We’ve always cared primarily about our social mission. This is a different approach for a public company to take. 

Simply put: we don’t build services to make money; we make money to build better services. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits. 

– Mark Zuckerberg, Facebook CEO

(pages 67-70 of IPO registration statement)

Back in October 2010 I reviewed The Social Network movie, the semi-fictionalized account of how Harvard student Mark Zuckerberg founded social-networking website Facebook. At the time, I speculated that Facebook wouldn’t go public until “either 2012 or 2013.” With the February 1^st filing at the SEC of an S-1 registration statement, it turns out that the Facebook IPO will occur sooner rather than later. IPO registration statements typically are filed a few months prior to a company going public, so I now expect the Facebook IPO to happen during the first half of 2012 (ticker symbol: FB). One thing is certain: it’s going to be huge with a first-day pop that will blow your socks off. What is less certain is whether the stock will be a good investment for the average person who buys in after the first-day pop.

Over the past year, I have analyzed the registration statements of two other social-networking stocks concurrent with or prior to their IPOs: LinkedIn (NasdaqGS: LNKD) and Groupon (NasdaqGS: GRPN). Neither company’s financial impressed me. Groupon was losing money – making a PE ratio meaningless — and LinkedIn was earning only $0.17 per share, which valued the stock at an astronomical PE ratio of 594. Anyone who bought either stock at the close of the first day of trading has lost money, down -15.2% with LinkedIn and down 7.9% with Groupon.  In both cases, you were much better off waiting a full month after the IPO to buy.

Facebook Registration Statement Looks Good: Profitable

Below are some pertinent “pro forma” fiscal 2011 facts from the registration statement and the private stock auction site SharesPost:

• 845 million monthly active users (MAUs)

• Year-over-year growth in MAUs: 39% (p. 1)

• Revenue: $3.7 billion (p. F-12)

• Revenue from advertising: $3.2 billion (85% of total) (p. F-12)

• Year-over-year revenue growth: 88%

• Net income: $1.0 billion (p. F-16)

• Year-over-year net income growth: 65% (p. 9)

• Free cash flow: $470 million (p. 41)

• Year-over-year free cash flow growth: 150%

• Cash and equivalents balance: $3.9 billion (p. 41)

• Diluted earnings per share: $0.43 (p. 9)

• Shares outstanding: 2.33 billion (p. F-16)

• Valuation: $96.5 billion (Sharespost)

• Price per share: $41 (Sharespost)

• Amount raised in IPO: $5 billion (first page of filing)

Facebook Valuation is Expensive But Better Than Many Other Internet IPOs

Based on this data, we can compute some Facebook valuation ratios:

Price to earnings: 95.3

Price to sales: 26

Now let’s compare these numbers to those of other Internet companies at their IPO:

The basic conclusion I get from this comparison is that Facebook is unusual among Internet stocks in its profitability. That’s a good thing. While its price-to-sales ratio is higher than most, its greater profitability may warrant it. After all, what counts is cash flow and earnings, not sales. Sales are simply a means to the end goal of profits. You can’t eat sales. Just ask any of the “dot bomb” stocks of the 1999-2000 Internet bubble. Google was the rare exception in that it was both profitable and priced at a reasonable multiple of sales. In contrast, the relatively low price-to-sales ratios of Groupon and LinkedIn make sense because they aren’t very profitable and consequently investors are not willing to pay much for profitless sales figures.

Facebook is Playing the Scarcity Game with Very Low Public Float

Based on a valuation of $96.5 billion, selling $5 billion in the IPO constitutes an initial float of only 5.2%, which would constitute an even lower float percentage than Groupon’s 6.3%, which at the time of its November IPO constituted the lowest percentage of shares offered by any U.S. Internet company in the past decade. This low float will guarantee Facebook a huge first-day pop, but is a red flag for me because it smacks of scarcity-induced stock manipulation.

Bottom line: Facebook is a real company that can turn a profit, so it will be a much better investment than most Internet IPOs, including LinkedIn, Groupon, and Zynga (NasdaqGS: ZNGA). I seriously doubt that Facebook’s stock will perform anywhere near as well as Google’s stock has since its August 2004 IPO. Facebook is an “upper middle class” Internet IPO, but short of royalty.

Facebook’s Business Model is Dangerously Skewed Toward Advertising

Keep in mind that Facebook’s growth – while historically impressive – is slowing and it recently missed its own internal revenue growth projections by a whopping $500 million. Although 845 million users create quite a “network effect,” Yahoo! arguably has a similar network effect with its web portal and yet it has struggled to convince its user base to buy anything. Like Facebook, Yahoo! gets almost all of its revenue from advertisers with only a sliver coming from users. Facebook users are willing to do that weird “poke” thing, as well as press “like” and play free Zynga games until the cows come home, but I’ve never bought anything on Facebook and I don’t think I’m unusual in that regard.

Furthermore, most postings on Facebook and other social media are really annoying and make me less likely to spend time on the site, let alone buy anything. I don’t really care if you’re tired or that you ate pasta for dinner. Most people agree with me that these kind of posts are “TMI” (too much information). Take, for example, tweets on Twitter. According to a recent academic study, people find almost two-thirds of tweets to be worthless. If Facebook users are similar to Twitter users and consider two thirds of Facebook posts to be worthless, Facebook’s future growth potential could be limited.

If you divide Facebook’s 2011 revenue of $3.7 billion by 845 million users, you get $4.39 — the amount of annual revenue per registered user. Compared to its competitors, $4.39 is very low. For example, Google gets more than $30 in annual revenue per user and even second-stringers like AOL (NYSE: AOL) and Yahoo! get $10 and $7, respectively. 

On the positive side, the University of Chicago has found that social networking is more addictive than alcohol or nicotine and the Pew Research Center discovered that “the longer someone has been on Facebook, the more active they are.” In other words, most of Facebook’s existing 845 million users will stick around a long time and give Facebook a chance to figure out how to sell to them.

Facebook Needs to Diversify Revenue Streams or it Will Become the Next Yahoo! (Not Good)

The good news is that Facebook has captured 96 of the top 100 U.S. advertisers. The bad news is that these advertisers might not stick around since they reportedly are disappointed in the effectiveness of Facebook ads. According to Forrester analyst Nate Elliott:

We’re hearing from our clients that their return on investment from Facebook ads doesn’t look anything nearly like what it does for TV, print and radio ads, or from Google advertising. I don’t think this will be a problem in 2012. But if marketers find in 2012 that Facebook ads still aren’t delivering, I would worry about how much they spend in 2013.

Facebook’s revenue model is exceedingly simplistic. They sell lightly targeted static advertising badges. This is an ad model that hasn’t really changed since 1997.

Facebook is the new Yahoo. And they desperately don’t want to be Yahoo!

