Monday - October 24, 2005
In response to subscriber requests for more timely content from Zacks.com, we are now publishing Profit from the Pros on a daily basis. Every Monday, we will feature the top articles from the previous week in a “Best of Profit from the Pros” format. On Tuesdays through Fridays, we will deliver the latest content from Zacks.com. We hope you find the new format useful and profitable.
Want to view the archive of past issues? Go to: http://at.zacks.com/?id=1344.
1. BEST OF ZACKS EQUITY RESEARCH
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.
More. . .
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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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BULL OF THE DAY
2. 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
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.
JLG Industries (NYSE: JLG), a Zacks #1 Rank (Strong Buy) stock, reported fiscal fourth-quarter adjusted earnings of 72 cents per share late last month. The result improved on last year’s 42 cents and jumped 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. Continue your research on JLG at: http://at.zacks.com/?id=2254.
EnPro Industries Inc. (NYSE: NPO) an industrial goods company, posted second-quarter earnings in early August. The result surpassed the consensus estimate by almost 29% and outperformed the year ago total. The company commented that the benefits of its strategic initiatives combined with high levels of demand for its products led to its best results as an independent public company. NPO meets the criteria of this profit track as evidenced by its net margin of .04 and full year 2004 earnings growth of about 28% above the year prior. Third-quarter results will be announced in early November. Continue your research on NPO at: http://at.zacks.com/?id=2255.
McDermott International Inc. (NYSE: MDR), with its PEG ratio of .33, sports one of the most favorable valuations currently listed under this profit track. DHB also has low levels of debt as evidenced by its current ratio of 4.5 and a debt/equity level of .21. In late July, the company announced second-quarter earnings of 17 cents per share, matching both the year ago result and the consensus estimate. The body armor company stated that its quarterly results are indicative of the ongoing demand for its products and reinforce the quality and reliability that its customers have come to depend upon. Continue your research on DHB at: http://at.zacks.com/?id=2256.
Sands Regent (NASDAQ: SNDS) experienced earnings growth of almost 45% for its most recently completed year versus the year prior. In early September, the company released fiscal fourth-quarter earnings of 19 cents per share, topping the consensus estimate by a penny. SNDS said it has demonstrated once again that its strategy to diversify its mix of local and tourism-related business has been successful. Continue your research on SNDS at: http://at.zacks.com/?id=2257.
To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2258.
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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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=2259.
3. ZACKS #1 RANK STOCKS
The Zacks #1 Rank (Strong Buy) list is always limited to approximately 220 stocks. Four stocks that are currently included in this elite group are: Blue Coat Systems, Ceradyne, National Semiconductor, and Too.
Blue Coat Systems, Inc. (NASDAQ: BCSI) earnings estimates for the year ending April 2006 increased 25 cents, or approximately 26%, over the past 90 trading days. In mid-August, the company reported fiscal first-quarter GAAP earnings of 24 cents per share, exceeding the consensus estimate by about 14% and surpassing the year ago result. On a year-over-year basis, net revenue grew by 58%. The company stated that it continues to be pleased with the market acceptance of the solutions that Blue Coat provides as evidenced by the stronger than expected sequential growth in net revenue. Continue your research on BCSI at: http://at.zacks.com/?id=2262.
Ceradyne, Inc. (NASDAQ: CRDN) will release third-quarter results next week. Earnings estimates for the year ending December 2005 climbed 16 cents, or approximately 10%, over the past 90 trading days. In late July, the company reported second-quarter record earnings of 46 cents per share, beating the consensus estimate by eight cents and outpacing last year's result. Sales also reached a record total, which was $89.9 million. The sales result for last year's second quarter was $39.2 million. Continue your research on CRDN at: http://at.zacks.com/?id=2263.
National Semiconductor Corp. (NYSE: NSM) earnings estimate for the year ending May 2006 climbed 14 cents, or approximately 14%, over the past 60 trading days. In early September, NSM announced fiscal first-quarter GAAP earnings of 24 cents per share, which was ahead of the consensus estimate by about 9%. The company stated that it is seeing strong demand for analog products, particularly from its wireless and flat panel display customers. Continue your research on NSM at: http://at.zacks.com/?id=2264.
Too, Inc. (NYSE: TOO) recently announced that because of stronger than projected back-to-school sales, it now expects earnings per share for the third quarter to be in the range of 41 cents to 43 cents per diluted share. Analysts are in agreement as evidenced by current fiscal third-quarter estimates of 43 cents per share, which is almost 8% above one month ago levels. The company mentioned that the key 'tween fashion trends that it capitalized on in early fall have sustained their momentum, providing TOO with a successful back-to-school season. Financial results for the fiscal third quarter will be available in mid-November. Continue your research on NPO at: http://at.zacks.com/?id=2265.
To see the full list of Zacks #1 Rank stocks (approximately 220 stocks), go to http://at.zacks.com/?id=2266.
The Zacks Rank is a powerful stock indicator whose #1 Strong Buy stocks have risen by an average annual return of 33% since 1988 versus 11.8% for S&P 500.
