And contrary to what CNN first announced – to much humiliation and censure – the law wasn’t struck down. In fact, the whole thing passed, kit and caboodle in a 5-4 ruling.

So that’s that, and Obamacare will stand, at least for now. Conservative organizations such as the Heritage Foundation have already begun preparing themselves to keep the battle alive going forward, especially in the case of GOP presidential nominee Mitt Romney taking the elections this November. Romney has, after all, campaigned from the start on the premise that he will strike down the rather unpopular law if voted into office.

Many anti-Obamacare (they would doubtlessly call themselves pro-free markets or pro-freedom) groups and individuals are worried that Romney, who has been known to flip-flop or play down the middle more than once, is merely spouting the type of political promises meant only for the campaign trail… and nowhere else. But even if they’re wrong and their preferred candidate actually does try to follow through on his word, that doesn’t by any means necessitate a victory for their camp.

The President of the United States doesn’t have the constitutional power to simply strike down a law he or she doesn’t like, regardless of whether it’s considered controversial, unpopular or even downright dangerous. Congress, of course, needs to approve the measure as well. And getting a bunch of politicians to agree on anything, especially something as complex as the 1,000-plus-page Obamacare, won’t be easy.

That’s not to say that it will be impossible, only that it won’t be a walk in the park by any means.

So for now, let’s just say it’s officially passed and upheld. And with that consensus, we need to figure out what the ramifications of that law will be, particularly from an economic standpoint.

Well before the Supreme Court passed its ruling, Investment U’s Jeannette Di Louie published a piece detailing some of the business changes to expect in the years following Obamacare’s passage. As she points out, we won’t necessarily feel its full affects for some time to come. That’s partially because laws usually take a while to fully play out, but also because many portions of the Patient Protection and Affordable Care Act are actually set up to take effect in stages. And much of it isn’t really implemented until after the 2012 elections.

In other words, don’t expect life to immediately produce rainbows, tie-dye and free LSD – as some naïve liberals may believe – or the apocalypse, as their conservative counterparts might think. Whatever happens is going to happen gradually, with the general populace not fully recognizing the positive or negative ramifications for years to come. It might even take decades.

However, even so, it’s usually best to be as prepared for the future as reasonably possible. Which is why it’s important to consider what Di Louie and company have to say on the matter…

A Forward Look at the Pharmaceutical Industry (Back before the Supreme Court Decision)

Healthcare Reform: Bad News for Big Pharma?

by Jeannette Di Louie, Investment U Research
Monday, April 2, 2012

Healthcare reform could be a minefield for Big Pharma in the long run.

The Patient Protection and Affordable Care Act – less fondly known as “Obamacare” – was the big story to close out the month of March, as the Supreme Court officially took the case.

In an effort to figure out which way the vote was going to swing, the media analyzed every word, pause and twitch the justices made. Though all of that heavy-duty analysis doesn’t actually prove anything; while the Court has likely already decided the healthcare mandate’s fate one way or the other, “We the People” probably won’t find out until June.

Considering the political left’s repeated complaints about Solicitor General Donald Verrilli Jr. and Deputy Attorney General Edwin S. Kneedler’s admittedly painful performance in explaining and defending the law’s constitutionality, many legal beagles and casual observers alike believe “Obamacare” has less than a glowing chance of standing.

But if they’re wrong and the Supreme Court rules in its favor, there’s one set of stocks that’s going to suffer miserably in the long run.

That sector would be pharmaceuticals, both big and small. And there’s a little-known reason why that’s so…

How the Rest of the World Gets its Healthcare so Cheaply

It’s a commonly known fact that U.S. citizens pay a hefty price for their prescription medication compared to just about any other country.

In December 2009, D. Brad Wright, then a doctoral candidate at the University of North Carolina, looked into the price differentiations of Plavix, Nexium and Lipitor, all important drugs designed to treat common but serious health complications. He concluded that Europeans and Canadians often pay less than half of what their U.S. counterparts are forced to shell out.

That’s definitely a sad story (for the United States, at least), but there’s a twist to it that few people fully understand…

The real reason Americans pay so much more than New Zealand, Canada, Mexico, England, Germany, France, et al. is because – for better or worse – those countries all practice some form of socialized medicine. Because the governments pay the bulk of their citizens’ healthcare costs, they set very strict limits on just how much they’ll pay for medication.

And those limits lead to significant losses for the pharmaceutical companies that sell them. That makes sense, considering how much time and money it takes to bring drugs from theory to viability.

There are costly materials to work with, numerous tests to run, top-of-the-line facilities to maintain, the best and the brightest to hire and retain, and all of the other expenses naturally associated with running a business to pay for. In addition, clinical research can take an easy decade to complete… or they fail somewhere along the way, costing pharmaceutical companies millions and even billions in the process.

In short, there’s a reason why drugs are so expensive to buy.

It’s because they’re so expensive to make.

The Last Healthcare System Standing

The United States is one of the few – if not the only – major countries out there that allows pharmaceutical companies to set their own prices. So America is one of the few countries they actually make a profit off of… a profit they need in order to survive.

Writing for MedcineNet.com, Dr. Omudhome Ogbru explains it this way:

“In a nutshell, the price paid by a patient for a medication must cover the costs of developing new compounds that become approved drugs and compounds that fail to become drugs, as well as marketing, post-marketing studies, and a profit. The profit ensures that the company provides a return to investors. Profit is the incentive for the risk that the company takes. Without the promise of a reasonable profit, there is very little incentive for any company to develop new drugs.”

All in all, it’s fairly safe to say that, without the United States paying more than its fair share of costs, the rest of the world wouldn’t have it nearly so easy. But even that cushion can’t last very long if the Patient Protection and Affordable Act stands.

As it stands now, the law requires everybody to have health insurance by 2014, either from a private insurer or the government. And if the U.S. government is going to remain financially feasible for long under that added burden, it’s going to have to start implementing the same price limits that the rest of the world is already working with.

