I hope that these people are right and that we are coming out of the recession. There are fears of a “W” (not Bush) or a “double-dip” recession and these should not be discounted. But, we don’t really want the recession to carry on in any form; we really don’t want the risks associated with the down-side.

Even though we may be at or near the bottom of the recession there are still plenty of concerns to deal with. My continued concern is that the collapse in the economy was primarily due to a supply side shift and was not initiated by a fall in aggregate demand. This I have tried to capture in posts like my June 22 effort: http://seekingalpha.com/article/144508-structural-shift-in-the-u-s-economy-is-really-in-supply. If the recession was, in fact, initiated by supply shifts then there are structural dislocations in the economy that need taking care of that cannot be satisfied by just increasing aggregate demand to put people back in the jobs in which they were formerly occupied. We cannot just return to factories that are only being partially used or have been cvacated. Trying to push things back to where they were just postpones the restructuring of the economy that needs to take place.

In the past twenty years or so, we, in the United States, have experienced two credit bubbles or credit inflations. These bubbles have created excess growth first in information technology in the 1990s and then in the housing sector of the economy in the 2000s. But, these credit bubbles were not just restricted to the United States.

There was a credit inflation throughout the whole world. Evidence of this has just been released in a report by Close Brothers Corporate Finance in the UK. (See “UK is Europe’s capital of distress” in the Financial Times: http://www.ft.com/cms/s/0/aba06ea2-758e-11de-9ed5-00144feabdc0.html.) The report claims that “The UK has western Europe’s highest percentage of financially distressed companies after being the leveraged buy-out capital over the past decade.” But, the report goes on to show that the credit bubble resulted in the serious collapse of the European manufacturing sector, as well as in the retail and leisure sectors. And, of course, there is the case of Japan in the 1990s and 2000s.

The problem created by credit bubbles or credit inflations (in addition to the excessive amounts of debt created) is that too much capacity is created in areas of the economy that cease to be needed any more once the bubble has burst. The normal response of the economy is to restructure so as to eliminate the excess capacity that exists and re-deploy resources into areas that are experiencing growth and development. A Keynesian effort to “pump up” aggregate demand is just an effort to re-employ resources in the same areas that formerly prospered but that now need to be “down-sized.” This does nothing to get rid of the excess capacity and postpones the restructuring of the economy. Furthermore it retains the misallocation of financial capital that evolved during the period of the credit inflation or credit inflations.

The drop in capacity utilization in the United States since the start of the recession has been extremely dramatic. Firms have gone from using about 81% of their capacity to using only 68%, a drop of 16%. This is the steepest drop for the longest period of time in the data series. But, even more important in my mind is that capacity utilization has been dropping steadily since 1967. Obviously, capacity utilization drops in periods of economic recession. Yet, in the United States, capacity utilization, after a recession, has never returned to the peak level it reached in the previous period of economic expansion.

Capacity utilization in the United States has been falling since the 1960s. This can be seen in the accompanying chart.

Although the United States has grown around 3% compounded annually over the last forty years and employment, through most of the period, has been at relatively high rates, there are still two pieces of information that are rather unsettling. The first is the continuing decline in capacity utilization just mentioned. The second is the decline in the civilian participation rate. For the United States, this rate peaked in the 1990s a little above 67.0% and has declined through the late 2000s remaining below 66.2% since 2004. This may not seem like much of a fall but it indicates that a lot of people have left the labor force!

The latter problem can be confirmed by figures from the Bureau of Labor Statistics. There are major sectors of employment in the United States that have experienced significant reductions in jobs and employment. These are in industries that one could seriously argue were in substantial need of restructuring. (I will return to this topic soon in another post.) The question is, should people to be pushed right back into these jobs again by a government stimulus program of increasing aggregate demand? Instead, it seems as if there needs to be a significant education of a large portion of the civilian population that would like to participate in the labor force again.

If there are structural problems in the United States and in the world that result from the existence of excess capacity in industries that are declining or less technologically relevant, shouldn’t we let these industries decline or try to become technologically relevant rather than stagnant? Should we try and keep people producing buggy whips when there are means of transportation evolving other than buggies?

So, to reclaim full economic health there is a need to reduce the excess capacity that has been built up in industries that are not so relevant any more and a need to deleverage financial structures. Unfortunately, a large portion of the needed financial deleverging is connected with firms that have excess capacity. Furthermore, there is a need to restructure U. S. manufacturing and business, and train more of the workforce to fit into twenty-first century jobs so as to get the labor participation rate up.

In my study of the Great Depression, this is one of the reasons why it took so long for the United States economy, and the world economy, to recover through the 1930s. The structural change in the United States taking the country from an agricultural society to an industrial society did not really take place until the beginning of the Second World War My concern is that the needed current economic restructuring will be delayed if Washington continues to focus on companies with redundant capacity by stimulating the re-employment of the same workers that used to work in them. The economic statistics (the leading economic indicators) may continue to improve in such cases, but the economic recovery will continue to languish.

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What Kind of Economic Recovery?

In the world of finance we can innovate and change and find ways to get around regulation. This has been the modus operandi of the financial system during my entire professional career. Consequently, the financial system of today in substantially different than the financial world that existed in the 1960s. I have called the last fifty years or so the age of financial innovation. Regulation and oversight of the financial system does have to change. But, we need to be careful about the change in regulation and oversight that results and not just give in to populist calls to “put a stop to the greed on Wall Street”.

The characteristic about finance that fails to be taken into consideration when people believe that they can “control” finance is that finance is about nothing more than information. Finance is numbers, nothing more, and numbers can be packaged in any way that a person wants to package them. On our currency we read that “This note is legal tender for all debts, public and private.” That is, people and governments can pay you for things in this script and you must take it. And, what more is a check, or a bank deposit, or a bond, or a stock certificate? In most cases today, these are nothing but 0s and 1s in a computer system. Finance is nothing more than information and how information is handled and transformed.

The unique thing about information is that it spreads and, as we have found out historically, information cannot be contained. Of course, its spread can be postponed or stymied for a while, but eventually its spread takes place. All human history is a record of this fact.

