by Marc Lichtenfeld, Advisory Panelist

There seems to be a breakdown in decorum lately. A few very public examples:

• Congressman Joe Wilson (R-SC) yells out, “You lie!” at President Barack Obama while he’s addressing Congress about his healthcare reform plan.
• Tennis star Serena Williams threatens to shove a “bleeping” ball down the “bleeping” throat of a tennis official when a call went against her.
• Rapper Kanye West rips the microphone out of a 19-year-old award winner’s hands and proceeds to tell the audience that someone else was more deserving.

Moronic behavior, for sure. And of course, all three have issued apologies. But if you believe that there’s no such thing as negative press, all three have grabbed some free publicity. Wilson received over $1 million in campaign contributions after his outburst.

But what do these situations have to do with investing?

Investing Lessons Learned From Loudmouths

All three of these loudmouths have come under heavy criticism for their outbursts – and rightly so. And while the media whips itself into a frenzy over the stories, we can actually learn investing lessons from them…

• Joe Wilson: President Barack Obama is essentially America’s CEO. In the same way as it’s his mandate to run the country efficiently, corporate CEOs are charged with running their companies and making their share prices rise.

I’ve been on the other end of phone calls when a CEO told me that my earnings or sales estimates were too high. Not because they couldn’t match them (often they were very close to the company’s real internal estimates), but because they wanted to beat them.

Many analysts tend to follow CEOs like sheep. They fail to uncover or expose any flaws in their arguments, for fear of hurting the CEO’s feelings and costing their company investment banking business.

The lesson: Read between the lines when CEOs speak. And if you feel they’re fudging or waffling, don’t be afraid to call them out (although not in a Joe Wilson-type of way). Remember, it’s your money on the line, so if you don’t agree with what you’re hearing, let your cash do the talking and put it somewhere else.

• Serena Williams: While I don’t condone shoving “bleeping” tennis balls down anyone’s “bleeping” throat (unless it’s Joe Wilson’s or Kanye West’s), some situations call for aggressive action.

The lesson: There is such a thing as analysis paralysis. Do your homework and be thorough, but don’t sit on your hands and go through all the “what if” scenarios for too long. Be proactive. And when the opportunity exists, grab some profits.

• Kanye West: Whether his opinion was right or wrong doesn’t matter. The point here is to recognize who might be more deserving of your investment dollars.

The lesson: Just because analysts and other investors think a stock is the greatest thing since spray-on hair doesn’t mean it is. Invest in companies that you know are better poised for success, no matter what anyone else says.

The latter point speaks to a crucial philosophy that I’ve cultivated over the years…

The Value of Being a Contrarian Investor

Having been trained by two of the best “against the grain” analysts, I can’t say enough about how important it is to be a contrarian investor.

You’re not in the markets to follow the crowd, make anyone happy, or do anyone a favor. You’re in it to make money. Period. If you want to be nice, buy someone a gift with your profits, donate it, lend it, etc. But the goal of investing should be to make money… plain and simple.

And history has repeatedly shown that you stand a better chance of claiming the biggest profits when you have the courage to steer away from the masses and go for the lesser-known names. Companies that nobody is talking about, but are stacked with potential anyway.

I’ve built my career on these principals. I take the words of CEOs with hefty grains of salt, rarely listen to analysts, do my own research. And when there’s an opportunity for profits in the market, I grab it.

Fact is, I’m not the only one. At Investment U, we have several analysts who aren’t afraid to go it alone. For example…

• This summer, as the masses were still falling over themselves to buy Chinese stocks, Lou Basenese suggested going short. That was right before the Shanghai Index fell off a cliff.
• At the height of the financial panic last February, when people were fleeing from the market and stocking up on guns and canned goods instead, Karim Rahemtulla recommended buying stocks. The markets are up huge since then.

Both strategies have proved successful – even as some wondered what the heck they were thinking (and told them so!). Bottom line, if you want to bag the best profits, it pays to be contrarian.

Good investing,

Marc Lichtenfeld

P.S. Going against the crowd is downright scary for many investors. After all, it’s tough to be on your own while everyone else heads in another direction. But that doesn’t mean it’s the wrong philosophy… far from it. At the Xcelerated Profits Report, both Karim and I regularly look for opportunities that nobody else has on their radar – and sometimes even hate completely! Right now, we’re tracking the developments of a little-known small-cap firm with technology that is set to trigger a $678 billion market. Click here for more details.

The Investment U News Tracker:

• American Airlines Cashes in Its Air Miles:

In the midst of the worst downturn to hit the airline industry, AMR Corp (NYSE: AMR), parent company of American Airlines, is cashing in its air miles.

No, it’s not using them for a blowout around-the-world jaunt… it’s raising critical funds to help it weather the ongoing storm. AMR shares shot up by 18% on the news that the firm has raised $2.9 billion in new capital. The company said that $1 billion came from selling its advanced sales of frequent flyer miles to Citigroup (NYSE: C). Good news if you use a Citigroup credit card with air miles rewards.

American could use some of the money to fund an increase in capacity at some U.S. airports, as well as for potentially buying a slice of struggling Japan Airlines.

• Break Out the Real Estate Cheerleaders… Again:

This news got the real-estate cheerleaders waving their pom-poms around frantically. The Commerce Department announced this morning that construction of new homes climbed by 1.5% in August – the fastest rate since November 2008. Driving the gain was a 25% surge in multiple-family homes (like apartment buildings).

Of course, the media wheeled out a procession of economists, keen to boldly declare that this news means the U.S. economy is out of recession and on the road to recovery.

Back the diggers up, boys. The multiple-family area suffered a 15.2% plunge in July, so a rebound wasn’t entirely unexpected. In addition, construction of large single-family homes dropped for the first time in six months. And Paul Dales, economist at Capital Economics, notes that housing starts are still 74% below their 2006 peak. Besides, the excess inventory of unsold homes and those in foreclosure is still a major obstacle to a full recovery.

