysts covering the stock, 4 analysts increased its EPS estimates while none decreased it. Similarly, for fiscal 2012, out of the 45 analysts covering the stock, 5 analysts increased their EPS estimates while none reduced their EPS estimates.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate was in line with the current estimates of $1.75 and $1.65 for the fourth quarter 2011 and first quarter 2012, respectively. For fiscal 2011, the Zacks Consensus Estimate inched up 1 cent, from $6.29 to $6.30. While for fiscal 2012, the Zacks Consensus Estimate inched up 4 cents, from $6.76 to $6.80.

Earning Surprises

In the previous quarter, Research In Motion Ltd. reported EPS of $1.74, which was 10 cents above the Zacks Consensus Estimate. The current Zacks Consensus Estimates for the ongoing quarter contains 1.14% upside potential while for the upcoming quarter, it is reflecting a 1.82% upside potential (essentially a proxy for future earning surprises). Similarly for fiscal 2011, the Zacks Consensus Estimates upside potential is 2.99% and for fiscal 2012, the downside potential is 0.78%.

Our Recommendation

Booming foreign markets and strong fundamentals, coupled with Research In Motion’s new PlayBook and QNX-based smartphone line up will act as positive catalysts for growth. Despite these positive factors, we expect stiff competition from Google Inc.’s (GOOG) Android-based smartphones and Apple Inc.’s (AAPL) iPhones, which will result in loss of market share. Moreover, launch of iPhones from Verizon Wireless (VZ) along with launch of Blackberry look-alike handsets and smartphones at cheap rates will pose serious threats to RIMM’s market share.

We, thus, maintain our long-term Neutral recommendation for Research In Motion Ltd. Currently, Research In Motion Ltd has a Zacks#3 Rank, implying a short-term Hold rating on the stock.