Tuesday - December 27, 2005

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A new up-cycle in the IT industry has got many investors again thinking about adding high-growth stocks to their portfolios. But which areas in tech make the best investments these days? We spoke with senior IT analyst Steve Biggs, CFA to find out.

What aspects of the tech up-cycle should investors be attuned to?

The enterprise side is definitely stronger than the consumer side. After Chief Financial Officers have been hesitant to spend on enterprise tech for the past four or five years, we expect this to change as new products come out. We look for companies to increase efficiencies with new technology and not just save up money over the next year or two.

We saw a little improvement for the first time in 2004, which was kind of a bounce off the bottom in tech spending. There was a little follow-through in 2005, and now we expect to see some acceleration in 2006 as companies are ready to roll out new technologies. Adding efficiencies is what tech is supposed to do, but for the last five years or so most companies having been looking to do this. Newer systems like VoIP (voice over Internet protocol) are the areas we expect to see growth in.

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Zacks Equity Research continued...

I was just going to ask about that. VoIP is a big growth area; what are some of the other groups expected to increase growth in the next year?

Well, security technology has been big and will continue to be so. This is more of an item of necessity, as security threats increase and computer hackers get more advanced. So enterprises will definitely have to keep spending there. I expect security to continue as a high-growth area.

But VoIP is a newer technology designed to increase efficiencies within company structures, and we will hopefully see a lot of acceleration here. So far, it already has pretty good traction. It is looking at large enterprise hardware companies. This should definitely be one of the main growth areas for next year.

Has progress been slow in deploying VoIP up until now?

Progress has been slow, but this has mostly been due to businesses not wanting to spend new money on IT, especially after the industry peaked in 1999 and 2000. Since then, companies have been more interested in keeping up what technology they already had. But as I said before, we look for companies to start becoming more willing to improve efficiencies. That’s what it’ll take to get tech moving again in ’06 and ’07.

Besides the possibility that enterprise spending may not meaningfully increase, what are some the other risks associated with overweighting tech right now? Well, let’s see. There is some weakness in both the Germany and U.K. markets. If this spreads to the rest of Europe, that would be a risk. Tech spending tends to correlate with economic growth.

Anything with extensive consumer exposure also represents a risk at this time. We’re not sure what direction this will take – or even why consumer spending is weak. Perhaps this may be due to higher interest rates, maybe the slowing in the housing market. But a good rule of thumb right now would be to stick with companies that have limited consumer exposure and are focusing on enterprise technologies.

What are your best Buy and Sell recommendations?

Palm, Inc. (PALM) is my best Buy rec at the moment. The company seems to do pretty well in penetrating the enterprise market. In the first calendar quarter of ’06, Palm will have a Windows-based version through Verizon (VZ), which should help penetrate this market even further. It should also get some business from Research in Motion’s (RIMM) losing out on customers nervous about that service getting cut off. It won’t be cut off, actually, but for those deciding between the two companies, this will push people more towards PALM. As far as Sells, I would have to say iPass (IPAS). The company rallied on a recent acquisition, but they used up a lot of cash in making this deal happen, and there is still a lot of work to do on it. This kind of lowers the floor on the stock price.

Steve Biggs, CFA is a senior analyst covering the information technology (IT) industry for Zacks Equity Research.

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MORE FROM ZACKS EQUITY RESEARCH…

BULL OF THE DAY

CNOOC, Ltd. (CEO) - Attractive Entry Point. For full Zacks research report, click here.

 
BEAR OF THE DAY

Merck & Co. (MRK) - Better Opportunities Elsewhere. For full Zacks research report, click here.

 
INDUSTRY OUTLOOK

Try This Industry on for Size

Consumers doing their part this holiday season for the retail - apparel/shoe industry. More...

 
ZACKS MARKET COMMENTARY

Estimate Revision Activity Remains Subdued

Estimate revision activity picked up a bit last week, but Director of Research Dirk Van Dijk says it’s still slow as investors set their sights on the New Year. 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: Recent Price Strength

This screen looks for stocks trading in the upper range of their 52-week highs along with attractive Zacks Rank and Broker Ratings. This strategy proves that the "trend is your friend" with a +14.6% return versus +2.4% for the S&P 500 for the first half of 2005 (through July 15).

