These banks were WFC, PNC and USB. Nearly six months later, fast forward to today’s close. Prices for each bank have increased markedly. WFC is up 40%, PNC is up 35% , and USB is up 35%.

Pretty impressive when you consider that analyzing a bank stock is not the same as analyzing an energy stock. Such performance should give comfort to MarketGrader subscribers that their money is well spent.

By MarketGrader.com’s account, earnings for the S&P 500 were virtually flat relative to the fourth quarter of 2010. With 475 of the 500 companies (or 95%) reported to date, index components are on pace to report $21.33 in fully diluted earnings per share in Q4 2011, putting it 0.5% below the $21.43 earned in the equivalent quarter a year earlier. Sequentially, when comparing the results against Q3 2011 earnings per share of $22.32, the drop was 4.4%. It’s important to note that MarketGrader.com’s tally of fully diluted EPS is lower than the tally of EPS as reported by the companies since the share base across most companies based on full dilution is larger than the number of shares used to calculate reported EPS. The trend of companies beating their consensus estimate last quarter was also negative compared to the third quarter, with 59% of all companies surpassing analysts’ expectations compared to 69% during the previous earnings season. While the number of companies that met estimates remained unchanged at 11%, the deficit in positive earnings surprises showed up in the earnings miss category, with 30% of companies failing to live up to their consensus estimate vs. 20% in the prior period. Despite a flat fourth quarter, S&P 500 companies reported a healthy 11.8% increase in diluted earnings per share for all of 2011 to $87.48 compared to $78.25 earned in 2010. Such increase is what has kept stock valuations within reason despite a gain of over 20% since early October in the main market benchmarks, along with rising estimates for the quarters ahead, which make forward P/Es appear relatively benign.

On a sector-by-sector basis, Consumer Discretionary was the big winner of 2011’s fourth quarter, with diluted EPS up 78% in the aggregate compared to the comparable period in 2010. It was followed by modest gains of 8% for financials, 6% for Industrials and 4% for Technology. The quarter’s biggest laggard was Materials, with diluted EPS coming in 71% lower than the Q4 2010 reports. Nominally, Telecommunications companies fell in the aggregate by more than 100% but this is simply an arithmetic quirk as the group as a whole reported negative diluted EPS. The two other sectors that reported earnings below the year earlier period were Consumer Staples, down 31% and Utilities, down 15%. Health Care was essentially flat with a 1% gain.

Some notable names that were upgraded by MarketGrader.com following their earnings report were Yahoo (YHOO – Hold), Ford (F – Buy), Humana (HUM – Buy), American International Group (AIG – Hold) and Paccar (PACR – Buy). Notable downgrades included Chevron (CVX – Sell), First Solar (FSLR – Sell), Alpha Natural Resources (ANR – Sell), Newmont Mining (NEM – Sell) and Hewlett-Packard (HPQ – Sell). For the complete list please visit our Earnings Season Report Card.

In contrast to last quarter’s flat earnings, analysts continue to sound bullish about earnings prospects for the S&P 500 both in the first quarter of 2012 and for the full fiscal year. Consensus estimates show the index earning $23.63 per fully diluted share this quarter, an increase of 11% from 2011’s first quarter. Full year 2012 earnings expectations are even rosier, with analysts polled by FactSet Research expecting aggregate S&P 500 diluted EPS of $103.99, up 19% from the $87.48 earned in 2011. On a quarter-by-quarter basis, S&P 500 companies are expected to report diluted EPS gains of 15% in the second quarter, 20% in the third quarter and 30% in the year’s last quarter. All else being equal, if analysts’ forecasts materialize into actual reported earnings for S&P 500 companies, the index would need to climb an additional 19% from current levels to 1,643 to maintain the exact same trailing P/E of 15.8 it sports today (based on fully diluted earnings.) With European sovereign yields for peripheral countries still dangerously high, the potential for U.S. rates to start climbing sooner than the Fed anticipates and what promises to be a highly contested November election, equity investors would no doubt sign off on such a bet today with over three quarters of the year still left. While we can’t predict the future, we do look forward to tracking and reporting the results in quarters to come.