We’ve written in detail on the current state of the U.S. real estate market recently. Check out our articles on why you should be suspicious of the headline figures, why the market isn’t rebounding, and why housing prices will continue to drop.

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by Marc Lichtenfeld, Advisory Panelist
Thursday, September 10, 2009: Issue #1089

You ready for a good ol’ 1960s rock n’ roll flashback, courtesy of four lads from Liverpool?

Amid a buzz of publicity, yesterday was the day that many Beatles fans had eagerly waited for, with the release of a new video game in the band’s name – “The Beatles: Rock Band.”

If you’re not familiar with the “Rock Band” concept, it’s a bit like karaoke, except you play music in addition to singing. Gamers follow along with their favorite musicians/songs, using an electronic drum kit and guitar, and sing the songs, too.

The game is enormously popular, having generated over $1 billion in revenue. And gamers can download individual songs, albums, or catalogs of groups like AC/DC, The Who and The Grateful Dead. So far, they’ve paid for and downloaded over 40 million songs…

Both Paul McCartney and Ringo Starr were part of the creative process and have endorsed the game in the ensuing media hype that developed.

But what about you and me? Well, while we might never be as wealthy as the “Fab 4,” perhaps we can profit from a new wave of Beatle Mania.

These “Fab Four” Stocks Are Set for a “Beatle Boost”

Let’s take a look at four companies that could make big bucks off the The Beatle’s Rock Band release…

• Viacom (NYSE: VIA.B): This firm should be the biggest beneficiary of the game’s success. Its MTV unit owns Harmonix Music Systems, the creator of “Guitar Hero” and several “Rock Band” titles, including “The Beatles.”

Viacom also owns cable TV staples such as Comedy Central, VH1, Nickelodeon and CMT. In addition, it produces and distributes movies through its Paramount Pictures division.

However, Wall Street likes Viacom about as much as conservatives liked Paul, John, George and Ringo’s mop-top haircuts in the 1960s. Analysts currently have eight “Buy” recommendations on the stock, 17 “Holds” and eight “Sell” ratings.

Keep in mind that most analysts rate stocks as “Buy.” A “Hold” essentially means sell, while an outright “Sell” rating means “this stock is so bad, even we don’t want the firm’s investment banking business.”

And note that Wall Street analysts have a horrendous track record when it comes to rating stocks.

So given my contrarian nature, I like stocks that have lots of “Hold” and “Sell” ratings, since analysts are often behind the curve and afraid to go against the grain. When a company turns around, they’re then forced to upgrade the stock and that often leads to gains in the share price.

And as for Viacom, the future doesn’t look as bad as they portray it. The company is expected to earn $2.05 per share in 2009, followed by a nearly 10% increase to $2.25 next year. In 2011, Wall Street projects earnings of $2.61.

The stock trades at just 12 times this year’s expected earnings, 11 times next year’s and just 1.1 times its trailing 12-month sales.

Viacom shares seem cheap. And if the game sells as well as I believe it will, shareholders will reap the reward.

• Sony Corporation (NYSE: SNE): Sony owns partial rights to The Beatles’ music catalog. That means every time a Beatles record is purchased, a song is downloaded, or a tune is played on the radio, Sony rings the register. The rights are held by Sony/ATV Publishing, a joint venture between Sony and Michael Jackson’s estate.

Of course, Sony has other businesses, too, aside from waiting for oldies radio stations to play Yellow Submarine…

It makes the ever-popular PlayStation video game consoles, on which users can play “The Beatles: Rock Band” (in addition to Microsoft’s X-Box and Nintendo’s Wii systems). Sony also makes a mass of other electronic equipment and is in the television and movie businesses.

Wall Street isn’t exactly enamored with the company at the moment. There are 12 “Buy” recommendations against 10 “Holds” and one “Sell.”

After a series of missteps, Sony isn’t expected to be profitable this year or next. But it does boast a strong film division and restructuring could result in its weak stock price rebounding.

• Electronic Arts (Nasdaq: ERTS): The company is the publisher of “The Beatles: Rock Band.” Like Viacom and Sony, Wall Street thinks it’s also going to be a Hard Day’s Night for ERTS. There are 14 analysts who believe the stock is a “Buy,” while 15 say, “Hold” and three have a “Sell” verdict.

In the face of stiff competition and few exciting new titles, Electronic Arts is expected to lose 30 cents per share this year. But in 2010, the books are expected to turn into the black, with the company projected to earn 97 cents per share, rising to $1.27 in 2011. In addition, it has over $2 billion in cash and no debt, and enjoyed recent success with its EA Sports Active.

The stock has suffered a beating, but has thus far failed to mount much of a rally, unlike many others who also took a hit in the downturn.

But should “The Beatles” and other games help turn things around, Electronic Arts might wind up being a great contrarian play.

• Gamestop (NYSE: GME): If you have a teenager, chances are they already spend Eight Days A Week browsing and playing games at Gamestop, a leading video game retailer in the United States, Europe, Canada and Australia.

The firm should benefit from increased consumer traffic related to purchases of “The Beatles,” plus a host of other games and accessories that it sells.

In contrast to the other three companies, Gamestop is much more popular, with analysts in giving it 14 “Buy” ratings and just two “Holds.” While earnings growth isn’t exactly stellar – EPS is estimated at $2.40 this year and $2.55 next year – the stock is cheap at 10 times this year’s EPS.

If you want to talk “best of breed” in the video game retailing world, Gamestop is it. Gamers can sell back or trade their games at Gamestop for other titles, which gives the company an advantage over retailers like Amazon.com (Nasdaq: AMZN) and eBay (Nasdaq: EBAY). Plus, in addition to browsing the store, gamers can test-drive the games on the demo consoles and talk with employees, who are usually gaming enthusiasts, too.

