Warren Buffett's Annual Letter - On Risk And Investment Choices

When Warren Buffett departs from this world he will leave two extraordinarily important legacies. The first will be the philanthropic disbursement of almost all of his immense material wealth. The second legacy will be the philanthropic disbursement of almost all of his immense intellectual wealth. The former will be distributed mainly through the Gate's Foundation; the latter will be distributed through his annual letters. For value investors and money managers, the latter contribution is consummate to hitting the lottery so long as they take the sufficient time to absorb the lessons and follow Mr. Buffett's advice.

In this year's annual letter, on pages 17-19, Mr. Buffett succinctly categorizes the three investment options which exist for investors while discussing the risk associated with each scenario.

The three asset groups are:

1) Non-producing assets such as gold

2) Currency-based producing assets such as treasury bonds

3) Producing assets with inflation protection such as farmland, real estate and stocks with low capital requirements to growth earnings.

The prodigious wisdom expressed in that brief dissertation is the subject of today's discussion.

The Choices for Investors

I have a good friend who was born into a farm family in rural Nebraska. My friend and his wife owned and operated a small restaurant in a small college town for a number of years, until they moved to the "metropolis" of Lincoln where he became a teacher. They sold their restaurant for a tidy profit; however they did not sell the property, instead they leased the property to the current owner in order to secure a steady earnings yield.

Additionally, the couple owns some apartments which they rent for income and several years ago they purchased some farmland in western Nebraska. The land is suitable for growing corn as well as wheat and millet; although it possesses no irrigation potential.

My friend has little interest in the stock mark! et other than holding a significant investment in Berkshire (BRK.A) stock. I get the idea that he feels slightly uncomfortable about his position in Berkshire because unlike his other ventures, he does not receive an earnings yield since the company pays no dividend.

Think my friend is a country rube who merely got lucky? Think again, this man is following the suggestions which Mr. Buffett provided at the bottom of page 19 of this year's annual letter to a tee. Furthermore, he did so without consulting the Oracle of Omaha; instead his financial pursuits were merely a matter of his own common sense.

In his newly released annual letter, Mr Buffett suggested that the lowest risk assets and the ones most likely to increase one's buying power for the foreseeable future are: farmland, real estate and select businesses. Further, Buffett recommends businesses which rely upon minimal capital requirements to grow their earnings. He cited Coke (KO), IBM, and See's Candy as examples.

My friend took care of the real estate and farmland but left the selection of businesses to Mr. Buffett. King Solomon would have certainly approved of his thought process.

You see my friend has invested his net worth in producing assets which are unrelated to currency. According to Buffett, the riskiest assets for investors at this point in history are the ones which produce an earnings yield but provide nothing in the way of inflation protection. Such "conservative" investments as savings bonds and money market accounts hold an almost certain risk of losing long-term buying power when adjusted for inflation. The most risky are long-term treasury bonds which offer minuscule interest rates which are accepted under the guise of safety.

Buffett makes it perfectly clear to his readers that the guarantee of one's return of principle accompanied by a meager interest rate offered by long term US Treasuries is a much riskier proposition than owning equities or even gold. That statement runs count! er-intuit! ive to most conservative investors who similar to the academic proponents of CAPM theory equate market volatility with risk. In reality, risk should be equated with the probability that one will lose significant long-term buying power in the form of inflation should an investor foolishly opt to preserve the nominal value of their nest egg by purchasing low-yield treasury bonds.

In Mr. Buffett's opinion; real estate, farmland and businesses with low capital requirements for growth, particularly ones which possess an economic moat, will maintain their exchange rate in proportion to inflation. In other words, a worker will still be willing to exchange an equivalent amount of his labor for a bottle of Coke or a piece of See's candy. Likewise, the price of rent or the price of corn will rise in a manner that is largely commensurate to the increase in inflation. Of course in the case of grains, real estate or select businesses there will be down years and earnings yield fluctuations; however in the long run such entities will almost certainly maintain their inflation-adjusted gains.

Mr Buffett further states that businesses with high capital requirements will be much more affected by inflation; however such businesses will still outperform nonproductive assets such as gold and currency-based producing assets.

Buffett reflected upon the importance of selecting businesses with low capital requirements during inflationary periods in his 1983 Annual Letter. The following passage from the appendix of the letter which discusses the relationship between investment returns and inflation in detail:

"That probability exists because true economic Goodwill tends to rise in nominal value proportionally with inflation. To illustrate how this works, let's contrast a See's kind of business with a more mundane business. When we purchased See's in 1972, it will be recalled, it was earning about $2 million on $8 million of net tangible assets. Let us assume that our hypothetical mundane bu! siness th! en had $2 million of earnings also, but needed $18 million in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic Goodwill.

A business like that, therefore, might well have sold for the value of its net tangible assets, or for $18 million. In contrast, we paid $25 million for See's, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less really have been more, as our purchase price implied? The answer is "yes" – even if both businesses were expected to have flat unit volume – as long as you anticipated, as we did in 1972, a world of continuous inflation.

To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double.

But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner.

Remember, however, that See's had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over t! wice as l! arge – a need for $18 million of additional capital.

After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its tangible assets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)

See's, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 million in additional capital – over $3 of nominal value gained for each $1 invested.

Remember, even so, that the owners of the See's kind of business were forced by inflation to ante up $8 million in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least."

Clearly the best type of investments to own during periods of extended inflation are businesses which hold limited capital requirements thus reducing the ravages of inflation or other assets which are nearly guaranteed to rise proportionally in value as inflation increases. Of course pricing power is everything during inflationary runs.

Conclusion

Buffett has clearly spelled out to investors that he believes the meager interest rates currently offered by US Treasuries are entirely inadequate to offset the long term inflationary risk for investors. Thus the virtually guaranteed return of principle plus interest offers only the illusion of a risk-free investment. In reality, the greatest risk which all investors face is the substantial loss of long-term buying power.

Certainly most of us are not equipped to purchase a farm nor a! re many o! f us suited to enter the world of real estate investment. Additionally, such options are rarely available in one's 401K account. However, almost every one of us has the ability to invest our savings in the stock market in one form or another.

It has been obvious to many market mavens that the Fed has been intent upon eliminating the option of Treasury bond investment in favor of stimulating the economy and ensuring that deflation does not become a long-term problem. Holding interest rates at low levels for an extended period and engaging in quantitative easing practices has accorded astute investors few options other than to overweight equities.

At some time in the future, Treasury bond yields will rise to a point where they offer a legitimate alternative to equities as they have in decades past but that time frame lies well out on the horizon. In the meantime, astute investors have no choice but to hold stocks in their IRAs, 401Ks and savings accounts in hopes of preserving the buying power of their hard-earned nest eggs.

Just bear in mind one additional thought which Buffett pointed out in his letter; liquidity is everything. In the case of the individual investor, liquidity means holding enough cash to meet one's intermediate needs and never I repeat never, employing margin in an attempt to magnify returns.

It is also important to note the importance of maintaining an earnings stream in the form of employment. The practice is immensely important in providing financial security as well as enhancing one's piece of mind. If Mr. Buffett can work productively into his 80s I imagine that most of us can make it until at least 65 years of age.

Disclosure: No position in any stock mentioned

Q2 Expectations Low, Guidance Key - Ahead of Wall Street

Tuesday, July 9, 2013

This is Mark Vickery, covering for Sheraz Mian while he records an early-morning interview.

Even though we've "unofficially" entered Q2 earnings season with Alcoa's (AA) top-line beat reported after the bell Monday, we're ramping-up to the busy time like an avenue in Chicago. Aside from earnings reports from Yum! Brands (YUM), JPMorgan (JPM) and Wells Fargo (WFC) in the latter half of the week, there is but a small handful of companies posting quarterly results otherwise.

Things pick up next week with many financials following JPMorgan and Wells Fargo this week. And because the financial industry is expected to be the biggest performer in Q2, we'll likely get a fairly articulate view of how the second quarter is coming along within the next two weeks or so… just not right now.

That said, expectations for Q2 are almost laughably low at the moment. With forecasts having come down drastically in the past three months from around 3.6% to 0.4% now, the question is not whether the quarter will outperform expectations -- at least, we all should certainly hope it won't be -- but by how much. The past two quarters, Q412 and Q113, posted actuals of 2+% -- a perfect definition of the "muddle-through" economy pretty much everyone agrees we're enduring. See here for the excellent synopsis by Zacks Director of Research Sheraz Mian:

Will Earnings Growth Bottom in Q2?

So with no particularly extreme headwinds over the past quarter, one might reasonably expect we will find ourselves back in the 2+% range once the dust settles on the quarter (and we can all go on vacation).

But even more interestingly, if you look at the graph in the link above, you'll see projected earnings literally skyrocket for Q3 and Q4 -- to 5.1% and 11.7%, respectively. And although these are year-over-year comparisons, they are anything but easy hurdles; the second half of 2012 was stronger than the first half, too. In fact, as Sheraz Mian points out, "[T]he level of tot! al earnings expected in 2013 Q3 and Q4 represent new all-time high quarterly records."

Clearly, this puts a premium not directly on Q2 earnings (they're going to be pretty crappy) but on company guidance for Q3 and the fiscal year. We might expect things to ratchet down from 11.7% earnings in the fourth quarter -- 11.7%! -- but unless the earth crumbles beneath the feet of about every industry, we can feel secure things will be looking up in the second half. Certainly we should not ignore particularly bad guidance from anyone in the next few weeks, but barring any major catastrophe we should be enjoying new record highs in the next couple+ quarters.