We see this trend also works in non-financial areas. Information relating to modernity and science and democracy is spreading throughout the world. In some areas this spread is being resisted by some who are attempting to keep the world mired in the ideas of the 7th or 8th century (C. E.) This attempt to prevent the spread of the idea of the modern world has resulted in violence and tremendous pain to many. But, the spread continues. It has all through recorded history. In the end, the resisters cannot stop it and their efforts to slow it down do nothing but cause unhappiness and dislocation.

The financial system over the past 50 years or so has been an engine of new creations. In the 1960s, we saw the movement of banks from being asset managers to becoming liability managers through the creation of instruments like the negotiable certificate of deposit and Eurodollar accounts. This broke down the geographical limitations on banks and helped them continue to evade government rules and regulations. In the academic world increases in computing power combined with the vast amount of data available on the stock market allowed for the development of ideas relating to portfolio management and risk control, which culminated in the creation of CAPM and the efficient markets hypothesis. A third innovation related to the growth and development of venture capital that put money into the hands of more and more innovators starting up small businesses. All of these developments had to do with information and how that information was bundled and traded.

In the 1970s we saw the development of the mortgage backed security, the junk bond, and the leveraged buyout. The creation of the mortgage backed security by the federal government was the test case for “slicing and dicing” up cash flows into tranches that could be packaged in ways that met the specific needs of different investors. And, as they say, the rest is history.

The development of the junk bond? The legend is that Michael Milken, sequestered in the bowels of the Lippincott Library of the University of Pennsylvania discovered information about the performance of “fallen angels”. These were high quality bonds issued sometime in the late 1920s or early in the 1930s whose companies had had financial difficulties. The bonds fell out of favor and hence yielded very high returns. Milken discovered that because of the lack of interest in these securities their actual performance substantially exceeded the performance exhibited in their market pricing. This information, which was confirmed by more current information, led Milken to develop the junk bond, the first such issue coming to market in 1976.

In addition, fund managers arose, like KKR, which discovered information concerning the value of assets that were on the books of many corporations. Often, these assets were undervalued because they were recorded at historical values and were substantially below current market values. Previously, these companies were “out-of-reach” of corporate raiders, but with the creation of the junk bond, all companies in the United States came within the reach of well-funded organizations. So, finance could now reach the largest, as well as the smallest, businesses.

This evolution, of course, continued into the 2000s. The point is that as information becomes available it can be used in many different ways to serve many different purposes. “Slicing and dicing” the information known as cash flows is not new, but is a part of a process that has a long history. And, due to the nature of information this process is not going to go away.

The Obama administration is now making its attempt to re-regulate financial institutions and financial markets. The proposal offered yesterday is much watered-down from what the “more progressive” wing of the political spectrum had wanted: its thrust is not sufficiently “Rooseveltian”. Still others express concern that the administration is going too far in some areas.

My take on the Obama proposals for financial regulation: it will make little difference in the end. Obama needs to take some kind of action and look like he is attacking the problems faced by the society. In the longer run the new regulatory scheme will make very little difference.

Financial innovation is going to continue. If some efforts are constrained in the United States, they will pop up elsewhere in the world. The incentives to innovate are still there. If we force the innovation to go off-shore, then we are, in my mind, the losers. This innovation will help others but provide little benefit to us.

What is needed? To me the most important thing that is needed is openness and transparency. We need to know what is being done and by whom. As derivative securities and hedge funds grew and prospered, we heard over and over again that they could not tell anyone what they were doing because, if they did, the narrow spreads they were working with would go away. Well, guess what! Most everyone knew what deals were being struck and the spreads went away anyway. That is why these organizations needed to use more and more leverage to take on riskier and riskier deals.

Highly competitive markets where there are few if any barriers to entry cannot continually provide exceptional returns. “Trading” is not the source of sustainable competitive advantage and keeping things secret will not salvage trading schemes. Openness and transparency will result in financial institutions focusing on what really creates competitive advantage and what is sustainable. This is necessary for the existence of a strong and healthy financial system.

Secondly, we need methods to close or put-out-of-business in a more timely fashion financial institutions that are troubled or are insolvent. Re-instating and improving mark-to-market accounting is a must. Increased openness and transparency should help the market place carry out this function, but, the regulatory system needs to have more FDIC-type efficiency to move quickly into institutions and shut them down. (The Federal Reserve is not the institution to do this. It needs to keep its focus on the conduct of monetary policy.) Moving quickly to resolve problems has always been the best policy. Managing institutions based on wishful thinking, a major trait of the banking system, is not a good policy.

We need financial regulation and oversight, just as we need periodic checkups and advice from doctors. However, there is only so much that regulators can do. Unlike our physical systems, our financial systems are going to innovate and change. My guess is that in the future with the continued advancement of information technology financial innovation will continue to increase rapidly and will serve as the model for more and more of our non-financial markets. “Information markets” is the model for the future. This innovation will, in one way or another, get around whatever regulation that is imposed. That is why openness and transparency is so important. But, that is also why the system of failure and bankruptcy should be enhanced and enforced. These, to me, are the major requirements we should impose on the financial system.

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Financial Well-Being and Regulation: the Obama Effort

Globes Online reported that three investment houses downgraded their recommendations for Amdocs due to the company’s reported results and forecast for continued difficulties. The investment houses, Oppenheimer, Cantor Fitzgerald and Wedbush Morgan all expect second quarter rwesults to lag.

Oppenheimer changed their recommendation from “Buy” to “Hold” and reduced their target price to $34. Cantor Fitzgerald also cut its recommendation to “Hold” from “Buy” and slashed its target price to $16 from $16. Wedbush Morgan had previously changed its recommendation from “Strong Buy” to “Buy.” The latest change brings the recommendation to “Hold”.

Amdoc’s shares rose yesterday 1.8% to $17.35.

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Amdocs Downgraded

Sales for the most recent quarter (MRQ) vs the quarter one ago are down from $9,831 billion to $9,089 billion or 7.5%. Sales, on a trailing twelve month (TTM) basis, are up about 5.2%. Standard and Poors projects a sales decrease of 9% in FY 09 reflecting the weak global economy.

Similarly, EPS for the quarter ending January 09 were down to $0.25 from $0.33 a year ealier. This represents a 23% decline. EPS (TTM) vs TTM one year ago are down 2.9%. S&P forecasts FY 09 EPS of $1.15. First Call reports consensus estimates of $1.25 for FY 09 with a range of $1.18 to $1.33.

