Merger mania is definitely back in the Tech sector. HP (HPQ) and Dell (DELL) are still seriously locking horns over 3PAR (as of this writing.) Intel’s (INTC) acquiring Infineon’s (IFNNY.PK) wireless business for about $1.4 billion in cash, less than two weeks after saying it would buy McAfee (MFE). However, the more intriguing story (or rumor) is when TechCrunch broke the news Sunday night that Cisco (CSCO) has made an offer to acquire Skype before completing its IPO.

Skype has had quite a few “colorful” years. You might recall eBay (EBAY) bought Skype for $3.1 billion back in 2005, and a drawn-out legal battle soon ensued between the Skype founders and eBay over the rights to Skype’s P2P technology. While this turmoil was still going on, eBay sold Skype to a group of investors last year at a loss, citing Skype didn’t fit well within eBay’s core business of connecting buyers and sellers.

The legal saga finally came to an end last November, eBay ended up owning 30% of Skype with some quite favorable considerations to the Skype founders. Fast forward to present, Skype filed for an IPO on Aug. 9. In the filing, Skype disclosed it has a subscriber base of 560 million with 8.1 million paid users. The revenue for the first six months of 2010 is $406 million, and net income at $13.2 million.

The consumer base, technology and market position make Skype an attractive investment, although some analysts believe its revenue stream is not that impressive given a lot of its users are not paid subscribers.

Chart 1

For Cisco, the timing seems opportunistic as the offer came just days after Google (GOOG) offered net phone call service over Gmail, seriously challenging Skype– along with other players in the telecommunication segment– and conceivably could have lowered Skype’s enterprise value.

In terms of strategic fit, voice is a crucial component of Cisco’s vision (Chart 1), but is also one of the weakest business segments of Cisco, in terms of market share (Chart 2). An acquisition of Skype or other similar technology could strengthen Cisco’s presence in the voice category, and augment its suite of network and router business.

Most importantly, it seems a strategic move so Cisco would be at the same entry point–the same time as Google–into a category both consider lucrative. As such, Cisco would be in a better position to rival or even prevent Google from gobbling up yet another tech niche.

Chart 2

A Cisco-Skype union would also make it the first time Cisco ventures into the service business. The transition and integration would be challenging, and at the same time pitting Cisco against many of its telecom and cable clients and partners.

Judging from CEO Chambers’ very bearish Q2 earnings call and with all the tech M&A actions, Cisco could be getting anxious and possibly on the hunt trying to juice up its asset portfolio. In addition to voice, it is logical Cisco could be looking to plug holes in categories where it has lower market share–Security, Home Network, and Storage / Area Networks.

And if there’s a Skype deal in the making, it would undoubtedly attract other big players, even just to give Cisco a harder time and jack up the price tag along the way. Based on my “short list”, Microsoft (MSFT) and Google could be two potentials vying for Skype.

While Skype did not specify the number of shares or a price range for the IPOs; TechCrunch noted, “Skype insiders are hoping for an out of the gate valuation of $5 billion or so.” Meanwhile, Based on Skype’s growth prospects, Jeffrey & Co. put the business worth at $3.7 to $4.7 billion. But taking inference from the 3PAR’s bidding war, the final deal value for Skype could be much higher, if a buyout were to take place.

On the other hand, it could be that Skype investors would want to go through with the IPO, as the thin float would most likely mean a spectacular debut, similar to that of Baidu (BIDU) in 2005, when its stock jumped 340% on day one. Well, if that’s the case, could there be another 6 am underwriters’ press conference to downgrade Skype stock–Déjà vu Goldman Sachs (GS), Piper Jaffray and Baidu –thus inadvertently making Skype ripe for deal…again?

Welcome to the jungle, and its new reality show called “Tech Survivor.” Stay tuned.

Article courtesy of Dian L. Chu

Wheee, that was fun!

We’re already back in our range after all that hand-wringing last week. I like to do these perspective charts once in a while even though I’m not much of a chart guy. It’s funny how people lose their minds over what was clearly a minor dip so far – never even coming close to threatening our 5% rule, which is the only way we’re likely to give up hope.

Our next big challenge is getting over the 1,088 Fibonacci line but after that we should have a clear shot to retaking 1,100. Nobody expects good jobs numbers today but more than 460,000 layoffs in this morning’s report will probably keep us on hold through tomorrow’s NFP report at least. Notice how yesterday’s fat-body candle was as big as any of our recent big drops – that means the bears are as freaked out about yesterday’s action as the bulls were about the flash-crash and there’s a lot of bears out there – crossing that 1,100 line this week could lead to a pretty good short-squeeze into the weekend.

