Brian Rogers' T. Rowe Price Equity Income Fund Semi-Annual Report 2013

Fellow Shareholders The first half of 2013 was rewarding for equity investors, lackluster for money market investors, and troubling for fixed income investors. U.S. stock prices rose despite weakness in June, as corporate earnings advanced, sentiment improved, and investors slowly reallocated assets to the equity market. Money market fund returns hovered in barely positive territory, while fixed income securities sold off as concerns mounted about changes in Federal Reserve policy, resulting in sharp losses for bond investors.

[ Enlarge Image ]

As shown in the Performance Comparison table, your fund generated a return of 14.12% for the past six months compared with 13.82% and 13.39% for the S&P 500 Index and the Lipper Equity Income Funds Index of similarly managed funds, respectively. (Returns for the Advisor and R Class shares were lower, reflecting their different fee structure).

DIVIDEND DISTRIBUTION

On June 25, 2013, your Board of Trustees declared a second-quarter dividend of $0.13 per share, which was paid on June 27. You should have received your check or statement reflecting this distribution. The second-quarter dividend brings the total for the year to date to $0.26 per share. (Second-quarter dividends were $0.11 and $0.10 for the Advisor and R Class shares, respectively.)

PORTFOLIO REVIEW

Several portfolio holdings performed very well in the first half of the year, while a smaller number were disappointing. Technology positions, including Microsoft, Cisco Systems, and Hewlett-Packard, were particular bright spots. Consumer holdings such as Time Warner, Walt Disney, Ford Motor, and Avon also performed well, as did our handful of holdings in the retail sector. Pharmaceutical stocks, including Pfizer, were strong, and we were pleased with the results from several of our larger holdings in the financial services sector, such as American Express, Wells Fargo, JPMorgan Chase, and SLM. ! (Please refer to the fund's portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)

[ Enlarge Image ]

A few weaker sectors lagged the broad market advance. The energy, telecommunication services, and utilities groups gained ground but at a slower pace than most other S&P 500 sectors. Hess was a welcome exception in energy. Most of our investments in the lagging sectors moved higher but trailed the broad market. Our most disappointing energy holdings shared a common theme: exposure to the mining industry. As concerns about the pace of global economic growth intensified, particularly in emerging markets like China, our positions in Cliffs Natural Resources, Newmont Mining, and Joy Global were negatively affected. Fortunately, these composed relatively small positions in the portfolio. The Major Portfolio Changes table on page 8 shows the stocks in which we were active buyers and sellers during the first half of the year. We initiated positions in Apple (AAPL), Joy Global (JOY), Hospira (HSP), and Western Union (WU), all of which had stumbled in the eyes of investors, resulting in sharply falling share prices before we decided to invest in them. Consequently, the companies' stock valuations became more attractive to us. We normally favor companies whose share prices have declined because of cyclical worries, sector concerns, or company-specific issues. When a stock falls in value, its price/earnings ratio usually declines while its dividend yield increases, characteristics we look for as value investors. The strategy can be rewarding as long as the company's fundamentals are still sound.

[ Enlarge Image ]

When we decide to sell a position, it is usually for the opposite reason: A company's rising stock price makes its relative valuation less compelling. The companies we eliminated or red! uced posi! tions in have appreciated. They included Thermo Fisher Scientific, Whirlpool, SLM, Ingersoll-Rand, ConAgra, Energizer, and Amgen. The valuations of those stocks became extended, and we took advantage of the opportunity to sell shares and invest in companies with more attractive relative valuations. Our sales were based on share price valuations and did not reflect our views of the quality of the companies mentioned.

OUTLOOK

In our annual report at the end of 2012, we commented on the likelihood of moderate economic growth in 2013, reasonable stock valuations, and the potential for investors to allocate more assets to the equity market as sentiment improved. Through the first half of 2013, we experienced the moderate growth we anticipated, as well as a reallocation of funds from low-yielding fixed income markets into reasonably valued equities. As we look forward to the second half of the year, we expect a somewhat more challenging investment environment as ongoing moderate economic growth dampens the pace of earnings growth.

Stock prices have advanced sharply over the last four years. Investor sentiment is likely to be affected by the rhetoric coming out of Washington, with increasing focus this fall on the debate over a continuing budget resolution and an increase in the federal debt ceiling. Investors will also be following news emanating from Europe and from the larger emerging markets, such as China and India, for indications of the level of economic growth in those regions.

We will continue to seek out promising investments with attractive dividend yields and appealing valuations, but there are fewer opportunities available now than there were six months ago. Therefore, we anticipate more modest returns over the balance of the year as we apply our investment strategy to achieve attractive long-term results for our shareholders.

As always, we appreciate your continued confidence and support.

Respectfully submitted,

Brian C. Rogers President of the fund and! chairman! of its Investment Advisory Committee

July 18, 2013

The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the fund's investment program.

Risks of Investing in the Fund

Value investors seek to invest in companies whose stock prices are low in relation to their real worth or future prospects. By identifying companies whose stocks are currently out of favor or misunderstood, value investors hope to realize significant appreciation as other investors recognize the stock's intrinsic value and the price rises accordingly. The value approach carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced.

Glossary Beta: A measure of the market risk of a stock showing how responsive it is to a given market index, such as the S&P 500 Index. By definition, the beta of the benchmark index is 1.00. A fund with a 1.10 beta is expected to perform 10% better than the index in up markets and 10% worse in down markets. Usually, higher betas represent riskier investments. Dividend yield: The annual dividend of a stock divided by the stock's price. EBITDA: A measure of earnings before interest, taxes, depreciation, and amortization that is used to focus on a company's liquid cash flow. Earnings growth rate—current fiscal year: Measures the annualized percent change in earnings per share from the prior fiscal year to the current fiscal year. free cash flow: The excess cash a company is generating from its operations that can be taken out of the business for the benefit of shareholders, such as dividends, share repurchases, investments, and acquisitions. Lipper indexes: Fund benchmarks that consist of a small number (10 to 30) of the largest mutual funds in a particular category as tracked by Lipper Inc. Price/book ratio: A valuation measure that compares a stock's market price with its book valu! e; i.e., ! the company's net worth divided by the number of outstanding shares. Price-to-earnings (P/E) ratio—current fiscal year: A valuation measure calculated by dividing the price of a stock by its reported earnings per share from the latest fiscal year. The ratio is a measure of how much investors are willing to pay for the company's earnings. The higher the P/E, the more investors are paying for a company's current earnings. Price-to-earnings (P/E) ratio—next fiscal year: A valuation measure calculated by dividing the price of a stock by its estimated earnings for the next fiscal year. The ratio is a measure of how much investors are willing to pay for the company's future earnings. The higher the P/E, the more investors are paying for the company's expected earnings growth in the next fiscal year .

