Like the saying goes: “Success is the best revenge.” Just days after closing the books on an awful second quarter, Disney’s (NYSE: DIS) movie studio — with the help of a few Marvel characters — notched a record breaking opening draw at the box office. “The Avengers” has grossed over $1 billion globally in its opening weeks, promising to more than make up for the $200 million that Disney expected to lose on that unfortunate budget buster, “John Carter.”

But for Disney, this win is about more than just avenging past mistakes on the income statement. Instead, the movie’s success is confirmation of Disney’s strategy to use its movie studio as a launching ground for billion dollar franchises, and to profit from those franchises in a way that only Disney can.

The Fall

A crucial first step to that strategy, though, is box office success, something that Disney really lacked this past quarter. Disney’s studio segment reported (pdf) its worst quarter in years, booking an $84 million operating loss due mainly to the poor reception of “John Carter.”

What’s more, the quarter looked no better when compared to the year ago quarter which logged an $80 million contribution despite its own big budget flop, “Mars Needs Moms.” As a movie studio, you know its bad when you have trouble beating a comparison like that.

Looking ahead to the next quarter, with “The Avengers” blowing away box office records, the studio should have no trouble beating the $49 million in operating profit in the year-ago quarter. That quarter’s profit was driven by the movies “Thor” and “Cars 2,” which together grossed a disappointing $400 million.

The Rise

Despite the rough movie quarter they had just reported, Disney executives were sounding downright giddy in their earnings conference call. With the ink still drying on the first week of Avenger’s receipts, CEO Bob Iger was already trumpeting the green-lighted sequels for its various characters including Iron Man and Thor next year, Captain America in 2014, and The Avenger’s sequel already approved but at a date to be determined. “I think what you’re essentially seeing here,” Iger said, “is a true franchise not necessarily in the making but having been made and launched.”

But it isn’t until after a successful launch that Disney can truly capitalize on its intellectual property. Because the company owns its own consumer products, media, and parks divisions, the profits from a franchise launch are captured by Disney in a way that pure studios like Dreamworks (NASDAQ: DWA) and Lions Gate (NYSE: LGF) just can’t replicate. Merchandising, licensing, theme park attractions, TV shows, and video games are just a few of the avenues that send dividends into Disney’s bottom line from a hit piece of intellectual property. Not even Hasbro (NASDAQ: HAS), with its similar strategy of box office launches leading to merchandising profits, can capitalize on its properties so completely.

Disney’s Iger was quoted in Walter Isaacson’s biography, Steve Jobs, telling the Disney board of directors at the time that “a hit animation film is a big wave, and the ripples go down to every part of our business — from characters in a parade, to music, to parks, to video games, TV, Internet, consumer products. If I don’t have wave makers, the company is not going to succeed.”

Iger was reportedly trying to convince the board to purchase the animation studio, Pixar, when he said those words. But they are as true for comic book heroes today as they were for animated toys then. In that way, the company’s purchase of Marvel a few years ago mirrors the Pixar purchase before that.

For Disney, it all starts at the box office. And with the break-out success of The Avengers, Disney’s movie studios have their redemption. But more importantly, Disney has its latest crop of wave makers that should be padding the company’s profits for years.

Full Disclosure: I own shares in Disney and Hasbro. You can see a full listing of my current holdings here. Don’t forget to subscribe to stay current on all posts.

Photo Credit.

Netflix (NASDAQ: NFLX) competitors, where are you? The world’s largest subscription Internet video provider has spent the last year hobbled by self-inflicted wounds which sent its customers’ satisfaction levels plummeting and forced the company to pause international expansion plans. With millions of angered streamers eager to shop around, and with choice international markets now open for the taking, its never been a better time to pick on Reed Hastings & Co.

And yet no one has stepped up to seriously challenge the lucrative market that Netflix has left so poorly defended. Worse yet for these would-be challengers, there are signs that Netflix is beginning to recover from last year’s PR fiasco. In other words, for the companies that aim to poach a significant block of Netflix’s 23 million customers, time may be running out on the best opportunity they’ve ever had.

A Brand Tsunami

Just how big of an opening did Netflix create for competitors? Consider that before the company implemented the ill-fated price hike in July of last year Netflix represented the gold standard in customer satisfaction, leading all Internet companies in Forsee’s e-retail satisfaction index (pdf) with a score of 87 out of 100. By the time the annual survey was next conducted, Netflix had slumped to an all-time low 79, ceding its top position to fellow streamer, Amazon (NASDAQ: AMZN).

The damage to the Netflix brand spread to engulf two of the company’s top strategies, as management explained in a subsequent earnings release (pdf) that “we greatly upset many domestic Netflix members…and in doing so, we’ve hurt our hard earned reputation, and stalled our domestic growth.” Later in the statement, management said they were putting a “pause” on international expansion plans too.

