Joy Global Stock Will Put A Smile On Your Face

Coal mining equipment maker Joy Global (NYSE: JOYG) just raised its financial outlook. Does this mean you should buy its shares?

Wednesday morning, Joy Global announced third quarter earnings that beat expectations and it raised guidance. Joy Global's third-quarter net income of $173 million was 45% more than the year before and it beat analysts' expectations by a penny when it reported adjusted EPS of $1.54 as its total net sales -- excluding a recently sold drilling unit -- grew 29% to $1.1 billion.

For 2011, Joy Global now expects 40 cents a share higher earnings of between $5.70 and $6.00 a share on higher revenue between $4.3 billion and $4.5 billion.

That sounds good -- but should you buy Joy Global stock? Here are four reasons why you might consider doing so:

• Cheap stock. Joy Global ’s price-to-earnings-to-growth ratio of 0.69 (where a PEG of 1.0 is considered fairly priced) means its stock is cheap. It currently has a P/E of 16.5 and its earnings per share are expected to grow 23.8% to $7.12 in 2012.
• Strong earnings reports. Joy Global  has been able beat analysts’ expectations consistently and in all but one of its past five earnings reports.
• Increasing sales and profits and cash rich balance sheet. Joy Global has been increasing sales but profits have fallen. Its revenue has grown at a 9.9% annual rate from $2.4 billion (2006) to $3.5 billion (2010) while its net income has increased at a 2.7% annual rate from $416 million (2006) to $462 million (2010) — yielding a wide 13% net profit margin. Its debt has risen but not as fast as its cash. Specifically, its debt rose at a 41.8% annual rate from has $98 million (2006) to $396 billion (2010) while its cash increased at an annual rate of 68.8% from $101 million (2006) to $819 million (2010).
• Out-earning its cost of capital -- and improving. Joy Global is earning more than its cost of capital – and it’s improving. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Joy Global's EVA momentum was 3%, based on first six months' annualized 2010 revenue of $3.3 billion, and EVA that rose from first six months' annualized 2010's $140 million to first six months' annualized 2011's $228 million, using a 12% weighted average cost of capital.

This company looks like it might be worth considering as a place to park your money.

Don't Dress Your Portfolio in PVH Shares

You've probably never heard of PVH Corp. (NYSE: PVH) but you've probably heard of some of its brands. The former Phillips Van Heusen -- it changed its name in June 2011 probably because it gets most of its revenues from other brands -- owns Calvin Klein and IZOD and it licenses a slew of other clothing brands. But Tuesday it raised its forecast for sales and profits. Should you should invest in PVH shares?

PVH now believes that it will generate revenues and EPS for 2011 that are higher than Wall Street was expecting at the beginning of the week. Specifically, PVH expects revenues between $5.78 billion and $5.82 billion -- as much as $80 million more than analysts' $5.74 billion forecast. Moreover, PVH's 2011 EPS are now forecast to range from $5.00 to $5.12, as much as 14 cents more than Wall Street's forecast of $4.98.

That sounds good -- but is it enough to warrant an investment in PVH stock? Here's one reason why it might:

• Strong earnings reports. PVH has been able beat analysts’ expectations consistently and in all of its past five earnings reports. In its most recent quarter, PVH's $1.07 beat expectations by 12.63%.

Three reasons to hesitate:

• Expensive stock. PVH’s price-to-earnings-to-growth ratio of 2.24 (where a PEG of 1.0 is considered fairly priced) means its stock price is expensive. It currently has a P/E of 30 and its earnings per share are expected to grow 13.4% to $5.68 in FY 2013.
• Increasing sales -- but declining profits and more debt-laden balance sheet. PVH has been increasing sales but profits have fallen. Its revenue has grown at a 21.7% annual rate from $2.1 billion (2007) to $4.6 billion (2011) while its net income has declined at a 23.2% annual rate from $155 million (2007) to $54 million (2011) — yielding a tiny 1% net profit margin. Its debt has risen far faster than its cash. Specifically, its debt rose at a 56.5% annual rate from has $400 million (2007) to $2.4 billion (2011) while its cash increased at an annual rate of 8.1% from $366 million (2007) to $499 million (2011).
• Under-earning its cost of capital -- but improving. PVH is earning less than its cost of capital – but it’s improving. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, PVH's EVA momentum was 13%, based on first six months' annualized 2010 revenue of $3.4 billion, and EVA that rose from first six months' annualized 2010's negative $817 million to first six months' annualized 2011's negative $379 million, using a 12% weighted average cost of capital.

To get my investment nod, PVH would need to strengthen its balance sheet, tighten its costs, out-earn its cost of capital, and accelerate earnings growth. Changing its name does not help it deal with any of these challenges. But it does make me question whether management thinks it can pull off a fast one on shareholders.

Donaldson Could Clear the Air For Your Portfolio

Air filter maker Donaldson Corp. (NYSE: DCI) reported better than expected results in the second quarter in Monday's report. Is this the signal you need to buy the stock?

Donaldson's earnings for the quarter ending July 31 (also the end of its fiscal 2011) were ahead of expectations. Its $65.8 million in quarterly profit were 29% above the previous year's net income and its $0.84 cents a share EPS beat expectations by a nickel.

Donaldson's sales also grew fast -- by 21% to $625.5 million -- $5.5 million more than Wall Street expected thanks to 26% growth in its engine-products segment, which includes aftermarket, aerospace and defense products.

And Donaldson remains optimistic. It's forecasting 7% to 15% sales growth for FY 2012 and EPS between $3.15 and $3.45 a share on sales of $2.45 billion to $2.6 billion, "bracketing the $3.21 a share on $2.52 billion in revenue currently expected by analysts polled by Thomson Reuters," according to MarketWatch.

Is this enough of a reason to invest in Donaldson? Probably not. But here are three reasons to consider it:

• Strong earnings reports. Donaldson has been able beat analysts’ expectations consistently and in all of its past five earnings reports.
• Increasing sales and profits and cash-rich balance sheet. Donaldson has been increasing sales and profits. Its revenue has grown at a 4.9% annual rate from $1.9 billion (2007) to $2.3 billion (2011) while its net income has increased at a 10.6% annual rate from $151 million (2006) to $226 million (2010) — yielding a solid 10% net profit margin. It has $206 million in long term debt and its cash rose at an annual rate of 49.3% from $55 million (2007) to $273 million (2011).
• Out-earning its cost of capital and improving. Donaldson is earning more than its cost of capital – and it’s improving. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Donaldson EVA momentum was 2%, based on 2010 revenue of $1.9 billion, and EVA that rose from 2010's $49 million to 2011's $92 million, using an 11% weighted average cost of capital.

One reasons to hesitate:

• Expensive stock. Donaldson’s price-to-earnings-to-growth ratio of 2.38 (where a PEG of 1.0 is considered fairly priced) means its stock price is expensive. It currently has a P/E of 20 and its earnings per share are expected to grow 8.4% to $3.51 in FY 2013.

If Donaldson sustains its most recent earnings growth rate of 29%, then the stock is quite cheap. But if analysts' estimates are accurate, I would wait for a market correction to pick up shares of Donaldson.

