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Table of Contents

1.  Market Outlook
2.  Vestin Realty (VRTB)
3.  Western Union (WU)
4.  Additional Investing Ideas
5.  Investor Trivia -- Dividend Growth
6.  Featured Topic -- Takeover Targets
7.  Free Investing Resources

Today's Top Stock Picks

Finding Value and 11.0% Yields in REITs
A downturn in mortgage lenders has left some great values and high yields.
Read More. . .

Beat the S&P by 45% by Investing in Spin-offs
Nine out of ten spin-offs top the S&P in their first two years -- by an average of 45%. This firm looks to continue this trend.
Read More. . .

Market Outlook

It may not have happened on the 4th of July, but some major fireworks have been reverberating on Wall Street lately.

To recap, things got off to a respectable start on Monday, as a massive $10 billion stock buyback announcement at Johnson & Johnson (NYSE: JNJ, $63.43) helped push the Dow Industrials up nearly 40 points to 13,676 -- right at the threshold of a new record high. Meanwhile, the Nasdaq advanced to a new six-and-a-half-year peak, thanks in part to an analyst upgrade at bellwether Intel (Nasdaq: INTC, $25.97).

Unfortunately, those gains unraveled in a hurry on Tuesday, as surging crude oil prices and soft forecasts from the likes of Home Depot (NYSE: HD, $40.87) and Sears Holdings (Nasdaq: SHLD, $157.40) conspired to send the Dow reeling nearly 150 points. Weak outlooks from those two prominent retailers raised fears that the sluggish housing market is beginning to have broader implications that are rippling throughout the economy.

However, that disappointment was forgotten a couple days later, when an upbeat sales report out of Wal-Mart (NYSE: WMT, $49.15) gave Wall Street a spark and sent the major averages soaring. Once again the Dow Industrials led the way, racing ahead 283 points, or about +2.1% -- its sharpest one-day percentage gain in nearly four years.

Typically, rallies of this magnitude are fueled by concrete catalysts, and the lack of any key economic news had some traders quietly speculating that the run-up could have possibly been aided by short-covering. In any case, Wall Street's optimistic mood remained in place on Friday, despite a softer than expected read on the retail world. According to the Commerce Department, retail sales slipped -0.9% last month, one of the largest declines in the past two years. However, we wouldn't read too much into that figure, considering May's sales jumped +1.4% -- double what economists were predicting.

Through it all, the Dow Industrials swung more than 450 points for the week from peak-to-trough, before finishing the period with a solid +2.2% gain -- rising to within shouting distance of the 14,000 mark. Meanwhile, the Nasdaq and S&P 500 both tacked on around +1.5% for the week. And overseas markets continued to gain ground as well, as European bourses moved mostly higher and Germany's benchmark DAX hit a new record high.

Looking ahead, earnings season kicks into high gear next week, and investors will get a particularly good look at the health of the tech sector -- with companies like eBay (Nasdaq: EBAY, $33.95), Microsoft (Nasdaq: MSFT, $29.82) and Yahoo (Nasdaq: YHOO, $26.58) all scheduled to report.

In the meantime, the fallout from the subprime mortgage meltdown has ensnared many financial institutions -- but not all lenders are created equal. In today's issue, editor Carla Pasternak profiles Vestin Realty Mortgage (Nasdaq: VRTB, $5.90), a growing commercial lender with conservative policies, a generous payout ratio and a rich 11% dividend yield.

Also in today's issue, editor Paul Tracy shares some thought-provoking facts about spin-offs -- most of which have handily outperformed the broader markets in recent years. And fresh off its separation from former parent First Data, global money-transfer specialist Western Union (NYSE: WU, $20.66) could well be the next in line.

Good Investing!

-- Nathan Slaughter
Co-Editor
TopStockAnalysts Digest

Not all subprime mortgage lenders are bad. In fact, the sell-off in the sector has created a value opportunity for well-managed subprime lenders like Vestin Realty Mortgage II (Nasdaq: VRTB, $5.90). Since listing on the Nasdaq exchange in May 2006, Vestin's shares have held steady above the $5.00-range, even amid the recent subprime mortgage meltdown.

This mortgage REIT (real estate investment trust) pays a monthly dividend of $0.0535, which equates to $0.64 annually and gives the stock a yield of nearly 11.0%. With cash flow of $17.8 million, the trust paid out $16.3 million worth of dividends in 2006, giving it a 92% payout ratio.

Since 1995, the Las Vegas lender has made more than $2.0 billion in loans and has diversified its loan portfolio across 11 states. The company was formed in 2001 and has paid out monthly dividends since 2003. It converted to a real estate investment trust last year after merging with a subsidiary.

The firm's dividend is powered by revenue from the interest income on short-term (one to two-year) commercial real estate loans. The loans are backed by trust deeds or mortgages, and the company maintains a fairly conservative loan-to-value ratio of 70%. In other words, its $300 million loan portfolio is backed by real estate worth about $429 million.

