Thursday - October 20, 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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Another jumble of data and ``tells`` doesn’t say much about the economy.

After gapping higher to start the day, the major indices fell into the red before stabilizing and then moving higher again. A mixed bag of economic news, as usual lately, is serving as the culprit.

Investors initially had reason to cheer this morning after the Labor Department reported the September figures on consumer prices. Prices paid by consumers did rise by 1.2% last month, the biggest gain in 25 years, as energy prices rose dramatically in the wake of Hurricanes Rita and Katrina. However, the leap was mitigated by the fact that core consumer prices - which exclude energy and food prices - rose just 0.1%, less than analysts` 0.2% forecast, and in line with August’s figure.

More. . .

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FEATURED EXPERTS Continued...

Investors also cheered news that retail sales rose 0.2%. Many analysts expected retail figures to be flat or show a decline due to waning consumer confidence, which fell for a third consecutive month and is at its lowest level in 13 years. Businesses, however, seem to have had a difficult time passing on high energy costs to consumers, although recent evidence suggests that consumers could start feeling the pinch sooner rather than later.

”There is no sign of an immediate pass through of energy to core prices, but consumers spent with abandon considering their lack of confidence in the continued health of the economy,” Christopher Low, chief economist at FTN Financial, told Bloomberg News. “That is likely to bolster the Fed’s fear of future inflation and reinvigorate their will to raise rates.”

Meanwhile, solid earnings from General Electric (NYSE: GE) are having a positive impact on stocks this morning. The conglomerate reported a 15% rise in third-quarter profits as its energy and jet engine businesses posted strong results. All told, each of GE’s six business units - including media and financing - posted earnings growth of better than 10%. On GE’s conference call, Chairman & CEO Jeffrey Immelt said that the company is not seeing ``a big headwind yet`` with regards to energy costs pressuring pricing.

On the negative side, weighing on tech stocks this morning is a Bear Stearns downgrade of semiconductor giant Texas Instruments (NYSE: TXN). Analyst Gurinder Kalra downgraded TXN from ``outperform`` to ``peer perform`` citing increased competition, pricing pressure, and a slower expected growth rate for its digital light processing business in 2006. Kalra also believes that TXN’s price already reflects potential fourth-quarter upside.

As has been the case in recent months, the economic data is mixed, at times lending credence to both the bull and the bear argument. With energy prices pulling back in recent weeks, inflationary pressures may decrease. However, it’s not clear when or if the Fed will ease off the brake.

 
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MORE FEATURED EXPERTS...
 

b) Focus on Inflation Data

Joseph Parnes says the market has been sunken by the bankruptcy effect, shaken future ratings, and the health of auto industries. More...
 

c) Heavily Oversold

Dan Sullivan says the near-term trend is down, but this mutual fund expert expects a snap-back rally. More...
 

d) Sanity Check

Nadine Wong says biotechs are alive and doing well. Discover which three companies recently reported favorable earnings. More...
 

e) Inflation vs. CPI

Most companies that have reported earnings beat expectations, and Jim Collins expects that trend to continue. 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

Cutera, Inc. (CUTR) - Superior Growth Outlook.
Full Zacks research report at: http://at.zacks.com/?id=1412.

 
BEAR OF THE DAY

MannKind Corp. (MNKD) - High Cash-Burn Rate.
Full Zacks research report at: http://at.zacks.com/?id=1413.

 
ZACKS ANALYST INTERVIEW

Hotel Supply Trends Remain Strong
We continue to foresee growth for large-cap hotel owners and operators. More...

 
EARNINGS & SECTOR UPDATE

Earnings Season is Here!
Dirk Van Dijk, Director of Research for Zacks Equity Research, says earnings have been holding up well – 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: Growth and Income

This Profit Track looks for stocks that are paying dividend yields of greater than 8% along with other attractive fundamental attributes. Although this screen is based on a long- term and lower risk approach to investing, it has consistently beaten the S&P 500 for with returns such as +19.5% in 2004 and +10.7% in 2005 (through 6/17/05).

 
Here are four stocks that make the grade for the Growth and Income Profit Track:

American Capital Strategies Ltd (NASDAQ: ACAS), which has a current yield of 8.59%, declared a third-quarter dividend of 78 cents per share in early August. The dividend amount marks an 8% increase over last year's third-quarter dividend. At the same time, the company reported second-quarter results, stating that it closed a record $903 million of new investments. Earnings per share totaled 76 cents, an improvement on last year’s 73 cents and the consensus estimate of 75 cents. Financial results for the third quarter will be released in early November. To continue your research on ACAS, click here.

Diana Shipping, Inc. (NYSE: DSX) meets the criteria of this profit track with a favorable yield of 13.80%. In early August, the company declared a dividend of 54 cents per share and announced second-quarter earnings per share that were approximately 2% ahead of the consensus estimate. The global provider of shipping transportation services completed a successful quarter, attributing it primarily to the enlargement of its fleet and improved trading conditions in the second quarter of 2005 compared with the same period of 2004. To continue your research on DSX, click here.

Novastar Financial, Inc. (NYSE: NFI) sports one of the highest current yields within this profit track. The company, which is yielding 20.48%, declared a third-quarter dividend of $1.40 per share in mid-September. NFI will report earnings for the third quarter in the beginning of next month. In late July, the residential lender and mortgage Real Estate Investment Trust released second-quarter financial results, noting that it delivered strong growth in loan originations, coupled with discipline in its pricing and cost management. To continue your research on NFI, click here.

