Wednesday - May 9, 2007

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Zacks #1 Ranked stocks average a 31.8% 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 – Texas Instruments (TXN)

Texas Instruments (TXN) is hitting on all cylinders as evidenced by its latest quarter which easily exceeded analyst expectations. The company posted a 13% positive earnings surprise and guided higher for the future. Earnings estimates for this year and next have increased nicely over the past month. Similarly, the quarter ending in June has seen a strong bump up in estimates over the past month. Read the analysis of TXN now!
 

Growth & Income – Cummins, Inc. (CMI)

Cummins, Inc. (CMI), a Zacks #1 Rank stock, topped the consensus earnings estimate in 11 out of the past 14 quarters by an average margin of 18.0%. The company recently boosted its full-year profit guidance to between $6.00 and $6.50 per share after delivering solid first-quarter results. Analysts responded by boosting their estimates. On Feb 7, the Board of Directors declared a quarterly cash dividend of 36 cents per common share of stock. Read the full analysis on CMI now!
 

Momentum – GFI Group Inc. (GFIG)

GFI Group Inc. (GFIG) recently reported first-quarter earnings of 86 cents per share, 11 cents above analysts’ expectations. In response, analysts raised their full-year estimates and the stock rose to 52-week highs. With no resistance to impede further momentum, GFIG is poised to continue its upward trend. Read the analysis of GFIG now!
 

Value – Tidewater, Inc. (TDW)

Listen to the audio podcast on TDW through Zacks' NEW Audio Feature.

Tidewater, Inc. (TDW), which was first featured as a Value stock on Dec 14, has returned nearly 20%. The company exceeded analysts’ earnings expectations for 10 consecutive quarters. TDW recently reported solid fourth-quarter and full-year results. Consensus earnings estimates have been trending higher for this Zacks #1 Rank stock. The company has a price-to-book ratio of 2.1, compared to 4.5 for the market. It has a PEG ratio of 0.17. Read the full analysis on TDW now!

 
Zacks Rank Resources

• Zacks Rank Homepage. Go there now.
   
• Zacks Elite: Discover Zacks' hand picked #1 Rank stocks on the Timely Buys list. Click here now.
   
• Zacks Rank Breakout Trader: When a stock moves quickly to a Zacks #1 Rank, this trading service uses that turnaround to make 55% a year. Learn more
   
• Zacks Options Trader: Combine the timeliness of Zacks #1 Rank stocks with the explosive profit potential of options. Learn more...
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more...

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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.
 

”A Winning Strategy to Outperform the Market”

Upgrades and Revisions2 is one of my favorite strategies.

As the name suggests, it focuses primarily on stocks with Upward Earnings Estimate Revisions and Rating Upgrades. Studies have shown that “earnings estimate revisions are the most powerful force driving stock prices.” And stocks with rising EPS revisions will generally experience broker upgrades as well.

On average, it generates approximately 8-10 stocks per run, has an excellent win ratio and has shown consistently impressive returns year after year.

Parameters

The first item in this screen is to find only those stocks that are a Zacks #1 Rank:

• Zacks Rank = 1 (Strong Buys)
  (Only stocks with a Strong Buy rating from Zacks are allowed. With the Zacks Rank proving itself to be one of the best (if not the best) rating system out there, this is a great way to start things off.

Next is the % Change in Current Quarter Earnings Estimates over the last four weeks, and I want that to be greater than (>) 0:

• % Change Q1 Estimates over the last 4 weeks >= 0
  (Earnings estimates with fresh upward revisions (or at the very least, no downward revisions, is one of the most important filters and one of the reasons why this screen is called Upgrades and Revisions.)

Next is the % of Average Broker Rating Change over the last four weeks. Again, greater than 0:

• % Rating Change over 4 weeks >= 0
  (Since analysts have such a big upside bias, we’re excluding anything that’s been even slightly downgraded. Another big item and where the Upgrades in the name Upgrades and Revisions came from.)

Next is:

• P/E using 12 mo. Forward EPS Estimates <= 65
  (That’s right, 65 -- growth stocks are welcome. Our studies have shown that stocks with P/E ratios of up to 65 outperform those with P/E’s of over 65. So to increase our probabilities of success, we’ve drawn the line at 65.)
   
