Determinants of Stock Prices - A Firm Level Analysis of the Energy Sector

Investors rely on massive amount of fundamental and technical information to make profitable investment decisions. Advocates of efficient market theory believe that stock prices reflect everything that is known about a company and hence can be predicted based on fundamental analysis, while proponents of technical analysis attempt at forecasting future security prices based on historical data. However, quantitative measures indicating stock price movements in relation to these factors are not entirely understood. The main purpose of this study is to identify the most important technical and fundamental variables that dictate capital gains at firm level for companies in the energy sector, specifically those involved in oil and gas exploration and production.

Vast amount of data and information regarding the movement of major indices such as S&P500 and DOW is available. Such studies provide a bigger picture on the health of the equity market and of the economy but lend less than needed support to investors who are focusing on a specific sector. The main focus of this research is firm level analysis of oil and gas exploration industry because it is an important element of every well-diversified portfolio.

A multivariate regression model with fixed cross-section effects is employed to examine the effects of fundamental and technical variables on movements of stock prices. Quarterly data for 39 companies from June-1997 to March-2007 was collected and the dependence of stock price relative to the S&P sector index (RELSP) on return on investment (ROI), current ratio (CURR), gross profit margin (GRPRMARG), dividends paid per share (DIV) and trading volume (TRVOL) was analyzed.

The results show that the dependence of RELSP is statistically significant on TRVOL (p-value: 0.0000), ROI (p-value: 0.0702) and GRPRMARG (p-value: 0.0334). For all else constant, on average as TRVOL increases by 1%, RELSP increases by 8.6%; as GRPRMARG increases by 1%, RELSP increases by 2.8% and as ROI increases by 1%, RELSP increases by 0.1%. These results are in accordance with the available literature; as the corporate executives become more efficient (ROI rises), the company increases its market share (GRPRMARG rises) and trading volume increases (TRVOL rises), the value of stock prices increase (RELSP rises).

Also, the model shows that the effects of CURR (p-value: 0.1787) and DIV (p-value: 0.5745) on RELSP are statistically insignificant. However, a nonlinear trend pertaining to DIV and CURR was revealed. The analysis shows that initially as DIV increases RELSP increases but investors start to penalize companies as a greater percentage of earnings are paid in dividends and not retained to be invested in increasing shareholder value. Similarly, it was found that initially as CURR increases RELSP increases but after a certain point stock prices are penalized for increased amount of uninvested cash in hand.

Moreover, the model shows that mean systematic effect of all variables ignored in the model is approximately 4.6% (p-values = 0.00000). Thus, this model must be employed with other variables such as seasonal effects inflation, number of shareholders, investor’s perception of the health of the economy etc.

Bottom line, investors must employ both fundamental and technical variables in making investing decisions so as to maximize profits.

EMC - A BULL in the bear market

EMC Corporation (EMC), involved in development, delivery and support of information infrastructure, is traded on NYSE and is one bull among the bears.

I recommended EMC to one of my close friends this summer and since then EMC has shown a solid upward movement (except in November - the story of every stock). This recent dip presents a great opportunity to load EMC in your portfolio.

Technical Analysis:
EMC stock price moved sideways for the last 3 years, but has had a very good run (more than 50% gains) in the past one year. The % increase in stock price in next 1 year is estimated to be 2%, which is very low. However, the much-anticipated spin-off of VMware has been a huge success and I would not be surprised if EMC stock prices pound the estimates.

Fundamental Analysis:
EMC has a strong balance sheet. Also, EMC has better profit margins and revenue growth than the rest of the industry. However, when compared to its competitors, EMC shares have a higher PE and thus are more expensive.

Another parameter, corporate governance quotient (CGQ) indicating the relative strength of the management is one of the important parameters that long-term investors consider. EMC CGQ is better than 85% of S&P500 companies and better than 98% of the technology hardware and equipment companies.

Bottom line, BUY EMC at any dip.

