In the summer of 2008, I started accumulating shares of Ingersoll-Rand (IR). At that time, the American economy had shown plenty of uneasy signs, while I identified IR as one of the stocks with the potential to thrive through the possible upcoming downturn. I had three reasons to back up my beliefs. First, Warren Buffett's stake in the company, second, IR's move to acquire Trane, and third, its global footprint - the Asian market would provide immense growth opportunities.

Then the unfolding of the financial turmoil later the same year proved my timing was not right. IR was hit way harder than I had figured, primarily due to their exposure to the construction (both commercial and residential) market, and the increased debt level - as a result of the Trane acquisition. However, I held onto my positions and haven't changed my long-term views on the company. Now we started seeing some positive signs of the economic trend, and I think it is a good time to revisit my thoughts on IR.

Last week, both Visa (V) and MasterCard (MA) released their quarterly earning results. Here are some thoughts on their reports and the conference calls. (Read Visa and Mastercard's conference call transcripts on Seeking Alpha.)

1) Economic Indicator

It is well known that Warren Buffett is bullish on the railroad industry. But among the top four American railroad companies, Burlington Santa Fe (BNI), Union Pacific (UNP), CSX (CSX) and Norfolk Southern (NSC), he has clear preferences. BNI is no doubt on the top, UP comes as the second, and NSC and CSX are much less favored. Through this article, I will try to provide my understanding of his logic behind his preferences. I will attempt to answer three questions, 1) Why does he pick the railroad industry? 2) Why are CSX and NSC less favored? And 3) Why is BNI more favored than UP?

To Question 1: Railroad has to be the future of American freight transportation

There are many articles discussing the future of Visa (V) and MasterCard (MA), the big two consumer credit companies, and the majority express very positive views. In summary, the long case is built upon the following points:

1) The trend to go plastic. There are more and more people making payments by swiping the plastic cards instead of writing checks or using cash. This is a trend across the world, not only limited to the US.
2) The international market. The plastic cards in Asian and Latin American countries just started to gain popularity, which presents great growth opportunities for both companies.
3) They are not directly exposed to consumer credit risks. Both companies operate a payment network that connect the consumer, the merchant, the consumer's bank and the merchant's bank. They earn profits by charging the corresponding transaction fees, not from the interest from the credit issued to the customers. As a result, the credit crisis didn't have direct impact on their business.
4) The economic downturn caused consumers to cut expenses, which doesn't necessarily indicate the number of payment card transactions will decline. The lost transactions in the luxury stores may be well offset by the increased volume in everyday life spending, such as groceries and gasoline.

Both Microsoft (MSFT) and Apple (AAPL) belong to the Most Innovative Companies category; however, we rarely see anything original from MSFT. Rather, Microsoft is widely accused of copying ideas from Apple. I guess the reason MSFT is in this category is because the Windows OS has an innovative meaning to the entire human being. This type of innovation doesn't necessarily indicate creativity, which, on the other hand, is the exact characteristic that differentiates Apple from the rest.

On the other hand, Microsoft is the indisputable monopolist in the Operating System world, owning around 88% of the market, and Mac OS owns around 10%. However, according to many users with Mac experience, the OS from Apple is so much cooler than Vista, and for years, there have been voices arguing that Apple should license the OS to the OEMs, the same way that Microsoft sells its flagship product.

In my previous post, I expressed my concerns over Apple's (AAPL) innovation power in case that Steve Jobs won't return from his medical leave. From reading the comments on the article, I had the impression that some of the readers thought of me as a short of the Apple stock. Actually I am not. In the disclaimer, I stated that 'I am considering selling my AAPL shares', maybe the more accurate words would be 'reevaluating my positions'.

But is it even worth it to reevaluate? Under normal market conditions, sure we should look into the uncertainties introduced by Steve's leave. But we are in this unprecedented bear market and there are a lot of solid companies out there with a stock price at a bargain level. In other words, we have investment options that may bring in similar returns, but with lower risks, then why bother with AAPL? For me, I seriously considered switching my holdings of AAPL to Nike (NKE) (read the analysis of NKE here).

As a long-term investor in Apple (AAPL), I was accumulating more shares during 2008 as the market was spiraling downward, and stopped, guess I had to, when my cash ran out, sometime long before the market bottomed out (longer if the new lows it reached the first week of March were not the bottom). I had strong beliefs in Apple's growth potential, based on its international appearance, and another one was based on the future of the Mac computers. The sole cornerstone of this all was my belief in its unmatchable powers of innovation.

I'd like to admit that my research on AAPL was not thorough enough, because I had this unanswered question both before and after I jumped in, and I am still having the same question today: why no other companies are capable of coming up with anything to match the iPod? Bottom-line, it is just an MP3 player. Resource wise, there are many others that can match or beat Apple, the most obvious being Microsoft (MSFT).

In the deep dive analysis of Nike (NKE) (read it here), I covered its growth potential in Asian countries. Later, I had one discussion about NKE on a stock forum, which prompted me to think deeper about the opportunities that China market presents to NKE. We'd like to pick companies managing to grow despite the worldwide recession. But given today's situation, it is reasonable to assume that the overall economic activities may slow down to such an extent that growth becomes unattainable for most of the companies. Nonetheless, we know that almost every company has some numbers from 'Wall Street' to beat, which, for some, is the key of the entire stock game. So the question is, does China market present a chance for Nike to beat its numbers? My answer: very likely.

1. Aggressive expansion may offset flat or declining revenue from existing stores. In the F2Q09 earning call, NKE management described its China market as:

China remains a premiere growth opportunity for the Nike brand. Revenue there is up 27% and futures are up 25%. Nothing has softened our enthusiasm for this market, or the Chinese consumers and their passion for sports. We’ve lightened our lead in brand awareness in China and now with more than 4,000 stores in tier-1 and tier-2 cities, we are well-positioned to compete and capitalize on the consumer connections we have built there.

What is going to drive Nike's (NKE) growth in the next 5-10 years? The answer is innovation and Asian countries. Let's dig a little deeper.

Innovation is particularly important for Nike in matured markets such as North America and Europe, where the product saturation has already been reached, price levels have been set, brand image/perception was well established, and competition is fierce, but won't take any new forms unless some of the players have significant missteps. In these markets, we have two levels of innovation. First, some technology progression and innovative marketing ideas seem to be a necessity to retain its current market position. The second level is beyond the first one, referring to the type of innovation that drives up revenue and market share, and we can call it growth innovation. The last such innovation is Nike+, the marriage between Nike and Apple, which is one of the key drivers of its footwear growth in US region in the past few years. Technically, it is not something that you can count on 100%; nobody could answer questions such as ‘when should we expect the next Nike+?’. Further, also a legitimate question, ‘will there be such an innovation at all?’.