Wednesday - November 23, 2005

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As GM takes more rather drastic steps to salvage its once-great company, we can see difficulties within the auto industry on many fronts. To help us make sense of these matters, we spoke with Paul Raman, CFA, our senior analyst covering several companies within the automotive industry.

Regarding Monday's news that GM will be slashing jobs and closing plants, do you feel these measures will go a long way toward righting the wrongs that have affected this company?

I think that General Motors' (GM) major restructuring moves are only a partial cure for the company. Obviously, the number of plants and employees affected are far higher than expected, which is a plus. However, the core issues - powerful unions, underfunded "legacy" pensions and underfunded healthcare costs - remain very serious problems.

More. . .

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Zacks Equity Research continued...

Ultimately, I think that GM will not wind up in bankruptcy, but is using this possibility as a bargaining tool with the unions to reduce their pension and healthcare costs. If the unions do not negotiate on these issues, then theoretically GM could file for bankruptcy, and the Bankruptcy Court would more than likely side with GM.

The bankruptcy of Delphi a month and a half ago seems to have triggered GM's recent problems. Are there any danger signs with auto supply companies that might affect other auto makers?

The bankruptcy of Delphi was one of many catalysts starting GM's recent woes. This is due to "flowback" issues surrounding GM employees that migrated to Delphi. "Flowback" issues involve pension and healthcare funding for these workers, along with salaries for these workers that are far higher than Delphi's non-unionized workforce.

However, this issue will not affect Daimler Chrysler (DCX) and Ford (F). Ford recently negotiated an agreement with Visteon (VC) to avoid a GM-like problem. Daimler Chrysler relies on several suppliers, which minimizes the Delphi-like risk.

How do auto sales and pricing look going into the fourth quarter?

Auto sales are slowing into the fourth quarter. The end of "Employee Pricing" plans plus rising rates, rising gas prices and a slowing housing market are all hurting the industry. Rising rates make cars more difficult to afford, rising gas prices favors imports over domestics, and a slowing housing market makes refinancing, taking the cash out of a home, and buying a car less likely. Prices are likely to weaken as automakers try to spur sales with incentives.

What Buy or Sell recommendations do you have for us today?

As far as Sells, I would still steer clear of Delphi (DPHIQ), even at these levels. I think that the residual stock will be worth $0, as equity holders are left with no value in the company. In other words, bondholders and creditors will own the company after the reorganization, much like another company that this just happened to, Intermet.

Looking forward through fiscal 2005 into the first quarter 2006, what can investors expect from companies in the auto industry?

Auto companies are likely to track the market. Fundamentals will be tough, but valuations are at levels where there is little downside (valuations near accounting book value, high dividend yields, etc.) Hence, the stocks will tread water over the next several months, in our opinion.

Paul Raman, CFA is a senior analyst covering the automotive industry for Zacks Independent Research.

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MORE FROM ZACKS EQUITY RESEARCH...
 

BULL OF THE DAY

Ultra Petroleum (ULP) - Continued Positive Outlook. For full Zacks research report, click here.

 
BEAR OF THE DAY

Saks, Inc. (SKS) - Ignore the Speculation. For full Zacks research report, click here.

 
EARNINGS & SECTOR UPDATE

Energy Sector Impacted by Lower Oil Prices

Despite a slight decline in its average estimate for this year, Dirk Van Dijk, Director of Research, says Energy continues to have strong upwards momentum for 2006. More...

 
ZACKS INDUSTRY OUTLOOK

Industry Rank for the Week of November 21

Some Thanksgiving-related stocks could add gravy to your portfolio. More...

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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=2335.
 

“New Analyst Coverage”

If you’re a regular reader of this article, you know that I’m not a big fan of Broker Recommendations.

And as you read on, you’ll see that I’m still not.

This is largely because of their overwhelmingly bullish bias.

But Broker Recommendations do have their place. And people do still look at them, from small individual investors to large institutional portfolio mangers. (Although I should note, that in general, the changes in the average broker recommendation is a better indicator than the actual recommendation itself.)

Anyway, what I want to talk about today, are companies that receive new analyst coverage.

One of the things that generates analyst coverage is investor interest. How else can you explain the increased analyst coverage for Google (a company that’s been public for only a little over a year) in comparison to companies like GE (public for nearly 40 years) and Microsoft (public for nearly 20 years).

And as new coverage is initiated, it becomes more visible, which in turn means potentially more demand (read higher prices).

This is often the case because analysts almost always initiate coverage with a positive recommendation. (Why write a research report on a company not widely followed only to say it stinks?)

