Thursday - September 29, 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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What a scary week! Thankfully, Mother Nature wasn’t quite as deadly as she was earlier in the month. The dog days of summer have not been kind.

Traders and average citizens breathed a sigh relief when Hurricane Rita left so many of the Houston-area refineries in tact. But there is still a lot of uncertainty throughout the gulf coast, so you can be sure traders will remain sensitive to news headlines.

Reports from the storm-ravaged US Gulf Coast remain incomplete. You are likely to see sudden and unpredictable volatility as traders sort through a mountain of data over damage from Rita and Katrina.

While Rita wasn’t as bad as feared, Dennis Slothower doesn’t think you should be under any illusions. The disruptions in the oil industry over the past few weeks are going to take a toll on the energy industry for months to come. There are so many things going on - it is going to take a few weeks to sort out what the long-term fundamental impact has been.

More. . .

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FEATURED EXPERTS Continued...

The good news is that the Strategic Petroleum Reserves will help to offset crude oil shortages and gasoline exports from Europe will hopefully keep gasoline at the pumps. The bad news is that we don’t know how long this dependency will last.

Under these circumstances, the stock market is extremely vulnerable to whipsaws on any change in oil price. This makes the trend in the stock market virtually unpredictable as stocks key off every movement in oil prices.

No one knows how long this tight interdependence with oil is going to play out over the next couple of months. But as the trend in crude oil unfolds, you can be sure the stock market will be paying close attention and usually moving in an inverse direction.

As Slothower looks at the various sectors in the market, most seem to be breaking down and in very poor shape. However, there are a few sectors that remain in strong up trends. Many other sectors offer good shorting opportunities if you are willing to play the downside of the market.

For most Slothower would recommend staying out of the stock market until the risk/reward ratio is more attractive and a more definitive trend emerges.

The most dominant sector on the long side, of course, is energy, energy service, natural gas and natural resources (like gold stocks). Of this group Slothower prefers the natural gas sector. The disruption to refineries along the Gulf Coast is expected to reduce the amount of fuel available for storage ahead of winter, so the natural gas sector seems like a good bet.

In the Income portfolio, Slothower recommend CPFL Energia SA (NYSE: CPL) and Dominion Resources (NYSE: D). Both pay about a 3%+ dividend yield. In the Income & Growth Portfolio, Slothower recommend Equitable Resources (NYSE: EQT) and Exelon Corporation (NYSE: EXC), which also pay attractive dividend yields.

In the meantime, avoid the mortgage companies, banking, leisure, chemicals, consumer industry, retail, construction and housing, electronics, and automobile sectors, which are all in downtrends. Slothower will be looking to short these sectors if he begins to see a market meltdown.

At this point, both crude oil and the stock market are trading in extremely tight, narrow bands, whipsawing up and down as investors try and decipher the longer-term fundamentals. Slothower wants investors to remain largely uncommitted to this market until we see whether the trend is about to break out or break down.

In the meantime, no one wants to be whipped to death while the market tries to figure out this combination of fundamentals. Risk management remains your top priority.

 
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.

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MORE FEATURED EXPERTS...
 

b) Hurricane Katrina Misses Wall Street

Jim Collins explains that investors have essentially priced in a high degree of pessimism. Read his outlook. More...
 

c) Bargains Scarcer but Still Available

Richard Moroney says plenty of quality values remain available. Check out a sampling of his 16 outstanding values. More...
 

d) Economic Growth is on Track

Mutual fund expert Don Dion explains that despite the storms there were reassurances by the Fed that economic growth is on track. More...
 

e) Fed Worrying About Inflation

John Reese believes the Fed is more concerned about inflation than the impact from hurricanes. More...
 

f) The Gold Standard

Ian Wyatt and his team wonder if investors should be betting on gold for the long-term. 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

Cognos, Inc. (COGN) - Attractive Entry Point.
Full Zacks research report at: http://at.zacks.com/?id=1412.

 
BEAR OF THE DAY

Dana Corp. (DCN) - Debt Rating Downgrade.
Full Zacks research report at: http://at.zacks.com/?id=1413.

 
ZACKS ANALYST INTERVIEW

Inland Natural Gas Operations Affected
Rita may have impacted non-shore companies in ways that Katrina did not. More...

 
EARNINGS & SECTOR UPDATE

Rita Struck Only a Glancing Blow
Despite the second half impact from the hurricanes, Dirk Van Dijk says many analysts are raising estimates for the year. 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 cumulative return of +425% since January 2001. During the first half of 2005, this screen continued its winning ways with a +13.8% return.

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

AAR Corp. (NYSE: AIR) boasts earnings growth of 400% last year over the previous year. The company, a worldwide leader in supplying aftermarket products and services to the global aerospace/aviation industry, recently reported fiscal first-quarter earnings of 15 cents per share. The result topped the consensus estimate by about 7% and surpassed last year’s first-quarter earnings. The company stated that sales and earnings growth for the quarter were driven by increased sales in the Aviation Supply Chain, Maintenance, Repair & Overhaul and Structures & Systems segments. To continue your research on AIR, click here.

AMREP Corp. (NYSE: AXR) is a real estate developer and builder of housing, national distributor of magazines and a provider of subscription fulfillment services for publishers. The company meets the criteria of this profit track as evidenced by its net margin of .12 and full year 2004 earnings growth of approximately 41% above the year prior. To continue your research on AXR, click here.

