So I never really short stocks, but I’m sitting here with the flu watching the tube (no, not YouTube — good old-fashioned television), and for the last 20 minutes I’ve been really tempted. It’s not because the flu has gone to my brain and driven me mad, it’s because an infomercial for a product called INVESTools, whose parent company is publicly traded, is driving me mad.

The company is making absurd promises (see “Avoiding the Charlatans“) that students who attend their seminars and use their pricey software will destroy the market in no time. Some of the testimonials even make claims of outrageous 800%+ profits in just two weeks! The software and “education” is based on a system of just “following the red and green arrows” that indicate by technical signals when to buy and sell.

That’s it. No research, no bothersome accounting to learn, no money to start, no problems!

At this point you probably know what I’m going to say: if this isn’t a scam, it’s at best a massive ripoff. And in the long-run, you can probably make a bundle shorting the company (note, though, I’m not actually recommending you do this, and I myself never do).

In case you’re not convinced right off the bat that something like this is bonkers, allow me to convince you. First, as I’ve argued in the past, technical analysis (especially “systems” using these special, mass-marketed, cookie-cutter strategies) are almost always bound to failure. But I’ll bite my lip on this, and save it for a different place and time. Instead I’ll make the ridiculous assumption that the system does work, and show why it just ain’t sustainable.

Even in the extremely unlikely case that the “system” did make its students a ton of money, like any trading system, the returns one could garner would disappear when everybody does it. That’s just part of the game. All good things must come to and end. Ask hedge fund gurus like Steve Cohen, who himself admits that opportunities become scarce when everyone is in on it. And, trust me on this, if there is some elegant system like this that actually works for an extended period, you can count on the hedge fund folks to find it and trade it away before INVESTools does. So the product seems bound to mediocrity or failure.

Furthermore, the way I understand it, INVESTools’ students often spend upwards of $10,000 on seminars and software and what they actually “learn” is not stock trading, but actually option trading. Right off the bat, this should scare anyone who knows anything about options. They’re not exactly easy money. It’s a bit frightening that this company is teaching the average Joe (and yes, when it comes to options you can include this Joe on the list) that this is somehow safe and guaranteed money (and yes, they are saying that).

Worse still, the web is littered with disgruntled students who never made a dime and whose attempts at a refund prove futile. It seems only a matter of time before this fad, to put it nicely, comes to an end.

From an operating standpoint, the company has grown the top line dramatic over the past few years. And its cash flow is strong, despite mounting accounting losses (which are mostly a function of the fact they collect the cash for services up front, but book revenue over the course of the subscription, leading to a large deferred revenue line item). The stock trades for around 20 times the TTM cash flow.

Nonetheless, with the basically-bound-to-fail product, I have trouble seeing any sustained growth, and would be surprised to see much of anything at all in a few years when everyone catches on that the product just isn’t worth it. I encourage anyone who has used the product to share your thoughts, and I hope that any bulls would share their take.

In light of recently seeing the Disney/Pixar flick Cars and, of course, Ford’s (F) huge loss coupled with Toyota (/TM) and Honda’s (HMC) anticipation of larger profits, I thought it appropriate to say some words on the automotive industry and its major players.

First things first. It’s no news that American car manufacturers are suffering and suffering mightily. Stagnant sales coupled with rising costs, stiffer price (and quality) competition from lower cost, more efficient foreign makers, and mounting liabilities make for an extremely difficult hand. Both GM and Ford are in the midst of restructuring processes, looking to cut jobs, close factories, improve efficiency, and shed some legacy costs.

Whether or not these initiatives will be successful is out of my (and probably many an investor’s) circle of competence. What I do know is that the challenge is immense and difficult to understand. Part of the difficulty is due to the off-balance sheet nature of the obligations, and the rest is due to huge uncertainties regarding the future of the companies’ operations.