And when it comes to companies with little to no analyst coverage, that one new recommendation can sometimes give portfolio managers the validation they need to build a position. (And the more money they can invest, the more they can potentially influence prices.)

The best way to use this information is to look for companies whose analyst coverage has increased over the last four weeks.

Simply look at the number of analyst recommendations now in comparison to the number of analyst recommendations four weeks ago. An increase in coverage is bullish whereas a decrease in coverage is bearish.

It’s typically more bullish if the increase went from none to one or if the coverage was minimal to begin with. (Going from 25 to 26 isn’t going to have the same impact because that 26th analyst isn’t discovering something ‘new’.) But increased coverage is better than decreased coverage –- assuming the coverage is positive of course.

Here’s a screen to try:

• Number of Broker Ratings four weeks ago <= 5
  (No more than five analysts were covering the stock four weeks ago.)
   
• Number of Broker Ratings now >= 6
  (There are at least six analysts covering the stock now.)
   
• Average Broker Rating < Average Broker Rating four weeks ago
  (By ‘ < ’ (less than), I mean ‘better than’ four weeks ago.)
   
• Average Broker Rating <=3
  (I’m not that concerned about the rating itself. But since analysts recommendations tend to be bullishly biased, I’d prefer to not have them be ‘bearish’.)
  
  And for good measure ...
   
• % Change in Q(1) Estimates >= 0 and ...
   
• % Change in F(1) Estimates >= 0
  (Companies that receive upward estimate revisions have a tendency of receiving even more upward estimate revisions. This, in combination with the stock’s increased visibility due to ‘new’ coverage, can be quite powerful.)
   
• And I’m applying all of the above parameters to stocks with Prices >= 5 (most money managers won’t even look at a stock under $5) and Average Daily Volume >= 50,000 shares (if there’s not enough volume, even individual investors won’t want it).

There are 7 stocks that made it thru this week’s screen (for the week of 11/21/05). Here are three of them;

Get the rest of the stocks on this list and see what new stocks the analysts are talking about. And don’t stop there. Try finding companies with no coverage four weeks ago that are finally being looked at today.

Most screeners won’t let you search for the number of analysts covering a stock, let alone comparing the amount of coverage they had weeks or even months ago. The same goes for changes in the Average Broker Rating and Estimate Revisions. But you can with the Research Wizard. And you can backtest it all. Find out how to pick the right stocks right now by learning more about our free trial to the Research Wizard stock picking and backtesting program.

Discover all the Free Screening Tools on Zacks.com at: http://at.zacks.com/?id=2336.
 

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.

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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: Knight Capital Group, Patterson-UTI Energy, Plexus Corporation and Quanta Services.
 

CommScope, Inc. (NYSE: CTV) recently posted third-quarter adjusted earnings of 34 cents per share, surpassing the consensus estimate by almost 26% and improving on last year’s result. The company commented that it managed costs effectively, achieved operating profits in all segments, including the Carrier segment, and expanded overall operating margins. Earnings estimates for the year ending December 2005 moved up seven cents, or almost 8%, form one month ago. Continue your research on CTV at: http://at.zacks.com/?id=2275.

Cryptologic, Inc. (NASDAQ: CRYP) recently announced third-quarter earnings of 36 cents per share, surpassing the consensus estimate by approximately 16% and improving on last year’s 21 cents. Quarterly revenue grew 35% year-over-year to a record $21.0 million. The company expects fourth-quarter earnings of 39 cents to 40 cents per share, which is in line with analysts’ expectations. For the 2005 full year, analysts project earnings of $1.43 per share, nearly 7% above one month ago levels. Continue your research on CRYP at: http://at.zacks.com/?id=2276.

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Zacks Rank continued...

Ingram Micro Inc. (NYSE: IM) recently posted third-quarter non-GAAP earnings of 36 cents per share, beating last year's 21 cents and jumping ahead of the consensus estimate by roughly 16%. The company stated that over the last eight quarters it has consistently delivered solid sales growth, and this quarter IM drove much of it to the bottom line. The company issued a fourth-quarter earnings guidance of 47 cents to 50 cents. Current Wall Street estimates are 48 cents per share, which is almost 7%, more than the forecast of one month prior. Continue your research on IM at: http://at.zacks.com/?id=2277.

Macromedia, Inc. (NASDAQ: MACR) released fiscal second-quarter non-GAAP earnings of 30 cents per share in late October, eclipsing last year’s 22 cents and beating the consensus estimate by 25%. The company noted that with the advancement of rich Internet application development, new mobile adoption on the Flash Platform, and the launch of Studio 8, this has been an outstanding quarter. Earnings estimates for the year ending March 2006 climbed 10 cents, or about 9%, over the past 30 trading days. Continue your research on MACR at: http://at.zacks.com/?id=2278.

