But first, a word about what’s going on with the market right now:

This week gave investors a return to heightened volatility as the VIX volatility index broke out to new highs for the month of September. But while the media focused on economic data as the driving force in the increased sway for stocks, the truth was much easier to understand…

On Monday, the S&P 500, a good proxy for the broad market as a whole, broke through a significant technical resistance level at 1130, taking stocks well above last Friday’s levels. Not surprisingly, Tuesday and Wednesday saw stocks lower as the market tested newfound support at the 1130 level.

While the Fed’s rate meeting was blamed for the tumble in equities, the market was really drooping because of technical phenomena.

Remember, the financial media likes explanations. It’s tough to say “the market’s up today, and we don’t know why…” so instead, CNN and CNBC attribute moves to whatever news story is in the headlines – even if it doesn’t really make sense. The fact is that on a day-to-day basis (barring a real piece of market-moving news) we really have little understanding over why the market moves the way it does. Despite that fact, technical analysis at least gives us a method of predicting how stocks will move in the short-term. Over the longer-term, nitty gritty fundamental analysis rules the roost.

So, what’s going on in the short-term?

Right now, it looks like more bullish days could be ahead… Following the market’s pullback earlier this week, we’re getting a bounce higher off of support today. Now that support has been set at 1130, we’ve got pretty unobstructed upside to the 1175 level.

Now onto our open positions…

Our Berkshire Play Powers On

Berkshire Hathaway (NYSE:BRK.B) is having a powerful run-up today thanks to strength in the insurance industry as a whole. As I write this, the stock is up around 3.5% intraday – making our overall gain on the stock more than 27% since we bought it in January.

That stellar performance is even more impressive compared to the rest of the market: the S&P 500 is down 0.2% over that same period. I’ll have some more interesting performance notes in next week’s quarterly letter to subscribers…

Selling Beer In China

Our long-term investment in beer is also paying off right now. Earlier this week, Molson Coors Brewing Company (NYSE:TAP) announced a deal to acquire a 51% stake in a joint venture with a Chinese beer company. The deal will help Molson Coors introduce popular American brands (like Coors Light) to Chinese consumers. With excellent beverage prospects in the People’s Republic right now, this move could provide Molson Coors with some top-line growth potential – especially now that China has vowed to let their currency appreciate for the rest of 2010.

Our 2010 Survey…

As I mentioned in last week’s market recap, I’m sending out our first quarterly letter to subscribers at the end of September (i.e. next week). In it, I’ll touch on strategies going forward, our performance, and changes coming to the Rhino Stock Report.

But I need your help too. Please fill out our Rhino Stock Report 2010 Survey. It’ll help me align this publication with your interests – and it’ll give you the chance to make suggestions and ask me questions.

I’ll answer your questions in next week’s letter. Click here to fill out the survey now – it’ll only take 5 minutes of your time.

Cheers,

Jonas Elmerraji
Editor, The Rhino Stock Report

On Monday morning, we added AllianceBernstein (NYSE:AB) to the Rhino Stock Report portfolio (read the full analysis here), opening our position in the stock at $25.82. In the days since, shares have traded mostly flat, a fact that’s left the stock well within our buying range.

We’ve had a fairly large influx of new Rhino Stock Report readers in the last month, so the fact that AllianceBernstein’s shares are still right around are entry point are significant – if you haven’t had a chance to pick up shares of this stock yet, now is your chance.

SPX Corp. Pays Out And Picks Up

Shares of SPX Corporation (NYSE:SPW) saw some bullish momentum this week following news that the company would be supplying Toyota with a new vehicle interface module for its diagnostic tools. While the deal isn’t valuation-changing for SPX Corp, it should help pick up this company’s investor profile.

If you own shares, you’ll also have some income coming your way soon – the company’s 25 cent per share dividend is payable on October 5.