Of greater concern to us, is margin contraction. Gross margins have been contracting since 2004 when GM stood at 68.6%. S&P forecasts FY 09 gross margins of 64%. Operating profit margins have also contracted. Reported FY 04 operating profit margins were 28.5%. For the TTM, operating profit margins contracted to 22.3%. On the plus side, net margins have held fairly steady at 20%.

Cisco’s balance sheet is strong. It has about $5.04 in cash per share on hand and generates $2.03 in free cash flow. Long term debt to equity is about 0.17 and total debt to equity is about 0.19. The current ratio is a healthy 2.79.
Return on equity is a respectable 23.8% and ROA is 14%. These are very solid numbers and compare very favorably with industry averages.

Standard and Poors has given CSCO a twelve month price target of $16.00. First Call reports a mean price target of $19.20 with a range of $13 to $33. Price targets were lowered 14 times in the past four weeks.

Value staocks are most often defined in terms of low P/E or low P/BV ratios. Cisco is trading at 13X trailing earnings and in-line with the S&P 500. Its P/BV is 2.55; not low. In a recent post, I wrote about the use of the Price/Sales ratio. In this case, the PSR is no bargain at 2.4X.

Our preference is to use a less common measure to determine value; the Price/Free Cash Flow ratio. We think FCF is a better metric to use than earnings. Free cash flow can be used to fund growth (organic and through acquisition), reduce debt, pay a dividend or repurchase debt. Free cash provides value to the shareholder, if it is wisely invested.

Cisco has a current P/FCF ratio of 10X. A year ago, it was 16X. The five year average P/FCF for CSCO is 19X. Going back a few more years, the seven year average is 22X.

Cisco reported $1.72 in free cash flow for the TTM ending January 09. Over the next twelve months, we project CSCO to generate $1.96 in free cash. At current prices, the forward P/FCF is about 8.25X. Our target value for CSCO is $28.96, representing a forward P/FCF of about 14.8X. This is less than year-ago levels and reflects continuing weakness in the global economy.

Disclosure: I hold a long position in CSCO.

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The Bargin Bin: Cisco Systems

Cisco Systems [CSCO: 25.88, 0.00 (0.00%)] Recent Price $17.04 Value Range 21.86 – $38.41
Cisco Systems, Inc. designs, manufactures and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry, and provides services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate and collaborate. Cisco Systems, Inc.’s products, which include primarily routers, switches, and products that the Company refers to as its technologies, are installed at enterprises, public institutions, telecommunications companies, commercial businesses and personal residences. In November 2008, the Company acquired Jabber Inc. In January 2009, the Company acquired Richards-Zeta Building Intelligence, Inc

CSG Systems International [CSGS: 21.44, 0.00 (0.00%)] Recent Price $15.47 Value Range $21.39 – $28

CSG Systems International, Inc. (CSG) is a provider of outsourced solutions that facilitate customer interaction management on the behalf of its clients, generating approximately 95% of its revenues during the year ended December 31, 2007, from the North American cable and Direct Broadcast satellite (DBS) communications markets. The Company’s solutions also support a number of other industries, such as financial services, utilities, telecommunications, and home security. CSG’s solutions manage customer interactions, such as set-up and activation of customer accounts, sales support and marketing, order processing, invoice calculation (customer billing), production and mailing of monthly customer invoices, management reporting, electronic presentment and payment of invoices, automated and interactive messaging, and deployment and management of the client’s field technicians to the customer’s home. In May 2008, CSG completed the acquisition of DataProse, Inc.

Forest Laboratories [FRX: 31.26, 0.00 (0.00%)] Recent Price$26.21 Value Range$51.57 – $64.09

Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products, which require a physician’s prescription, as well as non-prescription pharmaceutical products sold over the counter. The Company’s products in the United States consist of branded ethical drug specialties marketed directly or detailed to physicians by its sales forces, Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare and Forest Specialty Sales. Forest Laboratories, Inc.’s products include Lexapro, the Company’s selective serotonin reuptake inhibitor (SSRI) for the treatment of major depression and generalized anxiety disorder (GAD); Namenda, its N-methyl-D-aspartate (NMDA) antagonist for the treatment of moderate to severe Alzheimer’s disease; Bystolic, its novel beta-blocker for the treatment of hypertension, and Campral, for the maintenance of alcohol abstinence.

Robert Half International [RHI: 30.15, 0.00 (0.00%)] Recent Price $18.22 Value Range $26.27 – $30.14

Robert Half International Inc. provides specialized staffing and risk consulting services through such divisions as Accountemps, Robert Half Finance & Accounting, OfficeTeam, Robert Half Technology, Robert Half Management Resources, Robert Half Legal, The Creative Group and Protiviti. The Company, through its Accountemps, Robert Half Finance & Accounting, and Robert Half Management Resources divisions, is a specialized provider of temporary, full-time project professionals in the fields of accounting and finance. OfficeTeam specializes in skilled temporary administrative support personnel. Robert Half Technology provides information technology professionals. Robert Half Legal provides temporary, project and full-time staffing of attorneys and specialized support personnel within law firms and corporate legal departments. The Creative Group provides project staffing in the advertising, marketing, and Web design fields

Advance Auto Parts [AAP: 42.18, 0.00 (0.00%)] Recent Price 33.63 Value Range 10.02 – 12.07

Advance Auto Parts, Inc. (Advance) operates within the United States automotive aftermarket industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive chemicals for cars and light trucks (pickup trucks, vans, minivans and sport utility vehicles). The Company is a specialty retailer of automotive parts, accessories and maintenance items to do-it-yourself (DIY) and do-it-for-me (DIFM) customers in the United States, based on store count and sales. Advance operates in two business segments: Advance Auto Parts (AAP) and Autopart International (AI). The AAP segment consists of its store operations within the United States, Puerto Rico and the Virgin Islands, which operates under the trade names Advance Auto Parts, Advance Discount Auto Parts and Western Auto. The AI segment consists solely of the operations of Autopart International, which operates as an independent, wholly owned subsidiary.

