Bank on the Future

10 Index Funds Vying for a Spot in Your Portfolio August 28, 2009

Posted by Jack Hough in : Uncategorized , comments closed

Index funds are often described as plain vanilla investments. These low-cost funds aren’t flashy and won’t make you rich overnight. Rather, they simply strive to deliver a similar return to the benchmark they are tracking, thereby offering consistent but not stellar returns over the long term. That’s one of the reasons why these funds sit at the core of millions of retirement accounts.

For 50-plus years, the gold standard for index funds has been the S&P 500, which uses market value to weigh its member companies. The S&P 500 has always competed against funds that track indexes like the Dow Jones Industrial Average or the Russell 1000, but over the last decade, competition has heated up from a series of new-fangled alternative indexes that focus on revenues, dividends, equal-weight strategies and something called a “fundamental” approach (more on that later).

With so many options to chose from, it's difficult to decide which index fund can serve as the best foundation for a diversified portfolio. So, this week the SmartMoney.com fund screen takes a look at some of the more popular index funds as judged by their asset bases and from feedback from advisers. To perform this screen we suspend some of our usual search techniques. Instead of narrowing down a universe of funds, we simply list 10 index funds, with their year-to-date, three-year and five-year return numbers. We aren’t picking favorites here. It's more of a scorecard for the next time you go fund shopping.

Usually, the difference in returns between one index fund and another is narrow. Typically, the gap in performance comes down to cost (i.e., the annual costs of one fund eating more of its returns vs. its competitor’s cheaper fees).

Yet, this year the difference in performance is much starker. Since the stock market started rallying in early March, certain sectors and style-types have done better than others. According to Morningstar, small- and mid-cap stock funds are some of the best performers right now along with sectors like technology (for more returns, see the table below).

But when it comes to index funds, investors need to be cautious about chasing short-term results. The tide can turn very fast in this universe. While small-caps may be outperforming this month, they could easily be trailing the S&P 500 next month.

“You don’t want to chase your tail,” says Paul Frank, president of Aviemore Asset Management in Old Chatham, N.Y. and the portfolio manager of the ETF Market Opportunity Fund (ETFOX).

For example, the Rydex S&P Equal Weight (RSP) exchange-traded fund takes all of the members of the traditional S&P 500 index and gives them the same 0.2% weighting. Typically, the S&P 500 can rise and fall depending on the fates of certain few large firms. But by equal weighting all the companies, even the smallest constituents can have an impact on returns. That can have a profound impact depending on the year. For example, while this ETF is greatly outpacing the traditional S&P this year, it has trailed that same benchmark during the previous three years. So chasing performance based on nine months of numbers could burn opportunistic investors if the smaller companies cool off.

As mentioned above, some funds use a "fundamental approach" that weights companies based on traditional valuation metrics like revenues and book value. The Schwab Fundamental U.S. Large Company fund (SFLVX) uses that proprietary strategy to rank its member companies. Up 34.8% year-to-date, the fund has also benefitted from a small company stock bounce.

While the returns for both Rydex S&P Equal Weight and Schwab Fundamental are stellar to say the least, if smaller companies fall out of favor with investors those returns will shrink considerably.

Other funds are poised to take advantage of improving corporate returns. While these funds have kept pace with the S&P 500, they could prove to offer consistent returns as the recovery takes hold. RevenueShares, a $200 million family of exchange-traded funds, uses indexes that weigh companies solely based on sales figures. The flagship fund, RevenueShares Large Cap (RWL), is up a surprising 19.7% this year. Revenues are serving as a partial proxy for growth; so as investors become comfortable putting money back into the stock market, they are flocking to the companies that are actually showing positive results. In other words: the companies that are more heavily-weighted in these indexes.

“Revenues over the long haul are a great indicator of a company’s health,” says Sean O’Hara, president of RevenueShares. O’Hara adds that after two years of companies slashing costs it’s finally starting to show up in their revenue numbers. “The first thing to change is always top-line sales.”

The Criteria: To find the 10 index funds below, we suspended our usual screening techniques. Here, we simply list ten popular funds we feel give investors a wide swath to consider. We did not consider a fund’s annual expenses or whether it charges a load.