As I had mentioned way back on May 5th, our expected downtrend along the 5% rule was 1,155, 1,114, 1,100, 1,073 and 1,045. Now we just have to work our way back up that ladder! Since earnings were not as exciting as we had hoped, our expected mid-point on the S&P has since dropped from 1,100 to 1,070, which alters (lowers) our expectations slightly but not too much from a long-term standpoint and there hasn’t been a need to adjust our long-term positions as we hit our buy point on the nose at 1,045 and, of course, we have our hedges.

Speaking of hedges, on August 25th, with the S&P down at 1,045, we looked at Disaster Hedges that could make 500% if the market falls. The idea is to take 2% of your portfolio value in a play that makes 10% if the market falls 5% or more as insurance. We do this so we DON’T have to panic out of positions at an inflection point.

Some people take them right off if we hold our levels and some people use our 1,070 and 10,200 lines (both passed yesterday, of course) as a signal to take them off and some don’t mind the carrying cost of insurance but let’s look at the damages if we had done nothing while the Dow jumped over 250 points yesterday: The DXD Jan $27/32 bull call spread was $1.60 and the October $27 puts were sold for $1.20 for net .40 on the $6 spread with 1,400% of upside if DXD hit $32 (it was $28.50 at the time and is now $27.20).

So what are the damages on this “wrong-way” insurance play? The Jan $27 calls are now $3.30 and the Jan $32 calls are $2.10 so $1.20 on that spread and the Oct $27 puts are .75, so .45 on the total spread. It made a nickel – even though the market went way up! Meanwhile, the stocks we protected but didn’t sell made 2-3% so VERY NICE. How is that possible? Because we mostly sold premium and selling premium is GOOD. At PSW we teach you to BE THE HOUSE and sell risk, don’t buy it. We made money off people who were betting that DXD would fly to $32 and from people who thought it would drop below $27 and, since it has done neither, the time decay on the trade becomes our best friend and pays us a profit EVERY SINGLE DAY.

When you learn how to manage your portfolio using this kind of leverage, you will also learn that we can take our hedge off with a nice profit because THERE IS ALWAYS ANOTHER ONE. As PT Barnum told us, there is a sucker born every minute and I will add “and those suckers buy options from us.” When Barnum made his statement, there were only about 1Bn people in the world so, taking into account the population growth, there are now 8,640 brand new suckers born every single day and that’s why I can happily tell you our “secret” system for hedging – just like I have been telling people about our 3am Yen trade for over 2 years now and STILL it works almost every day.

Everything else is just timing and we just try to be right a little more often than we’re wrong to stay ahead of the markets. It’s 9am now and the Unemployment Report came in at 472,000 jobs lost last week. That’s 0.3% of the workforce (1 in 300) getting a pink slip in a week. 52 more of those and you have a 1 in 6 chance of losing your job in the next year – not so bad really. The problem is getting another one, not losing the ones we have.

Hopefully, the Government will wake up and start spending some money to create jobs. As jobs have a 1.8x multiplier effect on the economy and since the government is spending about 0.4x to sustain each unemployed person anyway – it is irrational not to spend money to create jobs. Spending 0.6x more than they are spending now to sustain the unemployed is a +2.2x return for each job created. This is not complicated, folks, all the rhetoric is nothing but political BS by people who want government handouts (defense contracts, tax breaks, bailouts) to go to them rather than to the people who actually need it, even though it is CLEARLY better for America to put our people back to work. Let’s stop the madness, please!

The American consumers (the ones who have jobs, anyway) are doing their best to chip in – if you give them jobs, they will spend, and turn into customers for others – this is a simple concept, isn’t it? August same-store sales are coming in better than expected in the early going, with companies like Costco (COST), Limited Brands (LTD) and Buckle (BKE) beating modest expectations. COST posted a 5% rise in same-store sales when a 3.6% gain was expected. The retailer’s international operations were up 11%, compared with a 6% rise in the U.S. Limited Brands, which owns Victoria’s Secret and Bath & Body Works, posted a 10% rise in same-store sales when a 7.3% gain was projected. All told, the 30 retailers tracked by Thomson Reuters are expected to post same-store sales growth of 2.5% for August, after a 2.9% drop last year and a 2.7% rise in July.

One very encouraging report this morning is Productivity falling 1.8%, more than expected. That has driven Unit Labor costs up 1.1% in Q2 and that is bad for corporate profits but good for America as it means they have finally squeezed everything they could out of the existing workforce and now they MUST begin to hire – providing buisiness picks up, of course. We’ll get an idea of whether business is picking up with July Factory Orders at 10 and any positive move there will keep the markets happy. We will also see Pending Home Sales but those are expected down 1% and it will be hard to be disappointed by housing data at this point.