Valor Communications Group, Inc. (NYSE: VCG) has an appealing valuation as evidenced by its price-to-earnings (P/E) multiple of 8.9 and price-to-book (P/B) multiple of 1.61. In late July, the company posted second-quarter earnings of $1.26 per share versus last year’s pro forma earnings 90 cents per share. The result surpassed the consensus estimate by more than 14%. The company mentioned that the second quarter was outstanding with production, assets, revenues, EPS and pipeline all at record levels. Third-quarter results will be announced on October 31, 2005. To continue your research on VCG, 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…
 

Blue Coat Systems, Inc. (BCSI)

Blue Coat Systems’ proxy appliances provide control of web communications to address business risks such as inappropriate web surfing and viruses brought in via instant messaging. Their ProxyAV solution is in very high demand. Originally founded as CacheFlow, Inc. in 1996, the company renamed itself as Blue Coat Systems, Inc. The company raised $130 million when it went public on November 19, 1999, and is headquartered in Sunnyvale, California. Blue Coat sells appliances through an indirect fulfill channel to customers worldwide. The company has over 20,000 appliances shipped to more than 2500 customers in all key verticals.

The company recently reported the best quarter in its history. Fiscal first-quarter earnings came in at 27 cents per share, six cents ahead of the consensus estimate, and well ahead of last year's 17 cents. BCSI experienced strength across all products and markets, aided by increased sales and marketing capacity. Their flagship ProxyAV solution was widely adopted by customers. The company's balance sheet is very strong, with cash balances at $55.2 million, combined with no debt. BCSI duplicated last quarters performance with another 300 new customers added during the quarter. The company will report its fiscal second quarter results on November 15. This is historically the company's strongest quarter seasonally.

BCSI continues to add to its sales & marketing organization by increasing sales teams by six to 43 and the company plans to add approximately six teams in Q2FY06. This number will very likely be above 50 after their second-quarter. Management indicated that while it will continue to invest in the business, the company plans to grow operating expenditures at a slower rate than revenues. DSO’s increased three days to 40 and inventory remained relatively constant at $337k. Deferred revenue increased by $4.7M to $21.6M, with deferred revenue approximately made up of 50% service and 50% product.

The stock is currently trading at 26.62x the newly revised 2007 estimate of $1.54 per share. Even after the recent run-up, this is near the long-term growth rate of 24.29%. Earnings momentum is extremely strong at this company as evidenced by the last two quarters, in which BCSI exceeded estimates and guided higher as well. Analysts are tripping over themselves to raise estimates for this company. Over the past month, eight different analysts revised their estimates upward for fiscal year 2006. Analyst agreement is a big component in the Zacks Rank. Brokers are quite bullish on BCSI as well, giving the stock an average rating of 1.50. This number isn't as important as earnings revisions, but it is definitely noteworthy. Despite the current market turmoil, BCSI is hovering near a 52-week high. This stock is still relatively unknown on Wall Street, which leaves plenty of room for upside as more investors learn about their success.

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As this is being written, the market is abuzz regarding Intel’s third-quarter report. Actually, the most attention is being paid to the company’s fourth-quarter outlook, since the revenue guidance between $10.2 billion and $10.8 billion suggests that the world’s leading chipmaker could fall short of analyst expectations at about $10.7 billion. Despite solid year-over-year advances in earnings per share and revenue during the third quarter, Intel’s bellwether status means any disappointment is going to shake the market.

However, in spite of momentary ripples, the positive, long-term potential for the semiconductor industry remains intact. The space enjoys a Zacks Industry Rank of 2.91, which places it 73rd out of more than 200 industries. When we last visited this space in early September, semiconductors were creeping toward the top 100, but had yet to cross the threshold. Now, approximately 24% of companies with a Zacks Rank in the semiconductor space have a rating of Strong Buy or Buy. That leaves plenty of potential points of profit for investors and, despite some near term-volatility, recent data bears this out.

According to the Semiconductor Industry Association (SIA), worldwide sales of semiconductors increased 3.2% to $18.6 billion in August, compared to $18 billion in July. That’s a nice rise when compared to the 0.3% bump in July from June. On a year-over-year basis, worldwide sales in August advanced 1.7% from August 2004. Furthermore, SIA reported that semiconductor sales through August are up 5.8% to $144.4 billion, which is on track to exceed the record sales of 2004.

“While there are lingering concerns about the effects of high energy prices and the impacts of Hurricanes Katrina and Rita in the United States, end markets for semiconductors continue to be very strong,” said SIA President George Scalise.

A fundamental shift in the semiconductor industry to consumer demand from corporate IT is one of the more significant movements in the space right now. More than half of sales in 2004 went to consumers, and this proportion should continue to grow moving forward. This leaves many concerned at the moment since consumers are being pressured by high energy prices, but the possibilities of innovative products such as digital media will continue to prosper regardless of the price for gas.

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PREVIOUS WEEKLY COMMENTARIES….
 

SCREEN OF THE WEEK

Big Money

Kevin Matras goes over his 'Big Money' screening strategy that has trounced the market in every year over the last five years: 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.

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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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Senior Market Analyst
Zacks.com

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