Why the Street Should Love SEI Investments's Earnings

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on SEI Investments (Nasdaq: SEIC  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, SEI Investments generated $245.0 million cash while it booked net income of $228.8 million. That means it turned 23.9% of its revenue into FCF. That sounds pretty impressive.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at SEI Investments look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

SEI Investments's issue isn't questionable cash flow boosts, but items in that suspect group that reduced cash flow. Within the questionable cash flow figure -- here a negative-- plotted in the TTM period above, adjustments for gains owed to asset sales constituted the biggest reversal. Overall, the biggest drag on FCF came from changes in accounts receivable, which represented 14.4% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

Looking for alternatives to SEI Investments? It takes more than great companies to build a fortune for the future. Learn the basic financial habits of millionaires next door and get focused stock ideas in our free report, "3 Stocks That Will Help You Retire Rich." Click here for instant access to this free report.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Add SEI Investments to My Watchlist.

With Apple, HBO Could Win Cable's "Game of Thrones"

Several services are already offering synchronized viewing across devices. Netflix (NASDAQ: NFLX  ) , YouTube, and now Apple (NASDAQ: AAPL  ) all offer bookmarking -- start a show on one device, pick up where you left off on another. HBO is a rare exception because of its cable ties.

It doesn't have to be this way. In January, Bloomberg reported that HBO and Apple were working on adding the HBO GO iOS app to Apple TV, which would allow for bookmarking and seriously challenge Netflix, says Tim Beyers of Motley Fool Rule Breakers and Motley Fool Supernova in the following interview with The Motley Fool's Erin Miller.

This sort of arrangement is central to Apple's TV strategy: enable the widest arrangement of content anywhere via iTunes and aggregated services, and then sell a ton of devices to users who want access. Tim says to expect it to pay off.

Please watch this short video to get his full take, and then leave a comment to let us know whether you'd buy, sell, or short Apple stock now and why.

Want even more Apple information? Allow me to introduce you to The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, who has the skinny on the various reasons to buy or sell Apple right now. Click here to get his latest thinking on the stock  and what opportunities are left for Apple (and your portfolio) going forward.

Why Citigroup Is Having Another Really Bad Day

Each of the Big Four banks took a pounding last week, but none quite as hard as Citigroup (NYSE: C  ) , and this week isn't shaping up to be much better. Down 2.56% about two and a half hours into trading, the superbank sheered off 5.82% last week, for a grand total loss-to-date of 8.36%. There's little question what's driving these losses, so the real question is, when will they stop, or at the very least, slow down?

It's been a hard day's week
To recap, last Wednesday Federal Reserve Chairman Ben Bernanke announced that the central bank's program of monthly bond purchases might start to be tapered off beginning later this year: if, and he made it clear it is a very big if, encouraging economic data continues to comes in.

But all investors heard was that quantitative easing was going away, and markets around the world tumbled. Here in the U.S., the S&P 500 is down 4.11% from Wednesday's close. The Dow Jones Industrial Average is down 3.71% for the same time period.

Foolish bottom line
In terms of Citi itself, it's a slow news period. Sometimes no news is good news, and that's the case right now. Meanwhile Bank of America (NYSE: BAC  ) investors are forced to bite their nails as they await the outcome of a trial over soured mortgages sold by the bank's Countrywide Financial unit, which could cost the bank tens of billions of dollars. In that sense, it's good to be a Citi investor right now.

But in terms of this market sell-off, don't look for it to end too soon. In addition to other objectives, Bernanke may have been hoping to let the air out of a potential bubble in the stock market, driven by four years of excess liquidity supplied by the Fed through its quantitative easing programs. There's a strong case to be made for a bubble: With all the market highs we've seen over the last six months, what has that been based on? Great economic data? There's been none of that. There's been encouraging economic data, but not great economic data.

But the good news here is, Citi is a fundamentally strong company. It's come a thousand miles since the depths of the financial crisis. Leadership is strong and steady in the form of CEO Michael Corbat. And the bank is well positioned to tap into emerging market growth. And while said markets may be down right now, developing markets are only to keep developing, and the world is only going to get more and more connected. Citi is perfectly positioned to take advantage of this growth, much more so than, say, Wells Fargo (NYSE: WFC  ) , who's CEO has stated outright that Wells is a domestically focused bank, and happy to stay one.

Stay focused on Citi's fundamentals, Fools, and always remember that you're in the market for the long run. And don't forget to look at this sell-off as a potential buying opportunity, I know I am. Wasn't it Warren Buffet who said when others are fearful, be greedy? 

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Then look no further than our new premium report. Inside, Motley Fool Senior Banking Analyst Matt Koppenheffer cracks the superbank's code: revealing how it makes money, how profitable it is, and what areas investors need to watch going forward. He'll also give you three reasons to buy and three reasons to sell. And with quarterly updates included, this premium report could quite literally be the last source of investment research you'll ever need on Citigroup. For immediate access, simply click here now.

Has High-Frequency Trading Gone Too Far?

I recently met up with Art Cashin, director of floor operations at UBS and a regular on CNBC for years, on the floor of the New York Stock Exchange.

I asked him about the rise in high-frequency trading over the last decade, and whether the pendulum from human traders to computers has gone too far. Here's what he had to say (transcript follows):

Morgan Housel: Do you think we have gone too far in the direction of high-frequency trading, moving away from humans? Is that pendulum swinging too far?

Arthur Cashin: Well it's always difficult to say. The Luddites were always worried that gee, the machine seems to be making what I used to make and more of us used to be employed, but I think you just want to take care that you see that the mechanisms have some safeguards and some protective means.

In the old days, when the market was shaped somewhat differently and New York had 70% of the market share, there were times when you might be able to walk in and halt trading in a stock to find out, did he or she have news that some little old lady in Iowa didn't have a chance to get? So in an effort to make things fair, you would occasionally have a timeout. And while we live in a fast-paced environment on a daily basis, and occasional timeout to learn more or do things better, is not always harmful.

Who Benefits the Most From Fed Policy?

Washington Post columnist Neil Irwin stopped by to discuss his book, The Alchemists: Three Central Bankers and a World on Fire. It's a great read on the history of central banks, including how they responded to the financial crisis and the challenges they face in the future.

Who benefits from the Fed's easy money policies? Will Japan's extreme financial measures make themselves felt in other economies around the world? In this video segment, Neil fields some questions from the audience. A full transcript follows the video.

Audience Member: When we talk about easy money policies, I think a lot of people would look at that and go, "Oh, so this is only good for banks. This is going to help banks." When you look at the banks' reports lately, I think you'll find that it's (unclear). They don't necessarily want the (unclear) low interest rate loans. There's not a lot of demand for them. It really hasn't been a huge benefit for them, so who has benefited most from the easy money?

Neil Irwin: I think it's holders of any financial assets, particularly equities, even more so corporate debt, especially high-yield corporate debt. It's pretty easy to trace the direct rise.

It's amazing how consistent the pattern is of, any time Bernanke gives a speech that's just, "More QE is likely," you see it in equity markets and corporate debt markets right away. I think that's a very direct relationship.

The reason it hasn't been a boon for banks is for exactly the reason it hasn't been a panacea for the real economy. What banks fundamentally need is an economy where businesses are making investments, they're borrowing money to build a factory, or whatever it may be.

As long as that's happening, no matter how low interest rates are, that's not a great spot for a bank to be in. If there's no loan demand, you don't really have much of a business. I think that's one of the great mysteries of, "Will this easy monetary policy at some point kick in and result in more activity in the real economy?"

Audience Member: You talked about the economists in Japan monitoring what they do here. (unclear) that was based on their financial policies. Is there any risk of what Japan's doing, what Europe's doing, that what they're doing makes its way over to our asset markets, to our stock market (unclear), and even if the Fed has their finger on what they're doing, maybe there's other central banks that are going to have an influence on our market?

Neil: It's funny, that's exactly what the foreigners have been complaining about with QE in the U.S. over the years.

If you remember after QE 2, the Germans were furious. The Chinese were furious. The Brazilians were furious, because they felt like this money printing by the U.S. Fed would ultimately leach into financial imbalances, asset bubbles, and inflation in their own countries, and that they wouldn't have the power to stop it.

This is especially true for Brazil. I think for China it's a little more complicated.

Look, if there's one thing this last few years has taught, it's that it truly is a global economy, especially once you're in the financial system, and you can't analyze -- if you're the Fed trying to think about doing QE or the Bank of Japan, or the ECB -- you can't do that without understanding how that will interact in the global context.