In that case, companies like Johnson & Johnson (NYSE: JNJ), Pfizer Inc. (NYSE: PFE), Eli Lilly (NYSE: LLY), Abbott Laboratories (NYSE: ABT), Merck & Company, Inc. (NYSE: MRK), AstraZeneca (NYSE: AZN) and Novartis (NYSE: NVS) are all going to lose out big time before too long.

Good Investing,

Jeannette Di Louie

Further Fines, Taxes, Government Fees and Results of Obamacare

Since that article debuted on Investment U and after the Supreme Court ruling, the bill and its ramifications have been given even more scrutiny by businesses and organizations, which means that there is a lot more information easily available to the average citizen. One particular piece of information to make the rounds is that the pharmaceutical industry will actually start suffering a bit sooner than expected through an increase in annual government fees (a.k.a. taxes).

According to the Kaiser Family Foundation, drug companies will have to pay $2.8 billion in government fees (a.k.a. taxes) this year and next, $3 billion each year from 2014 to 1016, $4 billion in 2017, $4.1 billion in 2018, and $2.8 billion in 2019 and beyond.

Insurers will face even more severe fines, starting at $8 billion in 2014 and rising all the way to $14.3 billion in 2018.

Some others on the hook include:

• Anybody who currently doesn’t have health insurance, can afford health insurance but doesn’t want health insurance (Government assessments put that number at about four million people.)
• Anybody who likes taking a turn in the tanning booth
• Couples who jointly report surplus investments of $250,00 or more
• Couples who separately report surplus investments of $125,000 or more
• Single filers who report surplus investments of $200,000 or more

Then there are retailers, many of who have known since 2010 that they didn’t like the bill, despite repeated attempts at lobbying and negotiations. Since they weren’t shy about offering their opinion to The Wall Street Journal and the likes back then, it shouldn’t come as any surprise that they’re not very happy about the court case outcome… or that they’re not holding back about those feelings.

National Retail Federation President Matthew Shay went on record specifically to take issue with the part of the law that mandates businesses to offer health insurance options. “Although the Court upheld the law’s constitutionality, many problems remain,” he stated. “It penalizes employers too much; it doesn’t do enough to reduce the cost of health care; and it is unreasonably complicated and difficult to implement and administer. This law will have a dramatic, negative impact on every employer and employee in the United States and further constrain job creation and economic growth.”

And restaurants feel the same way. In a world where food prices aren’t getting any cheaper, the average eatery has a difficult enough time balancing the budget. Add in the health insurance mandate with its expectation that employers offer options to their employees, and it could be a recipe for disaster, says National Restaurant Association CEO Dawn Sweeney.

Making no bones about where she and her organization stand on the issue, she urged Congress to keep trying to repeal the law since the Supreme Court wouldn’t rule it unconstitutional:

“This unworkable law cannot stand as is. We need reform that address the increasing costs our members are faced with each year. Restaurant owners are looking for solutions that will allow them to provide better health care coverage options for their team members, but they cannot be saddled with excessive costs and regulatory burdens that threaten their very business. We ask members of Congress to take action that helps the restaurant industry continue to help create jobs and grow the national economy.”

The one business type that seemed to thrive on the news the day of the Court decision was the hospital sector. One such example, HCA Holdings – a leading hospital and healthcare facility operator – moved from an open of $26.55 to a close of $29.47. So clearly, the markets expect Obamacare to bring hospitals an influx of new, paying customers.

Only time will tell whether any of the opinions, worries and hopes everyone is busy spouting right now actually happen or not. But one way or the other, it seems safe to say that, unless the law is repealed, we’re bound to see a much different United States of America in the next decade or so.

Despite the fact that the S&P 500 has doubled since the financial crisis in 2009, a shocking number of people still seem turned off by the stock market.

According to a poll conducted by Prudential, 58% of respondents “have lost faith” in the stock market. Even more stunning, 44% say they will NEVER invest in the stock market again. Never ever!

What that tells me is there’s still a lot of buying power on the sidelines. Call me a cynic, but people often say one thing and do another.

I’m sure there are some investors who got so burned by the collapse in 2008 and 2009, that they really never will put another penny into the market. They’ll cower in fear, with all of their money in gold or bury their cash under the floorboards. And while that might keep their money secure, it’ll never produce wealth.

If you’re a long-time reader of the site or subscribe to Investment U Daily, you know that we don’t try to time the markets. That’s a fool’s game. Sure, a market timer might make a great call now and then, but I don’t know any who are consistently accurate.

So rather than the futile exercise of trying to figure out the exact moment to buy or sell stocks, stick to our “Four Pillars of Wealth” to achieve your financial goals. The results will be better and you’ll be able to sleep at night.

1. Stick to an Asset Allocation Model – Investment U follows a formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990.
2. Adhere to Safety Switch – Buying a stock is easy. Knowing when to sell is the hard part. This way we let our winners ride and cut our losses before they get too big.
3. Understand Position Sizing – Invest no more than four percent of your portfolio in any one stock. That way if things go wrong, no one particular holding will sink your entire portfolio.
4. Cut your Expenses (Including Taxes) – Invest in no load funds with low expense ratios like Vanguard index funds. Also, choose closed-end funds that trade at a discount instead of open-end mutual funds with up-front fees or loads.

You can potentially lower your taxes by not selling your gains for one year, so that they qualify for the long-term capital gains tax rate (rather than the higher short term), avoid actively managed funds in your taxable accounts and keep your high-yield investments in your IRAs or other tax-deferred accounts.

The markets are a little tough right now. The big financials, such as Morgan Stanley (NYSE: MS), were just got downgraded by Moody’s. Typically, it’s difficult for the markets to rally without the help of the financials.

Several other sectors such as networking, transportation and utilities are also weak. One that still looks strong is the drug and biotech sector.