NRG Makes Another Acquisition

Our wholesale power generation play, NRG Energy (NYSE:NRG) made yet another purchase this week, spending $350 million in a buyout of Green Mountain Energy. The deal will be immediately accretive to earnings and free cash flow.

Watch for Your Quarterly Letter This Month…

I’m in the process of ramping up a few operational changes here at the Rhino Stock Report – one being the addition of a quarterly letter to subscribers. Much like a hedge fund’s letter to shareholders, our quarterly letter will take a look at our performance, decisions, and strategy for the coming quarter.

It’s just one of the steps we’re taking to increase transparency and operate the Rhino Stock Report more like a money management firm than an investment newsletter…

We’ve had some very strong performance lately – I’ll fill you in on the specifics at the end of the month.

The financial industry was home to some of the worst performers of 2008 – no surprise given the massive asset write-downs, forced deleveraging, and bankruptcies that plagued the industry that year. But it doesn’t end there – while the financial crisis helped mandate a minimum level of financial health for major banks, the level of stability in the financial sector has been largely outpaced by investor sentiment. At present, scores of financial companies are still in precarious financial situations, threatened by the risks of another bout of major losses if the economy slinks back toward recessionary currents.

It should come as no surprise then that financial stocks got punished once again earlier this spring, as volatility and concerns over European debt sent stocks into red for 2010. But while investors continue to treat financial stocks with equal reluctance in the sell-off, some financial firms are better on better footing than others.

One example is the asset managers. Asset management firms, the companies that professionally manage mutual funds, private accounts, and the like, took their knocks in the latest financial crisis for obvious reasons – their assets under management (AUM), the biggest contributor to revenue for most, tumbled across the board as scared investors grabbed their cash and ran.

But that selloff is proving to be premature. After all, while investors eschewed stocks in 2008, they were pulling their money out to invest in less accessible instruments like fixed income and money market investments – two areas where asset managers dominate. Sure enough, AUM has crept back up for most firms… And so have profits.

In fact, the only things that haven’t made their way back up to pre-2008 levels are share prices.

That’s why our newest Rhino Stock play is an asset manager – one with a uniquely lucrative business stucture…

If you’ve been keeping up on weekly Market Recaps, you’ve already heard me mention the name AllianceBernstein (NYSE:AB). The New York-based firm is an institutional investment manager with $482 billion in assets under management. Unlike many of the firm’s other competitors, AllianceBernstein benefits from a storied name, well-aligned product offerings, and strong growth in 2010.

With roots going back to 1967, the company’s predecessors – Alliance Capital and Sanford C. Bernstein – merged in 2000 to create AllianceBernstein in its current incarnation.

Today, that merger has meant that AllianceBernstein has one of the more diverse customer bases in the business – around 59% of customers are institutional, 15% are private wealth clients, and 26% are retail investors. That diversification helped the company retain clients in the mass exodus from equities in 2008 (institutional clients are less prone to flee positions under selling pressure), while still maintaining the higher profit margins of a big retail investment base.

That diversification extends to AllianceBernstein’s offerings as well – with more than 36% of its clients domiciled outside the U.S., the firm was one of the first to move toward allocating large amounts of capital in overseas investments. But while diversification is one thing, growth is quite another. Earlier in August, the firm announced that it had managed to grow its AUM by approximately 5% for the month, a stellar increase. As investors continue to seek out research-driven investment expertise, AllianceBernstein should be able to maintain strong AUM growth.

Even though this stock is making substantial fundamental strides toward recovery, shares of AllianceBernstein haven’t rallied in kind. In fact, despite some rumblings of a recovery in 2009, shares are still down 71% over the past few years despite the fact that AUM (and thus revenues) only fell around 38% over that same time. As the company asset base continues to grow, that valuation is becoming even more skewed.

That brings us to AllianceBernstein’s business structure.

AllianceBernstein is set up as a limited partnership, which means that barring few exceptions most of the firm’s earnings are required to pass through to investors in the form of dividend distributions. It also changes the way we value shares of AllianceBernstein’s stock – more on that in a minute.

