INVESTING COMMENTARY

5 High-Paying Stocks

By Tom Hutchinson
October 6, 2008

In times like these, we're all trying to find safe investments that will protect us from today's markets. High-yielding stocks are an attractive alternative for many investors, especially since dividends play a major part in earning robust overall stock market returns. From 1926 to 2006, dividends accounted for 41% of total stock market performance.

OK, I get it, dividends are good
However, the lure of a high dividend yield can be dangerous, since that dividend may not be safe. Usually, the dividend yield increases because the stock price decreases. A decrease in price can be a sign of trouble within the company, potentially imperiling the payout. Therefore, investors need to examine the underlying business that supports the dividend.

We'll first use the Motley Fool CAPS screener to identify a few stocks with dividend yields between 5% and 10% that have been awarded four or the maximum five stars by the 115,000-plus member CAPS community . The highest-rated stocks in CAPS have had stellar records, so we'll start with those, then search among them for stocks with the greatest dividend stability:

Company

CAPS rating

Dividend yield

Dividend payout ratio

Altria (NYSE: MO)

*****

6.3%

76%

AT&T (NYSE: T)

****

5.7%

68%

Duke Energy (NYSE: DUK)

*****

5.3%

67%

Pfizer (NYSE: PFE)

****

6.7%

92%

Verizon (NYSE: VZ)

****

5.9%

83%

Source: Motley Fool CAPS and Yahoo! Finance.

These stocks are not recommendations, of course -- just possible starting points for further research.

Pfizer
Sure, the stock looks cheap here, since it hasn't traded at so low a price in about 11 years. But is the dividend secure? I don't think so. Pfizer's 92% dividend payout ratio is double the industry average. In addition, with Lipitor coming off patent in 2011, Pfizer will lose most of the revenue associated with that $13 billion-per-year drug. Pfizer has been steadily growing its dividend over the past couple of years, but its net income in the trailing-12-month period is less than half of what it was for 2006. I'm not sure Pfizer can sustain its payout.

Altria
A 76% dividend payout ratio is OK for a cash machine like Altria, and it's right near the 75% payout ratio the company targeted in its latest 10-Q statement. In addition, Altria seems to have plenty of free cash flow to cover the dividend. Even though the total dividend paid out has dropped after the spinoff of Philip Morris International (NYSE: PM), the acquisition of US Tobacco (NYSE: UST) should counteract that to some extent. I think this one is pretty safe.

AT&T
AT&T is the world's largest telecommunications company by revenue, and the No. 1 U.S. provider of wireless, broadband, business, voice, and directory services. The company has achieved solid profit growth and double-digit EPS growth over the past several years, while generating strong cash flow. Its 68% payout ratio is a tad high relative to the industry, but I donât see any reason at this point why the telecom giant canât maintain the dividend.

Duke
Duke Energy has outperformed the S&P 500 for the past one-, three-, and five-year periods. Utilities are generally a recession-resistant business (people need their power, after all). With a history of paying dividends for 82 straight years, even though the payout ratio is high relative to utilities in general, it should be pretty safe.

Verizon
The company is competing with AT&T to be No. 1 in wireless. They also offer FiOS for phone, computer, and cable across the country. Although Verizon appears financially capable of maintaining the dividend for now, it seems contradictory that it would continue to pay out 83% of net income and half of free cash flow to shareholders while trying to grow bigger than a company like AT&T. Verizon may choose growth over dividends in the future.

Final thoughts
Investing in solid dividend-paying stocks in this environment is a smart thing to do. However, do your homework, and make sure you get companies that will maintain the dividend.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

4-Star Stocks Poised to Pop: Applied Materials

By Brian D. Pacampara
October 6, 2008

Based on the aggregated intelligence of 115,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, semiconductor equipment maker Applied Materials (Nasdaq: AMAT) has earned a respected four-star ranking. While five-star stocks have been the best performers, our data has shown that four-star stocks still outshine the market by a significant margin and shouldn't be taken lightly. Conversely, low-rated stocks have woefully lagged the market average.

With that in mind, let's take a closer look at Applied Materials' business and see what CAPS investors are saying about the stock right now.

Applied Materials facts

Headquarters (founded)

Santa Clara, California (1967)

Market Cap

$19.04 billion

Industry

Semiconductor equipment

TTM revenue

$8.45 billion

Management

CEO Michael Splinter (since 2003)

CFO George Davis (since 2006)

Return on equity (average last three years)

17.3%

Competitor

KLA-Tencor

CAPS members bullish on AMAT also bullish on

Intel (Nasdaq: INTC)

Cisco Systems (Nasdaq: CSCO)

CAPS members bearish on AMAT also bearish on

Novellus Systems (Nasdaq: NVLS)

Google (Nasdaq: GOOG)

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS. TTM = trailing 12 months.

Over on CAPS, fully 223 of 246 of the All-Star members who have rated Applied Materials -- some 91% -- believe the stock will outperform the S&P 500 going forward. These bulls include a pair of my Foolish colleagues TMFSarahGen and Fool co-founder David Gardner (TMFBreakerDave), both of whom are ranked in the top 2% of our community.

In August, TMFSarahGen reminded our community that Applied Materials "recently stated that the bottom has been reached, and semiconductor equipment sales are going up from here."

A more recent pitch from David last month shares that contrarian spirit, writing:

Cash-rich, well-positioned leader will create long-term value at these prices for patient shareholders, and should turn nicely as its industry cycle bottoms out and turns. I'm patient, as I am for [NVIDIA ] (Nasdaq: NVDA) and some other industry-related players.

My CAPS Stock of the Day today. Nice to be reminded of this long-term grower that I hadn't checked up on in some years....

What do you think about Applied Materials, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 115,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

4 Stocks That Took a Hike

By Rick Aristotle Munarriz
October 6, 2008

I love to kick off the new trading week by taking a quick peek at companies that have just hiked their dividends. It's not just about the money. A company that's opening its wallet wider probably has improving fundamentals to back up that generosity.

Readers of the Income Investor newsletter can certainly appreciate that kind of thinking. Let's take a closer look at four of the companies that inched their payouts higher over the past week.

We'll start with Speedway Motorsports (NYSE: TRK). The auto racetrack operator revved up its annual dividend to $0.34 a share. It's a good omen for the niche, with International Speedway (Nasdaq: ISCA) set to report its quarterly results on Thursday.

Investors who want to sink their teeth into a chewy dividend may warm up to DENTSPLY (Nasdaq: XRAY). The maker of dental office equipment -- including X-raying supplies, hence the ticker symbol -- is growing its quarterly payout by 11% to $0.05 a share. Look, Ma, no cavities!

NW Natural (NYSE: NWN) is another hiker. The natural gas utility company's quarterly disbursements are climbing 5% to $0.395. Investors aren't surprised. They've had decades of practice, since NW Natural has boosted its yield in each of the past 53 years.

Finally, we have MFA Mortgage Investments (NYSE: MFA) bringing home the bacon. Yes, even mortgage REITs can get in on the fun in this iffy environment. MFA specializes in high-quality, high-coupon, and adjustable mortgage-based securities. The company's new quarterly dividend of $0.22 a share is a 10% improvement over its previous rate. The move pushes up the yield to an eye-popping 16.2%.

Subscribers to the Income Investor newsletter can appreciate the companies sending more and more money to their investors. The newsletter singles out companies that are committed to growing their distributions with market-thumping results.

Want to see what is being recommended these days? Go ahead and give the newsletter service a shot with a 30-day trial subscription. Who knows? Maybe the next thing that will get hiked will be your interest.

3 Stocks That Blew the Market Away

By Rick Aristotle Munarriz
October 6, 2008

Why settle for ordinary quarterly reports?

Every week, I look at three companies that have beaten market expectations. Leaving Wall Street's pros with quizzical looks usually means that the companies have more in the tank than the analysts figured, and capital appreciation often follows.

So let's examine a few companies that humbled the prognosticators over the past few trading days.

We can start with Steelcase (Nasdaq: SCS). The office-furniture manufacturer posted a quarterly profit of $0.28 a share before restructuring charges, comfortably ahead of the $0.26 a share it earned a year ago and the $0.22 a share that Mr. Market was expecting.

That's right: A company that sells new corporate furnishings beat the market. Sure, Steelcase also hosed down its current quarter's outlook, but I always like to see how office-furniture companies such as Steelcase and Herman Miller (Nasdaq: MLHR) are faring, since their health seems to be a good indicator of corporate spending.

Marriott (NYSE: MAR) is another topper. The hotel giant came through with an adjusted profit of $0.34 a share from continuing operations. Analysts were checking in at the $0.32 mark.

The news wasn't all good, though. Marriott's timeshare business tanked. More importantly, the company sees worldwide revenue per available room dipping during the fiscal year's final quarter.

Finally, we have Circuit City (NYSE: CC) making a surprising appearance in this weekly list of accolades. Yes, the consumer-electronics chain is hurting. It's clearly no Best Buy (NYSE: BBY). Heck, even smaller chains, such as Conn's (Nasdaq: CONN) and Hastings (Nasdaq: HAST), are at least profitable. However, losing just $1.00 a share on a non-GAAP basis is a smaller deficit than what bearish pros were banking on. On a slow earnings-front week, it'll have to do.

So keep watching the companies that exceed expectations. Over time, it will be a rewarding experience for investors as the market rewards the overachievers. That's the kind of surprise we look for in the Rule Breakers newsletter service. Want in? Check out a 30-day trial subscription.

