Which brings me to this issue’s recommendation.

It’s pharmaceutical giant Novartis (NVS), which is headquartered in Basel, Switzerland, but does business in 140 countries all over the world. Created in 1996 from the merger of Ciba-Geigy and Sandoz, the company generated $51 billion in revenues last year. Its biggest market was the U.S., accounting for 32% of revenues. Its biggest revenue-generators included Gleevec, Diovan, Lucentis, Amoxicillin, Augmentin, Claritin, and Excedrin. And it’s growing at a good pace, in large part by acquiring smaller competitors with valuable properties. Last year it acquired eye care giant Alcon.

In the fourth quarter of 2010, Novartis saw revenues grow 10% from the year before, to $14.5 billion. Profit margins were 18.7%. And the dividend yield was a solid 3.0%.

It’s not a hot stock; NVS is owned by some 600 mutual funds, most of which are in for the long haul. But it is decently valued.

In fact, the latest issue of Cabot Benjamin Graham Value Letter says that the stock, currently trading at 56, can be bought anywhere under 55 … buying low gets you a Margin of Safety. And it can be held until at least 72.90, above which it will be overvalued and therefore carry excessive risk.

I think it’s a good choice for conservative growth investors who like the stability of some income from dividends.

For more, click here.

Then the French rioted over President Sarkozy’s plan to raise the retirement age from 60 to 62. (He succeeded last week.)

Then the English rioted over their government’s plan to triple college tuitions as part of a multi-faceted effort to stop the country’s financial hemorrhaging.

But here in the U.S. … we haven’t had any serious unrest yet, and the reason is not because Americans are better behaved.

It’s because our government hasn’t really done anything to get out of the deep hole we’re in!

Republicans want to cut spending.

Democrats want to raise taxes.

And neither side wants to compromise, for fear of being perceived as soft, losing out on lobbyists’ backing and losing the next election.

In the meantime, our national debt grows.

And that chart simply cannot grow to the sky!

The collapse of the housing industry under a mountain of bad debt was just a preview of what will happen if this trend continues. If this mountain collapses—say the Chinese stop buying our bonds—millions of Americans are going to start envying those vacationers who were stranded on a cruise ship last week (more about them later).

So occasionally, a politician takes a stab at the problem.

In 1982, the Greenspan Commission focused on reforming Social Security, and after that the program was actually in the black for a while before falling back into the red.

In 1994, there was the Bipartisan Commission on Entitlements and Tax Reform, composed of 10 U.S. Senators, 10 members of Congress and 12 members of the public, along with a professional staff of 27.

According to the Federal Register, “The Commission failed to achieve consensus and went out of business without issuing any recommendations. Instead, its final report was a compilation of competing proposals,” which were ignored by the Administration.

In 2005, there was the President’s Advisory Panel on Federal Tax Reform, a bipartisan group that, among other things, called for trimming the tax deduction on home interest, a move that might have stemmed the over-inflation of the housing bubble that popped in 2007-2008.

And now we have the National Commission on Fiscal Responsibility and Reform, a bipartisan group tasked by President Obama in February with finding a sensible path out of our economic mess.

Of the 18 members in the group, six are members of the U.S. Senate, six are members of the U.S. House of Representatives and six were appointed by the President.

Ten are Democrats and eight are Republicans.

To be fair, what the group’s leaders, Alan Simpson and Erskine Bowles, released last week is not a final plan … it’s a “discussion draft,” which the leaders released early because leaks seem inevitable and—perhaps— because getting early feedback on the draft will help them shape the final recommendations into something that can actually be implemented.

And the good news is there’s a lot to like in this draft, as well as plenty for party stalwarts on both sides of the aisle to criticize. Among the items the draft proposes:

First, reduce discretionary spending by $200 billion by reducing defense spending by 15%, closing one third of overseas bases, eliminating earmarks, and cutting the federal work force by 10%. Sounds good to me.