Mark Vickery
Senior Editor



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Top Performing Companies For 2014

Apple� (NASDAQ: AAPL  ) reported earnings last Tuesday night, and investors were generally pretty pleased with results. The stock spent most of the next trading day up more than 5% and has gained 3.8% in the past week. Yet while the result had some positives, such as iPhone unit growth well above analyst expectations, there were also some areas that were a mixed bag.�

In the following video, Fool analysts Evan Niu and Eric Bleeker look at the good, the bad, and the ugly in Apple's earnings. Beyond better-than-expected iPhone sales, the storyline was really how the company continues outperforming in America. In this quarter's report, the addition of T-Mobile (NYSE: TMUS  ) provided some new tailwinds to growth. As far as the "bad" and "ugly," the two look at Apple's first year-over-year decline in tablets and weakness in Greater China and what might be causing results in those areas that were worse than expected.�

Top Performing Companies For 2014: Vendtek Systems Inc(VSI.V)

VendTek Systems Inc. develops, markets, and licenses automated transaction system software and support technologies primarily for the prepaid telecom and financial services industries. The company offers efresh, a software product that provides electronic distribution infrastructure to service providers, retailers, and retail distributors for selling their products and services electronically. It is also involved in the resale and distribution of prepaid telecommunication products, such as prepaid cellular and prepaid long distance products; and manufacture of vending machines. The company serves its customers in the Americas, Asia, Europe, and the Middle East. VendTek Systems Inc. was founded in 1988 and is headquartered in Port Coquitlam, Canada.

Top Performing Companies For 2014: Clime Capital Ltd (CAM.AX)

Clime Capital Limited is a publically owned investment manager. The firm manages separate client focused equity portfolios. It also manages mutual funds for its clients. The firm invests in equities of publicly listed and unlisted companies. It invests in value stocks by employing fundamental analysis to make its investments. Clime Capital Limited was incorporated in 2003 and is based in Sydney, Australia.

Top 5 Growth Stocks To Invest In 2014: Universal Corporation(UVV)

Universal Corporation, together with its subsidiaries, operates as a leaf tobacco merchant and processor worldwide. It engages in selecting, procuring, buying, processing, packing, storing, supplying, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products. The company processes and/or sells flue-cured and burley tobaccos, dark air-cured tobaccos, and oriental tobaccos; and provides value-added services, including blending, chemical and physical testing of tobacco, just-in-time inventory management, and manufacturing reconstituted sheet tobacco. Its flue-cured, burley, and oriental tobaccos are used principally in the manufacture of cigarettes; and dark air-cured tobaccos are used in the manufacture of cigars, pipe tobacco, and smokeless tobacco products. The company was founded in 1888 and is headquartered in Richmond, Virginia.

Top Performing Companies For 2014: Derma Sciences Inc.(DSCI)

Derma Sciences, Inc. operates as a medical technology company. The company provides advanced wound care products, including Medihoney dressings that are used for the management of non-chronic and hard-to-heal wounds, such as chronic ulcers, burns, and post-operative wounds; Bioguard dressings that are used for prophylactic use in the prevention of hospital or community acquired infections through wound sites; Algicell Ag, antimicrobial dressings; Xtrasorb dressings that convert fluid within the dressings to a gel and lock the exudates into the dressings; TCC-EZ, a dressing system for the management of diabetic foot ulcers; and occlusive dressings, such as hydrocolloids, foams, hydrogels, alginates, additional silver antimicrobial dressings, cleansers, and Dermagran products. It also offers traditional wound care products, such as of gauze sponges and bandages, non-adherent impregnated dressings, retention devices, paste bandages, and other compression devices, as well as a dhesive bandages and related first aid products. In addition, the company provides pharmaceutical wound care products, including DSC127, an angiotensin analog for use in wound healing and scar reduction. It markets wound closure strips, nasal tube and catheter fasteners, barrier creams and ointments, antibacterial cleansing foams and sprays, shampoos and body washes, hand sanitizers, bath additives, body oils, and moisturizers to doctors, clinics, nursing homes, hospitals, home healthcare agencies, and other institutions. The company sells its products to health care providers, such as wound care centers, extended care facilities, acute care facilities, home health care agencies, and physicians? offices through direct sales representatives in the United States, Canada, and the United Kingdom; retail channels; manufacturers? representatives and independent distributors in international markets. Derma Sciences, Inc. was founded in 1984 and is headquartered in Princeton, New Jersey.

NOV Upgraded to Neutral - Analyst Blog

On Jul 11, 2013, we upgraded oilfield services behemoth National Oilwell Varco Inc. (NOV) to Neutral from Underperform. Our new investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Upgrade?

We like its healthy backlog, solid balance sheet and strength in international operations, particularly in the Middle East and Brazil. The Robbins & Myers acquisition will further boost NOV's earnings visibility by expanding its blowout preventer product line; a critical safety machine for a well. The recent influx of offshore rig awards adds to the positive sentiment.

Detailed Analysis

Houston, TX-based NOV is one of the biggest manufacturers of drilling equipment in the world with an impressive business model. The company's large installed base of rigs worldwide provides for a steady recurring revenue stream through demand for maintenance, parts and other expendable products.

NOV's recently completed acquisition of smaller rival Robbins & Myers will allow the energy equipment contractor to broaden scale and scope of the solutions that it offers to oil and gas customers worldwide. In particular, the move will help NOV to strengthen its position as a supplier of blowout preventer (a critical safety machine that can shut a well off in case of an emergency), as Robbins & Myers is the fourth-largest maker of such devices.

Finally, NOV, which ranks ahead of Cameron International Corp. (CAM) as the biggest U.S. maker of oilfield equipment, has a strong balance sheet with a debt to capitalization ration of 17.3%. Moreover, since it commenced paying dividends in 2009, management has increased the payout every year. This indicates NOV's healthy financial position.

However, we think the current valuation is fair and adequately reflects the company's future growth prospects. Moreover, with markets remaining competitive and pricing likely to be weak, we see no obvious catalyst in NOV's business to significantly push the stock price! higher.

Stocks That Warrant a Look

While we expect NOV to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating units, one can look at Forum Energy Technologies Inc. (FET) and Dril-Quip Inc. (DRQ) as good buying opportunities. Both these oilfield machineries and equipment providers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise considerably from current levels.

Is Lennar a Dangerous Investment?

With shares of Lennar (NYSE:LEN) trading at around $36.72, is LEN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

Lennar CEO Stuart Miller recently stated that a gradual rise in interest rates won't stop the housing recovery. He might be right, but let's play devil's advocate.

There's a lot of talk that consumers will be able to afford homes even if rates continue to increase. Once again, while this is possible, it's important to remember that investors always want to be ahead of the curve. In other words, it's not that rates are still low; it's that the direction of rates is up. Therefore, investors (and traders) are likely to shy away from such a play. That said, there is no guarantee that rates will continue to increase. If rates stay where they are or come back down, then longs are well-positioned.

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Instead of attempting to predict the direction of interest rates, let's instead attempt to answer the question whether or not interest rates and home prices can increase at the same time in this economic environment. In other words, will there be enough demand to push up home prices even if interest rates are higher and monthly mortgages become more expensive?

Most analysts are saying that this is a likelihood. Perhaps that's the case, but Generation X isn't exactly the wealthiest generation of all time, and Generation X is a major player when it comes to home buying. Headwinds include unemployment, underemployment, and debt. A lot of the strong performance in housing has come from investment firms and speculation. But to be fair, mortgage applications have been on the rise over the past year. The problem is that they declined in May. If rates are now higher – a 30-year fixed is at 3.91 percent – is it likely for there to be a sustainable increase in mortgage applications if rates continue to increase?

Lennar has significantly improved its efficiency since the real estate bust in 2006. However, while earnings have consistently improved on an annual basis and revenue has improved over the past three years, the last quarter saw significant declines in revenue and earnings on a sequential basis.

Lennar is trading at 16 times forward earnings, which is in-line with peers Toll Brothers (NYSE:TOL) and PulteGroup (NYSE:PHM), which are trading at 21 times forward earnings, and 12 times forward earnings, respectively. In regards to profit margin, Lennar is impressive at 16.51 percent. Toll Brothers is even more impressive at 23.60 percent. However, PulteGroup sports a profit margin of just 5.87 percent. Lennar's operating cash flow is -$613.70, which is a negative.

Lennar does offer a 0.40 percent yield whereas its aforementioned peers don't offer any yield. However, this isn't a large enough yield to make a difference in an investor's decision-making process.

The company culture at Lennar is average at best. According to Glassdoor.com, employees have rated their employer a 3.1 of 5, and only 45 percent of employees would recommend the company to a friend. In regards to leadership, it's also average as 50 percent of employees approve of CEO Stuart Miller. All that said, this is by far and away an industry trade, not a company-specific trade.

Let's take a look at some important numbers prior to forming an opinion on this stock.

T = Technicals Have Weakened

Lennar had been performing extremely well for years, but momentum has shifted to the downside.