The Future of Indexing?
Source: Lipper Note: Data as of August 27, 2009 n/a = funds haven't been around long enough to fulfill data set.
Fund	Ticker	YTD Return (%)	3-Year Average Annual Return (%)	5-Year Average Annual Return (%)	Expense Ratio (%)
PowerShares QQQ	QQQQ	35.6	2.0	3.7	0.20
Schwab Fundamental U.S. Large Company	SFLSX	34.9	n/a	n/a	0.44
Rydex Equal Weight S&P	RSP	30.4	-4.4	2.2	0.40
RevenueShares Large Cap	RWL	19.8	n/a	n/a	0.49
Vanguard Total Stock Market	VTSMX	18.0	-4.7	1.4	0.16
iShares Russell 1000	IWB	17.2	-5.2	1.0	0.15
Vanguard 500	VFINX	16.2	-5.3	0.5	0.16
iShares S&P SmallCap 600	IJR	15.9	-4.0	3.1	0.20
SPDR Dow Diamonds	DIA	11.2	-3.0	1.1	0.17
WisdomTreee Total Dividend	DTD	10.6	-7.2	n/a	0.28

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3 Stocks With Safe 4% Yields August 27, 2009

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Investors who are fretting over the stock market's next move should turn to dividends. Price gains, after all, can prove illusory.

In just more than 12 years, the Dow Jones Industrial Average has made four major thrusts past 8000 only to slide back below that mark each time. It topped 9300 in the summer of 1997, rose to more than 11900 five years later and smashed through 14000 in October 2007. There's no telling whether this fourth and latest move above 8000 is the last or how long U.S. stocks can go without heading permanently higher; Japan's main stock index, the Nikkei 225, is close to where it was 25 years ago.

Since dividend payments aren't dependent on price movements, shareholders of the three companies below will collect income whether the market rises, falls or stagnates in coming years. Each company pays more than 4%. That might not be a fortune, but it's double the broad market's average and well more than most bank certificates of deposits pay. Unlike CDs, stocks aren't insured against principal loss. But then, unlike stocks, CDs don't generally offer potential for larger payments and price gains over time. Beyond high yields, each of the companies below has earnings that dwarf their dividend payments suggesting the payments are safe, and each sells goods or services that tend to stay in demand in a soft economy.

Kimberly-Clark

Dividend Yield: 4%
Dividend as percentage of forecast 2009 earnings: 57%

Dallas-based Kimberly-Clark (KMB) makes mostly paper products used around the house or for personal hygiene. Its brands include Kleenex, Scott, Huggies and Kotex. Its sales are expected to dip less than 4% this year and regain lost ground next year while profits are rising on cost cuts. The company is a member of the Standard & Poor's Dividend Aristocrats, meaning it has increased its payments in each of the past 25 years. Its shares sell for 14 times forecast 2009 operating earnings vs. about 19 times earnings for the S&P 500 index.

American Electric Power

Dividend Yield: 5.2%
Dividend as percentage of forecast 2009 earnings: 57%

Just over a century old, American Electric (AEP) power provides electricity to more than five million customers in 11 states. Power companies aren't completely immune to economic downturns; American Electric's sales to industrial customers have dipped lately. But companywide sales are expected to decline just 1% this year. The Columbus, Ohio, company issued 63 million new shares in April and used the proceeds to repay debt. Such stock offerings tend to dilute the value of existing shares, but American Electric shares have about matched the S&P 500's performance over the past year and carry a much larger dividend yield of more than 5%.

Telefonica

Dividend Yield: 4.3%
Dividend as percentage of forecast 2009 earnings: 44%

Spain's largest telephone company, Madrid-based Telefonica (TEF), is feeling the effects of the country's worrisome jobless rate. The European Commission reckons Spanish unemployment will top 20% next year. Growth in phone and Internet services in Latin America is offsetting Telefonica's slowdown at home, though. The company's shares sell for just 10 times earnings, well cheaper than Verizon (VZ) or AT&T (T). And Telefonica's dividend yield of 4.3% might be too small. The company generates cash equal to more than 10% of its market value each year, meaning it could raise its payments going forward.

16 Small-Cap Funds on a Tear August 21, 2009

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The upcoming Labor Day weekend may mark the end of summer to some, but for investors it will mark the end of a nine-month period filled with incredible volatility, two lackluster earnings season and despite it all, incredible gains. The S&P 500, for example, is up 13.5% year to date.

But one of the biggest winners thus far this year are small-cap stocks. According to Morningstar, the average small-cap fund is up 19.3% this year through Thursday. In the fund world, the only groups outpacing small caps are their slightly larger midcap brethren and technology and energy sector funds.

We've spent a lot of time this year writing about the risks and rewards of investing in small company stock funds. This week the SmartMoney.com fund screen focuses on the 1,667 small-cap funds and share classes in our screener tool. We trimmed that group by searching for funds that had above average returns during the trailing three- and five-year time periods. The funds also had to be up by more than the S&P 500 this year. In addition, we favored funds with reasonable fees. That left us with 16 offerings.

Many advisors are adding to their small-cap positions for several reasons. Historically, small caps have performed well coming out of economic downturns. Investors are also regaining an appetite for risk after sitting on the sidelines for much of 2008. And there is also some opportunistic buying going on: The average small-cap fund dropped 37.2% during 2008, making plenty of good shares look cheap.

