Wednesday - January 4, 2006

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As I noted last week, the holiday season is typically a slow time for the financial community. Although the bond yield inversion raised eyebrows and the housing data was a bit disappointing, the earnings and economic outlook remained unchanged.

Given this lack of new data, I’m going to take broader approach this week and focus on some of the industry groups that look attractive for 2006.

Oil & Gas-Drilling and Oil & Gas-Field Services, two groups I discussed last week, have among highest net increased/total estimates ratios for 2006. Drilling companies have had 18% of 2006 profit estimates revised upwards, on a net basis (positive revisions less negative revisions). Oilfield companies are close behind with 14% of 2006 profit estimates revised upwards.

More. . .

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Zacks Equity Research continued...

The reason for this bullish outlook is the high price of oil. At just below $60 per barrel, oil companies are more willing to invest money into drilling and maintenance. Four companies that have been recent beneficiaries of increased earnings estimates are Ensco International (ESV), Nabors Industries (NBR), Diamond Offshore Drilling (DO) and Pride International (PDE).

Oil, however, is not the only commodity that soared in price. Gold, for instance, broke above the $500 mark. Several other metals also experienced strong price appreciation, making Mining-Misc and Mining-Non Ferrous two groups worthy of consideration. Both industry groups have a net increased/total estimates ratio of .23 or higher. (The ratio means that a 23% of all estimates have been revised upwards on a net basis).

My colleague, Dirk Van Dijk, tapped a stock from of these two groups for his Six Speculative Picks for 2006. Dirk suggests Southern Copper (PCU) could potentially double this year. Investors should pay attention to the word “speculative” as picking a stock to double is much easier said than done. This said, projections for the company’s 2006 profits have risen by nearly two bucks over the past 60 days ($8.12 versus $6.29) and the stock yields a dividend of 9.8%.

Other mining stocks with rising estimates include Falconbridge (FAL), Southern Peru (PCU), Chalco (also known as Aluminum Corporation of China), Alcoa (AA), Phelps Dodge (PD), Alumina (AWC), Anglo America (AAUK) and Rio Tinto (RTP).

Stepping outside of the commodity arena, Wire & Cable Products continues to look attractive. The group has a Zacks Industry Rank of 2.29 and a net increased/total estimates ratio of .07. Several companies in this group delivered bullish earnings reports during the third-quarter, including Encore Wire (WIRE), Commscope (CTV), Barnes Group (B), General Cable (BGC) and Belden GDT (BDC). More importantly, these companies are experiencing pricing power – meaning that they are able to push through raw materials costs to their customers.

The net ratio of increased estimates/total estimates for all companies within the Zacks Universe is -0.01 versus 0.00 last week, based on estimates for 2006.

Charles Rotblut, CFA is a senior market analyst for Zacks.com.

Read the complete Industry Outlook at: http://at.zacks.com/?id=2327.

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MORE FROM ZACKS EQUITY RESEARCH...
 

BULL OF THE DAY

Vimpel Communications, ADS (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.

 
ZACKS ANALYST INTERVIEW

China Expects Continued Solid Growth

Raw materials, wireless value-added services and online travel are expected to grow rapidly in 2006. More...

 
EARNINGS & SECTOR UPDATE

Growth Looking Good in ‘06

Director of Research Dirk Van Dijk says total net income growth should accelerate in 2006. More...

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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.
 

“Winning Ways”

This week, I’m writing about a screen that uses a lot of the ideas that I’ve written about in past articles, combined together into a powerful and consistently profitable stock picking strategy.

In fact, in 2005 (2005 YTD thru 12/23/05), the average cumulative gross return is up 49.9%!

I’ll go over the rest of the statistics at the end of this article. But first, the parameters;

• P/E using 12 month EPS Actuals <= 40
  (I’ve written how focusing only on stocks with P/E’s of 20 or less would’ve kept you out of some of the best stocks over the years. And that a P/E of 20 or less isn’t a ‘magic number’. In fact, I’ve often found that some of the best stocks started with P/E’s of twice that. So in this screen, I allowed stocks to have a P/E ratio as high as 40.)
   
• Price to Book <= 2
  (In that same article, I showed that a Price/Book value of 1 or less was also not a ‘magic number’ either. In fact, many of the best stocks started with P/B’s of 2 and 3 and 4. For this screen, we limited it to 2. But that’s still twice as big as the ‘magic number’ of 1.)
   
• Price >= 5
  (Most money managers won’t even look at a stock under $5, so we used this as a minimum price point.)
   
• Volume (20 day average) >= 50,000
  (Anything under 50,000 shares traded daily is excluded -- it has to be tradable. The typical stocks that make it through however, usually trade several hundred thousand shares daily. In fact, the average daily volume for the stocks qualifying this week is over 312,500 shares.)
   