Attractive Financial Fundamentals

One of the biggest benefits of an asset management firm like AllianceBernstein is low overhead – and thus very high margins. 70% of the firm’s revenues come from management fees levied on the AUM that AllianceBernstein manages for its clients, and most of that money passes through to the firm’s bottom line. While a contraction in AUM should have squeezed the firm’s margins in recent years, cost efficiency has kept net margins above 80% through the financial crisis.

Of that income, AllianceBernstein’s structure as an LP has kept the firm’s payout ratio (the percentage of income paid to shareholders) at 83% — that’s 259% higher than the industry average. AllianceBernstein’s product offerings are research-driven and scalable, which means that capital investments are minimal for the company to grow. Because of that, it makes sense for the firm to pay such a generous distribution.

Another result of the company’s LP structure is a relatively sparse balance sheet. While AllianceBernstein’s books don’t give investors a very accurate picture of the company’s size, they do show that the firm has plenty of balance sheet liquidity considering its hefty cash reserves and limited debt load.

Varying Valuations

From a value standpoint, AllianceBernstein looks attractive right now…

The firm currently only trades for a 43% premium over book value – a low number considering that this financial stock doesn’t own any capital assets other than marketable securities and office equipment. The real value generator for AllianceBernstein is its dividend payouts.

But even dividends don’t tell a very good story for investors used to traditional discretionary payments from their income stocks. Because AllianceBernstein is an LP, the firm is required to pay investors the vast majority of its income for any given quarter – that means that unlike a traditional corporation, where dividends are often predetermined and fixed, this firm’s distributions vary each quarter, and the dividend yield isn’t a very telling number.

That said, financial models can give us a glimpse at what this stock is worth right now.  Based on our analysis (which allows for a fairly conservative growth projection and a generous margin of error) I believe that this stock should be priced at  around $46 – an 84% upside from capital gains, not to mention the hefty distributions.

Riding the Technicals

That upside potential has been increased by waiting on buying shares for the last few weeks. When I first wrote to you about AllianceBernstein in early August, I told you that while I liked the stock’s fundamental potential, I thought there was more downside ahead for shares.

Sure enough, the stock has fallen around 6% in the weeks since…

Frankly, that’s a great thing for us. It means that we’re able to lock in an even lower price for a stock whose valuation hasn’t changed at all. But that discount could soon be coming to an end as shares of AllianceBernstein close in on support.

Right now, this company is turning back toward a bullish bent, so I’m adding shares to the Rhino Stock Report’s portfolio today…

Action to Take: Buy Shares of AllianceBernstein (NYSE:AB) at current levels…

First and foremost in today’s market update, I want to fill you in on our AllianceBernstein (NYSE:AB) trade.  I briefed you on AllianceBernstein, the $2.7 billion New York-based asset manager, on Monday, saying that while I like this stock, you should hold off on buying shares for now.

Sure enough, shares have fallen around 2.5% this week. That gives us a slightly better buying position when we do get into shares – but I’m continuing to hold off for a more bullish “buy” signal. I’ve completed my due diligence on AB, and I’m excited about its valuation and growth potential. You’ll get my analysis when I recommend buying shares – hopefully next week.

Bad Economies = Higher Profitability?

Shocking though it may seem, Wall Street loves to punish good companies in 2010. How else can you explain the fact that despite more than three-quarters of companies beating earnings for Q2, share prices have continued to tumble this earnings season?

Poor economic data continues to be the culprit. But while jobs numbers and housing starts hold stocks’ prices down, companies are continuing to deliver strong performance numbers this month.