Gamestop is gaining market share and is cheap enough to buy at current levels. If the upcoming holiday season is particularly strong, look for it to beat estimates and send share prices higher.

These four stocks have the potential to generate significant gains and put money in our pockets. And I hope we manage to make gobs of it. Just remember, money Can’t Buy Me Love.

Marc Lichtenfeld

Editor’s Note: Despite the slide for Electronic Arts shares over the past year, Xcelerated Profits Report readers have cashed in regardless. They’ve done so through a simple, yet powerful strategy where they sold call options against the underlying stock position, thus reducing the price paid for the shares and increasing the upside. It’s the perfect technique to use in a volatile market – and is proof that you can profit in any climate. Find out how you can join the Xcelerated Profits Report team here.

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by Marc Lichtenfeld, Advisory Panelist
Thursday, September 3, 2009: Issue #1083

“You think they’re your friends, but they’re not your friends.”

This was the frequent refrain from a landlord I had while in college. He was warning us on the danger of throwing parties and inviting people who we considered friends, but would think nothing of trashing the place.

I guess it’s not surprising that renting his house to college kids made him a little paranoid. He often showed up at random times to make sure there was no revelry taking place. Once, he chased away some of my buddies as we were watching “Monday Night Football” (I guess the keg in the corner didn’t help our argument).

This no-nonsense, unattached attitude is the perfect way to approach the stock market and your investments. After all, most investors have had stocks that we thought were our friends, but that ultimately turned on us and caused pain.

The trick is to not become emotionally attached to them.

This is easier said than done, so if you find yourself hanging onto stocks for too long, or investing more with hope and emotion than sound reasoning, allow me to give you some tips…

When it Comes to Emotions, Adopt DeNiro’s “Heat Mentality”

I was fortunate that my stock market education started at a trading desk, where we executed trades according to how the market and stocks were performing. Period. Nobody cared if the stock had a low P/E ratio… whether the company had the next great biotech drug… or was run by a terrific management team.

To us, stocks merely represented three or four letter symbols. That’s it. In some cases, I didn’t even know the names of the companies and couldn’t have told you much about their businesses.

Sounds a bit clinical, doesn’t it?

It was. And it served me well. I learned that you shouldn’t get emotional about stocks. They’re simply investment vehicles in which to park your money. Granted, you can be in a stock for five minutes or 20 years, but you should never form a relationship with them.

As Robert De Niro’s character said in the movie, “Heat”: “Don’t allow yourself to get attached to anything you cannot walk away from in 30 seconds flat if you feel the heat around the corner.”

Think about it. Many of us have owned a favorite stock – perhaps for years. Oftentimes, the longer you hold it, the more difficult it can become to sell it – even when you know you should.

We form an emotional attachment to the business that often has nothing to do with how the stock is performing – or how much money we’re losing from it.

This can be an issue, particularly in the biotech and health care spaces …

It’s Easy to Form Emotional Attachments to Early-Stage Companies

One of the key price catalysts for a biotech or health care company is when a medical advancement is made. For example, a new cancer drug is approved, a company sees strong clinical trial results, etc.

Not only are we happy that our investment is worth more, but we also feel good about being involved with a company that saves lives or alleviates suffering.

For that reason, some investors form particularly emotional relationships with early-stage companies that show great promise.

In The Xcelerated Profits Report, I recommended Medivation (Nasdaq: MDVN). The company is currently developing one of the most promising drugs to combat Alzheimer’s Disease – Dimebon.

When I made the recommendation in August 2007, I believed Dimebon would work and that the potential reward was worth the risk. Aside from the human issues surrounding Alzheimer’s, it was strictly a financial decision. And if the drug is successful or not, the decision to recommend selling the shares will be made for financial decisions only.

You Must Separate Emotion From Reality

That said, I’ll be terribly disappointed if the drug is a dud. Not only for my subscribers, but also for millions of Alzheimer’s patients and their families. The disease runs in my family, so it’s especially personal.

However, I won’t let those emotions get in the way of taking a profit or cutting a loss. If it doesn’t work I’m not going to hang on to hope, looking for some morsel of data that justifies holding onto the stock. The bottom line is that if the drug isn’t proven to be safe and effective, I don’t want to own the stock anymore.

Biotech investors often tell me that they can’t/won’t sell a stock because they’ve become emotionally invested, as well as financially. This isn’t surprising -dreams of riches and a better world are wrapped up in these tiny companies.

But you simply cannot allow that to happen, otherwise you risk taking a double hit if things don’t pan out in your favor.

So how can you remove emotion from the equation if you’re not using a stop? Fight emotion with emotion.

Three Ways to Take the Emotions Out of Your Investment Decisions

#1: Write Down Your Reasons:

When you buy a stock, write down the reasons why you’d sell and post it somewhere near your computer. Perhaps it’s when the stock hits a certain price, or when news on a particular drug comes out.

Whatever the reason is, write it down on paper and stick it in a visible place. That way, when your catalyst hits, it will be tougher for you to justify to yourself why you’re going against your original idea.

#2: Phone a Friend:

This doesn’t just work for “Who Wants to Be a Millionaire.” Telling a friend or family member your reasons for selling a stock is even better than writing the reasons down for yourself.

After all, you’ll face some serious peer pressure if you suddenly change your mind and refuse to take profits or cut a loss. Outsiders aren’t as emotionally involved as you because it’s not their money on the line, so they should be able to make you see that your original reasons are still right.

#3: Conduct an Annual Portfolio Review:

Review your portfolio at least once a year. Take a look at every stock and ask yourself why you’re still holding it. If your answer sounds more like a justification than a legitimate reason, dump it.

Any time there is money involved, emotions run high. Of course, it’s easier to get less attached to stocks in other sectors. For example, many investors have no problem letting industrial stocks go when their trailing stops are triggered.