	1 Month	Year-To-Date	1 Year	3 Year
LEN	-13.99%	-4.88%	45.50%	141.3%
TOL	-12.76%	-1.78%	27.74%	68.55%
PHM	-13.78%	10.24%	138.0%	109.6%

At $36.72, Lennar is trading below its averages. Even if after the recent selloff, this is a rarity throughout the broader market.

50-Day SMA	41.30
200-Day SMA	40.21

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E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Lennar is close to the industry average of 1.10.

	Debt-To-Equity	Cash	Long-Term Debt
LEN	1.25	1.18B	5.09B
TOL	0.78	936.00M	2.48B
PHM	1.14	1.60B	2.60B

E = Earnings Have Been Strong

Earnings have consistently improved on an annual basis, and revenue has improved for three consecutive years.

Fiscal Year	2008	2009	2010	2011	2012
Revenue ($) in millions	4,575	3,119	3,074	3,095	4,105
Diluted EPS ($)	-7.00	-2.45	0.51	0.48	3.11

Looking at the last quarter on a sequential basis, revenue and earnings both declined.

Quarter	May. 31, 2012	Aug. 31, 2012	Nov. 30, 2012	Feb. 28, 2013
Revenue ($) in millions	930.16	1,099.76	1,349.94	989.95
Diluted EPS ($)	2.06	0.40	0.56	0.26

Now let's take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Lennar's stock-price momentum has shifted in the wrong direction as interest rates have slowly headed higher. To simplify the future potential of Lennar, if interest rates head back down, then Lennar is a great investment. If interest rates continue to increase, then Lennar is a bad investment. And if interest rates gradually move higher (a realistic possibility), then nobody really knows the answer. However, if interest rates gradually move higher, then they will eventually reach a point where most consumers (not investors) won't be able to afford a home (see weak consumer). That being the case, how can Lennar possibly be a winning long-term investment? Lennar would be a winning long-term investment if rates were already at reasonable levels and the consumer was strong. However, that isn't the environment we're currently living in.

Top 10 Clean Energy Companies For 2014

In the U.S., when the topic of clean energy comes up, we like to debate concepts like climate change or global warming, turning it into a political debate more than a strategic one. Subsidies to industries such as wind or solar, no matter how small, take criticism from politicians and the media while the government continues to subsidizes oil, gas, coal, and nuclear production to the tune of billions of dollars each year. We neglect to account for externalities such as the cost of war ships keeping the Suez Canal open when Iran threatens to close it, oil spills inland and offshore, the wars in Iraq, and the limited liability given to the operators' nuclear plants. If Fukishima happened here, it would be no problem for U.S. companies -- Uncle Sam would pick up the tab.

In China, the energy debate is very different. When China sees its imports of coal rising and dependence on foreign oil growing, it springs into action. Not by screaming, "Drill, baby, drill," but by investing billions of dollars in home-grown energy sources. Yes, I'm talking about clean, renewable energy, and China's investment in these energy sources make U.S. subsidies look like the half-hearted effort they are.

Top 10 Clean Energy Companies For 2014: Information Services Group Inc.(III)

Information Services Group, Inc. operates as a fact-based sourcing advisory company principally in the Americas, Europe, and the Asia Pacific. It provides strategic consulting, benchmarking and analytics, managed services, and research services with a focus on information technology, business process transformation, and enterprise resource planning. The company serves financial services, telecom, healthcare and pharmaceuticals, manufacturing, transportation and travel, and energy and utilities industries; and state and local governments and airport and transit authorities. Information Services Group, Inc. was founded in 2006 and is based in Stamford, Connecticut.

Advisors' Opinion:

• [By Peter Leeds]

  According to The Washington Post over $1.8 trillion dollars is sitting idle in America's corporations.  The original reasons companies were hoarding cash, such as economic uncertainty and European debt contagion fears, are beginning to take a back seat to growth plans.  These companies (such as Microsoft with $40 billion cash, Caterpillar with $3 billion, Exxon at $11 billion, etc...) will look to use their cash to capture market share and expand.  I'm expecting this increased spending to result in a mild improvement in the unemployment rate, pushing it down from 9% to 7.5% in 2012. 

  A consulting firm like Information Services Group (III) will be one of the primary beneficiaries of increased corporate activity.  They have top clients from a broad range of industries, such as financial services, manufacturing, health care, energy, and more.  With the majority of their clientele increasing spending, a portion of those funds will find their way to III.  The Peter Leeds price outlook:  $2.40.

Top 10 Clean Energy Companies For 2014: RF Industries Ltd.(RFIL)

RF Industries, Ltd. provides interconnect products and systems for radio frequency (RF) communications devices and wireless digital transmission systems in the United States and internationally. Its Connector and Cable Assembly division designs, manufactures, and distributes coaxial connectors and cable assemblies that are integrated with coaxial connectors. The company?s Aviel Electronics division engages in the design, manufacture, and distribution of specialty and custom RF connectors primarily for aerospace and military customers. Its Oddcables.com division primarily sells coaxial, fiberoptic, and other connectors and cable assemblies on a retail basis to local multi-media and communications customers. The company?s Bioconnect division manufactures and distributes cabling and interconnect products to the medical monitoring market. Its Neulink division engages in the design, manufacture, and sale of RF data links and wireless modems for receiving and transmitting contro l signals for remote operation and monitoring of equipment, and personnel and monitoring services. The company?s RadioMobile division provides original equipment manufacturing services of end-to-end mobile management solutions implemented over wireless networks that supplement the operations of its Neulink division. RF Industries markets and distributes its products through warehousing distributors, original equipment manufacturers, hospital suppliers, dealers, distributors, directly or manufacturers representatives, system integrators, value added resellers, and dealers, as well as through the operation of an e-commerce Website, known as OddCables.com. The company was formerly known as Celltronics, Inc. and changed its name to RF Industries, Ltd. in November 1990. RF Industries, Ltd. was founded in 1979 and is headquartered in San Diego, California.

Top Medical Stocks For 2014: Anglo Pacific Group(APF.L)

Anglo Pacific Group PLC, together with its subsidiaries, engages in securing natural resources royalties by acquisition and through investment in mining interests primarily in coal, iron ore, gold, and uranium principally in Australia, North America, South America, and Africa. It holds 50% of the coking coal royalty entitlement on the Kestrel and Crinum underground mines located in Queensland, Australia; a 1% gross revenue royalty (GRR) on the Amapa iron ore system in Brazil; a 1% GRR on iron ore and non-precious metals, other than copper, on the Tucano project in the Amapa region of Brazil; a 2% net smelter royalty (NSR) on the Jogjakarta iron sands project in Indonesia; a 1.5% GRR on various exploration licenses, including the Railway iron ore deposit in Western Australia; and a 1% GRR over the Isua iron ore project in Greenland. The company also holds a 2.5% NSR on the El Valle-Boinas/Carles gold mines in Spain; a 2.5% NSR on the Malartic-Midway and McKenZie Break gold projects in Quebec, Canada; a 3% GRR on the Bulqiza chromite project in Albania; a 1% NSR on the Black Thor, Black Label, and Big Daddy chromite projects in northern Ontario, Canada; a 1% NSR over the Four Mile uranium project in south Australia; and a 1% NSR over the Salamanca uranium project in Spain. In addition, it holds an option to acquire a 2% NSR on Creso Exploration Inc?s Duggan gold project in Ontario, Canada; a 1.5% NSR on the Araguaia nickel project in Brazil; and a 1% NSR on the Highbank Lake and Eastbank PGE exploration properties in Ontario, Canada. Further, the company owns mineral licenses in the Groundhog and Peace River coal deposits in British Columbia, Canada. Anglo Pacific Group PLC is headquartered in London, the United Kingdom.

Top 10 Clean Energy Companies For 2014: THOMAS COOK GROUP PLC ORD EUR0.10(TCG.L)

Thomas Cook Group plc, through its subsidiaries, provides leisure travel services. The company offers its holiday services to approximately 23.6 million customers through its network of travel stores, Websites, and call centers. Its principal brands include the Thomas Cook, Direct Holidays, Neilson, club 18-30, Neckermann, Sentido, �er Tours, Jet tours, aquatour, Ving, Spies, Intair, Fun Sun, BelAirTravel.com, ALBATours, Tj�eborg.fi, and Condor. The company also engages in the airline, hotel, and travel agency activities, as well as offers foreign exchange services. In addition, it provides travel assurance that covers the various risks associated with travel, such as insurance for accidents and thefts; and travel finance that allows customers to finance their travel, such as credit cards. It operates in the United Kingdom, Ireland, India, the Middle East, Europe, and North America. The company was founded in 1841 and is based in London, the United Kingdom.

Top 10 Clean Energy Companies For 2014: Monarch Community Bancorp Inc.(MCBF)

Monarch Community Bancorp, Inc. operates as a bank holding company for Monarch Community Bank that provides various banking services in Branch, Calhoun, and Hillsdale counties of Michigan. The company offers various deposit products, including passbook and statement savings accounts, money market deposit accounts, NOW and demand accounts, interest bearing and non-interest bearing checking accounts, and certificates of deposit to consumers and businesses. It also provides a range of loan products comprising one-to-four family residential real estate loans; multi-family and commercial real estate loans; construction and land development loans; secured consumer loans, such as home equity loans and lines of credit, auto loans, manufactured housing loans, and loans secured by savings deposits; unsecured loans that include home improvement loans; and commercial business loans. In addition, the company, through its subsidiary, First Insurance Agency, offers insurance services. As of December 31, 2010, it operated five full service offices. The company was founded in 1934 and is headquartered in Coldwater, Michigan.