Either way, come back next Monday to learn about more stocks that blew the market away.

Your Portfolio's Worst Enemy

By Shannon Zimmerman
October 6, 2008

Mike Tyson once reportedly uttered these sage words of wisdom (and no, I'm not being sarcastic): "Everyone has a plan -- until they get punched in the face." Taken literally or metaphorically, truer words were never spoken.

These days, lots of folks are feeling punched in the face by the stock market. I'm guessing they're also feeling like they could use a new plan.

After all, the iShares Russell 1000 Growth (IWF) exchange-traded fund -- home to such large-cap racecars as Cisco Systems (Nasdaq: CSCO), Hewlett-Packard (NYSE: HPQ), and Monsanto (NYSE: MON) -- has declined by more than 25% on a year-to-date basis. Even the comparatively buttoned-down Dow-tracking Diamonds (NYSE: DIA) -- an ETF whose portfolio is home to the upper-crust likes of Chevron (NYSE: CVX), 3M (NYSE: MMM), and Johnson & Johnson (NYSE: JNJ) -- has fallen by nearly 21%.

New and improved?
Still, before tacking, and perhaps even flailing, in some new direction, it's well worth asking: What, if anything, is wrong with your current plan?

After all, you did your homework, right? You focused on your holdings' free cash flow history, as well as their forward-looking prospects. You dialed out macroeconomic noise -- even at its current deafening, jet-engine roar volume -- and zeroed in on operational prowess. You understood that, though it may take a while to catch up, a firm's stock price will eventually reflect its ability crank out and grow net income (aka profit). On that front, paying close attention to key profitability measurements, including return on assets and return on equity, no doubt came in plenty handy.

Again, I'm just guessing again here, but I'll bet you followed up that fundamental spadework with a fair amount of heavy valuation lifting. It's often the toughest code to crack, but when you compare a firm's price multiples (including price-to-earnings, price-to-book value, and price-to-sales ratios) with those of the broader market and industry peers, you can go a long way toward buying high-quality stocks on the cheap.

Sound like a plan?
If that sounds like a reasonable description of the way you assembled your portfolio, good, no, excellent for you. Even if you have been dinged up amid the mayhem -- and who among us hasn't? -- you have ample reason to stay right where you are.

Your losses, after all, are paper losses, unrealized declines that will only impact your purchasing power when you pull the trigger. Or, to circle back around to Mike Tyson's insight, when you make like your own worst enemy and punch yourself in the face, Fight Club-style.

My advice? Just don't do it. Unless you believe the economic end is nigh (I don't), patience really is a virtue. Since 1926 -- a period that covers even the years of the Great Depression -- the stock market has delivered an annualized gain of more than 10%.

In other words, sit tight on thoughtful and well-researched investments whose fundamental characteristics haven't changed.

Old and lousy?
If, on the other hand, as you look at your portfolio now, you're seeing a grab-bag of ideas that were perhaps not as, ahem, thoroughly vetted as they ought to have been, we have some suggestions. Eight of 'em, in fact.

That's the number of investments we've made at Ready-Made Millionaire, the Fool's real-money investment service whose portfolio features a power trio of world-class mutual funds, a high-octane ETF, and four cherry-picked individual stocks. Make no mistake -- our lineup has been rocked by the downturn, too. It is, after all, an all-equity lineup. But because the process we used to assemble the portfolio matches the criteria outlined above, investments that were bargains to begin have become even better values now.

That's good news for prospective members, particularly since our game plan -- to beat the market over the next three to five years and beyond -- remains intact. RMM will reopen to new members in just a couple of weeks. If you'd like to snag a free copy of our 11-Minute Millionaire special report and learn more about the service, just click here.

Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire service and doesn't own any of the securities mentioned above. Johnson & Johnson is a Motley Fool Income Investor recommendation. 3M is an Inside Value choice. The Fool has a strict disclosure policy.

The Battle for Wachovia: Round 2

By Morgan Housel
October 6, 2008

In the banking world, nothing can go right these days. Seriously, absolutely nothing.

First, a recap of last week's events: On Monday, Citigroup (NYSE: C) made an offer to buy Wachovia 's (NYSE: WB) banking operations for about $1 per share, with a fat government backstop that took care of losses beyond the first $42 billion on a $300 billion pool of Wachovia's loans.

On Friday, Wells Fargo (NYSE: WFC) shook things up with a surprise $7-per-share bid for the entire company, and offered to do it without any government help. Without question, the deal was far sweeter for both Wachovia shareholders and taxpayers. For the first time in recent memory, free markets triumphed, whoo-hoo!

Good news, right? In a perfect world, yes, but our markets are more like something between a soap opera and a science-fiction novel, so you know this story gets better.

Free markets, meet free courts
On Saturday, a group of Citigroup lawyers visited a New York judge at his house, persuading him to temporarily block the pending Wells Fargo transaction because Citi had an "exclusivity agreement" that prevented Wachovia from striking a deal with anyone else.

Then last night, the jesters kicked it into high gear, with that ruling being overturned by a New York state appellate court. Not surprisingly, Citigroup says it intends to appeal the ruling … and around and around we go.

What should irk you -- the taxpayer -- is that Wells Fargo's offer didn't include any government backstop, as Citi's offer did. From that standpoint alone, you'd think Wells Fargo's offer would have been ushered in by regulators, yet it was (at least temporarily) shot down by the courts. Perhaps bailouts have become so commonplace that no one knows how to handle a deal without one.

All of this just for Wachovia?
Why Citi and Wells Fargo are fighting so viciously isn't much of a surprise; Citigroup's drooling over Wachovia's $400 billion deposit base, which it can use as a cheap source of funding in lieu of short-term debt markets that have practically disintegrated. Doing so could let Citi to regain its footing over Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) -- the other two alpha banks that haven't been nearly as hammered as Citi has in the past year.

Wells Fargo could make serious headway on B of A and JPMorgan with Wachovia's presence in the East, its brokerage unit, AG Edwards, and its asset management division. Both Citi and Wells could reap a huge reward by exploiting a new tax law that'll let them charge Wachovia's writedowns as an offset on their own net income, meaning much lower tax bills could be in store for whoever gets a hold of Wachovia.

What happens from here? As has been the case in recent weeks, probably something that no one can predict and that completely bewilders markets when it happens. In its current form, the most likely outcome is either Wells Fargo prevailing, buying the entire company for $7 per share, or Citi and Wells further duking it out, divvying up Wachovia's assets between them.

Until then, the hamster wheel continues to spin at a frantic pace. Stay tuned.

For related Foolishness:

Great Call on Wachovia! What's Next?Fool Poll: The Fight for Wachovia Why You Should Fear the Future

Why Opposing the Bailout Hurts So Good

By Mac Greer
October 6, 2008

With so much talk of doom, gloom, and Great Depressions, why do so many Americans oppose the just-passed "bailout" plan? Is the lack of urgency rooted in a lack of understanding or are there other forces at work?

Dan Ariely is a professor of behavioral economics at Duke University and the author of Predictably Irrational: The Hidden Forces That Shape Our Decisions. I recently talked with him about some hidden forces shaping the current financial crisis.

Mac Greer: You have a lot of Americans seeing this as a Wall Street crisis and not so much as a "Main Street" crisis. What do you think it will take for most Americans to reach some sort of a consensus that this crisis really requires immediate action?

Dan Ariely: Well, one thing is we have been telling a lot of people for a long time that whatever they have in the stock market is about long-term strategy and not any short-term things. So the current change in speak, in some sense, doesn't seem to be very effective. We have been telling people for 20 years the money you have in the stock market is about retirement, it is not about anything urgent. Don't look at it. It is all about long-term strategy. It is very hard to convince people that all of a sudden that it is short term. That is one thing.

The second thing is that nothing has changed much in the short term living of people. In some sense, this is smaller than the effect of the increasing gas prices.

Greer: Yeah.

Ariely: What is happening? Basically the thing is we are creatures of habit, if you think about it. The best predictor of what we will do tomorrow is what we did today. That is it. Habits are good and bad. They are good because they help us save energy. We don't have to think about it. We don't have to contemplate every cup of coffee if it is worth it or not. As a consequence, we get into habits.

Now the question is, when will we change habits? I think we change habits only when we have to. Right now, because salaries have not changed and prices in the markets have not really changed, we don't have to change habits, so we don't see anything happening. The moment we will start seeing those, the moment stores will be closed, people we know will start losing their jobs, anything like that will happen, people would revise -- and revise big time.

But the other thing is, I think there is a huge sense of kind of justice. And people have been watching executives on Wall Street making a lot of money for a long time. There is clearly a feeling that they haven't produced anything useful to justify that amount. There's a kind of happiness with the fall of Wall Street.

Greer: A little schadenfreude. I think you're right.

Ariely: So I think it is a very complex, very complex phenomenon. The growth of the economy last year was mostly in the financial sector. Think from the perspective of an individual who sees the salaries, who sees the amounts of money and they think, what are these guys doing? They are managing my money that I worked very hard for and every year they take 1% out of it for the privilege of doing what? Following the S&P 500? So there is a sense of justice.

There is actually a very interesting paper by a group of Swiss economists who basically looked at people's desire to punish and there is a game we call the trust game. Imagine that you and I each get $10. And you get to pass to me $10 or you can keep your money. If you keep your money, the game is over. If you pass me the $10, the money quadruples on the way to me, so when I get it, I have my own $10, plus I have the $40 that you passed me. Now I have $50 and I can decide one of two things. I can either send you back nothing or I can send you back $25. If I send you $25, everybody is better off and everybody is happy. What happened if I send you nothing? You are unhappy, right?

