This has been a tough quarter for companies. Compared to last year’s second quarter, profit is down roughly 31 percent and revenue is down even more. Wall Street thought it was going to be even worse. So in one of the worst quarters ever, the market has rallied.

Investors learn all the wrong lessons from a rally like this. Nothing about it makes sense. The smallest companies are outgunning the biggest one. The most heavily shorted stocks are doing better than the least shorted stocks. The companies with the worst analyst ratings are outshining the ones with the best ratings. Everything about this rally is backwards.

Over the past 37 years – from 1972 to 2009 – these “best of breed” companies have made shareholders 2.3 times more money than the stock market as a whole. For every $100 you made from the stock market, you would have made $230 from these “best of breed” companies.

That’s not just slightly outperforming the market. That’s lapping the market and then some. And it’s even more impressive when you take into account everything this period covered. It’s been an eventful 37 years of embargoes, stagflation, a savings & loan crisis, an Asian economic crisis, a Russian national debt default, a near collapse of the Mexican peso, 9/11, two gulf wars, the bankruptcy of the Long-Term Capital Management hedge fund, the dotcom rise and fall, a bursting of the housing bubble, credit bubble and spending bubble. Forgive me if I’ve left some “minor stuff” out like the fall of the “Iron Curtain” and the rise of China.

Through all this, these companies gave their shareholders a steady and rising stream of revenue and a return that, as I’ve said, was more than 2.3 times what the markets gave. Who wouldn’t want that?

Everybody would. And that’s a big problem for all those mutual funds which don’t touch these companies … and for the hyper-active Wall Street press which makes a fuss over a dozen things every day but somehow misses the biggest story of all…

The existence of a class of companies which know how to put ever-increasing amounts of cash into the pockets of their shareholders, year in and year out, decade in and decade out.

Almost as bizarre as our junk rally are dividend-paying companies that can do no wrong. The ones strong enough and confident enough to raise dividends are going up in price. And the ones that are cutting dividends? Many of them are going up too.

Shareholders have recently been accepting smaller checks without protest and without selling their shares. They are evidently willing to take the hit today so the company can grow profits tomorrow. It’s easier to do when investors think that some kind of recovery is around the corner. If that recovery doesn’t materialize, these shareholders will be showing much less forgiveness to dividend cutters. I don’t want to own these companies when that happens.

If I were an investor in any of those companies, I’d sell my shares right away. The whole point of investing in the “best of breed” companies is that you get paid no matter what.

Everybody is cutting costs, the strong and weak companies alike. But not all dividend companies are cutting their dividends. Just slightly more than half are these days. It pays to invest in the dividend hikers, not so with the cutters. Let other investors be forced to rely on a recovery to reverse their portfolio losses.

You should be and can be making money even if the economy remains weak. As long as there are “best of breed” companies still raising their dividends, there’s no reason why you should sacrifice your pay “for the good of the company.”

The scary thing (for us and the Fed) is that low-interest rates aren’t speeding up the recovery. People aren’t willing to borrow. And banks aren’t willing to lend. The amount of money floating around the economy is pretty stagnant. The Fed should be pretty discouraged. They have $2 trillion on their balance sheet. And all they have to show for it are some banks which should have gone under but are instead giving its employees million-dollar bonuses.

Dividend companies are getting a little respect again. They may even have become the “new fad” according to the UK’s Telegraph. Here’s the money quote…

Few professional investors are banking on a return to the super-charged capital gains we have seen from equities in the past. Rather, the new fad is for companies capable of delivering reliable sources of income. Historically, dividends have been responsible for more than half the return on equities. In the more risk-averse environment which is the new norm it may be rather more than that.

But why be satisfied with just a “reliable source of income” when you could get income which is both reliable and growing. Perhaps the Telegraph doesn’t realize that with “best of breed” companies, you can have your cake and eat it too. But the Telegraph isn’t the only newspaper or media outlet that doesn’t “get it.”

