Select Comfort Corporation (NDAQ: SCSS) shares may be well off of their $19/share 52-week highs, but at several professional investors are giving this stock a second look. The depressed levels have led to several analyst upgrades as well as at least one activist hedge fund that has taken a positive stance. The Clinton Group not only commended management, but also increased its stake to 6.1% in recent days.

The Clinton Group previously expressed disappointment with Select Comfort in a series of letters, but is now convinced that the company is moving in the right direction. The activist hedge fund met with Chairman Ervin Shames and CEO William McLaughlin regarding the prospects and strategy of the company and liked what they saw. In particular, the two executives told the hedge fund that the company was improving operating practices by focusing on driving sales through new marketing strategies and implementing appropriate cost reductions where necessary.

The two parties also discussed implementing changes that the Clinton Group proposed during their last letter to the board, which included:

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.

It is clear that Select Comfort has been experiencing difficulty due to a weak macroeconomic environment, but the Clinton Group now believes management and the board is now cognizant of its previous missteps and focused on improving the company's performance in 2008 and beyond. Even assuming a difficult environment for consumer spending, the company is trading at historically low multiples and at a valuation discount to its comparable peers.

The Clinton Group believes that this valuation gap between Select Comfort and its peers will close as its new initiatives begin to bear fruit and the company will soon return to historical levels of profitability and valuation. As a result, their conviction is stronger than ever that the company has exceptional long-term growth prospects. In fact, they even recently purchased 461,244 more shares in a vote of confidence.

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Apple Inc. (NDAQ: AAPL) has reportedly surpassed Wal-Mart Stores Inc. (NYSE: WMT) to become America's largest music store by sales.

According to market research firm NPD Group, Apple's iTunes digital store sold more albums in the first two months of this year than any other music retailer. Though consumers still buy more physical music in the form of CDs than the digital song files that iTunes sells, iTunes has been able to vault ahead of Wal-Mart because it dominates the music download market – even though the music download pie is smaller, iTunes has such a big slice that it has overtaken all individual CD sellers.

This announcement is not so much immediately important for Apple's or Wal-Mart's profitability as it is symbolic – the fact that the biggest music retailer doesn't sell CDs or have physical stores signifies the transformation the music industry has undergone in the past decade.

Port Washington, NY based NPD Group computed the figures by counting every 12 individual songs sold as one album, which is absolutely key to the claim that iTunes sold more albums than any other retailer because in reality few iTunes customers purchase complete albums.

In the long-run, this news is much more significant for Apple than Wal-Mart because Apple's results are far more dependent on iTunes and its complimentary digital music players, iPods, than Wal-Mart's results are dependent on CD sales. Though Apple doesn't release specific results for iTunes – probably part of a strategy to prevent music companies from complaining about its profitability – if downloading music is now officially the standard, Apple could not be in a better position to capitalize on it.

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Honeywell International Inc. (NYSE: HON) announced an agreement to purchase personal protective equipment manufacturer Norcross Safety Products LLC for $1.2 billion from Odyssey Investment Partners.

Honeywell is the world's largest manufacturer of cockpit displays but also provides products ranging from security technologies for buildings to specialty chemicals. Last year, the company had net income of $2.4 billion on revenue of nearly $35 billion.

Norcross makes safety equipment for "the fire service, utility and general industrial worker segments" and had approximately $609 million in revenue last year according to the press release on the deal.

"With more than 100 years of industry experience, best-in-class solutions and trusted brands, and a strong management team with exceptional talent and depth, Norcross is a globally recognized industry leader that will bolster our offerings to our customers in key Life Safety segments," Honeywell CEO Roger Fradin said.

President of Honeywell Life Safety Mark Levy highlighted the logic of the deal, "This acquisition creates an exciting adjacency for Honeywell Life Safety -- especially our Fire Systems and Gas Detection businesses, which share common distribution channels with Norcross. We expect strong sales synergies across Honeywell businesses and opportunities to add value to Norcross products with Honeywell electronic gas sensors, fire detection and advanced fiber material technologies."

The obvious question, given that Norcross seems an excellent fit, is did Honeywell pay a good price for the company? Norcross is currently held primarily by Odyssey Investment Partners, a private equity firm, which frankly means almost no material financial data for Norcross is publicly available to analyze. Private equity firms can invest in companies traded on stock exchanges – which means they have to file legally required financial documents – but often instead purchase equity stakes in private companies or take public companies private.

