Countrywide Financial Corp (NYSE: CFC) shares are down significantly on reports it is being investigated by the Federal Bureau of Investigation for securities fraud, specifically whether it didn’t disclose its true financial condition and the poor quality of its mortgage loans in required regulatory filings. This new FBI investigation is in addition to SEC and Congressional probes already looking into the company.

The headline-making FBI probe led to speculation that Bank of America Corp (NYSE: BAC) might try to significantly renegotiate or even abandon its purchase of Countrywide. In January, Bank of America agreed to purchase the mortgage lender for $4 billion.

Despite such speculation, Bank of America spokesperson Scott Silvestri said today that “the transaction is on track.”

California-based Countrywide was the largest U.S. mortgage lender and particularly vulnerable to the declining real estate market that has led to record defaults and decreased availability of investor capital. Its upcoming operating report for the month of February, expected within the next few days, will reveal how badly Countrywide was further hit by last month’s new round of capital market problems.

Before the news of the FBI probe, Countrywide shares were trading almost 25% below Bank of America’s agreed purchase price, showing that investors lacked confidence in the deal. The proposed agreement gives Countrywide shareholders 0.1822 Bank of America shares for each Countrywide share, which as of Friday’s closing price for Bank of America stock valued a Countrywide share at about $6.70. Countrywide’s actual closing price Friday was $5.07.

Though the gap between Countrywide’s trading price and the purchase price may attract some short-term traders, the huge uncertainties created by this new FBI investigation mean the smart money is staying clear of Countrywide for now.

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Select Comfort Corp. (NDAQ: SCSS) may help its customers sleep well at night, but many of its shareholders are definitely losing sleep on with stock’s performance. The mattress-maker saw its shares drop over eight percent today after one of its largest shareholders sent a letter to the board demanding changes in a Schedule 13D filing with the SEC. So, will the company respond with shares trading at their 52-week low?

The Clinton Group, which owns a 5.07% stake in Select Comfort, requested a meeting with the board to address its concerns about missteps they believe the company has taken that have resulted in a deterioration of performance and that has obscured its strong growth prospects. The activist hedge fund joins many other dissident shareholders created as a result of a shocking 80% decline in market value over the past 52 weeks.

The Clinton Group believes that the board and management should immediately implement several initiatives designed to give Select Comfort strategic direction and restore its operational performance:

1. Revise marketing strategy to refocus on direct marketing.
2. Disband the “Quality of Life Advisory Board” as a wasteful use of company resources.
3. Review its store portfolio to eliminate underperforming stores.
4. Immediately cease all new store openings and spending on unnecessary capital expenditures until sales results improve.
5. Eliminate stores in regions where the Company does not have the critical mass to justify its advertising and the overhead for that region, and then eliminate the excess regional and corporate overhead.
6. Freeze spending on the SAP system installation until it is evaluated by an independent consultant.
7. Consider subleasing or disposing of the costly new corporate headquarters and conduct a study on the future needs of the Company in light of its anticipated growth.
8. Revise new Chief Executive Officer performance metrics to earn 2008 base salary to align with shareholders interests.
9. Consider outsourcing its call center operations.

“The dramatic declines cannot be blamed on a difficult macroeconomic environment alone, as the declines in the broader consumer discretionary indices and overall market declines have not been nearly as severe,” said Clinton Group Vice Chairman Jerry W. Levin in a letter to the board. “Even in a difficult market, we believe that the Company should be able to capture market share if it effectively communicates the value of its mattress products with respect to comfort, sleep quality, and price.”

In the end, Select Comfort is a solid company trading at just 6x earnings because of investor concerns about its future. Luckily, simple solutions are available that can be implemented in order to alleviate these concerns and restore investor confidence. The Clinton Group has clearly outlined these steps and it will be interesting to see whether or not the company embraces them. Combined, these factors make SCSS a stock worth watching!

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Kraft Foods Inc. (NYSE: KFT) is one of Warren Buffett’s most recent investments and shares are now trading just off their 52-week lows. This means that the average investor now has the opportunity to invest alongside the Oracle of Omaha at an even better price. Shares in the packaged food company rose substantially after its spin-off from parent Altria Group (NYSE: MO), but declined in recent months amid a weak U.S. economy. So, is KFT a buy at these levels or could it go lower?

Few can dispute the fact that Kraft is cheap at these levels- after all, if the world’s richest man invests you know it’s a good deal! The stock currently trades at just 19x earnings with an even lower forward multiple of just over 14x earnings. Perhaps more intriguing is fact that the company is trading at a 40% discount to enterprise value with strong free cash flows of $1.75 billion and a healthy debt-to-equity ratio of just 0.77x. It is clear that KFT is attractive on a fundamental standpoint, which is likely why Buffett is interested.

Kraft’s three year turnaround plan is also starting to pay dividends as the company continues to introduce new products while cutting overhead costs. The new product offerings include Bagel-fuls (bagels with cream cheese inside), Nilla Cakesters (a cake version of the Nilla Wafers), and a complete overhaul of the company’s salad-dressing products. Meanwhile, the company also announced that it has cut seven hundred jobs recently as a part of its plan to lower costs over the next year.

The key barrier to overcome, however, continues to be sagging profit margins. Higher commodity costs have eaten into the Kraft’s profit margins as it is unable to pass on the costs to customers amid weak consumer spending. The company insists that it will be able to increase prices in 2008, but many analysts remain skeptical that consumer spending will improve in such short order. It is worth noting, however, that Kraft continues to have one of the highest margins in the industry, so things aren’t as bad as they seem.

In the end, value investors like Warren Buffett like this stock because of its cheap valuation which can be attributed to temporary problems in the U.S. economy. Once prices can be raised, profit margins will improve, earnings per share will increase, the multiples will increase, and the share price will go up substantially. This process could take a few years to happen, but investors like Buffett prefer to buy at the bottom. This makes KFT a stock worth watching!

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