My latest column is up at RealMoney.

With the stock market flirting with “official” bear market territory, I realized I hadn’t written a bearish piece in a couple of months. Not wanting to buck the trend any longer, I decided to look through the models I follow to see which stocks might be on the pricey side. I think I found one in ACI Worldwide (ACIW) .

ACI develops, markets, installs and supports a broad line of software products and services primarily focused on facilitating electronic payments. The company’s products and services compete with offerings by Fiserv (FISV - Annual Report) , Fidelity National Information Systems (FIS) , S1 Corporation (SONE) , Metavante (MV) , Euronet (EEFT) , Fair Isaac (FIC) , Visa (V) and MasterCard (MA) .

About the only argument one can make in favor of a long position is that the stock has come down a lot — nearly 50% from last July’s peak. Unfortunately, at last July’s peak it had already come down a lot from the prior year’s peak. It is amazing to me that a stock performing so poorly can still be valued as highly as it is. For now, I’m not counting on a reversal in price momentum.

For those of ACI Worldwide’s peers that have earnings on which to base a P/E multiple, the average P/E is about 16. At 16 times the 58-cent current 2009 consensus estimate for ACI Worldwide, the stock would trade at just $9.28 — 46% below the current level. Even at the 21 times multiple S1 enjoys, the downside could be 30%. And those prices assume the company will actually earn what analysts believe it will. As noted earlier, that has not been a safe bet of late.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

What comparison site did “On The Money” blogger Carmen Wong Ulrich recommend to help avoid hidden bank fees?

No thanks, Jason. Do you realize that I can just go to Bankrate.com or Interest.com and do a little comparison shopping from the comfort and convenience of my desk and get myself a whole new place to bank for all our accounts with little or no fees—surely not $22.98 a month!

Bankrate.com (RATE) scores well in the price momentum model, but poorly for earnings quality and return potential.

What “Web Extra” Internet stock did Darren Chervitz recommend exclusively for CNBC Stock Blog readers?

Chervitz also offered a bonus selection for CNBC.com — not revealed on TV.

He likes Shutterfly (SFLY) the leading online photo service.  The company does a brisk business in personalized products like scrapbooks, beverage mugs, and calendars.  It’s expected to fulfill more than eight million orders this year.  He also notes there has been some insider buying by management in the last week.

I like Shutterfly’s service, but it doesn’t pass my initial screens so I don’t have much to say about it.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

Although it has been up and running (and including the feed for Stock Market Beat) for some time now, various issues have kept me from giving newly launched news feeder newsflashr the attention it deserves. Having finally gotten the opportunity to do so, I like what I see.

Newsflashr distinguishes itself from other aggregators through ease of use and transparency. A tag cloud shows the hottest topics du jour, and users can click to see what either mainstream media or a selection of top bloggers has been saying about the subject. Headlines are ranked according to relevance (number of times a keyword appears in the headline) and the popularity of the source.

I found it particularly useful for getting a quick feel for the response to events such as Google’s earnings announcement. The list of headlines gave the usual “Google Beats,” along with a quick way of spotting the more interesting “Why Was Everyone Wrong-sided on Google?“. 

For a more general idea of what is being talked about, the feed view lists the various sources and offers a quick skim of their most recent headlines, more akin to a traditional news reader.

If I have any complaint about the service, it is the lack of a full-feed view. Clicking a headline opens that site in a new window, which I appreciate as a publisher, but sometimes wish to avoid as a reader. Also, the feeds available are currently limited to a selection (admittedly a large one) of the top sources. While these are indeed the sources I most frequently consider, there are other sources I would like to be able to add as part of a personalized newsflashr. Based on what I have seen, I would bet adding those features is simply a matter of time.

All in all, I expect I will turn more frequently to newsflashr, and over time may cull the feeds it includes from my current feed reader since its presentation of those feeds is more useful.

The following article is a reprint of my February 6, 2008 RealMoney column

Hewitt (HEW) is a leading global provider of human resource benefits, outsourcing and consulting services. On Tuesday the company reported $0.59 in earnings per share, beating analyst estimates by a full $0.20 per share. Given that it currently sports a healthy 9.1% free cash flow yield, I thought it was worth a further look.

Unfortunately, the full year guidance given was that Hewitt is “maintaining our fiscal 2008 guidance despite absorbing what we expect will be about six cents per share in dilution from the divestiture of Cyborg over the balance of the year.” After a $0.20 beat in the first quarter, ideally estimates would be raised by $0.14 (or more) despite absorbing a $0.06 per share dilution.