But it’s your job to remove as much of it as you can and focus on decisions that will benefit your portfolio.

Marc Lichtenfeld

P.S: Letting emotions get in the way of your buy and sell decisions is a “two steps forward, one step back” approach to investing that is likely to hold you back from maximizing your profits. Instead, always base your decisions on sound reasoning, coupled with the powerful strategies that will help you beat the market – and the crowd. The Xcelerated Profits Report will give you both, as well as taking the emotion out of the decision-making process by telling you exactly what to buy and sell – and when. For more details, take a look at this report.

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by Marc Lichtenfeld, Advisory Panelist
Friday, August 28, 2009: Issue #1078

How do I know if I’m doing a good job for my readers and subscribers?

Simple. The stock market tells me every single day.

I’m not someone who needs a pat on the back to feel good about my work.. However, even I’ll admit it’s nice to have my judgment validated – especially when it comes from a well-respected source like Barron’s.

That’s what happened last Saturday when the 88-year publication published a story about the small-cap healthcare stock Electro-Optical Sciences (Nasdaq: MELA). As a result, shares soared 19% on Monday.

What’s more, the author, Neil Martin, expects the stock to tack on an additional 50%, as the company’s melanoma detection device is expected to gain FDA approval and become a big hit with physicians and patients.

I couldn’t agree more. In fact, I came to the same conclusion about 18 months ago when I first recommended the stock to subscribers of my small-cap healthcare service Access. Most subscribers got in at $5.50 or below. Some even reported buying in the $3 range.

Today, the stock is trading around $9.50.

Question is: How do you find these small-cap winners – particularly in the minefield-laden healthcare and biotech sectors? Here’s the tried-and-tested method I use…

Unearthing Small-Cap Healthcare Stocks Isn’t Easy…

Unearthing mega winning small-cap healthcare stocks isn’t easy. It’s certainly not a case of just looking at a chart or some magical signal that tells me it’s time to get in. For me, it’s a multi-level process that is fairly time-intensive.

You see, I learned how to analyze stocks from two of the greatest contrarian analysts on Wall Street. Guys who demanded the best and didn’t accept anything less.

First, I had to pass rigorous exams. Then it was trial by fire. I had to sell my idea to my boss before I was even allowed to begin conducting formal research on company time.

If it wasn’t sufficiently contrarian or well below Wall Street’s radar, he’d shoot me down.

And believe me, I was shot down more times than a drunken frat boy in a room full of supermodels.

But the rejection served me well. It forced me to create a stock research methodology that would not only satisfy my boss, but also prove profitable for folks who took my advice. It’s the same process I use today to pick stocks for Access and The Xcelerated Profits Report.

It’s called the F.I.R.S.T. system. Here’s how it works…

Breaking Down the 5-Step Process of the F.I.R.S.T. System

F.I.R.S.T. is an acronym for a five-step process that ensures I cover absolutely everything before I get a recommendation out to the public.

• Financials: This is the first step. I check everything from how much cash a company has at the moment, to how much it will need in order to fund its pipeline products and operations. Before a company is even worthy of making it to the next steps, it has to pass my financial model, which estimates revenue, earnings, market size, market share, margins and a host of other variables to determine whether the potential growth will be good enough.
• Interviews: If the numbers tell me it’s a good opportunity, I move onto the interview phase. But I don’t just talk to the company’s CEO and CFO, I talk to doctors who are using the product, plus others who aren’t. I get on the phone with specialists in the field, independent experts, the warehouse foreman – anyone who can give me on-the-ground insight into the company’s performance and prospects.
• Research: If I still like what I hear, then I dig into the hardcore step – roll up your sleeves, burn the midnight oil research. I read scientific papers, journals, news articles and even blogs to establish whether the company’s products will be successful.
• Safety: Both from an investment and human interest standpoint, this is the most important step. Drug/device safety is critical. Even when drugs have successfully treated diseases, I’ve seen the FDA reject them because they couldn’t be proved safe enough. The FDA is very conservative right now and we don’t want to be in any positions where there is even a question of safety, no matter how well the drug works.
• Timing: From an investment perspective, once I know that I like a company, all that remains is a reason to invest now. I search for the catalysts that will move the stock in the next six to 12 months. At the moment, I’ve got plenty of companies on the backburner because even though I like them, investing in the shares now would be dead money for another year.

A Deeply Contrarian Investing Approach Is Critical

As I noted above, my investing experience is rooted in a deeply contrarian approach. Finding stocks that you won’t hear about anywhere else is a critical aspect of my stockpicking methodology.

For example, virtually no one was talking about MELA last year. I’ve recommended several other stocks that are also practically unknown to Wall Street. This includes a swine flu play, a bioterror therapeutic stock and two little device companies that are poised to take market share from the big boys – which should result in significant earnings growth or a buyout (or perhaps both).

When it comes to investing in small-cap stocks, conducting thorough research becomes even more critical. You really need to roll up your sleeves and put in the work because in most cases, you won’t read about them in Barron’s, see them on CNBC, or hear about them from an analyst until much later in the company’s development. And by the time everyone else notices them, we’re already sitting on nice gains.

Good investing,

Marc Lichtenfeld

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by Marc Lichtenfeld, Advisory Panelist
Friday, August 21, 2009: Issue #1072

Heaven help me… Mrs. L is on a mission.

My house has been turned upside-down, as she prepares to redecorate several rooms. Fortunately for the household, my input is neither required, nor requested.

Undeterred by the recession, the missus has made Pottery Barn her second home. And look for Williams Sonoma’s (NYSE: WSM) earnings to cruise higher next quarter, thanks to her spending there.

Trouble is, when I return home from work, the items I expect to find in their regular spots are gone, replaced by new stuff.

Yesterday, I found my books lined up in the hallway and was asked to donate the ones I don’t want anymore. However, a good chunk of my library consists of investing books, which I like to consult from time to time.