Greer: Right.

Ariely: But now I give you a chance to punish me. I say, look, if you spend a dollar, the experiment will take $2 away from me. Another question is, would you be willing to suffer to punish me even more? And what happens is a lot of people are willing to punish other people, even when it costs them money.

What is more interesting is that this experiment they did was actually in the PET scan … So basically they measured what parts of the brain work as people think about it. It turns out that the part of the brain we call the striatum, which is usually related to reward -- it is the place that gets activated when we eat food and get sex and heroin and stuff like that -- is also activated when people make decisions about punishing others.

So the interesting thing is that there is some kind of pleasure in punishing others who have kind of violated some social fairness or norms.

Greer: So that may explain why I wouldn't support legislation, even if I think there is going to be some short-term pain for me because at the end of the day I think the chickens are coming home to roost and these fat cats on Wall Street had it coming. It is going to hurt them more than it is going to hurt me, so it is going to be worth any short-term pain that I have to endure.

Ariely: That is exactly right. So we are willing to lose money, the people with small portfolios are willing to lose a little bit of money if these guys would really hurt.

For more bailout or behavioral Foolishness, check out:

Why You Shouldn't Sell Bailout: It's On Everything You Want to Know About the $700 Billion Plan

You Do Have More Than You Think

By Selena Maranjian
October 6, 2008

Do you always do everything you want or need to do? I don't, and I bet you don't either. But that's not a good reason to give up trying.

Throughout history, people have risen above challenges to succeed in things they've set their minds to accomplish. Whether you're talking about explorers overcoming huge obstacles, or people overcoming their own physical challenges to excel in areas few believed they could participate in, a can-do attitude is all that you might need in order to make your dreams come true.

The book on it
Fool co-founders David and Tom Gardner tackled a similar topic in their well-received book, You Have More Than You Think.

They explained that you already have:

index fund, to earn the market's return.Time. Time is a critical part of the formula for making money. And even if you're 60 or 75 years old right now, it's not too late. Remember that you may well live to 90 or beyond. If so, some of your money still has 15 to 30 years left to grow, and you might want to keep much of it in stocks.

To those, I'll add that you have money. Sure, you might not have a million, or even $100,000 to your name. But smaller amounts can grow to much bigger ones. If you have as much as $25,000, for example, it can grow to more than $270,000 in 25 years at the market's historic average rate of 10%. Adding to it along the way will only take you further toward your financial goals.

What to do
So don't think you can't get rich, or at least more financially secure. Don't think you don't have what it takes. Just take some action.

Sock away 15% of your income each year for several decades, and invest it well, and you may end up with $1 million or $2 million in the bank. You might want to aim to beat the market with some or all of your money, too. One way is via mutual funds.

The Meridian Value (FUND: MVALX) fund, for example, has averaged nearly 7% over the past five years and recently included Intel (Nasdaq: INTC), Mattel (NYSE: MAT), and Verizon (NYSE: VZ) as top holdings.

Another option is individual stocks (and of course, you may want to mix and match, combining a few funds with stocks in your portfolio). Choose carefully, and you may do very well. General Mills (NYSE: GIS), for example, has averaged 14% growth over the past 20 years, while Procter & Gamble (NYSE: PG) has averaged 16%, and Harley-Davidson (NYSE: HOG) has averaged 21%.

If you're in the market for some promising investments, try (for free) our Motley Fool Stock Advisor newsletter. It regularly offers two investing styles, from Fool co-founders David and Tom Gardner, and its picks are trouncing the market. (Go ahead and try it.)

5 Battered but Worthy Stocks

By Tom Hutchinson
October 6, 2008

This past month has been brutal, and we've seen a lot of stocks lose value. Sometimes, a stock price declines because the market has efficiently digested new information and appropriately discounted the stock's value. And sometimes a stock price spikes downward because people panic.

But in Motley Fool CAPS, where 115,000-plus members offer their investing opinions, stocks with a maximum rating of five stars have a stellar record.

Still, some of our five-star stocks travel a turbulent road to good performance. And even though most of the five-star picks pan out, not all of them will. So let's examine some five-star stocks with large price declines over the past month. We'll look at some reasons for the decline and see whether these battered stocks are worth their stars.

Here are the past month's battered prospects:

Company

CAPS Rating

30-Day Return

Navios Maritime (NYSE: NM)

*****

(49.4%)

Renesola (NYSE: SOL)

*****

(39.8%)

Freeport McMoran Copper & Gold (NYSE: FCX)

*****

(44.2%)

Weatherford International (NYSE: WFT)

*****

(42.1%)

National Oilwell Varco (NYSE: NOV)

*****

(34.8%)

Source: Motley Fool CAPS. Decline from Sept. 3 to Oct 3.

Note that these are not recommendations to buy or sell; they're just interesting companies that deserve a look. So let's check out a few of them in further detail.

Navios Maritime
Long-term, this Greek shipping company should benefit greatly from worldwide economic expansion. But for now, Navios is a cyclical stock that's taking a pounding. The Greek shipping company currently sells at about 60% of book value -- 1.4-times tangible book -- and less than two times earnings. Navios also has relatively low debt -- debt to capital is 42% -- and is paying a 7.9% dividend supported by a 10% payout ratio.

Why is it so cheap? Two things appear to have precipitated the dramatic selloff. First, there's the worldwide economic slowdown and the accompanying decrease in demand for raw materials, which means less shipping. Second, a Chinese boycott of iron ore from Brazil over price increases has slowed things even further.

On the bright side, the Chinese will probably end the boycott when their iron ore inventories deplete -- and one analyst thinks that could be as early as next month. In addition, demand for raw materials should be among the first things to bounce back when world economies recover. And that's good news for shipping.

Renesola
Revenue and earnings show absolutely explosive growth over the past few years at this Chinese solar company. Little wonder, since Renesola has been in the midst of two of the hottest growth stories recently -- China and alternative energy. But both sectors have been clobbered this year.

Contributing to the falling stock price are the sputtering U.S. and Chinese markets and the declining price of oil, the latter of which makes alternative energy less attractive. But although the near-term direction of the markets is anyone's guess, solar energy appears to be here to stay, regardless of oil-price gyrations.

National Oilwell Varco
The stock price of this seller of oil-drilling equipment and services has fallen by more than half since its highs in July. Since that time, the markets have reacted to the economic slowdown and the fears that things could get worse. The price of oil has fallen precipitously on those same fears.

Regardless of any short-term economic troubles, though, industrialization rolls on in many countries. Will China, India, and Brazil decrease their oil consumption in the long term? I doubt it. That means drillers are in demand, which means the drillers need rigs, which means this company should do well. With oil giants ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) having incentive to drill, this stock is sure to bounce back.

Final thoughts
Despite the recent difficulties and share-price declines that these companies have experienced, enough CAPS members still rate them as outperformers to give the companies five-star status. Sometimes, investors can find great values among the steepest one-month decliners.

Do you agree or disagree? After researching these stocks on Motley Fool CAPS, make a call for "outperform" or "underperform." Your choice will help determine whether these companies will continue to rake in the five-star accolades. Come and join us on CAPS, absolutely free.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Today's 5-Star Movers

By Motley Fool Staff
October 6, 2008

As fundamentals-focused long-term investors, Fools never base an investment decision on the daily gyrations of the market. But the market's daily price movements can be useful when looking for new stock ideas for further research, or to keep tabs on watch-list stocks.

Below you'll find today's biggest movers among our five-star stocks -- the highest rating awarded by our CAPS community of more than 86,000 investors. Have a look, and then visit us on CAPS to dig in further on each of them.

Up Today

Sector

Sector Past 30 Days

Fools Saying Outperform

Research

ProAssurance Corp

(NYSE: PRA)

5.76%

Property & Casualty Insurance

(7.45%)

61 of 63

Research

Pinnacle Financial Partners

(Nasdaq: PNFP)

4.10%

Regional - Southeast Banks

7.12%

39 of 47

Research

Central Fund of Canada Limited (USA)

(AMEX: CEF)

3.91%

Closed-End Fund - Foreign

(18.67%)

451 of 460

Research

Other Five-Star Property & Casualty Insurance Darwin Professional Underwriters, Inc. (NYSE: DR) up 0.86%Baldwin & Lyons, Inc. (Nasdaq: BWINB) up 0.84%Other Five-Star Closed-End Fund - Foreign Taiwan Greater China Fund (NYSE: TFC) down 4.39%Swiss Helvetia Fund, Inc. (NYSE: SWZ) down 6.63%

Boost Your Returns by Avoiding These Highfliers

By Andrew Sullivan, CFA
October 6, 2008

Quick! What is Warren Buffett’s first rule of investing? That’s right: “Never lose money.” Buffett is all about investing in situations where his risk is low. Investing is hard enough as it is, and Buffett doesn’t want to expose himself unnecessarily to additional risk.

Plus, losses can ruin your returns. Investors in JetBlue (Nasdaq: JBLU) and Las Vegas Sands (NYSE: LVS) know what I'm talking about.

How can I avoid such losses?
One good way is to consult The Motley Fool’s CAPS stock-rating database before you buy a company. In CAPS, more than 115,000 people rank companies, which are then given a rating of one to five stars. Motley Fool data shows that the one- and two-star stocks have underperformed the market, so if the stock you are interested in shows up on that list, you may want to think twice.