Larry Rosenthal, president of Financial Planning Services in Manassas, Va., doesn't think we will see the Dow skyrocket back up to 1440. But, he says, two to four years down the road, investors will look back and say what a great buying opportunity stocks were at today's prices.

While you may want to start adding to your small-cap positions, don't get carried away. The third-quarter earnings season, which is a critical one for measuring consumer spending, is on the horizon and poor results could mean that run-up will cool off. Small caps usually account for between 5% and 20% of a diversified portfolio (depending on age and risk tolerance).

Rosenthal has advised his clients to dollar-cost average into the sector in order to build a position over time instead of jumping in with both feet. "I definitely feel right now everything is rising and falling together," he says. If improved consumer spending isn't evident in the third quarter earnings reports, he believes stocks could pull back.

So which funds are among the biggest gainers this year? Funds from Royce, FBR, Gabelli and TCW are making return appearances on this screen since the last time we did it in April.

The Criteria: The small-cap funds on the table below are open to new money, require a minimum investment under $5,000 and charge less than a 1.5% annual expense ratio. In addition, they are beating the year-to-date return of the S&P 500 and feature performance track records that put them in the top 10% of their category during the trailing three- and five-year time periods. As usual, we did not allow load funds.

Small-Cap Funds on a Run

Name	Ticker	Assets (In Millions)	YTD Return (%)	3-Year Average Annual Return (%)	5-Year Average Annual Return (%)	Expense Ratio (%)
Amer Cent:SC Val;Inv	ASVIX	612.3	22.77	-1.57	4.74	1.25
CG Cap Mkts:Sm Cap Val	TSVUX	311.3	22.54	-2.51	4.97	0.99
Dreyfus Sm Co Val	DSCVX	169.0	46.67	7.03	8.13	1.23
FBR:Focus;Inv	FBRVX	945.0	24.22	-0.52	5.83	1.42
Fidelity Sm Cap Retire	FSCRX	193.3	37.61	1.37	6.46	1.05
FMI:Common Stock	FMIMX	720.2	26.70	3.26	7.61	1.22
Gabelli Eq:SC Gro;AAA	GABSX	1014.4	20.12	0.34	6.05	1.43
Heartland:Value Pl;Inv	HRVIX	668.8	13.64	3.35	4.87	1.27
Janus Perkins SCV;J	JSCVX	487.8	22.43	2.63	5.93	1.03
Royce Fd:Heritage;Svc	RGFAX	134.5	33.33	-1.66	6.14	1.50
Royce Fd:Low-Prcd;Svc	RYLPX	2203.4	30.79	-1.94	4.87	1.49
Royce Fd:Premier;Inv	RYPRX	3238.0	20.10	0.99	7.20	1.13
Royce Fd:Premier;Svc	RPFFX	288.2	19.85	0.79	6.99	1.34
Royce Fd:Royce 100;Svc	RYOHX	110.8	25.13	1.36	8.23	1.50
Royce Fd:Value;Svc	RYVFX	991.9	28.14	-0.61	7.39	1.45
TCW:Sm Cap Growth;I	TGSCX	133.8	43.73	5.00	9.17	1.20

Recipe

Fund Type = Small Cap
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) <= 10
Annualized 5-Year Return (%) = Display Only
Rank in Classification (%) (5 year performance) <= 10
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= $5,000
Open to New Investors = Yes
Total Net Assets ($ millions) >= 50
Year-to-Date Return (%) = Display Only

3 Stocks Ready to Ride Out the Downturn August 19, 2009

Posted by Jack Hough in : Uncategorized , comments closed

Earlier this month I argued that stock prices are worrisomely high relative to profits, and that profits aren't likely to catch up soon (see "Why Stocks are Way Too Pricey"). That doesn't mean stocks won't climb higher, whether from investor exuberance or inflation. But it does mean that investors should demand good deals. Luckily, there are still some to be found.

I recently screened for stocks that seem likely to hold up well if the market tumbles. These are ones that are cheaper than the broad market, that pay handsome dividends and that have steady or rising sales despite lax consumer spending. Below are three that turned up.

McDonald's

P/E based on 2009 earnings consensus: 14
Dividend yield: 3.6%

When I last sized up McDonald's (MCD) in November, I could find no flaw in its operating metrics, but the stock seemed too expensive relative to the rest of the market. Since then, the S&P 500 index has climbed 30%, while McDonald's has gained just 3%. Business for the burger seller is better than ever. Sales at longstanding stores surged 4.3% in July versus a year earlier, driven by demand for a new line of fancy coffees and by strong traffic in the U.S., U.K. and France. McDonald's shares now sell for just under 15 times trailing operating earnings, vs. closer to 25 times earnings for the 500 index. The dividend is meaty, too: 3.6%, compared with the index's 2.3%.

