Friday - December 23, 2005
 Want to view the archive of past issues? Go to: http://at.zacks.com/?id=2283. Manage Profit from the Pros subscription: 1. ZACKS EQUITY RESEARCH A new Fed Chairman being ushered in early next year and interest rate hikes expected to continue are just two of the issues confronting the banking industry in 2006. Senior banking analyst Scott Jaggers, CFA was on hand to help us sort out what investors should know about the industry going forward. Banking has performed well for several years now. Where do you see this industry’s main strengths? Over the past few years, banks have been outperforming the broader market. 2005 will be the first year in perhaps the past five years when that will not have happened. In my estimation, 2006 should not break this trend. With interest rates rising such as they are, this is generally not a time when banks do better in the market, in most cycles. Banks have been pretty resilient on top-line issues, but most of these positive things are already reflected in most valuations. I don’t see many screaming Buys in banking at the moment. Loan demand has been fairly strong, and this is obviously good for the industry. These have also been a little bit skewed toward real estate – much of which is commercial, not just mortgages – and there are some pros and cons with that. Demand is good, so banks have had a reasonably good time growing balance sheets; the industry has been solid on that front. Real estate is always a bit on the risky side, but it is still the biggest loan category at around one-half to two-thirds everyone’s business. But with valuations high, is growth really sustainable? I’d have to say things look pretty good at the moment, as long as we stay at the status quo. Here’s where credit quality may come into question because of loan standards. Obviously, if all real estate got marked down 20% next week, these loans wouldn’t be looking so good. Most banks prefer commercial and industrial real estate lending, which tend to have good businesses and assets, and this has generally gotten stronger. But lending overall has sent a mixed signal, I think. Overall, I’m not so bullish on the industry right now. Banks have gotten a bit expensive. This goes especially for smaller-cap banks, who have higher P/E ratios and are less diversified and have less fee income than larger-cap firms. More. . .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Are you foreseeing a lot of M&A activity in the near future? There has been a fair bit of M&A already in the industry. Everybody is looking to grow their business, and one way to do this is through mergers. There are still a lot of banks in the industry, and there remain lots of economies-of-scale issues and so forth. M&A makes a lot of sense from a business perspective, to keep loan officers and people with contacts and get rid of excess office staff. Not that I’m making a social statement about whether this is a good thing, with employment where it is, but this can often be seen as a good move financially. 1 + 1 = a little more than 2, in many cases. Would you expect M&A to happen at the pace it has over the last few years? It could be, based on the relative valuations. Some might consider sellers’ expectations rather high nowadays. If some of these companies’ stocks do a bit better they could do a stock transaction, which would save some money. Overall, the pace of mergers and acquisitions has not been extraordinary; many companies are still looking to buy. I think this pace could easily continue. Also, M&A has been rather mixed lately – not so much banks buying banks as banks buying credit card companies or mortgage companies. What are the main issues facing the industry? Yield-curve inversion? The main issue I see has to do with the credit cycle. This could be a bigger problem that could affect the industry more suddenly than the yield curve. Through the third quarter of 2005, credit has been really strong, some have said it’s the best they’ve seen in ten years or more. We may be getting to a point where this cycle gets worse rather than better. In my models, credit will likely start to deteriorate from here. I think most sell-side analysts would tend to agree with this, by the way. However, there always seems to be a disconnect between what the sell-side thinks and what the public thinks. So even though most of the numbers reflect tougher credit in the future, this could still surprise the market when it happens. I would just advise investors to be aware that credit is cyclical, and we are at the best part of the cycle in many years. Banks are currently receiving more loan recoveries than charge-offs, and they have been getting money back on a net basis for many quarters in a row. This doesn’t typically happen. Those companies with the best record over the past few quarters may suffer the biggest hit in a credit cycle downturn, based on reported earnings relative to their past few excellent quarters. And something like this may take several quarters to play out even if the credit cycle is not particularly