Monday - February 6, 2006

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With IT performing strongly (aside from a couple early reporting glitches), we felt it would be a good time to check in with Steve Biggs, CFA, senior IT analyst. Which sectors are gaining momentum, and which have been slowing down as of late? Steve helped us survey the landscape.

There seems to be a lot of positivity about the graphics chips market at this time. Can you tell us a little about why this is?

Well, there are a couple discrepancies here with graphics chips. There are computer graphics chips and there are graphics chips that go into LCD and plasma televisions. This television chip market is a pretty rapidly growing area right now, particularly LCD. One company I’ve got a Buy on, Trident Microsystems (TRID), has a very strong position in the LCD television market, which is at an inflection point and starting to accelerate growth. This is taking share from not only the traditional CRT televisions but also the plasma TVs when you start talking about the larger screens. For the over 24-inch screens, Trident has about a 50% market share. And the sector as a whole is doing well in this TV area.

In the computer graphics segment, video games are really strong, benefiting from two new video game cycles. ATI Technologies (ATYT), which I have a Buy on, is making chips for Microsoft’s (MSFT) new Xbox 360. And even though I’ve got a Hold right now on NVIDIA (NVDA), it is supplying chips for Sony’s (SNE) PlayStation 3, which will come out sometime this year. Video graphics chips are benefiting from a number of high-processing demands for graphics.

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Zacks Equity Research continued...

Was part of Intel’s problem that it was pulling out of the graphics chips space?

Graphics chips might be too much of a niche market for Intel (INTC), actually. Intel’s traditional strength has been more on the manufacturing side, where they mass-produce chips at a very low price. Intel just hasn’t seemed to have a whole lot of success outside of its microprocessor group. Advanced Micro Devices (AMD) has had a strong cycle. It was first to market with a dual-core processor, and even though Intel’s got one now, AMD was at the head of the tech curve on that.

So Intel lost a little bit of its technology edge – this happens from time to time. AMD is taking share now, but Intel will eventually catch up and produce a chip more efficiently and take some of that share back.

I also wanted to talk a little about Internet advertising. How fast and how much do you expect this market will grow?

I expect Internet advertising will double over the next couple years or so. It is currently an underrepresented part of corporate advertising budgets – only about 5%. And with the amount of time people spend on the Internet relative to other media – a quarter of the time people spend on media is spent on the Internet – we expect money to continue to flow into Internet advertising.

This group has experienced pretty strong growth over the past year, as Google (GOOG) and Yahoo! (YHOO) have put up good numbers. I definitely expect this will continue over the next couple years, as we reach more equilibrium about how much companies will want to focus their advertising budget on the Internet medium. As I say, GOOG and YHOO are taking it in on the direct advertising side, and there are also companies who help manage advertising campaigns and track results of those campaigns, like Websidestory (WSSI) and Aquantive (AQNT). There are a few who even do the whole thing, like Marchex (MCHX), which can help with campaigns but also partner with some of the larger portals, as well. We’ve got a number of Buys in this group, so perhaps a basket approach may work best to purchase a number of stocks throughout this industry. But all of those in my coverage that I’ve just mentioned are rated a Buy at this time.

What is your top Buy recommendation in your coverage, if you had to pick one?

One stock we didn’t mention yet is Palm (PALM), which is my top pick of the year. I think this may have been my top pick the last time I did one of these interviews, too, but I still really favor it. Mostly this is based on a number of new product releases I expect to see this year, and also the improved execution on product releases. With the latest release of the Treo 700, I expect further penetration into the enterprise market with its Windows-based handset. There is also an agreement with Research in Motion (RIMM) to use BlackBerry software, which should further expand its user base to the enterprise side.

What would be your main Sell recommendation?

Well, they’re getting fewer and fewer, as the market’s gotten pretty good. But I think I would advise steering clear of iPass (IPAS) at this time. The stock has rallied on an acquisition it did recently, but I still see lots of risk in the stock even with the acquisition.

Finally, how do you think 2006 will shape up in tech, relative to other up-cycles in past years?

Tech spending by enterprise customers looks pretty good for 2006. We expect to see continued growth, and it looks as if the Fed is close to ending raising interest rates, which should help. The economy as a whole looks fairly strong at this time.

One area of concern is the consumer side, which has kind of weakened. It’ll be interesting to see if the consumer area comes back. The last up-cycle we had, the consumer side was strong, and it stayed strong even when enterprise slowed down. But now consumer has finally slowed, and this will probably continue through 2006. I think consumers had been getting a lot of money out of their houses, and now that’s slowed. And I don’t expect that will change this year.

Michael Schrage, CFA is a senior analyst covering the metals and mining sectors for Zacks Equity Research.

