Up 32% This Year, This Health Stock Is Set To Really Take Off

[John Thomas]

$388.5 billion is a staggering figure. It's more than the entire economy of Thailand, Denmark, Colombia or the United Arab Emirates.
And it's how much operating cash flow was generated by America's top 12 companies in 2012.


Source: Thomson Reuters

Of course, the old adage "It takes money to make money" applies. Many of these companies need to spend billions of dollars in research, infrastructure and other areas to generate that cash flow, and their actual take-home pay is a lot less. Exxon Mobil (NYSE: XOM), for example, spent more than $34 billion on capital expenditures last year, sapping a considerable chunk of its $56 billion in operating cash flow.
As a bit of silver lining, these companies spend much of that on goods and services offered by other companies, creating a virtuous circle of corporate spending. Here are the top 12 capex spenders of 2013.


Source: Thomson Reuters

The number of oil and gas firms in this group explains why an energy services provider like Schlumberger (NYSE: SLB) sports a $120 billion market value, but is not truly a household name.

The True Measure
Unfortunately, even as many Wall Street analysts wisely avoid a simple focus on net profits, their decision to value stocks in the context of operating cash flow is also mistaken. It's irrelevant that Exxon Mobil generated $56 billion in 2012 free cash flow. After capital expenditures are deducted, free cash flow falls by more than half to $22 billion. It's still an impressive figure, but knocks the oil giant from the leaderboard.

Rather than focus on operating cash flow, check out a company's free cash flow, which is the only bankable source of stock buybacks, dividends, acquisitions and debt pay downs. Indeed some of the top-performing stocks in today's market share some of all of those characteristics. Here's a look at the top 12 companies in America in terms of free cash flow.

[John Thomas]

When I was in elementary school, we called a student who got good grades, stayed out of trouble and embraced his or her position as teacher's pet "Goody Two-shoes."

With that in mind, I'd like to introduce you to a company I like to consider the Goody Two-shoes of insurance companies. It takes few risks, performs admirably and is well liked by some of the most upstanding clients around.

Founded in 1945 by two Illinois schoolteachers, Horace Mann Educators (NYSE: HMN) is an $8.5 billion national multi-line insurance company. Just about every penny comes from public K-12 teachers, administrators and their families in the U.S., a market expected to grow 14% by 2020. The auto, property and casualty segment represents 52% of Horace Mann's business, with commission-generating annuities and life insurance accounting for 39% and 9%, respectively.

About 6 million teachers, administrators and support personnel worked in K-12 in the U.S. in 2012. Another 413,000 college students are planning to become teachers, and 1.2 million are retired. That's a big, loyal, responsible, insurance-buying market that blesses Horace Mann with higher-than-average retention rates, a low rate of paid claims and steady growth of its annuity and life insurance products.

The company gets an A-plus on its third-quarter 2013 figures. Its $8.5 billion in total assets as of Sept. 30, a 4.9% year-over-year increase, is supported mainly by a 17.2% increase in annuity income and an 18.4% increase in life insurance income.

Those numbers look great, but what about competition? Horace Mann certainly has its share of general competition with the likes of Allstate (NYSE: ALL), Travelers (NYSE: TRV) and other insurers. However, Horace Mann's roots are firmly planted among teaching communities, and its competitors haven't made a concerted effort to enter its territory.

Because many former educators still active as PTA members or school board members have become independent agents for Horace Mann, they're on the grounds in more than half of the country's public schools. It's a tight-knit community of professionals who take each other's words as gospel, so Horace Mann agents are likely preaching to the choir on many occasions.

The key to keeping Horace Mann's competition at bay is the constant maintenance of close relationships with school districts and teachers organizations. No other insurance company has even tried to impede on this niche, a factor that serves Horace Mann well in the face of potential price wars from larger companies.

The fact that premiums grew 4% in third quarter 2013 on a year-over-year basis to $152.5 million is proof the strategy is working. Retention rates remain solid at 85% in auto and 89% in property. Those numbers, along with strong growth in annuities and life insurance as well as lower-than-expected paid catastrophe claims, prompted the company to increase its full-year earnings guidance from $1.95 to $2.05 a share.