 
Here are four stocks that make the grade for the Recent Price Strength Profit Track

AAR Corp. (AIR), a Zacks #1 Rank (Strong Buy) company, recently delivered fiscal second-quarter earnings per share that were ahead analysts’ expectations by nearly 5%. The company stated that its investments in facilities, assets and training have positioned it to benefit from outsourcing trends in both the commercial and defense markets. During the past four weeks, AIR’s share price has increased almost 14% and it is trading near a new 52-week high. Continue your research on AIR at: http://at.zacks.com/?id=2389.

CE Franklin Ltd. (CFK), an energy services company, is currently trading near its 52-week high. In late October, the company reported third-quarter earnings that more than tripled the year prior result and topped the consensus estimate by 100%. The company noted that this is the third quarter in a row it has achieved record breaking results for the comparable quarter, and the 12th quarter in a row with year-over-year improvement. During the past four weeks, CFK's share price has increased approximately 26%. Continue your research on CFK at: http://at.zacks.com/?id=2390.

Genesee & Wyoming Inc. (GWR), a railroad company, satisfies the criteria of this Profit Track with a share price that has demonstrated 6% growth over the past four weeks is currently very close to its 52-week high. In early November, the company announced third-quarter earnings per share that beat the consensus estimate by almost 9% and were well above the result from last year. Continue your research on GWR at: http://at.zacks.com/?id=2391.

Ladish Co., Inc. (LDSH), an industrial goods company and a Zacks #1 Rank (Strong Buy), released third-quarter earnings of 23 cents per share in mid-October. The result surged past last year’s total of six cents and exceeded the consensus estimates by 15%. Sales improved by 27% year-over-year. Shares of LDSH are trading near a new 52-week high and have advanced in price by about 8% over the past four weeks. Continue your research on LDSH 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

The Short Ratio

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=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.

Today we want to take a look back at one of our favorite filters for finding bullish plays – the Put/Call Ratio Over 1.0 (Bullish) filter. Given the nice trading rally we’ve seen the past two months this filter has given us numerous ideas, and one such idea was Lehman Brothers (LEH). As you might recall back on November 7 we recommended buying some LEH January 2006 120 calls (LESAD) for $7.30 per contract.

Fortunately, the market rallied and LEH spiked higher right out of the gate. In fact, the option was close to a 100 percent winner just two weeks later on November 23! Not too bad at all and that would have been a nice time to take some profits. As of Thursday afternoon the option was worth $9.60 – or a 31 percent profit. Not quite the big winner we’d like, but as we’ve said before in this column – once you’re up near a double, take profits. Had you done that, then you’re sitting pretty right here with a few weeks left before that option expires.

Now we want to show exactly what it was that we liked about this set-up back in November. It’s so very important to go back and examine your trades (both losers and winners). Odds are you’ll find something that you hadn’t noticed before and that could be the slight edge that every trader is consistently looking for. Remember below is from November 7.

Taking a step back, the Schaeffer's put/call open interest ratio (SOIR) is simply the number of puts divided by the number of calls among near-term options. With that, a number of 1.0 or greater means that there are more puts than calls in short-term trading.

From our contrarian-based approach, we love to see a large number of puts compared to calls levied against a strong-performing stock. If a security can advance amid heavy bearish sentiment, then there is evidence that ample money remains on the sidelines to help push the stock higher once that crowd begins to turn bullish.

Now, just because a stock has a high SOIR doesn't mean it is a good long play. Using a SOIR as an indicator is just one aspect of the Expectational Analysis approach. We also like to check in on analyst rankings, media sentiment, and short interest as other indicators for investor sentiment. If you can find a potential trade that encompasses all of those areas of sentiment, then my friends, you could have a potential winner on your hands.

Taking a look at the list from Friday, one name stands out to us: investment banker Lehman Brothers Holdings (LEH) . One look at LEH and its obvious that this stock is about as strong as they come. The shares have gained some 41-percent year-to-date and is trading near all-time high levels.

