Wednesday - November 30, 2005
 Want to view the archive of past issues? Go to: http://at.zacks.com/?id=2319. Manage Profit from the Pros subscription: 1. ZACKS EQUITY RESEARCH After an extremely busy past couple years with M&A activity in the telecom industry, we wanted to see if things were finally slowing down a bit. We spoke with senior analyst Jay K. Ritter, CFA about the state of the industry, and where the main growth is expected to be in 2006. Wireless technology seems to be dominating telco headlines. Is there any strength in wireline communications? What might we investors be missing? Well, you are correct in observing that wireless is the fastest-growing area within the telecom sector. Wireless subscriber growth in the U.S. is running at around 15% through the first three quarters of 2005. According to the CTIA (wireless industry association), there were 195 million wireless subscribers in the U.S. at the end of October, representing approximately 65% of the U.S. population. This is still well below the 80%+ wireless penetration level in Western Europe and Japan, which implies that subscriber growth should remain fairly healthy in 2006. The domestic wireless stocks have performed very well this year as subscriber growth has generally exceeded expectations, the churn (customer switching) rate has been improving and average revenue per user (ARPU) has remained stable, in part due to growing demand for value-added data services (e.g. text messages, ringtones and wireless Internet). More. . .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - On the wireline side, the Baby Bells continue to experience steady erosion in their local access lines, mainly due to wireless substitution and competition from the cable operators. Partially offsetting this, they are seeing strong growth in the number of broadband (DSL) customers. Unfortunately, trends on the wireline side could get worse next year as the cable operators aggressively roll out phone service based on low-cost Voice over Internet Protocol [VoIP] technology. In particular, Comcast (CMCSA) is expected to roll out the service across most of its domestic footprint in 2006. So to answer your question, the major positives for the incumbent wireline carriers are: 1) they are seeing strong growth in their broadband (DSL) businesses, 2) the regulatory environment has improved, which has enable them to recapture some of the lines lost to wholesale competitors (chiefly AT&T {T} and MCI {MCIP}), and 3) the enterprise data business appears to be gradually improving and it should improve further following the mergers of SBC (SBC) with AT&T and Verizon (VRZN) with MCI. As the Baby Bells continue to emphasize their other businesses, the shrinking local phone area should be less of a drag on growth. What’s more, a lot of the bad news is already reflected in the stocks. In fact, the three largest Baby Bells offer very attractive dividend yields (approximately 5%). Still, we would not recommend that investors buy the stocks at this time. Do you expect M&A activity to remain high in the industry? If so, which companies are most likely to participate? Telecom M&A has been significant, to say the least, over the past couple years. We don’t expect as many blockbuster deals in 2006 as we saw in 2004 and 2005, though we do believe a number of smaller deals are likely. For example, ALLTEL (AT), a leading rural wireline/wireless carrier is reportedly in talks to sell its local access lines. Earlier this year, ALLTEL acquired Western Wireless (a rural wireless carrier) and, much like Sprint Nextel (S), the firm plans to emphasize its faster-growing wireless business. Potential buyers include Citizens Communications (CZN) and CenturyTel (CTL). We don’t like the fundamentals of the rural wireline business (low growth, uncertain regulatory support, long-term technology risk) and we currently have sells on both CZN and CTL. While the acquisition of ALLTEL’s wireline assets could boost their growth prospects, we are concerned with the potential purchase price, which published reports indicate could be as much as $10 billion. On the equipment side, we believe M&A activity is likely to pick up as vendors try to better position themselves to meet the requirements of a shrinking number of giant telecom carrier customers. In addition, the convergence of wireless/wireline networks and emphasis on “triple play” bundled services (voice/data/video) by the telcos and cable operators should be a catalyst for some mergers. For example, Cisco (CSCO) recently announced plans to buy Scientific-Atlanta (SFA). We’ve had a Buy on SFA for some time now, as it is one of the two main providers of cable set-top boxes and other broadband communications gear. As a technology leader and supplier to several of the leading cable operators, SFA is a major beneficiary of the digital TV revolution. In addition, the phone companies are rolling out IPTV – Internet Protocol TV – and SFA is likely to be one of the suppliers for the telecom firms in this space. IPTV is basically the phone companies’ answer to cable TV. How is telecom growth in Europe affecting the industry? The European market is seeing many of the same trends we see in the U.S. However, the wireless penetration level is much higher in Europe – over 80% – versus the mid-60% range of U.S. customers who use wireless phone service. Europe is a more mature market, and therefore companies are attempting to grow revenues by upgrading their customer base to utilize 3G services. Their growth on the wireline side has been extremely