Because of what I was talking about earlier with this sense of common purpose and this sense of mutual confidence among the central bankers, they're talking about it. I guarantee you, Bernanke doesn't do a new round of QE, or the Bank of Japan Governor, or the Bank of England Governor, they don't do it without having some serious talks with their counterparts.

It's not that I have absolute confidence they'll get it right and avoid any kind of inflationary burst or global asset bubbles. It's that I know if they fail, it will not be for lack of airing all the views and all the possibilities that might happen.

More from the Motley Fool
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Top 5 Medical Companies To Buy For 2014

Abbott Labs' second-quarter earnings beat Wall Street's projections, as the company continues to perform well in its post-branded pharmaceuticals life. However, Abbott's medical device business couldn't keep up its more successful segments, even as the company has made progress in key areas such as drug-eluting stents, while advancing into emerging markets.Overall, device sales fell 1.6% year-over-year for the quarter.

Abbott's made a few recent acquisitions to beef up this business, and the company's stellar Xience stent remains atop the industry. Are Abbott's plans for the future enough to turn around this division's slumping sales, however? Below, Motley Fool contributor Dan Carroll tells you what you need to know about Abbott's device business, and how this segment will impact this well-diversified company -- and your portfolio -- in the future.

Top 5 Medical Companies To Buy For 2014: Quintiles Transnational Holdings Inc (Q)

Quintiles Transnational Holdings Inc. is a provider of biopharmaceutical development services and commercial outsourcing services. The Company operates in two segments: Product Development and Integrated Healthcare Services. The Company�� Product Development segment operates as a contract research organization (CRO) focused primarily on Phase II-IV clinical trials and associated laboratory and analytical activities. The Company�� Integrated Healthcare Services segment is a global commercial pharmaceutical sales and service organizations and Integrated Healthcare Services provides a range of services, including commercial services, such as providing contract pharmaceutical sales forces in geographic markets, as well as healthcare business services for the healthcare sector, such as outcome-based and payer and provider services. In August 2012, it acquired Expression Analysis, Inc.

Product Development

Product Development provides services and that allow biopharmaceutical companies to outsource the clinical development process from first in man trials to post-launch monitoring. The Company�� service offering provides the support and functional necessary at each stage of development, as well as the systems and analytical capabilities. Product Development consists of clinical solutions and services and consulting. Clinical solutions and services provides services necessary to develop biopharmaceutical products, including project management and clinical monitoring functions for conducting multi-site trials (generally Phase II-IV) (core clinical) and clinical trial support services that improve clinical trial decision making and include global laboratories, data management, biostatistical, safety and pharmacovigilance, and early clinical development trials, and strategic planning and design services that improve decisions and performance. Consulting provides strategy and management consulting services based on life science and advanced analytics, as well as regulatory and comp! liance consulting services.

The Company competes with Covance, Inc., Pharmaceutical Product Development, Inc., PAREXEL International Corporation, ICON plc, inVentiv Health, Inc. (inVentive), INC Research and PRA International.

Integrated Healthcare Services

Integrated Healthcare Services provides the healthcare industry with both geographic presence and commercial capabilities. The Company�� commercialization services are designed to accelerate the commercial of biopharmaceutical and other health-related products. Service offerings include commercial services (sales representatives, strategy, marketing communications and other areas related to commercialization), outcome research (drug therapy analysis, real-world research and evidence-based medicine, including research studies to prove a drug�� value) and payer and provider services comparative and cost-effectiveness research capabilities, clinical management analytics, decision support services, medication adherence and health outcome optimization services, and Web-based systems for measuring quality improvement.

The Company competes with inVentiv, PDI, Inc., Publicis Selling Solutions, United Drug plc, EPS Corporation and CMIC HOLDINGS Co., Ltd.

Top 5 Medical Companies To Buy For 2014: Scancell Holdings PLC (SCLP)

Scancell Holdings PLC is a United Kingdom-based company. The Company�� principal activity of the consists of the discovery and development of monoclonal antibodies and vaccines for the treatment of cancer. In April 2012, the Company completed recruitment to the Phase 1 clinical trial of SCIBI. In May 2012, the Company commenced recruitment and treatment of the first patient in the second part of it Phase 1/2 clinical trial of SCIBI. The Phase 2 part of the trial is conducted in five United Kingdom centers in Nottingham, Manchester, Newcastle, Leeds, and Southampton. On August 15, 2012, the Company announced the development of a platform technology, Moditope.

Top Performing Stocks To Own Right Now: InspireMD Inc (NSPR)

InspireMD, Inc., incorporated on February 29, 2008, is a medical device company. The Company is focusing on the development and commercialization of its stent platform technology, MGuard. MGuard provides embolic protection in stenting procedures by placing a micron mesh sleeve over a stent. Its initial products are marketed for use mainly in patients with acute coronary syndromes, notably acute myocardial infarction (heart attack) and saphenous vein graft coronary interventions (bypass surgery). The Company�� products include MGuard Coronary Plus Bio-Stable Mesh, MGuard Peripheral Plus Bio-Stable Mesh, MGuard Carotid Plus Bio-Stable Mesh and MGuard Coronary Plus Bio-Absorbable Drug-Eluting Mesh. Its initial MGuard Coronary products incorporated a stainless steel stent. The Company subsequently replaced this stainless steel platform with a more advanced cobalt-chromium based platform, which the Company refers to as the MGuard PrimeTM version of its MGuard Coronary. The Company operates in Germany through its wholly owned subsidiary InspireMD GmbH.

The Company focuses on applying its technology to develop additional products used for other vascular procedures, specifically carotid (the arteries that supply blood to the brain) and peripheral (other arteries) procedures. The MGuard stent is an embolic protection device based on a protective sleeve, which is constructed out of an ultra-thin polymer mesh and wrapped around the stent. The protective sleeve is comprised of a micron level fiber-knitted mesh, engineered in an optimal geometric configuration and designed for utmost flexibility while retaining strength characteristics of the fiber material.

MGuard - Coronary Applications

The Company�� MGuard Coronary with a bio-stable mesh and its MGuard Coronary with a drug-eluting mesh focuses on the treatment of coronary arterial disease. The Company�� first MGuard product, the MGuard Coronary with a bio-stable mesh, is comprised of its mesh sleeve wrapped around a! bare-metal stent. The bio-absorbability of MGuard Coronary with a drug eluting bio-absorbable mesh is intended to improve upon the bio-absorbability of other drug-eluting stents, in light of the wide surface area of the mesh and the small diameter of the fiber.

MGuard - Carotid Applications

The Company focuses on marketing its mesh sleeve coupled with a self-expandable stent for use in carotid-applications. Expandable stent is a stent that expands without balloon dilation pressure or need of an inflation balloon. This product is under development, although the Company has temporarily delayed its development until additional funding is secured.

MGuard - Peripheral Applications

Peripheral Artery Disease, also known as peripheral vascular disease, is characterized by the accumulation of plaque in arteries in the legs, need for amputation of affected joints or even death, when untreated. Peripheral Artery Disease is treated either by trying to clear the artery of the blockage, or by implanting a stent in the affected area to push the blockage out of the way of normal blood flow.

The Company competes with Abbott Laboratories, Boston Scientific Corporation, Johnson & Johnson, Medtronic, Inc., The Sorin Group, Xtent, Inc., Cinvention AG, OrbusNeich, Biotronik SE & Co. KG, Svelte Medical Systems, Inc., Reva Inc. and Stentys SA.

Advisors' Opinion:

• [By Roberto Pedone]

  InspiredMD (NSPR) is a medical device company focusing on the development and commercialization of its proprietary stent platform technology, MGuard. This stock is trading up 2.3% to $2.59 in recent trading.

  Today’s Range: $2.44-$2.65
  
  52-Week Range: $1.88-$10.16
  
  Volume: 313,000
  
  Three-Month Average Volume: 99,632

  From a technical perspective, NSPR is trending higher here right off its 50-day moving average at $2.42 with heavy upside volume. This stock has been getting heavy upside volume flows for the last few weeks, which is bullish technical action. Shares of NSPR are now quickly moving within range of triggering a major breakout trade. That trade will hit if NSPR manages to take out some near-term overhead resistance levels at $2.85 to $3 with high volume.

  Traders should now look for long-biased trades in NSPR as long as it’s trending above its 50-day at $2.42 and then once it sustains a move or close above those breakout levels with volume that hits near or above 99,632 shares. If that breakout triggers soon, then NSPR will set up re-test or possibly take out its next major overhead resistance levels at $3.55 to $4.25. This stock could even tag its 200-day at $4.80 if it breaks out soon and catches some momentum buying.

