Friday - June 16, 2005

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As fears of future interest rate hikes in the U.S. have sent stocks tumbling, the same thing recently happened in China. We felt that this would make a good time to check in with our senior analyst covering various industries in China, Paul Cheung, CFA. Is China experiencing the same difficulties the U.S. markets are?

Can you give us an update on how the Chinese market has responded to its recent interest rate hike and the possibility of future hikes?

I don’t think that the Chinese market responds to interest rate hikes as sensitively as the U.S. market does. When China announced it planned to increase its interest rate by 27 bps on April 28, the Chinese market grew 3.95% the very next day.

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Zacks Equity Research continued...

The possibility of future interest rate hikes in China is weak, at least over the next few months, in my view. The reason is that the Chinese government hopes to stimulate civilians’ consumption while interest rate hikes will reduce their willingness to consume.

Does the threat of rate increases in the U.S. affect the Chinese market?

Not really in any meaningful way, as far as I see it. Commonly, rate increases in the U.S. have few effects on the Chinese market because the Chinese market is not a free-flow market for foreign capital. In fact, market difficulties in the U.S. may have less affect on the Chinese market than any other major trading region in the world. There has also been some static regarding Chinese tech companies' products being used in the U.S. State Department. Is this affecting forecasts for Chinese technology companies in the future?

I don’t think this will affect forecasts for Chinese technology companies, at least not too greatly. The reason is that currently Chinese technology companies commonly make money mainly from China rather than from for developed countries like U.S. Would the Chinese tech companies like the additional U.S. business? Of course. But these types of things are not priced into the shares of these companies, at least not yet.

You recently upgraded KongZhong Corp. to a Buy. What are some of the reasons for this?

I upgraded KongZhong (KONG) to a Buy because of the following reasons: First, KongZhong has benefited a great deal from the rapid development of wireless value-added services (WVAS) business in China in the past quarters, and the company has managed to increase its revenue over the past consecutive fifteen quarters. The company also announced quarterly financial results exceeding its guidance as well as the market consensus for most quarters. Secondly, it is expected that WVAS revenues in China will grow at 25% per year for the next three years. Thirdly, Kongzhong has a leading position in the field of WVAS business in China, and should be able to leverage this group’s growth opportunities.

To read the complete Analysts Interview, click: http://at.zacks.com/?id=2306

Paul Cheung, CFA is a senior analyst covering various industries in China 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

Entergy Corp. (ETR) - 19% Return Potential. For full Zacks research report, click here.

 
BEAR OF THE DAY

iPass, Inc. (IPAS) - Difficult Transitions. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Still Shopping

The retail-miscellaneous/diversified industry is benefiting from undaunted consumers. More...

 
EARNINGS TRENDS

Earnings Still in Good Shape

With all the recent weakness in the market, it is important to keep in mind that earnings are still strong 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 continued to handedly beat the S&P 500.

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

Applied Industrial Technologies, Inc. (AIT) meets the criteria of this Profit Track with a PEG ratio of 0.62 and a price/sales multiple of 0.55. The company's current ratio is 3.07 and its debt/equity level is 0.19. In late April, the company posted fiscal third-quarter earnings of 65 cents per share, topping the consensus estimate by about 8% and surpassing the year-prior result. Continue your research on AIT at: http://at.zacks.com/?id=2290.

Barrett Business Services, Inc. (BBSI) recently reaffirmed its earnings guidance, stating that it anticipates earnings per share for the second quarter to range from 33 to 35 cents per share. This forecast is inline with current analysts’ projections of 34 cents per share. In late April, the company reported first-quarter earnings of 12 cents per share versus the prior year total of 10 cents. The result matched the consensus estimate. BBSI offers a current ratio of 1.98 and has very low levels of debt as evidenced by its debt/equity level of 0.01. Continue your research on BBSI at: http://at.zacks.com/?id=2291.

America's Car-Mart, Inc. (CRMT) announced fiscal third-quarter earnings of 37 cents per share in early March. The result improved on the previous year’s 36 cents and outpaced the consensus estimate by nearly 3%. The company said it was pleased with its strong operating results, including revenue growth of over 20%, same store revenue growth of nearly 17%, and retail unit sales growth of 13%. With a PEG ratio of 0.60, CRMT can be an appealing investment for value investors. Continue your research on CRMT at: http://at.zacks.com/?id=2292.

Quanex Corp. (NX) is a technological leader in the manufacture of value-added metal products made from carbon and alloy steel and aluminum. The company recently released fiscal second-quarter earnings of $1.07 per share, while analysts were expecting $1.06. Quanex Corp. has a current ratio of 1.80 and a debt/equity level of 0.18. Continue your research on NX at: http://at.zacks.com/?id=2293.

To see the full list of stocks that currently pass this winning screen, go to http://at.zacks.com/?id=2294.

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=2295.

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SCREEN OF THE WEEK

Minimizing Market Risk and Volatility with ‘Beta’

Kevin Matras looks at how to minimize your portfolio's market risk and volatility by using the ‘beta’ measure: http://at.zacks.com/?id=2289.
 

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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 – Grant Prideco, Inc. (GRP)

Grant Prideco, Inc. (GRP) trades at a low PEG ratio despite strong growth and rising expectations. The company has recorded explosive earnings growth and is expected to maintain a strong growth rate into the future. Since GRP last reported in April, analysts have raised their full-year estimates for both 2006 and 2007. Nonetheless, the stock trades at a PEG ratio of just 0.43. Read the full analysis on GRP at: http://at.zacks.com/?id=2505.

