Sometimes it takes quite a bit of time for a relevant theme to mature.  This year we have been bullish on fertilizer stocks such as Intrepid Potash (IPI) and Potash Corp of Saskatchewan (POT).  The trade has been a bit lonely from June through mid-November as a weak economy has dampened demand for fertilizer products.

In January, the ZachStocks Growth Model took a significant position in IPI based on the assumption that the stock would begin to rally back towards its $32 IPO price as demand picked up for agricultural goods.  On March 6, ZachStocks profiled Intrepid Potash, outlining three options which could help IPI better survive the economic uncertainty.  These conservative strategies included shutting down mines, deferring expenditures and reducing operating levels in order to preserve cash during the challenging period. It now appears that the company has survived the worst of the downturn and  is primed to benefit from any increase in agricultural demand.  Intrepid finished the third quarter with $94.9 million in cash and no outstanding debt.  The average price for selling a ton of potash declined to $458 per short ton compared to $623 last year, but this metric is relatively stable compared to the gyrating prices we were seeing last year.  It’s encouraging to see that the company was able to turn a profit even with lower sales prices and adapt to the changing market.

Management has been very careful to match production with customer demand in order to keep inventories at a reasonable level.  Production for the third quarter was actually down 44% which points to a disciplined approach and will likely lead to industry strength.  As demand picks up, IPI can quickly ramp production levels back up to meet rising demand.  And it appears that demand may be picking up:

The third quarter began to show some signs of a moderate recovery in the domestic potash market.  Although the potash market in the United States remains a just-in-time market, our forward warehousing efforts have provided Intrepid the opportunity to participate in sales that we would have otherwise not realized. ~Bob Jornayvaz, CEO

For the last several quarters, farmers have been reluctant to purchase fertilizer due to economic concerns as well as tight liquidity constraints.  Typical funding sources for crop investments were caught up in the financial market dislocation and the capital simply wasn’t available.  But as capital markets have thawed, the demand from farming institutions is beginning to pick up.  The pent up demand from several quarters of weak fertilization could drive significant sales increases. Agriculture stocks have lied relatively dormant for several months.  As the market has favored risk based investments in order to gun for above normal returns, these stable companies have largely been picked over.  However, it appears that we are in the early stages of a broad move back toward stability and away from risky assets.  If this is the case, agriculture stocks could easily regain popularity and see their earnings multiples increase.

The last two days of trading have seen IPI and POT run sharply higher on massive volume.  This most certainly points to institutions building large positions and will likely set off a significant trend.  Intrepid appears to be a better investment due to its smaller market cap and greater flexibility when it comes to adapting to the environment.  POT has a higher debt level and just appears to have more risk.

As IPI trades up close to the $32 level (which was it’s IPO price from early 2008), it could run into resistance and stall out for a week or two.  But I expect that inflationary pressures, rising demand, and low inventory levels will work together to push this stock significantly higher over the next six months.

FD: Author does have a position in IPI in the ZachStocks Growth Model

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What happens when investors expect perfection from the companies they are invested in?  Chances are, those expectations will eventually be disappointed and investors can realize that the level of confidence is unrealistic.  This appears to be the case with Salesforce.com (CRM) which is trading 4% lower in early trading after announcing earnings last night.

Earnings per share grabbed most of the attention with the company posting a 100% increase and booking $0.16 per share for the quarter.  The revenue figure was much less impressive with an increase of just 20%.  Salesforce is at a critical juncture where revenue has grown to a place where it exceeds fixed costs, so small increases in the revenue base can have a much larger impact on earnings (on a percentage basis).  The million dollar question is whether the company will be able to continue to keep costs low in order to leverage their revenue growth.

While management tried to put a positive spin on the forward guidance, there were some significant red flags which will likely cause further selling in the stock.  First of all, the level of deferred revenue dropped from Q2 to Q3.  This is significant because CRM has many long-term contracts with customers where the client pays an up-front fee and then CRM offers service for several quarters or even several years.  This up-front payment cannot be booked as revenue because CRM has not actually performed the service yet.  Instead, the payment goes to an account called deferred revenue which then is recognized as revenue slowly over the coming quarters.

If the level of deferred revenue is dropping, this has negative implications for future revenues and earnings.  Essentially, this means that the company sold less in the way of new agreements, than it completed during the quarter.  If this happens too many times, we will eventually see a decline in revenues which would be bad news for this high priced growth stock.  The other takeaway from the decline in deferred revenue, is that the economy as it pertains to business spending may be recovering more slowly than many anticipate.

The second red flag relates to the headcount of employees which is a major portion of the company’s overhead expenses.  During the third quarter, management stated that an additional 160 sales representatives were brought on board to help grow revenue during the fourth quarter.  Additionally, the company expects to hire another 160 representatives in the fourth quarter in what appears to be a dangerous bet that the additional headcount will pay for itself in the form of new business.

To its credit, the company did land an additional 5,000 customers which brings the total client count to roughly 70,000 relationships.  It appears that low attrition rates also point to the fact that customers are happy with the service and CRM is providing value.  Salesforce and Cisco (CSCO) are set to announce a new product in January which will be instrumental in connecting call centers with customers.  That product launch could significantly add to revenue which appears to be what investors are betting on.

Tuesday, the stock closed above $65. which is quite a hefty price considering the company is expected to earn 62 cents per share this year (fiscal year end is January 31) and 84 cents next year.  Assuming these analyst expectations are correct (and I wouldn’t be surprised if they are revised lower this week), investors are willing to pay more than $77 for every dollar the company earns.  That’s an incredible price which is very difficult to justify.

It has been difficult to act on short ideas this year as the market continues to trade higher regardless of the fundamental underlying issues.  CRM could certainly continue to trade higher in the short-run as management does a good job of creating excitement.  But the risk is very difficult to overlook and at some point soon I expect CRM to give up a good bit of its gains.  The 200 day moving average is currently at $45 which still seems like an aggressive stock price for the earnings level.  So watch for volatility and short at your own risk, but don’t be surprised if this stock loses 1/3 to 1/2 of its value over the next two quarters.

FD: Author does not have a position in CRM

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Shares of Wuxi PharmaTech Inc.  (WX) are trading sharply higher this morning after the company announced a strong third quarter.  The company grew revenue by 10% over last year for a total of $70.0 million while adjusted earnings per share grew 32% to $0.24 per share.  More importantly, the company is increasing its guidance for the year which is giving investors confidence in the long-term growth prospects for this innovative company.

Wuxi has built a strong reputation as an offshore research and laboratory service company and its clients include many of the major drug developers in the US.  While the corporation is registered in the Cayman Islands, the majority of its operations are in China where it has built efficient laboratory and manufacturing facilities.  During  the third quarter,the company increased its headcount by 400 in order to ramp up for what is expected to be a strong growth season for the company.

With a strong balance sheet and a positive outlook for worldwide pharmaceutical demand, Wuxi is investing heavily in its future.  The company has ambitious plans to expand into toxicology and large-scale manufacturing which will not only increase the revenue and earnings levels, but will also provide diversification in business lines.  Through September, the company has spent $33.4 million for capital improvements, but is guiding analysts to expect $55 to $60 million for the year.  This means that at a minimum, the company will be spending another $20 million to expand its capacity.

Our confidence in the continued success of our business model leads us to continue to make investments to build our capabilities and capacities…  As a result of these investments, we expect Laboratory Services, toxicology, and large-scale manufacturing each to be major contributors to the company’s growth in revenues and earnings over the next several years. ~Dr. Ge Li, CEO

The financial stability of the company is what allows for this aggressive growth approach.  Currently, the company is sitting on $85 million in cash with another $22 million in short-term investments.  Long-term debt is minimal at roughly $2 million so it is easy to see how the company has the ability to spend another $20 million on increasing its facilities.

Investors have faced a bumpy ride with this technology position.  In mid 2007, the stock was issued to the public at $14. per share and immediately began trading at a premium.  Within three months, the stock had reached $40 as optimism for the prospects of offshore drug development became inflated.  As the global economy downshifted, the stock eventually reached a low of $3.67 as investors worried not only about the end demand for business, but also about the financial solvency for many major Wuxi customers.

Today, the stock is back above the IPO price, and cannot be considered a cheap investment.  Analysts expect the company to earn 65 cents per share this year and 72 cents in 2010.  Those estimates are likely to be revised higher as the earnings announcement is considered and after management concludes the conference call.  However, there appears to be the potential for significant growth in the stock price and I believe Wuxi offers an exceptional opportunity.

As demographic shift and the global population experiences increasing demand for pharmaceutical products, Wuxi’s large-scale manufacturing facilities will likely receive steady business.  The company already has established strong relationships with major drug developers so the manufacturing process would be a natural fit.  US health care reform initiatives will likely cause drug manufacturers to seek more efficiencies in order to cut costs.  Outsourcing many processes to China will likely help facilitate these cost cuts.

So WX is positioned to grow sharply over the coming years and I believe that analyst expectations may not fully account for this increase.  There will certainly be volatility in the shares and I wouldn’t be surprised if the stock came back to test the $14 level again.  But over the next six to 12 months, investors could see the stock cross $25 simply by analysts increasing 2010 expectations to 85 cents and investors using a 30 multiple due to the sharp growth.  So don’t put all your eggs in this basket, but a diversified account could do well to allocate capital to this strong growth opportunity.

FD: Author does not have a position in WX

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Suntech Power Holdings (STP) is trading sharply higher this morning after the company announced that they would be opening a manufacturing facility in Arizona.  The China-based solar panel maker has managed to remain profitable this year despite a difficult environment for solar manufacturers.  The expansion move instilled investor confidence as positive news flow out of the solar sector has begun to spark buying.

Late last week, Yingli Green Energy (YGE) also saw its stock lift after announcing a positive quarter and raising estimates for the coming year.  Management cited an expected improvement in profit margins for 2010 which is a significant change in trend for the company and for the industry as a whole.

In 2007, solar manufacturers bucked the topping trend in the overall market by rallying sharply as demand for solar power began to expand.  Rising oil prices and potential shortages of traditional fossil fuel sources had investors anxious to own a piece of the coming solar power boom.  However, as financial markets collapsed, the entire world entered a significant recession, and traditional energy prices dropped; the allure of solar energy began to decline.

At the same time that demand was declining, advances in technology caused supply to increase exponentially.  The manufacturing process to create and use polysilicon became more cost effective and efficient, leading to an inventory glut and sharply lower end prices.  This caused many solar players who had used excessive leverage to increase manufacturing capacity to struggle.  With profit margins dropping and the cost of capital remaining stubbornly high, many players in the industry had to capitulate.  Stock prices sank, and investors quickly saw significant losses.

Today, the picture is once again beginning to change.  As stimulus programs are in place with a bent towards decreasing our dependence on foreign oil and increasing the portion of renewable energy used, the consumption of solar energy is on the rise.  There are still significant financial, political, and infrastructure issues to be resolved, but the picture is brightening for this industry.

Investors need to carefully weigh their positions in the solar industry because not all solar opportunities are created equal.  Some of the major pitfalls which should be considered include the debt levels of individual companies, long-term contracts with customers or suppliers, and the specific technology used in the manufacturing process.  Nearly every major player in the industry has significant debt.  What varies is the assets backing up that debt and the level of cash flow available to serve that debt.

Yingli has a published debt to equity ratio of 40% which is fairly attractive for the industry.  While the company is expected to post a loss of 22 cents per share this year, analysts expect the increased profit margins to yield 76 cents in profit next year which puts the stock at a multiple of 18 times next year’s earnings.  That multiple looks relatively attractive given the company’s increasing fundamental prospects and the traction we are seeing in the industry.