Price-to-earnings (P/E) ratio—12 months forward: A valuation measure calculated by dividing the price of a stock by the analysts' forecast of the next 12 months' expected earnings. The ratio is a measure of how much investors are willing to pay for the company's future earnings. The higher the P/E, the more investors are paying for a company's earnings growth in the next 12 months. Projected earnings growth rate: A company's expected earnings per share growth rate for a given time period based on the forecast from the Institutional Brokers' Estimate System, which is commonly referred to as IBES. Return on equity (ROE)—current fiscal year: A valuation measure calculated by dividing the company's current fiscal year net income by shareholders' equity (i.e., the company's book value). ROE measures how much a company earns on each dollar that common stock investors have put into the company. It indicates how effectively and efficiently a company and its management are using stockholder investments. S&P 500 Index: An unmanaged index that tracks the stocks of 500 primarily large-cap U.S. companies

The views and opinions in this report were current as of June 30, 2013. They are not guarantees of perf! ormance o! r investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a fore - cast of the fund's future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects

Also check out: Brian Rogers Undervalued Stocks Brian Rogers Top Growth Companies Brian Rogers High Yield stocks, and Stocks that Brian Rogers keeps buying

Currently 0.00/512345 Rating: 0.0/5 (0 votes)

Subscribe via Email Subscribe RSS Comments Please leave your comment:
More GuruFocus Links

Latest Guru Picks	Value Strategies
Warren Buffett Portfolio	Ben Graham Net-Net
Real Time Picks	Buffett-Munger Screener
Aggregated Portfolio	Undervalued Predictable
ETFs, Options	Low P/S Companies
Insider Trends	10-Year Financials
52-Week Lows	Interactive Charts
Model Portfolios	DCF Calculator
RSS Feed	Monthly Newsletters
The All-In-One Screener	Portfolio Tracking Tool

182,434 Users
Have Received Their FREE 12-Page Warren Buffett Portfolio Report Get Yours FREE Here MORE GURUFOCUS LINKS

Latest Guru Picks	Value Strategies
Warren Buffett Portfolio	Ben Graham Net-Net
Real Time Picks	Buffett-Munger Screener
Aggregated Portfolio	Undervalued Predictable
ETFs, Options	Low P/S Companies
Insider Trends	10-Year Financials
52-Week Lows	Interactive Charts
Model Portfolios	DCF Calculator
RSS Feed	Monthly Newsletters
The All-In-One Screener	Portfolio Tracking Tool

AAPL STOCK PRICE CHART 551.23 (1y: -4%) $(function() { var seriesOptions = [], yAxisOptions = [], name = 'AAPL', display = ''; Highcharts.setOptions({ global: { useUTC: true } }); var d = new Date(); $current_day = d.getDay(); if ($current_day == 5 || $current_day == 0 || $current_day == 6){ day = 4; } else{ day = 7; } seriesOptions[0] = { id : name, animation:false, color: '#4572A7', lineWidth: 1, name : name.toUpperCase() + ' stock price', threshold : null, data : [[1354600800000,575.845],[1354687200000,538.792],[1354773600000,547.245],[1354860000000,533.25],[1355119200000,529.821],[1355205600000,541.388],[1355292000000,538.77],[1355378400000,529.69],[1355464800000,509.794],[1355724000000,518.83],[1355810400000,533.9],[1355896800000,526.31],[1355983200000,521.73],[1356069600000,519.33],[1356328800000,520.168],[1356501600000,513],[1356588000000,515.06],[1356674400000,509.589],[1356933600000,532.173],[1357106400000,549.03],[1357192800000,542.096],[1357279200000,527],[1357538400000,523.9],[1357624800000,525.31],[1357711200000,517.1],[1357797600000,523.51],[1357884000000,520.3],[1358143200000,501.75],[1358229600000,485.92],[1358316000000,506.09],[1358402400000,502.68],[1358488800000,500],[1358834400000,504.77],[1358920800000,514.005],[1359007200000,450.5],[1359093600000,439.88],[1359352800000,449.83],[1359439200000,458.27],[1359525600000,456.83],[1359612000000,455.49],[1359698400000,453.62],[1359957600000,442.316],[1360044000000,457.844],[1360130400000,457.35],[1360216800000,468.22],[1360303200000,474.98],[1360562400000,479.93],[1360648800000,467.9],[1360735200000,467.01],[1360821600000,466.59],[1360908000000,460.16],[1361253600000,459.99],[1361340000000,448.85],[1361426400000,446.06],[1361512800000,450.81],[1361772000000,442.8],[1361858400000,448.97],[1361944800000,444.57],[1362031200000,441.4],[1362117600000,430.47],[1362376800000,420.05],[1362463200000,431.144],[1362549600000,425.662],[1362636000000,430.582],[1362722400000,431.72],[1362978000000,437.87],[1363064400000,428.43],[1363150800000,428.35],[1363237200000,432.5],[1363323600000,443.66],[1363582800000,455.72],[1363669200000,454.49],[1363755600000,452.08],[1363842000000,452.73],[1363928400000,461.91],[1364187600000,463.58],[1364274000000,461.136],[1364360400000,452.08],[1364446800000,442.66],[1364792400000,428.91],[1364878800000,429.792],[1364965200000,431.99],[1365051600000,427.72],[1365138000000,423.2],[1365397200000,426.21],[1365483600000,426.98],[1365570000000,435.69],[1365656400000,434.33],[1365742800! 000,429.8],[1366002000000,419.85],[1366088400000,426.24],[1366174800000,402.8],[1366261200000,392.05],[1366347600000,390.53],[1366606800000,398.67],[1366693200000,406.13],[1366779600000,405.462],[1366866000000,408.38],[1366952400000,417.205],[1367211600000,430.12],[1367298000000,442.78],[1367384400000,439.29],[1367470800000,445.52],[1367557200000,449.98],[1367816400000,460.71],[1367902800000,458.658],[1367989200000,463.84],[1368075600000,456.77],[1368162000000,452.97],[1368421200000,454.74],[1368507600000,443.86],[1368594000000,428.85],[1368680400000,434.578],[1368766800000,433.26],[1369026000000,442.93],[1369112400000,439.66],[1369198800000,441.354],[1369285200000,442.14],[1369371600000,445.15],[1369717200000,441.439],[1369803600000,444.95],[1369890000000,451.58],[1369976400000,449.735],[1370235600000,450.72],[1370322000000,449.31],[1370408400000,445.11],[1370494800000,438.46],[1370581200000,441.811],[1370840400000,438.89],[1370926800000,437.6],[1371013200000,432.19],[1371099600000,435.965],[1371186000000,430.05],[1371445200000,432],[1371531600000,431.77],[1371618000000,423],[1371704400000,416.838],[1371790800000,413.5],[1372050000000,402.54],[1372136400000,402.63],[1372222800000,398.07],[1372309200000,393.78],[1372395600000,396.53],[1372654800000,409.22],[1372741200000,418.49],[1372827600000,420.8],[1373000400000,417.42],[1373259600000,415.05],[1373346000000,422.35],[1373432400000,420.73],[1373518800000,427.288],[1373605200000,426.51],[1373864400000,427.44],[1373950800000,430.195],[1374037

5 Internet and Web Service Stocks to Sell Now

Popular Posts: 6 Oil and Gas Stocks to Buy Now16 Oil and Gas Stocks to Sell Now3 Machinery Stocks to Sell Now Recent Posts: 12 “Triple F” Stocks to Sell 8 “Triple A” Stocks to Buy 5 Stocks With Poor Analyst Earnings Revisions — VCRA SUNE BONT VRTX PSEM View All Posts

This week, the ratings of five internet and web service stocks on Portfolio Grader are down. Each of these rates a “D” (“sell”) or “F” overall (“strong sell”).

Youku Tudou, Inc. Sponsored ADR Class A’s () rating falls to a D (“sell”) this week, down from C (“hold”) the week prior. Youku.com operates as an Internet television company in the People's Republic of China. In Portfolio Grader’s specific subcategories of Earnings Revisions and Equity, YOKU also gets F’s. .

Slipping from a C to a D rating, 21Vianet Group, Inc. Sponsored ADR Class A () takes a hit this week. 21Vianet Group provides carrier-neutral Internet data center services in the People's Republic of China. The stock gets F’s in Earnings Growth and Earnings Momentum. .

iPass () is having a tough week. The company’s rating falls from a C to a D. iPass offers enterprise mobility services on a global basis by providing services that simply, smartly and openly facilitate network access from mobile devices while providing the enterprise with visibility and control over their mobile ecosystem. The stock gets F’s in Earnings Revisions, Equity, and Sales Growth. .