Dresser-Rand Could Drill an Investment Dry Hole

Oil and natural gas exploration and production equipment maker, Dresser-Rand Group (NYSE: DRC), popped 13.6% yesterday after announcing it would purchase $150 million worth of its stock, or about 5%, while issuing bullish guidance. Is this a one-day fluke or is it a buy signal?

Dresser-Rand has not exactly been on a roll lately. After all, its second quarter 2011 earnings were down and way below expectations. For example, its $10.7 million in net income was 69% below 2010's second quarter and its EPS of $0.14 per share was a whopping $0.31 less than the average of 13 analysts polled by Thomson Reuters.

The good news for Dresser-Rand was that its total revenues for the quarter of $514.1 million were 19.2% higher than in 2010 but roughly $30 million below expectations. The increase was due to higher volumes reflecting the recovery in global energy infrastructure markets.

With all the flopping around in Dresser-Rand's numbers, should an investor buy or sell its stock? Here are two reasons to consider buying it:

• Cheap stock. Dresser-Rand ’s price-to-earnings-to-growth ratio of 0.56 (where a PEG of 1.0 is considered fairly priced) means its stock price is pretty expensive. It currently has a P/E of 34.4 and its earnings per share are expected to grow 61% to $3.19 in 2012.
• Increasing sales and profits and cash-rich balance sheet. Dresser-Rand has been increasing sales and profits. Its revenue has grown at a 7.5% annual rate from $1.5 billion (2006) to $2 billion (2010) while its net income has increased at a 16.4% annual rate from $79 million (2006) to $145 million (2010) — yielding a 7% net profit margin. It has $370 million in long term debt and its cash rose at an annual rate of 30% from $147 million (2006) to $421 million (2010).

Two reasons to hesitate:

• Inconsistent earnings reports. Dresser-Rand  has been able beat analysts’ expectations inconsistently and has done so in three of its past five earnings reports. And in the quarter ending June 2011, Dresser-Rand missed estimates by 70%. This big miss puts its credibility on thin ice.
• Under-earning its cost of capital and doing worse. Dresser-Rand  is earning less than its cost of capital – and it’s getting worse. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2010, Dresser-Rand’s EVA momentum was negative 8%, based on six months’ annualized 2010 revenue of $1.9 billion, and EVA that fell from six months’ annualized 2010 -$26 million to six months’ annualized 2011 -$179 million, using an 11% weighted average cost of capital.

If you believe management's bullish forecast, consider buying now. If you're skeptical, take a fresh look after the company reports third quarter results.

Oracle Predicts a Bright Future

Business software and hardware maker, Oracle (NASDAQ: ORCL) has had a pretty good run since in 1986 IPO -- its stock is up about 40,000% from the split-adjusted $0.08 it traded at back then. Does it still have further to run?

One thing's for sure -- investors are increasing their bets that Oracle stock is going to fall. How so? As of August 15, Oracle stock ranked fourth on the list of top 50 increases in short interest on NASDAQ from the previous two weeks. Specifically, short interest in Oracle stock is up 57% to 34.6 million shares from the period ending July 29.

In its second quarter, Oracle beat expectations. It reported 75 cents a share -- four cents ahead of expectations. But its revenues of $10.8 billion only met expectations and its hardware sales -- from its purchase of Sun Microsystems -- fell 6%. Although those sales make up only about 10% of its total revenues, Oracle stock fell 6% in after-hours trading on the earnings announcement.

Is the rise in Oracle short-interest related to expected bad news on hardware sales when it reports its third quarter results next month? Does this mean you should avoid the stock?

Here are three reasons to consider buying it:

• Good quarterly earnings. Oracle has been able to surpass analysts’ expectations in all of its last five earnings reports.
• Oracle is out-earning its cost of capital and it's improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Oracle's EVA momentum was 4%, based on 2010 revenue of $26.8 billion, and EVA that rose from $2 billion in 2010 to $3.1 billion in in 2011, using a 10% weighted average cost of capital.
• Increasing sales and profits and strong balance sheet. Oracle has been increasing sales and profits. Its $35.6 billion in revenues have risen at an average rate of 18.6% over the last five years while its net income of $8.5 billion has increased at the same annual rate -- yielding a tremendous 24% net profit margin. It has no debt and its cash rose at a 23.3% annual rate from $7 billion (2007) to $16.2 billion (2011) to during the period.

One reason to hesitate is that Oracle is a fairly expensive stock. Oracle's price to earnings to growth of 1.38 (where a PEG of 1.0 is considered fairly priced) means it is fairly expensive. It currently has a P/E of 15.5 and is expected to grow earnings 11.2% to $2.58 in fiscal 2013.

My hunch is that there is a good reason that Oracle's short interest has spiked so much. Thus I would be inclined to wait until the shorts have taken their profits -- at which point Oracle stock will be lower -- before buying.

Hormel Foods Is Too Rich For My Blood

Hormel Foods (NYSE: HRL), maker of Dinty Moore Beef Stew and Jennie-O turkey products, just posted better than expected earnings. But will it make a hearty meal for your investment portfolio?

If its third quarter 2011 results, reported Thursday, are any indication, the answer is yes. After all Hormel net income for the period was up 15% thanks to solid sales of its grocery items and Jennie-O turkey products and good overseas revenues.

And Hormel beat expectations and raised guidance -- a generally good formula for boosting stock prices. Hormel earned $98.5 million, or $0.36 per share -- that was two cents a share better than analysts expected. Its 10% revenue rise to $1.91 billion beat expectations by $40 million. And Hormel raised its fully year earnings forecast by a few pennies from $1.67 to $1.73 per share to $1.70 to $1.75.

But one good quarter does not necessarily mean you can make money investing in Hormel stock. Here are three reasons such an investment might be good:

• Good quarterly earnings. Hormel has been able to meet or surpass analysts’ expectations in six of its last six earnings reports.
• Hormel is out-earning its cost of capital. Hormel is earning more than its cost of capital – and it’s progressing. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Hormel's EVA momentum was 2%, based on first six months' annualized 2010 revenue of $6.9 billion, and EVA that rose from $158 million in the first six months' annualized 2010 to $265 million in in the first six months' annualized 2011, using an 8% weighted average cost of capital.
• Increasing sales and profits and healthy balance sheet. Hormel has been increasing sales and profits. Its $7.2 billion in revenues have risen at an average rate of 5.6% over the last five years while its net income of $396 million has increased at a 8.5% annual rate -- yielding a slim 6% net profit margin. It has no debt and its cash has climbed at a 31.7% annual rate from $172 million (2006) to $518 million (2010).

One reason to hesitate is that it's a very expensive stock. Hormel's price to earnings to growth of 3.61 (where a PEG of 1.0 is considered fairly priced) means it is very expensive. It currently has a P/E of 16.6 and is expected to grow earnings 4.6% to $1.80 in fiscal 2012.

Unless the forecast for 2012 earnings is way too low, Hormel's stock price is way too high. I would wait until the price comes down or the earnings forecast goes up before investing.

Why McDonald's Is More Than Empty Calories For Your Portfolio

McDonald's (NYSE: MCD) has been a powerhouse under its current CEO and it looks like that momentum could continue after he retires. But is it too late to tuck into McDonald's shares?

Fortune wrote an interesting article about its current CEO Jim Skinner who has helped to boost McDonald's sales per store by 50% since he took over in 2004. At its 33,000 stores in 118 countries, average sales have increased from $1.6 million (2004) to $2.4 million (2010). And under Skinner, McDonald's stock has returned over 250% vs. 16% for the S&P 500.

