Wednesday - September 29, 2004
Want to view the archive of past issues? Go here.
Get Profit from the Pros content in Real Time. Learn more about this free tool at: http://at.zacks.com/?id=1509.
1. FEATURED EXPERTS
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.
Vodafone Group (VOD), the word`s largest wireless company with nearly 140 million proportionate customers in more than two dozen countries, hosted its annual analyst day at its headquarters in Newbury, England today. The company laid out its plan for cutting costs and growing revenue to boost earnings by more than a third before 2008.
VOD said that it plans to boost its pre tax operating free cash flow by $4.5 billion by the year ending March 2008, with 60% of this growth coming from cost cuts and 40% from top line growth. The firm expects free cash flow of $12.6 billion this year.
The wireless operator has been in streamlining mode the past few years after it went on a $300 billion acquisition binge under former CEO Christopher Gent. That being said, VOD had been in the bidding against Cingular for AT&T Wireless (AWE ) earlier this year. VOD`s participation in the AWE auction had frustrated many shareholders, who were afraid VOD would overpay for the asset. Cingular ended up winning in the end.
More. . .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
In a sign that VOD is now listening to its large holders, VOD chief Arun Sarin told investors at the annual meeting today that the company plans to pay out ``more and more`` of its cash flow in the coming years and that the current dividend ``is under serious consideration by the board.`` The firm will provide details of an expected dividend hike (talk among analysts has been of a 40% increase) when it reports results in November.
In May, Sarin hiked the firm`s dividend by a fifth and announced a $5.4 billion stock buyback. VOD`s current dividend of 39 cents per share works out to a modest yield of 1.69%. VOD currently only pays out 22% of its earnings as a dividend and Sarin said today that the firm was interested in having a ``competitive dividend`` going forward.
A 40% dividend hike would take VOD`s current dividend yield up to around 2.3%.
Sarin tried to comfort investors on the topic of future potential acquisitions by VOD.
``We have a very disciplined approach. This is a not a very larger set of opportunities we have out there,`` said Sarin.
While VOD tried to talk down its acquisition game plan, the company said it remains interested in doing deals in France (i.e. V`s SFR), eastern Europe, Asia and Africa. The firm also said for the umpteenth time that it would like to increase its ownership stake in Verizon Wireless in the U.S. from Verizon (VZ).
VOD reiterated its previous guidance for the year ending March 2005, which calls for ``high single digit`` percentage growth in customers and revenue and ``broadly stable`` margins. The firm also said that it planned to cut its mobile CapEx to less than 10% of revenue by 2008.
Given VOD`s giant size ($169 billion enterprise value and $67 billion in revenue expected this year), and modest growth rate (high single digit to low double digit EPS growth looks likely), this certainly isn`t a flashy growth story poised for big appreciation.
However, given the multiple value creation levers (dividend hikes, more share buybacks, complimentary acquisitions) it can pull, thanks to its billions in free cash flow, plus the new cost cutting plan and healthy level of investor skepticism surrounding the name, VOD could represent an intriguing, lower risk, long term growth Tiger Woods-like play. With its 14 PE, the dividend hike could make the name into more of a ``tech value play.``
Of course, in addition to the high level of competition globally in the wireless space, and the fact that VOD is susceptible to a slowdown in consumer spending, Sarin & Co. could always divert from their current ``give back`` to shareholders course, and again become over-acquisition hungry. This would likely send VOD shares back into the penalty box.
VOD shares finished the day off -21 cents to $23.42. VOD shares have risen more than 10% since July, but are still trading well off their 52-week high of $27.88.
Looking for a profitable edge to boost your investment portfolio returns in 2004? Look no further that FindProfit.com. Our model portfolios produced market beating returns of 67%, 63% and 39% in 2003. Our unique, contrarian investment style helps us identify companies on the rise before Wall Street and the mainstream press do.
Learn more about this newsletter and free trial offer at: http://at.zacks.com/?id=268.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Gregory Spear notes that investors must be aware of the
crossroads at which we find ourselves and ready and willing to
go with the flow. Find out how and get two top stock picks. More...
