Friday - January 13, 2006

Want to view the archive of past issues? Go to: http://at.zacks.com/?id=2283.

Manage Profit from the Pros subscription:
* Free Subscription: http://at.zacks.com/?id=2284
* Change of address: http://at.zacks.com/?id=2285
* Unsubscribe: http://at.zacks.com/?id=2286
 

Back to top

After a decent 2005 in the EuroZone -- riots in France and growing unemployment notwithstanding -- we felt it was time to check back in with senior analyst Duong Vuong, CFA. He covers a variety of sectors for companies in Western Europe, including the U.K. and Ireland, and was able to help us get a good read on what to expect from the region in 2006.

The value of the euro has softened a bit. What are some of the good points and bad points about this?

The good point about the softening of the euro is that it helps European exporting companies specifically, but in more general terms it helps European economies overall. This goes especially for Germany, which exports more to the U.S. than any other European country. This should translate to higher earnings across the board, which of course should help the broader European markets.

The bad point about this occurrence is that it will squeeze some companies that have a high percentage of their businesses tied up in material costs such as oil, as oil is priced in U.S. dollars. But overall for the both the emerging and the already relatively strong European economies, a softer euro has a net positive effect on companies' earnings in a general sense.

More. . .

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Back to top

 
Zacks Equity Research continued...

Considering the EuroZone economy was pretty much flat in 2005, many European stocks still performed well. What, if anything, do you expect will change in 2006?

I expect 2006 to be a positive year for European stocks, especially in light of the fact that U.S. interest rates have peaked and European interest rates will either stay the same or move lower. Net-net, a softer euro will help earnings, as I've just explained. However, on a comparative basis, I think EuroZone stock market gains in 2006 will be smaller than they were in 2005.

Unemployment in three of Europe's biggest countries -- Germany, France and Italy -- seems to be a big concern right now. Should U.S. investors in European stocks likewise be concerned about this?

Inasmuch as stock markets are forward-looking, high unemployment, terrorism, or other sorts of general bad news are usually priced in, or "over-priced-in," so in my view this shouldn't ever be a serioys concern for investors. Usually, once a recession -- by way of example -- is understood to have set in, stock markets have already priced this into account, and therefore may be closer to a recovery stage. As I say, I only use this as an example; there is no talk of recession in Europe at the moment. But more to the concern you cited, unemployment, usually the economy needs to recover for a longer period of time before the unemployment rate can decline.

What Buy and/or Sell recommendations do you have for us today?

One stock on which I have a Buy is Aegon (AEG). I think AEG is a recovery story, and on valuation terms, it looks cheap. Its U.S. business is turning around, with U.S. earnings showing a 42% increase in Q3. Late in 2005, I increased estimates from $1.45 in 2005 and $1.48 in 2006 to $1.75 and $1.78, respectively. Also, I consider AEG's dividend safe, and the fact that its interim dividend has been increased by 5% gives me some confidence about recommending the stock.

As an insurer, AEG is also geared to stock markets due to its portfolio. Therefore, I expect the company to have a decent 2005 in terms of earnings, and AEG's Q4 earnings report is expected at or around January 31st.

Looking forward, what do you expect will be the biggest economic stories in Europe through the first half of calendar year 2006?

My guess is that the biggest economic stories in Europe will probably be the relatively impressive strength of the European economies in general. If that happens I think European markets will have another decent year, building on the momentum of last year.

Duong Vuong, CFA is a senior Zacks analyst covering companies in Western Europe, including the U.K. and Ireland.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Back to top

 
MORE FROM ZACKS EQUITY RESEARCH...
 

BULL OF THE DAY

Intevac (IVAC) - Order Growth in Semiconductors. For full Zacks research report, click here.

 
BEAR OF THE DAY

Albertson`s, Inc. (ABS) - More Downside Risk. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Air Freighters Deliver

Pickup in global economy causes increase in demand for shipping. More...

 
EARNINGS & SECTOR UPDATE

Earnings growth expected to continue in 2007

The median firm in the S&P 500 is expected to grow by 12.4% in 2007, or roughly the same rate that is expected for 2006. More...

