Tuesday - November 22, 2005

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The third-quarter earnings season is almost over, with nearly 95% of S&P 500 firms having already reported. So far most companies are doing better than analysts expected. A total of 318 firms have exceeded expectations, 100 have disappointed and 63 have hit expectations right on the nail. This has led to a dramatic turnaround in the estimate revisions picture, particularly for this year. However, this has not been the case for all stocks, and a very high percentage of firms with positive surprises for the third quarter are suffering cuts for the fourth quarter, or even for 2005 as a whole.

The pullback in oil prices has taken a toll on the earnings estimates for the Energy sector, at least for this year, but not for next year. The sector actually suffered a slight decline in its average estimate for this year. It still continues to see strong upwards momentum in its 2006 estimates.

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Zacks Equity Research continued...

Measured either by total net income growth, or by the growth rate of the median firm, the S&P 500 is expected to post double digit growth for both 2005 and 2006. However, on a median basis, earnings growth is expected to decelerate from 13.9% in 2005 to 12.2% in 2006, while on a total net income basis it is expected to rise to 12.7% from 11.7% in 2005. The differences between these measures indicates a somewhat better performance for mid- to large-cap companies in 2005, but a better relative earnings performance in 2006 for mega-cap companies.

• Over the last month, 274 firms have seen estimate increases, while 211 have been cut for this year, a ratio of 1.30, down from 1.35 last week. However, the average estimate fell 0.15%.
   
• For 2006, the estimates rose for 241 and fell for 229, a ratio of 1.05, up from 0.98 last week. The average estimate fell 0.66%.
   
• A total of 2,134 current fiscal year estimates were increased over the last month for this year while 1,624 were cut (ratio of 1.31). Below last week reading of 1.35.

• For 2006, 1,522 estimates were increased and 1,439 were cut a ratio of 1.06, and inline with last week’s reading of 1.05.
   
• Median expected growth rates for S&P 500 firms are 13.9% for 2005 and 12.2% for 2006
   
• Total net income for the S&P 500 expected to rise 12.7% in 2005 and a further 11.7% in 2006.

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MORE FROM ZACKS EQUITY RESEARCH…

BULL OF THE DAY

salesforce.com (CRM) - Leader in Growing Market. For full Zacks research report, click here.

 
BEAR OF THE DAY

Cambrex Corp. (CBM) - Pricing Pressures in Main Segments. For full Zacks research report, click here.

 
ZACKS ANALYST INTERVIEW

Medical Device Pricing to Moderate

Focus on pricing flexibility within the medical device companies’ product portfolios. More...

 
ZACKS INDUSTRY OUTLOOK

Industry Rank for the Week of November 21

Some Thanksgiving-related stocks could add gravy to your portfolio. More...

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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...
 

Profit Tracks: Discounted Fundamental Strength

Fundamental strength is often a key criterion for many investors. A strong balance sheet and a history of profitability indicate that a company has the ability to meet its obligations and the flexibility to pursue opportunities for growth. Therefore, such stocks are often perceived as having a lower level of risk.

The lower level of risk often results in higher valuations. Occasionally, however, the markets undervalue a stock relative to its company's fundamental strength. When this occurs, opportunities for profits are created. This Profit Track identifies such opportunities.

Backtesting results show just how successful this Profit Track has been. Double-digit returns have been achieved during each of the past four years. In 2005, this strategy continues to handedly beat the S&P 500.

 
Here are four stocks that make the grade for the Discounted Fundamental Strength Profit Track:

AZZ incorporated (NYSE: AZZ), a manufacturer of electrical products and a provider of galvanizing services, announced fiscal second-quarter earnings of 24 cents per share in mid-October. The result eclipsed last year’s 16 cents. The company commented that quotation activity and incoming orders in its Electrical and Industrial Products Segment were at an improved level, both domestically and internationally. AZZ has low levels of debt as evidenced by its debt/equity level of .26 and a current ratio of 1.95.. Continue your research on AZZ at: http://at.zacks.com/?id=2389.

