Tuesday - January 10, 2006

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Fourth-quarter earnings season kicks off this afternoon with the release of Alcoa’s (AA) results. The aluminum company is expected to report profits of 38 cents per share.

Heading into earnings season, analysts have been, on average, reluctant to adjust their forecasts for 2006 profits. Last week, there was a drop in the number of earnings estimate revisions, both positive and negative. Notably, there was greater decrease in the number of estimates revised downwards causing the net ratio of increased estimates/total estimates1 to improve slightly to 0.00 from -0.01.

The relative lack of earnings warnings – particularly the lack of warnings from leading companies – combined with the stable tone to earnings estimates suggests the fourth-quarter earnings season should be positive overall. Certainly, the strong start to this year indicates the equity markets are pricing in good reports and bullish guidance.

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Zacks Equity Research continued...

Another potentially positive omen is the strength of the Transport-Air Freight group. This group has a Zacks Industry Rank of 1.71 and contains three Zacks #1 Rank stocks: Dynamex (DDMX), Egl (EAGL) and FedEx (FDX). United Parcel Service (UPS), which is also in the group, has a Zacks #2 Rank. Because these companies interact with businesses in so many other industries, they are, to a certain extent, a bellwether for corporate profits.

FedEx may have been a good precursor to the fourth quarter earnings season. Late last month, the company exceeded fiscal second-quarter expectations by 13 cents with profits of $1.53. (FedEx operates on a June-May fiscal year instead of a January-December year.) More importantly, the company raised its guidance for fiscal 2006 to $5.45-$5.70 per share from $5.25-$5.50 per share, despite rising energy prices. Nearly all of the 15 covering analysts revised their estimates for fiscal 2006 and fiscal 2007.

United Parcel Service is projected to report earnings per share of 95 cents on Jan 30. Estimates for full year 2005 profits have been holding steady, but estimates for 2006 profits have been revised slightly upwards over the past three months. UPS has topped analysts’ expectations for four consecutive quarters.

Read the complete Industry Outlook at: http://at.zacks.com/?id=2379.

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

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MORE FROM ZACKS EQUITY RESEARCH…

BULL OF THE DAY

Southern Peru Copper (PCU) - Favorable Global Demand. For full Zacks research report, click here.

 
BEAR OF THE DAY

Overstock.com (OSTK) - Disappointments Expected. For full Zacks research report, click here.

 
ZACKS ANALYST INTERVIEW

Natural Gas Prices Forecasted Lower

Bear in mind that even at $8 per mcf, these companies are enormously profitable. More...

 
ZACKS MARKET COMMENTARY

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 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:

American Financial Group Inc. (AFG), a Zacks #1 Rank (Strong Buy) company, recently increased its earnings guidance for 2006 to between $3.80 and $4.15 per share from $3.70 and $4.00 per share. In late October, AFG delivered third-quarter earnings per share that were ahead of analysts’ expectations by 26% and topped the prior year’s result by 55%. During the past four weeks, AFG’s share price has increased almost 5% and it is currently trading near its 52-week high. Continue your research on AFG at: http://at.zacks.com/?id=2389.

GMX Resources Inc. (GMXR) engages in the acquisition, exploration and development of properties for the production of crude oil and natural gas. In early November, the company reported third-quarter earnings that topped the consensus estimate by nearly 43%. Earnings per share rose 400% for the third quarter when compared to the second quarter. During the past four weeks, GMXR's share price has increased 19%. Continue your research on GMXR at: http://at.zacks.com/?id=2390.

Lifeline Systems Inc. (LIFE), a provider of personal response services and emergency call systems, satisfies the criteria of this Profit Track with a share price that has demonstrated 3% growth over the past four weeks and is currently close to its 52-week high. In mid-October, the company announced third-quarter earnings per share that beat the consensus estimate by almost 4% and were well above the result from last year. LIFE cited enhanced profitability, accelerated organic growth rate, and a broadened presence in the senior living market as the driving forces behind an impressive third quarter. Continue your research on LIFE at: http://at.zacks.com/?id=2391.

Superior Essex Inc. (SPSX) designs, manufactures and supplies communications wire and cable products. SPSX released third-quarter earnings of 37 cents per share in late-October. The result surged past last year’s total of 27 cents and exceeded the consensus estimates by nearly 3%. For the seventh consecutive quarter the company reported year over year increases in sales and profitability. Shares of SPSX have advanced in price by more than 4% over the past four weeks. Continue your research on SPSX 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

Winning Ways

Kevin Matras goes over a screen that handily beat the market in 2005. 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.

This week we want to take a look at the Unusually High Option Volume filter. We haven’t looked at this filter for a while and we think now is as good a time as any to take a look and see what we find.

The nice thing about this filter is that you can look at both the most active calls and most active puts from the previous day's action. What can you garner from this? Well, to answer that question, let's take a step back to describe our methodology here at Schaeffer's. In short, we are contrarians. The simplest way to put this is that we look for stocks that are trending higher amid a sea of skepticism. We view this as a sign that money is left on the sidelines just waiting to come in and push the shares higher. Obviously, bearish plays are vice-versa - optimism toward an underperformer.

If you’ve read this series over the past few months, then you know that back in October we were looking for a tradable bottom that would last the remainder of the year. Fortunately that worked out great and the filters found some nice bullish plays as a result. Currently we're beginning to think that at some point during the next few months we’re going to have a pretty good sized pullback and for that reason we're considerably more neutral on the overall market.