To see the full list of Zacks #1 Rank stocks (approximately 220 stocks), go to http://at.zacks.com/?id=2279.

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=2332.

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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.

 
a) Jim Collins, Editor of the OTC Insight newsletter
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An overwhelming number of positive earnings reports during the past week, as well as lower energy prices, have given stocks the momentum to sustain their recent rally. The Nasdaq Composite and the Dow Jones Industrial Average led the way with returns of 1.5%. The S&P 500 followed closely behind with a very good 1.2% return.

With most of the S&P 500 having reported earnings, nearly two-thirds have exceeded expectations. High-profile consumer giant Wal-Mart followed this trend today when it reported better-than-expected third quarter results on strong sales. Clearly, the economy is on solid footing heading into the fourth quarter and consumers have not stopped spending despite higher energy prices.

The major stock indexes have not budged for a long time, while earnings have continued to grow. This has left valuations at multi-year lows. As long as inflation remains under control, stocks should do well in the months ahead.

 
Stock Picks

Hansen Natural (NASDAQ: HANS) is a holding company and carries on no operating business except through its direct wholly-owned subsidiaries, Hansen Beverage Company and Hard e Beverage Company. Hansen is engaged in the business of marketing, selling and distributing so-called alternative beverage category, such as natural sodas, fruit juices, juice cocktails.

United Therapeutics (NASDAQ: UTHR) is a biotechnology company focused on combating cardiovascular, inflammatory, and infectious diseases with unique therapeutic products. These products include pharmaceuticals, arginine products and telemedicine services.

 
Company News

Urban Outfitters (NASDAQ: URBN) announced record results Thursday for the three months ended October 31. Net earnings jumped by 43% over the comparable quarter last year to $37.2 million. Third quarter earnings per share rose to $0.22 versus $0.15 in the prior year. Fueling this increase was a 13% jump in comparable store sales.

Building Materials Holding Corporation (NASDAQ: BMHC) has entered into a definitive agreement to acquire the business assets of the Home Lumber division of Leaman Building Materials. Home Lumber, which had sales of approximately $61 million last year, provides lumber, building materials and millwork to professional contractors and builders from its three locations in the Houston market. This acquisition of Home Lumber is another step in Building Materials` strategy of providing a full range of building materials and services in key homebuilding markets such as Houston, which is one of the top five markets in the country.

True Religion Apparel (NASDAQ: TRLG) released its fiscal third quarter results on Thursday. For the period ended September 30, net sales increased to $35.0 million compared to $7.4 million in the same quarter a year ago. Net income increased to $7.7 million, or $0.33 per share, compared to the year-ago level of $954,000, or $0.05 per share. The company’s results were three cents above its previously raised guidance of $0.29 to $0.30 per share issued on October 11.

 
About Jim Collins’ OTC Insight newsletter

OTC Insight® specializes in growth stocks, particularly in the small to mid-cap range. This monthly publication, which focuses on Nasdaq listed stocks, is a by-product of the research we use to select stocks for our managed client portfolios through Insight Capital Research and Management, Inc.®. http://at.zacks.com/?id=2399.
 

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MORE FEATURED EXPERTS...

b) Fowl Play

In the wake of the risk of avian flu, Vivian Lewis discusses Brazil, the world’s No. 1 poultry exporter. More...
 

c) Looking Around The Corner

Walter Frank expects less than average market gains after the Fed stops tightening. Read this mutual fund expert’s explanation. More...
 

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, which was the worst bear market in over 60 years.
• +18% in 2005 (through September 30)

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=2332.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2279.

FREE PORTFOLIO TRACKER

Do you believe that these events affect stock prices?

• Broker Recommendation changes
• Earning Estimate revisions
• Earnings Announcements
• Zacks Rank 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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Regards and Happy Investing,

Charles Rotblut, CFA

Senior Market Analyst
Zacks.com

p.s. What is the mission for Zacks Profit from the Pros? Click here to find out how we will help you become a more successful investor.

The Zacks Performance Rank performance is the total return of equal weighted simulated portfolios consisting of those stocks with the indicated Zacks Rank net of fees. Results reflect the reinvestment of dividends and other earnings. Simulated results do not represent actual trading and may not reflect the impact that economic and market factors might have had on decision-making if an adviser were actually managing a client's money.

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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