Top 10 Clean Energy Companies For 2014: Itv Ord 10p(ITV.L)

ITV plc operates television channels in the United Kingdom and internationally. The company?s Broadcasting and Online segment operates a family of television channels. Its channels include ITV1, a commercial television channel; ITV2, a digital channel for younger audience of 16-34 year old with a female bias; ITV3, a films and drama channel; ITV4, a sports channel; and CITV that provides children?s programming. This segment, through SDN, a digital terrestrial television multiplex operator, leases out digital terrestrial capacity to channel operators on the United Kingdom?s broadcast platform, Freeview. It also operates itv.com, which delivers ITV programming and clips to Internet users through ITV player, as well as provides video on demand services on cable television and other closed platforms. The company?s ITV Studios segment produces programming for ITV channels and for other UK and international broadcasters. This segment also distributes programming, formats, an d merchandising in the UK and worldwide on various platforms; and involves in home entertainment, publishing, and licensing activities. The company is based in London, the United Kingdom.

Top 10 Clean Energy Companies For 2014: Enzo Biochem Inc. (ENZ)

Enzo Biochem, Inc., an integrated life sciences and biotechnology company, engages in the research, development, manufacture, and marketing of diagnostic and research products based on genetic engineering, biotechnology, and molecular biology. The company operates in three segments: Clinical Labs, Life Sciences, and Therapeutics. The Clinical Labs segment offers routine and esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed condition. This segment operates a full-service clinical laboratory, a network of approximately 30 patient service centers, a laboratory, and a full-service phlebotomy and in-house logistics department. The Life Sciences segment manufactures, develops, and markets products and tools to life sciences, drug development, and clinical research customers. It provides proteins, antibodies, peptides, small molec ules, labeling probes, dyes, and kits, which offer tools for target identification/validation, high content analysis, gene expression analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis to life science researchers. This segment provides its products to scientific experts primarily in the field of cancer, cardiovascular disease, neurological disorders, diabetes and obesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity, and renal injury. The Therapeutics segment researches and develops therapeutic drug candidates in the areas of gastrointestinal, infectious, ophthalmic, and metabolic diseases. The company sells its products through its direct sales force; and a network of distributors worldwide. Enzo Biochem, Inc. was founded in 1976 and is headquartered in New York, New York.

Advisors' Opinion:

• [By CRWE]

  Enzo Biochem Inc. (NYSE:ENZ) is a pioneer in molecular diagnostics, leading the convergence of clinical laboratories, life sciences and therapeutics through the development of unique diagnostic platform technologies that provide numerous advantages over previous standards.

Top 10 Clean Energy Companies For 2014: Harry Winston Diamond Corporation (HWD)

Harry Winston Diamond Corporation, a diamond company, engages in mining and retailing diamonds in North America, Europe, and Asia. The company supplies rough diamonds through holding a 40% interest in the Diavik Diamond Mine located at Lac de Gras in Canada�s Northwest Territories; and retails fine jewelry and watches under the Harry Winston brand. As of January 31, 2012, it operated 20 directly operated salons, 4 licensed salons, and 194 wholesale watch doors. The company was formerly known as Aber Diamond Corporation and changed its name to Harry Winston Diamond Corporation in 2007. Harry Winston Diamond Corporation was founded in 1980 and is based in Toronto, Canada.

Top 10 Clean Energy Companies For 2014: Motorcar Parts of America Inc. (MPAA)

Motorcar Parts of America, Inc., together wit its subsidiaries, remanufactures and distributes alternators and starters for import and domestic cars, light trucks, heavy duty, agricultural, and industrial applications in the United States and Canada. It replacement parts are used on vehicles after initial vehicle purchase. The company sells its products to approximately 12,000 retail outlets; automotive warehouse distributors; and OES customers under customer private labels and under the Quality-Built, Talon, Xtreme, and Reliance brand names. Motorcar Parts of America, Inc. was founded in 1968 and is based in Torrance, California.

Advisors' Opinion:

• [By CRWE]

  Motorcar Parts of America, Inc. (Nasdaq:MPAA) is scheduled to make a presentation on Wednesday, May 23, 2012 at 9:30 a.m. Pacific time at B. Riley & Company’s 13th Annual Investor Conference at the Loews Santa Monica Beach Hotel in Southern California.

Top 10 Clean Energy Companies For 2014: Enterprise Bancorp Inc(EBTC)

Enterprise Bancorp, Inc. operates as the holding company for Enterprise Bank and Trust Company that provides various banking products and services primarily in Merrimack Valley and north central regions of Massachusetts, and southern New Hampshire. The company offers deposit products, which include personal interest checking accounts, savings accounts, money market accounts, individual retirement accounts, and term certificates of deposits to the general public; and commercial checking, business and municipal savings accounts, money market and business sweep accounts, and escrow management accounts, as well as checking and simplified employee pension accounts to the employees of its business customers. Its loan portfolio comprises commercial mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and standby letters of credit, as well as equipment lease financing for businesses; and residential mortgage loans, ho me equity loans, residential construction loans on primary residences, secured and unsecured personal loans, and lines of credit to individuals. In addition, the company provides investment advisory and management services, including brokerage, trust, and management of various strategic investment portfolios to individuals, family groups, businesses, trusts, foundations, non-profit organizations, and endowments and retirement plans; insurance products comprising property and casualty, employee benefits, and risk-management solutions; and online banking and cash management services, as well as non-deposit investment products and services. April 22, 2011, it had 18 full-service branch offices located in Lowell, Acton, Andover, Billerica, Chelmsford, Dracut, Fitchburg, Leominster, Methuen, Tewksbury, and Westford, Massachusetts; and in Derry, Hudson, and Salem, New Hampshire. The company was founded in 1989 and is headquartered in Lowell, Massachusetts.

The Original Behavioral Economist

“I’ve been doing the behavioral stuff for 35 years. It’s the basis of investing and economics. It’s only recently that it’s been popularized by academia. They’re reconstituting something in a trivial manner.”

Michael Aronstein doesn’t mince words. The president, chief investment officer and portfolio manager of the MainStay Marketfield Fund has a good thing going in the long-short equity space, due in part to his no nonsense style and the predictable unpredictability of human behavior. And it’s paying off. The fund has five stars, $7.4 billion in AUM, has returned 8.5% annually during the past five years (outdoing 95% of its peers) and is ranked third out of 45 long-short equity funds since inception its in 2007.

Aronstein, his partner Michael Shaoul and the team of analysts look for “ideas investors are acting on that we feel are incorrect.”

“We point to things they own that they shouldn’t be, and things they’re missing that they should,” Aronstein explains. “The markets are influenced by global market trends, but the two really are different. The global macro situation causes distortions in the domestic marketplace that will eventually correct themselves.”

It might sound like a value play, but it’s really anything but. To the contrary, Aronstein looks for growth companies with good balance sheets, those that “might be in controversial industries, but are strong themselves .”

When asked for an example of where this might occur, he immediately points to government statistics, an area he’s been studying for a year and a half.

“If government was subject to Sarbanes-Oxley, the producers of these numbers would be in jail,” he says. “Statistics is the easiest place for government not to spend money, if that’s what they’re looking to do.”

“If you have a story you’re writing about the New York State Legislature that is produced by the New York State Legislature, you wouldn’t need to be too innovative. People tend to be very lazy about taking numbers at face value. They don’t realize that most statistics are an estimate of a guess. When the revisions come out, it very often puts them in the opposite camp of the original conclusions.”

Aronstein says the real value comes in giving a sense of the forces at work in the world.

“Investing is avoiding the major sinkholes that could permanently take you out. We let clients know of the theme of the decade that has matured and is now too dangerous.”

With that in mind, he advises to “short bonds all over the world. The theme that’s matured is emerging-market fixed income. It’s been the most popular product on Wall Street recently.”

He noted the credit expansion “gave him pause in 2010 and 2011,” and we’re at an even higher level of credit exposure than 2003 through 2007, the period just prior to when the markets seized.

So what does he like?

Europe — little surprise given his philosophy.

“We have 25% of the fund in Europe. The north, in particular, is doing better than anybody could have guessed.”

He cryptically concludes that there are “forces that people have come to rely on that will be unseated,” noting energy as an example.

“This unseating will be an unmitigated positive for some and inherently unstable for others. Like the old saying in golf: every swing makes somebody happy.”

---

Check out It’s Not Just Active and Passive, but Behavioral Finance That Best Meets Clients’ Needs on AdvisorOne.

FSI’s First FA Conference Attracting Attendees, High-Profile Speakers

When Chris Paulitz started planning the Financial Services Institute's inaugural conference he wanted to set it apart from others.

"We decided that this conference has to be unique compared to all the other conferences out there,” said Paulitz of the conference for financial advisors scheduled for September. “One of the ways we did that,” said Paulitz, senior vice president for membership and marketing for the independent broker-dealer group, “is that only financial advisors would create the conference” agenda. Ten members of FSI’s advisor council were chosen to program the conference, he says, ensuring that “the majority of what they get at this conference they can’t get elsewhere.”