One thing is certain, however.  Investors now look at investment expenses with a different eye.  What if a stock index fund could be bought as a buy and hold but also factored in re-balancing as part of the equation.  Is there room in the equity index world for an Index that combines low expense ratios with passive / active  management that is equally weighted and outperforms a widely accepted benchmark?

MarketGrader thinks so and to prove its point developed the Barron’s 400 Index for Dow Jones along with 14 proprietary indices of its own.  In the case of the Barron’s 400, the Index was designed to outperform the S&P 500 doing so handily over the last ten years.  http://www.marketgrader.com/MGMainWeb/mgfree/mgindex/barrons.jsp

Key to the Barron’s 400 outperformance of the S&P 500 has been the use of MarketGrader’s  research www.marketgrader.com to optimize portfolio holdings. Twice a year, the Barron’s 400 Index is rebalanced in accordance with strict portfolio construction rules that use ratings derived from MarketGrader’s fundamental research. As a result the portfolio is optimized with approximately 45-50% annual turnover and meets the time proven test that successful investing is about taking intelligent risk, diversification, and keeping costs to a minimum.   A similar discipline is applied to the construction of proprietary portfolios that are core, market cap, and sector based.

Index providers owe a debt of gratitude to John Bogle.  The investment landscape we have today has been shaped by his vision.  The buy - hold  market cap weighted investment strategy  he espoused Vs the  buy -  hold & rebalance equal weighted investment strategy both have merit.  In short, as markets evolve in time,  investors will see that there are viable and prudent alternatives to straight passive index investing as long as expense ratios are controlled & methodologies are transparent. Performance will speak for itself.

Before discussing what MGSI is saying today it is worth noting how we got to our current state of collective enthusiasm for stocks. Since our October 5th warning of an extreme reading of 0.14 (with seven stocks in negative sentiment territory for each one with positive sentiment) the market has rallied strongly as the risk premium in risk assets has fallen significantly. Since our article, the S&P 500 Index has gained 20.8% with the Dow up 19.4%, the NASDAQ Composite up 23.1% and the Russell 2000 up 28.0%. We’ll take this opportunity, of course, to highlight the performance of the MarketGrader-powered Barron’s 400 Index, up 29.2% since Oct. 4th 2011. In rising periods such as this one the B400 clearly continues to outperform. Perhaps more telling than the rise in these benchmarks has been the fall in the VIX, the now ubiquitous measure of implied volatility in S&P 500 options, which closed Thursday 53% below its Oct. 4th level.

This forceful rise in equities in the last four and a half months has expectedly pushed the MGSI to and all-time high of 4.96, solidly in what we call “Extreme Optimism” territory. Today there are 1,175 stocks in MarketGrader.com with positive sentiment and only 358 with negative sentiment. To put this into perspective, since MGSI’s inception in November 2008, the index has spent only 20 days above 3.0 and three days above 3.5. And this rise has been powered by stocks across the board, as seen from our individual sector MGSI sub-indexes. These essentially track the same ratio of positive-to-negative sentiment stocks MGSI tracks but on a sector by sector basis across nine sectors. Of all nine MGSI sectors tracked by MarketGrader, seven are currently scoring above 2.5, inside our “Excessive Optimism” territory. Six of the seven currently score above 3.o, inside of our “Extreme Optimism” area. These are all at 52-week highs. The seventh, Energy, is not at a yearly high but is only a stone’s throw away from getting there. The sector with the most extreme reading is Financials with an off-the charts MGSI level of 9.61. Of the 15 stocks in the sector with a sentiment score above nine (out of 10) only three have a ‘Buy’ rating based on underlying company fundamentals. The only two sectors not in the overly optimistic camp are Telecommunications, which only counts a very narrow 109 companies and Materials, a somewhat broader group. Telecommunications, at 0.88, is actually in “Extreme Pessimism” territory and Materials, at 2.11, is in neutral, or ‘Goldilocks’ territory, not too hot,not too cold.

