Tuesday - December 13, 2005

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Last week, the airline industry twice experienced what is known as “event risk” as two sad incidents occurred. Early in the week, a man, whose wife said was bipolar, was shot in Miami after allegedly claiming to possess a bomb. Then on Thursday, a six-year old boy was killed when a plane skidded off of the runway at Chicago’s Midway Airport and onto a road.

Event risk is an incident occurring that could impact the profit outlook for a company or an entire industry. Some of these incidents can have a probability attached to them, such as a natural disaster, while the chances of other incidents are more random, such as the unexpected departure of a company executive. Short of creating a complex model or incorporating what could be a potentially expensive options strategy, there is a little an investor can do to protect themselves other than to maintain a diversified portfolio.

When an event does occur, however, investors should turn to the earnings estimates and keep an eye out for revisions. A divergence between the stock price and the trend in estimates can signal an opportunity, either to the upside (the stock price plunges, but estimates remain unchanged) or to the downside (the stock price holds but estimates are plunging). It is important to keep in mind that estimates can take a few days to be revised; therefore, there can be instances where selling on incomplete information may be prudent.

More...

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Zacks Equity Research continued...

For Transportation-Airline, earnings estimates were essentially unchanged this week. The incident in Florida was an extraordinary event that shouldn’t have any impact on AMR Corporation’s (AMR) prospects. The accident at Midway involving a Southwest Airlines (LUV) occurred too late in the week to show up in the numbers. As a group, the airlines have a Zacks Rank of 3.03, placing them in the middle of all industry groups.

The transportation sector as a whole, however, is experiencing relatively strong revisions in earnings estimates. For the second consecutive week, Transportation is the top-ranked sector, displacing Oils-Energy. Key drivers for the sector are Transportation-Trucking and Transportation-Shipping.

Transportation-Trucking has an increased/total estimates ratio of 0.14. Nearly a third of the group’s 26 companies have an increased/total ratio of 0.20 or higher. Among those companies is Landstar System (LSTR), which has a increased/total estimates ratio of 0.43.

Last Monday, LSTR upped its fourth-quarter guidance. The company now anticipates generating profits of 65-70 cents per share, versus the 46-51 cents it predicted in its third-quarter earnings release. The company cited both Katrina-related business and the combination of a favorable economic environment, account growth and new agents for the strong performance. Three analysts have revised their estimates upward in response, but the consensus estimate remains below LSTR’s revised guidance.

Transportation-Shipping has an increased/total estimates ratio of 0.23. A notable Zacks #1 Rank stock within this group is Tidewater (TDW). Although estimates for TDW have been holding fairly steady over the past month, forecasts for both fiscal 2006 (ending in March) and fiscal 2007 were revised sharply upwards by six analysts following the company’s fiscal second-quarter report.

The ratio of increased estimates/total estimates for all companies within the Zacks Universe is 0.10 versus 0.16 last week, based on estimates for 2005. Using 2006 estimates, the ratio is 0.09 versus 0.13 last week. Both numbers extend the downward trend that has been occurring over the past few weeks. The decline is not cause for concern, however, because the total number of new estimates being made has been declining as well.

Sector Rank is calculated by averaging the Zacks Rank for all of the industries within a given sector. Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry.

The Zacks Rank is a quantitative model that measures trends in earnings estimates revisions. Zacks Rank scores range from #1 (Strong Buy) to #5 (Strong Sell). At all times, approximately the same number of stocks are assigned a Zacks #5 Rank as are assigned a Zacks #1 Rank. Read the complete Industry Outlook at http://at.zacks.com/?id=2379 

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MORE FROM ZACKS EQUITY RESEARCH…

BULL OF THE DAY

CV Therapeutics (CVTX) - Potential Blockbuster Drugs. For full Zacks research report, click here.

 
BEAR OF THE DAY

Telecom Argentina (TEO) - Uncertain Earnings Outlook. For full Zacks research report, click here.

 
ZACKS ANALYST INTERVIEW

India Growing Despite Pricing Issues

Maintaining price leadership or a pricing edge is becoming increasingly difficult for Indian companies. More...

