Wednesday - December 21, 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 As the pharmaceutical industry tries to shake off a years-long market slump, we thought we would ask senior analyst Jason Napodano, CFA where the best buys in the industry may be. Are they in high-risk biotech firms, or are large-cap value plays more in order? One of the more troubled companies in your coverage recently has been Merck. Can you get us up to speed on this company's situation? Merck (MRK) held an analyst R&D day last week, in which it outlined very aggressive guidance forecasts, in my opinion, on how it’s going to return to growth. Merck thinks ’06 will still be down, but will return to slight growth in ’07. In my model, ’07 growth will only be a couple cents – nothing spectacular. Then the company says earnings will be down again in ’08, but it thinks sustainable long-term earnings growth will be starting in 2010. Based on this information, I maintain a Sell recommendation on Merck shares. There is nothing terribly exciting to note here. We learned about a new cholesterol drug being developed, but I don’t think it will be a blockbuster, for a few different reasons. First of all, cholesterol-lowering agents exist in a highly competitive market. This new drug would likely even compete against its own Vytorin. Basically, this new drug will be a combination of Merck’s LDL [bad cholesterol]-lowering Zocor and its HDL [good cholesterol]-increasing drug. Pfizer (PFE), with its market leader in LDL-lowering agents, Lipitor, is working on the same thing. But Lipitor is superior to Zocor, and Pfizer’s HDL-increasing drug is superior to that of Merck as well. So while this is an understandable strategy, Merck’s new cholesterol drug may wind up being just a second- or third-class product. We’re not terribly impressed. More. . .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - The Guidant buyout story seems to have turned into a kind of soap opera. What's the latest here? Well, the hubris of Johnson & Johnson (JNJ) is the first thing that comes to mind. JNJ had Guidant (GDT) at a reasonable price. Then some problems arose with some defribullators and other cardiac devices, and JNJ saw an opportunity to muscle Guidant into accepting a lower bid, which GDT reluctantly did. At the time, JNJ was able to come away from that with a big smile on its face, having just shaved about $4 billion off the price. But now Boston Scientific (BSX) has outbid JNJ. We thought that this deal was done, then we didn’t know, then we thought it was done again. But the bottom line is that the BSX bid is clearly superior, and unless JNJ raises its bid to about the same as its initial bid, they won’t get Guidant. As I say, it was a lot of hubris on JNJ’s part, and now Boston Scientific has shown up as the white knight for Guidant shareholders. I think JNJ could pay more than BSX, but will they? Plus, how stupid would they look going back and paying the same – or maybe even more – as their initial offer. Boston Scientific offered pretty much what Guidant wanted before they had their product problems. And JNJ needs Guidant, in my opinion; JNJ’s pharma growth is unimpressive. Medical devices are where the hot growth is in healthcare right now, and I think JNJ may have just blown the deal. So now the Guidant board says it’ll review the BSX offer, but this is a no-brainer. From the viewpoint of the Guidant shareholders, why would you want to take JNJ’s $62 per share when BSX is offering $76 per share? No doubt it is a superior deal. But then they’ll take it back to JNJ, where they’ll get an opportunity to outbid BSX or let the deal slide. I really don’t know if they’ll be willing to pay that much. At the very least, this is a hit to the management credibility at JNJ. I noticed you’ve got quite a few Buy recommendations on biotech firms these days. What’s the story there? You’re right – I’ve got Buys on lots of small biotechs right now, mostly ones with promising mid- to late-stage pipelines. Biotech is where the growth is in the industry; there is not a lot of growth in large-cap pharma. Those big companies can cut costs, buy back shares and pay healthy dividends, but if they want growth, they’re going to have to buy it. Take the case of Amgen (AMGN), which bought out small biotech firm Abgenix (ABGX) two or three months ago. You may remember, actually, that I had predicted this buy-out in a Zacks interview earlier this year. But basically, the story is that Abgenix had a Phase III potential blockbuster drug for the treatment of colorectal cancer that Amgen was going to split 50/50 with them. This is a potential billion-dollar drug developed by a company – Abgenix – trading at a market cap of only $700-800 million or so. When the data came