Education stocks have been hammered over the last few months. I’ve looked into many stocks in the industry, but this article focuses primarily on ITT Educational Services (ESI), as I like its current valuation relative to its primary competitors Apollo Group (University of Phoenix) (APOL) and Devry (DV), both of which are looking more and more attractive each day as well.

As I mentioned in a previous blog post, I recently started a position in Pfizer (PFE) in my self-directed IRA account. I like to watch the highest yielding stocks in the Dow (the top 10/30 are also known as "the dogs of the Dow") as I like the long-term data supporting this strategy and its simplicity, and think this screen can quickly find quality companies that may be beaten down to levels where they're undervalued and may offer great risk/reward. The current dogs of the Dow are listed below (in order from highest yielding (5.66%) to lowest yielding (3.16%) - thank god Citigroup (C) cut its dividend), with my brief thought on each company:

Pfizer (PFE) - Favorite of the group (read on to learn why).
Verizon (VZ) - Haven't researched, good company.
AT&T (T) - Haven't researched, good company, iPhone.
Altria Group (MO) - Late to the party, everyone knows this is THE recession proof play.
General Motors (GM) - No thanks to autos, rather look at Ford (F) once it's beaten down some more.
Dupont (DD) - Haven't researched.
General Electric (GE) - Next favorite after PFE, diversified, global exposure, no major worries here.
J.P. Morgan (JPM) - Stay away from black box banks.
Merck (MRK) - Disappointing Vytorin news, check out the price action to see what the street thinks of it.
Home Depot (HD) - Home improvement / consumer exposure...no thanks. At some point will be great value...not yet.

Historically speaking, U.S stocks are cheap on a P/E and P/B basis. Global stocks are not, by any means. China and India are the worst on a valuation basis, trading at nearly two times 10-year historical P/E and P/B ratios. The U.S, meanwhile, is trading at a discount to its 10-year historical P/E and P/B ratios. The chart below is an interesting slide from the Morgan Stanley report I spoke about previously. The only markets that are trading at a discount to their 10-year historical P/B ratios are the U.S, the S&P 500 index, the MSCI Europe Index, and Japan. It looks a little better on a P/E basis, where all North America and Developed Non-U.S markets are still at a discount to 10-year historical P/E ratios. All emerging markets are still at a premium.

I guess one reason for this may be because the U.S had its run during the dot com era when prices were inflated, which would have bumped that 10-year historical ratio up. Nevertheless, we've still been in about a 4-year bull market, regaining almost all of the losses from the 2000-2003 era. Going out further, we've really been in about a 20-year bull market. Or, maybe all of the historical P/E and P/B ratios are inflated a bit, and have been for some time? If that is the case, then bear market here we come. I don't know...I just don't see how it can go up in a straight line forever -- look at an 80-year chart and you'll see that it doesn't; between 1965 and 1985 it was pretty flat --- with an 80-year time horizon, sure, you'll be fine. But over the next decade, it certainly is not as clear. I truly could see a major correction coming in the next 3 years -- I'm not talking the apocalypse, but something major --- and I imagine it will be a slow, painful death as opposed to a panic sell-off -- or maybe just a flat market...better than a crash, but who wants to earn 0% for three years?

Sherwood has now offered Rentech (RTK) a buyout at $2.28/share, subject to "due diligence and the reaching of acceptable terms", similar to how they worded their offer to buyout Transworld. The stock went from $1.80 to a high of $2.02 after the announcement, but is now settling back at around $1.90. Obviously, the market doesn't think this will happen as there is still about a ~20% difference in the stock price and the offer price. Again, I don't think they take it per the rationale in my original post, but who knows. Below is the text of the letter.

I've gotten my hands on a December 12th research report from Morgan Stanley. In the report they highlight their 2008 economic forecast, and highlight their single best stock recommendations for each industry they cover, all-in-all about 45 different stock recommendations, some long ideas, some short ideas (you may have heard they called Citigroup (C) the single best short idea for 2008). Other notable shorts are JetBlue (JBLU) and American Express (AXP). They recommend shorting AXP and against a long position in MasterCard (MA).

I read the report and found some interesting things to note. First, their economic forecast takes a different view than I have seen elsewhere. A few highlights:

JoS. A. Bank (JOSB) turned in solid results Thursday morning when they reported a 27% rise in quarterly net income for Q3. The stock was up over 10% intraday, but settled back to close up around 4% on the day. The stock fell hard during the conference call when management stated "while November was fairly good, December has been somewhat sluggish, however the biggest days are ahead of us so it is too soon for us to prognosticate on the results for December". I think two weeks worth of data can safely be ignored for the time being. I'll be sure to tune into Dec/Jan/Feb same store sales numbers for some insight on how the 4th quarter is shaping up before taking any action --- but my guess is the long-term story will still merit holding the stock.

I've liked the stock for some time, primarily for its valuation compared to its growth prospects. While I would agree with an underweight in the consumer discretionary sector as a whole, if you are looking for some exposure to a few retail stocks, this would be one to take a closer look at. The good thing is they offer a good product at some of the lowest prices around, so they may be able to gain market share as consumers shift towards more moderately priced goods.

American Eagle Outfitters (AEO) released 3Q earnings yesterday before the bell (see conference call transcript). They basically were inline with the estimates at $0.45/share, but after an initial spike at the open the stock fell a little over 5% to a low of $20.20. It has rebounded since and appears to have temporarily bottomed, but the long term trend still looks ugly on a technical basis as it has fallen through support and continued its long-term trend downward since last January when it set its all-time high at $34.80 (now nearly 42% from this level).