Suntech has a much higher debt load, listed at 92%, but should manage to post a small profit this year.  The company will need to arrange financing for its Arizona plant which may increase the risk for the company to a small extent.  However, the market appears more confident in STP’s ability to generate profit growth as the stock is trading at 27 times 2010 expectations.

The solar industry could offer significant gains for 2010 but volatility will likely be high.  Aggressive investors may choose to ride out the swings and look for long-term gains.  Another more conservative approach would be to buy positions in individual solar names and then sell calls against those positions.  The calls will cap total gains available to investors, but will also serve to generate a “synthetic dividend” offering cash flow and a reduction in risk.  The premium on these options are relatively attractive depending on which issue you are considering.  Risk control is still the most important consideration, but there remains some attractive opportunities in play.

FD: Author has a long YGE position in the ZachStocks Growth Model

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Shares of AECOM Technology Corp. (ACM) are sharply higher this week after the infrastructure company issued the fourth quarter earnings announcement.  Since the company operates with a September year end, 2009 is now in the books and it has been a decent year.  For the fourth quarter, the company earned $0.48 per share which beats the street expectations which were at 46 cents.  The earnings represent a 20% increase in profit versus last year, and for 2009 in total, the company grew earnings by 19%.

Part of the strength of this company is the fact that AECOM receives a significant portion of their revenue from overseas.  With the dollar in a pronounced downtrend against most major currencies, this means that sales paid in Euros, Yen or other currencies are translated back to reflect higher dollar levels.  So international trade is not only helpful as far as diversifying between regions, but has also been helpful from a foreign exchange perspective.

The quarter was characterized by significant contract wins which will set the company up for success in the coming years.  A strong backlog of work is important for firms like AECOM which must complete some individual customer projects over the course of several years.  As existing projects near completion and are converted into revenue, the sales team must work hard to line up new contracts in order to remain stable.

During the quarter, we won over $1.8 billion in new projects, highlighted by several mega projects.  These wins, coupled with three recently announced acquisitions, make AECOM well positioned for continued success. ~John M. Dionisio, CEO

Total project backlog was listed at $9.5 billion at the end of September which represents a 10% increase over the past year.  That’s enough work to keep the company busy for another 18 months at the current rate of quarterly revenue.  The backlog is a record for the company and points to both the skill of the company in landing new projects and the strength of the industry as opportunities become available.

Has gold topped out for the year? (video)

While AECOM continues to operate on a global basis, management is expecting the US to play a major role in the profitability of the company over the coming two years.  During the conference call, management noted that US stimulus funds have begun finding their way to specific projects.  2010 and 2011 will be important periods for these projects and US stimulus should be a significant growth driver for ACM.

Management issued guidance for 2010, with earnings expected to fall between $1.90 and $2.00 per share.  While this is a touch below analyst expectations, there is a good chance that management is being overly cautious with its guidance in order to set the company up to exceed expectations.  The growth in backlog coupled with stimulus spending should allow the company to easily exceed this target.

After the announcement, the stock traded up to a level near $27.  The price level represents a multiple of 13.5 times management guidance for 2010 profits.  This is a conservative price considering the growth of the company, the stability of the business, and the strength of its balance sheet.  AECOM has acquired several attractive companies this past year which will add to earnings and allow the firm to reach a broader client base.  In short, it looks like the stock has much farther to run and I would encourage investors to continue to build positions in this solid infrastructure company.

FD: Author has a long position in the ZachStocks Growth Model

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Green Mountain Coffee Roasters (GMCR) is down sharply this morning after announcing earnings last night.  While the revenue and profit numbers for the fourth quarter (the company operates with a September year end) showed considerable growth, the stock (which is featured in the Retail Fail quarterly sector report) had been priced for perfection and it appears that investors now have some concern with the rosy outlook.

For the quarter, Green Mountain reported earnings per share of $0.34 which beat the 33 cent consensus estimate and represented an increase of 89% above last year’s level.  Revenue was $222.2 million which also beat estimates and represents a 65% increase over last year.  The third quarter was certainly a victory for the company, but looking forward the picture is a bit less optimistic.

Management issued its outlook for the first quarter which includes sales growth of 61 to 66% ($317 million to $327 million) and earnings growth of 11 to 15 cents per share.  Since analysts had been expecting first quarter earnings to approach 19 cents per share, this is obviously a disappointment.  While the sales growth guidance is relatively in line with the market’s perception, operating margins are expected to be between 3.8% and 4.3% which is well below the 11.4% operating margin in the fourth quarter.

There may be a reasonable explanation for such a steep drop in operating margins.  Green Mountain’s business model is to sell its coffee machines at nearly break even in order to get customers hooked on its brand.  Then once the machine is installed, GMCR makes a much higher profit margin on the K-cup coffee servings.  The strategy is similar to HP who invented the model of selling printers for a loss and then making a killing by supplying the ink cartridges.

Overall, the growth story for Green Mountain remains intact and as a stand alone business, they are very attractive.  The distribution deal with Wal-Mart (WMT) continues to drive sales and will likely be a stable source of revenue for the foreseeable future.  Management has a legitimate reason to be proud of their success.

GMCR is executing on its plans and running on all cylinders as the innovative and proprietary Keurig Single-Cup Brewing System continues to transform how consumers in North America prepare and enjoy their beverages. The resulting demand for K-Cups is fueling our growth. This past quarter, Keurig realized the highest ever quarterly year-over-year increase in K-Cup shipments since becoming part of GMCR in the third fiscal quarter of 2006. ~Lawrence J. Blanford, CEO

From an investment standpoint, however, I simply cannot justify the price that GMCR is trading at.  Current investors are buying the growth story with very little regard for the actual fundamental valuation of the company.  Using Wednesday’s closing stock price, and the high end of management’s updated guidance for 2010, investors are paying 41 dollars for every dollar the company is expected to earn.  That’s an exorbitant multiple and as we are seeing this morning, carries quite a bit of risk.

It is always difficult to anticipate the short-term price movement directly after the earnings announcement.  Obviously investors are frustrated with the first quarter guidance and have sent the stock lower to begin the day.  But it wouldn’t surprise me to see a rally over the next few days as bullish investors take advantage of a low price and accumulate more shares.

But over the next several weeks, I expect this news to sink in and cause more suspicion in the stock.  It is quite possible that analysts could assign a multiple of 35 or 30 or even 25 times projected earnings.  This would occur if the long-term growth rate were called into question.  After all, it’s going to be hard for the company to find a repeat event for it’s Wal-Mart contract win from this year.  At a still-aggressive multiple of 30 times 2010 expectations, the stock would trade in the mid 50’s which represents quite a decline from the current levels.

Aggressive traders could consider taking a short position in this name, although tight risk control should be used.  If the stock rebounds and closes above $76, I would become concerned and step away until a better opportunity arises.  Option premiums are very high which may prevent traders from buying puts outright, but may set up a better opportunity.  Consider selling the stock short and then selling the December or January $65 or $70 puts.  This would allow you to collect some attractive premiums which will offset losses if the stock runs higher.  If the stock continues to trade lower, you may sacrifice some of your gains, but your rate of return will still be very attractive.

FD: Author does not have a position in GMCR

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One of the more successful IPOs over the past few weeks has come from Vitamin Shoppe Inc. (VSI).  The stock was offered to investors at $17.00 and began trading on October 28.  Underwriters included JPMorgan Chase (JPM), Bank of America (BAC) / Merrill Lynch, and Barclays Plc. (BCS).  The stock traded sharply higher out of the gate, closing its first day of trading at $17.95 which was good for a 5.6% initial return.

Since the IPO, investors have gained more confidence in the stock, pushing it as high as $21.39 during the day on Tuesday.  That’s a potential 26% increase over the IPO price.  It’s encouraging to see additional strength in the open market for a growth opportunity in its early days of trading.  The positive movement points to liquidity which continues to show up in pockets of the market despite the economic uncertainty.

Investors were particularly pleased with the third quarter earnings release which came out last Wednesday, just a week after the IPO.  During the quarter, VSI reported sales of $168.4 million which represents an 11.3% increase over last year.  The company has opened 60 retail stores over the last year, brining their total locations to 434.  Comparable store sales were up 4.4% which is impressive given weakness in consumer spending.  Of concern was an increase in cost of good sold which were higher due to increased product costs and occupancy costs.

While there are certainly challenges in operating a retail shop in today’s market, VSI used the proceeds from its IPO to pay off debt, giving the company a better financial presence.  Of the $121.2 million received in the transaction, $72.5 million was used to redeem preferred stock, and $45.2  million was used to repurchase senior secured notes.  Now the preferred stock was essentially a way for the early investors in the company to get paid, but the lower value on the senior notes should help with long-term interest expenses.

The dynamics on this IPO are very positive for the time being.  A well managed deal has led to a higher stock price which will likely be supported for the next several months.  Aggressive traders could pick up stock on any dips into the high-teens with an absolute stop below $17.  If the stock breaks below this level, all bets are off and the picture could get ugly very quickly.  But as long as the stock remains above this level, the trading opportunities will be best from the long side.

Down the road, it will be important for the company to demonstrate superior growth characteristics.  Over the last 10 quarters, Sales have grown very steadily by roughly 10 to 12% but that number will need to pick up in order to justify the current stock price.  It appears that the first quarter is typically a strong earnings quarter for the company so that will be the first major data point for investors to analyze.

It is often a major challenge for management teams to transition to publicly traded dynamics.  Transparency is extremely important and the reporting issues can be burdensome.  Currently, the company does not appear to have an extremely transparent setup with balance sheet information less than accessible.  As management becomes more talented at disclosure and keeping the necessary systems and processes in place, they will need to refocus on driving growth in order to create value for shareholders.  I believe the long-term prospects are good, but challenges must be overcome quickly in order to maintain a premium stock price.

FD: Author does not have a position in VSI

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The company that allows you to “start learning a new language in less than 5 minutes” is having trouble communicating its message to Wall Street.  During the third quarter Rosetta Stone Inc. (RST) booked revenue of $67.2 million and earnings of $0.29 per share.  The result showed growth over the same quarter last year, but failed to revive investor confidence which had been falling for several months.

In August, ZachStocks discussed marketing expenses at Rosetta, explaining that the company was “purchasing sales” by exorbitant spending on sales and marketing in order to reach target revenue rates.  While the targets were being hit, profit margins suffered and the stock took a significant hit when third quarter guidance was issued on August 17th.  Last week when the company issued the  actual third quarter report along with guidance for the fourth quarter, the stock once again gapped lower, this time violating the $18 IPO price.

Once again, management tried to paint a positive light on the numbers, stating that the company saw strength in institutional and international markets while acknowledging that there were challenges with the US consumer.  While the press release did not break out the international versus domestic sales figures, it did lay out the fact that 76% of sales come from consumers while only 24% are institutional.  So it appears that the major portion of the company’s business is under pressure and unlikely to generate meaningful growth in the next few quarters.

While we resolved our Internet marketing issues during the quarter, we feel that the current economic environment is having an effect on our US consumer business, resulting in greater variability in our operating results as we head into the holiday season. ~Tom Adams, CEO

With Friday’s payroll report showing a worse than expected number of jobs lost and the unemployment level reaching 10.2%, it is unlikely the US consumer will add to sales for Rosetta.  While the company was able to land a meaningful contract from the military this month, it is still an uphill battle to generate meaningful sales growth.  International sales could pick up, but there is not significant strength in the global economy.  One positive could be a weak dollar which makes international sales cheaper, but Rosetta has yet to prove that this source of revenue can add meaningful growth.

