Tuesday - January 3, 2006

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We thought we'd start a new volume of senior analyst interviews by speaking with senior Chinese analyst Paul Cheung about growth prospects in his home country. Somehow, we found this to be an appropriate starting point for 2006, even though year 4702 on the Chinese calendar doesn't begin for another four weeks.

We've noticed a recent pullback in Chinese stocks. In your opinion, is this a justifiable correction, or does this represent a good entry point into the Chinese market?

I think this represents a good entry point into the Chinese market because most Chinese stocks are leaders in their field in China and have great potential to grow. However, they are undervalued compared to their American peers because some investors are unfamiliar with their operating environment.

Perhaps there are also concerns about the overall level of control the Chinese government has over its market and currency. But these concerns are mostly unfounded, in my opinion. China is very interested in growing more and more robust; its main challenge – especially for such a large country – is how to do so without letting certain aspects of the economy expand beyond their reach. There is a balancing act going on in China at the moment, but I feel that investment now in many Chinese stocks is an excellent opportunity for investors who are primarily interested in growth.

Where are the areas of largest growth expected to be in the next year?

I think raw materials, wireless value-added services and online travel are expected to grow rapidly in 2006. Among these areas, my Buy recommendations at this time are CNOOC, Ltd. (CEO), an oil and gas company, Tom Online (TOMO), in Internet services, and Ctrip.com International (CTRIP), which deals with the online travel industry. As the Chinese economy grows stronger, the Chinese infrastructure will grow as well. These areas are my top candidates for Chinese growth going in the new year.

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Zacks Equity Research continued...

How is the government expected to affect the Chinese market in 2006?

The Chinese government will try to stabilize the growth of the Chinese economy and improve the living conditions of low-income people in 2006. The macro-environment will be positive for Chinese stocks. This also brings me back to those three main groups of expected growth: raw materials, which will be necessary for new developments in expanding urban areas; wireless services, which will improve communication for both businesses and individuals; and online travel, again for both the increasing international business culture as well as individuals with more disposable income for things such as travel.

What are your main concerns regarding the Chinese market?

My main concern regarding the Chinese market is that there are a number of good companies in China that are not doing a good enough job attracting investors. Much of this has to do with the issues the West has about how successful China’s emergence as a top industrial nation will transpire. Is this system working? Is it at high risk? From my perspective, Chinese development is doing about as well as can be expected for a country of such size and complexity. But until investors everywhere, but mostly in the West, have stronger faith in the potential of the Chinese market, my concern is that some very good publicly traded companies may remain undervalued.

Do you have a Strong Buy recommendation for us today?

I don’t have a Strong Buy recommendation for any Chinese stocks at this time. Many of the Buy recommendations I currently have are approaching their target prices due to sustained growth over the past year or so. Therefore, I will likely re-evaluate my entire coverage of Chinese stocks – they are in a wide range of industries, too, by the way – as the new fiscal year begins.

However, because these Buy recommendations of mine also happen to be in the areas I feel have the greatest potential for sustained high growth, perhaps I will keep them all Buys and simply increase my target prices on them. I will need to take each consideration on a case-by-case basis. But overall, investors should be looking toward China as an excellent opportunity for growth stocks. In the longer view, we may all look back on this time in history and wonder why we had any doubts about China’s economic emergence.

Paul Cheung is a senior analyst covering a vast range of industries in the Chinese market for Zacks Equity Research.

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MORE FROM ZACKS EQUITY RESEARCH…

BULL OF THE DAY

Vimpel Communications (VIP) - Big Discount. For full Zacks research report, click here.

 
BEAR OF THE DAY

Merck & Co. (MRK) - Mounting Legal Liabilities. For full Zacks research report, click here.

 
INDUSTRY OUTLOOK

Drillers Digging Up Profits

Growth in energy industries should come from smaller companies in 2006. More...