One trend that I’ve noticed this quarter is expanding margins – as economic events impact sales, firms are generating income growth by improving efficiency and cutting excessive spending. That’s an attractive change, because it means that we’re essentially being offered leaner, meaner equities in today’s market at lower prices than before. Value investors should be getting excited here…

I’ve said it before that “the market can stay irrational longer than most investors can stay solvent”. But old edict only goes so far – after all, we’re finally starting to see good GARP (growth at a reasonable price) plays once more, and keeping money off the table is a great way to guarantee that we’ll miss out. That shift was a big part of the reason we added Applied Materials (NASDAQ:AMAT) to our portfolio earlier this summer, and it’s an instrumental part of why we’ll soon be adding AllianceBernstein.

It’s important to remain cautious about what’s clearly a fickle market – but don’t forget that scores of stocks look fundamentally impressive right now.

NRG Buys Up Serious Assets

NRG Energy (NYSE:NRG) made the news this morning when it was announced that the power generation company would be buying $1.36 billion in generation assets from competitor Dynegy Inc. as part of the latter’s acquisition by private-equity firm The Blackstone Group.

The purchase is a good move for NRG because it provides 3,884MW of additional generation capacity from low-carbon plants at an average cost under $400/kilowatt. NRG expects that the transaction will immediately increase free cash flow and EBITDA numbers.

Computer Sciences Increases Profitability

Our computer consultancy play, Comuter Sciences Corporation (NYSE:CSC), announced earnings on Wednesday, delivering profits of 91 cents per share – a cent higher than expectations. CSC was another example of a company that’s improving efficiency to generate better earnings on flat revenues. That’s a very good thing.

The company maintained its strong EPS targets, and expects to book projects in excess of $18 billion for the 2011 fiscal year.

Watch out for a potential Rhino Alert for AllianceBernstein next week.

Cheers,

Jonas Elmerraji
The Rhino Stock Report

Four of our portfolio companies announced earnings in the last week or so, and all four beat the outlook expected by Wall Street analysts. First, we’ll take a look at earnings, then I’ll give you a preview of our newest watchlist play:

SPX Corporation (NYSE:SPW) announced earnings this past week, completely obliterating Wall Street’s expectations of 71 cent per share by delivering income of a full dollar for Q2 2010. Revenue numbers fell in line with expectations. Better still, management guided Q3 EPS in the $1 to $1.10 range, exceeding analyst expectations of 89 cents.

With a capital-heavy business model, SPX Corp. took some significant knocks in 2009 as revenues were slow to recover. The numbers announced by the company last week should start to accelerate this stock’s comeback.

Our wholesale power generation play, NRG Energy (NYSE:NRG) has been another stock that’s underperformed the broad market as commodity costs, expensive capital expenditures, and stifled energy demands impacted its financials. Again though, the company surprised analysts with second quarter earnings numbers of 81 cents per share – nearly twice estimates of 42 cents. As with SPX, NRG Energy’s revenues fell largely into line with estimates.

That phenomenon of increasing income and in-line revenues is worth watching – after all, it means that efficiency is improving and margins are widening, two factors that could suggest that a more bullish model is needed for these firms. Ahead of earnings numbers, RBC analysts raised their view of NRG’s shares to outperform, with a price target of $30.

Becton, Dickinson (NYSE:BDX) is another stock that pleased investors with its quarterly numbers, the medical supply giant announced earnings of $1.30 per share. Analysts had hoped for $1.24.

Becton is one of the three stocks that’s currently in negative territory for our Rhino Stock portfolio (coincidentally, NRG is another), but that could soon change. Becton has been getting increasing attention lately, including  an East Coast Asset Management research report on the stock. The hedge fund thinks that Becton investors could see a double-digit upside in the next few quarters thanks to a deep economic moat and substantial misgivings about the stock’s real performance.

I’m inclined to agree (you can download the research report here).

Our best performer for 2010, Berkshire Hathaway (NYSE:BRK.B) announced its earnings numbers on Friday, outpacing earnings expectations despite some derivative losses for the second quarter. While the effects of derivatives were negative, the company saw improvements across most of its business lines, and I’m pleased to see that the rally shares have seen this year are being backed up by fundamental performance.