Top 5 Medical Companies To Buy For 2014: Impax Laboratories Inc.(IPXL)

Impax Laboratories, Inc., a specialty pharmaceutical company, engages in the development, manufacture, and marketing of bioequivalent pharmaceutical products. The company operates in two divisions, Global Pharmaceuticals and Impax Pharmaceuticals. The Global Pharmaceuticals division develops, manufactures, sells, and distributes generic pharmaceutical products. It provides its generic pharmaceutical prescription products directly to wholesalers and retail drug chains; and generic pharmaceutical over-the-counter and prescription products through unrelated third-party pharmaceutical entities. The Impax Pharmaceutical division develops proprietary brand pharmaceutical products that address central nervous system disorders, including Alzheimer?s disease, attention deficit hyperactivity disorder, depression, epilepsy, migraines, multiple sclerosis, Parkinson?s disease, and schizophrenia, as well as promotes third-party branded pharmaceutical products. As of May 2, 2011, the com pany marketed 101 generic pharmaceuticals, which represent dosage variations of 29 different pharmaceutical compounds; and another 16 of its generic pharmaceuticals representing dosage variations of 4 different pharmaceutical compounds. It markets and sells its generic pharmaceutical prescription drug products in the continental United States and the Commonwealth of Puerto Rico. The company has a strategic alliance agreement with Teva Pharmaceuticals Curacao N.V. Impax Laboratories, Inc. was founded in 1993 and is headquartered in Hayward, California.

Advisors' Opinion:

• [By Michael Shulman]

  The not-so-small generic drug maker Impax Laboratories (NASDAQ: IPXL) has arguably the best manufacturing technology for time-released drugs in the entire generic industry.

  Pfizer’s (NYSE: PFE) patent for its $11 billion cholesterol drug Lipitor expires this year, and we know IPXL believes it has the expertise to manufacture a sophisticated statin such as Lipitor given recent legal actions concerning Merck’s drug Vytorin, a combination of a competing statin and a blood pressure drug. In other words, IPXL has the technical expertise to enter this market should it choose to do so.

  Two other major product introductions are anticipated in 2011 — generic Concerta for ADHD and generic Solodyn for bacterial infections, currently with combined sales of $1.8 billion.

  My target for the stock is $35-$40 in one to two years. IPXL is also the possible target of an acquirer.

Top 5 Medical Companies To Buy For 2014: Prima BioMed Ltd (PRR)

Prima BioMed Ltd is a biotechnology company is engaged in the development and commercialization of medical therapies with a focus on oncology. Its product candidates in development include Cvac, an autologous dendritic cell vaccine for ovarian cancer, monoclonal antibodies for multiple tumour types, and an oral formulation for the human papilloma virus (HPV), vaccine. Its product candidate Cvac is a dendritic cell therapy, for which it is conducting a Phase IIb trial for the treatment of ovarian cancer. Cvac is designed to target the tumour antigen mucin-1, which is expressed at high levels on different tumour types. It also has two preclinical product development programs. In May 2011, Prima BioMed GmbH, a 100 % owned subsidiary of Prima BioMed Ltd, was incorporated in Germany. In May 2011, Prima BioMed Middle East FZLLC, a 100 % owned subsidiary of Prima BioMed Ltd, was incorporated in the United Arab Emirates.

1 Thing Worth Watching at Comfort Systems USA

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Comfort Systems USA (NYSE: FIX  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Comfort Systems USA generated $27.1 million cash while it booked net income of $17.0 million. That means it turned 2.0% of its revenue into FCF. That doesn't sound so great.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Comfort Systems USA look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 19.9% of operating cash flow coming from questionable sources, Comfort Systems USA investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 8.7% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 32.3% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

If you're interested in companies like Comfort Systems USA, you might want to check out the jaw-dropping technology that's about to put 100 million Chinese factory workers out on the street – and the 3 companies that control it. We'll tell you all about them in "The Future is Made in America." Click here for instant access to this free report.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Add Comfort Systems USA to My Watchlist.

Meridian Bioscience Beats Analyst Estimates on EPS

Meridian Bioscience (Nasdaq: VIVO  ) reported earnings on July 25. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended June 30 (Q3), Meridian Bioscience met expectations on revenues and beat expectations on earnings per share.

Compared to the prior-year quarter, revenue grew. GAAP earnings per share increased.

Gross margins contracted, operating margins expanded, net margins expanded.

Revenue details
Meridian Bioscience recorded revenue of $47.1 million. The nine analysts polled by S&P Capital IQ wanted to see net sales of $47.0 million on the same basis. GAAP reported sales were 12% higher than the prior-year quarter's $42.1 million.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
EPS came in at $0.24. The 12 earnings estimates compiled by S&P Capital IQ predicted $0.22 per share. GAAP EPS of $0.24 for Q3 were 14% higher than the prior-year quarter's $0.21 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 65.0%, 60 basis points worse than the prior-year quarter. Operating margin was 33.3%, 250 basis points better than the prior-year quarter. Net margin was 21.6%, 120 basis points better than the prior-year quarter. (Margins calculated in GAAP terms.)

Looking ahead
Next quarter's average estimate for revenue is $48.8 million. On the bottom line, the average EPS estimate is $0.23.

Next year's average estimate for revenue is $188.9 million. The average EPS estimate is $0.89.

Investor sentiment
The stock has a five-star rating (out of five) at Motley Fool CAPS, with 455 members out of 465 rating the stock outperform, and 10 members rating it underperform. Among 112 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 110 give Meridian Bioscience a green thumbs-up, and two give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on Meridian Bioscience is hold, with an average price target of $21.22.

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Add Meridian Bioscience to My Watchlist.

Google Stock Is on a Roll. Is It Still Worth Buying?

"Buy low, sell high." So goes the old adage for how to make money in the stock market. But what if there were another way? What if we could "buy high, and buy higher"?

I know that sounds ridiculous, but this past week, Fool user aryan89 posted a brilliant message on the Fool's premium boards. In it, he said:

History tells us that rather than trying to time the market and buy low, sell high, it is better to stick to your investing philosophies. If the reasons you invested into a company are still intact, rather than asking "Should I sell and take profits?" the correct question would be to ask, "Should I buy more?" 

With this in mind, as I look for five potential stocks to invest my real money in during August, I'm looking for companies and stocks that are firing on all cylinders, and unabashedly buying in even though a stock has had strong price appreciation.

Today, I'm investigating Google (NASDAQ: GOOG  ) , a stalwart that is beating the S&P 500 by 20 percentage points over the past year.

GOOG Total Return Price data by YCharts

Why such a good year?
To understand why Google is having such a good year, it's important to understand the challenges the company is facing, and why they worry investors.

The biggest of those challenges is a shift toward mobile computing. Though Google has its hand in many different businesses, advertising still makes up almost all of the company's revenue. And what people are seeing is that Google gets paid less for each advertising click on a smartphone or tablet than it would on a desktop.

That's an understandable concern for investors, but it's one the company is slowly dealing with. For starters, both Google and Chinese search giant Baidu (NASDAQ: BIDU  ) have reported that mobile searches are occurring largely in addition to already-established desktop searches. As fellow Fool Joe Tenebruso pointed out: "This is a key insight because many investors mistakenly believe that mobile search is cannibalizing the much more profitable desktop search business of these two Internet giants. However, both Baidu and Google said that this is not the case." 

The other part of the equation is that while the average cost per click has gone down over the past year -- though it is now stabilizing -- the total number of clicks has grown substantially. For instance, in the most recently reported quarter, the average cost per click was down 6%, but the total number of paid clicks was up 23%. An increase in volume like that is more than enough to offset lower price points, and investors are starting to catch on.

Why Google is still worth owning
Despite the recent price appreciation, I think Google has a lot going for it. The company has a milewide moat surrounding its core search business, and there are lots of other products the company is working on to make sure it's relevant in the future.

CEO Larry Page, in the most recent conference call, said the company will be investing capital to exploit the trend of users who are accessing the Internet through multiple screens. Obviously, the core search engine is the centerpiece, but Google has lots of other platforms to develop.

Android, for instance, is approaching 1 billion users worldwide. YouTube is now a profitable division of Google, and it's the third most popular website in the world. And the company's Chrome Web browser, according to Softpedia, now has a commanding 41% market share, far ahead of Microsoft's Internet Explorer and Apple's Safari.

Source: Softpedia. 

At today's prices, Google shares trade hands for about 22 times earnings and about 25 times free cash flow. That's not exactly cheap, but then again, the strength of Google's business is pretty well known. I don't expect it to ever trade hands for too cheap.

