Carl Icahn, Netflix: In a 13D filing just reported to the SEC, Carl Icahn disclosed a 4.5% stake in Netflix, Inc. (NASDAQ:NFLX), about half what he had owned previously. Netflix stock is down after hours as a result, and here’s what Icahn had to say via Twitter:

Disclosure: none

Poker Night on Wall Street: Due to the nature of poker, it’s only natural that hedge fund managers are probably dominant in the sport (that’s right, it is a sport). In case you haven’t gotten your fix of watching poker lately, Bloomberg TV is organizing a ”Poker Night on Wall Street” tournament with a $50,000 buy-in.

Six very well-known hedge fund managers, will enter with a buy-in of $50,000 each. The event is tomorrow night  in Atlantic City’s Borgata Hotel. Here’s the list of entrants, along with Insider Monkey’s unofficial odds placed on each:

David Einhorn: 5-2

Bill Perkins: 3-1

Jim Chanos: 10-1

Mario Gabelli: 12-1

John Rogers: 15-1

Steve Kuhn: 20-1

The highest odds are divided between David Einhorn and Bill Perkins.

The managers of Greenlight Capital and Skylar Capital Management have participated in World Series of Poker events in the past, and according to the WSOP website, Einhorn managed to get 18th place in 2006 and 3rd place last year, winning over $4 million. Perkins, meanwhile, finished in the top three of a smaller WSOP event earlier this year and won $1.9 million.

Mario Gabelli is also looking forward to the game:

Gabelli participated in an earlier tournament of “Poker Night on Wall Street” which took place in July and was not disclosed publicly.

Here’s a preview video of one hand from Bloomberg:

Sigma Designs, Raging Capital: Raging Capital Management recently disclosed two moves that decreased its exposure in the microcap company Sigma Designs Inc (NASDAQ:SIGM) to 4.98%. In two separate filings, the hedge fund reported reducing its position from over 2.4 million shares stated in its latest 13F to 1.74 million, and later to 1.72 million shares.

Disclosure: none

Recommended Reading:

Third Point 2013 Q3 Investor Letter

Hedge Fund News: Stanley Druckenmiller Calls Himself 'Washed Up,' John Paulson & Chris Hohn

Kendall Square Capital Now Owns +5% of CRA International

Third Point 2013 Q3 investor letter: Dan Loeb and Third Point’s third quarter letter is out, and here it is in all its glory (you can download it by clicking the link below).

Third-Point-Q3-2013-TPOI-Letter

Disclosure: none

DRUCKENMILLER: ‘I’m A 60-Year-Old Washed Up Money Manager’ (BusinessInsider)
This weekend Stan Druckenmiller sat down with the WSJ to talk about hiscontinued crusade for entitlement reform. The legendary hedge fund manager has been visiting schools from Maine to California, encouraging kids to start a revolution to change the way the country spends on the future. The fact that he's doing this at all is strange — what's stranger, at least for a Wall Streeter, is how he talks about it. …In an interview with Goldman Sachs earlier this year, Druckenmiller sounded equally futile about his place in an easy-money, QE market. He, like a lot of hedge fund managers, has been critical of Fed Chair Ben Bernanke's policies.

Paulson & Co. PFR Gold Fund Fell 16 Percent in September (BusinessWeek)
Hedge-fund manager John Paulson's PFR Gold Fund fell 16 percent in September after bullion and related stocks declined, according to a report to investors obtained by Bloomberg News. Last month's loss brings the 2013 decline in the $350 million fund, which invests in gold stocks and derivatives, to 62 percent, according to the report. Bullion producers fell 9.4 percent and the metal dropped 5 percent in September after a Federal Reserve policy maker said a small reduction in bond purchases may occur in October and the threat of a U.S. attack on Syria eased.

Hedge fund TCI is Royal Mail’s biggest shareholder (Telegraph)
The London-based hedge fund, known for its aggressive activism, has bought a 5pc stake in the newly privatised delivery company, according to a regulatory announcement filed today. The filing shows that TCI bought 58.2m shares worth around £280m at today's shareprice. TCI, whose boss Chris Hohn was described as a "locust" by German politicians, is the first to build a disclosable stake in Royal Mail. In the carefully managed sale process two weeks ago, institutional investors were allocated stakes in the company worth 2pc each. Under stock exchange rules, shareholders do not have to declare their positions publicly until they own more than 3pc of the company.

