Rite Aid Soars To Pre-Crisis Highs On Surprise Q2 Profit

Rite Aid (RAD) was up more than 15% at recent check, near six-year highs, as its second quarter surprised investors with an unexpected profit.

The drugstore said it earned $32.8 million, or three cents a share, compared with a year-earlier loss of $38.8 million, or a nickel a share. Analysts were looking for a per-share loss of four cents for the period ended August 31.

Rite Aid's total sales climbed 0.8% to $$6.28 billion, while same-store sales rose 1%, as a 0.3% decline in front-end sales was more than offset by a 1.7% increase in pharmacy sales.

In addition, Rite Aid also increased its forecast, saying it now expects to earn to between 18 cents and 27 cents a share on sales of $25.1 billion to $25.3 billion and same-store sales of plus or minus 0.5%. The company's EPS estimate is above expectations, while the revenue guidance is in-line with current forecasts.

At recent check, rival Walgreen (WAG), the nation's largest chain, was up 0.5%, while CVS Caremark (CVS), the second-largest drugstore operator, was down 0.1%.

Target PT Lowered By Citigroup (TGT)

Citigroup announced on Thursday that it was maintaining a “Buy” rating on the Minnesota-based retailer, Target (TGT), but went on to lower its price target for the company.Deborah Weinswig, an analyst with the firm, noted that Target’s expansion into groceries and focus on improving store level productivity are all encouraging developments that support Citigroup’s current “Buy” rating on the stock. Weinswig, however, went on to add that the health of the U.S. consumer as a whole remains fragile and the company’s recent entry into Canada would likely hurt earnings in the near-term. As such, Citigroup lowered its price target on the company from $75 to $72 a share.

Target shares crept lower on Thursday, shedding .14% on the day. The stock is up 8.04% YTD.

Buy This Pure-Play Silver Producer For 43% Upside

Different market sectors carry different risks. In the precious metals sector, and for mining companies in particular, there are geopolitical risks not normally associated with investments closer to home.

If you purchase shares of Bed Bath & Beyond (Nasdaq: BBBY), you don't need to worry about guerrilla fighters coming in and stealing your stores at gunpoint.

But in the mining sector, this threat is real. I'm referring to is known as nationalization or expropriation.  

Nationalization occurs when a government takes assets held by individuals or private companies and converts them into public or government property. Sometimes compensation is offered. Often it is not.

When Fidel Castro came to power in Cuba in 1959, he gradually nationalized all foreign-owned private companies. After a great deal of protest from former owners, the Cuban government eventually paid out $1.3 million to U.S. interests. It was a paltry sum, barely a fraction of what had been taken.

When Salvador Allende became president of Chile in 1970, his government finalized the nationalization of Chile's copper mining industry. The practice continued when Augusto Pinochet came to power in 1973. Chile's mining industry remains largely under state control.

For investors in precious metals, the threat of nationalization is a real concern. In StreetAuthority's latest special report, "The 11 Most Shocking Investment Predictions of 2014," you will learn why the silver industry in one South American country is under siege. You'll also learn what company our expert commodity analysts think is in the best position to profit if nationalization occurs.

Not all mining companies face this threat. The one I'd like to talk about today bases all of its operations a little closer to home -- in Mexico.

While Mexico has certainly experienced more than its share of drug violence over the past decade, its overall economy has enjoyed enormous growth. The Mexican government hasn't meddled with private companies since 1982, when the banking system briefly fell under state control due to a debt crisis. The country's rich mining resources have been left alone, and I see no cause for concern in the immediate future.

First Majestic Silver (NYSE: AG) operates five producing mines and owns six more in various stages of exploration and development.       

	© First Majestic Silver
	First Majestic's La Guitarra mine has contributed to the company's growing production.

The company is a pure-play silver producer experiencing strong growth in production. Production in 2013 is estimated to clock in at 11.3 million to 11.7 million ounces. However, the company estimates that it will produce 16 million ounces by end of 2014, which would be a one-year growth rate of 42%.

The company is planning to ramp up production at several mines in the near future. Of course, growth doesn't come for free. The company has consistently issued new shares to raise capital, and the share count has slowly grown from 99 million outstanding shares in 2010 to 117 million today.

As a pure silver producer, First Majestic's revenues are closely tied to the price of silver. Although silver is notoriously volatile, its price hasn't been this low since October 2010.

The current low prices for silver allow for a lot of upside. Should silver prices realize even a modest increase to around $27, and if First Majestic is able to meet production estimates for 2014, share prices could gain up to 43% over the next 12 months.

Risks to Consider: First Majestic does not pay a dividend and is therefore more suitable for speculative growth investors. The company has been slowly increasing the number of outstanding shares in order to fund new projects.  Increased share counts dilute the value of existing shares. In addition, silver prices are notoriously volatile.

Action to Take --> I wouldn't bet the farm (or my kid's college fund) on this stock. But for speculative investors who can stomach volatility, First Majestic's stunning growth rate, combined with the potential upside in silver prices, make the stock an attractive buy at today's prices.

P.S. -- The next big commodities play is unfolding right now... This disruptive energy technology will bring about major changes in our country... and one company is leading the charge. To learn more about this opportunity, click here.

A Rental Housing REIT

The Intelligent REIT Investor's Brad Thomas discusses a new rental housing REIT and shares his view on whether it is something that investors should consider.

SPEAKER 1:  My guest today is Brad Thomas and we are talking about housing rates.  Hi, Brad, and thanks for joining me.

BRAD:  Glad to be here, thank you.

SPEAKER 1:  Yeah, I know there is a new IPO of a company.  It is called American Homes 4 You.

BRAD:  4 Rent, American Homes 4 Rent.

SPEAKER 1:  4 Rent, okay, and that is a REIT that it is my understanding is they go out into the single-family housing market, they buy some of these properties that need to be renovated, and then they are not selling them or flipping them, they are renting them.  Is that correct?

BRAD:  That is correct, and first of all, I want to make a point about this company specifically.  When you invest in a REIT today, you are not only investing in these hard assets, which in this case, would be single-family housing for rent, but you are also investing in the management team. 

SPEAKER 1:  Sure.

BRAD:  When you invest in a company, one value that you have in a REIT structure is you have not only the liquidity, the transparency, and the diversification but you also get a management team.  One thing I can tell you about American Homes 4 Rent is that they have an exceptional management team.  One of the key figures behind the company is a guy named Wayne Johnson.  Wayne has a long history of creating shareholder value in a company that he created many years ago called Public Storage, which is the largest public storage company in the world.  Mr. Johnson is, every year, in the Fortune billionaire list.  He has made a large wealth but he has also made a lot of wealth for his shareholders so I want to point that out.  That is what backing American Homes 4 Rent.  Now, the business model itself is fairly new.  We have only had I think now two public rental housing REITS, the other one being Silver Bay, that came out with their IPO I believe in December of last year.

SPEAKER 1:  Correct, and they were a division of another larger company, right?

BRAD:  That is correct.  I believe they were an offshoot as well.  Now, American Homes 4 Rent is now the second largest in the sector.  The largest is actually a private equities firm.

SPEAKER 1:  It is Blackstone.

BRAD:  Blackstone, that is correct.  American Homes 4 Rent, they are very scalable.  Obviously, their name, American Homes, they are scaling this, trying to create the critical mass, so there are some questions out there in terms of how they can manage effectively at such a large portfolio and all of these multiple markets.  My opinion is I think I would, on this particular IPO, I would wait it out.  There is nothing better than patience and seeing how this company performs.  I would personally like to see that company create the track record for managing the large groups of housing because, again, they are in subdivisions.  It is not like an apartment complex where you are aggregated. 

SPEAKER 1:  Exactly.

BRAD:  They are in a lot of different places so I would like to see some management track record and I would also like to see, for most investors, the most important thing is the dividend track record.  I would like to see that.

SPEAKER 1:  Sure, sure.  And you are not a big fan of REIT IPOs in general.

