Windows Of Opportunity In Business Cycle Analysis - Seekingalpha.com

Amid all the recession talk of late, there's a lot of chatter about the value of predicting these events. One line of reasoning advises that unless you're capable of anticipating recessions with a fair amount of lead time, the situation is hopeless. Actually, no-reality is far more nuanced than this one-dimensional claim lets on. Different recessions dispatch different degrees of pain on different time schedules. As a result, there can be value in simply recognizing when recessions begin, as early as possible.

Life would be much easier, of course, if we could reliably forecast recessions well in advance and take defensive actions before the storm hits. But history is littered with failure here. What's more, it's never really clear if the claimed forecasting successes relied completely on a methodology vs. a bit of luck. In any case, the debate about predicting inspires looking for the telltale signs of economic slumps once the process has started and once the negative trend is clearly terminal. Designed properly, this approach can be quite effective, in part because it's not subject to the higher error rates of pure forecasting. I outlined a test on this front last week, and the results come with an encouraging record. It's not rocket science, but it's effective, as I discuss in a book I'm writing on the topic. In any case, the world is awash in predictions; what's missing is a robust model for recognizing that a recession is already upon us. That alone can't solve all our troubles with macro, but it's not worthless either.

Waiting for a recession to declare itself in convincing terms may seem like a pointless exercise, but in fact there's often a chance to prepare for the worst-even after the storm has recently started pummeling us. Consider the Great Recession. By NBER's estimate, January 2008 was the economy's first full month of broad decline. My research suggests that by the spring of that year, the data was clearly revealing, in real time, that the economy was in trouble. But wasn't the jig up in January? Hadn't the window of opportunity already closed by the first of the year? Not necessarily.

As one test, let's compare the stock market's one-year rolling return for the first 12 months of Great Recession with its 3-, 5-, and 10-year annualized counterparts. One-year returns were already negative by the time the recession started in January. But a roughly 4% loss at the end of the year's first month deteriorated dramatically as the recession unfolded. Meanwhile, the 3-, 5- and 10-year annualized returns for the S&P 500 remained positive through August 2008, offering investors a chance to preserve quite a bit of the gains earned previously before all hell broke loose in September 2008 and beyond.

Looking at a variety of economic indicators also reminds that the Great Recession's pain didn't arrive as an across-the-board bolt out of the blue early on. For instance, retail sales and new orders for durable goods held up surprisingly well during the first half of 2008. Although both series weakened as the year progressed, it was hardly the case that the worst of the contraction had struck in these corners at the beginning of the recession.

To be fair, the window of opportunity for defensive action, once a recession begins, can and does vary considerably through history. But it's misleading to argue that all of the damage is always dispatched up front. That may be true for some financial indicators and/or economic series in some recessions, but it's far from an iron rule.

In other words, developing a relatively reliable methodology for recognizing when a contraction has started can offer a surprisingly powerful bit of strategic information. But there's a catch: You have to be looking for it, and the search requires an analytical lens that's somewhat different than the usual suspects that are deployed for predicting recessions.

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Finding Opportunity In Rumors About Game Consoles: Gamestop In Play - Seekingalpha.com

The rumor mill begins

Recently there have been leaks of rumors that suggest both Microsoft (MSFT) (1st rumor) and Sony (SNE) (2nd rumor) will release new consoles to combat used games and possibly piracy. The thesis is game publishers will gain momentum in selling new games at the same price point and increase revenues and profits. In order to do so, game publishers are cutting out the middle man in digital distributions. They hope it will help the gaming industry, including, but not limited to, EA (EA) and Activision (ATVI). Finally, the theory holds that casual gaming is cutting profits from these publishers, making it difficult to compete in the market, as they rely on console manufacturers to sell their products.

Life without the middleman

There are several issues with these main theories. First, these assumptions are the basis to create an argument to short or bet against the survival of the industry as a whole and the viability of Gamestop (GME) in particular. The majority of core gamers in today's world who play on the PS3, Xbox 360, or Wii have also grown up playing consoles and handheld video games. The casual gamer is not a frequent and avid gamer when compared to someone who owns all three Playstation systems or both Xboxs. The "gamer" or "core gamer" of the industry thrives in a niche market where there is a unique industry with different variables and intangibles. They enjoy their entertainment, talking about games through online forums and review sites, going to retail stores including Gamestop, and playing video games with their friends. Gamestop's business strategy allows consumers interested in video games to purchase games at a lower price point by one of two ways (2012 10-K). One is they can buy the new game at a $60 price point and trade it in later for $20 credit towards another purchase. The other is a customer purchases a used game for $40 after it has been released and is able to avoid buying on an impulse decision. This unique aspect of the Buy-Sell-Trade business model and the overall gaming industry has increased the popularity of all gaming consoles, accessories, and software titles enjoyed by gamers at all prices.