So far, reports Paulitz, “well more than 200” advisors have registered and paid for their attendance, a number that he expects to increase as the conference draws nearer, citing the intent of a number of independent broker-dealers to pay for some of their representatives to attend the conference, which runs from the evening of Sept. 9 to midday Sept. 11 in Washington, D.C., at the Washington Hilton. “Some are paying part of the registration fee; some are paying the whole fee, some are even paying” for their advisors’ airfare and hotel accommodations.”

Moreover, he expects that some IBD reps will decide to join FSI prior to the FSI Financial Advisor Summit to get the discounted member rate.

A highlight of the conference will be the appearance of Phyllis Borzi (left), the assistant secretary of the Department of Labor’s EBSA, who will be interviewed on stage by Dale Brown, CEO of the FSI, and who will also take questions from attendees at a Sept. 10 session.

Borzi is leading DOL’s fiduciary reproposal for retirement plan advice, which is expected to be issued in October. The issue is of particular concern to FSI and its independent broker-dealer and 35,000 advisor members, though Paulitz worried that “most people don’t get” the impact of the DOL’s upcoming ruling “that they won’t be able to charge commissions” on retirement plans. “To her credit,” Paulitz says, “she wants to be sure that our members can interact with her.”

Other general session speakers include retired Marine General Peter Pace, NEFE President Ted Beck, and ChangeLabs' CEO Peter Sheahan.

There are three tracks in the conference program, Paulitz reports, “yourself, your business, and your community.” Stressing that “we’re not competing with other broker-dealer conferences,” the conference’s Business track will include succession planning and practice management sessions, but also “how to read body language, looking at advisors’ websites–what you’re doing right and wrong” and even an advisor’s clothing choices: “What are you wearing? What does that convey?” asks Paulitz, to clients and prospects.

The Yourself track will include advice on how advisors can stay healthy, how to care for their own aging parents, and how to achieve a “better work-life balance–all which will better your business” as well, he says.

The Community track will focus on how advisors can get more involved in their communities, including looks at how regulation “changes your community," how to run for public office, and a panel of advisors who’ve won philanthropic awards. There’s an “altruistic side and a business side for being involved in your community,” Paulitz points out.

In addition to the standard education and networking, attendees will be able to get free professional headshots from a photographer and “free website strategy” advice, along with “collateral to help FAs sell the value of independence to existing and prospective clients that has been  “FINRA reviewed.”

Hot Tech Companies To Invest In 2014

A panel of trade press editors and a public relations professional will discuss the best ways get press coverage (this writer will participate in that panel,) and attendees will receive discounted “one-on-one image consultations” by consultant Jane Seaman during the conference.

“The real purpose of this summit is to grow the engagement” of FSI’s members, says Paulitz, which he characterizes as the “voice of one through the strength of many,” which he said will come in handy “when this rule from DOL comes out.” 

NHAI Tax Free Bonds got listed on a bumper note today

5 Best Medical Stocks To Watch For 2014

National Highway Authority of India (NHAI) tax free bonds got listed on a bumper note today as per market expectations.

They are currently trading at the price of around 1028 (Series: 8.2%) and 1036 (Series II: 8.3%). It gives investors 2.8-3.6% returns in 34 days resulting in an annualised pre-tax return of around 33-43%. At the current market price of 1028 (Series I), the current yield on the 10 year bond after listing gains is around 7.78%. This is a tax free rate resulting in a pre-tax yield for the highest tax bracket (30.9%) investor at 11.26% while for the 20% tax bracket it is at 9.80%. Therefore, for 20% tax bracket investors, it makes sense to book profit in NHAI bonds and invest in options like Fixed Deposits (FD) , short term debt mutual funds , etc while an investor in the 30% tax bracket should remain invested.

The issue was oversubscribed in the HNI and QIB category on the first day itself. NHAI proposed to issue Rs 5000 crore but ended up raising Rs 10,000 crore with a greenshoe option as it got oversubscribed to the extent of Rs 25000 crore.

Since we are near the peak of the interest rate cycle, these bonds could see further capital appreciation once rates start falling. Therefore, investors should continue to hold these bonds at current levels also, as apart from a tax free yield of 7.78% (pre-tax: 11.26%), there is the possibility of further capital gains once the RBI start cutting rates. Being a long-term government backed bond, it also reduces re-investment risk once system interest rates come down and deserves to be a part of the fixed income portfolio. Currently, the five year and above FD interest rates are around 9.5-10%. Therefore, for investors in the highest tax bracket, NHAI bonds should be preferred over FDs. Also, because of the large issue size of Rs 10000 crore and high institutional interest, liquidity is also likely to remain better as compared to any other bonds. Therefore, they should be able to transact without much transaction cost in future also.

Click here to know more on Bonds and other Fixed Income instruments

5 Best Oil Stocks For 2014

If consistency is what you want, then the announcement by�Lufkin Industries� (NASDAQ: LUFK  ) �that�it will pay a�quarterly cash dividend�of�$0.125 per share on June 10 to shareholders of record at the close of business on June 3, is what you want. The oilfield industry services provider has paid that rate consistently every quarter for the last five years. It has paid a quarterly dividend every year since 1990.

The new dividend annualizes to $0.50 per share, and yields 0.6% at the closing price of Lufkin Industries' stock on May 2.

LUFK Dividend data by YCharts

More Expert Advice from The Motley Fool

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5 Best Oil Stocks For 2014: HRT Participacoes em Petroleo SA (HRTPY.PK)

HRT Participacoes em Petroleo SA, formerly BN 16 Participacoes Ltda, is a Brazil-based holding company engaged in the oil and gas industry. The Company is primarily involved in the exploration and production (E&P) of oil and natural gas in Brazil and Namibia. Through its subsidiaries, it is active in the geophysical and geological research, exploration, development, production, import, export and sale of oil and natural gas, as well as in the provision of air logistics services in transporting people and equipment related to oil and gas activities in the exploratory campaign in the Solimoes Basin. As of December 31, 2011, the Company had seven subsidiaries, including Integrated Petroleum Expertise Company Servicos em Petroleo Ltda (IPEX), HRT O&G Exploracao e Producao de Petroleo Ltda, HRT Netherlands BV, HRT America Inc, HRT Africa, HRT Canada Inc and Air Amazonia Servicos Aereos Ltda.

5 Best Oil Stocks For 2014: Shell Refining Company (SHELL)

Shell Refining Company (Federation of Malaya) Berhad is principally engaged in refining and manufacturing of petroleum products. The Company operates primarily in Malaysia. Its operations also include the gas to liquids (GTL) plant of its kind in Bintulu, Sarawak, and a refinery in Port Dickson, Negeri Sembilan. Its upstream operations focus on the development and extraction of crude oil and natural gas offshore Sarawak and Sabah. In downstream its main activity is in refining, supply, trading and shipping of crude oil and petroleum products through the sales and marketing of transportation fuels, lubricants, specialty products and technical services. The Company is also a partner in two joint ventures that convert natural gas to liquefied natural gas. Royal Dutch Shell plc is its holding company.

Hot High Tech Stocks To Invest In Right Now: BMB Munai Inc (BMBM)

BMB Munai, Inc., incorporated in July 1981, focuses on oil and natural gas exploration and production in the Republic of Kazakhstan (Kazakhstan) through a wholly owned operating subsidiary, Emir Oil LLP, (Emir Oil). Emir Oil holds an exploration contract that allowed exploration drilling and oil production in the Mangistau Province in the southwestern region of Kazakhstan. On February 14, 2011 the Company entered into a Participation Interest Purchase Agreement (the Purchase Agreement) with MIE Holdings Corporation (MIE), and its subsidiary, Palaeontol B.V (Palaeontol), pursuant to which the Company agreed to sell all of its interest in Emir Oil to Palaeontol (the Sale). On September 19, 2011, the Company completed the sale of all of its interests in Emir Oil LLP to a subsidiary of MIE Holdings Corporation. The operations of Emir Oil LLP is classified as discontinued.

The initial distribution amount was determined after giving effect to the estimated closing adjustments, Escrow amount, repayment of the Convertible Senior Notes, and after providing for the payment of or reserve for other anticipated liabilities and transaction costs. In February 2012 the Company entered into a Management Services Agreement (Services Agreement) with Lakeview International, LLC (Lakeview). Pursuant to the Services Agreement, Lakeview is providing management, administrative and support personnel and services to the Company.

5 Best Oil Stocks For 2014: Caiterra International Energy Corp (CTI.V)

CaiTerra International Energy Corporation (Caiterra), formerly Cyterra Capital Corp., is a Canada-based company is engaged in the exploration and development of oil and gas properties. The Company�� project includes Faust, Amadou and Lac La Biche. On March 9, 2012, the Company completed its qualifying transaction with West Pacific Petroleum Inc. (WPP), pursuant to which the Company acquired all of WPP�� working interests in certain petroleum and natural gas leases and an oil sand lease in the Lac La Biche and Amadou Projects located in Alberta, Canada and certain other assets (the QT Oil and Gas Properties) from West Pacific Petroleum Inc. (WPP). On December 17, 2012 the Company acquired the Faust Property located just north of the Swan Hills oil field and south of the Town of Slave Lake.

