Wednesday - September 8, 2004

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Dear Customer,

We recently conducted a customer survey to find ways to improve the value of our Profit from the Pros emails (PFP). The most glaring change we could make was in terms of timely delivery of commentary.

In the past we had 3 weekly versions of Profit from the Pros
* Best of Wall Street I (Tuesday)
* The Zacks Way (Wednesday)
* Best of Wall Street II (Thursday)

Given that they were unique emails, then we would hold certain commentaries for up to a week to place into that specific PFP version. From the survey, customers made it clear that they could barely distinguish between the 3 versions and overwhelmingly would prefer to have content delivered immediately.

The solution to this problem will take 2 forms.

1) Improved PFP Email Format: Going forward there is only 1 version of Profit from the Pros that is sent 3 times per week. Each of these emails will contain the timeliest commentary available from Zacks.com. No more waiting a week for pertinent information to arrive. While we were in “improvement mode” we also changed some of the content pieces to further the mission to help you Profit from the Pros.

2) Real Time Alerts: We have partnered with Forbes.com to create a simple, yet powerful software application that delivers the investment content you want in real time to your computer desktop. We are only a couple weeks away from launch. Stay tuned!

We hope these changes meet your needs for more timely delivery of investment information. Feel free to drop me a note with any feedback.

Best Regards,

Stephen Reitmeister
Editor-in-Chief
Zacks.com Profit from the Pros
stephenr@zacks.com

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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.

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Companies are always looking for ways to put the best face on their results. That means investors need to be rather diligent when it comes to making their financial moves when based primarily on a company’s numbers. Such research can be difficult for investors, but Richard Moroney offers a couple tips in his Upside newsletter. In this featured expert, Moroney shows you how to discover quality companies, and then highlights two of them before mentioned three other selections from the Upside Buy List.

 
With Earnings, Look for Both Quality and Quantity

Accounting is not an exact science. Managements have considerable discretion on when revenue and expenses are recognized. For example, if a company wants to recognize revenue before the end of a quarter, it can offer generous financing terms to entice buyers. The sales will not generate much cash, but revenue (and accounts receivable) will increase.

Many such accruals, or non-cash adjustments, are legitimate. But managers want to deliver the best earnings possible, and history suggests that companies relying heavily on accruals tend to see the world through rose-colored glasses. In fact, numerous academic studies have shown that companies relying heavily on non-cash income tend to have lower-quality earnings — and below- average stock returns.

To determine if earnings are benefiting from accruals, compare net income to cash flow from operations. High-accrual firms regularly report profits that outstrip cash flow. In contrast, high-quality companies rely less on accruals and typically generate more cash flow than net income.

As another check on earnings quality, compare the trend in receivables (from the balance sheet) to sales growth. Sales recognized prematurely are often not collected, which may lead to overstated receivables. Moreover, the longer it takes a company to collect receivables, the slower it generates cash. In general, companies that quickly convert sales to cash have higher-quality earnings. A handy metric is days receivable, the average number of days it takes a company to collect accounts receivable.

Profiled below are two quality companies with solid operating momentum and growth prospects. Both of them have delivered impressive cash-flow growth, with cash from operations exceeding net income. In addition, both have done a good job of matching receivables and sales.

J2 Global Communications (NASDAQ: JCOM) has strong cash-flow momentum. Trailing 12-month cash flow is $42.1 million, compared to $24.8 million for the year-earlier period. Net income over the past year was $38.7 million. The company has no long-term debt, and days receivable have been steady. J2 provides messaging to individual and business customers. The company’s services allow subscribers to receive faxes via e-mail, send faxes by computer, and retrieve e-mail over the phone. J2 scores an impressive 95 for Quadrix Overall, with high Quality (99) and Financial Strength (100) scores. Consensus estimates project 2004 earnings per share will climb 15% to $1.20. Three months ago that figure was $1.14. For 2005, the consensus estimate is $1.56. The stock could receive a boost if short sellers are forced to cover their positions. J2 has about 4 million shares sold short, representing roughly 21% of the float, or tradable shares.

OMI (NYSE: OMM), which owns and operates a fleet of 36 oil tankers, should deliver strong near-term growth. The company, using mostly double-hulled ships, is benefiting from regulations restricting single-hulled tankers. Moreover, higher global oil demand, coupled with strong leasing rates for tankers, should bolster results. Over the years, OMI has expanded and modernized its fleet through acquisitions. By year-end, the company expects its average tanker age to be only four years — well below industry averages. OMI, with outstanding Value and Earnings Estimate Quadrix scores, ranks among the best in the energy sector. The Overall score is 98 — higher than about 98% of the roughly 5,000 companies in our database. The company’s improving cash flow has exceeded net income for 12 consecutive quarters. While tanker-leasing rates are extremely volatile, the company expects strong rates in the September quarter, up sharply from a year earlier and higher than the June quarter. The stock trades at just six times projected 2004 per-share earnings of $2.14. For 2005, the consensus estimate is $2.03.