• % Change Actual EPS (Q0)/(Q-1) >= 0
  (Positive EPS growth this quarter over last and ...
   
• % Change Actual EPS (Q-1)/(Q-2) >= 0 (Positive EPS growth last quarter over the one before that. In other words, two quarters of positive EPS growth.)

Then it’s on to the annual growth rate:

• % Change Actual EPS (F0)/(F-1) >= 0
  (I want a positive EPS growth this year over last.)

And then the longer term historical growth rate:

• 5 Year Historical EPS Growth >= 17
  (Yes, 17 – the average stock in the Zacks universe has a five-year historical growth rate of approximately 15%. And this screen finds only those stocks with a growth rate above that threshold.)

Next is:

• Last EPS Surprise >= 0
  (No negative surprises allowed. And since companies that have recently surprised in the past have a tendency to surprise again in the future, this is move.)
   
• Price/Sales ratio <= 4
  (Actually, we’ve had great success with the Price/Sales ratio being between two, three and four. In general, a lower Price/Sales ratio is better. But I selected four because it didn’t narrow down the stock selection too much.)

And finally...

• All the stocks had to be trading at a minimum of $3 or more. (Although, with all the items above, the typical pick has an average stock price of usually $30 and higher.)

The Results

Returns

In 2001, the average annualized gross returns were 55.8%.

In 2002 it was 42.1%.

In the cake-walk of 2003, the returns came in at a whopping 108.5%.

In 2004, its average annualized return came in at 49.3%.

2005 was 16.5%.

And in 2006, the average returns were 22.7%.

This strategy comes loaded with the Research Wizard program and is called Upgrades and Revisions2.

Here are three stocks from this week’s list (5/7/07):

Get the rest of the stocks on this list and start trading the filtered Zacks Rank (or any of our other strategies) in your own account. Remember, the key to successful screening is in discovering those screens that have produced profitable results in the past. And that’s exactly what you get with the Research Wizard stock picking and backtesting program. Click here to learn more.

Discover all the Free Screening Tools on Zacks.com now!

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.

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Small-cap institutional research is a relatively new offering from Zacks & Company. Joining us today is the Director of Small-Cap Institutional Research Ian Gilson, CFA, Ph.D, who can now speak on how things are developing and how small-cap stocks are expected to perform.

Can you first give us a little background on the Small-Cap Institutional Research [or SCIR] format?

Certainly. Last August, Len Zacks decided to form a research group whose product basically are smaller-cap stocks. By small, we mean those companies with a market capitalization of less than $2 billion and usually above about $500 million. Below $500 million, they become micro-cap. This offers Zacks an opportunity to use our research to pick those stocks that we feel will outperform, and in fact the records have shown that since the inception of SCIR, our Buy picks have outperformed the general market.

More. . .

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Zacks Equity Research continued...

What is the coverage at this time?

We, at the moment, have about 50 stocks in several areas. It has somewhat of a bias towards technology in general: biotechnology, electronics, telecommunications, things like that. But we also have real estate investment trusts, we have chemicals, and basically we have nine analysts who are gradually adding stocks to our universe that they feel will outperform the market over the next six to nine months.

Recent history indicates that small-cap stocks have outperformed large-cap stocks. However, very recently that seems to have changed.

Yes, that is correct. In general, small-cap stocks have higher growth rates than more mature companies that make up the larger averages. And higher growth rates in earnings and revenue lead normally to somewhat higher valuations and better growth. That is not to say it always happens, but generally over the last seven years – up until the end of 2006 – small-caps did, in fact, on a quarterly basis, outperform the large market aggregates.

What is your forecast for small-cap stocks?

I mentioned the last time I spoke to your audience that when interest rates start to increase, this offers an alternative investment with a guaranteed return, and money managers begin to look at bonds and fixed-income securities as an alternative to equity. As interest rates go up, the risks factor the discount rate that is applied to earnings also goes up, which means you get a compression in P/E ratios. Since small-cap stocks generally have higher P/E ratios than large-cap stocks, you begin to get underperformance of the small-cap sector.

