Tuesday - December 6, 2005

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Due to the Thanksgiving holiday, and the lack of new earnings news, the pace of estimate revisions activity has slowed dramatically. For 2005, only 1,768 estimates were revised, versus 3,151 the week before. For 2006, total estimate revisions fell to 1,500 from 2,372 last week. The third-quarter earnings season is almost over, with 97.4% of S&P 500 firms having already reported. Most companies are doing better than analysts expected. A total of 322 firms have exceeded expectations, 102 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.

The pull back 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 11.2% 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, 236 firms have seen estimate increases, while 216 have been cut for this year, a ratio of 1.09, down from 1.20 last week. The average estimate fell 0.06 %.
   
• For 2006, the estimates rose for 195 and fell for 255, a ratio of 0.76, well below last week’s reading of 0.96. The average estimate fell 0.28%.
   
• A total of 881 current fiscal year estimates were increased over the last month for this year while 887 were cut (ratio of 0.99). Below last week reading of 1.14. Given the sharp drop off in total estimates changed, we would hesitate to read to much into the drop in the ratio.
   
• For 2006, 689 estimates were increased and 811 were cut a ratio of 0.85, down from last week’s reading of 0.96.
   
• Median expected growth rates for S&P 500 firms at 13.8% for 2005, and 12.2% for 2006.
   
• Total net income for the S&P 500 expected to rise 11.2% in 2005 and a further 12.8% in 2006.

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MORE FROM ZACKS EQUITY RESEARCH…

BULL OF THE DAY

Allscripts Healthcare (MDRX) - Fast-Growing Segment. For full Zacks research report, click here.

 
BEAR OF THE DAY

Telecom Argentina (TEO) - Uncertain Earnings Outlook. For full Zacks research report, click here.

 
ZACKS ANALYST INTERVIEW

Copper Stocks Better Than Gold

Copper stocks are selling at low multiples, which means there are some good investment opportunities. More...

 
INDUSTRY OUTLOOK

Zacks Industry Rank for the Week of Dec 5

The decline in the increased/total estimates ratio is not a reason to worry. 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: Earnings and Margins

This Profit Track goes to the heart of fundamental investing by finding companies with healthy earnings. The main ingredients are the search for Earnings Growth and Net Profit Margins. Then for good measure we make sure earnings estimates are moving higher which is a strong indicator of future performance and that brokerage firms are positively rating the stock.

Earnings are the single most important metric for a company. Combine that with a healthy Net Profit Margin and you find a screen that has generated a cumulative return of +425% since January 2001. During the first half of 2005, this screen continued its winning ways with a +13.8% return.

 
Here are four stocks that make the grade for the Earnings and Margins Profit Track

American Community Bancshares, Inc. (NASDAQ: ACBA), the holding company of American Community Bank, reported third-quarter earnings of 25 cents per share in mid-October. The result topped the consensus estimate by approximately 4%. The company, which has a net margin of .13, managed to produce annual earnings growth of 65% above the previous year. Continue your research on ACBA at: http://at.zacks.com/?id=2389.

Click Commerce, Inc. (NASDAQ: CKCM), a Zacks #1 Rank (Strong Buy) name, generated impressive earnings growth of 700% last year over the previous year. The company provides business-to-business software products and services that use the Internet to connect manufacturing companies with their distributors, dealers and other distribution channel partners. In early November, CKCM announced third-quarter GAAP earnings of 31 cents per share, more than doubling the previous year’s 14 cents and exceeding the consensus estimate by almost 35%. Continue your research on CKCM at: http://at.zacks.com/?id=2390.

Kendle International, Inc. (NASDAQ: KNDL) posted third-quarter earnings of 24 cents per share in late October, soaring past the year prior total of four cents and surpassing the consensus estimate by about 9%. The company mentioned that its continued strong performance and return to double-digit operating margins in the third quarter demonstrate the growing global strength and improved operational efficiency of its organization. KNDL experienced earnings growth of 540% for its most recently completed year versus the previous year. Continue your research on KNDL at: http://at.zacks.com/?id=2391.

Radyne Corp. (NASDAQ: RADN) is a profitable company as evidenced by its net margin of .24. RADN has also demonstrated solid year-over-year growth with the full year 2004 posting earnings growth of nearly 108% above the year prior. In late October, the company released third-quarter earnings of 16 cents per share, about 14% ahead of the consensus estimate. Radyne Corp. noted that its satellite and broadcast products continue to gain acceptance in the market. WLS has a price to sales ratio of .58. Continue your research on RADN 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

Finding Growth Stocks at Excellent Values

Kevin Matras shows you how to find great growth stocks at an excellent value. 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.

The past two weeks I’ve taken looks back on some winning trades using the filters on these pages. The main reason that I like to take a look back at a winning trade after the fact is it might teach us something. Trades work for a reason and by taking a closer look at what it was that lead us to the trade, we just might notice a subtle pattern that could be the edge that every trader is looking for. Now I don’t want it to sound like these filters are the “holy grail” to trading, but with a lot of patience and a desire to learn – you could find using these filters to be quite rewarding.

Last week I looked at the Put/Call Ratio Over 1.0 (Bullish) filter and showed how I used this filter to pick a winner. Then before that one I looked at the High Open Interest Put Filter and showed how I used this filter to pick a winner on Apple Computer (AAPL). Today I want to get back to using the filters and picking a winner.