out, the thing just rocketed. So Amgen said, “We can just buy this whole company rather than split the profits with them 50/50.” Now Amgen plans to file for approval of the drug very soon. This sets a model for what makes sense we might see in ’06: big companies taking a look at small companies with promising mid- to late-stage drugs. Are most of your Buy recommendations in biotech right now, or do you have any large-cap plays for us today? I have both, actually. In large-cap, I just upgraded Eli Lilly (LLY) to a Buy. Lilly recently held an analyst day, and I think the company has found good price level support in the low-$50’s. Its cheap drug Zyprexa, whose sales had been falling because of some negative side-affects and competition, has finally stabilized. Lilly has the best late-stage pipeline in the pharma industry at the moment. And growth is there for Lilly, too. The company is about a quarter the size of a Pfizer or a JNJ – it is big enough to compete with the biggest of the big pharma firms, but it’s still small enough to generate an impressive rate of growth. With Pfizer, which brings in $50 billion in annual sales, it takes $5 billion to grow 10%. Whereas Lilly, which sells about $14-15 billion per year, to achieve 10% top-line growth of about $1.5 billion. And with its impressive late-stage pipeline, double-digit growth for a company like Lilly is much easier to attain. What are some of you biotech Buys? Well, I’d like to break these down into bigger and smaller firms, even within biotech. For the bigger companies, I’d recommend Amgen (AMGN) and Biogen (BIIB). Amgen mainly is a valuation call due to its under-appreciated pipeline. It delivers impressive growth – not as much as Gilead Sciences (GILD) or Genentech (DNA), perhaps – and it is trading at a significant discount to smaller biotechs. So the valuation is out of whack. For Biogen, its much-maligned M.S. drug Tysabri will be back on the market sometime in 2006. We feel the financial forecasts are too conservative. I believe the Street kind of under-appreciates the kind of growth and earnings BIIB will be able to deliver. As far as the smaller biotech firms, we’re going to see some data in the next three or four months on an atherosclerosis drug from AtheroGenics (AGIX). This is a potential blockbuster drug – over $1 billion – if it does what it’s supposed to in decreasing plaques found in arteries. Heart disease is the #1 killer in the developed world, and most heart disease is caused by atherosclerosis. So here’s a company with a $625 million market cap with a potential billion-dollar drug in Phase III testing. If the tests come out positively, I can’t imagine a Bristol (BMY), a Merck (MRK) or a Lilly (LLY) not wanting a piece of this drug. Finally, I’ll recommend two very similar, very small companies who deal with neurological sciences - Acadia (ACAD) and Arena (ARNA). Acadia has two mid-stage schizophrenia and Parkinson’s drugs, which represent very large opportunities in underserved markets. Arena has had very positive Phase II testing for its anti-obesity drug. At the highest dosage, patients lost an average of eight pounds in 12 weeks. This may not sound like a lot, but it is impressive. With no radical surgery, just going through a normal daily routine and taking the drug, these numbers are up there with some of the best we’ve seen in an obesity medication. The company’s small $500 million market cap means that the company may develop a partnership or may get bought out. Any final thoughts? Yes. Large-cap pharma had an absolutely horrible 2000 to 2005. The second half of the decade should be significantly better. So, while I’m not overly optimistic on Pfizer (PFE), which I’ve got a Hold on, or Merck (MRK), where I’ve got a Sell, this might be a good time to start establishing positions in the industry. Right now there are low expectations and – more importantly – low valuations for many of these companies, so they should make good long-term value plays. Jason Napodano, CFA is a senior analyst covering the pharmaceutical industry for Zacks Equity Research. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - BULL OF THE DAY Rackable Systems (RACK) - Rapid Growth Trajectory. For full Zacks research report, click here. Sappi, Ltd. ADR (SPP) - Material Costs Hurting Profits. For full Zacks research report, click here. Estimate Revision Activity Remains Subdued Zacks Industry Rank for the Week of Dec 19