Its not overstatement to say that Netflix had entered a full-blown crisis. With subscribers fleeing and satisfaction among those that remained at all time lows, the company was in no shape to resume domestic growth, let alone target new markets abroad. Since then, Netflix has been wearing a huge “kick me” sign on its back, inviting competition to oblige.

Let’s survey the field to see how the major streaming challengers have responded.

- Amazon

Amazon has shown a perplexing eagerness to lose big money on everything from free shipping, to e-readers, to now high-end fashion. But the company has so far declined to commit serious resources into the video streaming space. Amazon has indeed been adding content to the company’s fledgling streaming service that comes free with an $80 yearly Amazon Prime membership. But it has also seen its own share of PR problems, getting called out last month for “massively inflating” its streaming library size.

Amazon’s margins are already razor thin, and it doesn’t have much operating income to toss around. Still, the company should be able to find room for the $2 billion or so in annual spending that would constitute a serious challenge in the streaming market.

Maybe such a commitment is already under way, but Amazon is characteristically opaque with investors on the subject. Netflix, for its part, has said that it carries “essentially all” of the Amazon streaming content and claims that it hasn’t seen subscribers choosing the Prime service in any material numbers. Who’s next?

- Coinstar (NASDAQ: CSTR)

Coinstar’s Redbox has been the biggest beneficiary of Netflix’s stumbles this past year as it picked up many of the DVD subscribers that fled Netflix following the price hike. The company has a strong presence in DVD, having blanketed the country with kiosks and establishing a relationship with millions of entertainment-seekers. But costs forced Coinstar to implement its own price hike, to $1.20 a day from $1.00 for DVD rentals, a reminder that the economics point to online streaming as the future growth source.

To that end, Coinstar announced a partnership with Verizon (NYSE: VZ) to directly compete with Netflix in streaming, maybe as early as the second half of this year. Maybe this service will build up a formidable content offering. Maybe it will gain comparable ubiquity on TVs, gaming consoles, and other devices. And maybe it can do this at a price point that makes it a compelling choice for customers without breaking both Coinstar and Verizon’s balance sheets.

But it took Netflix years to achieve each of those objectives, even with the early benefit of first-mover advantage and the more recent benefit of scale. We don’t know the details of the coming Coinstar/Verizon offering, but we do know that the companies have a tough road to walk here.

- Hulu

In contrast to Coinstar, Hulu, a joint project by Comcast (NASDAQ: CMCSA), News Corp., and Disney (NYSE: DIS), already has a strong online streaming presence. The company’s content is focused on current season TV but Netflix’s stumbles have offered a window for the streamer to expand into the Netflix territory of movies and deeper prior-season offerings.

But Hulu has been plagued by high-level disagreements about its strategic direction, with media owners perfectly willing to sacrifice Hulu’s growth in order to “safeguard their traditional TV businesses.” It seems like the media companies have won that fight over at Hulu headquarters so aggressive expansion into Netflix turf doesn’t appear to be in the cards.

A passing storm?

We’re now one year into the three years that Netflix has said it expects the recovery from its self-generated debacle to take. In that time, the company’s subscriber satisfaction figures have bottomed out and have even started climbing again, reaching a respectable 81 in the latest e-retail satisfaction survey. Growth has also returned to the streaming service. Most surprisingly, profitability has reached the point where management canceled the “pause” on international expansion.

Netflix is busy digging itself out of a massive hole, leaving the company’s grasp on the global Internet video market the most tenuous that it has ever been. Yet the 23 million member question remains: Just who is going to step up and do something about it?

Full Disclosure: I own shares of Netflix and Disney. You can see a full listing of my current stock holdings here. Don’t forget to subscribe to stay current on posts.

Photo by loop_oh.

Trip Advisor (NASDAQ: TRIP) spent little time celebrating its first few months as an independent public company. Instead, the travel research site was busy crafting an impressive ecosystem in the online travel space.

Investors responded to the positive results of that effort by bidding shares up by nearly 20 percent on Wednesday. In the short time since the company’s spin-off from Expedia (NASDAQ: EXPE), TRIP’s stock has surged over 60 percent. With dramatic moves like that, its fair to ask if the company’s growth has peaked, or if this trip is just getting started.

The Preparation

TRIP undeniably made some impressive progress in building momentum towards that “virtuous cycle” of user-generated travel content leading to more engagement, leading to more users, leading to more content.