To get you started with a few names to avoid, I punched a few criteria into the CAPS screening tool, looking for expensive stocks with low CAPS ratings:

The search returned the following:

Company Name

Current CAPS Rating (5 max)

Underperform Picks

Outperform Picks

Price-to-Earnings (TTM)

Price-to-Sales (TTM)

Bankrate (Nasdaq: RATE)

206

37.3

5.5

Investors Bancorp (Nasdaq: ISBC)

100.0

5.1

Kimco Realty Corporation (NYSE: KIM)

119

31.2

8.6

Lululemon Athletica (Nasdaq: LULU)

298

40.6

3.6

Urban Outfitters (Nasdaq: URBN)

114

504

30.1

3.5

Source: Motley Fool CAPS, as of Oct. 3, 2008

I’ll let you judge the worthiness of these potential investments, but I personally would rather own cheap stocks with five-star ratings like these instead of the expensive stocks with one- or two-star ratings listed above. What about you?

5-Star Stocks Poised to Pop: Cameco

By Brian D. Pacampara
October 6, 2008

Based on the aggregated intelligence of 115,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, uranium producer Cameco (NYSE: CCJ) has earned a coveted five-star ranking. Our data has shown that five-star stocks outperform the market by a significant margin; conversely, one-star stocks have woefully lagged the market average.

With that in mind, let's take a closer look at Cameco's business, and see what CAPS investors are saying about the stock right now.

Cameco facts

Headquarters (Founded)

Saskatoon, Canada (1987)

Market Cap

$7.05 billion

Industry

Consumable Fuels

TTM Revenue

$2.21 billion

Management

CEO Gerald Grandey (since 2003)

CFO Kim Goheen (since 2004)

Return on Equity (average last three years)

15.17%

Competitors

Rio Tinto (NYSE: RTP)

BHP Billiton (NYSE: BHP)

CAPS members bullish on CCJ also bullish on

Freeport-McMoRan Copper & Gold (NYSE: FCX)

Vale (NYSE: RIO)

CAPS members bearish on CCJ also bearish on

First Solar (Nasdaq: FSLR)

Baidu.com (Nasdaq: BIDU)

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS. TTM = trailing 12 months.

Over on CAPS, fully 180 of 185 of the All-Star members who have rated Cameco -- some 97% -- believe the stock will outperform the S&P 500 going forward. These All-Star bulls include pencils2 and RonChapmanJr, both of whom are ranked in the top 1% of our community.

In January, pencils2 noted, "Nuclear power is more and more becoming the most plausible clean, cheap energy option for countries everywhere. Nuclear power is climbing up the ranks and Cameco is in a good position to benefit from nuclear expansion."

A more recent pitch from RonChapmanJr in late July follows that rationale, letting the company's unique position speak for itself:

I do not like the P/E on this one or even the earnings per share, but I do like this: "Cameco is also one of the four converters of uranium concentrates 'U3O8' to uranium hexafluoride 'UF6' in the western world, the only commercial supplier of services to convert uranium concentrates to uranium dioxide 'UO2' in the western world, and one of two Canadian commercial suppliers of fuel fabrication services for CANDU reactors."

What do you think about Cameco, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 115,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Kiss These Retailers Goodbye

By Alyce Lomax
October 6, 2008

The coming holiday season promises to be interesting, given our current economic crisis and the intense pressure many consumers feel on their pocketbooks because of rising energy and food costs, among other things. This means many retailers may get the equivalent of coal and switches in their stockings, and some may not even get the opportunity to make up for it next year. Be on guard, retail investors.

Dark times for some retailers
The Friday after Thanksgiving is called Black Friday because, traditionally, retailers finally venture into the black thanks to the tremendous volume of revenues that day as shoppers hit the pavement in earnest.

This winter, though, a weak and frightened consumer may be a real chiller, and many retailers may find themselves lingering in red. September consumer confidence looked a little stronger -- as strong as it did last April -- at 59.8, but that's not saying much. First of all, that figure didn't include the recent harrowing developments in the credit crisis. Secondly, the index was 99.5 last September.

And, of course, word on the street is that many credit card companies are tightening up credit -- and that means some are cutting credit lines of already strapped consumers. People might not be able to whip out their plastic bearing the Visa (NYSE: V) or MasterCard (NYSE: MA) logos as much as they did in the past, even if they want to.

Instead of smooching under mistletoe, we're likely to end up kissing some retailers goodbye. The Grinch may be stealing more than just Christmas, taking along quite a few retailers with him. So get under the misled toe and kiss these retailers goodbye.

The quick and the dead
In good times, it's a bit easier for an ailing business to mask its problem areas. But in economic crises, the weak are finally winnowed out. Based on several vital metrics, I've accumulated a list of companies unlikely to make it through this holiday season.

Debt/Equity

Operating Margin

Quick Ratio

Circuit City (NYSE: CC)

26.20%

(3.60%)

0.3

Talbots (NYSE: TLB)

92.70%

(0.80%)

0.5

Borders (NYSE: BGP)

110.20%

0.20%

0.1

There's more red to Circuit City than the color of its storefront. The retailer was suffering even when the economy was chugging along, as consumers looked elsewhere for deals on electronics. And Borders may be working on paying down its debt, but with a quick ratio of just 0.1, this is one heck of a risky investment. A quick ratio beneath 1.0 can serve as a major warning flag, particularly if a company's sales and profit margins are suffering and its inventories may have to go on clearance sale. (Read up on these ratios in "How to Read a Balance Sheet: Current and Quick Ratios" and "Using the Debt-to-Equity Ratio".)

All three of these companies have several years of falling sales, falling profit margins, and lack of profitability. Circuit City and Talbots reported negative operating income in the last 12 months, meaning neither boasts the ability to cover interest expenses with operating income. Throw in a major economic crisis and a lot of terribly frightened, cash-poor, credit-constrained consumers, and the headwinds look perilous this holiday season.

Cash is king
I've been saying this for months now: A far safer path for investors is to buy and hold stocks of companies that have plenty of cash and little or no debt during these tough economic times. Even if those companies are pressured by the current economic storm and suffer near-term drops in profitability, they still have the means to weather the storm, and maybe even make strategic acquisitions.

For example, personally, I can't stand Gap (NYSE: GPS) as a potential investment, but I did have to admit a couple of weeks ago that Gap's strong cash position allowed it to make a strategic acquisition despite the tough times. No credit required. There's a survivalist moral to that story.

And of course, consider a company like Apple (Nasdaq: AAPL). As much as many people griped for years that it just sat on its huge trove of cash like Scrooge McDuck, it's a high-quality stock with cash as a safety net, since not only do people love its products, it can ride out the blizzard and come up with more innovative products at its leisure, and without any need for debt.

The reason for the season
The good news is, perhaps, that we'll all remember what the holiday season is all about, and it's not materialism. (Sorry, retailers.) As for us investors, it's a good time to remember to select financial houses in good order that never go out of style.

How much are consumers expecting to shop this holiday season? Find out in our Fool Poll.

Cardinal Atones for Its Sins

By Brian Orelli
October 6, 2008

For companies in the drug industry, there's one agency that they'd rather not deal with: the Drug Enforcement Administration. Those guys have guns, you know.

Cardinal Health (NYSE: CAH) thinks it's finally done dealing with the agency, now that it has agreed to pay a $34 million fine. The DEA has agreed to reinstate the company's licenses to distribute controlled substances at three distribution centers.

The licenses were revoked because Cardinal didn't report suspicious purchases of hydrocodone that it distributed to pharmacies that filled fake prescriptions from Internet pharmacies. The company has since spent $20 million to upgrade its system, in hopes of avoiding trouble with the DEA again.

Cardinal isn't the only drug distributor that's had problems with the DEA recently. Both of its main competitors, McKesson (NYSE: MCK) and AmerisourceBergen ,(NYSE: ABC) have also resolved issues with the agency over the distribution of controlled substances. It seems rather ridiculous to me that the DEA requires the companies to play the role of a police officer, but if they want a license to deal drugs, I guess they have to play by the rules.

These DEA crackdowns on the abuse of prescription drugs could help the likes of Pain Therapeutics (Nasdaq: PTIE), King Pharmaceuticals (NYSE: KG) and Alpharma (NYSE: ALO) -- drugmakers that are developing abuse-deterrent drugs. The Food and Drug Administration isn't likely to approve these drugs just because the DEA says they're needed, but once the harder-to-abuse drugs are approved, everyone in the supply chain is likely to encourage their use, if it means lowering the chances of getting in trouble with the DEA -- and its guns.

It's certainly good news for Cardinal and its investors that the DEA issue is behind it. Now it can focus on that spinoff it announced a short time ago.

More Foolishness:

Dirt Cheap Dream Stocks 5 Top Turnaround Stocks Now That's the Way to Spin Off a Company

Fool Poll: How Much Will You Spend This Holiday Season?

By Alyce Lomax
October 6, 2008

Well, it's official: These are tough times. It's not really a stretch to think that the coming holiday season may be reminiscent of the Grinch coming down the chimney in the dead of night to steal Christmas.

The consumer confidence figure for September may have been a wee bit more confident than it has been lately, clocking in at 59.8, but here's the bad news. The index didn't reflect the realization of just how bad the credit crisis is. Meanwhile, it's a major deterioration in confidence from last year, when the index was an extremely confident 99.5.

