50 hot stocks to buy in August

StockScouter, MSN Money's stock-picking tool, identifies companies that can sustain the momentum that made July the best month in years for the major indexes.

The small screen is becoming a big deal for DreamWorks Animation (DWA, news, msgs), the company spun off from Steven Spielberg's privately held DreamWorks Studios in 2004 in a public stock offering.

Nickelodeon's new animated series "The Penguins of Madagascar" is based on DreamWorks' "Madagascar" movies; the hit TV series should start generating licensing revenue for the studio in January.

"This is a property that has the potential of a 10-year life span to it," DreamWorks Chief Executive Jeffrey Katzenberg told shareholders and analysts in a July 28 conference call.

DreamWorks Animation also has four holiday-themed specials in the works that will air on NBC -- two this fall and two in 2010 -- as well as two series in development at Nickelodeon.

The Glendale, Calif., studio expects revenue this quarter from pay-TV airings of the 2008 sequel "Madagascar: Escape 2 Africa."

TV networks have been forced by the weak economy to charge DreamWorks and other advertisers less for commercial time. "We're obviously going to be a very big advertiser with three releases next year," Katzenberg said during the conference call.

"Shrek 4," featuring the voices of Mike Myers, Paul McCartney, Justin Timberlake, Amy Poehler and others, is scheduled for release in May. Also due next year are the superhero spoof "MasterMind" and "How to Train Your Dragon," the studio's second offering in digital 3-D.

Although 3-D screens are rolling out more slowly than anticipated, there's reason to be "cautiously sanguine" about the technology's impact on the studio's bottom line, wrote analyst Tuna Amobi of Standard & Poor's Equity Research in a July 29 research note. "We see a renegotiated video game licensing pact with Activision taking root, and note continued strong traction of new business initiatives (TV specials, Broadway musicals)," said Amobi, who reiterated his "buy" rating on the stock and raised his 12-month price target to $35 from $32.

DreamWorks Animation appears on a monthly list of stocks created with MSN Money's StockScouter tool, which since 2001 has helped investors assess individual stocks' likelihood of outperforming the broad market.

Investment research firm Gradient Analytics uses StockScouter to create daily and monthly stock lists. MSN Money columnist Jon Markman collaborated with the company to devise strategies for putting the tool to work.

One of Markman's strategies involves investing an equal amount of money in each of the stocks in the computer-generated portfolio at the start of the month, selling them at the end of the month, then beginning the process again the next month. An investor who followed Markman's strategy since it was launched would have realized a gain of 178% through June 30, according to Gradient Analytics, and had an annual average return of 15%. Over the same period, the Standard & Poor's 500 Index ($INX) was down 24%.

The chart near the bottom of this page represents the benchmark StockScouter portfolio for August.

An IPO on hold?

EBay (EBAY, news, msgs) is on the August list. As the online auctioneer slogs ahead with a makeover designed to deliver a more effective electronic marketplace, some of the company's ancillary businesses are providing impressive growth.

Revenue rose 11% at online-payments unit PayPal in the three months through June 30, and the number of registered accounts grew by 20%.

Skype's revenue grew 25% in the second quarter; the service is now used by more than 480 million people worldwide to make telephone calls over the Internet. Skype, which started the year with 405 million users, is the largest provider of international calls, said research company TeleGeography.

CEO John Donahoe plans to take Skype public in the first half of 2010, a move that could, by some estimates, generate $2 billion that the San Jose, Calif., company could use to solidify its transition from quirky auction site for sellers and buyers of antiques and secondhand goods to an increasingly global marketplace weighted toward bulk sales of fixed-price merchandise.

But a legal dispute with Skype's founders jeopardizes the IPO plans.

EBay bought Skype for $2.6 billion in 2005, though the rights to some of its so-called peer-to-peer technology stayed with the founders, Niklas Zennstrom and Janus Friis, the entrepreneurs who created the file-sharing software Kazaa.