BRAD:  Correct.  I mean, I think, you know, there is really no reason to invest in a REIT today who comes out.  Let’s wait on that company to perform and let’s wait on a bargain.  I like to buy with a margin of safety so let’s wait on that stock to fall, it will come down, and then you can pounce on it then and if you want to load up the truck, load up the truck.

SPEAKER 1:  Are there any other housing type REITS that you like?

BRAD:  You know there are.  There is a niche sector, which is the modular housing sector, and they are not mobile homes.  That is a misconception.

SPEAKER 1:  Yes, right, right.

BRAD:  The one I really like is called UMH.  They are headquartered up in New Jersey, run by a fellow named Sam Landy.  The family has been around a long, long time.  They invest mostly in the Northeastern markets.  They are getting down to the Southeast now but they have a really attractive dividend in the seven-plus range

SPEAKER 1:  That is very healthy.

BRAD:  It is and they have been able to sustain that more recently so I like that sector some.  I think there is a lot of demand for that space and, again, they are not mobile homes.  They are really providing attractive housing for families.

SPEAKER 1:  That is sort of like the Habitat for Humanity homes, right.  Those are modular homes, that they bring in the walls.

BRAD:  Exactly.  I tell you, Warren Buffett owns a piece of Clayton Home, so that will tell you something.

SPEAKER 1:  Sure, yes, exactly.  Thanks for being here, Brad.

BRAD:  Thank you.

SPEAKER 1:  And thanks for joining us at the MoneyShow.com video network. 

Fret the debt ceiling, not shutdown: stock charts

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As investors fret about a potential government shutdown and a debt-ceiling fight, strategists have turned to past government crises for hints on how markets could react this time around. One takeaway is that a debt-ceiling scare likely would roil markets more than a government shutdown. At left, Senate Majority Leader Harry Reid, a Democrat, and House Speaker John Boehner, the lead Republican.

Read on for five lessons from prior government crises. --Victor Reklaitis @vicrek

A government shutdown might not be that bad for U.S. stocks, according to a note put out during the past week by Sam Stovall, chief equity strategist at S&P Capital IQ. "History says (but does not guarantee) that while Congress may force the S&P 500 (SPX)   to endure another 5%+ drop, it may end up as a gift to investors," he wrote. He points out that the peak-to-trough decline associated with the shutdown of the U.S. government between Dec. 16, 1995, and Jan. 6, 1996, involved an S&P 500 drop of 3.7%, followed by an advance of 10.5% in the subsequent month. Lawmakers must reach an agreement by midnight Monday to avoid a shutdown.

The battle over raising the debt ceiling is truly worth worrying about, according to a note from Barclays' Michael Gapen and Michael Gavin. The S&P 500 sold off sharply during the debt-ceiling uproar in summer 2011. During that crisis, S&P issued a negative rating watch for the U.S. on July 14, then downgraded the nation's credit rating to AA+ from AAA on Aug. 5. "Historical experience seems to support the view that a short-lived government shutdown would be something that the economy and financial markets could withstand with limited damage. Renewed anxiety about a U.S. government credit event would likely be immeasurably more disruptive," Gapen and Gavin wrote. The Treasury Department has said lawmakers must act by Oct. 17 or it will run out ways to keep paying all its bills.

Despite fears about the fiscal cliff in December 2012, the S&P 500 just pulled back moderately. "The market reaction to the temporary impasse was mild, and once the impasse was resolved, U.S. equity markets resumed their strong recovery, even though the resolution involved higher taxes and a substantial part of the feared fiscal drag," Gapen and Gavin wrote. The Barclays strategists compared the market reaction to the fiscal-cliff issue to the limited market reaction to the 1995-96 government shutdown. They said investors treated the more recent "event as a temporary setback of limited significance." The fiscal cliff referred to the threat of a severe hike in taxes and a drop in government spending in 2013.

If you want more evidence that a government shutdown shouldn't be that frightening, Goldman Sachs analysts have provided a look at options hedging for stocks that are highly exposed to government spending. They found "complacency" around these stocks, which include health-care and defense names. "Fear priced into options on these stocks dropped over the past few months to new lows vs. SPX options," the Goldman analysts wrote in a research note. They also emphasized that such stocks haven't underperformed the S&P 500 over the past month, "suggesting that recent events have not caused investors to re-price expectations." A Tell blog post during the past week offered more details on this take.

What about other assets? Gold, often called the ultimate safe haven, rallied sharply during the government shutdown from Dec. 16, 1995, to Jan. 6, 1996. But that doesn't automatically mean the precious metal will see buying from the uncertainty created by a shutdown, as MarketWatch's latest Commodities Corner column noted. The adjacent chart shows how gold actually dropped another shutdown around that time, one that ran over several days in mid-November 1995.

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Learning from “Tony Soprano”

The passing of actor James Gandolfini, best known as Tony Soprano in The Sopranos, received a lot of publicity. Not all the publicity was in the entertainment or celebrity media. Financial and legal media pounced on Gandolfini’s will, generating a lot of commentary from lawyers and estate planners, little of it positive.

Gandolfini’s estate plan was thought by many to be a bad one, because it appears that of the $70 million value about $30 million will be paid in federal and state taxes. Instead of leaving most of the estate to his widowed second wife, which would protect it from estate taxes, he left 30% to each of his two sisters, 20% to his daughter from the current marriage, and 20% to his wife. His son from the first marriage was given only clothing and jewelry under the will.

While that seems like bad planning to many, there are better conclusions to draw. This is an example of the many trade offs and difficult decisions that often are involved in estate planning. It also shows that the will is not the entire estate plan.

For example, Gandolfini might already have provided for his son previously outside of the will. In 2012, many wealthy people were making large gifts to loved ones to avoid the scheduled expiration of generous estate and gift tax exemptions. We don’t know how much wealth was shifted to his son and others before his death, and probably never will.

There could be other assets that won’t pass through the will or probate process, such as retirement accounts and annuities.

The will indicates Gandolfini set up a separate irrevocable life insurance trust that apparently carries a life insurance policy payable for the benefit of his son. Again, we might never know the details about this.

Finally, this case shows that tax reduction is not the most important part of estate planning. Gandolfini apparently wanted to ensure wealth was passed to his sisters and young daughter. He had enough wealth that he could leave them substantial amounts even after paying estate taxes. So, he chose to leave them directly substantial parts of the estate, though leaving it to his wife would have eliminated the estate taxes.

The discussion about Gandolfini’s estate, however, does make two good points. One is that certain mistakes and oversights frequently occur in estate plans. The other point is that estate planning can involve some tough issues. Let’s review some of the important mistakes and difficult issues.

Establish your domicile. Many people spend time in more than one location. Each location that has an estate tax will try to claim you were domiciled or resident in that state and tax it. It is a benefit to you and your heirs to at least clearly establish your domicile in one state. You do this by living more than half the year there and definitely not spending close to half the year in another state. This is easy to prove with a simple log book or calendar noting where you spent your time during the year. The optimum approach would be to establish domicile in the state with the lowest tax burden. But you might be like Gandolfini and prefer living in a high tax jurisdiction such as New York. That’s fine, as long as you recognize you’re making that choice and what its costs will be. And make sure two jurisdictions can’t claim you as a resident.

Review those beneficiary designations. An array of wealth passes to the next owner outside of the will or a living trust. These most prominently include retirement accounts (including IRAs and 401(k)s), annuities, and life insurance. Most estate planners say one of the problems they see most frequently is beneficiary designations that are woefully dated. IRAs still name a divorced or deceased spouse as beneficiary. Or the oldest child is named but not children born later. It’s not unusual for beneficiary designations to be blank. Bringing beneficiary designations up to date is easy and free in most cases. Not doing so is very costly to heirs.

Managing digital assets. Oversight here is understandable, since digital assets still are fairly new. There are two issues to consider.

The first issue is leaving a list of digital accounts and access information so your executor and others can access accounts without hiring an expensive forensic computer expert. The more of your life that is online, the more important this is. People need to access e-mail, any web sites and social networking sites you maintain, and financial accounts. It’s especially important to note expenses that automatically are withdrawn from your accounts, so these can be stopped in a timely manner.

