This week an Inner Circle, one question on stock market investments concerned a company that executed a major spinoff this past autumn, changing its name and turning its focus toward premium spirits.

Q: Hi Pat: Can you give your opinion on Beam Inc.? It has a lot of good brands. Looking forward to your comments.

A: Beam Inc., (symbol BEAM on New York; www.beamglobal.com), is the successor to consumer conglomerate Fortune Brands, Inc. following the spinoff of that company’s home and security business in October 2011.

Fortune Brands shareholders received one share of Fortune Brands Home & Security (New York symbol FBHS) for each Fortune Brands share they held. In addition, Fortune Brands sold its Acushnet golf business (maker of the Titleist and Footjoy brands) to a group led by Fila Korea, Ltd. and Mirae Private Equity.

Fortune Brands then changed its name to Beam Inc. The company now mainly produces and distributes spirits. It is the world’s fourth-largest premium spirits company and the biggest in the U.S. Its brands include Jim Beam and Maker’s Mark (bourbon), Courvoisier cognac, Canadian Club whisky, Teacher’s Scotch Whisky, DeKuyper Cordials, Sauza tequila and Skinnygirl cocktails.

Stock market investments: Reality-TV star creates fast-growing brand of cocktails for women

The company has recently added to its product lineup by purchasing a number of other brands. In particular, in March 2011 it paid $120 million for Skinnygirl spirits, created by reality-TV star Bethenny Frankel.

Skinnygirl is best known for the Skinnygirl Margarita, a ready-to-drink product with 100 calories per serving, lower than typical margarita-style cocktails. Beam has since made Skinnygirl available in 70% more locations. That has helped the drink become one of the fastest-growing spirit brands in the U.S.

Skinnygirl is mostly aimed at women, who are a growing segment of the premium-liquor market. The company is now making more drinks for women, including the recently introduced Red Stag by Jim Beam, a black cherry-infused bourbon whisky.

Beam shares trade at 24.4 times the company’s likely 2011 earnings of $2.11 per share, and 22.1 times this year’s forecast earnings of $2.33 a share. The stock yields 1.5%.

In the Inner Circle Q&A, Pat looks at whether the company can keep growing in international markets. He also considers the possibility of a takeover bid by one of the larger global spirits firms. He sums up with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this special investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

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You might call it fair-weather investing. Many investors prefer to buy stocks only when economic and financial conditions seem good, if not ideal. When there’s news of rising oil prices or interest rates, for instance, they are inclined to stay out of the market, or get out if they’re already in.

Yet when they think conditions are ripe, these “fair-weather” investors can be surprisingly casual about what they buy. They readily accept recommendations from brokers, or they buy stocks that are touted by public-relations firms. They give promoters and insiders the benefit of the doubt.

You could say the strategy of these investors is highly sensitive to stock market timing risk, but relatively insensitive to investment-quality risk. This is pretty much the opposite of the approach we take with our stock trading advice.

Losses can mount up with stock market timing

When it comes to stock trading advice, we don’t put much emphasis on market timing risk. That’s because you can never get away from market risk, and it can cost you money to try. If you only buy when it seems market risk is low, you’ll wind up paying top prices (even though prices may and probably will eventually exceed what you paid.)

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If you compound the error by selling whenever you think market risk has gone up, then you’re going to sell near market lows.

Up to a point, you might say we give the market outlook the benefit of the doubt. Stock market investors have to accept the constant risk that unforeseen events — unrest in the Middle East, a terrorist attack or even a spike in interest rates — may come at any time. You can’t predict when these events will take place. For that matter, you have no way to tell if an unpleasant surprise is a solitary event or the first in a series.

Of course we always have an opinion on the market outlook and we routinely share that opinion in our publications. Our market views do have some impact on our recommendations. That’s unavoidable. But our advice relies much more on investment quality and our five-sector approach to diversification.

Stock trading advice: Investment quality equals less risk

Opinions always differ about what constitutes a high-quality investment. However, if you invest mainly in well-established, dividend-paying companies, you’ll find that any investment or market timing mistakes you make will rarely cause serious or permanent losses. When you spread your money out across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities), you’ll cut your vulnerability to market risk all the more.