Consolidated Edison

P/E based on 2009 earnings consensus: 12.7
Dividend yield: 5.8%

New York City's electric company, Consolidated Edison (ED), tends to trade at a deserved discount to the broad market. After all, it's a slow-growth business. This year, sales and earnings per share are expected to increase 2% and 4%, respectively. But the modest valuation means shares have little popularity to lose if the market tumbles, and it keeps the dividend yield generous. Assuming no change in the stock price, ConEd shareholders can double their money in about 12 years.

American Water Works

P/E based on 2009 earnings consensus: 14.6
Dividend yield: 4.2%

There's plenty to like about shares of the nation's largest water utility, American Water Works (AWK), which has operations in 32 states. Apart from the reasonable valuation and healthy dividend, the company is expected to increase its sales by 7% both this year and next on rate hikes. There are two negatives to consider, however. The first is a debt load that's large but not unmanageable (utilities can carry sizable debt safely because their cash flows are predictable). The second is ongoing selling by German utility RWE AG, which owned the company outright until spinning off 40% of it in an April 2008 stock offering. So far, the selling doesn't seem to have depressed the stock price. Shares are 9% lower than a year ago, but the 500 index is down 23% during the same period. The latest sale, a 35 million share offering priced Aug. 13, brought RWE's ownership under 27%.

13 High-Minimum Funds With Solid Returns August 14, 2009

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TheVanguard 500 (VFINX) fund is legendary not only because it was the first index offering ever launched, but also because of its rock-bottom prices. The fund levies a mere 0.18% annual expense ratio, one of the lowest in the industry. What investors may not realize, though, is that they can cut those expense fees in half -- as long as they are willing to pony up some serious cash.

Vanguard 500, like every mutual fund, requires shareholders to invest a certain amount of money when they first buy shares. The amount funds charge can be as little as $500 or as high as a six-figure sum. Vanguard 500's regular minimum investment is $3,000. But the fund also has an Admiral share that rewards investors with a 50% fee discount if new investors put at least $100,000 down.

Typically, when SmartMoney.com runs a fund screen we set our minimum investment cutoff at $5,000 or less -- a level we think most people saving for retirement can realistically afford. However, that means we disqualify funds for reasons that have nothing to do with their performance. But this time we decided to take a look at funds with much higher minimum investment thresholds. We started by looking at the 5,296 funds and share classes in our Lipper database that charge a minimum investment of greater than $5,000. We then searched for funds with above-average track records during the trailing three- and five-year time periods. We also favored cheap fees. Ultimately, we were left with the 13 funds listed on the table below. All of the funds are up 14% or more for 2009.

Some fund families say they offer high minimums in order to protect existing shareholders. The goal is to deter investors who chase performance from moving in and out of the fund, which could potentially impact the fund's performance if the manager is forced to sell some stocks in order to cash out an existing shareholder. The belief is that a higher minimum may keep some of those investors from jumping in at all since putting up $50,000 is a much bigger commitment than investing $500. Fund families can also use large minimums to slow down the flow of money to a certain fund if the total amount is getting too cumbersome for a manager.

While Mark Matson, founder of Matson Money Advisors, a Cincinnati investment company with over $2 billion under management, believes higher minimums do help to protect shareholders, he also sees some of the so-called benefits as marketing ploys. In his experience, Matson has seen investors chase performance regardless of whether they can afford to invest $500 or $5 million.

"It does afford a little protection, but it sounds like a little bit of marketing from the fund company," he says. "[Investors] will market time if they have hundreds of millions of dollars or if they don't have that much. Just are both as likely to panic in a down market and sell."

Of course, picking a mutual fund simply because of its minimum investment is not something we recommend. While high minimums help keep costs down -- if a fund can raise $100 million from just 20 shareholders they don't have to print as many prospectuses or account statements as if there were 20,000 shareholders -- investors need to be careful when investing such sizable sums of money. If your account balance is just $300,000, moving a third of that into a high minimum fund simply to take advantage of lower fees could skew your entire portfolio and leave it too heavily weighted in a particular asset class. It may pay to go with a financial advisor instead. Those pros can usually get around the minimum if they have a relationship with the company.

For those who still want to invest in a high-minimum fund, keep in mind that it can be complicated. At Vanguard, new investors can put $100,000 or more down for what the company calls an Admiral share. In return, Vanguard cuts the annual expenses to 0.09%. In addition, investors who have owned shares of a given Vanguard fund longer than 10 years can get the same deal if they have half that amount in the fund. Fidelity has a similar $100,000 hurdle associated with its Advantage share class. (The deals apply mostly to index funds, as evidenced by our table.)

The Criteria: The funds on the table below require a minimum investment greater than $5,000, according to Lipper. In addition, they are in the top 20% of their respective fund categories over the trailing three- and five-year time periods. They are open to new money, charge an annual expense ratio less than 1.5% and do not levy a sales load charge.