In that vein, here are a few of the key wins that the company announced in its first quarter results (pdf):

• Reached 60 million reviews and ratings from users.
• Deepened and extended Facebook integration to over 120 million users.
• Increased syndication and licensing of content including to a new partner, Wyndham Hotels.
• Surpassed 17 million downloads of the company’s mobile app.

In terms of crafting a robust ecosystem of highly engaged users supplying reviews on the one side – with motivated hotel, airline, and restaurant merchants seeking business and positive reviews on the other, you couldn’t have asked for a better quarter.

Looking ahead, the company can also expect international sales to play a key role in growth. TRIP’s revenue is still dominated by domestic sales – which made up 52 percent of sales in the quarter – leaving the company plenty of room to expand towards the 80 percent in international sales that is traditionally booked by Priceline (NASDAQ: PCLN).

Trends in the travel industry look favorable to TRIP’s growth, too. As airline ticket prices continue to climb, TRIP’s advertising business model should benefit from the “increased shopping behavior” that has forced travel sites like Priceline and Orbitz (NYSE: OWW) to increase marketing spend while chasing after travel bookings. A growing middle class in emerging markets, meanwhile, looks to lift all boats in the industry as the travel market expands and continues its migration online.

The Payoff

Positioning itself to take full advantage as travel search becomes more social and more mobile, TRIP has been working to build up critical mass, with the ultimate goal of capturing more and more advertising dollars from Google (NASDAQ: GOOG). After all, every one of those 17 million downloaded apps represents another user that can search for flights, hotels, and restaurants outside of the reach of the gorilla of desktop search.

Results so far are trending well for the upstart. Click based advertising, where TRIP derives most of its revenue, was up 20 percent this quarter, helping net income surge over 100 percent.

The Jetlag

But it hasn’t been all smooth travel for TRIP. Selling and marketing expenses grew faster than revenue last quarter, and nearly set a new high as a percentage of revenue. That’s surprising, given that the increased user base and Facebook integration should be leading to more organic growth. While too early to say what this bump in spending means, its true that if TRIP can’t continue to bring more people into its ecosystem in a cost-effective way, the entire growth model is at risk.

The company’s separation from Expedia also complicates the growth picture. TRIP still relies on Expedia as its single largest advertiser. Under terms of the spin-off agreement, Expedia will be paying a lower rate on purchases from TRIP in 2012, putting a drag on revenue growth that the company will have to make up elsewhere. The split from Expedia also entails substantial costs that have to work their way through TRIP’s bottom line in the coming quarters.

But the main roadblock I see for TRIP – and it’s a big one – is Google. The online travel market touches local businesses and a wide range of global merchants. Its hard to imagine Google ceding that ground to anyone without a fight. In fact, Google already dipped its toes into airfare search and is now tinkering with a new “hotel finder” service that promises at least as much functionality as Trip Advisor’s.

Bottom Line

Still, a powerful suite of mobile apps that combine social sharing with deep Facebook integration can go a long way toward sustaining early growth for a disruptive business like TRIP. Just look at Zynga’s early days for an example of that cycle at work.

TRIP has a solid lead building out a compelling ecosystem around travel research that will make it hard for even deep-pocketed competitors to wrest its users away. And the company’s international sales have plenty of room to expand. As far as growth goes, then, I think this trip’s far from over.

Full Disclosure: None. You can see a full listing of my current stock holdings here. Don’t forget to subscribe to stay current on posts.

Photo Credit

The stock market is not a game, but that doesn’t mean it can’t be fun. Trying to “play” the market’s short term swings is a loser’s game, but there is one stock market game that I think individual investors should play, called Motley Fool CAPS. So much more than a game, CAPS helps you find investment ideas, track progress, and test yourself against a huge group of motivated investors, including me. And its fun, too.

What is it?

CAPS is a community rating system that uses the stock picks of thousands of players to punch out a collective sentiment on any given stock, displayed in stars. Five star stocks have the highest community sentiment, 1 star stocks have the lowest. Players simply give a stock a “thumbs up” or “thumbs down” depending on whether they think it will outperform or underperform the S&P 500. The top 20 percent of CAPS stock pickers, so called “all-stars,” are given more weight in the community star calculation. This means that the system not only gets better with more picks, but it learns which players are having the best success and rewards them, and the community, by giving their picks greater weight in any stock’s ranking.

Does it work?

As a predictive system, there’s actually some good evidence that it does work. This research study(pdf) analyzed over 1 million CAPS picks a few years back and compared them against actual performance. They found ”consistent evidence that CAPS picks yield information that predicts future stock market returns for individual stocks.” But I don’t use CAPS for its predictive power, even though I do pay attention to what the community rates the stocks I’m researching. I use CAPS mainly as an investing tool, and that’s where it really shines:

Your Shopping Cart

Whether you buy into the whole wisdom of crowds concept or not, CAPS is a great tool for tracking and watch-listing companies that you want to follow. You can keep an eye on the total sentiment, see what investors are saying about the company, and follow the stock’s performance vs. the S&P 500 over time.