Hewitt’s surprise was largely driven by the fact that its Human Resources Business Process Outsourcing (HR BPO) business, which accounts for 20% of total revenue, lost less money in the company’s fiscal first quarter 2008 than it did in the prior year. Still, there are contracts that the company is trying to restructure to achieve profitability that are in “sensitive” stages.

Given how much most companies hate the human resources function, one would think that those willing to take on others’ headaches would be able to earn high profits. Unfortunately, there are a surprisingly large number of companies willing to take on those headaches. In the latest 10K, management says that “The principal competitors in our HR BPO segment are technology consultants and integrators such as Accenture (ACN), Affiliated Computer Services (ACS - Annual Report, EDS/ExcellerateHRO (EDS) and IBM (IBM - Annual Report) and; companies that have extended their services into human resources outsourcing such as Automatic Data Processing (ADP) and Convergys (CVG).

On the conference call, management indicated that the outsourcing business was counter-cyclical, with customers outsourcing more in downturns in order to reduce costs. Yet they seemed to contradict this statement by saying that the current market environment was causing their new contract signing pace to be behind schedule. Hewitt’s Zacks rank declined last week from 1 (best) to 2. Although the current rank still puts Hewitt in the top 20% of companies measured for earnings momentum, the cautious guidance and talk of a light pipeline are likely to result in some estimate reductions for the remainder of the year.

Despite the lower sales pipeline and ongoing restructuring of unprofitable contracts, Hewitt paid higher performance-based compensation in the fourth quarter. This resulted in first quarter free cash flow being $4 million lower than last year. The company also expects to spend more on capital expenditures this year, which will dampen free cash flow generation.

Furthermore, while earnings are improving the quality of those earnings is not. To gauge earnings quality, I measured the accrual ratio (change in net operating assets as a percentage of net operating assets) over the past several years. The accrual ratio gives an indication of the extent that earnings are driven by cash flows versus accounting choices. The closer the ratio is to zero, the better. Hewitt’s has been declining.

Source: Zacks Research Wizard, compiled by William A. Trent

So, after looking under the hood, I see a company with falling earnings momentum, falling free cash flow yield and falling earnings quality. The only thing rising in recent quarters has been the share price. As a value oriented investor, I’d rather it was the other way around.

Disclosures: None

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

This article is a reprint of my February 5, 2008 RealMoney column

In the wake of Google’s (GOOG - Annual Report) disappointing earnings results and Microsoft’s (MSFT - Annual Report) premium bid for Yahoo! (YHOO), I started wondering if Google might finally be cheap enough to consider buying on a contrarian/value basis.

Google generated $3.37 billion in free cash flow (cash from operations less capital expenditures) in 2007, sufficient for a 2.5% free cash flow yield based on the latest enterprise value estimate. That isn’t much less than the 2.8% yield on 5-year Treasuries, and the Treasury yield, unlike Google’s free cash flow, is not doubling annually.

It is also significantly higher than the 2.1% free cash flow yield Microsoft will capture if it succeeds in its $44.6 billion acquisition of Yahoo! On the other hand, if Microsoft truly manages to wring $1 billion in annual synergies from the deal and those synergies flow through to cash rather than just accounting earnings the yield for Microsoft would double. Since that is a lot of “ifs,” I’ll stick to the 2.1% number.

At a 2.1% free cash flow yield, Google would trade for $553. And that is assuming the company were truly similar to Yahoo!  In fact, Google is growing its revenue at more than 50% per year rather than Yahoo!’s 8.3%, and is estimated to grow its earnings per share nearly 33% annually over the next five years rather than 23% for Yahoo! If anything, Google should capture a much higher valuation than Yahoo!

For example, assuming both companies were to grow at the expected rate for five years and then at the same rate as the S&P 500 thereafter, they might both decline to a 15x P/E multiple over the five year horizon. In such a situation, the five-year price target for Yahoo! would be $19.50, while the five-year price target for Google would be $886. If anything, that scenario seems a bit conservative for Google and a bit aggressive for Yahoo! in my opinion.

The Downside

While there is no doubt that contextual search ads are a more desirable advertising venue since customers can monitor the results, I don’t buy the notion that Google can see increased ad spending during a recession. If ad budgets are cut, I think the revenue advertisers will be willing to pay for each click will go down. I accept that the search ads might be less impacted than other outlets, but just don’t believe that budgets formerly reserved for TV, for example, will be shifted to search.

I also think Yahoo! offers some insight as to the worst-case scenario for Google in a recession environment, based on what happened to Yahoo! in 2001. Revenues declined 35% in 2001, operating expenses continued to creep up, and free cash flow got hammered.

