Tuesday - January 17, 2006

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Fourth-quarter earnings season started off with some less than stellar news. Alcoa (AA) missed for the third time in five quarters, Phelps Dodge (PD) warned, Tyco (TYC) lowered its guidance and announced a plan to break itself up, and the SEC upgraded its investigation of IBM (IBM) to formal status.

On the bright side, the Dow did spend a few days above 11,000. More importantly, earnings have been positive. Within the Zacks Rank universe, 137 companies, or about 3%, have released fourth-quarter results. Within this small sample, 84 companies have delivered a positive surprise and 32 have missed expectations. The number of reports will rise sharply over the next few weeks with literally thousands of companies releasing results.

The large amount of data will create volatility in the Zacks Rank. The reason is that the Zacks Rank factors in both earnings surprises and earnings estimate revisions. Furthermore, the indicator calculates both the relative strength of estimate revisions and the date of the change in revisions. In other words, a company that delivers a surprise this week and increases guidance by a material amount is more likely to earn a Zacks #1 Rank stock designation than a company that will not report until February.

From an industry perspective, retailers are more likely to gravitate towards a neutral rating of 3.00, because the majority of these companies operate on a February-January fiscal year. Most other industries, however, are likely to move towards a rank of 1.00 (Strong Buy) or 5.00 (Strong Sell) because the majority of companies operate on a January-December fiscal year.

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Zacks Equity Research continued...

Keep in mind that because the Zacks Industry Rank is calculated by averaging the Zacks Rank for all companies within a given industry, only groups with a very small number of companies are likely to actually to be among the very top or bottom industries on a given week (as defined by a Rank close to 1.00 or 5.00).

For instance, consider Retail-Convenience Stores, which has a Zacks Industry Rank of 1.00 and a net ratio of increased estimates/total estimates2 of 0.27. This group has just two stocks with a Zack Rank: Casey’s General Stores (CASY) and Pantry (PTRY). CASY has been using a combination careful merchandising and cost controls to deliver strong revenue and EPS growth. As a result, two of the three covering analysts have increased their estimates for fiscal 2006 within the past 30 days. PTRY has been exceeding profit expectations by wide margins and, last month, increased its guidance for fiscal 2006 earnings to $2.80-$2.90 per share from $2.55-$2.65 per share. PTRY has also benefited from careful merchandising, including higher margin, private-label goods.

Notably, both companies credited gasoline sales for contributing to growth. Although one would expect higher gasoline prices to contribute to higher revenues, both companies were able to increase the number of gallons sold and the profitability of each gallon sold. Higher revenues and widening margins are a powerful combination.

At the other end of the Industry Rank Table is Auto Manufacturers-Domestic, which has a Zacks Industry Rank of 4.00 and a net ratio of increased estimates/total estimates of -0.14. This group is comprised of Ford (F), a Zacks #3 Rank stock, and General Motors (GM), a Zacks #5 Rank, stock. Both companies have been in the news because of their financial problems and loss of market share. What hasn’t been discussed much, though, is the trend in estimate revisions. About a quarter of the analysts who cover GM have cut their forecasts for 2006 within the past 30 days; the consensus estimate for earnings of 84 cents is more than 40% below the level it was at just three months ago. (On Friday, CEO Rick Wagoner refused to provide guidance for 2006 when speaking to a group of securities analysts.) The 2006 consensus estimate for Ford has fallen by a nearly similar margin, from 95 cents to 59 cents.

In comparison, Auto Manufacturers-Foreign has a Zacks Industry Rank of 2.89 and a net ratio of increased estimates/total estimates of -0.08. Included in this group are DaimlerChrysler (DCX) and Toyota Motor (TM), which have Zacks Ranks of #1 and #2, respectively. The only laggard in this group is Indian manufacturer Tata Motors (TTM). The sole analyst covering TTM has been cutting his estimates.

For all industries, the net ratio of increased estimates/total estimates is 0.00, unchanged from a week ago. The average Zacks Rank is, as always, is 3.00. (The Zacks Rank is distributed according to a bell curve with the same number of companies receiving a Zacks #1 Rank and a Zacks #5 Rank every day).

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

Penn Virginia (PVR) - Improving Coal Fundamentals. For full Zacks research report, click here.

 
BEAR OF THE DAY

iPass, Inc. (IPAS) - Business Model Challenges. For full Zacks research report, click here.

 
ZACKS ANALYST INTERVIEW

Higher Valuations Don't Stop Semiconductors

Semiconductors have gone up, but we are in the middle of the industry’s up-cycle. More...

 
ZACKS MARKET COMMENTARY

S&P 500 Set for 15th Straight Quarter of Double-Digit Earnings Growth

Based on current expectations, Director of Research Dirk Van Dijk says it looks like the long string of robust earnings gains still has some room to run. 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

This Profit Track looks for stocks that are paying dividend yields of greater than 8% along with other attractive fundamental attributes. Although this screen is based on a long-term and lower risk approach to investing, it has consistently beaten the S&P 500 for with returns such as +19.5% in 2004 and +10.7% in 2005.

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

American Financial Group Inc. (AFG), which has a current yield of 10.37%, declared a fourth-quarter dividend of 28 cents per share in early December. In early November, the company posted third-quarter earnings of 28 cents per share, which matched the year ago result. AHR stated that it achieved solid commercial real estate portfolio growth of 14% on the year despite high prepayment activity. Continue your research on AHR at: http://at.zacks.com/?id=2389.