Initial investors who bought on the IPO have to be extremely frustrated at this point.  After experiencing more than a 75% increase within a few weeks of the offering, positive returns have now evaporated.  As RST probes new lows and slides below the IPO price, there are now no investors who actually have a profit in the stock.  Ironically, this is taking place at the same time the Dow is hitting new highs.  As we mentioned in the ZachStocks Newsletter this week, investors are quickly fleeing risky assets and putting capital into blue chip investments.  This doesn’t bode well for investors in RST.

When discussing the stock in August, I mentioned that I would not be interested in buying the stock unless it reached $15.  I stand by that statement but want to add a caveat.  As we approach that level (which represents a 16% decline from the IPO price), I do not want to buy Rosetta simply because it reached that price level.  In order to buy this name, I want to see a clear picture for how the company will grow revenue and translate that to significant earnings growth.  Until the picture for the consumer picks up, or the company proves it can ramp up its institutional business quickly, there is too much risk to own this under performing stock.

FD: Author does not have a position in RST

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Analysts ended up with a bit of egg on their face last week when Genoptix Inc. (GXDX) reported earnings.  In August we took a look at the company, noting that new customers were leading to significant revenue growth.  The trend has continued with Q3 revenue coming in at $33.5 million – good for a 47% increase over last year.  Analysts had been expecting earnings of $0.34 which were blown away by the actual $0.53 per share figure.

Management didn’t stop with an excellent historical record.  The company issued guidance for the fourth quarter with full year revenue expected at $180 million and EPS of $1.60.  This guidance caused analysts to jump to adjust their models and several research desks had to increase their estimates for 2009 earnings.  In addition, the company expects to see 2010 revenue grow to $235 million – good for a 30% annual increase.

Growth was particularly impressive during the third quarter because summer is typically a slow season for customer acquisitions.  As Genoptix continues to add to its sales force, the potential for additional growth is significant.  At the end of the summer, the company served a roughly 1,300 physicians with nearly 15,000 patient cases in process.  Certainly, the track record of growth should instill investor confidence over the coming quarters.

It was another quarter of solid performance as we continued to fine-tune our operations and drive new business while maintaining our signature high-quality service offering ~Sam Riccitelli, EVP and Chief Operating Officer

Looking at the financial strength of the company, there are two metrics which stand out to me as significantly positive data points.  First, the company was able to cut it’s Days Sales Outstanding (DSO) to 51 compared to 56 days last year.  This means that the company has been more successful at collecting revenues from physicians on a timely manner.  Similarly, earnings benefited $0.03 this quarter from a decline in bad debt expenses.  So skill in collecting revenue and improvement in customer credit score can be considered part of the company’s financial strength.

Secondly, GXDX has amassed a significant cash balance of $141.9 million.  With no debt on the books, this hefty cash balance allows management to be flexible in how they approach growth opportunities.  There has been talk of opening a second laboratory which would be used to serve the company’s east coast physicians and offer a bit quicker turnaround.  The cash balance would offer flexibility for this endeavor and would also come in handy if the company were to acquire another operation in order to expand their footprint.

The one thing that concerns me with Genoptix is the way the stock traded on Friday after the news was released.  Initially, the stock gapped higher making a new recovery high.  However, as the day went on, investors began taking profits and eventually sold the stock down to where it only recorded a modest gain for the day.  Volume was extremely high which would have been a positive had the stock maintained its gains.  However, the late-day weakness could leave some who bought on the news feeling “trapped” and lead to additional selling.

I believe that Genoptix is an excellent long-term position worth holding for several quarters if not years.  The management team has built a strong track record of growth, and the future looks bright for additional growth.  The Medicare reimbursement schedule is expected to remain relatively stable in 2010 which will likely be a positive for the stock.  But with the action on Friday, I think traders might be able to pick up shares at a bit more of an attractive spot (possibly between $32 and $33.  Regardless of where you pick up exposure, I believe GXDX is an excellent long-term growth opportunity.

FD: Author has a long position in the ZachStocks Growth Model

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What if I walked up to you this afternoon and asked you personally for a loan?  I know, we probably haven’t met and already you are uncomfortable with my overt start to our conversation.  But let’s run with this for a few minutes…  Assuming you had the money to lend, and I appeared to be a legitimate borrower with every intention to repay the loan, you might actually consider the transaction.  After all, loaning someone money can be a benefit to both the borrower and the lender – I would have the capital needed for whatever project I was undertaking, and you would negotiate a reasonable return for the capital you trust me with.

Treasury securities are not all that different.  In fact, a good friend and colleague of mine likens treasury liabilities to Loans to Congress. Essentially, buyers of these securities are allowing the US government to borrow capital, and Congress is the body primarily responsible for spending that money.  So let me pose my original question to you from a different standpoint.  If your congressman walked up to you this afternoon and asked you personally for a loan – would you consider lending him money?  Would your answer change if he offered the full faith and credit of the United States as a guarantee on your principal?  Well, many investors today are saying “yes” to this request – possibly without fully understanding the risks involved.

Three Considerations for Lending Money

When loaning money to an individual – or for that matter when loaning capital to a corporation – there are three primary categories that must be analyzed in order to make a rational decision.  Banks perform this type of analysis all the time as part of their underwriting process.  In order to distribute capital, lenders should look at the borrower’s position on these three factors.

1. Revenue or Income – What type of cash inflow is expected to be used in order to repay the loan?
2. Fiscal Strength – What shape is the borrower in financially – what assets and liabilities should be considered?
3. Ongoing Expenses – What level of operating expenses or household spending is in place and how will that affect repayment?

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As far as revenue or income is concerned, I would likely be a decent credit risk.  I receive a monthly check from a publishing company which has employed my services to write a series of financial newsletters.  I own an investment advisory which yields and increasing amount of revenue, while also performing some consulting work on the side.  It makes for a busy life, but a lender would see a diverse and stable source of revenue which would certainly be attractive.

Looking at Uncle Sam, the revenue base is more complicated.  Currently, the Internal Revenue Service (IRS) is dealing with low receipts as the economic recession has caused both businesses and individuals to earn less and therefore pay lower taxes.  Now Congress can easily pass laws requiring higher tax rates (and I believe we will see this as a trend over the next several years), but that strategy can be self-defeating.  Not only could citizens and businesses move offshore to countries with better tax rates, but heavy taxation can also lead to frustration where employees and employers alike simply do less business because there is less incentive to succeed.

The Issue With Printing

Now when we talk about our Loans to Congress (Treasury Securities) most people feel relatively safe because the notes are backed by the full faith and credit of the United States of America.  Even if the economy tumbled to the point where revenues were cut in half – or by 80%, the US could still print the money necessary to pay for the treasury liabilities.  So we are secure knowing that even with a worst-case scenario, the income stream can come from the printing press.

OK, let’s assume I made the same argument to a banker when I was applying for a loan.  ”Sir, I have an off-set printer in my basement that can turn out genuine $100 bills and while I don’t intend to make use of this, you should know that if my revenue decreases I will resort to printing these bills and you will still get paid.”  Of course this is highly illegal (and for those spoofs out there reading, I actually do not have an off-set printer in my basement.  But even stepping away from the legality of the situation, why would that be such a bad idea?  Why is printing money illegal in the first place?

The act of illegally printing money can have a devastating effect on the local or even national economy.  As cash floods the system, the laws of supply and demand come into play.  More cash chasing fewer goods leads directly to inflation.  It’s not a theory, it’s a fact!  As this money circulates, the value of each dollar will decline.  The US government places a high priority on guarding against counterfeit money as a means of protecting the integrity of our currency.

But in our Loans to Congress example, the government is essentially making the other side of the counterfeit argument.  ”If we get into trouble, you can rest assured that we will simply print more cash in order to make sure that you get paid.”  Why is that not comforting?

Fiscal Strength

Moving on to our second metric worth considering before making a Loan to Congress, we want to look at the fiscal strength or balance sheet for anyone we lend money to…  If you were looking at my personal finances, you may have been comfortable with the income side of my equation, but the balance sheet may paint a different story.  As a dad with six kids and some medical issues in the family, we have accumulated a bit of debt from hospital admissions, surgical procedures, and medical specialist consultations.  On top of that, we have the mortgage on the house, and a mortgage on a rental property.

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While the family is making progress working down these balances, the numbers would be enough to cause a banker to raise his eyebrows and consider charging a higher interest rate.  After all, the more debt that is on our balance sheet, the more risk the bank is taking.  The only saving grace for our family would be the progress we have made over the past few years in decreasing those liabilities.

As we look at the balance sheet for Uncle Sam, the picture is much different.  Not only do we see an eye-popping number eclipsing $10 trillion dollars, the level of indebtedness continues to rise at an alarming rate!  This week the Treasury Department is scheduled to sell more than $80 billion in notes and bonds to the general public as part of its ongoing funding process.

In addition to the explicit debt in the form of outstanding treasury securities, the US government has made enormous agreements to backstop financial and industrial institutions which still have a very real risk of failing.  The FDIC has a $500 billion dollar credit line which it can borrow from the Treasury should it need additional capital and many of the stimulus and rescue programs of the past year have included Treasury guarantees on loans and asset values.

The fiscal strength of the US government is not in a state that should make lenders feel comfortable.   Ironically, we are currently operating in an environment where yields on treasuries are some of the lowest in history.  Investors are flocking to the “relative safety” of treasuries because the risk in other asset classes is high.  Unfortunately, the risks in Treasuries are masked, but still significant.

Ongoing Expenses

The final issue that a lender should consider before making a Loan to Congress, or a loan to any other applicant, is the level of ongoing expenses which must be paid.  After all, as your borrower is paying his expenses, there needs to be enough cash left over to eventually pay off the loan.

On a personal level, my household would likely have a difficult time meeting standards in this regard.  With my oldest turning 10 last month, there is less than a decade until the college expenses start to hit.  And with my youngest two just turning a year old (twins), it is likely that quite a few dollars will go to the hallowed halls of many of this nation’s higher education institutions.  Top it off with five weddings to pay for (yes, David has five little sisters), I am basically out of luck when it comes to long-term expenses.

Turning to Congress, the picture doesn’t get much brighter.  We are in the middle of a raging debate over health care and how much responsibility should be taken on by the government.  Health care costs have been rising sharply over the last several years (rightfully so considering the advances in medicine and what we receive for these costs).  At the same time, the current population is entering a demographic phase where there will be significantly higher need for long-term medical care.

At a time when we can ill afford to debate this issue, it appears that the US government will begin spending billions (if not trillions) to ensure health care is provided to every citizen.  Now don’t get me wrong, I’m a compassionate guy and want the best for each of our countrymen…  But from a financial perspective, we are running into some pretty serious challenges.

Add to that, the cost of social security which is the biggest (legal) Ponzi scheme in history, and you have a recipe for disaster.  The young and emerging workforce paying into the system will not be able to keep up with the withdrawals from retirees and within the next few years, this source of government funding will quickly become a net exporter of money.  So the long-term prospects for government expenses makes for a dismal picture and it is difficult to rationalize lending money to this type of institution.

Alternative Capital Allocation

So what is the solution?  What should investors who need stability and income do?  Well, unfortunately, there are precious few “good” solutions right now when you consider the risk and potential return for investment capital.  But I do think that long-term treasury securities are some of the most dangerous vehicles to own for the reasons mentioned above.  Eventually when rates are ratcheted higher and lenders require a higher return for the risk of 30 year treasuries, the face value on these Loans to Congress will drop significantly and cause huge losses for many who believed they were in “safe investments”

Instead, I would consider very short-term treasury securities and bank deposit products (FDIC insured of course) for capital that you simply must have protected.  Over time, it makes sense to diversify into resource rich investments including precious metals, commodities, and foreign currencies with higher yields.  While these asset classes may sound more risky, the benefit of diversification, coupled with a conservative approach can actually add stabilization to your true purchasing power or real net worth.