For instance, let’s consider GM’s pension status and healthcare obligations. While pension plan accounting is quite arcane and sensitive to a number of actuarial estimates (like life expectancy, wage increases, discount rates, etc.), I’ll do my best to keep it simple for demonstration’s sake. Basically, the company made some unfortunate agreements with the UAW years back which were based on a much brighter expectation for GM’s future. As we’ve seen, that has now backfired bigtime. I liken the company’s obligations to the US Social Security problem — it is “underfunded” in the sense that more money in benefits will be paid out than is currently being brought in.

For every current employee, GM is paying benefits to roughly 2.5 retired workers. All said, the “funded status” (that is, pension plan assets minus estimated benefit obligations) of GM’s obligations was around negative $63 billion at the start of 2006. And, again, that is not really reflected on the balance sheet. And as the company tries to shed its workforce to cut costs, this deficit could grow (provided that some other solution is not reached).

This becomes an even bigger problem when contrasted with the fact that companies like Toyota and Honda are sitting relatively pretty. Both of these companies are supporting pension plans with an employee base far larger than their retiree base. GM has cut its workforce over the last 20 years while TM and HMC have done the reverse. Given its financial difficulties, poor capital structure, and competitors’ financial success this, in plain English, ain’t good for GM.

Oh, and Ford? Not too much different: with a funded status of -$43 billion, there’s not much to be gleeful about.

Another terrible obligation bearing down on American manufacturers is, of course, their heavy debt loads. GM is paying around $4.5 billion a quarter in interest expense and Ford is a bit better at around a $2 billion run-rate. Both companies’ liquidity positions are troublesome, and barring some drastic, successful measures, credit ratings will worsen and the situation will continue spiraling downward.

Contrast this, for instance, with Toyota, whose debtload is but a small fraction of its American counterparts’. Furthermore, Toyota enjoys triple A credit ratings and extremely low cost financing.

Furthermore, some argue (perhaps rightly) that American manufacturers, in addition to suffering from a classic case of the lower cost competitor blues, are selling products that offer less value than foreign cars. Despite pretty positive ratings for some Ford and GM models, there does seem to be a perception of generally greater affordability, quality, safety, fuel-efficiency, and durability from Japanese cars especially. Naturally, this doesn’t do much for Ford or GM’s performance, and provides an operating and marketing edge for companies like Toyota and Honda.

So what will come of all this?

Well, like I said, I don’t think I can predict the success of current restructuring efforts. But, for starters, whatever does happen should be interesting. It’s difficult to imagine two American icons with still tremendous market shares going out of business anytime soon. And, realistically, I don’t anticipate that happening with high probability. Granted, GM and Ford have been steadily losing market share to foreign rivals, and that trend could continue. But entirely displacing such big players is difficult to accomplish, and, if there is a death, it’ll be a slow death.

I also feel the managements of both Ford and GM are doing a pretty good job considering the awful economics of their businesses. For example, CEO Mulally at Ford is top notch in the restructuring area and I don’t see it impossible that he can repeat his success at Boeing. He has and will probably continue bleeding the company of its ills, and shareholders might well be better off for it.

Obviously, handling the mounting liabilities and inherent institutional cost difficulties is the key concern. But surprisingly, I also believe alot may end up depending on both companies’ willingness to be entrepreneurial. My (admittedly bold) prediction is that an ability to adopt technology like clean, fuel-efficient vehicles and embrace change could not only help them compete, but, if done skillfully (and perhaps with some luck) propel them back to their glory days. Clearly, this is no easy task, but should remain somewhat of a priority in a world of shifting preferences.

This may be controversial, but I find that the average car buyer is more willing to switch brands if given good reason than are consumers in other industries. Today’s Toyota owners might well be tomorrow’s Ford owners if, hypothetically, Ford can develop an image as an innovator on the frontier of clean, cheap fuel technology. How likely that is to happen, I have no idea. Naturally, they’d have to be a step ahead of financially sounder enterprises trying to do the same thing. But on the bright side, a company like Ford has the government subsidiaries and research pipeline that has been proving somewhat successful, and it’s not entirely out of the question that American manufacturers can do what I call “pulling an Apple” and really reinvent themselves and their image.

