Tuesday - November 1, 2005

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We are now more than two thirds of way through the third quarter earnings season, and so far most companies are doing better than analysts expected. This has led to a dramatic turnaround in the estimate revisions picture, particularly for this year.

• Over the last month, 250 firms have seen estimate increases, while 202 have been cut for this year, a ratio of 1.24, up from 0.95 last week. However, the average estimate fell 1.25%.
   
• For 2006, the estimates rose for 207 and fell for 219, a ratio of 0.95. The average estimate fell 0.05%.
   
• A total of 1,492 current fiscal year estimates were increased over the last month for this year while 1,200 were cut (ratio of 1.24). This is a significant improvement over last week when the ratio was 1.03 and two weeks ago when it was 0.77.
   
• For 2006, 1,185 estimates were increased and 1,125 were cut (ratio of 1.05).

More. . .

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Zacks Equity Research continued...

3Q 2005 EARNINGS Scorecard – S&P 500

Highlights

• Exxon’s third quarter earnings were greater than the 2004 earnings of all but eight of the S&P 500 firms (including Exxon itself).
   
• Energy has by far the highest growth, but has had the most difficulty clearing the high hurdle posed by analysts.
   
• In the Consumer Discretionary sector, weak results posted by the auto and related industries, while Homebuilders continue to post strong growth.
   
• Bad news for the newspapers.
   
• No disappointments so far in the Technology sector.
   
• In Health Care, HMO’s hot, Drugs not.
   
• Paper and packaging performance poor. Non-ferrous metals prove their mettle.
   
• Property and Casualty Insurance firms earnings are a casualty of the hurricanes.
   
• Brokers and big Banks boast beautiful earnings growth.

A total of 335 S&P 500 firms have reported for the third quarter¹ . The results so far are encouraging, with 68.9% beating expectations, and only 17.6% disappointing. Put another way, positive surprises are outnumbering disappointments by almost four to one. So far, every sector has had more positive surprises than negative surprises.

At the beginning of earnings season we predicted we would see positive earnings surprises concentrated in the Energy and Technology sectors. So far that has certainly played out relative to Tech, with 25 of the 33 reports so far being positive surprises, and no disappointments. So far we have been wrong about the Energy firms posting positive surprises, as disappointments have almost matched positive surprises. Not to make excuses, but we suspect that Energy firms may be taking what steps they can to report their numbers as conservatively as possible. Right now we see the biggest risk to the energy sector as coming from Washington. We also predicted that the Materials and Consumer sectors are most likely to see a significant number of earnings disappointments. That has been relatively true so far as far as the Consumer Discretionary sector is concerned, less so with respect to the Materials and Consumer Staples sectors. We have seen significant weakness in the autos and related area. Many of the retailers, particularly those catering to the middle to low end of the earnings spectrum suffered low or negative earnings growth in the third quarter. However, many of these firms are yet to report. In the Materials sector, the Paper and Packaging firms generally posted poor results, while the metals industry, with the notable exception of U.S. Steel posted strong earnings growth.

¹Defined as the fiscal quarter ending in August, September or October, data as of 10/27/05 close.

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MORE FROM ZACKS EQUITY RESEARCH…

BULL OF THE DAY

Komag, Inc. (KOMG) - Excellent Entry Point. For full Zacks research report, click here.

 
BEAR OF THE DAY

Ethan Allen (ETH) - Worsening Industry Fundamentals. For full Zacks research report, click here.

 
ZACKS ANALYST INTERVIEW

European Inflation May Mean Higher Rates

Rising rates would hurt the already pressured employment market in Europe. More...

 
ZACKS INDUSTRY OUTLOOK

Industry Rank for the Week of October 31

Banking stocks once again were beneficiaries of bullish analyst forecasts. 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: Low Price Stocks

Many investors prefer stocks priced below $20 because the low prices allow them to accumulate more shares. Fortunately, lower prices do not necessarily mean lower quality.

This strategy identifies stocks priced below $20 that are trading at discount valuations and have a Zacks Rank of #1 ("Strong Buy") or #2 ("Buy"). The stocks identified by this search strategy trade at price-to-sales (P/S) multiples of 1.0 or below. The strong Zacks Rank is indicative of positive revisions in earnings estimates.

Combining these characteristics can result in high-dollar returns. In 2004, this strategy generated a stellar +54.8% return. Equally impressive, the strategy has a win ratio of nearly 75% for the past 4-1/2 years.