The comparison to Yahoo! during the tech bust is probably too conservative. Yahoo’s display ads in 2001 did not offer nearly the advertiser measurability that Google’s search ads provide. Further, Yahoo! stock was unfairly tainted by all of the other Internet stocks that didn’t deserve to trade at all, let alone at lofty multiples of sales. Still, I think there are useful comparisons to draw from such recent history.

I could see Google’s revenue declining as much as 20% year/year, which I don’t think many analysts give much credence. Its earnings would plummet in such a situation because Google continues to add operating expense. I don’t see $5.00 in EPS as being out of the question. But in 2001 Yahoo! ended up with a 100x P/E multiple against its 2002 earnings per share (the trailing earnings had gone negative.)

At 100x my recession-trough EPS estimate of $5.00, Google is fairly valued today.

Sure, history never repeats exactly. And sure, momentum could take Google significantly lower regardless of the logic (or lack thereof) in my analysis.

But to me, Google is starting to look like a value stock.

The following is a reprint of my December 13, 2007 RealMoney column.

Diebold (DBD), the maker of ATM machines and much-criticized automated voting machines, never seems far from controversy. It also has developed a habit over the last ten years or so of its share price swinging wildly back and forth between the $30’s and $50’s every couple of years. With the pendulum now back at the low end, traders may be tempted to hop on for the ride. Investors, however, should probably look elsewhere.

The Latest Controversy

Diebold topped out at $54.50 in late July, when it announced it would miss the deadline for filing its 10Q for the June quarter “while it seeks guidance from the Office of the Chief Accountant (the “OCA”) of the Securities and Exchange Commission with regard to its revenue recognition policy.”

After receiving said guidance, Diebold announced on October 2 that it would cease using the “bill and hold” method to record sales. The company helpfully added that:

The change in the company’s revenue recognition practice, and the potential amendment of prior financial statements, would only affect the timing of recognition of certain revenue. While the percentage of the company’s global bill and hold revenue varied from period to period, it represented 11 percent of Diebold’s total consolidated revenue in 2006. The company does not anticipate that the change in the timing of revenue recognition would impact previously reported cash provided by operating activities or the company’s net cash position.

Diebold will provide further information once it has completed an in-depth analysis of the most appropriate revenue recognition method and has reviewed it with its independent auditors and its audit committee. While the company cannot predict with certainty the length of time it will take to complete this analysis and review, it anticipates the process will take at least 30 days. Upon completing this process, Diebold will be in a position to provide updated revenue and earnings guidance for the full-year 2007.

At least 30 days later, the company announced its September quarter 10Q would also be delayed, as it is “in the process of determining the most appropriate method to replace its bill and hold practice, and has sought additional guidance from the OCA.”

Bill and Huh?

For the uninitiated, an SEC document describes what they are looking for:

Improper accounting for bill-and-hold transactions usually involves the recording of revenue from a sale, even though the customer has not taken title of the product and assumed the risks and rewards of ownership of the products specified in the customer’s purchase order or sales agreement. In a typical bill-and-hold transaction, the seller does not ship the product or ships it to a delivery site other than the customer’s site.

Diebold’s revenue growth rate in 2007 was 12.3%, and may have been mostly due to this questionable revenue recognition practice (as bill and hold sales were approximately 11% of total revenue in 2006.) Furthermore, since half the recorded revenue was service-related, the actual product sales may have even declined year/year.

Diebold’s chief rival, NCR (NCR) has noted that the upgrade cycle for ATM machines is in a lull. This is before any potential spending cutbacks by banks needing to conserve cash in the wake of the subprime crisis. It is hard to imagine the revenue growth getting much better.

Somebody Buy Them A Clue

As for “the most appropriate method to replace its bill and hold practice,” I don’t see why the company requires additional guidance from the OCA. They should recognize revenue when the customer accepts delivery of the product or service in question. In their own 10K they tell investors “for product sales, the company determines that the earnings process is complete when the customer has assumed risk of loss of the goods sold and all performance requirements are substantially complete.”

The fact that the company needs additional guidance when its own 10K describes the appropriate policy is troubling. Just as the previous CEO’s massive fund-raising activities for one political party cast doubt on the company’s objectivity when providing election equipment, the company appears to keep making mistakes that should be easily avoidable.

Shares are No Bargain

Now, just because the company keeps shooting itself in the foot doesn’t mean its stock is overpriced. Down 40% from the recent peak, it is worth asking whether the bad news is all priced in. Unfortunately, I don’t think it is.