Gold and silver have had a sharp run in recent weeks and while I like them as investments for a long-term approach, there may be some weakness in the coming few weeks as investors take profits.  Using pullbacks to slowly add exposure can be a conservative way to approach these trending markets.

Similarly, commodities have volatility, but can offer stability.  Aside from hiring a commodities broker, you can also look at individual equities which have exposure to the agriculture, energy, or metal prices.  Many of these investments can be in blue chip names that actually pay healthy dividends and yield capital appreciation.  This can be significantly better than the tiny yields currently paid on treasury securities.

Finally, foreign currencies can offer diversification and better returns.  Consider the Australian dollar.  The country recently increased its equivalent of the Fed Funds rate, and Australia is rich in natural resources.  This bodes well for its currency which is holding up strongly against other currencies despite our turbulent markets.

The bottom line is that when you make an investment (whether in treasuries, metals, commodities, equities – or loaning capital to an individual or business) you need to understand the risks and potential rewards.  Loans to Congress have underlying risk that may not currently be priced by the market.  Having a defensive approach to your investments may include a more diversified approach – after all, you are the one who has to live with the risk and return for your own investments.

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While major equity markets gyrate in mixed trading after the payroll report, investors in The Blackstone Group LP (BX) are pushing the stock decidedly higher.  Blackstone reported earnings this morning and while the official numbers showed a loss for the quarter, it appears that trends are turning higher for the private equity firm.  Revenue and earnings figures for this company are particularly difficult to analyze because of the partnership accounting surrounding many of the firm’s managed alternative investments, but the statistics from the earnings release were certainly encouraging.

Many of the firms hedge funds have seen significant increases over the past two quarters as asset prices have become more liquid and risk premiums have increased.  Essentially the lower risk or higher credit score for equities has led to significant investment returns.  Unfortunately, quite a few of these funds have “high water marks” which have yet to be eclipsed.  A high water mark simply means that the fund must make up losses for investors before Blackstone as a management company can collect the rich incentive allocations as part of its compensation.  As these high water marks are reached, the profitability of Blackstone will likely increase geometrically as the firm is able to participate in the profits funded by its investors.

The environment for private equity firms is decidedly more appealing than it was a year ago.  Large deals are now coming to market and investors appear more than willing to invest capital in newly issued stock.  For instance, Hyatt was able to issue the second largest IPO this year selling 38 million shares at a price of $25 (above the expected range).  The stock was well received by investors and is currently showing initial investors a 12% gain.  This type of liquid environment will lead to exceptional opportunities for Blackstone to sell portions of its private holdings to the market, while the company still has significant available cash to make opportunistic investments.

We see many opportunities to deploy our substantial available capital across each of our asset management businesses with attractive potential risk-return for our fund investors. ~Stephen Schwarzman, CEO

The beauty of Blackstone as an investment is that the company essentially offers a “heads I win, tails we break even” opportunity.  Investors in Blackstone’s private funds, put up capital to participate in a particular fund run by the company.  For instance, Blackstone is currently raising 5 billion Yuan ($732.5 million) for a new fund investing in mainland China.  If these funds perform well, Blackstone (and by extension, investors in BX) typically receives an attractive management fee and a very lucrative incentive allocation.  This allocation allows Blackstone to keep a percentage of the profits from the funds managed for investors.

If these private funds turn out to be unprofitable, Blackstone is usually still able to collect its management fee and while the firm may have some capital tied up int he fund, the majority of the risk is borne by investors in the fund, not by the parent company.  The result is that each of the many funds run by the parent company has the potential to generate millions in incentive allocations which are direct profits for investors in BX.

Blackstone announced that they will continue to pay their dividend (or partner allocation) of $0.30 for the current quarter.  Currently, the stock has a dividend yield of 8% while still offering investors one of the most attractive long-term growth opportunities in the market today.  I think the dividend should be very stable because institutional investors (including the China government) will require the company to continue to pay.  There is certainly a great case to be made for this investment and I look forward to seeing what the company will do in the coming months.

FD: Author has a long position personally and in the ZachStocks Growth Model

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Investors in Blue Nile Inc. (NILE) are cheering the third quarter earnings release.  For the period ending September 30, the company grew revenue by 2.4% and turned in earnings of $0.17 per share.  The profit represented 13% growth over the same period last year as the company noted specific strength in bridal jewelry and international sales.

Any consumer discretionary company growing sales and earnings in this environment deserves a certain degree of respect.  While the third quarter of 2008 was no picnic, retail companies are finding it difficult to convince penny pinching consumers to open their wallets.  Blue Nile is capturing market share from competitors during the difficult economic period with the expectation that the recovery will bring substantial revenue and earnings growth.

The Blue Nile brand is resonating with consumers in the current environment, and we are gaining market share. As we look toward the important holiday season, we are well positioned with a broad selection of diamond engagement rings and fine jewelry and a newly redesigned website to showcase these products. ~Diane Irvine, CEO

The most impressive part of the quarterly report was the fact that the company grew international sales by 27.5%.  While the percentage gain is quite a large number, NILE only received 8.8 million from international customers (roughly 13% of total sales).  In order for international growth to make a significant difference in the company’s growth, it will have to represent a larger portion of the total business.  Volatility in currency rates could cause these numbers to fluctuate, but a generally weaker dollar could be a benefit as it makes merchandise generally cheaper to offshore purchasers.

While I continue to be impressed by the company’s growth, I am very concerned that investors could find themselves trapped in an inflated stock over the next several months.  NILE commands a hefty multiple of 60 times expected earnings for 2010.  Even if the company is able to grow by 26% next year (which is the consensus estimate), the stock still appears to be overvalued at a price that is potentially double an aggressive analytical price.

There are plenty of examples of stocks which have traded at exorbitant multiples for several months, only to disappoint investors with a sharp reversal lower.  In fact, Blue Nile itself lost more than 80% of its value between late 2007 and the beginning of this year.  After making up about half of those losses, it appears the stock could once again be setting up for disappointment.

Currently, I don’t have a short position in the stock due to its strong momentum.  However, some technical chinks are showing up in the armor as NILE recently traded below the 50 day in strong volume as the overall market began to deteriorate.  Today’s earnings announcement and subsequent stock rally will be a good test as to the resolve of investors picking up new shares.

If the stock is able to maintain a price above $60 for the next week, then I would steer clear of committing capital on the short side.  Momentum could certainly carry the stock higher as investors are more excited about the solid company story than they are concerned with valuation.

However, if the stock gives up its gains from this morning and breaks back below the 50 day average, that would be a good short-term indicator that the picture is deteriorating and investors are ready to bail.  Once the positive momentum is broken, analysts could quickly begin calling for a multiple of 25 to 30 which would represent a 50% decline in the stock.

So tread carefully in this over-hyped retail stock.  Using your capital to buy actual gold or a diamond ring will likely be a much better investment than purchasing the shares of this high value growth stock.

FD: Author does not have a position in NILE

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The Federal Open Market Committee (FOMC) concluded its two day meeting yesterday with their customary announcement at 2:15 PM.  The statement concluded (as everyone expected) that the Fed would leave rates unchanged at a target of 0% to 0.25%.  More importantly, the committee said that it plans to keep rates exceptionally low for the foreseeable future – a very popular stance with the masses, but one which could lead to significant trouble down the road.

Essentially, it looks like the committee is trying to have its cake and eat it too.  The official posture is that the economy is improving and capital markets are once again functioning.  To back up this assumption, the Fed points to improving consumer spending, and home buying activity.  Now those two areas have been artificially propped up by two major government programs…  The “cash for clunkers” measure, along with the first time homebuyers tax credit.

While these programs have been terribly inefficient and mismanaged, they did in fact push consumer spending into a positive trend.  The government has taken capital from current and future taxpayers, allocated it to encourage two specific types of transactions, and then used these transactions as “proof” that the economy is recovering.  Meanwhile, unemployment continues to increase, and an asset bubble has begun to inflate around risk related assets.

The Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. ~FOMC Press Release

At the same time the Fed is stating verbally that the economic picture is improving, the posturing states that they are scared to death of the underlying economic situation.  Keep in mind that a zero to 0.25% interest rate is basically unprecedented in modern economic history.  The decision to cut rates to zero was born in the days of full-fledged panic when it looked as if our entire global financial system would fall apart.  Even a 1.5% or 2% fed-funds interest rate is considered “accommodative.”  But our rate structure implies that we are still at DEFCON 1.

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The difficult pill to swallow in this situation is that fiscally conservative individuals are being unfairly treated in an attempt to create more risk taking.  Interest rates on deposit accounts are at all time lows.  Retirees with more than a million in net worth cannot possibly live on the interest they receive on their capital.  Not unless they put that capital at risk in a shaky economic environment where they could easily lose a substantial portion of their nest egg.  It seems the government is content to offer incentives to encourage the very same risky behavior that got us into this mess in the first place.

A prominent money manager has been quoted (and this is admittedly a poor paraphrase) as saying that the tragedy of this recession is that we will emerge having learned absolutely nothing.  I fear that this may be true for our society in general, but does not have to be true for us individually as investors.  Some of the takeaways I have gleaned from the last 24 months include:

• Risk control is always paramount in any investment strategy
• Markets can be carried to unexpected extremes (both higher and lower)
• Lost opportunity is easier made up than lost capital
• Always understand the other side of the trade

We’ve got a ways to go before the economy and our markets are out of the woods.  If you have participated in the run up since March, count your blessings but make sure you have an exit strategy in place.  The markets gave up nearly all gains in the wake of the “positive” FOMC announcement which may be indicative of a sharply lower move in the next few weeks.

So keep your defense on the field and consider raising cash or initiating short positions.  There’s no reason to lose all of the gains from the last eight months.

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The market melt-down caused a significant decline in the number of IPO transactions over the past two years.  While a typical year used to include more than 200 major offerings, there were less than 50 such offerings in 2008 and so far I count 44 major transactions for 2009.  However, the pace of deals has picked up as markets once again offer liquidity and private equity investors and corporations are using that liquidity to cash out and raise capital.

The health of the most recent deals will have a major affect on both the pricing and frequency of upcoming deals.  If investors are willing to take on risk and the market has a speculative tone, then underwriters will likely have little trouble in pricing deals and getting top dollar for the selling shareholders.  But as we start to see a shift to more caution on the street, underwriters will have to adjust terms in order to get shares sold.  This doesn’t necessarily mean the rate of deals will decline, but it may mean that sellers will have to settle for lower prices and for selling smaller allocations in order to match market demand.

Dole Food Company Inc. (DOLE) was able to raise $419 million in its most recent transaction, netting the underwriters more than $26 million in fees.  The stock met selling its first day of trading with the IPO price of $12.50 quickly shunned by investors.  The majority of the capital is expected to be used to pay down the company’s debt which is likely to be a wise move given the uncertainty surrounding capital markets and the company’s interest expense.  However, investors appear to be worried that a faltering economy could still pressure shares and without earnings growth, the debt repayment will do little to add to shareholder value.

On a more positive note, Verisk Analytics Inc. (VRSK) was offered to the public at $22.00 and has quickly traded higher offering the IPO investors a handsome profit.  The risk management and analytics company is broadening its customer base to extend beyond its roots with insurance companies.  Essentially, the company will be able to offer internal credit reports for customers in many industries and should be able to grow revenue and earnings steadily in future quarters.  While the stock has pulled back a bit in the last week of trading, it is still 24% above the IPO price which is encouraging for the IPO market.

The most anticipated upcoming IPO is undoubtedly Hyatt Hotels.  Barron’s had a scorching article on the company this week including information surrounding the family squabbles which have plagued this closely held company for years.  The company is expected to offer 38 million shares to the public between $23 and $26 per share, valuing the entire firm near $4.1 billion.