More. . .

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FEATURED EXPERTS Continued...

 
Other Upside Buy List stocks include:

Biosite, Inc. (NASDAQ: BSTE)  is a research-based company dedicated to the discovery and development of novel protein-based diagnostic tests that improve a physician's ability to diagnosis debilitating and life-threatening diseases. The company combinesintegrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes.

Comtech Telecommunications Corporation (NASDAQ: CMTL)  designs, develops, produces and markets sophisticated wireless telecommunications transmission products and solid state high power broadband amplifiers for commercial and government purposes. Their products are used in point-to-point and point-to-multipoint telecommunications transmission and reception applications such as satellite communications, over-the-horizon microwave systems, cellular telephone systems and cable and broadcast television.

HCC Insurance (NYSE: HCC),  through its subsidiaries, provides specialized property & casualty insurance coverages, managing general agency services & insurance related services both to commercial customers & individuals. HCC's insurance products are underwritten on both a direct & reinsurance basis & are marketed by the company itself & through a network of independent & affiliated agents & brokers.

 
About Richard Moroney’s Upside

Richard Moroney,CFA and editor-in-chief of Upside has more than a decade of experience in stock market analysis. Mr. Moroney is a frequent guest on financial TV and radio shows including CNBC, CNN, and Business Radio Network.

Learn more about this newsletter and free trial offer at: http://at.zacks.com/?id=1381.

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MORE FEATURED EXPERTS...
 

b) Market Lacks Volatility at the Moment

Bullish signals in September can be frustrating for investors, since history urges caution during this month. But Jeff Carter and his team can help you gain ground even through this weak period with their options analysis on a pair of trades. More...
 

c) REBUILDING YOUR PORTFOLIO AFTER THE MARKET BOTTOMS

Dr. Edward Olmstead can make sure that all your bases are covered during this uncertain time through options. Learn about a bullish play and a bearish play that can keep you on a profitable course. More...
 

d) Playing with the Bulls and the Bears

Time Warner now appears to be the frontrunner for MGM, according to Bill Martin and Matt Ragas. Use this pair`s extensive analysis to get the inside scoop on this potential deal, and discover what it could mean for Time Warner shareholders. More...
 

Featured Expert articles are courtesy of the 60+ leading investment newsletters that have partnered with us to create the Zacks Expert Advice service. Check out the Experts section of Zacks.com daily to find profitable stock picks and timely market commentary at: http://at.zacks.com/?id=1386.

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Zacks.com offers 3 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. http://at.zacks.com/?id=1388
 

“Cheap stocks and Big Returns”

This screen is one of my favorites, which I shared with folks more than 3 years ago in 2001. The premise behind this screen was to try and find cheap stocks (stocks at or less than $15) that were trading at (or consolidating) just under their 52 week high, in an effort to ‘get on board’ before they broke-out to new highs.

In other words, I wanted the stocks to be near their highs, but most of all, I was looking for stocks that had been turned back from their recent highs, had consolidated their advances on their trek higher to those highs and were just now starting to make a run at the 52 week high again. I’m a big fan of getting into basing patterns (relatively narrow trading bands) after an uptrend has been established. Especially near recent price highs, since stocks making new highs tend to make even higher highs.

I have found this screen to be an ideal strategy for finding low priced stocks with a high probability of success.

 
Parameters:

• It searches for stocks trading at or below $15.
   
• They also have to have a Zacks Rank of 1.
   
• They have to be trading within 10% of the 52 Week high. (Expressed as Current Price / 52 Week High >= .90) (Simply put, I’m looking for stocks high up in their uptrend.)
   
• The % Price Change over the last 4 weeks has to be >= 10% but not more than 20%. (I’m looking for stocks on the move, but not ones that have moved so much, so quickly, a correction could be in store. Since 10% seems to get people’s attention while follow- thru at 20%, typically signals the beginning of a ‘trend’ or a ‘breakout’, I wanted to be alerted BEFORE a breakout was seen.
   
• And lastly, for good measure, I want the Beta to be <= 2. (Active stocks are good, but wildly volatile ones are not.)

 
Results:

I ran a series of tests over the last 3 1/2 year time span (2001, 2002, 2003, and the first half of 2004) as well as a series of tests for each of the last three and a half years individually. I rebalanced the portfolio every four weeks and started each run on a different start date so each test would be rebalanced over a different set of four-week periods. (This was done to eliminate coincidence and verify robustness.)

Over the last 3 1/2 years, this strategy has shown an average annualized gross return of 75.8% with an average win ratio (winning periods divided by the total number of periods) of 75%. And it holds on average of only 3-5 stocks in your portfolio each month.