We’re currently up 21.6% on the position since adding the stock to the Rhino Stock Report’s portfolio in January.

Adding a Financial Stock to The Watchlist

Despite significant economic improvements since 2008, many investors continue to eschew the financial stocks. That’s a big mistake when you consider the fact that many of these firms are still enjoying booming business. But while investor pressures hold shares down temporarily, others could be enjoying a great time to pick up shares.

That’s the case with AllianceBernstein (NYSE:AB), a $2.8 billion asset manager that I’m adding to our Rhino Stock Report watchlist this weekend.

AllianceBernstein invests on behalf of institutional and retail clients in efforts to generate the highest returns possible. In exchange, the company earns asset management fees. But AB isn’t your typical money manager. The company’s massive value prospect, massive dividend, and unique business structure make it a potentially lucrative opportunity right now.

In fact, my valuation model places this stock at between a 16% and 70% discount to where its share prices should be. That’s a disparity that likely won’t last long as AB continues to generate substantial income…

Not so fast – don’t buy shares of AllianceBernstein just yet. I’m completing my due diligence on this stock this week… I’ll have my detailed report (along with buy and sell target prices) to your inbox later this coming week.

Until then, watch out for earnings of Computer Sciences Corp. (NYSE:CSC) on August 11.

Here’s an updated chart for the S&P 500:

The S&P broke above two key resistance levels this week – the blue downtrending trading channel and its 50-day moving average. With this broad index above those two key levels, the market should start to give us some semblance of stability in the near term, particularly if economic news stays relatively muted.

But don’t be lulled into thinking that the worst is over. Stocks still need to clear the 200-day moving average (thin red line) before I’d be willing to believe that we’ll see another meaningful rally. That said, investor sentiment seems to be turning to stocks once again, and where investors see value price appreciation usually follows.

Frankly, added attention on stocks is a good thing – I’ve been concerned for a little while now about the potential of a bubble in bonds. Investors have flocked to the bond market in the last couple of years in an attempt to move from apparently risky investments to less risky ones… but with a slew of problems in sovereign, state, and municipal budgets right now, the potential for government defaults is relatively high.

Here in the U.S., the fact that the ratings agencies continue to rate shaky state and city debt at investment grade levels is something to watch out for. Not all bonds will be impacted by the bubble – corporate borrowings are likely to remain robust after the scrutiny investors put on their equity issues.

But I’ll be watching this issue pretty closely for the rest of the year. States and municipalities need to get their finances in order ASAP.

In the mean time, here’s an update on a few economic items…

Financial Reform: The Senate passed H.R.4173 earlier this week – and President Obama signed it into law on Wednesday. The act ushers in a number of financial reforms and consumer protections, most notably increased regulation and oversight on consumer financial products. Ultimately, though, the new law lacks many important features. It’ll have minimal impact on Wall Street.

Earnings Season Earns Respect: Despite a somewhat inauspicious start to earnings season last week, this week’s accelerated announcement pace has impressed investors. That should be a relieving fact for Main Street, because it means that the private sector is still seeing strong performance in 2010. We’ll see what this means for our portfolio companies…

The Happier Housing Market: Housing numbers released yesterday beat expectations, showing slight growth in home sales and residential real estate prices. These metrics lead the economy right now, so good performance is a great sign for stocks.

Applied Materials Restructures Its Energy Business

Our newest position, Applied Materials (NASDAQ:AMAT), announced Wednesday that they’d be undergoing restructuring for their energy and environmental solutions business and revised their Q3 outlook as a result.

Typically, restructuring is sort of like ripping off a band-aid: it hurts at first, but it ultimately a good thing. In Applied’s case, however, restructuring shouldn’t be as painful as Wall Street expects. Solar has been a thorn in Applied Materials’ side for the last few years as sales stalled and sentiment waned. That’s one of the things I wrote to you about when I recommended the stock last month. But in 2010, things look to change thanks to increased emphasis on solar technology and alternative energy.