Citizens Communications Co. (CZN) recently paid out its regular quarterly dividend of 25 cents per share. The company meets the criteria of this Profit Track with a current yield of 8.11%. In early November, CZN announced third-quarter earnings of 11 cents per share, outpacing the previous year’s performance. The company noted that the number of its high-speed Internet subscribers has increased by more than 102,000, or 55%, from a year ago. Continue your research on CZN at: http://at.zacks.com/?id=2390.

MCG Capital (MCGC) declared a dividend of 42 cents per share in late October. The company, which is currently yielding 10.68%, reported third-quarter earnings of 34 cents per share in early November. The result surpassed the year prior total. In late November, MCGC reaffirmed guidance regarding its net investment growth. The company commented that while its quarters can have material variances, the overall trajectory of the business from an asset growth perspective is in line with its prior estimates. Continue your research on MCGC at: http://at.zacks.com/?id=2391.

Southern Copper Corporation (PCU), a Zacks #1 Rank (Strong Buy) company, released third-quarter earnings of $2.49 per share in late October, outperforming analysts' expectations by about 8% and improving on the previous year's result. Sales increased 39.3% year-over-year. The company paid out a dividend of $1.70 per share in late November. PCU sports a current yield of 9.58%. Continue your research on PCU 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

Increasing Cash Flows

Kevin Matras looks at Cash Flows (and increasing Cash Flows) for a winning stock picking strategy: http://at.zacks.com/?id=2395.
 

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Based on Dr. Edward Olmstead and his team’s read of the market internals (new 52-wk highs & lows, in particular) they have been bullish on the major indices since late October, favoring calls, not puts. Their outlook at the beginning of December was also positive, and their many bullish trades far outperformed their selected attempts at honoring the bears, despite the fact that they saw a fair amount of year-end tax selling. Overall, however, Dr. Olmstead and his team’s trading results were more or less a wash for the month, which can be typical for a choppy to down market environment.

Now, the typical January sell-off (it has happened the last three years) has been averted, probably because too many were expecting it. The market likes to do things in threes… but not fours. Of course, in absolute terms, the market has not really made any progress in the last month, but we are, at the very least, expecting a challenge of the December highs and a breakout seems likely enough this month. Once again, Dr. Olmstead and his team have their eye on the semiconductors, which have finally assumed some leadership. The market tends to do better when the Nasdaq is feeling its animal spirits, so Dr. Olmstead and his team are encouraged by the technical action in the chips.

PLAY OF THE MONTH

In every monthly issue, Dr. Olmstead and his team feature an intermediate to long-term play.

Cal Dive International Inc. (CDIS): On Wednesday, CDIS closed at $39.81. This company offers a range of marine contracting services including those that support drilling and well completion. It also operates offshore oil and gas properties. Based upon fundamental and technical analysis, it is projected that CDIS will rise to $44.50 over the next eight weeks.

Trade: Buy 1 Mar 37.5 call

Cost = $440
Max risk = $440

If CDIS rises to $43.00 anytime before Feb 24, this trade should show a profit of at least $110 for a gain of 25% or better.

If CDIS rises to $44.50 anytime before Feb 24, this trade should show a profit of at least $300 for a gain of 68% or better.

 
About Dr. Edward Olmstead’s Options Professor newsletter

Our trading methodology allows us to limit our losses and run with our winners. As of August 9, 2004 subscribers to the Options Professor had a return of 1183 percentage points on trades closed in 2004. Our record: 86 closed trades: 29 losers; 1 at break-even; and 56 winners - very solid winners. An average return of nearly 14% per trade! 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 – Gilead Sciences, Inc. (GILD)

Gilead Sciences, Inc.’s (GILD) strong pipeline and healthy product line is driving earnings growth. The company has exceeded estimates for eight consecutive quarters, with year-over-year earnings growth exceeding 50% in six of those quarters. Eight different analysts have raised their numbers, helping 2006 estimates to rise 13.8% to $1.98 over the past 90 days. Read the full analysis on GILD at: http://at.zacks.com/?id=2494.

 
Growth & Income – Amphenol Corporation (APH)

Amphenol Corporation (APH) has topped analyst estimates in 11 of the past 12 quarters. The company has a ROE of 35%—compared to 9% for the industry. APH’s recently completed acquisition of Teradyne’s Connection Systems division figures to benefit the company in a number of areas. Read the full analysis on APH at: http://at.zacks.com/?id=2495.

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Zacks Rank continued...

Momentum – The Mitsui Group (MITSY)

The Mitsui Group (MITSY) is a stock on the move with a Zacks #1 Rank and positive technical market action that is delivering new ten-year highs. Read the full analysis on MITSY at: http://at.zacks.com/?id=2496.

 
Value – Komag Inc. (KOMG)

Komag Inc. (KOMG) has topped analyst estimates for seven straight quarters. This Zacks Rank #1 stock recently raised its fourth-quarter revenue outlook, leading to an increase in consensus estimates. KOMG is trading at a discounted valuation of 3.2x book value and its ROE of 29% surpasses the industry average by a large margin. Read the full analysis on KOMG 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: 63 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: 60 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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