Here’s an example of my pick on Southwest Airlines (LUV). The black line shows when I picked the stock to outperform.

As you can see, I’m losing on this particular pick, down about 10 points vs. the S&P 500.

Your Crayon

Peter Lynch famously said “never invest in an idea you can’t illustrate with a crayon.” CAPS makes a great crayon by letting you add pitches that you can attach to any of your picks. Get in the habit of adding a quick pitch for every stock and after a while, you’ll have a catalogue you can return to whenever you are thinking about buying more or selling.

I find these really helpful to come back to a few months after I’ve bought a stock. For example, here’s what I wrote when I bought Hasbro (HAS) two years ago:

People pay a premium for entertainment, and for quality brands. Hasbro has both of these in spades. Boosting dividends witih room to spare shows how shareholder-friendly this company is. Small cap growth potential with big cap dividend payout while you wait, what’s not to like?

Keep your pitch short and testable if you can, that way you can evaluate how well it has panned out. Do this for everything you buy and you’ll have a complete history of your investment theses over time.

Your Playground

The itch to buy or sell stocks based on short term ideas is always there. Is oil at a peak? Is AIG heading for bankruptcy? Will XYZ drug company win the patent and jump 80 percent? Some investors scratch that itch by setting aside “play money” to test out these kinds of theories.

I use CAPS instead, and it lets me indulge my short-term trading impulses and even bet against a few companies from time to time. Satisfy your inner speculator with some risky picks in the CAPS game, and not in your portfolio.

Your Stat Sheet

CAPS does a great job answering the question, “How am I performing compared to my peers?” The number it assignes to you is a percentile ranking telling you what percentage of the community you are outperforming. The coveted 80 percent threshold is where you become an “all-star” with greater weight given to your picks.

The rankings can also tell you a bit about your investing style. My stats, for example, suggest that I’m not much better than a coin flip (just 52 percent) when it comes to picking a winner. But when I’ve picked winners, they tended to outperform by a lot (1570 over the S&P 500). Here’s what my score breakdown looks like, after over 3 years of playing:

Your Stalker Tool

Lastly, CAPS is a great way to keep tabs on your fellow investors. Many of the names you would recognize are there, and you can see which Wall Street players are leading (David Einhorn of Greenlight Capital at 98.97%), and which are loosing (Tobin Smith of ChangeWave at less than 20%).

You can measure yourself against any of the investors you like to follow, and track your progress towards their numbers over time. I’m a big fan of the investing style of Motley Fool’s David Gardner, for example (CAPS name TMFSpiffyPop) and I keep up with his stats and picks. As you can see, I’m nowhere close…yet!

Bottom Line: Get in the Game

I think CAPS is an incredibly deep and often overlooked free tool that individual investors can use to track stocks, test theories, and follow friends and other investors. If you’re already a player, add me as a favorite and let me know your handle.

If you aren’t yet, what are you waiting for? Join the game, start “playing,” and have some fun! My CAPS name is SigmaSwan.

Full Disclosure: I own shares in HAS, LUV.

Photo Credit

The wallet’s days are numbered, thanks to the coming boom in mobile payments.

Scrambling to get established in what promises to become a large global business in the next few years,  a diverse group of competitors – from mobile phone producers to credit card companies to tech giants – are all jockeying for position as this new payment channel begins to take off.

Predictably, the major tech competitors have focused on technology as the key to taking mobile payments into the mass market. Central to that strategy is a technology called near field communication which involves a secure chip, installed in mobile phones, that can safely store and transmit payment credentials from any mobile device, allowing users to make payments by bumping their phone on special recievers.

But while many in the industry, particularly Google (NASDAQ: GOOG), struggle to get the technology just right, eBay’s (NASDAQ: EBAY) PayPal service may just win the day with one of the lowest-tech solutions of all: the number keypad.

The Tri-Fold Deluxe Model

Less than a year ago, Google was beside itself about the potential for mobile payments using phones, probably because the wallet passes CEO Larry Page’s ”toothbrush” test: it is used by millions of people at least once a day.

At the D9 technology conference last June, company executives talked up their digital solution, Google Wallet, aimed at capturing a big piece of the 80-90 percent of commerce that is still done locally.

The rush to create the standard digital wallet was on, joined also by Visa (NYSE: V) with its V.me service. In the mix, too, are wireless providers AT&T (NYSE: T) and Verizon (NYSE: VZ), with their own mobile payments venture called ISIS. Google’s offering, because it includes payment and local promotions, is the most ambitious of the bunch.