The stock is up 43% this year to date and 59% over the past 12 months. On top of steady growth and healthy earnings, HMN delivers a 2.7% dividend. That's supported by a 28% payout ratio, so management has room to boost the dividend. Currently trading above its 50- and 200-day moving averages, HMN has momentum heading into 2014.

[John Thomas]

When I was in elementary school, we called a student who got good grades, stayed out of trouble and embraced his or her position as teacher's pet "Goody Two-shoes."

With that in mind, I'd like to introduce you to a company I like to consider the Goody Two-shoes of insurance companies. It takes few risks, performs admirably and is well liked by some of the most upstanding clients around.

Founded in 1945 by two Illinois schoolteachers, Horace Mann Educators (NYSE: HMN) is an $8.5 billion national multi-line insurance company. Just about every penny comes from public K-12 teachers, administrators and their families in the U.S., a market expected to grow 14% by 2020. The auto, property and casualty segment represents 52% of Horace Mann's business, with commission-generating annuities and life insurance accounting for 39% and 9%, respectively.

About 6 million teachers, administrators and support personnel worked in K-12 in the U.S. in 2012. Another 413,000 college students are planning to become teachers, and 1.2 million are retired. That's a big, loyal, responsible, insurance-buying market that blesses Horace Mann with higher-than-average retention rates, a low rate of paid claims and steady growth of its annuity and life insurance products.

The company gets an A-plus on its third-quarter 2013 figures. Its $8.5 billion in total assets as of Sept. 30, a 4.9% year-over-year increase, is supported mainly by a 17.2% increase in annuity income and an 18.4% increase in life insurance income.

Those numbers look great, but what about competition? Horace Mann certainly has its share of general competition with the likes of Allstate (NYSE: ALL), Travelers (NYSE: TRV) and other insurers. However, Horace Mann's roots are firmly planted among teaching communities, and its competitors haven't made a concerted effort to enter its territory.

Because many former educators still active as PTA members or school board members have become independent agents for Horace Mann, they're on the grounds in more than half of the country's public schools. It's a tight-knit community of professionals who take each other's words as gospel, so Horace Mann agents are likely preaching to the choir on many occasions.

The key to keeping Horace Mann's competition at bay is the constant maintenance of close relationships with school districts and teachers organizations. No other insurance company has even tried to impede on this niche, a factor that serves Horace Mann well in the face of potential price wars from larger companies.

The fact that premiums grew 4% in third quarter 2013 on a year-over-year basis to $152.5 million is proof the strategy is working. Retention rates remain solid at 85% in auto and 89% in property. Those numbers, along with strong growth in annuities and life insurance as well as lower-than-expected paid catastrophe claims, prompted the company to increase its full-year earnings guidance from $1.95 to $2.05 a share.

The stock is up 43% this year to date and 59% over the past 12 months. On top of steady growth and healthy earnings, HMN delivers a 2.7% dividend. That's supported by a 28% payout ratio, so management has room to boost the dividend. Currently trading above its 50- and 200-day moving averages, HMN has momentum heading into 2014.



Risks to Consider: Horace Mann's narrow focus can also be a negative in the event budget cuts and reduced funding for public school districts lead to layoffs. The company doesn't currently have plans to broaden its scope, but it plans to fine-tune its products within education next year.

Action to Take --> HMN met resistance after hitting its high for the year on Oct. 21 of $31.03, pulling back some 10% over the next 10 days. I'd buy the stock once it resumes momentum at that Oct. 21 level.

- Karen Canella

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[John Thomas]

Graphic via Fidelity Investments, great reference:

[John Thomas]

For many market strategists, the Federal Reserve's multi-trillion-dollar stimulus program has had one huge drawback.

The Fed's massive quantitative easing (QE) programs have rendered what's known as the yield curve utterly useless -- and that's left everyone in the dark as to just how healthy or weak the U.S. economy remains.

The good news: The Fed's looming retrenchment from stimulus will let the yield curve take its natural shape again, helping investors to better navigate a confounding market environment. (Surging stocks and weak economic data do no typically go hand in hand.) You'll be hearing a lot about the yield curve in 2014, so to better understand its looming implications, let's brush up on the concept now.