Back to top

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: PEG Ratio

This strategy uses the PEG Ratio to find attractively priced stocks poised for price appreciation. The PEG Ratio is simply the P/E (Price divided by Earnings) of a stock divided by its 5-year projected growth rate. Too often investors think of value investing being the antithesis of growth investing. The beauty of using PEG is that you can find value stocks even amongst hot growth stocks.

If you like to use a company's PE ratio to determine its value, you'll love using the PEG ratio. Find out which companies offer the greatest value regardless of growth rate to enjoy stellar returns. Using this indicator in a stock screening strategy can produce stellar profits.

Here are four stocks that make the grade for the PEG Ratio Profit Track:

Bronco Drilling Co., Inc. (BRNC) released third-quarter earnings in early November. The result was ahead of the consensus estimates by approximately 15%. Revenues were a record $18.6 million versus $11.7 million for the previous quarter and $5.4 million for the year prior period. The company mentioned that demand for its rigs is strong and dayrates continue to trend upward. BRNC has a PEG ratio of .49. Continue your research on BRNC at: http://at.zacks.com/?id=2290.

Pioneer Drilling Co. (PDC) issued its report for the fiscal second quarter in early November. Earnings per share of 24 cents surged past last year’s three cents and topped the consensus estimate of 21 cents. With a PEG ratio of .40, value investors may find this to be a good addition to their portfolio. Continue your research on PDC at: http://at.zacks.com/?id=2291.

True Religion Apparel Inc. (TRLG), another Zacks #1 Rank (Strong Buy) company, reported third-quarter earnings of 33 cents per share, exceeding the consensus estimate by 10%. The company noted that it was pleased with its record revenue, margins and earnings results. TRLG satisfies the criteria of this Profit Track with a PEG ratio of .25. Continue your research on TRLG at: http://at.zacks.com/?id=2293.

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.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

 
SCREEN OF THE WEEK

Increasing Cash Flows

Kevin Matras looks at Cash Flows (and increasing Cash Flows) for a winning stock picking strategy: http://at.zacks.com/?id=2289.
 

Back to top

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 – 51job, Inc. (JOBS)

Recruitment-related services are in high demand in the booming economy of China. 51job, Inc. (JOBS) is the most famous brand in the online recruiting market in China. The company exceeded estimates by 33.3% in its latest quarter, posting quarter-over-quarter earnings growth of 71.4%. The stock should do well over time due to the huge opportunities in China. Read the full analysis on JOBS at: http://at.zacks.com/?id=2505.
 

Growth & Income – Casey's General Stores, Inc. (CASY)

Casey's General Stores, Inc. (CASY) has increased revenues and expanded gross margins for nine straight years. The consensus earnings estimates for this Zacks #1 Rank stock is trending higher for fiscal 2006 and fiscal 2007. CASY released impressive second-quarter results and is currently yielding 0.70%. Read the full analysis on CASY at: http://at.zacks.com/?id=2506.

More...

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Back to top

 
Zacks Rank continued...

Momentum – Clayton Williams Energy (CWEI)

Energy is all the rage right now as oil and gas prices still reflect substantial premiums from a year ago, due as much to this Fall’s hurricane season as to political uncertainties. As a result, Clayton Williams Energy (CWEI) is setting new highs. Read the full analysis on CWEI at: http://at.zacks.com/?id=2507.
 

Value - Asta Funding Inc. (ASFI)

Asta Funding Inc. (ASFI) is a Zacks #1 Rank stock that has topped analyst estimates for the past five quarters. The company recently announced record portfolio purchases for the first quarter of fiscal 2006. ASFI is trading at a discounted valuation of 2.9x book value. Read the full analysis on ASFI at: http://at.zacks.com/?id=2508.
 

Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2297.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide:  http://at.zacks.com/?id=2553.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2554.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2555.

Back to top

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) Richard Moroney, Editor of Dow Theory Forecasts
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Back to top

Over the last two years, the Forecasts has become increasingly attracted to large-capitalization stocks. In 2004 and 2005, companies with market values above $8 billion accounted for 72% of the stocks added to the Buy List or Focus List, up from 34% in 2002 and 2003.