The rating of Liquidity Services, Inc. () declines this week from a C to a D. Liquidity Services provides full service solutions to market and sell surplus assets and wholesale goods. The stock also gets an F in Earnings Momentum. The stock price has fallen 16% over the past month, worse than the 1.3% decrease the Nasdaq has seen over the same period of time. As of Nov. 29, 2013, 29.4% of outstanding Liquidity Services, Inc. shares were held short. .

Velti () earns an F (“strong sell”) this week, moving down from last week’s grade of D (“sell”). Velti is a global provider of mobile marketing and advertising solutions. The stock gets F’s in Earnings Growth and Earnings Momentum. .

Louis Navellier’s proprietary Portfolio Grader stock ranking system assesses roughly 5,000 companies every week based on a number of fundamental and quantitative measures. Stocks are given a letter grade based on their results — with A being “strong buy,” and F being “strong sell.” Explore the tool here.

Intuit Inc. (INTU) Q1 Earnings Preview: What To Watch?

Intuit Inc. (NASDAQ: INTU) is slated to report its first quarter financial results on Nov.21. The company will host a conference call on the same day at 1.30 Pacific Time to discuss the operating performance.

Intuit makes tax preparation and payroll processing softwares. The company's key products include include QuickBooks, Quicken and TurboTax. Founded in 1983, Intuit had revenue of $4.2 billion in its fiscal year 2013. The company has approximately 8,000 employees with offices in the United States, Canada, the United Kingdom, India and other locations.

Wall Street expects Intuit to report a loss of 10 cents a share, according to analysts polled by Thomson Reuters. In the same period last year, it reported a loss of 3 cents a share. Intuit projects GAAP and non-GAAP net loss per share of 10 to 11 cents for the August to October period.

[Related -Scanning For Stocks With The Highest Consecutive Up Closes In An Uptrend]

The company's results have managed to beat Street view thrice in the past four quarters. However, the consensus loss estimate has widened from 2 cents in the past 90 days, indicating analysts have a bearish stance on the company's earnings prospects for the quarter.

Quarterly sales are expected to fall 6.8 percent to $603 million from $647 million in the same quarter last year. Intuit sees first-quarter revenue of $595 million to $605 million, growth of 6 to 8 percent.

Intuit has built an impressive franchise for financial management software focused on small business and individuals, with high recurring revenues, strong financial management and shareholder friendly cash use (buybacks and dividends).

[Related -Stocks End Lower After Bernanke Testimony; Zale (ZLC) Surges]

Weakness in tax is being offset by ongoing strength in small business where Intuit aims to be the "small business OS," and the acquisition of Demandforce would help the company in gaining more SMB business.

Intuit covers 5 million out of 29 million small business! es in U.S. and about 1 percent of 600 million small businesses worldwide. It processes less than 1 percent of the $2 trillion in commerce managed through QuickBooks (QB). This underscores the huge market available in front of Intuit.

The Street would be focusing on competition around QuickBooks and the uptake of the next generation of QuickBooks Online. QBO was re-written from scratch starting 2 years ago, using JavaScript and HTML5, and features an entirely modern Cloud stack that is more open to partners, including Square that was announced recently.

Investors will look at how tax trends are faring and how the company is coping with the current situation and what it is expecting for the future periods. Tax season can be volatile especially due to Congress delays around funding/budgets.

International business should be another focus point as the company is in early stages of exploring countries beyond U.S. and Canada.

"While int'l revs have been stuck at <5% of revs, we may see it break out during the next 5 years," UBS analyst Brent Thill wrote in a note to clients.

The previous quarter's results were marred by higher costs that weighed on margins and the profits. So, the Street would welcome any improvement in cost reductions.

The market may want some color on the competition in payment processing space, and how Intuit is faring against leading payroll solution provider Paychex Inc. (NASDAQ:PAYX) in the SMB arena.

Investors will want an update on management's full year outlook. It forecasts revenue of $4.440 billion to $4.525 billion, growth of 6 to 8 percent, GAAP EPS of $3.11 to $3.19 (growth of 10 to 13 percent) and non-GAAP EPS of $3.52 to $3.60 (growth of 10 to 13 percent).

For the fourth quarter, Intuit reported a net loss of $16 million or 5 cents a share, compared with a net profit of $4 million or 1 cent a share last year. Excluding items, the company reported adjusted profit of $1 million or breakeven earnings per share for the quarter. Mou! ntain Vie! w, California-based company's revenue for the quarter grew 12 percent to $634 million.

INTU stock is up 16 percent since its last quarterly report and 19 percent this year. Shares of the company, which trade at 18 times its forward earnings, have traded between $55.54 and $73.94 during the past 52-weeks.

An Energy Boost for Canada’s Exports

Canada’s latest trade data show the country’s exports sustained strong growth during September, which more than halved the country’s trade deficit from the prior month. According to Statistics Canada, seasonally adjusted exports rose 1.8 percent in September, to CAD40.6 billion, the highest level since late 2011.

And because imports increased just 0.2 percent, to CAD41.1 billion, that was good enough to pare the country’s trade deficit to CAD435 million from a revised CAD1.1 billion in August. This performance blew past expectations, with the consensus forecast having been for a trade deficit of CAD1 billion, according to a Bloomberg survey of 19 institutional economists.

So does that mean the Bank of Canada’s (BoC) hope for the economy to shift from its dependence on weakening domestic demand has finally been realized? It’s entirely possible, but economists remain skeptical.

For one, the balance of payments can vary widely from month to month. June’s trade deficit was just CAD141 million, while March had a shortfall of CAD278 million. But these promising showings were each followed by months in which the trade deficit exceeded CAD1 billion.

Moreover, when viewed from this perspective, Canada still seems to be struggling to establish a firmly positive trend in international trade. Over the past five years, the country’s monthly trade deficit has averaged CAD613 million, while over the past year it’s averaged CAD824 million.

However, when we examine just export data, the trend appears a bit friendlier. Canada’s monthly exports have averaged CAD35.9 billion over the past five years, while over the trailing year they’ve averaged around CAD39.4 billion. So something’s happening, even if, as BoC Deputy Governor Tiff Macklem recently noted, exports still have significant lost ground to make up to return to pre-recession levels.

Further complicating the interpretation of recent trade data is the fact that the industries that have been driving recent results tend to be volatile in the short term. Canada’s resource riches mean energy products accounted for nearly a quarter of total exports in September. And according to economists with CIBC World Markets, energy products drove 60 percent of the third quarter’s CAD714 billion increase in exports.

While energy exports have jumped almost 23 percent year over year, the prices that energy commodities fetch are notoriously volatile. For instance, Western Canada Select (WCS), a benchmark for the heavier crude produced from the country’s oil sands, has seen its usual discount to the benchmark West Texas Intermediate (WTI) widen significantly since June. WCS recently traded at a USD36.25 discount to WTI, a stark contrast to a discount of just USD9.26 in June, or even its five-year average discount of USD17.20.

Canadian crude shipments have been crowded out from pipelines leading to key US refineries by competition from the prolific US shale plays. And even when pipelines have been more accommodative, some refineries have been down for maintenance, adding to Alberta’s glut of supply, which itself has been increasing thanks to new production from the Kearl project. That means higher volumes, not prices, have been key to the energy sector’s performance.

The aircraft industry has also posted strong export growth, up 11.6 percent over the past year. But with a CAD1.2 billion contribution to total exports, it’s more of a marginal player whose monthly gains can prove evanescent over longer-term periods.

