TheStockAdvisor

Say shalom to Israel's Cellcom (CEL)

steven@thestockadvisors.com (Steven Halpern) — Thu, 05 Nov 2009 05:00:00 PST

"Founded in 1994, Cellcom (NYSE: CEL) holds the dominant position in Israel's wireless market; it serves about 3.2 million customers, it enjoys around a 34% market share," says Carla Pasternak.

In her specialty service, High Yield International, she adds, "Overall, the shares are attractively value, and should continue to delight investors with stable growth and a high yield." Here's her review.

"Cellcom's policy is to distribute at least 75% of net income in quarterly dividends. As such, dividends vary with earnings.

"Gross (before withholding tax) distributions of $0.62 in December 2008, $0.53 in March 2009, $0.68 in June, and $0.64 in August total

"The last four payments have totaled $2.47, for a trailing yield of 8% ($2.47/$30.47). Bloomberg estimates call for a final distribution of $0.84 in late November, which would spike the trailing yield to nearly 9% of today's purchase price ($2.69/$30.47).

"Dividends are paid in U.S. dollars after being converted from the Israeli shekel, so they are subject to currency fluctuations.

"According to Israeli tax law, the company must deduct 20% of the dividend amount payable to U.S. shareholders. Investors can claim a foreign tax credit for this amount against their federal income tax.

"The dividends should qualify for the reduced dividend tax rate of up to 15%, making the shares suitable for a taxable brokerage account.

"Earnings have grown an average 33% annually over the past five years as the company aggressively grew its share of the Israeli market with enhanced services and technological upgrades.

"Data services now account for about 15% of revenues. To capture more of this lucrative market, Cellcom launched the 'Android' smartphone by Samsung and plans to market the popular iPhone from Apple.

"Even with only slightly higher revenues, net income was up solid 15% over last year to $70.7 million ($0.72 per share). The rise was aided by stronger profit margins as operating expenses fell from 21.9% of revenue in last year's second quarter to 21.3% this year.

"Cellcom does have about $1.2 billion in debt versus $1.6 billion in equity, but the debt burden seems quite manageable. Operating income of $113 million easily covered debt expenses of $30 million.

"Growth in the Israeli market is limited given the country already has around a 125% cellular penetration rate (some people have more than one cell phone). Moreover, Cellcom does face significant competitio.

"But Israel's relatively young population is a demographic more open to subscribing to new technologies and data services. And at this point, there seems to be enough business to go around.

"While Cellcom's dominant position and competitive technology should allow the company to continue churning out increasing cash flow, growth is expected to slow going forward compared to the rapid pace of the past five years.

"Per share earnings are expected to grow around 12% this year and another 5% next year, for a still robust average of about 10% annually over the next five years.

"I first flagged CEL at $26.20 as one of my 'star' performers in July and since then, the shares have provided a total return of nearly 20%.

"However, the stock is still off their 2008 peak levels of around $37, offers a rich yield, and carries an extremely low forward PE of less 3 times 2010 projected earnings of $11.66 per share. I believe they are appropriate for all but the most conservative income investors."

China Yuchai (CYD): Asia expert eyes diesels

steven@thestockadvisors.com (Steven Halpern) — Thu, 05 Nov 2009 05:00:00 PST

"In China, there is roughly one car for every 53 people vs. in the United States where the average is 2.28 vehicles per household," notes Keith Fitz-Gerald.

The advisor -- who spends much of his time in Asia gaining first-hand knowledge of potential investment opportunities, suggests, "Desiel engine maker China Yuchai International Ltd. (NYSE: CYD) is poised to rocket on China’s auto market growth." Here's the latest from The New China Trader.

"And as China’s economy continues to grow, China’s demand for commercial vehicles from taxis to buses, light duty delivery trucks and heavy duty construction vehicles will grow as well.

"Automobiles don’t go very far if they don’t have engines, enter China Yuchai, a Singapore-based small cap ($368 million), founded in 1951.

"The company manufactures a wide ranging array of light duty, medium sized, and heavy duty diesel engines for use in everything from construction equipment, to buses, trucks, and cars.

"In 2008, CYD’s main operating subsidiary, Guangxi Yuchai Machinery, sold 372,000 diesel engines and was consistently ranked no.1 in units sold by the Chinese Association of Automobile Manufacturers.

"Net revenues increased by 17.9% from the first quarter of 2009 to the second quarter of 2009. The company is on pace to produce and sell over 510,000 units by year’s end, which would represent an increase of roughly 37% over 2008.

