Thursday - August 4, 2005

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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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From a trend following perspective, the bulls have control over the stock market, which is likely to carry forward into the month of August. What none of us know is how long this trend will continue in light of extreme overbought conditions and rising oil prices.

Since the attacks on London, the Federal Reserve appears to have seen the need to shore up our economy. In the week of the attack, M2 was only growing at 1.3%. Since early July M2 has sharply increased and is now growing at 4.2%.

Dennis Slothower thinks this attack on London has reminded the Fed what happened to our economy following 9-11, which went into a stall following the attacks. As a result, the Fed is injecting capital reserves just in case terrorists strike in the U.S.

With recent growth in the money, growth investors have taken heart. Consequently, market leadership is looking much better, with the OTC indexes showing the strongest relative strength.

More. . .

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FEATURED EXPERTS Continued...

Slothower thinks crude oil speculators have also taken notice of the increase in the money supply and have been encouraged that perhaps the economy isn’t going to weaken all that much if the Fed is injecting liquidity into the monetary system as it did following 9-11.

September is only a month away -- oil speculators could also be hedging ahead the possibility for an anniversary attack in the U.S. In any case, oil prices have rallied to $62 again.

The combination of a rising money supply, Saudi King Fahd’s death, Iranian threats to restart uranium enrichment program, and problems at several US refineries may push crude oil beyond $62 to test $70 a barrel during the month of August.

This bodes well for the oil sector again, especially if the Fed continues to increase the money supply, which of course will only stimulate growth in the US and correspondingly increase the demand for oil.

In the meantime, the stock market is grossly overbought on an intermediate basis. But traders aren’t very motivated to sell with the Fed injecting liquidity.

The stock market is likely to stretch a bit higher in the first week or two of August but as September gets closer the odds favor an intermediate correction. September is traditionally the weakest month of the year. If oil prices climb to $65 a barrel or higher investors will be faced with another high-risk market environment.

With oil prices now at $62 a barrel again and the market still at extreme overbought conditions, Slothower recommends you continue to keep high cash values in your portfolio.

 
About Dennis Slothower’s Stealth Stocks newsletter

During my 25-year career as a money manager, I’ve tested hundreds of market indicators. I’ve fine-tuned my strategy using specific indicators that work together to predict the market with incredible accuracy and find stocks flying under the radar screen. Indicators are pointing to a strong bull market in 2005. I don’t want you to miss a single day of what I’m convinced will be a spectacular bull market. Learn more about this newsletter and free trial offer at: http://at.zacks.com/?id=321.

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MORE FEATURED EXPERTS...
 

b) Market Bolstering Editor’s Portfolio

Charles Carlson says the stock market’s strength has been good news for his Editor’s Portfolio. Read about three DRIPs that are on the move. More...
 

c) Semi Strength Continues

Charles Norton and Allen Gillespie discuss the burgeoning semiconductor space. Read about the stocks they highlight. More...
 

d) Losing Momentum

Despite positive earnings news, Gregory Spear says earnings growth for most of the 500 largest companies in the U.S. has slowed. More...
 

e) Trade Winds

Ron Rowland says signs of tension between the U.S. and its import/export partners are reason for caution. More...
 

f) The ISM Manufacturing Report was `HOT`

Pricing power appears to be favoring buyers, but Richard Rhodes wonders how long it will last. 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=637.

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BULL OF THE DAY

SeaBright Insurance (SEAB) - Competitive Advantages.
Full Zacks research report at: http://at.zacks.com/?id=1412.

 
BEAR OF THE DAY

Tele Centro Oeste, ADR (TRO) - Losing Market Share.
Full Zacks research report at: http://at.zacks.com/?id=1413.

 
ZACKS ANALYST INTERVIEW

Some Nuggets in Mining Stocks
We expect that copper demand will outstrip supply due to mine depletions in Chile. More...

 
EARNINGS & SECTOR UPDATE

Energy, Industrials and Telecom have the Most Positive Surprises
Nick Raich says it was another good quarter, with average earnings growth above expectations so far. 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…

 
Profit Tracks: Earnings and Margins

This Profit Track goes to the heart of fundamental investing by finding companies with healthy earnings. The main ingredients are the search for Earnings Growth and Net Profit Margins. Then for good measure we make sure earnings estimates are moving higher which is a strong indicator of future performance and that brokerage firms are positively rating the stock.

Earnings are the single most important metric for a company. Combine that with a healthy Net Profit Margin and you find a screen that has generated a return of +362% in the last 4+ years compared to -4.8% for the S&P 500.

 
Here are four stocks that make the grade for the Earnings and Margins Profit Track:

Astec Industries, Inc. (NASDAQ: ASTE), a Zacks #1 Rank (Strong Buy) stock, generated profit growth in excess of 180% in 2004. In 2005, the company continues to display strong momentum. It’s recently reported second quarter earnings totaled 49 cents per share versus 31 cents a year prior and ahead of the consensus estimate by almost 20%. Astec Industries also noted that net sales from continuing operations increased 17% versus to the second quarter of 2004. To continue your research on ASTE, click here.

Community Bancorp, Inc. (NASDAQ: CMBC) recently posted second-quarter earnings per share of 51 cents, which improved on last year’s 42 cents and topped the consensus estimate by about 4%. The company mentioned that it experienced continued robust loan demand during the second quarter. With a net margin of 20% and 2004 earnings growth of approximately 20%, Community Bancorp appears to be a healthy company that is generating profits. To continue your research on CMBC, click here.