This doesn't bode too well for retail sales. Although discounters like Wal-Mart (NYSE: WMT) and Costco (Nasdaq: COST) will probably be bright spots, you could also surmise that high-end companies like Tiffany (NYSE: TIF), Nordstrom (NYSE: JWN), and Coach (NYSE: COH) might not fare well at all.

And of course, the potential for an awakening consumer aversion to debt -- not to mention shrinking credit lines -- certainly might have an impact on Visa (NYSE: V) and MasterCard (NYSE: MA) businesses, as well as those companies that issue the cards.

Of course, it seems un-American to skimp during the holidays, so we want to hear what your plans are. A significant amount of feedback can give us all at least an anecdotal idea of how retail sales might fare this holiday season, as well as which types of retailers might benefit.

Are you adjusting your holiday spending plans in light of the current economic concerns? If you have additional comments -- like how you're cutting up your credit cards or cooking up ideas for money-saving gifts -- please feel free to use our comment box below to chime in.

Free Protection for Your Stocks

By Jeff Fischer
October 6, 2008

On Wednesday, I wrote about a way to insure your portfolio against decline by buying put options -- in effect, insurance policies -- for your largest or most important holdings. Options typically get a bad rap as being risky or speculative, but, used correctly to complement a long-term stock portfolio, they're simply tools to help you manage your risk and returns.

So, if you want to protect a stock you own, you can buy a put option. But in today's volatile market it will cost you even more than usual -- about $3,000 to $4,000 to insure the typical $20,000 stock position from now through January 2010. That may be worth it if your stock falls sharply or fails, but it's a lot of money to forfeit if your stock holds steady or increases in price.

There is a way, however, to insure a stock against decline without needing to spend much or any capital yourself. Now that's worth knowing about.

Buying protective puts with call option income (What!? We'll explain)
Let's use Citigroup (NYSE: C) as a general example. Suppose you own 1,000 shares of the $16.50 stock, and you want to protect it against further big declines. Right now, Citigroup's January 2010 put options with a $15 strike price (the price at which you could sell your stock, guaranteed) cost $4.09 per share.

So, it will cost you $4,090 to insure your $16,500 Citigroup position from now through January 2010, when these options expire. The insurance would be great to have if Citigroup sits at $7 15 months from now. No matter what happens to Citigroup by then, you'll be able to sell your shares at $15 -- but it's a net sell price of $10.91 after factoring in what you paid for the put options.

"But wait," you're saying, "I have to pony up $4,000 just to insure what is supposed to be an investment? I know times are risky right now, with a lot of uncertainty, but that's a lot to pay for something that very well might not happen!"

It is. And there's an alternative.

Cash in pocket, insurance in hand
Instead, you could pay for your insurance entirely, and have money left over, by using the proceeds from writing call options on the stock. When you write options, you're the seller of the contract, rather than the buyer, so you're paid up front when you execute the trade. In this case, as the owner of 1,000 shares of Citigroup, you could write -- or sell -- 10 call options (each option contract represents 100 shares) on your stock for an immediate payment.

Right now, in fact, Citigroup's $17.50 call options are paying $4.40 per share. You could sell call option contracts on your 1,000 shares, be paid $4,400, and then use the money to buy your $15 put contracts for $4,090. You clear a little money even after commissions, and now your position is insured. No matter what Citigroup does, you can sell at $15.

And, in this case, since you paid net zero for this trade (you were in fact paid a bit), $15 plus some change is indeed your actual sell price should you end up selling, rather than the $10.91 that was your net sell price when you paid for your insurance out of pocket.

The catch, however, is that your upside is now very limited. If Citigroup increases above $17.50 per share and you keep your call options open to expiration, your stock would be called away from you -- in other words, it would be sold for you, at $17.50 per share. So, even if Citigroup recovers to $25 or higher, as long as you have these open call options, you'd be forced to sell at $17.50.

With this strategy, you're insured against a disaster, but you also have limited upside.

When to insure positions with call option income
The option strategy of buying a put and selling a call (or vice versa) is called a "collar" strategy. You're limiting the potential pricing outcome for the position you're "collaring" -- in this case, Citigroup. You'll be able to sell it at $17.50 or $15, no matter what.

A collar is a useful tool in bear markets or when you are uncertain about a business. This year, that would have applied to just about any company related to financials, from General Electric (NYSE: GE) to AIG (NYSE: AIG) to Morgan Stanley (NYSE: MS).

But the strategy can also come in handy with stocks that are volatile at the best of times, especially after making big runs, such as to protect a position in Google (Nasdaq: GOOG) or Baidu (Nasdaq: BIDU). A collar strategy might also have made sense when Apple (Nasdaq: AAPL) rebounded to $180 a few months ago, if you were concerned about it falling back.

The strategy may be used when you don't want to sell a stock quite yet, but you also want to limit your potential losses. With a collar, you limit your upside significantly, but you're also in effect saying, "I don't believe there's much upside in the near term anyway. Meanwhile, I'm concerned about the risk. So, I'll insure my stock without any out-of-pocket expense." In our example, it's called a "costless collar."

Collars can smooth returns and help you ride out a very rough market -- both of which help you survive to see a better day. They're not for everyday use -- no option strategy is a blanket strategy -- but they're useful for situations that merit protection.

Don't go into a collar hoping for the perfect outcome, however -- they're useful precisely because nobody can time the market or what a stock will do next.

Options as tools
Options are tools best used in tandem with in-depth business knowledge and a long-term stock perspective. They can be used to protect positions, generate income, short, or hedge with much less risk than naked short-selling, and to get better buy or sell prices on your stocks.

We're going to use options in the Fool's new $1 million real-money portfolio, Motley Fool Pro. By the time we're fully invested, we'll be about 70% in long-term core stock holdings; 15% in exchange-traded funds, shorts, and hedges; and 15% in options. We launch tomorrow (Oct. 7) with the goal of building a portfolio that can ultimately profit whatever the market throws our way. If you're interested in learning more about the new Motley Fool Pro portfolio, and sensible option strategies, just enter your email address in the box below.

Here's Your Shot to Score Big

By Austin Edwards
October 6, 2008

Anytime I need investing inspiration, I turn to "The Great One" -- but I don't mean Warren Buffett, Peter Lynch, or Benjamin Graham. And I definitely don't mean Jim Cramer.

You've probably heard The Great One's name dozens of times, but you may not know just how wise he is. Nonetheless, he's said some very smart things. For instance ...

"You miss 100% of the shots you never take"
That's but one of the many pearls of wisdom The Great One has dropped over the years. And while it might seem obvious, or even trite, it's a truth we often take for granted.

Just think of the person you never asked to the dance, or the job you never applied for, or the novel you never finished ... or the stock you never purchased.

It happens to all of us. We get nervous, or doubtful, or busy, or ... you name it. And that might end up costing us the person of our dreams, or the job we've always wanted, or our only shot at fame. But in the case of investing, it will definitely cost us a fortune.

Last year, three stocks sat on my watch list for a full 365 days:

Stock

Gain in 2007

Market Cap Today (in Billions)

Google

50%

$114

Apple

134%

$79

Chipotle

158%

$1.6

A $17,100 mistake
Should I have bought all three? Perhaps. But by not investing in any of them, I wound up making a grand total of ... nothing. Nada. Zip. Zilch.

However, had I decided to take a shot, I would have scored -- big time. Five grand invested in each company at the beginning of 2007 would have been worth $32,100 one year later.

An even worse mistake
Each new year brings a chance to learn from our mistakes and move on. But we need to make sure that we move in the right direction.

Haphazardly plowing money into stocks on our watch lists isn't that direction. In fact, it could end up costing us even more than not investing at all.

Instead, we need to do our homework. That means reading quarterly reports, looking through financial statements, checking out the competition, reading up on management, looking for insider holdings, and assessing future possibilities.

Then, and only then, can we go ahead and take our shot.

And if we want to score really, really big ...
We have to follow The Great One's most famous piece of advice: "Skate to where the puck is going, not to where it's been."

You may already know that The Great One is ice hockey legend Wayne Gretzky. If not, all you need to know is that Gretzky was by far the greatest player ever to take the ice.

What made him The Great One? Quite simply, he was always one step ahead of everyone else -- not because of his speed, but because of his anticipation. While everyone else skated to where the puck had just been, Gretzky always skated to where it was going next.

That's the key to great investing, too
If you look back at my watch list, you'll notice an interesting correlation between market cap and percentage gain -- the smaller the business, the greater the returns. That won't always be the case, of course, but it's a quick and dirty way of showing that the best performers do indeed start small.

That's how you can skate to where the puck is going next.

It's simple math, really. While Google is one of the world's most powerful and innovative companies, it would have to pack on another $114 billion for its shares to double again.

Meanwhile, if Chipotle gains even one-tenth that amount, its share price should soar more than 750%.

Bigger isn't better, but size does matter
If you want even more proof of this investment phenomenon, just take a look back at 2007's top-performing stocks.

Here are a few companies that began 2007 with market values greater than $5 billion:

Stock

Gain in 2007

Rank Among Large Caps

Amazon .com

135%

No. 9

Research In Motion

166%

No. 4

Mosaic

342%

No. 3

Data provided by Capital IQ.

