Prudential (PRU): Time to Get Insured?

Be sure to check out our detailed stock analysis (click here). Prudential Financial (NYSE: PRU) was up 11% over the past week after first quarter operating earnings surpassed consensus and year ago results. Could this be a sign of things to come for other insurers?

Prudential is a financial services company, with operations in the United States, Asia, Europe and Latin America. Through its subsidiaries and affiliates, the insurer offers an array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management.

Its 1Q EPS came in at $2.28, exceeding consensus of $1.89 and prior-year quarter EPS of $1.16. Prudential's top segment is its international insurance and investments business, accounting for some 50% of revenues. This segment offers international individual life insurance products in Japan, Korea and other countries. Other major Prudential segments include U.S. retirement and investment management, accounting for 27% of revenues, and U.S. insurance which was 23% of revenues.

One of the key long-term benefits for Prudential, as well as some of the other insurance operators, should be an aging American population. The U.S. Census Bureau projects that nearly 25% of the population will be 65 years or more by 2050. 

Prudential management expects to be generating returns on equity between 13% and 14% by the end 2013. This should be driven by divesting less profitable businesses. In late 2012, Prudential acquired the individual life insurance business of The Hartford Financial Services Group, which is part of the company's long-term plan to secure a leadership positions in universal, term and variable life insurance.

Prudential also pays investors a 2.4% dividend yield. Back in 3Q 2012, the company increased its annual dividend by 10%. However, from a valuation standpoint, Prudential trades in the mid-range of some of its peers with a 0.77 P/B and 7.5 forward P/E. Prudential has been superior at growing book value for investors--over the last five years, the company has grown its book value by an annualized 9.6%, well above any of the other insurers below. 

Finding hidden value in other insurers

Lincoln National (NYSE: LNC) operates multiple insurance and retirement businesses through various subsidiary companies. Lincoln's 1Q EPS results came in at $1.02, beating consensus of $0.99. Life Insurance is Lincoln's staple; this segment focuses on an array of life insurance products, such as term insurance and linked-benefit product (UL policy linked with riders that provide for long-term care costs). This segment accounted for 44% of the total revenues in 2012.

At the end of  the first quarter, Lincoln's book value per share came in at $55.33, up 20% on a year-over-year basis. Excluding accumulated other comprehensive income (AOCI), book value climbed 14% year over year to $42.00 per share. The big initiative for Lincoln is its move toward small- to mid-corporate clients, which should help it capture a big part of the employee benefit market on the back of a rebounding economy.  

Manulife Financial (NYSE: MFC) is one of the three dominant life insurers within its domestic Canadian market and possesses rapidly growing operations in the U.S. and several Asian countries. Its U.S. wealth management segment is its top revenue generator, accounting for some 44% of revenues. This segment offers a range of personal and family oriented wealth management products and services. The segment also encompasses three core business lines: John Hancock Wealth Asset Management, John Hancock Variable Annuities and John Hancock Fixed Products.

Manulife is also looking to strengthen its position in Asia. The insurer has had a presence in the Asian for over a century, and now the company is further penetrating the Asian market. This includes securing distribution agreements with key partners in Japan and Indonesia. Worth noting is that Manulife is the most expensive of the insurers listed, trading at 1.27 times book value and 10.1 times forward earnings. 

Genworth Financial (NYSE: GNW) is a financial security company providing insurance, wealth management, investment and financial solutions. Genworth was spun out of General Electric's life and mortgage insurance operations in May 2004. Its biggest segment is U.S. life insurance, making up 60% of revenues. This segment focuses on life and long-term care insurance.

Genworth is looking to diversify some non-key assets in an effort to better focus on its wealth management business. This should be a big positive with the upcoming need for retirement solutions by the baby boomer population.

One of the key draws for Genworth investors is the fact that the stock is the cheapest on a price to book basis among the other insurers listed. Genworth trades at a 0.32 P/B ratio and a 7.7 forward P/E. However, Genworth's return on equity is relatively unimpressive at only 2.4%. 

Hedge fund trade

Going into 2013, Manulife had the lowest interest among hedge funds, with only 8 hedgies long the stock. This includes Tetrem Capital with the largest position, worth close to $64.6 million, comprising 1.9% of its total 13F portfolio. However, billionaire Steve Cohen's SAC Capital did take a new stake in Manulife during the fourth quarter (check out Cohen's top five).

Lincoln had solid hedge fund interest at the end of 2012, with 25 hedge funds long the stock. These include top hedge fund owner East Side Capital with a $172 million position in the stock, comprising 9.7% of its 13F portfolio, and in second was AQR Capital with a $49 million position (check out AQR's small cap picks).

Prudential had some of the top interest, with 30 hedge funds owning the stock, a 15% increase form the third quarter. Billionaire Ken Griffin's Citadel Investment Group had the top position, with a $286 million position (see Griffin's dividend picks).

Don't be fooled

With the recent positive performance by Prudential, it's worth taking a look at the insurance companies to see if there's value to be had. I like Prudential despite the run up, as the company has a solid international presence and has shown an impressive ability to grow book value. Meanwhile, another solid pick that I like is Lincoln, which is one of the cheapest insurers from a P/B and forward P/E basis, but what's more is that Lincoln has an 8.6% return on equity, well above the second place company Manulife's 4.3%. 

Occidental Petroleum (OXY): With the Chairman Out Look for this Stock to Rise

Be sure to check out our detailed stock analysis (click here). Shareholders in Occidental Petroleum (NYSE: OXY) can finally breathe a sigh of relief now that former Chairman Ray Irani is gone. Over the last four years he has taken over $200 million in compensation from the company and has made nearly $1.1 billion in his 20 years as CEO. Ray Irani decided on Friday to withdraw his name as a nominee to the company's board. This now clears the way for current CEO Steve Chazen to focus on improving costs at the company and unlocking value for shareholders.

The Irani Era

Ray Irani took over as CEO of Occidental Petroleum in 1990 after the death of company founder Armand Hammer. Irani's lavish compensation has been criticized for many years as being excessive and not truly performance based. Over the years he earned substantially more than the CEOs earned at ExxonMobil (NYSE: XOM), which has a market cap five times greater than Occidental's.