Investors could justified in concern over the Pritzkers dysfunctional management of the company, especially considering that the family will retain voting control over the company through the use of two classes of shares representing ownership of the company.  The public will be issued class A shares, while the family will retain class B shares for their continued ownership.  The class B shares have 10 votes for every vote class A shares have which means that for the foreseeable future, the family will retain control over Hyatt.  Institutional investors will likely bulk at such a stipulation, which will likely lead to a lower share price than would be reasonable if the company were controlled equally by investors.

Although there are negative issues surrounding the deal, Hyatt has a strong brand, a full portfolio of attractive properties, and a top tier underwriting firm.  Goldman Sachs (GS) will likely pull out all the stops in order to get this deal priced and trading attractively.  I would not be surprised to see the company buying shares heavily after the deal to prop up the price and maintain that the deal was positive.  This would give the Pritzker family more confidence in the investment bank so that when it is time for round two of selling (a secondary offering) Goldman will get the deal and collect the fees.

I would keep indications low if you intend to participate in the IPO.  While profits could be substantial if Goldman does a good job, the risk in this offering is higher than normal.  I would prefer to allow the stock to start trading and establishing a pattern before committing capital.

FD: Author does not have a position in any stocks mentioned.

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Stanley Inc. (SXE) is trading sharply higher today after reporting earnings for the fiscal second quarter.  ZachStocks featured SXE last month noting that the company’s government contracts would likely drive growth in earnings.  Investors are quickly competing to buy shares after the announcement which not only showed strong growth for the quarter, but included strong guidance from management.

For the second quarter (ending in September) the company logged revenue of $217.1 million which was 14% higher than the same quarter last year.  The majority of this growth was organic, although three of the percentage points were due to an acquisition made earlier in the year.  Earnings were also strong with EPS coming in at $0.49, an increase of 32% above last year’s levels.

Stanley receives most of its revenue from government contracts as the company offers support initiatives for military and defense functions.  The earnings report noted the following business lines as showing particular strength:

• IT support systems for US Marine Corps
• Military intelligence training
• Operations support for US Army
• Biometrics software development
• Training and support for Dept. Of Defense
• Space & Navel Warfare Systems Command

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In addition to strong revenue and earnings growth, the company is showing more efficiency.  EBITDA profit margins came in at 10.7% for this quarter versus 9.9% in Q2.  Increased profit margins are due both to a more favorable business mix (contracts with higher profitability) as well as to strategic initiatives aimed at cutting back on administrative and overhead costs.

One of the more important metrics to consider is the company’s backlog of business.  Over the last three quarters, the level has remained relatively constant with a backlog of roughly $2 billion.  For a growth company like SXE, we would like to see this level increase which would indicate that the company is booking more contracts than it is fulfilling each quarter.  Management stated that delays in government procurement processes have kept bookings lower than they would like to see, but they anticipate an increase as these delays are resolved.  For now, it still appears that the company has more than 2 years worth of business to work on regardless of new contracts being inked.

Stanley’s second quarter of fiscal year 2010 demonstrated strong revenue growth and margin improvement, EPS growth and cash flow generation. Expected revenue contributions from recent new awards have enabled us to raise the midpoint of our fiscal year 2010 revenue guidance. ~Phil Nolan, CEO

Estimates for next year (fiscal year ending March of 2011) show analysts expecting $1.91 in earnings.  At the current price near $27, the stock is trading with a multiple of just 14.  This appears to be low considering the strong revenue growth and stability of the US government as a primary customer.  Over the next several months, I want to be involved in names that are less economically sensitive as we could very easily begin to see a “double dip” pattern in markets and in the economy.  SXE will likely offer more stability due to its long-term contracts and healthy backlog of business.

FD: Author does not have a position in SXE

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This week LogMeIn Inc. (LOGM) reported earnings for the first full quarter that the company was public.  The stock has been a rousing success with the initial investors receiving stock on July 1 at a price of $16.  Initially, the stock began trading near $20 for a 25% initial premium to the deal price.  As is usually the case, the stock backed off a bit once the hype of the deal dissipated, and by August the stock was testing the $16. IPO level.  By the middle of this month the stock had successfully tested the initial price and broke to new highs in the low $20’s which is where the stock was positioned coming into the earnings announcement.

The third quarter looked very positive with the company reporting revenue of $19 million which is up 32%.  Earnings were also strong with non-GAAP earnings per share of $0.12 compared to $0.05 last year.  During the quarter the company generated operating cash flow of $7.1 million compared to $4.3 million last year, so the business model is certainly strong with the only question being how quickly and effectively management can scale in the future.

Investors appear to have been disappointed with the company guidance for the fourth quarter.  Management is guiding revenue expectations toward a range of $19.6 to $19.9 million which is 22% growth over the fourth quarter last year.  Earnings should come in between 11 and 12 cents per share so the high end “only” represents a 100% increase over last year.  Considering the last 3 quarters have shown a minimum of 200% growth in earnings per share, this number could be disappointing to investors who have bid up the price of LOGM based on aggressive growth assumptions.

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Looking at the financial strength of the company, it appears that LogMeIn is in a great spot to capitalize on growth opportunities with a strong war-chest of capital.  Currently the company is sitting on cash of $121 million which includes $84.5 million which was raised in the IPO transaction.  In the prospectus for this offering, the company announced that it intended to use the capital for development of new services, sales and marketing activities and capital expenditures.  These investments should continue to assist the company in growing its customer base and developing strong revenue growth.

One of the newest products (LogMeIn Central) appears to be generating revenue and strong interest within the firm’s customer base.  Michael Simon (President and CEO) had this to say about the new product’s performance in the third quarter:

We are particularly pleased with sales generated from the recent release of LogMeIn Central, a web-based console that complements LogMeIn Pro2, Hamachi2 and Free products. While it is early in the release and sales cycle for LogMeIn Central, we are encouraged by the initial adoption of Central by both our premium and free users. ~Michael Simon, President and CEO

Analysts are currently only forecasting 9% earnings growth in 2010 which leaves expectations at $0.59 per share.  However, with a significant amount of cash, a positive operating business model, and growth initiatives underway, I expect these expectations to prove conservative.  Employers are continually looking for ways to make their workforce more competitive and efficient and LogMeIn provides some excellent tools to drive these initiatives.

Thursday’s trading has LOGM rebounding after two days of selling.  It appears that investors are being offered a chance to buy stock at a discount before the stock continues to run ahead of company growth.  I am strongly considering adding a position in this hot technology company to the ZachStocks Growth Model as we have a significant amount of cash on the sidelines waiting to be put to work.  The stock certainly carries some risk with the high price tag, but based on management’s ability to grow earnings, I believe this could be a strong position for 2010.

FD: Author does not have a position in LOGM

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Over the past two months, the IPO market has heated up, allowing companies and private investors to access liquidity by selling new shares to the public.  While the performance of these deals have varied from company to company, Verisk Analytics (VRSK) turned out to be one of the better managed, more profitable transactions for investors.  The stock was offered to the public on October 7th at $22 per share and closed above $28.50 on Tuesday for an attractive gain of nearly 30%

The deal was underwritten by Bank of America (BAC) and Morgan Stanley (MS) along with a syndicate of supporting cast.  Although Bank of America was not considered one of the top tier underwriters for the majority of this decade, their acquisition of Merrill Lynch during the financial meltdown has given them access to a large pool of retail and institutional investors which makes placing IPOs and secondary offerings a bit easier.

It is interesting to watch the trend in underwriting fees which used to be incredibly lucrative for these introducing firms.  While the profit margins are still relatively fat, Verisk Analytics only offered the underwriters 88 cents per share for the offering which represents a 4% haircut.  A few years ago, this underwriting discount could easily have topped 8 to even 10% of the offering price.

Looking at the details of the transaction, it immediately becomes clear that the entire amount of the $1.8 billion raised in the offering goes to selling shareholders with no capital actually flowing to Verisk as a company.  This would usually be considered a black mark against the deal, but Verisk is a different animal.  The company was actually owned by a broad assortment of top tier insurance companies including American International Group (AIG), Berkshire Hathaway (BRK.A), CNA Financial (CNA), Hartford Financial Services Group (HIG) and Travelers.

Verisk was created by these insurance companies as a third party risk analysis and decision support vehicle.  Verisk has built a well-recognized skill base in determining risks associated with a number of different industries, and providing decision support tools allowing clients to properly price, manage, and avoid risks associated with their individual businesses.  The decision to spin off the company appears to be an important liquidity event for these insurance companies, many of which could use some additional stability in their balance sheets.

Earnings have been relatively stable over the past five years with Verisk growing pro-forma EPS from 79 cents per share in 2004 to $1.26 per share in 2008.  The first two quarters of 2009 showed attractive growth with revenue increasing by 14% and 16% respectively and earnings up 9% to 16%.  So far there have been no official consensus estimates for the full year or for 2010 due to the fact that so many underwriters were assisting on the deal and they are barred from issuing an opinion on the stock for about 30 days.  Over the next several weeks we should see these research firms quickly initiate coverage and offer guidance for earnings.

The risk assessment business will likely face significant demand over the next several years as Wall Street and Main Street adjust to the new dynamics of a (hopefully) post recession world.  With VRSK now operating as its own independent business apart from the founding insurance companies, the firm should be able to diversify its client base and expand into promising industries.  In fact, the company recently hired Vince McCarthy who has extensive experience in corporate finance and M&A (Mergers and Acquisitions).  The title of Sr. VP – Corporate Development and Strategy indicates that the company is exploring opportunities to broaden its reach and develop new business lines.

Investors in VRSK are paying a relatively high premium for the potential growth.  Currently, the published PE for VRSK is 21 which is in line with Risk Metrics Group (RMG) which operates in a similar field.  I would expect a bit of a pullback in the stock over the next two weeks as the 30 day restriction on trading is lifted and a few investors cash in on their profitable position.  However, the long-term prospects for this industry are very good and I expect VRSK to begin a steady climb once the IPO trading dynamics have played out.  Investors may want to try to accumulate shares near $24 if they have the opportunity with the intent of holding into the $30’s over the next 12 months.

FD: Author does not have a position in VRSK

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Shares of AECOM Technology Corporation (ACM) got a lift Monday after the company announced a weekend acquisition.  Ellerbe Becket which is an architectural, interiors and engineering firm has been bought by AECOM who continues to build out its portfolio of product offerings by buying out the competition.  The ZachStocks Growth Model has a long position in ACM which has taken more time than expected to mature, but it now appears that the company may be building a strong fundamental base which could lead to a sharp rally in the stock.

It is a bit unusual to see the acquiring firm stock rise on the day that the acquisition is made, because usually investors are wary that the acquiring company may have paid a premium in order to take over the target company.  However, ACM rose more than 12% on a day when the market was experiencing a significant decline.  Volume was roughly double the average number of shares indicating that institutional investors may have been at work building large positions.  The initial strength after the transaction is a positive sign and is likely to point to this being an accretive deal for AECOM.

Ellerbe Becket employs 450 people in 7 offices across the US and the Middle East.  The company specializes in the following types of projects:

• Health care facilities
• Sports complexes
• Government buildings and installations
• Corporate projects
• Higher education facilities

One concern that often arises when a large corporation takes over a smaller rival is that headcount will be reduced resulting in unemployment.  However, in the architectural business, strength comes from human capital and so it is unlikely that AECOM will do much in the way of headcount reduction.  In fact, I imagine that there will be some retention bonuses for key architects and project managers to ensure that the investment pays off.

AECOM purchased Ellerbe Becket as the parent company continues to try to build out its product offerings to cover a broad range of architecture and engineering solutions.  The combination will give existing clients of both companies a wider platform of services for individual products.  AECOM is betting that cross selling these services will result in strong profitability for shareholders.  Although terms of the deal were not released, AECOM has a relatively stable financial position and it is not likely that significant additional debt was needed in order to secure this transaction.

