Wednesday - November 22, 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 – MIPS Technologies, Inc. (MIPS)
MIPS Technologies, Inc.'s (MIPS) business is on fire. The company has substantially exceeded earnings estimates in each of the past four quarters. Two analysts have raised their projections for this year and next. Over the past month, this year's estimates have jumped 21.7%, while next year's have risen almost 54%. Read the full analysis on MIPS now!
Growth & Income – Polo Ralph Lauren Corporation (RL)
Polo Ralph Lauren Corporation (RL) recently raised its fiscal 2007 earnings per share guidance after releasing solid results for the second quarter and first half of the year. Consensus estimates for both this year and next have been on the rise for this Zacks #1 Rank stock. Earnings per share are projected to grow 16% over the next 3-5 years. RL’s return on equity of 18% betters the industry average of 12%. Read the full analysis on RL now!
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MMomentum – American Eagle Outfitters, Inc. (AEOS)
American Eagle Outfitters, Inc. (AEOS) hit a new 52-week high last week, following the release of bullish third-quarter earnings. The teen apparel retailer topped earnings estimates by a penny with profits of 66 cents per share. Read the analysis of AEOS now!
Value – Anixter International, Inc. (AXE)
Anixter International, Inc. (AXE), a Zacks #1 Rank stock, exceeded analysts’ earnings expectations in 14 out of the past 16 quarters, most recently by 20.6%. Earnings per share are projected to grow 14% over the next 3-5 years. Consensus estimates for both this year and next have been trending higher. The company has a price-to-book ratio of 2.4, compared to 4.9 for the market. AXE’s return on equity of 20% crushes the industry average of 8%. Read the full analysis on AXE 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.
“The Importance of Screening and Backtesting”
Every week in this article, I usually outline a unique way to screen for stocks or go over a proven, profitable trading strategy.
In this week’s article though, I thought I’d start at square one and explain why screening is so important. But even more importantly, why backtesting is the most important step of all.
Why Should I Use a Stock Screener?
The short answer is:
Because there are over 10,000 stocks out there and you need a way to find the good ones.
The long answer is:
Other than buying stocks that are talked about on TV or written about in the paper (not to mention ‘tips’ from a friend); how else are you going to find stocks that meet certain fundamental characteristics?
Even if you don’t use a screener now, most people still do their own ‘screening’ one way or another. They may hear that a stock has a certain Growth Rate, or a certain P/E Ratio or Sales Surprise, etc. They then find themselves listening for or reading about stocks that meet this criteria.
Well if you want to find stocks that meet certain criteria, you can find them quickly and easily with a stock screener.
But just because you narrow down 10,000 stocks to only a handful, doesn’t necessarily mean that you’ve picked the best stocks on the planet.
You might have picked the worst ones.
But how will you know?
Once you’ve created a screen, you can then backtest it to see how good (or bad) your screening strategy has performed.
In other words, does your screen generally find stocks that go up once they’ve been identified? Or does your screen generally find stocks that get buried once they’ve been identified?
This is good stuff to know.
With backtesting, you can see how successful your stock-picking strategy has performed in the past, so you’ll have a better idea as to what your probability of success will be now and in the future.
Of course, past performance is no guarantee of future results, but what else do you have to go by?
Think about it; if you saw that a stock-picking strategy did nothing but lose money year after year, period after period, stock after stock, over and over again (you get the point); there’s NO WAY you’d want to trade that strategy or use that screen to pick stocks with.
Because it has ‘proven’ that it picks bad stocks.
Sure, it may turn around and start picking winners, but it may also continue to pick losing stocks.
On the other hand:
... what if you saw a strategy that did great period after period, you’d of course want to trade that strategy.
Because it’s proven to be a profitable trading strategy.
And while it could start picking losers all of a sudden, it may also continue to pick winning stocks.
Keep in mind, a screening and backtesting program isn’t a ‘box of magic’.
But it’s a great way to see what works and what doesn’t BEFORE you put your money at risk!
I’ll end this with a recollection of a conversation I had with someone a while back who was ‘stuck’ in a losing stock:
I asked him why he was still in it if it kept on losing money.
He said that he didn’t think it would go much lower from here.
I asked him if he thought it would go this low when he bought it. (He of course said no.)
I then asked him if he thought it’d go up from here. His answer was ‘probably not right away’ and then he added that it could possibly still fall a bit more from here.
I told him there are plenty of stocks going straight up. Why don’t you get out of that one that’s losing you money and get into a better one?
He answered that he didn’t know of any better stocks to get into.
I then asked him, “What if you did know of a better stock to get into, would you do it”?
His answer of course was: “YEAH!” But he quickly added that he didn’t know how to find ‘better’ stocks.
That last comment said it all.
He was in losing stocks because he didn’t know to pick better ones.
But if he had a proven, profitable, stock picking strategy, he could.