The second issue is ownership and continuation of online information. Do you want a personal web page or Facebook page converted into a memorial site, shut down, or maintained as is? Some web site providers have policies that take effect when they learn of a member’s passing. More details are in our December 2012 visit.

Business succession. Few business owners maximize value for their heirs. A good succession plan begins at least five years before ownership or management passes. You need to get the books and records in condition to satisfy a buyer. Performance over multiple years should be easy to compare, and generally accepted accounting principles should be used. Run the business professionally and be sure personal and family goals are separated from the business. Too many small businesses are run partly as family charities or extensions of the owner’s personal life. If your goal is to have a family member take over, then start the transition process. Don’t assume you can run it as you’ve always done and that the successor will step in smoothly right after you’re gone.

Sharing homes and other assets. Many families have a vacation home or other property that the parents treasure and hope the children will enjoy. But think very carefully about leaving such a property to siblings and their families to share. Such arrangements often don’t fare well. The siblings might have different financial positions and goals. They also might have different attitudes about the property once they are owners instead of your guests. If you decide to leave it to them jointly, discuss this in detail with them ahead of time. Set up a clear ownership structure with rule making, and have an exit plan for them so the property doesn’t become a distress sale. Ideally, you should provide a separate financial account for maintenance of the property and payment of annual expenses.

Leaving wealth to minors. Whether they are children or grandchildren, at least two issues arise here.

The first issue is whether they should be treated equally. On the surface, it appears Gandolfini didn’t treat his son and daughter equally, but we really don’t know since wealth likely passed outside the will. But equal treatment is an issue many people struggle with. When one sibling has done better financially than others, should that sibling be left less wealth in the estate plan since he or she likely doesn’t need it as much? Or should one sibling be left little or nothing for the opposite reason: He or she has shown a propensity to waste money or has substance abuse or similar problems?

The second issue is how much control should the offspring have and at what age. Gandolfini’s daughter will have complete control when she turns 21. That’s probably too young for a person to have responsibility for that much money. Trusts can be used to provide for the young person while protecting the wealth until he or she might be better able to manage it.

Some estate plans go in the opposite direction. They impose a lot of controls and restrictions on wealth and continue them until the person is well into middle age. Some also impose incentives that amount to control of the person’s life, such as requiring them to meet certain education or income levels before receiving money.

Discuss the pros and cons with your estate planner before deciding when and under what conditions young people receive control of wealth.

Updates and changes. Gandolfini’s will was updated in December 2012, just two months after his daughter was born. That’s a good move. Wills should be reviewed at least every couple of years, and you should meet with an estate planner close to any major change in your life or finances. Examples of such changes are marital status, family births or deaths, change of financial status (for either better or worse), purchases or sales of major assets, and a change in your health or that of a family member. An estate plan is a process. It needs to change with circumstances.

This is just a sampling of common mistakes, oversights, and difficult issues in estate planning. You can read about more of them in the short book, The 10 Most Common Estate Planning Mistakes and How to Avoid Them by David T. Phillips of Estate Planning Specialists, Inc. The revised edition soon will be available through Amazon.com for over $13. I’ve arranged with David to make it available to my subscribers for only $6.95, including shipping. To order, call 888-892-1102.

A Shutdown or Debt Default Isn't in the Market

Given the recent developments in the Capital, and the very real possibility of either a governmental shut-down or debt-default imminent, MoneyShow's Howard R. Gold questions the fairly indifferent attitude many investors have towards it.

The clock is ticking on the prospects for a government shutdown and, even worse, a technical default on US obligations—and investors seem almost blasé about it.

The Standard & Poor's 500 Index (SPX) is down barely 1% since reaching its all-time high last Wednesday, after the Federal Open Market Committee declined to taper its $85-billion monthly bond purchases.

Meanwhile, since Labor Day, the yield on the Ten-Year Treasury Note (TNX) has dropped from nearly 3% to 2.65%. September may be a record month for investment-grade corporate bond issuance. And the CBOE Volatility Index (VIX) has barely budged.

And every day, we move closer to a government shutdown or debt default, with far knottier politics than we had during the debt-ceiling fiasco of summer 2011, after which the US lost its AAA rating from Standard & Poor's.

"The complacency on this issue is alarming," Chris Krueger, Washington analyst for Guggenheim Partners, told me earlier this week. "Clearly with Washington policy, everybody's been focusing on the Fed and the taper," he said, and are only now looking at the prospects of shutdown or default—and aren't worrying too much about it.

"Our growing concern is that everyone is far too complacent that just because there has been a deal in all the prior fiscal cliff fights that there has to be a deal in this debt-ceiling fight," he wrote in a note to clients. "There is no evidence to suggest that the debt-ceiling will be raised in time."

Read Howard's August piece about how There's too much Complacency in the Market on MoneyShow.com.

Krueger clearly thinks the debt-ceiling fight is the more dangerous one, but avoiding a government shutdown may not be a slam dunk, either. Here's why.

In recent years, Congress has passed continuing resolutions (CR) instead of formal budgets to fund the government. The latest runs out on October 1, which is when fiscal year 2014 begins. Without that funding, the government would begin shutting down.

But some Tea Party-backed senators, like Ted Cruz (R-Texas) and Mike Lee (R-Utah) have pushed to tie passage of the CR or extension of the debt-limit to cutting-off funds for Obamacare. The House of Representatives defunded Obamacare in its CR, which the Democratic-controlled Senate is now taking up.

But the Senate bill would likely include funding for Obamacare, and it could pass by Saturday. That would give the House a short time to either cave to the Senate's budget or vote it down, setting the stage for a government shutdown.

Krueger puts the chances of a government shutdown at 40%. If the government does shut down, federal employees may be furloughed, and national parks and museums could close, although air traffic controllers and border patrol officers would likely remain on duty.

NEXT: Default is another story

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Start ups pitch automated advice at tech confab

At a gathering of geeks, bankers and even some advisers this week in New York, a chorus of developers hawked products, claiming to revitalize — with airtight security, jazzy graphics or habit-forming incentives — the way people pay for investment products, approach personal finance goals such as saving and communicate with their banks.

In timed, seven-minute pitches at the annual FinovateFall (twitter hashtag: #finovate) conference, some executives from startups also pitched software solutions for problems that vex financial advisers.

Finect Inc., for instance, provides a social-networking platform with compliance support, Place2Give uses algorithms to help advisers match their clients to philanthropic groups and Lumesis Inc. offers detailed data and compliance features for municipal bonds.

But a larger and growing cast of developers sidestepped advisers altogether in their pitches Tuesday and Wednesday, touting algorithm-driven online platforms that try to replicate the experience of getting individualized investment advice as a revelation for the vast majority of people, who lack sufficient assets to even get a call back from a wirehouse such as Merrill Lynch, Morgan Stanley or Wells Fargo Advisors.

(Don't miss: The buzz at FInovate.)

The impact of these burgeoning adviser-emulating platforms on the business of providing investment advice is ambiguous, with industry watchers and developers engaged in a long debate over whether software will supplant or supplement the role of the average, traditional financial adviser.

“The quality advisers who add value and do the right thing don't have anything to worry about,” said Simon Roy, president of Jemstep Inc., whose platform walks investors through a step-by-step process that suggests an ideal asset allocation and whether to buy, sell or hold existing investments. “It's the advisers who are not serving their clients' interest who are more at risk as this wave breaks.”

In addition to recommending what they say are superior asset allocation and investment recommendations, Mr. Roy's product and its peers, including FutureAdvisor and Financial Guard, draw attention to the cost of investment advice by laying out how management and advisory fees affect their returns.

“The asset management style doesn't really lend itself to transparency — people don't see how much they're paying,” said Grant Easterbrook, an analyst who follows the space at Corporate Insight. “It's going to make it much easier to hold advisers accountable.”

But some advisers said they would relish new competition.

“Bring it on,” said Doug Flynn, co-founder of Flynn Zito Capital Management LLC, which manages $300 million in assets in its advisory and brokerage. Mr. Flynn said his business offers high-q! uality, dispassionate advice and a human touch, especially in times when investors most need it — during a market rout, for example.