The point is there’s still stocks out there performing well. You just have to look harder for them.

Consider following the Four Pillars of Wealth to achieve your financial goals and leave the panicking to those who have ridiculously sworn off the markets forever.

Good Investing,

Marc Lichtenfeld

Editor’s Note: These “Four Pillars of Wealth” were originally developed by Alexander Green for The Oxford Club. Marc and Alex wanted me to share a more detailed outline of these wealth preservation tips for those interested in learning more.

For a free copy of The Oxford Club’s full report on “The Four Pillars of Wealth,” click here.

It’s not breaking news that dividends are hot. With bonds paying next to nothing, income-starved investors are increasingly pouring money into dividend-paying stocks.

Last year, while $178.2 billion was removed from equity products, $26.8 billion were invested into dividend-focused funds.

And mutual funds that specialized in dividends saw net inflows (more money invested in than taken out) every week for 44 weeks, according to EPFR Global.

I’m not a huge fan of mutual funds in general, and especially not those that are dedicated to dividends. You can do much better yourself.

For example, Columbia Dividend Opportunity I (RSOIX) is rated five stars by Morningstar. It has a current yield of 3.79% and an expense ratio of 0.75%. Since March of 2004, $10,000 invested turned into $16,915 versus $13,426 for the S&P 500.

Those are some pretty solid stats. If I were looking for a mutual fund that invested in dividend payers, this one would be near or at the top of my list. It’s beaten the S&P 500 and its peers since its inception, the yield is solid and the expense ratio is reasonable.

Its largest holdings are Lorillard (NYSE: LO), J.P. Morgan Chase (NYSE: JPM) and Pfizer (NYSE: PFE) – not exactly a low-risk group. Most of the rest of the portfolio are large cap names like Microsoft (NYSE: MSFT), AT&T (NYSE: T) and General Electric (NYSE: GE).

That’s because a $3.9-billion fund has to buy a lot of stock in order for any one position to be meaningful. A large fund is able to go into the market and purchase two million shares of AT&T or Microsoft.

But if there are better opportunities in smaller names, a mutual fund is going to have a tough time buying enough shares to make a difference.

For example, if you invested in some of the smaller-cap names that are in The Ultimate Income Letter’s Perpetual Income Portfolio, you could do significantly better at an even lower cost.

For instance, let’s say you invested $2,500 each into Community Bank System (NYSE: CBU), Omega Health Investors (NYSE: OHI), Main Street Capital (NYSE: MAIN) and Genuine Parts (NYSE: GPC). During the same eight-year period as the mutual fund’s 69% increase, your $10,000 would have become $19,862 – a significant difference over the $16,915 this very good mutual fund returned.

Community Bank System is not a stock that a mutual fund manager would likely buy. It’s a great little bank with a 3.9% yield, but it only trades 200,000 shares a day. It would be hard for a fund to accumulate enough shares to make a difference in the fund’s returns. Perhaps more importantly, it would also be tough to sell a lot of shares if the fund manager no longer wanted to hold the stock. Omega Health and Main Street have yields approaching 8% and Genuine Parts’ yield is 3.2%, but the company has raised its dividend every year for 56 years.

All of the stocks mentioned above trade less than one million shares per day, although Genuine Parts has a market cap of over $9 billion.

And don’t forget that 0.75% expense ratio. While that is on the low side for mutual fund fees, your return is still being impacted by that 0.75% every year.

If you bought the four stocks listed above with a discount broker, it would cost you about $10 per trade or $40. That comes out to 0.4% of your initial investment. However, that’s a one-time cost, not an annual expense. The only time you’ll incur another fee is when you go to sell. So if you sold it today, you’d have incurred a total expense of 0.8% ($80/$10,000) over eight years rather than 0.75% every year. When you pay that 0.75% every year for eight years, you end up impacting your return by 6%.

I don’t know about you, but I prefer to keep the 6% for me, rather than pay it to a mutual fund manager who can’t do as good a job as I can.

It’s not that the fund managers aren’t smart. They are. But the size of their funds limits their flexibility. As an individual investor, you can use that flexibility to your advantage by owning smaller cap stocks that have higher yields and better growth potential.

Stay invested in dividend paying stocks. They’re the best way that I know of to grow your wealth and generate increasing amounts of income over the long term. But do it yourself. With just a little bit of work, you’ll make more money and pay less in fees than you would with even the best mutual funds. Because this is one area where the little guy has the advantage.

Good Investing,

Marc Lichtenfeld

P.S. The four quality dividend plays I listed above are just the tip of the iceberg. There are 17 more dividend positions I’m currently recommending in my Perpetual Income Portfolio. As I write this, our 21 open positions are scoring an average gain – including dividends – of 25.40%. And my portfolio is just one of the many resources The Oxford Club provides to help out the little guy.

For more information on how to access our Club’s full repertoire of portfolios along with the rest of our expert connections and financial intelligence, click here.

Are Goldman Sachs and Facebook Poised for a Rebound?
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, June 6, 2012: Issue #1789

As you may have heard, golfer Tiger Woods won his second tournament in three months, after having not won an event since before his personal life went over a cliff in 2009.

We’ll have to see if the old Tiger is back, but regardless, it’s a strong comeback for an athlete and a man who seemed completely lost just a short time ago.

Stocks can act the same way.  Sometimes a stock is enormously popular, only to crash and burn.  And if you can find the ones that will rise from the ashes, there is a lot of money to be made.

Let’s look at a few stocks that have had a rough go of it over the past few years, but seem poised to rebound.

Goldman Sachs (NYSE: GS)  – Goldman’s stock is a disaster, trading at about 1/3 of its all-time high of $250, back in 2007.  Main Street despises Wall Street right now and that will likely only increase as we head into a particularly nasty election where the Obama campaign will attempt to position Mitt Romney as everything negative about the industry.

