Wednesday - November 15, 2006
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1. ZACKS RANK BUY STOCKS
Zacks #1 Ranked stocks average a 32.4% annual return. Every day on Zacks.com we highlight four new 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 - RBC Bearings Incorporated (ROLL)
RBC Bearings Incorporated (ROLL) has an excellent business
model with high barriers to entry. This is causing gross
margins to expand and earnings to blossom. ROLL has met or
exceeded earnings estimates in five straight quarters, with
three of them registering double-digit surprises. Two analysts
have raised their forecasts for this year and next. Read the full analysis on ROLL now!
Growth & Income - Franklin Resources, Inc. (BEN)
Franklin Resources, Inc. (BEN), a Zacks #1 Rank stock,
exceeded analysts’ earnings expectations for eight consecutive
quarters, most recently by 10.4% in the fourth quarter of
fiscal 2006. Earnings per share are projected to grow 15% over
the next 3-5 years. The Board of Directors announced a
quarterly cash dividend of 12 cents per share on Sep 20. Read the full analysis on BEN now!
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Momentum - Rock-Tenn (RKT)
Rock-Tenn (RKT) announced fourth-quarter fiscal 2006 earnings
of 52 cents per share on Monday of last week. The result
doubled earnings of 26 cents achieved in the prior-year period
and was a 27% positive surprise above analysts’ predictions.
This represented the third straight quarter that RKT exceeded
the consensus earnings estimate. Read the analysis of RKT now!
Value - RenaissanceRe Holdings, Ltd. (RNR)
RenaissanceRe Holdings, Ltd. (RNR) beat the Street’s third- quarter earnings estimate by 81.9% when it posted profits of $3.42 per share. The company’s average margin of surprise over the past three quarters has been 49.5%. Consensus estimates have been on the rise for this Zacks #1 Rank stock. The company has a current dividend yield of 1.5%. RNR’s price-to- book ratio is 1.8, compared to 4.7 for the market. Read the full analysis on RNR now!
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. Click here to learn more about the Research Wizard.
"Diversification and Portfolio Weighting"
Being in the right sectors and industries at the right time is what every investor wants. Groups such as utilities, finance and consumer staples, among others, have been awesome lately with some spectacular gains.
But having too much of any one good thing can work against you when those groups inevitably turn around. (Just ask the ‘tech’ investors back in 2000. Or even the overweighted energy guys earlier this year.)
Having a diversified portfolio is critical for reducing unsystematic risk (sometimes referred to as unsystemic risk), which is the risk to your portfolio due to one stock (or a group of related stocks).
Systemic risk (also know as market risk) is the risk attributed to the whole of the market itself. Systemic risk can’t really be diversified away.
But unsystematic risk (also known as specific risk) can be lessened with proper diversification and proper stock weighting.
For the sake of this article, let’s say that the right number of stocks to hold in a portfolio is no less than five and no more than 20. (Investors and Money Managers with very large portfolios will usually be forced to hold a much larger number of stocks for many reasons, not the least of which is the sheer amount of money they’re trying to fit into the market. But let’s put that topic beyond the scope of this article.)
So let’s say between five and 20 stocks is the right number to have in a portfolio with 10 being the ideal for many.
This means that no one stock will ever account for more than 20% of a portfolio and never any less than 5%, with the goal being approximately 10% for each stock.
Let’s also say for the sake of this article that no one sector or industry ever represents more than 20% of your holdings, i.e., 20% of your stocks are utilities, 20% are finance, 20% are aerospace, etc.
Here’s where some people get confused.
If you’ve got a 10-stock portfolio and two of your stocks are in oil; that would appear to be fine on the surface. Any more would increase your specific risk (which is the type of risk/volatility people try and avoid).
But if 50% of your money is tied up in those two stocks, with tiny portions allocated elsewhere, you’ve missed the point.
So if 20% of your stocks are allocated to energy that means no more than 20% of your funds should be in energy -- no more.
It’s good to get into the habit of making sure your stock buys are equally dollar weighted. That means you buy the same dollar amount of shares for every stock.
No, not the same amount of shares, but the same dollar amount of shares.
For instance, back in October 2005, many oil stocks dropped by 20% and more within just a few weeks.
If you had just two oil stocks in a larger 10-stock portfolio with everything equally dollar weighted, and both of those stocks each went down 20%, it would have represented only a 4% loss for the portfolio as a whole.
For example: on a $20,000 portfolio, each stock would get $2,000 (10%). A 20% drop in each oil stock would be a $400 loss in each (or a loss of $800 total). And an $800 loss represents only a 4% loss of the $20,000 portfolio.
However, what if you had 25% in each of your oil stocks? Now that loss would amount to $2,000 total, which would represent a loss of 10% of your portfolio.
The scenario of course gets worse and worse the more unbalanced it gets.
Now let’s say some of the other stocks in your portfolio were winners. Just remember, the more you have over-allocated in one stock(s), the more under-allocated you are in another.