Nobody is talking about these companies providing reliable revenue to shareholders for decades (yes, I said decades) and increasing their dividends at rates of 25-40 percent every year. Yes, I said 25-40 percent every year.

Do the math. A company raising its cash payments to you by 25 percent every year will double the money it pays you every three years! If you’re getting $10,000 in cash every year from a company now, in six years you’ll be getting $40,000.

These aren’t junk bonds. They’re not risky derivatives. They don’t depend on a bull market. These payments come from some of the safest and strongest companies in the market. When companies provide rising cash payments for decades and generate plenty of cash with above average profit margins, they qualify for “best of breed” status.

Actually, some people out there do “get it.” One of them is Hersh Cohen. He has managed the Legg Mason Partners Appreciation fund for the past 30 years. Over these three decades, his fund has done better than the S&P 500, the dividend-company benchmark index and the average return for large-capitalization stock funds. Cohen, who holds a doctorate in psychology, says he focuses on companies with “superior balance sheets and rising dividends.”

Cohen says his academic training helps him when the market goes to extremes. During such times he likes to go against the flow, cutting back when the market is euphoric and increasing his bets when others panic “and stuff is being given away.”

I’m not a fan of mutual funds. I think they’re terrible instruments, trapping investors into very narrow styles of investment long past the time when those styles made a buck. And I don’t think mutual fund managers are the sharpest tools in the investment shed. So when I see an exception, I try to point him out. Cohen is an exception.

If you’re interested in doubling your money every three years with very little risk, there’s only one way to do it. Invest in “best of breed” companies.

To your investing success,
Andrew

Source: Why ‘Best of Breed’ Investing Is No Passing Fad

It was a real mind blower for both of us to fathom the profound meaning of these disappearing earnings. Mr. Gordon (he is a tiny bit older than I am) subsequently e-mailed a confirming chart my way:

Turn Away if You Suffer from Vertigo

Please grab a sickness bag. While many investors follow the Dow, the S&P 500 provides the most accurate measure of the status of the overall US market. As Andy reported, S&P earnings have “nosedived from $80 to $7 – the biggest drop ever recorded.” Both Andy and I are putting an exclamation point on this pathetic event.

You, also, should be extremely wary. This chart indicates that the earnings on one of the world’s most important stock indices are pitiful and plummeting. Little wonder corporate insiders are selling their company stock en masse.

Without earnings stock prices are temporarily levitating. Earnings have gone up in smoke! Isn’t that the life you’ve personally experienced over the last year as budgets are reigned in and unemployment has become pervasive? The S&P index has traded sideways within a range for the past few weeks, but it is still extremely overbought.

Personally, I have been shorting the S&P, but it’s hard to glean any satisfaction from making money from this catastrophe. There is no reason to hold stocks without sufficient earnings. I continually claim we’ve long been in depression mode and this ugly chart screams the truth. A picture (chart) can be worth a thousand words.

What should you do about it? I’m afraid you’re going to have to escape the CNBC, Wall Street and nightly news cheerleaders. These are all inside the box players and you will never regain your lost wealth or become rich following these puppets.

It’s a major stretch to believe you can randomly buy the general market and make 10% per year, though that is a common misconception. Factor inflation into the equation and you clearly see the folly. Most investors will never regain their lost wealth from the 2008 historic carnage. Only those of you wise enough to seek unique and highly profitable investment earnings will become whole again. The opportunity for enviable riches is also present.

Your IDE pundits are, to a person outside the box, offering commentary and services designed to protect and enhance your wealth. You cannot buy general stocks with miniscule earnings and expect to do anything but lose more money. No earnings directly equates to no capital gains.

Nor can your portfolio sit idle as it will end up looking like the nasty graph you just inspected. Ninety nine percent of us must have income or capital gains especially in a hyperinflationary environment.

As you may know, I’m primarily a resource stock investor. I’m also utilizing the incredible IDE brain trust in all of my financial decision making processes. You should be as well. I like and have confidence in each of these experts. We offer a very diverse range of worthy services that are designed to enhance your profits and assist you in escaping the failing financial matrix.