And although Goldman’s reputation doesn’t shine as brightly as it once did, it is still one of, if not the 800 pound gorillas in the business.  With J.P. Morgan Chase’s (NYSE: JPM) CEO Jamie Dimon seeing his formerly beloved status evaporate due to uncontrolled trading losses, Goldman is still arguably the king of Wall Street.

It’s stock isn’t trading like that though. Near its lowest level in three years, the stock is trading at just 7.6 times this year’s expected earnings.  In 2013, earnings per share are projected to grow 11%, increasing to 12% over the next five years.  On a trailing basis, Goldman is surprisingly trading well below its peers at 13.3 times earnings versus the industry average of 18.5

There are all kinds of regulatory reforms aimed at Wall Street firms, which make them out of favor with investors.  But nobody has done it better than Goldman for years and when the group comes back into favor, Goldman Sachs will likely lead the way.

Facebook (Nasdaq: FB) – Facebook hasn’t had a long history as a publicly traded company, but could anything be more out of favor?  On Monday, an analyst was on CNBC saying Facebook wasn’t going to be around in five years.

I’m going to bet he’s wrong.  Facebook might not have lived up to the hype that was generated in order to get the masses to pump up the stock price, but that doesn’t mean there isn’t a real business here that can grow by leaps and bounds.

Facebook has more of its users’ personal information than any company on the planet.  As it begins to figure out how to monetize that information, revenue and earnings will grow significantly.

Keep in mind that internet users spend three times as much time on Facebook than on any other website.

And don’t underestimate Mark Zuckerberg.  Just because he’s soft spoken and a little awkward, don’t mistake him for being complacent.  He is one of the most driven CEOs around.  He wants to be the next Bill Gates. He has the intelligence and the product to get him there.

It’s still in the early stages with Facebook, but I think long-term investors will be just fine with this stock.

It’s hard to know who is disliked more, Tiger Woods or Goldman Sachs and Facebook.  But Tiger appears to be back and I expect Goldman and Facebook to help investors be at the top of their game in the near future too.

Someone in my office recently called me a finance geek. I was actually a little bit insulted. But then, as I started to write this column, I realized she spoke the truth.

You see, I enjoy looking over financial statements and seeing how the numbers interact with each other. I like to look for clues about what the future might hold.

And if there’s a surprise in earnings, I go back to previous quarters to figure out if I could have detected it earlier. It’s kind of like a big puzzle with lots of interconnecting parts that, once you understand them, give you a clear picture of the company and its prospects.

Today, I’m going to use one of the metrics we’ve discussed before to see if we could have predicted an earnings warning by Qualcomm (Nasdaq: QCOM).

That metric is inventory turnover – an often-overlooked measure that can tell you a lot about a company’s operations.

Inventory turnover is essentially how many times a company turns over its inventory in a quarter or a year, or how many times it sells through the products on it shelves.

I decided to look at Qualcomm’s inventory turnover because, although the company reported stellar quarterly results a number of weeks ago, it issued an earnings warning because it couldn’t keep up with demand due to a shortage from one of its vendors. Therefore, I assumed inventory turnover should have spiked.

Let’s see if it did…

Over the last four quarters, Qualcomm’s inventory turnover climbed from 6.8 to 9.7. In other words, a year ago it was selling through its inventory 6.8 times per year. In December, it spiked to over nine, and in the most recent quarter the company was turning over its inventory 9.7 times per year.

In fact, the inventory turnover is higher than it’s been since 2006.

Now, an earnings warning isn’t a positive, but not being able to keep up with demand is a good problem to have. I expect that Qualcomm’s earnings will be excellent once it gets its distribution issues straightened out.

Earnings per share popped in December and March, as well. Qualcomm earned $0.83 per share in December versus $0.61 in the previous quarter. More importantly, the higher inventory turnover may signify what’s going to happen in the next quarter.

In the September quarter, inventory turnover began to rise and we saw a pop in earnings in December. December’s inventory turnover rose sharply, and earnings in March were also strong.

With another quarter of high inventory turnover in March, I would expect a stronger June quarter in terms of earnings than Qualcomm is letting on.

Keep in mind – most companies give very conservative guidance. But even if June isn’t especially strong, I’d expect earnings to pick back up in the September quarter, as it’s clear that Qualcomm is moving product off its shelves at a rapid pace.

Like I always say, earnings can be and are manipulated to tell the story that management wants to tell.

Looking at inventory turnover can give you a strong idea as to how well a company is operating and what the future may be bring.

Good Investing,

Marc Lichtenfeld

Bears Make Headlines, Bulls Make Money (NYSE: CBU)
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, May 23, 2012: Issue #1779

My wife and I have very different opinions as to what makes a nice vacation. Her ideal getaway is a hike through the woods, winding up at a nice spot to pitch a tent, cooking dinner over an open fire and hunkering down in our sleeping bags for the night.

I, on the other hand, prefer to sit by the pool (or ocean) sipping a colorful drink that has an umbrella in it, dining at a nice restaurant, catching a show and then going to sleep in our luxury hotel room.

So this year, once again, we had the ongoing debate about what to do this summer. So we reached a compromise…

We’re going camping.

And this year, we’re going to be camping in an area known for bears. Those animals scare the heck out of me. With one kind of bear you’re supposed to play dead, another you’re supposed to scare it away. I have no idea which is which.

I don’t know if it’s the color, the snout, or how you’re supposed to identify them. I know nothing about bears, other than that I don’t want to come across one.

But when it comes to the stock market, I know a lot about bears. And despite this nasty sell-off we’ve had lately, this is no bear.

Watching Stocks Bleed Every Day

The market is off 7% since May 1 and has fallen 12 of the past 15 days (as of Tuesday morning). It’s been painful to watch stocks bleed every day like a fighter who’s been cut and keeps getting hit in the same spot over and over.

But that’s not how bear markets usually work. They usually don’t have those drops that feel like a punch to the gut. A bear market typically dribbles lower until one day you wake up and realize you’re down 20%.

