When people start quiting their job to be a full-time stock trader and valuations look unreal there is going to be a big fall. Those are just a couple of the things that happen in an overvalued bull market. All excessive bull's led by speculation come to a severe fall. The bubble in China is getting out of control and will crash sooner than later. How soon? One can't know for sure. I found the average PE of 8 of the top 10 stocks in the (FXI), the index that tracks the Chinese market. The average was about 50. That would be ridiculous in itself but factor in the variable that a lot of the numbers reported by many of these companies isn't totally clear. What impact will the crash have on the world markets and furthermore the world economy? I'd say dump your FXI very very soon, maybe today. It is best to sell when the valuation is to high.

EDIT: Just two days after this post the Xinhua Index began crashing and was down 77% by March 2008.

stock pursuit
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There is this fast food company that is in North Carolina and only North Carolina called Cookout. I've never actually eaten there yet but the place is popular. I was going to drive thru and order but the line at about 7:30 pm was so long I opted for Jack in the Box. This was good but I was disappointed to see only two cars going through Jack's drive through and basically no wait while its competitor was getting all the traffic.

I couldn't find much of anything on the web about them because they are pretty new I think and are only in about a couple dozen cities in North Carolina, mostly around college towns I read. I couldn't find a webpage but I found that they apparently have a niche in serving a variety of menu items like BBQ sandwiches and they stay open late in college towns until 4 am. I highly doubt they are public because I probably would have heard of them and found a ticker or some clue on the web. I wouldn't be surprised if they decided to expand and raise some capital by going public and doing an IPO. I might ask some local management more about the company. Restaurant chains can be fantastic growth stories.

full disclosure: no position in Jack in the Box (JBX)


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There is this saying, "A foolish man learns from his mistakes. A wise man learns from other peoples mistakes." Many great investors and intellectual minds have given some great advice. Why not learn from them? These are some of the best books by the greatest investors in my opinion.

"To carry ones eggs in a great number of baskets without having time or opportunity to discover how many have holes in the bottom is the surest way of increasing risk and loss."

-John Maynard Keynes

Focus investing before Buffett. What you can get from this quote is that over-diversifying or even diversifying without having the "opportunity" to do the right analysis is foolish and will hurt returns.


Warren Buffett
Buffett was a student of Benjamin Graham and Graham had a big influence on him as an investor. He always kept Graham's teachings but Phil Fisher and Charlie Munger had a big influence on him later.


Risk comes from not knowing what you're doing.

-Warren Buffett

Paying attention to contemporary theories like beta, volatility, risk of loss are barriers to the investor that knows what they are doing and has a sound thesis for buying a stock. Are so called growth stocks riskier than so called value stocks? What does risk mean? The market is not efficient, just do your damn homework! When Buffett bought The Washington Post you could have sold it to many investors for more than the market price but beta said it was risky. Is buying a $1 for $.60 risky just because the price fluctuates? No!


"There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper."

-Warren E. Buffett from speech at Columbia Business School 1984

This is from an essay by Warren Buffett in response to disproving the efficient market theory. He showed the market beating results of all the students of Ben Graham and proved that it is no coincidence. I really recommend that speech "The Super Investors of Graham and Doddsville." Excerpts are all over the Internet. It is in this book The Intelligent Investor


"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

-Warren Buffett

Armed with a contrarian view an investor who finds real value in stocks others are scared to own will do well. Fear and greed cloud investing judgement and will always be around to be taken advantage of.


The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch.

I think this is a great quote not only for professional investors but for the individual investor. The individual investor can sit on a bunch of cash or not invest much in an over-valued market. They aren't always invested like fund managers who have to be as well as diversified. If a small investor sees an opportunity they can put as much as they please into a stock. I think this also applies to buying great companies at great prices, what Buffett loves to do. Sure you can get a good price every year or so in some great companies but it may take some big bad news or a slip-up by the company to get that great long-term price.

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."

The competitive landscape and how businesses live doesn't have mercy on great managers. Don't put to much faith in management to help a poor company. To much else is involved. This is a little off the topic of the quote but management can be underestimated and can do powerful things to companies. Just look at Apple Computer and how it has changed over the last 6 year.

"At some point in its life, almost every stock is a bargain; at another time, it will be expensive. Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go. "

-Jason Zweig

Exploiting the inefficient market works. One can't get to attached to the stock price. It is just a price. The value is what one should concentrate on and understand how the market gets greedy and gives a bad price and how it gets fearful and gives a good price.

Benjamin Graham
"Confronted with the challenge to distill the secret of sound investment into three words, we venture the motto: Margin of Safety."

-Benjamin Graham

Calculating intrinsic value of a stock and company is not precise so if you can allow for some discrepancy you will do fine. It also means that even if you are right a margin of safety will increase ones returns and is a sound strategy. It definitely applied to his net quick liquidation stock portfolio he held but to other investments as well. Would you rather pay $10,000 for a $10,000 car or $6,600?

"The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment."
-Ben Graham

"In the short term the market is a voting machine, in the long-term it is a weighing machine."

-Ben Graham

The market is not efficient, eventually the true value of a company will be reflected by the stock price. I have actually struggled with this idea that the business fundamentals have to be reflected by the stock price over a year or so. I think this quote applies to the lifetime of a stock and company but stocks are a reflection of the future discounted to the present. Yes, eventually the stock price will catch up to value with a buyout or say a huge panic induced fall or a bankrupt companies shares trading for 0 but years can pass until then. This quote also reinforces the psychology behind stock prices and that fear can be exploited if you look into it.

This leads into the next quote by Peter Lynch

"Stockpicking is both an art and a science, but too much of either is a dangerous thing. A person infatuated with measurement, who has his head stuck in the sands of the balance sheets, is not likely to succeed. If you could tell the future from a balance sheet, then mathematicians and accountants would be the richest people in the world by now."

-Peter Lynch

You have to understand the dynamic environment of business and economics and understand how to invest and at the right prices. You have to take everything into account but not every ratio, analysis, possible short-coming is the end all. Experience and knowing WHAT math to put the most emphasis on is the most important part of investing in stocks.


