Over the summer and into the fall, growth stocks have seen their share prices rise sharply as a violent shift from pessimism to optimism encouraged risk taking.  Arguably, many of these growth companies had been unfairly punished as the economic crisis created opportunity for some, and was simply not as bad as expected for others.  However, the unbridled buying of the last few months has pushed quite a number of growth stocks into excessively over-valued territory and many are vulnerable to sharp drops.

Netsuite Inc. (N) could be one of the next victims of the flight to quality.  The stock has recently fallen 22% from it’s recovery high, and that could simply be the start.  While Netsuite came public at a price of $26 in December of 2007, the company has failed to show any meaningful profitability and investors are losing patience as profit projections continue to be extended to later dates.

Management recently bragged that Netsuite logged its fourth consecutive profitable quarter, pointing to the company’s $0.01 earnings for the third quarter.  The earnings were on an “adjusted” basis while true GAAP earnings showed a loss of 13 cents per share for the quarter.  Adjusted earnings are certainly important for investors to consider, since many intangible items are included in the GAAP numbers.  However, even the adjusted earnings show a company that is clinging to marginal profitability instead of growing rapidly.

Earnings are a bit easier to manipulate than revenues.  While management can defer expenses and play around with the adjustments a bit, it is difficult to hide a lack of revenue growth.  So while the press release stated that the company experienced the highest number of Netsute One World (its flagship product) wins, the actual revenue came in at $41.7 million which is only 3% higher than the same level in 2008.  The decline in revenue growth has become a trend as 2008 saw the majority of quarters with 40% plus revenue growth, but the last four quarters have shown 30%, 22%, 10% and 3% growth respectively.

Our customer wins and new SuiteCloud partnerships indicate customers are running from legacy applications like SAP and Microsoft Great Plains to NetSuite’s cloud computing offerings. ~Zach Nelson, CEO

Another concerning statistic is a decline in the deferred revenue.  Companies like Netsuite usually sell annual subscriptions and often collect payment for a full years worth of service.  The company cannot book the full payment as revenue, because the service will actually be delivered in future quarters.  So the payment usually goes into the “deferred revenue” category and is realized as revenue in future quarters when the company performs the service.  If the level of deferred revenue declines, this can be ominous for revenue growth in future quarters.

The cloud computing service is certainly a growth industry, and has helped many companies save resources during a time when it is important to keep expenses low.  However, competition is heating up in this industry and the  majority of publicly traded companies are trading at extraordinary multiples.  It’s easy to see how investors could quickly begin selling shares at the first hint of trouble in the industry.

Most analysts are expecting Netsuite to earn $0.06 in 2009 and $0.14 in 2010.  This is a strong growth rate, but simply represents the huge percentage change from “near zero” to any positive earnings growth.  It is unlikely that the company will experience any significant earnings growth with revenue trends in such dismal shape.

The stock is currently trading north of $13.50, so even if the 2010 estimates are correct, the price/earnings multiple is roughly 98.  Unless the company continues to see its earnings double or more for several years, investors are likely paying too much for the hope of future growth.

To its credit, Netsuite does appear to offer a very attractive product, the company is being run with no debt, and technology advances continue to make it more relevant with new features such as an app for the iPhone.  However, as an investor, I am not willing to pay the current price for this growth story, and would be much more interested in shorting the stock and looking to cover somewhere south of $10.00.  Concern is beginning to creep back into the market, and we are seeing speculative issues get hit the hardest.  For now, Netsuite appears to be a poor place to invest your hard earned capital.

FD: Author does not have a position in N

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Today is traditionally known as “Black Friday” in the retail industry for a number of reasons.  Traditionally, it was the day after Thanksgiving when many retailers actually crossed into the black, meaning they became profitable for the year.  More commonly, retailers and shoppers  refer to the day after Thanksgiving as “Black Friday” because of the madness at store locations where door busters, huge crowds, and short tempers make for a chaotic shopping experience.

