Wednesday - July 26, 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 When we conduct interviews with Dirk van Dijk, CFA, Director of Zacks Equity Research, instead of focusing on specific industries, we try to get a broader market perspective. Now that earnings season is back at full force, we wanted to get his impressions on how things are progressing. What trends are you starting to see from Q2 earnings thus far? Any major surprises? What may be surprising to some investors is that the start of earnings season has not been all that bad, at least in terms of earnings relative to expectations. We are well on our way to yet another quarter of double-digit year-over-year gains. Positive surprises have outnumbered disappointments by more than 5 to 1. Every sector has so far reported more positive surprises than disappointments. The median firm has reported year-over-year growth of 13.1%, and 3.4% ahead of expectations. More. . .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - However, several companies have come in a bit light on revenues, or have made somewhat downbeat comments about the outlook for either the 3rd quarter or the second half. Note that if a firm reports in-line earnings, but lower than expected revenues, by definition it means that its margins are better than expected. It is not intuitively clear to me that that is all bad. However, it is still early in the earnings season, with less than a third of the reports in. If earnings have been so great, why has the market not been able to put together more than two or three up days in a row? Let’s be honest – geopolitical events are likely to have a bigger impact on the market right now than earnings surprises. The take away message is this: Don’t worry about this quarter’s earnings; there is plenty else out there to worry about. Earnings growth remains strong, and over the last month there have been more than five 2006 estimates raised for every four cut for S&P 500 firms. So which sectors are looking the best and the worst? It looks like we are seeing spectacular earnings growth for the Energy and Materials sector, good year-over-year growth in the Industrial and Tech sectors, and solid earnings growth for the rest of the sectors. While only one out of six reports are in for each of the Energy and Materials sectors, so far Energy firms have reported a median growth rate of 65.6%, while Materials have shown a 42.9% growth rate. While Tech has shown a very respectable 17.3% growth rate, with over a third of its reports in, it is not translating to higher earnings expectations going forward. In terms of estimate revisions, the fact that “tech” rhymes with “wreck” is not just a coincidence right now. Energy, Industrials and Materials, on the other hand, continue to see a large preponderance of upward revisions to estimate cuts. The Consumer Staples sector, a traditional safe haven in times of trouble, has also been showing signs of strength. To read the complete Analysts Interview, click: http://at.zacks.com/?id=2525. Dirk van Dijk, CFA is the Director of Zacks Equity Research. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Analyst Blog Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Schering-Plough (SGP), Merck (MRK), Hanover Compressor (HC) and Arkansas Best (ABFS). To see their latest posts, click here. The U.S. economy is in the process of making an uneven transition from above-trend growth to below-trend growth. click here. Find out which stocks have been recently upgraded by Zacks Equity Research: click here. Read the reports on all of the stocks on the Zacks Equity Research Buy List: click here. Schering-Plough (SGP) - Healthy Earnings Growth. For full Zacks research report, click here. AMCORE Financial (AMFI) - Lackluster Earnings. For full Zacks research report, click here. The Week of Jul 24 Second Quarter Earnings Season off to Strong Start
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. ”Screening for Stocks to Pick the Right Options” This week, I want to talk about options. More specifically, how a good stock screener is the best tool you can have for picking the right options. Regardless of whether you’re buying options or writing them, calls or puts, ‘nakeds’ or ‘covereds’, you not only have to be right on the stock’s direction, but also on its timing. Even the most sophisticated of options strategies requires, in the least, an idea on what the stock will or won’t do within a certain period of time. Often, people who buy options with more time (in order to be safe) are forced to buy options further out-of-the-money because of the cost, which ultimately reduces their chances of profitability. But by backtesting to see if your stocks typically go up as soon as they're identified (within the first one week or four weeks, for example), you can buy less time and closer-to-the-money (better) options. Simply put, you can make better decisions as to which options to get into. For example, let’s assume we’re buying calls. If you know your stock-picking strategy has a high probability of picking stocks that go up within the first few weeks they come across your screen, you won't have to waste your money on purchasing options with excessive time. (As you know, ‘time’ does indeed cost money when it comes to options, i.e. time value or extrinsic value.) And the less ‘needless’ time you buy, the more money you’ll have to spend on buying an option that’s closer to the money or even in-the-money (my favorite). I won’t get into an options lesson in this article, but too many people treat option buying as a lottery ticket. They’ll buy the cheapest options (usually meaning several strikes out-of-the-money) and hope for an explosive move (which they’ll need if they’re too far out-of-the-money). Unfortunately, these