Wednesday - October 20, 2004
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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.
Hold Fast to Current Positions-From October 14
From a fundamental perspective, the outlook for stock prices continues to look good. On September 29, the annualized growth rate for second quarter U.S. Gross Domestic Product (GDP) was revised higher to 3.3% from the preliminary figure of only 2.8%. Meanwhile, Business Capital Expenditures— a leading economic indicator—have risen during each of the past four quarters, and the housing market continues to show strength as sales of new homes rose to an annualized rate of 9.4% in August compared to the same period a year ago.
Although threats of terrorism continue to be reported throughout many parts of the world, U.S. consumers seem to not be frightened by such threats, as air traffic on the nation’s major airlines has risen during each of the past five months. During September, United Airlines’ traffic rose 11.1%, as compared to the same period a year ago; American Airlines’ traffic rose 9.4% overall, with international traffic up 17.4%; and US Airways’ traffic rose 6.7%.
The ongoing robust economic environment in the U.S. might best be illustrated by recent freight transportation statistics, as freight volume on railroads set all-time records during each of the past two weeks, according to the Association of American Railroads.
More. . .
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Given that inflation does not seem to be a problem at this time, based on recent readings for the core rate of the Consumer Price Index, short-term interest rates seem poised to remain at low levels, thus fueling continued improvements in the overall economy and in stock prices. Despite the recent selling squall, it remains, in Dan Sullivan and his team’s opinion, very much a bull market until he sees evidence to the contrary. What he finds encouraging is the fact that the high relative strength stocks that make up the Actual Cash Account, as well as the Traders Portfolio, have been giving ground grudgingly as the overall market pulls back. This represents a big plus for the market because, historically, the high relative strength stocks have, in the majority of instances, been the last group to fall.
eBay (NASDAQ: EBAY) recently announced that it has closed its tender offer for the remaining outstanding shares of South Korea’s Internet Auction Co. Ltd. for about $37.4 million. The transaction takes eBay’s ownership stake from 97% to 99.7%. South Korea boasts one of the world’s highest broadband penetration rates, making it a key international growth target for eBay and other U.S. Internet companies. In addition, eBay’s PayPal division is seeing big opportunity in China and is looking to set up operations there. China, which is still predominately a cash-only country, is seen as a strong area of potential growth for a variety of online merchants.
Gilead Sciences, Inc. (NASDAQ: GILD) has announced a collaborative agreement with Genelabs to develop Genelab’s novel Hepatitis C compounds. Genelabs will lead research efforts while Gilead will lead development and commercialization efforts for the novel nucleoside inhibitor of HCV polymerase. Gilead will pay Genelabs a nonrefundable $8 million upfront payment and will provide research funding over the next three years.
JC Penney (NYSE: JCP) posted a 2% increase in September sales at department stores open at least one year. Total sales at its department stores rose 2.5% to $1.51 billion in the five weeks ended Oct. 2. Sales at its catalog/internet arm rose 3.3 JC Penney expects third quarter earnings to be at the high end of its outlook of 35 cents to 40 cents per share.
TEVA Pharmaceutical (NASDAQ: TEVA) has announced FDA final approval for three of its drugs. The approved drugs are: a generic version of Pfizer’s epilepsy drug Neurontin; a generic of Schering’s Ribetal® capsules; and a generic of Solvay’s RowasaTM enema. All three products have begun shipping.
YAHOO! (NASDAQ: YHOO) third quarter profit nearly quadrupled. The company posted earnings of $253.3 million, or 17 cents per share, for the three months ended in September, up from net income of $65.3 million the same time last year. Yahoo’s third quarter profit included a $191 pre-tax windfall that Yahoo realized by selling part of its stake in Internet search engine rival Google. Yahoo expects fourth quarter revenue to rise as high as $760 million during the three months ended in December.
Ask yourself this simple question, Do the people you trust for investment advice put their own money on the line? Chartist editor, Dan Sullivan does. With over 33 years publishing his highly successful stock newsletter, he ranks as one of the most experienced and best performing financial advisors in the country.
Learn more about this newsletter and free trial offer at: http://at.zacks.com/?id=352.
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Gregory Spear believes investors should take advantage of high
energy prices and focus on oil-related companies. Learn how to
invest in the oil patch and discover some of this expert`s
favorites from the field. More...
Disciplined investors can weather short-term fluctuations and
achieve solid returns over long periods of time, according to
Jim Oberweis. Learn about this expert`s excellent long-term
results, and then read about several selections from his current
Ken Trester and his team expect a market bottom this month that
could lead toward higher stocks in November. Learn how to make
money and insure your investments with a trio of option trades
from this team of experts. More...
Yahoo’s earnings report helped a couple of Steve Harmon’s
watchlist stocks. Learn why this expert believes investors
should hold their ground with a tight stop loss, and then
discover some up-and-coming technology stocks that you may be
hearing a lot from in the near future. More...