Bears usually appear when investors are optimistic. That’s hardly the case right now. According to the American Association of Individual Investors Sentiment Survey, only 23.6% of investors are bullish, while 46% are bearish. The bears are up 3.9% from last week. The long-term average is 39% bullish against just 30% bearish.

A Franklin Templeton Global Investment Survey found that 45% of respondents are more risk averse this year and only 20% would consider becoming more aggressive in their portfolios in 2012.

Combing the financial websites, it’s hard to find someone recommending that investors buy stocks.

In other words, investors are scared, and that’s usually a good time to pick up some cheap stocks. There may not be outright panic quite yet. The bottom may still be a little further down, but it’s probably a good time to start nibbling at some stocks that you’ve had your eye on for a while but wanted to wait until prices went lower.

Take Advantage of Higher Yields

For example, some of the stocks in my Perpetual Income Portfolio whose yields declined as the stock prices rose, once again have attractive yields.

One I really like, Community Bank Systems (NYSE: CBU), is a great little bank based in upstate New York and Pennsylvania. It’s currently yielding 3.9%, that’s up from 3.5% just over a month ago when the stock was trading several points higher (although Ultimate Income readers are enjoying a yield of 4.7% if they bought it when it was first recommended in September).

Could the market head lower from here? Of course it could. We’re not market timers at Investment U, so I’m not going to make a prediction. However, I will say this certainly doesn’t feel like a bear market.

Instead it feels like an opportunity to leg into some positions, particularly for income seekers who felt shut out over the past few months as income stocks’ prices rose sharply, making obtaining an attractive yield difficult.

Thanks to this sell-off, it just got a little easier.

Now, if anyone has any suggestions on where to find bear repellent (for real bears), I’d appreciate it.

Good Investing,

Marc Lichtenfeld

But perhaps the financial topics he’s most passionate – and most well-versed – about, are the healthcare and biotech sectors. He has an entire service, FirstLine Investor Alert, which is built around such investment opportunities. In it, he does due diligence on dozens of companies every year, picking and choosing the best of the best for his subscribers.

FirstLine openly advertises its intentions to take advantage of the growing opportunities in the healthcare sector. With over 65 million Baby Boomers turning 65 over this decade and next, there will be plenty more need for everything from diagnostic tests to lab work, medicines to surgeries, and devices to services. And none of that includes all of the incredible medical ideas and alternatives being tested out even now, including regenerative medicine, DNA sequencing, cancer cures, diabetes treatments and numerous other lifesaving – and potentially portfolio-altering – techniques.

Based off of his research and connections, Marc truly believes in FirstLine’s possibilities as a service… and in the targeted sector’s growth opportunities in general. Early on this year, he went into more depth on the subject in an Investment U article:

Healthcare: The Sector You Must Be Invested in for the Next 10 Years

by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, January 4, 2012: Issue #1679

Wes Harris of Charlotte is going to have a heart attack in February. His blocked artery isn’t going to wait to see if Greece or Italy will default on its debt.

John Davidson of Oklahoma City is going into the hospital for a knee replacement next week. The surgery will happen no matter if the S&P is up, down, or sideways.

And Carly Nelson who lives in a suburb of St. Louis needs a mastectomy after breast cancer was discovered. She will likely start chemo several weeks later. Whether unemployment climbs back over nine percent will have no bearing on her decision about treatment.

These procedures and others save lives and improve quality of life. Millions of operations, tests and other healthcare services will happen regardless of world events, economic, political, or otherwise.

When people are sick, they’ll do anything in their power to get better. And it doesn’t matter one iota what else is happening on the planet.

It’s one of the reasons I love the healthcare sector.

Starting this year until 2030, 10,000 Baby Boomers will turn 65 every single day. And you don’t need a doctorate in demographics to know that older people consume more healthcare as they age.

That’s why $4 trillion is expected to flood into healthcare over the next eight years.

Super Bowl of Healthcare

While football players are gearing up for the playoffs, hoping to make it to the big game, I know that I’m already going. But the Super Bowl I’m talking about is in San Francisco, not Indianapolis, and it takes place a month earlier.

On Saturday I fly to California for the J.P. Morgan Healthcare Conference. It’s the most important and exclusive healthcare conference of the year. Typically, you need to manage millions of dollars to get a ticket to sit in on presentations and meet the CEOs of some of the largest and most innovative healthcare companies.

This is my sixth consecutive year attending the conference and it always generates a ton of new ideas.

Presentations are expected from the likes of Pfizer (NYSE: PFE), Celgene (Nasdaq: CELG) and AstraZeneca (NYSE: AZN), as well as some smaller companies like Incyte (Nasdaq: INCY), Illumina (Nasdaq: ILMN) and NuVasive (Nasdaq: NUVA).

I’m looking forward to hearing about the macro picture and how all of these companies plan on capitalizing on the millions of new patients and trillions of new dollars that are on the cusp of entering the system.

As a result, I’m particularly interested in diagnostics and genetic sequencing. We’re already at the point where doctors know that specific cancers will or won’t react to certain treatments based on genetic mutations. But we’re in the very early stages of this type of science. Within the next 10 years, by reading our genetic code, doctors will be able to understand so much more about what keeps us healthy and what makes us sick.

And in order to gather that information, medical professionals will need tools – machines, consumables, tests – in order to gather and interpret all of that data.

I expect diagnostics and medical technology to be huge winners not only in 2012, but over the next decade or so. The Oxford Club’s Investment Director Alexander Green has been bullish on medical technology for a while now, discussing it at length in The Oxford Club Communique’s 2012 Forecast Issue.

Interestingly, on New Year’s Eve, I had dinner with a health insurance executive, a surgeon and a computer programmer. For half of the evening, we talked about the changes technology is bringing to healthcare. It further confirmed what Alex and I have been saying for a while now. This sector is going to be huge.

