Duff & Phelps (DUF)

With the biggest shopping season of the year just around the corner, we thought it would be timely to highlight some consumer sector companies that look attractive according to The Applied Finance Group’s (AFG’s) criteria for investment opportunity attractiveness, as they are in line to benefit from the upcoming seasonal spending patterns. The list of companies we have provided look the most attractive within the AFG consumer sector in terms of valuation attractiveness, economic performance, and overall investment attractiveness relative to their peers.

One of the companies that we feel particularly confident in is the retailer Kohl’s (KSS) which is currently a holding in The AFG 50, (a model portfolio of 50 large cap stocks designed to help Portfolio Managers save time, make more informed investment decisions, and outperform their benchmark). We are confident about Kohl’s competitiveness because they have a strong cash flow, strong execution, and have been outperforming their competition.

Next Week's Game Plan: Clean Energy Fuels (CLNE) Fuel Systems Solutions (FSYS), Fluor (FLR), Vulcan Materials (VMC), Diana Shipping (DSX), Burlington Northern (BNI), Joy Global (JOYG), Ralcorp (RAH), Applied Materials (AMAT), Macy's (M), Kohl's (KSS), Wal-Mart (WMT), Urban Outfitters (URBN), Nordstrom (JWN), Walt Disney (DIS), Ancestry.com (ACOM)

It seems it has been some time since I updated the performance of Standard & Poor's Dividend Aristocrats. Year to date through November 4, 2009, the Aristocrats have generated a better return than the Dow Jones Industrial Index, 12.2% versus 11.7%, respectively. However, the Aristocrats performance has trailed the return on the S & P 500 Index's return of 15.9%.

In the below table, I have shaded the rows for those companies that have cut their dividend this year.

Cummins (CMI), Caterpillar (CAT), 3M (MMM), Goldman Sachs (GS), Wells Fargo (WFC), IBM (IBM), Intel (INTC), Microsoft (MSFT), Apple (AAPL), Macy's (M), Home Depot (HD), Family Dollar (FDO), J.C. Penney (JCP), J.Crew (JCG)

The Conference Boards Index of Consumer Confidence dropped to 47.7 from 53.4 in September. While this is much higher than the readings in the low 20’s earlier this year, it is a very disappointing reading. Both the current situations index, and the expectations for conditions over the next six months dropped.

The present situation index fell to 20.7 from 23.0 and now stands at its lowest point since February of 1983, when it hit 17.5. The expectations component had seen a much larger recovery earlier this year, but it dropped from 73.7 last month to 65.7 in October. The number of people who see business as bad increased to 47.1% from 46.3% in September, while the percentage who saw business as good fell to 7.7% from 8.6% in September (where are those 7.7% of people located I wonder -- North Dakota?).

I am a firm believer in keeping things simple. However, you can simplify things to the point they no longer have value. In my opinion, a lot of the commonly used financial metrics can be very misleading unless you understand what is behind them. I would put EBIT, EBITDA and Dividend Payout in this category. As an investor in dividend stocks, I see Dividend Payout used a lot, so let’s take a closer look at it.

Most companies use debt for a variety of reasons in their operations. It could be either short term or long-term obligations. If there’s anything the 2007-2009 financial crisis has taught us, it is that excessively leveraged companies could easily blow up after a chain of negative events. Thus it pays to know what the debt situation for a particular company you are investing in actually is.

Some investors typically focus on debt to total assets to gain a perspective on the amount of the leverage the company has. While this method is widely accepted by some investors, I believe that it has some shortcomings, which might prevent investors from seeing the bigger picture. Most importantly comparing debt to total assets does not tell whether a company could service its debt obligations or not.

Retail stores have been among the hardest hit by the recent global recession, but it appears that finally some relief may be in sight. For the first time in 13 months retail sales rose, finishing up 1.1% in September. More big-ticket sales, a later Labor Day, and poor 2008 September numbers all contributed to the better-than-expected results.

Among the best performers were discounters such as Walgreen’s (WAG), which saw higher non-pharmacy sales, and Family Dollar (FDO), which saw its sales rise more than 5%. BJ’s Wholesale Club (BJ) and Costco (COST) also saw robust sales growth, suggesting that consumers are continuing to look for value. However, many teen and children’s retailers posted significant declines, a troublesome development since September performance usually gets a boost from the back to school rush.

Below we look at the market from a different view, if you had bought 1,000 shares of any S&P 500 stock what would have been the big winner? It turns out that a purchase of 1,000 shares of Google (GOOG) at the 3/9 close has returned $226,650 through the 10/7 close; far and away the biggest winner. There are only seven S&P stocks that are down since the market bottomed.