"That should further solidify them as the leading producer in diesel engines - again as ranked by the Chinese Association of Automobile manufacturers.

"In September, CYD announced phase one of their new 120,000 sq meter diesel engine assembly factory in Xiamen is complete and ready for commercial production. The new factory is expected to increase CYD’s total annual production by an additional 100,000 units.

"The firm's new Xiamen facility is located in the heart of Xiamen Automobile Industry City near the Xiamen port, a major hub for manufacturing auto-parts, bus and construction equipment. This premium location should help CYD shorten its supply chain and lower production costs.

"Last quarter sales increased by 33% year-over-year and the 3 year average sales increase has been a very healthy 29%.

"What that tells us is that recent sales are coming in above the three year average – and that’s without the huge boost they are about to experience from their new Xiamen facility.

"Recently, management has been doing a good job of keeping the books in order. In 2008, CYD reduced its long term debt by 66.8% and increased their Free Cash Flow position by over 33%. And those numbers came in a climate of a weakened Chinese economy.

"With all the hoopla around the Chinese auto market, you would think a small cap player like this would have gotten priced through the ceiling – but they haven’t. Most of Wall Street has yet to catch on. CYD is trading at a PE ratio is only 9.99. Buy CYD and be prepared to hold for 12 months."

Breakout at HMS Holdings (HSMY)

steven@thestockadvisors.com (Steven Halpern) — Thu, 05 Nov 2009 05:00:00 PST

In his Ticker Tape Digest, technician Leo Fasciocco looks for "breakout" stocks; his latest feature is HMS Holdings (NASDAQ: HMSY), which coordinates benefits for government healthcare programs.

"With annual revenues of $185 million, HMSY helps ensure that healthcare claims are paid correctly and by the responsible party.

"As a result of the company’s services, government healthcare programs recover over $1 billion annually and avoid billions of dollars more in erroneous payments.

"The company's clients include health and human services programs in more than 40 states. It services Medicaid managed care plans, the Centers for Medicare and Medicaid Services (CMS), and Veterans Administration facilities.

"Technically, the stock has broken out from a three-month, cup-and-handle base. The move carried the stock to a new all-time high. That is very bullish and could draw in more buying by the new-high crowd.

"The stock has appreciated 90% the past 9 months. That compares with a 10% rise in the S&P 500 index. The performance of HMSY is outstanding considering the stock has a low beta of 0.13 versus 1.00 for the stock market. That means HMSY's stock tends to be a slow mover.

"HMSY's long-term chart shows the stock climbing from 5 back in 2004 to a peak of 44. It weathered the bear market extremely well.

"The company reported third quarter earrings increased 31% to 30 cents a share from 23 cents a year ago. The consensus estimate on the Street was 29 cents a share. It topped that. The highest estimate was at 36 cents a share.

"This year, analysts forecast a 33% jump in net to $1.06 a share from 80 cents a year ago. The stock sells with a price-earnings ratio of 40. That is high given the earrings growth rate. However, in strong markets many institutions are willing to pay up for the stock.

"Going out to 2010, the Street expects a 23% gain in net to $1.31 a share from the anticipated $1.05 a share. We see chances for that estimate to be lifted.

"Overall, HMSY is a solid growth stock making new highs. We are targeting the stock for a move to 52 within the next few months.

"One needs to be patient with this stock. A protective stop can be placed near 39 giving it room. We rate HMSY an outstanding intermediate-term play as long as earnings growth remains strong."

Dow Theory: China favorites

steven@thestockadvisors.com (Steven Halpern) — Wed, 04 Nov 2009 05:00:00 PST

"It’s hard not to be intrigued by the investment potential of China," says Richard Moroney. In Dow Theory Forecast, he highlights a trio of funds and a China infrastructure stock.

"China is soon expected to overtake Japan as the world’s second-largest economy and Germany as the leading exporter.

"Aided by aggressive ﬁscal-stimulus efforts, rebounding consumer demand has sparked increased spending among China’s 1.3 trillion citizens, who represent nearly one-ﬁfth of the world’s population.

"China says its gross domestic product grew 8.9% year-to-year in the September quarter, after a 7.9% increase in the June quarter.

"Full-year growth should approach 8%, down from 10.6% in 2008 but very healthy relative to the U.S. Increasingly, investors looking to capitalize on China’s growth can do so via U.S.-traded individual stocks.

"Chinese equities, like those from other emerging markets, tend to be much riskier than U.S. stocks. For most investors seeking broad exposure to China, a mutual fund is the best choice.