Rise of Indie games and unique gaming experiences

Another major factor is that the gaming industry hasn't focused on what is truly occurring in digital distribution of games through the Playstation Network or Xbox live. The Indie genre is making inroads into the software sales through unique gaming experiences that can be offered under $15. A prime example is on the Playstation Network. Sony released a game made by That Game Company, titled Journey. Journey is a unique, immersive, and beautiful game that offers a completely different perspective of console gaming compared to your frequent shooter and sport titles. It creates a passion of excitement and allows the gamer to enjoy the game's unique playing opportunities. One can look at casual games on the smart-phone and understand how unique and different types of games are hits at the right price point. The first console manufacture to exploit this market of casual gamers includes Nintendo (NTDOY.PK). The Wii console has motion sensing technology that created new entertainment for friends and families across the globe. The continued success of the Wii will allow Nintendo to develop another updated version utilizing the same factors that made the original so successful (WiiU). If Sony and Microsoft rely on selling retail games at $60 over and over like Madden and Call of Duty franchises, then the industry will struggle without the ability to trade and purchase used games. The reason is simple: evolution of valued added entertainment plus the purchasing power of the consumer will be greatly inhibited. In the end, the traditional casual and core gamer will find cheaper entertainment elsewhere.

Taking advantage of the changing video game industry

I believe that the industry is not going to go down this road; however, it has offered some unique opportunities to invest in certain companies. Nintendo has a unique and quite interesting console coming out in 2012. This console will compete with the PS3, Xbox 360, and the next generation consoles. It uses a tablet based controller and immerses the gamer into the game unlike anything before. Gamestop comes to mind with their excellent retail financing and cash management. A loss of their used game business would not just harm their business, but it would also harm the whole video game industry.

Rumors like these create small opportunities to take advantage and learn about the market and focus on the companies surely to benefit when the new console refresh occurs. Simply put, I would recommend one to look over Gamestop's financial position and recent market value and see if they believe it is a good long term position. As for Nintendo, I cannot offer a recommendation for the lack of better competence in their financial situation. As an avid gamer and intelligent investor, I do not believe these rumors are true, but I do see an opportunity to be greedy when others are fearful.

Disclosure: I am long GME.

Additional disclosure: I am long Gamestop. I do not have any other positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Middleby Corp: A Strong Opportunity For Above Average Capital Gains - Seekingalpha.com

Middleby Corp. (MIDD) is a mid-cap growth stock with a terrific record of growing earnings, a strong balance sheet with no debt, and a current valuation that is historically below average. Therefore, we believe that it represents a very attractive opportunity for investors seeking strong growth from a financially-strong business, a great opportunity to conduct further research. In addition to having a great track record, leading analysts expect this company to continue growing at a rate that is consistent with what it has achieved over the last nine years (8 years of history plus the year we are in).

Growth stocks are defined as companies with high rates of change of earnings growth of 15% to 20% or better. Growth stocks offer the potential for share prices to rise in lockstep with their profit growth in the long run. Therefore, the PEG ratio formula (price equals growth rate) tends to be the most appropriate formula used to value growth stocks. However, due to the exponential nature of compounding large numbers, PEG ratio forecasts are capped at 40%.

Because of the higher valuation typically awarded to fast growth, growth stocks offer the potential for greater capital appreciation. On the other hand, they also offer higher risk. First of all, they tend to command much higher than average PE ratios, and second, achieving very high levels of growth is very difficult to sustain. Consequently, forecasting future earnings growth is more important with high growth stocks than any other class of stock. Also, the average growth stock typically plows all of its profits back into the company to fund its future growth, instead of paying dividends.

Middleby Corp: Large-cap Growth at an Attractive Price

About Middleby Corp

The Middleby Corporation is a global leader in the foodservice equipment industry. The company develops, manufactures, markets and services a broad line of equipment used for commercial food cooking, preparation and processing. The company's leading equipment brands serving the commercial foodservice industry include Anets®, Blodgett®, Blodgett Combi®, Beech®, Bloomfield®, Britannia®, Carter-Hoffmann®, CookTek®, CTX®, Doyon®, FriFri®, Giga®, Holman®, Houno®, IMC®, Jade®, Lang®, Lincat®, MagiKitch'n®, Middleby Marshall®, Nu-Vu®, PerfectFry®, Pitco Frialator®, Southbend®, Star®, Toastmaster® TurboChef® and Wells®. The company's leading equipment brands serving the food processing industry include Alkar®, Armor Inox®, Auto-Bake®, Cozzini®, Danfotech®, Drake®, Maurer-Atmos®, MP Equipment®, RapidPak® and Turkington®. The Middleby Corporation has been recognized by Forbes Magazine as one of the Best Small Companies every year since 2005, most recently in October 2011.

Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings. Here is a link to a live and fully functioning graph on Middleby Corp. We suggest running graphs over numerous time frames as part of a more comprehensive fundamental analysis.

Click on any chart below to enlarge:

Middleby Corp: Historical Earnings, Price, Dividends and Normal PE Since 2004

Performance Table Middleby Corp

The Two Keys to Long-Term Performance

Years of research and experience have taught us that there are two critically important keys to achieving above-average, long-term shareholder returns at reasonably controlled levels of risk. The first key is earnings growth, or what we like to call the rate of change of earnings growth. The faster a company can grow its business (i.e. earnings), the larger the income stream it can produce with which to reward shareholders. This is because of the power of compounding, which Albert Einstein was alleged to have called "the most powerful force on earth." Ultimately, both capital appreciation and dividend income will be a function of a company's ability to grow its profits.

The second key is valuation. When a company can be purchased at its intrinsic value based on earnings and cash flow generation, the shareholders' rate of return or long-term capital appreciation will inevitably correlate to and/or equal its earnings growth rate. Overvaluation will lower that rate of return and conversely, undervaluation will increase it. Consequently, paying strict attention to the valuation you pay to buy a stock is a critical component of both greater return and taking lower risk to achieve it. Because, ironically, when you overpay for even the best business, you simultaneously lower your return potential while increasing your risk of achieving the lower return.

The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two keys to long-term performance. Notice the impact that valuation (black line above or below orange earnings justified valuation line) had on the following performance results.

The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as normal as it has been since 2004.

A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Middleby Corp is 2.20, which is historically normal.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

The rate of change (growth rate) of the company's earnings

The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.

Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. Middleby Corp is clearly an industry leading superior business, which based on the consensus estimates from leading analysts, appears to be capable of growing earnings at an above-average rate for the foreseeable future. At its current price, which is attractively aligned with its True Worth valuation, Middleby Corp represents an opportunity for growth at a reasonable price. The important factor is that Middleby Corp, with its strong balance sheet and potential for future earnings growth, has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for outsized future returns.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent common sense investing decisions.

The consensus of 5 leading analysts reporting to Capital IQ forecast Middleby Corp's long-term earnings growth at 20%. Middleby Corp has no long-term debt at 0% of capital. Middleby Corp is currently trading at a P/E of 18.6, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 24. If the earnings materialize as forecast, Middleby Corp's True Worth valuation would be $269.57 at the end of 2017, which would be a 18.5% annual rate of return from the current price.

Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stake holders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any perspective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Middleby Corp to an equal investment in 10 year Treasury bonds, illustrates that Middleby Corp's expected earnings would be 7.1 times that of the 10 Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Summary & Conclusions

This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

We believe that Middleby possesses the most important characteristics that a growth-oriented investor should look for. It offers past and future above-average growth, low debt and the opportunity to continue growing for several more years. Current valuation is attractive, although not compelling since Middleby has a PEG ratio of just under one. Therefore, we believe the essential "fundamentals at a glance" on this company makes it an excellent candidate that is worthy of further consideration and the accompanying effort of additional due diligence.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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Opportunities In Renewable Energy - Seekingalpha.com

The desire for clean air and water has been a concern of mankind for millennia. But as the world becomes increasingly industrial and population explodes, governments and businesses are looking for ways to preserve our environment.

Many companies are focused on providing clean energy through new and renewable technologies such wind and solar power. These businesses were sizzling prior to the recent recession, as high energy prices and floods of government subsidies supported the budding industry.

FPL Group, like many other companies, has invested millions in these technologies. However, a closer look into the industry shows signs of trouble. In fact, two representative ETFs (TAN) and (FAN), which track the solar and wind industries respectively, have fared quite poorly. If fact, the prices for both of these investment vehicles plummeted during the recession and never really recovered. First Solar (FSLR), a bellwether of sorts for the solar industry, has shed over 80% of its value since its highs 4 years ago. So what gives?

The industry has been ravished by, among many factors, the cost of energy remaining relatively low, smothering demand for alternatives. Furthermore, debt ridden Uncle Sam, along with many governments around the world, has slashed subsidies and R&D spending for the industry.

As companies continue to spend millions in developing these technologies, traditional nonrenewable sources such as coal remain very abundant and significantly cheaper. The changing economics from the weaker economy have helped these sources attractive from a cost perspective.