About that massive number of in-store transactions that could be tied to local advertising, offers, and search, Google executives said “we’re assuming its going to the mobile phone.”

But it hasn’t gone exactly to Google’s plan. Credit card companies have been slow to partner with the service, leaving Google Wallet with a sparse selection of cards. AT&T and Verizon have committed to their own solutions too, leaving the Google service shackled to just a few Android based Sprint phones. Finally, merchants have been slow to adopt the point-of-sale upgrades needed for processing payments at their end.

In short, the Google wallet has had a tough year, to the point that it hardly warranted a mention in the company’s most recent earnings call.

The Money Clip

But at least one competitor was more than happy to discuss mobile payments this past quarter: eBay. The company’s PayPal service, with an installed base of over 100 million users at the start, introduced two innovations early this year that it hopes will expand its already successful payment service to the offline world.

First, the company released its mobile point-of-sale solution to small businesses. As an attachment that turns any Android or Apple iPhone into a mobile cash register, the card reader accepts all types of payment options and has received an initial response from merchants that the company called “fantastic.”

The PayPal service also began rolling out its first retailer based point-of-sale product to Home Depot (NYSE: HD) locations nationally, allowing customers to shop “without their wallets, credit cards or even their mobile phones” by simply keying in their phone number and their PayPal PIN. Critically, the product works with keypads that are already in the store, so there’s no need for expensive retailer upgrades.

Brushing off complaints about potential security issues, eBay has been encouraged by the results so far, and plans a major push to promote the service starting next month, with more retailers in the pipeline for next year.

Overall, CEO John Donahoe described the team as “very excited about the off-line opportunity for PayPal,” with the potiential to “expand PayPal’s served market from a $500 million market to a $10 trillion market.”

Bottom Line

The mobile payments business is a burgeoning industry with large, global market potential – and competition over it will be fierce in the coming years.

For my money, forget sophisticated radio-frequency technologies, encrypted microchips, and new recievers. The smart cyber-cash is on eBay, the company that’s been most successful at stripping technology out of the digital wallet.

Full Disclosure: None you can see a list of my current holdings here.

Thanks to 401K for the image.

If you are coming to the Netflix (NASDAQ: NFLX) streaming website looking for a particular movie or show, you will probably be disappointed. Netflix doesn’t have all – or even most – of the popular selections.

Yet Netflix users streamed over 2 billion hours last quarter, at an average of 30 hours per subscriber. Just as it did when it operated as a DVD-only service, Netflix is succeeding in driving usage of back-catalog titles.

But without a deep new-release selection to fall back on, the stakes are now much higher for the company as it tries to help users navigate its large – but limited – selection.

Less Selection
This kind of limited selection isn’t the norm for Internet companies. Ebay boasts on its website that customers can buy and sell “practically anything” through its service. Amazon (NASDAQ: AMZN) bragged in its latest shareholder letter (pdf) that the selection it offers wouldn’t even be “possible” in an actual store.

If Amazon was a physical store, though, the company estimates that it would ”occupy 6 football fields.”

Apple (NASDAQ: AAPL) tells prospective iTunes customers that its virtual store has “everything you need to be entertained,” including “millions” of TV shows, movies, and songs that help deliver on that expansive promise.

Netflix, meanwhile, makes much less sweeping commitments on its sign up page, pointing to a mere “thousands of movies and TV episodes.” For a new-economy, Internet-centered company, that pitch seems a bit underwhelming.

What’s more, Netflix’s management readily admits the catalog’s limitations. “At $7.99 a month, we can’t provide unlimited content,” CEO Reed Hastings has said. “We don’t have everything, but we have a great bargain,” Hastings said. “That’s what we want the brand proposition to be.”

The company’s limited offering is why Netflix needs you to browse, surf, peruse – anything but search – its catalog of streaming titles. The odds are just too high that the company won’t have the particular title you’re looking for. And after a few failed queries, you are likely to end up unsatisfied with the service, and ready to spend your $8 some place else.

But if searching isn’t helping users choose those 30-plus hours of streaming time per month, the company’s recommendations engine is. And in the new streaming-only model that Netflix has bet its future on, that engine is more than a service enhancement, it is central to the company’s success.

Higher Stakes
Back when Netflix was building its DVD empire the company held a $1 million data mining contest, offering an award to the first engineering team that could improve its recommendations algorithm by 10%. After thousands of hours of work, a few teams were able to collaborate and finally cross that threshold.

The result was an even better 5-star recommendation engine that simply worked to juice Netflix’s margins by drawing usage away from expensive new releases while also improving users’ satisfaction with the service. It worked brilliantly, driving demand for cheaper back-catalog DVD shipments that helped keep expensive new releases to a minority of Netflix’s usage.

