Due to market opportunity, I am posting the first pick today (Wednesday) two days earlier than planned (five consecutive Fridays beginning on November 2nd). The great thing about earnings season from the perspective of a long term investor such as myself is that short term hedge fun type traders always head for the exits like lemmings at any sign of short term issues, thereby presenting excellent investment opportunities.

Sports bar and grill chain Buffalo Wild Wings (BWLD) is seeing its share price collapse by nearly 25% today, as the company missed third quarter earnings estimates ($0.26) by 2 cents, coming in at $0.24 per share. Sales were above expectations for the quarter at $82.4 million. Now, let me tell you why I think this is a huge overreaction (provided you are a long term investor) and believe the shares of BWLD are worth $42 each, about 40% above current levels.

Buffalo Wild Wings is a pure growth story. The chain is transforming from a regional company (founded and based in Ohio) to a national presence. Management expects the United States alone can support 1,000 locations, more than double the current store count of more than 400 nationwide. To get to that size, BWLD is projecting long term annual expansion of 15% unit growth, 20% sales growth, and 25% earnings growth each year for the foreseeable future.

With such an impressive growth profile, and little in the way of barriers to achieve their goals (the concept is extremely popular), there is no reason to think BWLD shares cannot garner a P/E ratio of 30 times earnings. Despite the near-term earnings miss (more on that in a moment) BWLD is poised to earn around $1.40 per share in 2008, which is how I get to a fair value price objective of $42 for the stock (30 x $1.40).

Why aren't the near term issues worrisome from a long term investors' standpoint? From quarter to quarter there are always going to be positive and negative events that cause unpredictable short term financial results. This quarter, chicken wings were a little bit larger than normal, resulting in a 20 basis point increase in the company's costs. Sometimes weather might be an issue, or another state that increased their minimum wage.

These types of issues will impact quarterly results by a penny or two every so often, in either direction. It is important though, with a story like this to keep the big picture in mind. BWLD is a growth story. A two cent miss for the third quarter is not going to impact the growth trajectory for this company.

I'll leave you with this statistic. BWLD has about 17.8 million shares outstanding. An earnings miss of $0.02 per share equals $356,000 on a sales base of $82.4 million. Does that warrant a nearly 25% drop in the stock price in a single day? I think not.  

With all of the turmoil in the mortgage industry right now, the market has provided investors an opportunity to pick up bargains in the financial services sector that have little or no exposure to the housing market. While there is fear that home foreclosures will result in scores of people being unable to pay regular bills like credit cards, student loans, and insurance premiums, investors need to realize that the vast majority of Americans will have no trouble meeting their monthly obligations. Sure, loan losses will rise, but they would have to given that we just exited the easiest credit environment the country has ever seen. Just because loan losses are rising from extraordinarily low levels, it doesn't mean that companies won't be able to manage this normalization process.

A company I believe has been beaten down too heavily is First Marblehead (FMD), a leading provider of outsourcing services to the private student loan industry. FMD doesn't loan money directly to students, but rather they work with banks and other financial institutions, along with colleges and universities, to market and service private loans. In return, they receive fees based on loan volumes they help facilitate, as well as a percentage of loan proceeds when loan pools are securitized and sold to investors.

Due to the rapidly increasing cost of higher education in the United States, coupled with loan limits on federally funded loan programs, the private student loan market is growing at more than 20 percent annually. FMD helps service more than 20% of the market, making them the leading provider of outsourced services to private lenders and their customers.

Despite rapid growth, FMD shares trade at $32, down from an all-time high of $57 reached last year. Earnings are expected to reach $4.75 per share in calendar 2008, up 14% year over year. That gives the stock a P/E of 6.7 based on forward earnings. In addition, FMD pays an annual dividend of $1.10, giving the stock a yield of 3.4%. Now why on earth would a company like FMD trade at such a meager valuation? There are three main reasons in my view, which I will address individually.

First, the company gets more than 40% of its revenue from just two clients, JP Morgan Chase (JPM) and Bank of America (BAC). Investors are worried about customer concentration because if either client leaves (JPM's contract expires in 2010, and BAC can cancel at any time with several months notice), FMD would be impacted greatly in the short term. To deal with this issue, management has focused on attracting new clients. Last quarter, FMD's business with the "big two" grew 15%, with all other clients growing 95% versus last year. In fact, two years ago JPM and BAC were more than 60% of revenue, and next year they should drop below 40%. This trend should continue, and if it does, long term investors should take comfort that while losing a large client would hurt right away, the business will be made up via other clients eventually.