Tomorrow it’s all about Non-Farm Payrolls. Are we creating any jobs at all? If not, then it’s up to the Government to do so – THAT’S WHAT GOVERNMENTS ARE FOR! Remember the Bible story where Joseph tells Pharaoh to save grain in times of plenty so the Pharaoh’s Government can feed the people in times of famine? How do you think they got the grain? TAXES? That’s right, it’s in the friggin’ Bible – taxes are the way wise men manage the economy and the government collects taxes in times of plenty and then REDISTRIBUTES THE WEALTH in times of need. What amazes me is how this country seems to have gotten that backwards as the last Administration cut taxes when things were good and now the Conservatives refuse to redistribute the wealth in times of need – this is something we’ve been taught is wrong since the first sermon we heard when we were children – how has this nation gone so far off course?

Article courtesy of Philip R. Davis of Phil’s Stock World

How can you tell if a company is growing? CNBC recently began asking its guests whether or not they were hiring at the present time. There may be turmoil in the markets and the economic outlook may remain uncertain, but at Sirius XM Radio (SIRI) growth seems to be accelerating.

A look at the job listings tells the tale. There are 111 positions posted at Sirius XM Radio that go back as far as 2009. 70 of these positions have been added since June of this year, with 28 new job postings being added in August 2010 alone. I discovered this after being forwarded a link to a specific job listing with Sirius XM that offered a potential glimpse into SatRad 2.0.The job postings cover a multitude of services that are required at Sirius XM. For starters, one exciting new opportunity suggests that the company is seeking to merge both its Sirius and XM platforms into a single database. The one complaint I hear repeatedly is that there remains a gap between Sirius and XM which creates confusion on the part of consumers. {membership}

• The Teradata Database Developer – ETL Developer will be responsible for the design, development, and management of large complex databases that are located on multiple servers in a diverse hardware environment across geographically separate data centers.
• The Teradata Database Developer -ETL Developer also is responsible for the maintenance of databases, which includes but is not limited to: export/import of tables, backup and recovery, security, and database tuning.
• He/She will perform programming necessary to transfer and/or share data and assumes responsibility for the design, coding, documentation, and implementation of database related scripts and queries.

A closer look at the listings reveals a clear and new direction that the company is aggressively seeking to go in. There seems to be a big push in the direction of streaming media applications, both in the aftermarket and OEM channels. Many of the streaming media positions seem to indicate a desire to offer on demand programming and content choices. We had recently reported this potential based on patent applications that we reviewed, and these job postings would appear to confirm our hypothesis.

Position Summary:The successful candidate will apply their experience in software development for real-time embedded systems to expand Sirius XM’s software framework used to build automotive and aftermarket products. This individual will be a key member of the team responsible for design, documentation, implementation, and validation of software components used by multiple internal and external customers to launch exciting new satellite radio audio and data services.

While another posting includes:

Primary areas of responsibility include customer self-service applications and web-based interfaces into our subscriber management system for use by customer care agents and subscribers.

All of this would seem to confirm “the buzz” regarding the future of Satellite Radio 2.0. While some might look to Internet Radio offerings such as Pandora as a threat to Sirius XM’s viability, it seems Sirius XM is finally looking at such web based platforms as an opportunity instead.

Article courtesy of  Brandon Matthews of SatwavesPro.com

Despite relative strength in emerging markets, shares of Brazilian companies have lagged far behind their counterparts in South America as Chilean and Colombian index funds have both been crushing South America’s largest economy as of late. While this has helped to divert the focus away from Brazil for much of the summer, the coming fall season looks to put the BRIC member back into focus as one of the nation’s largest companies, Petrobras, signs a historic deal with the government that is likely to have far reaching implications for years to come.

Income. It is what the baby boom generation will need in order to survive. As they all know now – relying on capital gains to fund a secure retirment is a major risk. With the stock market not going anywhere over the past 11 years, and with many baby boomers either retiring or losing their jobs, they are finding themselves starting to worry about how they will pay the mortgage and the electric bill. If someone retires with $500,000 and is taking $30,000 per year from his portfolio with the stock market not going up, they will run out of money in 16 to 17 years. This seems like an absurd idea, but if you retired in Japan 20 years ago with a stock centric portfolio, you would have run out of money very fast as the Japan stock market has lost about 75% over a 20 year period of time.

That said, what can an investor do?

We are very big advocates of investing for income streams, whether it be from stocks or bonds. We don’t worry about the value of the investment we own, instead mostly about how much that investment can pay our clients and most importantly, how likely they are going to continue paying, even in a depression. We like to tell our clients to stop looking at the value of their investments, and instead look at the income stream the investments are producing. You don’t want to have to rely on higher stock prices to meet your retirement goals. You will sleep better at night knowing you are getting a solid stream of income no matter what the market is doing. WIth that income stream, you can pay your bills every month as the cash from the investments hits your account.