Check them out and see which of us best fits your investment temperament. We cover the total investment spectrum from bonds, blue chip stocks, options and natural resource speculations. The S&P index is down approximately 4% year to date but the last 14 picks I recommended in my Resource Windfall Speculator are up an average of 44%. All of your IDE editors are dead serious about bringing heady profits your way.

You simply must find the right escape hatch out of this historic mess.

Invest Resourcefully,

Rusty

Source: Neither You or the Economy Can Survive Without Earnings

More from Laura in Today’s Financial News:

Sun Healthcare Group, Inc. (NASDAQ:SUNH) runs over 180 nursing centers in the U.S. and provides rehabilitation, inpatient and medical staffing services.

On October 30, the company will announce its third quarter results and all indications are that they should be promising.

Fundamentally, I like the Sun’s P/E of 7.7 and Forward P/E of 9.63, but what I’m really looking at is the short-term potential…

At the beginning of the month, the California-based healthcare provider announced that it had discontinued operations at five centers and that it had a lower than anticipated interest expense on its variable rate debt.

Analysts estimate EPS this quarter to be up 36.30% to 20 cents. The company has exceeded analysts’ estimates for the last five quarters – and it very well may do the same on Thursday.

With good third quarter results in these depressing times, this company’s stock price will jump and if you get in now, you could see double-digit gains in just a few days.

I recommend you buy shares of Sun Healthcare Group, Inc. (NASDAQ:SUNH) at or under $11.

Source: Potential Double-Digit Gains By Oct 30 With SUNH

Believe it or not, these “boring” names soared in the early 1970s, reaching a dot-com style peak in 1972.

In 1972, Coke sold for 46 times earnings. And Disney was even more expensive, at 71 times earnings. Then, both stocks lost three-quarters of their value in two years. And these are just two examples. Similar losses occurred throughout the Nifty Fifty.

Looking back on the situation, Forbes magazine said:

The delusion was that these companies were so good, it didn’t matter what you paid for them; their inexorable growth would bail you out.

Obviously the problem was not with the companies but with the temporary insanity of money managers – proving again that stupidity well-packaged can sound like wisdom. It was so easy to forget that no sizable company could possibly be worth over 50 times normal earnings.

But investors soon forgot what Forbes said about earnings, and history repeated in 1999. Coke and Disney soared to over 40 times earnings. Once again, people thought these companies were so good it didn’t matter what you paid for them. But once again, they were wrong…

Today – nine years later – the share prices of Coke and Disney are down. But business at both has grown dramatically… meaning it just might be time to pile money into the Nifty Fifty stocks again…

———- Advertisement ———-
Finally… A Safe Alternative to Stocks

S&A Research has been conducting a secret project over the past 4 months, getting the full details on an unusual investment…

It has nothing to do with stocks, gov’t bonds, mutual funds, or options. But this investment legally requires you to get paid 50% to 400% gains on precise dates in the future.

Recently, even Barron’s noticed this secret… saying, in the current market environment, this investment is “starting to look juicy.”

Click here for details.
———————————–

Even though its stock price is lower, Disney earns 3.5 times as much as it did in 1999. And Coke’s earnings have doubled.

So with earnings soaring, and the stock prices stagnant, these old Nifty Fifty shares are now cheap again – Disney sells for a price to earnings (P/E) of 13.6 times forward earnings and Coke for 17.

It’s not just Coke and Disney… Earnings for the New Nifty Fifty Index (NFT on www.bigcharts.com) as a group have increased by over 100% since 1999… But the index is down since 1999. As a result, valuations have been cut in half… They’re cheap!

To explain just how cheap, Bloomberg lists the forward P/E ratio of the overall stock market at 16.25 (that’s the S&P 500). But the forward P/E of the New Nifty Fifty Index is only 12.79.

It’s hard to believe the Nifty Fifty won’t return to a premium to the overall market for one simple, brutal reason: Most companies won’t be around in 25 years. But I’d sure bet that in 25 years, families will still take their kids to Disney. And folks will still drink Coke.

