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This week, the world’s most powerful leaders — the Group of Eight — met in Italy to discuss how to handle the global recession. Meanwhile, oil prices plunged, ousted Honduran president Manuel Zelaya tried to regain power of his country and violent protests broke out in China.

Those events aren’t the only reasons why the international scene is getting its fair share of the spotlight. Indeed, just as attention-grabbing: fund performance. According to Lipper, the average domestic equity fund gained 6.5% in the first half of 2009; while the typical world equity offering gained 14.7%. Those returns have convinced investors that it may be time to once again send their money to overseas markets in Europe and Asia.

Investors who managed to more than double their returns by investing in an international fund instead of a domestic one were either prescient or just plain lucky. Usually, it comes down to a little of the former and a lot of the latter. But that’s a pretty big gamble to make. That’s why the mutual fund industry cooked up something called global funds. These offerings invest both in the U.S. and in countries outside its borders. The idea is simple: Give investors a one-stop option that buys stocks throughout the world’s exchanges. Investors can then sit back and relax instead of making what could turn out to be a poorly-timed investing decision on, say, Japanese retailers or European banks.

Our fund screen tool lists 2,128 global/international funds. (We’ll get to the problem with the labeling of these funds in a minute.) We trimmed that group down to 274 by disqualifying funds that charge a sales load. We then looked for funds with top-tier performance track records during the trailing three- and five-year time periods. The funds also had to charge below-average fees. We were ultimately left with just three funds.

In order to arrive at that final list we had to do a little subjective tweaking. This is where the labeling problem comes in. Tim Courtney, the chief investment officer at Oklahoma City-based Burns Advisory Group, defines global funds as those having around 40% of their assets invested in the U.S. That’s a definition that jibes with our thinking and with other experts, as well. But our fund screen tool lumps together global funds that fit our standard with international ones that could allocate much more of their money overseas. To make sure the funds fit that 40% parameter, we personally sifted through them. Anything less than 20% and greater than 50% was knocked out of contention.

Global funds offer investors an easy way to get instant portfolio diversification. And, for beginning investors, or those with smaller account balances, they’re also a cheaper alternative to buying several international and domestic funds. “We will use some global funds as an easy way to get access to broad diversification on smaller balances when we don’t want to go and buy several funds,” says Courtney.

However, some advisors point to the last year and argue that investors need to be more proactive with their retirement accounts instead of relying on a product that is wrapped up neatly for them. These advisors like to actively manage their domestic and international exposure, in order to avoid areas that may be cooling off while taking advantage of others that are heating up.

That point is illustrated in the returns of global funds during the first half of 2009. The average U.S. large-cap fund returned 5.6%, according to Lipper, while the typical international large-cap fund — those that only invest outside the U.S. — gained 7.1%. Meanwhile, global large-cap funds that invest in the U.S. and abroad finished right in the middle of those two groups, gaining an average 6.8%. That middling performance is why some advisors prefer to pick and choose their funds.

Whenever we arrive at a list that has such few candidates we feel compelled to explain where all the competition went. Polaris Global Value (PGVFX) and T. Rowe Price Global Stock (PRGSX) didn’t have good enough performance track records at the time. Dodge & Cox Global Stock (DODWX) and Thornburg Global Opportunities (THOAX) haven’t reached their fifth birthdays, so they don’t have long enough histories for inclusion. (The Thornburg fund also charges a sales load.)

One that made it through, Oakmark Global (OAKGX), is a fund that has made our list before. According to Morningstar, the fund has 39% of its assets in North America, 38% in Europe and Britain and 17% in Japan, with the rest spread throughout areas like Latin America. Top holdings include Oracle (ORCL), Credit Suisse (CS), Bulgari and Intel (INTC). The fund has returned an average annual 2% the last five years, about a half percentage point ahead of a Morningstar global index.

The Criteria: The funds on this week’s list are classified as global/international by Lipper. We narrowed down our candidates by looking for those with performance track records during the trailing three- and five-year time periods that put them in the top 50% of their peer group. The funds had to be open to new investors, charge an annual expense ratio under 1.5% and require a minimum investment less than $5,000. Furthermore, the funds had to have around 40% of their assets invested in the U.S. in order to fit our definition of a global fund. As usual, we did not include load funds.

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As a group, small-company stocks are providing just-OK returns this year. Those in the S&P SmallCap 600 index are up an average of 4.7%, vs. 4% for larger companies in the S&P 500 index.

But a handful of small companies are producing huge gains. That’s usually the case with small companies, since their returns tend to have what statisticians call a high standard deviation — a broad scattering — compared with large companies. Consider that 24 companies in the SmallCap 600 index have doubled their stock prices this year, compared with only five large companies in the 500 index. The top-gaining small company, retailer SteinMart (SMRT), is up nearly eightfold in price, while the winner among large companies, XL Capital (XL), has merely tripled.