If we are building a plan based on income streams, we better be very good at making sure we have a high probability that the income stream will be there no matter what kind of market environment we are in. One way we do this is by attempting to buy only companies that sell products people have to buy, even in a depression. Make no mistake, we think historians will one day name this period in time as the 2nd Great Depression before it is all done. With that mindset in place as the foundation, what do people have to buy? Do they need a new iPad? No. Therefore, Apple (AAPL) does not make the list. Will they need a new car, or can they use the old one? There go companies like Ford (F), off the list. In a depression, people still need to drink water, or use soap, eat food, etc. Therefore we want to focus on companies that sell products people have to buy. With that as the beginning foundation, we set ourselves up for protecting against the loss of income when we may need it most.

Today I am going to give you 5 of the 95+ companies that we own. These companies are the core of our portfolio, although they are some of the lower yielding securities that we own. We still love them due to the fact they sell essential products and services and that they yield more than the 10 year bond. This is not a potshot on the bond though. As my readers are aware – I actually am one of the few humans left who doesn’t despise the bond market.

Besides having to sell products and services people have to buy, even in a depression, and having to yield more than the 10 year, I want companies who have very large Free Cash Flow (FCF). With a large FCF business, we will own companies who have enough money to run and expand their business, and also have enough left over to pay the real owners, you and me. Below is my list with a quick description of the company, what their yield is, and what the potential yield could be if they paid out 100% of their free cash flow to the owners after all capital expenditures.

Waste Management (WM) – 3.8% yield and a 7.48% potential yield as all FCF was paid out. The company offers collection, transfer, recycling, disposal, and waste-to-energy services. Even in a depression, people still have to throw away refuse. Tracs is one of the last services people will cut.

Sysco (SYY) – 3.5% yield and a 6.7% potential yield. Sysco Corporation, through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States.

AT&T (T) – 6.3% yield and a 11.19% potential yield. AT&T Inc. provides telecommunication products and services to consumers, businesses, and other telecommunication service providers under the AT&T brand worldwide.

Atlantic Power Corp (AT) – 8% yield (before Foreign Tax of 15%) Atlantic Power Corporation, an independent electric power production company, owns interests in and manages a diversified portfolio of independent non-utility power generation projects.

Kimberly-Clark (KMB) – 4.1% yield and a 9.97% potential yield. Kimberly-Clark Corporation, together with its subsidiaries, engages in the manufacture and marketing of various healthcare products worldwide.

We will give another 5 in future updates. For now, do your own due diligence on these companies and see if you too come to the conclusion that getting paid a nice income from companies that sell products that people have to buy is a great strategy for your portfolio.

Part 2:

In Part 1 of this article, I had mentioned that I would give 5 more investments that meet our requirement, the requirement being you can only invest in companies that sell products people have to buy, even in a depression. These companies have to have managements who then take those profits and give them to us in the form of dividends. The yields from the dividends also have to pay our clients more than they could get from buying a 10-year Treasury bond. While I still plan to give another 5 companies, today I wanted to focus on some different kinds of dividend payers that litter our portfolio as well. I will also explain why I like the investment along with the yield they give.

Before we get started with the list though, I want to spend some time talking about a mind-set change. For decades, investors have been conditioned to think almost exclusively about the growth in the value of the stocks they own. Many baby boomers have become discouraged over the last decade because they were expecting stocks to continue to return 10% per year over the next few decades. They thought they were conservative in their retirement planning by using a 7% number as the yearly growth figure they were “sure to get from their portfolio.” Looking over the past 11 years, they are starting to think, “Hmm, now what? Hopefully we will get back on track with 15% gains a year for the next decade. This will bring the 20 year total back in line!” “Hope” may work for a campaign slogan, but like the reality of the current economic times, it sure does not work for an investment plan either.

While 15% a year for the next decade would certainly do a lot for the baby boomers who are retiring, we are just as likely to have the next decade look like the last. All one needs to do is look at Japan. While we just came off a great 80% rally off the lows in 2009, one has to remember that Japan saw no less than four 50% or greater rallies from certain new low points during the past 20 years. I am sure those rallies brought hope to their retirees as well that things were turning around for the better. But the truth is, 20 years later, and Japan is still 75% lower than the peak, and near the lower quartile of value currently.

Mindset change alert: DO NOT RELY ON CAPITAL GAINS TO FUND YOUR RETIREMENT

The best way I can help you visualize this new mind-set change is to give you an example of you buying a business. Imagine you were heading into retirement with $500,000 for example and you decided to buy a business that would produce $30,000 per year in income, and the income would grow by $1200 per year. The business is recession proof because you sell products people will always need, even people on welfare. You sign the documents to buy the business, and hire your manager to run the business for you. You just plan to collect the checks and keep an eye on the manager to make sure they are running the business the way you would if you were there working.

Day one of your new business comes, and the first person walks through your door and instead of buying your products, offers to buy your business from you for $480,000. Oh my word, you just lost 4% in one day! That is almost as much as you will make all year. You head into a slight case of depression and sulk in your tears over how much money you have just lost in one day and how painful your retirment will be.