"Among no-load funds focused on China -- Fidelity China Region (FHKCX), Guinness Atkinson China & Hong Kong (ICHKX), and Matthews China (MCHFX) score well in our fund-ranking system.

"Still, adventurous stock investors looking for ideas might want to consider individual issues. One intriguing stock is Jinpan International (NYSE: JST).

"A leading maker of transformers used for power distribution and wind-energy products, Jinpan is beneﬁting from an infrastructure build-out and increased demand for electricity.

"Its products are used in large projects such as real-estate developments, factories, airports, and subways.

"Management is focused on bolstering proﬁt margins while expanding product lines and the customer base. The stock, with an impressive Overall score of 99 (out of 100), has a market value of only $237 million."

National-Oilwell Varco (NOV): Value & growth

steven@thestockadvisors.com (Steven Halpern) — Wed, 04 Nov 2009 05:00:00 PST

"The energy firms in our 'Hot List' aren't the big integrated firms; rather, they are instead mostly smaller, more specialized oil equipment, services, or operations firms," notes John Reese.

In Validea, he adds, "National-Oilwell Varco (NYSE: NOV) is currently the only stock out of the thousands in my database that gets approval from both my strict Benjamin Graham-based value strategy, and my James O'Shaughnessy-based growth model."

"Many oil services companies were hit particularly hard right around the time that oil prices peaked in the summer of 2008; the SPDR S&P Oil & Gas Equipment Services exchange-traded fund plummeted about 70% from July 11 to Nov. 20 of last year.

"The sector has surged since then. But as a group, they remain well behind the big oil names since last summer, and my strategies are seeing exceptional fundamentals and a lot of value in them.

"Take National-Oilwell Varco. The company designs, manufactures and sells equipment, components, and services used in oil and gas drilling and production.

"More than 160 years old, the company's products include major mechanical components for land and offshore drilling rigs, complete land drilling and well servicing rigs, extensive lifting and handling equipment, and downhole drilling motors, bits and tools.

"The stock has a market cap of about $17.3 billion, and the company has raked in more than $13 billion in sales in the past 12 months.

"To pass the Graham strategy, a stock needs to have a sterling balance sheet, and Varco does. Its current ratio is above 2.0 (it's 2.1), a sign of strong liquidity, and its net current assets ($5.4 billion) are far greater than its long-term debts ($875 million).

"In addition, it has the solid valuation ratios (11.7 price/earnings and 1.22 price/book) to get approval from the Graham model.

"At the same time, however, Varco has upped earnings per share in each year of the past five-year period, and it has a solid relative strength of 77, catching the eye of the O'Shaughnessy growth approach.

"The strong interest ratings from two approaches that are quite different means Varco is attractive on a number of levels."

Joy Global (JOYG): Mining profits

steven@thestockadvisors.com (Steven Halpern) — Tue, 03 Nov 2009 21:00:00 PST

Resource sector specialist Larry Edelson has added Joy Global (NASDAQ: JOYG), a maker of mining equipment, to his buy list. Here's the latest update from his Real Wealth.

"Goldman Sachs recently forecast a looming natural resources crisis, based on years of underinvestment and the tight credit conditions of the financial crisis.

"Amongst the comments Goldman makes in its research report:

Commodity prices will remain high and volatile, with each subsequent spike higher than the last.
As the economy recovers, so will commodity demand.
China is consuming a large share of global natural resource supplies, with metals and agriculture in its crosshairs. At the top of this list are cotton, soybeans, copper and zinc, of which China consumes roughly a quarter to a third of the world’s output of each, and is also a net importer.

"Goldman also suggests investors look at engineering and construction as well as machinery companies that are uniquely positioned to address supply constraints. I agree.

"And it’s why I recommend you add to your natural resource portfolio by purchasing shares in Joy Global, a leading manufacturer of mining equipment with a strong presence in coal and copper mining, two of China’s most needed commodities.

"Trading at just over 11 times earnings -- and with sales soaring to $953 billion in the third quarter this year, more than 6% ahead of last year and 50% ahead of 2007 -- I think Joy Global’s shares are a great way to play the mining equipment sector — again, in two hot commodities China desperately needs."

Franco Nevada (FNV): A core holding in gold

steven@thestockadvisors.com (Steven Halpern) — Tue, 03 Nov 2009 05:00:00 PST

"We have very few buy recommendations currently; one exception is Franco-Nevada (Toronto: FNV.TO)," says resource expert Adrian Day.

In his The Global Analyst, the advisor explains, "Franco Nevada is one of our all-time favorites; it has top management, a solid balance sheet, and risk-averse business plan," Here's the advisor's bullish assessment.