And here are a few companies that began 2007 with market values less than $5 billion (but more than $50 million):

Stock

Gain in 2007

Rank Among Small Caps

Deckers Outdoor (Nasdaq: DECK)

159%

No. 52

priceline.com (Nasdaq: PCLN)

163%

No. 48

Trina Solar (NYSE: TSL)

185%

No. 33

Graham (AMEX: GHM)

299%

No. 11

China Finance Online (Nasdaq: JRJC)

392%

No. 5

Data provided by Capital IQ.

While the gains of the top-performing large caps were certainly impressive, it's worth noting that the 33rd best-performing small cap returned 50 percentage points more than the ninth best-performing large cap. In fact, of the top 10 overall performers, none was a large cap.

So how can you score big in 2008?
First off, keep The Great One's advice in mind. Second, take a page out of my colleague Tim Hanson's book, and make sure to look for stocks that are:

These three traits have characterized some of the best-performing stocks of the past decade. More importantly, they will characterize some of the most lucrative stocks of the next 10 years.

In fact, we started our Motley Fool Hidden Gems service precisely to uncover businesses with these three traits -- companies poised to rank among the very best investments of the next decade and beyond.

In other words, the Hidden Gems team is dedicated to discovering where the puck is going next. And so far, they're scoring big -- they've uncovered some great businesses, like Sadia (NYSE: SDA) and Rofin-Sinar Technologies (Nasdaq: RSTI), and their average pick has returnedÂ 14 percentage points more than a like amount invested in the S&P 500. Are you earning returns like that? You could be.

Right now, you can skate along with the Hidden Gems team, see all of its recommendations, and take full advantage of its research with a free 30-day guest pass.

Thanks to the current market sell-off, many of today's most promising small-cap stocks are selling at bargain-basement discounts. In other words, if ever there were a perfect time to take your shot and score big, this is it. For a little help, simply click here to try Hidden Gems free for a full 30 days.

This article was first published Jan. 25, 2008. It has been updated.

Fool contributor Austin Edwards finally did buy shares of Apple, Chipotle, and Google in 2008 -- but only after doing his homework. Apple, Amazon.com, and priceline.com are Motley Fool Stock Advisor recommendations. Chipotle, China Finance Online, and Google are Rule Breakers picks. Chipotle B shares, Rofin-Sinar, and Sadia are Hidden Gems recommendations. The Fool's disclosure policy is the coolest game on Earth.

Don't Trust This Yield

By Anand Chokkavelu
October 6, 2008

A couple of months ago, I went looking for the highest dividend payer in America. The winner? GateHouse Media , which boasted a whopping 150% dividend yield.

With a dividend like that, even if the stock price did nothing over the next year, you'd still more than double your money. But you knew there was a catch, right?

Here it is: The company hasn't been profitable since 1997. Its grand business plan is newspapers and Yellow Pages.

It's not hard to see how a situation like that -- absurdly high dividend, out-of-step business plan -- turns into a shattered dream. In fact, on Aug. 8, GateHouse suspended its dividend altogether.

But what about situations that aren't so clear-cut?

Are these yields believable?
Not all companies are as easy to dismiss as GateHouse is -- nor are their dividend cuts so easy to predict. Check out these big-name dividend-paying companies that substantially beat the 4% yield you can currently get on a 30-year Treasury bond:

Company

Dividend Yield

BP (NYSE: BP)

Bristol-Myers Squibb (NYSE: BMY)

6.1%

Deutsche Bank (NYSE: DB)

6.6%

Altria (NYSE: MO)

6.3%

With dividends like that, an increase in the stock price is just a bonus. That's why dividend payers are popular core holdings in many people's portfolios.

But if the stock price falls -- and the company cuts its dividend besides -- that solid core can start to look like Swiss cheese.

How can you tell?
Want to know whether a company is likely to slash its dividend? All you have to do is answer one question: Will a company's future earnings support its future dividend payments?

But as investors can tell you -- especially the ones who have been burned by the recent dividend-slashing at seemingly rock-solid companies -- figuring that out is much harder than it sounds.

A year and a half ago, for example, few people would have predicted the level of devastation the financial sector has experienced. We've seen dividend cuts precede the downfalls of Wachovia and Washington Mutual , leaving us to wonder about the viability of dividend-slashers such as Citigroup and Regions Financial (NYSE: RF). Even the seemingly secure dividends such as US Bancorp's (NYSE: USB) 4.8% yield and JPMorgan Chase 's (NYSE: JPM) 3.3% yield are called into question in this atmosphere.

How can we separate the dividend dynasties from the dividend destroyers?

To get some pointers, I turned to experts James Early and Andy Cross, co-advisors at our Income Investor investing service. They point to four factors we should look at:

Strength of management: Is management composed of competent leaders with a proven track record and years of relevant company and industry experience? Have they been able to raise dividends in good times and bad?Size: Does the company have a substantial market cap? Although it's possible to find solid small-cap dividend payers, James and Andy generally look for companies capitalized above $1 billion, to cut down on volatility.Financial fortitude: Does the company have a solid balance sheet and strong cash flows? Substantial debt combined with weak performance leads to dividend cuts.Competitive advantage: Is the company better positioned strategically than its competitors are?

Positive answers to all of these questions won't necessarily prevent a dividend from being slashed -- unexpected events will always arise -- but it's a good place to start.

The lesson?
As we saw in the GateHouse example, the future success of a company can't be distilled into one metric, like dividend yield. To make an informed investing decision, you really do have to do your homework -- read financial statements, check up on management, analyze competitors, listen to quarterly conference calls, and crunch the numbers.

Those four bullet points above are a good place to start. Or if you need additional help or specific stock ideas, check out Income Investor. The team recently reviewed every dividend stock they've ever recommended; you can see what they're bullish on now by clicking here for a free 30-day trial. There's no obligation to subscribe.

This article was originally published on August 22, 2008. It has been updated.

Anand Chokkavelu owns shares of Altria and Citigroup but of no other companies mentioned. US Bancorp and JPMorgan Chase are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.

Superhero Stocks That Crashed Back to Earth

By Dan Caplinger
October 6, 2008

Last week, the government couldn't get anything right. When the House voted the original bailout bill down last Monday, the bear roared for a nearly 800-point loss on the Dow. But then, when the bill finally got passed, stocks turned a big gain early in the day into another new multiyear low.

In a rational market, this heads-I-win, tails-you-lose game wouldn't happen. But as shareholders of Research In Motion (Nasdaq: RIMM) and Mosaic (NYSE: MOS) found out last week, the market isn't always rational. Luckily for us, you can sometimes take advantage of other investors' irrational actions and add to your own profits.

A counterintuitive strategy
What happened Friday is just one example of a strange phenomenon that happens over and over again. When an important piece of news is widely anticipated -- whether it's a new piece of legislation, government data, or a hot stock's earnings release -- investors start responding well in advance to rumors and speculations about what the news will be. When things turn out differently, the market reacts violently, as we saw on Monday.

That's not particularly surprising. The shocking thing, though, is what happens when the rumor mill gets it right. Often, instead of following through and giving investors additional gains, the share price will actually move against you -- even when the news is good. Thus the market maxim, "Buy the rumor, sell the news."

You can't be No. 1 forever
As strange as it may seem for stocks to fall after good news, you'll find the key to why it happens in a stock's price. Often, stocks end up getting priced for perfection, where everyone expects huge growth for the foreseeable future. As long as such companies can deliver on amazing results quarter after quarter, investors get rewarded. But eventually, the hurdles get too high -- and when that happens, you see huge declines.

For instance, look at Research in Motion. On its face, the company's latest quarterly report had plenty of positive news. Net income rose 72%, with BlackBerry sales remaining strong even in the face of an overall slowdown in the economy. Yet the stock responded with a huge drop, focusing instead on some disappointing news about current and future quarters.

Similarly, fertilizer stocks were red-hot earlier this year. When Mosaic reported last Wednesday an amazing 284% increase in profits from the previous year, casual observers might have thought the company was right on target. Instead, shares dropped over 40%, and its rivals followed suit, with Potash Corp. (NYSE: POT) losing over a quarter of its value and Monsanto (NYSE: MON) falling 16%.

And if even good news can hit high-flying stocks hard, bad news can hurt even more. With Apple (Nasdaq: AAPL) shares trading near $190 as recently as June, the Mac-maker was valued at over 36 times expected 2008 earnings. Even with analysts expecting earnings gains of 22% in 2009, that was a pretty rich valuation. After suffering along with the rest of the market in September, the coup de grace came in a pair of simple downgrades, citing concerns about order volume.

Pay attention to valuation
The main takeaway from all this is that if you're investing in stocks, it's not enough to know the fundamentals of your company's business. You also need to stay in tune with the market's expectations for the company as well as its track record in meeting those expectations. The more successful a company has been, the greater the expectations will be. If there's no way to meet those expectations, then it's time to cut back on your holdings.

Particularly vulnerable are companies like Disney (NYSE: DIS) and Google (Nasdaq: GOOG), both of which have historically had strong success in beating analyst estimates. There's simply no way those streaks can last forever, and as Google found out in February, the results can be devastating for shareholders.

The only warning is that you'll rarely have perfect timing, so your stocks may continue going up for a while even after you pare your position. But over the long haul, the money you save by avoiding catastrophes should more than make up for the money you lose being early.

For more about making money in a bear market, read about:

stupidity.Why the future is full of fear.The mistake that could blow your retirement.

Sell on the Rumor, Buy on the News

By Anders Bylund
October 6, 2008

One of the most exciting growth stocks in the last decade just showed us how much you can lose by sticking to old wives' tales about the stock market.