Open Economy - TRADE effect on UnEmployment Rate

This article analyzes the degree with which the unemployment rate in United States is affected by the openness of the economy. US unemployment rate is measured on a monthly basis by the Bureau of Labor Statistics and the openness of US economy is defined as the share of international trade in U.S. GDP, given by the ratio of Exports and Imports to GDP (TRADE).

Quarterly data on UR and TRADE from year 1973 through 2002 was analyzed using the least square linear regression method to evaluate the effect of TRADE on UR for US economy.

Firstly, our analysis shows that UR and TRADE are inversely related to each other. The correlation coefficient between UR and TRADE was observed to be -0.645855. The negative correlation coefficient value suggests that as TRADE increases and the economy becomes more open, UR goes down. Also, the absolute value of the correlation coefficient (0.645855) is big indicating that there is a clear inverse trend between UR and TRADE.

Secondly, based on the data our model shows that if TRADE increases by one percentage point, we can expect average UR to decrease by 0.17 %. The model estimated the effect of TRADE on UR with a high level of significance (p-value = 0.0000). Also, the coefficient of determination (a tool to assess the fit of the model) was obtained as 0.42, which means that approximately 42% of the variation in UR can be attributed to TRADE.

Lastly, the model estimated that hypothetically if the US economy be closed for TRADE, average UR can be expected to be just over 9%. In other words this means that the average effect of all other variables not included in the model is expected to be 9% on UR.

Before analyzing any deeper, it must be stressed that UR changes as the balance of trade shifts between export and import. This point has not been evaluated in this model but it is expected that UR will decrease when export > import. This is due to the fact that as companies start exporting more, the demand for goods and services increase and consequently they hire more labor to keep up with the increased pressure on production. Similarly, one can expect that UR will increase when import > export because as US imports more goods and services produced in foreign nations, pressure on production eases and as a result companies become more likely to lay-off work-force.

Bottom line, these results show that unemployment rate in US like in any other nation depends on the overall health of the economy and not on TRADE alone. With that said, if all other factors influencing the economy, such as housing market, credit crunch and politics, remain constant such that unemployment rate depends on TRADE alone, unemployment rate decreases as the economy becomes more open to trade. One reason is the fact that as the economy becomes more open to TRADE, jobs are created especially in industries, such as transportation and construction, that support both export and import in some form.

Tracking Picks - PEP, KO, JSDA

Pepsico, Inc. (PEP)
First Recommendation - BUY (03/05/2007)
Performance - ~ 6% gain in last 2 months
Reason behind excellent performance - The Street's tumble in late Feb-07 stressed increased market volatility; consequently investors are now turning to defensive stocks such as PEP.
Outlook - Positive. Pepsi should continue to benefit from its international business and broad product line. Also, in early May Pepsico announced 25% increase in its annual dividend; this should attract more investors.
Current Recommendation - BUY.

Coca-Cola Co. (KO)
First Recommendation - SELL (03/20/2007)
Performance - ~ 10% gain in last 2 months
Reason behind excellent performance - KO reported a phenomenal 2007 Q1.
Outlook - Positive. It looks like KO has been revived by its management. I still prefer PEP over KO because of its bigger product line that includes cereals and chips. But, I notice that people are appreciating Coke ZERO more and more every day.
Current Recommendation - Upgraded from SELL to HOLD.

Jones Soda Co. (JSDA)
First Recommendation - BUY (03/20/2007)
Performance - ~ 11% gain in last 2 months
Reason behind excellent performance - Strong marketing strategy; JSDA's management is doing a great job of marketing its product as healthy and by putting its consumer's picture on its bottles.
Outlook - Neutral. Though, JSDA's market share has been increasing, it reported lower than expected profits in 2007 Q1.
Current Recommendation - HOLD only if you can handle high risk. Also, JSDA is currently expensive with a PE of 116.