Overall, we’re heartened to see the energy sector drive Canada’s export growth, since resource plays are a strong component of our Portfolios. But it still remains to be seen when total exports will start growing at the pace necessary to drive the country’s economy.

Sen. Paul: Janet Yellen likely to be confirmed

Sen. Rand Paul, R-Ky., concedes he probably won't be able to block the nomination of Janet Yellen to be the next Federal Reserve chairwoman but he still wants to try.

In an interview to air Friday on Bloomberg TV, Paul says he will block Yellen from a vote unless he gets an up-or-down vote on his bill that seeks to audit the Fed -- an idea long pressed by his father, former Texas congressman Ron Paul.

"Apparently, Janet Yellen's been in favor of transparency at the Fed," Paul told Bloomberg's Al Hunt. "That's all we're asking for, is an open audit ... I think that there are a lot of people in middle-class America -- some want to call flyover America where I live -- who are concerned about the revolving door from the Treasury to Wall Street firms to the Federal Reserve."

Paul said one central question to him is "are people becoming wealthy off of policy that we should know about?"

Asked if Senate Majority Leader Harry Reid, D-Nev., has the votes to get Yellen confirmed, Paul conceded: "In all likelihood, yes."

Paul's vow to block Yellen, President Obama's choice to succeed Fed chairman Ben Bernanke, is in addition to a threat on all presidential nominees made by Sen. Lindsey Graham. The South Carolina Republican is seeking more information on the Obama administration's handling of the deadly attack on the U.S. consulate in Benghazi, Libya.

Paul told Bloomberg TV that his ability to keep a "hold" on Yellen's nomination is limited under the Senate rules. "In the old days, you could place a hold on and keep it forever," he said. "Even if I stand on the floor and filibuster in a personal fashion, I can only hold it there for two days."

Follow @ccamia on Twitter.

What to Do During Medicare Open Enrollment

Do I need to do anything during the Medicare open-enrollment period this year? I've been happy with my Part D prescription-drug plan.

SEE ALSO: 10 Things You Must Know About Medicare

You will automatically keep your Part D coverage if you don't make any changes to it during open enrollment, which runs from October 15 to December 7 for 2014 plans. But it's a good idea to shop around again for Medicare Part D prescription-drug plans and all-in-one Medicare Advantage plans, especially if your health or medications have changed. Even if your premiums haven't risen much, your out-of-pocket costs could change significantly.

Many Part D plans have increased premiums, boosted co-payments and changed the pricing tiers for prescription drugs. A number of plans have four or five tiers of drug pricing, and your out-of-pocket costs could go up if the insurer moves your drugs from one pricing tier to another. If a medication moves from a preferred to a non-preferred brand-name drug or specialty drug, for example, you may have to pay as much as 25% of the cost yourself. Some plans even have two pricing tiers for generic drugs, charging a higher co-payment for non-preferred generics.

One of the biggest changes in recent years is the growth of preferred pharmacy plans. More insurers are introducing low-premium versions of plans that also charge lower co-payments if you buy your drugs through certain preferred or mail-order pharmacies. The Humana Walmart Preferred Rx plan, for example, charges a monthly premium of $12.60 and co-payments of just $1 for preferred generics at Walmart and Sam's Club pharmacies, and $0 for generic drugs through the RightSource mail order pharmacy, but a $10 co-payment if you buy from non-preferred network retail pharmacies. Tier 3 preferred brand-name drugs have a 20% coinsurance at Walmart and Sam's Club pharmacies and at the RightSource mail-order pharmacy, but a 25% coinsurance through non-preferred network pharmacies. (Co-payments are a fixed-dollar amount that you pay for each prescription, coinsurance is a percentage of the cost that you must pay.)

To shop for a Part D prescription-drug policy or just check out your options, go to Medicare.gov's Plan Finder and type in your zip code (or your Medicare number for a personalized search), drugs, dosages and up to two pharmacies near your home. The tool lets you know if there is a generic alternative.

Click on "prescription drug plans" for Part D plans and you'll see information for all of the plans available in your area. Look at the monthly premiums, deductibles and co-payments, but focus primarily on the "estimated annual drug costs" column, which includes the premiums, deductibles and co-pays for your specific drugs and dosages. Also look at the plans' star ratings, which assess the Part D plans' customer service, complaints and member satisfaction.

You can compare up to three plans and see where to find more information about each plan's cost and coverage. You'll also see a list of the plan's network pharmacies in your zip code and how much you can save by using a mail-order pharmacy.

For more information about shopping for a plan for 2014, see Time for Medicare Open Enrollment. You can also get assistance shopping for a Part D plan through your local State Health Insurance Assistance Program (SHIP); call 800-633-4227 or go to www.shiptalk.org for contact information. You may also want to review the plan's information on the insurer's Web site before signing up for the new plan. The Medicare.gov Plan Finder information was delayed because of the government shutdown and most of the information on the site was updated by October 15, but it's a good idea to double check the information with the insurer's Web site, at least when shopping in mid-October.

Note that Medicare open enrollment is not related to open enrollment for the state health insurance marketplaces. Those exchanges are only for people who are under age 65 and not enrolled in Medicare. See Changes in Medicare for 2014 for details.

Got a question? Ask Kim at askkim@kiplinger.com.

How to Obliterate the Cost of College

A competent financial advisor may be able to save their clients tens of thousands of dollars in college expenses through a fairly straightforward understanding of merit-based scholarships, which we recently wrote about.

But it bears mentioning that an emerging trend would allow consumers of higher education to save hundreds of thousands of dollars, and advisors would be remiss if they were not fully briefed on the rapid changes taking place in online education.

Want a Stanford education without the $59,000 a year price tag? The growth in massive open online courses (MOOCs) now makes that possible.

Of course, you don’t get the on-campus experience with all that that entails—close interaction with teachers and fellow students for some, parties and football games for others—but the ability to learn from world-class experts is now widely available.

More available perhaps than many would think. While many have heard of MOOCs, few probably appreciate how explosive their growth has been.

Dhawal Shah, who while taking one of the first MOOCs from Stanford in 2011, founded Class Central as means of keeping track of the continually expanding menu of online courses, has recently tabulated where we stand two years into the MOOC experience. (Although a Stanford MOOC attracting 160,000 registrants galvanized public attention in 2011, some say the first MOOC, or a precursor MOOC, launched as early as 2006-07).

In an article written for education technology publication EdSurge, Shah summarizes MOOCs’ rapid progress: “200+ universities. 1200+ courses. 1300+ instructors. 10 million students.”

With 10 million students, why are Americans seemingly less cognizant of the MOOC phenomenon? Consistent data on MOOC demographics is hard to come by, but the single example of the University of Wisconsin—Madison is instructive. Only 23% of participants in its four MOOCs are from the U.S. The rest come from 19 other countries, including Brazil and India.

There are critics of MOOCs, with some preliminary studies suggesting that there are higher dropout rates among MOOC students, who also get lower grades than students in conventional brick-and-mortar colleges and universities.

As for online courses, aptly named start-up Coursera, founded by two Stanford professors, dominates the market, with nearly half of all MOOCs (47%). edX, which MIT and Harvard launched before U.C. Berkeley and 26 other institutions joined, has 8.3% of the market, followed by third-place udacity (with 2.8% of the market), whose founders taught the wildly popular Stanford class on artificial intelligence in 2011.

In terms of content, while MOOCs have been largely identified with computer science and engineering, Shah reports that swelling enrollment in humanities MOOCs has made that the largest segment, accounting for 20% of MOOCs, followed by computer science and programming (16%) and business and management (15%).