Officials worried as hedge fund now largest landlord in Huber Heights (BizJournals)
City officials in Huber Heights are expressing concern after a New York hedge fund bought 1,900 rental properties earlier this year, according to Bloomberg. Magnetar Capital LLC, a $9 billion hedge fund, acquired the properties in January from Teresa J. Huber, the widow of Charles Huber, who developed the city in the 1950s and 1960s. The value of the deal was not released, but the company raised $71 million in a private placement related to the deal, according to Bloomberg. The total purchase price could be much higher, potentially well over $100 million, depending on the average price per home in the transaction. But either way, the deal likely is one of the largest single real estate purchases in Montgomery County's history.

Regulation changes the way hedge funds grow (FT)
Few financial institutions have been hit as hard by the onslaught of new global regulation since 2008 as hedge funds. An avalanche of acronyms is threatening to overwhelm the industry's gentrified enclaves of Connecticut and Mayfair: from AIFMD to Mifid via Fatca and Ucits. Targeted hedge fund rules in both the EU and US, as well as regulations affecting the markets in which hedge funds trade and the manner in which they do so make for an unprecedented set of rules and costs for the once freewheeling hedge fund world to get to grips with.

Highbridge Said to Seek $250 Million for New Asia Hedge Fund (BusinessWeek)
Highbridge Capital Management LLC, the JPMorgan Chase & Co (NYSE:JPM) unit that manages about $31 billion, is starting an Asia hedge fund, returning to the market more than two years after shutting a predecessor fund. Highbridge plans to raise about $250 million for the Pan Asia Multistrategy fund when it opens to investors in early 2014, said two people with knowledge of the matter, asking not to be identified because the information is private. The fund is led by 32-year-old Asia head Arjun Menon, who is based in Hong Kong, according to a document seen by Bloomberg News.

Hedge funders for Cory Booker (CNBC)

Kendall Square Capital, CRA International: In a new 13G filing with the SEC, Jason F. Harris‘s Kendall Square Capital reported a 5.2% stake in CRA International, Inc. (NASDAQ:CRAI), worth approximately $9.5 million.

Disclosure: none

Tiger Global: In an amended 13D filing with the SEC, mega-hedge fund Tiger Global has reported a 12.1% stake in TAL Education Group (ADR) (NYSE:XRS), down from the near-13% stake it disclosed at the beginning of this month.

Disclosure: none

Starboard Value, Wausau Paper: Famed activist Jeff Smith and his hedge fund, Starboard Value, have just reported that they still hold a sizable position in Wausau Paper Corp. (NYSE:WPP) worth 15.2% of its outstanding shares. In a filing with the SEC this morning, Starboard also released a letter Wausau’s CEO and Board of Directors, calling for a share buyback and a dividend hike. Given the hedge fund’s history of successful activism, we’d take this development very seriously.

Here’s the full letter:

Starboard’s Letter to Wausau CEO/Board

Disclosure: none

Although we don’t believe in timing the market or panicking over market movements, we do like to keep an eye on big changes — just in case they’re material to our investing thesis.

The Dow Jones Industrial Average will begin the trading day higher, rising by 28 points at the opening bell, according to stock index futures as of 7:30 a.m. EDT.

The Department of Labor’s Employment Situation report, delayed until this morning by the government shutdown, showed that the economy added 148,000 jobs in September, below the 180,000 that was expected. The unemployment rate ticked down to 7.2%, remaining close to a five-year low.

With that bigger picture in mind, here three individual stock stories to watch for in today’s market.

Netflix (NASDAQ:NFLX) shares should see active trading today after the company reported gaining almost 3 million new subscribers last quarter. The company handily beat its own quarterly guidance for subscriber growth both domestically and overseas as original content like Orange Is the New Black and cable hits like The Walking Dead lifted quarterly membership viewing to nearly 5 billion hours. Earnings quadrupled to $0.52 a share on $1.1 billion in sales. Still, even though Netflix’s ambitious expansion strategy appears to be working, management echoed Tesla CEO Elon Musk’s recent comments, saying that “momentum-investor-fueled euphoria” is affecting the valuation. Netflix shares will see more of that volatility today, as they are up more than 9% in premarket trading.