This year we may face fewer shoppers than we have traditionally seen, due to lingering unemployment, an economy likely to still be in recession (or only recently beginning to show signs of recovery) and a level of wealth that is diminished from last year.  However, we may still end up with a significantly “black” Friday as far as the markets are concerned.

Most US investors were unaware of the carnage that was sweeping world markets yesterday as we all binged on turkey and remembered to be thankful.  However, the European markets along with many other international markets were down more than 2% as Dubai rocked the international sense of economic improvement.  Dubai World is a sovereign wealth fund which has huge liabilities related to its leveraged investment.  On Thursday, the country announced that it would seek arrangements to delay the repayment of a good portion of its debt.  This has caused quite a stir in the international community and brings liquidity questions into play.

As I write, the US pre-market futures are pointing to a negative open of about 3%.   While a drop of that magnitude is not extremely concerning, it should be noted that markets are likely very susceptible to a sustained decline, due to rich valuations in equities, and generally bullish pricing trends on securities across many asset classes.  Sometimes it only takes a small catalyst to shift sentiment enough to completely reverse the trend.  In today’s markets, there is enough dry powder which could lead to a morally bruising market decline, and Dubai’s news could be just the spark to set off the explosion.

US markets will only be open a half day today with the majority of the country still in celebration (or shopping) mode.  That leaves trading desks largely full of rookies whose trading decisions are fairly unpredictable.  If these managers begin to panic with losses mounting, selling could begin in earnest shortly after the 9:30 open.  If this happens, there will be very little liquidity in the market to support prices and the declines could quickly accelerate.  I’m not predicting this to be the most likely outcome, but investors should at least understand that this is a possibility.

With equities largely pricing in a full fledged economic recovery, stocks holding multiples that imply significant growth, and short-term treasuries at levels that are simply unsustainable, there are few safe places to hide.  We have been recommending purchases of precious metals for quite some time, but it now looks like gold may e a bit extended on a short-term basis, and while silver may have a long way to run, it will likely experience a temporary pullback if the markets decline.

So please keep your capital safe and wait patiently for buying opportunities.  I wouldn’t plow any capital into growth positions today or next week, even if the prices drop significantly.  The market will need to take some time to adjust to the declines and buying opportunities should only be pursued after careful thought and deliberation.  So keep the defense on the field and watch out for the dreaded “Black Friday” Enjoy this article? Sign up for the ZachStocks Newsletter, Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

Black Friday is coming – that dreaded day when consumers look for bargains, and retailers stay open from dawn (or pre-dawn) to dusk in a day that could make or break sales goals for the entire year.  Investors are shopping for bargains as well, and many are looking for quality stocks on sale.  The problem with buying something at a cheap price, is that unless you are careful, you could end up buying poor quality goods.

Whole Foods Market Inc. (WFMI) appears to be one of those “on sale” retail stocks.  Investors can pick up shares for a 22% discount to the high posted in October, and if you look back to the stock’s all-time-high in 2006, investors are now able to buy at a 65% discount.  Since the company sells high quality organic groceries at relatively wide profit margins, it is easy to understand why investors would be willing to pay a premium for the shares.  But at the end of the day, Whole Foods is still simply a grocery store, and one with relatively stagnant growth at that.

Back in August, ZachStocks noted that WFMI stock was as “pricey as it’s wares.”  We stated that the company had cloudy visibility into the year ahead, and that the US consumer would have difficulty rationalizing the higher costs for commodity goods.  While the stock still made new highs along with a strong market in October, the recent weakness has now pulled the stock below the level it traded at when our last article was posted.

On November 4th, the company announced it’s fourth quarter earnings (working off of a September year-end), which came in at $0.20 per share.  That represented an increase of 43% over last year’s fourth quarter earnings which would appear to be positive news on the surface.  However, this was the fifth quarter in a row that the company reported sales levels that represented growth of 0% to 3%.  Not exactly the kind of sales increases that you would expect out of a healthy growing company.

