Wednesday - April 5, 2006
 Want to view the archive of past issues? Go to: http://at.zacks.com/?id=2319. Manage Profit from the Pros subscription: 1. ZACKS EQUITY RESEARCH As we've asked senior insurance analyst Ann Northrop, CFA over the past several quarters now about affects of last year's Gulf Coast hurricanes, a new season of tropical storms is just over the horizon. We wanted to get her opinion on how P&C companies continue to be affected by developments related to Katrina and other hurricanes from last year. A study just came out predicting the number and intensity of hurricanes that will occur this year. Is this creating some worry among insurance companies in your coverage? There isn't a huge worry, no. Insurance companies are in the business of risk. Last year's hurricanes were the worst on record. But as I have said previously, companies have dramatically raised rates in the affected lines and many of those companies are benefiting from the storms. That said, however, I always look at insurance companies on a case-by-case basis, and some will be more vulnerable than others, particularly the less well capitalized ones. Are you still seeing effects of Hurricane Katrina fallout in the property and casualty (P&C) industry? Yes. All four of last summer’s hurricanes absorbed capital in the P&C industry. Indications now are that pricing has stabilized in many of the hurricane-affected lines, or in some cases appear to be rising. Therefore, I think there are some investment opportunities with some of the reinsurers right now. More. . .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Reinsurers have raised their prices, and as a result, primary insurers are increasing their retentions in order to keep their reinsurance costs relatively stable. The reinsurers then move toward higher policy layers with higher, more profitable returns. There has been some concern among investors lately that some reinsurers have seen premiums decline. I’m thinking mostly about Partner Re (PRE) here. However, we think higher margins at the reinsurers will more than compensate for a decline in premiums. PRE, for example, has a strong balance sheet, redundant reserves and a diversified business model. Also, its U.S. business – which accounts for roughly 40% of premiums – we expect will have margins expanding enough to make up for the declines in the company’s European and Asian premium volume and pricing. Another company we expect to benefit from the hardening reinsurance market is Everest Re (RE). Although the hurricanes wiped out more than 25% of the company’s book value, Everest Re remains well capitalized, issuing $280 million in common stock, replenishing about one-third of its $962 million in estimated after-tax losses from the three catastrophes. Prior to the hurricanes, the company was writing premiums at a ratio of 1.1 times its equity, which should leave it room for double-digit premium growth. That said, however, just over one-quarter of the company’s business is in property lines, which we expect to enjoy the biggest price increases. The majority of Everest’s business is in casualty lines, where pricing and conditions appear to have stabilized after several quarters of deterioration, but we don’t expect them to harden dramatically. The stock has fallen back to post-Katrina levels after running up on market hardening expectations. However, we think even at this lower level it is fairly valued and is unlikely to out-perform the overall market in the near term. Would you say reinsurers are the main bright spot in the insurance industry overall right now? Well first of all, the industry right now is experiencing a deceleration in pricing. Even though this has stabilized somewhat, the industry as a whole is still weakening. But beyond this, I would agree than reinsurers are the one bright spot, mainly because they can increase their prices in the hurricane-affected lines. They then move to higher lines when primary carriers retain more of their own risk. In Partner Re’s case again, that 40% in domestic premiums should increase in response to higher pricing in the hurricane-affected lines. And PRE is trading at 1.4x book, which is a value given expectations for mid-teens ROE in 2006 and 2007. Also, I’ll just mention here that PRE stock has retrenched since it reported about a week ago. This appears to be because of investors’ concerns over the negative premium growth the company reported in the fourth quarter. What are your thoughts on life insurance companies these days? Here I see a bifurcation between large and small life insurance companies. The large companies can take advantage of scale and distribution and grow earnings at a much-faster rate. Prices are up, on average, more than 30% in this group. So it’s hard to find good values in this area at this time. But Prudential (PRU), even though it’s been up big, is a company we can still see some value in. Prudential is a good company: its international operations are a strong engine of growth, as will be its domestic annuity and retirement