Granted, Google gets 96% of its revenue from advertisers (even more than Facebook’s 85%), but Google’s advertising revenue comes from paid search, which is a unique animal that has already proven its worth to advertisers — unlike the static banner ads on Facebook and Yahoo! Whereas Facebook desperately doesn’t want to be Yahoo!, it would love to be Google.

Facebook’s Future Profitability Depends on Conquering Social Search

If Facebook doesn’t want to meet the same fate as Yahoo!, it is going to have to go beyond display ads and monetize “social search,” which prioritizes search results by social interaction rather than relevance. As one analyst describes it:

If I want to purchase a new television, I could use Google, Yahoo! or Bing to gain access to several product listings and online retailers. I can learn a lot of information from running this kind of search, but the results still fail to contain a vital element to any potential customer experience: trust.

By contrast, suppose I ask my friends and family which television I should purchase. The responses I receive from my friends and family are probably not as comprehensive as my digital search. Nevertheless, because I trust my friend, the information I collect from them carries a different weight than the results I gain from an internet search engine.

Google is the king of search and Facebook is the king of social networking. Both companies are vying to be the first to combine the two skill sets and dominate the next phase of the Internet some are calling “Web 3.0.”

Wait at Least a Month Post-IPO Before Buying Facebook

Given the massive uncertainty that Facebook will come out on top in the Web 3.0 arms race, I think it best for investors to avoid Facebook stock until its sky-high valuation comes down a bit. At the very least, I would wait at least a month after the IPO to consider buying since almost all Internet IPOs fall back to earth after the initial first-day pop. Granted, Google bottomed only two weeks after its IPO, but Facebook is no Google.

The S&P 500 has confounded the bears and is off to its best start in years, rallying almost 7 percent in a little more than a month of trading. The Dow Jones industrial average is testing its 2011 high, the Nasdaq is hovering near an 11-year high, and the S&P 500 is within 2 percent of its 2011 peak.

This breathtaking rally continues a pattern that played out in 2010 and 2011: The bipolar stock market fluctuates wildly between bouts of extreme risk aversion and periods where investors frantically add riskier assets. This risk-on/risk-off pattern is unlikely to change; investors unwilling to be flexible stand the risk of underperforming,

After an uninterrupted rally of this magnitude, investors should be prepared for the inevitable correction. In each of the past two years, the S&P 500 has witnessed a short-term pullback that begins in February. In 2010 the S&P 500 gave up about 9 percent, while last year the index lost about 7 percent of its value. Past history isn’t necessarily predictive of future events, but similar dynamics appear to be at work in 2012.

Timing short-term pullbacks in the stock market is a fool’s errand; these corrections are sudden and often lack an apparent catalyst. But there’s an old Wall Street saw that investors should sell when they can, not when they have to. When the market is in rallying, investors should lock in some gains and hold the proceeds for the next selloff. Here’s my game plan.

1. Don’t chase stocks. All the stocks highlighted in Personal Finance include buy targets that instill price discipline: By adhering to these targets, we avoid overpaying for stocks. It’s tough to stay on the sideline when the stock market rallies, but no stock is a buy at any price.

For example, in this week’s issue of The Energy Strategist, I dropped SandRidge Mississippian Trust I (NYSE: SDT) from my Best Buys list because the stock has gained almost 50 percent and trades more than 10 percent above my buy target. I remain bullish on the stock and its growth prospects, but I’d rather wait for the stock to pull back.

2. Don’t be afraid to take partial profits on winners. Whenever one of your stock holdings appreciates considerably in a short period, you should always consider taking some money off the table. Deciding to sell a stock is much more difficult than adding one to your portfolio; nobody wants to cash out early and miss out on an additional 15 percent to 20 percent of upside.

But selling a stock doesn’t have to be an all-or-nothing decision. If you paid $11,745 for 500 units of SandRidge Mississippian Trust I at the close on Oct. 6, 2011, you’ve received distributions of $408.21 to and are sitting on a capital gain of $5,298.75. In other words, your stake would now be worth $17,553.08.

To protect turn prevent your paper profit from being eroded in a correction, sell about 150 units of SandRidge Mississippian Trust I and hold the remaining 350 units. This move pares your position to your original investment of about $12,000 and secures your profits. In the event that the stock pulls back below my buy target, you can purchase additional units at a favorable price.

3. Buy in batches. If you plan to invest a sizable amount of cash in the stock market, consider making incremental purchases over time rather than investing one lump sum. For example, you could put $30,000 to work right away, invest another $30,000 toward the end of the quarter and reserve the balance for a 5 percent to 10 percent correction in the broader market.

By dividing your purchases over time, you’ll gain some immediate exposure if the stock market continues to rally. At the same time, if the market pulls back, all of your capital won’t be exposed to this correction. Keeping some powder dry for a pullback is a great way to pick up high-quality stocks at favorable valuations.

Even with occasional bouts of short-term profit-taking, the S&P 500 should trend higher in the coming month, supported by four developments:

• Improved US economic data reduce the likelihood that the country will lapse into recession in 2012;
• China’s economy appears to have stabilize, reducing the odds of a hard landing;
• Stress in the EU and interbank lending market has receded for the time being; and
• Facebook’s initial public offering has renewed investors’ interest in tech stocks.

Bearish commentators would struggle to find a weak point the US employment numbers from January. The nation added 243,000 jobs in the month, including 257,000 private-sector jobs, trouncing analysts’ consensus estimate for a gain of about 150,000 jobs.

The Bureau of Labor Statistics (BLS) also raised its estimate of private nonfarm payrolls by 8,000, to 220,000. The courier and package delivery industry had accounted for many of the jobs created in December, prompting critics to suggest that these temporary positions would disappear after the holiday season. But these job gains held in January, vitiating this argument.  

The recent decline in initial jobless claims, coupled with employment statistics from the BLS and ADP Employer Services, suggest that hiring has accelerated in the private sector. The economy isn’t booming, but a recession doesn’t appear to looming.

Developments in global credit markets are equally encouraging.

The TED spread, which measures stress in the interbank lending market, has tumbled to about 45 basis points from about 58 basis points at the end of 2011. That banks are willing to lender money to one another suggests that fear that an EU financial institution would collapse because of its exposure to troubled sovereign debt.

Meanwhile, the yield on 10-year bonds issued by the Italian government has tumbled a whopping 200 basis points since late November.

I was one of the last people I know to join Facebook, though I’m now active on the site,   Seeking Alpha and Twitter. Even if you’re not interested in social networking, it’s tough not to be impressed by some of the statistics in Facebook’s registration statement with the Securities and Exchange Commission.