Many mortgage REITs use leverage to expand their investment opportunities, but borrowing money against real estate assets also puts these firms at risk if interest rates rise. What makes Vestin particularly attractive to risk-averse investors is its policy of remaining virtually debt-free to limit risk.

Still, the company is not entirely risk-free. In late 2006, it had four delinquent loans on the books, worth $35 million, that will likely go into foreclosure.

In March, management approved a share buyback program, allowing it to take $10 million worth of shares off the marketplace. Share buybacks like that generally bode well for the share price.

As a REIT, Vestin's dividend income is taxable at the ordinary income tax rate of up to 35%, making the shares suitable for a tax-deferred IRA or 401(k) type of account. The company has a dividend reinvestment plan, and you can call 610-649-7300 for more information.

Action To Take ---> With its stated "low-to-no-debt" policy, Vestin's double-digit yield may be less risky than many of its subprime mortgage peers. Still, rising long-term interest rates together with a slowing economy could reduce demand for commercial real estate loans and weigh on the company's returns. As such, we consider VRTB a more aggressive high-yield play.

As we know, aggregating different businesses into a conglomerate typically produces an unwieldy and inefficient corporate structure, as well as sub-par stock market performance. Sometimes, however, the opposite can also hold true -- breaking apart large firms into smaller more nimble companies often unlocks shareholder value and produces superior market gains.

Don't believe me? Just consider this example...

PepsiCo (NYSE: PEP) is best known for its namesake carbonated beverages and its Frito-Lay salty snacks group. These two businesses are classic complements -- consumers tend to buy soft drinks and salty snacks together. There are even synergies to be had in marketing the brands in tandem.

However, a decade ago the company was also actively involved in another business -- restaurants.

For many years, Pepsi owned three well-known fast-food chains: Taco Bell, Pizza Hut, and Kentucky Fried Chicken (KFC). There was nothing wrong with any of these chains, and all enjoyed strong brand name recognition both in the U.S. and in dozens of other countries around the globe. Nor are fast food and soft drinks totally unrelated businesses -- after all, these restaurants also sold beverages.

However, by 1997 it had become clear that the task of managing a fast food unit and that of managing a global beverage firm were quite different. Pepsi believed that its restaurant subsidiary could benefit from a separate dedicated management team that could concentrate on expanding the chains' footprint into new markets. So, on September 17, 1997, Pepsi's restaurant business went public on the NYSE under the name Tricon Global Restaurants.

Check out the chart to the right for a closer look at how Tricon, later re-dubbed Yum! Brands (NYSE: YUM), has fared since its IPO in late 1997.

As you can see, Tricon performed extremely well as a separate entity. The new management team successfully expanded the chain into high-growth markets like China; today YUM has even more outlets in China than McDonald's (NYSE: MCD). In addition, YUM re-focused its attention on marketing, coming up with innovative initiatives such as packaging two or more restaurant chains into a single, convenient location.

Since its IPO in 1997, YUM has delivered impressive growth, and the stock has soared, returning more than +300%, versus just +85% for the S&P 500 and just over +100% for its former parent PepsiCo.

Sound like an isolated example? It isn't. In fact, the outperformance enjoyed by spin-offs is one of the most reliable patterns in the stock market today. A 2005 study by Lehman Brothers found that nearly nine of every ten (88%) spin-offs between 2000 and 2005 outperformed the S&P 500 -- by an average margin of +45% in their first two years as a public company. In that vein, we think we've found one spin-off that is likely to outpace the S&P in the coming years...

Western Union (NYSE: WU, $20.66) -- Western Union is a worldwide leader in the money transfer business. The venerable company was long considered one of the crown jewels of payment processor First Data (NYSE: FDC). Unfortunately, investors wanting a piece of Western Union also had to buy into First Data's other franchises, most of which operate in viciously competitive markets.

Because Western Union was lumped together with First Data's other businesses, its growth prospects and investment potential were less visible to investors. Since being spun-off late last year, the firm is now a far more attractive and visible pure-play on the growing money transfer market.

The company has only one real global competitor, MoneyGram (NYSE: MGI). Even then, Western Union has roughly 300,000 agents around the world -- nearly three times as many as MoneyGram. Western Union also has operations in almost 200 countries, giving it a much broader international reach than its smaller rival. The size and coverage of Western Union's extensive global network makes it the company of choice for sending money abroad -- this has given the firm a powerful competitive advantage.

The money transfer business is primarily driven by remittances made by immigrants to relatives abroad. According to the United Nations, there are currently more than 191 million people living outside their home country. Close to 40 million of these people are in the U.S. alone. Many of these immigrants come to the U.S. seeking higher wages to support their family back home. And because relatively few of these families have bank accounts, the easiest way to send cash across the planet is by fast, inexpensive wire transfer.

We expect this trend of sustained immigration to continue, which should lead to higher and higher money transfer volumes in the years ahead. Western Union is the highest quality and most direct play on that trend.