In 1990 Irani inherited a conglomerate that included oil, movies, and meatpacking. In his 23 years in charge, he transformed the company into the fourth largest oil producer in the United States and sold off unrelated assets. He expanded the company's international reach with his connections in the Middle East, beating out rivals and won drilling contracts in the Middle East and North Africa. He famously said that he gave oil ministers his home number to call him any time.

Peer Picture

Occidental Petroleum has a current market cap of $71.99 billion. This puts Occidental as one of the largest operators in the industry, but still well below some major peers. ExxonMobil trades with a $410 billion market cap, and Chevron (NYSE: CVX) trades at $239 billion. Exxon has a robust investment program, with plans to spend about $185 billion over the next five years, up 29% from the last five-year period. This CapEx plan will cover as many as 21 oil and gas projects, and is estimated to accumulate over 1 million net oil-equivalent barrels per day by 2016. 

Exxon also remains in superb financial health and has an AAA credit profile. The company has a solid share buyback program in place, having repurchased $5 billion in shares during the fourth quarter and targeting a similar buyback level going forward. 

Chevron also has a very strong oil and gas development project pipeline, where the company plans to target volume growth of 20% by 2017, more than twice the rate of growth from 2003 to 2010. The company has also been re-focusing its asset portfolio, having sold it marketing businesses in Kenya, Nigeria, Uganda, Western Africa and Brazil. 

Much like Exxon, Chevron has solid financial flexibility and strong balance sheet. The oil and gas company has $21 billion in cash on hand and a debt-to-capital ratio of just over 8%. Chevron's buyback program includes a target of up to $1 billion of its common stock quarterly. 

Valuation

Occidental trades at 12 times forward earnings, which is above Exxon (11.1 times) and Chevron (11.5 times); yet, Occidental has grow its dividend by an annualized 20% over the last five years, compared to Exxon's 12.5% and Chevron's 11.5%. 

The other side of the story is earnings growth, where, yet again, Occidental reigns supreme. Analysts expect Occidental to grow EPS at an annualized 5.9% over the next five years, and Exxon at 1.8% and Chevron at 1.6%. 

Over the past year, Occidental is up only 2.80%. Of the analysts that follow the stock, 6 have it rated as a Strong Buy, 10 a Buy, and 8 a Hold. Price targets on the stock range from $82 to $120 with 99.50 being the median target.

Hedge fund trade

At the end of the fourth quarter, a total of 54 hedge funds were long Exxon. Billionaire Bill Gates' Foundation was the top fund owner at the time, owning some $662 million worth of stock, comprising 3.9% of its 13F portfolio (check out Bill Gates' big moves).

Meanwhile, going into 2013, there were a total of 42 hedge funds long Chevron. This includes billionaire Ken Fisher's Fisher Asset Management as having the largest position, worth close to $397 million, accounting for 1.1% of its total 13F portfolio (see Fisher's cheap stock picks).

Occidental had a number of billionaire hedge fund managers upping their stakes at the end of 2012. Billionaire D.E. Shaw (the top hedge fund owner by shares) increased his stake 86%, as did Jim Simons' Renaissance Technologies. Billionaire Steve Cohen's SAC Capital upped its stake by 241% (check out Cohen's top consumer picks). 

What's Next?

The company's shares have fallen 25% since it reached a high of $115 in 2011. During this time Chazen and Irani clashed over the direction of the company. Chazen wanted the focus to be on North America, whereas Irani advocated international expansion. Now Chazen is free to re-focus the company, and a breakup is likely.

Occidental could be broken up into four separate companies. Those companies could be a (1) U.S. crude producer, (2) international oil and gas company, (3) chemicals manufacturer, and (4) a pipeline and logistics company. According to Fadel Gheit, an analyst at Oppenheimer & Co., “each separate and standalone entity would be very competitive and highly valued in its own sector.”

In CEO Steve Chazen, shareholders have the right man for the job. As a former investment banker, he understands mergers and acquisitions and how best to create shareholder value. He has seen how shareholder value has been created in the oil sector when ConocoPhillips spun off its Phillips 66 operations and Marathon Oil spun off Marathon Petroleum. I don't think Chazen or the board want to be the targets of activists (like with Hess Corporation) if they don't follow through on increasing shareholder value. 

For a steady, low-volatility investment, investors can look toward Exxon or Chevron; however, for a higher-growth play (that also happens to pay a 2.8% dividend yield), investors can find value in Occidental. I see Occidental Petroleum as an undervalued stock with plenty of upside potential, and my target is $125 on a breakup of the company.

Yum! Brands (YUM) Has A Bigger Problem In China Than The Bird Flu

Be sure to check out our detailed stock analysis (click here). Lately the focus for investors in Yum! Brands (NYSE: YUM) has been the issues in China concerning bird flu and the company's meat suppliers. As Yum! has worked to address these issues, a bigger problem remains and that is competition. Yum! is not only seeing competition from U.S. multinationals like McDonald's (NYSE: MCD) and Burger King (NYSE: BKW), but also from home-grown Chinese competitors.

The First Problem

Last week Yum! Brands reported that same-store sales were down 29% year over year in April. Analysts had only been expecting a 27% drop, and this drop is much worse than the 13% drop the company had seen in March. Worries over food safety and avian flu have not brought the Chinese diner back to the dinner table. This is worrisome because Yum! Brands gets 51% of its revenues from China. Yum! has started a marketing campaign to assuage fears, but that is not having much of an impact in a nation that is suspicious of the media. The Chinese citizens want independent results by food safety experts, and Yum! has not provided that yet. Until Yum! does something to that effect, look for same-store sales to remain weak.

The problems in China for Yum! Brands started in December when Shanghai's Food and Drug Administration said tests found that eight batches of chicken supplied to KFC had high levels of antibiotics. Over the years Chinese citizens have seen several food safety scares and are not as quick to forget such incidents. Yum! has a lot of work to do with repairing its reputation in China.

The Bigger Problem

Yum! Brands has sought to tailor its menu to Chinese tastes. By doing that the company has lost some of its Western allure. In effect, Yum! wants to be a Chinese company for Chinese consumers. However, that strategy is starting to backfire as local Chinese companies are expanding and doing the same thing. This strategy is putting KFC at a competitive disadvantage because the local Chinese companies are more in tune with the local palette.