“How does a computer hand-hold you?” Mr. Flynn said. “How does it talk you off the ledge?”

The products have a range of features. Many begin with a simple questionnaire asking when a person intends to retire, and links with their brokerage accounts to assess their existing portfolios. The software then advises people on the trades they should make — whether to buy or sell a particular fund, for instance.

A number of startup firms have registered enthusiasm from venture capitalists and other investors. Seven of the online advisory businesses that have appeared in Finovate forums since 2009 have raised $97.5 million since February 2012, according to The Finovate Group Inc.

That funding, as well as the prospect of collaborations with existing businesses, has lifted the online advisory product class, according to Mr. Easterbrook.

He said the products have as much a prospect of expanding wealth management to a new market as challenging existing players. Bo Lu, co-founder and chief executive of FutureAdvisor, agrees.

“We're not going to have much of an impact on human financial advisers … the demand for what we as an industry do far outstrips supply right now,” Mr. Lu said. “We would love to work together with advisers on those clients that they wouldn't be able to take otherwise.” Like what you've read?

Top 5 Oil Companies To Buy For 2014

Utilities have been busy this week, making moves to maximize profit potential. With bigger dividends, Obama's new climate change policy, natural gas investments, and more, here's what you need to know to stay on top of your dividend stocks' latest moves.

Natural NYC
Consolidated Edison (NYSE: ED  ) announced earlier this week that it plans to spend around $100 million extending its New York City natural gas infrastructure. The decision is based on a variety of factors but can be most directly linked to environmental regulation compliance and cheaper costs for both Con Ed and customers.

"Building owners who make this choice will lower their energy bills and contribute to making New York City cleaner, safer, and economically vibrant," said Director of Con Ed subsidiary Gas Conversion Group Nick Inga in a statement. As the utility phases out fuel oil to comply with different regulations, it expects to cut direct costs by 40%.

Top 5 Oil Companies To Buy For 2014: Royal Caribbean Cruises Ltd.(RCL)

Royal Caribbean Cruises Ltd. operates in the cruise vacation industry worldwide. It owns five cruise brands, which comprise Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, and CDF Croisi�es de France. The Royal Caribbean International brand provides various itineraries and cruise lengths with options for onboard dining, entertainment, and other onboard activities primarily for the contemporary segment. It offers surf simulators, water parks, ice skating rinks, rock climbing walls, and shore excursions at each port of call, as well as boulevards with shopping, dining, and entertainment venues. The Celebrity Cruises brand operates onboard upscale ships that offer luxurious accommodations, fine dining, personalized services, spa facilities, venue featuring live grass, and glass blowing studio for the premium segment, as well as resells computers and other media devices. The Pullmantur brand provides an array of onboard activities and serv ices to guests, including exercise facilities, swimming pools, beauty salons, gaming facilities, shopping, dining, complimentary beverages, and entertainment venues serving the contemporary segment of the Spanish, Portuguese, and Latin American cruise markets. The Azamara Club Cruises brand offers various onboard services, amenities, gaming facilities, fine dining, spa and wellness, butler service for suites, and interactive entertainment venues for the up-market segment of the North American, United Kingdom, German, and Australian markets. The CDF Croisieres de France brand offers seasonal itineraries to the Mediterranean; and various onboard services, amenities, entertainment venues, exercise and spa facilities, fine dining, and gaming facilities for the contemporary segment of the French cruise market. As of December 31, 2011, the company operated 39 ships with a total capacity of approximately 92,650 berths. Royal Caribbean Cruises Ltd. was founded in 1968 and is headqua rtered in Miami, Florida.

Advisors' Opinion:

• [By Jon C. Ogg]

  Royal Caribbean Cruises Ltd. (NYSE: RCL) was maintained Buy and its target was raised by $2 to $46 at Argus.

  Vodafone Group PLC (NASDAQ: VOD) was started with an Outperform rating by Raymond James.

Top 5 Oil Companies To Buy For 2014: Linn Energy LLC (LINE)

Linn Energy, LLC (LINN Energy) is an independent oil and natural gas company. The Company�� properties are located in the United States, primarily in the Mid-Continent, the Permian Basin, Michigan, California and the Williston Basin. Mid-Continent Deep includes the Texas Panhandle Deep Granite Wash formation and deep formations in Oklahoma and Kansas. Mid-Continent Shallow includes the Texas Panhandle Brown Dolomite formation and shallow formations in Oklahoma, Louisiana and Illinois. Permian Basin includes areas in West Texas and Southeast New Mexico. Michigan includes the Antrim Shale formation in the northern part of the state. California includes the Brea Olinda Field of the Los Angeles Basin. Williston Basin includes the Bakken formation in North Dakota. On December 15, 2011, the Company acquired certain oil and natural gas properties located primarily in the Granite Wash of Texas and Oklahoma from Plains Exploration & Production Company (Plains).

On November 1, 2011, and November 18, 2011, it completed two acquisitions of certain oil and natural gas properties located in the Permian Basin. On June 1, 2011, it acquired certain oil and natural gas properties in the Cleveland play, located in the Texas Panhandle, from Panther Energy Company, LLC and Red Willow Mid-Continent, LLC (collectively Panther). On May 2, 2011, and May 11, 2011, it completed two acquisitions of certain oil and natural gas properties located in the Williston Basin. On April 1, 2011, and April 5, 2011, the Company completed two acquisitions of certain oil and natural gas properties located in the Permian Basin. On March 31, 2011, it acquired certain oil and natural gas properties located in the Williston Basin from an affiliate of Concho Resources Inc. (Concho). During the year ended December 31, 2011, the Company completed other smaller acquisitions of oil and natural gas properties located in its various operating regions. As of December 31, 2011, the Company operated 7,759 or 69% of its 11,230 gross productiv! e wells.

Mid-Continent Deep

The Mid-Continent Deep region includes properties in the Deep Granite Wash formation in the Texas Panhandle, which produces at depths ranging from 10,000 feet to 16,000 feet, as well as properties in Oklahoma and Kansas, which produce at depths of more than 8,000 feet. Mid-Continent Deep proved reserves represented approximately 47% of total proved reserves, as of December 31, 2011, of which 49% were classified as proved developed reserves. The Company owns and operates a network of natural gas gathering systems consisting of approximately 285 miles of pipeline and associated compression and metering facilities that connect to numerous sales outlets in the Texas Panhandle.

Mid-Continent Shallow

The Mid-Continent Shallow region includes properties producing from the Brown Dolomite formation in the Texas Panhandle, which produces at depths of approximately 3,200 feet, as well as properties in Oklahoma, Louisiana and Illinois, which produce at depths of less than 8,000 feet. Mid-Continent Shallow proved reserves represented approximately 20% of total proved reserves, as of December 31, 2011, of which 70% were classified as proved developed reserves. The Company owns and operates a network of natural gas gathering systems consisting of approximately 665 miles of pipeline and associated compression and metering facilities that connect to numerous sales outlets in the Texas Panhandle.

Permian Basin

The Permian Basin is an oil and natural gas basins in the United States. The Company�� properties are located in West Texas and Southeast New Mexico and produce at depths ranging from 2,000 feet to 12,000 feet. Permian Basin proved reserves represented approximately 16% of total proved reserves, as of December 31, 2011, of which 56% were classified as proved developed reserves.

Michigan

The Michigan region includes properties producing from the Antrim Shale formation in the northern ! part of t! he state, which produces at depths ranging from 600 feet to 2,200 feet. Michigan proved reserves represented approximately 9% of total proved reserves, as of December 31, 2011, of which 90% were classified as proved developed reserves.

California

The California region consists of the Brea Olinda Field of the Los Angeles Basin. California proved reserves represented approximately 6% of total proved reserves, as of December 31, 2011, of which 93% were classified as proved developed reserves.

Williston Basin

The Williston Basin is one of the premier oil basins in the United States. The Company�� properties are located in North Dakota and produce at depths ranging from 9,000 feet to 12,000 feet. Williston Basin proved reserves represented approximately 2% of total proved reserves, as of December 31, 2011, of which 48% were classified as proved developed reserves.