You see these P/Es coming down, then.

Correct. I am of the opinion that interest rates are going to continue to increase. Please don’t ask me what they’re going to be; I haven’t got the foggiest idea, nor does anybody else, by the way.

You’re expecting an interest rate increase, not a decrease?

That is correct. I expect an interest rate increase. The Fed cannot really control interest rates. International money markets and currencies have an influence on interest rates in this country, which of course the Fed cannot control. But I see interest rates going up. I see speculative stocks declining the most – most of those are in the micro-cap arena, which we do not follow. But I do see a compression in P/E ratios.

Read the complete ANALYST INTERVIEW.

Ian T. Gilson, CFA, Ph.D is the Director of Small-Cap Institutional Research at Zacks Investment Research..

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MORE FROM ZACKS EQUITY RESEARCH...
 

Analyst Blog

Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Maxim Integrated Products (MXIM), Raytheon (RTN), ValueClick (VCLK) and Horizon Offshore (HOFF). To see their latest posts, click here.

 
BULL OF THE DAY

Regency Centers (REG) - Strong Development Pipeline. For full Zacks research report, click here.

 
BEAR OF THE DAY

Emergency Medical Services (EMS) - Long-Term Debt. For full Zacks research report, click here.

 
EARNINGS PREVIEW

Listen to the audio podcast of the Earnings Preview through Zacks' NEW Audio Feature.

The Week of May 7 – May 11

A Fed meeting will steal the spotlight from earnings news, though both Disney and Cisco are on deck. More...

 
EARNINGS TRENDS

Listen to the audio podcast for Earnings Trends through Zacks' NEW Audio Feature

Positive Surprises Leading to Upward Estimate Revisions

The flood of positive surprises pushed the 2007 Revisions Ratio to 1.59 from last week’s 1.24, a huge increaseh. More...

 
Rating Upgrades

Find out which stocks have been recently upgraded by Zacks Equity Research: click here.

 
Zacks Equity Research Buys

Read the reports on all of the stocks on the Zacks Equity Research Buy List: click here.

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Every week, Zacks Wealth Management provides informative articles on how to build and protect wealth. Today’s topic is:

 
Retirement Plans for Small Businesses

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)

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

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.

Jonas Zamora is a Certified Financial Planner™ professional. You may contact him at jzamora@zacks.com.

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.

Learn more about Zacks Wealth Management now!

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Zacks is conducting a nationwide talent search to find the very best stock pickers. The winner gets a $100,000 dream job with Zacks! . Sign up for free to join the competition, or just read what stocks the leading players are trading on the Zacks Challenge Player Blogs.
 

Best of the Zacks Challenge Player Blogs

Here's what the leading players are saying lately:
 

Lilnev2000 (Rank #7 with $179,499)

OREZONE RESOURCES – RIPE FOR A BUYOUT IN THE FALL (OZN)
Gold Fields is spending $US 11.4 million to increase their interest in the project to 60% by completing a bankable feasibility study. If the feasibility study shows great margins for the project, Orezone might be snatched up by Gold Fields…

Read More or Comment on this post.
 

Shoelessjoe (Rank #24 with $146,613)

DOMINO’S DELIVERS PIZZA IN A ZAP
More good news, this is a stock that I highlighted a few months ago. They are getting a lot of press lately...

Read More or Comment on this post.
 

Zoroleheros (Rank #2 with $186,759)

MACD BEARISH DIVERGENCE ON THE S&P 500… A TOP IS HERE (OR NEAR)!
The S&P 500 is just 2.5% below its 2000 historical high… look for a summer correction to start there (or maybe as soon as Wednesday with the FOMC meeting)…

Read More or Comment on this post.
 

Read all the Player Blog posts.

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:

• +31.8% average annual return since 1988 versus +11.8% for S&P 500
• Outperformed S&P 500 in 17 of the last 18 years
• +43.8% total return from 2000 to 2002, which was the worst bear market in over 60 years.
• +18% in 2005

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.

FREE PORTFOLIO TRACKER

Do you believe that these events affect stock prices?

• 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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