"The company previously merged with Newmont, and was reborn in a spin off nearly two years ago. Although the stock has nearly doubled since the IPO, it still represents good value.

"Franco is a royalty company, owning royalties on other projects, producing and exploration. Royalties are a great business. It is a low-risk, high-margin business; for Franco, 85% of its revenue is free cash flow.

"Though the royalty owner is subject to the vagaries of resource prices and other risks of mining, it is not responsible for spending time and capital to fix problems, yet it is exposed to the upside, both from higher prices as well as exploration success.

"Royalties can either be acquired, typically so-called 'legacy' royalties usually from land owners, or created, from companies that want capital (perhaps to put the mine into production). Franco buys both, and its last two major gold royalty purchases are an example of each.

"At the end of last year, it acquired a legacy royalty of 7.29% (net smelter) on part of Barrick’s Gold Quarry mine in Nevada.

"Then, in February, in an innovative deal, it acquired 50% of the gold revenue stream (an effective royalty) on Couer’s new Palmarejo silver-gold mine in Mexico. Couer needed capital to put the mine into production, while as a silver company, it was willing to give up the gold.

"Immediately prior to these transactions, approximately 50% of Franco’s revenue was from gold, but these two transactions, now generating cash flow, have boosted the precious metals share of revenue (primarily gold plus the Stillwater PGM mine) to 80%.

"As production ramps up, next year should see precious metals revenues move up as a share of total revenue by a few percentage points, even without any new transactions.

"The balance is oil & gas and base metals. The company wants to keep its precious metals revenue at a minimum of 75% or so going forward.

"Today, Franco’s gold royalty revenues make it the leading gold royalty company, with a market cap over C$3 billion. Yet it trades at lower valuation metrics than other royalty companies.

"To a large extent, I believe this is purely a hangover from the lower valuation it was awarded when so much of its revenue was oil and gas.

"The company has a superb royalty portfolio, with over 300 royalties at all stages of development. Some 80% of its revenue is from mines in the U.S. and Canada, with more from Australia, giving it a triple A political risk rating.

"Indeed, now the company has brought its gold revenues from large, low-risk mines in politically safe jurisdictions to over 80%, it would be prepared—at the right price—to add high-potential but less-certain projects in less safe jurisdictions.

"It can afford to do this, with over $700 million of available capital, including an undrawn credit facility of $150 million.

"Franco is a core gold holding for all investors; we want to own it. It is appropriate for all investors and we are ranking it 'conservative' even though, as with all resource investments, it can be volatile.

"Overall, Franco is a great company at a very good valuation. There is near-term price risk if the gold price or broad stock market falls, but if it gets cheaper, we may buy more. So buy a position now, but keep some powder dry."

ASA Ltd. (ASA): Diversity in mining

steven@thestockadvisors.com (Steven Halpern) — Tue, 03 Nov 2009 05:00:00 PST

"ASA Ltd. (NYSE: ASA) is a closed-end investment company that keeps at least 80% of its holdings invested in mining stocks," notes Sy Harding in his Long and Short Stock Advisor.

"Gold mining stocks did prove to be a safe haven when the stock market was plunging sharply to its bear market low in early March.

"And perhaps more importantly, the mining stocks tend to move two or three times as much as the gold bullion when they are moving in the same direction.

"For instance, while gold bullion is up 49% since its low of last October, ASA is up 145% over the same period.

"ASA provides an opportunity to be invested in a diversified portfolio of mining stocks, rather than individual mining stocks. And it provides diversification into silver, platinum and diamond mining. Currently 16% of its assets are in platinum miners Anglo Platinum Ltd, and Impala Platinum.

"At the present time ASA is selling at a 6% discount to the net asset value of its combined holdings. With gold bullion having broken out above its previous peak, and currently about 5% above $1,000 an ounce, a reasonable preliminary target for ASA should be 5% or 10% above its 2008 peak of $92, which would be $96 to $101 a share.

"We suggest a ‘mental’ protective stop at $69, as usual based on closing prices, with the exit to be made the following day if the stop is hit. And as usual, to lock in profits it is a trailing stop that would be moved up as ASA moves in our direction to keep the stop about 15% below the highest price achieved."

Gilead (GILD): 4-in-1 HIV drug

steven@thestockadvisors.com (Steven Halpern) — Tue, 03 Nov 2009 05:00:00 PST

"Gilead Sciences (NASDAQ: GILD) develops treatments for life-threatening diseases and specializes in drugs for HIV, the virus that causes AIDS," notes Hannah Choe.