XL and SteinMart aren’t quite flourishing. Their share prices have multiplied this year because investors left them for dead at the end of last year, not because of fast growth. Other SmallCap 600 companies, however, are up big this year because their businesses are expanding. Below I’ve listed five with rising sales and profits.

Taleo (TLEO) makes software that companies use to hire, indoctrinate and judge workers. Users pay recurring fees. Over the five years ended 2008, application revenues grew at an average compounded rate of 31% a year. Shares are an ambitious 24 times this year’s earnings forecast, but sales are expected to increase 17% this year and the company has more cash than debt.

Synaptics (SYNA) makes touch pads for notebook computers and touch screens for mobile phones. It’s benefiting indirectly from the popularity of Apple’s (AAPL) iPhone. While Apple orders its screens from Toshiba, Apple’s competitors are calling on Synaptics to supply screens for their iPhone wannabes. Synaptics’ sales jumped an estimated 30% during its fiscal year ended June 30. Its shares are 16 times earnings. One forecast by Oppenheimer & Company, an investment bank, has earnings per share nearly doubling by 2012. It assumes the number of touch-screen phones sold by then will jump to 400 million from 50 to 60 million over the past year, that prices for the modules will contract to $5 from over $10 today, and that Synaptics will capture one-third of the market. Oppenheimer says the company currently has two-thirds of the notebook track pad market. (The forecast doesn’t include a rise in touch-screen use in notebooks, although the next version of Windows, expected in October, includes enhanced support for such technology.)

True Religion (TRLG) proves the present recession hasn’t completely snuffed out extravagance. The company sells $300 blue jeans that are faded and frayed just so, allowing the rich to look fashionably poor, while signaling with the giant label on the rear that they are, in fact, rich. Sales are expected to increase 11% this year. Shares fetch a rather working-class 11 times earnings.

Two more: I first recommended shares of Air Methods (AIRM), which uses mostly helicopters to fly the gravely injured or ill to hospitals, nearly three years ago. They’re up just over 10%, vs. a decline of about 30% in the S&P 500. The company still looks prosperous and fairly priced. Cheap eatery Cracker Barrel Old Country Store (CBRL) barely grew its sales in its most recent quarter, but increased its earnings per share 13% on lower costs for ingredients and labor. Shares are 10 times earnings and come with a 2.7% dividend yield.

Find details on all five companies on the table below.

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With apologies to author Dan Brown, Wall Street’s earnings estimates contain a Da Vinci Code of their own. Investors rightly pay attention to the size of the numbers; the higher the expected profit, the more valuable the shares, all else held equal. But other clues are hidden in the shape and movement of the numbers.

Clue 1: A recently raised estimate. When analysts raise their earnings forecasts for a company, its shares tend to jump right away. But they also tend to gradually outperform for months afterward, an effect documented 20 years ago in a study by Scott Stickel of the University of Pennsylvania, and in numerous studies since. (It’s similar to a phenomenon called post-earnings announcement drift, first explained in a 1968 study by professors Ray Ball and Philip Brown. Shares of companies that beat earnings forecasts gradually outperform, too.)

Clue 2: Tightly clustered estimates. What we call a company’s earnings estimate is usually an average of many estimates. Investors call that a consensus, as if to suggest agreement, but the numbers sometimes show anything but agreement. A consensus for earnings of $1.50 a share might contain individual estimates that are tightly clustered between $1.40 and $1.60, or ones that are wildly scattered from 95 cents to $2.05. Anna Scherbina of the University of California at Davis showed in a 2002 study that tight earnings consensuses tend to predict better stock returns than scattered ones. It’s not entirely clear why, but one theory holds that companies with good news tend to communicate more with investors and analysts, leading to greater agreement about their future profits.

Clue 3: A breakaway fan. Analysts, being humans, are more comfortable in groups than outside of them. Since analysts are paid in part according to the accuracy of their forecasts compared with other analysts, ones who stray away from the herd take risks, and had better have good reasons. Often, they do. Professors Christi Gleason and Charles Lee published a study of the matter in 2003. They compared estimate revisions that move toward the consensus with ones that move away from it, regardless of the size of the change. For example, within a $1.50 consensus, an estimate change from $1.40 to $1.49 merely falls in line with the consensus, but a change from $1.51 to $1.53, while smaller, strays from the herd. Straying estimates are more powerful predictors of stock performance, the two professors found. Stocks with straying estimate increases went on to outperform ones with straying decreases by a whopping 15 percentage points a year. A follow-up study two years later helped explain why: Straying estimate revisions, it found, tend to be more accurate than herding ones about future earnings.