Ennis, Inc. (NYSE: EBF) is one of the largest private-label printed business product suppliers in the United States and a Zacks #1 Rank (Strong Buy) stock. The company recently reported fiscal first-quarter earnings of 41 cents per share, surpassing last year’s 27 cents and exceeding the consensus estimate by about 17%. Net sales were $149.1 million compared to $65.7 million in the comparable quarter last year. This successful quarter shows that EBF is continuing to record strong growth following a 23% rise in 2004 full year profits. To continue your research on EBF, click here.

USA Truck, Inc. (NASDAQ: USAK) recently stated that its second quarter represents its strongest performance in six years, as it produced record base revenue and net income. Per share earnings totaled 45 cents, eight cents better than analysts were expecting. This strong performance is not surprising for a company that boasted over 119% earnings growth in 2004. To continue your research on USAK, click here.

 
To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=1365.

All the Profit Track strategies were created and backtested using the Research Wizard software from Zacks Investment Research. If you like this screening strategy, but want to narrow down the list of stocks and even improve the performance, then you should start a free trial to the this powerful stock picking tool. Learn more about the Research Wizard and Free Trial offer at: http://at.zacks.com/?id=1993

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Here you`ll discover a Zacks #1 Ranked stock hand selected by Ben Zacks to outperform the market over the next 30 to 90 days. This week`s Timely Buy is…
 

ADC Telecommunications (ADCT)

ADC Telecommunications is a leading global supplier of broadband network equipment, fiber optics, software, and systems integration services that enable communications service providers to deliver high-speed Internet, data, video, and voice services to consumers and businesses worldwide.

The emerging fiber-to-the-premises (FTTP) market will be a catalyst for long-term growth. FTTP was awarded a significant portion of Verizon’s FTTP business, and the other Baby Bells also plan to invest heavily in this area, which bodes well for the company. Apart from winning an order for a portion of Verizon’s passive components requirements, ADC has signed a similar contract with FTTH Communications, a small Minneapolis-based company. Though the near-term impact on revenue may not be substantial, the sector represents an attractive long-term growth opportunity.

This strong spending on Fiber-To- The-Premises (FTTP), especially by Verizon is boosting revenues for ADCT, and continued investment on the technology should benefit the stock for the foreseeable future. Management appears upbeat and visibility has improved in their business segments.

The company has significantly raised their guidance for their third quarter ending 7/05. They expect revenue to come in between $300M and $310M, above the $270M estimate. Earnings estimates have jumped substantially for this year and next. 90 days ago analysts were looking for 77 cents EPS for the year ending 10/05 and $1.09 for the following year. Current estimates call for 94 cents and $1.21 respectively. Third quarter earnings will be released on Tuesday, August 30 after the closing bell. The stock has been running up, so the market expects a great report.

Overall, we see a beaten down telecom equipment sector that is showing signs of life. Having completed the necessary restructuring and cost-cutting activities, the company is in a good position to benefit from the current rebound in telecom capital spending. ADCT is one of the players experiencing very nice earnings momentum along with a reasonable valuation. The stated long-term growth rate is 13.29%, but this could prove to be conservative if the telecommunications business continues its rebound. We very much like ADCT given their strong earnings momentum and being in a sector that is coming back into favor.

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With gasoline prices reaching record highs across the country, many investors might think the transportation industry is running on empty. But that’s not exactly the case. The space is primarily composed of trucking and railroad companies, which currently enjoy a Zacks Industry Rank of 2.62 and 3.00 respectively. According to Nick Raich’s “Weekly Earnings and Sector Update,” those ranks place these spaces 35th and 87th out of more than 200 industries. While there are certainly opportunities for savvy investors in this industry, there are also a number of lingering challenges that could stall your portfolio’s momentum if you’re not careful.

The trucking and railroad segments are closely tied to the economy, which is not all together a bad thing at the moment since the overall environment is rather favorable. Therefore, these segments are expected to perform in-line with the growth in the economy. But there are still ample challenges that must be confronted, such as rising costs from increased insurance, security, and fuel expenses, which will keep pressure on the space and possibly offset some of the forward progress

Take the trucking segment for example, which has experienced rising revenues in the recovering economy. This presents opportunity for investors that make smart picks. However, Zacks Equity Research analyst Claudio Freitas, CFA says the space is also experiencing a shortage of drivers. Furthermore, cost increases in freight equipment, insurance and diesel fuel continue to pressure margins.

As for the rail segment, Freitas expects the space to see flat results in the near-term. “While we expect growth in railcar loadings to improve in line with the economy, we do not expect much in the way of price appreciation since prices already reflect improved margins,” he said. But rising locomotive lease rates and a pickup in coal shipments are positives.

There are several other segments in the transportation industry, including travel management and tanker freight, but the above-mentioned spaces offer a broad look of the arena. While the industry continues to face hurdles, the Zacks #1 and #2 Ranks, along with Zacks analysts, show that there is room for investors to make headway in a space that many have ignored. Be careful before venturing in this industry, or any industry for that matter, but don’t dismiss this space as a lemon.

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PREVIOUS WEEKLY COMMENTARIES….
 

SCREEN OF THE WEEK

The Difference Between Good Stocks and Great Stocks

Kevin Matras goes over two Screening Strategies that go beyond your ordinary Earnings screens: http://at.zacks.com/?id=1410.
 

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 Rank (Strong Buy) List has produced the following results for investors:

• +32.8% average annual return since 1988 versus +11.9% for S&P 500
• Outperformed S&P 500 in 16 of the last 17 years
• +43.8% total return from 2000 to 2002 – the worst bear market in over 60 years.
• +74.7% in 2003 and +28.8% in 2004

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, by visiting: http://at.zacks.com/?id=1424.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=1423.

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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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Stephen Reitmeister

Editor-in-Chief
Zacks Profit from the Pros

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