I’m often asked for recommended investment books, and as I transferred the books from the floor to the new bookshelf (excuse me, escritoire), I revisited some of my favorite titles. Here are the ones that I’ve found most valuable in my career…

Let These Authors Propel You Towards Greater Investment Success

Make some room on the bookshelf – because you’ll want to add these investment books to it if you want to increase your chances of investing success…

• Contrarian Investment Strategies – The Next Generation (David Dreman): My colleague Louis Basenese mentioned this in his investing in small-caps column earlier this week. Like my beloved Yankees, Lou has been knocking the cover off the ball, thanks in part to Dreman, who is considered the father of contrarian investing.

As an analyst, I worked at a strictly contrarian research shop. In fact, I wasn’t even allowed to initiate coverage on a company unless it went against the consensus. I trained with two of the greatest contrarians in recent decades. So believe me when I tell you that Dreman’s book is a must read. It shows you how and why contrarian investing works.

• Understanding Wall Street (Jeffrey Little): This is the first book I ever read about investing. It’s terrific for beginners. Written in an easy-to-understand language, it explains what stocks and bonds actually are. If you’re new to investing, I cannot recommend this book enough.
• The Little Book That Beats the Market (Joel Greenblatt): The author is an extremely successful money manager, who shows investors how to beat average market returns with a value investing approach. You can read this in one afternoon, yet it contains as much valuable information as you’d find in most 500-page tomes.
• Get Rich With Options (Lee Lowell): If you want to know how to make money with options, learn from the guy who did it and retired in his 30s. Mt. Vernon Research’s resident commodities specialist, Lee Lowell, shows investors the most profitable strategies and tools to use. The second edition of the book is due out in September.
• One Up on Wall Street (Peter Lynch): This classic teaches investors how to use what they are already familiar with to make money. Lynch takes a long-term outlook as he guides investors through the analysis process of companies that we interact with every day.
• The New Market Wizards (Jack Schwager): Profiles successful traders such as Stanley Druckenmiller, Linda Bradford Raschke and Blair Hull. I like that the traders open up in these interviews, letting readers in on their processes and hearing about their failures just as much as their successes. Schwager does an excellent job of selecting traders in various markets with different trading styles.
• Reminiscences of a Stock Operator (Edwin LeFevre): No investment book list would be complete without this. Originally published in 1923, it’s the marginally fictionalized biography of legendary speculator Jesse Livermore. It’s believed that Livermore actually wrote the book with LeFevre’s help. Livermore walks the reader through his considerable ups and downs. It’s a fascinating tale and a really insightful look back at market speculation in the early 20th century.
• Technical Analysis of the Financial Markets (John Murphy): While technical analysis can sometimes sound very complex, Murphy does a great job explaining the theories and indicators in a simple language. If you ever look at charts, you need to read Murphy’s book first – it’s the bible of technical analysis.
• The Secret of Shelter Island (Alexander Green): Once you’ve read all the investing books and amassed a fortune, The Oxford Club’s Investment Director will illustrate why money is not the most important thing in life. A compilation of his popular Spiritual Wealth essays, Shelter Island provides inspirational, whimsical and sentimental stories that remind the reader what is truly important.

What are some of your favorites? Leave your comments below – I still have space in the escritoire.

Good investing,

Marc Lichtenfeld

P.S. The Investment U Bookstore contains these and a number of other investing books that we consider “must reads” for serious investors. At the very least, if you don’t read these to gain new knowledge, do it to understand what your fellow investors, and Wall Street insiders, are reading. If you’re looking to put these strategies to use, take a look at The Oxford Club.

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Marc Lichtenfeld, Advisory  Panelist
Saturday, August 15, 2009: Issue #1067

If you’ve unfamiliar with my prior columns, you might not know that I focus primarily in the small-cap space – both in my specialist areas of healthcare and biotech and other sectors, too.

Typically, small-cap stocks purchased for capital appreciation and big gains more so than they are sought for dividends income.

But I’m actually a big fan of dividends, and the stability of the income they bring as well.

So is there a way to keep an eye on growth and earn solid, steady income at the same time? Usually, the two don’t go hand-in-hand – especially not in the small-cap sector.

But that doesn’t mean to say that it’s impossible to grab the best of both worlds.

There is a way to load your portfolio with outstanding profit potential and generate income too. Here’s how I found them, and three stocks that are perfectly suited to do the job.

Digging For Dividends

I’m not a market timer so I’m not going to tell you that now is the time to get out of equities before the market turns lower.

But what I will say is that with the Nasdaq and Russell 2000 (small-cap) indexes having blasted off their lows by 58% and 67% respectively, it makes sense to get a bit more defensive.

The reason is two-fold – and very simple: Owning dividend-paying stocks generates income and improves a portfolio’s return over the long-term.

However, it’s hard to find good small-cap companies that pay dividends. Smaller companies usually pour any excess cash back into the business to help it grow, rather than distributing it back to shareholders.

In fact, of more than 7,400 stocks with market caps under $1 billion, only 1,356 pay dividends. And if you want a meaningful dividend yield – let’s say 3% – the number decreases to less than 800.

I further whittled down the list to companies with high current ratios, low debt, and profit expectations to help ensure that dividends would continue to get paid.

I also stayed away from companies that paid a very high dividend. Companies with yields approaching 10% or higher may find those payouts unsustainable if business continues to be difficult.

Yes, if you want a higher potential reward, you do need to take on more risk. But buying stocks with sky-high dividends is riskier than those with solid but more sensible yields.

Here are three of the best from my small-cap dividend stock screen…

A Trio Of Small-Cap Dividend Stocks

• WD-40 Company (Nasdaq: WDFC):

The company makes everyone’s favorite industrial lubricant – WD-40 – plus household cleaners and other products. Through the first nine months of its fiscal year, it generated $18 million in profits and boasts $36 million in cash versus $21 million in debt. Earnings per share are expected to grow 13% in fiscal 2010.