Don’t get me wrong, just because you have a great strategy doesn’t preclude you from ever having another loser. On the contrary, even some of the best strategies ‘only’ have win ratios of 70% or 80%. (NOT 100%.)
But if your strategy picks winners far more often than losers, you can feel confident that your next pick will have a high probability of success.
And don’t be the guy who ‘accidentally’ gets into one or two good stocks and thinks he’s the next Warren Buffet. If your stock account is important to you, test your stock-picking strategies out to see if your method for finding winners is a repeatable one.
And that’s why someone should use a Screener and a Backtester.
As usual, I’ll close with a few new picks from some of my favorite backtested screening strategies for the week of 11/20/06:
Sign up now for your two-week free trial to the Research Wizard and take your stock screening to another level. And when you’re done, backtest it to see if it works! And don’t forget to check out the winning trading strategies that come loaded with the program. Know when to buy and when sell. It’s all there. You can do it..
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
When the Democrats won back both the House and the Senate in the mid-term elections earlier this month, we began to address those industries in the market that might be headed for change going into 2007. One such industry is aerospace and defense, so we asked a few questions of senior analyst Jon Kolb, who covers this industry for Zacks Equity Research.
What is the outlook these days for the aerospace and defense industry?
Currently, we have about ten companies under coverage in the aerospace and defense industry, with half of them having Buy recommendations at this time. Obviously, we think there are still good times ahead for this group. Our most recently updated Zacks reports on these stocks were General Dynamics (GD), L-3 Communications (LLL), Lockheed Martin (LMT), Northrop Grumman (NOC) and Orbital Sciences (ORB). Of these, only GD has a Hold recommendation; the others are all Buys.
More. . .
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So you continue your favorable outlook even with Democrats having taken over both houses of Congress?
I know that conventional wisdom is that the new Democratic Congress is going to be bad for the defense industry, because Democrats are going to want to spend more on health care, education and so forth. But the thinking is, at this time, that Democrats do not want to appear soft on defense, and cutting budgets in this industry would appear to American citizens that the Democrats are indeed soft on defense. Basically, nobody sees real big spending cuts at this time within the industry.
Would the expected upcoming policy shift in Iraq play into this, especially with those companies more heavily reliant on Iraq operations?
Some of the companies I’ve got Buys on in this space, such as L-3, don’t do much if any plane and tank building. The other Buys I mentioned earlier – particularly Lockheed and Northrop Grumman – make the planes, helicopters, tanks and amphibious machines, not to mention all the repairs and supplemental items. These lines may indeed take somewhat of a hit, although the next defense bill is still expected to look fairly strong from both an industry standpoint and an investor standpoint.
We may see some reallocation, and there may be some major cuts in specific items and programs, such as certain fighter jets and other things that are only being used in Iraq. Those vehicles and equipment will still be replenished, but there won’t be new spending initiatives to send more of those types of weapons over there.
So then, do you expect these companies to ratchet down their growth expectation numbers?
We still think there’s going to be growth, but it may be at a slower rate, especially when we talk about these tanks, fighter jets and other traditional weaponry that are being used in Iraq right now. But importantly, we are seeing a shift toward more stealth, high tech equipment. Over the past few years, the government’s focus has been turning toward the command, control, communications, intelligence, surveillance and reconnaissance – or C3ISR – weapons. Spying and other observation using satellites, and otherwise protecting against terrorist activity, is replacing traditional and conventional warfare.
Jon Kolb is a senior analyst covering the Aerospace & Defense industries for Zacks Equity Research.
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Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Secure Computing (SCUR), Conseco (CNO), Spectranetics (SPNC) and Constellation Energy (CEG). 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:
Almost all investors should allocate a portion of their assets to equities. No if ands or buts about it. With that in mind, it’s time to re-visit your portfolio and think of the best way to take advantage of the equity markets. In this issue, we will focus on Separately Managed Accounts and Mutual Funds and when you should use these investment vehicles. The most common way to invest in equities today is via mutual funds. They have several advantages:
If you have less than a hundred thousand dollars to invest, mutual funds are a good starting point.
If you have a larger portfolio, it may be more cost effective to invest in a Separately Managed Accounts (SMA). Once a product only available to large institutional investors, today with improved trading technology it’s become one of the fastest growing investment vehicles for individual investors. These accounts offer all of the diversification benefits of Mutual Funds but also have several advantages:
Which one is right for you? That depends. If you have several hundred thousand dollars to invest, SMAs may be the way to go. There are also some who decide to use SMAs as their core portfolio holdings and use mutual funds or Exchange Traded Funds (more on this at a later date) to take care of alternative markets (some examples are commodities, beaten down sectors in the market). Sit down with your financial advisor and he or she can look at your portfolio. Together, you can decide between SMAs, mutual funds or a combination of both.
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
The stock market should begin to benefit from flows of assets out of other investment classes. More...
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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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.
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