Indeed, out of all the big players in technology, I think Google -- along with Amazon.com -- has the most sustainable competitive advantages to keep the company relevant for decades to come. If you'd like to see how the future of technology will play out, and who we think will win, check out "Who Will Win the War Between the 5 Biggest Tech Stocks?" The free report details the knock-down, drag-out battle being waged among the five kings of tech. Click here to keep reading.

Best Growth Companies To Invest In 2014

The following video excerpt was taken from an interview with Steve Swad, CEO of Rosetta Stone (NYSE: RST  ) , in which he talks about his business philosophy, and how it is driving success both for language learners and for the company itself. In this segment, he discusses his top three strategies for future growth.�

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

�

Matt Argersinger: So you have three strategic priorities. Brand, platform, distribution.

Steve Swad: Right.

Matt: Can you tell us kind of what's driving each of those and what are the goals behind those platforms?

Best Growth Companies To Invest In 2014: The First Bancshares Inc.(FBMS)

The First Bancshares, Inc. operates as the banking holding company for The First, A National Banking Association that provides commercial and retail banking services to small to medium-sized businesses, professional concerns, and individuals in Mississippi. It accepts various deposit products, such as checking accounts, negotiable order of withdrawal accounts, savings accounts, and other time deposits, ranging from daily money market accounts to longer-term certificates of deposit, as well as retirement account services, such as individual retirement accounts. The company provides commercial loans, such as secured and unsecured loans for working capital, business expansion, and purchase of equipment and machinery; consumer loans, which include equity lines of credit and secured and unsecured loans for financing automobiles, home improvements, education, and personal investments; and real estate construction and acquisition loans. It also originates loans to purchase existi ng or construct new homes, and to refinance existing mortgages. In addition, the company offers Internet banking services, voice response telephone inquiry services, commercial sweep accounts, cash management services, safe deposit boxes, travelers? checks, direct deposit of payroll and social security checks, automatic drafts for various accounts, network of automated teller machines, and VISA and MasterCard credit card services. It operates 10 branch offices in Mississippi. The company was incorporated in 1995 and is headquartered in Hattiesburg, Mississippi.

Best Growth Companies To Invest In 2014: Hot Topic Inc.(HOTT)

Hot Topic, Inc., together with its subsidiaries, operates as a mall- and Web-based specialty retailer in the United States. The company operates Hot Topic and Torrid store concepts, as well as an e-space music discovery concept, ShockHound. Its Hot Topic stores sell music/pop culture-licensed merchandise, including tee shirts, hats, posters, stickers, patches, postcards, books, novelty accessories, CDs, and DVDs; and music/pop culture-influenced merchandise comprising women?s and men?s apparel and accessories, such as woven and knit tops, skirts, pants, shorts, jackets, shoes, costume jewelry, body jewelry, sunglasses, cosmetics, leather accessories, and gift items for young men and women primarily between the ages of 12 and 22. The company?s Torrid stores sells casual and dressy jeans and pants, fashion and novelty tops, sweaters, skirts, jackets, dresses, hosiery, shoes, intimate apparel, and fashion accessories for various lifestyles for plus-size females primarily betw een the ages of 15 and 29. As of July 30, 2011, it operated 636 Hot Topic stores in 50 states, Puerto Rico, and Canada; 145 Torrid stores; and Internet stores, hottopic.com and torrid.com. The company was founded in 1988 and is headquartered in City of Industry, California.

Advisors' Opinion:

• [By Wyatt Research]

  The teen retailer reported its same-store sales rose 0.4 percent, with same-store sales at its Torrid chain for overweight teens rising 7 percent. Analysts were expecting a decline.

Top Stocks To Watch Right Now: Louisiana Bancorp Inc.(LABC)

Louisiana Bancorp, Inc. operates as the holding company for Bank of New Orleans that provides commercial banking services to individuals and businesses primarily in southern Louisiana. It offers deposit accounts consisting of interest-bearing and non-interest-bearing checking, money market, savings, and certificate of deposit accounts. The company also originates one-to four-family, multi-family residential and commercial real estate mortgage, commercial, land mortgage, and construction loans, as well as consumer loans, including student loans, loans secured by deposit accounts, automobile loans, home improvement loans, unsecured personal loans, and home equity loans and lines of credit. As of December 31, 2010, it operated through its main office located in Metairie; and 2 full-service banking offices located in Metairie and New Orleans. The company was founded in 1909 and is headquartered in Metairie, Louisiana.

Honda Joins the Latest Sales Race in China

Honda showed the Acura Concept SUV-X in Shanghai earlier this year. The production version could become Acura's first made-in-China model in 2016. Photo credit: Honda

Luxury cars are huge in China, where Volkswagen's (NASDAQOTH: VLKAY  ) Audi brand rules the market, a market that is expected to grow rapidly for years to come. A bunch of big global automakers, including both General Motors (NYSE: GM  ) and Ford (NYSE: F  ) , are angling for a share of this rich pie -- and now, Honda (NYSE: HMC  ) is throwing its hat into the ring.

Honda is now saying that it will build Acuras in China starting in 2016, most likely starting with the small SUV shown above. In this video, Fool.com contributor John Rosevear looks at Honda's plans for this booming market -- and at whether 2016 might be too late to join the party.

China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

Chipotle Stock Rises Again: Is There More Room to Run?

Shares of Chipotle Mexican Grill (NYSE: CMG  ) surged to a new 52-week high above $400 on Friday following a strong Q2 earnings report. Chipotle stock peaked around $440 last year, before losing nearly half of its value because of concerns that growth was petering out.

Chipotle Stock 2 Year Price Chart, data by YCharts

One big blow on the way down was the short thesis outlined by David Einhorn at the 2012 Value Investing Congress. Einhorn argued that Yum! Brands (NYSE: YUM  ) would steal market share from Chipotle with its new Cantina Bell concept that offers higher-quality food than the typical Taco Bell menu but undercuts Chipotle on price.

Einhorn's argument has not found much support in Chipotle's recent performance. Chipotle restaurants are as busy as ever, and the company is still growing strongly. That said, I believe most of the profit has already been made for Chipotle investors. Chipotle stock now trades for more than 30 times forward earnings, and further multiple expansion is unlikely unless Chipotle shows investors that it can significantly increase its profit margin.

A reassuring quarter
In Q2, Chipotle posted an 18.2% increase in revenue because of new restaurant openings as well as a 5.5% increase in comparable restaurant sales. The comp growth was particularly reassuring for investors, because comparable restaurant sales grew by just 1% in the prior quarter.

A large part of the difference was a calendar shift that resulted in two fewer days in the first quarter and an extra day in the second quarter. That said, according to CFO Jack Hartung, the underlying trend still improved by 150 basis points from Q1 to Q2 after adjusting for the calendar shifts.This performance led Chipotle's management team to increase the company's 2013 sales guidance. As a result, investors drove Chipotle stock up by more than 8% on Friday.

Can margins keep growing?
Chipotle has grown revenue and earnings at an impressive rate since the Great Recession. Earnings growth has been boosted by significant margin expansion over the past five years. Chipotle's strong comp sales growth allowed it to better leverage its fixed costs. This margin expansion can be seen from the fact that earnings growth has significantly outpaced revenue growth for the past five years.

Chipotle 5 Year Revenue and Earnings Growth, data by YCharts

However, for the first half of 2013, Chipotle's pre-tax margin dropped from 17.8% to 17.3%. This was the result of more modest comp growth, which created less operating leverage, and rising food costs that weren't offset through menu price increases.

Chipotle announced on last Thursday's earnings call that it doesn't intend to raise prices at all this year. The company is in the midst of a campaign to remove genetically modified organisms from its food. That's driving some of the cost increases, since it's difficult to find suppliers of non-GMO ingredients. However, management wants to wait until Chipotle is 100% GMO-free before raising prices.

When these menu price increases occur (probably in 2014), they should offset the cost increases. However, it's not clear that Chipotle can raise prices enough to drive significant margin expansion, as opposed to simply recovering the increased costs. Without this margin expansion, Chipotle is unlikely to grow earnings fast enough to justify a higher stock price than the current $400 range. As a result, Chipotle stock doesn't seem like a good investment opportunity at this time.

Foolish bottom line
Chipotle has proved doubters wrong time and again by posting consistent revenue and earnings growth throughout its national expansion. Even the recent challenge from Taco Bell hasn't had a noticeable effect on Chipotle's financial performance. Chipotle stock has risen accordingly, rewarding long-term investors.

However, as my colleague Dan Caplinger astutely pointed out last week, sometimes a great company doesn't have a great stock. Chipotle's stock price already incorporates all of the upside that can be reasonably expected from the company's performance. Investors who missed out on the recent run shouldn't risk compounding their frustration by buying Chipotle stock today when it already trades at a high valuation.