Put all the clues together and investors should perhaps take an interest in stocks with rising, tightly clustered consensuses that contain at least one estimate breaking away from the consensus to the upside. The first two attributes are easy to search for using stock screening programs. (The degree of clustering, in the language of these programs, is called standard deviation of estimates.) The third takes some digging through individual estimates that comprise consensuses, which are only available by paid subscription to research services from companies like Thomson Reuters. I recently searched current-quarter consensuses for S&P 500 companies and found two dozen examples of tightly clustered consensuses that increased this month, but only three that contained estimates that strayed from the herd to the upside. They’re listed below.

General Mills (GIS), which makes packaged foods like breakfast cereals and soups, is growing its sales through the current recession, as consumers eat more meals at home. Constellation Brands (STZ), whose booze business depends largely on restaurant and bar traffic, is seeing sales slip, but is still managing to increase profit. Waters (WAT) makes scientific equipment for use in drug development, food and water testing and more, and has beaten earnings estimates in each of its past four quarters. 

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News at a Glance

• Major Indexes: Stocks stay mixed after weak retail numbers.
• Earnings Season: Alcoa results do little to move market.
• Oil Roils: Futures circle $60 mark.
• Carbon Impasse: No agreement from G-8 leaders.

The Lowdown

Weak retail sales and a tired start to earnings season kept major stock indexes flat in midday trading.

Stocks rose slightly Thursday, after Alcoa (AA) posted a lower than expected loss. As of 12:10 P.M., the Dow Jones Industrial Average was up 4 to 8182, while the Nasdaq rose 10 to 1757 and the S&P 500 was up 4 at 884.

Earnings season got underway after the bell Wednesday when Alcoa surprised traders and analysts. Excluding one-time items, the aluminum giant lost 26 cents a share during the second quarter, compared to a gain of 66 cents a share in the same period a year ago. Analysts had expected a loss of 38 cents a share. As the first Dow component to report, Alcoa is traditionally seen as an economic bellwether and an indicator for second-quarter releases to come.

Retailers reported same-store sales for June, and the results were disappointing but unsurprising, with most reporting sdeclines from a year ago. From Abercrombie & Fitch (ANF) to Zumiez (ZUMZ), sales hit double-digit drops. Wal-Mart (WMT) stopped offering monthly sales figures, leaving Target (TGT) as the largest retailer to report. It posted a 6.2% same-store sales drop.

Oil prices wavered after data released by the Energy Department Wednesday suggested weak demand. By 12:15 p.m. crude futures traded on the Nymex dropped 30 cents to $59.84 a barrel.

Corporate News

• Alcoa (AA) posted its third consecutive quarterly loss. Excluding special items, the aluminum maker lost 26 cents a share in the second quarter, compared to a gain of 66 cents a share during the same period a year ago. Analysts had expected a loss of 38 cents a share.
• AIG (AIG) has restarted talks to sell its American Life Insurance unit to MetLife (MET), a deal which could help the insurer raise more than $15 billion, the Financial Times reported Thursday. Talks between the two companies fell apart earlier this year because of a disagreement about the sale price.
• Costco (COST) reported that June same-store sales fell 6% as customers held off on pricier items like cameras and cell phones. The warehouse retailer saw sales slip 6% in the U.S. and 3% internationally. The declines were in line with analysts’ expectations.

The Economy

• The initial jobless claims for the week ending July 4 were 565,000,  down from the revised 617,000 for the previous week, the Labor Department said Thursday. Forecasters expected the number of first-time filings for state unemployment benefits to come in at 603,000.  REPORT
• The Commerce Department reported better than expected figures on wholesale inventories for May, which declined 0.8%, less than the 1.0% estimated decline. They declined 1.4% in the previous month. REPORT

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Ten days from now, Sioux City, Iowa, will reach a high of 83 degrees Fahrenheit. At least, that’s what I’m estimating. I’m not a trained meteorologist. But then, according to accuracy-tracker ForecastWatch, predictions for more than nine days out tend to be less reliable than simply assuming that date’s weather will match its 30-year average, as I’ve done for Sioux City.

Still, weather forecasters are vastly more reliable than Wall Street analysts when the latter are announcing price targets on stocks. I’m referring to when an analyst says a stock that’s trading at, say, $12 should hit $16 within a year. Mark Bradshaw and Lawrence Brown, professors at Harvard Business School and Georgia State University, respectively, studied the matter and reported in a 2006 paper that analysts “do not exhibit persistent differential abilities to forecast target prices.” That’s a bummer, since most recommendations we see on whether to buy or hold (or rarely, sell) are based on the difference between today’s price and the target price.

Julian Koski and Armen Arus, former analysts, say they can make Wall Street’s predictions more accurate. Financial forecasters should work backward, they believe.