Nadine Wong is raising sales and earnings estimates for one
cancer company, and explains why she expects 2005 to turn to
profitability with upside from a massive pipeline. More...
Corporate defaults and bankruptcy are never pretty pictures, but
investing around the probability of those events can make you
money, and Richard Lehmann shows you how with two current
Steve McKee doesn’t think you should wait around for big gains
to revert to the mean, but rather seal them as they occur. Get
this timer’s insights and two top income recommendations. More...
If last year’s profits went up in smoke this year, Judy Alster
has a suggestion that may light your fire. 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.
2. WEEKLY COMMENTARY: Screen of the Week
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
“When to Sell: Using Price and Volume for Pulling Profits and Cutting Losses”
Last month I wrote about how you can use price and volume changes to spot buying opportunities. This week I’ll focus on how you can also use price and volume changes to alert you as to when to sell.
For instance, if your stocks have been moving up, have they been moving higher convincingly on growing volume or have they been marking higher prices on diminishing volume?
This is important since volume is supposed to follow price.
If the stocks on your radar are moving higher, but without greater investor interest, it can often mean a pullback is in the near offing.
Imagine you have a water hose and a ball. If you placed the ball on top of the water hose and sprayed it upwards, the ball would be lifted by the stream of water. The more water pressure you give it, the higher the ball will go. But once you start easing up on the water pressure, the ball will stop moving higher and eventually start falling as the water pressure diminishes.
That’s kind of what happens with stocks too. The more buying pressure there is, the higher it will go. Once the buying pressure eases up, it often means a pullback is in store. The pullback can be an ordinary retracement as new buyers catch their breath or it could be a trend-changing event. So pay attention to what the volume is telling you and be alert.
A screen for helping you identify the potentially weak from the strong can be as simple as looking for 3 days (or more) of higher prices while each day it’s registering less buying pressure (lower volume).
Current Price > Price 1 Day Ago
Current Volume < Volume 1 Day Ago
What about stocks that are drifting sideways or heading lower? Sideways activity is generally a sign of uncertainty and you’ll typically see volume dry up during these times. If you see volume increasing, it’s worth it to take a second look. And while it’s true, it could be people accumulating positions on an expectation for higher prices, it could also be people exiting their positions or new bets on lower prices. And of course, if the stock is falling amid increasing volume, the chances are even greater that this is indeed what’s happening.
A screen that looks for three days down (or unchanged) with increasing volume will spot these types of stocks. Lots of action with no upside progress can often be a sign of distribution (people selling off their stock), or people getting short.
Current Price <= Price 1 Day Ago
Current Volume > Volume 1 Day Ago
You may even want to check for stocks with big price drops on much larger than average volume. If the price falls by let’s say a $1 or more for instance on 20% or more volume than average, that can also be your queue that things may be changing. Again, since volume in general should follow the price, a big price drop on big volume could be foreshadowing even lower prices to come.
Price 1 Day Ago – Current Price >= $1
There are also many other ways to use price and volume as an indicator of a stock’s future direction. But by simply applying these screens to your stocks, you could learn how to lock in hard earned profits on your winners, keep yourself out “suckers’ rallies”, and get out of losers before it’s too late.
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.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
ALL STAR TOP PICKS
With diverse broadband services connected to more homes than ever before, it's no wonder the cable and entertainment industry is taking off like a rocket. More...
The balance between inflation, interest rates and profits is a
tenuous one that must be continuously studied…especially in this
environment. The pros weigh in on this subject along with top
3. BEST OF ZACKS INDEPENDENT RESEARCH
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
Accredited Home Lenders (LEND) - Undervalued stock
Ethan Allen (ETH) - Pressure from cheaper imports
Look for Long-Term Value in Semiconductors
Chemicals & Fertilizer - Negative
A Stronger Dollar May Hurt Third Quarter Numbers
4. TRADING STRATEGIES: Model Portfolios
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 feature our 2 exclusive model portfolios on Zacks.com (All Star Analyst and Brokerage Buy List). See below for highlighted stocks currently in these profitable portfolios.