Tracking Picks - NYX, DJO, CAT, XOM

NYSE Euronext, Inc. (NYX)
First Recommendation - BUY (02/03/2007)
Performance - ~ 10% decline in last 3 months
Reason behind lagging performance - Very often there is no connection between the company's fundamentals and its stock price. NYX is one such example. All NYX did in last 3 months was successfully merge with Europe's best and in return it experienced a hard fall. To some extent the recent downgrade of NYX by Goldman Sachs triggered its sell-off on the Street. The Goldman Sachs report basically recommended a SELL on NYX and a BUY on NASDAQ, rationalizing that NASDAQ is better poised to succeed in the US market. However, I believe the single biggest reason to get into NYX is its exposure to the European market not the US market.
Outlook - Positive. Recently, NYX reported a solid Q1 2007, which did not include earnings from Euronext. I believe NYSE-Euronext will beat all estimates in upcoming quarters once the revenue from Euronext starts flowing in.
Current Recommendation - BUY. Currently, the street is not on board with NYX, which makes investing in NYX very risky. However, I believe NYX can bring big gains.

DJO Incorporated (DJO)
First Recommendation - BUY (02/10/2007)
Performance - ~ 11% decline in last 3 months
Reason behind lagging performance - Problems with the integration of the Aircast business. On 05/08/2007 DJO posted a 40 percent jump in operating expenses and consequently a fall in 2007 Q1 earnings causing its share price to fall by approximately ~ 17% in one day.
Outlook - Dim short term outlook. DJO cut its 2007 full-year profit forecast because of increasing costs of inventories. This will also constrain increasing market share in the 2007.
Current Recommendation - SELL. In my opinion investing in an orthopedic device company is a great way to play the baby-boomer trend. I think investors should look into other better established players of the industry with broader product line such as Zimmer Holdings Inc. (ZMH) and Stryker Corp. (SYK).

Caterpillar Inc. (CAT)
First Recommendation - BUY (02/20/2007)
Performance - ~ 12% gain in last 3 months
Reason behind excellent performance - International exposure and thriving commodity market.
Outlook - Positive. US housing market is expected to get better by the end of 2007 and this is good news for CAT.
Current Recommendation - BUY.

Exom Mobil Corp. (XOM)
First Recommendation - BUY (03/05/2007)
Performance - ~ 15% gain in last 2 months
Reason behind excellent performance - Strong market for Oil.
Outlook - Positive. An oil company is a must have in any well diversified portfolio, and in my opinion XOM is the best oil company. Also, XOM is one of the most loved company by the mutual funds biggies which makes it a low risk.
Current Recommendation - BUY.

Tracking Picks - AUY, SBUX, MO, DENN

Yamana Gold Inc. (AUY)
First Recommendation - BUY (12/26/2006)
Performance - ~ 15% gain in last 4 months.
Reason behind good performance - Rising inflation and strong market for gold and copper.
Outlook - Positive. In current economic times, I believe gold must be a part of every well diversified portfolio, and the best way to play gold is AUY. AUY is the fastest growing intermediate gold company and is setting an example for the rest of the industry. On 04/24/2007 Yamana Gold reported that Q1 2007 production figures were ahead of budget. In my opinion, although AUY's momentum has stalled in last couple of weeks, it is poised to go much higher.
Current Recommendation - BUY.

Starbucks Corp. (SBUX)
First Recommendation - BUY (12/31/2006)
Performance - ~ 11% decline in last 4 months.
Reason behind lagging performance - Meeting (not beating) analyst estimates.
Outlook - Positive. Omnipresent Starbucks is committed to expand its business in more and more countries, the opening of its first store in Romania on April 8th being the latest example of its ongoing expansion.
Current Recommendation - Analyze Starbucks 2007 Q2 report coming out tomorrow (05/03/2007) for short term prospects. BUY for long term investing.

Altria Group Inc. (MO)
First Recommendation - BUY (01/10/2007)
Performance - ~ 5% gain in last 4 months.
Reason behind good performance - KRAFT spin-off, dormant litigation environment.
Outlook - Positive. A great value stock paying a good dividend (current yield is = ~ 5%); minor setbacks due to unforeseen lawsuits are possible.
Current Recommendation - BUY.