Your manager walks up to you and reminds you that business the rest of the day went as planned. The projected profit was on track and the paycheck you were going to recieve is on target. You become emboldened and start to realize that you no longer care what some yahoo off the street thinks your business is worth, because you are not selling. You bought that business because you needed an income stream, and you know the income stream is solid. You start to hope that the value of your business drops, because you plan to use some of your profits to fund the purchase of more income stream in the near future. If the income stream is solid at say $30,000 per year, you would rather pay $400,000 for the next business rather than $600,000 because the value went up.

You have arrived. Your thinking towards your business and investments has changed from the idea that you want to sell at a higher value to a greater fool, into one of wanting to buy a solid paycheck at ever lower prices. Welcome to a sleep filled retirement.

Now, let’s get a few more solid income payers for a sleepful retirement. (Again, I will get back to the core stock list in a future article, but wanted to cover some of my favorite investments now.)

• Breitburn Energy (BBEP) 9.3% yield. BreitBurn Energy Partners L.P. engages in the acquisition, exploitation, and development of oil and gas properties in the United States. It is an MLP which brings along certain tax benefits for those who want to hold in a non-retirement account. Breitburn trades at a market cap of around $900 million, but the liquidation value based on book is $1.2 billion. The company is worth more dead than alive. They could sell all their assets, pay off their debts, and have enough money left over to give us a 33% return on our cash. So we own the shares waiting for the true value of the company to be recognized, and we get paid 9.3% while we wait. Seth Klarman and the Baupost Group, one of the world’s greatest value investors, owns over 15% of the company.
• Rivus Bond Fund (BDF) 6.3% yield. Rivus Bond Fund is a closed end bond fund that currently trades at a 7.91% discount to the Net Asset Value of the bonds in its portfolio. That basically means they could liquidate their entire bond portfolio and return the money to the shareholders who in theory would gain 7.91% on their money. 86% of the fund is corporate bonds and another 10% is mortgage backed securities. 7.5% of the portfolio is AAA rated, 3% AA, 25% A, 40% BBB. That is over 75% investment grade. At the moment the fund does not use leverage. The fee is a bit high at 1.21%, but with a nice 7.91% discount, we are looking at 6.5 years for the fee to eat into the discount we are getting buying shares here.
• Aspen Insurance Holdings (AHL) We are buying the preferred shares, but want to share about the company who is paying the dividend on the preferreds first. Aspen Insurance Holdings has a rock solid balance sheet. The book value of the company stands at $3.3 billion as of the 2nd quarter 2010. The current market cap of the company stands at $2.15 billion. This means the company is worth 50% more dead than it is alive at the moment! I sure wish I had an extra $2 billion laying around. AHL has posted between $500 million to $700 million in free cash flow the past 3 years. That is a huge return on a $2 billion market cap, and the 6.2 P/E shows the value here. The chance we get paid seems very high. Investing guru David Einhorn an Greenlight Capital is the largest institutional holder of the common stock at around 5% of the outstanding shares. While the common stock pays a decent 2.1%, it does not pay more than the 10 year bond which is one of our requirements. I might take the common if the dividend were growing, but over the past 5 years, the dividend has remained constant. If the 10 year treasury dips to 2%, I will start buying AHL shares aggressively. In the meantime, one way to take advantage of this rock solid balance sheet and still get paid a respectable and solid income is to buy the Preferred A shares (AHL-PA). The preferred shares have a par value of $25, which is currently 11.11% higher than where they trade currently. The issuer can redeem them Jan of 2017 at $25 if they so choose. The shares pay .4625 cents per quarter which gives a current yield of 8.22%. This dividend is set through 2017. That is 7 years of solid income! After 2017, the shares will pay the yield of the 3 month LIBOR plus 3.28% and will reset quarterly. Keep in mind – the LIBOR shouldn’t be able to go under 0%, and currently, it is pretty close. So worst case scenario, if rates stay low forever, in 2017, we would get paid 3.28%, which is still better than the 10 year. More importantly, we will then be in a variable rate investment. If rates rocket higher, so will the income we recieve. Starting in 2017, we will have a “fixed” income investment in which we not need to actually worry about rising interest rates. In the meantime, we will get paid over 8% from a company with a rock solid balance sheet. Sign me up for that deal!

Article courtesy of Timothy L. Ayles, Napa Wealth Management, Inc.

Article courtesy of the Charles Payne, Wall Street Strategies

It’s beginning to look a lot like acquisition season these days with the high-profile negotiations between BHP Billiton (BHP) and Potash (POT), and Intel (INTC) and McAfee (MFE), among others. And why not? We’ve seen it coming as the market feels out a bottom and large corporations sit on large piles of cash. Like the NBA this summer, this year could be one for the record books for the equities free agency. So, with the housing situation seemingly as bad as it can get (we stress seemingly), it’s reasonable that speculation has begun to swirl about potential deals in the homebuilding space. As bad as business has been, some of the bigger players are in a more than adequate position to pick up a straggler or two for rock bottom prices. Then again, in an industry like housing one has to be very watchful for falling knives. We’ll separate the Shaqs (yeah, he’s way past his day) from the LeBrons in this year’s housing free agency.