Local competitors are expanding in China quite aggressively. Chongqing-based Country Style Restaurant Cooking Restaurant Chain offers a fried chicken with rice lunch set that is cheaper than KFC's and its taste is better suited to the palettes in smaller Chinese cities. Another local competitor is Discos, which is backed by Taiwan conglomerate Ting Hsin International Group. This chain already has over 1,500 eateries in China and hopes to have 1000 more by 2020. They also serve fried chicken, chicken burgers and wraps.

Where KFC has lost its American allure with the Chinese diner, McDonald's and Burger Kinghave not. Both burger chains have retained their traditional Americana menu. With China's growing affluence and worldwide travel exposure, this appeal is a prime asset for McDonald's and Burger King. Burger King currently only has 86 restaurants in China and plans to have 1,000 in the next 5 to 7 years. McDonald's will open 300 new restaurants in China this year alone.

Yum! Stock Overvalued 

For investors in Yum! Brands, another big problem is valuation.

Yum! trails both McDonald's and Burger King in terms of operating margins, while fast food giant McDonald's has a lower forward P/E than Yum! and has more room to grow in China than Yum! Brands.

What do hedge funds think?

Going into 2013, McDonald's had the most hedge fund interest of the three, with 47 hedge funds long the stock. This include billionaire Bill Gates' Foundation Trust, which had a $871 million position that made up 5.2% of its 13F portfolio (check out Bill Gates' top picks).

In second was Yum!, with 31 hedge funds long the stock, an 11% decrease from the previous quarter. The top hedge fund owner was Robert Karr's Joho Capital, which had a $70 million position, but most impressive was that it made up some 9.3% of the fund's 13F (public equity) portfolio (check out Joho's top picks). 

Burger King had the lowest interest, with 10 hedge funds bullish on the stock, but this was a 25% increase from the third quarter. Billionaire Bill Ackman's Pershing Square had the most valuable position, making up 6.9% of its 13F portfolio and being a $630 position (see Ackman's latest moves).

Assessment

Yum! Brand's issues in China are no quick fix. It's going to take time to restore its reputation and McDonald's and Burger King have significant room to expand in China, where neither one has a presence like KFC. I recommend investors own McDonald's or Burger King for a play on China growth and sell Yum! before the stock starts to weaken as investors realize there are bigger problems for Yum! in China.

Monster (MNST): Is this Stock Over-Caffeinated?

Be sure to check out our detailed stock analysis (click here). Monster (NASDAQ: MNST) is the largest U.S. energy drink maker by sales volume. It also fell farther than any of its competitors in the six months after a poor first quarter and slowing sales in April. First quarter earnings results showed a 17% decline year over year, and missed EPS consensus by 4.9%. Monster is now well off its 52-week high.

In November, the FDA noted that it was investigating whether energy drinks may cause harm when consumed in excess or by young people or those with pre-existing heart conditions. The FDA and health-concerns are one of Monster's biggest headwinds; otherwise, the company appears to be making strategic moves for future growth. Monster launched Monster Energy in Peru, Chile, and Singapore during the fourth quarter of 2012, and has interim plans to roll out the drink in India, Romania, Albania, Croatia. 

The comps

Major beverage and soft drink companies are also clamoring for a piece of the fast growing energy drink market share. These include Dr Pepper Snapple Group, The Coca-Cola Company (NYSE: KO) and Pepsi (NYSE: PEP). 

Coca-Cola, the world’s largest soft-drink maker, distributes almost half of Monster’s U.S. volume. However, unlike Monster, which is heavily tied to energy drinks, Coca-Cola has a robust portfolio of globally recognized brands offering an ever-growing choice of quality beverages. Coca-Cola has four four of the world's top five non-alcoholic beverage brands: Coke, Diet Coke, Sprite and Fanta. 

Coca-Cola's stronghold appears to be in North America, where that business saw its eleventh consecutive quarter of volume growth. What's more is that Coca-Cola's acquisition of the North American bottling business from Coca Cola Enterprises positioned the company even deeper in North American. Management expects synergies of at least $350 million in the next four years thanks to the Coca Cola Enterprises acquisition. 

Pepsi is the largest food and beverage business in North America and the second largest in the world, owning two of the three top health and wellness brands: Quaker, Tropicana and Gatorade. One of Pepsi's big advantages is the fact that Pepsi sells both snacks and beverages.

The beverage company is looking to squeeze out more North American market share in the future by upping its advertising expenses for the region. As of now, Pepsi has been growing its global portfolio nicely. In 2011 it acquired Wimm-Bill-Dann, which is the largest food-and-beverage business in Russia. Then in 2012, Pepsi completed an strategic alliance with Chinese food and beverage maker Tingyi Holding Corp. The Tingyi deal has created the number one liquid refreshment beverage (LRB) business in China (1.5 times the size of the nearest competitor). 

By the numbers

Monster naturally trades above some of its beverage peers, such as Coca-Cola and Pepsi, given its higher growth prospects. On a forward P/E basis, Monster trades at 20 times, compared to Dr. Pepper's 14.6 times, Coca-Cola's 18 times and Pepsi's 17.4 times. 

However, according to analysts, Monster is expected to grow EPS twice as fast as any of the other major beverage companies on an annualized basis over the next five years. The other notable positives for Monster is that the company carries no debt and has a return on equity of 38%, which is 1,000 basis points above the 28% ROE the other three beverage companies boast. 

Hedge fund trade 

Heading into 2013, a total of 58 hedge funds were long Coca-Cola. Most notably, billionaire Warren Buffett of Berkshire Hathaway had the largest position, with close to $14.5 billion and making up 19.3% of its 13F portfolio (check out Buffett's high upside picks).

Fellow cola maker Pepsi had 46 hedge funds long the stock, with its top hedge fund owner being Donald Yacktman's Yacktman Asset Management, with a $1.5 billion position that accounted for 9.4% of its total 13F portfolio (check out Yacktman's top five picks).

Monster had only 17 hedge funds long the stock at the end of 2012. Richard Pzena's Pzena Investment Management had the largest position, with only a $15 million position (check out all of Pzena's stocks).