But, to end sadly on a more dour note, doing any crazy, sexy innovation campaign in the midst of a restructuring effort is probably a HUGELY unlikely one-two punch. As much as I’d love to see American car manufacturers pull off one hefty task, let alone both, the odds are stacked heavily against them. If you’re one for supporting the underdog, so be it. But when it comes to a Ford or a GM from an investing standpoint, the risks are too great and the rewards are not entirely clear. Bottom line: if you absolutely MUST buy an auto stock, consider looking outside the old US of A.

Note: I do not own shares in any companies mentioned in this article.

PrePaid Legal Services markets a fee-based subscription for accessible legal services and plans to the middle-market (80%) of Americans and Canadians through its network of independently contracted “provider firms”.

There are currently 1.5 million Members (i.e. subscribers) to the company’s plans. Based on their estimated target market size of 100 million Americans, this is a 1.5% market share. The company seems to have run into some difficulty expanding this critical subscriber base, as they sign up around as much as they lose each quarter (around 150,000 Members per quarter).

Nonetheless, the company appears attractive for its high returns on capital, relatively consistent profitability, high margins, and low price/earnings multiple. It also seems to have found a place for itself in the niche market it serves.

But (and here comes my cynical side again), there are some problems with the company. Allow me to discuss.

The company uses multi-level marketing tactics to drive business. 80% of new orders are derived from the multi-level “sales associate” program. Yet, the “Sales Associate” program does not seem to be economically incentivized, at least vis-à-vis other similar programs. I just don’t see how it makes sense to participate. Here’s why:

Members pay an average around $260/yr for services. Sales associates get 80% commission in first year, and 5-25% thereafter. Even assuming an associate sells one membership a day for his first year (which just about impossible unless he’s damn good and makes it a full-time job) he stands to make just $75,920 before deducting for what it costs to enter the program and what is owed to the associates who themselves brought him in. Perhaps he ends up with a generous $70,000.

That may seem pretty good, but again, this is significantly more generous than the average (and median) associate and would require a stunning sale of 365 memberships. More realistically, the average associate brings in much less than 10 new members per year (which is around a measly $2000 for the first year, and a paltry $650 thereafter). Granted, the associate can draw some residual dollars by bringing in new associates, but given the cost (of time and money) to enter the program and the offsetting effect of having to pay, on average, 9 associates higher on the pyramid, it’s not all that attractive.

Indeed, a huge majority of associates probably don’t make any real money at all. This phenomenon is well-evidenced by the turnover in associates. While the company doesn’t release this number per se, it can be inferred from the numbers. The company had 79716 associates who sold at least one membership in 2004, and 103,248 of the like in 2005. But with 61,238 of the 2005 crowd being first time sellers, we see that 37,706 “old” associates pretty much gave up. That’s an implied turnover around 48%. Not too good.

But that’s enough about the associates program. There are still more problems to discuss.

Ready? Here’s the cynic again:

I find the ridiculous description of the new corporate headquarters, on which the company spent (read: wasted) $34 million, to be telling. To put this in perspective, they spent the equivalent of over 6% of the company’s market cap, around 10% of 2005 revenues, or substantially ALL of 2005 net income on the following. Here it is straight from the 10K, just for kicks:

“The new headquarters  contains two long bars of open office area  designed to serve as podiums,  which  stretch east from the northern  and  southern  edges  of  the  tower.   Two  and  three stories  high respectively,  the podiums  house the call  centers and  Information  Technology departments. Only 60 feet across, they are designed to ensure that employees are never more that thirty feet from a source of daylight. Shared corporate services –  including a 650-seat  auditorium,  dining  hall,  exercise  facility,  and a connecting  corridor  containing a company history gallery — are located at the east end of the bars, creating a central  courtyard.  The courtyard features a reflecting pool and a 12-foot bronze sculpture of our logo, the Lady of Justice, a  universal  symbol of justice.  The building’s  main  entrance  welcomes  its frequent  visitors,  celebrates  our  history,  and is  designed  to convey  the tradition of civic judicial  buildings.  The building is designed to expand over time without negatively impacting the site layout or the building concept and we emphasized the use of modular furnishings to provide enhanced  flexibility.  We placed  importance on the goal of providing each employee with an excellent work environment.”