According to the document, Facebook boasts 845 million active users who visit the site regularly regular basis. The number of active Facebook users surged almost 40 percent in 2011 and is up 330 percent since March 2009. The site is also a global phenomenon: 179 million users live in the US and Canada, while Asia is home to more than 212 million Facebook users and Europe has 229 million.

In 2011 Facebook generated $3.71 billion in revenue, up 88 percent from 2010. Advertising accounted for about 88 percent of that revenue, and the company is just scratching the surface of that market. For instance, Facebook doesn’t serve advertisements to users accessing the site through their smartphones.

Of course, the stock price will determine whether the Facebook IPO is worth buying. But investors should remember that when Google (NSDQ: GOOG) went public in 2004, many pundits argued that the stock was overvalued. The stock didn’t read these research reports and rallied to about $750 at its all-time high from about $100 per share at its IPO. Google revolutionized the advertising industry, and Facebook may do the same; truly revolutionary companies merit high valuations.

In the near term, Facebook’s pending IPO has generated a great deal of interest in other social media names. For example, shares of LinkedIn (NSDQ: LNKD), a social media firm that went public last May, has rallied sharply over the past few days. And Zynga (NSDQ: ZNGA), a firm that uses Facebook as a platform for its videogames, is up 40 percent over just the past week. Neither of these stocks rates a buy, but these rallies highlight the pent-up investor interest for this sort of fare. It’s hard to quantify the impact, but blockbuster IPOs attract a lot of attention from the public and can generate interest in the market.  

Master limited partnerships (MLP) have been around for almost three decades–Apache Oil Company, the first such partnership, launched in 1981–but these forbearers differed greatly from the modern-day incarnation. Though intended to facilitate investment in the energy industry, early MLPs gravitated toward exploration and production but also engaged in a wide range of other businesses.

By the end of 1986, there were 34 MLPs that operated outside the oil and gas industry, including offerings involved in restaurants, nursing homes, cable television and mortgage banking.

But many investors learned the hard way that cyclical businesses didn’t necessarily lend themselves to the MLP structure; the worst offerings failed to generate sufficient cash to support their high, tax-advantaged yields.

The modern MLP traces its roots back to the Tax Reform Act of 1986 and the Revenue Act of 1987, which required master limited partnerships to generate at least 90 percent of their income from “qualified” sources–many of which were related to natural resources.

In recent years, energy-focused MLPs have become more popular for the very same reasons as in the mid-1980s: high yields and tax advantages.

 A Compelling Case

Yield chasers have long flocked to MLPs. An article in the March 19, 1987, edition of the Wall Street Journal noted that “in order to be competitive” an MLP needed to yield 9 percent to 10 percent.

Today, MLPs are an attractive alternative to a frothy bond market, where spreads on high-yield issues appear insufficient to compensate for underlying risks. And whereas the S&P 500 yields 2 percent and the MSCI US REIT Index yields 3.4 percent, the Alerian MLP Index yields about 5.8 percent.   

The group’s safety has also been a selling point to investors seeking reliable income streams: Many MLPs managed to maintain their quarterly distributions throughout the 2008-09 credit crunch and collapse in oil and gas prices. Over the past two years, investment banks and asset management firms have launched more than 23 funds focused on MLPs.

The accompanying marketing efforts often tout the safety of midstream energy partnerships, likening these businesses to “toll roads” that generate reliable fee-based income regardless of commodity prices and economic conditions–an appealing pitch to investors scarred by

MLPs also offer significant tax advantages. As pass-through entities, MLPs don’t pay federal income taxes at the corporate level. They spread this responsibility among unitholders.

This tax relief is a huge advantage when these firms compete with traditional corporations for acquisitions–one way in which MLPs grow their distributions. And investors avoid the double taxation to which corporate dividends are subject. (The government taxes corporation’s earnings as well as the dividend payments received by individual investors).

Better yet, the Internal Revenue Service generally treats 80 percent to 90 percent of the distribution investors receive as a return of capital, limiting current tax liability. Rather, the amount paid is subtracted from the cost basis; taxes are due as a long-term capital gain when you sell your position.

In other words, 80 percent to 90 percent of the distribution you receive from an MLP is tax-deferred. The remaining piece of each distribution is taxed at normal income tax rates, not the special dividend tax rate. But the piece taxed at full income tax rates is only 10 percent to 20 percent of the total distribution–a substantial deferred-tax shield.

The group could become even more attractive in 2013, when the top rate on dividends is slated to increase from 15 percent to 20 percent in the best case or nearly 40 percent in the worst case.

Pitfalls and Opportunities

All too often, investors focus on a partnership’s yield rather than its underlying business. This shortsightedness is hardly a new problem. Writing for the Wall Street Journal in March 1987, Barbara Donnelly noted, “Investors are focusing too much on yield, ignoring whether the underlying business can really support such high payouts.”

Twenty-five years later, investors are prone to the same mistake. Although the financial crisis and stock market implosion of 2008 and early 2009 chastened investors about the dangers of reaching for high-yielding names, many continue to pursue the same shortsighted strategy in an effort to recover the wealth they lost three years ago.

At the same time, the Alerian MLP Index’s yield has declined from about 7.5 percent in the first quarter of 2010 to 5.8 percent today. In recent months, robust inflows into the group’s blue chips–Kinder Morgan Energy Partners LP (NYSE: KMP), Enterprise Products Partners LP (NYSE: EPD) and Plains All American Pipeline LP (NYSE: EPD)–have pushed these stocks to 52-week highs and lowered current yields.

Rather than speculating on high-yield fare or overpaying for steadier names, investors should consider setting buy-limit orders at attractive prices on less-risky names. We expect the stock market to remain volatile over the coming year and wouldn’t be surprised if equities swooned for the third consecutive summer. With the US economy growing at an anemic rate and the ongoing EU sovereign-debt crisis unlikely to be resolved soon, investors should have ample opportunity to pick up units of some overbought at MLPs at favorable prices.

Initial public offerings (IPO) also provide investors with an opportunity to lock in high yields on quality MLPs. Many financial websites misreport the yields on these fledgling stocks until the MLP has paid several quarters’ worth of distributions. Savvy investors often have an opportunity to buy these names at a discount before the yield-hungry herds rush in.

MLP IPOs surged in 2011 after taking a breather from 2008-10, reflecting strong equity markets and rising demand among investors for high-yielding securities and the tax advantages associated with the structure. (See The Case for MLPs: Investor Psychology and Demographics.) 

Source: Bloomberg

We expect this trend to continue as energy infrastructure owners seek to monetize energy-related assets.

Investing in MLP IPOs can be lucrative, but selectivity is critical to distinguishing the winners from the losers. Some new MLPs boast solid assets and a workable strategy to grow their distributions; others go public so their sponsors can exit their position and turn a profit.