 
ZACKS MARKET COMMENTARY

All Eyes on the New Year

With the third quarter earnings season practically over, Dirk Van Dijk, Director of Research, says investors should focus squarely on 2006. 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: Upgrades and Revisions

This strategy focuses primarily on Positive EPS Estimate Revisions and Brokerage Rating Upgrades. Over the last 20 years Zacks Investment Research has proven that "earnings estimate revisions are the most powerful force driving stock prices." Studies have also shown that stocks receiving upward EPS revisions tend to receive additional upward revisions in the future. Then consider that stocks receiving these upward revisions generally have brokers upgrading their Ratings, which is also a proven mover of stock prices. There are other parameters to this strategy, but the Rating Upgrades and positive EPS Revisions are the two powerful active ingredients.

This screen focuses on EPS Revisions, along with Broker Ratings and Rating Changes. According to Zacks Investment Research "earnings estimate revisions are the most powerful force impacting stock prices". Couple that with the proven benefits of upgrades in ratings from brokerage firms and you have a strategy that delivered a +55.7% return in 2004. In 2005, the Upgrades and Revisions Profit Track is continuing its trend of delivering double-digit returns.

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

Altiris, Inc. (NASDAQ: ATRS) offers a full line of Web-enabled solutions that empower organizations to easily manage desktops, notebooks, handhelds and servers throughout the IT lifecycle. The company satisfies the criteria of this Profit Track with its five-year track record of earnings growth of 53%. In late October, ATRS posted non-GAAP earnings of 19 cents per share for the third quarter. The result matched last year’s total but exceeded the consensus estimate by 90%. Continue your research on ATRS at http://at.zacks.com/?id=2389

Axsys Technologies, Inc. (NASDAQ: AXYS), a global leader in the design, manufacture and distribution of precision optical solutions, reported financial results for the third quarter in late October. Earnings per share were ahead of analysts’ expectations by nearly 37%. The Zacks #1 Rank (Strong Buy) company mentioned that it continued to book substantial quantities of new business. AXYS brought in impressive earnings per share growth of approximately 136% over the past five years. Continue your research on AXYS at http://at.zacks.com/?id=2390

Carpenter Technology Corp. (NYSE: CRS) is engaged in the manufacture, fabrication, and distribution of specialty metals and certain engineered products. The company, which is also a Zacks #1 Rank (Strong Buy), announced fiscal first-quarter earnings of $1.54 per share in late October. With Wall Street expectations coming in at $1.18, the earnings result was an upside surprise of almost 31%. The earnings total also topped the previous year’s performance. CRS experienced earnings per share growth of almost 22% over the past five years. Continue your research on CRS at http://at.zacks.com/?id=2391

Lennox International Inc. (NYSE: LII) put together earnings per share growth of about 31% over the past five years. In late October, the company released its third-quarter report, stating that all of its business segments realized increased revenue and segment profit. The global provider of climate control solutions reported earnings per share that eclipsed the consensus estimate by almost 14% and outperformed the year ago result. Continue your research on LII at http://at.zacks.com/?id=2392

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2393.

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=2394

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SCREEN OF THE WEEK

Screening for Stocks to Pick the Right Options

Kevin Matras shows you why a good stock screener can be your best tool for picking options: http://at.zacks.com/?id=2395

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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 more on Schaeffers Tools to Profit with Options.

Let’s take another look at drug giant Pfizer (PFE).  As you might remember, we said back in August to buy some PFE December 27.50 puts for $2.45 a contract.  Well, things have worked better than we could have ever hoped, as PFE continues to drop to new multi-year lows even as the broader market soars to new multi-year highs. 

In fact, as of Friday afternoon you could sell those same puts for $6.60 a contract – or a nice little 169% GAIN!  As we’ve said numerous times while writing this column, it’s so important to look back at trades (both winner and losers) and examine what it was that lead you to make that trade.  Doing this exercise over time should (hopefully) help you learn what tends to work for you – and better yet, what doesn’t work. 

Now lets take a look at what it was that we saw on the High Open Interest Call Filter back in August that lead us to think about playing PFE.  Remember, below is from August.

For starters, calls are simply a bet that the underlying stock is going to move higher. From our contrarian point of view, a large number of calls accumulated at a certain strike just above the stock's current level is a sign of potential options-related resistance. I won't get 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 have the potential to serve as a solid level of resistance.