American Eagle Outfitters [AEO: 18.74, 0.00 (0.00%)] Recent Price 9.64 Value Range 0.63 – $0.75

American Eagle Outfitters, Inc. is a retailer that operates under the American Eagle Outfitters, aerie by American Eagle and MARTIN + OSA brands. The Company designs, markets and sells its own brand of clothing targeting 15 to 25 year-olds. American Eagle also operates ae.com, which offers additional sizes, colors and styles of AE merchandise and ships to 41 countries worldwide. AE’s original collection includes standards, such as jeans and graphic Ts, as well as essentials like accessories, outerwear, footwear, basics and swimwear under its American Eagle Outfitters, American Eagle and AE brand names. The aerie collection is available in aerie stores, predominantly all American Eagle stores and at aerie.com. The collection includes bras, undies, camis, hoodies, robes, boxers, sweats, leggings, fitness apparel and personal care for the AE girl. MARTIN + OSA is a concept targeting 28 to 40 year-old women and men, which offers refined casual clothing and accessories.

Bed Bath & Beyond [BBBY: 42.28, 0.00 (0.00%)] Recent Price$24.00 Value Range $ 8.03 – $9.73

Bed Bath & Beyond Inc. and subsidiaries is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon) and buybuy BABY. The Company sells a range of merchandise principally, including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. In March 2007, the Company acquired buybuy BABY. In May 2008, the Company announced the formation of a joint venture with Home & More, S.A. de C.V., a privately held home products retailer operating in Mexico

Brown-Forman Corporations [[BF-B]] Recent Price $48.18 Value Range $8.17 – $10.28

Brown-Forman Corporation manufactures, bottles, imports, exports and markets a variety of alcoholic beverage brands. Its principal beverage brands are Jack Daniel’s Tennessee Whiskey, Southern Comfort, Finlandia Vodka, Herradura Tequila, Gentleman Jack, Jekel Vineyards Wines, Jack Daniel’s Single Barrel, Jack Daniel’s Ready-to-Drinks, Bel Arbor Wines, Bolla Wines, Bonterra Vineyards Wines, Old Forester Bourbon, Canadian Mist Blended Canadian Whisky, Pepe Lopez Tequilas, Chambord Liqueur, Sanctuary Wines, Don Eduardo Tequila, Sonoma-Cutrer Wines, Early Times Kentucky Whisky, Tuaca Liqueur, el Jimador Tequila, Stellar Gin, Five Rivers Wines and Woodford Reserve Bourbon. The Company’s core brand in its portfolio is Jack Daniel’s, which is a spirits brand and American whiskey brand. Its other brands are Southern Comfort and Canadian Mist. Its largest wine brands are Fetzer, Korbel and Bollab.

CLARCOR [CLC: 34.04, 0.00 (0.00%)] Recent Price $32.82 Value Range $12.18 -$17.86

CLARCOR Inc. conducts business in three segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. The Company’s Engine/Mobile Filtration Segment sells filtration products used on engines and in mobile equipment applications, including trucks, automobiles, buses and locomotives, and marine, construction, industrial, mining and agricultural equipment.. The Company’s Industrial/Environmental Filtration Segment centers on the manufacturing and marketing of filtration products used in industrial and commercial processes and in buildings, and infrastructures of various types. The Company’s consumer and industrial packaging products business is conducted, through a wholly-owned subsidiary, J.L. Clark, Inc. (J.L. Clark). In May 2008, the Company acquired a 30% share in BioProcess H2O LLC (BPT), a Rhode Island-based manufacturer of industrial waste water and water reuse filtration systems. The Company acquired 100% of the Keddeg Company on December 29, 2008

Cree [CREE: 70.95, 0.00 (0.00%)] Recent Price $21.84 Value Range $4.51 – $6.20

Cree, Inc. develops and manufactures semiconductor materials and devices based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The Company focuses its expertise in SiC and GaN on light emitting diodes (LEDs), which consist of LED chips, LED components and LED lighting solutions. It also develops power and radio frequency (RF) products, including power switching and RF devices. The majority of Cree, Inc. products are manufactured at its main production facility in Durham, North Carolina, in a six-part process, which includes SiC crystal growth, wafering, polishing, epitaxial deposition, fabrication and testing Additionally, it packages certain LED components and power and RF products at its North Carolina facilities, its facility in Huizhou, China and in other foreign countries through the use of subcontractors. It also operates research and development facilities in Goleta, California and Hong Kong. In February 2008, it acquired LED Lighting Fixtures, Inc.

Edwards Lifesciences [EW: 97.85, 0.00 (0.00%)] Recent Price $61.10 Value Range $16.74 – $21.24

Edwards Lifesciences Corporation (Edwards Lifesciences) is a global player in products and technologies designed to treat cardiovascular disease. The Company focuses on specific cardiovascular opportunities, including heart valve disease, critical care technologies and peripheral vascular disease. The products and technologies provided by Edwards Lifesciences to treat cardiovascular disease are categorized into five areas: Heart Valve Therapy; Critical Care; Cardiac Surgery Systems; Vascular, and through 2007, Other Distributed Products

Interactive Data Corp [IDC: 31.87, 0.00 (0.00%)] Recent Price$24.42 Value Range $4.90 – $6.34

Interactive Data Corporation is a global provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. The Company’s customers use its offerings to support their portfolio management and valuation, research and analysis, trading, sales and marketing, and client service activities. It markets and sells its services either by direct subscriptions or through third-party business alliances. Its offerings are developed and delivered to customers through four businesses that consist of its two operating segments: Institutional Services and Active Trader Services. In May 2007, the Company completed the acquisition of the assets comprising the market data division of Xcitek LLC, as well as the market data assets of its affiliate Xcitax LLC. In August 2008, announced the closing of its acquisition of Kler’s Financial Data Service S.r.l. In December 2008, the Company acquired a 79% interest in NTT DATA Financial Corporation

ITT Educational Services [ESI: 110.38, 0.00 (0.00%)] Recent Price $128.87 Value Range$23.33 – $33.99

ITT Educational Services, Inc. (ITT/ESI) is a provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of December 31, 2007, the Company offered diploma, associate, bachelor and master degree programs to approximately 53,000 students. All of its institutes are authorized by the applicable education authorities of the states, in which they operate and recruit, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). All of its programs were degree programs, except for a few diploma programs offered at six institutes that are being converted to degree programs. As of December 31, 2007, it offered 29 degree programs in various fields schools of study: information technology (IT); electronics technology; drafting and design; business; criminal justice, and health sciences. In October 2008, the Company announced that it has opened its first ITT Technical Institute in Mississippi.