JLG Industries (NYSE: JLG), a Zacks #1 Rank (Strong Buy) stock, recently posted fiscal fourth-quarter adjusted earnings 72 cents per share, improving on last year’s 42 cents and jumping ahead of the consensus estimate by approximately 22%. The company noted that its revenue grew significantly in each and every quarter of fiscal 2005. JLG also managed to produce annual earnings growth of nearly 76% above the previous year. To continue your research on JLG, click here.

Layne Christensen (NASDAQ: LAYN), a drilling services provider, released fiscal second-quarter earnings of 35 cents per share in late August. The result not only outperformed the previous year’s earnings but also eclipsed the consensus estimate of 32 cents. The company mentioned that it continues to experience good demand for products and services in all of its businesses. LAYN satisfies this profit track criteria with almost 103% earnings growth in 2004 versus 2003. To continue your research on LAYN, 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 this powerful stock picking tool. 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=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…
 

Cummins Inc. (CMI)

Cummins, Inc. engages in the design, manufacture, distribution, and servicing of diesel and natural gas engines, electric power generation systems, and engine-related products. It operates in four segments: Engine, Power Generation, Filtration and Other, and International Distribution. The Engine segment manufactures and markets a range of diesel and natural gas-powered engines for the heavy and medium duty truck, bus, recreational vehicle, light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail, and governmental equipment markets. It offers a variety of engine products with displacement from 1.4 to 91 liters and horsepower ranging from 31 to 3,500. The Power Generation segment provides electric generators; power systems; and related accessories, components, and services. These products include diesel and gas generators used in recreational vehicles, commercial vehicles, and pleasure boats, as well as diesel and gas generator sets, transfer switches, and switchgear used in commercial facilities for emergency back-up and prime power.

Demand for Cummins' engines has been robust recently due to a strong cyclical upswing in truck sales. Having purchased loads of trucks in the late 1990s, operators are starting to update their aging fleets. Also, operators are starting to buy trucks in advance of 2007 emissions legislation that will increase costs and may reduce engine performance. This is providing a substantial, though temporary, boost to Cummins' sales.

The company reported an excellent fiscal second quarter, in which they posted $2.83 per share, significantly ahead of the $2.41 Zacks consensus. They also raised guidance for the full year, going to a range of $10.10 to $10.30, up from the previously forecasted $9 to $9.20 per share. They are seeing strength in their engine business as sales of heavy duty truck sales advanced by 30% due to strong domestic and international demand. Their power generation segment also performed well, growing by 7% to $493 million. The company has improved its cost structure as well, enabling it to convert more of its sales into profits.

Cummins shares are very attractively valued at about 8x their new forecasted earnings per share for this year. Estimates have gone up significantly over the past 90 days. Over that time period, estimates for the year ending December 2005 have increased from $9.10 to $10.40 per share. That is an increase of 14.3%, which is impressive given the company's size. The stock could experience multiple-expansion due to strong earnings momentum.

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Business travelers, which stayed home while the economy sputtered early this decade, finally returned as prospects brightened; bringing with them the fortunes of the hotels and motels industry. Since then, hotel chains have enjoyed an upturn in occupancy, helping this space to generate a Zacks Industry Rank of 2.93. As indicated on Monday in our weekly Industry Rank feature, this puts the industry 78th out of more than 200.

“With the ongoing rebound in demand for business and leisure travel, we expect the lodging companies that offer premium services to continue to outperform their lodgings peers,” stated Zacks Equity Research analyst Matthew P. Quinn, CFA, in a research report.

Travelers, whether they be business or recreational, are much more demanding these days than in the past. Merely offering in-room movies and coffee isn’t enough to compete in this burgeoning business anymore. Premium services, such as health clubs, same-day laundry services, and swimming pools, have become necessary; and it doesn’t hurt to have a real complimentary breakfast and newspaper in the morning. Quinn believes that hotels offering these premium services have more leverage to increase daily rates, which should consequently boost profitability.

However, the aftermaths of Hurricanes Katrina and Rita, made all the worse by their close proximity in time and space, threatened to set the industry back again. Dozens of hotels on the Gulf Coast had to close due to the impact. Last week, Hilton Hotels, one of the leading forces in the space, provided an update on its locations affected by the hurricanes. Most of their hotels in the region reported water leaks, broken windows, and minor stucco damage, but others will have to be closed for a longer period of time due to cleanup efforts and water damage.

But Smith Travel Research, a leading resource of information and data for the lodging industry, believes that the reduction in supply from Katrina could lead to stronger growth in hotel revenue for the year. In fact, STR increased its 2005 revenue per available room (RevPAR) growth protection for the total U.S. to 8.2% from 7.6%.

“Despite the obvious attrition from displaced business, the increase in Katrina-related emergency travel combined with the relocated meetings demand to other cities will have a meaningful impact on occupancies,” stated Randy Smith, CEO and founder of STR.

The hotels and motels industry is part of the much larger and diverse consumer discretionary sector, with which Zacks Equity Research has a neutral rating. Quinn said that he believes the operating environment has become more favorable, especially for those companies with relative pricing power in a more favorable demand environment.

“We also expect the lodging brands with properties in major cities in the U.S., or those operating properties at popular resort destinations worldwide to outperform the sector in the near term,” stated Quinn.

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PREVIOUS WEEKLY COMMENTARIES….
 

SCREEN OF THE WEEK

Upgrades and Revisions -– A Winning Strategy for Beating the Market

Kevin Matras shows how you can beat the market with his ‘Upgrades and Revisions’ strategy: 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:

• +33% average annual return since 1988 versus +12% 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.
• +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.

FREE PORTFOLIO TRACKER

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• Broker Recommendation changes
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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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Charles Rotblut, CFA

Editor-in-Chief
Zacks Profit from the Pros

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