Apple (NASDAQ:AAPL) will be in focus as it holds a press event at 1 p.m EDT to unveil new hardware, including a potential refresh to its iPad lineup. The Wall Street Journal reports that a thinner, lighter iPad is in store and that the iPad Mini could get its own retina display upgrade. Apple saw its iPad sales drop for the first time last quarter: unit sales fell 14% compared to the prior year. While that dip had a lot to do with the timing of product refreshes, spiking competition played a role, too. Apple will be looking to win back some tablet momentum from rivals like Amazon, Samsung, and Microsoft, which have all introduced new models recently. Apple stock is up 1.1% in premarket trading.

Finally, Coach (NYSE:COH) reported earnings this morning that showed evidence of continued struggles in its turnaround effort. Overall revenue and profit both ticked lower as comparable sales in its North America region fell by a painful 6.8%. Profitability shrank, too, as gross margin dropped by a full percentage point to 71.8%, likely due to heavy promotions. While none of those figures are dire, it’s clear that Coach isn’t entering the critical holiday-shopping season with much momentum. The stock is down 3% in premarket trading.

The article 3 Things to Know Ahead of the Opening Bell originally appeared on Fool.com.

Fool contributor Demitrios Kalogeropoulos owns shares of Apple and Netflix. The Motley Fool recommends Amazon.com, Apple, Coach, Netflix, and Tesla Motors. The Motley Fool owns shares of Amazon.com, Apple, Coach, Microsoft, Netflix, and Tesla Motors.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has recently made the news for a supposed connection with Iran. Although the nature and deepness of the relationship between the Iranian and the firm's management has not been revealed, the program to be aired by Dutch TV station, Nederland 2, promises to be juicy. The Tegenlicht TV show (Backlight in English), is a series of television documentaries by the VPRO, aims to grasp the quintessence of prominent trends and developments in the practice of critical journalism, and tries to improve understanding of the intricate inner workings of our modern society.

The show will focus on Royal Dutch Shell alone, but public statements made together with Total SA (ADR) (NYSE:TOT), have already pointed out the importance of extending activities to Iran. However important Iran reserves can be for the world oil market, there are several political and security issues that need to be resolved. Currently, economic sanctions imposed by the United Nations and its Security Council prohibit the development of economic relationships between western institutions and companies with Iran. Moreover, institutions and companies carrying out business with Iran, and operating in Europe and the US, are exposed to a wide gamut of financial sanctions.

On another note, Royal Dutch Shell has announced the beginning of the construction of floating liquid natural gas (LNG) vessels. The purpose of these ships is to facilitate the extraction of LNG from offshore platforms, promoting a more efficient use of found resources, and production of many untapped resources.

The first vessel of this kind is currently under construction at a South Korean shipyard, under the guide of Samsung Heavy Industries, and has been named Prelude. In line, Peter Voser, Chief Executive Officer for Royal Dutch Shell, aboard the unfinished ship expressed his wish for the technology to take off worldwide.

Disclosure: Jodor Jalit holds no position in any of the mentioned stocks.

Recommended Reading:

Is Shell's Shocking Revelation Good News for Tesla?

Royal Dutch Shell News: Shell Switches Out US/Africa for South America

Royal Dutch Shell News: The Real Reason Why The Company Left Colorado

Last week, five of the 10 biggest stocks in Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) portfolio reported their third-quarter earnings, and investors are clamoring to know how he’s feeling this week.

At the end of the second quarter, Berkshire Hathaway had a little more than $75 billion dollars invested in its 10 biggest stock holdings, which are broken out in the chart below:

Source: SEC filings.

So far we’ve seen Wells Fargo & Co (NYSE:WFC), The Coca-Cola Company (NYSE:KO), International Business Machines Corp. (NYSE:IBM), American Express Company (NYSE:AXP), and U.S. Bancorp (NYSE:USB), which represented $62 billion of his portfolio, all report earnings — and while four of those companies had strong results, one of them dragged down the whole ship. Yet Warren Buffet’s opinion on that company may surprise you.

Wells Fargo
Wells Fargo reported earnings on Friday, Oct. 11, and the stock shot down almost 2.5% after the news was reported — even though the company reported its 10th straight quarter of record net income. While its income fell in large part to dwindling mortgage refinancings, it still saw strong growth in its other business lines. It also improved its ever-important return on equity (which is what Buffett holds, after all!) from 13.4% to 14.1% over the past year. Despite the early dip, Wells Fargo’s stock has rebounded nicely, and this bank looks poised to continue its strong performance — which likely makes Buffett very happy.