Denny's Corp. (DENN)
First Recommendation - SELL (01/25/2007)
Performance - ~ 12% decline in last 3 months.
Reason behind lagging performance - Falling same-store sales and guest traffic, in addition to high debt and low market share.
Outlook - Negative. Though Denny's management has been doing a lot to refinance its debt, it is proving to be just not enough.
Current recommendation - AVOID

Sell Dell

Dell Inc., a supplier of personal computers worldwide is traded on NASDAQ under the symbol of DELL, and in my opinion it sits on the SELL block.

Dell is involved in the design, development, manufacture, marketing, sale, and support of various computer systems and services.

In my opinion, anyone who owns it must dump it and those looking to invest should pass it. I am convinced, because I am now questioning the ethics of its management.

On March 30th this year, Dell announced delay (beyond the due date of April 4th) in filing its annual report for fiscal year 2007 with the SEC due to accounting irregularities. "The Audit Committee's investigation has identified a number of accounting errors, evidence of misconduct, and deficiencies in the financial control environment," Dell reported in a press release. As a result of this ongoing investigation into company's methods for recognizing revenue, the preliminary financial results for fiscal year of 2007 will be restated to reflect necessary adjustments in accounting estimates. The conclusion of this independent investigation can adversely affect the currently estimated numbers and growth between the current and prior year periods (which, even with the accounting irregularities, are strictly OK).

Dell is now expected to file form 10K with the SEC on April 18th providing an explanation for incorrect accounting and financial reports and establishing compliance with all SEC and NASDAQ requirements. I believe investors are still not selling DELL because they are waiting to know about the nature and severity of accounting errors made, which I think is a huge investing mistake. Regardless of what the error actually is (and however big or small it may be), trying to answer such questions will not mean much because an accounting mayhem almost always exposes the weakness of the company’s internal controls over financial reporting and effectively casts a doubt on the ethical functioning of the higher management. When a company starts making numbers, it is being irresponsible towards shareholders and I truly believe it is time to sell.

Bottom line, SELL DELL. When you can't trust the management's ethics, just run - questions about details can (and should) be saved for later.

Say NO to Coca-Cola

Coca-Cola Co., a nonalcoholic beverage company is traded on NYSE under the symbol of KO and I believe it must be AVOIDED.

Coca-Cola Co. is a big player in the business of manufacturing, distribution, and marketing of nonalcoholic beverage concentrates and syrups. In the absolute sense, KO has strong fundamentals. Coca-Cola Co. recently reported gross profit margin of ~ 66 % (greater than the industrial average) and quarterly revenue growth of ~ 7% (on par with the industrial average). Though Coca-Cola does clear the first pass of being a good investment choice, one must look beyond its financials. Besides, companies function in a competitive environment and this makes the complete analysis of the industry important and necessary.

Paying closer attention to other players in the soft drink business such as PepsiCo Inc. (PEP) and Jones Soda Co. (JSDA) changes the entire investment strategy.

Fundamentally, I believe PEP is the strongest. One parameter all investors care about the most is earnings per share (EPS). Greater EPS implies more value being returned to shareholders. EPS for PEP is 3.34, which is greater than the industrial average (0.9) as well as EPS for KO (2.16) and JSDA (0.186). Another plus for Pepsi is its efficient management. Return on equity (ROE), indicative of business efficiency, is greatest for PEP (~ 38%) compared to KO (~ 30%) and JSDA (~ 19%). Also, Pepsi is the cheapest in the group. The price to earnings ratio (P/E) for PEP is 18.79, lower than that of KO (21.89) and JSDA (107.63). Another fairvalue indicator, the PEG ratio for PEP is 1.71, which is lower than that of KO and JSDA. Both KO and JSDA have PEG ratio > 2 (KO PEG = 2.3 and JSDA PEG = 2.84), which means that they are currently traded at a premium twice its expected growth.