For one thing, the stock is trading at 26x the 2006 earnings per share. Those are the most recent earnings figures available since the company is late filing its reports, and even they are likely to be revised lower following the restatements. The existing 2007 and 2008 consensus EPS estimates are most likely wishful thinking.

So how about cash flow? After all, as the company points out, changing from the bill-and-hold method shouldn’t affect the reported cash flow from operating activities. Measuring free cash flow as cash from operating activities less capital expenditures, the $206 million in 2006 free cash flow represents an 8% yield on the current enterprise value. I would normally consider such a yield worth pursuing.

The problem is, I don’t think that cash flow is sustainable. A good chunk of it was due to the company reducing working capital, a strategy that can be taken only so far. I peg the sustainable rate of cash from operations at about $90 million less than was reported, and I also have questions about the rise in “certain other assets.”

Making these adjustments, the free cash flow starts looking more like $80 million, for a yield of just 3.1%.

With the financial statements raising more questions than answers, likely slowing and the valuation mediocre at best, Diebold looks like a stock to avoid.

Note: Find out the latest deals on credit cards at creditcardguide.com and get a new card today!

William Trent currently has a short position in put options related to Office Depot (ODP).

Originally published at RealMoney on September 19, 2007.

Tony Crescenzi says the latest PPI report should be tossed because the benign headline reading will almost certainly be reversed in the months ahead owing to the surge in energy costs that has occurred of late. I say not so fast! If prices are rising, that means some companies out there are likely to see better profits. Before tossing out the report, I’m betting we can figure out who a few of them will be.

The Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis. The problem is figuring out how to find it on their web site. Starting at the PPI home page, I scroll down to the headline that says “Get Detailed PPI Statistics” then click on Industry Data. You can then pick out which industries you want to see (I pick ‘em all) and click “Retrieve Data.” Then I select “More Formatting Options” and click on the boxes for 12-month percent change, all years, and include graphs. Once I hit “retrieve data” again I have what I’m looking for - graphs that make it easy to tell which industries are gaining or losing their pricing power.

First up is the fruit and vegetable canning industry. At 5.3% year/year inflation, pricing is clearly better than normal. It is down from a recent peak but still looks to be generally in a rising trend.

Possible plays on this industry include can makers such as Ball Corp. (BLL), Crown Holdings CCK - Annual Report), or Silgan (SLGN - Annual Report). Or you can go to the food processors such as Campbell Soup (CPB), Del Monte (DLM - Annual Report), Hain Celestial (HAIN), or HJ Heinz (HNZ).

Looking better still are industrial valves, up 9.3% year/year against tough comparisons.

Some of the industrial valve makers include Flowserve (FLS), Crane (CR) and Curtiss Wright (CW - Annual Report).

But enough with boring “old” industries. How about tech? It is seldom that tech prices actually increase, but sometimes they decline at a slower than usual pace, which can provide a similar opportunity. That may be the case right now with computer storage devices.

Last month’s 2.9% decline from last year was the smallest price drop on record for this industry, and the ongoing consolidation may help the trend continue. Plenty of ways to play this one, including Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), Sandisk (SNDK - Annual Report), Seagate (STX - Annual Report), and Western Digital (WDC).

By contrast, semiconductors are experiencing the worst pricing on record.

That could be the signal for a contrarian play (I happen to think the worst will soon be over for semiconductors) or possibly just an excuse to avoid the group for a while.

The PPI clued me in to the opportunity in railroads a year before Buffett bought in. I hestitate to bet against him, but it looks like the industry’s price increases have ground to a halt.

If you have the guts, I’d count this as bad news for Burlington Northern (BNI), CSX Corp. (CSX), Norfolk Southern (NSC), and Union Pacific (UNP).

Finally, Wired Telecommunications saw pricing decline for years after the 1996 Telecom Act, but recent consolidation is allowing them to raise prices again.

Winners here would be CenturyTel (CTL), AT&T (T - Annual Report), Verizon (VZ - Annual Report) and Embarq (EQ).

By my count, that is 26 potential stock tips, all courtesy of the U.S. government. I’ll take that over tossing the report any day.

Disclosure: Long Semiconductor HOLDRs (SMH).

This article was originally published at RealMoney on September 17, 2007 and was featured in the September 24, 2007 Festival of Stocks.

