Wednesday - August 17, 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.
Greenspan & Co. raise Fed fund rates to 3.5% by 25 basis points for the 10th consecutive time. The nation’s central bank stayed by its “measured” pace, with more increases to come. The language guarantees that the Fed’s monetary policy committee will raise rates by another 25 basis points during the next meeting on September 20 and November 1.
The Fed is showing no concern about the effect of rising oil/gas prices noting that “core inflation” has been relatively low in recent months. Could it be that the Fed will raise rates till Federal funds reach 4.25%? Since inflation is not a major problem, their intent is to shake out the speculative froth within the housing markets that has been fueled by relatively low long-term rates. The potential housing bubble, sloppy lending by institutions, rising prices of gold, and a boost in wages are reasons for the Fed’s justification to keep raising rates.
The Fed’s campaign is creating an investment rarity: a flattening yield curve. A phenomenon that could squeeze financial institutions such as banks and investment banking/brokerage firms. A flattening yield curve is detrimental to profit models for banks where they borrow money at low short-term rates and lend it out at higher long-term rates. As rates converge, banks have no choice but to cut costs, in order to save their shrinking profit. An “inverting curve”, where short term rates climb above long-term rates banks have no incentive to lend money. This is a phenomenon known to signal recessions.
In today’s economic environment falling long-term rates have impeded the effect of the Fed’s short term increases. A new nomenclature has evolved known as “bull flattening”. The predictability of the Fed’s policy by buying long-term bonds with borrowed money @ short-term rates, has been replaced by the purchase and added demand for long-term bonds which is pushing prices up and interest rates down, undermining the Fed’s ability to influence long term rates.
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To soften the pain of the flattening yield curve, banks are slashing costs, cutting jobs, and setting aside less in reserves to cover bad loans. Their reasoning is that demand for loans by consumer/corporations is low in historical comparison. This strategy could backfire if credit quality begins to deteriorate spreading the financial sector’s pain into the rest of the economy. Tipping the economy into recession is something that the Fed does not wish to witness again.
Gen-Probe (NASDAQ: GPRO) is a developer/producer of nucleic acid probe-based products used for the clinical diagnosis of human diseases and for screening donated human blood. The company reported second quarter earnings of $13.5 million or 26 cents per share, versus $11.8 million or 23 cents per share. Despite falling gross margins, GPRO raised its full year earnings to $1.20-$1.24 per share versus prior estimate of $1.17-$1.22 per share. The company also hiked its revenue estimate to $292-$300 million from $287-$295 million.
Dril-Quip (NYSE: DRQ), a maker of offshore drilling and production equipment suited for deep water and harsh environments, sees strong worldwide demand for its products. Reported second quarter earnings of $6.7 million or 37 cents per share, versus $2.8 million or 16 cents per share. Total revenue increased to $80.6 million up 52%. Stock price history: last three months +50.1%, last six months +25.6%, last 12 months +112%. Expected earnings of $1.15 per share for ’05 and $ 1.65 per share for ’06 on track.
Cummins (NYSE: CMI), the engine manufacturer, raised its ’05 earnings to $10.10- $10.30 per share from its prior estimate of $9-$9.20 per share, citing the strength of shipments of heavy-duty and medium-duty truck market. Posted second quarter earnings of $141 million or $2.83 per share up 72%. Bettered Street’s estimate on revenue of $2.49 billion up 17%- Volatile.
In either bull or bear markets, the hedge position presents the best strategic approach. The Shortex Market Letter provides investor/traders with the information and analysis you need to ensure a solid return on your investments. Our advisors focus not on selling underwriting services but on supporting their clients` and readers` portfolios. This objectivity, honesty, and experience have led to the newsletter being respected by both insiders and private investors alike. Learn more about this newsletter and free trial offer at: http://at.zacks.com/?id=313.
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Bill Martin and Matt Ragas view Southern Union as an attractive core position for long-term investors. More...
David Fried provides a buy recommendation on an auto parts chain and an auto insurance company. More...
Don Dion says the bulls still have the upper hand as this has been an uncharacteristically strong summer so far. More...
Richard Moroney highlights an oil and natural gas services company that goes places where others can’t. 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. SCREEN OF THE WEEK
Zacks.com offers three 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. Learn more about the Research Wizard at: http://at.zacks.com/?id=1388.
Increasing Cash Flows
This week’s screen focuses on cash flows (and increasing Cash Flows) as one of the main components in this stock picking 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.
The parameters to this screen are as follows:
I ran a series of tests over each of the last 4-1/2 years (January 2001 thru July 2005). Each test used a four-week rebalancing period and each run was rebalanced over a different set of four-week periods to eliminate coincidental performance and to verify robustness.
In 2001, this strategy showed an average annualized gross return of 37.8%.
In 2002, it showed a return of over 41.9%.
In 2003, it was up a whopping 102.9%.
In 2004, its average annualized gross return was up 22.4%.
And so far in 2005 (thru 7/29/05), its average cumulative gross return is up 20.8%.
This week (for Monday, 8/15/05), there are nine stocks that made it thru this screen.
(BTW, one of the stocks I planned on featuring in this week’s list, had a significant upside breakout today (8/15/05) and was up $3.49 by day’s end. That stock was LUFK. So I won’t be highlighting that one. But imagine if you had this strategy and the Research Wizard. You would have known about it on Monday morning instead of reading about it on Tuesday. In fact, it’s been on this screen’s list for the last four weeks and is up over $11 since it first appeared.)