"Investment is most intelligent when it is most businesslike"

-Ben Graham

I have only read a newer version which is really good of The Intelligent Investor and Security Analysis and not the originals. Some of the books I plan on reading soon are the Original version of The Intelligent Investor: The Classic Text on Value Investing and Peter Lynch's first book One Up On Wall Street : How To Use What You Already Know To Make Money In The Market. I only read Beating the Street.

This is a good book with Buffett quotes, Warren Buffett Speaks: Wit and Wisdom from the World's Greatest Investor.

A stock I found lately using Graham's techniques was Eternal Tech only it isn't a cigar butt, rather it is growing and the fundamentals are good. Since first mentioned the company it is up 30%. Some other companies I've noticed lately but need a closer look at are a small pharmacy, Nyer Medical Group Inc. (NYER), Emerson Radio Corp. (MSN), Abatix Corp. (ABIX.PK).

The larger ones that look interesting are J. Crew Group, Inc. (JCG), Limited Brands Inc. (LTD) which has has a dividend yield of 2.5% at 11 times earnings. I am going to see if there is any more value than meets the eye with an enterprise value/free cash flow ratio. They just divested some of the crappier teen apparel segments, are cutting costs and should focus more on Victoria's Secret and Bath and Body Works.



Stock Pursuit.com


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Sycamore Networks Inc (SCMR)- Growth in an Asset Value Play
Sycamore develops and markets optical networking products for telecommunications service providers worldwide. They make intelligent bandwidth management products, optical switches, multiservice cross-connects, access platforms, and access gateways.

At a market cap of $1.14 Billion or $4.05 per share the stock is almost selling for its net current assets of $903.85 Mil. Net current assets is calculated by taking current assets and subtracting all liabilities. What is so special about this form of valuation you ask? These current assets are the most liquid(easily converted to cash) and are a rough liquidation value. Typically, companies in financial distress or that have very weak prospects trade below this level. They mostly aren't companies like Sycamore that is piling cash and has total assets of just over $1 billion and total liabilities of only $60 million. They also just have $1.6 million in long-term debt. This company isn't seeing financial trouble any time soon.

Revenue growth has been really good growing 78% for the year ending July 2007. Sprint Corporation and Vodafone Group PLC account for 53% and 16% of revenue. They have generated some nice free cash with $18 mil in free cash flow last fiscal and $19 million in 2006, an improvement from the red. Their balance sheet is flush with cash! They have cash and cash equivalents of $924.8 million as of July 31, 2007.

Last fiscal years loss was related to their acquisition of Eastern Research which they paid in all cash for $80 million. This should be a temporary not future set-back as earnings are expected to come in at $.15 a share this year and $.18 next year putting the stock at a forward PE multiple of 22. They are expected to grow at 15% a year going forward. The purchase of Eastern Research will allow them to diversify, increase revenue and grow their customer base.

Companies this solid with discounts to asset values don't come around to often. This company is worth picking up and adding to a diversified portfolio below its net current asset value of $3.22 per share.




full disclosure: no position in Sycamore Networks Inc. (SCMR) at the time of this writing.


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Trying to pick a winner in today's market can be a complicated task. Many things need to be considered and taken into account before making an investment decision. One of the most important of these factors is the competitive landscape. It cannot be ignored no matter how great an investment a stock looks.
Lets compare two electronics retailers, Best Buy (BBY) and Circuit City (CC).

Profitability
Best buys trailing PE is 16 and the price to earnings growth (PEG) is rather low at .98. Circuit City is in the red. Circuit City has grown revenues since 2004 but were only profitable in 2005 and 2006.

What Is Really Important
One of the best indicators of a successful company is when management can grow shareholder equity year over year. Circuit City has had declining shareholder equity over the last 3 years while Best Buy has compounded shareholder equity at over 30% annually from 2003 to 2006.

Key Comparison
Best Buy vs Circuit City

inventory turnover 6.6, 5
return on equity 30% , -8.36

The important thing to take away from this is Circuit City is taking longer to sell items on its shelves and hurting as a result due to its low inventory turnover.

Competitive Landscape
Compared to its rivals like Circuit City and Radioshack, Best Buy is doing fantastic. When you are a retail company and your competitor fires its most loyal, best floor employees your in a good spot. Best Buy was in this position earlier this year when Circuit City layed off thousands of its highest paid employees in an effort to reduce costs.

The Bottom Line
Best Buy is better than its competition and is attractively priced. An argument against Best Buy says Walmart,Sam's Club,Costco have more buying power and can sell cheaper electronics. It is a valid point but it isn't comparing grapefruit to grapefruit. Those stores aren't one stop, all your electronics needs destinations. Even if they have the lower prices on a handful of merchandise Best Buy has competitive advantages like The Geek Squad and managements ability to change in response to customers needs. Management has proven to be innovative. Furthermore, they are putting in Apple mini stores in a handful of Best Buy's. Best Buy's valuation and future outlook are strong. More importantly the competitive landscape has swayed in its favor. In conclusion, the smart investors choice is to go long Best Buy (BBY) and short Circuit City (CC).

This article is for the collegeanalysts.com contest. It typically isn't my intention to take short positions in stocks, especially when there is a possiblitiy of a buyout or small turnaround as there may be in Circuit City.

Best Buy against Circuit City Contest Update

full disclosure: author has no position in BBY or CC


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Jack in the Box (JBX)
Jack in the Box is a fast food company that has been around since the early 50s. They offer a variety of hamburgers,salads,tacos and desserts. The majority of Jack in the Box's locations are in California representing 900 out of the 2,100 that they operate according to their website. They are in 17 states including Hawaii. There is a reason I am bringing this up. Look at how many more stores they can open and markets they haven't even stepped foot in! Some of their competitors like McDonald's are basically saturated.

Keeping Things Simple
It is nice to see an annual report that doesn't try to spin everything to make the companies prospects look as amazing as possible. In the annual report on the fifth page they show diluted eps growth instead of eps growth. They are not trying to sugar-coat anything. The report is a little flashy and colorful but I can forgive them for this. I almost forgot one of the best parts of Jack in the Box, Qdoba Mexican grill. This is a quick serve type restaurant where you can customize your burritos and tacos before sitting down to dine or carry it out. Qdoba has higher prices but the quality is great. Jack in the Box has a value menu as well and relatively inexpensive items to appeal to a wide spectrum of fast-food customers.