Despite the ugly sales growth numbers, management appears to be optimistic about what the figures represent…

We believe our sales have stabilized and officially turned the corner.  Our comparable store and identical store sales trends improved for the second quarter in a row and, after five quarters of year-over-year declines, so far in the first quarter are up 1.6% and 0.4% respectively.  ~John Mackey, CEO

Same store sales growth of 1.6% may be an improvement, but they hardly warrant the kind of optimism that investors are indicating with the share price.  Currently, WFMI trades between $26 and $27 even after falling 22% from its recent high.  Considering the company is expected to earn $1.10 this year (and I think analysts may have this number too high), the stock is trading at more than 24 times 2010 earnings.  A multiple of 24 may make sense for a rapidly growing technology company, but it certainly seems aggressive for a grocery chain (however swanky they may be) which is forecast to grow by 10% to 13% over the next couple of years.

There are several different ways that traders could profit from a fall in WFMI.  The most obvious would be to short the stock outright, but I would recommend managing risk carefully.  Stocks have been resilient lately and just because something is overpriced doesn’t mean that it will immediately fall.  Long-term puts are a bit expensive, but could turn out to be a risk-averse way to play this trend.  You can buy the May 25 puts for $2.75 right now which means that if the stock dropped to $20, the puts would realize at least an 82% gain.  However, there is a legitimate risk that these puts will expire worthless if WFMI manages to be stable for the next six months.

My suggestion would be to short the stock and then sell puts against the position to help offset risk.  Using this strategy, you cap the level of gains you can receive, but you also lower the volatility.  Shorting the stock today and selling the May $25 puts gives you a potential 18.5% return on capital in six months time.  Compounded (assuming you can find a similar trade for the second half of the year) that would yield roughly 40% annualized.  The best part about this trade is that you only need the stock to trade down to $25 to realize maximum profit, and you break even if the stock rallies to $29.45.

The bottom line is that Whole Foods appears to be a risky investment at the current price.  I expect shareholders to dump this position over the next several quarters as the lack of growth and poor consumer spending causes profits to remain pressured.

FD: Author does not have a position in WFMI

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Much attention has been given to gold lately, and rightfully so.  The yellow metal is often an excellent proxy for inflation, and can be a strong indicator of investor sentiment.  As investors become more risk averse, they look for “hard assets” that are likely to hold their value regardless of what happens to other asset classes.  Unfortunately, there have been few places for risk-averse investors to park their money because the yield on traditional Treasury securities has been so low.

With gold making new highs, some investors (myself included) fear that a correction could quickly hurt some of the gains that gold traders have accumulated over the past few months.  While I believe the secular trend for higher prices on hard assets will continue, volatility can knock a novice investor out of his position and eventually lead to losses despite this investor understanding the broad macro picture relatively well.

One possible alternative to owning gold today would be to diversify some capital into silver.  While silver has many of the trading characteristics of gold in that it truly is a precious metal and can be a good storage of value, silver is also a commodity that is used in various industrial processes.  Nearly every single ounce of gold that has been mined is now in circulation in the form of artifacts, jewelry, or bullion.  There are precious few actual uses for gold besides just being a precious commodity.

On the other hand, silver is used in soldering materials, in technology applications, for its reflective capabilities, for its anti-bacterial qualities, and is still often part of the X-ray process.  The vast majority of silver mined over the centuries has actually been used up or consumed.  So with shrinking supply and demand potentially building, silver could see its price rise much more than gold on a percentage level.

Skeptical investors may point to the fact that silver is still below it’s historical peak as an indicator that silver will not participate in a secular bull market in precious metals (at least not to the extent that gold will).  But in actuality, the volatility and potential investment gains in silver will likely dwarf the returns in gold.

Consider this…  Using SLV and GLD as proxies (they have very small tracking error to the actual commodities and are easier to buy for most investment accounts), gold has rallied 66% from it’s lows late last year.  However, SLV hit a low of $8.45 in the fourth quarter of 2008 and has since rallied to a current price near $18.40.  This gain of 118% is sharply higher than the gain in Gold, and could be a strong indicator of which metal will likely outperform in coming quarters.