Before I can go any further, I want to 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. 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 has lots of 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.

One more very important item I must touch upon regarding this filter before we get started is that the majority of the stocks it suggests are likely to be the big names that have lots of activity, such as the Nasdaq 100-Trust (QQQQ), the Spyders (SPY) or Microsoft (MSFT). These big names don't take away from the importance of this filter; they are just something to keep in mind.

Now looking at the list from last Wednesday, one name that struck me as a potential play was Pfizer (PFE). Just in case you didn't already know, PFE is one of the largest drug companies in the world and their best-known drugs include Celebrex, Zoloft and Viagra. I noticed PFE made the list thanks to the large buildup of bullish calls they have at the September 27.50 and September 30 strikes.

So with the shares currently trading around 26, the odds are in favor that they'll have a tough time getting through all those calls overhead at the $27.50 region.

Technically, PFE has traded in a five-point range this calendar year, but looking at the shares from longer-term perspective things are a little uglier, as the equity is in a solid downtrend. In fact, during the past 12 months, PFE has lost 17% and from its early 2004 peak, it has plunged almost 33%.

Now looking at the sentiment, we find a good deal of optimism. Remember, we view this bullishness as a sign that whoever wanted to buy the shares probably already has, and thus the path of least resistance is going to be lower. One good way to figure this out is to look at the short-interest ratio. Well, currently it would take only 1.51 days for all of the shorts to cover their bearish bets - greatly reducing the odds of a short-covering rally on any news.

Another good way to get a gauge of sentiment is what the analysts think. Given the poor performance for PFE you'd think they'd be a little skeptical, but this actually isn't the case, as according to Zacks, there isn't a single "sell" rating out of 24 total recommendations. This bullish configuration shows us that should the shares continue to fall there is plenty of room for some downgrades.

With all of that said, let's hypothetically buy the December 27.50 put (PFEXY) for $2.45 a contract (where it was trading on Thursday afternoon).

To learn more about the 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=2382.

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Every day on Zacks.com we highlight four Zacks Rank Buy stocks. Each individual stock is chosen based on how well they match the criteria for the four main schools of investing: Aggressive Growth, Momentum, Growth & Income and Value.

• Aggressive Growth – Merge Technologies, Inc. (MRGE)
• Recent merger with Cedera doubled the company’s size
• Appealing valuation with PEG at 0.79
• Margin growth strongest in company’s history
• Competes in high growth field of Healthcare IT
• Earnings have met or exceeded estimates for eight straight quarters

Read the full analysis on MRGE at /rank/?id=2494

Growth & Income – Praxair, Inc. (PX)

• Has beat estimates for four consecutive quarters, while meeting or exceeding estimates for 16 consecutive quarters
• EPS growth rate for the next 3-5 years projected to be 10.3%
• Gross margins have increased for the past five years
• Strong ROE of 21.0%
• Consistent history of paying dividends, with a current yield of 1.4%

Read the full analysis on PX at http://at.zacks.com/?id=2495

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Zacks Rank Buys continued...

Momentum – Dress Barn (DBRN)
• Dress Barn exceeded third-quarter expectations by a wide margin and raised full year guidance
• The full-year consensus estimate has been revised upwards by 42% over the past 60 days
• Shares of DBRN have broken out to the upside following a brief period of consolidation
• Both the 50- and 200-day moving averages have positive slopes, confirming the upward trend.

Read the full analysis on DBRN at http://at.zacks.com/?id=2496

Value – Corus Bankshares, Inc. (CORS)
• Has beat estimates for six consecutive quarters and eight out of the last nine quarters
• Estimates for 2005 have increased by 5.0% over the past 60 days, reflecting upward revisions by three analysts. For 2006, the consensus estimate is 8.2% above the level of two months ago 
• Sales and gross profit have increased for each of the past two years
• CORS trades at less than 3x book value

Read the full analysis on CORS at http://at.zacks.com/?id=2497

To see the full list of Zacks #1 Rank stocks (approximately 220 stocks), go to http://at.zacks.com/?id=2383.

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=2385.
 

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Zacks Rank #1 and #5 Additions

Zacks #1 Rank List: 34 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: 22 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.
• +18% in 2005 (through September 30)

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=2385.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2383.

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=2386.

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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