Makita Corporation [MKTAY: 33.95, 0.00 (0.00%)] Recent Price $22.81 Value Range $1.71 – $2.00

Makita Corporation (Makita), incorporated on December 10, 1938, is principally engaged in manufacturing and sale of a range of power tools for professional users worldwide. Makita’s power tools consist of drills, grinders and sanders and portable woodworking tools, primarily saws and planers. The Company also produces gardening and household products and provides parts, repairs and accessories. During the fiscal year ended March 31, 2008 (fiscal 2008), approximately 85% of Makita’s sales were outside of Japan. The Company specializes in power tools manufacturing and sales, as a single line of business, and conducts its business globally. As of March 31, 2008, Makita had over 100 service depots outside of Japan. As of fiscal 2008, 28 of these service depots were located in the United States, and 19 of these service depots were located in China.

NIKE Incorporated [NKE: 69.90, 0.00 (0.00%)] Recent Price $48.68 Value Range $15.83 – $21.46

NIKE, Inc. (NIKE) is engaged in the design, development and worldwide marketing of footwear, apparel, equipment, and accessory products. NIKE sells athletic footwear and athletic apparel. It sells its products to retail accounts, through NIKE-owned retail, including stores and Internet sales, and through a mix of independent distributors and licensees, in over 180 countries around the world. Its products include running, training, basketball, soccer, sport-inspired urban shoes, and childrens shoes. It also markets shoes designed for aquatic activities, baseball, bicycling, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. On March 3, 2008, the Company acquired Umbro Ltd. (Umbro). On April 17, 2008, it completed the sale of its Bauer Hockey subsidiary.

Paychex [PAYX: 32.13, 0.00 (0.00%)] Recent Price $26.93 Value Range$4.55 – $6.26

Paychex, Inc. (Paychex) is a provider of payroll and integrated human resource and employee benefits outsourcing solutions for small to medium-sized businesses in the United States. The Company’s Payroll and Human Resource Services product lines offer a portfolio of products and services that help clients to meet their payroll and human resource needs. Its Payroll services are provided through either its Core Payroll or Major Market Services, and include payroll processing, payroll tax administration services, employee payment services, and other payroll-related services, including regulatory compliance. Paychex’s Human Resource Services primarily include human resource outsourcing services, which include Paychex Premier Human Resources and its Professional Employer Organization; retirement services administration; workers’ compensation insurance services; health and benefits services; time and attendance solutions, and other human resource services and products.

Raytheon [RTN: 56.68, 0.00 (0.00%)] Recent Price $47.80 Value Range 12.68 – $19.58

Raytheon Company designs, develops, manufactures, integrates, supports and provides a range of technologically advanced products, services and solutions for governmental customers in the United States and worldwide. The Company operates through six business segments: Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). During the year ended December 31, 2007, the Company completed the sale of Raytheon Aircraft Company (Raytheon Aircraft) and Flight Options LLC (Flight Options), two former operating commercial aviation businesses. In October 2007, the Company acquired Oakley Networks, Inc., a privately held technology company based in Salt Lake City, Utah, which provides cyber security and data leakage prevention systems. In April 2008, the Company acquired SI Government Solutions. In July 2008, the Company acquired Telemus Solutions, Inc

Rockwell Collins [COL: 60.93, 0.00 (0.00%)] Recent Price $38.90 Value Range $12.94 – $15.93

Rockwell Collins, Inc. (Rockwell Collins) is a player in providing design, production and support of communications and aviation electronics for military and commercial customers worldwide. The Company’s products and systems are primarily focused on aviation applications. Its Government Systems business also offers products and systems for ground and shipboard applications. Rockwell Collins also provides a range of services and support to its customers through its network of service centers worldwide, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. Rockwell Collins operates in multiple countries. Rockwell Collins serves its worldwide customer base through its Commercial Systems and Government Systems business segments. On November 24, 2008, Rockwell Collins acquired SEOS Group Limited. In April 2008, the Company completed the acquisition of Athena Technologies, Inc.

Strayer Education [STRA: 245.49, 0.00 (0.00%)] Recent Price $222.04 Value Range $15.89 – $23.60

Strayer Education, Inc. is a post-secondary education services corporation. The Company offers academic programs through its wholly owned subsidiary, Strayer University, Inc., both in traditional classroom courses and through Strayer University Online. The Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 47 campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, D.C., via the Internet through Strayer University Online, providing its working adult students a program offering over the Internet. It also owns Education Loan Processing, Inc. (ELP), which was organized to administer the Company’s student loan portfolio. As of December 31, 2007, the Company had more than 32,087 students enrolled in its programs.

- Ronald Sommer

Disclosure: This article was taken from the website Measured Approach with the permission of the original author.  Please refer to the original author for disclosure information. We hold a position in FRX.

arket as well as surrounding regions.   This company has proven to be best of breed with a solid fundamental business core, but has great growth potential as its 3G network is still in its initial stage.

Strong Core

China Mobile is truly a monster with a market cap of over $212 billion.  They have dominated their domestic markets controlling roughly 70% market share in mainland China.  China Mobile has the world’s largest mobile network in addition to boasting the largest mobile subscriber base with roughly 415 million subscribers in 2008.  In addition to all the typical phone features that a network offers, CHL also offers Mobile TV, Mobile search, Mobile mailbox, Mobile map, Mobile advertising, and Mobile payment.  China Life boasts a very strong sustainable income, and has dedicated itself to expanding in the future.  They have posted tremendous historical growth numbers, with most major CAGR categories in the mid 20’s.  Their annual revenue growth has been 25.4% per year; total asset growth has been 20.6% per year. Annual E.P.S. growth has been 27.2% per year with an equity growth of 22.0% per year.  While it may not be possible for China Mobile to continue posting these types of numbers, they still have projections in the upper teens in its outlook.  CHL is able to obtain these strong numbers due to their dedication to always improving existing markets and vast growth opportunities.

Potential Growth

It is extremely difficult to find a telecom company, or any company for that matter that have this large of market share already, and yet are capable of such growth. Usually when you see a company that has strength in size, you see a large company that holds a ton of cash and has little upside.  These types of companies will lag the markets, but not CHL.  They have dedicated themselves to 3G growth and reducing weaknesses through acquisitions.