Other than better fundamentals I also like Pepsi because of its bigger product line compared to that of KO or JSDA. In addition to carbonated, noncarbonated and sports drinks, PepsiCo also offers a wide variety of chips and ready-to-eat cereals.

Though Jones Soda is fundamentally not as strong as PEP or KO and is the most expensive in the lot (with a triple digit P/E ratio), I still believe it is a good investment choice. I like Jones Soda because it is a relatively new company (JSDA was founded in 1986 and is about 100 years younger than the two Cola giants). And, where the multinationals PEP and KO have already penetrated most of the markets, Jones Soda predominantly serves Northern America (United States and Canada), and thus has high potential for growth and expansion worldwide. Also, I believe Jones Soda Co. is doing a great job marketing its products as "healthy". JSDA uses pure cane sugar instead of high fructose syrup (predominantly used throughout the industry), and thus has been able to lure the increasingly health conscious market. I believe this sets Jones Soda apart from its competitors and in effect gives it an edge over others in the industry. As a result, the market share for Jones Soda is increasing. JSDA has been able to increase its gross profit margin from 34.6% in 2005 to 39.2 % in 2006. Also, its EPS increased by 217% in 2006 compared to 2005.

In addition to the fundamental analysis, basic technical analysis also favors PEP and JSDA over KO. For the last 5 years Coca-Cola stock has moved sideways losing more than 10% in value. In the same period JSDA has gained more than 2000% and PEP has gained more than 20%. Basic charting shows that PEP correlates very well with the S&P 500 index and thus is a great defensive stock, while JSDA has the got the momentum.

Bottom line, Coca-Cola has lost its mojo and in my opinion investors should switch from KO to the best in the class. I believe both PEP (the best defensive soft-drink stock) and JSDA (the soft-drink stock with high growth potential) will beat KO in coming years.

Playing the Falling Market

Last week, we witnessed the greatest fall on the Street since 9/11, which started as a reaction to China's sell-off. Market's hard fall has led to massive selling which is a result of panic attack among investors. DOW is down by more than 500 points and NASDAQ has fallen more than 100 points. European and Asian markets haven't escaped this fall either.

This global market downturn has stressed one question always lingering over any investor's mind - is it just a correction or beginning of a recession? I believe the worst is not over yet and the market should bottom soon. This creates some buying opportunities for investors in the near future.

So, let’s go bargain shopping.

There is consensus among the Street analysts and economists that the US economy is slowing and will continue to grow at a moderate pace (slower than 2006). Also, there is a growing concern regarding the state of subprime lending market and with inflation still above the comfort zone of Federal Reserve, rate cuts are yet not in the picture. I believe it is time to play defense, which means that investors should look into buying good dividend yielding undervalued stocks.

My number one pick is Altria Inc. (MO). I like the smoke king because it pays a good dividend (yield = 4.1%) and has a strong balance sheet. Also, beta (a volatility measure in relation to the entire market) for Altria Inc. is low. For more information please read my previous post on MO.
http://happyinvestingposts.blogspot.com/2007/01/smokin-altria_10.html.

In such a turbulent time, I think investors should invest in defensive stocks such as PepsiCo Inc. (PEP). I like Pepsi because no matter where the global economy is headed, general population will continue to consume food items and drink soda. Also, the outlook for international markets still remains positive and this is good news for the food and beverage multinational.

I also like Exxon Mobile Corp. (XOM). XOM is down 9 points from its one year high and is undervalued. Exxon Mobile should continue to benefit from high demand for oil and increasing oil prices. One positive indication for Exxon Mobile is that the management is buying back its stock right here right now, which means that it believes in its future. Another thing worth mentioning is the fact that all big institutions have always loved the oil giant. Exxon Mobile Corp. is one of the most held stocks in mutual funds and as long as the mutual funds like it, XOM is going higher.

Bottom line, when the market is hard on you, play defense. In my opinion, all three MO, PEP and XOM are BUYs.