Pricey Funds, Decent Returns
Source: Lipper Note: Data as of Aug. 14, 2009
Ticker	Name	Assets (In Millions)	YTD Return (%)	3-Year Average Annaul Return (%)	5-Year Average Annual Return (%)	Expense Ratio (%)	Minimum Initial Investment
DSPIX	Dreyfus BASIC S&P 500	754.6	14.05	-5.21	0.92	0.2	10000
FMDCX	Federated Mid-Cap Index	648.5	22.99	-2.12	4.63	0.49	25000
FFNOX	Fidelity Four-in-One	1624.7	14.89	-2.76	3.04	0.08	10000
FSMKX	Fidelity Spartan 500	5647.5	14	-5.15	1.01	0.1	10000
IBSCX	Frontegra IronBridge Small Cap	296.4	15.24	-0.38	5.66	1.08	100000
HACAX	Harbor Capital Appreciation	6078.1	24.21	-0.27	3.97	0.67	50000
HAINX	Harbor International	16252.9	22.08	0.11	10.37	0.79	50000
MSILX	Masters' Select International	972.6	29.14	-0.92	9.59	1.07	10000
SSHFX	Sound Shore	1777.9	17.87	-3.59	2.6	0.92	10000
VFIAX	Vanguard 500	23394.6	14.06	-5.08	1.07	0.08	100000
VWILX	Vanguard International Growth	3423.9	28.51	-2.12	7.57	0.35	100000
VASVX	Vanguard Selected Value	2442.3	22.56	-3.2	4.29	0.45	25000
VTMGX	Vanguard Tax-Managed International	1176.5	18.75	-4.05	6.1	0.15	10000

Recipe

Fund Type = *
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) <= 30
Annualized 5-Year Return (%) = Display Only
Rank in Classification (%) (5 year performance) <= 30
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment >= $5,001
Open to New Investors = Yes
Total Net Assets ($ millions) >= 50
Year-to-Date Return (%) >= 14%

* Screen does not include fixed income funds.

3 Cheap Stocks With High Returns on Capital August 13, 2009

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For stocks, few measures separate winners from losers like return on invested capital. Calculating ROIC is simple enough. To do so, divide the amount of profit a company generated over the past year by the value of the stuff it owns, plus the amount it owes (in other words, equity plus debt).

The profits at the top of this fraction speak of the company's ability to drive sales without slashing prices and to keep corporate overhead and manufacturing costs low. Total capital, on the bottom of the fraction, shows whether a company can fund growth without over-borrowing, and whether it can generate new business with the equipment it already owns, rather than constantly spending on new gear.

Companies that are able to earn a lot while using little end up with the fattest returns on invested capital. Averages vary sharply by industry, but in general, investors should favor companies whose ROICs are safely into double digits -- provided their stock prices seem reasonable. (Be wary of unrealistically high ROICs, though, since they might be due to windfall profits that won't recur in coming years.)

Below are three companies with modest price/earnings ratios and ROICs of at least triple the current 7% median for the S&P 500 index.

Hillenbrand

ROIC: 34%

I've never quite understood why a coffin should cost two or three times as much as a reclining chair, even though comfort and durability are surely more important in the latter. But high prices and reluctance among the bereaved to shop around for a better deal make for superb margins in the coffin business. Hillenbrand (HI), whose Batesville-brand caskets are the U.S. sales leader, turns 24 cents of each sales dollar into operating profit, nearly three times as much as the median S&P 500 company. The business is resistant but not immune to economic slowdowns. Some strapped customers have traded down from Hillenbrand's hardwoods to its veneers, while others have spent even less by opting for one of its cremation urns. Also, death isn't exactly a growth market at the moment, thanks to steady medical advances. Still, sales for Hillenbrand are seen falling just 4% in its fiscal year ending Sept. 30, with growth resuming next year. Shares sell for less than 12 times earnings and offer a lovely dividend yield of 4%.

Weight Watchers

ROIC: 32%

According to ConsumerSearch.com, which amalgamates product and service reviews from other sources, Weight Watchers (WTW) is considered the best weight-loss program. Participants track "points" they accumulate at mealtime and expend at the gym. The company sells its own food, but shows dieters how to tally points from the nutrition labels of any food. With consumers keen on cutting monthly bills, Weight Watchers sales are expected to fall 10% this year. But margins remain stellar, long-term growth prospects are decent and shares sell for just 11 times earnings and pay a 2.4% dividend.

Gymboree

ROIC: 29%

Once a play center for children, Gymboree (GYMB) now sells clothing for newborns to 12-year-olds out of more than 900 stores. Analysts say its back-to-school wares are "fashion-appropriate." When I was 10 that meant that my Sears corduroys didn't have too many grass stains and my shirt was right-side-out. Now it means young Jacob and Emma have prefaded jeans, ironic-message T-shirts and camouflage sunglasses. Sales and profits for Gymboree are growing this year, the company has no net debt and its shares sell for just 13 times earnings. Management should think about accessorizing with a dividend.