Don't be fooled 

Monster has seen its stock punished a number of times over the past twelve months on health-related concerns, yet the stock has remained resilient and has always recovered. The beverage company made a big effort earlier this year when it decided to start posting caffeine content on its labels. I think Monster will take the necessary steps going forward to remain in the good graces of the FDA and believe its overexposure to the fast growing energy drink sector is a long-term positive. 

The stakes are high for Monster Beverage these days. The stock had been nothing short of a rocket, but recent developments have sent shares spiraling downward. Health scares sparked a number of investigations at the state and federal level into the energy drink’s role in several fatalities. With the company’s value slashed in half, investors are wondering whether Monster Beverage is a value or a bust in the fast-growing energy drink category. Find out now in our premium research report, which details all you need to know about Monster Beverage. Click here now to claim your copy and start reading today.

Netflix (NFLX): Why Netflix Is Too Rich for My Blood

Be sure to check out our detailed stock analysis (click here). Netflix (NASDAQ: NFLX) saw its stock soar some 32% during the week following its first-quarter earnings beat. I have my doubts as to whether the company will be able to maintain the momentum in the second quarter and move higher. The second quarter has historically been Netflix's weakest in terms of subscriber growth; so let's see how Netflix performed in 1Q and might fare in 2Q.

Q1 review

• The content streaming company managed to post earnings of $0.31 per share compared to a loss of $0.08 a share in the same quarter last year. Earnings came in above analyst estimates of $0.19 per share.

• For Q2, Netflix expects earnings to be in the range of $0.23 per share to $0.48 a share, compared to analysts' estimates of $0.30.

• B. Riley upgraded the company from sell to neutral after the announcement. Raising its price target from $90 to $165, suggesting over 20% downside from current levels. S&P maintained its hold rating on stock, moving its price target to $225, suggesting upside of just over 6%.

The negatives

Netflix's industry has low entry barriers. Netflix will likely face increased competition, including more competitive pressures from the likes of Amazon and Google. These rivals, though relatively new, have the infrastructure and capital to continue causing problems for Netflix. As well, Time Warner's HBO is becoming another popular competitor.

Another concern for investors should be the negative cash flow for three sequential quarters. For the most recent quarter (1Q), the company reported negative free cash flow of $42 million. The primary reason for negative cash flow is payments for original and non-original content.

Another key issue getting less attention is the weak performance in international markets. Netflix has still not been able to post a profit from its international operations, despite spending massive amounts on marketing and content licensing. International expansion and content additions resulted in cost escalations in the form of technology investments, up 27% year over year in 2012. Meanwhile, marketing expenses were up over 20% year over year in 2012.

The loss from Netflix's international streaming business widened from $103 million in 2011 to $389 million in 2012. This loss was related to rising content licensing costs. Netflix also has a current total of $5.6 billion to be paid for streaming content obligations, out of which $2.29 billion needs to be paid within the next twelve months.

Netflix's bonds also have a junk rating at double-B minus by Standard & Poor's. Though, individually this does not look that bad, if one sees the junk rating along with rising content cost, negative cash flow, and increased competition, the rating looks menacing. A recent report from Jefferies downgraded Netflix, citing concerns over high costs associated with securing content and profit margins.

Robust competition

Amazon.com (NASDAQ: AMZN) is one of Netflix's biggest rivals currently. Both companies have a similar P/B ratio, Netflix at 14.8 and Amazon at 13.6, but that's where the similarities end. Coinstar (NASDAQ: CSTR) is a smaller company compared to these two giants and poses less of a threat. Although Amazon's valuation is very "rich" too, I take solace in the fact that the company has a strong product portfolio and geographical mix.

Amazon started out as a book e-retailer, but now sells a diversified mix of products. Its North America segment generates around 57% of revenue, while international accounts for 43%. Meanwhile, its product mix includes 33% of revenue from media, 63% from electronics and other general merchandise, and other making up 4% of revenue. 

As well, unlike Netflix's struggles with generating strong free cash flow, Amazon is performing nicely in this respect. Which is in part thanks to its flexible cost structure, allowing the company to curtail technology and content expenses when margins are impacted by discounts and promotions to boost sales. Amazon's quarterly revenue has been growing in double-digits. Cash flows grew 6.1% in 2010, 11.7% in 2011, and 7.1% in 2012.

The nice thing about Coinstar is its "hybrid" model, allowing users to either stream movies or pick up the actual disk from any of its many RedBox kiosks. Part of what makes the kiosk system work is its number of locations, allowing for convenience, whereas Netflix's DVD business was time delayed (mail system). Coinstar also has its coin counting and coffee kiosks. Its coffee kiosks, Rubis, is expected to sell more than 10,000 cups per year per kiosk. Its traditional coin counters are gaining banking capabilities, thanks to a relationship with PayPal, which should be another long-term positive for the company. 

Late last month, Coinstar posted Q1 EPS that beat consensus, but was still down year over year. The company posted EPS of $0.93, versus $1.39 for 1Q 2012, but above consensus of $0.86. Coinstar also guided second-quarter revenue between $555 million to $580 million, and core EPS of between $0.90 and $1.05. Meanwhile, analysts expected the company to post Q2 EPS of $0.99, which again, is still below year ago EPS of $1.25 for Q2 2012. However, given the valuation and expected growth (17.7% annualized five-year expected EPS growth rate) the company appears to be a solid growth at a reasonable price with a PEG ratio of 0.59. 

Valuation

Netflix trades at an EV/EBITDA multiple of 89.7 times, while the other "expensive" stock, Amazon, trades at only 41.5 times, and Coinstar at 3.8 times. Netflix's P/E ratio remains high, however, the potential growth doesn't appear to justify the valuation.

With a P/E ratio of 517 times, Netflix is trading near the top of its five-year P/E range of 15 times to 570 times. Netflix also has a PEG ratio in excess of 8, while Amazon is at 5.15. What's more is that while Netflix's price continues to soar, it's free cash flow generating capabilities and return on equity have been in steady decline.

Netflix has grown EPS at an annualized negative 7% over the last five years, and although the future is brighter, I don't think it justifies a premium valuation to Amazon, nor a P/E in excess of 500 times.