Skinner has done this through excellent management. This is particularly important since McDonald's are 80% owned by franchisees who are not under McDonald's direct control. Thanks to Skinner's experience running McDonald's stores, he will only allow new products into the system if they do no involve a big interruption in the way the stores currently operate while offering profit potential in excess of their costs and global sales potential.

McDonald's applies a similarly rigorous process for developing management. After all, prior to Skinner, its two previous CEOs died suddenly -- thus putting a premium on management depth. Skinner has created an effective leadership development program and he makes sure that each manager has a number two who is ready to take over at a moment's notice and someone else on deck who can take over from the number two if that person gets tapped for a bigger job.

And its second quarter earnings report was excellent. McDonald's reported a 15% increase in profits and beat EPS expectations by seven cents a share -- posting second quarter EPS of $1.35 as more consumers dined out and McCafe beverages boosted sales, according to Bloomberg. Sales at its stores open more than 13 months rose 5.6% -- beating analysts' expectations of 4.1% growth.

Does all this mean that McDonald's should be in your portfolio? Here are three reasons to consider buying the stock:

• Attractive dividend. McDonald's dividend yield is a relatively high 2.73%.
• Good quarterly earnings. McDonald's has been able to surpass analysts’ expectations in four of its last five earnings reports.
• McDonald's is out-earning its cost of capital. McDonald's is earning more than its cost of capital – and it’s progressing. How so? It produced no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, McDonald's EVA momentum was 3%, based on first six months' annualized 2010 revenue of $23.1 billion, and EVA that rose from $2.3 billion in the first six months' annualized 2010 to $3 billion in in the first six months' annualized 2011, using a 9% weighted average cost of capital.

Here are two reasons to hesitate:

• Expensive stock. McDonald's price to earnings to growth of 1.81 (where a PEG of 1.0 is considered fairly priced) means it is expensive. It currently has a P/E of 18.1 and is expected to grow earnings 10% to $5.74 in fiscal 2013.
• Increasing sales and profits -- but more debt-laden balance sheet. McDonald's has been increasing sales and profits. Its $24.1 billion in revenues have risen at an average rate of 3.6% over the last five years while its net income of $4.95 billion has increased at a 14.6% annual rate -- yielding a tremendous 21% net profit margin. Its debt has risen faster than its cash. Its debt has climbed at an 8.2% annual rate from $8.4 billion (2006) to $11.5) while its cash inched up at a 3.4% annual rate from $2.1 billion to $2.4 billion during the period.

McDonald's is a well-managed company with solid future prospects. At its current price, it looks like investors have already discovered this. But it should definitely be on your shopping list when market plunge as they did earlier in the month.

Google's a Buy At Current Levels

S&P downgraded Google (NASDAQ: GOOG) to sell last week after its $12.5 billion acquisition of Motorola Mobility (NYSE: MMI). Then S&P changed its rating to hold after Google's stock price fell. Should you buy the stock?

On August 16, S&P's Scott Kessler, who I have met with several times over the years, downgraded Google to Sell from Buy. Tuesday, he upgraded Google from Sell to Hold. His reasoning for downgrading it on the 16th was that if Google were to enter the smartphone manufacturing market, the business would be hit with higher costs which would hurt Google's profits and put it in conflict with its current partners who make Android OS handsets.

But now Kessler thinks that the Motorola Mobility acquisition could -- if it is completed -- give Google a strong patent portfolio and that the decline in its stock to $500 a share, S&P's price target -- means that the stock is now appropriately valued after declining 20%.

Is this a signal that you should consider adding Google stock to your portfolio? Here are four reasons to consider the purchase:

• Low priced. Google's price to earnings to growth ratio of 0.94(where a PEG of 1.0 is fairly priced) means it is inexpensive. Google has a P/E of 18.7 and is expected to grow 19.8% to $37.14 in 2012.
• Good earnings reports. In a July 15 earnings report, Google announced earnings of $8.76 per share on revenue of $9 billion – 12% and 39% higher, respectively, than analysts’ expectations of $7.86 per share on $6.5 billion in revenue. Including this report, Google has beaten earnings expectations three out of the last five quarters. This ability to beat expectations fairly consistently, and by decent margins, is a good sign for Google's stock price.
• Out-earning its cost of capital. Google is earning well in excess of its cost of capital and that’s growing. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In the first six months of 2011, Google’s EVA momentum was 1%, based on annualized first six months' 2010 revenue of $27.2 billion, and EVA that grew from $2.9 billion for the first six months' annualized 2010 to $3.0 billion for the first six months' annualized 2011 using a 9% weighted-average cost of capital.
• New Revenue Stream in Google+ and Continued Android Success. Google+ (still in an invite only beta-like stage) already has 10 million members and over 550,000 Android phones are being activated per day. With its new Chrome OS operating system just getting started on retail computers, Google is showing that it is much more than just a search engine.

The recent market slump has created some buying opportunities for great companies. With Google trading 27% below its December 2007 all-time high, concerns about the Motorola acquisition are overblown. The company has many strong fundamentals and the stock price does not fully reflect them.

Abercrombie & Fitch Could Fit Your Portfolio

Abercrombie & Fitch (NYSE: ANF) has offered to pay members of the cast of MTV's Jersey Shore not to wear its clothes on the air. That is a brilliant piece of marketing since it has garnered massive amounts of publicity for the clothing retailer while using the show's popularity at the same time defining itself as the opposite of the Jersey Shore ethos. Is A & F equally good at creating shareholder value?

After an 8% drop in its stock price Wednesday, the short-term answer is clearly no. To understand why, it's worth looking at the earnings it reported -- and they were great except for one problem. For its quarter ending July 30, A&F reported $32 million in net income, 64% more than the year before. Its adjusted earnings of 37 cents a share beat expectations by a whopping 30 cents a share.

A&F's revenues also soared. They were up 23% to $916.8 million. U.S. sales rose12%, while international sales leaped 74%.

The problem for A&F was that it could not increase its prices as fast as its costs rose. This resulted in a 150 basis point (100 basis points = 1%) decline in its gross margin to 63.6%, driven primarily by an increase in average unit costs.

Did the market over-react? Here are three reasons to consider investing in A&F:

• Cheap stock. A&F's price to earnings to growth of 0.69 (where a PEG of 1.0 is considered fairly priced) means it is cheap. It currently has a P/E of 29.5 and is expected to grow earnings 43% to $4.69 in fiscal 2013.
• Good quarterly earnings. A&F has been able to meet or surpass analysts’ expectations in all of its last five earnings reports.
• A&F is out-earning its cost of capital. A&F is earning more than its cost of capital – and it’s improving. How so? It produced no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, A&F's EVA momentum was 2%, based on 2010 revenue of $2.9 million in 2010 to $66 million in 2011, using a 10% weighted average cost of capital.

One reason to hesitate is A&F's rising sales but declining profits -- with slightly more debt-laden balance sheet. A&F's $3.5 billion in revenues have increased at an average rate of 1.5% over the last five years while its net income of $150 million has tumbled at a 22.8% annual rate -- yielding a slim 4% net profit margin. But its debt has increased slightly to $68 million as its cash has grown at an 11.7% annual rate from $530 million (2006) to $826 billion (2011).