In the new streaming model, though, Netflix’s costs are mostly fixed and the content catalog is anything but comprehensive. That means the consequences of a failure for the recommendation engine are much more severe.

Instead of just choosing a costlier new release and dinging profits a bit, customers that aren’t swayed by recommendations have nowhere else to go. Either they like what Netflix recommends, or they become ex-customers.

Last week, at the company’s blog, Netflix opened up about how the recommendation engine has been evolving and the results are encouraging:

“Now 75% of what people watch is from some sort of recommendation. We reached this point by continuously optimizing the member experience and have measured significant gains in member satisfaction whenever we improved the personalization for our members.”

According to the post, the recommendation engine is also getting more sophisticated, taking into account diversity, freshness, and similarity across movies or members.

And with Facebook integration now working its way into the service, it should be getting even easier for users to find something in the catalog that they want to watch, even if they don’t seek it out themselves.

Bottom Line
By splitting out the DVD service, Netflix has jettisoned its safety net of a comprehensive new-release selection that could catch unsatisfied subscribers before they choose to opt-out of the service. But as long as Netflix can keep you watching with its improved recommendation engine, you’ll stay engaged and the company won’t lose your business.

Just don’t hit that search button, Netflix begs you.

Full Disclosure: I own shares in Netflix and Apple. You can see a full list of my holdings here.

Ross Stores (ROST) is firing on all cylinders: setting 5-year highs on key metrics including sales, earnings, return on assets, and sales per square foot. The stock is at an all-time high, too. But is 21 times earnings really too much to pay for high performance like that?

Key Stats

Market Cap: $13B
P/E: 21x
Dividend Yield: 0.95%
Sales/Square Foot: $338

The Business

ROST is a clothing retailer with an interesting business model.  Known as an “off-price” seller, the company provides apparel and home fashion at 20% to 60% below department store prices.

Unlike other discount chains, though, ROST doesn’t achieve this discount by offering lower quality, off-brand, or prior-season fashions. Instead, ROST’s army of merchandise buyers have been perfecting the art of fashion purchasing, taking advantage of the market’s inefficiencies and leveraging the company’s flexibility in order to win significant discounts to department store prices on in-season, first-quality products.

The Operation

The company has been a model of operating efficiency over the past few years. Costs as a percentage of sales have declined steadily from 77.3 percent to 72.5 percent, helping net earnings roughly double as a percentage of sales since 2007. Return on assets have just about doubled in that time too, rising from 11 percent in 2007 to 20% last year.

In fact, just about every operating statistic worth tracking is at or near a 5 year high (ROE, book value, comp sales, and sales per square foot). ROST has also been squeezing efficiency out of increasing inventory turnover, helping the company’s capital position while also benefiting shoppers by keeping fresh product on the shelves.

The Growth

With 1,130 stores this year and 1,055 in 2010, ROST has been growing at a steady pace but still has plenty of room to expand. The company has just started a push into the Midwest region, opening 12 new stores in the Chicago area.  ROST aims to open about 60 new stores for all of 2012.

ROST expects total sales growth in the 1-2 percent range for 2012 but has consistently outpaced expectations on sales growth so far this year. The latest results were no exception, booking a healthy 10% comparable sales growth in March on top of 9% growth in February. Broadly speaking, ROST should also benefit from an improving economy because lower promotion levels at department stores allow ROST to widen its pricing lead.

The Competition

The department store and discount fashion sectors are both going through some major changes right now. Discounter Filene’s Basement closed up shop right after the holiday season ended. JC Penny (JCP) is also going through some structural problems, which may open up an opportunity for ROST to gain share directly from the struggling department store.

CEO Michael Balmuth mentioned the industry consolidation in the company’s latest conference call when he was asked how he thinks the company could continue to outperform the apparel industry as the economy improves. He said “a lot of retailers have gone away. So I think we find ourselves in a better position just by surviving and being a reasonably profitable retailer in this time.”

The Value

ROST vs. S&P 500

ROST reminds me – in a few ways – of one of my favorite retailers, Costco (COST). As a price leader with impressive selling efficiencies, the company has a defensible business model that delivers a low frills, treasure-hunt environment that is resonating with customers. The company’s effective buying strategies and product-flexibility also give it a solid competitive moat to fend off discount rivals by offering higher quality, lower priced, and fresher product on the shelves.

ROST has demonstrated an aim to return cash to shareholders, as the company just raised its dividend for the 19th year in a row. Stock buybacks are frequent, too with over 11 million shares purchased in 2011.