Advisors' Opinion:

• [By Rich Duprey]

  Oil and gas MLP�LINN Energy (NASDAQ: LINE  ) announced yesterday its monthly distribution of $0.2416 per unit, the same rate it's paid for the past two months after switching to a monthly payout scheme.�The distribution is payable Sept. 13 to unitholders of record at the close of business on Sept. 10.

• [By Dimitra DeFotis]

  Those parsing what’s available seem to think the Hedgeye report takes aim at Kinder’s accounting for maintenance spending, its acquisition strategy and its commodity hedging.�Sounds much like the topics in the Hedgeye case against Linn Energy�(LINE).

Top 5 Dividend Companies To Invest In Right Now: Encana Corporation(ECA)

Encana Corporation and its subsidiaries engage in the exploration for, development, production, and marketing of natural gas, oil, and natural gas liquids. The company owns interests in resource plays that primarily include the Greater Sierra, Cutbank Ridge, Bighorn, and Coalbed Methane resource plays located in British Columbia and Alberta, as well as the Deep Panuke natural gas project offshore Nova Scotia in Canada. It also holds interests in resource plays comprising the Jonah in southwest Wyoming, Piceance in northwest Colorado, Haynesville in Louisiana, and Texas resource play, including east Texas and north Texas. The company serves primarily local distribution companies, industrials, energy marketing companies, and other producers. Encana Corporation was founded in 1971 and is headquartered in Calgary, Canada.

Advisors' Opinion:

• [By Jeremy van Loon]

  Encana Corp. (ECA), the natural gas producer selling assets after losing half its value since 2010, is being urged by investors to cut its dividend and focus on profitable projects in the U.S. and Canada.

Top 5 Oil Companies To Buy For 2014: ONEOK Partners L.P.(OKS)

ONEOK Partners, L.P. engages in the gathering, processing, storage, and transportation of natural gas in the United States. The company?s Natural Gas Gathering and Processing segment gathers and processes natural gas produced from crude oil and natural gas wells located in the Mid-Continent region; and gathers natural gas in the Williston Basin, which spans portions of Montana and North Dakota, and the Powder River Basin of Wyoming. Its Natural Gas Pipelines segment primarily owns and operates regulated natural gas transmission pipelines, natural gas storage facilities, and natural gas gathering systems for non-processed gas. It also provides interstate natural gas transportation and storage services. This segment?s interstate natural gas pipeline assets transport natural gas through FERC-regulated interstate natural gas pipelines in North Dakota, Minnesota, Wisconsin, Illinois, Indiana, Kentucky, Tennessee, Oklahoma, Texas, and New Mexico. In addition, it transports intra state natural gas through its assets in Oklahoma; and owns underground natural gas storage facilities in Oklahoma, Kansas, and Texas. Its Natural Gas Liquids segment gathers, fractionates, and treats natural gas liquids (NGLs), as well as stores NGL products primarily in Oklahoma, Kansas, and Texas. This segment owns FERC-regulated natural gas liquids gathering and distribution pipelines in Oklahoma, Kansas, Texas, Wyoming, and Colorado; terminal and storage facilities in Missouri, Nebraska, Iowa, and Illinois; and FERC-regulated natural gas liquids distribution and refined petroleum products pipelines in Kansas, Missouri, Nebraska, Iowa, Illinois, and Indiana that connect its Mid-Continent assets with Midwest markets, including Chicago, Illinois. ONEOK Partners GP serves as the general partner of the company. The company was formerly known as Northern Border Partners, L.P. and changed its name to ONEOK Partners, L.P. in May 2006. The company was founded in 1993 and is based in Tulsa, Oklahoma.

Advisors' Opinion:

• [By Jim Jubak, Senior Markets Editor, MoneyShow.com]

  Units of ONEOK Partners (OKS), a member of my Dividend Income portfolio, have dropped 12.2% from March 28 to the close on August 23. That's brought the yield on this MLP (master limited partnership) to 5.69%.

Top 5 Oil Companies To Buy For 2014: Caiterra International Energy Corp (CTI)

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

Yield Investing: Dividend, Earnings And FCF

There are numerous ways to value investments, and many investors prefer a specific valuation method. For some it may be the often used price-to-earnings multiple. For others it may be revenue growth, and still others may look at price momentum. Yield investing is one way to value a stock by comparing the current price to various factors that produce income from an investment. There are many ways to measure yield - three common ones are dividend yield, earnings yield and free cash flow yield.

Dividend Yield
Dividend yield is calculated by dividing the annual dividend per share by the price per share or the annual dividend by the market cap. A high dividend yield could reflect stocks that are undervalued and will provide a higher return. To determine if a dividend yield is high, it is often compared to the market yield. For example, the average dividend yield for the S&P 500 over the the last six decades leading up to 2013 is 3.4%. Using this as a benchmark, any yield above this mark is attractive. Rising dividend yield can be the result of two occurrences: a falling stock price or a rising dividend payout, the latter being preferable. Another use of dividend yield is to compare it to the yield on 10-year treasuries. If an investment's dividend yield is greater than the treasury yield, then that investment is attractive given that the risk profile is not too high.

Earnings Yield
Earnings yield is the last 12 months of earnings per share divided by the current price per share. The earnings yield measures how much return an investment in a company earned over the past 12 months. Earnings yield is the inverse of the popular price/earnings ratio. Like the dividend yield, the higher the earning yields, the more attractive the investment. Earnings yield is extremely useful for comparing various markets. For example, if the current 10-year treasury yield is 3.5% and the earnings yield for S&P 500 is 5%, then the stock market is undervalued on an earnings basis compared to the bond market. Company shares trading at an earnings yield greater than 5% will be considered undervalued compared to the market. The criticism of using the earnings yield, like the P/E ratio, is that earnings are easily manipulated. And because of the potential for creative accounting to impact earnings, some investors prefer to use free cash flow as a truer measure.

Free Cash Flow Yield
Free Cash Flow (FCF) yield is the annualized FCF per share divided by the current share price. FCF yield is popular with investors who believe the true measure of a company's operating strength is sought by following the cash. FCF is the cash left over after paying all the operating expenses and capital expenditures, or operating cash flow minus capital expenditures. Determining how much cash a company generated, after paying its operating expenses and other ongoing costs to keep itself operating, and comparing that to the price per share provides the company's true value. The higher the FCF yield, the more attractive the investment. The FCF yield points to the fact that investors would like to pay as little as possible for as much earnings as possible. Similar to earnings yield, the FCF yield can be used to compare companies across the same or different industries.

Which 'Yield' Makes Sense?
Are there advantages to using one yield measure over another? That depends on the investor. No one measure is the "holy grail." Each has its critics and proponents. Dividend yield is perhaps the most frequently used yield measure. It is also the one that is left to the company's discretion, because dividends can be increased, decreased or suspended by the company at any time, although companies try not to reduce dividends because it is a negative signal. Therefore, dividend yield is not the best yield measure when looking to value a company, but it can indicate a company's general trajectory.

Investors will often compare dividend yield to the yield on 10- year treasuries (a riskless asset) as a proxy for stock market attractiveness. Secondly, the yield level or percentage change can give investors foresight into company management's expectations of future cash flows and growth prospects. Lastly, dividend yield can be used in conjunction with other measures. For example, FCF provides insight into the cash generated after expenses. If the FCF is low and the dividend yield is high, this indicates a mismatch in the investment's valuation using both metrics and should raise a red flag for the analyst or investor. In contrast, if the FCF is high and the dividend yield is low, the company could be signaling a future acquisition or other growth investment that could be a positive catalyst for the stock.