Aggressive international expansion is one possible avenue for Chipotle to meet investors' expectations for strong growth. The Motley Fool's free report "3 American Companies Set to Dominate the World" takes you behind the scenes with three other American companies profiting from international growth. Click here to get your free copy before it's gone.

Top 10 Warren Buffett Companies To Own For 2014

From the impact of Obamacare to cutting-edge research, biotech buyouts to FDA decisions, The Motley Fool's health-care team sits down each week�to discuss the most fascinating developments in health-care and their implications for long-term investors. In this week's edition, the team talks about the coming trend of penalizing unhealthy employees, the importance of drug branding, the avian flu outbreak, one stock investors need to watch, and more.

In the following segment, health-care analyst David Williamson gives an update on the avian flu outbreak in China, how a flu drug helped propel Roche's strong first quarter, and a new vaccine that should be ready for the next flu season. Watch and learn more about the perils, profits, and prevention of the flu.

What macro trend was Warren Buffett referring to when he said "this is the tapeworm that's eating at American competitiveness"? Find out in our free report: "What's Really Eating at America's Competitiveness." You'll also discover an idea to profit as companies work to eradicate this efficiency-sucking tapeworm. Just click here for free, immediate access.

Top 10 Warren Buffett Companies To Own For 2014: Bandera Gold Ltd. (BGL.V)

Bandera Gold Ltd., a junior natural resource company, engages in the acquisition, exploration, and development of mineral properties in Colombia and Mexico. It holds 80% interest in the Belmira gold-silver project, which covers an area of approximately 6,845 hectares of property area located in Colombia, South America. The company also has 60% interests in Cinco Minas project that covers approximately 10,750 hectares located approximately 100 km northwest of the City of Guadalajara, Mexico; and Gran Cabrera project covering an area of approximately 4,300 hectares located approximately 35 km northwest of Cinco Minas, Mexico. Bandera Gold Ltd. was incorporated in 1993 and is based in Edmonton, Canada.

Top 10 Warren Buffett Companies To Own For 2014: Lon & St.lawrnce Inv(LSLI.L)

London and St. Lawrence Investment Company PLC is a publicly owned self managed investment trusts. The firm invests in public fixed income markets. It makes its investment in British government securities and other bonds, approved investment trusts, authorized unit trusts, and other financial securities. London and St. Lawrence Investment Company PLC was founded in 1957, and is based in Tunbridge Wells, United Kingdom.

5 Best Stocks For 2014: Active Control Techn (ACTV)

The Active Network, Inc. provides organization-based cloud computing applications services to business customers in North America, Europe, and internationally. The company offers ActiveWorks, an organization-based cloud computing platform, which transforms the way organizers record, track, manage, and share information regarding activities and events. Its ActiveWorks back-office system pulls customers� participant management, operational reporting, volunteer management, and service and payment processing functions into one hosted system. The company also provides consulting services, which consist primarily of business mapping, project management services, and guidance on best practices in using its services; and implementation services, including system set-up and configuration, and data conversion, as well as develops customized training and education programs relating to both the use and administration of its services. It serves a range of customers, including communit y and sports organizations, large corporations, small and medium-sized businesses, educational institutions, federal and state government agencies, non-profit organizations, and other related entities. The company was formerly known as Racegate.com, Inc. and changed its name to The Active Network, Inc. in May 2001. The Active Network, Inc. was founded in 1998 and is headquartered in San Diego, California.

Top 10 Warren Buffett Companies To Own For 2014: Terra Energy Corp(TT.TO)

Terra Energy Corp., a junior exploration and production company, engages in the exploration, development, and production of petroleum and natural gas in Western Canada. Its operations are primarily located in northeastern British Columbia and the Peace River Arch region of Alberta. As of December 31, 2011, the company had interests in 117 net producing and 280 net non-producing oil, natural gas, and other wells. Terra Energy Corp. is headquartered in Calgary, Canada.

Top 10 Warren Buffett Companies To Own For 2014: Ashland Inc. (ASH)

Ashland Inc. operates as a specialty chemicals company in the United States and internationally. Its Ashland Aqualon Functional Ingredients segment produces cellulose ethers; and specialty additives and functional ingredients. Its products offer functionality, such as thickening and rheology control; water retention; adhesive strength; binding power; film formation; protective colloid, suspending, and emulsifying action; foam control; and pH stability. The company?s Ashland Hercules Water Technologies segment manufactures papermaking chemicals and supplies specialty chemicals. It offers sizing agents, wet/dry strength additives, and crepe and release additives for tissue manufacturing; and deposit control agents, defoamers, biocides, and other process additives. This segment also provides specialized chemicals and consulting services for the utility water treatment; and performance-based feed and control systems; and monitoring devices and remote system surveillance. Its A shland Performance Materials segment manufactures and supplies specialty chemicals and customized services to the building and construction, transportation, metal casting, packaging and converting, and marine markets. It also offers unsaturated polyester and vinyl ester resins, and gelcoats; adhesives and specialty resins; and metal casting consumables and design services. The company?s Ashland Consumer Markets segment produces and markets packaged automotive lubricants, chemicals, appearance products, antifreeze, and filters to the private passenger car, light truck, and heavy duty markets. It also operates a quick-lube franchise under the name of Valvoline Instant Oil Change. The company was founded in 1918 and is headquartered in Covington, Kentucky.

Top 10 Warren Buffett Companies To Own For 2014: Yandex N.V.(YNDX)

Yandex N.V., an Internet and technology company, operates an Internet search engine in Russia and internationally. It offers access to a range of information available online; localized homepages for specific geographic markets; and personalized and email services. The company also provides specialized search services comprising news aggregation and information services; and price comparison services, such as product information, price comparisons, and consumer-generated reviews of products and online retailers, as well as other specialized search services, including search services for images, videos, music, theatres, televisions, weather, jobs, transportation, cars, and real estate. In addition, it offers desktop applications consisting of specialized toolbar for Web browsers, Russian-to-English and English-to-Russian keyboard layout switcher, and customized browser versions; and server applications for indexing and searching files in various formats. Further, the compan y provides text-based advertising and display advertising services for advertisers on its Websites and Yandex ad network member Websites; and Yandex.Market, a price comparison service, which offers a platform for retailers to reach consumers in a targeted manner. Additionally, it provides services and tools for businesses comprising Yandex.Webmaster that allows Webmasters to control how their Website is seen by its search engine; Yandex.Metrica, a Web statistics analysis tool; Yandex Site Search, a search tool for Webmasters and Website owners; Yandex.Mail for Domain Owners that allows users to create email accounts with their own domain names; Yandex APIs and Widgets that enable developers to use its technologies in their own businesses; and Yandex.Money, an online payment system. Yandex N.V. was incorporated in 2004 and is based in The Hague, the Netherlands.

Top 10 Warren Buffett Companies To Own For 2014: Bank Of Montreal (BMO)

Bank of Montreal, together with its subsidiaries, provides a range of retail banking, wealth management, and investment banking products and solutions in North America and internationally. It offers personal banking products and services to consumers and small businesses, including deposit and investment services, mortgages, consumer credit, small business lending, and other banking services; and commercial banking products and services to small business, medium-sized enterprise, and mid-market banking clients comprising lending, deposits, treasury management, and risk management services. The company also offers cards and payments services; investment and wealth advisory services; self-directed investing services; private banking services to high net worth and ultra-high net worth clients; investment fund solutions across a range of channels; pension plans; investment management services; and creditor insurance, and life insurance and annuity products and services. In add ition, it provides capital markets products and services, including equity and debt underwriting, corporate lending and project financing, mergers and acquisitions, restructurings and recapitalizations, balance sheet management, liquidity management, merchant banking, securitization, foreign exchange, derivatives, debt and equity research, and institutional sales and trading to corporate, institutional, and government clients. As of October 31, 2010, Bank of Montreal operated and maintained approximately 1,230 bank branches in Canada and the United States. The company was founded in 1817 and is headquartered in Toronto, Canada.

Advisors' Opinion:

• [By Andrew]

  This is another solid Canadian bank paying a whopping 4.70% dividend.  My arguments for buying this bank are pretty much the same as above for TD.