Hedge fund trade

Going into 2013, there were a total of 58 hedge funds long Amazon. Billionaire Ken Fisher's Fisher Asset Management had the largest position by market value in the company, worth $613 million (see Fisher's dividend stocks). While Amazon had the maximum interest from hedge funds going into 2013, Netflix saw some of the best sentiment, having 30 hedge funds long the stock, which was a 30% increase from the third quarter. The largest position held was by billionaire Carl Icahn, with a $514 million position that made up 4% of his 13F portfolio (check out Icahn's small cap picks).

Of the companies listed, Coinstar had the lowest hedge fund interest, with only 28 hedge funds long the stock at the end of 2012. This includes Marathon Partners and billionaire Jim Simons' Renaissance Technologies (check out Simons' high yielding picks).

Conclusion

The current momentum in Netflix's stock is similar to the January 2010 and July 2011 rally the company experienced, with the stock crossing $250 to reach its all-time high of over $300, but eventually came crashing back to reality. The stock is already up over 125% year to date.

So, currently it looks like the bear case is greater than the bull scenario, with concerns over rising content acquisition costs, negative cash flow, and limited success in international markets should cause concerns for investors.

Starwood (HOT): Why Is This Stock So HOT?

Be sure to check out our detailed stock analysis (click here). The hotel industry could be a big benefactor from the rebounding economy and increased consumer spending. It appears one of the big winners in the sector so far has been Starwood Hotels & Resorts Worldwide (NYSE: HOT). Starwood posted 1Q 2013 EPS of $0.76, compared to $0.63 for the same period last year, blowing past $0.53 consensus estimates. The question is, does this mean there are more good things to come for Starwood investors? Or is there another hotel stock that could be a better investment?

Starwood's better than expected results were on the back of higher vacation ownership and residential operating income. Its European segment remained stable, China improved and North America did better than the company expected.

Some keys for Starwood include its opportunities for emerging market growth, namely Latin America, and Brazil and Mexico are two relatively untapped markets. Meanwhile in Africa, Starwood intends to have 48 properties by 2015. Also, Starwood opened 23 hotels in North America in 2012, but the company expects 2013 to be its strongest year in terms of hotel openings in North America since the recession, with 28 scheduled hotel openings. 

One of Starwood's biggest initiatives is its plan to up its fee-based business. This includes increasing revenues from managed, unconsolidated joint venture hotels and franchised hotels. Currently, these hotels represent around 90% of the company's total portfolio, compared with 21% in 2004. Making this structure attractive is its capital efficiency, where owner/developer partners provide the capital and the company then earns a fee for managing and franchising the hotel. Starwood's long-term goal is to generate some 80% of revenues from this fee-based business.

Starwood is also committed to returning capital to shareholders. Since 2003 through the end of 2012, Starwood bought back 82 million shares for $4.5 billion. Meanwhile, the company has a dividend policy for paying out 25% to 40% of earnings per share every year. During 4Q 2012, Starwood raised its annual cash dividend by 150% year over year to $1.25 per share, offering investors one of the highest yields in the sector at 1.8%. 

A better way to play the hotel industry?

Although Starwood is executing well, there could be a couple of other stocks that could be better investments. These include Choice Hotels (NYSE: CHH) and InterContinental Hotels (NYSE: IHG). While Starwood trades at 22 times forward earnings, Choice and InterContinental are at only 18 times earnings. What's more is that both of the companies offer investors better returns, with Choice having an 19.4% return on assets and InterContinental at 17.3%, while Starwood's at 5.4%. 

Choice Hotels is one of the largest hotel franchise companies in the world with hotels, inns, all-suite hotels and resorts open and under development in countries across the globe under the brand names Comfort, Quality, Sleep Inn, Econo Lodge and MainStay Suites. The one downside for Choice is that the company is a pure franchisor of hotels. 

InterContinental Hotels   operates various hotel brands that include InterContinental, Crowne Plaza Hotels & Resorts, Holiday Inn, Holiday Inn Express and Staybridge Suite. InterContinental also happens to be a hotel manager and franchisor. 

The hotels that manage and franchise hotels have greater exposure to emerging markets and stronger unit growth prospects than pure franchisors. Worth noting is that pure franchisors do generate higher margins and returns on invested capital. However, their inability to manage hotels limits their growth prospects internationally. For example, most developing international markets, such as China and India, do not provide a favorable legal environment for hotel franchising. 

For operators that both manage and franchise hotels, new-room pipelines as a percentage of total existing rooms average 24%, compared with an average of 12.4% for pure franchisors. Starwood and InterContinental in particular are strong in China, which represents approximately 30% of their pipelines.

Morningstar notes that it projects system size (as measured by total rooms) to increase 18.2% on averageover the next five years for operators that combine hotel managing and franchising, significantly higher than the outlook for five-year system growth for pure franchisors Choice Hotels' 11.6% and Wyndham Worldwide at 9.2%. It also expects EBITDA to increase at a five-year compound annual growth rate of 9.5% for operators that manage and franchise, compared with an average of 7.3% for pure franchisors.

Hedge fund trade 

Going into 2013, there was a total of 31 hedge funds long Starwood, an 11% decrease from one quarter earlier. The top hedge fund owner was Tiger Consumer Management, with an $89 million position in the stock, which makes up 4.2% of its 13F portfolio (see Tiger Consumer's best picks).

Meanwhile, InterContinental had 13 hedge funds long the stock, an 8% increase from the previous quarter. Billionaire Jim Simons' Renaissance Technologies holds the biggest position in the stock, worth $16 million (check out Simons' tech picks).

Choice Hotels has the lowest hedge fund interest of the three, with only four hedge funds long the stock, which was a 43% decrease from the third quarter. Billionaire Israel Englander's Millennium Management dumped the biggest stake of all the hedgies, with Paul Tudor Jones's Tudor Investment Corp selling off the second largest position (see Tudor's top five picks).

Don't be fooled

2012 was a positive year for the hotel and lodging industry, which should continue through the interim due to a better economic operating environment and stronger travel and tourism. PWC forecasts 0.8% supply growth and around 1.8% demand growth in 2013, which will come on the back of a rise in occupancy levels. 

Although Starwood appears to be in full favor, blowing past earnings expectations, it appears investors might also be able to uncover some value from investing in InterContinental. InterContinental pays a 2.2% dividend yield, while it is also the top growth and best-value play among the three listed.

