Wednesday - February 2, 2005
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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.
Forecasts for the market in 2005 are ranging from a melt-up to a meltdown. There is little or no consensus among market strategists for 2005. This is unusual! Donald Rowe had always believed that most of the “experts” are guessing or just repeating the “company line” to facilitate investment banking and brokerage fees.
Economic booms and bull markets regularly unfold during the last half of the decade, during the five to nine years (e.g., 1995 to 1999; 1915 to 1919; 1925 to 1929). Recessions and bear markets unfold during the first half of the decade during the zero, one and two years (e.g., 2000, 2001, 2002). No one can explain this repeating phenomenon; it just happens with astonishing regularity.
With only a few exceptions, the fifth year of each decade has been the best performing year of the decade. Also, years ending in five have never shown a loss over the past 120 years. It is Rowe’s strong belief that 2005 performance will mirror the market performance of 1995, when the Dow was up 33.5 percent.
The market performance in 1994 and 2004 were very similar because the Fed was normalizing interest rates in both years. Between February and December 1994, the Fed moved the Fed funds rate from three percent to six percent using half point increases. During 1994, the Dow Average remained in a trading range between 3,600 and 3,900. Wall Street knew that a Fed funds rate at three percent was simply too low given inflationary pressures and bond yields in 1994.
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Ten years later in early 2004, the Fed, once again, began normalizing the Fed funds rate by raising the interest rate from 1.0 percent to 2.25 percent by December of 2004. The bond market pros expect the Fed to inch the Fed funds rate up a little further to possibly three percent. But, the Fed’s work is almost complete.
In addition to the ten-year stock market cycle for booms, busts and the fifth-year of-the-decade phenomenon, there is also a propensity for the fourth year of the decade to be a trading- range year.
After a trading-range market in 1934, the Dow soared 38.5 percent in 1935. The Dow soared 33.5 percent in 1995 after a trading-range market in 1994. While space doesn’t permit charts, 1984 was a trading-range year for the Dow. In 1985, the Dow soared 27.7 percent.
The point of this commentary is stock prices always explode in the fifth year of the decade after being held down by a trading-range market in the fourth year. After 2004’s trading range market, 2005 should not be an exception. The current investment emotion is fear: fear of higher interest rates and higher mortgage rates. Thank you, Mr. Greenspan.
The stock market will soar in 2005, but not until the Fed stops putting inflationary fears into stock market investors. The bond market, a much smarter group of people, knows that inflation is tame because long-term interest rates fall every time the Fed lifts the Fed funds rate another notch to “fight inflation.”
Don’t misunderstand Rowe. The Fed is acting properly, wisely and prudently to keep long-term interest rates low. Currently, there is too much liquidity, which will drive stock prices to relentless new highs during the greatest economic boom and bull market in U.S. history between now and 2009.
Nextel Partners, Inc. (NASDAQ: NXTP) has the exclusive right to provide digital wireless communications services using the Nextel brand name. Nextel Partners offers its customers the same fully-integrated digital wireless communications services available from Nextel including digital cellular, text/numeric paging and Nextel Direct Connect - a unique digital two-way radio feature - all in a single wireless phone. Nextel Partners' customers can seamlessly access these services anywhere on Nextel's or Nextel Partners' all-digital mobile network.
Park-Ohio Holdings Corp. (NASDAQ: PKOH) operates through two segments, Manufactured Products and Logistics, which serve a wide variety of industrial markets. Manufactured Products designs and manufactures a broad range of high quality products engineered for specific customer applications. The principal customers of Manufactured Products are original equipment manufacturers and end-users in the automotive, railroad, truck and aerospace industries. Logistics is a leading national supplier of fasteners (e.g., nuts, bolts and screws) and other industrial products.
Meridian Bioscience, Inc. (NASDAQ: VIVO) is a fully integrated life sciences company that manufactures, markets and distributes a broad range of innovative diagnostic test kits, purified reagents and related products and offers biopharmaceutical enabling technologies. Utilizing a variety of methods, these products provide accuracy, simplicity and speed in the early diagnosis and treatment of common medical conditions, such as gastrointestinal, viral, urinary and respiratory infections.
A SUPER ECONOMIC BOOM IS COMING! Momentum investor, Donald Rowe brings decades of experience and helps you utilize The Wall Street Profit System 2005TM to double your money every three years!. Learn more about this newsletter and free trial offer at: http://at.zacks.com/?id=380.
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Bill Martin and Matt Ragas liked what they saw in RealNetworks’
fourth quarter results. Find out why these experts believe this
company provides good exposure to the rapidly-growing digital
music, gaming and `Net video space. More...
Dennis Slothower explains that the market is not focused on
earnings, but on domestic and international politics. Find out
why this mutual fund expert is staying defensive in this
John Reese’s Hot List has performed well in a very difficult
market environment. Discover how far the Hot List has advanced
versus the market and read about a pair of additions to this
expert’s portfolio. More...
What does Paul McWilliams mean when he references his
‘convergence theme?’ Learn about the close link between
semiconductors and convergence, and then discover how Texas
Instruments fits into the equation. More...