Most of the price targets come from something called discounted cash flow (DCF) analysis. The idea is to predict how much cash a company will generate for investors in coming years, and then calculate how much investors ought to pay today for that string of future profits, based on factors like prevailing interest rates and risk. DCF is a centerpiece of business school curricula, perhaps because it’s math-y enough to seem worthy of the attention of bright minds. It’s not terribly reliable for most companies, though. The snag: The part where analysts predict cash flows years in advance, even though they have difficulty estimating next quarter’s earnings. No matter how much fine math you build atop a foundation of guessing, it’s still only a guess. If only more of the inputs could be known ahead of time.

Koski and Arus think analysts ignore the most important input of all: today’s price. Since we already know it, we can use the reverse of DCF analysis to calculate how much income companies will have to produce in coming years to make today’s price worthwhile. Then all we have to do is determine the probability of companies producing that income, based on their current trajectory. Koski and Arus call that the Required Business Performance (RBP) approach, and six years ago launched a firm called Transparent Value to market it.

Transparent Value assigns high RBP percentages to companies that look likely to do enough business in coming years to justify their prices and low RBP percentages to companies that seem priced for unrealistic expectations. Earlier this year, Dow Jones Indexes (on the corporate family tree, a third cousin twice removed to SmartMoney.com) launched indexes based on RBP. On Monday, Transparent Value filed a request with the Securities and Exchange Commission for permission to launch three mutual funds based on the indexes.

Evidence on RBP returns is theoretical for now, based on back-testing rather than real world performance. The numbers are promising, though. Through the end of 2008, the main RBP index returned an average 8.6% a year, while the S&P 500 index lost an average of 1.4%.

Since this column generally focuses on stocks to buy, and readers sometimes ask for ideas on ones to sell, I recently asked Transparent Value to send over a list of companies with low RBP probabilities — ones that seem priced for disappointment. It included title insurer First American (FAF), property and casualty insurer Progressive (PGR), pharmacy plan manager Express Scripts (ESRX), for-profit school Career Education (CECO) and Darden Restaurants (DRI), owner of Olive Garden and Red Lobster. Find details on each on the table below.

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Market Wrap-Up

Stocks finished almost flat Wednesday ahead of the start of the second quarter earnings season with Dow component Alcoa (AA) set to kick things off after the market closed. Low expectations about the upcoming reports hit major indexes, which then got a late-session boost from bargain hunters. Investors failed to find encouragement in domestic economic prospects or global responses to the slowdown.

The Group of Eight summit in Italy became the Group of Seven, following Chinese President Hu Jintao’s departure to address ethnic and religious unrest in the heavily Muslim western region of his country. The remaining global leaders continued to debates the proper approach to fixing the global economic slowdown.

The Dow Jones Industrial Average gained 15 points to 8178. The Nasdaq eked out a one-point gain to 1747 and the S&P 500 dropped a single point to 880. For a detailed rundown on Tuesday’s trading session see our market story.

Winners

Uncertainty was the only certainty Wednesday, as the iPath S&P 500 VIX Short-Term Futures Index fund, which profits off market volatility, rose 1.6%. Shares of the SPDR S&P Retail fund got a 2.2% boost in anticipation of earnings season, as online retailer Amazon.com (AMZN) received an upgrade to Positive from Susquehanna Investment Group.

Losers

The energy-heavy Market Vectors Russia fund (RSX) took a hit Wednesday, with shares declining 4.4%. The Market Vectors Gold Miners fund (GDX) also tumbled, losing 3.9% as the metal dropped $20 to close at $909 an ounce.

Wednesday’s Industry Headlines

Data Point

Total assets in exchange traded funds increased $5.7 billion in June from a year ago, according to State Street Global Advisors (STT). The 1% increase from a year ago left $593 billion invested in 740 ETFs, run by 25 managers, the report said. The top three managers in the U.S. ETF marketplace remain Barclays Global Investors (BGI), State Street, and Vanguard, which control approximately 83.5% of the U.S.-listed ETF market.

Thursday’s Notebook

Earnings and Conference Calls

3Com, Chevron, Franklin Covey, Helen of Troy, Shaw Group, Value Line

Economic Data

8:30 a.m. Initial Jobless Claims for July 4 Week
10:00 a.m. May Wholesale Trade
10:00 a.m. DJ-BTMU Business Barometer for June 26
June Chain-Store Sales

A look at how the industry’s most popular ETFs did on Wednesday:

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The second-quarter earnings season unofficially kicked off after the market close Wednesday, when aluminum giant Alcoa (AA) released its earnings. It proved to be a surprisingly good start. Alcoa, which is struggling with a slump in global demand, reported a loss of 26 cents a share (excluding charges) — marking the company’s third consecutive quarter of losses – but the firm shocked traders by topping analysts’ estimates by 12 cents a share.

Unfortunately, the rest of the season might look less rosy. According to analysis by Thomson Reuters, the expected second-quarter earnings growth rate for the S&P 500 is negative 35.5% — marking the eighth straight quarter of declines. All 10 of the sectors Thomson tracks are expected to fall (health care is expected to fare the best with a decline of 2%, while basic materials is expected to do the worst with a decline of 79%). “By any historical context, it’s not looking to be a good quarter,” says John Butters, director of U.S. earnings research for Thomson Reuters.