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. “The Short Ratio” This week’s Screen isn’t so much a screen, but rather a look at how using a market sentiment item can help find new stock picks. The item is called the ‘short ratio’. The short ratio is the number of shares sold short (short interest or bets that the stock will go lower in price) divided by the average daily volume. This is also sometimes referred to as the "days to cover" ratio because it tells approximately how many days it will take short-sellers to cover their positions if good news sends the price higher. The higher the ratio, the longer it would take to buy back the ‘sold’ (borrowed) shares. And in theory, the more short positions there are to cover, the stronger the short covering rally would be. Many people who use this indicator like the number of “days to cover” to be higher than 8-10 days. It’s generally believed that a short ratio of that size could prove difficult to cover and therefore trigger a strong rally on any hint of an upswing. (Kevin’s personal preference is to take that into consideration, but also compare it to the industry’s average ratio and the stock’s own historical ratio.) And while Kevin wouldn’t recommend using just the short ratio as the ‘be all and end all’ of screening items, he does think it can be a great tool for helping define great opportunities. For example: sometimes when looking for stocks that have been in a lengthy consolidation, Kevin will look for those stocks with high short ratios. Why? Because consolidation ranges are basically areas of market indecision. Bets are being made by both bullish and bearish investors. So finding stocks that are going back and forth near their price highs with a growing short ratio, shows that ever-increasing bets are being made on prices going lower. However, if the stock breaks out to the upside, properly positioned bulls will more than likely add to their winnings, undecided traders will now be convinced to get long, and shorts will have to scramble to cover their bearish bets. This can be an explosive situation. This can also be used quite effectively for bottom fishing too. When a stock is getting battered and pundits are wrangling over whether it’s the bottom or not, you should pay close attention to the short ratio. Of course, there has to be a reason for a stock to move higher. So seeing an improving fundamental outlook is important. But when lopsided market sentiment seems to be at its worst (reflected in investors’ buying and selling) the short ratio can be just the thing to uncover extremes. For example: you can search for companies near their 52-week lows with increasing short ratios to locate beaten-down stocks. Or better yet, look for short ratios above their average values or even ones that are at (or near) their two-year highs. For stocks moving higher, try looking for historically high short ratios for stocks up 20% or more (new uptrend) or that have just rallied past an important moving average like the 50- or 200-day average. (Funds will often pile in at those points. So a large short ratio could propel the market significantly higher as huge buyers bid the market up while panicky shorts chase it even higher just to get out.) A screen Kevin is currently running looks for stocks that are:
Here are three of the companies that made the list:
Try using the short ratio in some of your current screens and see if it doesn’t give you a greater edge and keener insight into what’s really happening in your stocks. This item isn’t available in all screeners (especially the historical values and industry values), but it is available in the Research Wizard. This item isn’t available in all screeners (especially the historical values and industry values), but it is available in the Research Wizard. And remember the key to successful screening is in discovering those screens that have produced profitable results in the past. And that’s exactly what you get with the powerful Screening and Backtesting ability of Research Wizard. 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 RANK BUY STOCKS 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 – Celadon Group (CLDN) Earnings at Celadon have been growing strongly and have routinely been beating estimates. The company has surpassed the consensus estimate in 12 out of the last 13 quarters. All three analysts covering the stock increased their numbers as a result of the outperformance. Over the past 90 days, estimates for the current year ending June 2006 have increased 12.6% to $1.79 per share. Read the full analysis on CLDN at: http://at.zacks.com/?id=2498. Growth & Income – Florida Rock Industries Inc. (FRK) Florida Rock Industries, a Zacks #1 Rank stock, has a history of exceeding estimates, topping expectations in the last four quarters. The company has increased revenues and expanded gross margins each year for the past 10 years. Analysts are projecting earnings growth of 15.0% over the next 3-5 years. FRK has a current dividend yield of 1.2%. Read the full analysis on FRK at: http://at.zacks.com/?id=2499. More...