Current dividend yield: 3.4%

• American Ecology Corporation (Nasdaq: ECOL):

The firm handles America’s hazardous waste. Not a great business if you’re the guy with the rubber gloves moving barrels of the stuff. But not bad if you’re an investor – particularly a new one, given that the shares have endured a beating over the past year. ECOL is profitable, has $24 million in cash and no debt. Over the first six months of 2009, it generated $17 million in cash from operations. So far it has paid out over $6 million in the form of dividends.

Current dividend yield: 4%

• CDI Corporation (NYSE: CDI):

The company provides engineering and information technology staffing services. With so many businesses cutting jobs, it’s had a tough time over the past year. But it’s still profitable, with earnings per share expected to nearly double next year. It has $77 million in cash, no debt and generated $10 million in cash from operations.

Current dividend yield 3.6%.

If you have any small-caps paying dividends in your portfolio, use the “Comments” link below to let me know which ones are your favorites and I’ll run a follow-up column, featuring stocks sent in by readers. Be sure to tell me why you like the stocks, too.

Hoping your longs go up and your shorts go down.

Marc Lichtenfeld

Today’s Investment U Crib Sheet

Here are some of the last few articles only found on InvestmentU.com:

• Financials Surge After Paulson Buys

• Economic Data: What Can You Believe?

• The Apple-Google Rivalry Goes Global

• Adding Iron for a Healthy Portfolio

• Fred’s, Inc. (Nasdaq: FRED): Stock of the Day

by Marc Lichtenfeld, Advisory Panelist
Saturday, August 8, 2009: Issue #1061

Editor’s Note: On August 15, we’ll be expanding our expert list to include Karim Rahemtulla, Lee Lowell and healthcare and biotech expert Marc Lichtenfeld. They’ll be joining our current experts in providing you the best investing ideas and investment education every day. Recently, Marc showed his readers how he locks in his profits in hot biotechs. With a number of small caps exploding upwards over the last few weeks, we felt it’s time to revisit this partial profit taking strategy.

So your stock just went way up, now what do you do? We often hear from concerned investors who aren’t sure whether to hold on or sell it all after a huge gain.

For example, I’m used to explosive gains in the biotech world, but I’ve never seen a moonshot quite like this one…

Shares of Vanda Pharmaceuticals (Nasdaq: VNDA) rocketed up by 625% on news that the company’s schizophrenia drug, Fanapt, was FDA-approved. Earlier, the stock had opened at $9.99, having closed at $1.08 per share on Wednesday night – that’s a massive 825% spike.

Even for a biotech veteran like me, a one-day percentage move like this is unprecedented.

When you reel in a big winner, you need to know when to dash off with the money. We recommend investors use trailing stops to help the lock in profits and prevent losses, but there is another strategy you can use when you see one of your holdings take off on you and that is to take partial profits.

Partial Profit Taking Lowers The Inherent Investing Risk

All investing carries inherent risks, even more so when we deal with small-cap stocks and the volatile biotech sector. We want to lower that risk whenever possible. However, that doesn’t mean we avoid risk all together – on the contrary.

It means that any position we enter should have significant upside potential to offset that risk. The more risk… the more profit potential I need to recommend the stock.

Sometimes, good news is already priced into a stock. In the case of Vanda Pharmacueticals, it clearly wasn’t. The reason why VNDA shares were so explosive is because virtually no one expected Fanapt to get the green light.

No doubt some VNDA investors were popping champagne corks, following the small-cap biotech’s liftoff. It’s probably made their year.

Others, however, are still trying to recoup their losses from the stock – even after today’s monumental surge. That’s because two years ago, VNDA was trading around $25.

Many investors who use trailing stops also pull money off the table when they feel a stock has moved up considerably – It could have helped VNDA shareholders two years ago.

Taking some money off the table when you’re up is another way to lock in your gains and “sell high.” Unfortunately, many investors don’t.

The Four Purposes of Partial Profit Taking

I’m a big proponent of partial profit taking on a winning position when appropriate. If a small-cap biotech stock is up significantly, locking in some gains serves four purposes:

• Returns Investment Capital: While remaining in the position, I now have capital to put into other opportunities.

• Helps Weather The Downside: If I still believe in the company and the investment, partial profit taking allows me to give the stock more room to fluctuate, as I’m no longer concerned with losing my original investment. It makes it possible to loosen up my trailing stops.

• Participate In Upside: Having secured my original investment, I can now allow my winners to run. That’s where truly large gains happen.

• Removes Emotion from your Decisions: An unemotional investor is a smart investor. Knowing that you’re playing with “the house’s money” can allow you to make decisions based off your risk tolerance and investment horizon, not emotion.

Recently, when I recommended that subscribers take partial profits in a top-performing stock, I received a ton of email asking why… particularly when I expect the stock to go significantly higher.

I emphasized the reasons above – that taking some profits lowers our level of risk, while still allowing us to go for the home run.

I’ll give you another specific example…

In my small-cap healthcare service, Access, we took 65% gains in half our position in SIGA Technologies (Nasdaq: SIGA). That’s allowed us to let the stock run to current levels, which are now 158% above our entry price. It also allowed us to use that money for a number of other winners.

So while VNDA blasted its way higher, remember that it’s a perfect example of how volatile the market can be – and how things don’t always happen the way you expect.

One of the best ways to make sure that volatility doesn’t negatively impact your portfolio is to play with the house’s money whenever possible.

Marc Lichtenfeld

P.S. Find more information on how you can join my small-cap healthcare and biotech investment service – Access.

by Marc Lichtenfeld, Advisory Panelist
Monday, July 27, 2009: Issue #1051

There have been many earnings announcements lately that have surprised investors and analysts. And this has resulted in some significant gains in stock prices.

But don’t take these quarterly results at face value.