The contributing editor to Personal Finance explains, "Already the market leader in HIV antivirals, Gilead is in the beginning stages of developing Quad, the first-ever, four-in-one AIDS pill." Here is her review.

"The manufacture of HIV drugs, which accounts for more than three-quarters of revenue, is Gilead’s highest-grossing business.

"This segment has held up through the Great Recession; in the second quarter product sales for the antiviral franchise grew 26% from a year ago to $1.41 billion.

"The spike resulted from higher sales of Truvada and Atripla, two frequently prescribed HIV drugs. Truvada’s sales totaled $608.1 million, an 18% increase from the second quarter of 2008; Atripla’s sales shot up 60% to $569.1 million.

"In total, second quarter revenue rose 29% to $1.65 billion, largely due to the $1.4 billion purchase of CV Therapeutics. With this acquisition Gilead expanded its cardiovascular drug portfolio, improving its ability to compete with its peers.

"Revenue from the firm’s HIV drugs should continue to grow in coming years, but its treatments for liver disease and respiratory conditions offer additional growth potential.

"It Quad four-in-one AIDS pill will combine the components of Truvada with two new experimental drugs. Patients can enjoy the convenience of taking just one pill with fewer adverse side effects compared to its competitors.

"The new treatment will be made up of only Gilead compounds; even if patients move from existing Gilead HIV pills to the Quad, the biotechnology giant will still benefit from improved margins on higher revenues.

"Analysts expect Quad to transform the HIV market between 2013 and 2018, at which point the drug could be the highest-selling antiretroviral treatment.

"In 2008 HIV antiretroviral sales reached $11 billion and are expected to climb to $18 billion by 2018, positioning Gilead for an even brighter future of profits and growth.

"With more than 1 million people infected with HIV in the US and only half being treated, Gilead will be able grab more market share.

"Health care stocks have underperformed the S&P 500 by 25% in the wake of government efforts to reform an industry that accounts for a sixth of the US economy. Uncertainties about the implications for earnings have weighed on share prices.

"But along with the growth in sales and revenues, second quarter ratios demonstrate that Gilead does a great job generating returns on capital and produces significant free cash flow. Even during the economic downturn, Gilead has remained stable and profitable.

"The strength of its HIV franchise and upcoming products for other diseases make Gilead Sciences a buy up to 55."

Risk and reward from Russia

steven@thestockadvisors.com (Steven Halpern) — Mon, 02 Nov 2009 05:00:00 PST

"Russia is a high-profile emerging economy with great investment potential -- along with high risk," says Leonard Goodall who eyes a Russia-focused ETF in No-Load Portfolios.

"With enhanced growth prospects, emerging economies such as Russia have the potential to outperform fully developed countries over the long term.

"As more and more people join the middle class in these countries, opportunities abound to sell them products of all kinds, driving profits and stock prices higher.

"From 2003 to 2008, Russia's economy grew at an average annual rate of over 5%, but it was slammed last year when commodity prices plunged. Russia is primarily a commodity-based country, heavily dependent on energy and mining exports.

"As oil and other commodity pries have risen this year, the Russian economy has improved, although its GDP is still down 9.8% year-on-year.

"The Russian experience offers a good lesson for all investors who are considering buying into emerging markets. Like Russia, many of these economies are often poorly diversified, depending disproportionally for their well-being on exports of a few commodities or other export products.

"Moreover, many emerging economies carry above-average political risks. And large economic swings are to be expected.

"The Market Vectors Russia ETF (NYSE: RSX) provides a good example. It's up over 100% this year, but over the last half of 2008, its performance was disastrous.

"Young investors with long investing time horizons have the best opportunities to capitalize on the high long term growth rates we can expect from Russia.

"For the rest of us with shorter perspectives, countries such as Russia should be viewed as trading vehicles only."

For subscription information for Leonard Goodall's No-Load Portfolios, contact Portfolios Strategies Inc., 8635 W. Sahara, #420, The Lakes, NV 89117

Income expert 'prefers' El Paso

steven@thestockadvisors.com (Steven Halpern) — Mon, 02 Nov 2009 05:00:00 PST

As his latest "Spotlight Income" feature, Roger Conrad looks to El Paso Corp. 4.75 Percent Preferred C (NYSE: EP C). Here's the latest from The Utility Forecaster.

"Ironically, dividends paid by sub-investment-grade utility bonds and preferred stocks were never at much real risk, thanks to solid essential service franchises.