Coca Cola
Thanks in large part to currency changes and one-time charges, Coke saw its revenue and net income drop in the third quarter. But if you exclude those, it actually saw its income grow by 8% and revenue grow by 4% in the quarter. While the company has still seen difficulty in its soft drink sales, it has seen strong growth in its tea business. Coke didn’t blow its earnings out of the bottle, but it still had another solid quarter.

Warren Buffet once said about Coca-Cola, “I’m the kind of guy who likes to bet on sure things. No business has ever failed with happy customers … and you’re selling happiness.” And while the packaging may be different from soda to tea, Coke is still selling happiness abundantly.

IBM
In November 2011, when Buffett disclosed his position in IBM on CNBC, he said about the management at IBM that “they treat their stock with reverence, which I find is unusual among big companies. Or they really — they are thinking about the shareholder.”

While IBM reported higher net income, as a result of weakening sales in China, IBM’s revenue took a turn for the worse, and the stock plummeted as a result, falling almost 6%. So, is Warren Buffett now reevaluating his position in this tech giant?

Eugene Fama was a name many investors never heard before the University of Chicago professor won this year’s Nobel Prize in Economics. Yet Dr. Fama has had a tremendous impact on the investment community over the past 50 years.

Fama’s research has shown that value stocks outperform growth stocks in the long run. He has demonstrated that small-cap stocks offer greater returns than large-cap stocks over time, and that the market leaders of the recent past are likely to continue leading the market in the future.

Articles explaining these concepts are found in academic journals and include math that could challenge the understanding of many college graduates. Yet, these ideas are easily applied by individual investors. Like many great thinkers, Fama has made difficult ideas simple to understand.

Value investing can be applied with a number of tools. Price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) ratios are popular, and all work well if applied with discipline.

Small-cap stocks can be rewarding in the long run. While there are a number of opportunities among small caps, most traders will find there are just as many opportunities among large-cap stocks.

Market leaders are defined with relative strength (RS), a tool we apply frequently when looking for stocks to trade. Fama’s work in this area has also been confirmed by real-world trading experience.

Fama shared this year’s award with Dr. Robert Shiller, who popularized the cyclically adjusted P/E ratio, among his many accomplishments, and Dr. Lars Peter Hansen, who developed a complex model that is used to test theories of how markets set prices.

Several other Nobel Prizes have gone to researchers who provide valuable information to investors. The 2002 prize, for example, went to Daniel Kahneman for his work in behavioral finance, which provides an intellectual framework for applying technical analysis to the markets. In 1997, Robert Merton and Myron Scholes were recognized by the Nobel Committee for their work with the late Fischer Black to develop an options pricing model. In 1990, Harry Markowitz, Merton Miller and William Sharpe were honored for the development of modern portfolio theory.

We have read a number of papers written by these economists, along with the work of other economists. While their ideas might seem abstract, they are directly applicable to investing. We have built entire trading systems around the ideas in those papers.

A trade that the Nobel Prize-winning ideas point to right now is in Siemens AG (ADR) (NYSE:SI). This company produces items ranging from home appliances to subway train cars.

When a business is diverse, it often trades at a discount in the market because analysts are unsure how to value the different operating divisions. SI is trading at an unusually steep discount to its potential value and has a PEG ratio of only 0.22. The PEG ratio compares the P/E ratio to the earnings growth rate. A stock is considered to be trading at fair value when the PEG ratio is 1.

The PEG ratio can also be used to develop price targets. With SI expected to earn $9.16 per share next year, and with the company expected to grow earnings at 61.8% a year going forward, if the P/E were equal to the earnings growth rate, SI would be worth more than $500 a share, but it is currently trading under $125.

The stock market has been on a wild roller-coaster ride recently.

Political posturing, the government shutdown, debt default fears and an earnings smorgasbord have all hit stocks at the same time — but despite the bumpy ride, the action has been textbook for experienced investors.

We witnessed the fear of a government default knock shares lower for several weeks, and then rumors of a solution sent markets surging higher. However, when the final-hour solution was finally announced, stocks slumped. This sell-off may have left many investors dumbfounded on why stocks sold off to great news — but it happens often in the financial markets

This is a classic example of the “buy the rumor, sell the news” effect. Hype and perception have a more powerful effect than reality on short-term stock price movement. In other words, the excitement associated with the possibility of a bullish event is the true bullish price driver. When the actual event occurs, the bullish excitement is gone, and the big-money investors take profits, sending the market lower. It may seem counterintuitive that perception matters more than reality for short-term stock price movements, but that’s the typical pattern.