Caterpillar is going higher

Caterpillar Inc., the world leader in manufacturing, is traded on NYSE under the symbol of CAT and in my opinion currently it is a BUY.

The company was founded as Caterpillar Tractor Co. in 1925 and was renamed as Caterpillar, Inc. in 1986. Caterpillar Inc. primarily designs, manufactures, and sells machines and engines for various applications such as marine, petroleum, construction, industrial and agricultural.

Fundamentally, Caterpillar Inc. is very sound. In FY 2006 its sales were up by 14% and operating profit soared by 30%, compared to FY 2005. Caterpillar Inc. has consistently delivered a good return on equity (ROE), which means that the Caterpillar management is very efficient in the way it conducts its business. Its ROE has consistently exceeded the industrial average and the S&P 500 average. For Q4 2006, Caterpillar's ROE was approximately 51% while the industry’s ROE was 23% and the S&P 500 ROE was 16%. Also, Caterpillar is growing faster than the rest of the industry. Compared to Q4 2005, in Q4 2006 its sales were up by 13% compared to the industrial average of 10%. Also, I believe CAT is currently undervalued with a PE ratio of 13, which is less than the industrial average of 17. Furthermore, on 02/15/2007 Caterpillar Inc. announced a stock buyback plan worth 7.5 billion USD. This is very good news for investors, because it means lower number of total shares outstanding and thus greater earnings per share.

Other than strong fundamentals, there is one more thing I like about CAT. Caterpillar’s business has a global presence. Other than United States and Canada, Caterpillar has penetrated various developing markets such as Africa, Middle East, Brazil, China, India and Indonesia. Though the 2007 outlook in North America (US and Canada) is not as bright as 2006 with sales expected to decrease by 8%, overall the year of 2007 looks good for Caterpillar Inc., because much of the increase in sales will come from outside United States. Also, Caterpillar's exposure to the US housing sector has scared away many investors in 2006, but the housing market is expected to get better in the second half of 2007 and this will provide an additional lift to the Caterpillar's business.

Another good thing going for Caterpillar Inc. is the strong commodity market for metals, oil, natural gas and agricultural products. Jim Rogers, the world's most successful commodity investor believes that currently the supply and demand for commodities is very unbalanced, with the demand exceeding the supply. Thus, we are in the middle of a commodity bull market and one way to benefit from this is by investing in companies aiding the commodity business such as Caterpillar Inc.

Bottom line, Caterpillar Inc. is the best in the breed and undervalued. It should benefit from the strong commodity market and its global presence. In my opinion, CAT's a BUY.

DJ Orthopedics playing the trend

DJ Orthopedics Inc., a medical device company is traded on NYSE under the symbol of DJO and in my opinion currently it is a BUY.

DJ Orthopedics Inc. specializes in non-operative orthopedic, spine and vascular products in the United States and in more than 60 other countries worldwide. DJO offers approximately 600 rehabilitation products that include rigid knee braces, soft goods and pain management products that are used to prevent injury, treat chronic conditions and aid in post-surgery/post-injury recovery.

Fundamentally, DJ Orthopedic Inc. has had a good growth story in 2006. In the quarter ending September 30, 2006, DJO Inc. reported a 56.9% increase in net revenues and 48.7% increase in the gross profit compared to Q3 2005. The company is also very committed in introducing new products in the market - DJO introduced 16 new products in the market in the first nine months of 2006.

I like DJO not only because of its dominance in the non-operative orthopedic segment of the healthcare industry, but also because of the current demographic trend in its favor. With the baby boomers reaching sixties and expecting to live longer, I see a growing demand for its product line lasting many decades.

One thing favoring DJ Orthopedics is its greater insulation to seasonal revenue patterns compared to its competitors who are in the business of operative surgical products. People suffering from orthopedic injuries are usually less inclined to go through a corrective surgery right away, and tend to opt for non-operative rehabilitation products as an intermediate measure. This is especially true during certain times of the year, e.g. the holiday season, when these non-operative rehabilitation products become all the more prevalent due to the desire to postpone the inconvenience of a surgery. In addition, more and more people indulging in outdoor activities (such as skiing, football, etc.) are also now routinely and proactively using injury preventing knee braces. These factors make the entire range of DJO products prevalent year round.

