Analyst Upgrades

• Abercrombie & Fitch (ANF) to outperform from market perform at Wells Fargo.
• Trinity Industries (TRN) to buy from hold at BB&T.
• Cameron (CAM) to outperform from sector perform at RBC Capital.
• Expedia (EXPE) to positive from neutral at Susquehanna.
• Micron (MU) to buy from hold at Lazard Capital.

United (UAUA) and Continental (CAL) announced a merger of equals on May 3. CAL shareholders will receive 1.05 shares of UAUA common stock for each CAL common share they own. UAUA shareholders would own approximately 55% of the equity of the combined company and CAL shareholders would own approximately 45%, including in-the-money convertible securities on an as-converted basis. UAUA overall option implied volatility of 56 is below its 26-week average of 73, according to Track Data, suggesting decreasing price movement.

Morningstar (NASDAQ: MORN) closed at $42.31. The 21st Morningstar Investor Conference will take place at McCormick Place Convention Center in Chicago from May 27 to May 29.

Bill Gross, founder and managing director of PIMCO, will give a keynote presentation on May 28. MORN June call option implied volatility is at 43, puts are at 53; below its 26-week average of 56 according to Track Data, suggesting decreasing price risk. MORN puts are more expensive than calls because MORN is difficult to borrow.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

A Morningstar advertisement asking "Is The Market Cheap Yet? We Think It Is" got my attention in a recent issue of Barron's. Promoting its Equity Research service, Morningstar discusses the NASDAQ sell-off this year, stating that in July of 2007 the market was 6% overvalued, but now it is 15% undervalued.

The ad goes on to state that eBay (NASDAQ: EBAY) is trading at a 41% discount to Morningstar's estimate of value and that Cisco Systems (NASDAQ: CSCO) is trading at a 35% discount. At the time, eBay was trading at $28.81, but it closed at $25.72 yesterday making the stock 52.7% undervalued by their measure. Cisco was then $24.94 and last night closed at $23.99, so it is now 38.8% below fair value.

Morningstar (NASDAQ: MORN), a provider of independent investment research, is scheduled to report Q4 EPS after the market close on Feb. 21.

MORN call option volume of 1,289 contracts compares to put volume of 795 contracts. MORN March option implied volatility of 45 is near its 26-week average of 42 according to Track Data, suggesting slightly larger price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

How should you invest $10,000 in the coming year? The question was posed to some of Wall Street's most respected seers by syndicated columnist Andrew Leckey, whose Successful Investing column appears in over 150 newspapers.

Here, courtesy of The Bull & Bear Financial Report, 9 leading Wall Street experts -- Elaine Garzarelli, Richard Crippps, Sheldon Jacobs, Don Phillips, Richard Yamarone, High Johnson, Mark Johannessen, Curt Weil, and Paul Nolte -- offer their answers to the $10,000 question.

"Amid relentless volatility in 2007, every participant last December produced an increase over the past 12 months. Our pundits for a second consecutive year are spreading their bets because there are so many economic and political wild cards in the coming presidential election year.

When BloggingStocks contributor Georges Yared recently took a look at lenders that could rise up out of the recent subprime-related credit mess, he focused on Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and US Bancorp (NYSE: USB) as strong contenders.

Well, the European markets have been struggling with many of the same credit concerns as in the U.S. Morningstar (NASDAQ: MORN) has gone looking for investment opportunities in European markets, and found such contenders as Alcatel-Lucent (NYSE: ALU), France Telecom (NYSE: FTE), and Cadbury Schweppes (NYSE: CSG). However, like Mr. Yared, Morningstar analysts found themselves focusing on a pair of wide-moat lenders that had been unfairly punished by reactions to the current problems.

The observer effect states that the act of observing a system changes that system. The Hawthorne Effect discusses the tendency of experiment subjects who are being observed to change their behavior to impress the observer. A fascinating column by MarketWatch's Chuck Jaffe takes a fascinating look at this problem in the mutual fund industry, although he doesn't specifically refer to the observer or Hawthorne effects.

The piece, titled The Downsides to Morningstar's Popular Fund Tools discusses the issue of fund managers manging with a focus on their Morningstar ratings and fitting into a particular quadrant of the Morningstar "style box", which is understandable given that over 80% of money invested in mutual funds flows to those given 4-5 stars. Jaffe writes:

The problem is that the financial advisory community has turned the boxes into straitjackets for money managers. They want a fund confined to a certain box, so that the adviser can build a portfolio certain in the knowledge that the fund represents a certain geography. When a manager moves from one box to the next, some investors bail out, fearing style drift.

Understandably, many fund managers are now allowing the style boxes to dictate their investment decisions. This reduces flexibility, and puts the focus on the wrong issue: Money managers should be looking to minimize risk and maximize returns, not fit into the right quadrant!

This is a pretty interesting issue, and not one that has been discussed extensively. Morningstar (NASDAQ: MORN) is a publicly-traded company with a $2 billion market cap, largely on the strength of its mutual fund research. But could its research actually be serving to hurt returns?

Oakley (NYSE: OO) volatility and volume elevated prior to anticipated LUX deal. Luxottica Group SpA (NYSE: LUX), the world's largest manufacturer of eyewear, agreed to buy OO for $2.03 billion. I reported uncharacteristic OO activity on 5/31/07 and 6/6/07. OO option volume was heavy on 6/20/07. OO July option implied volatility of 43 was above its 26-week average of 35 according to Track Data, suggesting larger price fluctuations.