Many other factors can cause stock prices to drop. Macroeconomic fears affect the broad market in a negative way, and individual stocks can get knocked down for dozens of reasons: missed earnings estimates, poor quarterly results, negative rumors, management shenanigans, even simple profit-taking.

The good news is that savvy investors can profit from this inevitable negative stock market action in three primary ways.

1. Shorting Shares

The most popular way to profit from a down market or stock is through shorting. This means you place a trade in anticipation of the price falling rather than appreciating. I know it sounds complicated, but it’s actually quite easy.

The way it works is, your broker loans you the shares at a certain price. The goal is to sell the shares back to your broker at a lower price, and you get to keep the difference between the loaned (short) price and the price that you sell the shares back to your broker.

Selling the shares back is called covering. Shorting can be done with individual stocks or exchange-traded funds (ETFs). An ETF such as the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) can be shorted to participate in broad market sell-offs. You need to have a margin account and be approved for short selling at your broker in order to sell short.

2. Put Options

While there are all kinds of different option strategies for a wide variety of stock market conditions, buying a put is the simplest way to profit from a decline. A put option is a bet that the stock or ETF will fall in price within a certain timeframe. It climbs in price as the share price drops.

Buying a put limits your downside risk to the price you paid for the option. However, puts are very time-sensitive. This means that not only does the underlying share price need to drop, but it needs to drop within the lifespan of the put. Most puts expire on a monthly basis, and they all decrease in value as the time to expiration draws closer.

Puts are highly effective tools for betting on a particular known event’s effect on price. If you anticipate the earnings report will be bad for a particular stock, buying puts to benefit from the resulting price drop makes sense.

3. Inverse ETFs

ETFs have opened new markets to investors.

Today, investors can access markets, indexes and complex trading ideas with the same ease as purchasing a share of stock through ETFs. A certain breed of ETFs known as inverse ETFs earns profits when the underlying instruments drop in value. This is accomplished by a complex mixture of future contracts and other derivatives to obtain the inverse movement in the ETF. Fortunately, as investors, we don’t need to fully understand the mechanics of how inverse ETFs actually work. Our job is to understand how to use them for maximum profit.

I probably don’t have to tell you this, but the odds are stacked against you when it comes to “beating the market.”

By nearly 6 to 1 in fact…

Investment analysts, advisors and fund managers — the so-called experts — spend their entire working lives and billions of dollars on research vowing to “beat the market” in any given year — yet the vast majority of them fail…

Just look at mutual fund industry’s record. In the past three years, just 14% of actively-managed mutual fund managers matched or exceeded the market’s performance according to Standard & Poor’s.

So how are the small minority beating the market?

After years of research, we’ve found that more often than not, companies with just three basic characteristics are the ones that consistently beat the S&P 500…

They often pay much higher dividend yields than the S&P 500 too. In fact, eight out of 10 stocks chosen for our “Top 10 Stocks For 2014″ report paid a higher dividend yield than the S&P 500. A few even carried yields over 4.3% — more than twice the S&P 500′s yield.

Don’t believe it’s as simple as three traits to find market-beating stocks? Consider our track record.

Over the years, our annual report of StreetAuthority’s Top 10 Stocks for the coming year has beaten the market 7 out of the past 10 years… We’ve also racked up some phenomenal homeruns from some of the picks.

In 2008 — a year marked by one of the worst sell-offs in history — we saw a gain of 45.8% on our recommendation of Panera Bread Co (NASDAQ:PNRA). The S&P 500 lost 37%.

In 2009 we earned 72.1% on shares of CPFL Energia S.A. (ADR) (NYSE:CPL), a Brazilian utility that soared as the S&P gained 27%.

In 2010 as the S&P clawed back with a modest 15%, we selected not one, but two stocks that gained more than 100% on the year – Skyworks Solutions Inc (NASDAQ:SWKS), up 101.8%, and Silver Wheaton Corp. (USA) (NYSE:SLW), up 159.9%.

Last year we offered up two more stocks – Brookfield Infrastructure Partners L.P. (NYSE:BIP) and Magellan Midstream Partners, L.P. (NYSE:MMP) — that returned more than 50% and 30%, respectively, for the year, despite the S&P being up just over 15%.

