Thursday - February 3, 2005
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1. FEATURED EXPERTS
Here we cast the spotlight on a timely Featured Expert commentary that recently appeared on Zacks.com. Following the article you will find previews of other profitable commentaries with insights and recommendations from leading investment experts.
Deciding not to invest in buyback stocks because you are wary of the way companies might misuse buybacks is like throwing out the baby with the bathwater. Buybacks had a banner year in 2004. Buybacks for companies in the S&P 500 totaled $45.7 billion last year, up from some $26.4 billion in 1998. Some of the best, most well-managed companies on the planet are robust repurchasers of their own stock.
A recent Associated Press (AP) article warned that in today's current boom in company buybacks, investors need to be wary of companies buying back stock to mask a slowdown in earnings growth. How would this work? Often there is at least a short- term uptick in the stock price after a buyback announcement, and certainly there is often a bounce up after the buyback itself is actually accomplished.
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So, some companies might like to divert attention away from a revenue problem by being able to show an increase in the stock price. Why would there be such an increase? Because a company usually buys back its own shares when it knows the market has seriously undervalued them. After the buyback, the company is still the same company, but there are fewer outstanding shares, so each of them is worth more. And, by decreasing the number of shares outstanding, earnings per share gets a boost. Yes, if repurchasing is a tactic used to divert attention from faltering fundamentals, then that is a specific buyback stock to avoid. But, there are plenty of examples of companies that bought back stock not to delay the discovery of or to hide problems, but because company management knew the stock was undervalued.
David R. Fried and his team currently hold Pepsi Americas (NYSE: PAS) in their Stock-Pickers Portfolio; they bought it in September 2003 and, as Fried writes this, it has gained 41%. Apria Healthcare (NYSE: AHG) is currently posting a 16% gain. Similarly, Fried and his team locked in a 338% gain when they sold Altria (NYSE: MO) in February 2004, and a 448% gain when they sold American Express (NYSE: AXP) in August 2000. The buybacks these companies undertook – and the resultant share price hikes – were legitimate. Plain and simple.
The same AP article also warned against companies that launch buybacks using borrowed funds, terming that tactic "a risky move." Using retailer Limited Brands (NYSE: LTD) –parent of Victoria's Secret, Bath & Body Works and the Express store chains – as an example, the article noted that Standard & Poor's downgraded the credit rating on the company's bonds after it announced a $2 billion stock buyback funded through cash and $1 billion in new debt. But not all buybacks financed by debt are bad buybacks. In the case of Limited, the company borrowed that money at a cheap rate, and the company's earnings easily cover the debt service. That's why Fried holds LTD in his Buyback Stock-Picker's Portfolio, along with 27 other stocks.
A recent USA Today article warned investors to be skeptical of companies that announce buyback plans, and months or a year later, show no decrease and sometimes even an increase in the number of shares outstanding. Why would this happen? Because they may have issued more shares to accommodate employee options, they may have bought another company and funded the purchase by using stock, or they may simply have decided not to follow through on the buyback. "Buybacks are often hocus pocus, smoke and mirrors," said one fund manager at Citigroup Asset Management. Well, yes, frankly sometimes they are, just as some companies' announcements of expansion or acquisition plans ends up being so much baloney.
Investing wisely is all in the details – and part of the due diligence required of any investor – is to sift through the rhetoric to find the truth of the matter. The buyback stocks Fried recommends for purchase have all been winnowed so that liars and laggards are left behind. Only after he sees a decline in outstanding shares does a buyback stock hit his list for careful review. That's why Fried and his team haven't yet recommended Microsoft. Yes, MSFT announced in July 2004 that it planned to purchase up to $30 billion in stock over the next four years, to help reduce excess cash holdings (the kind of problem we would all like to have!), but Fried is waiting for it to actually happen. Show him reduced shares outstanding, and he'll consider opening his wallet.
The bottom line is that no matter what strategy you use to choose your stocks, you simply must do your homework. With buybacks or with any other strategy, the well-prepared investor is the one with a smile on his face at the end of the day.