Future Outlook
People get hungry 3 times a day so they should have a long-term ability to stay in business. The industry is very competitive but Jack in the Box satisfies its customers with a value priced variety of offerings. Both of their restaurants serve Mexican-American foods which I see as a good thing as the country slowly blends Hispanic food into its culture. The Hispanic population in the U.S. is growing enormously. The food in the future of the U.S. will be a blend of the new and old culture, just look at the history of other countries.

Fundamentals
Same store sales growth is the most important measure because its easy to just open new stores for revenue growth without growing the existing stores. Both have growing same store sales. Most recently, the company expects a 5.5 percent to 6 percent same-store sales rise at Jack in the Box outlets and a 3 percent to 5 percent same-store sales rise at Qdoba restaurants. They have also increased their guidance for fiscal 07' to between $3.62 and $3.66 per share.

Jack in the Box
market cap 1.93 billion*
return on equity 23%
total debt to equity .86
forward PE 15*

*low numbers.

Valuation vs Peers

Burger king
market cap 3.48 billion
return on equity 23%
total debt to equity 1.32
forward PE 17

McDonald's

market cap 66 billion
return on equity 10%
total debt to equity .52
forward PE 18

Yum Brands
market cap 16.9 billion
return on equity 60%
total debt to equity 1.64
forward PE 17

This kind of relative valuation to its peers with earnings multiples is only a piece of the pie in considering a company for investing. As an example of its limits as the sole method of valuation, look at the valuations of the tech companies like Cisco CSCO and Lucent ALU just before the market crash in 2000. To pick the most "undervalued" of those based on price to earnings would have been disastrous. CSCO after sporting a PE ratio of over 140 in 2000 lost over 70% of its value. Some professionals will use this peer comparison as the meat of their analysis. That analysis is incomplete. The company must be compared of course to its competitors but to much emphasis on relative valuation is dangerous.

Opportunity Cost
The risk free long-term government bond yield is 4.75%. At a an inverse PE of 15 Jack in the Box has an earnings yield of 6% right now and very conservative growth of at least 9% per year. Flip the PE and you get a more meaningful ratio.


Bottom Line
They can grow earnings just 10% a year buy entering those new markets for 5 years. As they do this they should have eps of at least $5.77 in 2012 assuming this growth. If then the stock trades at just a PE multiple of 15 then there is a 48% return or an 8% compounded annual return on an investment at $58 a share. If the market is feeling a little more ecstatic a multiple of 20 could easily be attained then the return is 98% and the yearly compounded return is 14%. Jack in the Box is a buy below $58 a share.

Welcome to Stock Pursuit

full disclosure: no position in JBX


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Welcome to a highly fueled edition of The Festival of Stocks #48! There are some great articles in this weeks Festival of Stocks. Let's get to the submissions.


Eric Schleien presents The Dark Side Of Warren Buffett posted at ValueSeeker.Net. I really enjoyed this article about Warren Buffett. It keeps perceptions of him in perspective and shows that he is human and has made mistakes among other things.


Leon Gettler presents The bear turns global posted at Sox First. The fallout from the US mortgage mess continues to hurt the US market and beyond. Clearly, issues once specific to the US are now flowing through to other markets as banks force borrowers to sell assets and investors scramble away from risk. And it will get worse.


George Courtney jr presents Despite Volatility, Stocks Are a Good Deal posted at The Authentic Bartender Blog.
Makes the case though stocks are still near all-time highs, they are nevertheless bargain-priced. Second, the credit crisis that has triggered the recent volatility really isn't all that threatening.


FMF presents Another Vote for Index Funds posted at Free Money Finance. Another reason to invest in index funds. Looks at what legendary fund manager Bill Miller has to say and makes some good common sense conclusions about index funds vs. actively managed funds.
I myself like index funds/mutual funds plus a handful of quality stocks for the competent individual investor.


Babak presents Time To Consider The Battered Financial Sector posted at Trader's Narrative. Time to scoop up cheap and beaten down shares in the financial sector (banks, brokers, insurance co's). After the recent market weakness this sector has gotten very cheap. Time to buy great companies like Goldman Sachs, Citigroup and the like at fire sale prices.


James presents Analyzing Some of the New Top 25: Shoes,Oil,and... His site that I highly recommend College Analysts. Here he looks at Steven Madden (SHOO), Valero (VLO), and New Frontier Media (NOOF), all of which he believes are solid buys given their low valuations. These are from a model that does a quantitative evaluation of about 1,500 stocks. The model generates a power ranking of stocks. The model is very useful for generating leads into some excellent and potentially under-priced businesses.


Blake Morphis presents Mad Money - Defense - ATK and RTN | Mad Money and Fast Money Recap & Fan Site posted at Mad Money and Fast Money Recap & Fan Site. Given the recent market volatility, Jim's recent recommendation on the new bull market in defense stocks.


Silicon Valley Blogger presents Shrug Off A Stock Market Slide! 7 Surefire Ways To Handle A Market Fall posted at The Digerati Life. Some good advice on how to handle these falling markets. Just a couple of the topics hit on are to not listen to the media hype and think like a contrarian. Excellent article here.


The Mad Money Analyst presents Option Premium Valuation: Time and Intrinsic Value posted at The Mad Money Analyst. A good review of how to effectively evaluate options premiums. This gives investors a clearer view of what exactly effects prices and premiums of options. Markets have lately been increasingly volatile and this will help you find those right entry points and calculate volatility profitability. Make more on your investments.


Super Saver presents 7/30/07 Stock Purchase Update - After The Carnage posted at My Wealth Builder. Some recent stocks they picked up during the market fall. This article like so many others in this weeks festival have a recurring theme that lower stock prices are sometimes a welcomed opportunity for the intelligent investor. A depressed Mr. Market can give us great opportunities sometimes in good businesses like Ben Graham said.


Steve Faber presents - Make Gains From the Chinese and Indian Markets Without Actually Investing There posted at Debt Free.


Matthew Paulson presents When You Invest at the Bottom, When Do You Sell? posted at Getting Green.


Eric Stanley presents Two Investment Mistakes posted at Personal Finance Blog Articles. Are you finding good investments for your new money? Or are you doing the right thing and also finding better investments for your OLD money?