Big deals aren’t a new idea in the homebuilding sector, as we’ve seen some pickups already. The biggest story was the mega deal in which Pulte Homes (PHM) bought Centex for $1.3 billion in an all stock deal last summer. Back in May 2008, Private Equity firm MatlinPatterson dumped $530 million into Standard Pacific (SPF) for a controlling position in the Company, which significantly turned the homebuilder’s fortunes around. And then there’s Lennar (LEN), who in February strayed a little from the beaten path and snapped up $3.05 billion worth in balances of FDIC mortgages for $1.22 billion.

Certainly the market is in awful shape at the moment, as the loss of the federal homebuyers’ tax credit sank new home sales to record low levels and demand has hardly shown any signs of life since. That being said, homebuilders have done some major book-clearing over the past couple of years and have largely moved more towards a build-to-order business model to protect themselves for times like these. The problem is homebuilding takes time and with inventories down to the bone, pouncing onto a potential rebound in demand won’t be as easy as flipping on a switch; it would be convenient for the major builders to have pre-built homes and other land on hand for such a situation. The current post-tax credit hangover period might just be seen by some of the bigger fish as a good time to catch the market snoozing and to pick up a bargain.

Teams with Cap Space:

D.R. Horton (DHI)
• Cash: $1.7 billion
• Debt: $2.2 billion
• Inventory: $3.6 billion (7.8 months supply MRQ)

Pulte Homes (PHM)
• Cash: $2.8 billion
• Debt: $4.3 billion
• Inventory: $4.9 billion (11.5 months supply MRQ)

Lennar (LEN)
• Cash: $1.2 billion
• Debt: $2.9 billion
• Inventory: $3.7 billion (15.7 months supply MRQ)

NVR (NVR)
• Cash: $1.1 billion
• Debt: $81 million
• Inventory: $421 million (1.3 months supply MRQ)

KB Home (KBH)
• Cash: $986 million
• Debt: $1.8 billion
• Inventory: $1.7 billion (13.5 months supply MRQ)

Market cap leader NVR recently made a $170 million offer for bankrupt Orleans Homebuilders, which had approximately $440 million of assets at the end of 2009. Therefore we know it’s in the hunt for some more assets, and with minimal inventory on its books it is going to need some more supply in the event of a demand rebound. On the other hand, D.R. Horton, with the second largest market cap in the space, is beginning to run a little low on inventory and will want to expand into the big fish in the industry. Pulte also trails close behind NVR and Horton in market cap, and while it would like to keep expanding, it does harbor a bit more of a debt burden and more inventory as well. Lennar and KB Home are on the smaller side, but still have the resources to acquire stragglers if they see fit.

The Shaqs:

Hovnanian Enterprises (HOV)
• Market Cap: $246 million
• Assets: $2.0 billion
• Liabilities: $2.2 billion

Beazer Homes (BZH)
• Market Cap: $289 million
• Assets: $2.0 billion
• Liabilities: $1.5 billion

Although they look like discounts right now, their knees are about to blow out. Beazer and Hovnanian have well documented issues regarding their debt loads and their ability to fund both new development for sales as well as their debt payments. If any of these companies are potential falling knives, these would be them. Despite a relatively strong selling season with the culmination of the tax credit in the second quarter, neither was able to turn a profit while many of their competitors were, owing to their relatively high risk exposure and generally less profitable operations. While someone could pick up these companies and cover their debts in the process, there is a sense that the recovery is going to be a long process and that these companies could struggle further in the months ahead, especially if prices double dip (which is a very real possibility in our view). Perhaps any deals for these two would be held for later when either there is proof the market is recovering, or when the vultures really start to circle and bring values down more.

The LeBrons:

Standard Pacific (SPF)
• Market Cap: $387 million
• Assets: $2.0 billion
• Liabilities: $1.5 billion

Ryland Group (RYL)
• Market Cap: $719 million
• Assets: $1.7 billion
• Liabilities: $1.1 billion

Given their relatively recent investment into the Company, I don’t necessarily see MatlinPatterson as being willing to sell their Standard Pacific stake so early, but otherwise the Company is a relatively attractive buy. After being hit hard by the market collapse in California, MatlinPatterson picked up the pieces and turned the struggling homebuilder around well. It is currently running at a profit despite continuing hard times in California and seems to have a good handle on sales execution; at $387 million in market value this would be a good pick up for anyone willing to brave the California market.