Buyback Premium Portfolio Soars +110.37% since 8/00, doing 8 times better than the S&P 500 (as of Dec. 31, 2004). David Fried is on to something BIG with his Premium Portfolio, a focused 5-stock group for experienced, elite investors. Using his unique high-octane strategy, subscribers can double their money every 1.8 years even in today`s market! Supercharge your portfolio today! Learn more about this newsletter and free trial offer at: http://at.zacks.com/?id=1828.
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Dan Sullivan remains bullish, but says there could be more
downside action in the cards. Discover how the burden of proof
has shifted to the bulls, and then get earnings updates on
five companies. More...
Nadine Wong says that the future of drug development lies in
personalized medicine, and the biotech sector realizes this.
Read how big pharma will follow through on acquisitions and
alliances with biotech companies to improve their pipelines. More...
d) DRIP Leaders
Charles Carlson says that 2004 turned out to be decent for the
market in general with most of the stocks in his portfolio
providing good results. Read about some of the leaders in the
Editor’s Portfolio. More...
Jim Collins believes investors will be pleased with their
results at the end of this year. Learn how strong earnings and
upbeat economic reports could foreshadow a solid 2005. Then
read about some stock picks for the week. More...
Dennis Slothower is optimistic for the future, but remains on
the sidelines looking for improvement in market leadership.
Read this expert`s analysis and learn how to navigate through
the current environment. More...
Featured Expert articles are courtesy of the 60+ leading investment newsletters that have partnered with us to create the Zacks Expert Advice service. Check out the Experts section of Zacks.com daily to find profitable stock picks and timely market commentary at: http://at.zacks.com/?id=637.
2. WEEKLY COMMENTARY: Experts Watch
Zacks.com offers 3 unique weekly commentaries that all further
our mission to help you Profit from the Pros. Today is the
latest installment of Experts Watch from Trace Johnson. Each
week Trace shares winning strategies from leading investment
experts to outperform in any market environment.
Homeland & Energy Security
There are two stories going on in Washington, D.C. regarding the second inauguration of George W. Bush: the amount of money being spent on lavish parties and the significant expenditures related to ensuring that the city is secure from terrorists. Securing the United States in the 21st century involves more than our activities abroad. It involves new capabilities and technologies being deployed at home. It also involves maintaining access to cheap oil and energy. While both security and oil stock have received a great deal of attention over the last several years, the centrality of their role in the overall security of the US creates profitable investment opportunities that are also tantamount to contributing to the cause. Read on for Experts hot picks and security insights for '05.
In the run-up to the US elections in November, the price of a barrel of oil busted the $50 mark and set all-time highs. Expectations for an attack on the homeland and intensified complications in the conflicts with al Qaeda and in Iraq combined with falling inventories to send the speculators into frenzied states. After the election passed without significant or spectacular terror events, oil began backing off significantly and spurred a rally that stretched through most of the rest of the year. Dennis Slothower, editor of Stealth Stocks sees a very similar pattern forming as the Iraqi elections are fast approaching.
Click here to read the full article with commentary and
recommendations from leading market experts. http://at.zacks.com/?id=14
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SCREEN OF THE WEEK
Kevin Matras looks at increasing P/E Ratios for spotting
potential price and earnings trends. See how and get 3 new
picks from this screen. More...
ALL STAR TOP PICKS
The computer software industry finished 2004 on a strong note,
and the All Stars highlight a few companies that could
capitalize on improving trends in 2005 More...
3. BEST OF ZACKS INDEPENDENT RESEARCH
The analysts from Zacks Independent Research create a mountain of insightful equity research everyday of the week. Here you will find the best of that information recently published on Zacks.com.
BULL OF THE DAY
Millennium Pharma. (MLNM) - Attractive Current Valuation
Frontier Airlines (FRNT) - Quarterly Earnings Disappointment
Acquisitions Important for Newspaper Companies
Conglomerates Hope to Parlay Strong 2004
2004 Earnings are Looking Good
4. TRADING STRATEGIES: Profit Tracks
Zacks.com is proud to share with you some of the best trading strategies that truly allow you to Profit from the Pros. Today we highlight…
This Profit Track strategy uses Return on Equity (ROE) to discover solid stocks. ROE is one of the quickest ways to gauge whether a company is creating assets or gobbling up investors’ cash.
One of the quickest ways to gauge whether a company is creating assets or gobbling up investor`s cash is to look at their ROE. This fast moving Profit Track returned a respectable +70.4% in 2003 and is up over 30% YTD for 2004 (thru 12/31/04).