When fighting inflation, it is important to diversify into different asset classes in order to minimize risk.  Gold is a well known vehicle, but silver should be considered an option as well.  Investors should also look at agricultural commodities, and companies who would benefit from increasing agriculture pricing.  Our recent article on Intrepid Potash (IPI) outlined the benefits of this strong fertilizer company.

Current government statistics would have us believe that the risk of  inflation is very low.  However, with interest rates still at emergency levels, government spending out of control, and currency flooding the market, inflation should be an important consideration for long-term investors.  Silver could turn out to be an excellent storage of value and is worth considering for at least a portion of most investor’s portfolios.

FD: Author has a long position in SLV and GLD personally and in the ZachStocks Growth Model

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Sometimes it takes quite a bit of time for a relevant theme to mature.  This year we have been bullish on fertilizer stocks such as Intrepid Potash (IPI) and Potash Corp of Saskatchewan (POT).  The trade has been a bit lonely from June through mid-November as a weak economy has dampened demand for fertilizer products.

In January, the ZachStocks Growth Model took a significant position in IPI based on the assumption that the stock would begin to rally back towards its $32 IPO price as demand picked up for agricultural goods.  On March 6, ZachStocks profiled Intrepid Potash, outlining three options which could help IPI better survive the economic uncertainty.  These conservative strategies included shutting down mines, deferring expenditures and reducing operating levels in order to preserve cash during the challenging period. It now appears that the company has survived the worst of the downturn and  is primed to benefit from any increase in agricultural demand.  Intrepid finished the third quarter with $94.9 million in cash and no outstanding debt.  The average price for selling a ton of potash declined to $458 per short ton compared to $623 last year, but this metric is relatively stable compared to the gyrating prices we were seeing last year.  It’s encouraging to see that the company was able to turn a profit even with lower sales prices and adapt to the changing market.

Management has been very careful to match production with customer demand in order to keep inventories at a reasonable level.  Production for the third quarter was actually down 44% which points to a disciplined approach and will likely lead to industry strength.  As demand picks up, IPI can quickly ramp production levels back up to meet rising demand.  And it appears that demand may be picking up:

The third quarter began to show some signs of a moderate recovery in the domestic potash market.  Although the potash market in the United States remains a just-in-time market, our forward warehousing efforts have provided Intrepid the opportunity to participate in sales that we would have otherwise not realized. ~Bob Jornayvaz, CEO

For the last several quarters, farmers have been reluctant to purchase fertilizer due to economic concerns as well as tight liquidity constraints.  Typical funding sources for crop investments were caught up in the financial market dislocation and the capital simply wasn’t available.  But as capital markets have thawed, the demand from farming institutions is beginning to pick up.  The pent up demand from several quarters of weak fertilization could drive significant sales increases. Agriculture stocks have lain relatively dormant for several months.  As the market has favored risk based investments in order to gun for above normal returns, these stable companies have largely been picked over.  However, it appears that we are in the early stages of a broad move back toward stability and away from risky assets.  If this is the case, agriculture stocks could easily regain popularity and see their earnings multiples increase.

The last two days of trading have seen IPI and POT run sharply higher on massive volume.  This most certainly points to institutions building large positions and will likely set off a significant trend.  Intrepid appears to be a better investment due to its smaller market cap and greater flexibility when it comes to adapting to the environment.  POT has a higher debt level and just appears to have more risk.

As IPI trades up close to the $32 level (which was it’s IPO price from early 2008), it could run into resistance and stall out for a week or two.  But I expect that inflationary pressures, rising demand, and low inventory levels will work together to push this stock significantly higher over the next six months.

FD: Author does have a position in IPI in the ZachStocks Growth Model

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What happens when investors expect perfection from the companies they are invested in?  Chances are, those expectations will eventually be disappointed and investors can realize that the level of confidence is unrealistic.  This appears to be the case with Salesforce.com (CRM) which is trading 4% lower in early trading after announcing earnings last night.