Finally, there is Ryland, which at over $700 million in market value before potential premiums would take some heavy investment. However, it boasts a lean inventory placed in lower-risk areas like Texas, and throughout the downturn it has proven that its assets are less apt to devalue in the case of a double-dip in pricing (which as we said earlier, is a very real possibility in our view). The Company ran at a $6 million profit in its second quarter even after $19 million of debt retirement costs, owing to its sales savvy and risk aversion. Although its homes typically run at a lower gross margin, its value shows on the bottom line.

Disclosure: Author long RYL

While the Dow posted a 140 point loss (-1.39%), the Nasdaq composite fell 1.56%; S&P 500 followed suit sliding 1.47%. TimelessWealth.net guided Premium Newsletter Subscribers in avoiding losses and towards plentiful gains on Monday August 30th. Criteria for entry on the first two trading ideas was not met, therefore the trades were not executed. This delicate information helped avoid injury to our capital. Instead, TimelessWealth.net Premium Subscribers were led to a profitable day trade with shares of Distribution Management Services Inc. (OTC: DMGM). In our Breakfast Digest Newsletter this morning we wrote:

After posting a 5500% gain on Friday (yes, we said 5500%), shares of Distribution Management Services Inc. (OTC: DMGM) are bound to ‘pullback’ in trading, Monday. This ‘pullback’, whether it precedes a strong decline in price or further price appreciation, will serve as a reasonable entry on a swing or day trade. The market is anticipated to be volatile, yet sufficiently ‘liquid’ this upcoming session. Trade carefully.

The market retraced to roughly $0.10 a share before jumping over $0.28 in less than one hour. Trading in the latter half of the session saw shares selling as high as $0.335.

Join our Premium Newsletter service to receive our trading ideas and coveted Breakfast Digest Newsletter. As one of our subscribers wrote to us, “it’s one of the best guidance services a trader could ask for“.

These stocks made runner-ups to our Premium Digest Newsletter Stock Picks on Monday. All other things aside, they ranked high in several technical scans rounding off likely bottoms.

Zix Corp. (NASDAQ: ZIXI) shares are nearing resistance of $2.50. Twice in five months the price missed breaking out towards $2.70. One more miss and a bearish triple-top chart pattern forms. Otherwise expect a steady 8% move.

A small ascending wedge suggests shares of Quantum Corp. (NYSE: QTM) may attempt to move higher soon. This follows a dive to new lows just two weeks ago.

 
A bullish crossover in the MACD indicator has twice predicted a move (on average 9%) in Ivanhoe Energy, Inc. (NASDAQ: IVAN) shares in the last 3 months. For the third time as of Friday, the technical indicator points to likelihood of price reversal as shares round off a 52-week low.

The remaining charts (below) point to stocks that are ‘bouncing’ or ‘correcting’ to the upside, after being dropped drastically in recent trading. If you have a stock idea that you feel belongs on this list, tell us about it and it may just appear in our next issue!

 Capstone Turbine Corp. (NASDAQ: CPST)

Vermillion, Inc. (NASDAQ: VRML)

AMN Healthcare Services Inc. (NYSE: AHS)

At the end of the week, our watch list exploded to 72 companies. Our watch ranks companies with exceptional dividend increasing histories that are within 10% of their respective 52-week low. We excluded companies that have no earnings and payout ratios in excess of 100%. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence.

Watch List Summary

The best performing stock from the previous list was Harleysville (HGIC) which rose 4%. The worst performing stock was Medtronic (MDT) which fell 14%.

Topping the list this week is Johnson & Johnson (JNJ). Based on IQTrends, JNJ is undervalued at or near 3.5% yield. The current yield is 3.7%. The trailing P/E of 12 is 25% below its average 5 years P/E of 16. We suggest adding JNJ to your investment watch list.

Second on the list is Intel (INTC). After cutting their sales and margin forecast downward on Friday, the stock rose 1%. Could the negative news be priced in? Only time will tell. Intel is trading at 11x trailing earnings. Compared to its 5 years average of 21x, INTC could be a bargain. Analysts will have a weekend full of downward revisions so we expect a little more pressure on stock prices next week. However, since Intel is yielding 3.4% compared to the 5 years average yield of 2.3%, the risk/reward is much more attractive. Both JNJ and INTC have payout ratio below 50%.

Our Investment Observation of Wesco Financial (WSC) on Tuesday August 24th was quickly verifed as being undervalued by Warren Buffett’s offer to buy the remaining portion that he didn’t already own on Thursday August 26th. We were able to provide a new Investment Observation of Transatlantic Holdings (TRH). With Transatlantic Holdings selling below book value, median price-to-earnings and dividend increases every year since going public, we believe TRH is a great alternative to Wesco Financial. In addition to TRH, we are working on a company which we believe will be able to retain its value far into the future.

Because our list has many great companies, we urged investors to filter for companies with less than 50% payout ratio. This should minimize the risk of dividend reductions if earnings are to fall by half. If you understand the companies’ history and their ability to pay the dividend, then payout ratios in excess of 50% may be considered. We suggest readers to use the March 2009 low (or companies’ most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worst case scenario prior to investing. The November 2008 to March 2009 time frame fits that description. It is important to place these companies in your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety.