If the two stocks out of your 10 represented 50% of your portfolio, that means each of the other 8 stocks only represents 6.25% of your portfolio.
So let’s say the two oil stocks both lost 20% each for a total loss of $2,000. But now let’s say two other stocks each gained 20%. Since the other stocks had only a 6.25% weighting, the gains are only $250 for each (or $500 total). Your gains haven’t offset your losses, and you’re still down $1,500 or 7.5% overall.
However, if you were equally weighted, the gains would have completely offset your losses.
If you’re using a proven, profitable trading strategy, you’ll typically be purchasing your stocks in an equal dollar weighted format. And a good strategy will usually have a high win ratio of 60% or 70% or even higher. And if your strategy is typically finding good, solid stocks, you’ll often see those stocks coming from the best sectors and industries.
So don’t put the bulk of your money (and never ever all of it) in just one sector or industry. Diversify your portfolio over several ‘best’ sectors and industries. (And make sure all of your stocks are equally dollar weighted.)
If you want to make sure you’re diversified over enough groups, you can specifically screen for that.
Here’s a screen to start you off. (Incidentally, this screen backtested quite well last year (and so far this year too) with an average annualized gross return of 40% and an average win ratio of 64%.) (I ran a series of tests over the last 22 months (1/2005 through 11/3/06) using a four-week rebalancing period and starting each run on different start dates so each test would be rebalanced over a different set of four-week periods. This was done to eliminate coincidence and verify robustness.) The average compounded gross return (from 1/2005 through 11/3/06) is 74.8%.
I screened for the top five sectors and then picked the top two stocks in each one of those sectors for a total of 10 stocks.
But first, I wanted to qualify the ‘Universe’ with the following parameters:
Once our Universe is defined, I look for the best Sectors.
Then I look for the top two stocks within each of the five best Sectors.
This leaves me with a nicely diversified 10 stock portfolio every time I run the screen.
Here are a few of the stocks that made it to this week’s list (for the week of Mon, 11/13/06):
With the Research Wizard you can also determine on your own how you want to rank the sectors and what the best stocks are. Do you want to rank the Sectors based on their three-month % Price Change? -– you can. Maybe on their EPS Growth Rates, or Net Margin Increase, or etc. It’s up to you. And then make sure to backtest it to see how it works.
Sign up now for your two-week free trial to the Research Wizard and get the rest of the stocks on this list and see what other Sectors came through this screen. Or build your own screens and then test them. Get started now and start making better decisions today.
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 EQUITY RESEARCH
With the real estate market having made plenty of negative headlines over the past year, the real estate investment trust [REIT] sector has managed record highs over that time period. What has been their secret, and is it expected to continue? We spoke with senior REIT analyst Greg Sukenik to find out.
Do you continue seeing strong growth in the office REIT market?
After several years of depressed results, office fundamentals are definitely improving in most U.S. markets. We are seeing an overall drop in vacancies in downtown and suburban markets. The strongest are where job growth continues to exceed national averages – notably, New York City, Southern California and Southern Florida. Many Midwest and Southeastern markets are still suffering with higher-than-average vacancy rates, which dampen the prospect of raising rents. The Midwest is still suffering from slow job growth, while Southern markets like Atlanta, Austin and Dallas are negatively affected by new supply. Although, we note that even these weaker markets have reported some improvement, as less new product is coming onto market than in past building cycles.
Due to improving fundamentals, office REITs have had a nice run in 2006, as total returns among office companies in our coverage universe have exceeded 30%. Multiples are now stretched to historical highs. We continue to recommend companies in higher barrier areas of the country, where it is difficult to development new space, as these companies have the best prospects for long term growth.
More. . .
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There has been a lot of consolidation in the office REIT sector. Do you see this continuing?
Over the past year or so, several office REITs have been acquired. In our coverage universe, Trizec, Carr America, and Arden have all been acquired. There seems to be a sense that valuations have reached a top among office-focused REITs, so many companies have opted to cash out at all-time highs. We think this consolidation wave has helped propel the entire sector as investors try guess who is next. There is still a strong appetite for institutional quality real estate, and trophy office buildings continue to fetch record prices. We think several more deals for smaller office REITs will be announced in the next year.How have apartment companies been performing in light of the pullback in home sales? Apartment companies that we cover have reported excellent Q3 results, as rents continue to grow. With low levels of new product coming on line, existing landlords are holding occupancy while increasing rents at a healthy pace; a trend that we have not seen in several years. There has been a broad-based recovery in the multi-family industry in most markets, including the Midwest and Southeast, which are showing strength. The slowdown in housing has definitely had a positive impact on apartment landlords, as more people are opting to rent instead of buying overpriced houses. We see this trend continuing throughout 2007; there are ample signs that the for-sale housing market continues to decline and is not even close to a bottom. Although, with the current price run-ups, we would underweight the apartment sector. The good news is already priced into the shares of most companies. The average price/FFO multiple among the nine apartment REITs that we cover is now about 22x 2006 earnings, compared to historical multiples which have been in the mid-teens. Can you give us a few of your Buy recommendations? We still like Maguire Properties (MPG), an office REIT with assets in Southern California. The company is a directional play on the office markets in L.A., which should continue to improve in 2007. Despite a recent share run-up, the company is still discounted compared to peers. The company exceeded our Q3 estimates, and we have recently raised our 2007 expectations. We recently upgraded Public Storage (PSA) to a Buy. PSA is the largest self-storage operator in the country, and jut got bigger by acquiring its largest competitor, Shurgard. PSA has the best locations and is realizing strong growth from its core portfolio. In addition, we expect PSA to realize significant operating efficiencies after the Shurgard integration. Operationally, PSA should lead all of it public competitors in revenue and NOI growth in 2007.