Second, generate $100 billion in increased tax revenues by increasing the federal gasoline tax by 15 cents a gallon, increasing the capital gains tax to 28%, restoring the inheritance tax to 45%, eliminating the mortgage-interest deduction for second homes, home-equity loans and mortgages over $500,000 and eliminating the deduction for employer-provided healthcare benefits. I think the last two have been instrumental in driving up the costs of housing and healthcare, and as for the gas tax, I’d raise it even more, while eliminating the EPA, which foolishly tries to determine what kinds of cars we should all drive.

Third, maintain the Medicare cost controls associated with the recent health care reform legislation, while offering doctors new protection against malpractice lawsuits and strengthening the ability of the Independent Payment Advisory Board to squeeze costs. No comment; I’m waiting to see what they can do.

Fourth, reduce entitlements, including farm subsidies, civilian and military federal pensions and student loan subsidies. Absolutely.

Fifth, reform Social Security by increasing the amount of income subject to the payroll tax from $106,800 this year to $190,000 in 2020, and increasing the retirement age from 67 to 69 … gradually. Yes, yes, yes.

The co-chairs also recommended reducing the corporate tax rate from 35% to a more internationally competitive 26%.

Again, this is a draft, not a proposal. The final proposal is due December 1, and it needs to be favored by 14 of the commission’s 18 members to trigger a vote in Congress.

But it’s a start.

And I think that if anything remotely resembling this is actually enacted, it will provide a huge boost to the U.S. economy, as people will once again have more money to spend where they want to spend it, and not where their government foolishly spends it.

Of course, if the talk gets serious, no doubt there will be massive protests, and rioting, too. But if that’s the price of progress, I look forward to it.

Thus Ford became the only U.S. President who was elected neither President nor Vice President, while Nixon, who was (and remains) the only person to be elected twice to both offices, became (and remains) the only President to resign!

But at least one of Nixon’s greatest achievements has born wonderful fruit.  When Sino-Soviet relations began to deteriorate, Nixon saw the opportunity to get China on our side, and in 1972 he visited Mao Zedong in Beijing.  Thirty-eight years later, China is a key trading partner of the U.S. as well as the second-largest economy on earth!

Thirty-eight years ago, no one imagined this state of affairs was possible.
Similarly, none of us can know what’s coming 38 years down the road.  But I think it will be good!

Editor’s Note: One effect of Nixon’s visit and the booming Chinese economy is that Cabot China & Emerging Markets Report remains the top-performing investment advisory of the past five years, with a compound annual return of 17.9%

For more details, click here.

—

When I was in eighth grade, I took third place in the school science fair with an exhibit on Bernoulli’s principle.  Named for Daniel Bernoulli (1700-1782) the principle states that as the speed of a fluid increases, pressure decreases … and thus explains how airplanes fly.  My exhibit included a model airplane wing that lifted when a fan was turned on.  (My father was trained as an aeronautical engineer, so he was a valuable “resource.”)  And my prize was a hardcover copy of the book, The Way Things Work, which was chock full of two-color illustrations and explanations about how things worked.  These things included refrigerators, magnets, sewing machines, forklifts, televisions, X-rays, deadbolts, AM radios, machine guns, submarines, etc.

I loved that book … and I still have it.

But that book is useless at explaining how all the new stuff in my house works, from the Comcast router I have to restart at least once a week, to the Moxi DVR that enables me to avoid watching commercials, to the iPhone that’s much more than a phone.  Happily, the answers to all my questions about them are on the Internet.

And these days I’m less interested in how machines work, and more interested in how people work (or don’t), and in how the institutions made up of people work (or don’t).

So today I present my personal list of five programs that aren’t working, followed by five good things.

Five Programs That Aren’t Working

1. Our national balance sheet is a mess, and destined to get worse unless politicians make some hard choices.  My suggestions include progressively raising the retirement age, as well as the age at which people qualify for Social Security and Medicare; simplifying the tax code; putting the responsibility for health care back on the individual; and reducing spending on foreign military entanglements.  And why can’t our politicians do these things?  Because they care too much about being re-elected, and about pandering to the constituents of their home state.  Thus the country suffers.