See Home Depot and 6 others
who have upped their guidance.

But not all hope is lost. A handful of companies have actually raised their second-quarter projections, providing some precious clues to which industries may produce some upside surprises in the coming weeks. SmartMoney.com combed through earnings preannouncements and guidance to see which types of companies are feeling a little more optimistic about their results for the quarter. In doing so, two clear industries emerged: technology (particularly chip makers) and consumer goods.

Texas Instruments (TXN), for example, raised its earnings projections from a range of 1 to 15 cents a share to 14 to 22 cents a share in early June. And Pepsi Bottling Group (PBG) not only raised its second-quarter earnings projections by 5 cents a share in early June, it then followed that positive news by beating the high end of its revised projections by 4 cents a share Wednesday.

But do the positive announcements from Texas Instruments and Pepsi Bottling bode well for their respective tech and consumer goods peers?

In certain corners of the tech world, the earnings season could very well show signs that the industry is rebounding off of a bottom, says Daniel Berenbaum, an analyst at Auriga USA.

“I think second-quarter earnings is going to be pretty positive, and everybody’s going to be looking out at what guidance is for Q3,” says Berenbaum. The second half of the year is typically stronger for semiconductor companies, thanks to seasonal shopping patterns, he says. “We’re going to see some seasonality – there is going to be a back to school, and there is going to be a Christmas – it’s just a question of how good they are,” the analyst says.

Predicting how consumer-goods companies will fare is more difficult. “When you’re looking out at the environment, it’s really a tale of two cities,” says Paul Larson, an equity strategist at Morningstar, an independent investment research firm. He expects companies that sell goods consumers can’t do without to report earnings that are down year-over-year, but only by 5% or 10% — a relative success in the current recession.

Of course, investors should keep an eye out for company projections beyond the second quarter, says Butters. What the companies say they expect for the second half of the year will be key in determining their level of confidence about future sales, he says.

Here’s a look at some of the companies that have revised their second-quarter estimates upward, the factors behind their good news and whether it bodes well for other companies in their industry.

General Mills

Results: FY 2009 EPS $3.98
Forecast: FY2009 EPS would exceed earlier projection of between $3.87 and $3.89

General Mills (GIS) announced earnings for fiscal 2009 of $3.98 a share last week, exceeding their previous guidance by 9 cents a share, as the company had predicted it would in June. Consumers may be cutting back on their spending, but food apparently isn’t one area they’re skimping on. The company says U.S. retail sales have seen strong growth in the fiscal year ending May 31. The company also attributes the better-than-expected earnings to new products and consumer marketing efforts. Earnings for 2009 also reflect a gain from the sale of Pop Secret popcorn to Diamond Foods (DMND), which in late May also raised its full-year EPS estimates.

“Consumption’s probably going to fall as a percentage of GDP, which it needs to do, and the way it’s going to fall isn’t going to be that people stop eating,” says Dan Seiver, a finance professor at San Diego State University.

Companies like General Mills that rely on basic food products to drive their bottom line should hold up well even as consumer spending remains low, he says.

Home Depot

New Forecast: FY2009 EPS (continuing operations) flat to down 7%
Old Forecast: FY2009 EPS (continuing operations) down 7%

Even if Home Depot (HD) hits the high end of its projections, investors shouldn’t equate it with a broader recovery in the housing industry, says Larson. “At Home Depot, more than half of their business is plungers and light bulbs.” In other words, staple items consumers can’t skimp on, he says.

The mid-June revised estimate “builds upon what I’ve been seeing from Home Depot since the middle of 2008, where they’ve become much more efficient in their operations,” says Brian Sozzi, an equity research analyst at Wall Street Strategies. CEO Frank Blake’s emphasis on the shopping experience has also paid off: “If you’re a longtime Home Depot shopper, you can really tell the difference,” says Sozzi.

One wild card? The weather. Heavy storms in the Northeast and Midwest over the past couple of months could weigh on sales for the company and its main competitor Lowe’s (LOW) “[The second quarter] is their Christmas season – this is their key earnings quarter,” says Laura Champine, an analyst at Cowen and Company. Both companies have successfully cut costs, but housing has yet to turn around, and with the weather holding down summer spending, these companies could potentially miss their targets.

Pepsi Bottling Group

Results: 2Q EPS of 78 cents (excluding after-tax gains and restructuring charges)
New Forecast: 2Q EPS of 70 cents to 74 cents
Old Forecast: 2Q EPS of 65 cents to 69 cents

Pepsi Bottling Group (PBG) had raised both its second-quarter and its 2009 earnings guidance before reporting earnings per share of 78 cents on Wednesday, beating the revised guidance of 70 to 74 cents. The company credits the brighter outlook to improved sales in the U.S., continued commodity price deflation and decreased volatility in foreign currencies.