A&F looks like a good company and the recent plunge in its stock price has made it very inexpensive relative to its earnings growth. The big risk with this stock would be a further rise in costs -- but given the recent plunge in cotton prices from an all-time high of $2.27/pound in March 2011 to its most recent 93.5 cents/pound in July, the worst of that could be over.

Join Bill Gates in Buying CSX

Train transporter, CSX Corp. (NYSE: CSX), recently received a big investment from the world's richest person -- Bill Gates. Does this mean you should let your portfolio take a ride on CSX?

The Bill & Melinda Gates Foundation already had a stake in CSX but in a recent report, revealed that this stake was much bigger than before. Specifically, according to its August 16 13F, the Gates Foundation boosted its stake by 188% to 4.6 million shares.

While it's hard to know exactly when that investment took place, there must be something going on in the last few months that has attracted that much larger investment stake in CSX. Certainly its second quarter earnings report was a good one. Its second quarter EPS of $0.46 beat analysts’ expectations by two cents and its $3 billion in revenues were $44 million higher than expectations.

What's driving CSX's growth is global demand for coal and auto parts that and a shift by producers of those commodities from expensive truck transportation to less expensive trains. For instance, CSX's international coal demand caused 15% revenue growth despite a 3% loss of volume and its industrial merchandise segment -- that includes auto parts -- enjoyed 11% revenue growth and a 3% volume increase, according to SeekingAlpha. 

Is this performance a good reason for you to buy CSX's shares or are its best days behind it? Here are four reasons to consider it:

• Cheap stock. CSX's price to earnings to growth of 0.84 (where a PEG of 1.0 is considered fairly priced) means it is cheap. It currently has a P/E of 14.6 and is expected to grow earnings 17.3% to $2.04 in 2012.
• Good quarterly earnings. CSX has been able to meet or surpass analysts’ expectations in all of its last five earnings reports.
• Decent dividend. CSX pays a fairly attractive 2.13% dividend yield.
• CSX is out-earning its cost of capital. CSX is earning more than its cost of capital – and it’s not progressing. How so? It produced no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, CSX's EVA momentum was 4%, based on first six months' annualized 2010 revenue of $10.3 billion, and EVA that rose from $1.7 billion in the first six months' annualized 2010 to $2.1 billion in in the first six months' annualized 2011, using a 9% weighted average cost of capital.

One reason to hesitate is CSX's rising sales and profits -- but more debt-laden balance sheet. CSX has been increasing sales and profits. Its $10.6 billion in revenues have increased at an average rate of 2.5% over the last five years while its net income of $1.6 billion has increased at a 5.3% annual rate -- yielding a solid 15% net profit margin.

Its debt has risen faster than its cash. Its debt has climbed at 10.7% annual rate from $5.4 billion (2006) to $8.1 billion (2010) while its cash increased at a 9.6% annual rate from $900 million to $1.3 billion during the period.

CSX looks like it should be a long-term holding -- and at its current price, appears worthy of investment by lesser mortals than Bill Gates.

Home Depot Can Put Your Finances on a Strong Foundation

Home Depot (NYSE: HD) went on a wild ride over the last decade. A former CEO, between 2000 and 2007 Bob Nardelli, took Home Depot into a risky business and left it a much weaker company -- departing with a $210 million severance package. But Home Depot's strong earnings report suggests it may be turning around. Is it time to get into the stock?

As I wrote in 2009, Nardelli wrecked Home Depot by cutting costs to the point that its poorly paid store employees lacked sufficient product knowledge to help customers and store shelves lacked the products customers wanted so they walked across the street to competitors. Not only that, but Nardelli pushed Home Depot into the thin-margin wholesale supply business that tanked along with the housing market.

But Tuesday's second quarter 2011 financial report suggests that Home Depot may have better days ahead. Its second quarter net income rose 14% to $1.36 billion and its EPS of 86 cents a share beat by four cents the average of 21 analysts' estimates in a Bloomberg survey. Revenue from Home Depot stores open at least a year rose 4.3% -- 3.3 percentage points higher than analysts' estimates.

And Home Depot raised its guidance. By improving its customer service, due in part to employees use of handheld mobile devices to process inventory coming into stores and help customers find items. Home Depot is doing better than expected. This led the company to raise its fiscal 2012 EPS forecast by 10 cents a share from $2.24 in May to $2.34 -- four cents higher than analysts expected.

This all sounds very promising for investors, but is now the time to buy Home Depot stock? Here are three reasons to consider it:

• Good quarterly earnings. Home Depot has been able to surpass analysts’ expectations in all of its last five earnings reports.
• Decent dividend. Home Depot pays an attractive 3.01% dividend yield
• Home Depot is out-earning its cost of capital. Home Depot is earning more than its cost of capital – but it’s not progressing. How so? It produced no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Home Depot EVA momentum was 0%, based on first six months' annualized 2010 revenue of $72.5 billion, and EVA that rose from $1.6 billion in the first six months' annualized 2010 to $1.9 billion in in the first six months' annualized 2011, using a 9% weighted average cost of capital.

Here are two reasons to hesitate:

• Expensive stock. Home Depot price to earnings to growth of 1.22 (where a PEG of 1.0 is considered fairly priced) means it is expensive. It currently has a P/E of 14.9 and is expected to grow earnings 12.2% to $2.62 in fiscal 2013.
• Declining sales and profits -- but less debt-laden balance sheet. Home Depot has been losing sales and profits. Its $68 billion in revenues have fallen at an average rate of 3.8% over the last five years while its net income of $5.3 billion has increased at a 12.5% annual rate -- yielding a solid 8% net profit margin. Its debt has fallen faster than its cash. Its debt has declined at 6.9% annual rate from $11.6 billion (2007) to $8.7 billion (2011) while its cash fallen at a 2.9% annual rate from $614 million to $545 million during the period.

Home Depot looks like it's turned the corner with an effective focus on improved customer service that is bringing the company back to its roots while using the latest technology. The stock is a bit expensive but if it keeps beating expectations, then the current price could look low to those who buy the stock now.

Is Wal-Mart Emerging From the Doldrums

Wal-Mart Stores (NYSE: WMT) stock has been dead money for the last 11 years. Its latest financial report reveals a company that can't grow in the U.S. and is getting more of its revenues from overseas. But will this be enough to revive its stock?

Wal-Mart stock can be thought of as consisting of two eras: spectacular growth and stubborn stand-still. The spectacular growth era for Wal-Mart stock spanned the period from January 1978 to January 2000 when it rose 8,682% from a split-adjusted $0.78 to $68.50, a compound annual growth rate of 22.6%. The stubborn stand-still period since has led stockholders to suffer a 24% loss in value at a negative 2.3% annual rate.

Do recent earnings represent a turning point? Probably not. Wal-Mart's second-quarter 2012 EPS were up 12.4% from the year before and at $1.09 a share, those earnings beat expectations by a penny.Walmart’s net sales rose 5.5% to $108.6 billion -- beating expectations by $500 million.

Wal-Mart did well outside the U.S. Its biggest sales gains were from Wal-Mart International -- up 16% to $30 billion due to sales gains in Mexico, U.K., Canada, Brazil and China; as well as Sam's Club where sales increased 4.9% to $12 billion. In the U.S., Wal-Mart's same store sales fell 1.3%.