Speaking of the High Open Interest Put Filter, today I want to take another look at this filter and show you how I use it.

First off, lets take a look at what a put is. Puts are simply a bet that the underlying stock is going to move lower. From our contrarian point of view, a large number of puts accumulated at a certain strike just below the stock's current level is a sign of potential options-related support. I won't get 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 have the potential to 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. Conversely, we want to see optimism toward an underperformer. We view too much optimism as a potential sign that nearly everyone who wants to invest in a particular stock already has. Now, just because a stock sees substantial optimism doesn't mean that we will blindly short a particular security; we need to see some negative price action or a major catalyst for a downside move in order to pull the trigger in most cases. Other indicators that we tend to utilize in measuring overall sentiment include put/call ratios, short interest, magazine cover stories, media comments, and analyst ratings.

One more very important item I must touch upon regarding this filter before we get started 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 Spyders (SPY), or Microsoft (MSFT) . These big names don't take away from the importance of this filter; they are just something to keep in mind.

Looking at the list from Thursday one name that stuck out to me was the Financial Select Sector SPDR Fund (XLF). They made the list thanks to a build-up of puts at the January 28 strike (XLFMB).

Few sectors have been hotter recently than financials, as the shares of the ETF have soared over 11% since mid-October.

Looking at things from a little longer-term perspective you can see where the XLF broke obvious resistance around $30 and since that time it’s been off to the races.

Now let's turn to a few sentiment indicators that I like to use. Remember, we're looking for pessimism in the face of out-performance as a sign that money is still on the sidelines. One such indicator I like to use is the Schaeffer's put/call open interest ratio (SOIR). This ratio shows how many bearish puts there are compared with bullish calls among near-term options. Currently, XLF’s SOIR checks in at 3.25. That's all fine and dandy, but it only matters when you compare it to the other readings taken over the past year. Such comparison reveals that this number is higher than 78% of the readings over the past year, suggesting short-term options players are still betting against the shares. Also, this ratio has been trending higher of late, suggesting more bearish puts are trading than bullish calls.

Also there is a good deal of put open interest in the January 2006 LEAPs series. Again this configuration indicates a healthy amount of pessimism against the ETF.

Another area I like to see skepticism is from the shorts. To short a stock means you are making a bet that it’ll go lower. You do this by selling the shares first, with the hopes of buying them back at a lower price later. We like to see a big build up of shorts, because that means should the shares continue to gain those shorts will be forced to cover (buy back) their losing bets and thus push up the shares that much faster. Looking at the XLF I see that there are 31.7 million shares sold short, suggesting the odds of a short covering rally are strong. Turning to the media sentiment, in October’s Barron’s Big Money Poll the financial sector was picked to be a laggard. Yet another example of how negative the sentiment appears to be on the XLF.

With all of that said, let’s be contrarian and play a bullish call on XLF. I think a March 30 call (XLFCD) for $2.70 looks like a nice play. Write this one down and see how it does. Please continue to use all of the filters on these pages for more money-making ideas and don't be afraid to make a few paper trades to see what strategy works best for you. But please remember that when it comes to options, the majority of your trades are going to be losers. Don't get discouraged, because that's the beauty of the leverage that options provide. It takes only a few winners out of every 10 trades to make you a very happy investor. Good luck!

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: Ceradyne, Cymer, Express Scripts and Guess?
 

Ceradyne, Inc. (NASDAQ: CRDN) earnings estimates for the year ending December 2005 increased four cents, or about 2%, from one month ago. Estimates for 2006 moved up 42 cents, or 20%, from two months ago. In late October, the company released third-quarter earnings of 53 cents per share, topping the consensus estimate by 6% and eclipsing last year’s earnings. The company commented that its record setting results for the quarter were primarily due to ceramic body armor production at an elevated rate and at high quality levels. Continue your research on CRDN at: http://at.zacks.com/?id=2270.

Cymer, Inc. (NASDAQ: CYMI) earnings estimates for the year ending December 2005 are above one month ago levels by three cents, or almost 3%. Estimates for the 2006 full year climbed two cents, or about 1%, over the past 30 trading days. In mid-October, the company posted third-quarter earnings of 35 cents per share, jumping ahead of the consensus estimate by 75%. The company said it’s pleased that third quarter operating results came in ahead of its expectations, and with its continuing strong market leadership in the growing argon fluoride (ArF) segment of the DUV market. Continue your research on CYMI at: http://at.zacks.com/?id=2271.

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Zacks Rank continued...

Express Scripts, Inc. (NASDAQ: ESRX) recently issued its full year 2006 earnings guidance of $3.10 to $3.22 per share, which includes a stock option expense. The company stated that its positive outlook for 2006 reflects the strength of its core business and the success of its business model. Wall Street estimates for the year went up over the past seven trading days to a level of $3.17 per share from $2.98. Continue your research on ESRX at: http://at.zacks.com/?id=2272.

Guess? Inc. (NYSE: GES) recently announced strong November retail sales. Total retail sales were $58.2 million, an increase of 25% year-over-year. Comparable store sales for the November period climbed 15.8%. GES noted that the sales for the month were driven by a larger percentage of full-price sales as compared to the prior year. The company has also seen success with its quarterly earnings figures. Earnings came in above analysts’ expectations in each of the past five consecutive quarters. Continue your research on GES 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: 34 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: 22 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

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*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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