Here’s a sample of the Top 10 Stocks that had homeruns over the years…

In 2013 so far, stocks from our report have gained 34.6%… 30.2%… and 37.1%. The S&P 500 is up just half that year-to-date.

So how is this possible? How can you find stocks that can beat the market so often?

It’s simple. The Top 10 Stocks research team and I focus heavily on companies that have one or more of the following traits:

1. Companies that own irreplaceable assets:
What do things like pipelines, hydroelectric dams and utility services all have in common? They are all irreplaceable assets. Another company can’t simply come along and build a competing business. And these assets aren’t about to be replaced by some new technology. But when you find the sort of stocks that give you access to irreplaceable assets, they often end up being some of the most lucrative investments to own for the long term.

Some studies have shown that most of a stock’s return is due to the direction of the trend in a bull market. This can be seen in stock market breadth data. Breadth indicators include the advance-decline line and other data series that measure the number of stocks going up or down.

On days when broad market averages like the S&P 500 close higher, we generally see most stocks close up and breadth is positive. When the S&P 500 is down for the day, we usually see a majority of individual stocks fall and breadth is negative. This is true for weekly and monthly data as well as daily time frames.

Bull and bear markets also tend to play out on a global scale, and the indices of most countries will move up and down together. This tendency of global stocks to move together has been increasing in recent years as global economies have become increasingly interconnected.

Stocks and ETFs with high volatility tend to be among the biggest winners in bull markets and biggest losers in bear markets. For traders, this means that if they expect to see a bull market in the United States, they should consider investing in a foreign stock market that has a good degree of correlation to U.S. markets that also has a history of volatility. Italy fits that description.

The chart below shows a broad index of Italian stocks (the blue dotted line) and the S&P 500 (the green line). To make the indexes comparable, each was set to equal 100 in 1980. While the absolute levels of the index are changed in that way, the direction and size of the trends becomes easier to see. Over the long term, the direction of the trends in U.S. and Italian stocks has been similar, but the magnitude of the moves in the Italian market has been significantly greater.

Over the past 10 years, Italian stocks have been about 27% more volatile than U.S. stocks. Over the past three years, volatility has increased slightly.

In addition to being volatile, Italian stocks also appear undervalued. At the beginning of the year, Italian stocks had a cyclically-adjusted price-to-earnings (P/E) ratio (CAPE) of 8.4, well under the historic average of 21.8 for that market.

The CAPE uses an average of earnings over a business cycle. It is less prone to large swings because it uses several years’ worth of earnings data. This indicator was popularized by Yale professor Robert Shiller, who demonstrated that CAPE can be used to develop long-term market forecasts.

Founded in 1878 by none other than Thomas A. Edison, General Electric Company (NYSE:GE) is still going strong. GE stock has gained over 21% year-to-date and over 6% in the last month. The company operates through eight segments: Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions and GE Capital. The company discussed its Q3 2013 results last Friday. Our GE earnings analysis is based on these preliminary financial results for the quarter ended 2013-09-30. We have also just published Questions on Long-Term Strategy? Honeywell Earnings Analysis; Honeywell is another Industrial Conglomerate and a peer used in this  analysis.

GE Earnings Analysis

This analysis is peer relative (see the end of this post for the peer list) and is based on GE’s performance over the last twelve months (unless stated otherwise). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Margin Driven Operating Model

General Electric Company trades at a lower Price/Book multiple (2.1) than its peer average (3.3). The market expects GE to grow earnings about as fast as the average of its chosen peers (PE of 18.5 compared to average of 18.7) but not to expect much improvement in its below peer average rates of return (ROE of 11.8% compared to the average ROE of 14.9%).

The company’s relatively high profit margins (currently 10.2% vs. peer average of 8.3%) are burdened by asset inefficiency with asset turns of 0.2x compared to the peer average of 0.7x. Overall, this suggests amargin driven operating model relative to its peers. GE’s net margin is its highest relative to the last five years and compares to a low of 7.2% in 2009.

Long-Term Strategic Bet

The market gives the stock a PE ratio of 18.5 which is above average even though GE’s revenues growth has been below the peer average in the last few years (-2.4% vs. 3.6% for the past three years). It seems as if the market sees the company as a long-term strategic bet.

GE’s annualized rate of change in capital of -5.9% over the past three years is less than its peer average of 7.1%. This below average investment level has also generated a less than average return on capital (2.6% averaged over the same three years). This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Understatement of Net Income?