Meanwhile, Wal-Mart raised its guidance for 2012. Specifically, Wal-Mart increased its EPS guidance to a range between of $4.41 and $4.51 -- and the mid-point of that range would represent a 7% increase over the previous year's EPS of $4.18.

Is this enough to justify investing in Wal-Mart? Here are three reasons to consider it:

• Good quarterly earnings. Wal-Mart has been able meet or surpass analysts’ expectations in all of its last five earnings reports.
• Decent dividend. Wal-Mart pays an attractive 2.81% dividend yield
• Wal-Mart is out-earning its cost of capital. Wal-Mart is earning more than its cost of capital – but it’s not progressing. How so? It produced no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Wal-Mart's EVA momentum was 0%, based on first six months' annualized 2010 revenue of $407 billion, and EVA that declined from $5.7 billion in the first six months' annualized 2010 to $4.8 billion in in the first six months' annualized 2011, using a 9% weighted average cost of capital

Here are two reasons to hesitate:

• Expensive stock – Wal-Mart's price to earnings to growth of 1.26 (where a PEG of 1.0 is considered fairly priced) means it is expensive. It currently has a P/E of 11.8 and is expected to grow earnings 9.4% to $4.88 in fiscal 2013.
• Rising sales and profits -- but shakier balance sheet. Wal-Mart has been increasing sales and profits. Its $422 billion in revenues have grown at an average rate of 6.5% over the last five years while its net income of $15.4 billion has increased at a 6% annual rate -- yielding a slim 4% net profit margin. Its debt has risen while its cash fell. Its debt has risen at 9.3% annual rate from $30.7 billion (2007) to $43.8 billion (2011) while its cash declined at a 1.3% annual rate from $7.8 billion to $7.4 billion during the period.

Wal-Mart needs a catalyst for its stock and as it gets bigger, the law of large numbers makes that less and less likely to happen. For example, to accelerate its sales growth to 12%, Wal-Mart would need to add over $50 billion in revenues -- the world may be simply be too small to provide it that much growth in a single year.

I see no reason to rush into this stock.

Evergreen Solar Bites The Dust, Hoku Could be Next

Evergreen Solar (NASDAQ: ESLR) filed for bankruptcy Monday -- back in May I suggested you could profit by selling its shares short. If you had done that, you could earn a 683% return if you close out your position this morning. Are there other solar companies that could follow Evergreen?

Evergreen makes little panels -- called photovoltaic cells (PVCs) -- that convert sunlight into electricity. As I wrote in May, Evergreen got money from Massachusetts to manufacture there but shuttered that plant and shifted production to China because of plunging PVC prices. I suggested that at $1.41 a share, investors could profit by betting on an Evergreen Chapter 11 filing.

The way to do that would have been to borrow the shares from a broker and sell them on the open market -- with the hope of repaying the stock loan at a lower price in the future. If you had taken my advice on 10,000 shares, that would have given you proceeds of $14,100 on May 13 when that post was published -- stored in the broker's escrow account.

To get your hands on that cash, you would need to repay the loan of those 10,000 shares. If you did that at today's price of $0.18, you would shell out $1,800 netting you a profit of $12,300 -- almost seven times your investment in three months (excluding transaction costs).

The forces that sent Evergreen into bankruptcy are affecting other companies as well. Of these, two are worth looking at as possible short candidates:

Ascent Solar (NASDAQ: ASTI) a $100 million market capitalization PVC module maker. At $1.88, I'd give a short on Ascent shares a 40% chance of being a profitable.

Without outside help, it looks like it will run out of money by the end of the year. How so? It had about $10 million in cash at the end of June 2011, posted an $85 million loss for the first half of the year and is required to repay $14.5 million in debt by the end of the year. However, that loss included a $78 million impairment charge for shutting down its PV modules business -- a more normal loss would be $7.6 million a quarter.

The good news is that on August 12, Ascent got a $7.4 million investment from TFG Radiant -- an investment group. TFG has also "made a commitment to invest $165 million to build" a plant  in East Asia using Ascent's technology for making so-called CIGS PV.

If TFG actually provides the money needed to turn this plant into a profitable operation, Ascent could stave off bankruptcy. Otherwise, it could run out of money soon.

Hoku (NASDAQ: HOKU) a $103 market capitalization maker of solar products. At $1.88,  I'd give Hoku shares a 60% chance of plunging.

It appears to be on a glide path to running out of money within a year. It has $17.8 million in cash and lost $10.2 million both in the quarter ending June 2011. If it continues losing money at this rate, it will run out of cash by the end of 2011. But the problem facing Hoku is that it must repay $54.5 million in debt within the next year.

The key to its survival is an agreement it has with Tianwei, Hoku's majority shareholder that "has committed to provide the Company financial support for its ongoing operations, planned capital expenditures and debt service requirements until at least April 1, 2012." It also appears as though Tianwei will provide emergency funds -- so-called "standby letters of credit" worth $243 million at June 30, 2011 "as collateral for the Company’s third party debt."

My conclusion is that these companies are unable to operate as stand-alone entities but thanks to deep pocket investors, they could stay afloat. To profit from a short bet, you would need to be certain that these investors were about to pull the plug.

Neither of these short bets is a slam dunk -- if you missed out on the Evergreen Solar short, you should keep a close eye on these two.

Jacobs Engineering Could Profit From Infrastructure Bank

President Barack Obama has suggested that one way to help create jobs is to start an infrastructure bank -- it would lend money to projects for roads, bridges and other infrastructure. Jacobs Engineering Group (NYSE: JEC), a $4.5 billion market capitalization construction services firm, could be a beneficiary. But should you buy its stock?

The idea of an infrastructure bank could create work at Jacobs and also soak up some of the 1.5 million construction workers currently unemployed. The problem is deficient bridges (25%), leaky pipes (wasting seven billion gallons of clean water daily), and crumbling roads, according to the American Society of Civil Engineers, that cost businesses $2 trillion in 2008 and 2009 through delays, accidents and lost productivity.

The cost to fix these facilities would be $2.2 trillion over five years, according to ASCE, but the infrastructure bank would make loans and guarantees to help defray some of that cost.  And the benefit could be substantial -- for example, economist Mark Zandi estimates that every $1 spent on infrastructure adds $1.59 to GDP.

If Obama can get a bill to create and finance the infrastructure bank through Congress, Jacobs could benefit. Whether that happens or not, here are four reasons to consider investing in its stock:

• Good quarterly earnings. In its third quarter of fiscal 2011, Jacobs' EPS and revenues topped analysts' expectations and it maintained its 2011 guidance and maintained its earnings guidance for the full-year 2011. Jacobs reported EPS of 71 cents -- a penny ahead of estimates while its 9.4% revenue growth to $2.7 billion was about $60 million higher than analysts expected. Unfortunately, Jacobs has only met or exceeded expectations in three of the last five reporting periods -- although it has improved in the most recent quarters.
• Reasonable valuation. Jacobs's price to earnings to growth of 0.88 (where a PEG of 1.0 is considered fairly priced) means it is reasonably valued. It currently has a P/E of 14.3 and is expected to grow 16.2% to $3.01 in its fiscal 2012.
• Rising sales and profits with stronger balance sheet. Jacobs has been growing sales and profits. Its $9.9 billion in revenues have grown at an average rate of 7.8% over the last five years while its net income of $246 million has grown at a 5.7% annual rate over that period -- yielding a slim 2% net profit margin. Its debt has plunged to near zero while its cash has grown solidly -- at a 21.3% annual rate from $434 million to $939 million in those years.
• Out-earning its cost of capital. Jacobs is earning more than its cost of capital – and it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of 2011, Jacobs’s EVA momentum was 1%, based on first nine months' 2010 annualized revenue of $10.1 billion, and EVA that rose from $51 million annualizing the first nine months of 2010 to $134 million annualizing the first nine months of 2011, using a 10% weighted average cost of capital

Jacobs looks like an interesting investment opportunity as is -- if the infrastructure bank becomes reality, its share of the resulting business opportunity would be gravy.