Applied is trying to accelerate that growth by trimming underperforming parts of its nascent solar business. Ultimately, the company thinks that they’ll be able to save $100 million annually with the restructuring.

Despite the impressive savings, these changes won’t impact AMAT in a bad way this year. Revised Q3 guidance puts expected numbers on the higher end of the company’s previous target. That’s excellent management at work.

Upcoming Earnings

Becton, Dickinson (NYSE:BDX) is set to announce earnings next week on July 29. I’ll keep a close eye on how our second play of 2010 lives up to expectations.

But stocks could be setting themselves up for a new rally – if a few stars can align.

The old adage goes that everything is priced into the market. From the moment news is disseminated to the public, it’s analyzed and dissected to form the basis for investment decisions.

It’s no shock then that Europe’s debt problems have hurt stocks here at home. The declining value of the Euro means that one of our biggest trading partners has less buying power – and as a result, U.S. companies who sell products across the pond are seeing the valuations of their Euro-denominated operations fall hard.

But real economic news isn’t the only reason stocks have lagged this year. Estimates – also known as best guesses – play a big role on Wall Street. And like news, they’re used by retail investors and institutions alike to make investment choices.

That means that when analysts expect a company to report earnings of $1 per share, those earnings are priced into the stock before the company announces its results.

Wall Street estimates, though, aren’t always spot on; that’s where earnings season volatility comes in. When a company delivers numbers above estimates, the stock jumps – after all, the lower numbers had already been priced into it. When they underperform estimates, the opposite happens.

So it’s no surprise that in 2009, when the bears were out in full force and analysts were sticking to conservative estimates, companies continually outperformed the Wall Street’s best guesses and stocks rallied.

In 2010, though, analysts have adjusted their models. They realized that their numbers in 2009 were too conservative – and they’ve succeeded in completely overshooting earnings on scores of key companies in the past quarter.

Stocks have tumbled as a result.

But a technically oversold market and increasingly bearish stance from analysts look to turn that around this quarter. With stocks trading at levels not seen since last October, investors are realizing that a bullish bounce is eminent. More often than not, those sentiment readings are a self-fulfilling prophecy.

But while a short-term rally would be welcomed, for it to be sustainable it’ll need the economic fundamentals to back it up… Here’s a glimpse at what’s going on.

Rates Resting: Yesterday the Bank of England and European Central Bank announced that rates would remain unchanged – as expected. The decision suggests that the situation in the PIIGS countries is stabilizing.

Retail Sales Sour: June’s poor same store sales from major retailers this week drove home the fact that consumer spending has pulled back from the frenzy of 2009. Among the worst performers were mall apparel retailers. These numbers need to improve next month for any sort of sustainable jump in stock prices.

Jobs Continue to Be Less Bad: Jobless numbers were also announced yesterday, with both initial claims and continuing claims ringing in under estimates. But there’s still much further for these metrics to fall before we can celebrate.

Commodities Go Strong: Commodities – like crude oil and gold – continued to perform well in the increased volatility we’re seeing right now. The dollar is also a strong performer – if only thanks to investors’ exodus from the stock market right now.

Could Our Computer Science Play Double Our Money?

But not all of the news on Wall Street has been depressing – Computer Sciences Corporation (NYSE:CSC), the IT stock we picked up back in March 2009 for $34.19 per share, has been the topic of discussion lately…

Rumors are going around that defense industry giant Lockheed Martin (NYSE:LMT) could be interested in acquiring CSC for a price in the low $60s. The acquisition would make sense – Lockheed has been working to build its IT offerings and diversify away from the defense contracts that have built its nearly $30 billion business.

A buyout would be a coup for Rhino Stock Report readers who got in back in March – offering nearly double our money. But those rumors are just rumors for now, and I’m not recommending you increase your stake at current prices. I’ll keep a close eye on these developments.