In contrast, your market timing skills are bound to be crude and unreliable. They will never protect you from the risks of investing in companies with flawed business plans.

Moreover, even the best market-timing skills are useless when it comes to protecting you from untrustworthy insiders. If we have reason to doubt the integrity of a company’s insiders, we stay out, no matter how tempting it seems.

Those are the risks we focus on and attempt to avoid. The damage they can do to your finances makes political turmoil in the Middle East, interest-rate fluctuations and general market risk seem tame by comparison.

We try to help you reduce that risk when we make aggressive stock recommendations in our Stock Pickers Digest newsletter. Rather than relying on market timing, we aim to uncover undervalued stocks that will do well in both rising and falling markets.

If you buy aggressive stocks, you really should have a subscription to Stock Pickers Digest. The latest issue gives you our full analysis, including clear buy/sell/hold advice, on 20 stocks that may be suitable for the part of your portfolio you devote to more aggressive stocks. What’s more, you can get this issue free. Click here to learn how.

Our TSI Network rating system is a key guide we use to find the best stocks to recommend in our newsletters and investment services, including Wall Street Stock Forecaster, our newsletter that focuses on top-quality U. S. stocks.

Stock market strategy: This is a good time to add high-quality U.S. companies to your portfolio

We continue to recommend that a well-rounded stock market strategy for Canadians includes holding 25% to 30% of their portfolios in well-established U.S. companies. What’s more, today’s still-low U.S. dollar provides you with a rare opportunity to add leading stocks in the U.S. markets to your portfolio at bargain prices.

To help you quickly and easily determine whether a U.S. stock is appropriate for your portfolio balance and risk tolerance, we display one of our six TSI Network ratings next to every stock we analyze in Wall Street Stock Forecaster.

Our top rating is Highest Quality, followed by Above Average, Average, Extra Risk, Speculative and, at the bottom of the scale, our riskiest, lowest-quality rating of Start-up.

We award these ratings on a point system, using nine key factors to determine a company’s ability to survive a business setback and go on to greater success when conditions improve.

Our nine key factors for assigning our TSI Network Ratings are:

• One point for a long-term record of profit;
• One point for a long-term record of dividends;
• One point for industry prominence — two points for industry dominance;
• One point for an attractive balance sheet, with adequate equity and working capital, and manageable debt;

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• One point for nationwide operations, or two points for multinational operations;
• One point for being able to serve all shareholders’ needs. The best stocks in this category must be free of excess government regulation, free of too much dependence on a single supplier, and free of insider abuses;
• One point for freedom from business cycles;
• One point for the ability to profit from a secular trend, or two points for the ability to profit from two or more secular trends. Secular trends (such as the global move toward economic liberty and free trade) go far beyond mere business cycles; they reflect ongoing changes in society;
• One point for offering products or services that profit from habitual behaviour.

Stock market strategy: Our experts’ judgment calls give our system an edge in finding the winners

Companies with 11 or 12 points fall into the top category: Highest Quality. Those with eight to 10 points are Above Average. We focus on these two top ratings when we implement our stock market strategy. Six or seven points brings an Average rating. If a stock has just four or five points, it carries Extra Risk (that is, more risk than average); two to three points, Speculative; one or no points, Start-up.

Unlike computerized risk assessments, our ratings demand many judgment calls. But we find this system gives us a deep-seated measure that goes to the heart of a company’s staying power, and yields few unfortunate surprises.

To get our latest strategies for profiting in the fast-changing U.S. market, and clear, specific buy/sell/hold advice on dozens of U.S. companies, you should subscribe to Wall Street Stock Forecaster. What’s more, you can get the latest issue absolutely free when you subscribe today. Click here to learn how.

The company is seeing lower advertising revenue at its 82 newspapers, including its flagship paper, USA Today. That’s mainly because its 2010 revenue benefited from advertising tied to the U.S. midterm elections. However, the company’s revenue from its digital operations, such as CareerBuilder.com and newspaper web sites, rose 12.6% in the quarter.