But regardless of favorable economics, one thing has not changed: These energy sources are not clean. Coal, oil, and even natural gas are damaging to the environment. Regardless of the price, they can be unhealthy and unpopular by the constituents they power.

But there are a host of companies that are taking a different approach to green energy and a clean environment. Instead of developing and introducing technology solutions that fundamentally shift our energy sources, these businesses simply enable traditional sources, such as coal, to be cleaner, or at least less dirty.

As most know, when coal is burned it releases sulfur, which can cause acid rain. Coal is also blamed as the largest contributor to carbon dioxide, a greenhouse gas. But these new kinds of clean technologies solve one of the biggest problems with coal by mitigating these adverse effects.

Some companies, like ThermoEnergy, are taking green technology a step further. "First there was coal; then there were scrubbers," says Cary Bullock, ThermoEnergy CEO, "We're in the next wave of coal power."

In 2008, Siemens (SI), the German conglomerate, got the ball rolling by constructing the first clean coal plant in the world. Since then, the idea has continued to gain traction. ThermoEnergy possess a technology that gets rid of the smoke stack, all while enabling coal-fired plant to emit an impressive zero emissions.

As the political pressure builds and the regulations and fines become stricter, companies utilizing traditional sources of energy must adapt. New clean technologies that allow for lower emissions, while still enabling power to be created inexpensively, may be an attractive business model given the current macroeconomic situation.

But energy production is not the only industry that government regulatory agencies have their sights on. Ever since the polluted Cuyahoga River infamously caught fire in 1969, the US government has been at war with water pollution.

In fact, government regulations have only made the clean technology business model more attractive. For example, it was hefty environmental fines that led New York City to sign a multimillion-dollar agreement with ThermoEngery to utilize its ammonia recovery system a wastewater treatment plant.

In many ways, to Bullock, it is the pollutants themselves that provide a business opportunity. ThermoEnergy, for example, is able to recover materials in a way that they can be sold, such as use for fertilizer. In this way, clean technology business can on several mega markets like energy, water, and fertilizer, all while removing harmful pollutants from the air and water.

With many renewable technologies yet to prove their cost effectiveness, the green energy industry is still in its birth. Traditional energy sources like coal and natural gas will continue to dominate in the near term. But with shifting politics and regulatory rules, these energy sources will need to find a way to be clean. This is where clean technology companies can help make this a reality and where savvy investors may find profit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Greece Will Default: This Means Big Investor Opportunities - Seekingalpha.com

This is an update of my November 24 Seeking Alpha article warning investors that the euro bailout and Greek restructuring would fail and that Greece will default.

The default by Greece on its sovereign debt is certain now that Greece has effectively rebuffed the efforts of its debtholders committee to negotiate a "settlement" with a partial payment of 40 percent. They will announce a settlement. But it won't be worth the paper it is written on.

The default is going to have some unexpected impacts that are going to greatly change certain stock and bond prices in both Europe and the US. Some are going to rise dramatically and other significantly fall. It's going to provide some really good opportunities for knowledgeable investors.

Among the companies and banks that will be affected: National Bank of Greece (NBG), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), ETF funds with european stocks such GREK, and a lot of hedge funds.

There are five main questions. Their answers, some rather surprising, will affect certain stock and bond prices.

The first question is whether Greece will totally default, partially default, or allegedly not default by exchanging its euro-denominated debt for non-interest bearing certificates.

The second question is what steps Greece will simultaneously take to protect the Greek people and get the Greek economy going again.

The third question is what will Greece do about repayments to everyone outside of Greece holding its debt - the ECB, the large German banks, the IMF, the hedge funds and estate of MF Global, etc.

The fourth question is which companies and economies will take the hit when Greece defaults? For example will it slow down the US recovery? Increase the price of gold? Clobber US hedge funds?

The fifth question is which eurozone country will be the next to default.

The Current Situation

As predicted in the November 24 Seeking Alpha article, several "rescues" were attempted by the eurozone nations led by Germany and France and by the European Central Bank and the IMF.

The rescues were ostensibly to help Greece pay its maturing sovereign debt and cover its budget deficit. In fact, as noted previously, the goal was not to save Greece or the euro. Rather, the goal was to save the handful of to-big-to-fail German and French banks which made the high-interest loans and buy time for them to unload the loans that were not immediately maturing - on gullible hedge funds such as MF Global.

A substantial portion of the "bailouts" involved Greece borrowing money from the ECB and the IMF as well as from a fund set up by participating nations such as Germany. As it is in a reorganization bankruptcy, the new debt is supposedly senior to the old debt which is increasingly held by US hedge funds such as MF Global and the traditional buyers of distressed debt such as Alden and Angelo Gordon.