The MarketGrader Sentiment Index readings should be seen as tactical, rather than strategic market calls, considering they are based on a very narrow view of the market, namely through investor sentiment. Investors should place the MGSI readings in the context of macroeconomic trends and overall earnings-driven trends for U.S. companies. From the perspective of company fundamentals we feel generally bullish about the case for equities in the years ahead, particularly given the lack of earnings multiple expansion despite the aforementioned increases in stock prices. With three quarters of the S&P 500 and 83% of the Barron’s 400 companies having already reported results this earnings season, both indexes are still trading at below historical P/E ratios of 13 and 14 times 12-month forward earnings respectively. And while corporate earnings gains have slowed down from the early 2011 pace, U.S. companies continue to show productivity gains and are sitting on piles of cash and mostly sound business models. This will, however, be the subject of a separate story. For now cautious investors might want to keep an eye on MGSI, available for free here at MarketGrader.com.

One company in particular that caught our attention this week is Power-One, Inc. (NASD: PWER), a California-based manufacturer of power supplies and equipment used in the communications, semiconductor, health care and industrial sectors. In our view the company’s business segments put it in a strong position to benefit from two ongoing growth trends: the development of alternative sources of energy and the ongoing ‘cloud’ build out. The company manufactures solar and wind inverters, equipment that transforms energy from those two alternative sources into usable electricity. Exposure to this market segment, while promising, brings with it volatility given the nascent state of this industry, its dependence on venture capital and government incentives and the resurgence of the oil and gas industries in the U.S. On the other hand, its lineup of power supplies puts the company in the very real and very profitable position of providing critical equipment to the build up of data centers and the ‘cloud’ as companies from Amazon to Google race furiously to expand their networks.

The stock, currently at $5.15 a share, trades 43% below its 52-week high, mostly as a result of lowered guidance by management in the last quarter of 2011. However, since then, the company had a strong earnings report on February 2nd, beating analyst estimates by 50%. Its fiscal year 2012 consensus estimate is up now to $0.90 per share from $0.76 three months ago, an increase of 18%. And while the company’s revenue fell 27% last quarter from the year earlier period, its overall financial position is very strong. Trailing 12-month revenue is up 89% in three years, when the company was posting full year losses. In the last 12 months it earned $127 million. It is clear that the company is not only growing, but doing so profitably while systematically fortifying its finances. It has been trimming its debt load, which peaked at $110 million in 2008 and is down now to a mere $36 million, accounting for only 8% of total capital. All of it has long term maturities. Power-One generated $178 million of free cash flow in the last 12 months and now has $204 million in cash on hand. Also on a trailing 12-month basis its return on equity was 31% and its return on capital was 40%. The company generates almost $300,000 in revenue and $37,000 in net income per employee, both above the industry average.

The stock trades at a meager 5.5 times trailing earnings and 7.6 times next year’s estimates. It also trades at 0.5 times trailing 12-month sales, a fraction of the 3.5 price-to-sales ratio industry average for its peers in the Electrical Products industry. A few investors seem to be catching on; the stock’s Sentiment score has been climbing rapidly in recent weeks from a December low of 3.8 to its current 6.6 (out of 10.) But long term investors need not hurry as this is still, by our account, a value play. While Power-One has an overall MarketGrader grade of 77.8, when graded from the value perspective (where our system emphasizes value indicators over growth indicators) the overall grade jumps to an impressive 91.8. It is worth mentioning also that 12% of the company’s float is sold short, which, in combination with a small market cap of $630 million could represent unwanted volatility for the more conservative types. Long term, however, the stock looks solid from our vantage point. Please click here for our complete analysis.