Shadox presents SEC Fines? Double Whammy for Investors posted at Money and Such. Some SEC fines just don't make sense, since they are punishing the victims of the crime. This article is my analysis of the situation.

Personal Finance

Tim Ramsey presents How to Pay Off Credit Card Bills posted at My Debt Relief Blog. Trapped in credit card debt? You can get out of the credit card trap with my sure-fire way to pay off those pesky bills.


Eric Hudin presents My Estate Planning Career Blog » Blog Archive » Selecting a Good Trustee - Factors to Consider When Choosing a Trustee posted at My Estate Planning Career Blog. Wills and Trusts are an important financial vehicle for transferring wealth. But who should manage your trust? I'll tell you how to pick the best person.


Aaron Wakling presents Credit Cards - A Necessary Evil posted at The Credit & Credit Card Blog. Well you probabaly already know the answer to this one. I cover good uses for credit cards and bad ones. Its a good article for anyone concerned about if they should use their credit cards to make purchases.

Options and Trading

Dax Desai presents Fundamental Rule of Day Trading: Preservation of Capital posted at Dax Desai. Explains the importance of Preservation of Capital when day trading and gives examples of right/wrong ways of day trading.


Nabloid.com presents The Power of Options » Nabloid on Investing posted at Nabloid on Investing. Takes a look at the advantages of options.


Dax Desai presents Fundamental Rule of Day Trading: Preservation of Capital posted at Dax Desai. 1st in a series: Rules of Day Trading - Preserve Capital


Alvaro Fernandez presents Lifelong Learning for Top Performance posted at Brain Fitness Blog. Great advice from a trading guru.



Submit your best articles on stock market related topics for future festivals. This concludes another edition of the Festival of Stocks.


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Originally written November 2008, before the private equity buyout Silver Leaf Resorts is another timeshare and potential baby boomer stock like ILX that I mentioned in yesterdays article. Silver Leaf grew revenue in the first quarter this year at a little over 30% and diluted net income per share came in at $.17 a share vs. $.16. They grew shareholder equity 4% year over year. Earnings have been growing a little better than ILX over the past few years.

They have a bit of long term debt with notes payable and capital lease obligations of $276.765 mil. They have 6% $3.796 mil notes due this year,10.5% notes due in 2008 of $2.146 mil and $24.6 mil at 8% in 2010. They have a healthy current ratio of 1.44.

The stock has been in full bull mode and they haven't hesitated in issuing stock options and buying back shares because of it. This I don't like. They have been issuing shares which are currently at about $37 million from $11 million in 97'. Management has done a pretty good job over the last three years growing net margins, shareholder equity and earnings. The stock is up over 400% since early 2004.

The stock is currently trading for about $6.45 a share and has a trailing PE multiple of about 11 and a forward multiple of 9. It is trading for about 1.5 times book value. The valuations look compelling and the industry demand good. Baby boomers are retiring and not looking to spend money outside of the US with the weak dollar. In an interview on theStreet.com the CEO said they are in close driving distance with customers and gas prices aren't a big factor in the business.



disclosure: no position in Silverleaf Resorts, Inc.(SVLF)


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Welcome to the 44th edition of the Festival of Stocks! A blog carnival dedicated to highlighting bloggers best posts on stock market related topics. It is my pleasure to host the Festival of Stocks for the first time at Treasure Hunting Quest.


This Week’s Submissions

Leon Gettler presents Top 15 rules of investment posted at Sox First. about the top 15 rules for investing. And you can start off by checking the gray hairs on your financial advisor. If you see any, it means they've been around for a few cycles. Also, save your loyalty for your football team, not stocks.


Fat Pitch Financials presents Valuing the Tyco Spinoffs posted at Fat Pitch Financials. An estimate of the intrinsic values of the three companies
that formed from the recent Tyco International spinoff.


Matthew Paulson presents Single Stocks or Mutual Funds? posted at Getting Green. that shows which vehicle is more appropriate by weighing the risk and rewards for individual investors in choosing funds vs. stocks.


Average Joe presents Stock Analysis - Helix Energy Solutions Group Inc (NYSE:HLX) posted at Investment Jungle a look at Helix Energy Solutions Group (HLX) which is trading at a deep discount based on their analysis.


Average Joe presents Dividend Analysis - Washington Mutual Inc (NYSE:WM) posted at Dividends Matter an analysis of Washington Mutual Inc. which currently has a dividend yield of 5.03%.


The Skilled Investor presents Lifetime investment assets of renters -- with investment cost improvements posted at THE SKILLED INVESTOR Blog as Fran and Fred expect to pay investment costs that are typical of an average investor. This graphic is one of the reasons why The Skilled Investor keeps harping about reducing investment expenses. Even average investment costs are simply outrageous, and they can be the difference between success and failure of a family's lifetime financial plan.


Silicon Valley Blogger presents Our Investment Portfolio Update: Strong Gains Due To Stock Market Record Performance posted at The Digerati Life.
How their portfolio has fared in the stock market and discussion of their stock market investment strategies.


Rick Konrad presents Value Creation or Destruction-As Simple as (1), (2), (3)- Finding the Value Direction! posted at Value Discipline. It is about developing some insight into value creation or destruction by looking at three components of free cash flow.


Tyler presents Home Sweet Home Depot posted at Dividend Money. A look at Home Depot as a long term dividend growth investment.


KCLau presents Why Invest in Land? posted at KCLau's Money Tips. Most people think that land investment is only for real estate developers, who buy big parcels of land for commercial, or residential development. But actually, investing in land is one of the sound investment strategies available for common investor, both large and small.


Eric presents What is a Value Stock? posted at Stock Market Prognosticator with a theoretical argument on what constitutes a Vaue Stock.


Mark submits Lessons in Contrarian Investing from Peter Lynch posted at College Analysts.A look at one of famous portfolio manager Peter Lynch's investment decisions and what stocks might qualify today. James who runs College Analysts is a value investor himself.


Well, thats it for this weeks Festival of Stocks. I hope you enjoyed the submissions. Next weeks Festival of Stocks will be at Five Percent Stocks. Support future festivals as a host or contribute here.



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I found this company when I was looking in the Pharmacy industry awhile back. It was up 12% today on about triple usual volume. Nothing particular jumped out when I found them weeks ago looking at some basic figures except that it was reasonably priced and I was looking for a small-capper rather than a giant like CVS,WAG,RAD,WMT.

NYER has been paying long-term debt down all of 06' and 07.' EBITDA 8 times enterprise value, insiders have 30% stake. On that note about insider ownership, many acclaimed and smart investors take it into account. But who cares? Many investors pay close attention to insider ownership along with their buying and selling and try to size up the company as a worse or better investment because of it. First, on the buying and selling, it is trivial unless one knows for a fact what reason management sold or bought. Maybe they sold to pay their kids tuition. Would that effect the decision to buy the company? Maybe management is blinded by their own vision of the company even if it has no chance of success and they pick up a huge block of shares.

Isn't it a messed up society if we assume that only the managers with large stakes in the companies they manage will look out for shareholders? How about integrity, work ethic and honesty? Where has it gone? I still believe there are great management even if they don't have a large ownership or any at all for that matter.

Disclosure: no position in NYER


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This article is about famous portfolio manager Peter Lynch who headed the Fidelity Magellan Fund from 1977 to 1990. He began with $20 million in assets and grew into the largest fund with $13 billion in assets and still delivered over a 2,700% return during his time at the helm, over a 29% annual return. With such a large fund he may have actually bought more stocks than Samuel L. Jackson has starred in movies. Maybe. He is mistakenly known for his small-cap growth stocks. He invested in all kinds of industries and companies. Many of his investments like buying Volvo when it was selling for only its cash in the bank would be considered more value oriented. One of his keys to his success, he told Louis Rukeyser of Wall Street Week was he saw 200 companies and checked out 700 annual reports a year.

In the Spring of 1982 most professional money managers thought Chrysler the then number three auto maker was going to go bankrupt. Lynch thought otherwise and was not scared to go against the crowd. He did an enormous amount of scuttlebutt in companies. Seeing $1 billion on Chrysler's balance sheet in cash and government loan support, combined with great new products he bet against other investors fears in the hated automaker. He put the maximum 5% of his assets into Chrysler common stock. He said he would have put up to 15 to 20% if he could have.

Chrysler doubled after eight months thanks largely to the first mini-van and was a 50 bagger(increased 50 fold) by 1987. What can we learn from all this? By not making decisions based on what others are doing and using good fundamental analysis to find cheap beaten down stocks is a good foundation to investment success.


"Stockpicking is both an art and a science, but too much of either is a dangerous thing. A person infatuated with measurement, who has his head stuck in the sands of the balance sheets, is not likely to succeed. If you could tell the future from a balance sheet, then mathematicians and accountants would be the richest people in the world by now."

-Peter Lynch


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Right now I'm bearish on the U.S. equity markets over the next 1 to 3 years. With escalating commodity prices, inflation, rising bond yields, unfavorable interest rates and likely Fed tightening I think the US markets and economy will flat-line or grow slightly. Of course lower stock prices mean better bargains and as investors flee short-term a wise investor buys long-term. Every bull market has its bear. The more overextended the bull is the more devasting the fall. History doesn't repeat itself, but it does rhyme.

I believe Americans are slightly underexposed to foreign markets. Is it a coincidence that the majority of their investments are in the country that gains from this allocation? All the huge long-term future growth is in emerging markets like India,China,Russia,Latin America and parts of Asia. Furthermore, the U.S. equity markets have returned around 7% this year compared to almost double that in other countries. The U.S. GDP is growing at around 3%. China's GDP is growing at 12-13%. Bursting of a bubble in China will present great long-term buying opportunities. This closed end fund Claymore/BNY BRIC (EEB) has no U.S. holdings and is allocated heavily in Brazil 47% of assets, Hong Kong 26%,India 13, China 7, Russia 5%. This all India vehicle isn't an etf but a debt security that tracks the Indian index. iPath MSCI India Index ETN NYSE:INP. It is not actively managed and is one of the best vehicles to invest in India. A guy in India just recommended to me ICICI Bank and a construction company DLF. To bad DLF isn't an ADR.


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Maybe a hidden gem? Lazare is in the diamond business and is selling for less than its current assets minus all debts. About half of those assets are diamonds I assume in inventory and surely they have some worth in these assets. So if the company is selling for close to these hard assets not even including any other claims or plant property and equipment isn't the future growth of earnings and cash flow for this company basically free here. Looks like it could be a steal at $8.05. They've had some trouble with a joint venture and earnings recently came in lower than expected at a $.01 a share. Probably not a long-term setback.

*not recommending as a buy here.


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In looking for a red tag sale on Wallstreet recently I've come across some interesting companies selling for less than their current assets minus all liabilities. Most of them don't make money consistently so maybe you could make the argument that they don't deserve to sell for book value. This company, however has been profitable more consistently. The business is pretty straight forward they sell gloves, boots, and rainwear products primarily to retailers, including convenience stores, mass merchandisers, and hardware and grocery stores; and industrial customers comprising companies operating in the agricultural, automotive, energy, lumber, and construction industries. They've been in business for decades. The only major macro obstacle I could foresee is if companies that manufacture with cheaper labor say in China and kill their margins. They are working on improving margins though and sales are more flat than hugely down with the exception of one segment that is growing. At $7.35 it is selling for a cheap valuation, however, it looks more attractive at $6 or $5. Had one picked up a company I wrote about, RCMT at $6.60 there was a 20% return in just some weeks.


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It looked pretty cheap by way of some valuation multiples when I found it a few weeks or so ago and wrote briefly on them. The stock has been pretty active in recent days, up 5% for one day and is trading for $7 and change from $6.06 in the past couple weeks or so. I like that they have free cash flow, profit margins aren't the best but I suspect customers may be loyal and revenue pretty consistent. This one deserves a closer look at the overall business and competition to see if people are missing something and it is in fact undervalued. It is a tiny company. I'm not sure what good it would do to compare its valuation to the larger competitors or use a discounted cash flow model because its operating results are pretty sporadic in such a competitive industry.

I've had a lot of success spotting undervalued larger companies with sustainable competitive advantages that are undervalued because often just by looking at the financial statements paying attention to obvious things and looking at valuation multiples like pe, pe/pe growth, roe, etc. you can get a rough picture about whether or not it is cheap because it is being avoided for good reasons or stupid reasons like short-term fears or following the herd.


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Benjamin Graham, one of Buffett's most influential teachers is famous for his net current asset stocks, he held as much as 100 in a portfolio in the years after the depression. Buying stocks at a discount to their net current assets less total liabilities placed no value on the fixed assets and is a rough liquidation value. A diversified portfolio of these cigar-butt investments; hold until you get a little price increase (last puff) and sell was lucrative for Graham with a portfolio of them dishing out double digit returns. They still can be nowadays though they are harder to find. Of course many of them are cheap for a reason and are perennially cheap. Here is an interesting one.

This company, ETERNAL TECHNOLOGIES GROUP, INC. (ETLT.ob) looks cheap here, especially considering their most recent quarter. They've delivered the steak but the stock hasn't sizzled and is not loved. I found them months ago thanks to The Mico-Cap Speculator I was skeptical and still am but I can't overlook a company that makes me go "Wow" when I look at it. A net current asset stock with an attractive balance sheet, income statement, cash flows, good history, new plans, management that delivers and a price on the stock market that is so cheap it may even be irrational.

Moving along to the most recent quarter net current assets of $41,949,326.00 against
as of May 15, 2007, 47,073,279 shares of Common Stock outstanding times current price of $.65 a pop = $30.5 mil market cap against net current assets of almost $42 million.

This is a huge discount, especially considering the liquidity of these assets.
Eternal Technologies Group, Inc. Reports Record Revenues and Record Earnings for the Year-Ended December 31, 2006

For the last quarter March 07 in this year 07' vs 06'

Income highlights

Agricultural and genetics sales $ 5,726,797 vs. $ 3,608,572
Medical devices sales and services 1,498,065 vs. 607,787
Land lease 297,245 vs. -

Total revenue 7,522,107 vs. 4,216,359

Gross profit 1,522,660 vs. 1,161,724

Net income per common share
basic and diluted $ 0.03 vs. $ 0.01

Cash Flows
Net cash provided by operating activities 11,025,082 vs 4,597,423

Cash and cash equivalents, end of period $ 25,299,565

They have a new project found on their website. The site is a little unorthodox.

"Thermal Tomography System is a wholly new detecting system, with a leading diagnostic technology which has not yet been reported in the world. At present, the main detecting methods are molybdenum target tube and Doppler imaging system.

This system, without physical contact, trauma, and suffering, is an advanced green detecting method.
This system receives information from surface temperature collected by infrared imaging. After automatic analysis, it receives the curve describing temperature. According to the contrast between it and model curve, the diagnostic conclusion can be received fast. During the detection, it is based on objective data, which avoids the inaccuracy made by people.

This technology can be used for detection of many diseases, not only mammary gland, but also other organs of human body. At present, a research group led by Professor Li Kaiyang is researching ¡°process of normal cells into cancerous cells¡± with this technology. Once successful, this technology will play an epoch-making role in medical diagnosis."
-source, http://www.eternaltechs.com/prespective.asp


"Eternal is a major agricultural genetics and biopharmaceutical R&D firm operating in China with the support of the Chinese Government. Eternal's animal breeding division has a strong asset base, cash position and net income. Eternal has become one of China's leading institutions for biopharmaceutical and biotech research, pure breed cultivation and breed stock production. The Company has secured a key market niche by commercializing gene engineering technologies and providing superior breeding stock, allowing China's citizens the ability to improve their living standards. With the world's largest population, a double-digit national growth rate and entry into the WTO, Eternal Technologies has a playing field set for tremendous opportunity. As a prominent player in the agricultural genetics industry, cash in the bank and an untapped market, Eternal has the potential to become a major player in China's national growth."
-source, http://news.morningstar.com/news/ViewNews.asp?article=/BW/20070403005870_univ.xml&pgid=qtqnPress2

They obviously don't have a great investor relations department but is its current price below net current assets justified, ceterus peribus. I feel this is a great speculative contrarian opportunity for a small position in a portfolio.


disclosure: author is long Eternal Technologies (ETLT)


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Taitron Components (TAIT)
Let's just say an interesting business. It is a very small company and is international. It is in the distribution and supply of brand name electronic components, and original designed and manufactured (ODM) electronic components like discrete semiconductors. They also provide ODM services, such as outsourced product design and manufacturing assembly services for contract electronic manufacturers and original equipment manufacturers. The company sells its products in the United States, Mexico, Brazil, China, Taiwan, Canada, and internationally.

The stock price has risen consistently overall to where it is today from a deep low of $1.51 in mid 2005.

At its current market price of $2.74 as of June 1st on the exchange it is selling for below net current assets (net current assets - total liabilities) coming from its most recent quarterly on the SEC's site. This should be pretty close to its liquidation value theoretically but isn't close to the floor for the stock. But is the market efficient? Checking out some other things, they've reduced their long-term debt for the past 3 quarters but surprisingly this year they started paying a dividend of $.10 a share that they plan on keeping for 5 years. I don't think they have the cash flows or the opportunity that warrants paying a dividend with the business currently at hand. They have grown book value over the years and have always traded at low multiples. Are they expecting something great this year or next? Interesting. I'll be updating over the next days with some other small-cappers that I think have even maybe more potential and leave me scratching my head.

http://www.taitroncomponents.com/


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Winthrop Realty Trust, Inc. (FUR)
3.5% div yield. A REIT that has grown nicely over recent years. Owns office buildings around the country.

LTC Properties, Inc. (LTC)
6% div yield. 12 times eps. A healthcare real estate investment trust (REIT) that invests primarily in long-term care and other healthcare related properties through mortgage loans, property lease transactions and other investments.