EBay is building new software to run Skype, but the company acknowledged in a regulatory filing that the software will be expensive and might not work.

Catch change in real time

Cost cuts by corporations trying to ride out the recession have slowed the once-torrid growth of Infosys Technologies (INFY, news, msgs) and other Indian software-and-outsourcing companies. But as the crisis wanes, corporations are likely to renew efforts to become smarter, smaller, faster and more nimble, and that would play into the strengths of Infosys.

"This global crisis is going to fundamentally change companies," Infosys co-founder Nandan Nilekani said in a recent interview with the Globe and Mail newspaper in Toronto. "They will have to reinvent themselves hugely; their supply chains, what they sell, how they sell -- all that is going to change and that is going to drive the business transformation of the kind that we do."

Infosys is India's second-biggest provider of IT services by revenues, after Tata Consultancy Services. It divides projects into components, which it executes simultaneously at clients' sites and its development centers in India and around the world.

The humdrum work of grinding out efficiencies will help the economy begin to grow again, said Nilekani, who expects Infosys to be a force in the wireless computing trend that lets retailers and others gather the data they need to catch things changing in real time.

As the economy improves, Infosys intends to wean itself from its reliance on relatively simple IT outsourcing jobs and compete for more sophisticated long-term management projects. It's retraining employees and recruiting more experienced personnel that will allow it to grab a bigger share of the $800 billion global IT business.

The Bangalore, India, company is willing to trade more predictable income for the high margins that the offshore operators and their investors have grown accustomed to.

Gas to go

Dividend investors have buoyed shares of Oneok Partners (OKS, news, msgs), a partnership that owns natural gas pipelines and processing plants in the midcontinent and Rocky Mountain regions.

The stock, which has a dividend yield of 8.6%, has lagged the broader market as the recession has suppressed demand for natural gas, used to generate about a quarter of the nation's electricity and heat more than half of American homes. A glut of gas has driven the price below $4 per million British thermal units, from more than $13 per million Btu last year.

Still, Chesapeake Energy (CHK, news, msgs), the nation's biggest independent producer, and others have kept on producing. As a result, storage levels are rising to the point where facilities and pipelines may soon be too full to handle new supplies, forcing producers to temporarily turn off some wells.

Producers and distributors are betting demand will soon catch up to supplies, as electricity use grows and new natural-gas-powered buses and trucks roll onto the nation's roadways.

An innovative mix

StockScouter depends on advanced mathematics, software and an innovative mix of measurements and historical testing to forecast the short- and long-term outlook for all U.S. companies that have traded on the three major exchanges for at least the past six months. The analytical tools are applied to score stocks on fundamental, valuation, technical and ownership components.

This score is combined with each company's StockScouter rating to come up with the list in the above chart. Only stocks with a final closing price above $3 are eligible for the list.

How mortgage shopping could change

For legislative efforts to succeed in simplifying the process, promoting fairness and cutting down on the mountains of paperwork, 'transparency is the name of the game.'

Few borrowers read every line of the avalanche of paperwork that comes with a mortgage, and even the most well-intentioned consumer might have difficulty understanding all costs associated with their loan -- and how it compares with what other lenders are offering.

Now, well-intentioned lawmakers are looking to make the mortgage process easier to understand and fairer overall, through regulations that could come to fruition via the proposed Consumer Financial Protection Agency.

If the reforms materialize, "the days of fine print, amorphous language and an avalanche of papers . . . will come to an end," said John Taylor, president and CEO of the National Community Reinvestment Coalition, an association of community-based institutions that promotes access to banking services to create affordable housing and job development. "Transparency is the name of the game."

The goals of the reforms:

• Requiring transparency. Consumers would receive a simple, integrated federal mortgage disclosure that is "reasonable, clearly written and concise," and be adequately presented with the risks and benefits of a mortgage product.

• Promoting simplicity. Borrowers would first be offered "plain vanilla" mortgages with terms that are straightforward. They can obtain more complex mortgages, but those vanilla loans will be presented as a first choice.