Bluegreen Corp. (NYSE: BXG), a leading provider of leisure products and lifestyle choices, reported third-quarter earnings of 60 cents per share earlier this month. The result outpaced the previous year’s 54 cents and exceeded the consensus estimate by approximately 11%. Total sales increased to $166.8 million from $161.9 million year-over-year. The company sports a PEG ratio of .71 and a price/sales multiple of .75. Continue your research on BXG at: http://at.zacks.com/?id=2390.

JAKKS Pacific, Inc. (NASDAQ: JAKK), a Zacks #1 Rank (Strong Buy), has a debt/equity level of .19 and a current ratio of 2.59. In mid-October, the company posted third-quarter earnings of $1.05 per share. The result surpassed the consensus estimate by about 19% and outperformed last year's earnings. JAKK’s net sales grew from last year’s third-quarter total of $206.1 million to $233.5 million. Continue your research on JAKK at: http://at.zacks.com/?id=2391.

Reliance Steel and Aluminum Co. (NYSE: RS), another Zacks #1 Rank (Strong Buy), meets the criteria of this profit track with its current ratio of 2.68 and a debt/equity level of .38. In mid-October, the company released third-quarter earnings of $1.49 per share versus $1.35 for the year prior. The result was also ahead of the consensus estimate by approximately 19%. The company said its products sold into the aerospace industry continued to show strength during the quarter. Continue your research on RS at: http://at.zacks.com/?id=2392.

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2393.

All the Profit Track strategies were created and backtested using the Research Wizard software from Zacks Investment Research. If you like this screening strategy, but want to narrow down the list of stocks and even improve the performance, then you should start a free trial to this powerful stock picking tool. Learn more about the Research Wizard free trial offer and our new special report “Top 10 Stock Screening Strategies” at: http://at.zacks.com/?id=2394

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SCREEN OF THE WEEK

Filtering the Zacks Rank

Kevin Matras outlines a strategy for how to trade the Zacks Rank in a very practical manner for almost anyone's portfolio. http://at.zacks.com/?id=2395.
 

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Zacks has partnered with the leading options experts, Schaeffer's Investment Research, to provide you the best options commentary, research, and trading tools on the market today.
 

Read below more on Schaeffers Tools to Profit with Options.

What can you say about the market other than the past few weeks have been very impressive? As I’ve written about in the past, this is the “feel good” time of the year and fighting that isn’t a very wise decision. In fact, looking at the history of the Dow over the past 100 years or so, you’ll notice that November and December are two of the strongest months for stocks. Then with the classic October bottom now formed, I think the next few months could be a nice time to be long stocks.

What I want to do today is take a bullish filter that might be worth your while to use when it comes to looking for bullish plays over the next few months – and this is the High Open Interest Put Filter. As you might recall, I took a look at this filter the last week of September and determined that playing an Apple Computer January 2006 50 call (QAAAJ) for $6.30 (where it was trading at the time) made a lot of sense.

In fact, my opening line in that observation back then was “The market has had a rough few weeks, and I'm beginning to think that it might be time to get ready for a bounce and look for a bullish play.” Well, fortunately I was right, as just two weeks later we hit the “like clockwork” October bottom in the S&P 500 Index (SPX). From that point it’s been off to the races as AAPL has gained just under 20%. And had you bought that AAPL call back you’d be up just under a 100%. Not too bad for an option that still has over two months of life to it, huh?

Now I want to talk about the filter and show you exactly what it was that I liked about AAPL back then that lead me to picking it. I’ll be the first to admit, that not every trade works. But if you find what works best for you through practice and follow disciplined loss control, I think you’ll find that the filters on these pages can offer you a tremendous advantage over the “average” investor. Here goes (and remember, below is from September 28, 2005).

First off, puts are simply options used to place a bet that the underlying stock is going to move lower. We like to see a lot of these bearish bets accumulating slightly below an equity's current level as a sign of potential options-related support. I won't go into too much detail on this, but the reasoning is based on how the market makers are hedged. The bottom line is this: large numbers of puts at a certain strike can potentially serve as a solid level of support.