There 3G market is relatively young due to the fact that they are just received their license from the government to use and expand the 3G network in early ‘09.  They have their own TD-SCMA 3G standard, and it is currently being tested so it can be broadly implemented soon.  Their plan is to have this capability in 238 cities by the end of  ‘09.Currently, only 720 million people are 3G subscribers, but by 2013, that number is expected to grow by 29% annually to 2.5 billion 3G subscribers, 1 billion of which in Asia.   CHL is also ready to launch its new smart phones as they have recently signed a $311 million contract with a local manufacturer ZTE.  There is even a rumor that China Mobile will launch its new Android-based smartphone, the Ophone, in the 4th quarter of 2009.  On top of this, in April CHL joined into an alliance with Softbank and Vodafone to create an innovations lab that will provide further technology boost in both mobile technologies and applications.  This gives them a huge competitive advantage in the area of mobile Internet, an area which they want to expand.

Also, the areas of weakness are both their rural untapped markets and their lack of broadband market.   They have had a fantastic history of growing through mergers, as this is how they obtained such a global presence. They have made dozens of mergers since 2000 grabbing many regional networks. While CHL claims the largest wireless subscriber base of 415 million subscribers as of 2008, more than the US population; the market penetration in China is still only 50%.  This massive national population gives great growth potential, especially now as the Chinese government is investing roughly $41 billion in a stimulus plan to expand into rural areas and increase the 3G network.  CHL also had gained international exposure in 2007 when it acquired an 88.86% stake in Paktel, a Pakistan mobile telecommunications provider.   Recently this broadband industry hit 20 billion and I could envision CHL gaining exposure to this large industry through a key acquisition.

Looking Forward

While it cannot be ignored that Verizon is a very solid company with a strong dividends and is exposing itself to unique market, they may hit a tough spot in finding new business.  They are also focused on beating direct competitor AT&T domestically, rather than worrying about foreign markets.  Meanwhile, China Mobile has focused on spreading its influence because of its seemingly endless market potential.  The Chinese mobile market has room to grow in one of the world’s most booming economies and this company has a promising future.  Investors still have time to enter into this international sector with strong macro trends; if you’re trying to expand your portfolio to both international and telecom exposure, then it’s a simple and smart choice.

-Joe Gallo

Disclosure: The mutual fund the author is associated with is long VZ.

Breaking Ties

On March 16th, CSCO unveiled its two-year secret project: the Unified Computing System (UCS).  This new blade server capitalizes on two key trends in IT that deliver more for less:  virtualization and cloud computing.  The UCS harnesses the power of virtualization through combining computing, networking and data storing into a single energy efficient system that can power web-based apps of cloud computing.  With this courageous move, CSCO has chosen to sever the ties with longtime partners like IBM [IBM: 127.94, 0.00 (0.00%)], Hewlett-Packard [HPQ: 52.36, 0.00 (0.00%)] and Dell [DELL: 14.26, 0.00 (0.00%)] in order to compete in the server market.  This trio sells (or DID sell) billions in Cisco gear each year as they helped tech companies build out its IT infrastructure; IBM alone accounts for $3 billion (per analysts’ estimates). 

HP’s relationship with CSCO began to crumble when CEO Mark Hurd began aggressively pushing the ProCurve segment that makes LAN, WAN and wireless gear for powering networks.  However, the Big Blue relationship first went sour when CSCO stole Internet conferencing company Webex Communications right from IBM’s hands in 2007.  This acquisition has been resilient in this recession as companies cut traveling expenses and adopt CSCO’s Telepresence resulting in y-o-y growth of 70% in orders and 130% in revenues.  The UCS debut has recently led IBM to jump ship to Juniper Networks [JNPR: 29.94, 0.00 (0.00%)] for possible future partnerships to resell JNPR’s equipment as part of its family of products.

New Markets

Cisco CEO John Chambers told BusinessWeek’s Aaron Ricadela that the company will likely be in 50 fresh markets within a year, mainly in adjacent markets to its core business so it can integrate its diverse product offerings. 

“We’re moving into new [areas] with a speed nobody has ever attempted,” Cisco CEO John Chambers stated.

This includes in-house developments like the UCS, but also acquisitions such as Flip video recorder maker Pure Digital.  In addition to its Linksys offerings and TV set-top boxes, Flip will help Cisco further penetrate the $50 billion global market for consumer electronics.  They also bought out Tidal Software as an easy tuck-in company to enhance its data center business.  Furthermore, CSCO has made a push into the energy business by offering smart grid solutions that take advantage of secure IP-infrastructure to reduce energy storage, transmission and distribution costs for a more sustainable environment.  Cisco has struck an “alliance” to provide Clearwire’s wireless IP infrastructure along with plans to build new mobile WiMax supporting devices.  The Silicon Valley company has also made moves in virtual healthcare, sports and entertainment (with its StadiumVision) and much more.

Cisco CEO John Chambers

With $33 billion in its wallet, second in the S&P 500 to Exxon Mobil [XOM: 66.80, 0.00 (0.00%)], Cisco is gearing up for acqusitions.  This comes as no surprise as CSCO has acquired 175 business since 1993.  However, of the $33 billion in cash, the majority of it (approximately $26 billion) remains offshore and deferred from income taxes indefinitely until the profits are repatriated.  The Obama Administration aims to change this rule (or loophole).  Even with that controversy, Cisco still stands strong in the M&A world:

“First, the exciting part about today’s market is just about everybody’s for sale. And the second most exciting part is the prices are pretty reasonable.  In fact, if I were betting, it would not surprise me to see us move on the consumer side before you see us even move on some of the other areas,” exclaimed Chambers in the January 2009 conference call.

Despite its already large cash position, Cisco easily raised $4 billion in debt on Feb 9th, 2009, further substantiating the fact that Cisco is on the acquisition prowl.  Companies rumored to be in the crosshairs are EMC Corporation [EMC: 18.88, 0.00 (0.00%)], virtualization software company VMWare [VMW: 53.68, 0.00 (0.00%)], Red Hat [RHT: 30.76, 0.00 (0.00%)], NetApp [NTAP: 32.91, 0.00 (0.00%)] and BMC Software [BMC: 39.03, 0.00 (0.00%)].