Nordstrom Is Your One--Stop Shop For Riding the Wealthy's Coattails

Income inequality is as high as it was during the roaring 20s. So while the average person is making less than a decade ago, the top 1% is on a spending spree. But if you have some extra cash, buying shares of Nordstrom (NYSE: JWN) could be a way to go along for the ride.

During a quarter when U.S. GDP, 70% of which is accounted for by consumer spending, grew 1.3%, Nordstrom's profits popped 20% to $175 million and its sales were up over nine times faster than the general economy at 12.4% to $2.72 billion. Nordstrom's adjusted earnings of 80 cents a share were six cents higher than Wall Street expectations and its sales were $100 million above forecasts.

What's more, Nordstrom raised the top end of its company raised the upper end of its full-year guidance. Specifically, Nordstrom raised that range by 5% from 2011 earnings of between $2.80 and $2.95 and to between $2.95 and $3.10 per share.

But it's unlikely that most Americans are boosting their buying at Norstrom. After all 64% of them don't have enough cash on hand to cover a $1,000 emergency and 90% of Americans have suffered a decline in wages while the top 0.1% control $46 trillion worth of wealth.

And those top-income earners are the ones that are feeling it's alright to spend more at Nordstrom. The question for investors is whether this rapid boost in spending is sufficient to drive Nordstrom shares higher.

Here are four reasons to consider buying Nordstrom shares:

• Reasonable valuation. Nordstrom's price to earnings to growth of 0.90 (where a PEG of 1.0 is considered fairly priced) means it is reasonably valued. It currently has a P/E of 14.7 and is expected to grow 16.4% to $3.51 in its fiscal 2013.
• Decent dividend. Nordstrom has a 2.17% dividend yield -- not bad compared to what you'd get in a bank account.
• Expectations-beating earnings reports. Nordstrom has met or beaten analysts’ expectations in all of the last five reporting periods.
• Out-earning its cost of capital. Nordstrom is earning more than its cost of capital – and it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Nordstrom’s EVA momentum was 1%, based on first six months' 2010 annualized revenue of $9.2 billion, and EVA that rose from negative $11 million annualizing the first six months of 2010 to $143 million annualizing the first six months of 2011, using an 11% weighted average cost of capital.

One reason to avoid this stock is its rising sales with declining profits and a weaker balance sheet. Nordstrom has been growing with declining margins. Its $9.7 billion in revenues have grown at an average rate of 2.8% over the last five years while its net income of $613 million has slipped at a 1.3% annual rate over that period -- yielding a modest 6% net profit margin. Its debt has grown three times faster than its cash. Specifically its debt has spiked at a 45.5% annual rate from $624 million (2007) to $2.8 billion (2011) while its cash has grown at a 15.9% annual rate from $831 million to $1.5 billion in those years.

Nordstrom stock is poised to keep going up as the trend of wealth concentration increases and those top earners feel less inhibited about splurging. If you're not a Nordstrom shopper, at least you can benefit from the 10% discount on its stock.

Cree Needs Revenue Growth To Spur Stock

Cree (NASDAQ: CREE) makes electronics devices -- getting most of its revenue from so-called Light Emitting Diodes (LED) and power chips. And after reporting better-than-expected fiscal fourth quarter results, things are looking up. But should Cree stock be in your portfolio?

Cree's sales and profits are shrinking but less than expected -- boosting the stock 9% after-hours. One could argue that Cree did everything wrong -- its earnings and sales fell while its expenses climbed. Specifically its earnings were down 63%, revenues fell 8%, and expenses were up quarter earnings sank 63 percent as demand for its products declined and expenses climbed 16% to almost $73 million.

But earnings per share and sales for the company were better than expected. Its adjusted earnings of 28 cents a share were two cents higher than analysts polled by FactSet expected. And its $243 million in revenues were 5% ahead of their expectations.

So should you buy Cree stock despite the declining financial performance? Here are two reasons to consider it:

• Cheap. Cree's price to earnings to growth of 0.50 (where a PEG of 1.0 is considered fairly priced) means it is very inexpensive. It currently has a P/E of 20 and is expected to grow 40% to $1.80 in 2013.
• Rising sales and profits and stronger balance sheet. Cree has been grown revenues and profits. Its $867 million in revenues risen at a compound annual growth rate of 19.7% over the last five years while its net income of $205 million has increased at a compound annual growth rate of 16.3% over the last five years -- yielding a wide 24% net margin. It has no debt and its cash has risen at 44% annual rate from $256 million (2006) to $1.1 billion (2010).

Two reasons to pause:

• Expectations-missing earnings reports. Cree has missed analysts’ expectations in two of the last five reporting periods -- and did so by wide margins in those quarters.
• Cree is under-earning its cost of capital -- and getting worse. Cree is earning less than its cost of capital – and it’s in decline. How so? It produced negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In fiscal 2011, Cree’s EVA momentum was -4%, based 2010 revenue of $867 million, and EVA that fell from negative $103 million in 2010 to negative $138 million in 2011, using a 12% weighted average cost of capital.

Despite its wide margins and growing cash, this company needs to resume revenue growth and out-earn its costs of capital before it looks like a stock worth buying.

Cisco Systems Not Back to the 1990s

Cisco Systems (NASDAQ: CSCO) was a darling stock of the 1990s. In the last 11 years, though, it's lost 78% of its value and it keeps falling. Wednesday it reported better than expected earnings on big cost cuts. Is it finally time to buy Cisco stock?

Why was Cisco such a great stock? It consistently boosted revenues by as much as 40% a quarter and beat earnings expectations. At the core of its success was an acquisition strategy that I described in my book, Net Profit: How to Invest and Compete in the Real World of Internet Business. Instead of letting a competitor get a foothold into a customer's computer network, Cisco would buy the competitor.

But after the dot-com crash, companies stopped spending so much to build their networks and Cisco stock tumbled from a June 2000 high of $63.56 to its current $13.73. Interestingly, Cisco still dominates the market for routers (54.2% share) and switches (68.5% share) although its share of routers has fallen 6.4 percentage points while its switch share is down 5.8 percentage points, according to Dell'Oro Group.

Nevertheless, Cisco beat analysts' estimates when it reported its fourth quarter results. Adjusted EPS of $0.40 was two cents higher than analysts expected and sales rose 3.3% to $11.2 billion in the period -- $200 million higher than expected. And it plans to cut 6,500 people while shuttering its unprofitable video camera business.

Do these market share losses mean you should stay away from Cisco or are its better-than-expected results a sign of a brighter future?