Second, FMD's fee structure is such that a rather large portion of its fees are collected as student loans are paid off, rather than upfront at the time the loan is given out. This residual income starts to flow to FMD about 5 years after loans are securitized. Since FMD has yet to receive any cash flow from these residuals (they are on the firm's balance sheet as accounts receivable and the money should begin to come in late 2008 or early 2009), investors are not certain that the assumptions FMD makes about the actual payouts will materialize. Right now, FMD has about $1 billion of residual payments they expect to receive in the future. Due to present values of future cash flows, FMD will actually end up getting much more than that amount since they agreed to delay payment for years. There is little reason to think these payments will turn out to have not been estimated accurately, but until the first check comes in, investors will worry about the uncertainty. Right now they are just taking the company's word.

Lastly, the recent credit market turbulence has a direct on FMD. Since they securitize student loans on a quarterly basis, any lack of investor appetite for asset backed securities would impact FMD's ability to earn fees from securitizations. Last quarter, despite a poor market environment due to mortgage market woes, FMD was still able to complete their largest ABS deal ever. However, since markets have worsened since then, FMD's upcoming December securitization has investors worried. Although it is possible they could be forced to delay the deal, or take less money to get it done on time, the market dislocations are likely temporary, and as long as student loans are not handed out like sub prime mortgages were, investor appetite for these loans should not face the same fate as mortgages longer term. FMD coudl always wait and sell them later on when market condition improve.

All in all, there are concerns about FMD's business outlook. However, I believe the stock is currently pricing in most of the potential bad news (shares down 44% from their high, forward P/E of 6.7, dividend yield of 3.4%), without taking into account the fact that most of the concerns will likely be proved non-issues over the long term. Investors can also expect the high dividend payments to continue. The company's board and co-founders own about 30% of the stock, so near-term share price weakness will motivate them to reward shareholders with ever increasing dividend payments since they also benefit directly from doing so, while they wait for the market to readjust its view of FMD stock.

With the future of the U.S. economy uncertain and global economic growth outpacing us here at home, looking for international plays in the market makes good sense. The key is finding something that you both understand and that isn't trading at too lofty of a level. Large multinational firms have benefitted from a weak dollar and that trend is likely to continue. However, there are other small and mid size companies operating in international markets that offer investors unique opportunities.

For the final of my five picks in this mock portfolio, I want to mention NII Holdings (NIHD). Better known as Nextel International, NIHD is the international division of the popular Nextel brand, famous for bringing us "Direct Connect" walkie talkie service. You may recall Nextel's U.S. operations merged with Sprint several years ago, but NIHD remained independent and publicly traded, tracking business lines in countries like Brazil, Mexico, Argentina, Chile, and Peru.

NIHD shares are down more than 40% from their all-time high of $90 per share to the low 50's. Horrific weather in Mexico last quarter slowed subscriber growth there, and a combination of competitive pressures and a lofty stock valuation has resulted in a severe decline in market value.

Despite the short term negative issues, the growth outlook in Latin America remains strong long term. NIHD stock has now reached a level that I think represents an attractive investment opportunity. NIHD right now trades at only 11 times 2007 cash flow estimates of about $900 million, including net debt of $500 million. I would expect the stock to trade between 10 and 12 times cash flow, which makes the current valuation look reasonable, but only if no further growth is expected.

If we assume cash flow can grow nearly 20% annually for the next three years (not a very aggressive forecast given current projections), NIHD's EBITDA would reach $1.5 billion by 2010. Assigning a conservative 10 times multiple gets you to a share price of $75 to $80 per share, about 50% above current levels. Such a return would likely outpace the market by a factor of two.

Former Tech Highflier Gets Infusion of New Blood

When really smart people decide to devote time and money to a beleaguered company that possesses a strong market position but has suffered from lack of execution, it usually means change is on the horizon. In this case, the company is a former highflier in the technology industry, PDA and smart phone pioneer Palm, Inc (PALM). While technology stocks have been market leaders recently, Palm shares have been lagging for years. Although the company has maintained a solid number two position in the marketplace behind Research in Motion (RIMM), sporadic profitability and product innovation has led investors to look elsewhere. The result is a stock that is trading below one times current year revenue forecasts.