slow, so they are looking to the broadband data business to allow for some growth there. Otherwise, local phone business in Europe is declining for the same reasons as here, though they are also seeing strong growth in broadband and DSL services. Where we are seeing some growth is in Eastern Europe, which is not as mature a market. Carriers are acquiring phone companies in countries such as the Czech Republic and others in the Commonwealth of Independent States. Western Europe remains pretty sluggish at this time. How about in Asia? The Chinese market has been disappointing in 2005, especially from the standpoint of the equipment vendors. The major carriers there have slowed spending in anticipation of the Chinese government awarding 3G contracts. While the timing is still somewhat uncertain, some are expecting announcements early next year. In terms of how the government plans to proceed, once the contracts have been awarded, we should see some major restructuring. Formerly purely wireline carriers will likely be getting into wireless. Spending on telecom equipment is expected to pick up in China, which is good news for vendors. Companies most exposed to the Chinese market – UTStarcom (UTSI) and, to a lesser extent, Lucent (LU) – have seen particularly dismal results this year. Good growth in Asia for 2005 and expected to continue in 2006 comes from India, which Motorola (MOT) has targeted for growth. MOT has developed low-end phones they are planning to roll out in the Indian market, which had formerly been dominated by Nokia (NOK). India is expected to have the fastest growth of wireless subscribers in Asia, so we can see why Motorola is making an aggressive push there. What Buys and Sells would you recommend for us? Among the service providers, we still like Sprint Nextel (S), which generates a higher percentage of revenue from wireless services than most of its large-cap telecom peers. While we liked Sprint on a standalone basis, we believe the merger with Nextel will make it even more attractive. The combined company will have the necessary scale to compete on an equal footing with the wireless industry giants. The businesses should be complementary. Nextel’s strength is in the business market, whereas Sprint has mainly focused on the consumer area. In addition, there should be significant synergies from the merger (estimated at over $12 billion). After spinning off Sprint’s local phone unit, it will be one of the few large domestic “pure plays” in the domestic wireless industry, which should be attractive for growth-oriented investors. On the equipment side, we like Motorola (MOT). With a solid lineup of new products like the ultra sleek V3 Razr, the company has been gaining market share in the core wireless handset business. Most of MOT’s other key businesses are also performing well. In particular, the company is seeing strong demand from government agencies due to a combination of increased Department of Defense spending and Homeland Security initiatives. In addition, last year’s spin-off of the semiconductor business (Freescale) should result in higher profit margins and less volatile earnings over the long term. We are still de-emphasizing the rural wireline-only carriers, though we would become more positive on them if pending asset sales at ALLTEL and elsewhere can be had at attractive prices. Based on media reports of the amount these assets are likely to command, we don’t see them being picked up at bargain-basement prices. CenturyTel (CTL) and Citizens (CZN) we currently have Sells on, and you might want to throw into that camp Cincinnati Bell (CBB), even though I’ve still got a Hold on it. This company offers both wireline and wireless, but the wireless service is growing very slowly. What should investors watch for as 2006 approaches? First and foremost would be the competitive environment with large telecom carriers competing head-on with cable providers. Comcast (CMCSA) is expected to aggressively roll out telecom services in 2006, which could lead to more rapid erosion local phone business for the Baby Bells. This is definitely an area to keep an eye on. Another area will be how aggressively the Baby Bells choose to spend on equipment. They have been investing aggressively on their “fiber to the premises” with the intention of providing faster broadband access, and also getting into the cable TV business. Presumably, an important element of that strategy will be how successful they will be at getting through the necessary regulatory approvals. They are trying to expedite the process of not having to deal with each separate municipality as the cable companies have done, as it’s probably easier for cable companies to get into the phone business than the other way around. To whatever extent the Baby Bells are not successful with this, they may decide things are taking too long and begin backing off their investments in fiber technology. There is a possibility Congress will take a look at the ’96 Telecom Act, and try to come up with some widespread regulations to cover that. Phone companies have made progress in regulations on the statewide level (in Texas) to allow them easier access into the TV business. It will be interesting to see if and how other states will adopt similar regulations to help them. In terms of overall telecom spending, both wireless and wireline are up 10% in 2005, and expect mid-single-digit growth in 2006. Again, this is dependent on Baby Bells continuing to invest aggressively in their fiber rollouts. This is definitely something to watch. On the equipment side, once large mergers started occurring – including Verizon/MCI, which is expected to close around the end of the year, as well as several wireless deals – the fear was that this would cause equipment spending to slow. So far this has not been a concern. On the wireless side, subscriber growth and traffic have been so strong that the companies have continued heavy spending. The Baby Bells have continued spending on the wireline side as they compete with the cable guys. So 2005 has not been negative for equipment vendors, and equipment has not been an issue. But will it be one in 2006? Jay K. Ritter, CFA is a senior analyst covering the telephone industry for Zacks Independent Research. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - BULL OF THE DAY Maxim Integrated (MXIM) - Entering a New Up-Cycle. For full Zacks research report, click here. Cousins Properties (CUZ) - Continuing Weak Results. For full Zacks research report, click here. Finishing Up the Third Quarter Zacks Industry Rank for the Week of November 28
2. SCREEN OF THE WEEK 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. “Finding Growth Stocks at Excellent Values” This week’s screen has something for both Growth Investors and Value Investors alike. Growth Investors focus on companies with great earnings growth, but that alone isn’t good enough for many stock pickers any more. They want good growth at reasonable prices (low P/E’s). And while Value Investors focus on low P/E stocks, too many are low because they lack earnings power. So instead, try combining the best of both worlds by focusing on the companies with the highest growth rates with the lowest P/E ratios. The screen I’m running this week is as follows: Companies with 5-Year Historical Growth Rates to be in the top 20 percentile of all companies. (Using a Uniform Rank of 1-99 (99 being the best growth rates), I screened for stocks ranked 80 or better.) Companies that also happened to have the lowest P/E’s as well – lower than 80% of all other companies. (Using a Uniform Rank of 1-99 again (this time 99 having the lowest P/E’s), I screened for stocks ranked 80 or better.) I then required those qualified stocks to be trading at or above $5, with average daily trading volumes of 100,000 shares or more, and a Zacks Rank of #2 or less (only ‘buys’ and ‘strong buys’ allowed). This week, there are 20 companies that passed this screen. Here are three from that list that look great:
Incidentally, this screen backtested very well too. And while it wasn’t designed to be a trading strategy per se’ (20 stocks is a lot of stocks to trade every month), this screening strategy beat the market in every year for the last five years (2001 thru 2004 and YTD 2005). (I ran a series of tests over the last five year time span, using a four-week rebalancing period. Each run was rebalanced over a different set of four-week periods to eliminate coincidence and verify robustness.) In 2001, this screen showed an average annualized gross return of 42.6%. In 2002, it was 19.1%. In 2003, it was a whopping 93%. In 2004, it came in at 40.4%. And so far in 2005 (YTD thru 11/11/05), its average annualized gross returns are up 12.1%.. This screen is an excellent way to find good growth companies that also have low valuations. Check it out for yourself and get the rest of the stocks on this list. See where your stocks Rank out of all of the other stocks out there, and test your own strategies to see how they’ve done. Find out what works and what doesn’t. It can all be done with the Research Wizard stock picking and backtesting program. Sign up now for your two-week free trial and learn how. http://at.zacks.com/?id=2335. 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. 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: Cutera, Reliance Steel & Aluminum, RF Micro Devices and Western Gas Resources. Cutera, Inc. (NASDAQ: CUTR) recently reported third-quarter earnings of 27 cents per share, soaring past last year’s seven cents and jumping ahead of the consensus estimate by nearly 108%. The company stated that demand for its multi-application CoolGlide Xeo system, the Titan application, and the Solera platform, remain strong as customers continue to acquire its systems and upgrades to address the increasing consumer demand for non-invasive aesthetic procedures. CUTR raised its full year 2005 earnings guidance to 87 cents per share from 62 cents. Analysts increased estimates from 62 cents to 88 cents over the past 30 trading days. Continue your research on CUTR at: http://at.zacks.com/?id=2275. Reliance Steel & Aluminum Co. (NYSE: RS) announced third-quarter earnings of $1.49 per share in mid-October. The result improved on last year’s $1.35 and topped the consensus estimate by approximately 19%. The company mentioned that products sold into the aerospace industry continued to show strength during the quarter. For the fourth quarter, RS projected earnings of $1.10 to $1.20 per share. Analysts are in agreement as evidenced by current estimates of $1.19 per share, which is roughly 9% above two months ago levels. Continue your research on RS at: http://at.zacks.com/?id=2276.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - RF Micro Devices, Inc. (NASDAQ: RFMD) 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 RFMD at: http://at.zacks.com/?id=2277. Western Gas Resources Inc. (NYSE: WGR) 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 WGR 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. 4. FEATURED EXPERTS 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.