Earnings fell 13.5 %, to $151.5 million, or $0.62 per share, from $175.2 million, or $0.73 per share. The company’s publishing earnings were hurt by a 9.3% increase in newsprint costs. To cut costs, the company announced in June 2011 that it will cut 700 jobs, or 2% of its workers.

Gannett is a dividend paying stock. Its annual rate of $0.32 a share yields 2.3%. The company also plans to resume buying back its own shares.

Gannett is just one of the U.S. stock market investments we analyze in our Wall Street Stock Forecaster newsletter. You can get the latest issue, along with 5 in-depth Special Reports, access to our weekly Email/Telephone Hotlines (which keep you up to date on our U.S. stock market investments between issues) and much more absolutely FREE when you subscribe now. Click here to get started right away.

We analyze Macy’s in Wall Street Stock Forecaster, our newsletter that gives you stock market news and advice on U.S. stocks.

In the three months ended July 30, 2011, Macy’s earnings rose 63.9%, to $241 million from $147 million a year earlier. Earnings per share rose 57.1%, to $0.55 from $0.35, on more shares outstanding. That was well ahead of the consensus estimate of $0.48 a share.

Sales rose 7.3%, to $5.9 billion from $5.5 billion. That beat the consensus sales estimate of $5.8 billion. Same-store sales rose 6.4%. The company continues to benefit from its plan to tailor its merchandise to local tastes. Its private-label products are also selling well. In addition, Macy’s has been improving its customer service. That helps build customer loyalty.

The company expects its full-year same-store sales to rise by 4.8% to 5.1%. That’s up from its prediction of 3% at the start of the year. As well, Macy’s now feels it will earn $2.60 to $2.65 a share in fiscal 2012, up from its initial range of $2.25 to $2.30 a share.

We updated our advice on Macy’s in our August 12, 2011, Wall Street Stock Forecaster hotline, which you can immediately view when you take a 1-month free trial to Wall Street Stock Forecaster. Click here to learn how you can start profiting from Wall Street Stock Forecaster’s stock market news and advice right away.

(Note: If you are a current Wall Street Stock Forecaster subscriber, please click here to view Pat’s recommendation. Be sure to log in first.)

Today’s tip: “How you share splits affect your stock market investments”

When a company splits its shares, it is simply cutting itself up into a different number of pieces, without changing its fundamental value. It simply wants its stock to trade in a price-per-share range that seems reasonable to investors.

For example, in the June 30, 2011 Stock Pickers Digest Hotline, we took a fresh look at Computer Modelling Group Ltd. (symbol CMG on Toronto). That’s because the company had just split its shares on a 2-for-1 basis. Computer Modelling makes software and supplies services that help its clients get as much oil as possible from their existing wells.

Prior to its share split, Computer Modelling Group was trading at around $25 a share; it now trades at a more reasonable $13.25 a share.

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If a stock market investment’s share price rises too high, some investors may shun it, since it seems expensive. The company’s management may then declare a stock split of, say, 2-for-1 (as was the case with Computer Modelling).

This turns one “old” share into two “new” shares. That’s why Computer Modelling’s share split increased its shares outstanding to 36.48 million from 18.24 million. However, the stock market investment’s market capitalization (the shares outstanding times the share price) is unchanged at $480.3 million.

If you are a Computer Modelling shareholder, your percentage ownership of the company is unchanged — you hold twice as many shares, but you still own the same percentage of the total.

In short, a share split does not dilute your interest. Dilution usually occurs when a company issues shares for less than the current trading price. For example, if employees exercise options to buy shares at a discount or below the market price, dilution occurs. Each of your shares is now worth slightly less than it was before. This also happens when holders of convertible securities exercise their conversion privileges and exchange their securities for shares at less-than-market prices.

Share splits are often a good way for stock market investments to attract attention

After a conventional stock split, good news often follows. Companies mainly split their shares when they want to draw attention to themselves — because they expect earnings to rise faster than normal, say. At such times, they may also raise their dividends.

That was the case in March 2011, when Potash Corp. (symbol POT on Toronto) split its shares on a 3-for-1 basis. Immediately following the split, the company raised its quarterly dividend by 110.0%, to $0.07 U.S. (post-split) from $0.033 U.S. The new annual rate of $0.28 U.S. (post-split) yields 0.47%

Our investing advice: Stock splits are a minor detail. Don’t let them distract you from more important matters, such as a company’s fundamental value and how well it suits your investment objectives.