Top 10 Warren Buffett Companies To Own For 2014: Eastern Virginia Bankshares Inc.(EVBS)

Eastern Virginia Bankshares, Inc. operates as the holding company for EVB, a state-chartered community bank that provides a range of personal and commercial banking services to individuals and small to medium-sized businesses primarily in eastern Virginia. The company offers various interest-bearing deposits, including checking, savings, money market, and certificate of deposit and other time deposit accounts, as well as noninterest-bearing demand deposits. It also provides commercial business, industrial, agricultural, one-to-four family residential real estate, multi-family residential real estate, construction, farmland, non-farm and non-residential real estate, and consumer loans. In addition, the company, through the subsidiaries of its bank, offers investment brokerage services; originates and sells residential mortgages; underwrites and sells title insurance to mortgage loan customers; and sells various insurance products as an agent. As of December 31, 2010, it own ed and operated 24 full-service branch offices that serve customers in Caroline, Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Richmond, Northumberland, Southampton, Surry, and Sussex counties, as well as in the city of Colonial Heights. The company was founded in 1910 and is headquartered in Tappahannock, Virginia.

Top 10 Warren Buffett Companies To Own For 2014: Bca Erturi-lazio(PEL.MI)

Banca Popolare dell?Etruria e del Lazio provides banking and financial services to the private, corporate, and retail customers in Italy. It primarily offers traditional deposits and lending services. The company provides current-account transactions, bank transfers, and payment of notes; mortgages, such as 30-year mortgages, capped mortgages, and high-loan-to-value mortgages; revaluable policies comprising participating and endowment-type policies, plus pension planning, pure-risk, capital redemption, and index and unit-linked policies. It also provides online trading services for buying and selling equities listed on the Milan screen-based equities market; warrants; and covered warrants. In addition, the company offers loan intermediation, consumer credit, information technology, real estate, and business financial advisory services, as well as remote banking, home banking, and Internet banking services. As of December 31, 2008, it operated a branch network of 186 branc hes in the regions of Tuscany, Latium, Umbria, Marche, Abruzzo, Molise, Emilia Romagna, Lombardia, and Veneto. The company was founded in 1882 and is headquartered in Arezzo, Italy.

Top 10 Warren Buffett Companies To Own For 2014: GeoMet Inc.(GMET)

GeoMet, Inc., an independent energy company, engages in the exploration for, development, and production of natural gas from coal seams and non-conventional shallow gas. Its principal operations and producing properties are located in the Cahaba Basin in Alabama and the central Appalachian Basin in west Virginia and Virginia. The company also owns additional coalbed methane, and oil and gas development rights, principally in Alabama, Virginia, West Virginia, and British Columbia. As of September 30, 2011, it owned approximately 143,000 net acres of coalbed methane, and oil and gas development rights. The company, formerly known as GeoMet Resources, Inc., was founded in 1985 and is headquartered in Houston, Texas.

Here's Which Dow Components Are Reporting This Week

With earnings season now in full swing, let's look at which of the Dow Jones Industrial Average's (DJINDICES: ^DJI  ) components are set to report earnings this week and what investors will probably be focusing on in those reports.

We'll hear from a number of the Dow's components this week. First up is McDonald's (NYSE: MCD  ) , which is scheduled to release results on Monday before the opening bell rings. Wall Street's estimate for earnings per share is $1.40, which will be important for the company to beat, though perhaps it's not the most important detail of the report. This has been a rough year for the fast-food restaurant, which has struggled with beating same-store sales figures. For most investors, that will be what they want to see in the report.

DuPont is on tap before the opening bell on Tuesday, with AT&T (NYSE: T  ) is set to report after the closing bell and post EPS of $0.68. We've seen a number of changes within the telecom industry over the past few months, and it should be interesting to see whether any of the smaller players have taken market share away from AT&T or Verizon, the top two players.

Boeing (NYSE: BA  ) is set to report before the bell on Wednesday, and with all the recent problems the company has had with its 787 Dreamliner, investors are surely going to be picking through this report with a fine-toothed comb. One thing they'll definitely want to see is whether the backlog report amount has increased or decreased over the past few months. The number we get will tell us whether Boeing is still selling planes or whether the Dreamliner's battery problems and most recent fire have affected sales.

On Thursday, 3M (NYSE: MMM  ) kicks things off before the opening bell and is expected to post earnings per share of $1.70. With the company's previously expected top-line growth of around 2% to 6%, it will be interesting to see if management can pull off that feat as major world economies are still struggling. With China's GDP growth continuing to slow, I'll be looking at how 3M performed in that market and see whether any headway is being made in Europe, as the whole EU remains flat on a GDP basis.

On Friday, no Dow components are reporting. Give yourself a break and take the day off from the market.

More Foolish insight
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

GM’s 2014 Silverado Hits a Speed Bump

2014 Chevrolet Silverado courtesy of General Motors.

General Motors' (NYSE: GM  ) 2014 Silverado is the company's most important redesign since it filed for bankruptcy. It relies on the Silverado for juicy margins in the massively profitable full-size pickup segment, and it usually delivers. GM has been a little vague about when exactly these trucks will hit the showroom, initially saying it planned a spring launch. Now without more news from GM other than "soon," it's looking like mid-summer is a better bet. I think GM's hit a speed bump in the launch of the Silverado and it could be a big deal. Here's why the inventory report we'll see released after this month ends will be very important to watch.

High stakes game
Analysts estimate each full-size truck sold by Detroit's Big Three automakers can bring in as much as $10,000 in profit. Analysts also estimate that the full-size pickups can rake in as much as 60% of Detroit auto's profits. Right now, that's great news because the average age of trucks on the road is 13 years, and sales in the full-size truck segment is surging. Trucks are important for Detroit autos, but more important is the balancing act between new and old model inventories, especially during a redesign.

Inventory level
On May 1, inventory levels for the Chevrolet Silverado sat at 99 days, a high number yet still an improvement for GM. That's 12 days less inventory than it had a mere month earlier, but is still above January's 78 days of inventory. The average days of inventory for all Chevrolet "trucks" -- Avalanche, Suburban, Tahoe, and others -- sits at 74 days, a whopping 25 days fewer than the Silverado. If you want to compare apples to apples, rival Ford's (NYSE: F  ) F-Series has 93 days of inventory as of May 1, up from 85 a month earlier, which is at least in the ball park of GM.

Problem or not?
This could easily turn into a massive problem because of an aggressive price strategy by GM. It opted not to raise the price on its new 2014 model to try to take market share back from the F-Series and Ram pickups. It has a one year head start on Ford's next generation F-150 and with potential pricing pressure from Japanese rivals on a weakening yen, it felt its 2014 Silverado would be most effective without a price increase.

That turns into a big problem if and when you can't dwindle down your 2013 model inventory in time. That would leave GM between a rock and a hard place with tough decisions to make. It could opt to delay the release of its most important redesign, missing prime selling time as the full-size pickup segment surges from increased construction and housing demand. Or GM can release the 2014 Silverado on time and create a pricing war between its 2013 model -- a situation that has to be avoided. A nasty price war would result in massive incentives to move the older product as the 2014 has no price increase. As a result of that, the 2013 at a discount would cannibalize the 2014 market sales. Not a situation GM and its investors want to find themselves in this summer.

Bottom line
Currently Ford is producing more profits than GM off lower revenue from its leaner operations and if GM doesn't handle this speed bump quickly, it will cause margins and profits to drop, which GM can't afford. There's still time for GM to smooth things out, and last month was a solid step in the right direction. In addition to that step, much of Detroit is slashing downtime to improve its inventories of popular vehicles while GM is opting to keep its typical downtime for most plants to reduce its higher inventories. When we see inventory reports released next week, we'll know If Memorial Day sales helped slash Silverado inventories lower than 99 days. If it hasn't, GM will have a major speed bump to deal with this summer -- something management and investors hope to avoid.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Del Frisco's Restaurant Group Beats on Both Top and Bottom Lines

Del Frisco's Restaurant Group (Nasdaq: DFRG  ) reported earnings on July 16. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended June 11 (Q2), Del Frisco's Restaurant Group beat expectations on revenues and beat expectations on earnings per share.

Compared to the prior-year quarter, revenue expanded significantly. Non-GAAP earnings per share dropped significantly. GAAP earnings per share shrank.

Gross margins dropped, operating margins contracted, net margins grew.

Revenue details
Del Frisco's Restaurant Group logged revenue of $60.4 million. The seven analysts polled by S&P Capital IQ anticipated sales of $58.8 million on the same basis. GAAP reported sales were 19% higher than the prior-year quarter's $50.7 million.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
EPS came in at $0.20. The seven earnings estimates compiled by S&P Capital IQ predicted $0.19 per share. Non-GAAP EPS of $0.20 for Q2 were 20% lower than the prior-year quarter's $0.25 per share. GAAP EPS of $0.19 for Q2 were 5.0% lower than the prior-year quarter's $0.20 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 25.4%, 160 basis points worse than the prior-year quarter. Operating margin was 11.5%, 150 basis points worse than the prior-year quarter. Net margin was 7.3%, 20 basis points better than the prior-year quarter. (Margins calculated in GAAP terms.)