This strategy allows private equity firms to be freed from answering to Boards of Directors and company shareholders in the management decisions of companies they own but it also makes private equity firm performance, and the performance of their respective companies, very difficult to track. Honeywell certainly had access to Norcross' financial data while formulating this deal, but for now all that can be said for certain is the synergies of the purchase are obvious but the fairness of the price is not.

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Airlines are struggling to get any lift amid record oil prices and a weakening economy. ATA Airlines and Aloha Airlines both shut down operations and filed for bankruptcy this week alone while larger carriers like Northwest Airlines (NYSE: NWA) are raising prices and cutting routes to stay alive. In fact, the only airline eking out a profit seems to be Southwest Airlines (NYSE: LUV).

Southwest Airlines revealed $111 million in net income during the fourth quarter after it was able to lock in lower fuel prices using derivative hedges. These contracts enable companies to pay a small fee in order to lock in prices for fuel years later. As a result, the airline was able to save over $300 million in fuel costs and post a 95 percent increase in net income. Just how long Southwest can protect its 67 quarters of consecutive profit, however, will surely be tested in the coming year amid soaring expenses.

Many other airlines haven't been so lucky in facing these rising costs. Those that were in bankruptcy a few years ago did not have the financial flexibility to make the fuel hedges that Southwest made and are now completely exposed. As a result, many airlines are being forced to take other actions to raise revenues and cut expenses. Analysts remain concerned, however, that these could revive the industry's past trouble.

Northwest Airlines announced that it would raise its fairs, fuel surcharges and baggage fees and cut its domestic flight schedule by 5 percent in order to help its bottom line. The airline also said it had suspended plans to hire more pilots and flight attendants while cutting capital spending that doesn't involve airlines by $100 million this year. Meanwhile, fuel prices are now seen as being $1.7 billion higher than it projected in May when it exited bankruptcy, which could put the company back at risk.

Other airlines have also taken similar actions. UAL Corporation's (NYSE: UAUA) United Airlines announced that it will begin charging fliers that wish to take a second piece of luggage beginning in May. Delta Airlines (NYSE: DAL) is also imposing new or higher fees on many travelers including frequent fliers, passengers traveling with pets and people booking their ticket over the phone.

All of the problems can also be traced back to soaring fuel expenses. Delta saw its fuel bill jump 28 percent to $1.36 billion during the third quarter while United Airlines saw a 43 percent jump. Oil prices have reached speculative highs after OPEC promised that it would not raise production levels for the remainder of the year. Meanwhile, the declining dollar has also contributed to the speculation since all commodities are now more expensive.

In the end, the airlines are now in the "perfect storm" of problems with declining consumer spending and quickly rising expenses. Even the best airline in the industry is seen as at risk of losing its profitability. These problems may not disappear until the slowdown in the U.S. economy is over and that could take awhile. Whether or not these airlines will survive that time remains to be seen.

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Dillard's Inc. (NYSE: DDS) announced an agreement with many of its dissident shareholders in a move designed to avoid an expensive proxy contest. Activist hedge funds Barington Capital and the Clinton Group agreed to forgo a proxy contest in exchange for the voluntary nomination of four of its proposed directors. Additionally, the board agreed to review whether the company's real estate assets and capital are being optimally deployed to build shareholder value.

"We are pleased to have reached an agreement with Barington and Clinton," Chairman and CEO William Dillard. "Both the Board and management welcome the perspectives and insights of our proposed new directors. The Class B board members are committed to working with the new Class A board members to ensure that the best operating plan and management team possible are in place."

Specifically, Dillard's agreed to close under-performing stores in order to rationalize real estate as soon as possible, cut unnecessary costs, and subject all future commitments for new stores to strict return on capital requirements that will be set by the board and management. These measures will help the company improve its bottom-line by reducing unnecessary expenses while ensuring that its assets are being monetized to drive profitability.