Ian Wyatt continues to believe there`s potential in PetMed
Express, even though the company had a difficult 2004. Read
about its third quarter report. 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 P/E’s for Stocks on the Move
Studies have shown that the best stocks over the past decade saw their P/E ratio’s increase by more than 100% from their breakout point. The good news is that you can use screening tools to catch these stocks early in their breakout cycle and ride them up for big gains.
Here’s an example to explain this scenario. Say a stock price is at $20 and its earnings over the last 4 quarters = $1 per share. Then its P/E ratio will be 20. ($20 divided by $1 = 20).
If the earnings rise (to $1.25 for instance) and the stock doesn’t, the P/E ratio will fall. ($20 divided by $1.25 = 16)
If the stock rises and its earnings stay the same, the P/E ratio will increase. If the stock is at $30 and its earnings remain at $1, ... the P/E will have increased to 30 as well. ($30 divided by $1 = 30)
But now let’s say next quarter earnings come out and its 4 quarter combined numbers show the EPS at $1.25 and the stock has also increased to $30. The P/E ratio will now be 24. ($30 divided by $1.25 = 24 -- a 20% increase in its P/E ratio)
The interesting dynamic is that as earnings increase, so should prices. And as forecasts for continued earnings arrive, the demand for the stock should continue to send prices even higher.
This increase in price and earnings is an ideal way to spot stocks in favor and that are anticipated to continue to trend higher. And instead of looking for nominal P/E changes, screen for P/E increases in excess of 20%, which should provide the greatest upside potential.
Just like a 20% increase in the price of a stock can alert you to a new potential uptrend, you can also use a 20% increase in the P/E ratio to alert you to potentially significant price and earnings events too.
When we first published this screen in Jan. of 2003, the screen I was using was:
Current P/E’s that are at least 20% higher than their P/E’s from 3 months ago (but not greater than 100% higher).
And the stocks also had to be over $10 and have a minimum daily volume of 100,000 shares traded.
That screen produced approx. 50 stocks.
I also decided to run that screen over a historical period too, looking for stocks that had seen a 20% or more increase (but not greater than a 100% increase) in their P/E ratio over a previous 3 month period. (That run produced 54 stocks.) I then researched their price changes over the next 3 month period and found that 88% of the stocks on that list (48 stocks), saw their prices rise while only 6 stocks saw their prices fall. (The average price rise was 28%.)
It was a very interesting study.
In follow-up articles, I added some additional parameters to the screen; most notably, filters to ensure that all of the stocks saw an increase in their earnings.
I wanted to see an increase in the most recently reported Quarterly Earnings (recent over last) and an increase in the Quarter’s Earnings before that (last over previous).
And for good measure, I wanted last year’s EPS growth to be greater than the previous year, along with projections for this year’s growth to be greater than last.
In this week’s screen, they’re all combined, which includes trading at $5 or higher three months ago with a minimum daily volume of at least 100,000 shares traded.
(This screen by the way is available in the Research Wizard.)
Out of that list, there are 25 companies that have already reported 2004’s earnings. Here’s a few a few of them that look poised to breakout;
I have found this to be an excellent screen in helping me find stocks that are on the move with expectations of continued improving fundamentals.
Use this screening strategy alone or with other criteria to help spot winning stocks BEFORE they become BIG winners!
Most screeners don’t have historical P/E ratios (or other historical measures), but the Research Wizard stock picking and backtesting program does. Use it today, and see what new stocks you should be looking at. Click here to learn more.
All the Screen of the Week strategies are created and back-tested 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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ALL STAR TOP PICKS
The computer software industry finished 2004 on a strong note,
and the All Stars highlight a few companies that could
capitalize on improving trends in 2005. More...
After a rocky start for the market in 2005, one might expect the bulls to hide their horns. Examine the case of one ardent bull and two of his top buys. 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
Jacobs Engineering (JEC) - Work Projects Re-Appearing
Sierra Wireless (SWIR) - Market Share Losses in Core Segment
Look Toward Copper for Mining Metals
Insurance Industry May Consider Mergers
2004 Earnings are Looking Good
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 one of our exclusive model portfolios on Zacks.com (All Star Analyst). 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.
Caterpillar, Inc. (NYSE: CAT) Earlier this month, members of the United Auto Workers agreed to a six-year contract with Caterpillar, evading a strike. The deal also ended an uncomfortable situation where workers at four plants stayed on the job without a contract as the two sides negotiated. Such news should give Caterpillar a shot in the arm as it looks to improve upon its third quarter numbers, in which earnings per share and revenues improved upon year-ago totals. The company said its entire value chain is responding to the strongest recovery it’s every seen across the broad spectrum of markets it serves. To continue your research on CAT, click here.
Carnival (NYSE: CCL) recently announced an agreement with Italian shipbuilder Fincantieri for the construction of a new 112,000-ton vessel for its Costa Cruises unit. According to the company, continuing to invest in the Costa brand and introduce new vessels to its fleet is key to maintaining Costa’s preeminent position as Europe’s number one cruise line and to ensure Costa’s fleet in the most modern in the European market. The All Stars like that Carnival is building for the future and are encouraged for the company’s future. During its fiscal fourth quarter report from December, Carnival said it believes the strength of its 2005 advance bookings, along with the continued strength in overall leisure travel, builds confidence that 2005 will be a good year. To continue your research on CCL, 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.
