If you want the inside track on the best momentum stocks with ultra-explosive gains, throw on your “x-ray glasses” and focus on one of the most useful financial ratios around.

It’s called return on equity (ROE), but in many ways it tells us so much more.

ROE is one of the best measures of a corporation’s profitability. It shows you how much profit the company generates with the money shareholders have invested. Let me show you how to easily pull this number out – and how profitable it can be.

How to Calculate Return On Equity (ROE)

You calculate return on equity (ROE) by dividing net income by a shareholder’s equity. The higher the number, the more effective a company is at turning its assets and employees into piles of money for investors.

For instance, between 1998 and 2003, (NASDAQ:DELL) Dell Computer’s highly efficient direct sales and high profit-margin strategy paid off in terms of strong earnings growth and a double-digit ROE of 46%. During that same period Dell shares soared 91.95% raining money on shareholders.

ROE explains why Green Mountain Coffee Roasters (Nasdaq: GMCR) posted a 92.86% return while the S&P500 tanked, -34.37%, over the last year. It’s been a horrific time for most investors, but GMCR shareholders have had lots to smile about as management skillfully squeezed out a 27.85% return on equity.

It’s made Green Mountain one of the few really safe harbors for the investors to ride out the market’s “storm of the century.”

The ROE ratio looks like this:

The only way this ratio can stay high or increase is by maintaining or increasing the bottom line net income through good management. If executives try to hose investors by sucking profit away – issuing more shares through a seasoned equity offering – you’ll catch them by the drop in this ratio.

Other investors who solely focus on net income won’t know the jig is up, because it will stay the same. That’s why ROE is a much better indicator of management effectiveness at bringing home the bacon.

How to Track Return On Equity (ROE)

Return on equity (ROE) is easy to track through many free financial websites – I like to use Yahoo! Finance. First, type the stock symbol of the company you’re looking for into the “Get Quotes” form on the upper left part of the web page.

When the page for the company’s information comes up, click on the “Key Statistics” link. Then on the same page in the “Management Effectiveness” section you’ll see the value for “Return on Equity (ttm).” This tells you how well management is generating profits for shareholders.

Just look at how their shares have soared…

We can also pull up the amount of institutional shareholders of this company. One of the other interesting things we can access on Yahoo! is the amount of institutional ownership of GMCR. Today it’s almost 27.85% of the company shares.

Institutions are some of the biggest drivers of price movements on the markets and a low institutional ownership means that this stock could have much more to go. By comparison, Starbucks has an institutional ownership of 66% – and a ROE of 3.47%.

Return On Equity (ROE) – How Well Is Management Doing?

Quite simply, a higher return on equity (ROE) number tells us how well management is doing, and if a company is undervalued.

It’s imperative you watch closely how ROE changes over time – ideally you want it to increase. Print off and save the Yahoo! Finance web page for “Key Statistics” each week and you’ll see for yourself how return on equity is changing. If return on equity is double-digit and increasing you might want to consider buying the stock.

If a momentum stock like Green Mountain keeps on increasing its ROE, the stock should continue rising as well. So watch for the new ROE numbers for GMCR on June 28.

It all starts with education,

Dr. Scott Brown

Source: Return On Equity (ROE): Find Explosive Momentum Stocks With This Financial Ratio

This from Investor’s Daily Edge:

Economists say this recession will last till June 2009 at least. Conventional wisdom says it’s time to buy defensive stocks—utilities, consumer staples, booze, healthy banks, drug companies, and defense contractors.

I’ve been walking around with my eyes open, and I don’t think so.

Last week, Andy and I went to the bank then stopped at Starbucks. There were no lines in the bank. We had to wait 10 minutes to get to the counter in Starbucks (NYSE:SBUX).

The legendary Howard Schultz is back, and so is Starbucks.

Schultz was the person who convinced the original coffee-roasting partners to expand in the 1980s when he visited them to find out why they were buying so many of the Hammerplast Swedish drip coffee makers he sold. They hired him for marketing help. But when Schultz’s best new idea was to open a coffee bar, they wouldn’t do it. Schultz quit, started his own coffee bar, and within a few years, bought the roasters out for $3.8 million and called it Starbucks.