The activists' nominees will be designated Class A directors and have a term that will explore at the 2009 annual meeting. Under the agreement, they will have all the same rights and abilities and the original Class B directors while focusing on ways to implement the activist agenda. This agenda consists of three tremendous opportunities for improvement:

1. Dillard’s $7.5 billion revenue base offers significant margin leverage capable of producing sizable cash flow gains from any future operating improvements. The Company’s geographic concentration, especially in high-growth areas of the Southeast and Southwest United States, offers unique regional opportunities for its 331-store portfolio. Furthermore, the Dillard’s brand name is well-regarded in the department store sector and the Company has received above average scores in the area of customer loyalty according to a recently released survey by Brand Keys. Clearly, Dillard’s has the scale and brand recognition to be a successful retailer.
2. As Dillard’s trailing twelve month operating free cash flow margin is 2.4% versus 7.7% for its department store peer group, we believe that stockholders can realize enormous upside if margins can be improved to the levels achieved by the Company’s peers. We see a number of opportunities to immediately reduce the Company’s cost base, including by improving sourcing, rationalizing SG&A expenses and lowering capital expenditures. We also believe that there are a host of initiatives in inventory management and merchandising that can drive customer traffic and enhance margins. Among other things, we believe that Dillard’s needs to tighten its current assortment of offerings and vendors and consider a more regular promotional cadence, as its stores, in our opinion, are over-inventoried. In addition, we believe that Dillard’s needs to embark upon an aggressive re-merchandising effort that features new vendors (including exclusive offerings) and updated private label and in-house collections to differentiate its value proposition for customers. Furthermore, it is our belief that the Company needs to enhance its brand marketing by adding more image and lifestyle campaigns that communicate a revitalized message to the marketplace. We are convinced that each of these initiatives would add excitement and newness to the Dillard’s shopping experience and attract customers to its stores.
3. Dillard’s owns approximately 75% of its store portfolio, comprised of approximately 42 million square feet of retail real estate. Currently, the Company’s shares trade at only 0.5x its tangible book value of approximately $32.50 per share. This represents a significant discount to the Company’s peer group, which trades at an average tangible book value multiple of approximately 2.0x. We also believe that Dillard’s tangible book value is understated, since the current market value of the Company’s owned real estate far exceeds its depreciated book value. In fact, in a November 26, 2007 research report, Deutsche Bank estimated Dillard’s net asset value before taxes to be $59 per share. Deutsche Bank also notes that “actions taken to unlock the Company’s real estate value would be positive for the shares, as the NAV [net asset value] for Dillard’s [is] greater than the value based solely on operating fundamentals.” It is our belief that there are a number of measures that the Company can take to enhance the value of its real estate portfolio, including converting certain properties to higher and better use, closing underperforming stores and engaging in sale/leaseback transactions.

These proposals have a lot of merit and would unlock substantial value if implemented. The fact that the activist investors will now hold seats on the board of directors significantly increases the likelihood of change. This makes DDS a stock worth watching closely over the next few months.

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Google Inc. (NDAQ: GOOG) has announced it will sell a branch of recently acquired DoubleClick called Performics – a marketing firm that helps websites increase their ranking on search engines.

Facing an obvious question about conflict of interest – because Performics tries to increase rankings most prominently on Google's own search engine – the decision should help silence at least some possible concerns. Performics is a small wing of DoubleClick, which Google finalized purchasing three weeks ago for $3.2 billion.

Facing prickly questions about possible conflicts of interest, Google Inc. will sell a recently acquired service called Performics that helps Web sites improve their ranking on online search engines, including Google's.

"It's clear to us that we do not want to be in the search engine marketing business," said Tom Phillips, who oversaw the DoubleClick purchase, wrote in a Google blog. "Maintaining objectivity in both search and advertising is paramount to Google's mission."

The decision, announced Wednesday, comes three weeks after Google picked up Performics as part of the online search leader's $3.2 billion purchase of online ad service DoubleClick. Performics has about 200 of DoubleClick's 1,500 total staff.

In other housecleaning measures, Google is also planning to layoff 300 employees, according to much cited unnamed sources, These employees are presumably redundancies created from the DoubleClick deal – this would be the biggest loss of employees in the company's 10 year history. These layoffs are not unexpected as CEO Eric Schmidt acknowledged their possibility in documents published at the close of the DoubleClick deal.

Given Google's exponential growth – it now has more than 18,000 employees – a loss of 300 jobs is not materially significant, but it does perhaps signal the end of the company's era of unfettered financial and hiring growth. Such 'cutting of the fat' is seen by many analysts as online advertising, which drives Google's profits, comes to plateau for the foreseeable future. Google's stock has lost about a third of its value this year.

Hopefully these decisions signal a conscious and thorough effort by Google to improve its bottom-line by carefully examining all its businesses rather than relying solely on ad revenue growth.