(Note: If you are a current Stock Pickers Digest subscriber, please click here to view our recommendation on Computer Modelling Group. Be sure to log in first.)

If you buy aggressive stocks, you really should have a subscription to Stock Pickers Digest. The latest issue gives you our full analysis, including clear buy/sell/hold advice, on 19 stocks that may be suitable for the part of your portfolio you devote to aggressive investing. What’s more, you can get this issue ABSOLUTELY FREE. Click here to learn how.

General Mills is one of the stocks we analyze in Wall Street Stock Forecaster, our newsletter that gives you advice and stock market news for U.S. investing.

In its 2011 fiscal year, which ended May 29, 2011, General Mills’ revenue rose 1.7%, to $14.9 billion from $14.6 billion in the previous year. Earnings rose 17.5%, to $1.8 billion from $1.5 billion. The company spent $1.2 billion on share buybacks in the latest fiscal year. Because of fewer shares outstanding, earnings per share rose 20.5%, to $2.70 from $2.24.

If you exclude gains and losses on hedging contracts that General Mills uses to lock in prices for corn, wheat and other ingredients, earnings per share would have risen 7.8%, to $2.48 from $2.30. That matched the consensus estimate.

Higher volumes and selling prices were the main reasons for the revenue increase. Earnings benefited from a 7% decline in advertising spending, compared to a 24% increase in fiscal 2010. Rising ingredient and energy prices continued to put pressure on earnings growth.

General Mills is a dividend paying stock. It raised its quarterly dividend by 8.9%, to $0.305 a share from $0.28. The new annual rate of $1.22 yields 3.3%. General Mills has paid dividends for 112 straight years, and has never cut its payout.

We updated our buy/sell/hold advice and stock market news on General Mills in our June 30, 2011 Wall Street Stock Forecaster hotline, which you can immediately view when you take a 1-month free trial to Wall Street Stock Forecaster. Click here to get started right away.

(Note: If you are a current Wall Street Stock Forecaster subscriber, please click here to view Pat’s recommendation. Be sure to log in first.)

(You get subscriptions to all 4 of our newsletters—The Successful Investor, Stock Pickers Digest, Wall Street Stock Forecaster and Canadian Wealth Advisor—when you become a member of Pat McKeough’s Inner Circle. Read on to learn more.)

Stock research: Separating the wheat from the chaff

First, stocks that are attractive enough for us to want to recommend them as buys are always a small minority. In fact, when we’re conducting stock research we reject many potential new recommendations out of hand. After all, it’s relatively easy to set up a company and sell stock in it to the public. All it takes is some capital, legal fees and input by stock-promotion consultants and brokers.

Promoters can launch a new company while it’s still living off that initial capital. (They can then add to the capital by selling stock in the company to the public.) Meanwhile, they can maintain investor interest with a string of press releases and other public-relations efforts.

Don't take chances with your retirement nest egg. Protect your portfolio and make it grow with expert advice from Pat McKeough, cited by The Wall Street Journal as "one of only four investment newsletter advisors who have managed to serve their readers well over the long haul." Click here to learn how you can profit from Pat McKeough's The Successful Investor newsletter.

Start-ups and new issues are always highly risky. But even long-established companies can fail to thrive for years, while maintaining a seemingly healthy glow. As their business gradually loses momentum, they expose you to an ever-growing risk of loss.

In contrast, it’s much harder to set up and manage a business, and make it thrive over long periods. That’s why only a small minority of stocks are ever really suitable for serious, long-term investment.

Our stock research is always focused on investment quality

Second, even if a stock looks like it might thrive, we may still refrain from recommending it for a number of reasons. Our stock research may lead us to conclude that it presents too much risk of heavy loss if it fails to thrive. Or we may feel that stocks we already recommend offer better alternatives. Or we may simply prefer to hold off on a promising stock because we feel it has limited near-term potential. This can happen because it has been overhyped in the broker/media limelight, for instance.