"And with investor fears subsiding, their shares are making up lost ground quickly.

"El Paso Corp 4.75 Percent Preferred C has recovered roughly half of its late-2008 decline of 50% while steadily paying its quarterly dividend of 59.375 cents a share. But the best is yet to come.

"Issuer El Paso Corp. has seen its operating and financial prospects continue to improve, as they have every year since their late 2002 nadir. Energy pipelines and related facilities contribute 80% of earnings, and management will expand them by 40% over the next four years.

"Ninety percent of the additional capacity is already under contracts ranging from 10 to 30 years. The rest of earnings are from producing oil and gas, now hedged through 2011. A rising stream of earnings and cash flow will become a flood if energy prices rebound in coming years.

"That means a possible price-raising credit boost for the preferred. And convertible to common stock, it would score truly monster gains if El Paso’s common stock hits anything close to late 1990s levels. Buy El Paso Corp 4.75 Percent Preferred C up to 40."

Experts shop for value at Amazon (AMZN)

steven@thestockadvisors.com (Steven Halpern) — Mon, 02 Nov 2009 05:00:00 PST

Two of the newsletter industry's leading growth stock advisors remain bullish on the prospects of online retailer Amazon (NASDAQ: AMZN).

Mike Cintolo, editor of The Cabot Top Ten Report, explains, "Amazon.com recently blew away earnings expectations." Meanwhile, Alexander Green, investment director at The Oxford Club, says, "In our view, the best lies ahead for the company." Here are their reviews.

Mike Cintolo says, "Amazon announced that its Kindle e-book reader is now its most popular selling item, both in units and in dollars.

"That led to a big acceleration in revenue growth (28%, the fastest in ﬁ ve quarters), while earnings leaped 67%.

"As for the company’s regular business, we believe the economic turnaround combined with Amazon’s traditionally loyal customers is going to lead to big growth, especially during the holiday season.

"Meanwhile, the Kindle reader, though it faces growing competition, is easily the best-recognized of all e-book readers. And we believe the potential remains enormous.

"As the technology improves and prices come down, millions of people are likely to start reading their favorite blogs, newspapers, magazines and books on an electronic reader, saving money (e-books are far cheaper than hard copies) and effort. Amazon is a now a leader of this bull market.

"AMZN isn’t coming off a traditional basing pattern, but the stock did rest for much of the past six months. The stock had a nice recovery in the spring, but peaked just above 86 in April and, struggled until Labor Day.

"Following its latest earnings announcement, the stock rose 27% on volume that was eight times average. Our experience with earnings gaps this big, in this liquid a stock, is that they’re buyable right away. So pick up some shares around here."

Alex Green explains, "Amazon is no longer content to be the world's biggest e-tailer. Its new goal is to become the world's leading retailer. Period. It still has a long way to go, but the company is doing an excellent job of defending and expanding its turf.

"Amazon now sells just about everything under the sun. Its highly automated and centralized operations run at a much lower cost than traditional retailers.

"Not having stores means the company doesn't have the usual expenses of buying real estate, or building new retail centers, or hiring huge staffs, or paying all those utilities.

"Meanwhile customers have learned that shopping with Amazon is reliable, cheap and easy. The company is not just a big hit with consumers, incidentally. Tech Crunch, an online-technology publication, estimates that more than 60,000 corporate customers now use Amazon.

"The online leader is also expanding rapidly overseas. It now ships in six foreign countries, including Germany, Japan and China. International sales make up almost half of total revenue.

"Yet most investors still don't understand one of the most attractive parts of Amazon's business prospects. It's called cloud computing.

"Cloud computing is what happens when businesses outsource information-technology and data-center operations to third parties. It allows them to tap into Amazon's raw computing power, storage, software applications and data.

"Small businessmen increasingly ask themselves why they should hire a team to build and run their own retailing website when they can piggyback on the phenomenal success of Amazon.

"And just pay the company a small percentage of sales to handle their business. This way they avoid spending time, money and resources on servers and data centers.

"Cloud computing will soon create hundreds of millions of dollars in annual revenue for Amazon.

"Over the last year, Amazon has also unveiled mobile-shopping apps that allow customers to use their cell phones to compare its prices while shopping in traditional stores. (And place their Amazon orders on the spot.)

"Looking forward, Amazon predicts fourth-quarter revenue could top $9 billion and profits may hit $425 million. These numbers look conservative. And despite the recent move in the stock, in our view, the best still lies ahead."