5 Best Oil Stocks For 2014: Archer Ltd (ARCHER.OL)

Archer Ltd, formerly Seawell Limited is a Bermuda-based global oilfield service company. The Company provides drilling services, such as platform drilling, land drilling, modular rings, directional drilling, drill bits, tubular services, drilling and completion fluids, cementing tools, plugs and packers, underbalanced services, rentals and engineering. It specialises also in well services, such as wireline intervention, specialist intervention, frac valves, wireline logging, integrity diagnostics, imaging, production monitoring, coiled tubing, completion services and fishing. As of January 3, 2012, the Company's organizational structure centered on four geographic and strategic areas: North America (NAM), North Sea (NRS), Latin America (LAM) and Emerging Markets & Technologies (EMT). As of December 31, 2010, it was active through a number of subsidiaries, namely Seawell, Allis-Chalmers Energy, Gray Wireline, Rig Inspection Services and TecWel, among others.

New CFO for Compass Diversified - Analyst Blog

Top 10 Clean Energy Companies To Watch For 2014

Leading middle market business owner Compass Diversified Holdings (CODI) recently announced the promotion of its Director of Financial Reporting, Ryan J. Faulkingham, to Chief Financial Officer (CFO). Faulkingham will assume the new responsibilities from Nov 30, 2013 after the current CFO James J. Bottiglieri steps down from his position on the same date.

Faulkingham has a vast experience at the helm of the company and its subsidiaries in his existing position. The newly appointed CFO is expected to drive Compass Diversified to newer heights with his leadership traits, expertise and over 15 years of experience in finance and auditing. We believe that Faulkingham's sector know-how will prove beneficial for Compass Diversified and unlock further value.

With experiences in companies like Merrill Lynch & Co, where Faulkingham prepared regulatory filings, performed technical accounting research and implemented policies, he is expected to revamp Compass Diversified and augment its revenues going forward. He is expected to emulate similar success in Compass Diversified by judiciously investing for organic growth initiatives and accretive acquisitions.

Headquartered in North America, Compass Diversified is engaged in acquiring controlling stakes in small to middle market companies. The company seeks to invest in industries such as manufacturing, distribution, consumer products and business services.

Compass Diversified currently has a Zacks Rank #3 (Hold). However, stocks that look promising and are worth a look now in the industry include Honeywell International Inc (HON), Macquarie Infrastructure Company LLC (MIC) and Tyco International Ltd (TYC), each carrying a Zacks Rank #2 (Buy).

Get tax benefit through Rajiv Gandhi Equity Savings Scheme

For all those tax payers who have never had any exposure in the stock market let the year 2013  be their first year for  investing in the stock market. Firstly the action plan to enter into the stock market would be to open a Demat Account in your name. To inspire all those who have never had any exposure in the stock market tax incentive is being made available in the Income-tax Law in terms of the provision contained in section 80CCG whereby first  time investors in the stock market can go in for making investment up to Rs. 50,000 and enjoy a tax deduction equal to 50 per cent of such investment.  Thus, tax saving can be made by taking an exposure to Rajiv Gandhi Equity Investment Scheme and thereby cutting down your tax payment by Rs. 2,500 to Rs. 5,000. 

The author is Tax and Investment Consultant at New Delhi for last 40 years.  He is also Director of M/s R.N. Lakhotia & Associates LLP & The Strategy Group.E-mail : slakhotia@airtelmail.in

Horatio Gulash: Analyzing Advertising Expense

Hot Blue Chip Companies To Own In Right Now

Our last episode concluded with Horatio pondering various methods of growing his hot dog business. As you may recall, he still owes Pop a considerable amount of money which he must pay off within the next three years; thus far he has paid back approximately 40% of the debt.

Horatio has owned the hot dog stand and the lease on the parking lot for slightly over two years and still has nearly three years remaining on his lease. At that point he might be forced to move the stand from its prime location.

Horatio feels now is the time to expand but he must make certain that he does not over extended his limited finances. His moves must be frugal, strategic and above all, successful. He recalls the advice of his deceased father who once told him: "Hunters with a single-shot gun should not fire hastily but they can not spend much time aiming, or they will never get off a shot". Horatio feels he has only one bullet in the chamber so he must move abruptly while at the same time being extremely careful with his limited funds.

Horatio feels that Pop is a tremendous asset to his business. The customers who drop by the stand frequently carry on conversations with the elderly man as they dine. His thick German accent and his self-styled patois are entertaining. The old man is really quite amusing, possessing an innate ability to draw patrons to his stand.

While Pop talks Horatio listens and monitors the reactions of his customers. He notices that children as well as adults take to the old man. Pop is famous for carrying a sack of bubble gum which he hands out to children admonishing them: "dun't chew da gum til you eat da frankfurter."

It occurs to Horatio he is not selling hot dogs; rather he is selling a unique frankfurter which is not available from anyone else. The key ingredient of the frank is the special sauce that Pop has per! fected. The sauce mixes particularly well with sauerkraut but is just as appearing without the kraut. The smell of kraut permeates the stand and provides it with a certain presence that reinforces the name "Old World Franks." Pop's thick German accent adds to the ambiance and the uniqueness of the stand.

Horatio concludes that he must create an atmosphere to enhance the delicious taste of the frank. He also decides that Pop must be part of that atmosphere if he is to succeed. He needs the image of the old man as well as his financial backing; otherwise his business will never amount to anything more that a temporarily successful, single hot dog stand.

Horatio plans on coaxing Pop out of retirement and offering him an inviting proposition. He offers him a full partnership in the business. In return, Pop must forgive the remaining loan which Horatio owes on the business, provide some modest additional working capital as needed and serve as the advertising face of the business. In essence, Pop is a walking billboard for Old World Franks. He provides an unmistakable image for the business which continually reinforces the brand.

Advertising and Old World Franks

Pop's image will become instrumental in promoting the new stands and growing "Old World Franks." He will visit the new stands regularly, greeting customers, passing out gum to the children, and telling stories about his immigration to the U.S. from Germany and the origin of the special sauce.

Old World Franks stands will become fixtures in every serious home show or special event in St. Louis which offers food, and Pop will always make appearances as long as his health allows. The business will have carts outside the famous zoo during summer weekends, as well as outside the Ram football games. Eventually, the franks will make their way into the concession stands in the stadiums of every major St. Louis sporting event.

Pop is dressed in traditional Bavarian attire, complete with suspenders and various de! corated h! ats. When he arrives, the stand plays recordings of polka music as he welcomes the crowd, offering them small samples of his special frankfurters dipped in the delicious sauce. He asks the crowd, "Vould ya like a taste of de old vorld frankfurter? Its de secret sauce on de Bavarian frankfurter dat makes da difference. Come taste de German Frankfurter."

Later on when the business comes more successful and can afford more expensive advertising, Pop will be promoted as Papa Joseph Greiser, "Der Veiner Meister" on television. His thick accent and unique appearance will become the focus of the advertising campaign. A caricature of his face will appear on the shirts of employees and on the signs of all the Old World Franks restaurants. Der Viener Meister will become a highly recognizable character in the St. Louis area and gradually throughout the rest of the country as well.

Papa Joseph has but one rule in his restaurants, no employee will ever utter the word hot dog since he sells only "Bavarian frankfurters."

Advertising: The Key Ratio for Old World Franks

Despite his limited business experience Horatio was quite astute at recognizing the need for brand-building at Old World Franks. His decision to sacrifice 50% of his profits to utilize Pop's image and access his capital turned out to be a stroke of genius in the long term.

As it turns out the parking lot owner did not extend Horatio's lease after five years. It seems that he began to feel that Old World Franks was becoming too much of threat to the profits of his own restaurant and he attempted to run Horatio out of business. Similar to Sam Walton, Horatio never forgot that lesson. He never again undertook a short-term lease and he always insisted on having an option to extend the lease when he negotiated a property. Additionally, he made it a point to put an Old World Franks restaurant in close proximity to all of his former landlord's burger restaurants. Call it a bit of vindictiveness if you like.

Ho! ratio dec! ides that he will invest 10 percent of revenues into advertising expense. The advertising will help secure new customers for his existing stores and new stores in addition to maintaining his long time clientele by reminding them how much they enjoy his unique frankfurter.

To assess the effectiveness of his advertising, Horatio charts same store sales at all his stands and restaurants and monitors the total amount of hot dogs sold. In that way he able to test the pricing power and the growth in sales of hot dogs. He is pleased to find out that he can raise prices to offset his rising costs while still increasing the total volume of hot dogs he sells at his stands and restaurants.

His gross profit (Revenues minus Cost of Goods Sold) is rising, as is his gross margin (Gross Profit divided by Revenues). Those figures indicate that his business is developing not only a successful brand but a competitive advantage in the form of the delightful taste of his frankfurter. He has verified that the original location of his stand close to Busch Stadium was only part of the competitive advantage of his business. Old World Franks apparently contains some advantages that are quite sustainable, thus reinvesting capital for growth is an intelligent decision.

Horatio also tracks his advertising costs as a percentage of sales; much to his delight he finds that his advertising cost as a percentage of sales is decreasing. He derives that figure by dividing his advertising costs into his revenues. His advertising has been quite successful; each dollar he invests is resulting in an increasing greater amount of total revenues. The diminishing ratio speaks volumes for the effectiveness of his ad campaign.

Using Advertising Ratios in Analyzing Stocks: PETS

Just as in the case of Horatio's fictitious business, investors need to monitor advertising effectiveness to successfully analyze equities. Careful analysis of key advertising ratios can provide investors with information that may indi! cate that! competition is impinging on a company's profits. Most companies provide clues in their 10K filings.