2. We continue to consume excessive amounts of oil, both domestic and imported, clinging to the habits of an idealized past while reluctantly being dragged to a future that promises limitless non-polluting energy from the sun and wind.  The impediments to progress include lobbyists from our massive oil and gas complex as well as all who benefit in the short term from their money.

3. Obesity rates are still rising in this country, costing us untold billions in healthcare dollars, yet we’ve been unable to halt the trend.  Why?  Because the power of the corn industry, the soft drink industry, the processed food industry, the fast-food industry and all their lobbyists in Washington are too influential in Congress.  There’s much more wrong with our health care/insurance system but curing the obesity problem would provide the greatest benefit.

4. I’ve been delayed by a lot of stimulus-funded road projects over the past year, but the stimulus isn’t working as promised.  Why?  It’s not simply because those projects themselves have caused untold millions of hours of delays.  It’s because baby boomers have passed their point of peak consumption—not coincidentally at the same time housing prices peaked—and now they’re preparing for retirement.  It’s because the lingering recession and stubbornly high unemployment have increased the sense of uncertainty among consumers, and thus increased their reluctance to spend.  And it’s because businesses recognize this slowing demand—as well as increasingly costly and restrictive regulations—and conserve cash to get through the hard times.  Implementing the suggestions I made in #1 would help.

5. For far too long we’ve allowed our public education system to be controlled by the interests of the employees (the teachers), not the customers, and the results has been substandard achievement compared to other developed countries.  Happily, the Democratic establishment, heretofore the biggest beneficiary of the unions’ money, has begun to recognize the problem, and to see the gains that can be achieved through implementing systems of accountability, but we have along way to go.

Criticizing is easy, and I don’t want to be labeled a crank.  So I’m going to finish today with five good things.

1. Apple (AAPL) makes great products that make our lives both more productive and more enjoyable.  And that’s great progress.  The stock has been building a base around 260 for nearly four months, which is a positive technical pattern.  Furthermore, editor Roy Ward of Cabot Benjamin Graham Value Letter wrote this last week:  “CEO Steve Jobs and company have a unique ability to identify what customers want, produce easy-to-use products and launch huge marketing campaigns to create demand.  The iPad helped sales soar 88% and EPS more than double in the latest quarter. In addition to gaining market share in the computer, smart phone and tablet sectors, we believe Apple will launch a new subscription-based TV service and a new multi-task mini-computer. We expect Apple’s earnings to grow at a rapid 24% pace during the next five years. At 14.7 times our one-year forward EPS estimate, AAPL shares are clearly undervalued.”

For more, click here.

2. Momentum to undo our national prohibition of marijuana is growing, fueled in part by the hunt by cash-strapped governments for new sources of revenue.  Taxes on the sales of marijuana fit the bill, and as production chains are institutionalized, I look forward to a growing standardization of quality as well as diminished funding of criminal gangs, which will bring marvelous unanticipated benefits in both the U.S. and Mexico.

3. Momentum behind the solar power movement is picking up again, driven not so much by government action as by the actions of forward-looking individuals and institutions who don’t mind paying extra right now to get a clean source of power that will be insulated from higher oil prices in the future.  While there are many attractive companies in the solar cell business, I think one of the smartest plays is a company that makes the electric inverters that efficiently process that power so it’s suitable for the home, business and/or the electric grid.  The company is Power-One (PWER), and here’s what editor Michael Cintolo wrote in a recent issue of Cabot Top Ten Weekly.  “Not long ago, the bulk of its business involved manufacturing AC/DC and DC/AC converters for companies in the telecom, computer and office equipment markets.  But between competition and the great slowdown of 2008, 2009, the company was getting killed.  Then the booming market for alternative energy presented a market opportunity, and management took aim at that market and hit a bull’s-eye!  A year ago, 18% of the company’s business involved making inverters for solar power farms and wind power farms, so that their energy could be distributed to the grid.  Now that percentage is 66%, and rising!  Revenue growth is accelerating, analysts’ earnings estimates are being raised and investors are climbing on board.”

When Power-One was first recommended in Cabot Top Ten Weekly in mid-July, the stock was trading at 9.  Now it’s at 13, but still attractive on normal pullbacks.

For details on Power-One and other top stocks, click here.

4. It took a near-death experience, but the auto industry in this country is finally taking the search for the successor to the internal combustion engine seriously.  And one interesting aspect of this movement is that the Europeans couldn’t do it, even when motivated by years of high gas prices.  Now, good old American Ingenuity is bringing us Tesla, the Chevy Volt, and numerous companies involved in designing and manufacturing batteries and control systems.

One of these young, fast-growing companies is Polypore International (PPO), which is an expert at designing and manufacturing membranes that allow very small particles like ions, gas molecules and fluid components to pass through in a controlled way. These membranes are used to electrically insulate the two sides of batteries (both lead-acid and lithium), and battery-makers are lining up for Polypore’s material.

The stock (PPO) was recommended by editor Brendan Coffey of Cabot Green Investor back on June 18, when it was trading at 22.  Now it’s at 28.

Details here.

5. Finally, eBay is well known as one of the greatest online retailers, a great resource for both institutional and individual buyers and sellers of everything from old baseballs to new cars.  Far less well known, and with far greater investment potential, is the eBay of Latin America, MercadoLibre (MELI) (the name means free market).

Paul Goodwin, editor of Cabot China & Emerging Markets Report, recently wrote, “MercadoLibre is an Argentinean company that provides the same kind of e-commerce transactions as eBay, including fixed-price and auction sales, dedicated marketplaces for cars, boats, planes, real estate and services, and an online payment platform. The company was founded in 1999 and it’s the largest online trading platform in Latin America. It has operations in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Portugal, Uruguay and Venezuela, with recent expansions bringing Costa Rica, the Dominican Republic and Panama into the mix.  The Marketplace has nearly 43 million registered users and sales are expedited by a very efficient search engine, leading to gross merchandise sales of $2.7 billion in 2009.  MercadoPago, the company’s online payment system, processed over three million payments in 2009 and the division contributed 26% of revenues for the year.  The drivers for future growth are expected to be 1) increasing penetration of Internet access in Latin America as the area’s telecom infrastructure builds out, 2) strong GDP growth in the region, which will increase disposable income for its large population, and 3) the introduction of MercadoShops that offer sellers their own online sales channels, and MercadoClics, a search platform that uses sales of display ads and a program like Google’s AdWords to generate income.”

When Paul recommended the stock, MELI was selling at 64.  Now it’s 68.

Click here for details.

—

Last month, First Lady Michelle Obama launched a campaign against childhood obesity called “Let’s Move!” The same day, President Obama created a task force to combat childhood obesity, underscoring the seriousness with which this administration is addressing America’s obesity epidemic.

The administration’s efforts include the establishment of public-private partnerships between federal agencies and the business, entertainment and medical communities to promote healthier habits for children. The program’s goals include providing healthier school lunches, increasing access to fresh food in low-income areas, improving food labeling and encouraging families to eat right and exercise. The administration has requested an additional $10 billion in funding for the program over 10 years, which would largely be spent to improve the quality of school lunches and breakfasts and to increase participation in school nutrition programs.

The first lady even appeared on Fox News last week to discuss the program with talk show host Mike Huckabee, who made fighting childhood obesity a focus of his 10-year tenure as governor of Arkansas. One aspect of the fight that Huckabee focused on in the interview was personal responsibility.

Four Pieces of the Puzzle
Personal responsibility is essential for maintaining health and well-being. It needs to be part of any lasting solution to America’s obesity problem, and could be nearly the entire solution for many individuals. Taking charge of your own health, by making wellness a personal goal, eating attentively and staying active, is basically what most people need to do to be healthy. However, on a national scale–and this problem is on a national scale–there are other important parts to the solution as well.

The responsibility for one’s health is certainly personal, but it is also social, especially when our health choices affect our society as deeply as they do. As a society, we share health resources such as doctors, hospitals and research funds. We pay into the same insurance pool. We all pay into a social safety net system for individuals in our society who are struggling. And we share airplanes, trains and movie theaters with other members of society, which makes their weight problems our weight problems.

The administration’s anti-obesity campaign will increase our social responsibility for America’s health by encouraging and rewarding healthier, more active communities. It will encourage communities to build more places where children can play and be active. It will help communities plan “Kids Walk to School” events and locate safe routes for children to travel.

Social responsibility is also an important part of the “Let’s Move” campaign’s mission to bring fresh, healthy food to so-called “food deserts.” These are urban and rural places in America, often low-income areas, where families don’t have access to fresh healthy food. According to “Let’s Move,” more than 23 million Americans live over a mile from the closest supermarket.

In partnership with communities and non-profits, “Let’s Move” seeks to make a healthy lifestyle possible in any neighborhood. Steps will include making healthy snacks available at corner stores, where many urban schoolchildren buy snacks during the day, and increasing the number and accessibility of real grocery stores and farmer’s markets in low-income areas, both urban and rural.

Social responsibility also extends to our doctors, who are an important part of a healthy society. The American Academy of Pediatrics is educating doctors and nurses about how to reduce childhood obesity, including regular body mass index monitoring and healthy eating counseling.

Social responsibility will be an especially important tool in the fight against obesity when it comes to children. Beyond the individual and community levels, though, are larger, more influential entities that are also responsible for our national well-being. One is government.

While the U.S. government can’t fix the obesity epidemic all by itself–happily, we don’t live in a country where politicians can tell you what to eat–it can take measures to positively affect our national well-being.

One is mandating that food producers disclose the nutritional value of their food, a longstanding practice that makes it much easier for consumers to take personal responsibility for what they eat. It’s hard to eat right when you don’t know what you’re eating.

The U.S. Food & Drug Administration is currently researching new nutritional labeling guidelines that would put consumer-friendly nutrition information on the front of packaged food.

The U.S. Department of Agriculture is revamping the food pyramid and making the popular myPyramid Web site even more useful to consumers.

The USDA has also created an interactive database called the Food Atlas to provide important information, like the location of food deserts, to parents, nonprofits, government agencies and businesses that can help make America healthier.

The government is also responsible for the food served in America’s public schools, which provides half of many children’s daily calories. The government has already introduced higher standards for school lunches under the HealthierUS Schools Challenge Program, and the USDA is working to double the number of schools meeting those standards over the next school year.

Major school food suppliers have also agreed to work toward the new guidelines by decreasing the amount of fat, sugar and salt in school meals and serving more whole grains and produce. Their commitment is one of corporate responsibility, the fourth piece of the puzzle.

Corporations certainly have no legal obligation to shoulder this responsibility, but as powerful influencers of what we eat, they’re an important part of the solution. Corporations are an important part of American society, with an ever-growing influence on our lifestyles. It is up to corporations to wield that influence in a way that is positive as well as profitable.

School lunch providers aren’t the only ones stepping up to the plate. Corporations are showing leadership in every area of the fight. Soda companies are offering calorie information on the front of their products and on vending machines. One of the president’s guests at the State of the Union address was a Philadelphia grocer committed to opening stores full of fresh, healthy food in low-income areas.

A Company Working to Build a Healthier America

One company that has taken a leadership position in the fight against childhood obesity is food and drink giant PepsiCo (PEP). PepsiCo, which pays an indicated annual dividend of $1.80, was featured in a recent issue of Dick Davis Income Digest. The editors who recommended the investment (the Dick Davis Digest features hand-picked recommendations from hundreds of the top investment newsletters) cited the company’s excellent management, 3% yield and low risk in their recommendation. The stock is a good value, they wrote, while the company has good growth potential. And they predicted dividend increases to come. They also cited the high potential of PepsiCo’s new line of healthy snack foods.

In addition to their corn-syrupy namesake soda, PepsiCo also makes Tropicana juices, Quaker Oats, whole-grain Sun Chips, Naked brand juice drinks and smoothies, Life cereal and many more products.

The new healthier snacks mentioned in the Income Digest recommendation are only a small part of PepsiCo’s commitment to “Performance with a Purpose.” As the slogan says, PepsiCo has taken the idea of corporate responsibility and reconciled it with a corporation’s responsibility to its shareholders. For PepsiCo, Performance with a Purpose means taking care of its employees, minimizing its environmental footprint and providing healthy nutrition for its customers.

PepsiCo is constantly researching new products that will help consumers live healthier lives–while also making the company money. It is working with the government to enable consumers to make healthier choices by improving its product labeling. It is one of several large food companies that have voluntarily agreed to restrict advertising and marketing aimed at children to products that meet specific nutrition criteria.

The company is also a founding member of The Healthy Weight Commitment Foundation, which seeks to fight obesity by educating consumers about the importance of balancing calories in with calories out. Members include The Kellog Company, grocery store chain Hy-Vee, Coca-Cola, The J.M. Smucker Company, Unilever, Nestlé, Safeway Inc., Mars Inc., Sara Lee Corp., Bumble Bee Foods, Campbell Soup Company, General Mills, The Hershey Company and more.

PepsiCo has also committed to the “Let’s Move” initiative and announced a new beverage-labeling plan in support. Announcing the company’s support, PepsiCo chairman and chief executive officer Indra Nooyi said:

“We have learned over the years there is no silver bullet to solve obesity. No single entity can do it alone. We need a guiding coalition in which individuals, companies, health agencies, consumer groups and governments all take on their appropriate responsibilities. Major food companies such as PepsiCo are in a unique position to be leaders in health and wellness because of our resources, brands, research and development capabilities, consumer reach and logistics expertise.”

I couldn’t have said it better myself. As every member of our society begins to shoulder their responsibility to build a healthier America, I hope more companies will decide to be like PepsiCo. For now, the company’s commitment to corporate responsibility distinguishes it in a way that is proving profitable for both PepsiCo and its shareholders.

Wishing you success in your investments and beyond,

Chloe Lutts
Editor of Dick Davis Digest

So last week, as the broad market was tanking, I ran a quick screen, and found a handful of resilient names.  Most interesting to me was the strength in healthcare stocks.  In effect, investors are now saying that with the much-debated health care bill dead in the water, corporations will be able to carry on in their usual money-making ways.  Two of my favorites are below.

Perrigo (PRGO) is the largest U.S. maker of store-brand over-the-counter drugs, making and marketing over 1,300 store brand products and over 250 generic products.  These include cough and allergy medicines, gastrointestinal drugs, analgesics, dietary supplements and smoking cessation products.

The company has grown revenues every year of the past decade, and grown earnings every year since 2006.  Last Tuesday, it reported fourth quarter results, and they were terrific.  Revenues grew 9% to $583 million, while earnings shot up 56% to $0.70 per share.  Analysts had been expecting $0.66.  Also, the after-tax profit margin was a hefty 11.1%, the best in many years.

In response, buyers bought the stock heavily, pushing it up from 44 to 46 on more than double normal volume.  Equally important, this marks a clear breakout above the stock’s 2008 peak of 43.  I think it has further to run.

Substantially smaller than Perrigo is EV3 Inc. (EVVV), a Minnesota company whose stock has been coming on strong, climbing from 11 to 15 in the past thee months.  Because of this strength, the stock earned a spot in Cabot Top Ten Report last week, and here’s what editor Michael Cintolo wrote.

“EV3 calls itself “Your endovascular company.”  Its expertise is the minimally invasive treatment of lower extremity peripheral vascular and neurovascular diseases.  The company has developed and acquired a portfolio of devices including stents, guidewires, balloon catheters, thrombectomy catheters, plaque excision systems, embolic protection devices, liquid embolics, embolization coils, flow diversion systems and occlusion balloons.  And business is good; revenues have grown every year of the past decade.  Looking forward, earnings estimates are up, profit margins are very healthy and growing, and the number of institutional investors is growing, too.  In fact, back on January 19, JP Morgan upgraded the stock to “overweight,” setting a price target of 19.”

Mike recommended that subscribers buy the stock between 14 and 15, and the good news is that as the week went by, the stock declined calmly in sympathy with the market, closing at 14.  I think it’s a decent buy here.