D.R. Horton, Inc. (NYSE: DHI) recently reiterated its position as one of the country’s leading homebuilders when it reported a record December 31, 2004 sales contract backlog of $4.8 billion (17,405 homes), marking a year-over-year increase of +34%. In addition, net sales for the fiscal first quarter jumped +31% to $2.7 billion (9,901 homes). As if that weren’t enough, D.R. Horton also has a ROE of 28.17%, exceeding this Profit Track’s requirement proving that this company continues to create assets for its shareholders. Furthermore, with a price to sales ratio of .84, this company is still a good value and has earned a place on the ROE Profit Track. To continue your research on DHI, click here.
Lennar Corporation (NYSE: LEN) has a ROE of 27.16% and a price to sales ratio of .84, giving investors a good opportunity to pick up a cash-generating company at a good value. Furthermore, this Zacks #1-ranked stock has an average broker recommendation of 2.27. Lennar said demand for new homes remained strong in 2004, as the company remains well- positioned for future success in land-constrained markets and in other strategic markets. The company had excellent visibility entering 2005 and expect another record year. Lennar Corporation has momentum pushing it forward and is creating assets for investors along the way, making this company one of the highlights on this Profit Track. To continue your research on LEN, click here.
Rayovac Corporation (NYSE: ROV) is a growing company and its recent Microlite and Ningbo acquisitions helped first quarter net sales advance to $490.8 million from $454 million year- over-year. The company also raised its earnings expectations for fiscal 2005. Rayovac appears to be on the right track and is putting their investors’ cash to good use, as evidenced by its ROE of 24.39%. Its price to sales ratio of .92 suggests there room for more. Rayovac has a lot of confidence moving forward, and its position on the ROE Profit Track says such enthusiasm is well-founded. To continue your research on ROV, click here.
All the Profit Track strategies were created and backtested using the Research Wizard software from Zacks Investment Research. If you like this Upgrades and Revisions strategy, but want to narrow down the list of stocks and even improve the performance, then you should start a free trial to the this powerful stock picking tool. Learn more about the Research Wizard and Free Trial offer at : http://at.zacks.com/?id=1370
5. ZacksAdvisor.com TIMELY BUY of the WEEK
Energizer Holdings (ENR)
Energizer Holdings, Inc. (Energizer) is a manufacturer of primary batteries, flashlights and men's and women's wet-shave products. Energizer offers a range of miniature batteries for hearing aids, watches and small electronics, and photo batteries for film cameras. Energizer manufactures and markets a complete line of flashlights and other battery-powered lighting products under the Energizer and Eveready brands.
We are adding shares of Energizer (ENR) to the Focus List. The company significantly beat analysts` estimates for their fiscal year 2005 first quarter. ENR reported $1.62/share, which easily topped the Zack`s consensus of $1.38/share. Analysts covering the stock are increasing their earnings estimates after the excellent quarter.
We love the fact that the stock trades at 1.3X sales and PG just paid 5X sales to acquire G. ENR could make a nice fit for a large multi-national company, and the price paid would likely come at a nice premium. Energizer also has a strong buyback plan in place, buying about two million shares in the recent quarter. This is helping to drive the company's EPS growth. The weaker dollar is also helping the company. International battery sales increased 9.4% to $261 million. Analysts expect ENR to earn $3.67/share for fiscal year 2005, followed by $4.01/share in fiscal year 2006. The increasing earnings and the attractive valuations make ENR a solid addition to the Focus List.
OTHER TOOLS FROM ZACKS
At the heart of Zacks Investment Research is the Zacks Rank investment philosophy that continues to vastly outperform the market. Our Zacks #1 Ranked (Strong Buys) have produced the following results for investors:
And just as importantly, our #5 Ranked stocks (Strong Sells) have alerted investors as to which stocks to dump from their portfolios to avoid unnecessary losses.
To truly take advantage of the Zacks Rank, you need to first understand how it works. That`s why we created the free special report; Zacks Rank Guide: Harnessing the Power of Earnings Estimate Revisions. Download a free copy now to prosper in the years to come at: http://at.zacks.com/?id=1424.
Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=1423.
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