Companies like Pepsi Bottling and Coca-Cola (KO) are “thought to be very recession-proof,” says David Silver, an analyst at Wall Street Strategies. PBG, he says, is “one of the few companies [in the broader market] that are actually seeing a positive second half of the year.”

Silver cautions, however, that so far Pepsi Bottling has kept earnings flat year-over-year in part by cutting costs. “They’re continuing to cost-cut, but at the end of it there’s only so much that you can cut out before real revenue growth needs to come to grow the company,” Silver says. “We’re approaching that point very quickly.”

Qualcomm Incorporated

New Forecast: Fiscal 3Q revenues of $2.67 to $2.77 billion
Old Forecast: Fiscal 3Q revenues of $2.40 to $2.60 billion

Qualcomm (QCOM) cites strong world-wide demand for its 3G chipsets as the reason for its fairly sizable boost in revenue projections in early June. (The company did not provide earnings per share guidance, noting that potential investment losses make such projections unpredictable.)

“All these companies have cash on hand, so it’s invested in marketable ways” like stocks and bonds, says Vijay Rakesh, an analyst at ThinkEquity, LLC. ThinkEquity predicts fiscal 2009 EPS of $1.23, up from a previous estimate of $1.20.

Having grown from 20% of the handset market in 2003 to 50% today, the company is well-positioned to take advantage of growing 3G adoption, and to enter the burgeoning netbook market, Rakesh says.

Also helping, is an expected rebound in the overall semiconductor industry. “Through the second quarter you heard indications that demand improved,” Rakesh says. “That sets it up for a pretty good third quarter in terms of holiday and back to school.”

Silicon Laboratories

New Forecast: 2Q diluted EPS of 13 to 16 cents
Old Forecast: 2Q diluted EPS of 7 to 11 cents

Another chip maker makes the list: integrated-circuits maker Silicon Laboratories (SLAB) credits new timing, video. and short-range wireless products, and a recovery in orders and shipments for its upped estimates. “With more new product cycles than at any time in our history, we are increasingly confident that it will only be a matter of quarters rather than years to reach and then exceed our third quarter 2008 revenue peak,” CEO Necip Sayiner said in a statement on June 17.

For semiconductor companies overall, things are looking brighter. The second half of 2008 saw the supply chain “grind to a halt” on recession fears, says Adam Benjamin, an analyst at Jefferies & Company. But now, he says, demand is improving and Silicon Laboratories, in particular, could benefit from new product lines ramping up.

Texas Instruments

New Forecast: 2Q EPS between 14 cents and 22 cents
Old Forecast: 2Q EPS between 1 cent and 15 cents

Texas Instruments (TXN) is highlighting stronger-than-expected wireless handset revenues as part of the reason for its improved estimate. Earlier second-quarter estimates were “very conservative,” says Berenbaum. “Not to say that it was unrealistic at the time, but when guidance was given, we’d just come off a horrific quarter.”

After paring down their inventory levels in the grim fourth quarter of 2008 and first quarter of 2009, many semiconductor companies have benefited from restocking in the second quarter.

Tyco Electronics

New Forecast: Fiscal 3Q EPS of $0.00 to $0.07
Old Forecast: Fiscal 3Q EPS of -$0.05 to $0.00

Tyco Electronics (TEL) says its improved outlook for the quarter ending June 26 is due to increased revenue in the company’s electronic components and undersea telecommunications divisions, as well as cost savings from restructuring.

“Even though they have increased their guidance, this year is still going to be a tough year for them,” says Zahid Siddique, an analyst at Gabelli & Company. “Their end markets are very consumer-driven, and we’re seeing weakness in those markets,” he says. However, Siddique says that in the long term, Tyco is in a relatively stronger position compared to smaller, less-diversified companies like Bel Fuse, LittelFuse, Cooper Industries or Thomas & Betts.

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News at a Glance

• Major indexes: Stocks see-saw ahead of Alcoa earnings report.
• Oil slides: Prices hover near $60, weighing on broader markets.
• G-8 leaders: No accord on recession fighting tactics.
• Earnings season: Alcoa report starts off second quarter profit news.

The Lowdown

Stocks got a late afternoon lift Wednesday afternoon, as bargain hunting trumped low confidence ahead of the start of earnings season.

Investors failed to find much hope in domestic economic prospects or global responses to the slowdown, but pushed two major indexes into positive territory in the last 30 minutes of trading. Dow component Alcoa (AA) reported after the close, losing a less than expected 26 cents a share before items, signaling the unofficial start of second-quarter earnings season. It was the aluminum maker’s third consecutive quarterly loss.