Needless to say, I'm still going to hold here, and will likely average down if the stock continues lower under selling pressure. It is still just way too cheap here at an 11.0 P/E and 1.5 P/S compared to its competitors, Abercrombie & Fitch (ANF) (15.5 P/E and 1.8 P/S), Guess? (GES) (22.6 P/E), and Urban Outfitters (URBN) (29.2 P/E and 2.8 P/S), especially when they continue to issue earnings and guidance that are inline with analyst estimates. This is definitely one of my favorite GARP (growth at a reasonable price) holdings in the fund.

It's almost time for the annual reshuffling of the Dogs of the Dow. In particular, I have my eye on Citigroup (C) and Pfizer (PFE). These guys have been beaten down too far. While there is definitely valid reasons for the downside pressure in both companies, you have to begin to think that most of the bad news is priced in. Obviously, Citi would carry more uncertainty and risk considering the uncertainty that lies ahead (further writedowns, etc.).

However, both stocks have impressive yields (a requirement to be a Dog), at 6% for C and 5% for PFE. You would think that Pfizer would stand-up better if this recession that every one talks about comes to fruition.

I picked up some Jos. A. Bank Clothiers, Inc. (JOSB) yesterday ahead of Abercrombie & Fitch (ANF) earnings today. It's tough to recommend a retail stock with all the worries surrounding the consumer, but the current valuations are extremely attractive.

JOSB closed the day at 9.6X 2008 earnings (2 qtrs of which are in the books), putting its PEG at about 0.5 and its price/sales at 0.8. It's nearly 45% off it's 52 week high set on June 12th of this year. It has nearly a 50% short interest. The analyst 5-yr expected growth rate is 18.0 and the company's 5-yr historical growth rate is ~40%.

Rentech (RTK) popped yesterday following the announcement that Sherwood Overseas Investments is interested in taking the company private at $2.70/share. Currently, RTK is up 21% at $2.15, though it saw a high of $2.33 (up 32%) earlier. It appears to be pulling back now.

Sherwood sent a letter (copied below) to the board stating their rationale that the recent weakness in RTK's share price may hinder their ability to execute their business plan and even suggested they spinoff their recently acquired fertilizer business.

Not since Samuel L. Jackson graced the screen as Danny Roman in the Negotiator have I seen such incredible negotiating skills. In the last month Garmin (GMRN) has managed to turn a very sticky situation into a very big win. Perhaps there was some luck involved, but at this point, I think we can give them the benefit of the doubt. The company's future ability to access the mapping technology their products rely on (at reasonable prices) had been in limbo ever since Nokia (NOK) announced its acquisition of Navteq (NVT) and then TomTom made a bid for the only other major map-maker Tele Nav.

Fast forward a few months, and Garmin has managed to seal a deal with Navteq for rights to their maps through 2015, with an option to extend until 2019. Simultaneously, they have forced TomTom to pay ~45% more for Tele Nav, at an astounding acquisition price of $4.2 billion. This acquisition would have forced debt-free Garmin to take on a major liability and, in my opinion, would have taken focus away from their core business…selling their GPS and personal navigation devices. Let someone else make the maps.

Ok, maybe Rentech (RTK) is not THE answer. However, they do offer a valid, intermediate solution to our foreign dependence on oil through their coal-to-liquids [CTL] and gas-to-liquids [GTL] technologies. I’ve been following this company closely for 7 years – I first learned of them when I was an engineering intern at their pilot plant in Denver during college. I’ve seen compelling change in the company and in the industry over the last 3 years that has prompted me to start buying the stock.

The key realization here is that the U.S. is sitting on the largest coal reserves in the world and that there is a CLEAN way to turn this coal into CLEAN burning fuel. Copied below (in quotes) are some facts about CTL provided by the Coal-To-Liquids Coalition (see here (.pdf) for appropriate references):

In my last article, I disagreed with a UBS downgrade of Under Armour (UA). Not that I am after UBS, but they have changed their rating on another one of my portfolio holdings --- this time an upgrade on NII Holdings (NIHD) due to recent share price weakness. I think they have it right this time, and in fact, I was already in the process of writing this article about the attractive valuation when I learned of the ratings upgrade. I too feel the shares have been overly punished during the last 2 weeks.

Shares are now nearly 26% off of their 52 week highs, and trading below their 50 and 200 day moving averages. Following the upgrade, there was a slight lift in the stock but not by as much as I would have expected…it closed Friday at $72/share. Another catalyst that lies ahead are their quarterly earnings that will be released before market open on Thursday, Oct. 25th. I think the numbers will be inline with expectations at a minimum and I wouldn't be surprised if they came in ahead of estimates.

Following a UBS downgrade on 9/26, Under Armour (UA) has sold-off approximately 10%. Their primary rationale for the downgrade was that warmer September temperatures will prevent sales of cold weather gear, a factor that was key to last year's sales over the same period. UA is now nearly 20% off its 52 week high. UBS stated in their report that they were really only instituting a short-term sell on the stock; the analysts still like the long-term outlook and growth potential.

So do I. This stuff is as hot as it gets right now in specialty apparel. While it is somewhat pricey at almost 1.75x next years growth, shareholders will pay up for the growth potential and potential catalysts that lie ahead. With earnings a few weeks away, I think now is a good time to start buying. The stock and the sector are beaten down unfairly in my opinion. I think think the "short-term sell" period is over --- buyers will soon be back for the long-term story here -- perhaps into earnings on Oct. 31st.