GE has reported relatively strong net income margin for the last twelve months (10.2% vs. average of 8.3%). This margin performance combined with relatively high accruals (10.5% vs. average of 4.0%) suggests possible conservative accounting and an understatement of its reported net income.

GE’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer average — which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts for GE Earnings Analysis

Peers used for GE Earnings Analysis

GE Earnings Analysis uses the following peer-set: Siemens AG (ADR) (NYSE:SI), United Technologies Corporation (NYSE:UTX), 3M Co (NYSE:MMM), Honeywell International Inc. (NYSE:HON), Medtronic, Inc. (NYSE:MDT), Danaher Corporation (NYSE:DHR), Mitsubishi Corporation (USA) (OTCMKTS:MSBHY), Koninklijke Philips NV (ADR) (NYSE:PHG) and Hitachi, Ltd. (ADR) (OTCMKTS:HTHIY).

Disclaimer

President Barack Obama spoke publicly on Monday about the problems that millions of Americans have experienced with the health insurance exchanges established under the Affordable Care Act, commonly known as Obamacare. Here are three important takeaways from his remarks for investors.

1. 85% of Americans don’t need to sign up
One of the first statements out of Obama’s mouth was that 85% of Americans who have health insurance coverage through their employers, Medicare, or Medicaid don’t have to sign up through the federal or state exchanges. This is a key point that is easy to forget. However, don’t think for a minute that Obamacare isn’t impacting these individuals.

Investors should watch how the health reform legislation is directly and indirectly affecting the business landscape, including those who don’t have to purchase insurance through the exchanges. One important trend to note is the growth of private health insurance exchanges.

Aon PLC (NYSE:AON), for example, operates private health exchanges through its Aon Hewitt division. The company’s research found that 44% of employers could move to private exchanges within the next three to five years. This is a shift that should cause investors to sit up and take notice. Aon could be a stock to watch as this trend unfolds.

2. It’s not just a website
While Obama talked about a “tech surge” to fix problems plaguing the Obamacare federal exchange website, Healthcare.gov, he also explained that “it’s not just a website.” His point was that there are other ways to sign up for health insurance, including over the phone.

The president’s comment is correct in an even larger way. Obamacare could fundamentally change how millions of Americans access health care. There are multiple ways that this could benefit private companies.

Pharmacy retailers should benefit as individuals gain health insurance that allows them to purchase prescription drugs that were unaffordable to them in the past. Rite Aid Corporation (NYSE:RAD) could be a stock to watch for investors interested in that angle. The company has made a remarkable turnaround over the last year, including setting an all-time record for EBITDA last quarter. Rite Aid could keep its momentum going thanks in part to the “more-than-a-website” law.

3. No sugar coating
Acknowledging the myriad difficulties experienced by users, President Obama said that there’s “no sugarcoating” the problems. Sure, the president attempted to put as positive of a spin as possible on what’s happened, insisting that “the product [i.e., the health insurance itself] is good.” However, that’s what you would expect of any politician speaking about his or her major legislative achievement.

From an investing standpoint, it makes sense to not sugarcoat the overall impact of Obamacare. Some stocks could suffer from the Obamacare rollout. WellPoint, Inc. (NYSE:WLP), for example, could encounter higher medical costs — and lower profits — if one of the company’s key rivals proves to be correct.

In the month since Apple Inc. (NASDAQ:AAPL) released its new iPhone 5s and iPhone 5c phones, the market has been deluged with the sentiment that the iPhone 5c “is a failure.” Apple bears are rallying around reports that Apple has cut orders for the iPhone 5c, although they are not sure just how much Apple is cutting production.

All of these rumors about the iPhone 5c being a failure are flawed for one simple reason: They misunderstand the purpose of the 5c. Many observers – including me — expected Apple to release a “cheap” iPhone this year. When Apple released the iPhone 5c alongside the high-end iPhone 5s, a large contingent of Apple-watchers assumed that it was the rumored “cheaper” iPhone.

But the iPhone 5c is not a cheaper iPhone; it fits directly into the same pricing scheme Apple has used for years. It is not designed to gain market share in developing countries. It is not meant to target users who don’t receive smartphone subsidies.

Instead, the iPhone 5c’s primary purpose is to boost Apple’s margins by cutting production costs and minimizing cannibalization of the highly profitable iPhone 5s. So far, investors have every reason to believe that the iPhone 5c is succeeding in that task.