FCF yield and earnings yield are two measures that can be used to value a company and compare it to other investments over time. These yields look at valuation in two ways, the former using cash flow and the latter using earnings. Although proponents and critics argue about which measure is a better indicator of "true earnings," both can be used to find strong companies. Take the following example:

	Earnings Yield	FCF Yield
Stock A	5%	4%
Stock B	10%	5%

In this example, Stock B has a higher earnings and FCF yield than A, which says that the stock appears undervalued on both measures. Also, one can notice that the earnings yield has a larger spread than the FCF yield, which should make the investor look deeper into the financials to see where the cash is going or what makes the company's earnings much higher.

In another example:

	Earnings Yield	FCF Yield
Stock A	5%	4%
Stock B	10%	1%

In this example, Stock B has a higher earnings yield but a lower FCF yield, which can lead to two conclusions. The first is that earnings are being propped up by non-cash items like depreciation. The second conclusion is that FCF is being reduced by large capital expenditures.

Using the two yields in conjunction with each other provides a clearer picture of the company's valuation than either measure alone. Although earnings and FCF yields look backward, using these measures together with dividend yield may provide some forward-looking insight into the management's expectations of future earnings.

The Bottom Line
Dividend, earnings and FCF yields are applicable measures on their own, although their limitations are noteworthy. Understanding the inputs that go into each calculation better prepares the investor for the measure's usefulness. But used together, these yield measures can paint a clear picture of a strong or weak potential investment.

Reinventing an Asset Class

Betting on technology is not for the faint of heart. As any Silicon Valley venture capitalist will tell you, many technologies never cross the “valley of death,” the divide between technology creation/invention and early commercialization.

But income investors, accustomed to staid, low-risk utilities, are at a historical juncture. In the coming year, they may be forced to make some venture capitalist type decisions about which utilities have the best technologies to comply with new Environmental Protection Agency (EPA) emissions standards, should they be enacted.

In early July, we wrote about how the Obama administration was moving to have the EPA enact carbon regulations on existing and future power plants, and how this forever could change the valuations of low-carbon versus high-carbon utilities.

President Obama has said his initiative would seek to reduce US greenhouse gas emissions to 17 percent below 2005 levels (comparable to previous programs) by the end of the decade. And he plans to implement various other policies that would incentivize a doubling of renewables by 2020, as well as new incentives for more transmission, efficiency tech and biofuels, for example.

And so on Sept. 20, EPA Administrator Gina McCarthy proposed a rule for new coal plants that set such a high standard on carbon emissions that it essentially forces utilities to incorporate carbon capture and sequestration technology (CCS) into all future coal plants.

This rule says a new coal plant must be able to emit at a rate of no more than 1,100 pounds of carbon dioxide per megawatt hour (CO2/MWh). That is far below an estimated 1,700 pounds of CO2/MWh to 1,900 pounds of CO2/MWh for the most efficient plants currently in operation anywhere.

A new plant that uses CCS would capture carbon from the smokestack, inject it underground and either store it or use it in an oil-recovery process. The average US coal plant emits 1,768 pounds of CO2/MWh, so coal plants would have to capture and store 20 percent to 40 percent of the CO2 they produce. Cleaner-burning natural gas plants won’t be required to capture their emissions.

Power producers had urged the EPA to set the standard at 1,800 pounds or higher. Standards for new power plants will give coal-fired producers an option to meet a “somewhat tighter limit” if they choose to base compliance on an average of their emissions over a multi-year period.

According to the EPA, these rules will ensure new plants are built with “available clean technology to limit carbon pollution,” a requirement in line with investment in clean-energy technologies already taking place across the industry.

Technology: Faith vs. Fact

There are a lot of big names that have faith in CCS technology. The question is whether the cost of compliance with new EPA standards by using this technology will significantly reduce earnings in comparison with utilities that have more natural gas, nuclear, renewables and other low-carbon energy resources.

As it stands, according to research completed by your correspondent’s predecessor firm, consultancy Green Edison, the value proposition should shift toward low-carbon utilities in the short term.

The Top Low-Carbon Utilities

PG&E Corp (NYSE: PCG) Exelon Corp (NYSE: EXC) Entergy Corp (NYSE: ETR) Public Service Enterprise Group Inc (NYSE: PEG) NextEra Energy Inc (NYSE: NEE) Dominion Resources Inc (NYSE: D) Sempra Energy (NYSE: SRE)

But that is not to say that, over the long term, high-carbon utilities might not be able to crack the technology and cost issues that would make “clean coal” competitive with other low-carbon energy sources. Secretary of Energy Ernest Moniz has said, “No discussion of US energy security and reducing global CO2 emissions is complete without talking about coal and the technologies that will allow us to use this resource more efficiently and with fewer greenhouse gas emissions.”

And we know that even without such technologies, global coal use will be on the rise. But less certain is whether US utility investors will stick around while the domestic coal industry perfects carbon capture.

According to the US Energy Information Administration’s International Outlook, world coal consumption will rise at an average rate of 1.3 percent per year, from 147 quadrillion British thermal units (Btu) in 2010 to 180 quadrillion Btu in 2020 and 220 quadrillion Btu in 2040.

The forecast for near-term demand reflects significant increases in coal consumption by China, India, and other emerging markets. Over the long term, growth of coal consumption decelerates as policies and regulations encourage the use of cleaner energy sources; natural gas becomes more economically competitive as a result of development in the shale plays; and growth of industrial coal use slows largely due to China’s industrial activities (See Chart A).

Chart A: EIA’s International Outlook on Coal

In fact, Thomas Fanning, the CEO of Southern Company (NYSE: SO), which is building a CCS plant at its facility in Kemper County, Ga., has warned the EPA that the cost of building this plant should not be used by the agency as indicative that the technology is proven. Southern has argued that even at $4.8 billion, which with cost overruns is now double the project’s initial estimate, the Kemper plant would still be cheaper than others proposed, given the location of the plant in proximity to coal reserves and where the CO2 will be used for enhanced oil recovery.

Indeed, one critic of the EPA’s proposed rule says that the agency has jumped the gun, at least for coal, arguing that CCS technology has not been adequately demonstrated, and its implementation costs are not reasonable. “The EPA is abusing natural language to suggest projects which have not yet entered into service, some of which are still on the drawing board, somehow prove the technology is viable and can be implemented cost effectively.” The Clean Air Act requires the EPA to pay due attention to costs and technical feasibility when it draws up new standards.

But even as the industry argues over the costs, there are also some unresolved issues regarding potential legal liabilities resulting from the storage of carbon in non-oil and gas areas such as aquifers, not to mention the continued debate as to whether storing carbon in the ground is even an ideal approach. And capture and storage is where the greatest amount of emissions reductions can be achieved, so this is a fundamental question with respect to the technology.

There have been concerns raised in the past that cracks or leaks in the underground cavities could lead to dangerous gasses escaping to the surface. That happened in 1986 when a naturally occurring carbon dioxide leak led to the death of 1,700 people at Lake Nyos in Cameroon.

Furthermore, transporting CO2 from factories and other facilities to safer storage units would require long pipelines, and residents in these areas fear that faulty pipes could lead to the uncontrolled release of dangerous fumes. Others have argued that captured carbon emissions from coal plants should be used to grow algae as part of a move to a new biofuel that would support the industrial manufacturing and transportation sectors, eliminating the need for storage.

Income Investor or Venture Capitalist?

This implementation of new environmental rules will be similar to decades past when investors had to choose the winners and losers of electric deregulation, or between A/C or D/C technology, which was known as the War of Currents.

Almost like venture capitalists, investors will have to choose which utilities they believe will be best at commercializing new technologies while being the lowest cost producer.

But never fear if you find this a daunting task. As in previous years, we will be with you every step of the way, advising you on which utilities will provide the best opportunities for both growth and income.

Microsoft + Nokia vs. Google + Motorola = Win for Ballmer

Microsoft Corp. (NASDAQ: MSFT) has decided to buy the Nokia Inc. (NYSE: NOK) handset business for $7.17 billion, which is not much for a company with its balance sheet. In 2011, Google Inc. (NASDAQ: GOOG) bought Motorola Mobility for $12.5 billion, another small investment, based on the search company’s balance sheet. Which company got the better deal? Microsoft.