Oddest Retail Phenomenon in 30 Years: Family Dollar (FDO), Kraft (KFT), Kellogg (K), TJX (TJX), Coach (COH), Nordstrom (JWN)

F4Q09 Earnings Call

October 7, 2009 10:00 am ET

Symantec Corp. (SYMC) – Less than twenty minutes of the trading session had elapsed this morning when one investor exchanged approximately 30,500 option contracts on Symantec Corp. A portion of the trade looks like a closing transaction while the remainder of the activity represents fresh bullish positioning. Shares of the software company are currently trading 0.5% higher to stand at $16.49. It appears the trader originally purchased some 12,000 calls at the October 16 strike for an average premium of 1.42 apiece, back on May 8, 2009, when shares of SYMC were at $15.00. Today, the investor sold the lots to close out the now in-the-money call position for just 65 cents each. The apparent 77 cent loss on the closing sale is likely due, in part, to the eroding extrinsic (or time) value of the option premium on the calls. The loss, however, did not deter the investor from taking a new options approach on the stock. It appears he initiated a bullish risk reversal in the November contract by selling 9,300 puts short at the November 15 strike for 40 cents each, spread against the purchase of 9,300 calls at the higher November 17 strike for 75 cents apiece. The net cost of the reversal amounts to 35 cents per contract. The investor will amass profits on the trade if shares of Symantec rally at least 5% to surpass the breakeven point at $17.35 by expiration in November.

• Fed frets CRE collapse. In a just-revealed presentation to banking regulators last month, the Fed lamented that U.S. banks "are slow" to book losses on commercial real-estate loans being battered by slumping property values and rental payments (see below for more on commercial rentals). "Banks will be slow to recognize the severity of the loss - just as they were in residential," the Fed warned, suggesting banking regulators are girding for a rerun of the home-lending breakdown. NY Fed chief Bill Dudley echoed similar concerns in a speech this week, saying, "More pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures."
• Kindle goes global. Amazon.com (AMZN) announced late Tuesday a new version of its bestselling book reader that will wirelessly download books in more than 100 countries using AT&T (T) and its international roaming partners' network instead of Amazon's U.S. partner Sprint (S). The global Kindle will retail for $279, while the price of the domestic version drops by $40 to to $259. Electronic book readers are having a breakout year; in a report being released today, Forrester will revise its sales volume forecast prediction for the industry to 3M devices, up from a previous estimate of 2M.
• Fannie, Freddie lend a hand. Sources say Fannie Mae (FNM) and Freddie Mac (FRE) are readying a program that will help mortgage banks acquire the short-term credit they need to make home loans by committing in advance to purchase certain mortgages. The plan builds on an undisclosed pilot that Freddie has with lenders Provident Funding Associates and NattyMac, which provides short-term loans to mortgage lenders. GSE commitments to buy loans reduce the risk lenders will be stuck with GSE-reject loans which must then be resold at huge discounts.
• Nine EU members have 'excessive debt.' The European Commission warned nine countries, including Germany and Italy, that their budget deficits are too large. Twenty of the EU's 27 member countries are on track to breach the bloc's 3%-of-GDP limit on deficits, but the nine warned today "are neither close to the reference value nor temporary," the Commission said.
• HSBC in talks for RBS Asia assets. Sources say HSBC Holdings (HBC) is in advanced discussions to buy Royal Bank of Scotland's (RBS) retail and commercial banking assets of in China, India, and Malaysia after RBS's negotiations with Standard Chartered faltered yesterday.
• Santander: World's biggest IPO in 18 months. Santander's (STD) spinoff of part of its Brazilian unit, the world's biggest IPO in 18 months, will bring in about $8B. Spain's biggest bank hopes to open 600 branches in Brazil by 2013, and carve out new business in lending to companies and homebuyers as it bets on the Brazil's expansion while Spain wades through its worst recession in 60 years.
• BofA shortlist gets very short. Sources say Bank of America (BAC) has narrowed its list of internal candidates for CEO to Chief Risk Officer Gregory Curl and Brian Moynihan, the consumer and small-business banking chief - although the search committee continues to consider an outside hire. If the 61-year-old Curl were named CEO, it would likely be a two-year stint; Moynihan, 49, would likely be a longer-term choice.
• Europe contracts more than expected. Euro area GDP fell by 0.2% in Q2, according to Eurostat's second estimate (.pdf), far less than Q1's 2.5% contraction and the 4.8% decline of a year ago. In comparison, U.S. GDP also declined 0.2% in Q2, while Japan's GDP increased by 0.6%. The decline was sharper than the 0.1% dip estimated last month. While the report is "slightly negative," economist Nick Kounis said, it "adds nothing to the big picture: The economy very likely returned to growth in Q3, and a rather moderate recovery is likely to follow in the coming quarters."
• Office rents plunge. Office rents fell 8.5% Y/Y in Q3, the biggest drop since 1995, according to research firm Reis. The decline came as renters returned a net 19.6M square feet to landlords; YTD they've given back 64.2M square feet - the highest negative absorption rate on record. The vacancy rate of 16.5% is a five-year high. With more job losses still predicted, many say it's too soon to look for a bottom: "If employers are still shedding jobs, they are also going to shed space."
• Better economy doesn't inspire spending. Consumers are feeling an improvement in the U.S. economy, but concerns about their personal finances are limiting their spending plans. Only 19% of respondents in Discover's U.S. Spending Monitor said they expect to spend more in the next month, even though 33% now feel an improvement in economic conditions. "There appears to be no indication consumers are willing to increase their spending," Discover's Julie Loeger said.
• Mtg. apps rise. Mortgage applications increased 16.4% from a week ago, MBA said this morning, led by an 18.2% in refinancings. Average rates on 30-year fixed mortgages fell five points to 4.89%.