TC Pipelines, LP (TCLP)
6% div yield. dividend has 3% growth rate over last 5 years. Stock trades at $40 up from $15 in 2000. "TC PipeLines, LP is a United States growth-oriented Master Limited Partnership (MLP). It was formed by TransCanada PipeLines Limited to acquire, own and actively participate in the management of United States based natural gas pipelines and related assets."1


One Liberty Properties, Inc. (OLP)
6% div yield. Nice steady, slowly rising dividend going back at least 10 years. "One Liberty Properties, Inc. (One Liberty Properties) is a self-administered and self-managed real estate investment Trust (REIT). The Company acquires, owns and manages a geographically diversified portfolio of retail, industrial, office, health and fitness, and other properties, a substantial portion of which are under long-term leases."2

ProLogis (PLD)
about 3% div yield, 3% growth past 5 years. "ProLogis is a self-administered and self-managed real estate investment trust that operates a global network of real estate properties, primarily industrial distribution properties. It manages its business by utilizing the ProLogis Operating System, an organizational structure and service delivery system, which when combined with its international network, enables ProLogis to meet customers' distribution space needs on a global basis. The Company is organized into three business segments: property operations, fund management and CDFS business."3


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With Blockbusters attempt to compete with Netflix in the online movie rentals they may be seen as a legitimate competitor to Netflix, however, the obvious differences in the companies gives Netflix the advantage. Blockbuster's new total access plan where customers can exchange and rent movies in the stores seems like a good idea for the company with thousands of costly stores and employees but the average store only stocks about 6,000 movies compared to 10 times that online. It simply costs more to operate a brick and mortar like Blockbuster. If there are price wars I'm picking Netflix who has years of experience building up their online company vs. Blockbuster burdened by fixed costs. Netflix just had a hiccup with revenue and earnings probably because of Blockbuster but longer-term they have this market over Blockbuster and Movie Gallery. It's not smart to predict to far, say 5+ years in a world of rapidly changing technology however. Who knows what will happen with Tivo and the future home entertainment networks.

Netflix as of May 10th 2007 is trading for $21.91 per share. Fear and market sell offs that drive down stock prices but don't effect long-term prospects are some of the best buying opportunities. Netflix is currently selling for about 6 times free cash. Five year average net margins of 3% compared to Blockbusters -8%.
If Netflix can grow free cash flow to 354.31 in five years the stock currently is undervalued using a discounted cash flow model.
354.31 / (1+10%)raised to 5 years= net present value of cash flow 214, below its current 220.


disclosure: author doesn't own any shares of Netflix



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This Michigan based Bank holding company Dearborn Bancorp, Inc. (DEAR) on the Nasdaq offers a range of financial products and services mostly to commercial small and mid sized business. They just purchased Fidelity Financial Corporation in Michigan for $70.5 million in cash and will be taking their name. It was interesting to see how management is very candid in the annual report about how their name has limited them in their success so this new name and acquisition if all goes well should be a great achievement for the company which just reached total assets of $1 billion after the purchase. They have grown extremely fast to get there opening in 94' with $7 mil.

I was really impressed with managements discussion and honesty. I was curious about them not paying a cash dividend and they addressed that by saying they are still in a growth mode. They have payed stock dividends. They missed earnings guidance which I see as no big deal considering they can keep up the growth long-term. Earnings growth over the last 5 years has been at 25%. The stock has been hated over the last year now trading at around $15 a share a three year low. Some companies only say they are shareholder oriented but Dearborn means it. Management has just said shares are undervalued and are buying back up to 400,000 of the Company's common shares.

John Demmer, the Company's chairman, announced the Board's action. He added, "Given our Company's unusually strong capital position and the conditions in the market for the stock of all Michigan banking organizations, our board determined that this stock repurchase plan may be a prudent use of our ample resources that serves the best interests of all of our shareholders."

There are big risks for the company like competition, economic weakness in Southeast Michigan and a flat yield curve.


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Walmart and Coca-cola have performed nicely over the last several years but the stocks haven't. Walmart's revenues and profits have increased greatly since 2000 with earnings per share increasing from $1.25 to $2.72 but the share price hasn't reflected it. Coca-cola has grown earnings at a decent rate and the shares are flat. This rattles me in a way although I realize stock prices aren't efficient and even in many cases sensible especially in the short-term. It means that the expectations investors had for these companies I suppose didn't live up to what was expected. The stocks were somewhat overvalued but not that overvalued.

Walmart hasn't done a perfect job of allocating capital. They pumped a lot into marketing without any huge improvements in higher priced product mix like Target. Walmart has its niche as low prices only compared to Targets more diverse offering of higher priced items. Walmarts position and model should serve it well though and certainly has in the past.

This questions my ideologies. Warren Buffett and many great investors have said if a company does well the stock eventually follows. Some people think management is responsible for the stock price by giving returns to shareholders like at Disney and that Home Depot's ceo was responsible for HD's poor share price performance and complained. What more can management like Walmart's, Home Depot's and Coke's do than grow shareholder equity and earnings while maintaining its competitive position? In general isn't this why business value and investors stockholder equity grow? Does a great company's share price in traded capital markets have to rise over time or is it all dependent on psychology? It seems the investors desire to own a company via its stock is unpredictable and therefore so is the stock price EVEN WHEN THE FUNDAMENTALS ARE TAKEN INTO ACCOUNT. Psychology makes the markets inefficient and are responsible for investing being almost as much art as science. One of the most common defenses of the market being ineffecient is that a company trades because of earnings and earnings growth discounted for the future. I think examples like this might debunk that explanation.


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Why buy Best Buy. First of all its the leader in its industry. Circuit City just made the genius decision to fire its highest paid, best floor staff to cut costs. Radio Shack brick and mortars are less than half the size. Destroying the competition isn't a good enough reason to invest. The company is operated well and has consistent rising earnings per share and good cash flow and even pays a dividend. The company is customer oriented. They just announced that 200 Apple in-stores will be implemented. This is a sleep at night stock in my opinion because of their competitive advantage and likely stable future prospects. I'm not sure in 15 years how the internet will factor though.

None of this matters though unless the shares are undervalued. The company can fetch a premium stock price and can grow EPS at 15% year over year. Its currently selling for about 17 times earnings at $47. I think at a PE in the low teens it may be undervalued this year. It could become more attractive in a market sell off or recession which would be a good time to pick up shares.