Here are three reasons to consider buying Cisco:

• Expectations-beating earnings reports. Cisco has beaten analysts’ expectations in all of the last five reporting periods.
• Reasonable valuation. Cisco's price to earnings to growth of 0.89 (where a PEG of 1.0 is considered fairly priced) means it is reasonably valued. It currently has a P/E of 10.7 and is expected to grow 11.6% to $1.67 in 2013.
• Rising sales, wide profit margin, stronger balance sheet -- but declining profit. Cisco has been grown revenues and despite declining profit, its net margin is high. Its $43.3 billion in revenues risen at a compound annual growth rate of 5.5% over the last five years while its net income of $7.8 billion has declined at a compound annual growth rate of 4.8% over the last five years -- yielding a wide 18% net margin. It has no debt and its cash has risen at 18.9% annual rate from $22.3 billion (2006) to $44.6 billion (2010).

One reason to pause is that Cisco is under-earning its cost of capital -- and getting worse. Cisco is earning less than its cost of capital – and it’s in decline. How so? It produced negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In fiscal 2011, Cisco’s EVA momentum was -5%, based 2010 revenue of $40 billion, and EVA that fell from $1.3 billion in 2010 to negative $589 million in 2011, using a 10% weighted average cost of capital.

Cisco cannot cut its way to success -- until it out-earns its cost of capital due to market share gains, its shares are not likely to be a great investment.

Sara Lee's Stale Stock

Nobody doesn't like Sara Lee (NYSE: SLE) -- at least that's what its old ad tag line used to say. But should Wednesday's news of a divesture and Thursday's earnings report be reason enough for you to buy the stock?

Ralcorp (NYSE: RAL) is buying Sarah Lee's dough business.  More specifically, Ralcorp will pay $545 million for Sara Lee's North American refrigerated-dough unit to strengthen its private-label brands with pizza and toaster pastries, according to Bloomberg. The price is $100 million higher than one analyst expected and Ralcorp plans to cut about $8 million in costs once it takes control of the business.

Meanwhile, Sara Lee is poised to post Thursday what Zacks Consensus Estimate expects to be $2.2 billion in revenues and EPS of $0.20 a share for its third quarter.

Sara Lee beat expectations in its second quarter reporting adjusted earnings of $0.30 a share -- a nickel ahead of Zacks Consensus Estimate. And Sara Lee's net sales of $2.2 billion were 6.8% higher than the year before driven by 6.1% price increase and 1.3% favorable mix -- but Sara Lee's unit volume fell 3.3%.

But the past is not a predictor of the future -- but it certainly gives some good hints at times. So should you invest in Sara Lee stock? Here are two reasons that might make sense:

• Reasonable valuation. Sara Lee's price to earnings to growth of 0.89 (where a PEG of 1.0 is considered fairly priced) means it is reasonably valued. It currently has a P/E of 25.9 and is expected to grow 29.1% to $1.06 in 2012.
• Decent dividend. Sara Lee has a 2.57% dividend yield.

Here are two reasons to pause:

• Many expectations-missing earnings reports. Sara Lee has beaten analysts’ expectations in three of the last five reporting periods.
• Shrinking sales and a shakier balance sheet -- but rising profit. Sara Lee has been shrinking slightly with stronger margins. Its $10.8 billion in revenues have declined slightly from $10.9 billion five years ago while its net income of $635 million has risen at a compound annual growth rate of 30% over the last five years -- yielding a modest 6% net margin. Its debt has declined but its cash has fallen faster. Specifically its debt has declined at a 10.4% annual rate from $4.2 billion (2006) to $2.7 billion (2010) while its cash has fallen at an 18.8% annual rate from $2.2 billion (2006) to $955 million (2010).
• Out-earning its cost of capital -- but getting worse. Sara Lee is earning more than its cost of capital – but it’s doing worse. How so? It produced negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of 2011, Sara Lee ’s EVA momentum was -2%, based on first nine months' 2010 annualized revenue of $8.6 billion, and EVA that fell from $252 million annualizing the first nine months of 2010 to $113 million annualizing the first nine months of 2011, using an 8% weighted average cost of capital.

Sara Lee makes tasty products but it lacks any catalyst for a purchase of its shares. There is a chance that it could exceed expectations when it reports Thursday -- but if it misses, the stock could plunge. If history is any guide, its odds of missing are pretty high.

I would wait to buy this stock until management can demonstrate that it can boost revenues -- not just cut costs and sell businesses.

Walt Disney Is Moping Forward

ESPN, animation, movie, and theme-park operator Walt Disney (NYSE: DIS) reported strong earnings on Tuesday. But would investing in Disney stock yield victory for your portfolio?

Disney's sales and profit for its third-quarter beat analysts’ estimates due to pay-TV fees to ESPN that offset unchanged cable advertising sales. Disney reported 11% higher net income of $1.48 billion and its $0.78 worth of earnings beat by a nickel 22 analysts’ estimates compiled by Bloomberg.

Disney's cable-network profit increased 10% and its theme park net income rose 8.8% thanks to higher ticket prices while its consumer products unit enjoyed higher profit due to sales of “Cars” and Marvel merchandise.

But does one good quarter mean you should invest? No. But here are two reasons to consider buying Disney stock:

• Inexpensive stock. Disney's price to earnings to growth (where a PEG of 1.0 is considered fairly priced) is a modest 0.93. It currently has a P/E of 15.4 and is expected to grow 16.6% to $2.98 in 2012.
• Expectations-beating earnings reports. Disney has beaten analysts’ expectations in four of the last six reporting periods.

Here are two negatives:

• Under-earning its cost of capital. Disney is earning less than its cost of capital – but it's improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of its fiscal 2011, Disney’s EVA momentum was 2%, based on first nine months' 2010 annualized revenue of $37.8 billion, and EVA that improved from negative $797 million annualizing the first nine months of 2010 to negative $125 million annualizing the first nine months of 2011, using a 9% weighted average cost of capital.
• Slow sales growth and declining profits but a stronger balance sheet. Disney has been growing with declining margins. Its $38.1 billion in revenues have grown at an average rate of 1.8% over the last five years while its net income of $4 billion has fallen at a 4% annual rate over that period -- yielding a solid 10% net profit margin. But its debt has fallen as its cash increased. Specifically its debt has declined at a 3.9% annual rate from $12.2 billion (2006) to $10.4 billion (2010) while its cash has grown at a 3% annual rate from $2.4 million (2006) to $2.7 billion (2010).

Disney is headed in the right direction -- but lacks a sense of urgency or a catalyst to invest. I would avoid this stock until Disney supplies those.

Why Apollo Group Could Boost Your Portfolio

Apollo Group (NASDAQ: APOL) is the largest for-profit education company and despite turmoil in its regulatory environment, this owner of University of Phoenix has enjoyed a massive boost in profitability in 2011. With its stock taking a hit in the recent market tumble, does this mean it's time to add it to your portfolio?

Apollo Group has tumbled despite strong profit growth. Since its 2011 high point on July26, Apollo stock has lost 19% of its value, tumbling from $53.86 to its current $43.84. But during 2011 it has boosted its already high profitability even higher -- from a return on average equity of 45% for 2010 (the average S&P 500 company earns 24.4%) to 63% in its second quarter ending May 2011.