• Demanding fairness. Mortgage brokers would be required to determine whether the mortgage they're selling to a borrower is affordable, and prepayment penalties would be banned or restricted. Hidden fees that compensate a broker for selling higher-cost loans would be banned.

Loan originators and the sponsors of securitizations could also be required to retain 5% of the credit risk of a mortgage, requiring them to have "skin in the game," or a stake in the outcome of the loan originated, said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development.

That requirement -- along with all of the reforms, really -- could cost consumers more for their mortgage, perhaps adding as much as a half a percentage point to their mortgage rates, said Cameron Findlay, chief economist for LendingTree.com. In addition, lenders who can't afford to make the procedural changes might be forced out of business, which could effectively decrease competition, he added.

"It's going to create a situation where banks and brokers alike are going to make sure that their costs are covered for any adjustment to their process," Findlay said.

But, Findlay said, any extra costs would be worth it to restore faith in the system and protection for consumers. Also, it's a drop in the bucket compared with what it's costing to clean up the havoc created in the mortgage market and the entire economy when mortgage money was easy to get.

"How can it possibly cost consumers more than what it has already cost this nation?" Taylor said.

Clear disclosure 'worth it'

Even if lenders ultimately are forced to make fewer loans as a result of new regulation, the consumer protections are still worth it, said John Sullivan, president of the National Association of Exclusive Buyer Agents.

"I would rather people have more difficulty getting the loan than getting a loan they can't afford to pay in three years," he said.

At their heart, the reforms intend to force clear disclosure in the mortgage market so consumers can compare mortgage products on an apples-to-apples basis -- with easy-to-discern costs so that lender-to-lender comparisons are more straightforward. The goal is for people to always pick a mortgage based on what is actually being offered, not how it is worded or what is presented -- like they'd buy any consumer good, based on the product inside and not the packaging in which it's wrapped, Taylor said.

"Do you offer the best widget or don't you? It shouldn't be the best slogan or the best box," Taylor said.

All of these reforms are still a way off: First, the CFPA must be created. And some in the mortgage industry spy flaws in the proposals, and they'll fight to make their case.

"Traditionally, the lending world has been able to water down positive reform efforts on the regulation side, so the result is not as good as it could have been," said Howard Banker, executive director for the Fair Mortgage Collaborative, a nonprofit organization that identifies and certifies lenders that adhere to standards of fairness. If points are debated for too long a time, "momentum is lost and what you end up with is a shadow of a proposed idea," he said.

If the proposals do, however, emerge from this process and go into effect, below are some changes a mortgage shopper might expect.

1. You could have less paper to wade through

Anyone who has gotten a mortgage knows just how much paperwork is involved. Forms today are "too many and too complicated" and could be clearer, said Marc Savitt, immediate past president of the National Association of Mortgage Brokers.

Alex Pollock, in testimony to the House Financial Services Committee in June, said the one good idea that has emerged from the reform proposals has been the proposed requirement of clear and simple disclosures. Pollack is a resident fellow at the American Enterprise Institute for Public Policy Research.

"In congressional testimony in the spring of 2007, I proposed a one-page mortgage form so borrowers could easily focus on what they really need to know. The one-page-form idea was included in bills in both the House and Senate, but not enacted, unfortunately. It remains my opinion that something like it would be a huge improvement in the way the American mortgage system works," he said.

With better disclosures, borrowers can be better able to "underwrite themselves," he said, making sure they understand the debt commitments they are making.

2. Your first option might always be 'plain vanilla'

What would a "plain vanilla" mortgage be? Most likely a 30-year fixed-rate mortgage and possibly other basic loans, such as a five-year adjustable-rate mortgage, said Richard Thaler, a professor of economics and behavioral science at the University of Chicago Booth School of Business.

That doesn't mean you couldn't get a more complex product, just that you have to see more basic options first. To obtain a mortgage with more complicated terms, "people would have to opt into them and be warned that they would be doing something unusual," he said of the more complex mortgage products.