In 2001, the average annualized gross return was 53.5%, with an average win ratio of 71%. (This year’s avg. # of stocks held per period was 8.)

In 2002, the average annualized gross return was 36.2%, with an average win ratio of 70%. (4 stocks / avg. per period.)

In 2003, the average annualized gross return was 167.2%, with an average win ratio of 87%! (3-5 stocks on average.)

And so far, 2004’s YTD (thru 7/16/2004) cumulative average gross returns are up 25.1%, (annualized to 68.8% for 12 months) with an average of 3 stocks per run. (The cumulative average returns for the S&P are 0.2% (annualized to 0.4%).

As of Tues., 9/7/04, only two stocks had qualified. They are:

Note: Even though this screen will generally produce on average of 3-5 stocks per period, there will be times where literally no stocks will qualify due to the narrowness of the parameters.

Tip: Since this screen has such a great track record and such a high success rate, if nothing comes through on my first pass, I’ll run it day after day, until the screen spots something.

(This is one of the reasons why I run so many backtests using different start dates in my analysis. I want to make sure that the strategy has a history of picking good stocks ‘at any time’.)

Want to know what it picks next week? Then sign up for your free trial to the Research Wizard stock picking software now.

All the Screen of the Week strategies are created and backtested using the Research Wizard software from Zacks Investment Research. Learn more about the Research Wizard and Free Trial offer at: http://at.zacks.com/?id=1388.

 
Discover all the Free Screening Tools on Zacks.com at: http://at.zacks.com/?id=1389.
 

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PREVIOUS WEEKLY COMMENTARIES….
 

ALL STAR TOP PICKS

Better Reception for Telecom Equipment

Renewed interest in cell phones has helped to upgrade the telecom equipment industry, and the All Stars have five recommendations to connect you with this enterprising space. http://at.zacks.com/?id=1390
 

EXPERTS WATCH

Top Performing Expert sits on the Sidelines

When top-performing Experts counsel moving money to the sidelines, investors should listen up. Get insights and picks to outperform the market over the next twelve months. http://at.zacks.com/?id=1391

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The analysts from Zacks Independent Research create a mountain of insightful equity research everyday of the week. Here you will find the best of that information recently published on Zacks.com.
 

BULL OF THE DAY

Danaher Corporation (DHR) - Acquisition-Led Growth. http://at.zacks.com/?id=1392

 
BEAR OF THE DAY

WebMD Corporation (HLTH) - Decline In Year-Over-Year Revenue. http://at.zacks.com/?id=1393

 
ZACKS ANALYST INTERVIEW

Thinking Insurance? Pick Carefully
by Ann Northrop

Hurricanes expected to be a minor issue; the real unknowns are interest rates and the stock market. More...

 
ZACKS INDUSTRY OUTLOOK

Building Products Industry Outlook - Positve
The Building Products Industry has seen tremendous growth recently, which is expected to continue. Read Zacks Industry Outlook to see where investors should focus in this large and diverse industry. More...

 
ZACKS MARKET COMMENTARY

Zacks Model Portfolio – Focus List
See which stocks Ben Zacks is adding to our Focus List and which stocks he is selling, in the Focus List month end report. 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…
 

Zacks Rank #1 and #5 Additions

The Zacks Rank is a powerful stock indicator whose #1 Strong Buys stocks have risen +33.1% on average annual return since 1988 vs. +12.0% for S&P 500. And just as important it tells you which stocks to sell now (Zacks #5). Since 1988 the S&P 500 has outperformed the Zacks #5 Ranked Strong Sells by 141.8% annually (11.97% vs. 4.95% respectively). Learn more about the Zacks Rank following this section.

Below you will find all the stocks added to the Zacks #1 and #5 Ranked lists this week.

 
Zacks #1 Ranked List: 25 New Additions (alpha by ticker)

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Zacks #1 Rank List continued...

To see the full list of Zacks #1 Ranked stocks (approx. 200 stocks), then click here.

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Zacks #5 Ranked List: 32 New Additions (alpha by ticker)

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Zacks #5 Rank List continued...

To see the full list of Zacks #5 Ranked stocks (approx. 200 stocks), then click here.

ABOUT THE ZACKS RANK

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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:

• +33.1% average annual return since 1988 vs. +12.0% for S&P 500
• Outperformed S&P 500 in 15 of the last 16 years
• +43.8% total return from 2000 to 2002, which was the worst bear market in over 60 years.
• +74.7% gain in 2003

And just as importantly, our #5 Ranked stocks (Strong Sells) have 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 at: http://at.zacks.com/?id=75.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=72.

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,

Stephen Reitmeister

Editor-in-Chief
Zacks Profit from the Pros

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.

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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