But the for-profit education industry has been under regulatory scrutiny for at least the last year. As I wrote in June 2010, Washington uncovered abusive practices in the industry -- including aggressive student recruiting practices, extending student loans to people with little ability to repay them, very low graduation rates, and less-than-advertised job prospects for those who do graduate.

But this does not seem to be stopping Apollo. Here are three reasons to consider its stock:

• Expectations-beating earnings reports. Apollo has beaten analysts’ expectations in five of the last five reporting periods. In its 2011 second quarter, Apollo reported $0.45 in adjusted EPS -- 11 cents above analysts' expectations as higher tuition fees more than offset a decline in student enrollments.
• Out-earning its cost of capital. Apollo is earning more than its cost of capital – and holding steady. How so? It produced unchanged EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of its fiscal 2011, Apollo’s EVA momentum was 0%, based on first nine months' 2010 annualized revenue of $4.9 billion, and EVA that fell from $515 million annualizing the first nine months of 2010 to $493 million annualizing the first nine months of 2011, using an 8% weighted average cost of capital.
• Rising sales and profits and a stronger balance sheet -- with some debt. Apollo has been growing with declining margins. Its $4.9 billion in revenues have grown at an average rate of 18% over the last five years while its net income of $568 million has tumbled at an 8% annual rate over that period -- yielding a solid 12% net profit margin. Its debt has grown twice as fast as its cash. Specifically its debt has grown from nothing in 2006 to $163 million billion (2010) while its cash has grown at a 38% annual rate from $355 million (2006) to $1.3 billion (2010).

One negative -- it is hard to value its stock. Apollo's price to earnings to growth (where a PEG of 1.0 is considered fairly priced) is undefined. That's because despite a low P/E, analysts expects its earnings to fall fast in the next year. It currently has a P/E of 14.5 and is expected to shrink 33% to $3.24 in 2012.
 
Apollo Group is likely going to survive the effects of tighter regulation and will be able to grow by acquiring rivals and cutting costs. Its ability to beat expectations despite these challenges suggests that the stock could rise after losing 19% of its value in the last few weeks.

Stocks Lose $4.3 Trillion: What To Do

Stocks have lost 15% of their value since July 21st's near-term Dow high of 12,724 -- amounting a loss of around $4.3 trillion. And they look like they'll fall further. What should you do about it?

The first thing to consider is why stocks have been plunging. After all, if you know the cause, you might be able to get a handle on whether stocks will keep falling or turn around. Regrettably for the average investor, there is no credible way to explain what caused stocks to lose 15% of their value.

That is not to say that people are not offering explanations, it's just that there is no evidence to back up the claim that there is a cause and effect relationship between those drops and the supposed causes. Here are a few examples:

• S&P downgrade. The idea here is that S&P's downgrade of U.S. debt caused stocks to crash. Of course, stocks have been plunging since July 21st and that downgrade happened on August 6th so that could not be right. On the other hand, it would not shock me if rumors of an imminent downgrade hit the hedge funds last month and many investors sold their stocks in anticipation of general investor panic. But so far, there is no proof that this is what happened. Meanwhile, S&P's downgrade has had exactly the opposite affect it intended -- investors are pouring money into 10-year treasuries, dropping the interest rate they charge us by 27% in the last month.
• Double-dip recession. Concerns about another recession certainly gained steam when the Commerce Department reported a big negative adjustment to first quarter GDP growth (up 0.4%) and a dismal second quarter report (+1.3%). But that happened on July 29 -- so unless that report leaked eight days earlier, it probably does not explain the stock market plunge. If GDP growth does go negative, it might result in lower earnings growth and undermine stock valuations.
• European debt troubles. These troubles have been going on for at least a year -- with Greece, Portugal, and Ireland bringing down the financial prospects for the European Union. There have certainly been new twists and turns -- including potential problems with Italy and Spain and even rumors of a downgrade of France's credit rating. While this uncertainty contributes to stock price fluctuations, there is nothing fundamentally new since July 21st.

In short, nobody can explain why stocks have lost 15% of their value in the last several weeks. The good news here is that there are people who do know -- they are the managers of huge pools of money that are either selling stocks or betting that they'll drop.

The bad news for the average investor is that those money managers are not disclosing the reasons for their decisions. One relatively small player, Barton Biggs, called U.S. equities a “strong buy” just last week, according to Bloomberg. But as a manager of $1.4 billion Traxis Partners LP, he is taking a risk off posture.

His comments reveal how he thinks about stocks -- they should go up based on their valuation relative to earnings growth and he is selling them because everyone else is and he can't afford to be wrong in the short-term about stocks' direction. As he told Bloomberg TV, “I’ve taken some risk off, and I hate to do it, I think it’s probably the wrong thing to be doing. But I’m a fiduciary to a certain extent, and I’ve got to protect my capital.”

So what should you do? That depends on what you think will happen next and your financial condition and cash needs. To further this discussion, let's assume two possible scenarios about what will happen next and describe three scenarios of your possible financial condition and cash needs. Using this oversimplification, we'll look at what you ought to do.

Here are two scenarios of what happens next:

• Pessimistic: stocks fall 10% and keep falling for years. Under this scenario, the selling panic continues until stocks are down another 10% from here. Then the combination of a the lost wealth effect -- people feeling poorer due to stock market losses -- and years of cuts to government spending cause a deflationary spiral. This would mean companies shrink -- leading to lower demand, more layoffs, and earnings contraction. Stocks continue creeping downward on light volume for years.
• Optimistic: stocks fall 5% more and bottom out. Here, investor panic results in a further 5% decline in stocks after which people buy stocks with strong earnings prospects and low valuations. This results in a gradual rise in stock prices -- helped by a panic as investors who have bet on a decline are forced to buy shares to repay the loans they took out to fund those bets. Stocks recover and go up as the stock market P/E of 12 rises up to meet the 19% earnings growth forecast for 2011.

Now let's look at three possible scenarios for your financial condition:

• Getting by. If you have limited savings and are just keeping up with your monthly bills, then these scenarios don't matter much to you. Instead, you are likely to benefit from the big drop in oil prices -- West Texas Crude fell to $75.71 -- the lowest since Sept. 2010 -- that should send gasoline prices down. Your biggest concern might be keeping the paychecks coming in -- because under the pessimistic scenario, the odds of you losing your job would go up. Thus you should see if you can cut expenses and start saving.
• Need cash soon. If you have savings but you need a big chunk of them soon to make a down payment on a house or pay college tuition, then you may need to decide whether you should draw that check from your money market or bank account or whether you should sell stocks to raise the cash you need. The answer here depends on whether you think the scenario: if you buy the pessimistic one, then you should sell stocks if you're optimistic, then you should use mostly cash and some stock.
• Patient. If you have savings and don't need to write any big checks in the near-term, then you have more options. These options include doing nothing, selling or buying stocks, buying gold or buying bear ETFs. What to do here depends on which scenario you like. If you're pessimistic, sell stocks, buy gold and bear ETFs -- such as Direxion Daily Finan. Bear 3X Shs (ETF) (NYSE:FAZ). If you're optimistic, do nothing now and wait until the selling panic subsides before buying stocks -- if you're interested, here are three.

In past panics, I suggested that it is better to remain calm than to act rashly. To do that, find a way to relieve stress -- exercise works for me -- and think clearly about your options.