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MORE FROM ZACKS EQUITY RESEARCH…

Analyst Blog - NEW!

Get real-time market insights from Zacks Equity Research Analysts. To see their latest posts, click here.

 
BULL OF THE DAY

Priceline.com (PCLN) - Very Attractive Valuation. For full Zacks research report, click here.

 
BEAR OF THE DAY

CenturyTel (CTL) - Uninspiring Revenue Expectations. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Valuations in Telecom Equipment Back to `Pre-Bubble` Levels

But picking winners still requires selectivity in the current environment. More...

 
EARNINGS & SECTOR UPDATE

Positive Surprises Leading Disappointments by Almost Three to One

With well over half the earnings reports in, Director of Research Dirk Van Dijk says Energy is again leading the pack with median growth of 78.0%. 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: High Rank Value

Two of the most commonly accepted measures of a value stock are a price-to-earnings (P/E) multiple of 15.0 and a price-to- book (P/B) multiple of 3.0. Although many studies have shown performance advantages to investing in value stocks, not all value stocks are actually bargains. A value stock is only a good buy if earnings are expected to improve in the future.

High Rank Value is a strategy designed to find the true bargains among value stocks. By requiring a Zacks Rank of #1 ("Strong Buy") or #2 ("Buy"), this strategy restricts the pool of value stocks to only those with positive revisions in earnings estimates. In other words, profits are expected to improve in the future at a faster pace than originally anticipated.

The combination of a low valuation and a high Zacks Rank is very profitable. This Profit Track has consistently topped the S&P 500 during the past five years. In 2005, this strategy generated a return of +13.7%.

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

Alfa Corp. (ALFA) has an appealing valuation as indicated by its price-to-earnings (P/E) multiple of 14.40 and price-to-book (P/B) multiple of 1.84. In mid October, the company posted third-quarter earnings of 30 cents per share, beating last year’s 24 cents and matching the consensus estimate. ALFA said its operating performance was driven by the property and casualty combined ratio, as well as the premium growth in its life company. Continue your research on ALFA at : http://at.zacks.com/?id=2254.

Comm Bancorp, Inc. (CCBP) has a price-to-earnings (P/E) multiple of 14.98 and price-to-book (P/B) multiple of 1.56. The company recently reported fourth-quarter earnings of 72 cents per share. The result topped last year's 66 cents. CCBP mentioned that improved net interest income was the key factor leading to its strong earnings performance in 2005. Continue your research on CCBP at: http://at.zacks.com/?id=2255.

Commerce Group, Inc. (CGI) is another good value play as evidenced by its price-to-earnings (P/E) multiple of 7.93 and price-to-book (P/B) multiple of 1.44. In late October, the insurance company reported third-quarter earnings that were ahead of analysts’ estimates by about 5% and outperformed the previous year’s result. Fourth-quarter results will be available later this week. Continue your research on CGI at: http://at.zacks.com/?id=2256.

Energy East Corp. (EAS) released its third-quarter financial results in early November. The company’s earnings were 14 cents per share, which topped the year prior total of 12 cents. EAS noted that the year-over-year increase was primarily due to higher margins on electric sales and an increase in the estimate of unbilled revenues. This stock offers a price-to-earnings (P/E) multiple of 13.88 and a price-to-book (P/B) multiple of 1.22.Continue your research on EAS at: http://at.zacks.com/?id=2257.

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2258.

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=2307

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SCREEN OF THE WEEK

Three Days Up: Price and Volume

Kevin Matras goes over a price and volume screen for finding stocks on the move: http://at.zacks.com/?id=2259.
 

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Every day on Zacks.com we highlight four Zacks Rank Buy stocks. Each individual stock is chosen based on how well they match the criteria for the four main schools of investing: Aggressive Growth, Momentum, Growth & Income and Value.
 

Aggressive Growth – Nextel Partners, Inc., (NXTP)

Nextel Partners, Inc., (NXTP) has met or exceeded earnings estimates in eight consecutive quarters, with solid year-over-year growth during that time period. Over the past 30 days, 2006 estimates have increased 5.1% to $1.03 per share. Read the full analysis on NXTP at: http://at.zacks.com/?id=2510.
 

Growth & Income – Eagle Materials, Inc. (EXP)

Eagle Materials, Inc. (EXP) recently upped its fiscal 2006 earnings per share guidance. The company has increased revenues for the past eight years. Strong operating cash flows have enabled the company to consistently pay a dividend to its shareholders. Earnings per share for this Zacks #1 Rank stock have grown 30.5% over the past five years. Read the full analysis on EXP at: http://at.zacks.com/?id=2511.

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Zacks Rank continued...