One more thing worth mentioning is the possibility of a short squeeze. Currently, many traders are betting against DJO, thus shorting approximately 7.4% of the total number of shares available for trading. The short ratio for DJO as of January 9th, 2007 was 12.1, which means that it will take approximately 12 days for the shorts to cover their sales. In my opinion any positive indication in favor of DJ Orthopedics will pressure shorts and if they all start covering their calls at the same time, we will witness a short-squeeze.

Bottom line, current demographic trend and growing market presence make DJO lucrative. So investors BUY DJO and play the trend, in my opinion it will make you greener.

NYSE Group for risk-lovers

NYSE Group Inc., the biggest stock exchange in the world is traded on NYSE under the symbol of NYX. In my opinion currently it is a BUY, but only for risk-takers.

NYSE Group operates two securities exchanges, the New York Stock Exchange (the "NYSE") and NYSE Arca. As of December 31, 2006, the NYSE and NYSE Arca listed approximately 2,764 world-class issuers. NYSE Group listed 206 new issuers in 2006, including 28 transfers from other markets (compared to 16 in 2005) and 29 non-US companies (compared to 19 in 2005).

On February 2, 2007, NYSE Group, Inc. announced its 2006 annual financial results. In the fourth quarter of 2006, NYSE Group reported profit after reporting a loss in the year ago quarter. It posted 55% increase in revenue in the fourth quarter of 2006 compared to the fourth quarter of 2005. Its earnings per share (excluding non-recurrent items) were 45 cents, just missing the analysts’ estimates by 01 cent. Though the NYSE Group saw tremendous growth in revenue and profit in 2006, its expenses were higher than expected due to increased marketing costs. The non-recurrent expenses mainly included merger costs and restructuring costs because of workforce reduction.

I personally like the Big Board led by John Thain, because it is all about growth and expansion. However, I will recommend it only to risk-takers. As part of its global growth strategy, NYSE Group is all set to merge with Euronext N.V., a pan-European, Paris-based stock exchange with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. On January 10, 2007, NYSE Group announced an agreement to acquire a 5% equity position in the Mumbai-based National Stock Exchange of India Limited (NSE). On January 31, 2007, NYSE Group formed a strategic alliance with the Tokyo Stock Exchange hoping for a stronger tie-up in the future. Also, John Thain, the CEO of NYSE Group Inc., mentioned that a link up with a Chinese exchange is now on his mind.

In addition to its global growth, NYSE Group has a sound cost-cutting strategy in place. The company is cutting its workforce, replacing people with faster and cheaper machines and closing its trading floors. The exchange is in the process of implementing an electronic trading platform, the "Hybrid Market". On January 24, 2007 NYSE Group announced the completion of Hybrid Phase III and expects to conclude Hybrid phase IV by March 5, 2007. This move has resulted in improved efficiencies and reduced expenses allowing the Big Board to shut down some of its trading floors. NYSE Group's total employee headcount was 2578 as of December 31, 2006, compared to 3296 as of December 31, 2005 (a reduction of 718 positions).

I believe that investing in NYSE Group Inc. can make you very green, but it is risky for two reasons. Firstly, the NYSE Group is competing with NASDAQ Stock Market Inc. (NDAQ). NASDAQ has lower listing fees and this will put pressure on NYSE Group's pricing controls. Secondly, the NYSE Group is growing too fast and its failure to integrate its mergers and acquisitions smoothly can damage the stock. The NYSE Group has bright growth prospects, but its inability to increase its earnings per share in the future quarters can affect the stock price adversely.

Bottom line, NYSE Group's main objective is to make money and it is expanding at a high pace, but I think it is not for faint hearts. So, investors BUY NYX but do not make it a part of your risk-averse portfolio.