The Group of Eight summit in Italy became the Group of Seven, following Chinese President Hu Jintao’s departure to address ethnic and religious unrest in the heavily Muslim western region of his country. The remaining global leaders continued to differ on approaches to handling a global economic slowdown. After a day of swings on the declining side, the Dow Jones Industrial Average closed up 15 points at 8178. The Nasdaq eked out a 1-point gain to close at 1747 and the S&P 500 dipped 1 point to finish at 880.

Family Dollar Stores (FDO) beat Wall Street earnings estimates for a sharp early rise, news that indicates households remain budget conscious and that a recovery may remain tepid thanks to low consumer spending and declining availability of credit. 

The Tuesday bankruptcy filing of auto parts maker Lear spotlighted the fallout from the nation’s faltering automakers. American Axle & Manufacturing (AXL) shares slid below $2, continuing a week of daily double-digit percentage declines.

The fate of the dollar as the world’s reserve currency remained a hot topic among G-8 summit participants. Negative economic news from Japan also contributed to the downturn. The country’s current account surplus fell 34.2% in May from the same month a year ago, and the trade surplus fell 22.1%, according to data released by the Japanese Ministry of Finance Wednesday. Separate data from the Cabinet Office showed core machinery orders fell 3.0% in May from April. Both sets of data suggest the global recession has not waned.

Oil prices continued their decline as pessimism about the economic recovery deepened. Crude stayed lower at $60.18 in afternoon trading on the Nymex after a $2.79 drop in the Wednesday session.

Corporate News

• Google (GOOG) is designing a new open-source computer operating system that will be available on netbooks in the second half of 2010, the company announced on its blog Tuesday evening. The Chrome operating system, which will be separate from Google’s Android system for cell phones and other smaller devices, is intended to compete with Microsoft‘s (MSFT) Windows.
  
  
• Teva Pharmaceuticals (TEVA), France’s Les Laboratoires Servier and other generic drugmakers face antitrust investigations by the European Union into whether an agreement between the companies hindered the entrance of a generic cardiovascular drug on to the market. The probes come after raids at the companies in November, the European Commission said Wednesday.

The Economy

• Crude oil inventories for the week ending July 3 showed a lower than expected decline of 2.9 million barrels, according to a report from the Energy Department Wednesday at 10:30 a.m. Analysts on average expected a drop of 3.2 million barrels. REPORT
• Consumer credit decreased at an annual rate of 1.5% in May, according to data released Wednesday afternoon by the Federal Reserve. Revolving credit, such as credit cards, decreased at an annual rate of 3.75%, and nonrevolving credit decreased at an annual rate of 0.25%. Consumer debt decreased by $3.4 billion from April, lower than earlier estimates of $8.8 billion. REPORT 

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SUMMER, IF THE CALENDAR IS TO BE BELIEVED, started two weeks ago.

The season of scorching sand and sultry nights, patios and poolsides, of sizzling grills and swizzle sticks seems lost this year to a wide swath of the country that has been cursed by cool temperatures, cloudy skies and drenching rains. Worst hit have been the Midwest and Northeast. The Southwest has been unseasonably cool as well. Summer finally showed up in the deep South and Southeast, but with a sweltering vengeance, accompanied by heat advisories discouraging outdoor activities. High temps and dry conditions have gripped Texas the past few weeks. The Pacific Northwest also has been unseasonably warm and dry.

For many retailers and purveyors of food and beverages, the summer ended long before it began. Outside of those who sell mosquito repellent or windshield wipers, or who deliver pizza, expect the month to be a washout for retail sales. That, in turn, sets the stage for a round of terrible second-quarter sales.

“Any chance of good news has gone down the sewer with the rain,” says Larry Haverty, a retail specialist based in Rye, N.Y., who is portfolio manager of the Gabelli Global Multimedia Trust closed-end fund. He expects retailing stocks to mark time until September, when inventories will be in better shape.

The International Council of Shopping Centers now estimates that June same-store sales at retail chains will be down by about 5% from year-earlier levels, excluding Wal-Mart Stores (ticker: WMT), which stopped reporting monthly sales. That compares with an earlier forecast of a decline of 3% to 4% for June and an actual drop in May of 4.6%. In a clear sign of bulging inventories, Williams-Sonoma ‘s (WSM) Pottery Barn slashed the prices of chaise lounges and other patio gear by 20% for the Fourth of July weekend.

THE STANDARD & POOR’S RETAIL INDEX, which outpaced the S&P 500 throughout much of the past year and was a leader off the market lows in early March, has been showing signs of weakness more recently, falling 10% since May. And the June weather may be “another nail in the coffin,” says Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment-banking firm based in Manhattan.

“How can you have unemployment exploding and savings exploding and expect to have retail business?” he asks. “The weather hasn’t helped.”