Let's take a quick look at PetMed Express (PETS) as an example. From the Fiscal 2012 10K:

Fiscal Year Ended March 31,
		2012			2011			2010
Sales			100.0	%			100.0	%			100.0	%
Cost of sales			66.3				63.8				61.4
Gross profit			33.7				36.2				38.6
Operating expenses:
General and administrative			9.4				9.6				9.4
Advertising			12.8				11.8				11.6
Depreciation			0.6				0.6				0.6
T! otal oper! ating expenses			22.8				22.0				21.6
Income from operations			10.9				14.2				17.0
Total other income			0.2				0.2				0.1
Income before provision for income taxes			11.1				14.4				17.1
Provision for income taxes			4.1				5.4				6.2
Net income			7.0	%			9.0	%			10.9	%

The above key ratio summary contains some troubling trends. First of all, gross margin and net margin are dropping; secondly, advertising as a percentage of sales is increasing. For the purpose of today's discussion we will focus on advertising.

The table suggests that either the advertising campaign for PE! TS is bec! oming less effective or that competition is intruding upon the competitive advantage of the business. Since gross margins are dropping significantly it seems that increased competition may be the source of the overall margin decline.

If we scroll down the 10-K we find some more troubling news:

Sales may be adversely affected in fiscal 2013 due to increased competition and consumers giving more consideration to price and trading down to less expensive brands, including generics. In response to these trends, the company will maintain a more aggressive advertising and pricing strategy combined with expanding our product offerings to pet supplies and generics.

This more aggressive pricing strategy has resulted in a decrease to gross profit margins, and no guarantees can be made that the Company's efforts will be successful, or that sales will grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm, and flea and tick medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2012, the company's sales were approximately 31%, 24%, 21%, and 24%, respectively.

In effect, the company is telling us in fiscal 2013, advertising costs will continue to increase and gross margins will continue to drop. That may translate into another significant increase in advertising expense as a percentage of sales.

Further down in the 10-K we find more interesting information:

Advertising expenses increased by approximately $3.0 million, or 11.0%, to approximately $30.4 million for the year ended March 31, 2012, from approximately $27.4 million for the year ended March 31, 2011. The increase in advertising expenses for fiscal 2012 can be mainly attributed to a more aggressive advertising strategy during the year. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $42 for both the fiscal years ended Mar! ch 31, 20! 12 and 2011.

Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, increased advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future new order sales, whereas a less favorable advertising environment may negatively impact future new order sales.

Note that advertising cost for acquiring a new customer was $42 for both fiscal years 2011 and 2012. What was the cost in prior years? The fiscal 2010 10K reveals the answer:

The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $34 for the year ended March 31, 2010, compared to $36 for the year ended March 31, 2009.

In other words, the effectiveness of the company in generating new customers through advertising has diminished significantly in the last two years. Since advertising is the key expense in generating new sales for PETS, the increase in acquisition costs does not bode well for future operating margins — particularly when those increased advertising costs are coupled with declining gross margins.

Fortunately for Horatio, his business is experiencing exactly the opposite scenario as PETS. His ad costs as a percentage of sales are declining, while his gross margin is increasing.

In the next episode Horatio expands the business outside the St. Louis area.

Disclosure: No position in PETS

Best Safest Companies To Own In Right Now

UnitedHealth Group (NYSE: UNH  ) is scheduled to release its quarterly earnings report tomorrow, and the company is at the epicenter of the debate over health care reform and the gradual implementation of Obamacare. But with the stock trading near all-time highs, will UnitedHealth be able to overcome the impediments that Obamacare has put in its path and produce the earnings growth investors want to see?

As the newest member of the Dow Jones Industrials (DJINDICES: ^DJI  ) , UnitedHealth is a giant in the health care industry. The prospect of bringing millions of previously uninsured Americans onto its insurance rolls has helped push UnitedHealth stock to all-time highs recently, but analysts are less certain that UnitedHealth's earnings will grow as quickly. Let's take an early look at what's been happening with UnitedHealth over the past quarter and what we're likely to see in its quarterly report.

Best Safest Companies To Own In Right Now: Goldman Sachs Group Inc.(The)

The Goldman Sachs Group, Inc., together with its subsidiaries, provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. Its Investment Banking segment offers financial advisory, including advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense, risk management, restructurings, and spin-offs; and underwriting securities, loans and other financial instruments, and derivative transactions. The company?s Institutional Client Services segment provides client execution activities, such as fixed income, currency, and commodities client execution related to making markets in interest rate products, credit products, mortgages, currencies, and commodities; and equities related to making markets in equity products, as well as commissions and fees from executing and clearing institutional client transactions on stock, options, and fu tures exchanges. This segment also engages in the securities services business providing financing, securities lending, and other prime brokerage services to institutional clients, including hedge funds, mutual funds, pension funds, and foundations. Its Investing and Lending segment invests in debt securities, loans, public and private equity securities, real estate, consolidated investment entities, and power generation facilities. This segment also involves in the origination of loans to provide financing to clients. The company?s Investment Management segment provides investment management services and investment products to institutional and individual clients. This segment also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families. In addition, it provides global investment research services. The company was founded in 1869 and is headquartered in New York, New York.

Best Safest Companies To Own In Right Now: Under Armour Inc.(UA)

Under Armour, Inc. develops, markets, and distributes performance apparel, footwear, and accessories for men, women, and youth primarily in the United States, Canada, and internationally. It offers products made from moisture-wicking synthetic fabrics designed to regulate body temperature and enhance performance regardless of weather conditions. The company provides its products in three fit types: compression (tight fitting), fitted (athletic cut), and loose (relaxed) extending across the sporting goods, outdoor, and active lifestyle markets. Its footwear offerings comprise football, baseball, lacrosse, softball, and soccer cleats; slides; performance training footwear; and running footwear. The company also provides baseball batting, football, golf, and running gloves, as well as licenses bags, socks, headwear, custom-molded mouth guards, and eyewear that are designed to be used and worn before, during, and after competition. Under Armour sells its products through retai l stores, as well as directly to consumers through its own retail outlets and specialty stores, Website, and catalogs. The company was founded in 1996 and is headquartered in Baltimore, Maryland.

Advisors' Opinion:

• [By Glenn]  

  Current Price: $27.27 12-month target: $37

  I see potential in opportunities for new product adjacencies, and expanding distribution worldwide. Footwear growth will continue to increase. Revenues for these products have increased over 69% in 2009. Adding to this I still see growth in Under Armour’s apparel sales, which are up 8%. Under Armor had yet to even break into the international market, which offers a plethora of new opportunities for this growing brand. I believe sales will rise drastically in 2010 driven by international sales, new women’s clothing line, and expansion within their own footwear line.

10 Best Bank Stocks To Invest In 2014: Fluor Corporation(FLR)

Fluor Corporation, through its subsidiaries, provides engineering, procurement, construction, maintenance, and project management services worldwide. Its Oil & Gas segment offers design, engineering, procurement, construction, and project management services to upstream oil and gas production, downstream refining, chemicals, and petrochemicals industries. This segment also provides consulting services comprising feasibility studies, process assessment, and project finance structuring and studies. The company?s Industrial & Infrastructure segment offers design, engineering, procurement, and construction services to the transportation, wind power, mining and metals, life sciences, manufacturing, commercial and institutional, telecommunications, microelectronics, and healthcare sectors. Its Government segment provides engineering, construction, logistics support, contingency response, management, and operations services to the United States government focusing on the Departme nt of Energy, the Department of Homeland Security, and the Department of Defense. The company?s Global Services segment offers operations and maintenance, small capital project engineering and execution, site equipment and tool services, industrial fleet services, plant turnaround services, temporary staffing services, and supply chain solutions. Its Power segment provides engineering, procurement, construction, program management, start-up and commissioning, and operations and maintenance services to the gas fueled, solid fueled, plant betterment, renewables, nuclear, and power services markets. The company also offers unionized management and construction services in the United States and Canada. Fluor Corporation was founded in 1912 and is headquartered in Irving, Texas.

Best Safest Companies To Own In Right Now: Petroleo Brasileiro S.A.- Petrobras(PBR)

Petroleo Brasileiro S.A. primarily engages in oil and natural gas exploration and production, refining, trade, and transportation businesses. The company?s Exploration and Production segment involves in the exploration, production, development, and production of oil, liquefied natural gas (LNG), and natural gas in Brazil. This segment supplies its products to the refineries in Brazil, as well as sells surplus petroleum and byproducts in domestic and foreign markets. Its Supply segment engages in the refining, logistics, transportation, and trade of oil and oil products; export of ethanol; and extraction and processing of schist, as well as holds interests in companies of the petrochemical sector in Brazil. The Gas and Energy segment involves in the transportation and trade of natural gas produced in or imported into Brazil; transportation and trade of LNG; and generation and trade of electric power. In addition, the segment has interests in natural gas transportation and d istribution companies; and thermoelectric power stations in Brazil, as well engages in fertilizer business. The Distribution segment distributes oil products, ethanol, and compressed natural gas in Brazil. The International segment involves in the exploration and production of oil and gas, as well as in supplying, gas and energy, and distribution operations in the Americas, Africa, Europe, and Asia. Further, the company involves in biofuel production business. Petroleo Brasileiro was founded in 1953 and is based in Rio de Janeiro, Brazil.