Conclusion

Despite recent economic indicators beating estimates, the economy is still contracting, albeit at a slower rate than before.  This has indicated signs of stabilization in the near future but the jury is still out on just when that will be.  Even after the recent market rally, P/E ratios are still relatively low historically speaking; cheap valuations are still present as market consolidation continues to occur.  Cisco has the fundamentals, management and courage to innovate to survive this cyclical downturn.  With $33 billion in its pocket, Cisco will be making acquisitions, buying back stock or pouring it into R&D.  All this boils down to one thing: maximizing shareholder value.  I believe CSCO is a great buy at current levels and so does the Dow Jones Industrial Average. 

- Jake Kimble

Disclosure:  The fund the author is associated with is long CSCO and IBM.

Apple [AAPL: 226.60, 0.00 (0.00%)]

Steve Jobs picked this company up from the ground, dusted off its coattails and led the innovation charge of the last decade.  From iPods to macbooks to the iPhone, Apple is the definition of “halo effect.”  They have defined themselves as the COOL brand for not only the young population, but also parents who are catching the technology bug.  At its annual WWDC, Apple showcased:

• New 16Gb & 32 Gb iPhone 3G S (’S’ is for Speed)
• Original iPhone 3G cut to $99 (to sustain its momentum in this cash-tight recession)
• Snow Leopard operating system for just a $29 update
• Price slashing the macbooks by $300.

Apple continues to innovate; here are some rumors/speculation on what they could do:

• CDMA-capable iPhone (86 mln subscribers with Verizon; penetration in China)
• 4G iPhone
• Touchscreen notebook
• Apple iPad (similar to Amazon’s Kindle reader)
• Increase penetration in the Enterprise market
• iPod Touch video capable, thus Skype capable over Wi-Fi

The last bullet surprises me because Apple did not make a bid for Skype from eBay [EBAY: 25.97, 0.00 (0.00%)] despite its stellar success as an iPhone app, Apple’s $28.9 billion in cash and how the VOIP company could be easily tucked into the business model of the superb-managed IT giant.  Remember, Apple was the company that dominated the MP3 player market (the Zune had no chance).  Also, the macbook has had a cult-like following; ask your friends if they would ever switch back to a PC.

QUALCOMM [QCOM: 38.95, 0.00 (0.00%)]

Toshiba’s TG01 netbook utilized QCOM’s 1 GHz Snapdragon processor, which returned positive feedback.  Now the company is planning to release its 1.3 GHz QSD8650A processor (30% stronger and 30% less power).  QCOM is bridging the gap between smartphones and notebooks by coining a device called a smartbook. Smartbooks are mini-laptops that are similar to netbooks, but differ such that they operate on mobile phone chips (thus QCOM chips) as opposed to PC microchips, such as Intel’s [INTC: 21.27, 0.00 (0.00%)] Atom microprocessors.  This device will have “the portability and intuitive feel of a smartphone combined with the versatility and capability of a notebook.”  Smartbooks will come in various forms “from larger, sub-notebook designs to compact, touch-screen tablets.”

QCOM’s Mirasol display technology is an emerging alternative for battery-draining LCD screens on mobile phones.  It is based on reflective technology called IMOD, with MEMS structures at its core, that was developed by studying nature’s processes and structures.  This technology has the potential to revolutionize the mobile world as it operates on extremely low power, yet is highly reflective (the screen can be seen in bright sunlight).  No longer will your smartphones be sucking the juice from your battery!  Check out this YouTube video of people viewing this technology for the first time.  For more info on why I believe QCOM will be a wise investment, read my article from June 7th.

Google [GOOG: 579.54, 0.00 (0.00%)]

At Google’s headquarters, they give their engineers “20% time” or “Innovation Time Off”, which means that the developers are encouraged to work on side projects one day out of the five day work week; in other words… INNOVATE.  Many successful Google products were born from this employee perk such as gmail, google news and social networking site Orkut.   Remember, Google still dominates the online advertising/search market and they could soon penetrate the new market of mobile advertising.  Google has a vast array of successful products such as Google Apps, Google Docs and my new default web browser Google Chrome.  Google also owns YouTube, a key driver of the recent explosion in internet bandwidth as users stream high-quality videos online.  In addition, GOOG plans to sell online access to electronic versions of books, an attempt to steal market share from Amazon [AMZN: 131.82, 0.00 (0.00%)].

Android is Google’s free and open source software platform for mobile devices, predominantly for smartphones.  However, the Linux-based operating system has jumped into the booming netbook market as Acer recently unveiled an Android Aspire One netbook that runs on an Intel Atom processor.  Android has a significant advantage for companies trying to develop low-priced netbooks because the software is free, as opposed to Microsoft’s [MSFT: 29.27, 0.00 (0.00%)] Windows operating system which costs a heavy licensing fee.  Many companies have showed interest in working with the Android system including:  HP, T-Mobile, Vodafone, Verizon and many more.  A feasible partnership would be the Android OS, primarily developed for smartphones, operating on QCOM’s smartbook chips.

Sybase, Inc. [SY: 46.17, 0.00 (0.00%)]

For this company, I would like to give all the credit to my friend and colleague Santosh Sankar for picking this stock in the Bullish Bankers “Best Stocks of 2009″  Newsletter, released in January.  I encourage you to download this newsletter, as our picks have outperformed the S&P 500 by 14.83% YTD (as of 6/15/09).  I will briefly summarize his investment rationale:

Sybase is the largest enterprise software and services company exclusively focused on managing and mobilizing information to capitalize on the trend for a more virtual office.  They offer ERP and CRM tools via internet connections on PDAs, smartphones or notebooks; all powered by its cloud in a secure and trouble free fashion.  Their innovative products offer corporations cost-cutting strategies combined with a significant investment in human capital, thus driving end-user productivity and supporting fact-based, real-time decision making.  It also has a strong database and business intelligence segments that will provide stable revenues as its iAnywhere business continues to expand.  Imagine accessing sophisticated corporate applications in the elevator to make last second corrections/updates to your work on the way to your important meeting.  Not only is this a play on data mobilization, but also an investment in cloud computing and smartphone/netbook growth.

- Jake Kimble

Disclosure:  The fund the author is associated with is long GOOG, with interests in QCOM and SYB.

I am instituting a stop limit order to curtail losses if I am wrong, at about a 7-10% loss, or around $42.50 – $43.50 and I advise you do the same. If I am wrong and the stock pokes through its 50 day moving average on the upside (which will present resistance on the way up) then you need to take your losses and get out. If, however, the stock nudges through that level on weak volume on an up day in the market, you might want to look at keeping or adding to your short position, with an even tighter stop.