Let's backtrack a bit, though. Hansen Natural (Nasdaq: HANS) sure knows how to pick its friends. A brand-new 20-year distribution deal with Coca-Cola (NYSE: KO) and its chief bottler, Coca-Cola Enterprises (NYSE: CCE), puts Monster Energy drinks on store shelves in six Western European markets and strengthens the company's shipping infrastructure in Canada and the United States.

The two-year-old deals with Anheuser-Busch (NYSE: BUD) and PepsiCo (NYSE: PEP) are still in place, and you can pretty much assume that wherever you see a bottle of Bud or a can of brand-name cola today, Monster will soon follow. I'd be very surprised if Hansen were satisfied with a paltry six-nation contract in Europe, and Eastern Europe and Asia are still virgin territories for the biggest-selling energy drink in the U.S. This growth story still has a lot of high-octane fruit juice left in its tank.

Back to the market lesson at hand, though. This partnership with Coke and its mini-me has echoed around the rumor mill since mid-September. Hansen's share price got a massive 31% boost in two days on the back of this promising development. Now that we have the facts, there's an instant 10% price drop on the books.

If you bought this stock when you heard the rumors and sold today with the facts in hand, you'd actually be sitting at a loss over the past three weeks. Existing shareholders like yours truly rode these conflicting waves to a 20% gain instead, with a fair chance of making more in the coming weeks, months, and years.

It's a classic example of how trading stocks usually falls far behind the returns you get from investing in great companies. One is a gamble, the other a lifestyle. "Buy on the rumor, sell on the news" would work great if you knew the rumors and the news before the market at large did. But you have the same publicly available information as everyone else, including the big boys with billions of dollars to invest.

Feel free to buy some Hansen shares -- it's a well-managed business with large market opportunities and a hot product or two. Just don't do it according to the rules in the "Wall Street Farmer's Almanac."

Further Foolishness:

A Bullish Rush Continues for Hansen 5 Top Stocks at Half Price The Investing Recipe for Long-Term Success

Defend This Crashing Market

By Colleen Paulson
October 6, 2008

It's tough not to be a Monday-morning quarterback these days. I try not to look at how much my investments have lost, because I know that I'm investing for the long term and I won't be retiring for awhile. Still, it would be nice to make some money for a change. Or at least think that my portfolio has the potential to make money sometime soon.

To call this a frenzied month for the market would be an understatement. Investors looking for the long-ball touchdown pass certainly aren't scoring. As a Pittsburgh Steelers fan, I'm all about defense. And right now, the defensive plays of the market look attractive.

No Hail Mary here
That's why I became a shareholder of Procter & Gamble (NYSE: PG) after working for the company for several years. While the S&P has struggled for gains in the last 10 years, P&G stock is up almost 80%, with a steady dividend throughout. Not bad for a defensive play, eh?

Strong companies that don't heavily rely on the cyclical nature of consumers, like Procter & Gamble, are great plays that can both protect and grow portfolios. These aren't reactive plays, but solid investments across sectors like health care and consumer products. These stocks can bolster your holdings -- and keep you from going completely nuts while the rest of the market is fluctuating.

Healthy gains ahead for UnitedHealth?
Like the Motley Fool CAPS community who rates the company a full five stars, I've kept UnitedHealth Group (NYSE: UNH) on my radar screen for some time. I'm particularly interested now that the stock is down almost 60% from its 52-week high, with health insurance stocks being hit hard after AIG 's (NYSE: AIG) fall.

But just because a stock is cheap doesn't make it a great pick, even if it offers a product that people will need no matter what happens next with the economy. UnitedHealth has delivered a five-year annualized revenue growth rate near 25%, and an EPS gain of more than 20%. And while the company hasn't delivered these kinds of numbers lately, UnitedHealth is positioning itself for a turnaround by raising premiums and cutting jobs. The company will be announcing earnings later this month, so it's definitely worth watching to see whether these changes will help its bottom line.

Food for thought?
It's no secret that food giants like Heinz (NYSE: HNZ), Kraft (NYSE: KFT), and General Mills (NYSE: GIS) are doing great, even in today's inflation-driven environment. These companies have delivered strong increases in revenue even with increasing commodity costs, which has been no small feat.

But there are so many more reasons why these foodies can add some real comfort to your portfolio. S&P studies have shown that these consumer staples and the like have outperformed the market by up to 90% in times of recession. Even better for these companies, though, is the declining price for commodities like corn, which has fallen from nearly $8 per bushel in July to $4.55 at the end of September. That's not great news for farmers, but it's definitely good for food producers looking to pad their profits. Combine this with a growing trend of people eating in to save cash, and the future looks bright for these companies.

Blitzing on first down
Sometimes your defense has to get a little aggressive, so this last pick lets you blitz on first down to change things up. Near its 52-week low, United Technologies (NYSE: UTX) is selling at a P/E of just 11.8. This conglomerate manufactures a diverse portfolio of industrial products, including elevators, heating and cooling units, and aerospace products. Its exposure across numerous sectors means that investors like you aren't isolated to one industrial area.

As far as growth is concerned, United Technologies has trounced the competition, with five-year annualized top- and bottom-line growth rates of nearly 15% each. United Technologies carries much less debt than its competitors, with a long-term debt-to-equity ratio of 0.37 versus the industry average of 2.04, positioning it well in this credit crunch. The company is continuing to deliver strong results in spite of declines across the housing market and elsewhere, projecting double-digit earnings EPS growth for the year.

In these times, keeping it simple is some of the best advice investors can get. By investing in strong, blue-chip companies, you can protect your portfolio even when the Dow falls below 10,000, as it has this morning. I just need to keep reminding myself not to look at how much I've lost, and to think instead about what I have to gain by being defensive.

Make a play for further Foolishness:

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4-Star Stocks Poised to Pop: Siemens

By Brian D. Pacampara
October 6, 2008

Based on the aggregated intelligence of 115,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, German industrial giant Siemens AG (NYSE: SI) has earned a respected four-star ranking. While five-star stocks have been the best performers, our data has shown that four-star stocks still outshine the market by a significant margin and shouldn't be taken lightly; conversely, low-rated stocks have woefully lagged the market average.

With that in mind, let's take a closer look at Siemens' business, and see what CAPS investors are saying about the stock right now.

Siemens facts

Headquarters (Founded)

Munich, Germany (1847)

Market Cap

$65.95 billion

Industry

Industrial Conglomerates

TTM Revenue

$104.98 billion

Management

CEO Peter Loescher (since 2007)
CFO Joe Kaeser (since 2006)

Return on Equity (average last three years)

10.93%

Competitors

General Electric (NYSE: GE)
ABB (NYSE: ABB)

CAPS members bullish on SI also bullish on

Apple (Nasdaq: AAPL)
Johnson & Johnson (NYSE: JNJ)

CAPS members bearish on SI also bearish on

Research In Motion (Nasdaq: RIMM)
General Motors (NYSE: GM)

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS. TTM = trailing 12 months.

Over on CAPS, fully 528 of 553 of the All-Star members who have rated Siemens -- some 95% -- believe the stock will outperform the S&P 500 going forward. These Foolish bulls include kshepheard and Schmacko.

Last month, kshepheard had a few simple things to say about Siemens: "Solid fundamentals...when world economies pick up this stock will be part of that climb. good buying opportunity here..."

An earlier pitch from Schmacko in June shares that sentiment, highlighting the stock's sliding price (which has since dropped even further) as an overseas bargain opportunity:

A German version of GE. I like engineering and infrastructure plays and I tend to like foreign stocks/stocks with a lot of international exposure. This is a german blue chip that seems to be bouncing off of 52 week lows amid some controversy over corrupt/scandalous management. Hooray! They also apparently make devices that help cancer patients.

What do you think about Siemens, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 115,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

The Next Bear Stearns

By Rich Greifner
October 6, 2008

On Monday, March 10, shares of Bear Stearns declined 11% on rumors of a potential liquidity crisis. CEO Alan Schwartz maintained that "Bear Stearns' balance sheet, liquidity, and capital remain strong." Former CEO and current Bear board member Alan "Ace" Greenberg dismissed the liquidity rumors as "totally ridiculous." The stock closed that day at $62.30.

You know what happened next.

On Sunday, March 16, JPMorgan Chase struck a deal to buy the beleaguered investment bank -- for $2 a share. JPMorgan subsequently raised its offer and ultimately bought out Bear for $9.35 per share.

This startling chain of events has caused investors to ask three questions:

Good questions, Ace
To the first question: No. After all, if British businessman Joe Lewis, who steadily bought Bear shares through the end of 2007, couldn't have seen this coming, the odds weren't good for us. The Bear Stearns blowup seems obvious in hindsight, but it came as a shock at the time. This was a powerful, experienced company that consistently ranked as one of Fortune's most admired companies.

We knew Bear was in trouble as early as last summer, when two of its hedge funds blew up. But few investors, if any, foresaw such a cataclysmic collapse. Many seasoned veterans were left holding the bag -- including Lewis, Bear's largest shareholder, who watched nearly half of his $2.5 billion fortune disappear overnight.

Avoiding another Bear
Brace yourself for some bad news: There's another Bear Stearns out there. You may already own it. And just as with Bear Stearns, chances are you won't see the collapse coming until it's too late.

Fortunately, there are several steps you can take to protect your portfolio against another Bear attack, or at least limit the damage if it does occur.