bad. The Street won’t be surprised by this, but Joe Investor might be. A bank with $5 million in provisions might have $25 million next year – the swings could really be that big. Do you have any Buys or Sells you consider noteworthy at this time? I don’t have any new Buys or new Sells lately. Most of my Buy and Sell recs had performed pretty much the way I had anticipated, and now my Buys are all within 10% of their target price. So what I’ll be doing is re-assessing these companies to figure out what the next round of Buys are. For instance, I’d been recommending Accredited Home Lenders (LEND) forever, it seems, and the market just never believed in them even though the company kept hitting its numbers. I put a Buy on LEND at $30 ages ago, and it has finally responded – up $8.00 in the last eight days – and now trades up in the $49-range. My guidance for LEND in ’06 is $7.80 per share, which is within the guidance numbers of the company. So even at around $49, the stock is not dramatically expensive. But now that LEND is up 50% over the past two months, I feel I need to take another look, just in case there may be a correction. What about the issues regarding interest rate increases and the yield curve? For four quarters in a row, the yield curve was down between 40 and 70 basis points. It’s still drifting downward, but not as sharply; the curve is at around 50 right now, which is pretty flat. An extended flat yield curve can cause certain problems, such as when hedges expire after a period of time, since they can’t be recreated. And the longer it drags on, the more difficulties there are in creating profit margins. Do you think we might see a yield-curve inversion? I suppose anything is possible. But between the 10-year and the three-month, we’ve only seen a yield curve turn negative two times in the past 20 years. It’s been close on a couple of other occasions. The spread peaked in about March or April of ’04 and has been going down the last 18 months straight. It will hit bottom soon; I don’t know if it will stop here in the 40-50 bps range or invert before turning around, but let’s face it: if I knew that, I wouldn’t have to work! If you look at the history, with rates continuing to raise a quarter point each session, there’s a good chance this cycle could remain flat for the next quarter or two. The market expects two more quarter percent increases, my model says there’ll be three of them, but not necessarily consecutively. Somewhere in the range of two or three more increases puts us back to a historically normal level. We haven’t over-shot yet, that’s for sure. The good news for banks is that when there are slow and steady rate changes, they are able to plan for that. But if we were to see, say, a 50-point rate hike or lowering, this might cause problems due to the fact that it would be unexpected. Scott Jaggers, CFA is a senior analyst covering the banking industry for Zacks Equity Research. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - BULL OF THE DAY TXU Corporation (TXU) - High Annualized Return Expected. For full Zacks research report, click here. Tweeter Home Entertainment (TWTR) - Remains Unprofitable. For full Zacks research report, click here. Try This Industry on for Size Estimate Revision Activity Remains Subdued
2. PROFIT TRACKS Zacks.com is proud to share with you some of the best trading
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we highlight... Profit Tracks: Earnings and Margins This Profit Track goes to the heart of fundamental investing by finding companies with healthy earnings. The main ingredients are the search for Earnings Growth and Net Profit Margins. Then for good measure we make sure earnings estimates are moving higher which is a strong indicator of future performance and that brokerage firms are positively rating the stock. Earnings are the single most important metric for a company. Combine that with a healthy Net Profit Margin and you find a screen that has generated a cumulative return of +425% since January 2001. During the first half of 2005, this screen continued its winning ways with a +13.8% return. Here are four stocks that make the grade for the Earnings and Margins Profit Track: Amcol International Corp. (ACO), a Zacks #1 Rank (Strong Buy) company, reported third-quarter earnings of 37 cents per share in mid-October. The result topped the consensus estimate by almost 9%. The company stated that it saw continued growth, particularly in its international business, with improvements in both of its major reporting segments. ACO generated annual earnings growth of 33% above the previous year. To continue your research on ACO click here. Click Commerce, Inc. (CKCM) produced impressive earnings growth of 700% last year over the previous year. The company provides business-to-business software products and services that use the Internet to connect manufacturing companies with their distributors, dealers and other distribution channel partners. In early November, CKCM announced third-quarter GAAP earnings of 31 cents per share, more