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SMTC Corporation (NDAQ: SMTX) is barking up the wrong tree according to one major activist investor. Red Oak Partners voiced its concerns with the company's chronic under-performance in relation to its peers. In fact, the electronics manufacturer is the only company in its peer group that has grown neither revenues nor EBITDA during the past three and four year periods. The only thing the company does beat out all of its peers on is executive compensation! Many shareholders feel that these problems require new blood to fix and are demanding change.

Red Oak sent a letter to the board making several recommendations. First, the hedge fund demanded that the company remove shareholder-unfriendly provisions from its bylaws. These provisions may have been necessary in the past, when the company was struggling to raise money, to fend off vultures but they are now outdated. These provisions include staggered board elections and limits on the number of board candidates that can be proposed. The removal of these provisions would allow shareholders to more easily make their voice heard.

Red Oak's second demand was to add a board member and consultant with experience in building and selling manufacturing and assembly businesses. The goal behind this move would be to maximize shareholder value through a sale of the company at some point in the future. With $250 million in revenues and just $12 million in EBITDA, there are huge cost savings that could be obtained through a buyout. These cost savings could be passed on to shareholders through a higher buyout price. To this end, the hedge fund nominated Rich Effress, who has the necessary experience.

The final recommendation made by Red Oak is a change in the compensation committee to ensure objectivity, independence and performance. The compensation at this company is the highest among its peers while its performance has been the lowest - clearly there is a disconnect. The compensation for board members is also too higher, reaching $370,000 in 2006 for only five individuals. This is nearly double that of other companies with its profitability and value. And finally, they recommended a switch from restricted stock to stock options in order to better align management with shareholders.

"As the largest shareholder - by a wide margin - we ask that our recommendations be heard and strongly considered in the best interests of all shareholders and not just for us," said David Sandberg of Red Oak Partners. "We think it is important to begin a meaningful dialog as to the most effective way to enhance shareholder value and address the concerns and recommendations listed above."

Shares moved up over 6 percent on the news Thursday.

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Spanish Broadcasting System (NDAQ: SBSA) is under pressure from at least one activist shareholder disappointed with the company's performance. Discovery Group demanded a list of shareholders today in an effort to put pressure on the board to act by encouraging them to withhold their votes. The activist hedge fund also aims to draw awareness to its campaign to unlock value in a company whose shares have dropped from $20 in 1999 to under $2 now.

Discovery Group sent a letter to the board about a month ago demanding that it form a special committee to explore strategic alternatives, including a going-private transaction, sale to a strategic party, or at least the adoption of modern corporate governance practices. Current management has failed to build value internally by spending money on acquisitions that provide no incremental value and failing to growth operating income at all.

Spanish Broadcasting holds many properties that would be of great interest to an acquiring party. The company enjoys a market leadership position, operating in highly attractive geographic markets and is situated in the most promising media genre. However, CEO Alacron has refused to entertain any offers that would involve him relinquishing control of the company. This includes offers that have already been made at a substantial premium to today's price.

Discovery Group validated these claims with an anecdote in their February letter:

"We now know this claim to be justified because we have direct knowledge of an important public media company (“XYZ”) that is interested in a potential transaction that could yield a substantial premium to the current SBSA stock price, yet Mr. Alarcon refuses to engage in an evaluation of this opportunity. During a meeting with Mr. Alarcon in December 2007 members of our firm presented the rationale for a combination with XYZ, to which SBSA would bring great strategic value and substantial, immediate cost synergies. Mr. Alarcon concurred with the analysis and suggested that we get the reaction of XYZ’s management to the idea.

"Our team met in January 2008 with XYZ’s Chairman/Chief Executive Officer and its Chief Financial Officer. We communicated to Mr. Alarcon that the XYZ officials were very enthused about the possible combination and wish to engage in a further dialogue directly with Mr. Alarcon. Mr. Alarcon is also in possession of detailed materials prepared by Discovery that outline a proposed structure for this transaction which yields a premium in excess of 100% to SBSA shareholders.

"Suddenly and without explanation, Mr. Alarcon refuses to discuss this opportunity. While Mr. Alarcon’s change in posture is consistent with his industry reputation, it is surprising nonetheless. Mr. Alarcon’s resistance in this case cannot be attributed to valuation because the proposed structure gives him the option to either remain invested or liquidate his shares. Rather, it appears that Mr. Alarcon fears a loss of control. That fear is interfering with Mr. Alarcon’s ability to act in the interest of all shareholders."