Normally there would be little reason to think the fortunes of Palm would be changing anytime soon, but a recently completed recapitalization plan indicates otherwise. Private equity firm Elevation Partners, led by the highly successful tech investor Roger McNamee, invested $325 million in Palm as part of the plan, and in return now owns 27% of the company via convertible preferred stock holdings. The preferred issuance converts at a share price of $8.50, slightly above the current quote of $8.88 each. As a result, investors can essentially invest alongside Elevation given the proximity of the firm’s breakeven point and the current price of the stock.

That said, an investment alone would not necessarily have an impact on the company’s turnaround efforts. However, key additions to Palm’s board, which were concurrent with the $325 million investment from Elevation, point to the desire to make meaningful changes to maximize Palm’s leadership position in the mobile device market. Jon Rubinstein, former senior vice president of hardware engineering and head of the iPod division at Apple (AAPL), has taken over as chairman of the board at Palm, and Elevation’s managing directors and co-founders, the aforementioned McNamee and Fred Anderson, are filling two other director seats vacated by the exit of prior members of the Palm management team.

Changes at the top of a company, even involving smart tech investo visionaries with strong track records, do not ensure a turnaround at Palm will take shape. However, there is clearly potential for vast improvement over the execution levels achieved in recent years. Given that the stock is cheap on a price to sales basis (market value of $1.3 billion versus 2007 revenue of $1.5 billion) and investors can purchase shares near where Elevation’s convert price sits, there is reason to believe there is value at the current quote of $8.88 per share.

Given the changes that are being made at the company, spearheaded by Elevation with their investment, clearly a renewed focus on operational improvement should be paramount. If not, why would Elevation have bothered bringing in a new chairman and insisted on filling three of the company’s nine board seats? Clearly, they are committed to trying to enact positive change. Investors might want to consider running alongside them since they have that ability right now.

One might think finding values in the healthcare sector would be tougher right now given the volatile economic and market climate we are facing in the United States. With slowing economic growth, credit access tightening, and consumer-led recession worries ruling the day, healthcare stocks are supposed to be viewed as a safe haven. They still are, but for some reason they really haven't performed all that well in recent months. However, the fact that they are somewhat recession-proof compared with other areas of the economy, coupled with an aging baby boomer population, investors should easily be able to see why attractively priced healthcare stocks could prove to be bargains in coming years.

One such name I chose to highlight here is Zimmer Holdings (ZMH). While not a well known brand name, Zimmer makes reconstructive orthopaedic implants, a growth segment of the healthcare industry and one that should have little problem continuing on a growth track as our population ages further, on average. If you are in the market for a new knee, hip, shoulder, or elbow, Zimmer is one of a handful of companies that manufacture them for use in reconstructive surgery.

Despite a solid track record and an industry that has grown revenue in the 8 to 10 percent range annually, Zimmer shares currently trade around $64 per share, down from an all-time high of $94 earlier this year. Short term worries over a lack of new product cycle have led to a below-average valuation relative to the group as a whole. Even without a lineup of impressive new products in the short term, Zimmer figures to remain one of the largest industry players over the long term, along with companies like Stryker and Biomet. Product cycles are, by definition, cyclical, but even if growth rates at Zimmer fail to match other firms in coming quarters, the stock looks like a bargain after a more than 30% haircut.

ZMH trades at only 15 times 2008 earnings estimates of $4.24 per share. Sales and earnings are only expected to rise by 8-9 percent next year, due to lack of new product introductions, but over the course of the cycle, revenue growth of 8-10 percent and profit growth of 10-15 percent annually are very reasonable expectations for investors to have. As a result, orthopaedic equipment firms have traditionally traded at P/E ratios anywhere between the mid teens and the low twenties. With the stock at trough valuations right now, an economic slowdown in the intermediate term, and new products longer term, could both serve as catalysts for ZMH to see profit acceleration and multiple expansion. As negative sentiment abates over time, gains of 20 to 30 percent or more could surely materialize for investors.