than doubling the previous year’s 14 cents and exceeding the consensus estimate by almost 35%. To continue your research on CKCM, click here. Kendle International, Inc. (NASDAQ: KNDL) posted third-quarter earnings of 24 cents per share in late October, soaring past the year prior total of four cents and surpassing the consensus estimate by about 9%. The company mentioned that its continued strong performance and return to double-digit operating margins in the third quarter demonstrate the growing global strength and improved operational efficiency of its organization. KNDL experienced earnings growth of 540% for its most recently completed year versus the previous year. To continue your research on KNDL, click here. Medical Action Industries Inc. (NASDAQ: MDCI), a leading supplier of medical and surgical disposable products, delivered annual earnings growth of nearly 11% above the year prior. In late October, the company released fiscal second-quarter earnings of 28 cents per share, almost 8% ahead of the consensus estimate and an improvement over last year’s 26 cents. MDCI noted that its record operating results reflect growth from its line of minor procedure kits and trays, containment systems for medical waste and operating room towels. To continue your research on MDCI, click here. To see the full list of stocks that currently pass this winning screen, go to http://at.zacks.com/?id=2294. 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=2295. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Kevin Matras looks at the 'short ratio' as a market sentiment indicator and shows how to use it for finding winning stocks: http://at.zacks.com/?id=2289. 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 – Chemed Corporation (CHE) Growth & Income – Goldman Sachs Group (GS) More...
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Momentum – Onyx Software Corporation (ONXS) OmniVision Technologies Inc. (OVTI) 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=2296. 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.
The major indexes are mildly on the plus side. However, the road to this point has been rocky. The good news is that the path is beginning to become smoother. Much of the volatility this year has been due to rising interest rates, record energy prices, and economic uncertainty caused by Hurricanes Katrina and Rita. These primary impediments to rising stocks are in the process of being removed. The main concern over rising energy prices is inflation and not the drain high energy prices puts on the economy. The economy has been expanding at a solid rate even when accounting for higher energy costs. Instead, it’s the longterm threat of inflation that has made investors uneasy. Fighting inflation is one of the Federal Reserve’s mandates and one of the concerns cited by the Fed for raising rates at its recent meetings. Fortunately, higher energy costs have remained contained and have not spread to other areas of the economy. With energy prices continuing to fall, inflation is unlikely to spread. The result is that the Fed is likely nearing the point where it will stop raising interest rates. Meanwhile, the economy has escaped from the hurricanes largely unscathed. There has been a cornucopia of data over the past month to indicate the business climate is good. This week alone it was reported that durable goods orders more than doubled what was anticipated, new home sales exceeded expectations, consumer confidence soared in November, and the third quarter economy expanded at a 4.3% annual pace, which was much faster than the 3.8% originally reported. All of these reports suggest the consumer is healthy and that fourth quarter earnings will be quite strong. With concerns over rising interest rates and high energy prices diminishing, valuations will be permitted to increase and allow investors to benefit from rising corporate profits. As Jim Collins and his team have stated time and time again, earnings drive stock prices over the long term. 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. Insight looks forward to a good close to 2005 and a positive beginning to 2006. Analysts’ Review Recent News Financials Caveats 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. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Nadine Wong discusses an acquisition in the biotech space that should prove to be fruitful. Read about the companies involved. More... c) Economy Needs a Good PR Firm Mutual Fund expert Don Dion says economists think two or three more rate hikes are likely. Read his outlook. 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 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=2296. Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2297. 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 06/19/2013
| Company Name | Symbol | %Change |
|---|---|---|
| SUMITOMO MIT | SMFG | 3.56% |
| SUPPORTCOM I | SPRT | 3.53% |
| RENEWABLE EN | REGI | 3.39% |
| HOOKER FURNI | HOFT | 3.19% |
| INGLES MARKE | IMKTA | 2.80% |
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