OncoGenex (OGXI): Targeting cancer treatment

steven@thestockadvisors.com (Steven Halpern) — Fri, 30 Oct 2009 05:00:00 PDT

"OncoGenex (NASDAQ:OGXI) is a development-stage biopharmaceutical company focused on new cancer therapies to address treatment resistance in cancer patients," says biotech expert John McCamant.

In his The Medical Technology Stock Letter, he explains, "The firm’s market cap is just under $225, which is extremely low for a cancer compound this far along in development." Here's his in-depth analysis.

"The company completed a reverse merger with Sonus Pharmaceuticals in August 2008 that resulted in OGXI becoming a publicly-traded company.

"Its lead product, OGX-011, has the potential to address very large market opportunities, including prostate and breast cancer.

"OGX-011 has completed five Phase 2 trials in prostate, breast and non-small cell lung cancer (NSCLC), generating positive data to date, and is poised to enter two Phase 3 studies in first and second-line hormone refractory prostate cancer (HRPC).

"This lead drug candidate was in-licensed from ISIS who retains roughly 30% of OGX-011’s economics.

"The company’s current valuation of $215 million is providing a unique opportunity for a company with a drug development candidate that has delivered impressive randomized Phase 2 data showing a survival benefit in a major cancer market.

"We expect a partnership by year end which would allow the company to quickly start their Phase 3 trials for OGX-011 as they have already obtained special protocol agreements (SPAs) for both trials from the FDA.

"OGX-011 reduces the production of the protein clusterin which is believed to help cancer cells survive when treated with chemotherapy and is known to be present in a large number of tumor types.

"Data from the Phase 2 program have shown that adding OGX-011 to chemotherapy provides a survival advantage vs. chemotherapy alone in 1st-line HRPC treatment, provides better pain palliation in 2nd-line HRPC therapy, and appears to benefit NSCLC patients.

"We estimate the potential opportunity in the HRPC market alone could exceed $1 billion in sales if the drug were ultimately approved for both first- and second-line treatment and that additional indications may provide an even larger market opportunity.

"The most important data produced to date for OGX-011 is the randomized survival data obtained from the first-line HRPC trial. The trial showed that median overall survival was 23.8 months in patients receiving OGXI-011+ docetaxel/prednisone vs. 16.9 months for patients receiving docetaxel/prednisone alone.

"We believe, given the randomized structure of the study and the strength of the data, that the likelihood of success of OGX-011 is higher than a typical drug entering Phase 3.

"In addition, OGX-011 appears to have impacted pain palliation. In previous studies, only 22%-35% patients receiving first-line docetaxel therapy reported a reduction in pain.

"By comparison, 61% of patients receiving OGX-011+docetaxel reported durable pain responses in a second-line setting. Pain palliation is the primary end-point agreed to by the FDA for OGXI’s pivotal Phase 3 trial.

"Overall, given the strength of the data from the Phase 2 study, we believe the likelihood of success is relatively high compared with an average cancer drug entering Phase 3.

"We believe that the current valuation of OGXI is based solely on the probability of OGX-011 being approved for HRPC. However, OGXI has also produced attractive results in a Phase 2 trial in NSCLC, another large indication that could open up an additional multi-billion dollar market to OGX-011.

"Additionally, OGXI has four compounds in the pipeline that could increase in value as they move through clinical development.

"The most advanced of the four compounds is HsP27, is a heat shock protein, that has generated impressive Phase 1 data. HsP27 may have utility in prostate, breast, lung, ovarian, bladder, pancreas, and multiple myeloma.

"As a result, we believe investors could benefit from upside above our forecasts given the potential to expand OGX-011 into additional indications and the opportunities that may develop as the pipeline matures.

"OGXI has repeatedly stated it intends to license OGX-011 to a larger pharmaceutical company for commercialization before initiating the Phase 3 program as they currently don’t have a large enough cash position to do it alone.

"This makes good sense for OGX-011 shareholders as raising the required capital would extensively dilute current shareholders and partnering lowers the risks for the commercialization path for the company.

"A major partnership that provides OGXI with substantial upfront and milestone payments ($200+ million), and a royalty on future sales would be a big win for shareholders.

"We believe that a partnership would be a significant catalyst for the stock as it would validate the drug development candidate and eliminate the funding concern for the Phase 3 development program.

"Once the company has finalized a partnership, we believe it will move quickly to begin enrolling patients in its Phase 3 trials. Management has negotiated Special Protocol Assessments (SPAs) from the FDA for both of the planned Phase 3 trials.