He’s the genius who took Starbucks from one very cool Seattle store to 10,000 around the world.

If you missed that wave, catch its revival now.

This stock may be 76% off its 2006 high of $40, but it’s on the way back with Schultz at the helm.

Starbucks has been one of those growth stories that kept fooling people. At first, it was so hot everyone agreed it was going places. Cities were complaining if they didn’t have a Starbucks yet. Then it appeared to be in every town it could conquer.

So much for hot growth, though it was still a fine business, the analysts thought.

Except Starbucks’ Schultz knew better. Under Schultz’ guidance, Starbucks started putting two, three, four stores in a town…

And that seemed likely to end when the analysts noted there were corners with Starbucks stores facing each other.  Growth would slow.

Wrong again. Starbucks began sidling into the crevices, into grocery stores, bookstores, airports and little kiosks within other businesses. Growth kept rolling.

And it began going international.

Schultz, who founded Starbucks and embodied everything it stood for, retired as CEO in 2005.

But eventually growth did slow. Starbucks seemed to be courting trouble. Some of the stores weren’t selling well. In the meantime, Green Mountain (GMCR) had moved into similar niche locations and done much better at cornering the convenience store/gas station market. Dunkin’ Donuts expanded its coffee offerings. Peet’s started taking equal shares of grocery store shelf space.

Last January, Schultz un-retired. The first thing he set out to do was to restore the company’s feel. To him, Starbucks is not about coffee, it’s about the feeling of having coffee. It bothered him that when you walk into a Starbucks today, it no longer smells good. Schultz moved quickly to shut down stores that weren’t selling enough. He set out to ramp up international sales.

And he vowed to make Starbucks a real coffee place again. Grinding beans in the stores is to make a comeback. And now there’s Clover…

Clover is a special brewing system. The Clover choice costs even more than regular high-priced Starbucks. Another new system will improve on the espresso, grinding the beans for each cup, as they should be.

I expect Starbucks to recover its momentum this year. The international expansion is particularly promising. Even Starbucks-besotted Americans are pikers among international coffee drinkers.

Americans consume just over 4 kilograms (8.8 pounds) of coffee beans per person a year. The Scandinavians drink two to nearly three times as much, with Finland leading the way. The Swiss, Germans, Dutch, French, Austrians, Belgians and Italians drink 5 to 6 kilograms to our 4. Plus, Europe is like the U.S. pre-Starbucks. Coffee is sold locally, in restaurants and independent cafes.

Source: Wikipedia, consumption in kilograms per capita

So, yes, there’s a global recession on. Yes, premium coffee is a luxury compared to the can of Folgers in the supermarket. But think booze…

Spirits and beer sales usually hold up well in bad economies because they are modest luxuries. It’s not that everyone is suddenly a drunk (though some are to be sure). Rather, most drinkers consider that cold beer an affordable treat. A cup of Starbucks fills the same role in the non-alcoholic beverage world.

Will Starbucks really be the absolute best stock of 2009? Nah. Probably not. That one will probably be an out of the blue surprise. But Starbucks will be one of the great ones. I’m expecting the shares to rise 100% or more in the next year and triple in two years.

Source: A Cheap Luxury for a Dreary Economy

I’m not talking about the increases in daily staples that make the front page, but those little extras that make daily life just a little bit sweeter – coffee, cocoa and sugar.

We might not need them, but we definitely want them. And inflation is putting upward pressure on the price of these soft commodities just as it is on oil and grains such as wheat and rice.

Coffee is Big Business

It doesn’t take an investment expert to realize Americans love their coffee. It’s no longer a drink just to wake you up in the morning. Starbucks Corp. (SBUX) helped create a cultural coffee phenomenon, introducing consumers to espresso drinks. Now it seems like every city street corner has its own gourmet coffee shop selling specialty coffee beverages, often for upwards of $4 a cup.

But it’s not just the extra foam on top that is making that cup of coffee cost more. The price of coffee beans has more than doubled in the past few years.