With all the potential advantages MOOCs offer—predominantly free online college-level courses in a wide and growing range of subjects often taught by renowned experts (the “Ivy League for the masses,” as Time put it)—one  key drawback has been that they do not, as a group, meet the demand for college degrees.

That shortcoming may become of less and less consequence as the high cost of college together with growing awareness of its educational inadequacy inspire a greater openness to MOOCs. In an op-ed in Friday’s Wall Street Journal called “We Pretend to Teach, They Pretend to Learn,” one professor laments the credentialist motives of the mass of students whose lack of preparedness he says is being noticed by employers.

Nevertheless, Shah, in his article, says that credentialing may be the big MOOC development of 2014. Many MOOCs are already offering certificates of course completion, but Georgia Tech and Udacity’s online master’s degree in computer science doubtless suggests that more economical degrees will be part of the near future. And at just $7,000 for a master’s degree, financial advisors can now suggest ways to obliterate most of the current cost of college.

Shutdown fears create short-term buying opportunities, market watchers say

The political brinkmanship on display in Washington has created what could be a short-term buying opportunity, according to some market watchers.

With the Dow Jones Industrial Average down more than 100 points in midday trading on fears that political infighting will lead to a partial government shutdown Monday night, investors are acting as if something much worse is in the works.

“If the government shuts down, they might cancel White House tours, and you might not be able to visit some national parks, but right now the stock market is offering buyers a discount,” said Douglass Cote, chief investment strategist at ING U.S. Investment Management. “Yes, the government may, in fact, shut down today due to a lack of a continuing resolution passed by Congress to fund the government, and investors should use this as a opportunity to get a full allocation to the markets.”

The clich� that the markets don't like uncertainty is clearly in play and most analysts think that the markets could fall further if the shutdown actually happens.

But from a fundamental perspective, there is no good reason to flee the markets at this time.

“To me, this is all just noise, and we try to block it out,” said Mark Travis, manager of the Intrepid Capital Fund (ICMBX).

“There will be some nonessential services that could stop, but unless you're planning to visit the Lincoln Memorial, you probably wouldn't notice it,” he said. “From our perspective, prices are still not cheap for stocks or bonds, and we're not cheering for a bloody mess, but if one appears we have the resources to put some money to work.”

Mr. Travis cited a similar market reaction in August 2011 when U.S. debt was downgraded and stocks saw a few single-day drops of up to 5% over the following next week.

“We've been through a very benign period this year with very low volatility,” he said. “Right now, you've got equity indexes that are up more than 20%, so it's not inconceivable that some people will decide they're happy with that return, and they want to take some of the profits.”

Virtually across the board, market watchers aren't buying into the Washington hype.

“If you're a stock buyer, you're buying stocks into this, but there's no way to handicap whether or not the government will be shut down,” said Aaron Izenstark, chief investment officer at Iron Financial LLC.

The logic behind the sell-off ahead of a government shutdown follows that it will dramatically reduce government and business spending and increase consumer fears about the economy, forcing reduced spending at the consumer level.

“When people are nervous, they stop spending money,” Mr. Izenstark said.

But even if consumers are getting nervous about the latest mess in Washington, the macroeconomic picture continues to tell a different story.

“Corporat! e profits and retail sales are at record highs, the trade deficit is going down because of shifts in energy and the economy is in pretty good shape,” Mr. Cote said. “This day-to-day political brinksmanship has become part of the normal political process, and if investors try to Washington-proof their portfolios they will be whipsawed at best.”

Mr. Cote added that one need look no further than third-quarter market performance to understand why it makes sense to be globally diversified.

The S&P 500, which was up 20.5% this year through Friday, gained 5.9% in the third quarter, including 3.8% this month.

The emerging markets are down 3.7% from the start of the year, but gained 10% in the third quarter, including 9.7% this month.

Developed Europe is up 17.7% this year, and gained 12.7% in the third quarter, including 8.5% this month.

“This is the first time all year that global diversification has worked,” Mr. Cote said. “The rest of the year I'm calling it the mean-reversion trade because I think the global equity markets continue to outperform U.S. equity markets.”

IBM Eyes Investments in Linux (IBM)

On Tuesday, New York-based “Big Blue” bellwether IBM Corp. (IBM) announced its commitment to developing and investing in open source software, namely Linux.

IBM re-affirmed its dedication to work more closely with the Linux OS in light of the LinuxCon event taking place this week. The company is reportedly setting aside roughly $1 billion over the course of the next four to five years to invest in the development of Linux-based technologies and platforms. Sources say the money will likely go into building a “cloud” based on IBM Power servers running Linux; the company did not disclose whether it was financing Linux developments internally or through third-party projects.

IBM shares sank lower on Tuesday, shedding 0.51% on the day. The stock is flat YTD.

The Heavy Price of Stockpicking

The tab for speculating in the stock market is about 4% a year, according to the calculation of one influential wealth manager. That’s a harsh penalty to pay when the S&P 500’s average annual result over the past 15 years is barely above that amount, at 4.28%.

Eric Nelson of Servo Wealth Management goes through the grim numbers in his July newsletter to clients.

The Oklahoma City-based registered investment advisor and Dimensional Fund Advisors loyalist starts his analysis at the professional money manager level, arguing that their performance as measured against indexes shows they lack market-beating skill.

Unlike top athletes or surgeons who demonstrate superior abilities, Nelson’s scorecard reveals that just 20% of fund managers beat their index from 2008 to 2012 and that the number who did so in most categories closely matched the number of mutual funds that were outright closed “due to horrendous underperformance.”

For example, 24.6% of active large-cap funds beat their index during that period, while 27.7% of active large-cap funds were shut down. The category that exhibited the least correspondence was not to the credit of professional managers: Just 9.6% of active short-term bond funds beat their index—far less than the 21.7% of such funds that closed during that period.

Nelson attributes manager selection to a Lake Wobegon mentality that assumes their manager is better than average. Yet he argues that people select their better-than-average managers based on past performance that doesn't persist.

Nelson cites data from Standard & Poor's showing the performance of the top managers from 2003 to 2007 in the subsequent five-year period from 2008 to 2012. Just 24.1% of top quartile managers remained in the top quartile, whereas 19.3% fell to the second quartile, 20.3% to the third quartile and 23.1 dropped to the last quartile; the missing 13.3% lost their jobs as their funds were shut down.

The wealth manager concludes: “So even when narrowing the search for a professional active manager to only those who have previously produced the best results, we still find the chance of future index-beating returns is no better than choosing at random (by chance, we’d expect to have 1/4 odds of landing in each of the four quartiles, and a bit less when we consider the odds of disappearing completely).”

Nelson notes there are actually greater odds (nearly 37%) of a top fund falling to the bottom quartile or disappearing than remaining in the top quartile (24%).

The professional advisor emphasizes that this poor performance emanates from people with chartered financial analyst (CFA) designation and Ivy League MBAs.

“If they can’t get it right," he asks, "what is the chance that a do-it-yourself investor running a Charles Schwab or Morningstar stock screener for a few hours in the evening or on the weekends will perform better?”

Drilling down further, Nelson next takes a page out of John Bogle’s book, literally, and considers both the underperformance of active managers and bad investor behavior.

Bogle’s The Clash of the Cultures shows that large-cap funds returned 4.1% to investors from 1997 to 2011, compared with 5.4% for their S&P 500 benchmark. While the numbers are both small, Nelson points out that that means 37% less wealth over 15 years for active fund investors, and 72% less wealth over the same time period compared to the wealth managers’ clients invested in his favorite DFA US Large Value Fund (DFLVX).