This exclusive portfolio contains only those stocks recommended by 5 or more of the best stock pickers on Wall Street based upon performance (aka All Star Analysts). Here are 2 stocks currently appearing in the All Star Analyst Portfolio.
Flextronics (Nasdaq: FLEX) is the leading electronics manufacturing services (EMS) provider focused on delivering operational services to technology companies. In July, Flextronics announced that net sales for the first quarter were $3.88 billion, representing an increase of $773.7 million, or + 25% over the June 2003 quarter. Excluding restructuring and other charges, net income for the first quarter increased 283% to $78.3 million, or 14 cents per diluted share, compared with $20.4 million, or 4 cents per diluted share in the year ago quarter. The quarterly results reflect continued industry- leading working capital management, with a cash conversion cycle of 19 days and inventory turns in excess of 11 times. In addition, Flextronics generated approximately $166 million in cash flow from operations in the first quarter. This positive momentum makes it easy to see why Flextronics has caught the attention of several All Star analysts. To continue your research on FLEX, click here.
Illinois Tool Works Inc. (NYSE: ITW) is a $9.5 billion diversified manufacturer of highly engineered components and industrial systems. The company consists of approximately 600 decentralized operations in 44 countries and employs 48,700 people. Last week the company reported an operating revenue increase of +16% for the three months ended August 31, 2004. Operating revenues for the three month period consisted of +9% growth from base revenues, a +7% increase from acquisitions, and a +3% contribution from currency translation. After two months of actual results in the 2004 third quarter, the company continues to forecast a third quarter earnings range estimate of $1.05 to $1.11 for income per diluted share from continuing operations. For full-year 2004, Illinois Tool Works continues to maintain its earnings range estimate of $4.21 to $4.35 for income per diluted share from continuing operations. Several key top All Star analysts are recommending ITW as a long-term holding and should be considered a solid investment. To continue your research on ITW, click here.
Which brokerage analysts are the best stock pickers in their field and what stocks do they recommend today? Find out here with the Zacks All Star Analyst Survey, the best way to find those rare few analysts whose recommendations are worth following. http://at.zacks.com/?id=1419
Long-term investors take note. The stocks in the portfolio must be on the core recommended list of at least three of the top 14 brokerage firms. These stocks tend to be large-cap, "blue chip" companies and is for conservative, long-term investors.
Anheuser Busch Companies Inc. (NYSE: BUD) is the leading beer manufacturer in the country. Recently the company told analysts that it is enjoying another year of strong growth in earnings per share, cash flow and return on capital. This represents the sixth straight year of solid growth. On May 31, Anheuser-Busch agreed to purchase an additional 6.9% in Harbin Brewery for a price of HK$5.58 per share. Together with the 29.1% purchased earlier in the month, Anheuser-Busch owns a total of 36% of Harbin Brewery. The international beer segment is making a significant contribution to Anheuser-Busch's earnings growth, and they are strategically well positioned for long-term growth with expanded position in China and their 50 percent ownership of Modelo. BUD also remains confident in their ability to achieve double-digit earnings per share growth over the long- term. With this strong growth from all of its major operating segments, Anheuser-Busch achieved record sales and earnings for the second quarter and first six months of 2004. Consolidated net sales increased +6.4% in the second quarter, while earnings per share increased +10.7%. BUD had an excellent second quarter and continued its track record of delivering consistent and dependable earnings growth. The company has now achieved 23 consecutive quarters of double-digit earnings per share growth. Four top brokerage firms have BUD on their Focus Lists making it the king of beers. To continue your research on BUD, click here.