This market is starting to resemble the storyline in the movie Groundhog Day. This is to say we keep seeing the same thing over and over. The market rallies close to the old high set on (fill in the blank) date, rolls over and heads back toward 10,000. The only thing more tedious than the market action itself is the myriad explanations by the punditry. The real answer to this market is to understand this question; what does a bear market behave like? This is still a bear market and will be until the dividend yield on the Dow Industrials reaches its historic level of undervalue. Until that time the market will rally and decline, much like it has the last five years. The investment strategy for most investors is to try to pick the hot stock de jour or to time short-term market or sector direction through indexes or ETF’s. This is a tough way to make money. Kelley Wright and his team would suggest that investors wait for historic values to become available and then to add them to their portfolio. This generally takes courage, especially if the stock is out of favor with the general market trend. This is the lot of the value investor however; treading where others dare not. Polaris (NYSE: PII), the ancient word for “North Star” also happens to be the world’s largest maker of snowmobiles. Named for the far north location of its corporate headquarters in Minnesota, the company developed one of the world’s first snowmobiles over 48 years ago. In 1958, Polaris snowmobiles were used by the U.S. Air Force to travel within 400 miles of the North Pole. Product reliability was put to the test in rugged weather that exceeded –48°F. Polaris now operates wholly-owned subsidiaries in Australia, Canada, France, Great Britain, and New Zealand. Expanded production includes All Terrain Vehicles (ATV’s), Motorcycles, and Snowmobiles. During 2004, PII’s sales of snowmobiles increased for the first time in three years. The company entered the season with two completely new models, with several more planned for the near future. As with Polaris’ other products, snowmobiles have also won several key points of recognition. A blind test recently found PII to be the highest in quality of all snowmobile makers. The 800 RMK has been named “the biggest, baddest factory mountain masher in the universe” by SnowGoer magazine. Models are made for many different segments, including performance, deep snow, trail luxury, crossover, 2-up touring, trail sport, and youth. At a recent price of $47, Polaris remains in a Declining Trend with a downside risk of 21% to an Undervalue price of $37, high yield of 3.0%. From current levels the company has a 59% upside potential to an Overvalue price of $75, low yield of 1.5%. Based on the company’s current downside risk and overall low yield relative to many other sectors, Wright and his team do not yet feel a purchase is justified. However sales trends have been difficult and the company has seen problems with rising costs. Should these continue, the company is very likely to enter back into its range of historic Undervalue. At these levels, shares offer excellent dividend growth potential with management willing to also reward shareholders with stock buybacks and other incentives. Based on the current annual dividend of $1.12, the company will again enter Undervalue at a price of approximately $41.50/share. Investment Quality Trends is the #1 performing newsletter on a risk-adjusted basis for the past 15 years -- through 1/31/2001 according to industry watchdog, Mark Hulbert, who ranks the top performers in the investment newsletter industry. Find out why we’re #1. http://at.zacks.com/?id=2349. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - b) A Trifecta for the Hot List John Reese’s Hot List topped the S&P 500 in three different categories. Discover by how much. More... c) Pay Attention to Past Market Cycles Ken Trester explains that if history is an indicator, investors should prepare for a sizeable correction next year. More... 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 (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?
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 to help take definitive action to improve your portfolio's performance. Did we mention it's free? Get started now! We hope you enjoyed this issue of "Profit from the Pros", And we look forward to visiting with you again next week. REFER-A-FRIEND If you enjoy this e-mail newsletter, then please pass it along to a friend. Simply forward them the link below to sign up for their own free subscription. If you're reading a forwarded copy, sign up for your own, so you get this wealth of information every week. Just click here. THANKS! Regards and Happy Investing, Charles Rotblut, CFA 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. To contact us by mail: Zacks Investment Research To unsubscribe from receiving "Profit from the Pros" e-mail newsletter, click here. | |||||||||||||||
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Zacks #1 Stocks on the Move 05/22/2013
| Company Name | Symbol | %Change |
|---|---|---|
| ALLIANCE FIB | AFOP | 9.31% |
| SONIC FOUNDR | SOFO | 7.77% |
| TRI TECH HOL | TRIT | 6.62% |
| A M R CP | AAMRQ | 4.52% |
| FLOWERS FOOD | FLO | 4.31% |
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