Understanding the difference between solid and questionable MLP IPOs requires taking a close look at the firm’s underlying assets and growth prospects.

Consider the timing of Niska Gas Storage Partners LP (NYSE: NKA) and PAA Natural Gas Storage (NYSE: PNG), which went public in quick succession in late spring of 2010.

At the time, fundamentals in the gas storage business had started to deteriorate. Demand for storage capacity hinges on the spread between summer-winter spread in natural gas prices. Traders often purchase inexpensive gas during the spring and summer (periods of relatively weak demand), and sell these inventories for higher prices in the winter (a period of higher demand and inventory withdrawals).

However, the glut of production from the nation’s prolific shale gas plays has eroded the winter-summer spread and potential profits, reducing demand for storage. Curiously, both MLPs sponsors–private-equity firm Carlyle/Riverstone and Plains All American Pipeline LP (NYSE: PAA)–saw fit to spin their gas storage assets off in the year that the US overtook Russia as the world’s leading producer of natural gas.

Both MLPs have pulled back substantially this year, as the winter-summer spread has eroded considerably. This headwind is likely to persist for at least the next two to three years, pressuring pricing on contracts up for renewal. During Plains All American Pipeline and PAA Natural Gas Storage’s joint conference call to discuss fourth-quarter results, one analyst asked if the sponsor would consider rolling up PAA Natural Gas Storage if business conditions deteriorate further.

Niska Gas Storage Partners, however, is arguably in worse shape: Only 60 percent of the MLP’s storage capacity is covered by long-term contracts, and management suspended distribution payments on the subordinate units because of a shortage in cash flow.

Remember the lessons of the 1980s: Forget the yield–instead focus on the underlying fundamentals of each MLP in your portfolio.

Is Madam Blue back at last? Since the recovery began in March 2009 US economic growth has been dogged but extremely uneven, buoyed by the relentless expansion in Asia but narrowly avoiding a series of near-cataclysmic events, any one of which could have reversed whatever progress had been made.

This morning, however, the Labor Dept issued its most bullish report on employment since the 2008-09 market crash/credit crunch. The headline highlight: A drop in the unemployment rate to just 8.3 percent.

Politicians and presidential candidates will rightly point out that unemployment was “just” 7.8 percent when President Obama took office. But the report is just one of many signs that the world’s largest economy is no longer a basket case. In fact, reviving US growth could well wind up being a major positive surprise for the global economy and stock markets in 2012.

One of the few forecasters to predict anything positive for the US economy has been my colleague Elliott Gue, through his “Recession Radar” indicator. Published in every bi-weekly issue of Personal Finance, Recession Radar focuses on the stock market and unemployment claims, the only employment indicator that’s not revised ad nauseum. The indicator has consistently forecast the US economy will do better than expectations in recent months–and it now sets the odds of a US recession at just 13 percent this year.

Of course, expectations are what it’s all about when it comes to the economy’s effect on the stock market, just as they are when it comes to assessing the prospects of individual companies. It’s not so much how the economy or the company in question actually performs. Rather, it’s how that performance measures up to what investors are expecting.

Elliott’s advice notwithstanding, investors’ expectations for the US economy have rarely been lower, at least if recent headlines and prognostications are any guide. The silver lining is they’ve also rarely been easier to beat.

This accounts for the stock market’s robust performance whenever an individual indicator like such as the unemployment rate beats expectations. And it’s why many stocks that posted seemingly dismal earnings during this reporting season have gone up.

Simply, the companies performed better as businesses than the previous investor consensus had predicted. And because their stocks were priced for much worse, a rally was inevitable.

To be sure, there are headwinds facing income investors now as well as positives. Record-low corporate borrowing rates remain a huge plus for companies refinancing debt to cut interest costs, as well as those looking to expand operations. Rising industrial activity and lower unemployment are fueling growth of underlying sales in many dividend-paying sectors.

A revived US economy will take a lot of pressure off regulators regarding utility rates. That will allow them to continue encouraging long-term planning, which is the formula for lower rates over the long term as well as healthy utility balance sheets and dividend growth. And there’s still little inflation to push up costs or erode the purchasing power of dividends.

Countering that, however, is the possibility of a credit event in Europe at least temporarily tightening conditions here and derailing growth. Shrinking budgets at state and local governments are a threat to boost unemployment even as the private sector fires up.

The still somewhat opaque nature of China’s economy remains a threat to reduce demand for resources, crimping a sector that’s been a mainstay of income portfolios the past three years. And crashing natural gas prices are hurting margins at many dividend-paying companies, even as they’re helping others.

All of these factors have the potential to severely whack earnings at dividend paying companies. And the higher stocks go, the higher expectations will be, and the greater the potential for disappointment.

The upshot: Let’s acknowledge the good news on the US economy. But let’s not allow our expectations run wild, particularly by assuming risks at our individual stocks will drop. There are still plenty of snares in this market and economy to trap the unwary. And there’s still absolutely no substitute for putting every company under the microscope every time major news such as earnings comes out.

For most companies, this reporting season includes full-year results as well as quarterly numbers. And given the regulations heaped on in recent years for financial reporting, small companies especially need additional time. As a result, we’re not going to have numbers for some companies until the end of March.

That’s a stark contrast to the much more compact reporting seasons in spring, summer and fall, which are mostly over with in a few weeks. And it does diminish the value of looking at the “snap shot” numbers, such as balance sheet items.

However, management teams do typically use the accompanying conference calls in winter reporting season to lay down guidance for the current year. And used in conjunction with dynamic numbers such as operations growth, they provide a pretty clear picture of the health and growth of the company’s operations.

Debt, meanwhile, is always best assessed in terms of what’s coming due. And that information remains readily available from looking at companies’ reported action in capital markets.

I’ll be looking closely as ever at how portfolio companies in my advisories stack up. I’ll be quick to heap praise on those that top my expectations as well as to unload any that abruptly shift negative.

The first key to solid income investing performance 2011 was focusing on dividend paying stocks, which again were the only income investment paying livable yields. That’s still the case today.

The second key was to balance and diversify among stocks in different sectors. The third was to keep a close watch on the underlying businesses of the stocks you own. And the fourth was to avoid emotional responses to market volatility, such as averaging down in falling stocks and refusing to get rid of weakening businesses.

These remain the keys to strong performance for income investors in 2012. A healthier US economy is certainly good news for all. But the unfortunate fact is not all stocks are going to be in the black this year. Moreover, stocks are still going to have their ups and downs, even if volatility is less intense this year.

The bottom line: Let’s keep our feet on the ground as the economic news improves, just as we did in past years when it seemed to worsen every day. The last three years have been good ones by and large for dividend-paying stocks by following this plan. And if we stick to it, 2012 will be a fourth, and possibly the best yet.