Article courtesy of the New Low Observer

At $30, HP’s current offer is the sixth bid, a 200 percent premium over 3PAR’s previous $10 share price. Not only is this insane, but it’s also nearly unprecedented in M&A history. And since 3PAR is trading above $32 the market thinks Dell will bid even higher.

First Off, Is 3PAR Really THAT Unique?

Yes and no.

3PAR is a classic disruption play, its value proposition based on the premise that unused storage is wasteful—often times just 10% to 25% of allocated disk space is actually used.

3PAR’s “thin provisioning” technology enables disk space to be allocated only when applications need capacity, greatly reducing IT management costs. Think of it as storage on a just-enough and just-in-time basis.

In the cloud era, pre-allocation of storage is especially wasteful, because on-demand storage and computing services delivered via the internet have wide variability and less deterministic usage patterns. This makes 3PAR a great fit for data centers, and it’s partly why the technology is suddenly perceived as very valuable.

Not surprisingly large storage vendors have been slow to adopt technologies like 3PAR’s for a simple reason: making storage more efficient ultimately means selling less gear and is essentially akin to committing commercial suicide.

EMC CEO Joe Tucci actually once went on record admitting as much saying “If I only have hardware and I just keep helping to make you more and more efficient at less and less cost, eventually I’m going to hit a wall and it’s going to be tough for me to make money.”

HP’s Vanishing R&D Budget and The Mark Hurd Effect

This classic “Innovator’s dilemma” definitely applies to HP. But something else has hamstrung its ability to innovate in high-end storage, a market HP has been a leader in for many years.

And it’s correlated to former CEO Mark Hurd’s recent firing. Word on the street is Hurd wasn’t let go for his affair or even for his embellishment of trivial expense reports. Instead the board kicked him out because his employee approval rating was absolutely atrocious.

And the reason employees hated him is because he traded short-run profits for long-term innovation by laying off entire design teams and killing HP’s R&D budget—take a look at this chart and compare HP to Cisco and IBM, both storage leaders.

In this way, I believe acquiring 3PAR is actually the beginning of a secular trend for HP in using M&A to “make good” on the company’s lack of organic innovation.

Yes that’s right, believe it or not, the real reason why HP’s board is obsessed with 3PAR is closely correlated to Hurd’s departure—divisions like HP’s storage group simply haven’t kept pace with peers. I used to sell to HP’s storage groups (as well as Dell and 3PAR) and have plenty of friends who tell me that projects have been canned and innovation has languished.

Dell is Desperate for Similar Reasons

Innovation within Dell is even more of an oxymoron. If you thought HP’s R&D allotment was low, compare it to Dell’s. Dell is not an engineering driven company. They are a system integrator desperate for growth outside of the personal computing market.

And storage consolidation threatens Dell for another reason. Storage has traditionally been like a cross selling catalog, with vendors filling in their product portfolios by OEM’ing equipment from others—Dell actually resells EMC’s high-end storage gear today. But these cross-sell deals are becoming more tenuous to defend as vendors build out more complete portfolios.

This is because cloud computing requires complex virtualized resource allocation, management and provisioning. Vendors are increasingly moving up the stack in providing services beyond hardware, which is all but a commodity.

Owning 3PAR would give Dell a chance to stay in the game and complement the low end storage solutions it acquired from EqualLogic in 2007. And the Dell board is prepared to break the bank since there is a scarcity of other good high end storage virtualization plays (Pillar Data and Compellent are two of the largest, but don’t have 3PAR’s traction).

Why HP Will Probably End Up with 3PAR

So there you have it. With its DNA as a system integrator, Dell doesn’t have a hope in hell of organically growing complex ASICs and software like 3PAR has, and is desperate to move up the food chain and stop reselling EMC’s portfolio. And the HP board is tacitly admitting it needs to rectify the fact that Mark Hurd sort of killed the “HP. Invent” culture. 3PAR would give HP several hundred R&D focused engineers and a talented ASIC team.

The interesting thing about this bidding war is that it conveys a larger lesson about why M&A often fails.

It’s easy to listen to investment bankers and overpay on acquisitions. But it’s much harder to actually handle post-merger integration. Dell is the perfect example. They have essentially no precedent for running an ASIC team, and would take a company like 3PAR that spent 25% of its revenue on R&D and eventually starve it.

3PAR is a better fit for HP, and in the end it’s likely that they will prevail. It sure seems that way anyway. HP’s board is set out to make up for lost time and right its innovation ship regardless of cost to shareholders. But the synergy premium for 3PAR will be enormous, and history suggests that deals with such a massive allocation of acquisition goodwill generally fail to pay for themselves.

Article by Steve Cheney of TechCrunch