While I don’t think ROST has earned the high-20′s P/E ratio that COST sports, I still think the company is a bargain at just 21 times earnings, even at a 52-week high. With strong growth opportunities and a great competitive position in a consolidating retail industry, ROST looks to continue its impressive performance into 2012 and beyond.

Your Thoughts?

How would you feel about paying a premium for this discounter? Sound off in the comments section, below.

Full Disclosure: I own shares of COST. You can see a full list of my current holdings here.

Thanks to lynnsta for the image.

Good Reads

The markets are closed today, so here’s just a quick list of light reading to help fill the three-day void.

1. The JOBS act passes, and Wall Street is combing through it looking for loopholes: Wall Street Examines Fine Print in a Bill for Start-Ups @nytimes
2. A 50 Year Financial Game Plan @budgetsAreSexy
3. A great roundup of financial blog posts compiled by @myOwnAdvisor

Also a reminder: If you haven’t yet, don’t forget to do your taxes, and maybe open up that Roth IRA you’ve been meaning to.

Sigma Swan News

Two Sigma Swan posts were featured on the Motley Fool website including this week’s article on Google which got top billing on the site for the day. The other article, about Apple, was also well received.

Enjoy the weekend, and be good!

Thanks to stevendepolo for the image.

With its page-rank algorithm, Google (NASDAQ: GOOG) brought order to the Internet, which is an achievement that would be hard to overstate. Google’s success in ranking the usefulness of the vast number of websites on the Internet not-coincidentally made it the single most useful destination on the Internet – and one of the more profitable companies in the world. In return for weaving organization into the web, Google got a prize that was at least equal to that enormous achievement: the dominant position in search, at the head of the trillion-dollar information economy.

Evidence of the scale of that victory continues to flow into Google’s financials. The company most recently reported its first $10 billion sales quarter on revenue that surged 30% from the year-ago quarter. With over two thirds of the search market, Google leaves rivals Microsoft (NASDAQ: MSFT) and Yahoo (NASDAQ: YHOO) comfortably behind.

But search is evolving rapidly: it’s getting more mobile, more social, and more vocal. Each of these emerging trends carry structural risks to Google’s dominance of the industry. And together they could threaten the company’s position as the number one gatekeeper to the web’s information.

1) Mobile

As sales of PCs continue to flatline and sales of tablets and and other high-powered mobile devices surge, Internet search is increasingly moving away from desktops. But the risk to Google is more than just the fact that the company must now compete on a much wider range of devices to make itself the go-to choice on everything from a 4.5-inch Android phone made by Samsung to a 10-inch iPad tablet produced by Apple (NASDAQ: AAPL).

Apps are decentralizing the search process and that represents a major risk to the Internet’s central hub. The Apple-pioneered mobile app economy is pushing search out of Internet browsers and into apps. It turns out that given the choice, many users are searching for movie tickets on their Fandango app, products in their Amazon app, and restaurants in their Yelp app.

One of the few ways to capture those wayward search dollars is to offer ads within the apps, as Apple has been doing with its iAd program. That’s why the operating system war between Android and iOS is so critical to Google. It’s also likely the reason Google may be getting into the tablet business, even after trying – and failing – a similar strategy with its own phone in 2010. Google needs a win here, and while it may wrestle market share away from Apple, I just don’t see the company dominating this space.

2) Social

Against that platform-war backdrop, social sharing is also rising as a potentially serious challenge to the “authority” based algorithm that Google innovated and that still sits at the heart of search today.

Google determines a web page’s authority by looking at the number and quality of sources that link to that page. Its a logic that works brilliantly for evaluating the strength of academic papers and Google masterfully applied it to the Internet and succeeded in rank-ordering the web so that when you search for something, the source with the most authority on that topic always comes up first.

But authority has its limits, as people also tend to give a lot of weight to recommendations from people they know.  Microsoft is now integrating Facebook recommendations in its Bing search engine, dramatically personalizing search results in a way that portends to change the search model at a basic level.

But Facebook and Twitter aren’t playing nice, and are refusing to share their social information with Google. If Google wants social content to include in its search results, it seems it will just have to go out and create its own social network. Enter Google+, the company’s latest major strategic push that now boasts around 100 million members with so-far underwhelming levels of engagement.

Again, Google has the resources and the user base to eventually make in-roads with its own social network, but I don’t see the company having anywhere near the level of success enjoyed by the established players.

3) Vocal

Finally, the human voice is warming up to have its own impact on search as well, in still more difficult ways for Google. Voice technology pioneer Nuance Communications (NASDAQ: NUAN), threatens to be a game-changer in the search space with voice recognition software that may change the way we interact with all of our devices.