What Kind Of Slope?
Bond investors typically demand a higher interest rate for longer-term securities. After all, in an uncertain world, longer time horizons bring a greater chance that something can go wrong. (And if we're talking about bonds, then we're talking about the corrosive effects of inflation or an expectation of much higher bond issuance by Uncle Sam and others.)

So a yield curve is simply the slope of interest rates on short- to mid- to long-term bonds. A healthy yield curve implies an economy poised for growth, and typically looks like this:

[John Thomas]

Stuff I?m Reading this Morning?

A high level sector look at what top hedge funds bought and sold leading into Q4. (FactSet)

Pros polled by Bloomberg are big-time worried about a bubble. (Bloomberg)

Samsung gets nailed in patent suit, forced to pay $290 million to Apple, which has absolutely no idea what to do with more cash at the moment. (NYP)

All kidding aside, Marissa hasn?t done much to improve Yahoo?s core business, the stock price is 75% ?Asian assets? and 25% her. (CNNMoney)
Dan Loeb buys stake in Japan?s Softbank as a way to play Alibaba?s IPO. Details here: (Reuters)

Using Holiday Sales Forecasts as an Investment Tool is Pointless (YourWealthEffect)

Paulson?s gold hedge fund is now down 63% year-to-date yet is still capable of generating hilarious headlines. (Bloomberg)

The fact that Wall Street guys are still passing around Pessimism Porn charts says we?re not quite in a bubble yet. (BusinessInsider)

Finra is cracking down on ?high risk? or ?rogue brokers? (WSJ)

Ken Fisher: If the broker-dealers get control of the RIA world via regulatory oversight, kiss your ass goodbye. (ThinkAdvisor)

How Wall Street?s changed since the crisis, great chart. (CNBC)

$48M in cocaine washes ashore in Japan (NYP)

[John Thomas]

One of the coolest things about the stock market is that money can be made regardless of the direction of a stock. I've often heard investors lament that they missed a sharp upward move.

Often, these same investors will commit the investing sin of chasing stocks that have made extreme short-term moves to the upside in the hope of momentum carrying shares even higher. While upward momentum can and does take stocks higher, more often than not, prices will quickly retrace the upward spike.

This leaves the stock chasers jumping from one hot stock to the next, wondering why many of their investments are losers.
One solution to this dilemma is to learn how to short. Shorting allows investors to profit from downward moves in price. For those of you unfamiliar with shorting stocks, my recent article on shorting biotech stocks describes the method. The same tactic can be applied to any stock, regardless of sector.

Stocks that have spiked higher often drop in price. This is particularly true if the increase is due to questionable news, hype or other dubious reasons. Just like the stock chasers, short sellers scan the market for stocks that have soared higher in a short time.
Next, these rocketing stocks are researched to determine whether the move was warranted and will be sustained. Sometimes the move is in reaction to a real event, but the shares simply become overextended. Other times, the upward move will be due to hype or any number of questionable reasons. These are the ideal short candidates.

Keep in mind that stocks can simply keep climbing higher, no matter how dubious the reasons. This is why stop-loss orders are critical when shorting.

I think InterCloud Systems (Nasdaq: ICLD) looks like an ideal short candidate of the overextended variety. Its share price recently spiked from a low of $2.20 to a high of $16.69 in just the past week. That's a gain of more than 650%.

InterCloud is a global provider of cloud, managed and professional consulting services for technology companies. It helps support the operation of enterprise, fiber optic, Ethernet and wireless networks. The stock moved from the OTC market to the Nasdaq on Oct. 31 after raising $5 million in a public stock offering.

A massively successful third quarter is what fueled the upward spike. The company reported that revenue increased by 448%, to $16.2 million; gross profits hit $5.5 million, crushing the $1.2 million from a year ago; and net income was $0.26 a share, compared with a loss of $2.16 a share a year ago. While these are compelling numbers, I think the share price increase is unsustainable, primarily due to the daily chart pattern.

[John Thomas]

Watch Those Monetary Aggregates!