In many cases, we watch the progress of these stocks-we-like-a-little. We may recommend buying them months or even years later, but only after seeing favourable developments and signs of progress.

Let my stock research help you zero in on high-quality stocks—and avoid the ones that could put your portfolio at risk

When you become a member of my Inner Circle service, you always have access to me and my investment team. Whether you’re looking for investment strategy or a trusted second opinion on whether you should buy, hold—or sell—a specific stock, my trusted advice is always a mouse click away.

In addition, you’ll not only receive the answers to your questions, but you’ll also get to see all other members’ questions, and our answers (of course, we eliminate any personal information).

Even if you don’t ask questions yourself, you’ll be surprised at what you can pick up by reading answers to questions posed by other investors just like you.

And that’s not all. You also get subscriptions to all 4 of my newsletters, The Successful Investor, Stock Pickers Digest, Wall Street Stock Forecaster and Canadian Wealth Advisor.

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Stock market strategy error #1: Trying to time the market. Our view is that nobody guesses right every time about the direction of the stock market. Some of the most prominent people in the investment world owe their prominence to a series of correct guesses that could end at any time.

That’s why market timing plays a small role, if any, in our stock market strategy. Instead, we focus on investment quality and portfolio management. We diversify across most, if not all, of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities), we aim to uncover investment quality at a modest price, and we downplay or shun the overhyped investments that you’ll find in the glare of the broker/media limelight.

Don't take chances with your retirement nest egg. Protect your portfolio and make it grow with expert advice from Pat McKeough, cited by The Wall Street Journal as "one of only four investment newsletter advisors who have managed to serve their readers well over the long haul." Click here to learn how you can profit from Pat McKeough's The Successful Investor newsletter.

Stock market strategy error #2: Failing to maintain an attitude of healthy skepticism when reviewing advice from brokers and other sources. Many investors assume their broker is honest and has their best interests at heart; if not, they get a new broker. But, you should also check for conflicts of interest that might warp the broker’s judgment.

For instance, selling new issues or new structured products is substantially more profitable for the broker and the brokerage firm than carrying out transactions in existing securities. But existing issues may be better for you.

Sometimes, brokerage firms accommodate institutional clients by buying blocks of stock from them when it might otherwise take days or weeks for the institution to sell the stock on the market at a favourable price. The brokerage firm then takes the stock into inventory and offers its brokers an extra fee or some other inducement to sell it to their own “retail” clients.

Respectable brokers would only do this with respectable stocks, of course. But the opportunity to earn an extra fee (and curry favour with the boss) can lead some brokers to make recommendations that are more for the broker’s benefit than the client’s.

Stock market strategy error #3: Letting a concept distract you from investment quality. It’s easy to fall in love with the premise/concept that makes a junior stock attractive, so much so that you ignore dismal financial developments. It happens all the time with gold explorers, cancer-cure stocks, and the many change-the-world technology stocks whose technologies just don’t work.

Buying a profitless wind-power stock, for example, is not an effective way to protect the environment. To help the environment, invest wisely, then donate some profits to environmental causes.

If you’d like me to personally apply my time-tested investment advice to your portfolio, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.

We analyze Dun & Bradstreet in Wall Street Stock Forecaster, our newsletter for stock market trading in the U.S. markets

The company gets two-thirds of its revenue from credit reports. The rest comes from other information products, including software to help other companies manage customer data and Internet sites.

In the three months ended March 31, 2011, Dun & Bradstreet’s revenue from ongoing operations rose 5.4%, to $403.6 million from $382.8 million a year earlier. The company earned $64.4 million, down 2.3% from $65.9 million. Earnings per share were unchanged at $1.29 due to fewer shares outstanding. These figures exclude unusual items such as restructuring costs and losses on the sale of investments.

Dun & Bradstreet is a dividend paying stock. Its annual rate of $1.44 yields 1.9%.

Dun & Bradstreet is just one of the U.S. stock market trading picks we analyze in our Wall Street Stock Forecaster newsletter. You can get a 1-month trial subscription, which includes the latest issue, 5 in-depth Special Reports and access to our Email/Telephone Hotlines—absolutely FREE when you subscribe to Wall Street Stock Forecaster today. Click here to learn how.