Nokia may be crippled, but it is still, by many measures, the larger of the two handset companies. Motorola’s near-death experience, triggered when its popular RAZR’s sales disappeared, has been a shell of late, and that is all it is today.

Google Android has dominated the smartphone market for years, and the OS is on the handsets of most of the industry’s leaders. In buying Motorola, it got only one Android-based hardware company. And it ran the risk of alienating its other Android hardware partners.

Microsoft has tried to get its Windows mobile OS onto handsets for years. Its success has been very limited. In Nokia, it finds a ready customer base. It could be argued that its 2011 $1 billion deal with Nokia worked in that direction. However, owning a company and having a strategic deal with it are two different things. Like Motorola is a slave to Google, Nokia will become one to Microsoft. There were rumors Microsoft would launch its own Windows 8 based phone this year. Instead, it will buy its own large launch platform.

The deals are very different from another standpoint. Microsoft has been on a push into hardware for years. Its signature product has been the Xbox, which leads its industry ahead of the Sony Corp. (NYSE: SNE) PS products and a bevy of products from Nintendo. It has been less successful (much less) as it has tried to enter the tablet market with the Surface. Microsoft CEO Steve Ballmer, on his way to retirement, obviously has convinced his board to stick with his vision — part of the future of Microsoft is in hardware. Redmond once again admitted as much in its announcement: “Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing.”

One part of the announcement that was given a great deal of attention is that Steve Elop, a former Microsoft employee and current Nokia CEO, will remain with the company. That might be a signal he eventually will lead Microsoft. However, most of Nokia will remain intact. Smartphone development will even stay in Finland, according to Ballmer. Not too much should be read into the Elop decision. He is part of an entire team Microsoft has decided to retain.

Nokia has 15% of the global handset business, an awful fall from 39% five years ago. But Motorola has been worse off than that for years. Microsoft may be buying a weak company. Google bought an industry ghost.

Microsoft needs Nokia. The same cannot be said about Google’s deal to buy Motorola. Each got money losing operations. However, no matter how crippled Nokia is, it is Microsoft’s best, and perhaps last, hope to go mobile

Oppenheimer Institutional Strategy: Six IT Services Stocks to Buy with Big Upside

The institutional portfolio strategy team at Oppenheimer use some very specific parameters when looking for stocks and sectors. Earnings revisions sentiment and alpha momentum can be used as tools from a contrarian or trend-following perspective toward identifying future periods of outperformance or underperformance. Valuation also serves as a check against excessive market exuberance, or conversely against undue despondency.

In a new research piece, the Oppenheimer analysts highlight the information technology (IT) service stocks as a sector with solid upside potential. They cited two months of notable improvements in analyst revisions breadth and now positive and rising alpha momentum. With positive earnings and domestic and global demand increasing, they have a list of top stocks to buy.

Alliance Data Systems Corp. (NYSE: ADS) has had a very strong year so far. The company and its combined businesses are North America’s largest and most comprehensive provider of transaction-based, data-driven marketing and loyalty solutions serving large, consumer-based industries. The Thomson/First Call price target for the stock is set at $220.

Computer Sciences Corp. (NYSE: CSC) posted huge first-quarter results, with net income up 279% over last year’s numbers. The company has shifted its focus from infrastructure sales to more profitable software and services. It recently purchased big-data rival Infochimps. The stock also remains a top holding in hedge fund manager David Einhorn's Greenlight Capital. The consensus price objective for the stock is $54. Investors are paid a 1.6% dividend.

Fiserv Inc. (NASDAQ: FISV) is a leading global technology provider serving the financial services industry, driving innovation in payments, processing services, risk and compliance, customer and channel management, and business insights and optimization. The company announced last month a 10 million share buyback, which is almost 8% of the outstanding shares. The consensus price target for the stock is $100.

International Business Machines Corp. (NYSE: IBM) has become a services powerhouse since its exit from the personal computer business. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. This diverse array of business lines has generated huge profits and should continue to help the company grow long into the future. The consensus price target for the iconic company is $217.50. Investors are paid a 2.1% dividend.

MasterCard Inc. (NYSE: MA) has been an investing home run. The Untied States accounts for 39% of MasterCard’s total revenue and debit card accounts for about 50% of the U.S. market’s total gross dollar volume (GDV), which is the dollar amount of purchases made by MasterCard’s customers. Analysts expect MasterCard to maintain the GDV growth through fiscal 2013. The consensus price target for the stock is $695. Investors are paid a small 0.4% dividend. MasterCard was one of the highlighted stocks in our recent story on top stocks that are candidates for a stock split.

Visa Inc. (NYSE: V) is another top credit card stock investors can look to buy. The company engages in the operation of retail electronic payments network worldwide. It facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. A staggering 21 analysts across Wall Street rate the stock at Buy, and nobody has a Sell rating on it. The consensus price target for the stock is $212. Investors are paid a 0.8% dividend.

Internet commerce and transactions are becoming so ubiquitous, that the day of actually using paper money may be less of a science-fiction scenario after all. Companies that continue to expand IT services soon will address a growing emerging market consumer, which will drive international sales much higher. The time to own these stocks may be now. Any sort of meaningful market pullback may provide investors an excellent entry point.

Will Pepsi Be Salty or Sweet for Investors?

With shares of Pepsico (NYSE:PEP) trading at around $81.20, is PEP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

There are two main themes for the Pepsi story.

One, it's going to move more towards snacks in the future. This has a lot to do with a health-conscious society that is moving away from soda. There are also rumors that a tax could be imposed on sodas. This would be downright absurd. The problem is that most stores now sell larger sizes of soda. This helps sales, but it also leads to bad habits. If more 8 oz. sodas were on the shelves, or in those little refrigerators you see prior to checking out at a retail store, then the health concerns wouldn't be as broad. Consuming too much of anything is a bad idea, and there is too much sugar in a 20oz. soda, especially considering humans shouldn't consume more than 40 grams of sugar in one day. The irony here is that snacks aren't exactly healthy, either. However, the problem with most snacks is calories, not sugar. Pepsi does offer healthy snacks as well, including Quaker products and yogurt. Pepsi is now expanding its yogurt operation.

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The other theme for Pepsi is emerging markets. With incomes growing in emerging markets, there is more discretionary income available for consumers to spend on Pepsi products. Another big plus is that competition in these markets is limited. Pepsi's market share in emerging markets is expected to grow as high as the low double-digits. One concern here is the health of the global economy.

Pepsi is a well-managed company, and it's highly focused on cast savings. This is a company that's always looking to improve the bottom line. For example, Pepsi is using strategic agricultural and packaging techniques that will cut costs.

In regards to top-line growth, Pepsi is expanding its marketing to increase exposure for existing products, and it's always looking for great acquisition opportunities.

Yet another positive is that Pepsi consistently returns capital to shareholders via dividends and buybacks. In regards to dividends, Pepsi currently yields 2.80 percent. The Coca-Cola Company (NYSE:KO) also yields 2.80 percent, and Dr Pepper Snapple Group (NYSE:DPS) yields 3.30 percent. This doesn't mean Dr Pepper Snapple is the best option of the three. It has underperformed Pepsi and Coke over the past three years. It's also not as resilient as Pepsi and Coke in bear markets. For example, Dr Pepper declined approximately 50 percent in late 2008/early 2009 whereas Pepsi and Coke declined approximately 30 percent.

Getting back to Pepsi, there are several other positives to consider:

Strong brand portfolio Geographic diversity Solid cash flow

Revenue and earnings declined last year after several years of consistent gains. This is concerning, especially the revenue. Earnings can be improved using many different tactics. The good news in regards to revenue is that there was a year-over-year increase last quarter.

The chart below compares fundamentals for Pepsi, Coke, and Dr Pepper.

	PEP	KO	DPS
Trailing P/E	20.80	21.27	15.50
Forward P/E	16.99	17.37	13.96
Profit Margin	9.33%	18.19%	10.53%
ROE	27.15%	26.59%	28.14%
Operating Cash Flow	9.87B	10.63B	843.00M
Dividend Yield	2.80%	2.80%	3.30%
Short Position	0.80%	0.90%	3.90%

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

T = Technicals Are Mixed

Pepsi has been a steady performer for not just years, but decades. However, the last month has been disappointing.