Before I can go any further, I want to talk briefly about our methodology here at Schaeffer's. We are contrarian-based investors, meaning that we want to see skepticism toward an outperformer as a sign that money is still on the sidelines, or we want to see optimism toward an underperformer, showing that nearly everyone who wants to put their money to use probably already has. Just because a stock has lots of skepticism, we won't blindly go long. We need to see some positive price action or major news catalyst to pull the trigger in most cases. Things that we tend to use to measure overall sentiment include, but aren't limited to, put/call ratios, short interest, magazine cover stories, media comments, and analyst ratings.

One more very important item I must touch on regarding this filter is that the majority of the stocks it suggests are likely to be the big names that have lots of activity, such as the Nasdaq-100 Trust (QQQQ), the S&P Depository Receipts (SPY), or Microsoft (MSFT). This doesn't take away from the importance of this filter; it's just something to keep in mind. Looking at the list from last Wednesday, one name stuck out: Apple Computer (AAPL). As you might already know, AAPL has been on a tear during the past few years, thanks largely to the enormous success of their iPod digital music players. One look at a weekly chart and you'll see what I mean.

So, with AAPL, you've got a stock that has gained approximately 450% since the beginning of 2004, and yet there is still a wall of puts residing just below the equity to server as potential support. This setup is exactly what we like to see from our contrarian perspective; pessimism levied toward a strong performer.

Taking a closer look at the data from Wednesday shows that AAPL made the list due to a large build-up of puts at its October 47.50 strike. In other words, there is a strong chance that AAPL won't dip too far below this level of put support before October expiration. I won't get too in-depth here, but it appears that these puts have been bought, suggesting they should hold as support. I did this by checking out the implied volatility of this option. It turns out it is slightly higher than where it was two weeks ago, so I can make a good bet that the puts are "buys to open".

But what about the quantitative sentiment you ask? Well, it also reveals some areas of skepticism. One indicator that I like to use is the Schaeffer's put/call open interest ratio (SOIR). This ratio shows how many puts there are compared to calls for the front three months of options. Currently, AAPL's SOIR checks in at 0.97. That's all fine and dandy, but it only matters when you compare it to the other readings taken during the past year. Doing this indicates that this reading is higher all others taken during the past 12 months, suggesting short-term option players are extremely bearish.

One area though that is showing some optimism though is the stock's short interest picture. As it stands, it would take less than two days to cover all of these bearish bets, reducing the odds of a short-covering rally on any good news - something to watch closely.

Finally, according to Zacks, there is still room for upgrades from Wall Street analysts. To me, this is a little amazing. Currently, there are 13 "buys," nine "holds," and one "sell" rating. Its hard not to think that should the shares continue to soar higher, some of those "holds" could turn into "buys" in a hurry.

With all of that said, let's paper trade the AAPL January 2006 50 call (QAAAJ) for $6.30 per contract (where it was trading on Wednesday afternoon). Write it down and see how we do, but it looks like a potential winner to me.

So there you go – exactly what I looked at back then and fortunately if you listened then you have a nice looking winner on your hands with the room to really make some more gains. Be sure to visit www.SchaeffersResearch.com and review even more commentary on potential BIG winners. Also, please feel free to use this and the other filters that we offer and find out which one works best for you - all at www.zacks.com/research/options/index.php. Good luck and don’t be afraid to take some losers, just be sure to keep a trading journal and try to learn from your mistakes and your successes. Have fun.

To learn more about the the High Open Interest filter, click here.

Discover all the tools and commentary available from the Zacks.com Options Center at: http://at.zacks.com/?id=2382.

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The Zacks #1 Rank (Strong Buy) list is always limited to approximately 220 stocks. Four stocks that are currently included in this elite group are: Administaff, Advent Software, Broadcom and Herman Miller.
 

Administaff, Inc. (NYSE: ASF) recently reported third-quarter earnings of 26 cents per share, beating the consensus estimate by about 13% and improving on last year’s 14 cents. The company said its unit growth rate has increased ahead of schedule due to improved sales efficiency, strong client retention and some contribution from new hires within the existing client base. Revenues for the third quarter increased 20.9% year-over-year. Earnings estimates for the year ending December 2005 moved up seven cents, or almost 8%, from one month ago. Continue your research on ASF at: http://at.zacks.com/?id=2270.