There may very well be a slight bounce in the stock, but what we don’t want to see is a huge move to the upside breaking through resistance on high volume, which would render our short term trade null, at least temporarily, regardless of the longer term thesis.

Why:

As I recently wrote, I think that the stock has gotten way ahead of itself, and has now shown extreme weakness, good fundamentals or no fundamentals. This is a relatively short term trade, 1-4 weeks or so in length, playing the weakness in the stock, rotation into other discretionary names as the economy recovers, and an overall correction in shares of the company from its recent highs, which doubled from its lows in short order.

As investors rotate out of these recession plays and look at more discretionary stocks where people are likely to migrate once the fear of losing a job and a down economy subside, stocks like Netflix that were strong on the way up, despite a down market, will be the first to fall.

I believe that has already begun.

-Chris Fernandez

Disclosure: This article was takenwith permission from PeakStocks.com. At the time of the original article date, the author was short NFLX.

On April 27th, QUALCOMM reported revenues of $2.46 billion, beating analysts’ estimates of $2.33 billion. However, the big news was $891 million will be paid to Broadcom [BRCM: 32.63, 0.00 (0.00%)] from a litigation settlement charge over the next four years. However, this will save QCOM $100 million in annual operating expenses as well as pay off the litigation charge with offshore cash, thus saving QCOM about 25% instead of repatriating that cash as profits as well as $100 million annually in operating expenses. This ongoing legal battle has hindered QCOM’s performance and distracted management, but with these issues now behind them, I believe QCOM will outperform the broader semiconductor market in the near future.

Semiconductor Snapback

Record high inventory levels in semiconductors have been decreasing over the past two months due to a snapback in demand, evident as channel inventories have been compressing. According to the Wall Street Journal on April 26th, memory chips comprise 14% of the overall broader semiconductor industry but often are a leading indicator for the sector due to their commodity-like status as widely used products that are hard to differentiate. Their downturn that began in early 2007, foreshadowed last year’s broader industry fallout. However, the two biggest memory chip makers, Samsung and Hynix, have reported smaller chip losses while Intel [INTC: 21.27, 0.00 (0.00%)] and Texas Instruments [TXN: 24.00, 0.00 (0.00%)] have beat expectations in microprocessors and digital signal processors, respectively. Although bookings and billings have been decreasing over the past half year, January and February levels have stabilized further substantiating a semiconductor bottom and an opportunity to invest before the rebound.

3G Growth

Wireless companies Vodafone [VOD: 23.00, 0.00 (0.00%)], Verizon [VZ: 29.73, 0.00 (0.00%)] and AT&T [T: 25.62, 0.00 (0.00%)] have reported data revenue growth of 46%, 41% and 51% respectively from 4Q 2007 to 4Q 2008. With data traffic exploding, wireless networks need to be upgraded to third generation (3G) to sustain the increase in bandwidth usage. Today, only 720 million people are 3G subscribers, but by 2013, that number is expected to grow at a 29% CAGR to 2.5 billion 3G subscribers, 1 billion of which in Asia. 3G phones are predicted to increase from 40% of the world cell phone mix to 70-80% by 2012. Asian countries such as China and India have huge wireless growth potential due to their exponential population boom and under-served rural markets. China is expected to spend over $60 billion over the next three years with help of its stimulus plan to build out its 3G network in both metropolitan and rural areas. India has just began rolling out its 3G network and Indian CDMA net adds more than doubled from the December quarter. Even Korea and Japan have seen increases in CDMA/WCDMA subscribers. In the long run, even 3G will be obsolete, but QCOM is preparing for this; the 4G technology called Long-Term Evolution (LTE) is QCOM’s single largest R&D project. All this boils down to one key point: QUALCOMM will capitalize on this significant trend in telecom because they are the major supplier of 3G wireless integrated circuits for both infrastructure and handsets.

Smartphone Growth

A smartphone is a loose term, but I will define it as a mobile phone with advanced capabilities beyond that of standard texting and voice calling, including features such as email, web browsing, Microsoft Office documents, MP3 playback, and much more. Smartphones have continued to grow even amidst our recession; Gartner research predicts smartphone sales to increase 29% in 2009. Last quarter, QCOM shipped 69 million chips, ahead of estimates and the company’s high end of guidance of 60-65 million. The company has predicted a 40% CAGR through 2013 and that 31% of all handset shipments will be smartphones in that year. Wireless providers have been aggressively promoting these phones due to their high margins that drive average revenue per user (ARPU) upward. For instance, Verizon has a “buy one get one free” Blackberry promotion and AT&T subsidizes the iPhone $200.

QCOM is also well-positioned to ride the next wave in consumer electronics with its Snapdragon and Gobi chips for higher-end smartphones, mobile internet devices, netbooks and laptops. These devices should be accretive to the bottom line by 2010 and could see more growth than handsets over the next few years as they further penetrate the market as demand increases. The first snapdragon based devices were announced this past quarter (Toshiba TG01 smartphone) and should ship commercially this summer. Gobi is also available for commercial shipping and already has nine original equipment manufacturers (OEMs) supporting the platform on 40 notebook models. QCOM has other emerging technologies such as mobile TV called MediaFLO, a mobile commerce platform named FireThorn and eZone, a universal wireless charging technology that can simultaneously charge multiple electronic devices.

Financial Analysis/Conclusion

To sum up, QUALCOMM not only has favorable macro trends, but it’s also a fundamentally sound company. They have a strong balance sheet with a diverse revenue breakdown (shown below). Last quarter, QCOM reported strong cash flow once again, increasing $300 million year-over-year to $1.3 billion. Also, out of all non-financial companies in the S&P 500, QCOM ranks among the highest in percentiles for 2008 in return on invested capital (ROIC), return on assets (ROA) and operating margin (shown below).

• ROIC – 95% percentile
• ROA – 86% percentile
• Operating Margin – 90% percentile

Revenue Breakdown:

• South Korea = 35%
• China = 21%
• Other global = 21%
• Japan = 14%
• United States = 9%

Disclosure: The fund the author is associated with is long VZ and has interests in QCOM. The author’s family is also long VZ.