Dividend discount model includes stock buybacks

The dividend discount model calculates a stock's worth based on its expected future dividend payments. Professor Aswath Damodaran of New York University's Stern School of Business has updated the model to include stock buybacks. He notes that stocks now trade at a slightly bigger discount to their dividend value than they have on average over the past 50 years. That means stocks are undervalued — but not by much.

• Thompson Plumb Growth Fund seeks growth at a reasonable price, which means it spends a lot of time bottom-fishing for former high-fliers with good turnaround prospects. This can make for patchy short-term results but has worked out spectacularly in the long run, as evidenced by Plumb's 14.9 percent average annual gains over the past decade. Recent favorite stocks: Cincinnati Financial, Coca- Cola, Fannie Mae, Microsoft, Pfizer.

• The sale-leaseback model was once considered arcane among real-estate investors. Now it's becoming increasingly popular as a property management tool and a safer play for real-estate investment trust (REIT) stocks, since such REITs don't assume the expense of maintenance, insurance and taxes. Fortune magazine recently recommended four sale-leaseback REITs with high returns and yields and solid growth prospects: American Financial Realty Trust, Capital Automotive REIT, Correctional Properties, Entertainment Properties.

• In the three years of its existence, Standard & Poor's Neural Fair Value 20 portfolio has appreciated an average 14.7 percent annually vs. a 9.4 percent loss for the S&P 500. The portfolio contains the 20 stocks S&P believes have the greatest potential for short-term price appreciation. The current selections: Activision, Amdocs, AutoNation, Borders Group, Coinstar, Concord EFS, Coventry Health Care, Cytec Industries, Electronics Boutique, Genentech, Genesco, Harley-Davidson, Keane, Oxford Health Plans, Reynolds & Reynolds, Sybase, Talx, Teva Pharmaceutical, UnitedHealth Group, VF.

• Brighter prospects for the economy have produced lower bond prices and higher long-term interest rates. But many bond analysts believe the sell-off has gotten ahead of itself. Supporting the case for lower bond yields, and higher prices, is moderate inflation. "The bond market is making a mistake, and investors should be ready and willing to exploit it," says William Cunningham, head of credit strategy for FTN Financial, a research and investment-banking firm.