Earnings per share grabbed most of the attention with the company posting a 100% increase and booking $0.16 per share for the quarter.  The revenue figure was much less impressive with an increase of just 20%.  Salesforce is at a critical juncture where revenue has grown to a place where it exceeds fixed costs, so small increases in the revenue base can have a much larger impact on earnings (on a percentage basis).  The million dollar question is whether the company will be able to continue to keep costs low in order to leverage their revenue growth.

While management tried to put a positive spin on the forward guidance, there were some significant red flags which will likely cause further selling in the stock.  First of all, the level of deferred revenue dropped from Q2 to Q3.  This is significant because CRM has many long-term contracts with customers where the client pays an up-front fee and then CRM offers service for several quarters or even several years.  This up-front payment cannot be booked as revenue because CRM has not actually performed the service yet.  Instead, the payment goes to an account called deferred revenue which then is recognized as revenue slowly over the coming quarters.

If the level of deferred revenue is dropping, this has negative implications for future revenues and earnings.  Essentially, this means that the company sold less in the way of new agreements, than it completed during the quarter.  If this happens too many times, we will eventually see a decline in revenues which would be bad news for this high priced growth stock.  The other takeaway from the decline in deferred revenue, is that the economy as it pertains to business spending may be recovering more slowly than many anticipate.

The second red flag relates to the headcount of employees which is a major portion of the company’s overhead expenses.  During the third quarter, management stated that an additional 160 sales representatives were brought on board to help grow revenue during the fourth quarter.  Additionally, the company expects to hire another 160 representatives in the fourth quarter in what appears to be a dangerous bet that the additional headcount will pay for itself in the form of new business.

To its credit, the company did land an additional 5,000 customers which brings the total client count to roughly 70,000 relationships.  It appears that low attrition rates also point to the fact that customers are happy with the service and CRM is providing value.  Salesforce and Cisco (CSCO) are set to announce a new product in January which will be instrumental in connecting call centers with customers.  That product launch could significantly add to revenue which appears to be what investors are betting on.

Tuesday, the stock closed above $65. which is quite a hefty price considering the company is expected to earn 62 cents per share this year (fiscal year end is January 31) and 84 cents next year.  Assuming these analyst expectations are correct (and I wouldn’t be surprised if they are revised lower this week), investors are willing to pay more than $77 for every dollar the company earns.  That’s an incredible price which is very difficult to justify.

It has been difficult to act on short ideas this year as the market continues to trade higher regardless of the fundamental underlying issues.  CRM could certainly continue to trade higher in the short-run as management does a good job of creating excitement.  But the risk is very difficult to overlook and at some point soon I expect CRM to give up a good bit of its gains.  The 200 day moving average is currently at $45 which still seems like an aggressive stock price for the earnings level.  So watch for volatility and short at your own risk, but don’t be surprised if this stock loses 1/3 to 1/2 of its value over the next two quarters.

FD: Author does not have a position in CRM

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Shares of Wuxi PharmaTech Inc.  (WX) are trading sharply higher this morning after the company announced a strong third quarter.  The company grew revenue by 10% over last year for a total of $70.0 million while adjusted earnings per share grew 32% to $0.24 per share.  More importantly, the company is increasing its guidance for the year which is giving investors confidence in the long-term growth prospects for this innovative company.

Wuxi has built a strong reputation as an offshore research and laboratory service company and its clients include many of the major drug developers in the US.  While the corporation is registered in the Cayman Islands, the majority of its operations are in China where it has built efficient laboratory and manufacturing facilities.  During  the third quarter,the company increased its headcount by 400 in order to ramp up for what is expected to be a strong growth season for the company.

With a strong balance sheet and a positive outlook for worldwide pharmaceutical demand, Wuxi is investing heavily in its future.  The company has ambitious plans to expand into toxicology and large-scale manufacturing which will not only increase the revenue and earnings levels, but will also provide diversification in business lines.  Through September, the company has spent $33.4 million for capital improvements, but is guiding analysts to expect $55 to $60 million for the year.  This means that at a minimum, the company will be spending another $20 million to expand its capacity.