There may possibly be one more bailout payment in order to pay the $18.7b of debt due in March, primarily to Greece's original lenders. Then Greece defaults.

In the meantime, Greece and the current owners of the debt are engaged in negotiations, allegedly to negotiate a bond swap with a significant creditor "hair cut," but really in an effort to buy time until the final bank bailout can occur in March.

Surprisingly, the current holders of the old debt are actually taking the negotiations seriously - thinking they are in a US bankruptcy-like position and can get more than the 50% initially proposed by Germany and France and the 40% that apparently was the holders last proposal. They won't.

After more Greek filibustering and delay, and perhaps even with what appears to be an agreement giving the holders of the old debt something, it's much more likely they will end up getting absolutely nothing no matter what "agreement" is announced.

In fact, Greece is filibustering in the "size of the haircut" negotiations at the behest of Germany and France, so their banks can get the March payment and their 2012 elections can conclude before Greece officially throws in the towel and announces there will be a total default.

The deal appears to be a quid pro quo wherein Greece filibusters and "settles" to delay the official announcement of default so Germany and France can get the maximum political benefits. In exchange, Germany and France will not oppose either Greece staying in the EEC after it goes off the euro or defaulting and staying on the euro and in the EEC.

The latest numbers for Greece suggest it generates enough revenue to pay all its non-debt expenses with enough left over to pay a bit of interest on its debt going forward. If that is not true at the moment due to the continued decline in the Greek economy, it will undoubtedly be true when Greece defaults and its economy and the resulting tax collections begin to recover.

The November prediction seems increasingly likely to occur - that Greece will meaningfully guarantee all Greek bank deposits and CDs, all its pension payments, and that it will continue to pay interest on that portion of its current debts held by Greek banks and other financial intermediaries. In other words, the Greek government will protect the Greek people. No surprise there.

Also, though the odds are increasingly against it because the default will leave Greece with enough revenue to cover its expenses other than its sovereign debt, is that the Greek government will use the default to implement at least some economic changes to help its economy in the future.

Another November prediction that also may come true in the end is that Greece will provide "political cover" to the leaders of the Common Market by "paying' off" its current debt with non-interest bearing bonds with no due date. Anyone who gambles on these being paid would be better off buying the Brooklyn Bridge. Sorry Mr. Corzine.

So Where Can Investors Find Profits In This Event?

My first suggestion for investors and traders: Look at Greek companies and banks as quickly becoming much more profitable: the very real likelihood that Greece will protect its own banks and their depositors, while ignoring everyone else, makes publicly traded Greek banks and companies an interesting speculation as one of the few possible winners from the default (see the National Bank of Greece and other Greek banks and electronic traded funds such as GREK).

The big win for Greece occurs if it goes off the euro and stays in the EEC. The depreciation of its new currency will provide a major uptick in Greek exports and tourism and will encourage EEC companies to relocate to Greece where the cost of living and producing will now be substantially less expensive. Greek companies engaged in tourism and exports will be very good investments. tourism companies such as Attica Holdings (ATTICA), and exporters such as Unibios (BIOSK)

Another big winner, at least initially until its downward trend overwhelms its temporary Greek bounce, will be gold. There is going to be turmoil and uncertainty in the "cake walk" of the world's financial markets until it is certain who, besides MF Global, ended up with the old Greek bonds-- and thus, the losses-- when the Greeks sit down on the only remaining chair. Gold is still viewed by many as a safe haven, and there will be renewed calls for currencies to have gold "backing"-- - which won't happen but will certainly encourage the buying of gold until reality sets in once again and gold's long term decline continues.

The governments of other countries with unpayable sovereign debt are likely to quickly follow Greece in fairly quick succession. There will be quite a bit of turmoil, and what actually happens when Greece defaults, not what is announced or claimed by the politicians, will be a great template for what will happen each time a new default occurs. Expect Italy and possibly Portugal to follow Greece off the euro.

Thus the second suggestion for investors and traders: Buy and sell in the expectation of similar swings in gold and the defaulting country's stock and bonds comparable to those that occur when Greece goes down.

In the long run several things are likely as Germany and some other countries such as the Netherlands and Finland continue on the euro. One is that the biggest losers from the defaults will ultimately be German shares, bonds, and banks - all of them. The departure of the weaker euro members will mean the euro is undervalued at its current exchange rates with other currencies, such as the dollar and pound. In other words, the euro will tend to rise each time a weak country leaves. Each time that happens it will make the exports of Germany, and the countries that remain on the euro, more pricey.