 
ZACKS MARKET COMMENTARY

Earnings Forecasts Favor Mega-Caps

Director of Research Dirk Van Dijk says that last week marked the first time 2006 revisions outnumbered 2005. 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: Growth and Income Profit Track

 
Here are four stocks that make the grade for the Growth and Income Profit Track:

American Capital Strategies Ltd (NASDAQ: ACAS), which has a current yield of 8.64%, recently declared an additional 2005 dividend of three cents per share. ACAS noted that total dividends declared for 2005 equal $3.08 per share, an increase of 6% over 2004. In early November, the company reported third-quarter earnings of 82 cents per share. The result topped the consensus estimate by about 5% and outpaced the year prior total. Continue your research on ACAS at: http://at.zacks.com/?id=2389.

Diana Shipping, Inc. (NYSE: DSX) meets the criteria of this profit track with a favorable yield of 15.16%. The company recently reaffirmed its fourth-quarter dividend guidance, stating that it expects the dividend to exceed 36 cents per share. DSX expects to declare the dividend in early February 2006. In late October, the global provider of shipping transportation services announced third-quarter earnings per share that were almost 8% ahead of the consensus estimate. Continue your research on DSX at: http://at.zacks.com/?id=2390.

New Century Financial Corporation (NYSE: NEW), a real estate investment trust (REIT) and parent company of one of the nation's premier full-service mortgage finance companies, is yielding an impressive 18.43%. NEW recently declared a dividend of $1.70 per share for the fourth quarter. The company mentioned that this is the fourth consecutive increase in the dividend since electing to become a REIT in the fourth quarter of 2004. Continue your research on NEW at: http://at.zacks.com/?id=2391.

RAIT Investment Trust (NYSE: RAS), a real estate investment trust, satisfies the criteria of this Profit Track with a yield of 9.38%. The company recently declared a fourth-quarter dividend of 61 cents per share. In early November, RAIT Investment Trust posted third-quarter earnings of 65 cents per share, outperforming the previous year’s earnings of 63 cents per share. Continue your research on RAS 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

Using Common Sense to Manage your Portfolio

Kevin Matras explains why monitoring your stocks is just as important as picking them. It's simple common sense that can make all the difference. 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 – Kookmin Bank (KB)

Kookmin Bank's (KB) extensive restructuring policy, its acquisition and expansion program, and its better control of asset quality through limits on credit growth, have caused all of the covering analysts to considerably raise their numbers. Over the past 90 days, estimates have risen 34.5% to $6.75 per share. The PEG ratio of 0.39 makes the stock extremely attractive at these levels given the strong growth expected by analysts. Read the full analysis on KB at: http://at.zacks.com/?id=2494.

Growth & Income – Prudential Financial Inc. (PRU)

Prudential Financial Inc. (PRU), a Zacks #1 Rank stock, has exceeded analyst expectations for six consecutive quarters, by an average margin of 18.1%. Earnings per share are forecasted to grow 12.4% over the next 3-5 years. PRU recently raised its annual dividend. Read the full analysis on PRU at : http://at.zacks.com/?id=2495.

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Zacks Rank continued...

Momentum – MWI Veterinary Supply (MWIV)

MWI Veterinary Supply (MWIV) since going public last August has been a stock on the move. A positive earning surprise the last quarter has driven the stock price to new highs. With analysts raising earnings estimates for 2006 and an attractive technical picture, MWIV is our first Zacks #1 Rank momentum stock for 2006. Read the full analysis on MWIV at: http://at.zacks.com/?id=2496.

Value – Carpenter William Lyon Homes (WLS)

William Lyon Homes (WLS), a Zacks #1 Rank stock, exceeded second- and third-quarter 2005 expectations by an average margin of 60.2%. Estimates are trending upwards for 2006 despite somewhat negative data on the housing industry. The company is trading at a discounted valuation of 2.0x book value with an extremely attractive ROE of 38.6%. Read the full analysis on WLS 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

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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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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