3 Popular Stocks Priced to Underperform August 12, 2009

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Prosperous, fast-growing companies can provide awful stock returns. That's true even if their products are best-in-class, if they're debt-free with oodles of cash and if analysts sing their praises on Wall Street.

That's because discovering promising stocks isn't just a matter of finding top-performing companies, but of locating moments when shares of such companies are selling for less than they're worth. Today, overly optimistic stock valuations abound. Among stocks in the S&P Composite 1500, a mega-index of small, midsize and large companies, 672 fetch more than 15 times trailing earnings, while 431 have no profits to show for the past year. That means that barely one-quarter of the field have price/earnings ratios (based on actual and not predicted earnings) that are below the market's historical average.

On Tuesday I highlighted three companies upon which few analysts have bestowed "Buy" recommendations, but which investors should nonetheless embrace for their modest valuations and handsome dividends. Below are listed just the opposite: companies with generally bullish recommendations (1 = Strong Buy, 5 = Sell) that seem priced for disappointing returns.

Apple

Average Analyst Recommendation: 1.9
Trailing P/E: 28

I own two of their laptops, an iPhone, the giant monitor and more, so the appeal of the products isn't lost on me. But Apple (AAPL) has a stock market value of $146 billion. Imagine for a moment that an investor had that much money to put to work. He could buy both Hewlett Packard (HPQ) and Dell (DELL). The investor would end up with five times as much in yearly sales and about 85% more in profit than Apple produces. And that imaginary investor would still have enough money left over to buy, say, Best Buy (BBY). Apple has more growth potential than those companies, of course, but this fiscal year it's expected to increase its earnings per share by just 9%.

Priceline.com

Average Analyst Recommendation: 2.2
Trailing P/E: 23

I like Priceline.com, but no more than I like Expedia (EXPE), Orbitz (OWW), Hotwire and the rest. The very fact that I'm visiting an online price engine for flights and hotels means: 1) I'm cheap; 2) I have no brand loyalty when it comes to travel; and 3) I know how to use the Internet to find bargains. That makes me and people like me difficult to collect fresh sales from without sacrificing margins, especially in a business where competition is fierce and volumes are weak right now. To Priceline's credit, it has consistently grown faster than the competition, but that's partly owed to the company eliminating booking fees two years ago. The others have since followed suit. Priceline is still dominant in Europe, but Expedia's subsidiary there, Venere, is growing quickly. All told, Priceline is a fine company but following its own advice to Name Your Own Price, I'd say about 16 time earnings, not 23.

Intuitive Surgical

Average Analyst Recommendation: 2.4
Trailing P/E: 45

I'm not, fortunately, in need of invasive surgery at the moment. But if I were, I'd hope for a top surgeon at a posh medical center with access to a da Vinci robot. The machine pokes tiny holes into patients and inserts tools to see, cut, sew and more. The small incisions make for speedy recoveries. And since the machine can downscale the movements of the hand controlling the joystick, it turns jitters into precision. Intuitive Surgical (ISRG), which owns the patent-protected da Vinci system, is expected to grow its sales by 11% this year, even though the machines cost millions of dollars and hospitals are looking to cut costs. And more procedures are likely to go robotic in coming years. The stock is easily worth 20 to 25 times earnings. But it trades at 45 times earnings. Da Vinci himself couldn't make that math work.

3 Unloved Stocks Worth Investor Affection August 11, 2009

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For stocks, popularity carries a price. Among S&P 500 companies, those with average analyst recommendations of “buy” carry stock market values that are a median of 1.6 times their trailing 12-month sales. Companies rated “hold” or “sell” trade at a median of 1.1 times sales.

The trade-off for investors seems lopsided, however. Long-term studies convincingly show that stocks with low price/sales ratios tend to produce better performance than those with high ones. The correlation between analyst advice and stock performance isn't as clear. In most studies, buy-recommended stocks do no better than hold-recommended ones after adjusting for other variables like valuation. That suggests investors should ignore analysts’ shopping lists and search for their own bargains.

As I noted Friday, the broad stock market seems worrisomely expensive at the moment. That makes now a fine time to prefer companies with modest expectations built into their share prices.

The three companies below are rated “hold” or worse (1 = Strong Buy, 5 = Sell) by analysts, but have strong balance sheets, below-average price/earnings ratios and larger-than-average dividend yields. Sales for each are holding up nicely through this year’s spending downturn.