January 2012 was a very good month for world stock markets. The S&P 500 enjoyed its highest gains at the outset of a year since 1989. Other markets saw similar strong starts:

• United Kingdom stocks up most in 23 years
• Emerging market stocks up most since 2001
• Gold bullion up most since 1980

A big up-move to start a year does not guarantee that market will produce a positive gain for the full year–emerging market stocks actually fell 4.9 percent in 2001 after rising 14 percent in January of that year.

Federal Reserve Extends ZIRP By 18 Months

The bullish tone so far in 2012 was helped last week by the Federal Reserve, which surprised many observers by extending its commitment to a zero interest rate policy (ZIRP) for an additional 18 months–from mid 2013 to late 2014. Fed Chairman Ben Bernanke also opened the door to a possible third round of quantitative easing (QE3) by stating:

The Committee recognizes the hardships imposed by high and persistent unemployment in an underperforming economy and it is prepared to provide further monetary accommodation if employment is not making sufficient progress toward our assessment of its maximum level or if inflation shows signs of moving further below its mandated consistent rate.

PIMCO bond chief Bill Gross thinks QE3 will be just the beginning, stating that “a third, fourth and fifth round of easing lie ahead.” He considers ZIRP and more quantitative easing to be forms of “financial repression” that will keep real interest rates negative and make it impossible for fixed-income savers to earn a return that keeps up with inflation. Bernanke has publicly stated that he believes a sustainable economic recovery won’t take hold until the housing market improves, so Gross has bet big that the Fed’s next round of monetary easing will focus on buying mortgage-backed securities, which will result in lower home mortgage rates.

ZIRP Helps Financial Assets and Commodities, But Not Real Economy

QE3 and negative real interest rates are very bullish for gold and other commodities and stocks are likely to come along for the ride. But Gross makes a convincing argument that ZIRP actually makes the economy weaker because financial institutions no longer find it profitable to provide loans or offer money market funds, so banks take more and more of the nation’s money supply out of circulation and park it at the Federal Reserve. The end result is that ZIRP causes financial assets to rise, but the real economy remains moribund and what little economic activity occurs is limited to paying down debt. Eventually, the debt burden will be paid off and economic growth will resume. But the resumption of growth will be impeded by the huge money supply caused by all the rounds of quantitative easing. Additionally, hyperinflation becomes a real risk.

Not a pretty picture, but the likelihood of financial asset inflation in the face of QE3 and subsequent rounds of easing lead me to believe that a prolonged and severe stock market decline is probably unlikely. Even if corporate earnings growth slows down or even reverses, stock prices could remain flat if the earnings weakness is counterbalanced by higher valuation multiples caused by more quantitative easing. If earnings fall too much, stocks will fall even with quantitative easing.

Stock Market is Cheap Based on Current Earnings But Could Be Value Trap

So my market forecast depends upon how much of an earnings slowdown actually occurs. To a large extent, the stock market is already anticipating an earnings slowdown as its collective price-to-earnings (PE) ratio has been below its long-term average PE ratio for 446 days–the longest stretch since the 13 years beginning in 1973. With the S&P 500 index’s PE ratio currently at only 13.7, the index would need to rise above 1,700 to get back to the long-term average PE ratio of 16.4.

A return to an average PE ratio of 16.4 is unlikely because investors are scared about the future and have been cashing out of the stock market. Only 57.9 percent of all US companies that have reported fourth-quarter earnings in January have beaten analyst earnings estimates–the lowest percentage since early 2009. Furthermore, there are 3.3 percent more companies lowering earnings guidance for the upcoming first quarter than raising guidance, which is also the largest negative discrepancy since 2009.

The Economic Cycle Research Institute (ECRI) continues to forecast a US recession, as the year-over-year growth in the Weekly Leading Index (WLI) during the latest reporting period remains negative at -6.5 percent. To be fair, the WLI growth rate has improved recently with the latest -6.5 percent number being the least negative since early September. But during the 2008 Great Recession, WLI’s negative growth improved from -10.7 percent on March 28, 2008, to -5.5 percent on May 23, 2008, without changing the economic tumoil to come, so it’s way too early to conclude that ECRI is wrong.

Robert Dieli’s Mr. Model Says ECRI’s Recession Call is Wrong

However, economic optimists may be happy to learn that another highly regarded economic forecaster–Robert F. Dieli of Mr. Model fame–does not see a US recession occurring anytime in at least the next nine months. According to analyst Jeff Miller:

In the 50-year history of Mr. Model, when the indicator is at current levels, there has NEVER been a recession within nine months. In fact, we are not even close to the nine-month signal.

Europe remains a mess with Fitch Ratings downgrading five eurozone countries, including Italy and Spain. Greece’s impending agreement with private creditors to forgive 70 percent of the $270 billion of debt owed (up from a 50 percent cut) is a default by any other name. The European Central Bank’s (ECB) Long-Term Refinancing Operation (LTRO) gives European banks unlimited 3-year loans at 1 percent and has reduced pressure on Italian 10-year government bond yields–down to 5.60 percent from over 7 percent a few weeks ago. But Portugal is spiraling out of control with 10-year yields briefly hitting 16.6 percent earlier this week (now 15.2%), the highest they have been since the creation of the euro. Beyond that, Spain’s economy contracted in the fourth quarter with a long recession now a certainty.

News that 25 out of 27 eurozone countries have agreed to tighter fiscal spending limits is meaningless since these new fiscal limits aren’t very different from the fiscal limits that have been in place all along. The bottom line: the ECB’s LTRO program has delayed a Lehman-like financial event in Europe, but bank credit is still tightening for the worse. And French President Nicolas Sarkozy’s likely loss in the elections slated for late April could cause a new euro crisis if it means France backs away from its bailout commitments.  

S&P 500 “Golden Cross” Points to Higher Prices in the Intermediate Term

From a technical standpoint, the S&P 500 is on the verge of experiencing a “golden cross” where the 50-day simple moving average (SMA) crosses above the 200-day moving average. In early January a golden cross based on the exponential moving average (EMA) had occurred on the S&P 500, but a SMA golden-cross crossover is now confirming the earlier crossover. SMA crossovers are historically longer-lasting bull signals, so this is a good sign. According to Birinyi Associates, in the 26 instances since 1962 when the S&P 500 has experienced a golden cross, the market was higher six months later 81 percent of the time.

In the shorter term, investor sentiment has become overwhelmingly optimistic based on a collection of different measurements, including AAII, Investors Intelligence, and the negative put skew in S&P 100 options, as well as the fact that the S&P 500 is three standard deviations above its 20-day moving average. Based on history, when sentiment becomes too bullish, a significant correction typically occurs.