Here’s 3 (other) stocks from this week’s list:
Get the rest of the stocks on this list and start using this winning strategy in your own portfolio, or pick from a list of other winning strategies that come loaded with the Research Wizard program. Or create and backtest your own strategies and see how good they are. Sign up now for your free trial to the Research Wizard and start making better decisions today.
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 free trial offer and our new special report “Top 10 Stock Screening Strategies” at: http://at.zacks.com/?id=1388.
Discover all the Free Screening Tools on Zacks.com at: http://at.zacks.com/?id=1389.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
3. BEST OF ZACKS EQUITY RESEARCH
BULL OF THE DAY
Biogen Idec (BIIB) - Residual Earnings Power.
CNH Global (CNH) - Slow Agriculture Equipment Sales.
Must a Housing Bubble Pop?
Making a Clear Connection
Positive Signs for Second Half ... So Far
4. PROFIT TRACKS
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...
This Profit Track strategy uses Return on Equity (ROE) to discover solid stocks. ROE is one of the quickest ways to gauge whether a company is creating assets or gobbling up investors’ cash.
One of the quickest ways to gauge whether a company is creating assets or gobbling up investors’ cash is to look at their ROE. This fast moving Profit Track returned an impressive +30.3% in 2004. In 2005, it continues to outperform the S&P 500 by a wide margin.
Beazer Homes USA, Inc. (NYSE: BZH) has a ROE of 27.77 and a price to sales ratio of .60. In late July, the company posted fiscal third-quarter record earnings of $2.50 per share, beating the consensus estimate by almost 22% and eclipsing last year’s result. BZH stated that it achieved record earnings and significantly improved margins this quarter as its focus on profitable growth and accelerated closings yielded significant returns. To continue your research on BZH, click here.
Lamson & Sessions Co. (NYSE: LMS) reported second-quarter earnings of 35 cents per share in late July, outpacing last year’s 19 cents and exceeding the consensus estimate by about 9%. Net sales grew 21.4% year-over-year. The company mentioned that net sales growth in each of its three business segments was in excess of 19% and reflected improving demand in its key end markets. LMS satisfies this profit track criteria with a ROE of 22.97 and price to sales ratio of .50. To continue your research on LMS, click here.
Premcor, Inc. (NYSE: PCO) is a solid company that is creating assets for investors as evidenced by its ROE of 34.17. In late July, PCO announced second-quarter earnings of $3.60 per share, improving on last year’s $1.61 and surpassing the consensus estimate by almost 42%. The company noted that it benefited from strong refining margins and the continued wide differentials between light-sweet and heavy-sour crude oil prices during the second quarter. For a price to sales ratio, PCO scores .39. To continue your research on PCO, click here.
Standard-Pacific Corporation (NYSE: SPF) released second-quarter record earnings of $3.08 per share, outperforming last year’s $1.90 and topping the consensus estimate by almost 16%. The company said that its record results reflect continued healthy housing market conditions in its three largest markets: California, Florida and Arizona. SPF sports a ROE of 30.09 and a price to sales ratio of .79. To continue your research on SPF, click here.
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
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.
Virtually every investment web site's mission statement can be boiled down to the following: "We will help you be a more successful investor".
Sounds great. But how is that accomplished? Today we want to go beyond the catch phrases to show how Zacks.com is designed to help you maximize your returns year after year.
Zacks Investment Research was formed in 1978 to compile, analyze, and distribute brokerage research to investors. The guiding principle behind our work is the belief that there must be a good reason why the brokerage firms spend over a billion dollars a year to research stocks to recommend to their clients. Obviously these investment experts must know something special that is indicative about the future direction of stock prices. We were bound and determined to unlock that secret knowledge and make it available to our clients to improve their investment results.
We went about compiling all research created by the over 250 brokerage firms in North America. With this wealth of information at our disposal the team at Zacks set out to find patterns in the brokerage research data that would serve as an accurate indicator of the future direction of a stock. What we discovered is that "earnings estimate revisions are the most powerful force influencing stock prices."
From this seminal work was born the Zacks Rank, which is a quantitative model that uses four factors related to earnings estimates to classify stocks into five groups: with 1 being the highest and 5 being the lowest. Since 1988 the Zacks #1 Rank stocks have generated an average annual return of 33% vs. 12% for the S&P 500 (calculated through 7/31/05). Learn more about the Zacks Rank at: http://at.zacks.com/?id=1705 Or see the current list of Zacks #1 Rank stocks at: http://at.zacks.com/?id=1551.
The Zacks Rank proved to be a great starting point for our work to uncover strategies to beat the market. Over the years we also discovered that changes in brokerage recommendations were indicative of future stock performance. This information is readily available on the web site. We also started to calculate the stock picking performance of individual brokerage analysts. So, it doesn't matter how many times an analyst appears on CNBC, we simply want to tell you who is good at picking stocks. We call this our All Star Analyst survey located on the site at: http://at.zacks.com/?id=1706.
Our latest endeavor to help investors be more successful is Profit Tracks. Each Profit Track is a successful stock screening strategy with proven results through the Bear Market of 2001-2002 and the Bull run started in 2003. We currently have nine unique screens that were hand picked to offer investors great strategies to potentially outperform the market in the years ahead. To see the nine strategies with full details and stock picks then go to: http://at.zacks.com/?id=1707.
We hope you agree that we have gone beyond the rhetoric of most investment web sites and truly delivered tools that can help you become a more successful investor. And perhaps best of all, each tool we discussed above is available for free on Zacks.com. We look forward to helping you Profit from the Pros in the months and years to come.
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, the Zacks #5 Rank (Strong Sell) List has 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=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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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,
Charles Rotblut, CFA
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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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