• Zacks Rank <= 2
  (The Zacks Rank is one of the best, if not the best, rating systems out there. So only stocks with a Zacks #1 Rank (Strong Buy) or Zacks #2 Rank (Buy) are allowed.)
   
• % Change Actual EPS Growth Q(0)/Q(-1) >= 0
  (I’m looking for the last Quarter over Quarter EPS Growth to be at the very least flat to positive. (Q(0) being last Quarter and Q(-1) being the Quarter prior to the last Quarter.) In other words, if the last Quarter was worse than the previous Quarter, it’s excluded.)
   
• % Change in Q(1) Estimates over 4 weeks >= 0
  (And I want the Earnings Estimates for the Current Quarter to be increasing. (Q(1) being the Current Quarter.) The whole idea being; companies that receive upward Earnings Estimate Revisions have a tendency of receiving even more upward Estimate Revisions. And this paints a solid picture moving forward.)
   
• % Change in Price over 4 weeks >= 0
  (The stocks have to have either increased in price over the last four weeks or at the very least, stayed steady. Any stock with a net breakdown in price over the last month is ignored.)
   
• Return on Equity -- Top # 5
  (What this means is I’m narrowing down all of the stocks that qualified the above parameters, to only the five with the best (highest) Return on Equity (ROE). And the ROE is one of the quickest ways to see whether a company is creating assets with Investors’ Cash or gobbling it up.)

The Results:

I ran a series of tests over the last five-year time span (2001 thru 12/23/2005), as well as a series of tests for each of the last five years individually. I rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four-week periods. (This exercise was done to eliminate coincidence and verify robustness.)

In 2001, the average annualized gross returns were 48.1%.

In 2002, the average annualized gross returns were 34.2%.

In 2003, the average annualized gross returns came in at 101.7%!

In 2004, the average annualized gross returns were up 55.5%.

And in 2005 (YTD thru 12/23/05), the average cumulative gross returns are up 49.9%.

(I’d also like to note that I successfully tested this strategy with as few as only three stocks per period and as many as 10 stocks per period and they too came out with very impressive returns as well.)

Of the five stocks that made it thru this screen this week (1/3/06), here are three of them:

Get the rest of the stocks on this list and start using this winning strategy in your own portfolio. You can do it. Sign up now for your free trial to the Research Wizard and start making better decisions today. 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.

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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 – Zumiez (ZUMZ)

The investment case for Zumiez (ZUMZ) is supported by its competitive strengths and aggressive growth strategy. Zumiez is able to compete against other teen specialty retailers through its differentiation strategy. Estimates for next year have increased almost 7% to $1.10 per share. All four analyst raised their numbers for next year. Read the full analysis on ZUMZ at: http://at.zacks.com/?id=2498.
 

Growth & Income – United Auto Group Inc. (UAG)

United Auto Group Inc. (UAG) recently posted record revenues for the 26th consecutive quarter. Earnings per share are forecasted to grow 12.3% over the next 3-5 years. The company currently yields 1.3%. Read the full analysis on UAG at: http://at.zacks.com/?id=2499.

More...

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Zacks Rank continued...

Momentum – Cameco (CCJ)

With global oil prices remaining high, energy consumers and investors are once again looking favorably at nuclear power. And Cameco (CCJ) is the world’s largest producer of uranium, so it’s not surprising that the stock getting a lot of attention. Earnings estimates are rising and the stock is starting the new year off with a new 52-week high. Read the full analysis on CCJ at: http://at.zacks.com/?id=2500.
 

Value – Brown Shoe Company, Inc. (BWS)

Brown Shoe Company, Inc. (BWS), a Zacks #1 Rank stock, recently raised its fiscal year 2005 EPS guidance. Analysts reacted by upping their estimates for 2005 as well as 2006. The company is trading at a discounted valuation of 2.0x book value with earnings projected to grow 12.0% over the next 3-5 years. Read the full analysis on BWS at : http://at.zacks.com/?id=2501.

 
Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2383.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide: http://at.zacks.com/?id=2545.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2546.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2547.

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Zacks Rank #1 and #5 Additions

Zacks #1 Rank List: 84 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: 80 New Additions (alpha by ticker)

To see the full list of Zacks #5 Ranked stocks (approximately 220 stocks), then click here.

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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.

 
a) Charles Carlson, Editor of DRIP Investor
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When it comes to divining the future, most of us are hugely influenced by the recent past. Market prognosticators are no different. If the market is ending the year on a good note, than the New Year should be a good one, and vice versa. Of course, the problem with this forecasting style is that things change, and the most significant changes are those that nobody expects.