Earnings: Wed. Before Open

• Costco (COST): FQ4 EPS of $0.83 beats by $0.06. Revenue of $22.38B (-3.1%) in-line. Says sales were negatively impacted by ongoing softness in U.S. sales, higher employee benefit costs, and lower U.S. dollar amounts of international profits as a result of weaker foreign currencies. (PR)
• Family Dollar Stores (FDO): FQ4 EPS of $0.43 beats by $0.02. Revenue of $1.81B (+2.5%) in-line. Gross profit as a percentage of sales rose to 34.8% from 33.6% last year. Co. ends year with $439M in cash vs. $158M a year ago. (PR)

Earnings: Tue. After Close

• AngioDynamics (ANGO): FQ1 EPS of $0.09 beats by $0.01. Revenue of $50M (+13%) vs. $48M. Shares +2.1% AH. (PR)
• Yum! Brands (YUM): FQ3 EPS of $0.70 beats by $0.12. Revenue of $2.8B (-2%) in-line. Shares +1.3% AH. (PR)

Today's Markets

Asia markets were mostly higher Wednesday following Tuesday's strong U.S. showing. Europe stocks are flat at midday, and premarket futures are slightly higher.

4:10 PM, Oct 6, 2009 --

• NYSE up 104.54 (1.5%) to 6,899.67.
• DJIA up 131.50 (1.4%) to 9,731.
• S&P 500 up 14.26 (1.4%) to 1,055.
• Nasdaq up 35.4 (1.7%) to 2,104.

GLOBAL SENTIMENT

Speculating on Gambling: WMS Industries (WMS)

As Wall Street investors ponder their strategies, the key driving factor is revenue earnings. Some argue this third quarter will show growth with a slight bounce upwards in GDP. There are signs that companies may report better earnings compared to the bottoms of last quarter (Q2) in the next week ahead.

However, we cannot discount the effects of lagging U.S. sectors such as the automobile industry that suffered severe cash-for-clunkers stimulus hangovers as sales plummet with GM down 45%, Chrysler (FIATY.PK) down 42%, and Ford (F) down 5%. Sobering statistics still persist in many sectors demonstrating that consumers are unable to propel significant growth without artificial government stimulus.

Keeping an eye on the big movers in the market does not help investors determine which stocks are poised to continue their upward or downward movement. To help our devoted readers identify the movers that still look fundamentally sound and those to walk away from, ValueExpectations.com has scored each of the top 10 Hot and Cold stocks of the month based on Valuation Attractiveness and Economic Margin Change.

If an investor should consider adding any of these stocks as a holding for a portfolio, one should look for companies with attractive valuations and expected improvements in a company’s Economic Margin (EM) which essentially is a measure of a company’s true economic profitability. As an additional level of analysis, we also recommend understanding the embedded expectations that are priced into each of these stocks.

The S&P 500 moved into the green in May and has never looked back. So far in Q3, it's up a whopping 16.8%, even better than Q2's 15.9% total return. Despite the large advance, 40 of the members are actually down QTD. Thinking that there might be some opportunities from the long side, I wanted to take a closer look, so I created a screen in StockVal to narrow the list. Here is how I constrained the group:

• 50dma > 200dma (maximum 10%)
• PE F12M <120% of 5yr Median
• Net Debt to Capital < 60%

The first constraint is to assure that the trend is up but it isn't overextended. The second constraint makes sure the PE isn't super-inflated. The final factor kicks out balance-sheet disasters. Here are the 15 stocks: