NEW YORK – With the second quarter of 2001 almost at a close, big capitalization stocks have moved off their lows from earlier in the year but are still in a funk. The Dow Jones industrials are up just 2% so far this year, while the broader-based Standard & Poor’s 500 is down 4%.

Allan Rudnick, president and chief investment officer of Kayne Anderson Rudnick Investment Management, a Los Angeles-based money manager with $7 billion in assets, cautions against abandoning large cap stocks. “Our message to clients is that you shouldn’t move from one asset class to another to play a cycle,” he says. In fact, Rudnick sees opportunities in large caps, particularly given the S&P’s 11% correction over the past year.

One stock Rudnick recommends is Gap (nyse: GPS – news – people ), which is off 17% from its 52-week high, due to investors’ concerns about weakness in same-store sales and declining earnings. In mid-May, Gap announced that quarterly earnings were off 51% versus the same quarter a year earlier.

Gap, however, satisfies several of Rudnick’s criteria, notably a healthy latest 12-month return on equity of 25% and annualized earnings growth of 27% over the last five fiscal years.

Full story at Forbes.com

Before 1989 one U.S. company dominated the international market for breakfast cereal—and it wasn’t General Mills. “Kellogg was kicking everybody’s rear end overseas,” admits Ken Harris, partner and industry consultant at Cannondale Associates.

Rather than try to build an international cereal business from the ground up, General Mills found a partner: Nestlé. The joint venture, known as Cereal Partners Worldwide (CPW), combined General Mills’ expertise in cereal with Nestlé’s brand recognition and distri-bution throughout Europe.

The strategy worked. Since forming, CPW has expanded operations to 75 markets and captured 21% of the international cold cereal business. “The equation is pretty simple,” explains Cannondale’s Harris. “They find value in a partner’s assets, send their best people to run the company and stay vigilant as to how to improve the partnership on an ongoing basis.”

Not all of General Mills’ international joint ventures have gone as smoothly. Analysts say the firm has had disagreements with PepsiCo over strategy regarding Snack Ventures Europe, a joint venture with $1 billion in annual sales. General Mills also shut down a Latin American dessert venture with Best Foods.

Still, international alliances alone accounted for $825 million of the company’s $6.7 billion in sales last year.

Full story at Forbes.com

NEW YORK – When it comes to earnings estimates, close agreement among analysts isn’t necessarily a good thing. “It makes me nervous when analysts are that sure of themselves,” says Joseph Kalinowski, equity strategist at Thomson Financial/IBES.

Close agreement among analysts should draw more suspicion when valuations are high in a particular sector and analysts are revising their estimates upward in lockstep. “In that situation, if a company starts to miss or gives downward guidance,” Kalinowski explains, “it can all come crashing down.”

On the other hand, too much divergence among analysts can signal a problem. For example, 2001 earnings-per-share (EPS) forecasts for Lucent Technologies (nyse: LU – news – people) range from 40 cents to -$1.25 per share. Given Lucent’s 3.4 billion common shares outstanding, this represents a difference of $2.9 billion in projected losses.

How do investors know when variation between earnings estimates is too great, too little, or just right? Kalinowski uses a statistic known as the coefficient of variation (CV), which measures how similar earnings forecasts are to each other. Generally, a small CV indicates strong agreement among analysts and a large CV indicates strong disagreement.

Kalinowski suggests that investors compare a company’s current CV against its historical CV, or against the industry average. “When the CV is in line with and above either of these numbers, earnings surprises tend to have less effect on the price of a company’s stock,” explains Kalinowski.

Full story at Forbes.com

NEW YORK – Though a noted bear, Paul McEntire takes a subdued tone when it comes to the question of whether the market is overvalued. The chairman of Skye Hedge Fund, a $5 million (assets) fund with long and short positions, McEntire concedes that many companies are now good long-term investments, particularly large technology companies with proven business models.

But McEntire, who holds a Ph.D. from Stanford University’s engineering and economic systems department, is less charitable when it comes to companies with speculative business models, especially those carrying a large debt load. One example: Exodus Communications (nasdaq: EXDS – news – people), a provider of Internet hosting services. In its latest fiscal quarter, Exodus reported a loss of $650 million on sales of $349 million.

Exodus carries a whopping $2.8 billion in long-term debt. “If you’ve got over $2 billion in debt, you have $250 million to $300 million in debt service to overcome before you can become profitable,” says McEntire.

The market hasn’t been oblivious to Exodus’ financial situation–even after a recent rally, the firm’s stock is off 84% from its 52-week high.

Full story at Forbes.com