 Packed Calendar

The pace of the week is hectic. I’ll [be] at the conference every morning by 7:15 AM. Right now, the only holes in my schedule are Monday at 2:00 PM and Wednesday at 10:00 AM. Lunch and dinner are booked every day with fund managers and analysts.

Along with sitting in on presentations and breakout sessions, I have one-on-one meetings set up with several management teams, including the one from a tiny company with mind-blowing technology that’s on the verge of changing how new drugs are discovered.

I’ll report back to you next week in this column with some of my observations.

Meanwhile, if you’re as jazzed as I am about the prospects for the healthcare sector, let me know. When you provide your email address, you’ll be the first to hear about my new healthcare investing service, FirstLine Investor Alert, which is launching in the next week or two. And you’ll receive a special discount that’s only available to those who sign up on this hot list. You’ll be under absolutely no obligation. You’ll simply be notified first and save a significant amount if you do decide to try the service.

The healthcare sector is on the launch pad. The conference I’m attending always gives me some great ideas and new contacts to help my readers navigate the field to find the best profit opportunities.

With all of that money cascading into the healthcare sector over the next decade, medical stocks are going to take off with or without you. I hope it will be with you. And it’s taking place no matter what happens in Europe or the election.

I’ll talk to you next week.

Good Investing,

Marc Lichtenfeld

A Follow-up on the J.P. Morgan Healthcare Conference… and Marc’s Thoughts in General

Sure enough, Marc was as good as his word. The following Wednesday, January 11, he published another piece at Investment U entitled “Jamie Dimon’s Medicine to Cure America.”

In it, he reiterated his enthusiasm for the healthcare industry, both now and going forward. Though he flat-out admits that the J.P. Morgan Healthcare Conference usually has him feeling optimistic, it’s hard not to understand exactly why that is when he spent the entire time listening to brilliant presentations, speaking with first-rate scientists at the top of their game, and meeting with industry leaders who are overseeing amazing breakthroughs in medicine and medical technology… ones that might someday treat and even cure previously catastrophic diseases and medical issues.

Out of that extremely impressive list of activities, there was one event that stood out the most to Marc. And he consequently shared it with Investment U readers. As he put it, despite the remarkable advances and advancers on display all around him, “none of the doctors had a prescription for what’s ailing America and its economy.” Nobody except for Jamie Dimon, that was, the CEO of J.P. Morgan Chase (NYSE: JPM).

Apparently, Dimon – one of America’s most respected business leaders – sat down with CNBC’s Maria Bartiromo over lunch for a one-hour interview that Marc found “stirring.” Known for his bluntness, the CEO explained exactly why he sees the economic glass half full and discussed ways to fill it up even more. An enthusiastic and unapologetic capitalist, he completely disregarded the new age, Occupy Wall Street-reinforced taboo of wealth condemnation, and told his interviewer and the gathered medical-oriented audience that they “should feel pretty good about the lives” they save and shouldn’t have to hide shamefaced from whatever profits – big or small – they made in the effort.

But that might not have been the most shocking statement Marc recalled him making, because – despite the prevalence of negative economic opinions among the “little people” in America (i.e. Average Joe and Jane), Dimon shared his opinion that the United States was in a mild but still strengthening recovery across numerous sectors. And, he added, companies within the U.S. were in fabulous shape.

To back up that opinion, he noted two main points:

• The consumer debt ratio, which had returned to where it was two decades ago
• Housing supply and demand, which he saw as beginning to balance out once again

But as Marc put it, “it wasn’t all sunshine and rainbows. There’s a lot of hard work to do. Dimon’s recipe for getting America back on its feet is for executives to stop griping and work hard to build their companies regardless of the economic, geopolitical, or regulatory environments.”

That includes running stress tests like the banks have been required to do off and on ever since the global financial crisis first hit. But as for the global financial crisis itself, Dimon made it clear that businesses have no right to blame their failures on such factors, since there is always negative news out there to affect the markets somehow and someway. That’s just a fact of life that companies have to live with, complete with strategies on how to work through or around those issues.

Yet, understanding that the entire onus to turn around the country doesn’t belong on companies, Dimon tackled the tough topics of government involvement and regulatory power as well. For one thing, he made it very clear that he has no problem with lobbying, even going so far as to encourage fellow CEOs to allocate funds, resources and personnel to reaching out to Congress.

And if elected representatives don’t listen? Well then, he has the same words of wisdom concerning the economy: Suck it up and deal with it.

A Few Last Thoughts from the Conference

Basic business analysis aside, however, Marc is extremely bullish on the healthcare sector. And after attending the J.P. Morgan Healthcare Conference, he knows very well that he isn’t the only one out there to think that way. Now a regular, he’s been going to the exclusive gathering for six years now, but it was the 2012 edition that had more than 8,500 people in attendance… more than he’s ever seen there before.

Many of the presentations were standing room only, and some of them were so packed that anybody who didn’t arrive at least 10 minutes early were relegated to listen from the hallway. And from what he could pick up of the conversations around him, that large crowd of overall attendees have cash to burn, the desire to use, and the inclination to put it into healthcare investments.

Basing so much off of one single conference might seem silly, but it both is and it isn’t.

It isn’t because of the sheer number of people attending and exactly who they were. These people were rich, well-connected and well-experienced in making money off of healthcare and biotech stocks. They’re anything but uninformed on the subject and, as a general rule, they don’t throw their money around lightly.

 Yet at the same time, it would be foolish to blindly invest in random healthcare stocks just because the sector has so much promise. And Marc has no intention of doing any such thing. He looks at the big picture, yes, but – like Dimon practically preached back in January – he also looks at each individual picture as unbiased and analytically as possible. There’s been more than one time where he’s told his subscribers to look forward to some promising new pick… right before yanking them away because of some new, unflattering or disconcerting data he’s uncovered on the company. He doesn’t believe in hype; he believes in quality that he can believe in.