American International Group, Inc. (NYSE: AIG) increased the quarterly dividend on its common stock to 12.5 cents per share from the previously declared 7.5 cents, representing an increase of +66.7%. The dividend is to be paid on March 18th to shareholders of record on March 4th. The company said the increase was in recognition of its superior financial position and its confidence in its strategic plans for future growth. In late December, American International Group announced that early reports from the countries impacted by the earthquake and tsunami tragedy suggest that the company will not have significant business exposures or losses. AIG remains high on three brokerage firm’s Focus Lists. To continue your research on AIG, click here.
Medtronic, Inc. (NYSE: MDT) may face some challenges in its industry, but the company still expects earnings per share growth of +14% to +16% for its fiscal year. Furthermore, Medtronic expects revenue growth at the low end of its +12% to +14% range, generating revenue of at least $10 billion. It barely fell short of Wall Street’s earnings per share expectations for its fiscal second quarter, but brokerage firms are paying closer attention to the longer term, as Medtronic expects a number of positive events that occurred during the quarter to help fuel growth in the second half of its fiscal year. Medtronic is an innovative company at the forefront of its industry, which is keeping this company as a Core Holding for several top brokerage firms. To continue your research on MDT, 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.
Perhaps the most often used (and abused) stock research item is the Average Broker Recommendation (ABR). Let’s dig into the ABR and learn how to employ this information to make better investment decisions.
What is the ABR? It is a simple statistic that tries to synthesize all Wall Street research into an easy to digest form. Let’s take a look at the example of the ABR for General Electric (GE). Currently there are 20 brokerage firms that have a rating on GE with 11 Strong Buys, 5 Buys, 4 Holds and 0 Sells. Now we layer on a weighting system from 1 to 5 with Strong Buy being a 1. This adds up as follows
11 Strong Buys x 1 = 11
34 Total Points divided by 20 brokerage firms with ratings = 1.70 ABR
You may notice that Zacks.com lists the ABR for GE as 1.65 rather than 1.70. The reason for the difference is that some brokerage firms use a 7 point rating scale rather than a 5 point scale used in the illustration above. The ABR of 1.65 shown on Zacks.com takes into account the 7 point scale. So why only show the breakdown according to the 5 point scale on the web site? Unfortunately the 5 point scale is what most people are accustomed to from usage on virtually every investment web site.
Back to the real point. On the surface an ABR of 1.70 sounds pretty good as it is saying that the average brokerage firm believes that GE is somewhere between a Strong Buy and a Buy. However, before you place your life savings in this stock you may want to read this next paragraph…
The ABR of a stock is virtually worthless in helping you pick good stocks. How’s that? The usual assumption by investors is that the better the ABR (closer to 1) the more likely they are to profit with the stock. However, our studies over the years show a very minor correlation between ABR and results. In fact, when the market is going poorly, the stocks with the best ABR’s dramatically underperform the stocks with the worst ABR’s.
We don’t know the exact reason why this is the case, but the general assumption is that when everyone on the street is recommending a stock, then it will probably be priced too high and more likely to fail miserably on any bad news. Conversely, an out of favor stock will probably already be trading at a steep discount and any turnaround will create a nice bounce for the stock.
So, now you’re probably thinking to yourself the key to eternal happiness is to find stocks with the worst ABRs. Unfortunately we don’t recommend that either because over the long haul these stocks will underperform the average stock (meaning that both the best and worst ABR stocks underperform the market).
The good news is that we have indeed found an effective way to invest using the ABR. Our research has uncovered that stocks with the biggest positive change in ABR over the last month will outperform the market. We call this the “Piggyback Strategy”. Here are the results of the test for the 10 year stretch from April 1992 to March 2002
Top 10% of ABR Changes = 18.3% average annual return Average Stock = 10.7% average annual return Bottom 10% of ABR Changes = 0% average annual return. There are some great free resources on Zacks.com to take advantage of these changes in ABR to find some potential winners as well as stocks to avoid.
Pre-Defined Screen: Best Change in Avg. Broker Rec 1 Week http://at.zacks.com/?id=1501.
Pre-Defined Screen: Worst Change in Avg. Broker Rec 1 Week http://at.zacks.com/?id=1502.
Profit Tracks: Upgrades and Revisions Strategy. These are stocks that are enjoying both positive estimate revisions and brokerage rating upgrades. This strategy has handily beat the market over the last 4 years. Learn more at: http://at.zacks.com/?id=1503.
Analyst Recommendations Research Report: This research report gives details on the break down of recommendations for any stock. Here is a link to view the report for GE. Once there you can enter any ticker symbol to get the Analyst Recommendations report for the stock you want. http://at.zacks.com/?id=1504.
Want more insight on the Piggybacking Strategy? Mitch Zacks covers it in detail in his critically acclaimed book “Ahead of the Market”. To learn more about this book and special 30% discount go here: http://at.zacks.com/?id=1505.
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.
FREE PORTFOLIO TRACKER
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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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