Voice based searching is already growing on devices as varied as Apple’s iPhone to Microsoft’s Xbox 360. The question-answer voice search model is very different than the browse-and-search model that Google now delivers. And with voice, the search portion happens completely behind the scenes and away from the user, threatening to cut Google out of the equation completely.

Bottom Line

Google, more than any single company, can arguably claim to be responsible for much of the value that the web delivers. But unless the company can soon transform itself into an amazing mobile device producer, a fantastic app developer, a successful social network giant, and a voice technology provider, its days of dominating search are over.

Full Disclosure: I own shares of Apple. For a full list of my current holdings, check here.

Don’t forget to subscribe, to stay current on all posts.

Thanks to EvelynGiggles for the image.

Today, the largest lottery payout in history – $540 million in “Mega Millions” – may go to one lucky soul who beats the overwhelming odds of 175,000,000 to 1.

Unfortunately, it won’t be me.

Since I didn’t buy a ticket my odds are even worse than that (slightly). Instead, I’m counting on the stock market as my eventual path out of the workforce and into retirement.

But both stock market investing and the lottery can be boiled down to the important exercise of estimating your odds. After all, someone is selling me that stock that I’m purchasing. What are the odds that I’m right…and the person on the other end of the trade is wrong?

Its a question that all investors face. To help answer it, here are a few investing strategies that have a good track record for squeezing the best odds possible out of investing in the stock market:

1) Crisis Investing

“People are always asking me where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable?”

Ever since super-investor John Templeton showed that there were profits to be made in the most depressing corners of the stock market, investors have been shopping the 52-week-low aisles, trying to follow this advice.

Whether it was in airlines after the attacks on 9/11, or in banks right after the financial crisis in 2008/2009, world events have provided plenty of opportunities for investors to step in and buy when – as the wall street saying goes – there is “blood in the streets.”

Contrarian investing like this requires some serious confidence in your own judgment, and it also hinges on having plenty of liquidity at the moment when cash is king and when everyone else is desperate to cash out.

2) Dividend Growth Investing

This strategy focuses on the elite group of companies that have consistently paid and raised dividends for an extended period – sometimes 25 years or more. Investing in these aristocrats carries little risk of income cuts and some decent odds of a dividend hike.

While most of the blue-chip companies that make up these lists have long since seen their high-growth days pass, the predictable, diversified, and defensible profits they pull in can pad an investors portfolio with a steady stream of high-quality earnings.

And as a bonus, dividend reinvestment during times when the market is down allows a dividend growth investor to take advantage of dollar-cost averaging and gives a nice consolation while he waits for capital appreciation to catch up.

Best summed up in Jeremy Siegel’s book Stocks for the Long Run, this strategy values what he calls the “tried and true” over the “bold and new.” Think Altria, not Facebook.

3) Deep Value

“In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.”

This is the strategy that world famous investor Warren Buffett picked up from Benjamin Graham. Focused on distressed companies with price/book ratios at or below 1.0 and price/earnings ratios in the low single digits, this investment strategy is not for the risk-averse because many of these companies are on the brink of bankruptcy.

Deep value investors aim to purchase stocks in companies that are trading below their fair value, sometimes below what they could be sold for in a liquidation sale. The strategy has been compared to scanning the sidewalk for used cigarettes, finding those that are still good for a few puffs, and profiting from the former-owner’s hasty disregard.

While Buffett began investing this way, his fantastic investing performance wasn’t unleashed until he met Charles Munger, who introduced him to my personal favorite investing strategy:

4) Wonderful Businesses

“If you find three wonderful businesses in your life, you’ll get very rich.”

Charles Munger said these words in a shareholder’s meeting for Berkshire Hathaway in 1996. The next year, he confessed that “the single biggest recurring mistake I’ve made has been my reluctance to pay up for outstanding businesses.”

As you can see from the quotes above, this investment strategy isn’t focused on price, but on characteristics – like brand power, management quality, and competitive moats – which don’t show up in financial statements. Buffett made that clear himself when he said that he’d much rather buy a wonderful business at a fair price than a fair business at a wonderful price. It was the combination of Buffett’s fantastic valuation skills and Munger’s eye for stellar business models that let the duo redefine what was possible with stock market success.

Put it All Together

A solid investment strategy pulls together elements from each of these investing masters:

• Like Templeton, look first to areas of the market that wall street has written off, avoid super-popular stocks, and keep a significant fund available for opportunistic buying in case of market turmoil.
• Like Siegel, remind yourself that the best companies of the next decade are often the best companies of the last decade, and anchor your portfolio with proven, long-term winners.
• Like Graham, understand that what’s smart at one price is dumb at another one.
• Like Buffett and Munger, focus on finding great companies and don’t be afraid to pay up for them.

Thanks to Montage for the image.