moves often never come. And even when they do, usually by expiration, their time value has eroded with no intrinsic value at all. Let’s say stock XYZ is trading at $50. And the options are expiring in five weeks. There’s a $45 in-the-money call at $5.60 (which means it costs $560). A $50 at-the-money call going for $2.20 ($220). A $55 out-of-the money call going for $1.50 ($150) and a $60 call going for 75 cents ($75). The 45 call has $500 of intrinsic value (the difference between the underlying stock’s price and the strike price) and $60 of time value or extrinsic value (amount of the option’s price that’s greater than the intrinsic value). The 50 call has $0 (zero) intrinsic value and is fully comprised of extrinsic value ($220 worth). The 55 and 60 calls also have zero intrinsic value and only time value ($150 and $75 respectively). The interesting dynamic is that time value or extrinsic value declines as the expiration date draws near. In other words, as time goes by, your option is losing its time value. To complete this example, let me go over a few scenarios. Scenario 1) Let’s say at expiration, XYZ stock closes at $50. The 45 call is worth $500 for a loss of $60 or 11%. Why? Because at expiration, there’s $500 of intrinsic value left. But the $60 worth of time value has ticked away, for a loss of $60. So out of your $560 investment, you get $500 of it back. The 50 call is worth $0 for a loss of $220 or 100%. That $220 was all time value and it has all been used up. The 55 and 60 calls will also expire worthless, each one for a 100% loss. Same story. While it’s true that if you spend less on an option, then your absolute risk is less since you can only lose what you put in. But the ‘worse’ option you buy, the less likelihood there is that the stock will reach and surpass your strike price at expiration. (Less potential monetary loss per option, but less likelihood of making anything either.) Scenario 2) Let’s say XYZ makes only a mediocre move of $2 to close at $52. At expiration, the 45 call would be worth $700, which means it would gain $140 or 25%. So you get your $560 back, plus an extra $140. The 50 call, in spite of XYZ’s $2 move, would have actually lost money. The 50 call would now be worth only $200. But remember, you paid $220 for it. The move gave you $200 of new intrinsic value, but all of the time value you purchased ($220 worth) would have ticked away. The net result would have been a loss of $20 for a 9% decrease. So out of your $220 investment, you’ll get back $200 of it. The 55 and 60 calls both expire worthless for a 100% loss on each. Scenario 3) This time let’s say XYZ goes to $55. The 45 call is now worth $1,000 at expiration. That’s a $440 gain or a 79% increase. ($1,000 - $560 investment = $440 gain.) So you get your $560 back, plus an extra $440. Good trade. The 50 call will be worth $500. That’s a $280 gain or a 127% increase. Excellent. You get your $220 back, plus an extra $280. But on a $5 stock move, your option captured only about half of that. The 55 and 60 calls, in spite of XYZ’s $5 run-up, both expire worthless. Yes, even the 55 call. It has no intrinsic value and no time value left –- so it’s worth nothing. Scenario 4) This time, let’s say XYZ shoots up $10 to close at $60 by expiration. The 45 call will be worth $1,500. ($1,500 - $560 investment = $940 gain or a 168% increase.) You get your $560 back, plus an additional $940. Awesome. The 50 call also fared well. It’s now worth $1,000. ($1,000 - $220 investment = $780 gain or a 355% increase). You get your $220 back, plus an additional $780. The 55 call is finally profitable as it’s now worth $500. So your gain is $350. ($500 - $150 investment = $350.) That’s a 233% increase. But a bit disappointing, considering you got only about $3.50 worth of a $10 move. The real disappointment though is for the 60 call. Once again, it’ll expire worthless as all of it’s time value has ticked away leaving its value at $0 –- zero. Of course, the out-of-the money call strategy will score big if there’s a huge move and you have lots of options. But short of that, the ‘cheap’, out-of-the money calls will often expire with a 100% loss. Ouch. And how much money are you really willing to commit to an out-of-the money play knowing the odds are so stacked against you. Unfortunately, that’s how too many people do it. And because they rationalize that they can get several cheaper options for the price of one really good one, they’ll often spend just as much and lose it ALL. And if you buy more time (until expiration) the options will cost even more, for a potentially bigger loss. In fact, every one of the above scenarios would have done commensurately worse. So getting back to my point; once you have an idea as to how good your screening strategy is at picking winners and how quickly they move once they’ve been identified, you can then go about picking the best option to give you the highest probability of success. For instance, what if you knew your screening strategy picked stocks that had a high probability of going up within the next few weeks. You wouldn't need to buy two months or three months or six months of time. And you could then spend your money on getting a closer out-of-the money or better yet, an at-the-money or an in-the-money option. I personally like to look at options as simply a cheaper way to invest in stocks. Because if I bought 100 shares of a $90 stock, that would cost $9,000. But if I bought an $85 call option with four to six weeks left while the stock was at $90, I would have the right to buy 100 shares of that stock at $90. And I’d probably only have to pay about $5.50 to $7.00 ($550 to $700) to do so. (There are other considerations to the pricing of options that are beyond the