Our confidence in the continued success of our business model leads us to continue to make investments to build our capabilities and capacities…  As a result of these investments, we expect Laboratory Services, toxicology, and large-scale manufacturing each to be major contributors to the company’s growth in revenues and earnings over the next several years. ~Dr. Ge Li, CEO

The financial stability of the company is what allows for this aggressive growth approach.  Currently, the company is sitting on $85 million in cash with another $22 million in short-term investments.  Long-term debt is minimal at roughly $2 million so it is easy to see how the company has the ability to spend another $20 million on increasing its facilities.

Investors have faced a bumpy ride with this technology position.  In mid 2007, the stock was issued to the public at $14. per share and immediately began trading at a premium.  Within three months, the stock had reached $40 as optimism for the prospects of offshore drug development became inflated.  As the global economy downshifted, the stock eventually reached a low of $3.67 as investors worried not only about the end demand for business, but also about the financial solvency for many major Wuxi customers.

Today, the stock is back above the IPO price, and cannot be considered a cheap investment.  Analysts expect the company to earn 65 cents per share this year and 72 cents in 2010.  Those estimates are likely to be revised higher as the earnings announcement is considered and after management concludes the conference call.  However, there appears to be the potential for significant growth in the stock price and I believe Wuxi offers an exceptional opportunity.

As demographic shift and the global population experiences increasing demand for pharmaceutical products, Wuxi’s large-scale manufacturing facilities will likely receive steady business.  The company already has established strong relationships with major drug developers so the manufacturing process would be a natural fit.  US health care reform initiatives will likely cause drug manufacturers to seek more efficiencies in order to cut costs.  Outsourcing many processes to China will likely help facilitate these cost cuts.

So WX is positioned to grow sharply over the coming years and I believe that analyst expectations may not fully account for this increase.  There will certainly be volatility in the shares and I wouldn’t be surprised if the stock came back to test the $14 level again.  But over the next six to 12 months, investors could see the stock cross $25 simply by analysts increasing 2010 expectations to 85 cents and investors using a 30 multiple due to the sharp growth.  So don’t put all your eggs in this basket, but a diversified account could do well to allocate capital to this strong growth opportunity.

FD: Author does not have a position in WX

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Suntech Power Holdings (STP) is trading sharply higher this morning after the company announced that they would be opening a manufacturing facility in Arizona.  The China-based solar panel maker has managed to remain profitable this year despite a difficult environment for solar manufacturers.  The expansion move instilled investor confidence as positive news flow out of the solar sector has begun to spark buying.

Late last week, Yingli Green Energy (YGE) also saw its stock lift after announcing a positive quarter and raising estimates for the coming year.  Management cited an expected improvement in profit margins for 2010 which is a significant change in trend for the company and for the industry as a whole.

In 2007, solar manufacturers bucked the topping trend in the overall market by rallying sharply as demand for solar power began to expand.  Rising oil prices and potential shortages of traditional fossil fuel sources had investors anxious to own a piece of the coming solar power boom.  However, as financial markets collapsed, the entire world entered a significant recession, and traditional energy prices dropped; the allure of solar energy began to decline.

At the same time that demand was declining, advances in technology caused supply to increase exponentially.  The manufacturing process to create and use polysilicon became more cost effective and efficient, leading to an inventory glut and sharply lower end prices.  This caused many solar players who had used excessive leverage to increase manufacturing capacity to struggle.  With profit margins dropping and the cost of capital remaining stubbornly high, many players in the industry had to capitulate.  Stock prices sank, and investors quickly saw significant losses.

Today, the picture is once again beginning to change.  As stimulus programs are in place with a bent towards decreasing our dependence on foreign oil and increasing the portion of renewable energy used, the consumption of solar energy is on the rise.  There are still significant financial, political, and infrastructure issues to be resolved, but the picture is brightening for this industry.