Marc only recommends what he perceives as the best. And that’s a guarantee any FirstLine Investor Alert subscriber can take to the bank and back.

Money-Losing Companies That Beat the Market By 46% Each Year
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, May 16, 2012: Issue #1774

When I was young, stupid and chasing girls, good looks were the most important attribute a female could have as far as I was concerned.

A disastrous relationship with an insane model changed my thinking pretty quickly. After splitting up with “Crazy Christine,” as my friends used to call her, I became much more interested in what was beneath the surface.

The same can be said about my approach to stocks.

Most investors look at earnings when evaluating a company. And that’s a great place to start. Typically, a company that’s consistently increasing its earnings has a healthy business, and the stock should emulate that success.

But I like to dig deeper and really get to know the company. To do that, I look at cash flow.

Cash flow is how much actual cash came into the company versus how much went out. At the end of the year (or quarter) if more cash came in than went out, the company is cash flow positive.

Now, you may be asking, if the company is profitable, shouldn’t it be cash flow positive?

Not always.

Due to complex accounting rules, earnings can be doctored to tell pretty much any story an executive wants.

Here’s an example of how a company can be profitable, but not cash flow positive.

In 2011, InterDigital (Nasdaq: IDCC) made $89 million in earnings. However, its cash flow from operations was negative $34 million. How is it possible the company was profitable, yet saw more money go out the door than came in?

When we look at InterDigital’s statement of cash flows, we see that the company recognized $235 million in deferred revenue, which is subtracted from cash flow. Here’s why…

Deferred revenue is when a company gets money up front, but doesn’t recognize the revenue right away. This is very common among software, technology and services companies. For example, a company will sell a software package that has a $1-million service agreement that’s valid for four years. The company might get paid that $1 million up front, but will only recognize $250,000 per year for four years.

On the cash flow statement, however, that money has to be accounted for, because cash flow represents how much money flowed into or out of the company.

So in InterDigital’s case, the negative $235 million means the company recognized the revenue in calculating net income; however, it doesn’t represent any actual cash that flowed into the company in 2011. That money came into InterDigital in previous years, but is only now being recognized as revenue and contributing to earnings.

To sum up, InterDigital made a profit in 2011 because it recognized revenue on cash that it received prior to 2011. But it didn’t bring in more cash than it spent. Keep in mind, this is actually a conservative strategy, because if the company recognized all of the revenue at once, when it still owes a client four years of service, that could cause problems down the road if its obligations aren’t met.

And it goes both ways…

This earnings and cash flow discrepancy can work the other way, too, where a company is unprofitable. but takes in more cash than it spent.

For example, in 2011 Zynga (Nasdaq: ZNGA) lost $404 million. But when we look at its statement of cash flow, we see that $600 million in expenses was stock-based compensation expense – which is a non-cash item. It still needs to be accounted for on to determine profitability, but it doesn’t represent cash going out the door in the same way paying employees’ salaries does. So that $600 million gets added back to cash flow. After a few other small adjustments, the company’s cash flow from operations was $389 million.

So even though it lost $404 million according to the income statement, the business actually generated $389 million in cash.

I ran a screen to see which companies were unprofitable and cash flow positive and profitable but cash flow negative. Here are some of the largest in terms of market cap. Results are for the full year 2011.

Knowing which companies are getting too much credit for their earnings, or too little for their cash flow, is a good starting point for your investment research.

In fact, over the past 10 years, if you bought all of the stocks that lost money but had positive cash flow, you’d beat the market by an average of 46% per year.

So whether you’re checking out potential dates on Match.com or looking at the fundamentals of a stock, it pays to look beyond what you see on the surface and dig a little deeper. The rewards for doing so are significant.

Fortunately, I realized that a long time ago. I’ve been happily married to my wife, who was previously not my “type,” for 16 years.

Good Investing,

Marc Lichtenfeld

Finding the Best Cheap Stocks to Buy
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, May 9, 2012: Issue #1769

My mother believes shopping is a sport. If it were, there’s no doubt she would be a world champion. I’d say an Olympic gold medalist, but she lost her amateur status years ago.

When my mom shops, she’s not satisfied unless she’s getting top merchandise for at least 40% off.

And like a hunter who can’t wait to brag about the 12-point buck he took, my mother will tell anyone who’ll listen about the $300 sweater she got for $80. But unlike the tales of hunters and fishermen, when it comes to my mom and shopping, the big one doesn’t get away.

Everyone loves a bargain. But some people are willing to work harder to get it. Investors are like shoppers. Some will stand in line to buy the latest hot Apple product (or stock), while others will wait patiently until the product or stock they want goes on sale.

When investors look for cheap stocks, they often concentrate on the price-to-earnings ratio, or P/E. The P/E is simply the price per share divided by the past year’s earnings per share.

So in the case of Intel (Nasdaq: INTC), for example, the company earned $2.36 per share in the last 12 months. The current share price is $27.69. Divide $27.69 by $2.36 and you get a P/E of 11.7.

You can use that number to compare it to the P/E of the S&P 500 (15.3), its industry average (15.4), its historical average (17.1), or other specific stocks in its sector, to get an idea of whether the stock is cheap or pricey.

Analysts also look at forward price to earnings, which divides the price by the consensus analyst estimate for the next year. In Intel’s case, analysts project earnings of $2.49 per share in 2012, giving it a forward P/E of 11.1.

Methods Better Than P/E…

But I believe investors pay too much attention to earnings and not enough to cash flow. You can also obtain a company’s valuation based on price to cash flow and, like P/E, compare it to industry averages, the S&P 500, etc.

Other popular valuation metrics include price to sales (P/S), which is the share price divided by revenue per share. If revenue per share isn’t readily available, all you do is divide the last 12 months’ sales and divide by the number of shares.

Price to book value (P/B) is also a popular tool. Book value is the value of the assets investors would get if the company were liquidated. Book value is simply shareholders’ equity (found on the balance sheet) divided by the number of shares outstanding.