Tyson (TSN): Don't Be Too Chicken to Buy This Stock

Be sure to check out our detailed stock analysis (click here). Tyson Foods (NYSE: TSN) is the largest meat processor in the U.S., working with chicken, pork, and beef. Its recent quarterly results showed weaker-than-expected results, as consumers and restaurants switched to cheaper chicken from beef. The big news was the fact that Tyson cut its full-year guidance. 

The company's stock was down nearly 5% on the news, but has slowly recovered as investors digest it. For the first quarter of 2013, Tyson saw chicken volume up 0.1%, beef down 3.9%, and pork down 2.2%. Tyson posted EPS of $0.36, compared to $0.44 for the same period last year and well below the consensus estimate of $0.45. CEO Donnie Smith noted that Tyson's gross margins fell as its "beef segment suffered margin compression as consumers opted for the relative value of chicken."

Some new initiatives for Tyson include joining forces with healthy and low-calorie food specialist Hungry Girl Lisa Lillien for new variants of low-calorie meals for calorie-conscious customers.Tyson is also focusing on Mexican food, as is evident from its strategic acquisition of the Mexican snacks and tortilla producer Don Julio Foods. 

The other big positive for the company is its international presence. The company operates in Canada, Central America, China, the European Union, Japan, Mexico, Middle East, South Korea, Russia, Taiwan and Vietnam. However, international sales accounted for only 16% of sales, leaving plenty of room for growth. This growth should be driven by a rising middle class across all the developing nations. 

Also, its chicken segment should continue to see strong momentum as there is an increasing number of health-conscious consumers that opt for chicken instead of red meat because of the associated health risks.

Stacking up the comps

Hormel Foods (NYSE: HRL) is a maker of various meat products, including fresh, frozen, cured, smoked, cooked and canned meat. Hormel's key segment is refrigerated foods, accounting for some 50% of revenues. This segment includes the Hormel Refrigerated, Farmer John, Burke Corporation (Burke) and Dan's Prize operating segments. 

Hormel is also relatively diversified when it comes to products. During the first quarter of 2013, a decline in the revenue from refrigerated foods was neutralized by an increase in prices across all other segments. Earlier this year, Hormel bought the U.S.-based Skippy peanut butter business for some $663 million. Hormel expects annual sales of Skippy to come in at $370 million. Although I see this as a positive diversification attempt that should lead to higher margins, I still prefer the large protein producers, namely Tyson, which will be the big benefactors as emerging nations urbanize. 

Smithfield Foods (NYSE: SFD) is the largest hog producer and pork processor in the world. Its pork segment consists of three wholly-owned U.S. fresh pork and packaged meat subsidiaries. Its hog production segment includes hog production operations located in the U.S., and its international segment includes the international meat processing operations that produce a wide variety of fresh pork, beef, poultry and packaged meat products, including cooked hams, sausages, hot dogs, bacon, and canned meats. 

The company's key focus of late is the introduction of healthier products with low sodium content. Also, the company is working on restructuring its pork segment. Thus far, its efforts have improved annual profits by approximately $125 million. Now, the company is in the process of executing a cost savings program aimed at lowering the cost structure and enhancing profitability of the domestic hog production business. This initiative is expected to result in an annual improvement in profits of approximately $90 million by fiscal-year 2014. 

One of the big headwinds for Smithfield is that the profitability of hog production is directly related to the market price of live hogs and the cost of feed grains such as corn and soybean meal. This has in turn hurt margins of late and could further pressure margins as grain prices rise due to drought conditions. 

Hedge fund trade

Heading into 2013, Tyson had the most hedge fund interest, with 25 long on the stock. The top hedge fund owner by market value was Cliff Asness' AQR Capital, with a $82.5 million position in the stock, comprising 0.4% of its 13F portfolio (check out AQR's small cap picks).

In a close second was Smithfield, with 24 hedgies long the stock, a 20% increase from the third quarter. This includes the top hedge fund owner Adage Capital, with a $65 million position making up 0.2% of its 13F portfolio (see Adage's small cap picks). 

Hormel had the lowest hedge fund interest going into 2013, with only seven hedge funds long the stock, a 36% decrease from the third quarter. Worth noting is that the top hedge fund owner was "small-cap king" Chuck Royce's Royce & Associates with a $24.8 million stake, which made up a mere 0.1% of its total 13F portfolio (check out Royce's top picks).

The bottom line

The recent weakness that Tyson has noted is likely a short-term setback and the company should perform nicely going forward. The company is well positioned in the meat industry and is also one of the cheapest stocks in its sector. The long-term catalyst will be rising incomes in developing markets, which should boost the demand for protein products. 

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." Justclick here to access the report and find out the name of this under-the-radar company.

Investing in Investment Managers

Be sure to check out our detailed stock analysis (click here). Invesco (NYSE: IVZ) is up 25% year to date, and 10% over the past week alone. This thanks to a stellar start to the year with 1Q 2013 EPS that came in at $0.52, compared to $0.45 from the previous quarter and consensus estimates of $0.47.  Tailwinds for the better-than-expected earnings were related to rising assets under management (AUM) and a stabilizing balance sheet.

At the end of 1Q 2013, AUM was up 6% year-over-year to $729 million. Revenue increased 5.2% sequentially, and the adjusted operating margin expanded to 38.4% from the 35.6% in the prior quarter. 

Invesco is also looking to increase its focus on international and emerging markets. Near the end of 3Q 2012, Invesco formed a joint venture (JV) with an Indian asset management firm, Religare Asset Management. Another big key for Invesco is the diversification in its AUM by client base and asset class. At the end of 2012, roughly 30% of Invesco's client AUM was from outside the U.S.

Invesco does offer investors a solid dividend, one that yields 2.7%, and back in April the company upped its quarterly dividend by 41% over the prior quarter. Since 2009, the company has been increasing its dividend every year. However, with the recent run up in the stock is it too expensive? I think so, but don't worry; there are other ways to play the rebounding investment-management market. 

The comps

Although the recent run up in Invesco might make the stock a bit too expensive from a valuation standpoint, could Invesco's performance be a sign of things to come for its competitors?

From a valuation standpoint, Legg Mason (NYSE: LM) is the most expensive. This comes after the investment firm managed to post 1Q EPS of $0.79, which was in-line with consensus estimates. Legg Mason is a global asset-management firm focused on proprietary mutual funds and separately-managed accounts (SMAs).