It is clear that there is a lot of value that can be unlocked if Discovery Group can successfully pressure Spanish Broadcasting into at least entertaining such offers. Moreover, a simple move to modernize governance practices would enable shareholders to more forcefully make demands designed to maximize value. In the end, this is a valuable company being held back by a poor management team, but Discovery Group aims to change all that.

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Circuit City's (NYSE: CC) turnaround plan has been "disastrous" according to one activist shareholder. Mark Wattles criticized the board for focusing too much on cost-cutting and ignoring its impact on profits and revenues. And it's not hard to see the result: The electronics retailer reported a profit of $140 million in fiscal 2006 that quickly dropped to a loss of more than $8 million in 2007.

Management has blamed the decline on outside factors, such as the economy and increased competition from mass merchants. These factors may have affected performance, but firm's like Best Buy (NYSE: BBY) have prospered none-the-less. In fact, Circuit City's largest competitor announced yet another year of double-digit revenue growth while still beating analyst expectations on earnings per share.

Wattles believes that the right senior management team with the right strategy and focus would be able to immediately and dramatically improve Circuit City's profitability. As a result, the activist nominated his own candidates to replace the existing directors on the board. These nominees would conduct a comprehensive review of the retailer's strategy, operations and senior management in order to formulate and implement a plan to maximize value.

In particular, Wattles proposed a series of immediate changes the new directors would make:

1. Replace the current Chairman and CEO with a seasoned executive capable of restoring credibility with employees, vendors and stockholders;
2. Focus on the "customer experience" and strategies for making the current stores more productive;
3. Begin addressing the actual issues facing the Company and drive revenue growth, rather than focusing on cost-cutting strategies and "spin" campaigns.
4. Focus on the most immediate and least capital-intensive opportunities to improve the health of the business; and
5. Develop and articulate a deliverable promise for the new "The City" brand that works within the realities of the current store footprints.
   

Wattles also suggested that Circuit City not summarily dismiss any legitimate, third party interest in acquiring the company. The electronics retailer did exactly that on two occasions during the past five years, including the rejection of a $17 per share bid in February 2005. The activist demanded that the company immediately hire an investment banker to explore strategic alternatives if they receive an expression of interest.

In the end, Circuit City is a strong company with a national brand, strong cash position, minimal debt, and access to a newly-expanded line of credit. Wattles insists that the current senior management is not leveraging these assets to build value, but rather destroying it by focusing only cost-cutting measures. The existing board has lost credibility with shareholders and many believe new blood is exactly what is needed.

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Across the board, automakers announced that U.S. sales dropped severely in the month of March in the face of record high gas prices and concerns about economic stability.

General Motors Corp. (NYSE: GM) had sales drop by a staggering 19%, while both Toyota Motor Corp. (NYSE: TM) and Ford Motor Co. (NYSE: F) had sales drop more than 10% respectively. Not to be left-out, Honda Motor Co. (NYSE: HMC) and Nissan Motor Co. also experiences declines, though much less severe.

This is certainly not totally unexpected – this is the 10th sales drop out of the last 12 month for U.S. auto sales, but what makes it surprising is just how large the drop was across even foreign carmakers.

Ford Vice President Jim Farley said, “I'd like to be able to tell you the worst is behind us but I can't really say that. The second quarter may be the worst sales period of the year.”

Though U.S. automakers weren’t alone in experiencing the sales decline, their share of the overall U.S. market is still decreasing compared to foreign makers. It is now estimated that U.S. companies have 48.4% of the U.S. market compared to 44.5% of the market for Asian companies. This balance will most likely continue to shift as more cars were sold than trucks last month for the first time since May last year – foreign companies tend to do much better in car sales than truck sales. This reversal reflects a renewed customer focus on fuel efficiency in the face of rising gas prices. Not only is this bad news for U.S. market share, it is also very bad news for profitability because trucks and SUVs are drivers of domestic carmakers’ profits.

“Market demand is more sedan-weighted, more to small cars,” because high gas prices force “people [to] rethink their vehicle choice and consider more efficient types Nissan North American VP Al Castignetti said.

Despite this positive trend for Asian manufacturers that tend to have more fuel efficient models, Toyota, Honda and Nissan are still experiencing sales declines. “We’re not immune to economic cycles and downturns in the automotive industry,” said Toyota’s brand division head Robert Carter. “We hope to sustain sales somewhere around the same level as last year.”

In this economy, when the world’s best positioned car manufacturer can only hope to sustain sales, investors should be wary of automaker stocks.

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