According to U.S. Department of Agriculture (USDA) data, the New York spot price for Brazil’s Arabica coffee is up 20% over last year’s annual average of 110.72 cents per pound. Just five years ago in 2003, the annual average was only 50.82 cents per pound.

The USDA said in its recent Tropical Products: World Markets and Trade report that U.S. imports of coffee and coffee products increased 14% in 2007 to $3.8 billion. Meanwhile, exports were at a record $513 million, but that’s still a huge trade imbalance.

But there’s hope for those who are looking for a cheap cup of joe before year-end. Brazil’s 2008 coffee crop is just starting to be harvested and is already forecast to be one of the best ever, producing almost 50 million bags of coffee.

“With Brazil’s larger production this year, world coffee output is expected to reach 133.25 million bags while consumption is seen at 126.0 million. If these figures are realized, it will result in an 8.25 million-bag surplus for the 2008 crop year,” wrote James Cordier & Michael Gross, Optionetics.com. “This is not a record surplus, but it should be enough to knock prices down into a new trading range for the second half of the year.”

If coffee prices head lower this year, then the buyers of the raw beans are going to be the ones to benefit. You might want to consider:

• Green Mountain Coffee Roasters Inc. (GMCR): The bulk of U.S. coffee exports are of the roasted variety and this company is getting its share of that export action. It recently announced expected sales growth of 42% to 47% for its fiscal third quarter and reaffirmed its positive outlook for the full-year. Year-to-date, shares are up just a little over 1%, but are up 35% over the past five years. Green Mountain also owns the popular Keurig single-cup brewing system and sells many varieties of coffee to fit it.

• Starbucks Corp. (SBUX) and McDonald’s Corp. (MCD): Starbucks will likely benefit from any dip in coffee prices. Meanwhile, McDonald’s has been aggressively entering the specialty coffee arena and is set to give Starbucks a run for its money when it comes to lattes and espressos served on the go.

The Cost of Cocoa

You may have noticed that your candy fix, much like your caffeine fix, has cost you more lately. On average, the cost of high-quality chocolate, which has a higher cocoa content, has increased over 6% in the last year, according to Nielsen data.

That’s because the cost of cocoa has more than doubled since the beginning of 2007. It can be shipped in powder, paste or liquid form and commands $2,600 per metric ton on New York’s Intercontinental Exchange, up from $1,700 at the start of 2007.

And while cocoa is certainly subject to the same conditions that can affect other crops such as poor weather conditions, the huge increase in price, at least for this commodity, doesn’t seem to be a simple function of supply and demand.

For the year ending in September, the International Cocoa Organization only expects a 51,000-metric-ton shortfall, which can be made up with existing stock, The Wall Street Journal reported.

“The fundamentals do not justify this price, and I haven’t heard of any other explanation other than [investment] funds,” said Hagen Streichert, a German government official and the spokesman for cocoa-buying countries on the International Cocoa Council.

Many analysts and management from some of the leading global chocolate manufacturing firms including Cadbury PLC (ADR: CBY) and the Swiss firm Chocoladefabriken Lindt & Spruengli AG are pointing the finger at hedge fund investments. Volatile equity markets and tight global credit markets have led funds to seek out alternative investments in commodities.

“In my lifetime, it’s an entirely new phenomenon,” Stephanie Garner, a cocoa trader for Sucden, a broker owned by Sucres & Denrees SA, on the London International Financial Futures and Options Exchange told The Journal, speaking of the sudden increase in cocoa futures contracts. “It’s to a large extent a fallout of the credit crunch.”

It’s hard for the average investor to find a pure cocoa play. There are some exchange-traded funds that focus on the price movements of cocoa, but they trade in London and aren’t open to most U.S. investors. However, Africa produces most of the world’s cocoa supply, so an ETF focused on that region could be a good choice:

• SPDR S&P Emerging Middle East & Africa ETF (GAF): This ETF seeks to replicate the movement of an equity index based on the Middle East and African equity markets. The fund uses a passive management strategy to track the total return of the S&P/Citigroup BMI Middle East & Africa index.
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