And that’s not all. As if an exercise facility, company history gallery, reflecting pool and 12-foot statue weren’t enough, the company spent an additional $11 million (!) on corporate jets. Worse than that, they took on the risk of debt to finance it.

If anyone can explain to me this waste of funds or explain how in the world these expenditures will yield any return whatsoever, please drop me a line.

Call me crazy, but I don’t really think I need to delve into the valuation, because it’s not a company I’d feel too happy about owning. And apparently the insiders feel the same way. Just check out their recent stock sales.

As a wise man once said: “The bold print giveth, but the fine print taketh away.”

Some investors may well be enticed by the common stocks of post-reorganization companies. Here’s why:

In a typical Chapter 11 Bankruptcy proceeding, most creditors are not made whole in cash. So instead of liquidating and giving creditors whatever proceeds are available from the sale of assets, companies offer equity stakes in the newly reorganized company. This both keeps the company alive and provides a better deal for creditors since they extract more on the dollar by owning stock rather than getting a smaller value of cash in liquidation.

But because many creditors either a) prefer to just have the cash (at least after the new equity starts trading) or b) cannot own the equity (due to regulatory issues, the creditors’ covenants to their own constituency, etc.), the stock of the reorganized company suffers a sell-off unrelated to the nature of its business.

Because the companies (usually) come out with a lightened debt load and can be okay businesses post-Chapter 11, this selloff can lead to bargains for investors willing to purchase what everyone else is dumping. That’s all well and good.

But obviously these “special situations” are not universally good investments simply by virtue of being post-reorganization stocks (after all, they WERE struggling businesses, otherwise they would not have needed to file Chapter 11 in the first place). Luckily, the reorganization plan and disclosure statements filed with the SEC often contain quite thorough and useful information on the company post-Chapter 11, often including projections for earnings many years out.

Which brings me to an example from very recent history (i.e. about 2 months ago). Winn-Dixie Stores (WINN) emerged from bankruptcy in November, and the stock rose sharply before — you guessed it — the selloff. Looking at the situation superficially, WINN appears to trade for just 11-12 times earnings and has little debt. This may jump out to some as a bargain.

But even ignoring the lengthy minutiae of the disclosure statement (which you can find here) and just skipping down to the juicy part at the bottom of the document entitled “Projected Statement of Operations” (go ahead and do it. I’ll wait…) reveals that management expects net income of $137 million by year 2011. Given Winn-Dixie’s market cap of $1.9 Billion right now, I ask you the following [Editor’s Note: At the time of writing, Winn-Dixie’s market cap was actually closer to $760MM. Joe made a big blunder here, and the example, not necessarily the point, is not a great one]:

Would you really want to own a run-of-the-mill grocery operation trading for 14 times earnings more than four years away? [Another Editor’s Note: No, you wouldn’t. However, since Joe botched this one and needs to take his own advice to read the small print, the actual price to earnings four years out is more like 5.5. Big difference]

I know I don’t. Even assuming that management’s projections are right (they usually never are, and often err on the generous side), and further assuming that this mediocre company will trade at 20 times earnings in four years from now, investors stand to make just about 9% on an investment. That’s not spectacular, and becomes even less enticing considering the inherent risks of the situation, including a Chapter 22 filing (Ch. 11 times 2), widely erroneous projections, and many others. [Yet Another Editor’s Note: Just to rub it in and show how wrong Joe was, this scenario would actually lead to around a 40% annualized result. Obviously, it’s still unlikely that the projections are accurate and that a grocer would trade at 20 times earnings, but you get the point].

Bottom line? Investors just have to read the fine print. Avoid falling prey to the value trap. Just because companies sell off a bit or seem to be bargains superficially does not make them wise investments. [A Final Editor’s Note: Bottom line? Joe needs to take his own advice )