Looking ahead
Next quarter's average estimate for revenue is $55.5 million. On the bottom line, the average EPS estimate is $0.11.

Next year's average estimate for revenue is $278.2 million. The average EPS estimate is $0.95.

Investor sentiment
The stock has a three-star rating (out of five) at Motley Fool CAPS, with 11 members out of 12 rating the stock outperform, and one members rating it underperform. Among six CAPS All-Star picks (recommendations by the highest-ranked CAPS members), six give Del Frisco's Restaurant Group a green thumbs-up, and give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on Del Frisco's Restaurant Group is buy, with an average price target of $21.50.

Does Del Frisco's Restaurant Group have what it takes to execute internationally? Take a look at some American restaurant concepts that are generating profits in all over the globe in, "3 American Companies Set to Dominate the World." It's free for a limited time. Click here for instant access to this free report.

Add Del Frisco's Restaurant Group to My Watchlist.

The Greatest Threat to the U.S. Wireless Market

The U.S. telecom space has generated more than its share of headlines over the last 12 months amid a wave of massive mergers. And, while that's been plenty exciting in this usually dull space, the real competition might just be getting started. With plenty of fresh capital and spectrum to boot, Sprint Nextel (NYSE: S  ) is taking dead aim at the two largest incumbents in in this space -- AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) , much to consumers' delight. So what's Sprint's master plan? In this video, Fool contributor Andrew Tonner talks about how Sprint could quickly change the game in the U.S. telecom space.

Want to get in on the smartphone phenomenon? Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further."

Thursday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, as earnings season gets under way in earnest, analysts are busy tweaking their price targets to track changes in earnings and guidance. We'll be taking a look at three such tweaks today, for popular stocks: SanDisk (NASDAQ: SNDK  ) , Johnson & Johnson (NYSE: JNJ  ) , and HollyFrontier (NYSE: HFC  ) .

Good news first
Let's take these in order, beginning with SanDisk, which is up more than 2% today after reporting $1.06 per share in profits on $1.5 billion in revenues -- beating analyst estimates on both counts. Speaking of counts, the number of analysts upping their price targets on the stock had reached five at last count, with Needham & Co. leading the pack with a projection of $80 a share.

That target is close to $20 above where the shares now trade, suggesting a potential 31% profit in the stock. But can investors realistically hope to capture those profits?

Yes, it very well might. SanDisk turned in a truly magnificent quarter yesterday. Thanks to the beaucoup profits, the company's P/E ratio now stands just a hair below 21 -- versus the near-31 times earnings valuation still being shown on Yahoo! Finance's key statistics page. If the company succeeds in hitting the 28% annualized, long-term growth estimate that analysts have it pegged for, 21 times earnings is an absolute steal of a deal on this stock. Plus, with trailing free cash flow now clocking in at $940 million -- versus "only" $718 million in GAAP net earnings -- this stock's arguably even cheaper than it looks.

Fact is, at a price-to-free cash flow ratio of less than 16 today, I think SanDisk will be a great bargain if the stock even posts growth in the upper teens over the next five years. If it gets into the 20-percent range, though, look out ... above!

Paging Dr. Profit
In contrast, I'm less enthused about Johnson & Johnson, the buy rating Argus Research is still assigning it, and the new $104 price target Argus has suggested.

Don't get me wrong. Johnson & Johnson's report yesterday was fully as good as SanDisk's with revenues ($17.9 billion) and per-share profit ($1.32) both beating expectations. My objections to this stock center less on the success of the business, and more on the price that investors are being asked to pay to own a piece of that business.

Simply put, Johnson & Johnson shares cost too much. Based on the most recent data the company has provided us (which does not include free cash flow data, tsk, tsk), Johnson & Johnson shares now trade for nearly 20 times earnings. That's quite a lot to pay for a company that few analysts see growing earnings at much more than a 6% annualized rate over the next five years.

In fact, even Johnson & Johnson's generous 2.9% dividend yield isn't enough to entice me to buy these shares. As great a company it may be, Johnson & Johnson's stock price is a prescription for portfolio underperformance.

And speaking of underperformance...
One of the very few stocks getting hit with a reduction in price target today is oil refiner HollyFrontier. Over at Imperial Capital, analysts just cut $10 off their target price for Holly shares. (And Holly didn't even report earnings yesterday).

The reason: As Motley Fool Blog network writer Sarfaraz Khan recently pointed out, a marked contraction in the difference in prices between West Texas Intermediate (WTI) crude oil and that of Brent is putting the squeeze on refiners like Holly. In years past, these refiners have been able to buy WTI crude oil at steep discounts, refine them into gasoline and diesel, and sell them at prices more approaching to what other refiners had to charge after refining pricier Brent crude oil.

Those days are coming to an end, and with them, the tailwind that's been boosting HollyFrontier's profits. As a result, the P/E at Holly that today sits below 5.0 is expected to spike sharply upwards next year, giving the stock a forward P/E ratio of nearly 8.5. Indeed, already, we can see foreshadowing of this effect on the company's cash flow statement, where free cash flow numbers for the past 12 months ($1.3 billion) are coming in about half-a-billion dollars below reported net income numbers ($1.8 billion).

Mind you, despite cutting its price target on Holly, Imperial Capital isn't actually counseling selling. To the contrary, Imperial retains a buy rating on the stock, and the reason here is clear: Holly remains cheap, even if earnings falter a bit.

The stock costs only 6.5 times free cash flow today, and the company is sitting on $1.2 billion in net cash (reducing its valuation even further). If earnings aren't going to grow much -- or don't grow at all -- over the next few years, at least the stock is cheap enough to "price in" that risk. Meanwhile, we know that growth will return... eventually. At this point, investors may just want to sit back, cash their 2.8% dividend checks, and wait out the slump.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson.

Top Dividend Stocks To Watch For 2014

In June 2011, I invested my money equally in a selection of 10 high-yield dividend stocks. With a year of success behind me, in July 2012, I added even more money to the portfolio. Those names offer triple the yield of the average S&P 500 stock. You can read all the details here. Now let's check out the results so far.