Each time the euro appreciates as weaker economies leave, the export sales from the remaining euro countries will tend to decline as a result of the stronger euro. This, in turn, will force the ECB to loosen up so interest rates fall in the euro block.

Thus my third suggestion: At some point short the shares of German and other euro country exporters, particularly those exporting outside the Eurozone with price sensitive products. Among those to consider: Hanse Yachts [H9Y], Aleo Solar (AEORF.PK), Carl Zeiss [AFX], Elexis [EEX], Duerr (DUE), Jenoptik (JNPKF.PK), and Neschen (NSN).

The other thing to watch carefully is the reforms announced by the Greek and other governments when they announce their defaults. For investors and traders, these will be the very important back stories of the big news that there will be a default, probably more important than the news of the default itself.

My fourth suggestion-- and it's the most important: Investors and traders should particularly watch the back stories as it is likely the Greek, and other defaulting countries, will use the event to announce major economic reforms, such as going off the euro entirely but remaining in the Common Market and/or dramatically reducing taxes and regulations. Such changes, if actually implemented as opposed to merely being proclaimed at the time of default, particularly when coupled with the resulting appreciated euro, would attract German and other Common Market employers to relocate to Greece and cause the Greek economy to begin to boom. All the more reason to buy Greek stocks and bonds. The EEC companies that move to take advantage of the now-lower costs in Greece may also be good investments. Daimler [DAI], Siemans (SI), and companies such as those suggested for shorting are all good candidates to expand in Greece and elsewhere as they flee Germany.

My fifth suggestion: Carefully watch the euro's exchange rate in the sales of the companies in the euro block with a high percentage of export sales. The demand for some export products is inelastic, and the demand of others elastic. Some companies will not be hurt much by Greece leaving so that the euro strengthens, and others will really take a hit.

My sixth suggestion: Because Greece's revenues are sufficient to cover its current expenses when it has no debt service, bet on Greece defaulting and using its resulting small surplus to partially pay off the IMF and ECB, but not leaving the Common Market or going off the euro.

Where Will Greece End Up?

Because jettisoning its euro debt and going off the euro - and the possibility that the event will make it politically feasible for Greece to adopt major pro-business reforms - will all be good for Greek banks and companies, investors should view the default as a good time to buy Greek shares and bonds across the board.

If Greece does go off the euro it will almost certainly stay in the common market - then Greece and its companies and banks will boom relative to the countries remaining on the Euro. This is because even more German and other euro block companies will be setting up operations in Greece to take advantage of the lower costs of production, resulting from the absolutely certain major depreciation of the euro/Greek exchange rate.

Thus my seventh suggestion to investors: buy even more Greek shares and bonds if Greece both defaults, goes off the euro, and stays in the EEC. Same for Italy when it goes.

A Word of Caution

A word of caution. Investors and bondholders should not be gullible and believe everything (or anything) that is promised in the default announcements and the "agreements" and "settlements" that accompany them.

Similarly, investors should not be spooked about the impact of the default on United States' economy, sovereign debt and banks. The Greek default will have only the most minor effect on the United States - except that it will give the White House and its Federal Reserve appointees someone other than themselves to blame for the economy not recovering in 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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43 Dividend Champions On Sale: A Rare Opportunity - Seekingalpha.com

We believe that based on earnings, 2012 is starting out with the stock market undervalued. We believe in the long-term ownership of great businesses purchased at sound and attractive valuations. Consequently, we view the stock market as merely the store that we shop at in order to buy the businesses we want to own.

Furthermore, we do not rely on the market to set the price at which we are willing to buy or sell. Instead, we prefer to calculate the intrinsic value of the business based on the company’s earnings power. If the market price is at or below that level of valuation we will be a buyer, if not, we either look elsewhere or patiently wait for the True Worth™ valuation to manifest.

Conversely, if the market significantly overprices a company, even one that we like very much, we will sell to avoid long-term risk. Based on years of research and reviewing the earnings and price relationship on thousands of companies, we are confident that the proper value will inevitably be applied to a business by the market; it’s only a matter of time.

Shares of stock represent ownership in the business. In the long run, business success and shareholder returns will inevitably correlate. However, it is also an undeniable fact that the stock market can and will temporarily either over-price or under-price a business. And, it is also an undeniable fact that a company (business) derives its true value from its earnings power, in other words, the amount of cash flow it is capable of generating on its shareholders’ behalf.

Therefore, contrary to what many people are willing to accept, is the indisputable reality that the business results of the company behind the common stock you own is far more important to wealth creation, than what the stock market may be mispricing it at over a short period of time.