Citigroup, Inc. (NYSE: C) is one of the most diversified financial institutions in the world, which is probably why 40% of the 15 largest brokerage houses recommend it as a long-term Core Holding. The company will announce its third quarter figures on October 14th. Last month Citigroup announced that it will acquire First American Bank, one of the largest independent financial institutions in Texas. The transaction is expected to be immediately accretive to Citigroup's earnings. Terms of the transaction are not being disclosed. In July, Citigroup announced that net income for the three months ended June 30, 2004 was $1.14 billion and earnings per diluted share were 22 cents. Results included a $4.95 billion after-tax charge, or 95 cents per share for the WorldCom class action settlement and increased litigation reserves related to 2003 regulatory settlements. Results also included a $756 million, or 15 cents per share, after-tax gain on the sale of the company's 20% stake in the Samba Financial Group. Excluding these previously announced items, earnings would have been $5.34 billion, or $1.02 per share, an increase of +24% and +23%, respectively. Also, without the effects of those items, underlying business dynamics were strong, with revenues increasing by 9%, despite sluggish capital markets in May and June, according to the company. With the stock’s price off its April highs and testing the $48 resistance, it might be a good time for those looking for a long-term investment to test the waters. To continue your research on C, click here.
5. ZACKS TOOLBOX
Zacks.com is first and foremost a free resource to help you make more profitable stock picks. In this space each week, we will provide insights into various tools and data points provided on Zacks.com, and how to use them to improve your portfolio’s performance.
At the end of the day, every one of us is a value investor. Meaning that we believe the stocks we own are worth more then the current price and soon enough the rest of the world will awake to the same notion. When this happens the stock will rise and we live happily ever after. If only it were that easy.
The problem is that we all use different measures to determine value. The Warren Buffets of the world pour over a company’s financials to find deep and lasting value. At the other end of the spectrum you have “the greater fool theory” where people jump on board a momentum stock with a high PE and hope that some fool will take it off your hands at an even higher price. There is also everything in between.
Emerging from this clutter is a fairly popular value metric that continues to gain traction with investors; the PEG Ratio. The PEG builds upon the popularity of the Price/Earnings ratio and goes one step further to try and determine how much you are paying for each unit of earnings growth. When you stop to think about it, that is the essence of company valuations. What are you willing to pay today for a company’s future earnings stream?
The PEG is defined as the P/E of a stock divided by its 5 year projected growth rate. The general rule of thumb is that a PEG of 1.0 is fair value. Below that is undervalued, and above that is overvalued. What you will discover is that the PEG helps to dispel the myth that growth stocks cannot also be value stocks. Let’s look at 2 examples.
Stock ABC is a high flier with projected growth of 30% a year. Yet the stock is only trading at a P/E of 24. That means we have a PEG ratio of 0.8, which is considered undervalued.
Stock XYZ has a P/E of only 15 (less than the 24 for ABC), however it is only estimated to grow earnings 10% a year. This computes to a 1.5.
Given the construct of the PEG ratio, it appears that Stock ABC is a better value proposition since you are paying less for the estimated future earnings then for XYZ. This, of course, is an oversimplification of the situation as many things could happen over time to change the perceived values of these companies. However, it should be plain to see that stocks with PEG’s of 1.0 or lower provide a great starting place to identify stocks with great profit potential.
What to do Next?
Profit Tracks: PEG Strategy – The stocks on this list combine the benefits of a low PEG, Zacks Rank of 1 or 2 (Strong Buy or Buy) and a solid Average Brokerage Recommendation. How powerful is that? Since 1/5/01 these stocks have generated a total return of 373.8% versus –14.5% for the S&P 500. Discover all the stocks from the PEG Strategy at: http://at.zacks.com/?id=1534.
Custom Stock Screening: Zacks.com offers one of the most robust free stock screeners on the web. Go to http://at.zacks.com/?id=1535 . Once there you will see a drop down box labeled “Select Category”. 2/3rds of the way down the list you should select “P/E Ratios” category. After that you will see a field to screen by the PEG Ratio. After filling out that field, chose any other investment parameters to create a screened list of stocks that meet your needs.
Full Company Report: Find the PEG ratio for any stock you want on Zacks.com through the “Full Company Report”. On every page of Zacks.com you will see a ticker entry box in the upper left hand corner of the site. Put in any stock symbol, then select “Full Company Report” from the drop down box. Then press “Go”. This report has most of the main company metrics a fundamental investor could dream of. About half way down the page on the left side is a section entitled “P/E”. There you will find the current PEG ratio for any stock you are following. To kick start this process, click here for the Full Company Report for Microsoft.
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, 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.
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,
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 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.