Growth & Income – MetLife, Inc. (MET)

MetLife, Inc. (MET) exceeded analysts’ earnings expectations for seven consecutive quarters by an average margin of 14.1%. Earnings per share grew 28.3% over the past five years and are forecasted to grow 10.5% over the next 3-5 years. After the company’s first quarter produced solid results, MET raised its full-year 2006 earnings per share guidance. MET increased its 2005 annual dividend by 13%. Read the full analysis on MET at: http://at.zacks.com/?id=2506.

More...

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Zacks Rank continued...

Momentum – CorVel Corporation (CRVL)

CorVel Corporation (CRVL), a Zacks #1 Rank stock, makes new highs. CRVL reported a 37.5% positive earnings surprise on Jun 1, reporting EPS of 33 cents. When compared to the 24 cents posted last year, this also equated to a 37.5% gain. Sales were off 6.2% at $66.55 million, while income was reported at $3.1 million, up 10.7%. Read the full analysis on CRVL at: http://at.zacks.com/?id=2507.

Value - Olympic Steel, Inc. (ZEUS)

Olympic Steel, Inc. (ZEUS), a Zacks #1 Rank stock, exceeded analysts’ earnings expectation for four straight quarters by an average margin of 27.7%. The company recently completed its acquisition of Tinsley Group PS&W Inc., a fabricator of heavy construction equipment components. Consensus earnings estimates have been on the rise. The Board of Directors at ZEUS recently approved a quarterly cash dividend. The company has a price-to-book ratio of 1.4. Read the full analysis on ZEUS at: http://at.zacks.com/?id=2508.

 
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.

Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2297.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide:  http://at.zacks.com/?id=2296.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2532.
   
• Zacks Options Trader: Combine the timeliness of Zacks #1 Rank stocks with the explosive profit potential of options. Learn more at http://at.zacks.com/?id=2695.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2533.

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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.

 
a) James Oberweis Jr., Editor of The Oberweis Report
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In the January 2006 outlook issue of The Oberweis Report, Jim Oberweis Jr. and his team wrote that their data showed “below-average pickings for U.S. equities compared to those of other countries with higher investment and stronger growth. However, their tune is changing. The valuation discount for Asian equities, including China, has narrowed. While equities in the greater China region have soared, U.S. stocks have experienced only slight gains. Although Oberweis and his team continue to have a bullish view on emerging markets such as China over the long term, they now recommend a balanced outlook with a shift toward domestic equities, given the significantly higher stock prices abroad and more favorable domestic valuations.

Emerging markets this year have been fueled by fund flows. If a lot of dough pours into a small market, you can bet your last nickel that prices are probably going higher. And since sheep flock toward the trough, performance begets further performance. It becomes a self-fulfilling prophesy, until it isn’t anymore. And the past couple of weeks have been a sobering reminder that emerging markets can be a bumpy ride. Oberweis and his team’s guess is that the hot money is done chasing emerging markets, at least for now. Further gains will have to be earned.

More to the point, the U.S. market is beginning to look like a bargain. Within Oberweis and his team’s universe of high-growth small-caps, stocks have not appeared this cheap in a long time. Indeed, Oberweis and his team have seen relative valuations like this only on a few other occasions in the past five years, and those generally represented good times to buy.

Framed quantitatively, on a weekly basis Oberweis and his team track the average P/E ratios of companies under $1 billion in market cap with 30% or faster growth in revenues and earnings per share during the last quarter. Oberweis and his team average P/E calculation is computed using forward 12-months earnings estimates. At the year’s beginning, the average P/E of this group was 28. It was over 33 by February, but has now dipped down to a modest 25x earnings. The last time Oberweis and his team saw the average P/E dip to 25x was April 2005, which turned out to be a good time to be buying.

For the first time in a long time, the portfolio looks cheap. They certainly could get cheaper, but the risk/reward profile appears to be favorable. Oberweis and his team admit that the effects of high energy prices and higher interest rates may still impact future earnings, and indeed are likely contributors to these more reasonable valuations. That said, these are not new facts. We all knew rates were going up and oil was expensive six months ago. If the impacts are not too material or long lived, this dip will be a good time to add to funds to U.S. stocks, particularly the sorts recommended in Oberweis and his team’s Model Portfolio.

Current Portfolio profiles include:

Redback Networks Inc. (RBAK), a leading provider of next-generation broadband networking equipment, enables carriers and service providers to build Smart Broadband Networks that are personalized, adaptive and efficient. In the latest reported quarter, the Company reported revenue growth of 69% to $57.9 million versus $34.3 million in the year ago first quarter. Earnings, ex stock comp, grew to $0.05 versus $(0.05) in the same period a year ago.

Zoltek Companies, Inc. (ZOLT) is the leader in the commercialization of low-cost, high-performance carbon fibers for use as an everyday building material for commercial products ranging from sporting goods to aircraft brakes to production automobiles. In the latest reported quarter, the Company reported revenue growth of 91% to $27.3 million versus $14.3 million in the year ago first quarter. Operating income grew to $3.2 million versus a loss of $1.9 million in the same period a year ago.

 
About James Oberweis Jr.’s The Oberweis Report newsletter:

The Oberweis Report is a proprietary investment advisory letter specializing in stocks of extraordinarily rapidly growing companies. Each issue contains new stock recommendations along with a review of those previously recommended stocks that have yet to be sold. http://at.zacks.com/?id=2449.
 

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MORE FEATURED EXPERTS...

b) May CPI was “HOT”

Richard Rhodes thinks a 50 basis point rise by the Fed is best. Learn why and check out two stocks. More...
 

c) Is it Time Yet?

Nadine Wong believes the biotech sector is ready for a decent rally. Read about four high-profiled FDA approvals. More...
 

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 +11.9% 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=2296.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2297.

FREE PORTFOLIO TRACKER

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• 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 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.

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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 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.

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