While the long-term fundamentals for the agricultural sector remain intact, investors are enduring a 17 percent decline in agricultural commodity prices since last year’s all-time highs.

At present, the corn market is of particular interest. The ERUR (end-stocks-to-use ratio) for corn suggests that the global corn market is vulnerable to a sudden supply or demand shock, as the indicator has been hovering near record lows.

Although there have been upward revisions in crop sizes around the world, the supply is not nearly as ample as is generally believed, and any disruptions could significantly alter the supply-demand balance.

Nevertheless, fertilizer stocks should be major beneficiaries of a rally in agricultural sector equities later this year. In fact, the declines in the sector over the past year have reduced valuations to levels last seen more than two years ago.

At these levels, fertilizer stocks are more than pricing in the recent decline in agricultural commodity prices, and further downside appears limited unless there’s a new global economic recession. Indeed, bad news about the Argentinean corn crop or a delay in the US corn planting season could send prices back to their highs.

Potash Corp of Saskatchewan (NYSE: POT) is our top pick among fertilizer stocks because it offers exposure to all three major fertilizers. The company controls nearly a quarter of the world’s total potash mining and production capacity and is by far the largest player in this market.

The potash market is an oligopoly, with the six largest players essentially controlling the market. These companies have proved adept at managing supplies in recent years, maintaining pricing and margins by shuttering production facilities following declines in demand. And Potash Corp’s mines in Canada are among the lowest-cost sources of this key fertilizer in the world.

The company suffered a weak fourth quarter, as Asian demand slowed and dealers and distributors delayed new orders because of economic uncertainty. However, management suggested that despite a decline in its fertilizer sales during the fourth quarter, actual applications of fertilizer by farmers remained strong, an indication that producers and distributors have been drawing down their inventories.

As we noted in a recent commentary: “…while such caution is expected to continue into the first quarter of this year, the US spring planting season is just a few months away, and agricultural economics are still attractive even if prices are off their highs.

The US Dept. of Agriculture (USDA) raised its estimate of last year’s corn crop in recent months, but poor growing conditions throughout much of last season stressed crops and hurt yields. Farmers are expected to aggressively plant acreage this year in an effort to offset that showing. The company expects that to lead to more robust sales as the year progresses and dealers restock their inventories.”

The bad news about near-term potash demand appears to be baked into valuations, and Potash Corp of Saskatchewan should be bought at current levels.

Technology investors who weren’t focused on the long-awaited Facebook IPO filing yesterday were taking a close look at the latest quarterly results from Amazon.com (NasdaqGS: AMZN) .

What they saw prompted them to hit the restart button on the e-commerce giant, sending its shares down 7.7% on the day — its largest one-day loss in three months.

Amazon.com: Slowing Revenue and Weak First-Quarter Guidance

In the fourth quarter of 2011, Amazon’s profits slumped 58%, to $177 million, or $0.38 a share, from $474 million, or $0.91 a share, a year ago. Despite the drop, they were still way ahead of the $0.17 a share that analysts were expecting.

Sales jumped 35%, to $17.4 billion from $12.95 billion. But that was still nearly $1 billion short of the $18.3 billion that the Street was expecting—and that was the part of the story that investors zeroed in on. The company pointed to a slowdown in video game sales as one reason for the miss.

In addition, Amazon.com said it now expects sales of between $12.0 billion and $13.4 billion in the first quarter of 2012. Analysts had been forecasting sales of $13.41 billion.

Jeff Bezos, the founder and CEO of Amazon.com, focused on strong sales of the Kindle e-reader (up 177% from a year ago) in his remarks:

We are grateful to the millions of customers who purchased the Kindle Fire [the company’s tablet computer, launched during the quarter] and Kindle e-reader devices this holiday season, making Kindle our bestselling product across both the U.S. and Europe.

Worries About Profit Margins at Amazon.com Overshadow Soaring “Kindle Fire” Sales

MarketWatch.com neatly summarized investors’ response to the numbers in its report: “The most worrisome aspect of Amazon’s report was its sales picture. The final three months of the year, coinciding with a normally robust holiday spending period, should have been a bonanza for a consumer-driven operation like Amazon. But the revenue miss certainly will make people wonder whether the retailer’s growth is now waning.”

In addition, there was a big jump in the number of units sold by other vendors through Amazon’s sites. In his Tech Trader Daily blog on Barrons.com, Tiernan Ray noted that this gave some analysts pause, including Mayuresh Masurekar of Collins Stewart:

Amazon books a significantly lower amount as revenue (only 6% to15% of merchandise sales) for third-party units as compared to Amazon’s own unit sales for the same volume of sold merchandise. Third-party units grew 65% year over year vs. 35% for Amazon’s own units … That said, paid units grew 46% year over year, indicating continued volume growth and share gains.

Analysts Split on the Prospects of Amazon.com but Agree It’s All About the Kindle

The news brought out a bundle of firewood-themed headlines in the press. In an article entitled “Turning Amazon Cash to Kindling,” John Jannarone of the Wall Street Journal noted that “Until now, many investors have let the company get away with shrinking operating margins for the sake of gains in market share. But if sales growth slows, investors may pay closer attention to expenses.”

Also raising concern was the fact that Amazon.com  is likely selling the Kindle Fire at a small loss (the device retails for just $199 compared to $499 for an iPad) in hopes of closing the gap later by selling content to users. Jannarone argued that the company may not have much flexibility if its profits turn to losses, as its $9.6-billion cash holding is small next to Apple’s nearly $100-billion stash.

Zerohedge.com in an article entitled “Goldman Puts More Kindling on the Fire” points out that Goldman Sachs had cut its price target to $182 from $190, mainly due to the company’s lowered guidance. The site quoted the brokerage’s latest research report on the stock, which sounded less than impressed with the Kindle Fire’s performance:

As for its Kindle and Kindle Fire performance in 4Q2011, we estimate sales hit 10.6 million [units], below our forecast of 13.9 million. That said, we believe the company hit our more important Kindle Fire unit forecast of 6 million, suggesting the Fire cannibalized sales of traditional e-readers.

Zerohedge’s prescription? “Time for Amazon to make up for ever lower margins with even higher volume. Or something.”

Amazon’s Sales Miss “No Big Deal” for Cheerleader Analysts

But for every analyst who was cutting their price on the stock, there seemed to be another who called the decline a buying opportunity.

In an article entitled “AMZN’s Miss: No Big Deal,” Olivia Oran of TheStreet.com argued that “as the company shifts from its role as an online bookseller to a technology and entertainment provider, it is upping its investment in hardware, infrastructure and digital content.” In particular, she points to a 66% jump in spending on technology and content from a year ago.