Thaler is co-author of the book "Nudge," which examines scenarios that "steer people in the direction that is likely to be helpful and warn them about things that are likely to be dangerous." A "plain vanilla" mortgage encourages borrowers to opt for a certain basic mortgage type without banning other choices, he said.

This system could help prevent consumers from agreeing to complex terms they don't understand, when they might otherwise have chosen a simple, basic product. Case in point: Sullivan recently was involved in a transaction with sellers who didn't realize they had an interest-only loan until five years later when they wanted to sell the property; without paying principal on a loan, they didn't build equity.

3. You could be spared certain fees

Prepayment penalties, or costs you're charged if you want to pay off a mortgage early, could be banned or restricted by the proposed agency. At worst, consumers get trapped in mortgage terms that aren't right for their situation because they can't refinance unless they pay the penalty fee.

Because it's not easy to spot to begin with, one fee -- the yield spread premium -- could become extinct without consumers even noticing. Donovan called them "unfair practices," used by lenders to encourage brokers to sell riskier and higher-priced loans.

From the industry perspective, Savitt said the premiums are a way consumers can finance origination costs over time. He said costs built into the interest rate -- both from brokers and lenders -- should remain permissible, but that "it's important that everything be disclosed on both sides," meaning both brokers and lenders should disclose all fees embedded into the rate.

The recovery puzzle's missing piece

Investors, if you think US fortunes continue to drive the world economy, keep your money out of this market. But if you expect Asia and South America to lead the recovery, jump in now.

U.S. and global economic data have begun to diverge so greatly in recent months -- with sustained weakness here and a surge of strength overseas -- that it's a wonder we're all on the same planet.

The differential is more than just a matter for academics to discuss at the faculty club, because investors large and small need to decide, pretty much immediately, which set of data to believe.

Those who believe that American consumers, banks and factories are still the main engine of growth in the world are taking profits on recent gains in stocks, shying away from risk and husbanding cash. Those who believe instead that rising consumption and industrial might in Asia and South America are more important are going in the opposite direction, diving into risk with abandon.

We'll know who's right in the fullness of time, but in the near term, investors do not have the luxury of waiting. They must anticipate the future based on limited data, act now, and prepare to face the consequences if they're wrong. That makes this summer one of the most intense stretches of soul-searching for professionals in the past two years, as it will make and break careers, reputations and fortunes for years to come.

In a moment I'll tell you why data and psychology now favor bulls, but let's look at the story from the perspective of active practitioners rather than economists -- two private wealth managers who actually have to make decisions on behalf of clients, rather than just spout off with no consequences.

Worries and economic warts

Eric Sprott, a veteran fund manager and researcher based in Toronto, believes the buyers are in la-la land when it comes to interpreting economic data emanating from the world's largest economy. A few of his salient points include:

• A prolonged U.S. retail sales slump, highlighted by a same-store sales plunge of 32% last month at Abercrombie & Fitch (ANF, news, msgs), shows that consumers are in no mood to buy goods even if factories were ready to make them. A plunge of 5.1% reported by U.S. shopping malls in June was worse than the dire 4.5% forecast.

• Unemployment is not just the worst since 1983 -- 29% of the unemployed have been looking for work more than six months; the number of people taking unemployment benefits has reached a record 6.88 million; and six people are looking for work for every job opening, a fourfold increase from just a year ago.

• With consumers on the sidelines, U.S. industry is on the brink. Factories used only 68.3% of available capacity in May 2009. The lowest prior level since the Depression was 70.9% in December 1982.

• Despite the recent uptick in construction, new-home sales are down 73% from their 2005 high, and the cumulative loading of rail cars is down 19.2% from 2008's depressed levels.

• Price/earnings multiples on U.S. stocks, reflecting investor sentiment, fell only to a multidecade average at 16 rather than to the single-digit lows seen in prior deep recessions.