MarketGrader.com does not yet grade companies listed in European exchanges, so our analysis is mostly limited to those with American Depositary Shares. More specifically we have looked for companies with strong MarketGrader scores, of course, but also with compelling valuations and a significant share of their business generated outside of Europe’s sickest areas in the continent’s indebted south. And those domiciled in countries with their own currencies, and thus monetary policies independent of the ECB, seem to us to offer even greater appeal. Among them we find a handful we’ll be highlighting in this column in coming days. The first one, and perhaps one of our three favorites, is Statoil ASA ADS (NYSE: STO).

Statoil is Norway’s national oil company. It generates 78% of its revenue in Norway, 10% in the U.S. and another 10% across the rest of the world. While Brent crude has traded around $110 a barrel for the better part of the last year, the Norwegian Krone has depreciated by approximately 15% in the last six months against the U.S. dollar, mostly because of the strengthening of U.S. economic indicators, a dynamic that boosts the value of the company’s dollar-based revenues. And as it happens to be, Statoil, with an overall grade of 78.8 (out of 100,) is the highest ranked company among the 18 oil ‘majors’ followed by our system and classified in the Integrated Oil industry. Chevron and Suncor Energy round out the top three in the group.

Statoil’s 12-month trailing net income of $11.4 billion is up 25% from three years ago, which might not seem like a hit-it-out-of-the-park number but considering that in the depths of the global recession two years ago, for the 12-month period ended in September of 2009, the company earned $2.08 billion, the latest results reveal a remarkable comeback as energy demand roared back to life. Of particular importance is the fact that even though capital expenditures have been growing at a year-over-year clip of about 25% in the last four quarters, the company’s free cash flow last quarter almost tripled from the year-earlier period. This helps explain an across the board margin expansion in the last 12 months, with EBITDA margin at an impressive 41.7% and operating margin of 29%.

Statoil’s stock trades at only seven times trailing 12-month earnings despite a two-year EPS growth rate of 134%. Its P/E based on the next 12 month’s earnings estimates is only 9. Furthermore, if the company’s $17.04 billion in cash is subtracted from its valuation, the stock’s trailing P/E would fall to a ridiculously low 5.7.

It’s important too that investors understand the company’s ownership structure, which we think adds to its appeal. The number of shares outstanding has remained virtually unchanged in the last five years, at 3.18 billion, probably as its largest shareholder, the Norwegian government who owns 71% of them, prefers to avoid diluting its stake considering how important the company’s contribution is to national coffers. To put this into perspective, Statoil’s 12-month trailing revenue of $110 billion is the equivalent of 41.5% of Norway’s GDP of $265 billion, according to the IMF’s most recent figures. With such a small float (29%) owned by shareholders other than the government, even a small increase in demand for the stock, such as what would happen once it’s clear that Europe will sort out its current troubles, could drive up the share price pretty quickly. And while at $80 billion in market cap the company’s valuation might seem too high to move to the upside too quickly, at $25 (today’s close) the stock is trading 40% below its pre-Lehman high of $41.68, reached in May of 2008. And yet when the company reports earnings next month February 9th, if the consensus estimate is somewhat close to the reported number, Statoil is expected to have earned $2.67 per share, above the $2.63 earned in fiscal year 2007, right before the financial crisis brought the world economy to a halt. The company’s return on equity, currently at 26.23% is also almost back to the pre-recession level of 28%.

Statoil’s $20.35 billion on total debt, or $3.3 billion in net debt when cash on hand is subtracted, accounts for only one third of its total capital, giving the company ample room to increase its dividend payout which at current levels translates into a yield of 3.9%. And with interest rates at rock-bottom levels and the company’s excellent return on equity and return on invested capital (52.4%) it would be silly not to continue funding exploration and production projects with additional debt. It would also be silly for investors to assume Statoil is simply another European stock to avoid.

Readers that are not yet MarketGrader.com subscribers may view our complete analysis of Statoil by clicking here or by visiting this week’s featured Honor Roll: Large Caps.