Ellerbe Becket’s decision to join us in order to expand the services available to its clients and the professional development opportunities offered to its employees further establishes AECOM’s position as a preeminent global design consultancy. ~John M. Dionisio, President and CEO

The company will report earnings on November 12 and while the acquisition obviously occurred in the fourth quarter (and will not be included in the September fourth quarter numbers), it will be interesting to see if management sheds any additional light on the transaction.  It would be helpful to know approximate pricing details, any financing efforts that were taken to pay for the deal, and what sort of earnings growth investors can expect as a result of this purchase.

Stimulus measures both in the US and abroad were expected to help the company grow in 2009 and beyond.  Infrastructure projects captured headlines and investors attention, but investors now seem to have lost interest in infrastructure spending.  The earnings do continue to grow quarter by quarter, but investors still seem relatively unsure of the long-term growth prospects.  ACM is currently trading at near 16 times expected earnings for this year, and 13 times earnings expectations for 2010.  The multiple seems a bit low for a company that is growing earnings by 20% on an annual basis and I think patient shareholders will eventually be rewarded for sticking with this name.

Currently, there is no yield on the stock as management has decided to retain earnings to continue building the company.  This may be a wise move from a capital perspective, although a small dividend plan may open the stock up to a broader group of investors who need to have some cash-flow attached to their investment.  The chart pattern is not particularly attractive, but the Ellerbe acquisition could spark interest resulting in a more attractive price movement.

FD: Author has a long position in the ZachStocks Growth Model

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An extensive article in the Wall Street Journal Online today, points out some of the challenges that Tiffany & Co. (TIF) is facing as the company struggles to remain competitive in the current global economy.  The company has increasingly turned to integrating a larger portion of its supply chain by taking interests in overseas miners and opening factories for cutting and polishing its diamonds.  The strategic decisions over the past few years have led to difficulty as the global demand begins to dry up at the same time that Tiffany has built a costly supply structure.

Tiffany is  one of the featured shorts in the ZachStocks Retail Fail sector report.  As the market continues to make new highs on a weekly basis, investors should begin to develop defensive strategies for protecting gains.  Many professional investors initiate short positions in sectors in which prices have advanced much more quickly than the fundamental improvement seen in the businesses.  This strategy can be effective in protecting gains that have been accumulated as the market has rapidly advanced.

The current retail environment for Jewelry remains difficult despite a few positive signs pointing toward economic stabilization.  Over the last three quarters, Tiffany has seen earnings decline by 39%, 58%, and 37% respectively, and the company is expected to report full year earnings of $1.74 this year which is down 24% over last year.  Analysts are handicapping next year’s returns at $2.04 representing a 17% increase for fiscal year 2011 (Tiffany works with a Jan 31 fiscal year end).

An Alternative to Gold You Might Find Interesting

Global sales of jewelry have been constrained with the total market for diamonds expected to fall by 16% this year.  The number of specialty jewelry retailers declined by 1,500 last year and another 900 stores are expected to close in 2009.  With unemployment remaining stubbornly high, and some of the highest earning industries facing compensation scrutiny by regulatory bodies, it is unlikely that the outlook for this industry will turn higher in the next few quarters.

Tiffany has accumulated a significant amount of long-term debt which could eventually turn into a much larger problem if the economy continues to be soft.  At the beginning of the year, long-term debt was roughly $425 million.  But as of the last reporting period, Tiffany now has more than $710 million in long-term debt, plus pension and other liabilities bringing the total long-term liabilities to well above $1 billion.  As a result, interest expense is several times the level seen last year which is becoming a material drain on earnings.

One of the most dangerous issues for the financial health of the company is its surging inventory level.  The second quarter earnings release showed that the company is sitting on $1.5 billion in inventory which is an expensive prospect considering the interest expense along with an unstable sales outlook.  But with significant investment made in the supply chain, it is difficult for management to make the decision to cut back on purchases.  So the options are relatively difficult no matter which direction the company’s leadership decides to take.

Currently, stockholders seem relatively oblivious to the challenges facing this company.  Tiffany is trading at a multiple of more than 20 times aggressive expectations for 2011.  Given the low amount of growth expected, and the uncertainty which surrounds the luxury goods environment, I would not be willing to pay more than 12 times earnings for this mature company.  If the stock traded with this multiple, the price would drop below $25.  This decline seems to have a reasonable chance of occurring over the next 9 months.

With all of the concern over economic recovery, and the financial and strategic risks involved in this stock, I would recommend closing any long positions and potentially shorting the stock.  Alternative measures could be taken including selling calls against a long position, buying puts which will increase in value as the stock declines, or setting up a pairs trade by shorting TIF and buying another instrument such as a market or sector ETF.  Please understand the risks and the trading instruments before putting any strategy into place.  Tiffany is a well known and loved company and stock.  But the price pattern is likely to disappoint many investors over the next several months.

FD: Author does not have a position in TIF

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This week ZachStocks hosts the 112th edition of the Carnival of Financial Planning, the best personal financial planning and personal investment articles this week from personal financial blogs.

Welcome to the October 23, 2009 Edition #112 of the Carnival of Financial Planning.

The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security.

This edition is arranged by subject heading, so that you can browse efficiently.

Enjoy!

The Skilled Investor, Editor

Budgeting

Wise_Bread presents 3 Steps to Organize and Track Your Finances Without the Hassle posted at Wisebread.

GLBL presents Money Savings Tips for a Wedding posted at Gather Little By Little, saying, “I will share all the money savings tips related to weddings that I used for my own wedding: – Talk to people – Go back to school – The DIY method – Try combinations – Prioritize”

Susan Savering presents Personal Budgets posted at Family Financial Planners, saying, “When you don’t understand how much you spend and how much you save and invest, you do not have a financial plan. This dramatically increases your family’s long-term financial risk.”

Economics

Darwin presents Could the US Dollar be Replaced as the World’s Reserve Currency? What it Would Mean posted at Darwin’s Finance, saying, “Could the US Dollar be Replaced as the World’s Reserve Currency? Based on alleged secret meetings between Central Bankers of foreign countries that fund our debt, the US Dollar may have seen its best days. What it Would Mean?”

Roshawn Watson presents The Rich Get Poorer posted at Watson Inc, saying, “The implications of this recent recession have been far-reaching enough to put a big dent in American and world wealth. Both the magnitude of wealth and the number of millionaires decreased profoundly in 2008.”

Tyler Tervooren presents I Am Responsible for the Corporate World’s Waste, or A Lesson in Micro Economics posted at Frugally Green, saying, “When a fellow blogger questioned why we focus our environmental efforts at the individual level when large businesses waste so much more than each of us without prejudice, this is the response I wrote. The answer, interestingly enough, is all about money. You may not have much, and I may not have much, but together, we have more than we could ever imagine. Money talks, and when we use it to tell the business world what we really value, they listen and provide.”

Zach Scheidt presents Mortgage Crisis, Part Deux posted at ZachStocks, saying, “Commercial Mortgages continue to clog bank balance sheets and losses do not appear to have been recognized. Watch for weakness in regional banks with heavy exposure to commercial real estate loans.”

Estate Planning

The Financial Blogger presents Estate Planning: 5 Reasons Why You Should Have A Professional Among Your Liquidators posted at The Financial Blogger, saying, “managing an estate is more complicated than simply writing a few checks! Fortunately, for those who can afford it, you can name a professional among your liquidators.”

Financial Planning

Patrick @ Military Money presents How Much Life Insurance Do Military Members Need? posted at Military Finance Network, saying, “Military members may have different life insurance needs than civilians. Here is information regarding how much life insurance military members should buy, and some resources for finding the best life insurance deals.”

Big Larry presents Fantastic Free Resources for Your Annual Credit Check-Up posted at Out of Debt Christian, saying, “Just like your annual physical, it’s vital that you perform a credit check-up each year. We’ve uncovered some great and truly free resources to help you make sure your credit reports are accurate and your scores are as high as they can be.”

jim presents Beware Bank-paid Complimentary AD&D Insurance posted at Blueprint for Financial Prosperity, saying, “If your bank offers you “free” AD&D insurance, take a closer look because you might be signing up for more than you bargained for.”

Susan Saverton presents Financial Advisor Pasadena California posted at Pasadena Financial Planner, saying, “Appropriately setting your personal asset allocation in line with your personal risk tolerance is a critical decision for every investor. The percentages that are allocated to various asset classes tend to change slowly over time, so it is important to get it right at the outset.”

Dividend Tree presents Building Core Competency for Long Term Survival posted at Dividend Tree, saying, “whether it is running a business or individuals’ investment portfolio, it is important to build a core competency for long term sustainability. In my case, I focus on good quality companies that consistently pay or have potential to pay growing dividends over time.”

Financing a Home

Alex Fotopoulos presents When to Refinance a Mortgage? posted at My Trader’s Journal, saying, “Some key points to consider when refinancing your home.”

Financing Education

Praveen presents Will Education Follow the Housing Bust? posted at My Simple Trading System, saying, “Tips for students to avoid excessive loans and debt”

Health Care

KCLau presents Withdraw EPF Fund to Pay Insurance Premium? posted at KCLau’s Money Tips, saying, “Vincent Lee from Penang generously shares an idea to use your EPF”

Income

FMF presents The Top Ten Turnoffs About Networking posted at Free Money Finance, saying, “Networking is a key part of making the most from your career. This piece lists some of the circumstances that keep people from reaching out to others.”

April presents Five Steps to Six Figures in Seven Years posted at Get Rich Slowly, saying, “FMF from Free Money Finances offers up a guest post in which he recounts, step-by-step, how he was able to generate a 6-figure income in just 7 years.”

Dividend Tree presents Three Companies with Sustainable Dividends posted at Dividend Tree, saying, “Even in soft economic environment, there are companies out there that are continuing to increase dividends for their shareholders. While dividend increase is good, it is more critical to make sure we understand that companies can sustain their dividends.”

Investing

The Investor presents Think you’ve spread your risk? Think again posted at Monevator.com, saying, “Research shows different asset classes are more closely correlated than ever before. Is it still possible to create a less risky portfolio?”

Super Saver presents Why Stocks Still Make Sense to Me posted at My Wealth Builder, saying, “I still believe stocks are a great investment.”

Manshu presents Brazil ETF List posted at OneMint, saying, “A list of ETFs that give you exposure to Brazil”

ABC presents Stock Purchase – Bid/Ask Prices posted at ABCs of Investing, saying, “Bid and Ask prices – Information if you are buying or selling a stock.”

Praveen presents India Fund (IFN) Trade Example posted at My Simple Trading System, saying, “An example of how having a trading system gives you an edge, and let’s you take advantage of market moves outside of your control.”

Jules Wells presents Best Investment Strategy posted at Financial Planning Software, saying, “Personal investing seems incredibly complex, but the best investment strategy also tends to be a more simple investment strategy.”

Leslie Brown presents The Ten Best ETFs You’ve Never Heard Of posted at ETFdb.

Zach Scheidt presents Strategic Acquisition Boosts EBIX posted at ZachStocks, saying, “Ebix Inc. (EBIX) made a strategic acquisition this month which should increase earnings and give the company an inroad to serving a new sector of clients. Shares could increase 50% in the next few quarters.”

Fred Elkins presents Bond Fund Primer: Part Two – Look Before You Leap posted at Finance Banter, saying, “Part two of our bond fund investing series”

Tomas Escent presents Professional Investment Management posted at Nerds on Wall Street, saying, “Think of this book as sort of a Hitchhiker’s Guide to Wired Markets. There are no robots parking cars for six million years, but there are robots trading millions of shares in six milliseconds, so maybe that’s close enough.”