Sprott concludes by listing three scenarios for his clients: If S&P 500 earnings stay constant at $63.03 and price-to-earnings multiples hit cycle lows at 6 due to worsening sentiment, he sees the Standard & Poor's 500 Index ($INX) falling to 378. (It closed at 987 on Thursday.) If earnings are halved, as they have done three times in the past 30 years, and the P/E stays constant at 16, the S&P 500 would fall to 506. If earnings are halved and the P/E hits cycle lows, he gets an S&P 500 value of 189 -- a true, old-school depression.

Sprott says only buoyant investor sentiment is keeping the market up, as earnings have not improved. "Keep it simple, stupid," he says. "Investing is and always has been about the real economy, and this market is ignoring the hard data."

Globalization's other face

Worried yet? Well, Chris Helton, research director at Paragon Asset Management in Seattle, isn't. In an interview he said Sprott's point of view is misguided.

Helton believes bears like Sprott are selecting only the data that make their points and missing noncorroborating evidence. He points out that P/Es have indeed come down by more than half, so what's the problem? Corporate earnings are stabilizing and show signs of going positive in the fourth quarter, and that's even more clear when you look at the S&P 500 without the volatile results of the banks and energy producers. And while more people are out of work, those who are working are enjoying rising real incomes because of low inflation and improving wages.

Don't focus just on struggling retailers, which always have troubles forecasting demand, Helton says. Look at networking equipment titan Cisco Systems (CSCO, news, msgs), whose chief executive last week said he predicts 12% to 17% growth and sees productivity for the nation overall rising up to 3% annually, which would potentially equate to gross domestic product growth rising to around the normal rate of 4% by 2011. "The bears are always squawking about dangers at inflection points," Helton added. "But they're just projecting the recent past into the future," he said. Three months from now, he suspects, data will force the bears to reconsider.

If Helton is right, and I suspect he is, it's going to be in large part because U.S. companies are getting a huge boost from their international operations. Most North Americans don't pay enough attention to this data, but a quick synopsis from ISI Group analysts from the past week can shed some light.

The improvements, in many cases due to government stimulus, make your eyes bug out: Global vehicle sales are up 21% in the past seven months; steel production is up 15%; China's electricity production is up 14%; Korean GDP is up 9.7%; Japanese exports are up 20%; and Taiwan export orders are up 45% and industrial production is up 50% in the past five months. It's not just Asia, either: French consumer spending is up 3.4% in the past four months; Canadian retail sales are up 2.5% in the past five months; the Brazilian unemployment rate has fallen to 7.9% from 8.6%; and the Mexican unemployment rate has fallen to 5.7% from 6.2%.

This is not a trivial travelogue. These countries' companies are buying more Caterpillar (CAT, news, msgs) and Cisco equipment, organizing their sales databases with Oracle (ORCL, news, msgs) software and charging purchases on MasterCard (MA, news, msgs). Last summer, I wrote a column headlined "Warning: Worldwide wipeout ahead." Now the opposite seems likely, as the U.S. has an opportunity to follow the rest of the world out of recession.

Room to run

In short, while globalization has been fingered as a culprit that got us into this mess, fast-twitch global supply chains and software may actually get us out. Already it looks like one reason for second-quarter improvements has been the unprecedented speed with which companies have responded to their fear of a depression by slashing employment, capital expenditures, advertising and travel to levels that were well beyond necessary -- and unsustainable.

Now that unprecedented levels of worldwide fiscal and monetary stimulus have blunted the credit crisis and parried the recession, companies are doing well enough to beat analysts' panic-inspired earnings expectations. And those improvements in stock prices and the tone of hopefulness are likely to make consumers more optimistic, and thus more likely to spend in the third and fourth quarters of this year.

Even bulls are not calling for another rip-roaring move higher now to complement the 45% advance off the March lows that has already been recorded. But with so many investors still on the sidelines or short, paralyzed with disbelief and anxiety over having missed the initial move, you can probably count on an advance for the rest of the year even if it's punctuated with more 10% to 15% corrections such as the one just seen in June.