That’s no accident.

From 1998 through most of 2003, smaller stocks tended to have higher Quadrix® scores than larger stocks, and the Forecasts frequently fished in the midcap and small-cap pools. But since late 2003, the average Quadrix Overall score for large-cap stocks has topped that of smaller stocks. The percentage of large-cap stocks with high scores is up. Driving the gain has been a steady improvement in relative valuations over the last two years, along with modest improvement in sales and profit growth.

For 2005, the S&P 500 Index returned 4.9%, versus 12.6% for the S&P MidCap 400 Index and 7.7% for the S&P SmallCap 600 Index. But large-cap stocks didn’t do as badly as the S&P 500’s return suggests; the poor performance of some megacaps weighed down the capitalization weighted index. While the largest 100 stocks in the S&P 500 averaged a 2005 return of 4.5% for the year, the average S&P 500 stock returned 9.4%.

Both the S&P 400 and the S&P 600 have outperformed the S&P 500 in each of the last six years. Since the end of 1999, the small-cap and midcap indexes are up more than 66%, versus a 15% decline for the S&P 500. The median S&P 500 stock gained 43% during that six-year period, versus 78% for the median S&P 400 stock and 91% for the median S&P 600 stock.

Small stocks are projected to deliver higher profit growth over the next year than large stocks, expectations reflected in their valuations. The median S&P 600 component trades at 17.4 times estimated forward earnings, while the median S&P 500 stock has a forward P/E of 16.1. In fact, neither small-cap, midcap, nor largecap stocks appear overly expensive or overly cheap right now. Richard Moroney and his team are not advising investors to abandon small-caps and run to the big boys, but instead suggesting that large-caps deserve a good, long look this year.

Two of the favorites:

While other oil companies have invested aggressively in new production opportunities, Exxon Mobil (XOM) says it will not take on too many risks or sacrifice profitability to boost production. Case in point: Most competitors plan to accept Venezuela’s demand for higher royalties and more state control over oil projects. But Exxon sold its share of a Venezuelan operating contract to a Spanish rival, making it the only company not to sign a new deal with the South American country.

Oil prices rose 40% in 2005. Exxon’s operating cash flow jumped 42% to more than $50 billion in the 12 months ended September. Yet capital spending rose just 10% to $13.3 billion, well below the increases posted by most of its largest peers.

Exxon management has taken a conservative stance in part because it is not confident oil prices will remain high. Oil fell to $10 a barrel in 1985 following predictions it would reach $100. Futures markets price oil between $60 and $65 per barrel throughout 2006.

L-3 Communications (LLL), a leading maker of military and homeland-security electronics and surveillance gear, expands primarily through acquisitions. Yet management targets 8% to 10% annual revenue growth excluding acquisitions.

Concerns regarding internal growth have weighed on the stock in recent quarters, and L-3 underperformed both the S&P 500 Index and average stock in the aerospace and defense sector in 2005. But considering L-3’s profit momentum, robust cash flow, and attractive valuation, the stock has solid year-ahead capital gains potential.

 
About Richard Moroney’s Dow Theory Forecasts newsletter

Get clear Buy, Hold and, yes, SELL advice from one of the nation’s oldest and most successful investment newsletters. Our in-depth analysis and advice have been helping subscribers weather market volatility since 1946. http://at.zacks.com/?id=2406.
 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Back to top

 
MORE FEATURED EXPERTS...

b) Lack of Easy Money in 2006

Joseph Parnes illustrates why 2006 may see a lack of easy money. He also profiles some long positions. More...
 

c) Let’s Hope History Repeats Itself

Mutual Fund expert Don Dion explains that the Fed minutes appear to indicate a willingness to stop rate hikes early in 2006. More...
 

OTHER TOOLS FROM ZACKS

Back to top

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=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?

• 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 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

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.

To contact us by mail:

Zacks Investment Research
Attn: Profit from the Pros
155 N. Wacker Drive, 6th Floor
Chicago, IL 60606

To unsubscribe from receiving "Profit from the Pros" e-mail newsletter, click here.