 
Here are four stocks that make the grade for the Upgrades and Revisions Profit Track:

Aftermarket Technology (NASDAQ: ATAC) a consumer goods company, posted strong third-quarter earnings. The company announced earnings of 39 cents per share, matching the upper end of previous guidance for profits of 35-39 cents. The stock is trading around $18 per share, with a price-to-sales ratio of .88. The company has earned $1.39 per share over the past 12 months. Continue your research on ATAC at: http://at.zacks.com/?id=1996.

Deckers Outdoor Corp. (NASDAQ: DECK), a retailer, recently reported third-quarter earnings of 63 cents per share. The result topped the consensus estimate and outpaced last year’s second quarter. The stock trades a reasonable valuation as is evident by its price-to-sales ratio of .9. On an earnings basis, the stock is also reasonably valued with 12-month cumulative profits of $2.25 per share and a price of about $18. Continue your research on DECK at: http://at.zacks.com/?id=1997.

Lakeland Industries Inc. (NASDAQ: LAKE), a medical appliance company, recently delivered fiscal second-quarter profits of 33 cents per share, beating the consensus estimate by two cents. The stock is trading around $18, with a price-to-sales ratio of .94. The company has earned $1.20 per share over the past 12 months. Continue your research on LAKE at: http://at.zacks.com/?id=1998.

Rex Stores Corp. (NYSE: RSC), a consumer electronics retailer, posted second-quarter earnings of 71 cents per share, beating the consensus estimate by 22. This stock is trading a discounted valuation; its price-to-sales ratio is .36, its 12-month earnings are $1.84 per share, and its stock price is $13. Continue your research on RSC at: http://at.zacks.com/?id=2016.

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=1999.

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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SCREEN OF THE WEEK

Great Stocks Often Have Great Peers

Kevin Matras looks at how to find winning stocks in the winningest Sectors. http://at.zacks.com/?id=1474.
 

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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 for more on Schaeffers Tools to Profit with Options.

Last week we took a look back at the High Open Interest Call filter and showed why it was that we recommended playing a put on Pfizer (PFE) clear back in late August. At that time we considered buying a PFE December 27.50 put (PFEXY) for $2.45 a contract and as of last week’s blurb that option was up over 120% Well, PFE fell some more the past week and as of Thursday afternoon you could have sold that option for over a 160% profit! Today let's take another look at this filter and try to find another winner.

First off, calls are simply options used to place a bet that the underlying stock is going to move higher. We like to see a lot of these bullish bets accumulating slightly above an equity's current level as a sign of potential options-related resistance. I won't go into too much detail on this, but the reasoning is based on how the market makers are hedged. The bottom line is this: large numbers of calls at a certain strike can potentially serve as a solid level of resistance.

Before we can go any further, let's talk briefly about our methodology here at Schaeffer's. 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, or we want to see optimism toward an underperformer, showing that nearly everyone who wants to put their money to use probably already has. Just because a stock has lots of skepticism, we won't blindly go long. We need to see some positive price action or major news catalyst to pull the trigger in most cases. Things that we tend to use to measure overall sentiment include, but aren't limited to, put/call ratios, short interest, magazine cover stories, media comments, and analyst ratings.

Now looking at the filter, one name that you'll notice is the SMH or the Semiconductor HOLDRs Trust. As the name might imply, this ETF is used to gauge the semiconductor index. I noticed it made the list thanks to a large build up of calls at the 35 strike. With the shares currently just under this level, this large amount of calls could very well serve as resistance. We won't get too in-depth here, but it appears that these calls have been bought, suggesting they should hold as resistance. We discovered this by checking out the implied volatility of this option. It turns out it is slightly higher than where it was three weeks ago, so we can make a good bet that the calls are "buys to open". All you need to know is it‘ll take some work for the SMH to get over 35.

But what about the quantitative sentiment you ask? Well, it also reveals some areas of optimism. One indicator that we like to use here at Schaeffer's Investment Research is the Schaeffer's put/call open interest ratio (SOIR). This ratio shows how many puts there are compared to calls for the front three months of options. Currently, the SMH’s SOIR checks in at 0.90. That's all fine and dandy, but it only matters when you compare it to the other readings taken during the past year. Doing this indicates that this reading is lower than 69% of the readings over the past year – suggesting short-term option players (usually dumb money) are still rather bullish. Also, the SOIR has been trending lower recently, implying more bullish calls are being traded than bearish puts.

In addition, it doesn’t look like the shorts are making many big bets against the shares, as it would take less than two days for all of them to cover their bearish bets. This low number reduces the chances of a short covering rally.