Thumbs down for Denny's

Denny's, America's family-style restaurant chain is traded on NASDAQ under the symbol of DENN and in my opinion, currently it must be AVOIDED.

A good product can be a good enough reason to want to invest in any company, but Denny's is an exception. I love their pancakes and I appreciate the free flow of coffee, but my liking for Denny's ends after I kill my mid-night hunger. The main reasons why I advise staying away from Denny's are its weak balance sheet and low profit margins.

The restaurant industry is a very mature and a highly competitive business with a low barrier for entry. In such industries, the more cash flexibility a company has, the more it can expand and grow. Though Denny's has demonstrated healthy growth in earnings and sales in 2006 compared to 2005 (230% increase in net income, 220% increase in earnings per share and 1.42% increase in sales), it still has negative net worth. Negative net worth (assets < liabilities) implies that Denny's has less cash on hands, thus less flexibility in spending, and this in effect limits its growth. Though the Denny's management has lowered its debt by approximately 100 million or 18% in the fiscal year of 2006 by closing underperforming stores and by restructuring its business, it still has a long way to go. Denny's has almost no liquidity and its asset to debt ratio is lower than most of its competitors in the industry such as McDonald’s Corp. (MCD). Denny's current ratio is approximately 0.46 and its quick ratio is approximately 0.40 as compared to MCD which has a current ratio of 1.27 and a quick ratio of 1.24.

In addition to a huge debt, Denny's also has very low profit margins. For the quarter ending September 2006, Denny's gross profit margin was 19% and its net profit margin was 9.8%, which is very low compared to its competitors in the industry such as MCD. In the same period MCD had a gross profit margin of 38% and a net profit margin of 14%. Low profit margins imply that even though Denny's is increasing its earnings it is not able to generate much profit and does not have a competitive edge over others in the industry.

Bottom line, Denny's debt-laden balance sheet and low profit margins make it an unattractive and speculative investment option. So investors don't gamble and say NO to DENN.

The Smokin' Altria

Altria Group Inc., the smoke giant is traded on NYSE under the symbol of MO and in my opinion currently it is a BIG BUY.

Altria is liked primarily as an income-oriented value stock for conservative investing. Altria is supported by a huge dividend yield of 3.9%. Its P/E ratio is approximately 16.4, which is comparable to the industrial average and is lower than the S&P 500 average. Also, ß (a volatility measure) for Altria is equal to 0.78, which means that MO stock prices are less volatile than the market as a whole. But other than being a good dividend-yielding and low-risk value stock there is one more thing going right for Altria. I personally like Altria, because I think it can now grow.

Altria Group is the parent company of Kraft Foods (engaged in manufacturing and sale of packaged foods and beverages), Philip Morris USA and Philip Morris International (mainly involved in manufacturing and sale of cigarettes). Altria's management realizes that splitting its business into Kraft Foods, domestic tobacco and international tobacco would be beneficial, but it hasn't been able to restructure its business until now because of unfavorable litigation environment. Though it is common sense to avoid litigation prone and politically influenced industries such as tobacco, things look different now. The good news for 2007 is that the litigation prone Altria's involvement in lawsuits is now running low, allowing the management to carry out their restructuring plan. Because of this, Altria is enjoying loads of positive attention from the Street analysts who believe that Altria's restructuring will change the look of the cigarette industry.

Also, Altria is very committed in growing its business by continuously innovating and introducing new products in the market. The current growth trend in the smoking world is "smokeless tobacco" and Altria is one of the primary players along with Reynolds American (RAI). Currently, Phillip Morris USA is test marketing its smokeless tobacco product called "Taboka" in Indianapolis region and will look to introduce it nationally in the near future. I believe this will be huge for Altria as more and more people with increased awareness of the hazards of smoking will be switching to smokeless-tobacco.

Bottom line, Altria is currently one of the top value stocks with high dividend yield, low risk and bright growth prospects. I believe Altria is all set to deliver a good year. So, investors BUY MO and enjoy 2007. In my opinion it should make your life smokin' green.