Investors need to carefully weigh their positions in the solar industry because not all solar opportunities are created equal.  Some of the major pitfalls which should be considered include the debt levels of individual companies, long-term contracts with customers or suppliers, and the specific technology used in the manufacturing process.  Nearly every major player in the industry has significant debt.  What varies is the assets backing up that debt and the level of cash flow available to serve that debt.

Yingli has a published debt to equity ratio of 40% which is fairly attractive for the industry.  While the company is expected to post a loss of 22 cents per share this year, analysts expect the increased profit margins to yield 76 cents in profit next year which puts the stock at a multiple of 18 times next year’s earnings.  That multiple looks relatively attractive given the company’s increasing fundamental prospects and the traction we are seeing in the industry.

Suntech has a much higher debt load, listed at 92%, but should manage to post a small profit this year.  The company will need to arrange financing for its Arizona plant which may increase the risk for the company to a small extent.  However, the market appears more confident in STP’s ability to generate profit growth as the stock is trading at 27 times 2010 expectations.

The solar industry could offer significant gains for 2010 but volatility will likely be high.  Aggressive investors may choose to ride out the swings and look for long-term gains.  Another more conservative approach would be to buy positions in individual solar names and then sell calls against those positions.  The calls will cap total gains available to investors, but will also serve to generate a “synthetic dividend” offering cash flow and a reduction in risk.  The premium on these options are relatively attractive depending on which issue you are considering.  Risk control is still the most important consideration, but there remains some attractive opportunities in play.

FD: Author has a long YGE position in the ZachStocks Growth Model

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Shares of AECOM Technology Corp. (ACM) are sharply higher this week after the infrastructure company issued the fourth quarter earnings announcement.  Since the company operates with a September year end, 2009 is now in the books and it has been a decent year.  For the fourth quarter, the company earned $0.48 per share which beats the street expectations which were at 46 cents.  The earnings represent a 20% increase in profit versus last year, and for 2009 in total, the company grew earnings by 19%.

Part of the strength of this company is the fact that AECOM receives a significant portion of their revenue from overseas.  With the dollar in a pronounced downtrend against most major currencies, this means that sales paid in Euros, Yen or other currencies are translated back to reflect higher dollar levels.  So international trade is not only helpful as far as diversifying between regions, but has also been helpful from a foreign exchange perspective.

The quarter was characterized by significant contract wins which will set the company up for success in the coming years.  A strong backlog of work is important for firms like AECOM which must complete some individual customer projects over the course of several years.  As existing projects near completion and are converted into revenue, the sales team must work hard to line up new contracts in order to remain stable.

During the quarter, we won over $1.8 billion in new projects, highlighted by several mega projects.  These wins, coupled with three recently announced acquisitions, make AECOM well positioned for continued success. ~John M. Dionisio, CEO

Total project backlog was listed at $9.5 billion at the end of September which represents a 10% increase over the past year.  That’s enough work to keep the company busy for another 18 months at the current rate of quarterly revenue.  The backlog is a record for the company and points to both the skill of the company in landing new projects and the strength of the industry as opportunities become available.

Has gold topped out for the year? (video)

While AECOM continues to operate on a global basis, management is expecting the US to play a major role in the profitability of the company over the coming two years.  During the conference call, management noted that US stimulus funds have begun finding their way to specific projects.  2010 and 2011 will be important periods for these projects and US stimulus should be a significant growth driver for ACM.

Management issued guidance for 2010, with earnings expected to fall between $1.90 and $2.00 per share.  While this is a touch below analyst expectations, there is a good chance that management is being overly cautious with its guidance in order to set the company up to exceed expectations.  The growth in backlog coupled with stimulus spending should allow the company to easily exceed this target.

After the announcement, the stock traded up to a level near $27.  The price level represents a multiple of 13.5 times management guidance for 2010 profits.  This is a conservative price considering the growth of the company, the stability of the business, and the strength of its balance sheet.  AECOM has acquired several attractive companies this past year which will add to earnings and allow the firm to reach a broader client base.  In short, it looks like the stock has much farther to run and I would encourage investors to continue to build positions in this solid infrastructure company.