On Friday, Bernie was quoted in a very interesting article in the Wall Street Journal that focused on small-caps versus large-caps. According to the article, “The latest Russell Investment Group survey of 112 U.S. money managers found 80% touting large-cap growth stocks above all else, the highest percentage of favoritism shown to any one asset class in the two-year history of the survey.” The only problem is the Dow was a down a little bit last year, while small-caps and mid-caps rose to record highs. So, we have an underperforming sector (large-caps) getting lots of love, while an under-loved sector (small/mid-cap) still isn’t getting recognition. This is exactly what we want to see.

Here’s what Bernie had to say in that article, “Such smothering chumminess gives most contrarian investors the heebie-jeebies. Not only was the same consensus forecast dead wrong last year -- major, large-cap indexes were little changed, while the small-cap Russell 2000 and S&P 600 both rose to record highs -- but the fact that it still holds sway means too much money is already riding on large-caps and there may not be enough left to push them higher.” Interesting stuff, huh?

Now back to the list. As you might have guessed from all the above – the iShares Russell 2000 Index Fund (IWM) (small-caps) made the list on Thursday thanks to over 11,000 bearish put contracts trading at the February 68 strike. The only tickers that had more volume were the usual biggies like the QQQQ or SPX.

So we know that the majority of the “experts” are telling us to switch out of small-caps and into large-caps, because small-caps are due to correct or large-cap is undervalued. But what about the other areas of sentiment that we track?

One area we like to look at is what the short-term option traders are doing. This can best be seen by looking at the Schaeffer's put/call open interest ratio (SOIR). The SOIR is simply the number of puts divided by the number of calls among near-term options.

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

Turning back to the IWM, on Friday it sported a SOIR of 2.33 – which was higher than 68% of the readings over the past year. Also it has been trading higher recently, suggesting the crowd is actually getting more bearish (play trading bearish puts). This of course is exactly what we want to see, as this crowd is usually wrong.

We also like to usually look at the analysts, but obviously the IWM doesn’t have any analyst ratings on it. But if it did, then in this case we’d want to see lots of “holds” or “sells” – as a sign there is room for upgrades down the road. With those upgrades could come a huge rush of money from the sidelines.

Looking at the open interest I see there is a huge amount of bearish puts below the IWM’s current level of $68. Without getting too technical here, we use these high levels of put open interest at a strike below the current price as potential support. It has to do with the market makers and the way they are hedged. We'll just leave it at that, as the bottom line is lots of puts can serve as support.

Add it all up and the IWM sports a Schaeffer’s Gold Score of 7.0 out of 10.0 – suggesting there could still be room to run for small-caps.

So there you have it, after looking at the Unusually High Option Volume filter we have a potentially very nice looking long play. For fun, why don’t we say we’ll paper traded the IWM May 69 call (DIWEQ) for $3.70 – where it was trading on Friday afternoon. Write this one down and see how it does, but given the media sentiment and quantitative backdrop, this one could be a nice contrarian play.

We'll be back next week to take a look at yet another filter. In the mean time, please continue to use all of the filters on these pages and try to find out which one's work best for you. Remember, don't be afraid to paper trade a few here and there, as this is a great way to learn. Finally, options are highly leveraged vehicles, and the odds favor that most of your trades are going to be losers. But, thanks to this high leverage, all it takes are a few winners here and there to be more than profitable. Keep on using the filters and good luck!

To learn more about the Unusually High Option Volume 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 – Pride International, Inc. (PDE)

Pride International, Inc. (PDE) is a leading contract driller whose earnings are soaring. Growth has really started to accelerate recently as year-over-year increases in earnings has exceeded 100% for the last three quarters. Sixteen different analysts raised their numbers for the year ended December 2005. Those estimates have increased 14.7% to 78 cents over the past 90 days. Read the full analysis on PDE at: http://at.zacks.com/?id=2494.

 
Growth & Income – Harris Corp. (HRS)

Harris Corp. (HRS) recently raised its fiscal 2006 earnings guidance. As a result, analyst estimates have been trending higher for both fiscal 2006 and fiscal 2007. HRS has an attractive ROE of 16.0% and is currently yielding 0.69%. Read the full analysis on HRS at: http://at.zacks.com/?id=2495.

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Zacks Rank continued...

Momentum – Papa John’s (PZZA)

After a season of turkey, once the leftovers are gone, American appetites turn to simpler fare, such as pizza. Investor appetites have been focused on Papa John’s (PZZA) for a long time now, as the stock has set new 52-week highs every trading session of 2006. In addition, analysts following PZZA have been revising their forecasts for 2005 and 2006 earnings upwards over the past 30 days. Read the full analysis on PZZA at: http://at.zacks.com/?id=2496.

 
Value – FedEx Corporation (FDX)

FedEx Corporation (FDX), a Zacks #1 Rank stock, recently increased its EPS guidance for fiscal 2006. Analysts responded by upping their estimates for both fiscal 2006 and fiscal 2007. FDX is trading at a discounted valuation of 3.0x book value. Read the full analysis on FDX at: http://at.zacks.com/?id=2497.

 
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=2558.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2559.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2560.

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Zacks Rank #1 and #5 Additions

Zacks #1 Rank List: 73 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: 83 New Additions (alpha by ticker)

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

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.

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

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 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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