Earnings and guidance are very conservative this year, so it shouldn’t come as a shock when a company beats its projections. Just because a company like Caterpillar crushes its estimates, it doesn’t mean the business is humming along. It just means they beat the estimate.

That said, at a time like this, it’s important to figure out why the earnings come in better than expected. Were sales higher than forecasted? Did margins improve? Was it due to a lower tax rate? Lower general and administrative costs (layoffs)?

There are a number of reasons why a company might spring a surprise. Let’s take a look at a few that recently reported earnings surprises to see the real reasons why it happened…

Three Reasons Why Company Earnings Can Surprise

• Employee Layoffs

On Tuesday, Yahoo! (Nasdaq: YHOO) doubled up on analysts’ estimates, notching earnings per share of 16 cents, versus expectations of eight cents. That was on a non-GAAP (Generally Accepted Accounting Practices) basis, though. Using GAAP, the company earned 10 cents per share – a penny more than in the same period last year.

Behind the flashy headline numbers, Yahoo! actually experienced a 13% decline in sales. It offset that with a $120 million decrease in sales and marketing expenses and $50 million less in general and administrative expenses (most likely due to layoffs).

In addition, the company’s gross and operating margins were both lower than the corresponding earnings period in 2008. So while Yahoo! did beat its estimates – and even earned more per share than it did last year – it was all due to cost-cutting and firing employees.

• Cost Cutting

Despite a revenue decline of 6.6% during its fiscal third quarter, as all-important same store sales dropped by 5%, Starbucks (Nasdaq: SBUX) was still able to post a profit of $151 million (20 cents per share). That beat EPS by a penny and compared to a net loss of $6.7 million during the same period a year ago.

To its credit, management was able to shave operating costs at company-owned stores from 42.1% of revenue to 41.9%. But the big change to this quarter’s income statement was the roughly $175 million in cost-savings, mainly by closing stores.

It took $51.6 million in restructuring charges this quarter, versus $167.7 million a year ago.

Starbucks also had an additional $33 million benefit, due to lower interest expenses, higher interest income and other items, when compared to last year.

But even though the company swung to profitability, a quick comparison of this quarter’s numbers versus the same data from a year earlier shows that the real story behind the profitability was because of savings from closed stores.

Still, that’s not necessarily a bad thing. Starbucks did need to cut back (as long as they don’t cut the one by my office!).And if the company can show increased profitability from existing (and any new) stores in the future, then its cost-cutting moves will prove fruitful.

Right now, though, a look at Starbucks’ numbers tells us that its recovery is still early in its development. Too early, in my opinion, to make for an attractive investment.

• Operating Expenses

Here’s another example of how the mainstream media can mislead.

Some outlets reported that Delta Air Lines’ (NYSE: DAL) revenue shot up by 27%. But some journalists didn’t take the company’s acquisition of Northwest into account. Their combined revenue actually fell by 23%.

In addition, while Delta did report better than expected numbers, losing 24 cents per share, five cents better than consensus estimates, it would have turned a profit if not for losses suffered when trying to hedge fuel costs.

So in Delta’s case, the airline was actually operating in the black, despite lower revenues. That was until some traders got involved and bet the wrong way on fuel prices. Had it managed to cut its expenses, the earning surprise could have gone the other way.

I don’t love the airline business, but if Delta can show me another quarter where it manages its business efficiently, it could be an interesting recovery play. Assuming some oil traders don’t mess things up, of course.

Clearly, this is just a quick look at these companies’ earnings reports. But even then, it reveals more information than the headline numbers you see reported in the press. Unless you drill into those numbers, they’re pretty meaningless.

Earnings increases on favorable tax treatment, layoffs and accounting slight of hand isn’t sustainable. Whereas earnings increases on increasing sales and decreasing costs are something that investors like to see in well-run companies that make good long-term investments.

Understanding earnings surprises and why a company beat its numbers is incredibly important to making good investment choices.

Hoping your longs go up and your shorts go down.

Good investing,

Marc Lichtenfeld

by Marc Lichtenfeld, Advisory Panelist
Thursday, July 9, 2009: Issue #1036

Almost half of all American adults no longer believe that home ownership is a realistic way to build wealth. That’s according to Gail Cunningham of the National Foundation for Credit Counseling.

Given that home ownership is a cornerstone in almost every wealth-building plan, this is astonishing.

Even if the days of selling a house for an enormous profit are over, building equity in a home beats the pants off paying rent.

Of course, ownership is not always better than renting, but in most cases, it still is. And even if home prices are flat, building a little bit of equity makes it worth the cost of ownership, especially when you add in the tax breaks associated with owning a home.

Trouble is, some of the statistics are frightening:

• One-third of those surveyed don’t believe they’ll ever be able to afford a home.

• Forty-two percent of those who once purchased a home, but no longer own it, don’t think they’ll ever be able to afford to buy another one.

Recently, Karim Rahemtulla detailed the problem that the large number of short-sales are causing in the real estate market. Today, I’m going to give a couple of tips to both house-hunters looking for bargains and investors looking to “buy on fear.”

Buying Property With “Blood in the Streets”

There’s an old Wall Street axiom that says you should “buy when there’s blood in the streets.” And throughout the real estate market, there is clearly blood in the streets.

In some markets like in Oakland, California – where prices have dropped 32% in the past year and 75% of first quarter home sales were distressed sales – there’s not only blood in the streets, there’s a virtual river of the stuff flowing down Broadway & 17th St.

But if you’re considering buying a property – either as a primary residence, investment property, or vacation home – now is probably a good time to start looking. Desirable vacation and retirement spots such as Southern California, Miami and Naples, Florida, Phoenix, Arizona and Las Vegas, Nevada have suffered a particularly bad beating and likely contain many desperate sellers and foreclosed properties.