“But even this dismal result is too generous,” Nelson says, since naughty investors typically dump poor-performing funds for those with recent good performance, which subsequently perform poorly, which “amplifies the return deficit.”

Citing Bogle again, Nelson shows that investor returns trail fund returns by nearly 2% on average.

“So between poor professional management and bad investor behavior, the total cost speculators pay is almost 4% per year!” Nelson says in summary, calling on investors to save their wealth through the discipline of a fee-only investment advisor.

---

Check out Your Move, Bogleheads: Advisor Finds DFA’s Returns Trump Vanguard’s.

Stocks Market News for July 12, 2013 - Market News

Benchmarks bolstered gains on the back of Federal Reserve Chairman Ben Bernanke's encouraging comments about the bond buying program. Bernanke said the Federal Reserve is in no rush to taper the stimulus program. The S&P 500 and the Dow Jones registered all-time highs after Bernanke's positive statements. Additionally, the Nasdaq finished at its highest level since 2000. Meanwhile, the number of Americans filing for unemployment benefits increased during the previous week. All ten sectors of the S&P 500 industry groups finished in the green led by technology and materials.

For a look at the issues currently facing the markets, make sure to read today's Ahead of Wall Street article.

The Dow Jones Industrial Average (DJI) gained 1.1% to close the day at 15,460.92. The S&P 500 added 1.4% to finish yesterday's trading session at 1,675.02. The tech-laden Nasdaq Composite Index rose 1.6% to end at 3,578.3. The fear-gauge CBOE Volatility Index (VIX) declined 1.4% to settle at 14.01. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and Nasdaq were roughly 6.5 billion shares, marginally higher than 2013's average of 6.4 billion shares. Advancing stocks outnumbered the decliners. For the 85% that advanced, only 14% declined.

Ben Bernanke allayed investor concerns about winding up the stimulus program sooner-than-expected. In June, Bernanke's comments on slowing the bond purchase program by the end of 2013 and completely ending it by mid-2014 had created panic among investors. Following his discouraging comments, the S&P 500 declined nearly 6%. But recent better-than-expected domestic reports, an encouraging start to the earnings season and Bernanke's positive comments have boosted investor sentiment.

Bernanke said the Federal Reserve is no hurry to wind up the stimulus program and the central bank will continue supporting the economy. He said: "Highly accommodative monetary policy for the foreseeable future is what's n! eeded in the U.S. economy." According to the Fed, short-term interest rates will be kept at record lows, at least until employment rate declines to 6.5%. Regarding the tapering of bond purchase program, Bernanke said the Fed is "trying to achieve a substantial improvement in the outlook for the labor market in the context of price stability. We've made progress on that but we still have further to go."

According to the U.S. Department of Labor, initial claims moved up in the previous week. The number of Americans filing for unemployment benefits increased 16,000 to 360,000 from the previous week's revised figure of 344,000. This was well above the consensus estimate of 340,000. The four week moving average increased 6,000 to 351,750 from 345,750. Initial claims numbers follow positive non-farm payroll data released in the previous week. The report stated that the U.S. economy added 195,000 jobs in the month of June. The unemployment rate has also come down to 7.6% from 8.2% a year before.

On the earnings front, Yum! Brands, Inc. (NYSE:YUM) reported second quarter results yesterday. The company's earnings came in above the Street's estimates but revenue fell marginally short of expectations. Shares declined nearly 1.2% after the declaration of results. Excluding items, the company's second earnings per share declined 11 cents to 56 cents from 67 cents in the same period a year ago. Yum's Chairman and CEO David C. Novak said: "KFC sales and profits in China were significantly impacted by intense media surrounding avian flu, as well as the residual effect of the December poultry supply incident. The good news is that China sales are recovering as expected." Banking giants JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) are scheduled to report quarterly results on Friday.

The Technology sector was the biggest gainer among the S&P 500 industry groups and the Technology SPDR (XLK) gained 1.7%. Stocks such as Google Inc (NASDAQ:GOOG),! Microsof! t Corporation (NASDAQ:MSFT), Hewlett-Packard Company (NYSE:HPQ), Intel Corporation (NASDAQ:INTC) and Texas Instruments Incorporated (NASDAQ:TXN) added 1.6%, 2.8%, 1.7%, 3.2% and 1.6%, respectively.

Should You Take A Gamble On Zynga?

Zynga's (NASDAQ:ZNGA) stock price plummeted earlier this month, and it lost 16 percent of its market cap after the company revealed plans to cut 18 percent of its workforce. Can the company rebound from this massive layoff? Let's use our Cheat Sheet investing framework to decide whether Zynga is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock's Movement

Clearly, the most recent catalyst for the fall in Zynga's share price has been the large-scale layoff announced at the beginning of the month. CEO Mark Pincus said that by closing three U.S. offices, the online game developer would cut costs by $70 million to $80 million annually. The reduction in costs will free up capital for Zynga to focus on its mobile gaming strategy. The news is especially disheartening as Zynga had to close its OMGPOP Studios branch — makers of Draw Something — one year after acquiring the company for $200 million. This bleak news has spooked investors and initiated a large sell-off.

Zynga has become reliant on Facebook (NASDAQ:FB) games for personal computers and has recently seen a sharp decline in its daily average users, a standard metric measuring online game usage. While titles like Farmville achieved massive success in 2009 and 2010, generating more than $1 billion in revenue for Zynga, the popularity of these types of titles has diminished. Zynga needs to adapt to current market trends or face obscurity.

H = High-Quality Products in the Pipeline? 

The company hopes to get back on track by pivoting to a strategy focused on mobile gaming. But Zynga might be too late to the party: its most popular game, Farmville, has been overtaken on mobile devices by newer releases. Pincus's track record has not exactly been stellar — investors and employees alike question his foresight and ability to capitalize on new trends in gaming.

Zynga has talked about rolling the dice and entering the online real-money gambling sector. It plans to use new capital to develop online card and slot games, recently acquiring Spooky Cool Labs, an online slot game designer. While the economics of online gambling is certainly more profitable than that of Zynga's “freemium” business model, the industry is surrounded by uncertainty. Currently, online gambling is illegal in most states. And even if more states legalize online gambling, the company would be facing online gambling titans such as Caesar's Entertainment (NASDAQ:CZR), who have much more resources than Zynga as well as exposure in the gambling industry.

T = Technicals are Weak

Zynga is currently trading around $2.75, below both its 50-day moving average of $3.12 and 200-day moving average of $3.05. The company is experiencing a strong downtrend, and is down more than 55 percent since its 52-week high one year ago of $6.35. Zynga currently has a relative strength index of less than 30, suggesting that the stock is oversold and could be poised for a rally. However, if Zynga continues to report bad news and earnings, this is a remote possibility.

Conclusion 

The future for Zynga is uncertain. Its stock price may currently be undervalued, as indicated by its low RSI after the layoff announcement on June 4 triggered a large sell-off. The stock has posted two consecutive quarters of declining revenue growth and expects to report a net loss next quarter of between $28.5 million and $39 million. But the company is not yet in dire straits: It still has $1.4 billion in cash and a $2.18 billion market cap as of Tuesday.

If you feel like taking a chance on the government's decision to allow online gambling, Zynga might have some upside. And if the company can produce another hit equivalent to Farmville for mobile devices, it could rapidly expand its user base and, consequentially, its share price. These events are just speculation at this point. While Zynga is not a worthless company, there is too much uncertainty in its transitioning business model and the economics of its industry to warrant an OUTPERFORM rating. For now, Zynga is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don't waste another minute — click here and get our CHEAT SHEET stock picks now.

Ford Moves to Boost Electric-Car Sales

Critics like Ford's Focus Electric, but few have sold so far. Photo credit: Ford Motor Co.