Deutsche Bank analyst Jeetil Patel agreed:

We reiterate our buy investment rating on shares of Amazon.com, and believe that the pullback in the stock presents an opportunity for growth-oriented investors looking for the ecommerce leader to resume operating profit dollar growth in the second half of 2012.

Despite Mr. Patel’s buy recommendation, it’s hard for value investors like us at Investing Daily to understand how the stock of a company with slowing revenue and which trades for a price-to-earnings ratio of greater than 100 is a bargain by any stretch of the imagination.

Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY), the dominant telecom Down Under, is close to realizing the AUD11 billion promise of its arrangement to transfer fixed-line infrastructure and customers to seed the National Broadband Network (NBN).

Only the Australian Competition and Consumer Commission’s (ACCC) approval of the company’s “structural separation undertaking” (SSU) remains before management and the board of directors can take up, with consequence now, the question of how to spend its bounty. This approval, according to statements made by members of the ACCC itself, should be forthcoming sometime in February, though probably not before Telstra reports fiscal 2012 interim results next Thursday, Feb. 9.

But when the decision comes Telstra won’t have the pleasure of receiving a giant AUD11 billion check, like those you seen presented to lottery and golf tournament winners.

Rather, this AUD11 billion will be paid over decades, about 30 years, commencing this year with AUD90 million for infrastructure leasing payments and about AUD100 million for transferring customers. Exact figures depend on the schedule according to which the NBN is rolled out across Australia, but the payments will increase and then stabilize over about 10 years.

CEO David Thodey, in recent interviews focused on the impending completion of the long-gestating NBN deal, has hinted that he and the board are sensitive to the desires of the company’s relatively large base of retail investors, many of whom rely upon Telstra’s dividend for income in retirement. The institutional side is also clamoring for some sort of return of capital to shareholders in calendar 2012, assuming the NBN deal is completed.

Telstra hasn’t boosted its dividend since 2005. The corollary to that–an important one–is that neither has it cut its dividend, ever, since it first declared one in the mid-1990s, a period that includes the Great Financial Crisis. Management has committed to paying AUD0.28 per share per year for each of fiscal 2012 and fiscal 2013.

Although discussion about Telstra’s “capital management” plans has focused almost entirely on special dividends and/or stock buybacks, it’s important to bear in mind that Telstra’s competitive advantage is based on its ability to invest in and expand its network in order to satisfy the seemingly ever-increasing data demands of its wireless customers.

Technology and infrastructure and management’s ability and willingness to regularly devote about 14 percent of annual turnover–or AUD3.5 billion–toward improving them go a long way to explaining Telstra’s ability to attract and hold onto highly desired post-paid wireless subscribers.

Telstra’s success following approval of its SSU will now depend more on its sales and marketing efforts, as it competes for retail customers in the wireless space. One thing it brings to the competition is overwhelming scale, comparable in relative terms to what AT&T (NYSE: T) and Verizon Communications (NYSE: VZ) enjoy in the US. Telstra continues to beat pretenders to its throne where it counts most these days: on the post-paid wireless subscriber playing field. During the quarter ended Sept. 30, 2011, Telstra’s “services in operation” count grew by 450,000 to 500,000.

SIO is a rather broad measure that essentially amounts to a count of SIM cards in devices tied to Telstra. It’s not a straight-up tally of customers. Nevertheless, Telstra’s additions dwarf top competitor SingTel Optus’ 131,000 and shine in comparison to VHA’s 54,000 SIO losses. In short, though, Telstra is increasing its share of SIO as well as of the dollars Australians spend for telecom services.

There are risks with Telstra, which engages European credit markets as much as any other Australian company. Sovereign debt concerns on the Continent have stoked new worries of frozen credit markets, though Telstra’s solid balance sheet should allow it to glide above any turmoil. Telstra’s strong cash flows have meant it’s never had any problem raising debt. And the situation in Europe “doesn’t change anything we have done,” noted Mr. Thodey. “As we look at raising debt for this year we still are comfortable with what our parameters are and what we need to do.”

Telstra raised EUR750 million in Europe with a 3.75 percent bond due May 2012, at the end of 2011, at 145 basis points above the benchmark mid-swap rate, when markets were threatening to collapse amid a surge in Italian bond yields. The current yield on this issue is 3.63 percent. Telstra last raised debt capital in Europe in October 2011, via a EUR500 million bond maturing in 2011 and priced at 3.625 percent. That bond has a current yield of 3.51 percent.

The company also faces additional regulatory risk that would see government, in effect claw back some of the AUD11 billion its paying Telstra for the key elements to get the NBN off the ground. The Australian communications ministry recently proposed steep increases for new and renewed spectrum licenses. If the proposal is accepted as is Telstra will probably have to add, according to an estimate by Fitch, about AUD200 million to AUD250 million to capital expenditure budget for fiscal 2013.

However competitors are likely to face similar costs. The question will be whether to pass these new costs on to customers or to absorb them in an effort to grab market share.

Telstra’s original 800 megahertz of licenses cost about AUD300 million in the late 1990s, substantially lower than what European telcos were paying for spectrum at the time. The company’s fiscal 2012 capital budget of AUD3 billion includes about AUD500 million to AUD600 million; Fitch estimates this figure must increase to about AUD785 million to accommodate an enacted telco ministry proposal.

But once the NBN is finalized Telstra will no longer be subject to Telstra-specific regulation. It has the cash flow to cover the increased license fees, and any other threats the government may represent to cash flows can likely be easily passed off to its large customer base; these folks are unlikely to notice nor be terribly upset by incremental increases to tariffs built into their rates–provided Telstra is able to provide the data to power music, movies, messaging and more on ever-more powerful smartphones and tablets.

Telstra has long shown an ability to invest in its network at the same time it’s paid a generous dividend. For example it will be the first Australian telco to roll out a fourth-generation (4G) network service in the country. This advantage will bear a lot more fruit once Apple (NSDQ: AAPL) introduces a 4G capable iPhone Down Under.

The stock is up 34.5 percent over the trailing 12 months, its 20 percent-plus price rise on the Australian Securities Exchange (ASX) augmented by the aforementioned AUD0.28 per share dividend and 5 percent appreciation of the Australian dollar against the US dollar over the same time frame.

Telstra will report fiscal 2012 interim results–for the six months ended Dec. 31, 2011–on Feb. 9. We aren’t likely to know for sure that the ACCC has approved the company’s separation plan, but we’re likely to be confirmed in our view that Telstra is on track to continue to add more than its share of the high-value post-paid wireless subscribers.

Its robust network serves a high-quality customer base. This customer base–mostly long-term, post-paid subscribers–produces predictable cash flow. These customers don’t mind paying more for good service, so Telstra must balance the demands of shareholders in addition to customers. And management is also likely mindful of credit raters such as Fitch, which doesn’t favor a large, one-time outlay, either in buyback form or through a special dividend, because of the potential negative implications for a stable model built on network investment.