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There is good and bad for Caribou. More bad but a little hope I feel. 1st quarter same store sales fell 1% while first-quarter sales where up 10 percent to $61.5 million.The company said other sales, which consist of sales to commercial customers, licensees, mail order and Internet sales, grew 39 percent to $3.7 million from $2.7 million a year ago. If I was a shareholder I wouldn't want to see anymore red. I think its better off to get profitable and grow slowly than to open stores like crazy and hope for the best. I guess this is why they are getting help from Tom Zosel Assoc. See link below. Heck, even stay out of Starbucks way if you have to and focus on the better segments like bean sales for awhile. I wonder where these analysts come up with the price target of 8 for Caribou. Price targets are useless in my opinion. Earnings guidance isn't even a science. Anyway, I might pay a little more than liquidation value right now for CBOU assuming they ever make money again.

Tom Zosel Associates Helps Caribou Coffee Model Its Supply Chain Network to Tap Logistics Efficiencies

http://biz.yahoo.com/bw/070409/20070409005041.html?.v=1

Apparently they blamed the weather for impacting comps. I think its unaccountable when companies blame the weather for not getting it done.
It's going to be awhile until the company shows any hope of being worth investing in. Disclosure:author has no position in CBOU


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I was looking for companies selling for less than what they are worth with a zach's stock screen recently. I need about a week and 5 people to look deeper unfortunately because I couldn't find a company in this screen that didn't get me interested. Interested that it was maybe undervalued that is. A lot of financials were found with the low price to book and lack of debt to equity filter but not all. What it mostly found was small companies in pretty good to great financial shape with growth potential that are maybe sold off for no good reason. The low market cap is important because its harder to find great large-caps on sale generally. Looking for smaller companies with growth compares to Bass fishing where nobody else is fishing. You might get better results casting where nobody else has looked. You have to scavenge the bottom of the lake for that 20 pound lunker large-mouth. In this case they are maybe lunker 40 baggers.
A couple banks looked like they could be good long-term investments or takeover targets. Access Nat. Bank ANCX , American River Bankshares AMRB. This retailer United Retail Group Inc. (URGI)may be cheap considering their customers fashion tastes don't change and they keep good brand loyalty. This scares me about clothing companies though even the best. I haven't looked at all of these companies instead focused on a lot with high ROI and low price/cash flow. some that caught my eye...

ASI
CLDN-this company has delivered. Literally and figuratively.
OPMR
AMCP
CLMS

Characteristics of the Screen

# OF COMPANIES: 39

Market Cap (millions)<= 400
Price/Book <= 3
Price/Cash Flow <= 20
PEG Ratio <= 1
Current ROE (TTM) >= 10
Current Ratio >= .8



AMCP
AMRB
ANCX
ASI
BBSI
CACH
CBON
CLDN
CPE
CPII
CPSS
CVCO
DEIX
DELTA FINANCIAL
EPEX
GEHL
GIFI
IBCA
ICTG
LCUT
MBWM
MESA
MIG
MRLN
NAVR
NNBR
OPMR
PROS
RADN
SAIA
SNIC
TBSI
TTMI
UDRL
UPFC
URGI
VTNC
XJT
XPRT LECG CORP -found them before actually


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I've read a lot of methods of valuation for public companies. One striking consistency I've seen recently even among professional writers is comparing U.S. companies PE ratio, forward or trailing to the S&P 500 or the market.

I don't think PE is the greatest ratio for determining value. I don't think any ratio alone can find the intrinsic value of a company but it can be useful to get a ballbark idea in some cases. Having said that it would seem more usefull to compare the companies PE or price to free cash flow, EV to fcf/ebit etc. to another company in its same industry. This company competes next to it unlike the overall market with thousands of different companies with different
products,services,accounting,growth prospects and so forth.

Maybe they are making the case that the S&P 500 could be your opportunity cost so why invest in this company with its current valuation when you can buy the market for cheaper through a fund or etf. An investor should always consider opportunity cost but I don't see the logic in this comparison because the US economy and Large-Cap stocks have very different prospects and barriers than say one single company. Say the company has a pe of 10 and the market is 20. Who knows what the market is going to do. The FED may not even know. Say the company grows at 2% a year and the market 15. This has to be taken into account as well. The companies ability to compete and maintain revenues among many other measures seems more important than a simple valuation ratio comparison to the overall market or index. In fact, it seems out of place.


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If there was an alternative/ energy drink etf this might present a good opportunity for some returns. But for a "know something investor" why buy into an etf when you can pick the best individual companies in it? As John Maynard Keynes said, "to carry ones eggs in a great number of baskets without having time or opportunity to discover how many have holes in the bottom is the surest way of increasing risk and loss."

"Beverage Digest reported that the total sales volume of soft drinks in the United States fell 0.6 percent in 2006, following a 0.2 percent decline in 2005. The industry sold 10.16 billion cases of soft drinks in 2006, down from 10.22 billion in 2005(reuters.com)."The carbonated soft drink industry has moved from roughly 3 percent growth in the 1990s to modest declines in the last two years," Beverage Digest reported, saying the estimate included energy drinks, a very fast-growing segment."

I see Coca-Cola KO with the largest market share in softdrinks and a flat share price over the last 10 years and Pepsi PEP not a true drink play as it is the largest producer of salty snacks. I wonder if these types of companies are going to grow as fast as these new energy, coffee, healthy drink companies are? Supposedly people are looking for healthier and more invigorating drinks and foods for that matter, so one should find these companies and see if there is any hidden value. If the others are valued the same as Hansen Natural Corp. (HANS) then it may not be strikingly obvious. Hansen sports huge multiples but has great returns on equity with little to no debt. Hansen has had its time and this all could be just a fad. I haven't found any other independent companies but they are probably the same. Valuation isn't easy and is far from precise because you can't see into the future. Was Google overvalued at $150? It looked like it to me then. The big guys will probably have the only leading energy drinks next to RedBull in a few years because they're big and they can. Capitalism at its essence.




1. http://today.reuters.com/news/articleinvesting.aspx?type=comktNews&storyid=URI:2007-03-08T194514Z_01_N08161106_RTRIDST_0_BEVERAGEDIGEST-UPDATE-3.XML&rpc=11


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I really like Jim. He is also great on TV and I respect him for that. I have and sometimes watch his show because it's one of the only real in depth stock shows on cable. I will take anyone seriously who has results and a great track record with a proven investing strategy. I don't think he has this though. I'm skeptical of his actual record before the show even. copy and paste below link into browser.

slate.com


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