I sincerely believe that, after nine years of terrible performance, the New Nifty Fifty stocks will beat the overall market over the next few years, as they simply work their way back to a premium to the overall stock market.

However, I can’t fully endorse buying up all these household names just yet. As you can see from this chart of NFT, the uptrend just isn’t there yet.

I have been burned fighting the trend in the last year. I won’t buck it.

So, do I believe it’s time for the New Nifty Fifty to soar again? Yes. We should be just about there… But wait to see the uptrend before jumping in.

Good investing,

Steve
Source: Time for the Famous Nifty Fifty to Soar Again?

Take the above chart of Eli Lilly (LLY:NYSE).

On April 11, we saw weakness in LLY. Officially, it had failed to rise above long-term support. After trading flat, it was destined to fall. At that time, LLY traded for $52.37 per share.

So we shorted it. And sat patiently.

Seven trading days later, LLY reported earnings. They were good, but failed to meet analysts’ expectations. So LLY dropped $2.48 per share! The news backed up the technical picture.

By that time, LLY was trading around $49.05 per share. LLY stock had fallen 6.34%… but we made much more than that on a short play!

The power of Death Cross Trader gives you the ability to make 10 times your money on a stock’s fall. Very easily, readers of Death Cross Trader made gains of 58% on LLY’s 6.34% drop.

If you don’t want to take my word for it, just listen to DCT subscriber D.H.

He wrote in to say that he “entered the LLY play 10 cents higher but still made a nice profit and I have made back the cost of your service and more in only 2 weeks!”

With a recession in place and stocks continuing to fall from historic highs, it’s time to learn how to double your money in a matter of days, or even triple your money in a month by betting against the biggest stocks on the market.

Ann Sosnowski

Editor, Death Cross Trader

*** Your chance at Triple-Digit Gains in just six weeks…

This is the hottest new research service to hit the market. It’s already had 15 recommendations return 100% gains in just seven month’s time!

Those who get in NOW can expect to receive triple-digit winners each and every month! The only question is: Will you be one of them?

Read on to find out…

The loss is larger than expected, but a higher-than-expected top-line earnings number has given traders reason to celebrate, apparently. Ticker C rocketed up over 8% in premarket trading. Our best guess: A known loss is better than the great abyss. And there are still plenty of folks willing to time the bottom in any one of these behemoth Wall Street banks.

Au contraire, counters Dan Amoss. “I expect financials to keep trending down. Banks and brokers still have plenty of losses to report in 2008 and 2009, even if they can go to the Fed window and temporarily swap their illiquid, impaired mortgage-backed securities for Treasuries.””

So needless to say, I’ve been going to McDonald’s more often lately. So last night me and my girlfriend went to McDonald’s in search for some Cinnamon treats. And we also ordered a chicken burger. So my girlfriend asks for some barbecue sauce, and the stupid manager guy looks at us and says ‘11 cents per sauce packet’.

Really?!?!?!?!

First of all, why 11 cents? Did you want to bring the penny back? Why not 10 or 15 cents. You know, a nice round number. Instead, if I don’t have exactly 11 cents, I have to get 4 pennies back from you.

I hate pennies! If they are double stamped, then OK, I’ll take them. But until then, what the hell!

The second frustrating thing about this, if I buy anything at McDonald’s I should have the privilege of being able to choose what condiment I want. I shouldn’t have to order a ’special’ meal just to have the ‘right’ to have barbecue on my chicken burger.

What, should I sign some forms to make sure I’m eligible for ketchup?

God, McDonald’s does some crazy things sometimes. But I have to say that at least the market is looking down today.

We had an airliner go bankrupt. GE screwed the earnings pooch. And import inflation soared 2.8% last month (what is that like a 10% rise in the past year?!?).

Yeah, as you can expect, market isn’t too happy about that. Maybe we’ll have a nice 200-point drop today to celebrate.

I’ll be back later!