So what should investors expect in 2006? As usual, expect the unexpected:

The Dow Industrials will outperform most indexes. Charles Carlson doesn’t think stocks are necessarily cheap or expensive but believes they are a bit cheaper going into 2006 than they were going into 2005. He especially sees value in the mega-cap stocks that have been especially sluggish in recent years. And in terms of the Dow, Carlson sees a number of stocks due for snap-back rallies in 2006. For that reason, he is looking for the Dow to be up 6% in 2006, which would put it around 11,500, and believes that return will be better than most other indexes. Carlson will qualify this prediction, however, by saying that all bets are off unless the Dow Industrials can close above their previous high of 10,940.55 by the end of January.

Don’t expect similar gains in small-cap stocks. Carlson has been saying that large-cap stocks would finally rebound versus small-cap stocks. Well, 2006 is the year this will happen. The valuations on large-cap stocks are just too compelling at this time. Carlson wouldn’t be surprised if smallcap indexes actually declined slightly in 2006. Does that mean investors should dump their small-cap stocks and focus entirely on large caps? Of course not. The bottom line is that there will be small-cap stocks that do extremely well in 2006, even if small-cap indexes are sluggish. Thus, your portfolio should have exposure to small and midsized companies. But if you are looking to tilt your portfolio in the direction of the asset class Carlson expects to do best in 2006, tilt it toward large-cap stocks.

Oil prices will settle into the high $40s/low $50s. Carlson doesn’t see a collapse in oil prices, but doesn’t see $70 oil prices either. He thinks you will see oil prices spend most of 2006 in the high $40s/low $50s range. That level should be more than enough to generate huge cash flows for oil companies, thus leading to big dividend hikes in the group.

Long-term interest rates will increase more than short-term rates. Currently, the yield curve is “flat.” That means short-term rates and long-term rates are similar. The reason the yield curve is flat is that while the Federal Reserve Board has been boosting short-term rates, long-term rates have not followed suit. That will change in 2006. While short-term rates will remain flat or only slightly higher, long-term rates will jump. That will likely put some pressure on certain sectors of the economy, including housing.

What are potential wild cards for the market? One that Carlson is watching closely is the mid-term elections and what those elections will do to economic policy, specifically tax policy. Congress has failed thus far to make permanent or extend the changes in the 2003 tax bill that reduced the maximum tax rate on dividends and capital gains to 15%. And with President Bush’s approval ratings at low levels and Republicans concerned about their fate in the mid-term elections, it does not appear to be a slam-dunk that Congress will push hard on tax issues. If Wall Street perceives that the political rhetoric is endangering these tax breaks, rest assured the stock market will not react well. In fact, the failure to make the changes in capital gains and dividend tax rates permanent or at least extending them past their expiration date of 2008 could set off a significant decline in the stock market.

Stocks to Watch in 2006

Disney (Walt) (NYSE: DIS) has been hurt by the same issues that have crimped many media-related concerns, such as a sluggish ad market. However, Carlson believes 2006 will be a much better year for the company and stock. The firm’s broadcasting properties (ESPN, ABC) should do well in 2006. Theme parks should also do well, especially if energy prices retreat and the economy remains strong. The one area that has hurt the bottom line has been movie operations. Disney seems to be making headway in repairing its relationship with Pixar, and some announcement concerning the status of this important relationship is expected soon. The stock has pulled back from its 52-week high of $30. I see the stock surpassing that level in 2006.

DRIP Specifics:

Minimum initial investment is $1,000. The firm will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $100.

There is an enrollment fee of $10.

Purchasing costs are $5 ($1 if made with automatic monthly investment) plus $0.03 per share.

Selling fees are $10 plus $0.03 per share.

The plan is available to investors outside the U.S.

Harris (NYSE: HRS) manufactures communications systems for commercial customers and the U.S. government. Harris has handily beaten Wall Street’s estimates in each of the last four quarters. For fiscal 2006 ending in June, per-share profits should grow at least 35%. While defense spending could slow a bit, the company’s communications systems should remain in big demand. A move to $50 would not be surprising in 2006.

DRIP Specifics:

Investors must own at least one share in order to be eligible to join the DRIP.

Minimum optional cash payment is $10.

There are no fees to purchase shares in the plan.

The plan is available to investors outside the U.S.

 
About Charles Carlson’s DRIP Investor newsletter

The only newsletter dedicated to the profitable world of dividend reinvestment plans, DRIP Investor helps its readers pick stocks with staying power and strong growth potential. The monthly newsletter is edited by Chuck Carlson, the acknowledged expert on DRIP plans. http://at.zacks.com/?id=2543.
 

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MORE FEATURED EXPERTS...

b) More of the Same in 2006?

Kelley Wright explains which types of stocks will present the most opportunities in 2006. More...
 

c) Steady as She Goes

Walter Frank says the same issues that concerned the market in 2005 have spilled over into the New Year. More...
 

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, which was the worst bear market in over 60 years.
• +18% in 2005 (through September 30)

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

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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

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.

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