Mispricing happens when emotions erode rational thinking thereby manifesting either greed or fear. It is important that investors maintain a reasoned and rational approach and avoid the emotional response at all costs.

When reviewing the broader stock market in the context of market price versus intrinsic value, we emphatically state that the stock market is significantly undervaluing many best-of-breed American corporations. We believe this is primarily due to extreme pessimism that has been promulgated by the masters of the media.

Currently, when you review America’s best of breed companies from the perspective of operating results, i.e., earnings power, you will discover that in the aggregate, there are a large number of businesses that have performed extremely well in calendar year 2011.

Stated more simply, there are numerous businesses that grew at above-average rates during 2011, but alas, the stock market did not reward that growth according to what it should have. Therefore, based on price action, many of America’s best businesses had a down year. However, when you measure earnings power, the same companies generated significant business growth. In time, we contend that it is inevitable that these fine businesses will be rewarded according to their business achievements. Once again, it’s only a matter of time.

Even more importantly, we further contend that best-of-breed companies trading at such unrealistically low valuations, at least in our opinion, offer the best combination of low risk and future growth possible. The opportunity to invest in and own best-of-breed companies trading at unjustified low valuations is very rare. Common sense would dictate that it can only come when pessimism about our future is at its lowest.

Furthermore, we are also very confident that the majority of these companies are going to continue to generate above-average future earnings growth. As a result, we see a potential double-barreled explosion in the future stock price of many of these fine businesses.

First, we expect a PE expansion as the market inevitably values these companies at more normal PE ratios. Second, we expect that the majority of these companies will continue to grow their businesses (earnings) at above-average rates over the next several years.

The combination of these two factors could generate significant future rewards at low levels of risk. We feel that risk is reduced when valuations are too low to be reasonable, and could be reduced further with the proper level of diversification.

The Case for a Positive View of Stocks

The following list is comprised of Dividend Champion companies that are trading at historically low PE ratios based almost exclusively on negative investor sentiment. Our list is comprised exclusively from David Fish’s current list of 102 Dividend Champions, companies that have increased their dividends every year for at least 25 years. Amazingly, of the 102 names on this list, 43 of them were available at below normal, and therefore we feel, attractive valuations.

To be clear, there were another 45 or so names out of the 102 Dividend Champions that could have been included based on reasonable or fair valuation. Names like McCormick & Co. (MKC), McDonald’s Corp. (MCD), Hormel Foods Corp. (HRL), Sherwin Williams Co. (SHW), and RPM International (RPM) represent just a few of the high profile names that were excluded due to our strictest definition of intrinsic value. In other words, these names were not necessarily overvalued but just fully valued. Of the entire Dividend Champions list, we only rejected five that we considered either excessively overvalued or poor investments based on weak fundamentals.

43 Dividend Champions On Sale

We have organized this list in order from the highest five-year estimated annual total return to the lowest, based on the combination of consensus analyst estimates for growth and valuation. The first four columns in the table compare the current PE to the historically normal 15-year PE and the 15-year historical EPS growth rate to the 5-year estimated EPS growth rate. Then the current dividend yield is listed, and finally, the 5-year estimated annual total return calculation. The 5-year estimated annual total return is a calculation based on the company achieving the estimated EPS growth rate and then the stock trading at its earnings justified valuation.

click to enlarge images

More Reasons To Be Positive About The Market

On top of low valuations, there are additional insights supporting a positive view for our economy and the stock market. John Bodnar, a financial planner/registered investment advisor in Florham Park, New Jersey, sent a letter to his clients, and with his permission we offer a few excerpts. What fascinated us was the following paragraph referencing an article in TIME magazine in 1992 that is eerily similar to even almost identical to the doom and gloom promoted by the media today:

The U.S. economy remains almost comatose… the economy is staggering under many structural burdens, as opposed to familiar cyclical problems… The structural faults represent once in a lifetime dislocations that will take years to work out. Among them: job drought, debt hangover, the banking collapse, the real estate depression, the healthcare cost explosion, and the runaway federal deficit.

All of these worries, which reflect almost perfectly the exact worries we face today, were offered by TIME magazine just prior to one of the longest and strongest stock market advances in recorded history - 1992 to 2007. Similarly, with stock valuations as they are today, we believe that we are sitting on the threshold of extraordinary future returns from owning high-quality common stocks that can be bought at such low valuations. Billions upon billions of dollars have been fleeing the stock market as panicked investors seek the refuge of so-called safer alternatives such as bonds and other fixed income instruments.

However, we would caution you that interest rates are currently at all-time lows which imply that the future price of bonds could be just as volatile and fall just as far as stock prices did in 2008 when interest rates return to more normal levels. Moreover, the rates on these so-called safer investments are so low today as to almost guarantee the potential for loss given any level of future inflation.