Weis Markets

Average Recommendation: 4
Number of Analysts: 1

Tiny grocer Weis Markets (WMK) has just 154 stores in five mid-Atlantic states. Kroger (KR), for comparison, has more than 2,800. The conservative growth strategy has left Weis debt-free and prosperous. During the company’s second quarter, sales at its longstanding stores increased 2.4% vs. a year earlier while companywide earnings rose 19%. For the year, earnings are projected to jump 34%. Shares sell for 14 times forecast 2009 earnings and yield 3.6%.

Hasbro

Average Recommendation: 2.5
Number of Analysts: 13

Wall Street is down on toymakers in general, which isn’t surprising; demand for action figures, toy trucks, outdoor sports staples and more has stalled in recent years while sales of videogames have soared. Suddenly, though, videogames are having a lousy summer, and Hasbro (HAS) has two hits on the shelves. Transformers and G.I. Joe figures are hot, thanks to film tie-ins for both this summer. Earnings for the company are projected to grow by just 5% this year, but second-quarter earnings beat expectations. Shares are 13 times earnings and yield 3%.

ConAgra Foods

Average Recommendation: 2.7
Number of Analysts: 9

Founded 90 years ago as a Nebraska grain mill, ConAgra in recent decades has bought its way into packaged foods: Banquet frozen meals, Hunts sauces, Pam cooking spray and Hebrew National franks to name a few brands. Its shares are cheaper than those of most of its pantry peers. At 12 times earnings, ConAgra trades at about a 20% discount to both Kraft (KFT) and Kellogg (K). Shares yield 3.9% and while the company isn’t a fast grower, in its fiscal year ending May 2010 it’s expected to turn a tiny sales increase into a 9% profit gain.

14 All-Weather Funds for a Tricky Market August 7, 2009

Posted by Jack Hough in : Uncategorized , comments closed

Much of the fanfare in the mutual fund world is devoted to high-flying funds that post eye-popping returns. James Balanced: Golden Rainbow (GLRBX) has never been one of those offerings. Its biggest one-year gain over the last decade was an 18% return in 2003 — and that was ten points behind the S&P 500 index. The fund is by no means flashy. But while it may not produce headline-making returns, James does deserve recognition for its long-term track record: Over the last ten years it has averaged an annual 6.1% return while the S&P 500 has lost 1% a year.

Nevertheless, balanced funds like James, which consist of sleeves of stocks and bonds (and, on occasion, commodities and cash, too), are a hard sell for some investors right now. When the stock market rallies balanced funds lag their equity-only competitors because the conservative fixed income component weighs on returns. Given that the S&P 500 is up more than 12% in 2009, balanced funds aren’t on many buy lists.

Should the rally cool off, however, balanced funds could wind up outdoing some of their all-equity peers. In down or flat markets the bond component gains favor as stocks slump. If the market experiences the occasional upward movement, a balanced fund’s equity component will capture some of those gains. While it's impossible to predict what the market will do in the second half of 2009, these funds offer some upside in either scenario -- or at least they aim to.

“Balanced funds try to be an all-weather type of investment,” says Craig Skeels, managing director of Apex Wealth Management Group in Oxnard, Calif.

This week the SmartMoney fund screen focuses on balanced funds. We started with 2,248 funds and share classes in Lipper’s Mixed Asset category. Lipper's Mixed Asset category encompasses a wide variety of offerings.

There are the traditional balanced funds and also funds-of-funds and target date offerings that shift between stocks and bonds the closer they get to a prescribed year. The category also includes asset allocation funds that are typically stamped with “conservative,” “moderate” or “aggressive” in their names. For the purposes of this screen, we stuck to traditional balanced funds. We narrowed that group by looking for funds with above-average performance during the trailing 3- and 5-year time periods. The funds had to charge cheap fees and be open to new investors. As usual, we did not include load funds. That ultimately left us with the 14 funds.

Investors shouldn't approach balanced funds as a way to make quick money off a market recovery. Advisors consider balanced funds a core holding that should be in a client's portfolio for decades. What’s more, since balanced funds are a cheap alternative to buying separate equity and bond funds they make for decent starter kits.

“There is nothing wrong with them, but generally speaking [sophisticated investors] need a more customized approach,” says Jill Holup, director of investments at Lowenberg Wealth Management in Austin, Tx. But, she adds, they make sense “if you are 23 years old and just starting to invest.”

There are several funds that are making return appearances on this screen. James Balanced Golden Rainbow, Permanent Portfolio (PRPFX), Mairs & Power Balanced (MAPOX), T. Rowe Price Capital Appreciation (PRWCX) and Hussman Strategic Total Return (HSTRX) feature respected managers, good long term track records and low fees — all of which are hallmarks we look for in a fund.

The Criteria: The funds below are part of Lipper’s Mixed Asset classification. They have 3- and 5-year track records that put them in the top 40% of their respective peer groups. In addition, they are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio under 1.5%. As usual, we did not include load funds.