The Skilled Investor presents Investing Strategy posted at Personal Investment Manager, saying, “Investors more easily understand investment costs that are directly measurable, such as fees deducted on investment statements. However, many investors ignore or are unaware of the opportunity costs of their sub-optimal investment behaviors. Opportunity costs are usually much more difficult to measure directly, but these investment costs can be even higher than more visible investment fees.”

The Financial Blogger presents ETFs VS Index Mutual Funds: The Ultimate Battle! posted at The Financial Blogger, saying, “Let’s look at why you probably think ETFs are the best investment in the world: The very first argument is the one that doesn’t lie: yield graph over the past 5 years comparing the TSX 60, the XIU (TSX 60 ETF) and the Altamira Canadian Index Fund (NBC814)”

The Smarter Wallet presents Lending Club Review: Lending Money For Profit posted at The Smarter Wallet, saying, “Alternative investing using a lending platform.”

Tushar Mathur presents Can’t Control the Markets? Try controlling the Costs posted at Everything Finance, saying, “As 2008 proved, the financial markets are prone to unpredictable periods of turbulence. That can make investing feel a bit like a roller-coaster ride. The disappointing results that many mutual funds posted in 2008 and at the outset of 2009 may have left you feeling concerned over your financial future. You’re not alone.”

Frank Vertin presents Low Cost Index Fund posted at Best Index Fund, saying, “Buying an S&P 500 index fund through an investment counselor can substantially increase your initial purchasing costs and and drive up your annual management expense fees. Unfortunately, the vast majority of individual investors buy mutual funds and ETFs through brokers and investment advisers. Rarely do financial advisors recommend that you buy index funds with low fees. This is because low cost, no load mutual funds do not pay them as well as loaded, high fee mutual funds.”

Dividends4Life presents 3 Dividend Stocks Rewarding Their Shareholders posted at Dividends Value, saying, “Investing in dividend stocks provides the investor with continuous feedback. As time passes, dividend investors see their income steadily grow. You do not have to wait five to ten years to determine if the strategy is working.”

FMF presents Bond Primer: Yield vs. Total Return posted at Free Money Finance, saying, “The basics of investing in bonds.”

Larry Russell presents NoLoad Mutual Funds posted at Best No Load Mutual Funds, saying, “Taken as a whole, the vast body of investment research studies show that there really are better approaches to buying and owning mutual funds and ETFs. You do not need to frantically chase fund performance. Performance chasing simply does not work.”

ABC presents More Exciting Facts About Stock Indexes posted at ABCs of Investing, saying, “Some interesting facts about stock indexes.”

Mike Piper presents The Best (Lowest-Cost) ETFs to Buy & Hold posted at The Oblivious Investor, saying, “A collection of the lowest-cost ETFs in each asset class–ideal for constructing a buy & hold portfolio.”

Managing Debt

Adam Williams presents Dave Ramsey said to sell my stuff and payoff debt posted at RabbitFunds.com, saying, “A post in the form of a letter to Dave Ramsey about my experiences in selling my stuff to pay down debt as Dave suggests in his Financial Peace University course.”

Peak Personal Finance presents Teach Your Child About Responsible Credit Use posted at Peak Personal Finance, saying, “Help your children understand proper use of credit.”

Patrick @ Cash Money Life presents What to do About Increased Credit Card Interest Rates posted at Cash Money Life, saying, “Tips on your options if your credit card company raises your interest rates or changes the terms of your credit card agreement. Options include closing the card, transferring the balance to another credit card, or accepting the terms.”

Tom Drake presents When To Consider Filing For Bankruptcy posted at The Canadian Finance Blog, saying, “There are many people who are feeling overwhelmed by the burden of their high credit load. If you are feeling like you’ll never be able to pay off the debt you’ve accumulated, you might be wondering if you should file for bankruptcy.”

The Smarter Wallet presents How To Get A Credit Card That’s Right For You posted at The Smarter Wallet, saying, “How to shop for the right credit card.”

MoneyNing presents Credit vs Debit Transactions with Your ATM Card posted at Money Ning, saying, “Are there any difference with saying credit or debit when you hand over an ATM card?”

FMF presents Make Sure Your Credit Card Has Smart Features posted at Free Money Finance, saying, “Use the right credit card and make it work FOR you — not against you.”

Peak Personal Finance presents How to Compare Secured Loans posted at Peak Personal Finance, saying, “Selecting the right secured loan can save you a heap of money over the life of the loan. This article helps you avoid common pitfalls to identify the best loan for you.”

Miscellaneous

FMF presents The Basics Will Make You Rich posted at Free Money Finance, saying, “If you follow a few, simple steps, you will become wealthy.”

No Load Bond Funds presents Low Cost Bond Funds posted at Bond Index Fund, saying, “Simply put, if you pay higher bond mutual fund fees, then these bond management expenses tend just to be a deadweight loss to you. The best bond fund buying strategy is to pick only very low-cost no load bond funds.”

nissim ziv presents Career Statement: Examples of Career Statement posted at Job Interview Guide, saying, “The purpose of writing a career statement is to give the professional a clear direction for the future. A career statement is a creation of your career vision for inspiring and motivating youself.”

Roshawn Watson presents Should You Buy A House Outright? posted at Watson Inc, saying, “Suppose you find yourself in the somewhat unique predicament of having the resources to purchase your house outright without a mortgage. Is it then financially-wise to make the purchase?”

Susan Savering presents Personal Financial Strategy posted at Family Financial Planner, saying, “When pursuing optimal financial planning and investing strategies and controlling your costs and capital gains taxes, you also need to establish a time-efficient system to monitor, adjust, and adhere to your financial plan.”

Retirement Planning

Jeff Rose presents Why You Should Keep Contributing to Your 401k posted at Jeff Rose.

Madison presents 2010 Roth 401k and Roth IRA Limits posted at My Dollar Plan, saying, “Time to plan for 2010. Here are the 2010 401k and IRA limits.”

Patrick @ Cash Money Life presents Should You Rollover a 401k into an IRA? posted at Cash Money Life, saying, “When you leave your company you have to decide what to do with your 401k. One option is to roll it over into an IRA.”

Paul Kamp presents Bad Attitude, Las Vegas, Retirement, Caution, Risk, American International Group, Gambling Bias, Rationality posted at Don’t Quit Your Day Job – Personal Finance, Economics and Investing, saying, “Vegas is not a good place to learn about retirement planning. It is a good place, however, to learn what not to do.”

Top Stock Index Mutual Funds presents Stock Index Funds posted at Top 10 Index Fund, saying, “To build your retirement portfolio, buy some of these top 10 very low cost no load S&P 500 index mutual funds directly. You do not have to pay the heavy added expenses of buying through a stock broker, financial adviser, investment adviser, or investment counselor.”

Risk Management and Insurance

Jeff Rose presents Term Life Insurance Vs. Cash Value Life Insurance: What Is the Difference? posted at Jeff Rose, saying, “Depending on what your needs are will decide if term life insurance vs. cash value is better in your situation.”

Evolution Of Wealth presents Social Psychological Change posted at Evolution of Wealth, saying, “Have you ever heard of cognitive dissonance? Chances are it is intertwined with your life. It is probably causing some undue stress. If you don’t know you have a problem or want to pretend you don’t then it becomes extremely difficult to fix it. It might just be time to make a change in your financial world.”

Patrick @ Military Money presents COBRA Benefits 2009 Economic Stimulus Recovery Act posted at Military Finance Network, saying, “The 2009 Economic Stimulus Plan includes additional COBRA and unemployment benefits.”

Savings

Silicon Valley Blogger presents Ally Bank (GMAC Bank) Review posted at The Digerati Life, saying, “A review of a popular savings bank.”

Jody T Fransch presents The Law of Saving | jody fransch posted at jody fransch.

MoneyNing presents Why Do High Yield Savings Account Rates Change posted at Money Ning, saying, “Here’s a way to figure out which online bank is best for your money going forward.

KCLau presents How much money you spend in a lifetime? posted at KCLau’s Money Tips, saying, “How much do u spend in a lifetime”

Four Pillars presents $8,000 Credit For First-Time Homebuyers Extended 6 Months – Not Increased To $15k posted at Quest For Four Pillars, saying, “Home buyers credit extended 6 months.”

Four Pillars presents Back To School Cell Phone Deals posted at Quest For Four Pillars, saying, “Comparison of the best cell phone deals for students heading back to school.”

Taxes

Mike Piper presents 72(t) Distribution Rules posted at The Oblivious Investor, saying, “An explanation of the 72(t) rule, which can be used to withdraw money from an IRA prior to age 59 1/2 without having to pay the 10% penalty.”

Jeff Rose presents 2010 Traditional IRA to Roth IRA Conversion Tax Rules posted at Jeff Rose, saying, “Tax implications of converting from a Traditional IRA to a Roth IRA. Don’t forget the after-tax contributions.”

Super Saver presents End of Year Tax Planning – Deductions posted at My Wealth Builder, saying, “For me, October is a good time to review my 2009 financial status for tax return filing purposes. It gives me a few months to make any changes that can lower my taxes.”

That concludes this edition. Submit your blog article to the next edition of Carnival of Financial Planning using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Technorati tags: carnival of financial planning, blog carnival.

First Cash Financial Services (FCFS) reported earnings Tuesday morning and the stock responded by trading sharply higher.  The strength certainly benefited the ZachStocks Growth Model which currently has a 4% position in the stock.  ZachStocks published a positive article on FCFS earlier this spring and while it has been a bumpy ride, it appears that the company is making some good strategic decisions and realizing attractive growth.

Earnings for the third quarter came in at $0.35 per share, above consensus expectations and 21% above the third quarter of 2008.  More importantly, management increased their guidance slightly for the year and it appears both revenue and earnings growth remain solid.  Revenue came in at $94.6 million which is up 20% when taking currency fluctuations into consideration.

Most of the company’s recent strength has come from their operations in Mexico.  Pawn operations south of the border were up 38% compared to 12% for a US store base which is much more mature.  While the dollar has been relatively weak, the peso has had even more difficulty which has added pressure to the revenue side of the income statement.  At the same time, a weak peso has caused store opening and operating expenses in Mexico to be lower, so the positives and negatives balance each other out.  It appears that the strategy for broad expansion into Mexico is paying off.

With 45 store openings year-to-date, we are on target to meet our goal of 60 new pawn stores in Mexico for 2009.  Importantly, the new stores opened this year, along with 64 stores opened and acquired last year, have generated early stage growth in pawn loan portfolios and profits at a record pace. ~Rick Wessel, CEO

One interesting sign of the times is that First Cash is benefiting from the increase in gold prices.  Scrap jewelry can be a strong source of revenue and the company expects that they will see significant additional revenue in the fourth quarter as a direct result of selling jewelry at higher prices for the gold and silver content.

From a financial perspective, FCFS continues to increase its strength.  The total debt level was reduced by $31 million over the last quarter (37%) and it is likely that the company will pay off more debt during the final quarter of 2009.  The fact that the company continues to open new stores while reducing debt and interest expense should add to long-term earnings stability and create a more attractive company for investors.

Free cash flow for the third quarter came in at $43.8 million which was significantly higher than the $9.3 million seen in the third quarter 2008.  This cash flow takes into account the expense of rolling out new stores which is what makes the number so impressive.  At some point over the next year, the company will have to decide whether they have the ability to reinvest this cash positively in their business or whether they should return it to shareholders in the form of either declaring a dividend or purchasing stock.  This kind of issue is a great problem to deal with.