Momentum – Archer Daniels (ADM)

Strong earnings, a gap higher into new 52-week highs, and a stubborn refusal to share general market weakness make Archer Daniels (ADM) our Zacks #1 Rank momentum stock of the day. Archer Daniels (ADM) a Zacks #1 Rank stock, reported higher earnings on Tuesday and gapped upward on Wednesday. Read the full analysis on ADM at: http://at.zacks.com/?id=2512.
 

Value – Marten Transport, Ltd. (MRTN)

Marten Transport, Ltd. (MRTN), a Zacks #1 Rank stock, has beaten the consensus earnings estimate for the past five quarters by an average margin of 12.2%. The company has increased revenues for 10 years running. Last year marked another year of solid growth and record profits for MRTN. MRTN has a price-to-book multiple of 2.5. Read the full analysis on MRTN at: http://at.zacks.com/?id=2513.
 

Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2266.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide: http://at.zacks.com/?id=2267.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2538.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2539.

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Here we cast the spotlight on a timely Featured Expert commentary that recently appeared on Zacks.com.

 
Jack Adamo, Editor of the Insiders PLUS newsletter

The first five days of the new year got off to a great start when minutes from the latest Federal Reserve meeting suggested the Fed would soon stop raising interest rates. Then we had a few earnings warnings, compounded by tensions in the Middle East, and bang, we have the worst market day since 2003. It is not hard to see that this market is emotionally on the edge.

Those of us who pay attention to things like the yield curve, can’t help but be nervous that there are only a few hundredths of a percentage point difference between the yield on the Fed Funds rate and the 10-Year Treasury bond. The curve is not quite inverted yet, but it is very close. (An inverted yield curve is a condition where short-term interest rates are higher than long-term rates.) Inverted yield curves almost always mean a recession is nigh.

According to some pundits, this isn’t a big deal because it can be anywhere from 6 to 18 months between the time a yield curve inverts and the actual onset of a recession. The problem with that logic is that recessions are measured in retrospect (and are defined as two consecutive quarters of negative economic growth.) Hence, we never know we’re there until we’re six months into it.

Furthermore, the stock market typically anticipates recessions by six months or more. Hence, if the curve does invert, our grace period may not be as long as the pundits imply. Considering that recessions slice about 40% of the stock market averages, complacency does not seem wise. With yield curves in most of the world’s major economies flat or already inverted, my concern is compounded.

For now, however, Jack Adamo and his team won’t overthink this; they will let the market do the talking. Adamo and his team are up 4.9% for the year. That’s what the S&P 500 returned for all of last year; so, they can’t complain there. They will keep their eyes open. If the market shows signs of protracted weakness, Adamo and his team will lighten up on the positions that seem most vulnerable.

A sampling of Adamo’s portfolio updates:

Mosaic Company (MOS) reported earnings this week. Results were pretty weak, as expected, due to the drought in Brazil and the residual disruption of shipments down the Mississippi River caused by hurricanes Katrina and Rita. The company expects conditions to remain weak through most of the current quarter, and pick up in time to have a good fourth quarter, which ends May 31.

The market took the news pretty well, especially considering that the Dow fell 213 points Friday. Mosaic actually rose on that day.

Energy prices are another factor affecting results at Mosaic as well as Bunge (BG). Just as the cost of fuel hurt gold miners last year, so it raises expenses for phosphate mining. Adamo and his team’s investments in energy act as a hedge for them, should this trend continue, but when demand picks up for phosphates, Adamo suspects that Mosaic and Bunge will be able to pass along some of that added cost to customers.

Both Mosaic and Bunge are long-term plays on the rising standard of living in China, India and South America. The first thing prosperity brings to a population is a better diet. More food requires more fertilizers.

Smithfield Foods (SFD) shares pulled back a bit after Japan reinstated a ban on beef imports from the U.S. The ban applies only to animals under two years of age (veal), which is a small part of the market. Moreover, beef is a pretty small part of Smithfield’s business anyway. Smithfield is the world’s largest pork producer.

The weakness in the shares is unwarranted. The company has been a great long-term grower, and should continue to be for decades.

 
About Jack Adamo’s Insiders PLUS newsletter

Insiders PLUS monitors Insider activity by corporate executives, exchange members and floor traders, while also keeping an eye out for special situations and major macroeconomic trends. Jack Adamo caught the big move in REITs, gold and oil in the past few years. See what he’s discovering now. http://at.zacks.com/?id=2429.

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:

• +32.5% average annual return since 1988 versus +11.8% for S&P 500
• Outperformed S&P 500 in 16 of the last 18 years
• +43.8% total return from 2000 to 2002 - the worst bear market in over 60 years.
• +18% in 2005

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=2309.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2266.

FREE PORTFOLIO TRACKER

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

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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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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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