And even in markets that have held up relatively well compared with the rest of the nation, you can likely find some bargains…

Use Homeowner Desperation to Your Advantage

Take Asheville, North Carolina, for example…

The average sales price of a home there is only off by about 15% from the peak, but homes are now sitting on the market for an average of 144 days, up from 94 days. The number of houses sold in 2009 is down by one-third from last year.

Even Austin, Texas, which has weathered the real estate storm better than most, has seen the average price of a single-family home decline by just 3% from a year ago, but volume has slipped 25%.

As Karim suggested on Tuesday, the best strategy may be to find a desperate seller who is forced to compete with short-sales and the foreclosures. Plus, you’re likely to get the deal wrapped up in a much more timely fashion than if you’re dealing with the banks’ lawyers. Sure, you may find bargains on foreclosed properties and short-sales, but the process will take much longer.

For those of you not looking to buy a house but still like the idea of buying fear, consider this option…

Go Contrarian on Commercial Real Estate

Many experts believe commercial real estate will be the next big shoe to drop. And my colleague David Fessler, recently published some alarming statistics about it. Take a look:

• During the first quarter, businesses vacated 8.7 million square feet of retail space. Not only was that a 10-year high, it compares with 8.6 million square feet vacated for all of 2008.

• Vacancy rates at regional malls, strip malls and neighborhood centers are increasing at the highest rate in 30 years.

But if you’re looking for an uber-contrarian way to play this commercial real estate trend, consider REITs (Real Estate Investment Trusts) that specialize in commercial property.

Take a look at Kilroy Realty Corp. (NYSE: KRC). Founded in 1947, it develops and manages office and commercial property in Southern California – one of the hardest hit markets in the country.

The firm just cut its dividend to $1.40 per year, but that still equates to a beefy 7% yield. It’s cash flow positive and has a healthy return-on-equity.

Currently trading at just under $20 per share, it’s down considerably from its high of $88 back in February 2007.

And while it’s not always easy to buy when everyone else is selling, history has proven time and again that it is precisely those who are able to buy in scary times are the ones who make that make the most money.

Hoping your longs go up and your shorts go down.

Good investing,

Marc Lichtenfeld

by Marc Lichtenfeld, Advisory Panelist
Wednesday, July 1, 2009: Issue #1031

There are a number of health care reform plans on the drawing boards right now, and they all seem to come with mind-numbing sticker shock. The administration’s new plan and Senator Kennedy’s plan are both estimated to cost $1 trillion over 10 years.

I’ll believe that when I see it. When was the last time the government completed any project on budget?

And I’m not the only one with doubts.

Health Systems Innovations, a health care consultant that has worked with private health insurers, estimates that Senator Kennedy’s bill would cost $4 trillion over 10 years.

Ouch…

Should a health care plan be passed that even resembles anything like the current proposals, $2 trillion in final costs would be a minor miracle.

A trillion here, a trillion there. Pretty soon, you’re talking about real money.

As these health care reforms gather momentum, I’m going to explore a few more investments that should thrive in the face of a major health care system overhaul, regardless of any health care reform plan that may be passed…

Health Care Reform : Protecting Against Inflation With Bond Funds

Despite the President’s popularity, he’s not likely to get everything he wants. Some sort of compromise is to be expected. One thing we can assume is that the cost of any health care reform plan – regardless of whose it is – will be a 13-figure number (i.e. more than $1 trillion).

On a macroeconomic level, that would likely be inflationary and cause bond prices to decline. So if you’re a bond bear, here are two instruments for you…

• UltraShort 20+ Year Treasury ProShares (NYSE: TBT): This ETF is not for the faint-hearted. It seeks to perform at twice the inverse results of the Lehman Brothers 20+ Year U.S. Treasury Index. So if the Index drops 5%, TBT should rise about 10%.

• ProFunds Rising Rate Opportunity (RRPIX): This is a mutual fund that also seeks the inverse performance of the bond market. Its results aim to correspond to 125% of the inverse of the daily movement of the 30-year Treasury bond.

Profit From Health Care Reform with Biotech & Selling Put Options

Recently while researching stocks that would profit during the health care reform process, I discussed the attractiveness of investing in biotech companies that treat rare diseases.

One of the companies I’ve recently discussed, Genzyme (Nasdaq: GENZ), had a major setback when it disclosed problems at one of its manufacturing facilities. The stock price took an immediate hit.

I believe these difficulties are temporary and I still like the company. But if you’d prefer to reduce your risk further, you can look at selling put options on GENZ at a lower strike price. My colleague Lee Lowell just talked about a put selling strategy earlier this week.

I explained to Lee why I like GENZ, but wanted a good put-selling trade for investors who want to own the stock at a lower price. Here’s what he suggested…

• Sell the October 2009 $47.50 puts, currently trading at $1.50 on the bid. This means for every put that you sell, you will collect $150.
• Keep in mind that one put contract represents 100 shares.

• If GENZ never sees the $47.50 strike, you keep the $150.

• If the stock drops to or below $47.50 at expiration, you’ll be required to buy the stock for $47.50 (100 shares of GENZ for every put contract you sell). But remember that you collected $1.50 already, reducing your cost basis to $46 per share.

So if you like GENZ, but would prefer to own it at a lower price, this is one trade to consider.

Health Care Reform: Two Biotech Companies Set For Profits

I’ve recently suggested a few other biotech stocks to my subscribers, including:

• Best-in-class generic drugmaker Teva Pharmaceuticals (Nasdaq: TEVA).
• Another generic drugmaker to look at is Watson Pharmaceuticals (NYSE: WPI). Watson just announced its acquisition of privately held Arrow Group, a generic biotech drugmaker, with significant international operations.I like this move by Watson, as it broadens the company’s reach both in products and markets served.

The bottom line is that while health care reform could very well change the investing landscape within the sector, you can always find opportunities if you know where to look.

Good investing,

Marc Lichtenfeld