Advent Software, Inc. (NASDAQ: ADVS) announced third-quarter earnings of 19 cents per share in mid-October, soaring past the consensus estimate by nearly 138% and reversing last year’s loss. The company commented that, among other positives, it saw continued revenue growth and its third consecutive quarter of positive earnings per share. Earnings estimates for the year ending December 2005 are above one month ago levels by 10 cents, or about 32%. Continue your research on ADVS at: http://at.zacks.com/?id=2271.

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Zacks Rank continued...

Broadcom Corp. (NASDAQ: BRCM) released unaudited third-quarter pro forma non-GAAP earnings of 39 cents per share in mid-October, outpacing last year’s 36 cents and topping the consensus estimate by almost 3%. The company noted that its revenue and net income reached record levels in the third quarter, driven by continued broad-based strength within its major target end markets. Earnings estimates for the year ending December 2005 climbed seven cents, or approximately 5% over the past 30 trading days. Continue your research on BRCM at: http://at.zacks.com/?id=2272.

Herman Miller, Inc. (NASDAQ: MLHR) earnings estimates for the year ending May 2006 increased by three cents, or about 2%, over the past 30 trading days. In mid-September, the company posted fiscal first-quarter earnings of 34 cents per share, outperforming last year's 20 cents and exceeding the consensus estimate by approximately 3%. Sales increased 20.6% year-over-year. The company noted that it generated double-digit sales and order growth in both its domestic and international operations this quarter. Continue your research on MLHR at: http://at.zacks.com/?id=2273.

To see the full list of Zacks #1 Rank stocks (approximately 220 stocks), go to http://at.zacks.com/?id=2383.

The Zacks Rank is a powerful stock indicator whose #1 Strong Buy stocks have risen by an average annual return of 33% since 1988 versus 11.8% for S&P 500

To help you fully understand how the Zacks Rank works and, more importantly, how you can profit by using the Zacks Rank, we have created a free report - The Zacks Rank - Harnessing the Power of Earnings Estimate Revisions. This valuable information is available at: http://at.zacks.com/?id=2385.
 

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Zacks Rank #1 and #5 Additions

Zacks #1 Rank List: 47 New Additions (alpha by ticker)

To see the full list of Zacks #1 Ranked stocks (approximately 220 stocks), then click here.

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Zacks #5 Rank List: 29 New Additions (alpha by ticker)

To see the full list of Zacks #5 Ranked stocks (approximately 220 stocks), then click here.

OTHER TOOLS FROM ZACKS

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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:

• +33% average annual return since 1988 versus +11.8% for S&P 500
• Outperformed S&P 500 in 16 of the last 17 years
• +43.8% total return from 2000 to 2002 — the worst bear market in over 60 years.
• +18% in 2005 (through September 30)

And just as importantly, the Zacks #5 Rank stocks (Strong Sell) List has 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 by visiting: http://at.zacks.com/?id=2385.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2383.

FREE PORTFOLIO TRACKER

Do you believe that these events affect stock prices?

• Broker Recommendation changes
• Earning Estimate revisions
• Earnings Announcements
• Zacks Rank changes

If you answered yes, then how are you staying on top of these changes for your stocks? If you are one of the 45,000 investors who wake up every morning to the Daily Portfolio Updates emails from Zacks.com, then you are all set. If not, then sign up now to get this vital information sent to you daily and improve your portfolio's performance. Did we mention it's free? Get started now by going to: http://at.zacks.com/?id=2386.

We hope you enjoyed this issue of "Profit from the Pros", And we look forward to visiting with you again next week.

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Regards and Happy Investing,

Charles Rotblut, CFA

Senior Market Analyst
Zacks.com

p.s. What is the mission for Zacks Profit from the Pros? Click here to find out how we will help you become a more successful investor.

*The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor's. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

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