Ford's (NYSE: F  ) Focus Electric is a pretty nice electric car. It has decent range for its price, it drives well, and most critics have been impressed by its overall execution. But it's selling in tiny numbers: only about 1,600 since it was launched late in 2011. Tesla Motors (NASDAQ: TSLA  ) sells that many car every few weeks.

Part of the problem is the price: Compared with rivals such s Nissan's (NASDAQOTH: NSANY  ) Leaf EV, the Focus Electric is expensive -- about twice the cost of a regular gas-powered Focus. Ford just announced a price cut, but will it be enough to jump-start sales?

In this video, Fool contributor John Rosevear looks at Ford's electric car in the context of the company's overall green-car strategy, and he gives his thoughts on whether this price cut is likely to help the Focus Electric's sales -- and on how much that matters to Ford.

China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

Need to Lose a Few Pounds? Try Using a Debit Card

Credit card use is up, and that's great news for industry heavies Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) , both of which have been on a tear over the past few month. To make things even sweeter, delinquencies have dropped, too, and now stand at a level not seen since 1990.

For consumers, however, the jump in swiping activity is having a deleterious effect -- and not on their financial health. According to The Street, research has found that using a credit card can lead to weight gain, ostensibly because purchasers are more apt to buy junk food or pricey gourmet items. The same effect was not found in consumers using a debit card -- or cash -- which tend to limit overspending by removing the "buy now, pay later" factor.

It doesn't look like Visa and MasterCard need to worry, though. Not only is consumer card-swiping increasing as the public's perception of the economy improves, but both companies also provide debit card services, as well.

A terrific year
Both card companies have seen their fortunes rise over the past year, and they've been garnering attention  for their impressive gains, which have pushed both toward their 52-week highs. Analysts note that these companies are especially well-positioned to take advantage of an improving economy, as increased consumer confidence leads to more credit card purchases.

In addition to domestic markets, both companies have been focusing on emerging economies, where historically cash transactions are beginning to segue into credit and debit card purchases. In the first quarter of 2013, MasterCard reported an increase in global payment volume of 11%, and Visa notched gains of 7%.

Banks love plastic, too
Big banks make a nifty profit from the credit card industry, and both Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) made note of this in their recent earnings reports. Wells reported that its revenue growth was partially aided by double-digit revenue growth in its credit card department, and JPMorgan also showed growth of 10% year over year in its own credit card sales division.

Banks are especially fond of interchange fees, tasty little nuggets that are created each time a consumer swipes his credit card. Last year, the battle between retailers and card issuers over swipe fees resulted in a settlement, one from which many retail stores, led by Target (NYSE: TGT  ) and Walmart (NYSE: WMT  ) have since opted out.

These swipe fees can add up to around $40 billion each year for banks, which is why they are getting involved in a state-by-state push to enact laws to prevent retailers from charging consumers extra when they make a credit card purchase. Both banks and card issuers are concerned that such a fee would reduce the utilization of credit cards, thus cutting into profits. For its part, Visa has sued Walmart to force it to accept the original $7.25 billion settlement.

Dispute hasn't dinged profits
Despite all the hullaballoo over interchange fees, Visa and MasterCard have had a brilliant year. As the economy -- and consumer confidence -- continues to improve, these two companies will reap the rewards.

Credit card companies are no slouches in the dividend department, but they're not the only game in town. If you're on the lookout for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.

Oracle defends CEO’s pay amid shareholder unrest

SAN FRANCISCO (AP) — Oracle is facing a potential shareholder revolt against a compensation formula that has consistently made its billionaire co-founder, Larry Ellison, one of the best-paid CEOs in the world.

The business software maker staunchly defended Ellison's pay in a letter sent to shareholder activist firm CtW Investment Group in an effort to rally support for its board of directors before the 11 members stand for re-election at Oracle's annual meeting on Oct. 31.

First Take: Larry Ellison, the world's wealthiest underdog

The letter released in a Wednesday regulatory filing came in response to a scathing attack that CtW launched last week against the compensation that Ellison has been receiving from the Redwood Shores, Calif., company for years.

CtW doesn't own any Oracle shares directly, but the Washington D.C., group is paid to fight for shareholder causes. It is vowing to organize the pension funds of labor groups that are stockholders unless the company changes its ways. Oracle's letter gave no indication that the company is going to relent, setting the stage for an attempt to oust at least three of Oracle's directors at the annual meeting.

"It seems pretty clear that they aren't willing to listen to the concerns of shareholders," said Rich Clayton, a research director at CtW. A truce could still be reached during a meeting with an Oracle representative that Clayton said is scheduled for Thursday morning in Washington.

Shareholders expressed their displeasure with Oracle's compensation practices at the company's annual meeting last year. About 59% of the shareholders voted against a "say-on-pay" proposal seeking an endorsement of the board's compensation policies. That vote was non-binding, and Oracle's compensation committee decided that no significant changes to its practices were needed, according to the company's proxy statement for the upcoming annual meeting.

Ellison: America's Cup win helps Ellison and Oracle brand

Oracle awarded Ell! ison a pay package valued at $78.4 million in its last fiscal year ending in May, down from $96.2 million in the previous year.

Ellison, 69, could have made even more last year if he hadn't turned down a $1.2 million bonus. He also limited his salary to $1 annually, a symbolic measure that has been embraced by several other Silicon Valley CEOs who are already billionaires, including Google's Larry Page and Hewlett Packard's Meg Whitman.

Oracle has primarily paid Ellison through stock options and other long-term incentives designed to prompt him to boost the company's market value and enrich shareholders. Ellison's pay packages have included an award of 7 million stock options in each of the last six years. Those awards are the main reason Ellison has ranked among the top-paid CEOs in each of those years.

The ultimate value of Ellison's stock options hinge on how Oracle's stock fares. In its response to CtW, Oracle pointed out that some of the stock options issued in Ellison in past years haven't made him any money because the cost of exercising them was higher than the price of the company's stock.

Millions of other stock options have yielded windfalls that have helped Ellison build upon a fortune estimated at $41 billion by Forbes magazine. Since the end of Oracle's fiscal 2007, Ellison has realized gains totaling $851 million by exercising 55.4 million stock options, according to the company's regulatory filings. More than $151 million of those gains came in Oracle's most recent fiscal year.

If Oracle refuses to change its policies CtW plans to wage a campaign aimed at persuading its labor union allies and other major Oracle shareholders to oppose the re-election of the three directors on the company's compensation committee.

Those directors are: Bruce Chizen, a former CEO of Adobe Systems who has chaired the compensation committee for nearly three years; venture capitalist George Conrades, who is also chairman of Akamai Technologies; and Naomi Seligman, a partner ! at techno! logy consultant Ostriker von Simson.

Earlier this year, CtW led shareholder protests against Hewlett-Packard's board. Although the directors were re-elected, the opposition was strong enough to culminate in former Oracle executive Ray Lane's resignation as HP's chairman and the departure of HP's two longest-serving directors.

In its letter, Oracle accused CtW of trying to orchestrate a misleading campaign against the company's board and hailed Ellison as "its most critical strategic visionary, a role that he has served and continues to serve our shareholders extremely well."

With Ellison in charge, Oracle said it has returned nearly $40 billion to shareholders during the past decade. The company's stock rose by 28% in its last fiscal year, outperforming the 24% increase in the Standard & Poor's 500 over the same period.

Even without options, Ellison benefits more than any other Oracle shareholder when the stock rises because he owns a 25% stake in the company.