According to the filter, LEH checks in with a SOIR of 1.19 (95,660 near-term puts compared with 80,583 near-term calls). Now what exactly does this mean? On the surface not much; until you compare it with other readings taken during the past year. Doing this, we find that LEH's current SOIR is higher than 94 percent of those taken during the past year, suggesting short-term option players are extremely bearish. This is exactly what we want to see.

Let's take a look at some other areas of sentiment that we track before we go out and load up on LEH. The more confident we are about the sentiment being negative amid strong price action, the better the odds are that the trade will work. Two quick and easy things we like to look at to discern this is the equity's short interest and analyst ratings.

Shorting a stock means that you are selling it with the intention of buying it back later. In other words, you are betting the shares will go down. We love to see lots of shorts betting against a stock because this means that, should the shares continue to advance, those bearish investors will be forced to cover their bets, creating a short-squeeze situation. Turning back to LEH, we find that it would take nearly four days for all of the shorts to cover their bearish bets. This isn't a huge number, but it could be enough to spark a short-covering rally on any good news.

Now for the analyst ratings. If the brokerage firms are bearish on a stock that is a top performer, it means that the shares could benefit from any positive upgrades. As you might have expected, LEH has seven "buys" out of 16 total recommendations. Any upgrades from this bearish bunch could really help out the shares.

Overall, the security has earned a Schaeffer's Equity Scorecard ranking of 8.0 out of 10. This relatively high reading indicates that the shares may still have additional upside ahead of these as this pessimism unwinds in the form of increased buying pressure.

We think its time to pick on option, because this particular stock looks like a nice play. With that said, we'd suggest paper trading the January 2006 120 call (LESAD) for $7.30 per contract - where it was trading on Friday afternoon. Write this one down and see how it does, but I must say it looks like a potential winner.

There you have it, word for word what we liked about LEH. Sure they all don’t work, but with some practice and discipline you might find that trading options can be a very rewarding (both financially and emotionally) game. Remember that the odds are in favor that the majority of your trades are going to be losers, but thanks to the leverage that options provide a few winners will more than make up for the losers. Keep on using all of the filters on these pages and have fun.

To learn more about the Put/Call Ratio over 1.0 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 – Marvell Technology (MRVL)

Earnings at Marvell have been nothing short of spectacular. The company has exceeded expectations in 15 out of the last 16 quarters, with year-over-year growth registering at least 55% over that time period. Estimates for the current year have increased 7% to $1.37 per share over the past 90 days, with all 19 analysts raising their numbers. Read the full analysis on MRVL at: /rank/?id=2494.

Growth & Income – Administaff Inc. (ASF)

Administaff Inc. (ASF), a Zacks #1 Rank stock, has a history of exceeding estimates, topping expectations in the last five quarters. The company recently raised its 2005 guidance and EPS estimates have been trending higher as a result. Earnings are forecasted to grow 18.4% over the next 3-5 years. Read the full analysis on ASF at : http://at.zacks.com/?id=2495.

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Zacks Rank continued...

Momentum – Universal Compression Holdings, Inc. (UCO)

Universal Compression Holdings, Inc. (UCO) is making new market highs fueled by higher analyst revisions of both FY 2005 and FY 2006. Read the full analysis on UCO at: /rank/?id=2496.

Value – Carpenter Technology Corporation (CRS)

Carpenter Technology Corporation (CRS) is a Zacks #1 Rank stock that has recently benefited from a better product mix, higher base selling prices and surcharges. Strong first quarter results have led to positive earnings forecasts for both this year and next. The firm current exhibits fundamental strength and is trading at a discounted valuation of 2.37x book value. Read the full analysis on CRS 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.
 

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

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• Broker Recommendation changes
• Earning Estimate revisions
• Earnings Announcements
• Zacks Rank changes

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We hope you enjoyed this issue of "Profit from the Pros", And we look forward to visiting with you again next week.

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Regards and Happy Investing,

Charles Rotblut, CFA

Senior Market Analyst
Zacks.com

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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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