It is comforting to know that we are not alone regarding a positive view of the future. Most of us have heard or read Warren Buffett’s famous refrain: “Be fearful when others are greedy and greedy when others are fearful.”

With stock market fears at such a heightened state, and with billions of dollars on the sideline, it only seems logical that investors faced with few alternative viable choices for an adequate return at reasonable risk levels might someday soon become once again attracted to blue-chip stocks.

This would especially apply to blue-chip dividend paying stocks with long histories of increasing their dividends every year. As the list above depicted, there are so many blue-chip names like Procter & Gamble (PG), PepsiCo (PEP), Abbott Labs (ABT), Johnson & Johnson (JNJ), Medtronic (MDT), and others that offer an attractive and growing dividend rate, that can be bought today at historically low values.

The following excerpt from the concluding remarks from John Bodnar’s piece referenced above summarizes our views:

Ready to wrap this up? Let’s return to the 1992 Time cover story. Sounds eerily like the headlines we read today. And yet, the decade of the 1990s turned out to be a boom for investors. Odd considering all the negative headwinds reported in the Time article. I suggest we resurrect the American spirit and align ourselves with the economic realities instead of the political headlines. American businesses are doing well. They are well capitalized, sitting on loads of cash, increasing their dividends, and buying back their own stock. It is a great time to be an investor in some of the greatest companies in the world…… Significant market bottoms, when they finally occur, have less to do with fundamental economic and financial shifts than with crescendos of public panic. On this you can rely: the stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.”

A link to an article we posted on our blog includes John Bodner’s entire letter can be followed here.

Next, the opening paragraph of an article written by Arne Alsin in the financial blog Seeking Alpha on November 29, 2011:

I’ll make it crystal clear, in no uncertain terms: The asset class to own right now - for the rest of this decade, even – is stocks. Not only are investors set to earn multi-fold gains over the remainder of this decade, but those gains are achievable with low risk.

Low Valuation: A Significant Long-Term Opportunity

We remain very frustrated by the low, and what we consider to be ridiculous, valuations that the market is applying to many great businesses. It is inconceivable to us that strongly above-average franchise names such as Hewlett-Packard (HPQ), Aflac (AFL), or Teva (TEVA), the world’s leading generic pharmaceutical company, could be trading at single-digit PE ratios when the more than 150-year-old historical normal PE ratio for the S&P 500 has been 15, as it is today.

To be clear, many average companies with significantly lesser earnings power are trading at earnings multiples approaching 2 to 3 times greater than many above-average companies are trading at. This makes no logical sense, and therefore, we believe it represents a rare and significant opportunity for those investors with the foresight to consider earnings power over what is often a very fickle stock market. We believe that these low prices simply mean that many stocks are currently illiquid, and not that they are poor or bad investments. In this context, we are suggesting they are illiquid because they cannot be currently sold for what they are truly worth based on fundamentals. Selling a stock, or any asset for that matter, for less than it is worth is not a wise decision, in our opinion.

3 High Profile Examples Of Extreme Undervaluation

Notice how the black monthly closing stock price lines are uncharacteristically and significantly below the orange earnings justified valuation line on the following earnings and price correlated F.A.S.T. Graphs™. This vividly illustrates how undervalued these companies really are:

Hewlett-Packard Co. (HPQ)

AFLAC Inc. (AFL)

TEVA Pharmaceutical (TEVA)

The above are just three examples of many that we could show.

Conclusions

To be fair, many undervalued holdings have experienced moderate to even minor issues that spooked investors. After being traumatized by the 2008 market crash, investors remain fearful. Therefore, even the slightest bit of negative news can result in panic, even when it’s mostly unjustified. We believe the reactions with the three examples featured in this article have been extreme. Consequently, we further believe that the opportunity that these reactions have created represent an incredible long-term opportunity. The above emotional reactions do not reflect the fundamental strengths and future potential of those fine businesses.

Speculating in the stock market can be fraught with risk. At any moment in time the market can become disconnected from economic reality. We believe the key is not to react to market volatility, and we have certainly had lots of that recently. If you invested in a business that you like, and the business continues to perform well as an operating entity, short-term market variations should mean little to you. After all, if you were not planning to sell your investment today why should you care what someone is willing to offer you. This especially applies to dividend growth investors that have invested in businesses that they believe can continue to provide them a growing income stream.

Disclosure: I am long MKC, MCD, AFL, ITW, WAG, MDT, ABT, BCR, SYY, MHP, JNJ, PG, KMB, PEP and GPC at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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