Ed Bugos reviews a recent proposed deal in the gold markets and discusses why it reveals value in a top gold pick of his. 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
“Increasing Cash Flows”
In this week’s screen, I’ll focus on another winning screening strategy that is both easy to build and easy to use with our Research Wizard program.
This screen uses Cash Flows (and identifies an increase in Cash Flows) as one of the main components in our strategy.
Cash Flow is considered, by some analysts to be a company’s most important financial barometer. Since Cash Flow pays the bills and keeps the company operating, many look to it as the best measure of a business’s profits.
Zacks Rank = 1 (The Zacks Rank has proven to be one of the best, if not THE BEST rating system out there. Only stocks with a ‘Strong Buy’ from Zacks are included.)
Average Broker Rating = 1 (Since broker ratings are typically skewed wildly to ‘Buy’ and ‘Strong Buy’, I’ve decided to cancel out any company where the brokers aren’t fully on board.)
Current Cash Flow >= 5 Year Avg. Cash Flow ($/share) (This will produce only those stocks that are exhibiting Stable or Increasing Cash Flows with respect to their 5 Year Avg. Cash Flow numbers.)
And all of the stocks have to be trading at >= $5 share.
I ran a total of 12 tests (4 tests ea. over 2002, 2003 and 2004), using a four-week rebalancing period. Each run was rebalanced over a different set of four-week periods to eliminate coincidental performance and to verify robustness.
In 2002, this strategy showed an average annualized gross return of over 44% with an average win ratio (winning periods vs. total periods) of 68%.
Last year in 2003, it showed an average annualized gross return of over 62% with an 80% win ratio. And so far this yr. (2004, YTD -- thru 10/1/04), the average annualized return is up nearly 15% with a 63% win ratio.
This screen typically produces on average of 7-9 stocks per run.
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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The machinery industry looks poised for a strong third quarter,
and the All Stars have four recommendations that can get your
gears turning in a profitable direction. More...
ALL STAR TOP PICKS
Simple growth, value, and momentum approaches are sometimes not enough in a market as complex as this. Discover how the pros' hybrid strategiescan work for you. More...
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
Lamar Advertising (LAMR) - Demand Up for Local Ads
Tower Automotive (TWR) - Hurt by Auto Production Cuts
Restaurants Face Tough Commodity Pricing
Supply Deficits Helping Metals
Materials and Technology Sectors Leading the Way in Q3
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.
Illinois Tool Works Inc. (NYSE: ITW) The company will hold its 2004 third quarter conference call today, October 19, 2004. Last month 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.
Cytyc Corporation (NASDAQ: CYTC) Earlier this month the company ranked #5 on Forbes Magazine's 2004 list of the 200 Best Small Companies. In July, Cytyc announced results for the second quarter ended June 30, 2004. Revenues for the quarter rose +30% to $99.5 million compared to $76.7 million for the second quarter of 2003. Diluted earnings per share increased to 19 cents compared to 16 cents reported in the second quarter of 2003. Net income was $23.4 million, or 21 cents per diluted share. Excluding the nonrecurring charge of $19.1 million for acquired in-process research and development related to the acquisition of Novacept, net income for the six months ended June 30, 2004, was $42.5 million, or 37 cents per diluted share. The company's successes have attracted the attention of several All Star analysts, and have them singing the company's praises to investors. To continue your research on CYCTC, 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.
Tyco International Ltd. (NYSE: TYC) The company will hold its 2004 third quarter conference call today, October 19, 2004. Last month 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 TYC, click here.
Wal-Mart Stores, Inc. (NYSE: WMT) is a leading discount retailer. Earlier this month Wal-Mart reported a modest 2.4% gain in same-store sales for September. High gas prices, hurricanes in Florida and unseasonably warm weather in the Midwest affected sales. However, the nation’s leading retailer still managed net sales, for the five-week period ending October 1, 2004, of $25.739 billion, an increase of +10.8% over the $23.239 billion in the same five-week period in the prior year. The company also announced that it plans to open or expand 40 to 45 discount stores and 240 to 250 Supercenters in the United States next year as the world's largest retailer continues an aggressive expansion plan. The total expansion will result in about 55 million square feet of new retail space, an +8% increase above the 655 million square feet the retailer estimates it will have at the end of this fiscal year. Several top brokerage firms are optimistic about the holidays and the new products that will bring customers into Wal-Mart even thought the company believes that third-quarter earnings will most likely fall at the lower end of its earlier forecast of 52 cents to 54 cents a share. Although the company is cautious, several top firms are still recommending Wal-Mart as a Core Holding. To continue your research on WMT, 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?Here are some great free resources on Zacks.com to discover stocks with low PEGs.
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, here is the Full Company Report for Microsoft at: http://at.zacks.com/?id=1504.
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.
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Regards and Happy Investing,
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*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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