scope of this article, but you get the idea.) The benefits of my in-the-money preferences are; if the stock went sideways, I’d retain the majority of my investment since my option is comprised of mostly intrinsic value. If it went up a little, my option would still have a great chance of gain. If it moved up nicely (as I’d expected), I would get the lion’s share of the move. And if it collapsed, my maximum exposure would be limited to my purchase price. (And even less if I sold prior to expiration.) So what does all this mean? Make sure you screen for good stocks!!! And make sure you know what the probability is for those stocks to move, say within the next week or month, etc. And the only way to really know, is to backtest your screening strategies. This way, even a crummy option strategy will then have a better chance of profit. But with better knowledge of your stocks’ potential, you can employ a better option strategy for even bigger gains. Here’s an easy way to get started. In the Research Wizard, some of our best and winningest strategies come loaded with the program. Simply add the filter; ‘optionable’ (meaning these stocks have options). Add the optionable filter to these strategies and then go find the best options. Here are three optionable stocks from some of my favorite stock screening strategies (for 7/25/06):
Get the rest of the stocks from each one of these screens and start making better stock and option decisions today. And remember, the key to successful stock picking is in discovering those screens that have produced profitable results in the past. And the key to better option selections is in knowing what to expect from your stocks (and when). And how will you know? By backtesting! Click below to find out more about our free trial to the Research Wizard stock picking and backtesting program. http://at.zacks.com/?id=2335 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 – FormFactor, Inc. (FORM) FormFactor, Inc. (FORM) has met or exceeded earnings estimates in 10 out of the past 11 quarters. Over the past 90 days, four analysts have raised their numbers for this year, while three have done so for next year. 2006 estimates have increased 8.4%, while 2007 numbers have risen 9.2% over the past three months. Read the full analysis on FORM at: http://at.zacks.com/?id=2498. Growth & Income – PACCAR, Inc. (PCAR) PACCAR, Inc. (PCAR) topped the Street’s earnings estimate in 15 out of the past 16 quarters. The company increased revenues, expanded gross margins and grew profits for the past four years. Earnings per share are projected to grow 13% over the next 3-5 years. PCAR’s quarterly dividend was raised 20% to 30 cents per share back in late-April. The company is currently yielding 1.6%. Read the full analysis on PCAR at: http://at.zacks.com/?id=2499. More...
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Momentum – Orbital Sciences (ORB) Orbital Sciences (ORB) set new highs after topping second-quarter expectations. The company reported profits of 16 cents, beating the consensus estimate by three cents. Read the analysis of ORB at: http://at.zacks.com/?id=2500. Value – Helmerich & Payne, Inc. (HP) Helmerich & Payne, Inc. (HP), a Zacks #1 Rank stock, topped the Street’s earnings estimate in six out of the past seven quarters, most recently by 19.2%. Consensus estimates have been on the rise for HP. The company is currently yielding 0.67% and has a price-to-book ratio of 2.4. Read the full analysis on HP at: http://at.zacks.com/?id=2501.
4. ZACKS WEALTH MANAGEMENT Every week, Zacks Wealth Management provides informative articles on how to build and protect wealth. Today’s topic is:
With recent market volatility, investors are once again being caught up in the ever present conflict between their need for return on their investment and their tolerance for downward fluctuations in their account balances. Unfortunately, history has been a poor teacher for many as hordes of investors rush online or to the telephone to place sell orders when the market turns sour, only to buy back in once the market turns up. This misguided practice alone has been the single largest destroyer of wealth over the last two decades. Numerous detractors will point to the gut wrenching decline of the technology sector from mid 2000 through 2002 as the most obvious example of the why this statement is so thoroughly incorrect. But, I assure you that this point will actually support the veracity of our conclusions. Ultimately, there are only a few IRREFUTABLE FACTS of investing and equally few, time tested RULES of investing that WILL yield positive results for investors. FACT #1: Equity (i.e. OWNERSHIP) in the world’s most PROFITABLE companies has returned far more wealth to investors over the past half century than any other asset class in the world. Note the word profitable. The unbridled speculation in unproven, unprofitable technology companies that occurred throughout the late nineties and into the turn of the century is the absolute antithesis of prudent investment and the fundamental precepts of asset allocation. FACT #2: Volatility is the price you pay for higher returns. Indeed, it is the inevitable UPWARD volatility that constitutes a significant portion of these returns. Attempting to consistently sidestep the downward volatility will only lead to unbearably disappointing returns. In most cases, investors would have been better off putting their money in guaranteed time deposits and saved themselves the heartache over the previous five to ten years. Now, in no way do I intend to promote a pure “buy and hold” strategy when it comes to investing. It was the buy and hold mantra that led countless investors and their equally misinformed advisors to hold onto profitless companies all