Applied Materials Breaks Support
I’d held off recommending shares of Applied Materials (NYSE:AMAT) for a while, hoping to find a more attractive entry point. While it looked like that time had come on June 23, when the Rhino Stock Report took an official position in the semiconductor company, shares broke through support following a nasty week of European debt news and a bearish turn on solar stocks…

Shares look like they’re continuing their descent – but not for much longer. If you haven’t entered this stock already, I’d recommend buying shares on the first signs of strength. If you’re a big fan of Applied Materials, consider doubling down.

Becton, Dickinson’s a Buy
Becton, Dickinson (NYSE:BDX) hasn’t been a particularly strong performer this year, falling more or less in line with major market indexes like the S&P 500. But I’m still bullish on this stock and Main Street is catching on – a recent Barron’s profile on the company suggests that a 40% upside is in place.

If you haven’t picked up shares of Becton yet, now would make for a good time to do so.

Berkshire Hathaway Boasts 31% Outperformance
We’re up more than 20% on Berkshire Hathaway (NYSE:BRK.B) as of this writing – a position that’s outperforming the broad market by around 31% as of this writing. If you bought back in January when I recommended the stock, continue to hold onto it. We got into shares of Warren Buffett’s company at a significant discount thanks to the market’s mispricing of Berkshire’s split… if you missed it, I’d recommend investing elsewhere for now.

NRG Steps Up Acquisitions
Our wholesale power generation play has been on a shopping spree, buying up key subsidiaries at discount prices. That’s a strategically significant phenomenon because it suggests that NRG Energy (NYSE:NRG) is well on its way to rounding out its energy offerings this year. With headwinds turning to tailwinds for alternative energy, NRG is a smart stock to be in right now. If you haven’t bought shares, consider buying at current levels.

Sell Off Your Bear Market Hedge
I wrote to you back in January 2009 about the ProShares UltraShort S&P 500 ETF (NYSE:SDS) as a potential hedge against a “W-Shaped” market recovery. I qualified that article by saying that SDS should only be held in the very short term because of tracking errors inherent to leveraged ETFs… but I never issued an official sell alert on the fund.

That’s in part because I talked about SDS without knowing how exactly to treat an investment where I specifically said. “This isn’t a Rhino Stock.”

But I think that the fund’s performance in the Rhino Stock Report portfolio is causing confusion, so I’m officially selling it today and putting it in a “Special Situations” portfolio on our Members Only website.

Hold Onto The Big Gainers For Now
The rest of the stocks recommended in the Rhino Stock Report before 2010 should be pretty sizable gains for you right now. As such, I’m recommending that you continue to hold them, but don’t recommend initiating positions if you haven’t already. With gains like 55% in J.M. Smucker (NYSE:SJM) as of this writing, they’re not the values they once were – but they should still provide performance for us during the rest of 2010.

Have a good fourth of July weekend. I’ll be back next week with a more traditional market update.

Cheers,
Jonas

We’ve been holding off adding Applied Materials (NASDAQ:AMAT) for the last several weeks in hopes that we’d be presented with a more attractive entry point. That price level has materialized, and now’s the time to add this semiconductor giant to our portfolio.

But first, I want to tell you why this stock fits into our investment mold.

We’ve talked a lot about Applied Materials lately, but most recently it’s been in the context of stock charts and timing. While charting is an exceptionally valuable tool for timing entries and exits, it’s never the sole basis for investing in a Rhino Stock – instead, the fundamentals are key.

And in Applied’s case, those fundamentals are duly impressive. From the emergent technologies coming out of its research and development department to the consistent revenue streams from Applied’s semiconductor equipment business, this firm has the value case and growth prospects to warrant a significantly higher share price.

The Leader in Nanomanufacturing

In essence, Applied Materials is one of the biggest players in the nanomanufacturing market – a fancy word for the business of building small.