Balancing Acts
Source: Lipper Note: Data as of Aug. 6, 2009
Ticker	Name	3 Month Return (%)	3-Year Average Annual Return (%)	5-Year Average Annual Return (%)	% of Portfolio in Fixed Income	Expense Ratio (%)
BERIX	Berwyn Income	12.91	6.66	6.25	61.27	0.73
CBALX	Columbia Balanced	14.53	3.24	5.13	35.09	0.74
FBALX	Fidelity Balanced	13.07	-1.85	4.17	35.37	0.61
FGBLX	Fidelity Global Balanced	16.52	2.27	7.40	36.78	1.13
FPURX	Fidelity Puritan	13.12	-1.78	2.63	32.04	0.61
HSTRX	Hussman Strategic Total Return	3.57	7.61	7.93	65.38	0.90
GLRBX	James Balanced: Golden Rainbow	4.70	3.12	6.31	45.45	1.18
JABAX	Janus Balanced	11.22	5.07	6.90	43.68	0.79
MAPOX	Mairs & Power Balanced	13.40	-0.61	3.09	34.53	0.80
PRPFX	Permanent Portfolio	9.12	5.28	8.97	37.86	0.84
RPBAX	T. Rowe Price Balanced	14.30	-0.59	3.70	31.77	0.67
PRWCX	T. Rowe Price Capital Appreciation	14.30	0.60	4.90	19.80	0.72
VBINX	Vanguard Balanced	10.40	-0.38	3.14	36.87	0.20
VWINX	Vanguard Wellesley Income	11.47	2.85	4.70	58.75	0.25

Recipe

Fund Type = Mixed Asset *
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) <= 40
Annualized 5-Year Return (%) = Display Only
Rank in Classification (%) (5 year performance) <= 40
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= $5,000
Open to New Investors = Yes
Total Net Assets ($ millions) >= 50
1% in fixed income = Display Only

3 Stocks That Handily Beat the Street August 6, 2009

Posted by Jack Hough in : Uncategorized , comments closed

Three-quarters of S&P 500 companies have now bared their second-quarter financials, and the numbers are better than expected. Mind you, Corporate America is plenty skilled at manufacturing earnings-season sunshine. In a typical quarter, three companies beat Wall Street forecasts for each that misses them. This quarter, though, the ratio for S&P 500 companies is tracking at 5-to-1, a record.

That’s not to say second-quarter earnings are up vs. a year ago. They’re expected to have shrunk more than 15%. Also, plenty of companies are topping earnings estimates but missing on sales, a sign of painful cost-cutting rather than sustainable improvement. Expectations for the next several quarters are high, with earnings forecast to increase 26% by next year’s second quarter.

Considering the difficult road ahead, investors might wish to focus their attention on companies that are not merely beating earnings estimates, but are crushing them, with better-than-expected sales to boot. Below are three that did so this week.

Cognizant Technology Solutions

EPS surprise: 27%
Sales surprise: 2%

With companies looking to reduce costs, outsourcing specialist Cognizant (CTSH) is prospering. It pairs U.S. employers with mostly India-based workers. Plenty of outsourcers have suffered over the past year alongside major clients in the financial sector, but Cognizant is diversified among other sectors like healthcare, where outsourcing is still in brisk demand. The company’s sales are forecast to grow 11% this year and 14% next year. Its shares are up 80% year to date. Stockholders don’t get a dividend for now, but the company is debt-free and holds cash equal to close to 10% of its market value.

Molson Coors Brewing

EPS surprise: 14%
Sales surprise: 6%

A combination of cost cuts and price increases helped Molson Coors (TAP) double its second-quarter profits. Shares rose 5% on the news Monday. Beer drinkers looking for bargains sent sales of the company’s down-market Keystone and Miller High Life brands higher. Meanwhile management hiked prices on some premium brands to help make up for volume declines. With the dollar losing ground of late vs. the British pound and Canadian Loonie, Molson Coors stands to profit, since it draws considerable income from both countries. Shares trade at 13 times earnings and carry a 2% dividend yield.

STEC

EPS surprise: 24%
Sales surprise: 4%

Stec (STEC) makes solid-state drives like the ones available as pricey upgrades on laptop computers, except that its drives are used by businesses for servers. Solid-state drives have no moving parts unlike standard mechanical drives, so they’re typically faster and less power-hungry. Stec claims its Zeus line of business drives improve performance by as much as a factor of 78 over traditional drives and use up to 96% less electricity. Companies are evidently willing to pay a premium for such performance. Second-quarter sales for Stec surged 54%. Investors seem to expect grand things from the company in coming years. Shares are priced at a lofty 22 times forecast 2009 earnings.

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10 Index Funds Vying for a Spot in Your Portfolio August 28, 2009