programs. This company trades at a premium, but we feel this is deserved. So although the stock has appreciated significantly over the past couple years, we still think it’s a ROE expansion story. PRU’s ROE was 13% in 2005, and its goal was 14% by 2007, though we think they can get there in the next year. Also with Prudential you can expect stock buybacks and increased dividend yields. So the overall insurance industry outlook is still in a down-cycle, though. Can you gauge when this might be headed back around? In terms of cyclicality, P&C I don’t see turning around any time soon. The losses from the hurricanes last summer absorbed lots of capital. Some of that capital has now been replenished through stock offerings, debt, and new companies coming into the industry like hedge funds setting up shop to underwrite business in the hurricane-affected lines. Despite all that, I see price increases in the affected lines and stabilization in other lines. But I see that stabilization as more of a stop on the road to further price declines. Prices had been rising for quite awhile and were set to come back down. The hurricanes stabilized this decline for a period, but I expect the deceleration to continue in the affected lines, although at a slower rate. How long will it last? That depends on the speed of the decline, like in any cyclical industry. I might be tempted to say two or three years, which would be a normal period, but there’s really no way of knowing. Ann Northrop, CFA is a senior analyst covering the insurance industry for Zacks Equity Research. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Analyst Blog - NEW! Get real-time market insights from Zacks Equity Research Analysts. To see their latest posts, click here. Linear Technology Corp. (LLTC) - Should Exceed Expectations. For full Zacks research report, click here. UIL Holdings (UIL) - Dividend Unsustainable? For full Zacks research report, click here. Zacks Industry Rank for the Week of Apr 3 Materials Makes its Move
2. SCREEN OF THE WEEK Zacks.com offers three unique weekly commentaries that all
further our mission to help you Profit from the Pros. Today is
the latest installment of Screen of the Week from Kevin Matras.
Each week, Kevin shares with you another winning screen he has
discovered using the Research Wizard software from Zacks
Investment Research. Learn more about the Research Wizard at: http://at.zacks.com/?id=2335. “Increasing P/Es for Stocks on the Move" Studies show that the best stocks over the past decade saw their P/E ratios increase by more than 100% from their breakout point. The good news is that you can use screening tools to catch these stocks early in their breakout cycle and ride them up for big gains. Here’s an example to explain this scenario. Say a stock price is at $20 and its earnings over the last four quarters equal $1 per share. Its P/E ratio will therefore be 20. ($20 divided by $1 = 20) If the earnings rise to $1.25, for instance, but the stock doesn’t, then the P/E ratio will fall. ($20 divided by $1.25 = 16) If Earnings go up but Prices don’t, the P/E ratio will decrease. (But typically, as earnings increase, so should prices.) If the stock rises and its earnings stay the same, the P/E ratio will increase. If the stock is now at $30 and its earnings remain at $1, ... the P/E will have increased to 30 as well. ($30 divided by $1 = 30) If Prices go up but Earnings don't, the P/E ratio will increase. (But this scenario is probably short-lived because the demand for a stock (prices) only goes up when earnings are going up, or at least expected to.) But now let’s say next quarter earnings come out and its four-quarter combined numbers show the EPS at $1.25 and the stock has also increased to $30. The P/E ratio will now be 24. ($30 divided by $1.25 = 24 -- a 20% increase in its P/E ratio from the first example.) If Earnings go up and Prices go up as well, the P/E ratio will also increase. (The interesting dynamic is that as earnings increase, so should prices. And as forecasts for continued earnings arrive, the demand for the stock should continue to send prices even higher. This type of scenario (higher earnings and higher prices) has longevity and is common in most trends.) This increase in price and earnings is an ideal way to spot stocks in favor and that are anticipated to continue to trend higher. And instead of looking for nominal P/E changes, screen for P/E increases in excess of 20%, which should provide the greatest upside potential. Just like a 20% increase in the price of a stock can alert you to a new potential uptrend, you can also use a 20% increase in the P/E ratio to alert you to potentially significant price and earnings events. When we first published this screen in January of 2003, the screen I was using was:
In follow-up articles, I added some additional parameters to the screen; most notably, filters to ensure that all of the stocks saw an increase in their earnings. (If prices are rising without an increase in earnings, there’s no real reason for prices to continue to rise.)