The company’s core business includes fabrication tools for chip manufacturers, components for flat-screen displays, and even solar panel manufacturing. Through significant growth since its founding in 1967, Applied has carved itself a large competitive advantage over its competition. That growth has been fuelled by huge research and development spending – around $1 billion annually – spending that isn’t easy for competitors to compete against. The end result is a store of intellectual property that spans across Applied Materials’ businesses and gives the company one of the biggest reaches of any technology firm.

Today, Applied is the biggest supplier to the global semiconductor industry – a $17 billion market that the company currently controls more than 15% of according to a recent study by Gartner. And with customers like Intel, Toshiba, and Texas Instruments, it’s no surprise that this stock has built itself an unmatched reputation in semiconductor fabrication.

In fact, if you’re reading this Rhino Alert on a flat-screen monitor – or using nearly any electronic device, for that matter – there’s a good chance you’re making use of Applied’s technology.

Applied’s position in semiconductors is impressive, but the further reaching implications shouldn’t be missed… With a number of breakthroughs forthcoming on the semiconductor front, the industry is on the verge of significant growth; and increasingly complex and production-intense chip technologies translate into more profits for our pick.

That reach also makes for higher switching costs for its installed base. When a major chipmaker like Intel uses Applied Materials’ processes or technologies, it’s extremely expensive and time intensive to switch to a competitor’s offerings.

That chipmaking prowess has been transferred over to Applied’s flat-panel display segment in recent years. Because many of the technologies used to fabricate semiconductors are similar to those used in the flat-panel manufacturing process, Applied was able to hit the ground running with its entrance into this high-growth segment of the tech market.

Of course, flat-panels haven’t been the only area where Applied Materials was able to apply its existing intellectual property to new businesses. Starting in 2006, the company began making acquisitions for its burgeoning solar panel business. Today, its solar photovoltaic (PV) segment is developing some exciting new high-efficiency panels that stand to make solar energy commercially viable on a large scale.

Despite all of the prospects that Applied Materials is enjoying, this stock has faced some serious setbacks in the last couple of years. The semiconductor and flat-panel industries have been on a cold streak of late, hampered by excess inventory and significant declines in consumer spending. Likewise, solar has lost some of the cachet it enjoyed in late 2007 as efficiency concerns and high capital requirements scared potential customers away.

But economic tailwinds are starting to form in all three segments as consumer spending begins to perk back up and controversy over fossil fuels grows – especially in the wake of the Deepwater Horizon spill in the Gulf of Mexico.

Financial Stability in Tough Times

Even though Applied Materials has faced challenging economics in the last year, the company’s strong financial position has kept the stock from floundering. At present, Applied’s balance sheet is impressive – with more than $3.6 billion in cash and only $207 million in debt right now, the company has more than enough liquidity to battle through less than ideal markets.

From a profitability standpoint, Applied has historically been one of the best companies in the industry. That changed in fiscal 2009 when the company posted a loss of 23 cents per share versus profits of 97 cents for the same quarter in 2008. Not surprisingly, Applied’s poor performance was the result of slowed revenues for the year amid billion-dollar R&D costs. In the long-run, keeping research and development spend high should pay off for Applied’s shareholders even if it led to short-term losses.

This year, the company’s on track to deliver substantial revenue growth.

That said, the factors that bode well for a resurgence in Applied Materials’ share price have yet to take effect in any meaningful way – that makes right now an excellent time to become a shareholder in this tech giant. I’m adding Applied Materials to the Rhino Stock Report’s portfolio at its current market price. That should be reflected online in our live portfolio by the day’s end.

But while I hack away at AMAT’s financials, I wanted to fill you in on another of our portfolio position, J.M. Smucker (NYSE:SJM)…

Smucker announced earnings of $1.07 per share, blowing away Wall Street’s expectations of 80 cents. Revenue too increased 10% to $1.1 billion, suggesting  that the company’s consumer staple status is paying off in an otherwise volatile market.

Shares of the company are up more than 11% in the last five trading days, bringing our total gain to 61.42%. Continue to hold onto your shares.