Last month’s numbers faced a difficult comparison, in any case, with those 12 months earlier. June 2008 had phenomenally good weather that made it the strongest month for retailers last year. And the arrival of federal tax-rebate checks that month only added to the boom. Another plus was that that gasoline prices peaked just as summer got under way, and subsequently slid. In contrast, this year’s weather couldn’t be more horrendous, the economy remains frail and consumers are more interested in saving than spending. On top of that, the gas-pump price trend is up.

Even if the weather improves, the fallout is likely to spill over to the third quarter. “The weather impact doesn’t stabilize in a single quarter,” says Scott Bernhardt, chief operating officer at Planalytics, a Wayne, Pa.-based weather-forecasting service for businesses. “The summer is over for full-price sales, and [retailers] will be marking down goods like crazy.”

CONDITIONS ARE SUCH IN THE HEARTLAND that corn and soybeans are behind in their growing season, and the stocks-to-use ratio, a measure of grain supply to grain demand and a good predictor of price trends, is at the lowest level since the early 1970s, according to Michael Ferrari, vice president of commodities research at Bethlehem, Pa.-based Weather Trends International, a long-range weather forecaster for businesses.

Spring flooding in the Plains states delayed the winter-wheat crop, but harvesting began recently. Nonetheless, an expected cold front could put the kibosh on an extended harvest, in contrast to last year, when a mild fall stretched out the growing season. Reflecting supply concerns, open interest on grain futures has ratcheted higher in the past few weeks, as investors bet higher prices are in the offing. One way to make a concentrated bet on the grain sector is through the PowerShares DB Agricultural ETF (DBA).

Still, the biggest immediate impact from the lousy weather will be felt among the retailers, particularly those with heavy presences in the most affected states. The Northeast, for example, accounts for roughly 30% of the nation’s apparel sales. However, “broadline” retailers, selling everything from furniture to household goods to food, are expected to bear the brunt of the storm. Clothing retailers, in contrast, might see some benefit from people seeking refuge in malls from the extreme weather.

BJ’s Wholesale Club (BJ), with 70% of its warehouse clubs in the Northeast, could be pressured more than, say, Wal-Mart’s Sam’s Club, with its roots in the South. Ross Stores (ROST), with a big California presence, could post better numbers than, say, TJX (TJX), whose off-price T.J. Maxx and Marshall’s brands claim the Northeast as a stronghold.

Unfortunately, umbrellas are no match for this storm.

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Investors have returned to stocks in brave fashion. But while they’re placing pricey bets on struggling sectors, they may be ignoring some prosperous and cheap companies whose products fill their kitchen pantry.

Since the S&P 500 index closed at a humble 676 on March 9 it has rebounded 30%. Within the index, financials and “consumer discretionary” companies — the latter sell things we want but don’t need, like toys and restaurant meals — have soared 83% and 37%, respectively. Both sectors suffered steep earnings declines over the past year. Both now trade well above 20 times forecast 2009 earnings, vs. 16 times earnings for the index. Investors seem to be counting on a quick return to the borrowing and spending that powers profits for both sectors.

Packaged food makers seem a safer bet — and a cheaper one. While the average S&P 500 company saw its sales shrink 8% last quarter vs. a year earlier, the index’s pantry companies increased sales as consumers ate more meals at home. There’s no earnings rebound needed to justify food stock’s prices: They trade at a reasonable 14 times 2009 earnings and they offer hearty dividend yields. The average is 3.4%, about a percentage point more than the S&P 500 index provides.

Below are five S&P 500 food stocks that look especially promising.

J.M . Smucker (SJM), which makes its namesake jams, Pillsbury rolls and Hungry Jack pancake mix, bought Procter & Gamble’s (PG) Folgers coffee business last year. The purchase has fueled giant sales increases of late, but even without it, sales would have increased 3% in the company’s most recent quarter. Profits beat Wall Street’s expectations in every quarter of the company’s fiscal 2009 ended April 30.

ConAgra Foods (CAG) owns an eclectic mix of businesses including Chef Boyardee canned pasta, Orville Redenbacher’s popcorn and Slim Jim meat . . . things. The company recently sold its commodity trading unit. Adjusted for the change, sales and profits are growing nicely. The stock is the cheapest on the list at less than 12 times earnings and it comes with a 4.1% dividend yield.

H.J. Heinz (HNZ) sells plenty of ketchup to restaurants, so it’s not seeing quite the same benefit as other food companies from consumers eating at home. Also, some shoppers are trading down to store-brand ketchup. Sales in the company’s most recent quarter slid 6%. Management says it plans to trim costs and spend some of the savings on more marketing, while avoiding price cuts, in an effort to regain market share while keeping profits plump. If the plan works quickly, the stock price will surely benefit, and if it doesn’t investors still collect the biggest yield on the list: 4.7%.

Have a look if you like at details on these three and two more companies on the list below.

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