Company

Cost Basis

Shares

Yield

Total Value

Return

Southern	$39.71	25.0818	4.1%	$1,194.40 Top Dividend Stocks To Watch For 2014: Vornado Realty Trust(VNO) Vornado Realty Trust is a privately owned real estate investment trust. The trust engages in investment, ownership, and management of commercial real estate. It invests in the real estate markets of United States. The trust primarily invests in office, industrial and retail properties. Vornado Realty Trust is based in New York, New York. Top Dividend Stocks To Watch For 2014: Lorillard Inc(LO) Lorillard, Inc., through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States. The company offers 43 different product offerings under the Newport, Kent, True, Maverick, and Old Gold brand names. Lorillard, Inc. sells its products primarily to wholesale distributors, who in turn service retail outlets, chain store organizations, and government agencies, including the United States? Armed Forces. The company was founded in 1760 and is headquartered in Greensboro, North Carolina. Advisors' Opinion: [By Glenn] Lorillard (LO), through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States. The company has paid a rising dividend since becoming a separately traded company in 2008. It yields 5.40% and has a high dividend payout ratio as well. 5 Best Stocks To Watch For 2014: JDS Uniphase Corporation(JDSU) JDS Uniphase Corporation provides communications test and measurement solutions, and optical products for telecommunications service providers, wireless operators, cable operators, network-equipment manufacturers, and enterprises worldwide. The company?s Communications Test and Measurement segment supplies instruments, software, and services to enable the design, deployment, and maintenance of communication equipment and networks. Its product portfolio consists of test tools, platforms, software, and services for wireless and fixed networks. The company?s Communications and Commercial Optical Products segment offers components, modules, subsystems, and solutions that are used by communications equipment providers for telecommunications and enterprise data communications. This segment?s products comprise transmitters, receivers, amplifiers, ROADMs, optical transceivers, multiplexers and demultiplexers, switches, optical-performance monitors and couplers, splitters, and circ ulators, which enable the transmission of video, audio, and text data through fiber-optic cables. It also provides various laser products, including diode, direct-diode, diode-pumped solid-state, fiber, and gas lasers for micromachining, materials processing, bioinstrumentation, consumer electronics, graphics, medical/dental, and optical pumping; and photovoltaic products, such as concentrated photovoltaic cells and receivers for generating energy from sunlight, as well as fiber optic-based systems for delivering and measuring electrical power. The company?s Advanced Optical Technologies segment offers optical solutions for security and brand-differentiation applications; and thin film coatings for a range of public and private-sector markets. This segment also provides multilayer product-security solutions that deliver overt, covert, forensic, and digital product and document verification. JDS Uniphase Corporation was founded in 1979 and is headquartered in Milpitas, Califo rnia. Advisors' Opinion: [By he Fiscal Times] JDS Uniphase  (JDSU +0.85%), like Akamai, is a name that will be familiar to anyone who watched the big technology bubble of the 1990s take shape. It has been a volatile ride ever since, and the company's earnings are flagging, but the telecommunications technology provider, which specializes in optical products, offers rising revenues and adequate cash flow. The company got a boost in December from the decision by Piper Jaffray analyst Troy Jensen to boost his price target to $16 from $12 (the stock now trades at about $14 a share). Jensen's bullishness stems from a conviction that spending by telecom companies is about to take an upward turn, and that JDS Uniphase is likely to be one of the beneficiaries as its customers move to improve their network infrastructures later this year. JDS Uniphase climbed 16.2% in December. Top Dividend Stocks To Watch For 2014: Northeast Utilities(NU) Northeast Utilities, a public utility holding company, provides electric and natural gas energy delivery services to residential, commercial, and industrial customers in Connecticut, New Hampshire, and western Massachusetts. The company engages in the purchase, delivery, and sale of electricity; and owns and operates approximately 1,200 megawatts of primarily fossil-fueled electricity generation assets. As of December 31, 2010, it served approximately 1.2 million customers in 149 cities and towns in Connecticut; 497,000 retail customers in 211 cities and towns in New Hampshire; and 206,000 retail customers in 59 cities and towns in western Massachusetts. The company also operates a natural gas distribution system in Connecticut and serves approximately 206,000 customers in 71 cities and towns. It offers gas supply to commercial and industrial customers; and to residential customers for heating, hot water, and cooking needs, as well as provides gas transportation services t o commercial and industrial customers. In addition, the company offers electric transmission services. Northeast Utilities was founded in 1927 and is headquartered in Hartford, Connecticut. Top Dividend Stocks To Watch For 2014: Nordson Corporation(NDSN) Nordson Corporation manufactures equipment used for precision dispensing, testing and inspection, and surface preparation and curing. Its Adhesive Dispensing Systems segment manufactures equipment for applying adhesives, lotions, and liquids to disposable products; automated adhesive dispensing systems for the food and beverage, and packaged goods industries; hot melt and cold glue adhesive dispensing systems for the paper and paperboard converting industries; adhesive and sealant dispensing systems for bonding or sealing plastic, metal, and wood products; and laminating and coating systems to manufacture continuous-roll goods in the nonwovens, textile, paper, and flexible-packaging industries. The company?s Advanced Technology Systems segment comprises automated gas plasma treatment systems used to clean and condition surfaces for the semiconductor, medical, and printed circuit board industries; controlled manual and automated systems for applying materials in customer pr ocesses requiring precision and material conservation; ultraviolet equipment used in curing and drying operations for specialty coatings, semiconductor materials, and paints; and bond testing and automated optical and x-ray inspection systems used in the semiconductor and printed circuit board industries. Its Industrial Coating Systems segment provides automated and manual dispensing systems used for applying coatings, paint, finishes, sealants, and other materials. Nordson Corporation markets its products in the United States and internationally through a direct sales force, as well as through qualified distributors and sales representatives. It serves various markets, including the appliance, automotive, bookbinding, container, converting, electronics, food and beverage, furniture, life sciences and medical, metal finishing, non woven, packaging, and semiconductor industries. The company was founded in 1935 and is headquartered in Westlake, Ohio. 3 Biotechs That Could Be Bought Out This Year Buyout! The word gets biotech investors' blood flowing and their hearts racing. Mere rumors that a biotech stock could get bought out can send shares surging. Chances are that a few biotech companies will be scooped up by larger players over the coming months. Here are three biotechs that could possibly be bought out by the end of the year. 1. Onyx Pharmaceuticals (NASDAQ: ONXX  ) This one's virtually a no-brainer. A few weeks ago, Amgen (NASDAQ: AMGN  ) made an unsolicited offer for Onyx. Although Onyx rejected Amgen's bid of $120 per share as being too low, that wasn't the end of the story. Onyx decided it liked the attention from Amgen and "interest received from other third parties," so it commissioned its financial adviser to explore other opportunities for a sale. Depending on which analyst you're listening to, the biotech could bring as low as $145 per share and as high as $180 per share. Several potential buyers have been floated -- by pundits, not by the company itself. German drugmaker Bayer and Onyx already work closely together, co-marketing Nexavar. Pfizer (NYSE: PFE  ) also has a connection with the biotech through its licensing of breast cancer drug palbociclib. Of course, Onyx won't limit its options to big companies with which it currently works. 2. Alexion Pharmaceuticals (NASDAQ: ALXN  ) Despite all of the buzz, I won't say that a sale of Alexion is a done deal just yet. Roche is reportedly looking to finance a buyout of Alexion, but the possibility exists that the high price tag could scuttle those plans. On the other hand, we would be remiss without including Alexion in our list of potential biotech buyouts. Roche threw in the towel last year on a potential acquisition of Illumina due to price. The company hasn't shied away from big deals, though. It bought Genentech in 2009 for $46.8 billion. However, that buyout was for 17 times EBITDA. Piper Jaffray says that an acquisition of Alexion could cost 61 times EBITDA. Valuation concerns aside, Alexion makes an attractive target for Roche. Soliris, which treats two rare blood diseases, enjoys marketing exclusivity as an orphan drug and ranks as one of the most expensive treatments in the world. Alexion also continues to experience strong growth from Soliris, with revenue increasing 38.5% year-over-year last quarter. 3. Acadia Pharmaceuticals (NASDAQ: ACAD  ) There aren't any known deals in the works for Acadia, but it wouldn't be surprising if acquisition stories emerge in the not-too-distant future. Several factors could contribute to the small biotech ending up as a target for a larger player. Acadia received great news from the Food and Drug Administration in April. The FDA told the company that another planned phase 3 trial wouldn't be needed for pursuing approval of pimavanserin, which targets treatment of Parkinson's disease psychosis, or PDP. As a result, Acadia anticipates submitting a New Drug Application, or NDA, for the drug by the end of 2014. Pimavanserin also holds potential to treat Alzheimer's disease psychosis, which is similar in several aspects to PDP, as well as schizophrenia. Analyst Jason Napodano projects that worldwide peak sales for all indications could exceed the $2 billion mark. With Acadia's market cap now at a little over $1.5 billion, the company could be a good buy for a larger organization if these estimates are even close to accurate. Buyout fever Just because a company is open to being acquired doesn't necessarily mean that it will be acquired, as is the case for Onyx. And just because a larger company has the motive and the means to make an acquisition doesn't mean that it will happen. Pfizer, for example, could benefit from a smart buy and certainly has the cash to make a deal happen. However, CEO Ian Read hasn't placed a high priority on acquiring smaller companies. Roche might want Alexion, but the price tag could ultimately prove too high. Getting buyout fever can be a dangerous disease for investors. Chasing a stock on buyout rumors only to have those rumors fail to pan out can be hazard to your portfolio's health. The smarter approach is to buy a stock based on its own merits. If the company gets bought out, that's great. If not, you're still holding a stock with good prospects for producing gains. Biotech stocks can soar on buyout rumors, but the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading. Tuesday, July 16, 2013 Some Numbers at Graham that Make Your Stock Look Good There's no foolproof way to know the future for Graham (AMEX: GHM) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. A cloudy crystal ball In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future. Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can, at times, suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.) Why might an upstanding firm like Graham do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors. Is Graham sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO: Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter. The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above. Watching the trends When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. Graham's latest average DSO stands at 60.6 days, and the end-of-quarter figure is 65.7 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does Graham look like it might miss its numbers in the next quarter or two? I don't think so. AR and DSO look healthy. For the last fully reported fiscal quarter, Graham's year-over-year revenue grew 52.6%, and its AR dropped 7.0%. That looks OK. End-of-quarter DSO decreased 39.8% from the prior-year quarter. It was down 3.9% versus the prior quarter. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions. Looking for alternatives to Graham? It takes more than great companies to build a fortune for the future. Learn the basic financial habits of millionaires next door and get focused stock ideas in our free report, "3 Stocks That Will Help You Retire Rich." Click here for instant access to this free report. Add Graham to My Watchlist. 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