the way to the bottom of a decline that produced losses of 80% or greater for far too many investors. What I am advocating is once you have a clearly defined goal and a proven process for achieving it (as is the case when hiring a money manager to make investment decisions for you) that you stick to it. Ultimately, no matter what process you utilize for making investment decisions there are three rules every investor must follow. RULE #1: Know your tolerance for risk Risk in the investment world is almost always measured as volatility of returns. However, as we all know, it is only the downward volatility most investors are concerned with. Fortunately, history gives us a very solid understanding of both the upward and the downward volatility that is both possible and/or likely within any given time horizon for all major asset classes. Armed with this information you can construct a very reliable asset allocation model that can predict the maximum decline an investor is likely to experience over any given time horizon. If this maximum decline is outside of your tolerance for loss – stay out of that allocation. RULE #2: Align your expectations with reality Of course, we all want 13% annual returns with only the possibility of a 5% decline in the value of our portfolios. But then again, as my ever so subtle east Texas grandparents told me very early in my younger years: “People in hell want ice water”. The misalignment of return expectations with the tolerance for downward fluctuations in the account balance inevitably leads to investment decisions based not on prudent judgment, but on the two most pervasive emotions in investing: fear and greed. No matter what the circumstances may be, these two emotions will virtually always lead to inevitable disappointment. RULE #3: Control your spending I know… this one is the least palatable. It’s the financial equivalent to being told what to do and how to live in a free country and robs us of the inherent satisfaction of maintaining a standard of living that is fundamentally beyond our means. But it is also the most important. If you are only spending 4% of your portfolio per year, I can offer a very reasonable degree of assurance that you will enjoy a comfortable degree of financial security over your lifetime, no matter what the volatility of your portfolio. 6% or greater will require a little more homework and will invariably reduce the amount of volatility a portfolio will be able to tolerate and meet future income requirements. Anything at or above 10% and all bets are off. You WILL bear the very real risk of running out of money before the end of your life if you plan on living off of your investments for 10 years or more. In the end, if you have carefully and thoughtfully developed an asset allocation model that falls squarely within the guidelines outlined above, there should be absolutely no reason to make dramatic changes to it without a substantial and material change in your personal and financial circumstances. These changes include the death of a spouse, major medical expenses, a dramatic shift in expenditures, etc. They do NOT include short term fluctuations in the equity markets or changes in any one of the myriad economic indicators reported daily by the financial media. Ultimately, the keys to successful investing are rather mundane and anti-climactic. Stick to basics. Have a plan. Set an allocation that is appropriate for your need for income and tolerance for risk in the first place and leave the rest to the money managers. Instead of reacting when the market is down, take the opportunity to review your plan when the market is up and you can make changes based upon your unique circumstances, on your terms and in a favorable environment. This article is provided for informational purposes only and does not constitute legal or tax advice. Zacks Investment Management, Inc. is not engaged in rendering legal, tax, accounting or other professional services. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. CFP Board, a nonprofit regulatory organization, fosters professional standards in personal financial planning so that the public values, has access to and benefits from competent and ethical financial planning. CFP Board owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements. CFP Board currently authorizes more than 50,000 individuals to use these marks in the United States. For more about CFP Board, visit HYPERLINK "http://www.cfp.net/"www.CFP.net. David Metzger is Director of Financial Planning with Zacks Wealth Management. Zacks Wealth Management provides independent, unbiased financial plans for its clients. David specializes in implementing unique financial planning strategies to help clients meet their financial goals. Learn more about Zacks Wealth Management at: http://at.zacks.com/?id=2994. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - MITCH ZACKS ON THE MARKETS Periods of weak sentiment typically precede a rally in growth stocks: http://at.zacks.com/?id=2995. 5. FEATURED EXPERTS Here we cast the spotlight on a timely Featured Expert commentaries that recently appeared on Zacks.com. Ian Wyatt discusses recent agreements that have been initiated by industry leaders. Discover which companies are teaming up. http://at.zacks.com/?id=2400. Mutual Fund expert Ron Rowland says almost every corner of the market has no clear trend. Read his thoughts on volatility. http://at.zacks.com/?id=2970. 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 06/19/2013
| Company Name | Symbol | %Change |
|---|---|---|
| SONIC FOUNDR | SOFO | 4.40% |
| SUPPORTCOM I | SPRT | 3.75% |
| UNISYS CORP | UIS | 3.31% |
| SHORETEL INC | SHOR | 3.22% |
| GREEN MOUNTA | GMCR | 3.13% |
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