With all of that said, let's paper trade the SMH February put (SMHNG) for $2.60 per contract (where it was trading on Thursday afternoon). Write it down and see how we do, but it looks like a potential winner to me.

Please continue to use all of the filters on these pages for more money-making ideas and don't be afraid to make a few paper trades to see what strategy works best for you. Be sure to visit the trading filters and tools at Zacks.com/options and discover the detailed commentaries and more at SchaeffersResearch.com. 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!

 
To learn more about the High Open Interest filter, click here.

Discover all the tools and commentary available from the Zacks.com Options Center at: http://at.zacks.com/?id=614.

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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: CSG Systems International, Express Scripts, GameStop and NutriSystem.
 

CSG Systems International, Inc. (NASDAQ: CSGS) said it executed on all fronts during the third quarter by continuing to migrate customer to its new billing platform ACP, increasing the penetration of its ancillary products and services, and adding new subscribers. Income from continuing operations of 30 cents per diluted share marked a positive earnings surprise of 20%. Total revenues from continuing operations reached $96.8 million, or a year-over-year increase of 7%. For full year 2005, CSG Systems expects revenues from continuing operations of between $388-$391 million, and income from continuing operations per share of $1.13-$1.14. In just the past seven trading days, earnings estimates for 2005 have improved 12 cents, or about 13%. Continue your research on CSGS at: http://at.zacks.com/?id=2270.

Express Scripts, Inc. (NASDAQ: ESRX) reported third-quarter profits of 67 cents per share last week. The result bettered expectations by six cents, or almost 10%. ESRX also provided updated guidance for the remainder of the year, predicting full-year profits of $2.54-$2.61 per share. All 12 covering analysts raised their forecasts, causing the consensus estimate for 2005 to jump from $2.41 to $2.56 per share in the past seven trading days. Continue your research on ESRX at: http://at.zacks.com/?id=2271.

More...

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Zacks Rank continued...

GameStop Corporation (NYSE: GME) recently provided an updated guidance. Although the company did predict that third-quarter earnings would be 3 to 4 cents below consensus estimates, GME anticipates a strong fourth quarter. Crediting Sony’s PSP and the upcoming release of Xbox 360, GameStop now anticipates generating full year profits of $1.65-$1.75 per share. Six of the ten covering analysts responded by upping their forecasts, bringing the consensus estimate for the year ending January 2006 up to $1.68 per share. By means of comparison, two months ago, the consensus estimate was $1.38 per share. Continue your research on GME at: http://at.zacks.com/?id=2272.

NutriSystem’s (NASDAQ: NTRI) earnings estimates for 2005 have moved upward 10 cents, or about 22%, in the past seven trading days. For its third quarter, NutriSystem reported earnings per share of 19 cents, a strong year-over-year gain from breakeven and a positive earnings surprise of almost 19%. Revenues surged by 743% to $64.5 million, thanks to the effectiveness of the company’s marketing programs. NTRI said the combination of higher than expected new customer counts and lower than expected customer acquisition costs underscores the momentum its beginning to see. The company, which now expects full year 2005 revenues to eclipse $200 million, believes its on track for a great 2006. Continue your research on NTRI at: http://at.zacks.com/?id=2273.

To see the full list of Zacks #1 Rank stocks (approximately 220 stocks), go to http://at.zacks.com/?id=1353.

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=1346.
 

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Zacks Rank #1 and #5 Additions

Zacks #1 Rank List: 54 New Additions (alpha by ticker)

To see the full list of Zacks #1 Ranked stocks (approximately 220 stocks), then click here.

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Zacks #5 Rank List: 62 New Additions (alpha by ticker)

To see the full list of Zacks #5 Ranked stocks (approximately 220 stocks), then click here.

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 Ranked (Strong Buys) have produced the following results for investors:

• +33% average annual return since 1988 versus +11.8% 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, 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

Do you believe that these events affect stock prices?

• Broker Recommendation changes
• Earning Estimate revisions
• Earnings Announcements
• Zacks Rank changes

If you answered yes, then how are you staying on top of these changes for your stocks? If you are one of the 45,000 investors who wake up every morning to the Daily Portfolio Updates emails from Zacks.com, then you are all set. If not, then sign up now to get this vital information sent to you daily and improve your portfolio's performance. Did we mention it's free? Get started now by going to: http://at.zacks.com/?id=1674

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

Senior Market Analyst
Zacks.com

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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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