	1 Month	Year-To-Date	1 Year	3 Year
PEP	-1.28%	20.35%	24.79%	44.78%
KO	-3.76%	12.95%	14.11%	72.86%
DPS	-5.51%	6.14%	17.50%	39.75%

At $81.20, Pepsi is trading below its 50-day SMA, but above its 200-day SMA.

50-Day SMA	82.48
200-Day SMA	75.80

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E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Pepsi is weaker than the industry average of 0.60.  However, it’s likely to improve going forward.

	Debt-To-Equity	Cash	Long-Term Debt
PEP	1.31	7.01B	29.40B
KO	1.07	18.44B	35.12B
DPS	1.25	220.00M	2.80B

E = Earnings Had Been Steady

Earnings had been steady on an annual basis until 2012. But earnings are an easy fix for a company like Pepsi. The real concern is the top line.

Fiscal Year	2008	2009	2010	2011	2012
Revenue ($) in millions	43,251	43,232	57,838	66,504	65,492
Diluted EPS ($)	3.21	3.77	3.91	4.03	3.92

Looking at the last quarter on a year-over-year basis, revenue improved and earnings declined. This should be looked at as more of a positive than a negative.

Quarter	Mar. 31, 2012	Jun. 30, 2012	Sep. 30, 2012	Dec. 31, 2012	Mar. 31, 2013
Revenue ($) in millions	12,428	16,458	16,652	19,954	12,581
Diluted EPS ($)	0.71	0.94	1.21	1.06	0.69

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

Conclusion

Pepsi has been a steady winner for decades. This trend is likely to continue. Even if the stock gets slammed, it should present an opportunity to buy more at discounted prices. The generous yield would also help ease the pain a little.

Is Kraft Expensive or Undervalued?

With shares of Kraft Foods Group (NASDAQ:KRFT) trading at around $54.51, is KRFT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

Many investors are staying away from Kraft because it only has domestic operations, which leads to limited growth potential. However, Kraft shouldn't be looked at as a growth play. This is a company that should be able to deliver consistent profits and return capital to shareholders through dividends and share buybacks. Currently, Kraft yields an impressive 3.70 percent. This is higher than the 3.00 yield for ConAgra Foods (NYSE:CAG) and the 1.40 percent yield for Hillshire Brands Company (NYSE:HSH).

As far as growth for Kraft, it has an expected five-year growth rate of 6 percent, which is below the industry average of 7 percent. Kraft has increased its advertising and brand building efforts. This has the potential to help the top line, but even employees have been frustrated by the company's lack of investment in new brands.

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Kraft delivered a strong Q1. Gross profit increased 3.7 percent year-over-year, operating profit increased 9.2 percent year-over-year. Organic revenue for the Cheese segment increased 5.5 percent. However, organic revenue for the Grocery segment declined 0.4 percent. Overall, revenue increased 2.10 percent year-over-year, and earnings declined 5.60 percent year-over-year. These numbers can be a bit misleading considering the direction of the company. While there is some innovation, cost-cutting has been a major focus, which has made this a leaner and more profit-focused company.

Many investors would like to know as much information as possible about Kraft since it has ventured out on its own. One good way to find out what's going on at the company is to take a peek inside. In other words, what do employees feel about the company? According to Glassdoor.com, employees have rated their employer a 3.4 of 5, and 68 percent of employees would recommend the company to a friend. These numbers indicate a slightly above average company culture. In regards to leadership, 89 percent of employees approve of CEO Tony Vernon. This is a high number, which is a good sign.

On the negative side, Berkshire has reduced its stake in Kraft by 4.0 percent and competition has increased. A 4.0 percent decline in Berkshire's stake isn't major and shouldn't be cause for any alarm. As far as competition goes, this should be expected. Therefore, these aren’t major negatives.

Sticking with the competition theme, Kraft is trading at 20 times earnings whereas ConAgra is trading at 28 times earnings and Hillshire Brands is trading at 5 times earnings. Many investors feel that Kraft is expensive here. However, the industry a is trading at 24 times earnings.

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

T = Technicals Are Still Mixed

Kraft has performed well since the spinoff, but the past month has been subpar.

	1 Month	Year-To-Date	1 Year	3 Year
KRFT	-1.29%	21.06%	0.00%	0.00%
CAG	-2.90%	16.45%	38.04%	49.80%
HSH	-3.32%	21.37%	-19.91%	20.60%

At $54.51, Kraft is still trading above its averages.

50-Day SMA	54.16
200-Day SMA	49.46

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E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Kraft is weaker than the industry average of 0.80. This is one of the few negatives for Kraft.

	Debt-To-Equity	Cash	Long-Term Debt
KRFT	2.66	1.18B	9.97B
CAG	2.07	723.80M	10.68B
HSH	2.25	416.00M	949.00M

E = Earnings Have Been Steady

Only the quarterly numbers are listed below since they better reflect Kraft’s potential as its own company.

Quarter	Mar. 31, 2012	Sep. 30, 2012	Dec. 31, 2012	Mar. 31, 2013
Revenue ($) in millions	4,453	4,606	4,494	4,546
Diluted EPS ($)	0.82	0.79	0.15	0.76

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

Conclusion

Kraft might not be a great growth play, but it's still capable of growth. Even though product innovation hasn't been overly impressive, Kraft is exceptional at marketing. Therefore, it should be able to increase exposure for existing brands. It should also be noted that most Kraft consumers are loyal to the brand, which helps establish a solid base for revenue.

America’s Disappearing Jobs

Because of a major decline in jobs during the recession, the number of nonfarm workers is up just 5% over the past 10 years. While the past decade's painful recession and the slow job growth that has followed have negatively affected most Americans, certain occupations have experienced job losses that were especially severe.

24/7 Wall St. compared employment figures published by the Bureau of Labor Statistics (BLS) for hundreds of occupations from May of 2002 and May 2012. In that time, the estimated number of advertising and promotions managers fell by nearly two-thirds. Because of the housing crisis, many occupations in the construction sector were disproportionately hurt, while many manufacturing trades lost jobs due to structural changes in the economy. These are America's disappearing jobs.

Click here to see what jobs are disappearing

According to Martin Kohli, Chief Regional Economist for the BLS, "most of these occupations were concentrated in industries that hemorrhaged jobs during the Great Recession and have not yet bounced back to their job levels of 2002."

This is clearly the case in the construction industry where, according to a 2011 BLS study, 1.5 million jobs were lost from December 2007 to June 2009. This nearly 20% drop in construction-related jobs was the largest of any other major sector. Three of the five occupations with the largest decline in employment are in the construction sector, where job totals are still well below pre-recession levels.

The number of workers in other occupations has been greatly reduced because of technological improvements. Jobs in several manufacturing occupations have been made expendable because of advances in automation. For drilling and boring machine operators working with metals and plastics, as well as for textile workers, automation has helped contribute to a more than 50% decrease in jobs between 2002 and 2012. Work in several fields, including prepress technicians and computer operators, has also been cut by improved software and automation of processes that specialists once had to do by hand.

Several occupations on this list also have suffered from companies moving jobs abroad. U.S.-based semiconductor processors jobs fell by half between May 2002 and May 2012, partly because of the lower labor cost in other countries. Similarly, more than half of textile jobs were cut due to the combination of outsourcing and improved automation.

To determine the jobs with the highest percentage decline in employment, 24/7 Wall St. compared data from the BLS's Occupational Employment Statistics program for both 2002 and 2012. We included only jobs with an estimated 20,000 employees or more. The figures are estimates subject to sampling error and do not count self-employed workers. Data are collected by the program over several years. We considered only occupations that existed in both 2002 and 2012, and excluded any occupations split-up or consolidated between these periods. The textile workers occupation is a combination of two similar occupations listed by the BLS. The bulleted data is for one of these categories, but we make reference to both in the description. Further information on each occupation came from the Occupational Outlook Handbook and O*Net OnLine.