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Momentum – M Systems (FLSH) With the holidays upon us, you might be facing buying flash storage devices for that new camera or computer that you’re giving. At least that’s what M Systems hopes. Driven by excellent earnings, broker upgrades and revisions, this Zacks #1 Rank stock is making new 52-week highs. Read the full analysis on FLSH at: http://at.zacks.com/?id=2500. Value –Amcol International Corp. (ACO) Amcol International, a Zacks #1 Rank stock, reported strong third quarter results prompting positive earnings forecasts for both this year and next. Despite impressive year-to-date results, the stock continues to trade at a discounted valuation of just 2.43x book value. ACO currently yields 2.0% and has a favorable ROE of 11.4%. Read the full analysis on ACO at: http://at.zacks.com/?id=2501. 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.
One big piece of economic news this week is that the country's trade deficit increased faster than expected (even though the price of imported oil fell), and reached a new record. Given our country's record of trade deficits, this latest trade gap may seem relatively unimportant. But some observers think this will hurt the economy. The New York Times reported: "The widening [trade] gap is likely to reduce the nation's overall growth in the final quarter of this year. Morgan Stanley reduced its forecast for growth this quarter to 3 percent, from 3.4 percent on Wednesday, and Merrill Lynch shaved its already pessimistic forecast to just 2.3 percent." The trade deficit, if it slows the economy, will put a damper on company performance and, of course, stock prices. The second big piece of news was the increase the Fed made in interest rates. Okay, you're probably thinking this is no longer big news. After all, this is the 13th time since June of 2004 that the Fed has hiked rates. But the language from the Fed suggested, at least to some, that the bank was signaling its rate increases might soon be coming to an end. Observers seem to think the Fed will raise rates a few more times, from today's 4.25 percent, perhaps up to 5.0 percent or so, but then stop. This prospect made many investors cheerful, though reading the Fed's crystal ball is more difficult than ever since there will be a change at the top on January 31, 2006, when Alan Greenspan leaves and Ben S. Bernanke takes over. Another piece of news to come out this week was the November consumer price index, which fell 0.6 percent, the biggest one-month decline since July 1949 - 56 years ago. Driving the decline was the drop in gas prices. The core CPI, which excludes food and fuel, rose 0.2 percent, which was in line with the Street's expectations. What this suggests is that inflation is under control, which is always good news for the stock market. D. R. Horton (DHI): This major builder of homes has the backing of the strategy John Reese bases on Martin Zweig's writings. The P/E of a company must be greater than 5 to eliminate weak companies, but not more than three times the current market P/E because the situation is much too risky. Horton's P/E is 8.21, based on trailing 12 month earnings, while the current market PE is 22. Revenue growth must not be substantially less than earnings growth, according to the Zweig strategy's view. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. Horton's revenue growth is 30.09 percent, while its earnings growth rate is 43.57 percent, based on the average of the three, four and five year historical EPS growth rates. Another Zweig test is to compare the earnings growth rate of the previous three quarters with the long-term EPS growth rate. Earnings growth in the previous three quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for Horton is 21.78 percent. This should be less than the growth rates for the three previous quarters, which are 28.81 percent, 53.33 percent and 46.25 percent. Horton passes this test, which means that it has good, reasonably steady earnings. Invest with the confidence of knowing that your decisions have been validated by strategies of Wall Street legends that have proven to outperform the market. The Validea Hot List contains a portfolio of stocks that pass our interpretation of the strategies of the world’s most astute investment minds, including Graham, Lynch, Zweig, Buffett and others. Validea’s extensive research has shown that when these strategies agree, the result is market beating returns and low levels of risk. http://at.zacks.com/?id=2404. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - b) Thank Heaven for the Hedge Fund Kelley Wright is glad that he runs a hedge fund. Discover why and read about some of Wright’s featured stocks. More... c) Current Bullish Stance May Become Neutral Ken Trester expects a rally during the final week of December but recommends lighter options positions. Learn why and check out an option trade. 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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