Ellison has used his wealth to buy luxurious estates around the world, as well as his own Hawaiian island, Lanai. He also bankrolled two victories in the America's Cup, with the most recent triumph in sailing's most prestigious event coming last week in San Francisco. Oracle's brand was featured prominently in the competition.

Don't Get Too Worked Up Over Orient-Express Hotels's Earnings

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Orient-Express Hotels (NYSE: OEH  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Orient-Express Hotels burned $51.6 million cash while it booked a net loss of $40.2 million. That means it burned through all its revenue and more. That doesn't sound so great. FCF is less than net income. Ideally, we'd like to see the opposite.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Orient-Express Hotels look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

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

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 68.4% of operating cash flow coming from questionable sources, Orient-Express Hotels investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, stock-based compensation and related tax benefits provided the biggest boost, at 13.5% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

Looking for alternatives to Orient-Express Hotels? It takes more than great companies to build a fortune for the future. Learn the basic financial habits of millionaires next door and get focused stock ideas in our free report, "3 Stocks That Will Help You Retire Rich." Click here for instant access to this free report.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Add Orient-Express Hotels to My Watchlist.

KMG Chemicals Beats on Both Top and Bottom Lines

KMG Chemicals (NYSE: KMG  ) reported earnings on June 10. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended April 30 (Q3), KMG Chemicals beat expectations on revenues and beat expectations on earnings per share.

Compared to the prior-year quarter, revenue shrank. GAAP earnings per share shrank significantly.

Margins shrank across the board.

Revenue details
KMG Chemicals chalked up revenue of $59.9 million. The one analyst polled by S&P Capital IQ predicted revenue of $57.6 million on the same basis. GAAP reported sales were 10.0% lower than the prior-year quarter's $66.6 million.

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

EPS details
EPS came in at $0.25. The one earnings estimate compiled by S&P Capital IQ forecast $0.22 per share. GAAP EPS of $0.25 for Q3 were 26% lower than the prior-year quarter's $0.34 per share. (The prior-year quarter included $0.01 per share in earnings from discontinued operations.)

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

Margin details
For the quarter, gross margin was 27.3%, 360 basis points worse than the prior-year quarter. Operating margin was 7.3%, 300 basis points worse than the prior-year quarter. Net margin was 4.8%, 120 basis points worse than the prior-year quarter. (Margins calculated in GAAP terms.)

Looking ahead
Next quarter's average estimate for revenue is $74.0 million. On the bottom line, the average EPS estimate is $0.26.

Next year's average estimate for revenue is $256.2 million. The average EPS estimate is $1.03.

Investor sentiment
The stock has a three-star rating (out of five) at Motley Fool CAPS, with 288 members out of 307 rating the stock outperform, and 19 members rating it underperform. Among 57 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 51 give KMG Chemicals a green thumbs-up, and six give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on KMG Chemicals is outperform, with an average price target of $22.00.

Looking for alternatives to KMG Chemicals? It takes more than great companies to build a fortune for the future. Learn the basic financial habits of millionaires next door and get focused stock ideas in our free report, "3 Stocks That Will Help You Retire Rich." Click here for instant access to this free report.

Add KMG Chemicals to My Watchlist.

If Channels Become Apps, Is TV Doomed?

Never before has the catch phrase "there's an app for that" applied so broadly as to include nearly every major television channel available. From the familiar options from Time Warner (NYSE: TWX  ) -- including HBO, TNT, and TBS -- to both the channels owned by Comcast (NASDAQ: CMCSA  ) and Comcast itself, most of your favorite channels are now available on mobile devices as apps. Perhaps the purest form of this trend is Netflix (NASDAQ: NFLX  ) , which looks increasingly like a channel as it produces more of its own shows. As this phenomenon continues, your ability to pick and choose which channels you really want will only increase.

Furthermore, with the increasing capabilities of 4G, the subscription model for streaming content could come under fire as well, opening up a whole new frontier for advertisers. In the following video, Fool.com contributor Doug Ehrman discusses the future of TV as more and more content becomes available in streaming format right to our mobile devices.

The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

Fed to Start Tapering, Easing QE Program

The Federal Open Market Committee announced Wednesday that it would start reining in its QE program by instituting a “modest” $10 billion reduction in its monthly bond-buying program to $75 billion per month.

Beginning in January, the FOMC said, it will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month, which would slow down its stimulus program called quantative easing.

At his last press conference before he steps down as Federal Reserve Board Chairman, Ben Bernanke said Wednesday that further tapering will “be data dependent.” However, he said he anticipated that the Fed would “probably do a measured reduction” at each meeting.

“If the economy slows or we are disappointed we could skip a meeting or two, but if things pick up we could go a bit faster," he said. "I anticipate similar moderate steps through most of 2014.”

Like other economists, Jim O'Sullivan, Chief U.S. Economist at High Freqency Economics, had said that while he thought tapering "was quite possible today," HFE thought the Fed "would hold off for one more meeting." Markets appear to be taking the news in stride, O'Sullivan said, "with bond yields little changed and equities rallying by close to 1%."

Consistent with the message on tapering, O'Sullivan said that "the tone on growth was reasonably positive."

Bernanke said at the press conference that “We think inflation will gradually move back to 2%." However, inflation might rise due to health care costs, he noted. “We take this very seriously; inflation cannot be picked up and moved where you want it. We are committed to make sure inflation does not remain too low” and “get it back to target.”

The unemployment rate that stood at 7% in November will continue to decline, Bernanke said. When the Fed started its QE program in September 2012, he said that the unemployment rate was expected to rise to more than 8%. “Economic growth will support further job gains,” Bernanke said. FOMC expects that the 6.5% unemployment threshold will be reached by the end of 2014. "We will continue to keep rates low well beyond the point that unemployment hits 6%," Bernanke said.

Senate Majority Leader Harry Reid, D-Nev., said Wednesday that the Senate would consider Janet Yellen’s nomination to lead the Federal Reserve this week.

The Committee said in its statement before Bernanke held his press conference that it would “closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”

The FOMC added: “If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”

However, FOMC continued, “asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”

---

Check out these related stories on ThinkAdvisor:

Wednesday Analyst Moves: Apple Inc., 3M Co, M&T Bank Corporation, More (AAPL, MMM, MTB, More)

Before Wednesday’s opening bell, a number of big name dividend stocks were the subject of analyst moves. Below, we highlight the important analyst commentary for investors.

JP Morgan Raises Estimates on Apple
JP Morgan has raised its price target on “Overweight”-rated Apple Inc. (AAPL) to $615. This new price target suggests an 11% increase from the stock’s current price of $554.99. The firm has also raised estimates on AAPL due to higher iPhone and Mac estimates. AAPL has a dividend yield of 2.20%.

Avon Products Downgraded at BofA/Merrill Lynch
Avon Products, Inc. (AVP) has been cut from “Buy” to “Neutral” at BofA/Merrill Lynch as it is likely that a turnaround will take longer than expected. The firm currently has an $18.50 price target on AVP, suggesting a 9% increase from the stock’s current price of $16.92. AVP has a dividend yield of 1.42%.

Nomura Downgrades Global Payments to “Neutral”
Nomura reported that it has downgraded Global Payments Inc (GPN) to “Neutral,” and has given the company a $66 price target. This price target suggests a 4% upside from the stock’s current price of $63.36. The firm has cut its rating on GPN based on a valuation call. GPN currently has a dividend yield of 0.13%.

Jabil Circuit Downgraded to “Hold”
Jabil Circuit, Inc. (JBL) has been downgraded from “Buy” to “Hold” at Needham as the company lacks visibility. JBL currently has a dividend yield of 1.62%.

Total System Services Upgraded at Nomura
Total System Services, Inc. (TSS