FD: Author has a long position in the ZachStocks Growth Model

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Green Mountain Coffee Roasters (GMCR) is down sharply this morning after announcing earnings last night.  While the revenue and profit numbers for the fourth quarter (the company operates with a September year end) showed considerable growth, the stock (which is featured in the Retail Fail quarterly sector report) had been priced for perfection and it appears that investors now have some concern with the rosy outlook.

For the quarter, Green Mountain reported earnings per share of $0.34 which beat the 33 cent consensus estimate and represented an increase of 89% above last year’s level.  Revenue was $222.2 million which also beat estimates and represents a 65% increase over last year.  The third quarter was certainly a victory for the company, but looking forward the picture is a bit less optimistic.

Management issued its outlook for the first quarter which includes sales growth of 61 to 66% ($317 million to $327 million) and earnings growth of 11 to 15 cents per share.  Since analysts had been expecting first quarter earnings to approach 19 cents per share, this is obviously a disappointment.  While the sales growth guidance is relatively in line with the market’s perception, operating margins are expected to be between 3.8% and 4.3% which is well below the 11.4% operating margin in the fourth quarter.

There may be a reasonable explanation for such a steep drop in operating margins.  Green Mountain’s business model is to sell its coffee machines at nearly break even in order to get customers hooked on its brand.  Then once the machine is installed, GMCR makes a much higher profit margin on the K-cup coffee servings.  The strategy is similar to HP who invented the model of selling printers for a loss and then making a killing by supplying the ink cartridges.

Overall, the growth story for Green Mountain remains intact and as a stand alone business, they are very attractive.  The distribution deal with Wal-Mart (WMT) continues to drive sales and will likely be a stable source of revenue for the foreseeable future.  Management has a legitimate reason to be proud of their success.

GMCR is executing on its plans and running on all cylinders as the innovative and proprietary Keurig Single-Cup Brewing System continues to transform how consumers in North America prepare and enjoy their beverages. The resulting demand for K-Cups is fueling our growth. This past quarter, Keurig realized the highest ever quarterly year-over-year increase in K-Cup shipments since becoming part of GMCR in the third fiscal quarter of 2006. ~Lawrence J. Blanford, CEO

From an investment standpoint, however, I simply cannot justify the price that GMCR is trading at.  Current investors are buying the growth story with very little regard for the actual fundamental valuation of the company.  Using Wednesday’s closing stock price, and the high end of management’s updated guidance for 2010, investors are paying 41 dollars for every dollar the company is expected to earn.  That’s an exorbitant multiple and as we are seeing this morning, carries quite a bit of risk.

It is always difficult to anticipate the short-term price movement directly after the earnings announcement.  Obviously investors are frustrated with the first quarter guidance and have sent the stock lower to begin the day.  But it wouldn’t surprise me to see a rally over the next few days as bullish investors take advantage of a low price and accumulate more shares.

But over the next several weeks, I expect this news to sink in and cause more suspicion in the stock.  It is quite possible that analysts could assign a multiple of 35 or 30 or even 25 times projected earnings.  This would occur if the long-term growth rate were called into question.  After all, it’s going to be hard for the company to find a repeat event for it’s Wal-Mart contract win from this year.  At a still-aggressive multiple of 30 times 2010 expectations, the stock would trade in the mid 50’s which represents quite a decline from the current levels.

Aggressive traders could consider taking a short position in this name, although tight risk control should be used.  If the stock rebounds and closes above $76, I would become concerned and step away until a better opportunity arises.  Option premiums are very high which may prevent traders from buying puts outright, but may set up a better opportunity.  Consider selling the stock short and then selling the December or January $65 or $70 puts.  This would allow you to collect some attractive premiums which will offset losses if the stock runs higher.  If the stock continues to trade lower, you may sacrifice some of your gains, but your rate of return will still be very attractive.

FD: Author does not have a position in GMCR

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