"We expect OGXI to ink an attractive partnership for OGX-011 by year-end which would allow them to start Phase 3 as soon as 1Q2010. Both of these events should serve to drive OGXI’s share price higher. OGXI is a buy; our 18 month target for the stock is $75."

Carlson's dividend trio

steven@thestockadvisors.com (Steven Halpern) — Fri, 30 Oct 2009 05:00:00 PDT

"One way to build an inflation hedge into your investment cash ﬂows is to focus on stocks that are likely to boost their dividends on a regular basis," explains dividend specialist Chuck Carlson.

In his The DRIP Investor, he notes, "Since dividends are paid with cold cash, they can’t be faked. Either you pay the dividend or you don’t. They can’t be some ﬁgment of accounting magic." Here, he looks at three favorite blue chips with strong dividend records.

"The math is simple, but compelling. If your dividend stream can at least keep pace with inﬂation — and hopefully exceed the inﬂation rate — your real spending power can be maintained or even increased over time.

"When a company makes a commitment to pay the dividend, the company is saying that it is conﬁdent that it will be able to continue to pay this commitment to shareholders.

"And when a company increases its dividend, the ﬁrm is saying that it believes the company’s future is strong enough to support an increase in shareholder cash ﬂows.

"The three stocks profiled each meet the following criteria:

All have yields of at least 2.2%.
All have increased dividends every year for at least the last ﬁve years.
All have 5-year annual dividend growth of at least 8%.
All have Overall Quadrix® scores in the top quintile (above 80) in our Quadrix universe. Quadrix is my ﬁrm’s proprietary stock-ranking system that scores more than 4,000 stocks based on more than 100 different variables, such as Value, Quality, and Performance.
All have direct-purchase plans whereby any investor may buy shares directly, the first share and every share.

"Aflac (NYSE: AFL), the insurance company, has an especially impressive record of dividend increases spanning more than a quarter century.

"The stock has come through a very tough patch for ﬁnancials and should be among the sector’s leaders going forward. DRIP investors note that Aflac has a very user-friendly DRIP. Minimum initial investment is $1,000. There are no fees on the buy side.

"Medtronic (NYSE: MDT), a leader in medical-technology equipment, is another with an impressive dividend-growth record. Dividends have increased every year since the company initiated a dividend in 1977.

"Health-care stocks continue to feel investor uncertainty as a result of the looming health-care reform bill. Still, Medtronic offers a quality play in the ﬁeld, and the company’s dividend-growth record is a bonus.

"The last stock I’ll mention here is Colgate-Palmolive (NYSE: CL). The ﬁrm has paid a dividend every year since 1895 and has increased its dividend in each of the last 46 years.

"Colgate-Palmolive’s direct-purchase plan has a minimum initial investment of $500. There is a one-time enrollment fee of $10. Purchase fees are $2.50."

Select Healthcare: 'One-stop shop'

steven@thestockadvisors.com (Steven Halpern) — Thu, 29 Oct 2009 21:00:00 PDT

"Healthcare is a core holding in our fund portfolios," says fund expert Jim Lowell. In The Fidelity Investor, he adds, "We own a healthy dose of Fidelity Select Health Care (FSPHX)."

"Traditionally, healthcare has served us well as both an anchor to windward and also as a way to generate real returns." Here are some highlights from his latest review of healthcare-related funds.

"My long-standing diagnosis is that healthcare remains a reliable cure for overall market volatility with organic and strategic upside growth potential.

"Of course, heathcare -- representing nearly 16% of our total GDP -- is unlike any other sector in the S&P. It is so diversified and global, so inter-related to technology, manufacturing, and R&D, so depending upon delivering real goods and services for consumer consumption, that it is almost an economy unto itself.

"Since 2000, Fidelity Select Healthcare has delivered a total return of 38.8% vs. a loss of 14.4% for the S&P 500. Up 24.2% year-to-dater, manager Eddie Yoon invests in the gamut of healthcare options: pharmaceuticals, biotech, medical equipment and systems, and HMOs.

"Investors looking for a one-stop healthcare shop should pick this option. The trumped up political crisis that has engendered a rush to 'cure' our healthcare system has done little to dent the fundamental reasons for keeping a core holding in healthcare now -- earnings growth, demographics and innovation.

"There's also a steady global market dose here; foreign stocks make up 13% of the holdings, but the companies that aren't listed as foreign still derive increasingly greater amounts of revenue from the burgeoning global marketplace.

Yoon's top holdings are Covidien, Pfizer, Medco Health, Allergan, Amgen, Illumina and Bard. It's diversification is a good prescription for risk."