Earlier this year, Legg Mason completed the acquisition of London-based fund-of-hedge-fund firm, Fauchier Partners, from BNP Paribas Investment Partners. The acquisition is expected to be accretive to Legg Mason's earnings in the first year.

Legg Mason has been vigorously working on improving its profitability through key initiatives such as innovative product solutions to its client base, tapping sound investment capacities and expanding distribution relationships. After restructuring its debt in 2012, the firm's interest expenses fell 29% in the first nine months of fiscal 2013 compared to the prior-year period.

Another key competitor, Lazard (NYSE: LAZ), utilizes a strategy that includes local and emerging markets in both equities and fixed income. This diversity has helped the company grow AUM to $167 million at the end of 2012, an 18% increase year-over-year.

Lazard managed to post 1Q EPS of $0.28, below the $0.32 consensus estimate, citing lower investment-advisory fees related to delays from its merger and acquisitions backlog. However, despite the under-performance, the company expects its M&A segment to expand over the interim. I think the recent earnings miss might be a great time to buy into the stock. 

In late 2012, Lazard announced various cost-saving initiatives, with a target to realize about $125 million in annual savings from its existing cost base. Over the interim, the company expects revenue growth from defined benefit and defined contribution retirement-plan growth in developed economies. Meanwhile, longer-term revenue growth will be from increasing its AUM from Asia, Latin America and the Middle East.

Hedge-fund trade

At year's end, Invesco had the most hedge fund interest among companies listed, with a total of 23 long the stock. Richard Pzena's Pzena Investment Management had the most valuable position, worth some $226 million and making up 1.9% of its 13F portfolio. Billionaire Ken Griffin was in second with a $194 million position (check out Griffin's dividend picks).

In second place was Legg Mason, with 20 hedge funds long the stock at the end of 2012. Billionaire Nelson Peltz's Train Partners was the top hedge-fund owner with a $331 million position, making up an impressive 14% of its 13F portfolio (see Peltz's newest picks).

Although it was a 14% increase from the third quarter, the 14 hedge funds long Lazard were the smallest among the three investment-management companies listed. Top hedge funds included John Rogers' Ariel Investments and Train Partners, as well, as billionaire Ken Fisher (see which other hedgies were going long).

Don't be fooled

So which investment management company should investors jump in to? Lazard appears to be one of the best buys from a valuation perspective, while also holding impressive growth prospects. The other key benefit for Lazard shareholders is its 3% dividend yield. Lazard trades at 13.1 times forward earnings compared to Invesco's 13.2 times and Legg Mason's 14.6 times.

What's most impressive is analysts' expectations for future EPS growth:  Lazard is expected to grow EPS at an annualized 36% over the next five years compared to Invesco's 14.7% and Legg Mason's 16.4%. The outlook for Lazard looks to be solid and I take the recent strong performance by Invesco as a sign of things to come for Lazard. 

What Could Drive This Automaker Higher?

Be sure to check out our detailed stock analysis (click here). This car maker's recent results are just another vote of confidence that Ford (NYSE: F) could be one of the top company's in the auto industry. Late last month, Ford managed to post preliminary adjusted 1Q 2013 EPS of $0.41 compared to $0.39 for the same quarter last year, meeting consensus estimates. From the announcement, North American results remain positive, but Europe continues to struggle. 

Yet, Ford hopes to change that in the near future. It is looking to reach a long-term operating margin of 6% to 8% by 2015 by restoring profitability in its European operations. Ford also expects its 2013 U.S. market share to be higher than 2012, Europe to be almost the same as in 2012, and China to be higher. Its market share in 2012 was comprised of 15.2% in the U.S., 7.9% in Europe and 3.2% in China.

Much like many of the other car makers, Ford hopes to leverage hybrid vehicles for future growth. This includes investing $135 million to develop key components, including advanced battery systems, for next-gen hybrid-electric vehicles.

Also, further growth should come from the emerging markets, where Ford expects Asia to account for some 70% of its global growth over the next 10 years. The car maker also expects small cars to account for 55% of total sales by 2020, compared with 48% presently, with one-third of the small-car sales expected to come from Asia. 

Big headwinds

For General Motors (NYSE: GM), some of the big headwinds for this automaker include the weakness in Europe. GM Europe's revenue fell 17.6% in 2012 year-over-year. The segment also saw a broader loss for 1Q, losing $1.8 billion, compared to the $747 million loss for the same period last year. GM expects modest growth in global auto sales in 2013 as improvements in China and the U.S. are offset by sluggish car sales in Europe. The automaker predicts a 5% rise in industry sales in the U.S. and international markets each, while the European market is expected to shrink 4%.

Analysts expect GM to only grow EPS by 3.3% in 2013 from 2012 levels. S&P also recently cut its rating on GM from buy to hold, citing lower EPS estimates on expectations that the automaker will see an increase in its tax rate from 10% to 35%. Another key factor worth noting is that the car company saw debt increase to $16 billion at the end of 2012, up from $13.8 billion at the end of 2011. 

Better performer

Toyota Motor (ADR) (NYSE: TM) is the better-performing Japanese car market year-to-date compared to Honda. Its strength is its number-one spot in hybrid vehicles, with the most offerings in that space. Toyota has managed to sell some 3.4 million hybrid vehicles over the last 15 years and it expects to launch 21 gas-electric hybrid models by 2015. What's more is that Toyota plans to launch a fuel-cell vehicle, which runs on hydrogen to produce electricity, by 2015.

The other key growth focus for Toyota is emerging markets, where the company hopes to introduce eight new compact car models in Brazil, China, India and Indonesia by 2015. This should help the company with boosting sales in emerging markets to 50% of global sales from 18.6% in 2000.

Toyota also managed to top GM as the sales leader for 2012, selling some 9.8 million vehicles compared to GM's 9.3 million vehicles. This comes after GM topped Toyota in 2011, after Toyota wrestled with a series of safety concerns and natural disasters in Japan and Thailand.

Industry tailwinds

S&P expects that the U.S. automobile industry will perform nicely over the interim thanks to pent-up demand. S&P estimates light-vehicle sales in the U.S. to grow to 15.4 million units from 14.4 million for 2012. Global auto sales are also expected to be higher despite weakness in Europe. This will be on the back of robust growth in China. The big tailwinds to drive the U.S. auto market higher are expected to be a loosening of credit and the fact that the average vehicle is upwards of 11 years old.