Here are three stocks from this week’s list (4/4/06):
I have found this to be an excellent screen to help find stocks that are on the move with expectations of continued improving fundamentals. Use this screening strategy alone or with other criteria to help spot winning stocks BEFORE they become BIG winners! Most screeners don’t have historical P/E ratios (or other historical measures), but the Research Wizard stock picking and backtesting program does. Use it today, and see what new stocks you should be looking at. Click here to learn more. Discover all the Free Screening Tools on Zacks.com at: http://at.zacks.com/?id=2336. Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. 3. ZACKS RANK BUY STOCKS 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 – W-H Energy Services, Inc. (WHQ) W-H Energy Services, Inc. (WHQ) has achieved sequential revenue growth in each of the last eight quarters. The company has met or exceeded analysts' earnings estimates for each of the past five quarters, with year-over-year growth exceeding 110% in four of those quarters. Five analysts have raised their numbers for 2006. Over the past 60 days, 2006 estimates have increased 7.8% to $2.64 per share. Read the full analysis on WHQ at: http://at.zacks.com/?id=2498. Growth & Income – Tele Norte Leste Participacoes S.A. (TNE) Tele Norte Leste Participacoes S.A. (TNE) has experienced impressive growth in both its wireless and broadband business segments. The company is currently yielding 6.2% and has a five-year average dividend yield of 2.7%. Analysts’ earnings estimates for 2006 have been trending higher. Earnings per share for this Zacks #1 Rank stock are projected to grow 26.9% over the next 3-5 years. Read the full analysis on TNE at: http://at.zacks.com/?id=2499. More...
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Momentum – Entravision Communications (EVC) Entravision Communications (EVC) has climbed more than 29%. Can it continue to climb further? After delivering a shockingly positive 200% earnings surprise on Feb 23, EVC’s stock has climbed more than 29%. Can it continue to climb further? On Feb 23, 2006, EVC announced fourth-quarter earnings at three cents a share, up 50% from the same quarter last year. All seven analysts following the stock raised their FY 2006 estimates after the report. Read the full analysis on EVC at: http://at.zacks.com/?id=2500. Value – ALLETE, Inc. (ALE) ALLETE, Inc. (ALE), a Zacks #1 Rank stock, has topped the consensus earnings estimate in four of the past five quarters by an average margin of 21.2%. In mid-February, the company reported impressive profit growth in the fourth quarter of 2005. Furthermore, ALE issued EPS guidance above analysts’ estimates. The company has a price-to-book (P/B) multiple of 2.3. Read the full analysis on ALE at: http://at.zacks.com/?id=2501.
4. 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.
While Upside’s Best Buy List and Buy List have performed well this year, the strong returns have little to do with Richard Moroney and his team’s penchant for high-quality companies with strong finances. The top one-fifth of U.S. stocks based on Quadrix® Quality scores has returned about 5% this year, versus 13% for the worst one-fifth. Quality scores reflect three- and five-year growth rates, along with returns on equity, investment, and assets. Based on Quadrix Financial Strength scores, the top one-fifth has gained less than 7%, versus more than 13% for the bottom one-fifth. Financial Strength scores reflect debt positions, interest coverage, and profit margins. According to Merrill Lynch, stocks with the worst S&P quality ratings have delivered the highest returns this year, while those with the best quality ratings have delivered the lowest returns. S&P quality ratings reflect dividend and profit records. After this year’s performance, Merrill Lynch reports, the valuation of high-quality stocks relative to low-quality stocks is back near 20-year lows. In all 10 economic sectors, low-quality stocks are selling at a premium to high-quality stocks based on expected 2006 price/earnings ratios. Anticipating the rotations between low- and high-quality stocks is difficult, but Wall Street’s willingness to pay up for low-quality merchandise has presented an opportunity for value-minded investors. Look for reasonably valued shares supported by solid profit records and growth prospects, and don’t be afraid to buy stocks up sharply from 52-week lows. Listed below are four recommendations that rank among the top one-fourth of U.S. stocks based on Quadrix Quality and Financial Strength scores, returns on equity and investment, and earnings predictability. Earnings predictability measures the consistency of year-to-year profit growth over the past 20 quarters. All four of the listed companies have delivered at least three straight years of per-share profit growth, yet their stocks appear modestly valued relative to likely earnings growth. Despite three years of strong share-price and operating performance, Corus Bankshares (CORS) is cheaper than about 93% of U.S. stocks based on its Quadrix Value score. The modest valuation reflects worries about exposure to the condominium market, but Corus has a good record of making prudent loans. 