Few stocks boil the blood of both bull and bear as much as Apple (AAPL), and for good reason. The company, richly valued though it is, has come out with more cool products than the rest of the tech industry combined. That helps excite the bulls, and as for the bears, there’s a good chance many of them are jealous for having missed out on the stock’s run. They have sour grapes they hope will someday be pressed into wine. And before you fanboys of some other tech stock get all hot and bothered about my disrespect of your favorite company’s innovation record, allow me to summarily dismiss them.

• Research in Motion’s (RIMM) Blackberry? Great mobile enterprise email device. But that’s for work. Ewww!
• VMWare (VMW)? See above. Not to mention it’s hard to show off your virtual server.
• First Solar (FSLR)? Try this for a pickup line: “Hey, want to go back to my place and see how thin my solar film is?” Unh-uh.
• Google (GOOG - Annual Report)? Still great at search. Nice email product. So what? They’ve spent more than a billion and a half on research and development in the last 12 months, and I dare you to tell me where it went.

As you can probably tell, I haven’t gotten nearly enough hate mail recently, and I’m trying to kick things up a notch. So back to the task at hand: Apple. Let’s quickly take a look at what I think are the best arguments on each side.

First up is whether the “halo effect” from the iPod is helping bread and butter Mac sales. Mac units were up 33% year over year, compared with just 12% for PCs overall. Bears counter that most PC makers (with the exception of industry leader Dell (DELL) had unit growth similar to the growth in Macs. But this ignores the very important point that Mac units sell for much more on average than the typical PC - so in terms of revenue share is likely growing much faster. Edge: Bulls.

Next, is the iPhone a phlop? When 270,000 units were sold in the first two days, I said “the 730,000 they are guiding to for the next three months seem conservative laughably low.” It is now looking as though it was only conservative. It is pretty clear the price cut was driven in part by a significant slowdown in sales - to possibly as low as 5,000 units per day by the time of the price cut according to one convincing analysis. But that would still put the iPhone in the same league as Palm, even if not quite matching their original estimate of being in RIMM’s league next year. But don’t forget - they got where they are now being sold by one carrier in the U.S. As they roll out to other carriers on other continents, they could meet their target yet. It’s not living up to the hype, but it is still a success. Edge: Even.

Finally, the iPod - a product that nobody seems to care about anymore, yet which sold 10 million units last quarter when it hadn’t had a product refresh in ages.

From an accounting standpoint, things are going so well that they are now deferring revenue from their new products rather than booking it up front. This practice will help bake some growth into the cake. True, the company’s earnings were boosted by a penny due to a lower bad debt reserve, but when you are beating quarterly estimates by a quarter that is just chicken feed.

While the stock has nearly doubled over the last year, its free cash flow has more than tripled. As a result, a company that is growing at more than 20% per year on the top line is yielding 3.9% on a free cash flow to enterprise value basis.

About the most significant risk, in my mind, is the possibility of a consumer slowdown combined with increasingly high expectations. Apple is far more consumer-driven than other tech stocks, and a 40x P/E multiple might not hold up if they only beat by a nickel instead of the quarter investors have come to expect. That’s why I think the free cash flow is so important in this case - it provides a solid backstop, and would help justify being patient through a slowdown should it come. If the company can grow at even half the current rate over the next five years, investors are likely to be well compensated for the added risk.

Positions: Short Research in Motion (RIMM)

I recently addressed concerns that Cognizant’s (CTSH) growth - as well as that of other Indian outsourcing firms - may be peaking. Now it seems that those in thee industry may be wondering the same thing.

Is the party over for Indian outsourcers? - Business - News - ZDNet Asia

A confluence of adversities is at play. They include an appreciating rupee that is cutting into earnings, a severe shortage of qualified talent at home, and a cap on H-1B worker visas to the U.S., along with pre-2008 election protectionism threats.

On top of that, there is the end of preferential industry tax benefits at home and the growing success of multinational competitors such as Accenture and IBM on Indian turf. Perhaps most challenging for the Indian players is the pressing need to move up the ladder into business consulting, a domain that companies such as IBM have dominated for decades. Indian outsourcing firms need to invest heavily to secure a position in this arena, and that will erode their fat profits, at least in the short term.For the first time, industry insiders are asking: Is the outsourcing game over for Bangalore? “The Indian IT companies have had an unusually long run in profits and growth,” says Siddharth Pai, partner and managing director of global tech advisory TPI Advisory Services India. But that is “an anomaly”, he adds. “As they mature, they cannot expect the same kinds of returns.”

It is healthy that industry insiders are beginning to worry about the issue. Nothing is more dangerous than cocky management teams. For investors, though, there still needs to be an adjustment to the risks that growth will not be what it used to be.