Margin quandary
While the financial press has extensively covered the slowdown in Apple’s growth this year, the issue that has really spooked investors has been margin contraction. Apple churns out so much cash that the stock is a no-brainer even with no growth. The biggest risk for Apple investors is not slowing growth, but a potential collapse of the company’s legendary margins.

Margin erosion was a key factor driving Apple stock’s poor performance in the past year. Apple’s gross margin has fallen year-over-year for three consecutive quarters, and will almost certainly fall again when Apple reports September quarter results next week. Sometimes the declines have been quite substantial; in the March quarter, gross margin dropped by 990 basis points compared to the same quarter in 2012.

One cause of this margin erosion has been cannibalization of the full-size iPad by the lower-margin iPad Mini. However, declining profitability within the iPhone product line has been just as important. The iPhone 5 was very difficult to manufacture, driving up production costs compared to the iPhone 4S. Meanwhile, Apple experienced a mix-shift toward older, cheaper iPhones that also pressured product margins.

The iPad Mini has been one cause of Apple’s margin erosion. Photo: Apple.

iPhone 5c to the rescue!
This may be the true “origin” of the iPhone 5c. The idea that it is a cheaper phone designed to appeal to developing-world customers is fairly ridiculous, considering that it’s not even the cheapest iPhone on the market!

Instead, the iPhone 5c is simply a new version of the iPhone 5 that is cheaper to produce. IHS iSuppli has pinned the manufacturing cost of the high-end iPhone 5s at $199, just above the $197 cost of the iPhone 5 from last year. By contrast, the 16 GB version of the iPhone 5c costs just $173 to build, according to IHS estimates.

Some trends are favorable for the retail pharmacy industry. As the U.S. domestic population ages and health care insurance coverage expands, the pharmacy benefit management (PBM) business is expected to surge. The increasing number of lives covered following the health care reforms should also benefit this business by increasing sales.

Not everything is good news, however. Wal-Mart Stores, Inc. (NYSE:WMT) recently made its entrance into the retail generic drug market, which forces drugstore companies to lower prices and lose margins. To see the full effect of this, let’s analyze three companies in the sector.

BioScrip: Margins down but outlook good
The first company to review is the third-largest home infusion services provider, BioScrip Inc. (NASDAQ:BIOS). The company enjoys competitive advantages in this segment, owning 60 infusion pharmacies.

Despite the company’s impressive 22.3% jump in revenues, the second-quarter adjusted loss remained flat year over year at $0.02. BioScrip’s margins are contracting due to escalating costs and expenses. Gross margin contracted 260 basis points to 31.8% in the quarter, showing that there are still things to work on.

There is some hope, though. Strategy-wise, the company is focusing on its strong infusion segment. BioScrip experienced a robust 41.5% increase in infusion revenue this last quarter, the main driver for the company’s strong results. Acquisitions will be key looking forward, since they will strengthen the company’s market position. BioScrip’s $223 million acquisition of CarePoint goes in this direction, as it will increase the company’s top line. This past February, the company also took over HomeChoice, which has been integrated successfully. In July, it acquired site infusion pharmacy services provider InfuScience. The infusion market is expected to grow in the range of $15 billion to $20 billion from current range of $9 billion to $11 billion, so there is substantial space for growth.

CVS Caremark: Good margins being threatened
Another company to consider is CVS Caremark Corporation (NYSE:CVS), which owns approximately 7,300 stores nationwide and enjoys 21% of the whole U.S. prescriptions market.

The company showed mixed results for its second quarter. Although adjusted earnings per share grew an outstanding 19.5% and revenue in the specialty pharmacy rose roughly 19%, front-end sales declined. Unlike BioScrip, CVS Caremark’s margins are expanding, thanks to the steady growth of generic medicine. The gross margin improved 60 basis points, while the operating margin improved 60 basis points–not bad at all for this industry.

PBM is showing good performance for CVS Caremark as well, which has an expected market share of 26% for 2013. However, the recent Medco-Express Script $29 billion merger has created a dominant player that will cover more than 150 million prescription drug consumers and half of the large employer market. This will bring intense competition and erode margins for the company going forward.

Rite Aid: Will good margins and expansion continue?
The third and last company to analyze is Rite Aid Corporation (NYSE:RAD), which operates 4,623 retail drugstores in 31 states across the U.S.