2005 was its sixth consecutive year with no commercial real-estate loan charge-offs, and the amount of non-performing loans was negligible. Corus has 11 branches in the Chicago metro area and provides construction and development loans for commercial real-estate projects in major markets across the country, with a target loan size of $20 million to $150 million. Asset growth, 150% in 2005, has been impressive. Loans outstanding rose 69% last year as total originations increased 32%. Eagle Materials (EXP), a maker of wallboard and cement, is vulnerable to a slowdown in the demand for building materials. But the company’s operations have delivered double-digit annualized growth in sales and profits over the past 10 years, and tight industry capacity suggests healthy growth should continue over the next 18 to 24 months. U.S. demand for wallboard is outstripping supply, allowing Eagle to raise prices — including a 10% to 12% hike announced in March. Eagle’s cement operations are also operating at capacity, prompting the company to announce an aggressive expansion plan in January. J2 Global Communications (JCOM) provides fax-messaging services, allowing users to receive and send faxes by computer. The company has delivered strong growth, fueled by rapid international expansion, new services, solid pricing, and robust subscriber growth. J2 scores an impressive 91 for Quadrix Overall, with high Quality (97) and Financial Strength (98) scores. The company boasts strong cash-flow momentum. Trailing 12- month cash flow is $64 million, up 26% from the year-earlier period. J2 recently authorized the repurchase of an additional 1 million, or 4%, of its common shares. The shares retreated after J2 said it would delay filing its annual report following a review of a subsidiary’s accounting. The review, now completed, did not impact previously released figures for sales and pretax income in fiscal 2005. But the corporate tax rate increased, reducing net per-share earnings by $0.08 to $2.00 per share. At 23 times trailing earnings, the stock seems reasonably valued. Secure Computing (SCUR), a leading provider of computer- and network-protection solutions, is benefiting from healthy order growth and product launches. December-quarter earnings per share were $0.17, up 42%. Sales rose 18%. New orders increased 33% from the year-earlier period and 21% from the September quarter. In 2005, per-share earnings surged 68%, on top of a 36% increase in 2004. Over the last three years, sales have increased at an 18% annual rate. Sales and earnings should be driven by several factors. Secure holds a strong and growing market share. The January acquisition of CyberGuard should expand its distribution capabilities and strengthen its position in the government market. Healthy cash flow could be used to fuel foreign expansion. Hello, I’m Richard Moroney, Editor of Upside and creator of the Quadrix Stock Rating System. In February 1999, I began using Quadrix to serve as a first screen to identify stocks with winning potential. Over the past few years, this system has proven to work significantly well with smaller stocks and has proceeded to gain 240.1% while the Russell 2000 Index gained only 36.3%. http://at.zacks.com/?id=2537 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - b) March Madness Come and Gone Nadine Wong says biotech investing is not for the faint of heart, unless you have expert opinions guiding your decision: More... c) Focus on Longer-Term Positions Ken Trester says continued low volatility makes this a time to focus on longer-term positions. More... 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, the Zacks #5 Rank (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=2332. Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2279. FREE PORTFOLIO TRACKER Do you believe that these events affect stock prices?
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 to help take definitive action to improve your portfolio's performance. Did we mention it's free? Get started now! We hope you enjoyed this issue of "Profit from the Pros", And we look forward to visiting with you again next week. REFER-A-FRIEND If you enjoy this e-mail newsletter, then please pass it along to a friend. Simply forward them the link below to sign up for their own free subscription. If you're reading a forwarded copy, sign up for your own, so you get this wealth of information every week. Just click here. THANKS! Regards and Happy Investing, Charles Rotblut, CFA 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 Zacks Performance Rank performance is the total return of equal weighted simulated portfolios consisting of those stocks with the indicated Zacks Rank net of fees. Results reflect the reinvestment of dividends and other earnings. Simulated results do not represent actual trading and may not reflect the impact that economic and market factors might have had on decision-making if an adviser were actually managing a client's money. 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. To contact us by mail: Zacks Investment Research To unsubscribe from receiving "Profit from the Pros" e-mail newsletter, click here. | |||||||||||||||
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Zacks #1 Stocks on the Move 05/21/2013
| Company Name | Symbol | %Change |
|---|---|---|
| SCIENTIFIC L | SCIL | 8.00% |
| NATUS MEDICA | BABY | 6.11% |
| SUMMER INFAN | SUMR | 6.02% |
| RADIANT LOGI | RLGT | 5.32% |
| NEW ORIENTAL | EDU | 4.51% |
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