The hedge fund trade

GM had, by far, the most hedge-fund interest among the major automakers; there were a total of 98 hedge funds long the stock going into 2013. The top owner (by market value) was billionaire Warren Buffett and Berkshire Hathaway, with a $721 million position (check out Buffett's high upside picks). Meanwhile, fellow billionaire David Einhorn of Greenlight Capital wasn't far behind with a $610 million position. 

Ford had 58 hedge funds long the stock, with Bill Miller's Legg Mason Capital having the largest position, making up 2.8% of the fund's 13F portfolio (check out Legg Mason's best small caps). Honda had a mere nine hedge funds long the stock at the end of 2012, a 10% decrease form the previous quarter. The company's largest hedge-fund owner was billionaire Jim Simons' Renaissance Technologies, with only a $9.2 million position in the stock, comprising less than 0.1%% of its 13F portfolio (check out Simons' cheap picks). Toyota had little hedge fund interest as well, albeit a bit more than Honda. There were a total of 14 hedge funds long the stock going into 2013.

Don't be fooled

Ford appears to be effectively working its turnaround and is also relatively cheap. Ford trades at only 9.3 times forward earnings, compared to GM's 10.6, Honda's 18.5 and Toyota's 20.9. This is also encouraging when you consider that Ford has an ROE of 34% and GM is at 18%, with both Toyota and Honda at only 7%. Oh, and Ford pays investors a solid 2.9% dividend yield (read more about Ford's great dividend). 

Oil States (OIS): JANA Partners Strikes Oil

Barry Rosenstein's JANA Partners is on the hunt again, this time targeting Oil StatesInternational (NYSE: OIS). JANA Partners recently revealed that it holds a 9.1% stake in Oil States, making it the oilfield servicer's largest shareholder. JANA has already indicated that they are going to be an active investor. According to JANA's SEC filing:

The Reporting Person acquired the Shares because it believes the Shares are undervalued and represent an attractive investment opportunity. The Reporting Person has had discussions with the Issuer’s management relating to the Issuer’s corporate structure including a discussion on April 26, 2013 regarding separating its Well Site Services, Offshore Products, and Tubular Services segments (referred to collectively as "Oilfield Services") from its Accommodations segment and the formation of a REIT for Accommodations. 

Company overview

Oil States International is a diversified oilfield services company and provides housing for workers in the Canadian oil-sands projects, Australian mining regions, and in some parts of the U.S. Oil States is also a leading manufacturer of products for deepwater production facilities and subsea pipelines, as well as a provider of completion services, oil country tubular goods distribution, and land drilling services for the oil and gas industry.

Oil States has a current market cap of $5.06 billion. The stock trades at a forward P/E of 11.56 and has a low PEG ratio of 0.62. Operating margins are 14.54% and return on equity is 17.77%. Of the analysts that follow the stock, six have it rated as a Strong Buy, 11 a Buy, and two a Hold. Price targets on the stock range from $80 to $115 with $92 being the median target.

JANA's record as an activist

JANA has had an impressive record in activism. The hedge fund is known for being very deliberate and tenacious in its activism. The fund has scored victories in Kerr-McGee, Houston Exploration, Charles River Laboratories International, El Paso, Marathon Petroleum, McGraw Hill, and Agrium. JANA Partners recently initiated an activist position in Ashland (check out all of Jana's stock picks).

Industry shakedown

Some of the other notable oilfield servicing companies have also been performing well. This includes Clean Harbors (NYSE: CLH), which provides a wide range of environmental services. The company has witnessed a couple of notable upgrades from top investment houses. Oppenheimer upgraded it from perform to outperform in April, while Baird upgraded the company to outperform from neutral in March.

Baird noted that earnings in the future will likely surprise and that Clean Harbors is now a long-term value-creation story. The firm moved the company from neutral to outperform and placed a $61 price target on the stock, suggesting over 10% upside. However, valuation wise, the stock is the most expensive among its peers. 

Cameron International (NYSE: CAM) has a diversified product portfolio, specialty service capabilities, and proprietary technological expertise. The positives for Cameron include a strong backlog position, growing international operations, and a favorable outlook for subsea activity levels.

First-quarter 2013 orders came in at $3.6 billion, which was an increase of 41% year over year, and up 8% from the fourth quarter. One of its biggest catalysts is Brazil. Analysts expect solid growth for the company, with revenue expected to grow 19% year over year in 2013 and then 12% in 2014. Next to Oil States, Cameron appears to be one of the best bets in the industry.  

Likely outcome for shareholders

JANA is going to push management of Oil States to turn the accommodations business into a yielding asset and return capital to shareholders. According to Stern Agee and Leach, the accommodations unit may be valued as much as $5.5 billion under a REIT structure. The accommodations unit is expected to provide 53% of the company's EBITDA. With a current market cap of only $5 billion, you get the picture that Oil States can be worth double its current valuation with a REIT spin-off.

There has been talk in the past of a spin-off and management is aware of the potential. On the company's earnings call last week, CFO & SVP Bradley Dodson said about the possibilities: "I think there are really two issues that we've addressed. And one, we've grown the business pretty successfully over the last three years...that being said, as I mentioned on the last call when we've been presented or discovered or become aware of possible structures that will be advantageous to the shareholders."

Hedge fund trade

Going into 2013 there were a total of 15 hedge funds long positions Clean Harbors. This includes the top hedge fund owner Ken Griffin's Citadel Investment Group, with a $60 million position (check out Griffin's cheap stock picks). Meanwhile, Griffin was also the top hedge fund owner in Cameron International. Cameron had a total of 28 hedge funds long the stock at the end of 2012, which was a 22% decrease from the third quarter (see how other hedge funds traded Cameron).

Bottom line

Oil States appears to be an industry leader no matter how you stack it up. The stock is cheap and is a growth at a reasonable price opportunity. As well, Oil States has the best ROE and EBITDA. 

Management is aware of the possibility of a structure change, but for some reason, seem to have been dragging their feet. They won't be able to do that anymore now that JANA Partners has taken a stake. There's value to be unlocked in Oil States and JANA will see that it happens.