What remains the key factor is Telstra’s continuing strength as an operating business. The ability to compete on service terms rather than solely on price terms helps Telstra attract and keep highly sought post-paid wireless customers, the key to sustaining and growing the business over time and returning wealth to shareholders. The AUD11 billion soon to be due Telstra should help it maintain its current dominant position within Australia’s telecom industry, sustain a dividend that at current levels equates to an 8.5 percent yield and continue to push its technology edge.

Satisfying increasing demand for good wireless connectivity–in Australia or anywhere else on Earth–is about network strength. And right now that’s Telstra’s competitive advantage.

An important decision needs to be made when you leave an employer. It doesn’t matter if you retired, took a new job, or were laid off. You have to decide what to do with any retirement accounts you have at the employer you’re departing. The right answer varies from person to person, but I can give a framework for making the decision that will enhance your financial security.

The decision depends on the type of account involved. A defined contribution account (such as a 401(k) plan) has some different considerations than a defined benefit plan. A defined benefit plan (DB) is the kind that promises you a fixed payment for the rest of your life.

We’ll tackle DB plans first, and then look at 401(k)-type plans.

About half of DB plans let you choose between an annuity and taking a lump sum. The choice usually is the same whether you leave the employer at retirement age or leave at a younger age.

More than 90% of employees choose the lump sum, according to The Wall Street Journal. I’m sure many people select the lump sum because they want control of the money. Some believe they can invest to earn a higher return than is reflected in the annuity, and probably a few don’t trust their employers. Others use the lump sum to pay down debt or to make a large purchase they’ve been delaying.

Those are important factors, but to maximize wealth consider how the employer calculates the lump sum.

The lump sum is supposed to be the amount you need today to be able to generate a fixed payment equal to the annuity promised by the pension plan. To make the calculation, the pension plan assumes a rate of return that will be earned by the lump sum while you draw it down during retirement. The rate selected determines how much of a lump sum you’ll receive. A higher rate means you’ll receive a smaller lump sum, because more of the future payments would be assumed to come from investment returns. A lower rate means you’ll receive a larger lump sum, because investment returns will contribute less to your stream of income.

A tax law change that took effect in 2008 and is being phased in changes the amount you’ll receive. Before the change, retirement plans were required to use the treasury bond interest rate. After the change, they’re allowed to use a corporate bond rate. The corporate bond rate is higher these days, so the lump sums paid to employees decline.

The amount by which the lump sum is reduced varies. The younger you are the bigger the difference, because of the effect of compounded returns over time. But at any age, you’ll receive less under the new rule.

Not every pension plan is using the corporate bond rate to calculate lump sums. Plans have discretion to phase it in through 2012, and some are delaying use of the higher rate. Before choosing between a lump sum and annuity, you should ask the plan administrator how the lump sum is calculated, especially the interest rate used.

One easy way to evaluate the lump sum offer is to ask insurance agents how much of a monthly annuity you can purchase with the lump sum and compare that to the annuity you would receive from the plan. You can get a range of quotes from www.Immediate-Annuities.com (ignore the hyphen) and some other web sites. If you can buy higher-paying annuities from insurers, you might want to take a lump sum. When a private annuity would be lower than the plan’s annuity, your wealth might last longer with the pension plan’s annuity.

There are other factors to consider.

The pension annuity might come with other benefits, such as an early retirement payment, disability payout, or other features. Be sure you know all the benefits you’re giving up with a lump sum.

Some departing employees take a lump sum because they fear the employer will go bankrupt. But defined benefit pensions are insured by the Pension Benefit Guaranty Corporation, up to a maximum monthly amount. Unless your monthly pension isn’t insured by PBGC or would exceed the maximum guarantee (currently $55,840.92 annually for a 65-year-old), a potential bankruptcy shouldn’t be a major consideration.

Consider your other financial resources. Some new retirees have other assets and sources of income. Taking the pension as a lump sum allows them to invest it more aggressively for a potentially higher return. This is a good strategy if the other resources provide for a comfortable retirement regardless of how the investments with the lump sum turn out. Or when other resources are adequate, the lump sum can be used to create a bequest or gifts for charity or loved ones.

You also need to consider longevity. When the pension plan calculates your lump sum, it assumes an investment return and life expectancy. If you outlive that life expectancy, the pension plan still is on the hook to continue the payments. If you take the lump sum and exceed life expectancy, you have to spend less or earn a high enough return to cover those extra years.

The pension plan also assumes the risk of investment returns that are lower than the assumption. When you take a lump sum, you assume the risk and consequences of low investment returns.

The considerations for a 401(k) or other defined contribution plan are different. Whether you take the lump sum or stay with the plan, you’re making the investment decisions and taking the risks of a long life and low investment returns.

Many people automatically take a lump sum from their 401(k) plan when leaving an employer, and the financial services industry certainly encourages that action. But that might not be the best move for you. Consider all the factors before deciding.

The 401(k) plans maintained by many small and medium-size employers and even some large employers are inferior to an IRA. They have limited investment options that often aren’t among the best funds available. The costs can be high. There also might be limits on how often changes can be made in the investments, when money can be taken from the plan, and other actions.

With a 401(k) plan you also need to consider the long term. Check to see how the plan treats your account when you turn age 70½ or when a beneficiary inherits the plan. Some plans require fast payouts in these circumstances.

When a plan has drawbacks in these areas, your best action is rolling over the 401(k) plan to either an IRA or your new employer’s plan.

But some 401(k) plans, especially those maintained by large employers, are pretty good. The employer is careful to negotiate low expenses in both the investment funds and the other plan costs. The employer often picks up some or all of the plan costs.

In those cases, when all costs are considered a 401(k) can be cheaper than an IRA. Many 401(k) plans have access to “institutional” shares of funds, which charge lower expenses than the shares of the same funds available to most IRA investors.

An employer that takes its 401(k) seriously also seeks out the best funds in each asset category, offers a wide range of asset categories instead of just the basic five or so, and works with outside firms to design target date plans or similar asset allocation funds that are better than the off-the-shelf products at most fund families. You’ll have more investment choices in an IRA, but a well-run 401(k) narrows your choices down to the best ones you’d find yourself and negotiates lower fees.

A 401(k) plan also is likely to have a stable value fund option, which is a good place to hide while earning a decent yield when you want to be out of the markets or are mapping out your future.

A major downside to staying with even a good 401(k) plan is that you can’t consolidate your assets in one account.

You can see why the best choice varies from person to person and plan to plan. Don’t follow someone else’s rule of thumb or any general guidelines. Whatever type of employer plans you have, consider all the factors and reach the best decision for you.