Which one is more important when it comes to price performance?

Let’s take a look at each. I ran a stock screen and a corresponding backtest to measure the performance of all stocks whose valuation in each of those four metrics (separately) was below the average of its industry.

Over the past 10 years, if you bought every company (that was profitable) trading below its industry’s average price-to-earnings ratio and held the stock for one year, you’d have outperformed the S&P 500 by 218%. In only two out of the 10 years would that formula have underperformed the market – and not by much.

A recent example is Apache Corporation (NYSE: APA), trading at 7.8 times earnings versus the average oil and gas company at 17.8.

Price-to-Cash Flow

Testing undervalued, cheap stocks based on price-to-cash flow also turned out a stellar outcome, beating the market by 749%. It underperformed the market in three out of 10 years, but the worst year was only by 3.15%. Conversely, in six of the seven years it beat the market it did so by double digits, several times by 50% or higher.

Sprint Nextel (NYSE: S) currently trades at just 1.9 times cash flow, which is dirt cheap, even in its industry, which only trades at an average of 4.6 times cash flow, compared to the S&P 500, which is valued at 9.1 times cash flow.

Price-to-Book Value

The results were even better on stocks trading at a lower price-to-book value than their industry average. Over the 10-year period, those stocks climbed 2,193% versus the 13% of the S&P 500. These stocks beat the market every year, including by over 100% in 2009 and 2010. A current example is NVIDIA Corporation (Nasdaq: NVDA), which trades at 1.8 times its book value, versus its industry average of 2.8.

Price-to-Sales Ratio

When I ran the backtest using companies whose price-to-sales ratio was below the industry average, something incredible happened. A $1,000 investment in 2001 turned into $286,535! While the same amount invested in the S&P 500 was worth $1,130.

The screen beat the S&P 500 in every year. But what was really interesting was that in 2003 and 2009, years in which the overall market recovered from steep sell-offs, the low P/S stocks went nuts. They outperformed the S&P 500 by 232% in 2003 and 745% in 2009.

Keep in mind, this involved owning a few thousand stocks, so this isn’t easily copied in real life, but it might give you a starting point the next time we start to come out of a nasty bear market.

Symantec (Nasdaq: SYMC) is a current example, trading at just 1.8 times sales versus its peers’ average of 3.8 times sales.

You obviously don’t want to run a screen, throw a dart at the list and buy a stock. You want to dig a little deeper. But by knowing which types of stocks tend to outperform the market, you increase your chances of getting a bargain that you’ll be as happy with as my mother is with a $400 designer jacket that she got for $35 (true story).

Good Investing,

Marc Lichtenfeld

Dividend investors are enamored with yield. Obviously, they want to get paid as much as they can. It’s why stocks like Annaly Capital Management (NYSE: NLY) and its 13.5% yield are so popular.

But what many investors ignore in their search for yield is safety. What good is a high yield if the dividend is cut in the near future? Not only does an investor receive less income when a dividend is cut, capital can be lost, as the stock usually tanks as a result.

When I look to add a stock to The Perpetual Income Portfolio, yes, I’m looking to obtain as high a yield as I can, but only if I’m comfortable the dividend is safe. If I’m not confident, then I won’t recommend the stock no matter how juicy the yield is.

To analyze the safety of a dividend, look at the payout ratio, which is the percentage of net income paid out in dividends – although I use a slightly different formula. I look at cash flow from operations and free cash flow instead of net income, because net income, or profits, can be manipulated fairly easily with accounting tricks. Cash flow, which represents the actual amount of cash that came into a business versus the cash that went out, is a more accurate representation of a company’s business.

So let’s take a look at a couple of companies whose dividends may not be entirely safe.

The first one is Meridian Biosciences (Nasdaq: VIVO). It pays a 3.7% yield and business has been strong. I applaud management’s desire to return a significant portion of profits to shareholders. However, they return too much. Their stated goal is to have a payout ratio (based on earnings) of 75% to 85% each fiscal year.

My threshold for the payout ratio is 75%. Anything higher and the dividend could be in jeopardy if the company has a bad year.

Meridian just reported quarterly results and earned $9.6 million in the quarter. Its dividend payment of $0.19 per share should come out to approximately $7.9 million, which equals 82% of its net income.

The company’s cash flow results weren’t released. But in the last quarter, dividends ate up over 80% of free cash flow and in the three prior quarters, dividend payments were more than 100% of both earnings and free cash flow. The company has about $24 million in cash and no debt.

With earnings expected to grow this year and next year, paying the dividend shouldn’t be a problem if Meridian hits its numbers. However, if they experience a hiccup in business and net income falls, the company may have to dip into its cash to keep the dividend the same. And if business stalls for more than a quarter or two, the company would have to think seriously about cutting its dividend.

Let’s look at another.

Portugal Telecom (NYSE: PT) paid a dividend equal to all of its free cash flow in 2011. It did the same in 2010, but dividends didn’t eat up all of its free cash flow prior to that.

The company has 6.4 billion euros in debt and 5.7 billion euros in cash and it’s located in a country that’s facing difficult times right now. Keep in mind, it does a lot of business in Brazil, so it’s not solely focused on Portugal. But the Portuguese portion of the business is something to worry about, particularly since its payout ratio based on free cash flow is 100%.

Should the company run into trouble, it will likely cut the dividend the way some of its peers have. The 7.2% yield is attractive. But I’m concerned it’s not sustainable.

For both companies, I’m not saying a cut in the dividend is imminent, but if you’re an investor in these stocks, you should be watching the financial statements very closely to see if there’s any trouble on the horizon. Often, a company won’t cut the dividend immediately after reporting a bad quarter. They’ll wait to see if things improve. But then a quarter or two down the road, investors get hammered when the dividend is reduced.

Keep a close eye on these two. You’ve been warned.

Good Investing,

Marc Lichtenfeld