Currently the stock is trading at less than 12 times expected earnings for 2010.  While there is certainly some concern regarding regulatory issues in the industry, the company should be able to continue to operate with strong profits and attractive margins.  I expect investors to be more confident throughout the next year as the regulatory environment becomes more clear and believe that the stock could easily trade into the mid 20’s before this time next year.

FD: Author has a long position in the ZachStocks Growth Model

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Ebix Inc. (EBIX) has been an incredible investment this year.  The shares began 2009 trading in the mid-20’s before hitting a low of $17.12 in the early days of March.  Since that time, the stock has rallied 279% to its most recent close of $64.91 and the stock could still have farther to go.  Estimates for earnings continue to be ratcheted higher, and even today after an incredible rally, the valuation still looks relatively attractive.

The software and services company has developed a strong business serving the needs of insurance companies across the United States.  Their solutions cover a wide range of technology needed by groups and independent agents, and the expertise has allowed the company to carve out quite an attractive niche and grow market share.  Now that the company has proven successful and grown into a market leader, Ebix has its sites set on a much larger target market.

On October 1, the company announced that they have agreed to purchase E-Z Data for the tidy sum of $50.35 million.  The terms require half of the payment to be in cash, and half in stock with Ebix essentially guaranteeing a floor price for the shares at a 10% discount should the shares lose value over the next two years.  E-Z Data is one of the leaders in CRM solutions for insurance brokers and the acquisition helps to round out the technology offering that Ebix can sell to clients.

According to the press release, Ebix is expecting the deal to be immediately accretive and add significant value for shareholders over the years.  The new product line will not only allow Ebix to offer new services to their existing clients, but actually allows Ebix to get their foot in the door serving banks, investment dealers, agents and financial advisors.

This is one of our most strategic acquisitions since this will provide us access to a majority of the life and annuity brokers’ desktop in the United States. We have always had the vision to include CRM into the core fabric of the information exchanged in the insurance business. E-Z Data CRM when blended into our life and annuity exchanges provides the insurance industry with a giant leap forward, in terms of making end-to-end, enterprise-wide information exchange rather seamless for the majority of the industry.~Robin Raina, Chairman, President and CEO

Ebix should have a good idea of a baseline for future revenue from this acquisition.  E-Z Data has an existing revenue base that is primarily subscription based and 85% of all revenue is expected to be recurring.  So even if Ebix does nothing to improve on the business, they should have an attractive business on their hands.  Looking down the road as Ebix sells CRM solutions to existing clients, and internet based services to the new list of E-Z Data, there should be significant synergies driving earnings much higher.

Currently, analysts are expecting the company to earn $2.93 per share in 2009 which represents 29% growth over last year.  The company has been growing earnings steadily for years with earnings at $0.07 in 2002.  While the growth rate may decline a bit due to the magnitude of the company’s current earnings, Ebix can still be considered an aggressive growth company and the stock should continue to trade with a healthy multiple.

In a decision that shows confidence in future growth, management recently announced that they will offer a 3 for 1 stock split which will bring the shares back down to roughly $21 per share.  The transaction is expected to take place at the end of November, so the stock could actually be significantly higher by that time.  With a low debt level and positive cash flow, the company could easily look for additional strategic acquisitions and their financial stability is quite impressive.  It’s customer base is relatively healthy as most insurance companies are recovering from the turmoil of last year and the diversification into the financial industry will help as well.

Analysts are expecting earnings to come in at $3.63 next year and Ebix may very well perform above expectations.  Considering the expectations are correct, and using a conservative multiple of 25, we could still expect the stock to cross above $90 in the next 6 to 12 months.  Any further accretive acquisitions or growth surprises could lead to much larger gains.  So while the stock may be extended, and it may make sense to watch for a pullback, the future looks bright for Ebix and its investors.

FD: Author does not have a position in EBIX

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The housing market may be dead in the US, but in China there is still significant activity.  As a massive population continues its transition to a higher standard of living, millions of rural Chinese citizens are moving to large cities and are in need of housing.  A real estate bubble may be in the works, but it is certainly a long way from popping.

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E-House Holdings (EJ) is a leading real-estate company serving this growing need.  The firm currently operates a large real estate agency with brokerage services.  It also has a consulting and information services business which allows clients to have access to a huge database of information.  This information will be spun off to investors in a complicated transaction this week.  The new IPO will be China Real Estate Information Corp (CRIC).

Over the past year, CRIC has partnered with Sina Corp (SINA) which is a leading web portal in China.  The strategic alliance has allowed the information division to reach a very wide audience and has developed a strong revenue base.  This joint venture will be merged into the new IPO which means that Sina will be a large shareholder in the newly issued company.

Currently it looks like the deal will raise somewhere between $210 million and $242 million depending on whether the underwriters exercise their options to sell excess stock.  It is difficult to determine just how popular the deal will be with investors as we have conflicting trends to deal with.  On the negative side, the most recent IPO out of China was a big disappointment.  Shanda Games saw its IPO flop with the stock offered to investors at $12.50, but the stock (GAME) is now trading close to $10 – or 20% below its offering.  If investors see that previous IPOs are having a tough time generating profits, they will be more hesitant to buy the next deal.  Underwriters may have to price CRIC at the low end of estimates in order to get the deal done which would be a red flag and also provide less capital to the company and selling shareholders.

On the other hand, investor sentiment appears very robust with the Dow crossing 10,000 for the first time since our financial collapse.  Now the rally may be suspect and I understand that there are serious fundamental flaws, but for short-term trades like IPO issues, healthy investor sentiment is much more important than macro fundamental issues.

Investors in CRIC should certainly hold the IPO with a traders perspective.  At this point there is very limited operating information available, and it wouldn’t surprise me to see some hiccups in the first year as a stand alone company.  I expect that the real estate market will remain firm in China for three to five years, which will provide some support for the company as it begins operating on its own.

If you have a relationship with Credit Suisse, UBS, or Bank of America / Merrill Lynch, you may consider taking stock on the deal.  There will likely be a small pop as the underwriters need to price this one attractively to make up for investor concern following GAME.  However, a week after the deal is priced, I think the best option will be to sit back and let CRIC begin to form a trading pattern and watch for the fundamental picture to mature.  I would rather miss out on a good opportunity today, than commit capital to a risky situation that has the potential for disappointing losses.

FD: Author does not have a position in EJ

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Protectionism is alive and well and the Chinese government is tightening pressure on foreign investment.  Most recently the country’s lucrative online gaming industry is seeing tougher regulations aimed at protecting local gaming companies who are finding it difficult to compete with larger players.

On Saturday, the China regulatory body, the General Administration of Press and Publication issued an announcement which bans foreign investors from participating in profits from the country’s online gaming business.  These investors are not allowed to participate in wholly owned investments, joint ventures, or any other manner in which they could profit from the thriving business.

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While the issue at stake appears to be protectionism (an individual country protecting industry within its borders by shutting out foreign competition), the method used to enforce this issue appears to be censorship.  The new restrictions would require approval for all new games launched within China.  This adds another layer of risk to businesses who produce these games as companies could spend millions of dollars to develop games only to be turned down by regulators after the games had been produced.

New games are not the only targets as any upgrades to existing programs will also have to be approved.  Nearly every game that has been successful for a long period of time, has performed well because of continual upgrades to the platform.  Gamers continue to play and generate revenue because the game continues to evolve and capture their imagination.  If this process is thwarted it will likely allow smaller gaming companies to compete, but it could also be very detrimental to to the industry as a whole.

One of the companies which could be most affected by the regulations is Netease.com (NTES) which recently bought the license to distribute Wold of Warcraft in China.  Despite the fact that this license was formerly held by The9 Ltd. (NCTY), China has delayed approval of the game now that NTES is has the license.  If games that are currently licensed in China face scrutiny once they are transferred to another parent company, it could be a significant burden on commerce.

Other companies that may be effected include Shanda Interactive (SNDA) and their recently issued spin off Shanda Games (GAME).  The uncertainty in the market surrounding these regulations has caused the stocks to trade off even given the positive fundamentals.  It does little good to own a company with strong earnings and a healthy cash position if the Chinese government is going to cap growth or potentially nationalize the industry.

While the news is certainly negative for the industry, there are many regulatory bodies in China – not all of which appear to be against foreign investment.  The GAPP has significant influence, but China is also cognizant of the benefit of foreign investment to drive industry growth and technology advancement.  One player in the sector that appears to be holding up well is Perfect World (PWRD).  The stock has pulled back to it’s 50 day average, but technically still looks very sound.  The company is expected to earn $3.43 per share in 2010 which represents a 21% growth rate over 2009.  The stock is just above $40 which is a reasonable multiple given the growth.

Investors should probably wait for a bit more clarity from regulators before committing significant capital, but PWRD may merit further investigation.  A good strategy may be to initiate a small or partial position at the current price and then begin to build that position as the situation improves.

FD: Author has a long position in SNDA and NTES in the ZachStocks Growth Model

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The Blackstone Group LP (BX) is cashing in.  The private equity company which manages alternative investments for affluent and institutional investors is apparently ready to begin selling some key positions.  Recent market strength has been a boon for existing private equity investments and may provide an attractive exit point for several timely purchases made by individual fund mangers.

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Investors in funds managed by Blackstone received a letter on Friday explaining that the company was close to listing eight of its portfolio companies.  Typically this type of transaction is very lucrative for private equity firms as well as for investors in their individual funds.  Listing these private positions on the market allows Blackstone to mark these investments to a legitimate market value which in turn allows them to book a realized (and unrealized) profit on the position.  Since the majority of Blackstone’s income comes from incentive fees tied to profitable trades, listing its positions through an IPO transaction can immediately raise profits for the parent company.

When listing new positions, Blackstone will likely only sell a portion of the individual companies to the market, keeping the majority of these companies closely held.  This allows management to continue to act as a majority owner and ensure proper decisions are made which foster long-term growth.  That growth should allow Blackstone to sell the remainder of its position gradually over the course of several quarters or even several years – booking even larger profits throughout the process.

Investors in these early stage IPOs should do very well with an attractive risk/reward scenario.  Blackstone has a very strong incentive to make the IPOs work to the buyers advantage, because the private equity firm will continue to own the majority of the stock.  If a new IPO is listed at $18 and immediately trades to $21, investors will be satisfied with their return which will make marketing the next IPO that much easier.  Blackstone should not be too concerned with missing potential profit by listing these shares too low because they will book the profit on the majority of shares still owned.  The investor confidence and liquidity for future deals will more than offset the missed opportunity on the shares initially sold.

Private equity firms were hit particularly hard during the recession because investors worried that poor access to credit markets, and dwindling values on existing investments would pressure profits and even cause significant losses.  But institutional investors were quick to put money into the funds managed by companies such as Blackstone in order to achieve investment returns that were not heavily correlated to the falling market returns.  The net result was that firms like Blackstone were able to raise significant capital at a time where the investment opportunities were the most attractive.

Now, several months into a market recovery, Blackstone is able to capitalize on these savvy investments and sell stock to an unwitting public which is clamoring for exposure to the rising market.  Blackstone continues to have a hefty war chest of available cash to spend on opportunities, but now appears to be playing both sides of the market by selling partial positions and booking profits.  Funds continue to accept new capital with a Chinese sovereign wealth fund making headlines by investing significant capital in a Blackstone fund.

Blackstone is up over $1 per share in early trading due to the positive news, and this rally puts the stock well above the $15 level which had been providing resistance for the past several months.  A breakout above this level could be the first step towards retaking the IPO price in the low $30’s.  I think investors could easily double their money over the next 12 to 18 months and potentially see even larger gains if Blackstone receives significant capital or reports significant success in the IPO transactions.  Private equity opportunity is quite attractive and Blackstone is the highest quality player in this sector.

FD: Author has a long position in the ZachStocks Growth Model

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