Greg Sukenik is a senior analyst covering the Real Estate Investment Trust industry for Zacks Equity Research.
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Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include King Pharmaceuticals (KG), Texas Capital Bancshares (TCBI), Tech Data (TECD) and Siemens (SI). To see their latest posts, click here.
4. ZACKS WEALTH MANAGEMENT
Every week, Zacks Wealth Management provides informative articles on how to build and protect wealth. Today’s topic is:
Are you a small business owner looking to attract and retain great talent? Perhaps you should think about adding a retirement plan or improving an existing one to get the job done. After all, a retirement plan could be used to draw and keep employees, improve moral, and therefore allow you to improve your business in the long-run. There are tax advantages for you as the owner of the company in terms of tax deductions to contributions made into these plans. Bear in mind that certain plans will be a better fit than others depending on your situation. Let’s look at some plans you may establish as a business proprietor.
SIMPLE (Savings Incentive Match Plans for Employees)
These are usually set up as IRAs and are very easy to establish as well as low cost because it involves little administrative paperwork. Your firm may establish a SIMPLE IRA if you have 100 employees or less. You (employer) can do a dollar for dollar match on employee contributions-up to 3% of employee compensation- or make a fixed contribution of 2% of employee compensation for eligible employees. Employees may contribute up to $10,000 plus an additional $2500 for employees age 50 and up. You must offer the SIMPLE to all employees with income of at least $5,000 in any prior two years and reasonably expected to earn $5,000 in the current year.
Simplified Employee Pension (SEP)
This plan allows you to set up a form of IRA for you and your employees. The advantages here are low cost and the ease with which they are set up and maintained. You just need to complete IRS Form 5305-SEP. All you need to be eligible is to have one or more employees. As for contributions, they are really flexible and amounts could be decided with current business conditions in mind. For 2006, the maximum contributions are up to 25% of compensation (20% for the owner) or a maximum of $44,000. Keep in mind that this has to be offered to all employees who are at least 21 years old, earned income of $450 and employed by you for three of the last five years.
Defined benefit plans
You don’t see many companies set these up presently for a couple of reasons. They are costly, and they are more complex. These plans are typically more advantageous for older employees as they allow a higher tax deductible contribution for them. The great thing about these plans is that you get a fixed benefit at retirement. Business owners usually fund defined benefit plans. The disadvantage is the fact that you must contribute regardless of the profitability of your company once you commit to the plan terms.
401(k) plans have grown in popularity over the years for many businesses. The big advantage here is that a higher level of salary deferral by employees is allowed in these plans. For 2006 they may defer up to $15,000 plus $5,000 more for those age 50 and up. Some employers choose to match up to a certain percentage of employee contributions and that could give you a leg up on recruiting and retaining top talent. The maximum annual contribution between employer match and employee contributions cannot exceed 100% of compensation or $44,000 for this year. Also, per the Pension Protection Act of 2006, plan sponsors may incorporate automatic enrollment for employees. This may result in higher participation rates and encourage everyone to save. The burden would be on employees to opt out if they do not want to participate in the 401(k). Depending on your situation, these plans can vary in terms of complexity and the amount of administration needed. Keep in mind that prototype plans exist to lessen the administrative burden on your company.
Profit sharing plans, unlike defined benefit plans, allow for discretionary annual contributions. This is an advantage for the business if you are having a down year. The employer makes the contribution and you may contribute the lower of 100% of compensation or $44,000. Some plans may also allow for employee contributions.
Those are a few retirement plans that are available to small businesses. Most of these retirement vehicles can be flexible in terms of the types of investments you can use. This is about being in business in the long run as well as taking care of the folks that keep the wheels turning. Retirement plans are a win-win situation. If you need assistance in this area, I would encourage you to contact us and ask for Retirement Plan Solutions. We’ll be happy to help.
Jonas Zamora is a Certified Financial Planner™ professional
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 www.CFP.net.
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MITCH ZACKS ON THE MARKETS
Relatively strong earnings should push the market higher: 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.
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.
Or view the full list of Zacks #1 Ranked stocks.
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Regards and Happy Investing,
Charles Rotblut, CFA
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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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