Advisors' Opinion:

• [By Dave Friedman]

  Institutional investors bought 78,663,680 shares and sold 101,125,380 shares, for a net of -22,461,700 shares. This net represents 0.23% of common shares outstanding. The number of shares outstanding is 9,872,826,100. The shares recently traded at $27.61 and the company’s market capitalization is $170,178,700,000.00. About the company: Petroleo Brasileiro S.A. – Petrobras explores for and produces oil and natural gas. The Company refines, markets, and supplies oil products. Petrobras operates oil tankers, distribution pipelines, marine, river and lake terminals, thermal power plants, fertilizer plants, and petrochemical units. The Company operates in South America and elsewhere around the world.

Three Good Reasons to Be Cautious on Stocks

 As the stock market rallies to new all-time highs and the cheerleaders on the financial networks urge investors to "get in while the getting is good," three charts suggest caution...

 

 First is the Volatility Index (the "VIX")...

 

 

The VIX is a measure of investor fear, and it closed Friday near its lowest level of 2013. Investors are complacent. They're not fearful of an impending market decline.

 

From a contrarian point of view, a low VIX is a bad sign for the market. Periods of low volatility are always followed by periods of high volatility and vice versa. So this chart is one reason to be cautious for the short term.

 

 The Nasdaq Summation Index (the "NASI") gives us a reason to be cautious for the intermediate term...

 

 

The NASI is a momentum indicator that helps point out overbought and oversold conditions on the Nasdaq stock market. As you can see from the chart, the NASI rallied to its highest level of the year last week. It's well into "nosebleed overbought" territory. Stocks are more overbought now than they were in June, just before we got hit with a fast 7% selloff.

 

Also, notice that the NASI hasn't been below the "0" line all year. This is unusual. The NASI usually spends about half its time above zero and half its time below.

 

That it hasn't been below zero all year is a testament to how strong the buying pressure has been. It's also a strong warning that the next decline phase may be more severe and longer-lasting than what we saw a couple months ago.

 

 Finally, there's this long-term, monthly chart of the S&P 500...

 

 

The S&P 500 ended July above its monthly upper Bollinger Band.

 

Bollinger Bands measure the most probable range of prices for a stock or index. Any move outside of the bands indicates an extreme condition – one that is likely to reverse.

 

It's rare for the S&P to close above the upper Bollinger Band on the monthly chart. The two previous times it happened – in 2011 and 2007 – signaled important intermediate-term tops for the stock market. It's too early to tell if that will be the case this time as well.

 

But it's a good reason to be careful with stocks trading at new all-time highs.

 

Best regards and good trading,

 

Jeff Clark

 

Salesforce After The Earnings: The Good, The Bad And The Ugly

Salesforce.com (CRM), also known as the world's largest customer relations management software company, announced its latest earnings results on May 23th. In this article, I provide an overview of the latest results, a momentum analysis and a note on fundamentals.

Relative Performance

First, I compare the stock performance of Salesforce.com with other competitors. Although some competitors are not exactly in the same business, all of them have either a cloud computing or CRM component in their revenue: Citrix Systems (CTXS), RackSpace (RAX), SAP (SAP), Oracle (ORCL), Microsoft (MSFT), IBM (IBM), Amazon (AMZN) and VMWare (VMW). Salesforce.com's one year stock performance, 13.51%, is far from the top (that is, SAS, with 31.19%) gainer. On one hand, things could have been worse, as a good number of competitors show negative returns. On the other hand, we should notice that the current stock price level has not changed that much since early 2011 ($39.2 per share). This stagnation is hard to ignore.

Current Momentum

It should be clear by now that the latest results disappointed investors. As it can be easily noticed, the stock price increased almost every day between May 1st and May 20th. The bullish momentum was probably caused by high expectations on the earnings call scheduled for May 23th. Perhaps most investors were thinking that the "stagnation" period of Salesforce.com was over, and were optimistic about the company's aggressive acquisition strategy. However, the graph shows that a strong bearish sentiment has completely replaced the bullish trend. With both the RSI and MACD indicator decreasing fast, I see no indicators of improvements in upward momentum for the next days. Finally, the stock was down 5.34% on Friday, indicating that a massive adjustment of expectations took place.Earnings Overview: The Good

Revenue growth: Marc Benioff, President and CEO, started the earnings call by announcing that revenue for the first quarter rose 28% y/y, to more than $890 million. Operating cash flow exceeded $280 million for the quarter, showing an increase of more than 30% y/y. Deferred revenue grew to more than $1.7 billion, also up 30%.A raise in revenue guidance for 2014: from $3.835B to $3.875B.Salesforce is optimistic about the result of its Japanese operations. According to Benioff:

We have new partnership with Japan's government, Salesforce platform and Chatter will touch nearly aspect of the agencies engagement with millions of SMEs. Companies are going to tap in the online marketplaces with service professionals, like attorneys and tax advisors and by connecting Japan to SMEs to each other and information real-time, Salesforce is helping us critical Japanese agency, bolster competition, innovation, and growth in this phenomenal time into the Japanese economy. This continues our commitment to partner with the Japanese government as our most important and largest customer.

Benioff notes that (refer to page 1 in the earnings call published by Seeking Alpha):

I'm thrilled that after a decade of growth and market share gains, Gartner announced this quarter that Salesforce is now the largest CRM platform in the world. We've displaced SAP to become the number one CRM market share leader regardless of On Premise or Cloud, Salesforce is number one. I'd like to congratulate all of our employees, our customers; our shareholders on this important achievement of become the number one CRM company.

Earnings Overview: The Bad

(This is subjective) I had the impression that management should put more emphasis on explaining profitability. You will find keywords associated with revenue growth many times in the earnings call transcript. But what about margins? Marc Benioff did not tal! k about e! arnings and profitability in the beginning of the earnings call. He mainly referred to growth revenue and some milestones that the company recently achieved. However, what most investors were, and continue being worried about, are profitability margins.Abenomics will continue playing against Salesforce.com's profitability in Japan:

Q1 revenue was $893 million, that's up 28% over last year, excluding an approximately $10 million FX headwind, first quarter revenue was up 30% year-over-year.

Earnings Overview: The Ugly

Finally, in page 4 of the earnings call transcript, you can find that Graham Smith, CFO, mentioned:

Our first quarter non-GAAP gross margin was 80.2%, that's about a 160 basis points lower than Q1 last year. Our first quarter non-GAAP operating margin was 10.5% or about 100 basis points lower than last year, leading to the first quarter non-GAAP operating income of $94 million, that's up 18% over the last year.

Basically, this demonstrates that subscription and support costs are rising faster than revenue. After looking at these poor profit figures, revenue figures do not seem that amazing as they seemed in the beginning. In the words of Mark Moerdler, analyst at Bernstein: "They're moving from organic to inorganic growth. And inorganic (growth) is very expensive".

Net loss is actually increasing: It is hard to notice from the earnings call, but Salesforce actually had a net loss of $67.7 million, or 12 cents a share; compared to a net loss of $19.5 million (4 cents a share) in the same quarter last year.

Fundamentals

I believe that even at $40 per share, Salesforce.com could be overvalued. But first, let me walk you through some key ratios. According to Morningstar, Salesforce.com's inability to generate profit is no recent history. Operating margin figures for 2012-01 and 2013-01 (margin of % sales) are -1.55 and -3.63 respectively. Next, we move to the free cash flow. Using Old School Value spreadsheet for financial analysis, I plot the free cash fl! ow trend ! (the latest earnings call data is not included):

This kind of trend shows me that Salesforce could be a one-hit wonder. Notice the massive increase in FCF that occurred in 2011. After that, there is only stagnation. Just like the stock price!

Matt Mandel from ClearBridge Investments suspected that Salesforce.com could be overvalued as early as one year ago. In a note published in Sumzero Elite, he notices:

Salesforce.com ("the Company" or "CRM") trades at 105.0x FCF-to-EV, 8.9x Sales-to-EV, and is grossly overvalued. I believe that investors are overlooking a confluence of negative factors including: aggressive accounting assumptions, highly promotional statements by Company management, reduced transparency, poor capital allocation decisions, low quality of reported earnings, and a weak corporate governance model by over emphasizing the primacy of revenue growth.

To confirm this, I run a DCF valuation using Old School Value software, which always gives me very accurate fair value estimates. My assumptions are optimistic. First, we assume an average growth rate of 12% for the next 10 years, a terminal growth rate of 9% and a discount rate of 9%. I obtain a fair value estimate of $24.70 per share. Therefore, according to my DCF model, Salesforce.com is also overvalued, even at $40 per share. I attach a screenshot of my model, which includes a sensitivity matrix:

(click to enlarge)

In conclusion, Salesforce.com has too many risks to be a long term sound investment. Revenue is growing, but not as fast as operating costs. As a result, it is hard for the firm to break the buck. More yen devaluation could further damage the profitability of the firm for the next quarter. Finally, due to ! low barri! ers to entrance, we can be sure that competitors will continue increasing in number (both in the cloud computing and CRM fields).

References

Oldschoolvalue software was used for the DCF valuation. Data comes from Morning Star. The earnings call document was obtained from Seeking Alpha.

Final Remarks

Price target: $24.00 / from N.A.
Rating: Sell / from N.A.
Investment Strategy: Value
Investment Horizon: 1 year
Uncertainty: Medium

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)