To help you fully understand how the Zacks Rank works and, more importantly, how you can profit by using the Zacks Rank, we have created a free report - The Zacks Rank - Harnessing the Power of Earnings Estimate Revisions. This valuable information is available at: http://at.zacks.com/?id=2267.
4. OPTIONS CENTER
Zacks has partnered with the leading options experts,
Schaeffer's Investment Research, to provide you the best options
commentary, research, and trading tools on the market today.
Read below more on Schaeffers Tools to Profit with Options.
Last week we went over the Put/Call Ratio Over 1.0 (Bullish) and took a look back at two winning trades that we picked using this filter. Now this past week we’ve noticed a few signals beginning to flash that we’re nearing very oversold levels and the next good buying point could be just a few weeks away. Well, today we're going to take another look at this very important filter and try to find yet another winning bullish trade.
For a refresher of our methodology please read on, if you already know this please go to the next paragraph. We are contrarian-based investors, meaning that we want to see skepticism toward an outperformer as a sign that money is still on the sidelines. Conversely, we want to see optimism toward an underperformer. We view too much optimism as a potential sign that nearly everyone who wants to invest in a particular stock already has. Now, just because a stock sees substantial optimism doesn't mean that we will blindly short a particular security; we need to see some negative price action or a major catalyst for a downside move in order to pull the trigger in most cases. Other indicators that we tend to utilize in measuring overall sentiment include put/call ratios, short interest, magazine cover stories, media comments, and analyst ratings.
Turning to this money making filter now, the Schaeffer's put/call open interest ratio (SOIR) is simply the number of puts divided by the number of calls among near-term options. With that, a number of 1.0 or greater means that there are more puts than calls in short-term trading.
From our contrarian-based approach, we love to see a huge number of puts compared to calls levied against a strong-performing stock. If a stock can advance amid heavy bearish sentiment, then there is still plenty of money left on the sidelines to help push the stock higher once that crowd begins to turn bullish.
Now, just because a stock has a high SOIR doesn't mean it is a good long play. But using a SOIR as an indicator is just one aspect of the Expectational Analysis® approach, as we also like to check in on analysts, media, and short interest as other indicators for investor sentiment. If you can find a potential trade that encompasses all of those areas of sentiment, then my friends, you could have a potential winner on your hands.
Looking at the list from Friday one name looks pretty tempting to me and that is Medimmune (MEDI). It turns out MEDI has a SOIR of 1.66, which we find by dividing the number of short-term bearish puts by short-term bullish calls (55,912 divided by 33,640).
MEDI is one of the top performing biotech stocks out there, as the shares have gained over 21% this calendar year. With gains like that you’d expect some type of optimism to begin to creep into the shares, but you’d be wrong.
I’ve already mentioned how its SOIR is 1.66. Now what does that mean exactly? Well, it only tells you something if you compare it to the past year’s worth of data. And it turns out that this number is higher than 96% of the readings over the past year, suggesting that short-term option players are still very bearish on the shares. Remember we like to see this heavy skepticism in the face of strong performance - so far so good.
Another area of sentiment that we like to look at is what the shorts are doing. To short a stock means you are selling it first, with the intention of buying it back later. In other words, you are betting the shares will go down. We love to see lots of shorts betting against a stock, because that means should the shares continue to advance as all of those bearish bets will be forced to cover (or buy back) their bearish bets, pushing the security up that much quicker. Turning back to MEDI, we find that it would take only 3.20 days to cover. This isn’t a huge number (I’d prefer to see it over six or seven days), but one encouraging sign is the shorts increased their bearish bets by over 21% last month. Suggesting they could still be trying to pick a top on this strong trending stock.
Finally, the analysts. This one is probably better used as a longer-term indicator, but it does give you a great idea of what Wall Street thinks of MEDI. Low and behold, they don’t like all of the gains, as according to Zacks there are 16 “holds” or less out of 21 total recommendations. Thus leaving lots of room for upgrades should the shares continue to gain.
In conclusion, MEDI sports has a Schaeffer’s Gold Score of 8.0 out of 10.0, suggesting more gains could be in the cards for this biotech.
With all of that said, and should this market find a bottom over the next few weeks, MEDI looks like it could be a strong leader and thus let’s consider buying a bullish call. As of Friday afternoon you could have bought the January 2006 30 call (MEQAF) for $4.40 a contract and that’s the one I’d play. Write it down and hopefully it’s a nice of a winner as the others have been.
Please continue to use all of the filters on these pages for more money-making ideas and tale the time to visit SchaeffersResearch.com for more commentaries and tools. Don't be afraid to make a few paper trades to see what strategy works best for you. But please remember that when it comes to options, the majority of your trades are going to be losers. Don't get discouraged, because that's the beauty of the leverage that options provide. It takes only a few winners out of every 10 trades to make you a very happy investor. Good luck!
Discover all the tools and commentary available from the Zacks.com Options Center at: http://at.zacks.com/?id=2261.
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 stocks (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=1346.
Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=1353.
FREE PORTFOLIO TRACKER
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