There's no shame in having a "too hard" pile
Warren Buffett and Charlie Munger are presented with thousands of potential investments each year, but according to Munger, they "put almost all in the 'too hard' pile and sift through a few easy" investment opportunities. This cautious approach certainly hasn't hurt the dynamic duo's returns -- and it shielded them from exposure to the Internet bubble.

If you can't explain, clearly and concisely, how a company makes money, or if you don't have a good grasp on industry dynamics and key risk factors, that company probably belongs in your "too hard" pile. No matter how cheap JA Solar (Nasdaq: JASO), Energy Conversion Devices (Nasdaq: ENER), or Altera (Nasdaq: ALTR) become, they'll never occupy a spot in my portfolio; these companies and industries are simply too tough for me to wrap my head around.

If you insist on buying complicated companies with highly uncertain futures, such as Allied Capital (NYSE: ALD), ExpressJet (NYSE: XJT), or Idearc (NYSE: IAR), limit your exposure to a small percentage of your portfolio -- no more than 10% should go toward the entire group -- and be prepared to kiss that money goodbye.

An inside job
In addition to a simple, easy-to-understand business model, you should also look for quality, shareholder-friendly management. When analyzing a company's management team, Motley Fool co-founder Tom Gardner always asks: "Would I want the CEO babysitting my kids? Would I want the CFO managing my portfolio?"

You may not have the same access to senior management that Tom does, but you can get a sense of the chief officers' trustworthiness by reading annual reports and listening to conference calls. Does management tend to gloss over bad results and make excuses, or does it own up to mistakes?

Apple CEO Steve Jobs' passion for his company's products is absolutely infectious. Much of the credit for Apple's resurgence can be attributed to his leadership. Even better, Jobs has a significant chunk of his net worth invested in the company. This signals that his incentives are aligned with those of shareholders. The same is true for Vasco Data Systems (Nasdaq: VDSI) CEO Ken Hunt, who owns about 25% of the company's shares. It's not foolproof, but the absence of any such executive incentives should give you pause.

Diversify, diversify, diversify!
Finally, let Joe Lewis' misfortune serve as a warning. A diversified portfolio can withstand the brunt of a Bear Stearns or two -- a concentrated portfolio cannot. Tom recommends that investors hold a minimum of a dozen stocks, preferably spread across numerous industries. Of course, the appropriate number of stocks will vary depending on an investor's experience and risk tolerance, but as a general rule, if the performance of any single position is keeping you up at night, your portfolio is not sufficiently diversified.

At Motley Fool Stock Advisor, Tom and his brother David Gardner have suffered a few Bear Stearns-style blowups over the past five years (cough Krispy Kreme cough). But thanks to their diversified collection of great companies, the Fool co-founders have produced average returns of 18% per pick, versus a loss of 12% for the S&P 500. To see all of Tom and David's recommendations, as well as their best buys for new money now, click here to join us for a 30-day free trial.

This article was originally published May 5, 2008. It has been updated.

Rich Greifner's "too hard" pile also includes "Through the Fire and Flames" on expert difficulty. Rich does not own shares of any company mentioned in this article. Apple and Vasco are Motley Fool Stock Advisor selections. JPMorgan Chase is an Income Investor choice. The Fool has a disclosure policy.

McCain and Obama's Infinite Playlist

By Rick Aristotle Munarriz
October 6, 2008

The presidential election is bound to get intense in its final few weeks. Desperate marketing campaigns will take a turn for the vicious. The candidates will go for the jugular, singling out the inherent differences in each White House hopeful's policies.

However, they have more in common than the inevitable round of negative ads would seem to suggest. Friday's $700 billion cowardly bailout? They were both for it, my friend.

It certainly seemed like a noble cause a week ago. Financial markets were teetering. Something needed to be done. However, now that the market tanked on Friday following its passing -- and the overseas rumbling and tumbling that followed over the weekend -- one has to wonder if supporting the costly bailout is something that will look good on either candidate's resume.

John McCain and Barack Obama have clearly different ideologies. They aren't all that different than the Nick and Norah characters in Sony 's (NYSE: SNE) Nick & Norah's Infinite Playlist that opened over the weekend. In the movie, the two teens overcome their initial disagreements in the mad pursuit of a single goal: to decipher the cryptic underground location of a Where's Fluffy concert. The presidential wannabes are united, unwillingly perhaps, in the mad dash to get the credit markets rocking again.

The rub, of course, is that the "Wall Street greed" that both candidates seem to want to control is running amok as a direct result of the government's belly-flop into the financial markets.

You don't need to look any further than Friday's bizarre Wachovia (NYSE: WB) love triangle for proof. Citigroup (NYSE: C) thought it had landed a sweet deal to acquire the troubled company's banking operations for roughly $2 billion in stock, with Federal Reserve support as the cherry on top.

Along comes Wells Fargo (NYSE: WFC), hungry for Wachovia's East Coast presence, offering to buy all of Wachovia in a $15 billion deal, without the government's risk-reducing assistance.

A no-brainer? Not so fast. Citigroup isn't going down quietly. It is arguing that it had exclusivity to steal Wachovia's banks. How insane is that? How sick is it that the government is such a lousy matchmaker that it's settling for less in its lousy hookups? This isn't too far from the JPMorgan Chase (NYSE: JPM) deal where Bear Stearns got bailed out at $2 a share, before shareowners clamored for JPMorgan to up its offer fivefold.

Forcing the government to play Cupid as a way out of this mess is a dreadful mistake. It's no Chuck Woolery. It's more chuck and wool. In Wells Fargo, you have free markets at play. In Citigroup, you have the failure of regulators stepping in with arranged weddings and the arrogant greed it fuels. Do McCain and Obama realize what they are empowering? Leave the matchmaking to Hollywood. At least there it's just 90 minutes and a pricey tub of popcorn that gets squandered.

Where's Fluffy? Everywhere, unfortunately.

Some of Friday's related headlines:

Congress Falls Short of Low Expectations Bailout: It's On Fool Poll: The Fight for Wachovia

Even Netflix Sings the Blues

By Rick Aristotle Munarriz
October 6, 2008

So much for the theory that Netflix (Nasdaq: NFLX) is built to weather the economic maelstrom.

The DVD-rental giant lowered its subscriber and revenue targets this morning. It's feeling the pinch as even consumers who decide to stay home fail to pounce on the company's value proposition of movies delivered by mail or streamed digitally.

Netflix closed out the third quarter with 8.672 million subscribers, just shy of its original target of 8.675 million and 8.875 million members.

Burn after reading
Netflix is still growing, thankfully. A tally of 8.672 million accounts is still 23% more than the company boasted a year ago. Despite the slowdown, particularly during the month of August, Netflix is on track to hit its original revenue and profit targets for the third quarter.

Unfortunately, the current quarter is a different story. Netflix is talking down its subscriber and revenue growth expectations, while keeping its net income guidance intact.

Netflix now projects that it will close out the year with 8.95 million to 9.25 million flick-loving subscribers. Its more ambitious earlier outlook called for the company to end 2008 with as many as 9.7 million members.

Where have all the people gone?

Ghost town
Netflix is a survivor. It outlasted the threat of Amazon.com 's (Nasdaq: AMZN) foray into the DVD rental market. It got Blockbuster (NYSE: BBI) to blink first in its mail-based pricing war.

Its push for Web streaming -- a move that now finds Netflix subscribers with access to thousands of on-demand titles through their computers, branded set-top boxes, LG electronics, and eventually Microsoft 's (Nasdaq: MSFT) Xbox 360 consoles -- is also paying off. You don't hear a lot from the premium digital video-downloading sites like Amazon, do you?

So what's going on here? If the whole "staycation" movement has any merit, one would expect Netflix to be the cornerstone of the home theater. Couch potatoes would rejoice over the availability of unlimited DVD rentals for as little as $8.99 a month (under the "1-at-a-time" plan). That's a fraction of their cable bills or gym memberships, and even less than the satellite radio fees they may be paying to Sirius XM Radio (Nasdaq: SIRI), especially now that they're not driving around so much.

And have you been to a multiplex lately? $8.99 is less than most cinemas are charging for a single prime-time ticket these days.

How to lose friends and alienate people
Most investors may not be worried by these minor guidance markdowns. The company is reaffirming its profitability projections for the third and fourth quarters.

But I'm not so optimistic, even though I'm a Netflix shareholder. Companies like Netflix, Sirius XM, and TiVo (Nasdaq: TIVO) spend plenty to acquire new subscribers. Decelerating growth has had a favorable near-term impact on these companies' bottom lines: Losses have narrowed in satellite radio, while TiVo has posted back-to-back profitable quarters. That may look like welcome improvement on the income statement, but I would rather see subscriber-based companies scaling quickly.

Of course, that assumes the company is lowering its subscriber targets because it's having more trouble recruiting new members. If the net subscriber tally is shrinking because of greater-than-expected member cancellations, Netflix has even bigger problems to tackle.

The move toward digital streaming isn't cheap. Since the company isn't charging its customers extra for the service, it shouldered those chunky bandwidth costs and studio royalties to help retain subscribers. Digital cable giants like Comcast (Nasdaq: CMCSA) may give away some of their pay-per-view offerings, but their model -- like Amazon and iTunes -- revolves around premium offerings.

Netflix's smorgasbord model makes it a standout. It's a great value, but where are the people?

Sure, missing the low-end of its third-quarter headcount by 30,000 doesn't seem like much of a problem. It's less than half of a football stadium. How

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