Morningstar (NASDAQ: MORN) option implied volatility Stable. MORN, a provider of independent investment research, closed at $47.57. MORN's 2007 Morningstar Investment Conference will feature leading mutual fund managers and industry leaders-discussing current topics and industry issues beginning June 27th in Chicago. MORN over all option implied volatility of 30 is near its 26-week average according to Track Data, suggesting standard deviation price risks.

Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

Morningstar has some favorable research out on three media names today: Time Warner Inc. (NYSE: TWX), News Corporation (NYSE:NWS), and The Walt Disney Company (NYSE:DIS).

The note says that Time Warner, News Corp, and Disney are increasingly focused on making sound capital allocation decisions, recently evidenced by making large share repurchases.

Morningstar also expects more buybacks and thinks these firms' competitive advantages will allow them to continue to improve total returns on invested capital and earn incremental returns on capital in excess of their cost of capital for years to come. While the report is upbeat on all three stocks, it expects more upside from Time Warner and Disney.

Morningstar's take:

News Corporation: 3 Stars; Fair Value Estimate: $25
Risk: Below Average

Walt Disney: 4 Stars; Fair Value Estimate: $40
Risk: Below Average

Time Warner: 4 Stars; Fair Value Estimate: $25
Risk: Below Average

Fastenal Company's (NASDAQ:FAST) reduction of its growth estimates for 2007 from 20.2% to 16.9% may not have been encouraging for some -- analysts at Robert W. Baird maintained a neutral rating but reduced the target price from $46 to $43 -- but Morningstar sees good things for the company.

Morningstar has selected FAST's Will Oberton as the CEO of the Year for 2006, on the basis of the company's financial track record, corporate governance, history of creating shareholder value, and growth potential.

A supplier of manufacturing and construction equipment and supplies, FAST got its start some 40 years ago as a producer of fasteners, and now has about 2,000 stores in North America. It has reported compounded earnings at almost 30% annually since its IPO in 1987, while generating returns on invested capital of more than 20%. And the company's share price has kept pace with its financials, also compounding at about 30%.

Oberton has been aggressive about improving FAST since he became CEO, with programs such as overhauling its stores to increase traffic and sales, to centralizing accounts-receivable collection and bringing more of the company's transportation needs in-house. Some of these initiatives have hurt the company's margins over the past few quarters, which may be why Wall Street soured on Fastenal a bit last year.

Besides FAST's long-term growth potential, Morningstar also picked Oberton for his model corporate stewardship, citing the company's superb financial disclosures, reasonable compensation, and minimal option issues. In short: he's not an overpaid, rock-star CEO.

Tired of the same old New Year's resolutions? Weight loss takes a lot of work and more willpower than most of us have. My resolution last year was to stop swearing and well... that didn't happen.

So if you're looking for a good new resolution for 2007, I got one for you. Morningstar.com made a list of some of the top investment books of all time for their last-minute gift ideas, and reading them all would make just about anyone a good investor. I'm embarrassed to admit that I've read almost every book on their list, and they are all good reads, and full of wisdom.

Some of my favorites from their list:

• Michael Lewis's Moneyball: Oakland A's general Manager Billy Bean has made such an impact with his reliance on computers for analyzing players and his penchant for finding value where others see nothing that he was a speaker at T. Rowe Price's annual investment symposium. The Financial Times did a write-up on it, and it's easy to see how applicable his philosophy for baseball is to investing.
• Pat Dorsey's The Five Rules for Successful Stock Investing: This provides awesome information on how to do bottom-up analysis in stocks in a great variety of industries, including banking, health care, energy, and utilities. I don't know of any other book where you can get this level of detail in a readable manner on so many different industries. It also has an excellent introduction to fundamental analysis (good explanations of concepts like the moat, margin of safety, and various valuation metrics).
• Why Smart People Make Big Money Mistakes: This is the classic introduction to the field of behavioral finance written by one of its pioneers. What do the last three digits of your phone number have to with when Genghis Khan was born? Find out in this book.

On Monday, ModernGraham.com, one of the more respected financial sites on the internet, named Time Warner Inc. (NYSE: TWX) as its "Overvalued Company of the Week" and suggested the stock is trading at over 300% above its intrinsic value. That seems more than a little severe. Modern Graham bases all of its stock analysis on the work of Ben Graham, the famous stock analyst.

The blog blames most of the valuation issues at Time Warner on the AOL merger and wants new management to come in and fix things up.

By contrast, Morningstar, the big stock and mutual fund analysis company, puts Time Warner's fair value at $20 (subscription required for stock analysis). The Morningstar valuation is based on a revenue growth rate of 3% a year and modest improvement in margins.

Indeed, TWX's fundamentals aren't all bad. Time Warner's return on equity is 7.8% for the trailing twelve month period. In 2003, the number was 4.9%. Return on assets is also increasing.

Another reason that TWX shares are unlikely to drop is the old "most of the bad news is out" view. This may well be the case. The 52-week low of $15.70 is about as low as the stock has been in three years. There is an expectation that the operating results at the magazines and studio will be choppy. The jury will be out for some time on the AOL move to offer its service for free to broadband customers and rely more on ad revenue. There is no reason to believe that the cable operations and networks will not continue to do well.

Seen in context, the Modern Graham piece shows how Time Warner bashing can get out of hand.