Call me a nerd, but instead of spending my Sundays watching football, I pour over data analyzing the monetary aggregates. That?s a tough thing to say for someone whose dad was a lineman on the University of Southern California?s legendary 1947 junior varsity football team.

This is so I can gain insights into the future performance of assets classes. What I am seeing these days is not just unusual, it?s bizarre. Call it a double reverse, a Hail Mary, and a Statue of Liberty all combined into one.

You can clearly see the impact of QE2 at the end of 2010 on the chart below, which caused the monetary base to explode and triggered a six month love fest for all risk assets. Hard asset prices, like energy, commodities, the grains, and precious metals did especially well, leading to fears of resurging inflation. This prompted the European Central Bank to commit a massive policy blunder by raising interest rates twice. The US dollar (UUP) was weak for much of this time.

When quantitative easing ended in June of that year, not only did the base stop growing, it started shrinking. Hard assets rolled over like the Bismarck, and gold peaked in August. No surprise that when you take away the fuel, the fire goes out. And guess what else happened? The dollar began an uptrend that continues unabated.

So what happens next? Given the continuing strength of the economic data, I think that the prospects of a taper have been greatly diminished. Not only has it been taken off the back burner, the flame has been extinguished and the pot put back into the cupboard.

Needless to say, if this trend continues it will have an inflationary impact on the global economy as a whole, and ?RISK ON? assets specifically. It?s simply a question of supply and demand. Print a lot more dollars and you create a supply shortage of other assets, forcing bidders to pay up.

[John Thomas]

!

Call me a nerd, but instead of spending my Sundays watching football, I pour over data analyzing the monetary aggregates. That?s a tough thing to say for someone whose dad was a lineman on the University of Southern California?s legendary 1947 junior varsity football team.

This is so I can gain insights into the future performance of assets classes. What I am seeing these days is not just unusual, it?s bizarre. Call it a double reverse, a Hail Mary, and a Statue of Liberty all combined into one.

You can clearly see the impact of QE2 at the end of 2010 on the chart below, which caused the monetary base to explode and triggered a six month love fest for all risk assets. Hard asset prices, like energy, commodities, the grains, and precious metals did especially well, leading to fears of resurging inflation. This prompted the European Central Bank to commit a massive policy blunder by raising interest rates twice. The US dollar (UUP) was weak for much of this time.

When quantitative easing ended in June of that year, not only did the base stop growing, it started shrinking. Hard assets rolled over like the Bismarck, and gold peaked in August. No surprise that when you take away the fuel, the fire goes out. And guess what else happened? The dollar began an uptrend that continues unabated.

So what happens next? Given the continuing strength of the economic data, I think that the prospects of a taper have been greatly diminished. Not only has it been taken off the back burner, the flame has been extinguished and the pot put back into the cupboard.

Needless to say, if this trend continues it will have an inflationary impact on the global economy as a whole, and ?RISK ON? assets specifically. It?s simply a question of supply and demand. Print a lot more dollars and you create a supply shortage of other assets, forcing bidders to pay up.

[John Thomas]

We are about to get some wild, seasonal gyrations to the jobs numbers, and I think you will be well advised to know about them in advance.
A large part of our economy is moving online more rapidly than most people and governments realize. According to ComScore, a marketing data research firm, online sales leapt by 15% to $35.3 billion during the last November-December holiday period, an all-time high.

I speak from a position of authority here as I happen to run one of the most successful financial sites on the Internet, which I kicked off four years ago with a $500 investment.

Much of this migration is being captured by FedEx and UPS, the nexus at which Internet commerce meets the real world. After all, virtual products require a real world delivery. This explains why the couriers are seeing a booming business in an otherwise flat economy. FedEx (FDX) hired 10,000 temporary workers to deal with the last Christmas surge in 2012, a gain of 18% over the same period the previous year. UPS added a stunning 55,000, a 10% increase.

Watch for the other shoe to drop. That will become apparent when that the newly hired become the newly fired, leading to a sudden and rapid deterioration of the jobs data. This could be the information the stock market and other risk assets need to put in a top for the year. The scary part is that this may happen sooner than you think.