Wednesday - February 15, 2006
 Want to view the archive of past issues? Go to: http://at.zacks.com/?id=2319. Manage Profit from the Pros subscription: 1. ZACKS EQUITY RESEARCH Companies in the machinery group have been receiving a decent share of attention lately. We thought we'd ask senior machinery analyst Mario Ricchio what all the fuss is about. He helped us break down what can be expected from companies in this space in 2006. Prevailing wisdom seems to be there's lots of value in the machinery industry right now. Is this how you see it? Machinery stocks have some value left in them. Within our coverage space, we expect the average machinery company to grow fiscal year 2006 earnings by at least 15%, in many cases by 20% plus. The average P/E multiple is only 12 times forward earnings. An investor gets growth at a reasonable price. The machinery stocks are likely trading at a discounted valuation to reflect the cyclical nature of the business, and hence, the volatile nature of the earnings stream. However, we believe earnings sustainability remains a little higher than the market anticipates due to the secular growth potential of the energy equipment market. As long as oil prices maintain above $40 a barrel, the outlook for energy-related products – such as petroleum engines – appears bright. A couple of the value plays in the machinery group set to benefit from the positive capital spending trends in energy are Dover (DOV) and Caterpillar (CAT). More. . .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Profits seem to have been coming in a little low for some machinery companies. Would you say this is mostly due to higher energy costs? I would say profits are running below potential due to production bottlenecks rather than rising energy costs. Strong pricing has allowed the big companies to pass these energy cost increases along to the customer – thereby preserving the bottom line. The profit issue really emanates on the production side. Even though machinery companies reported double-digit EPS growth in the fourth quarter, they missed satisfying all end-market demand. The supply chain remains the concern. Both Dover and Caterpillar had difficulty getting component parts to meet customer demand. The suppliers failed to build up production capacity. This limited earnings growth, but we expect these constraints to ease into the second half of 2006. The last time we spoke about this industry, farming machinery was weak but mining was strong. Has anything changed here? The situation remains very similar. Mining machinery quarterly sales continue to rise at double-digit pace while overall South American agricultural equipment quarterly sales deteriorate on the back of lower farm income.Mining machinery companies that sell equipment to the copper, oil & gas, and gold producers are doing extremely well amid rising commodity prices. Higher prices create the economic incentive for producers to increase investment spending on new mining equipment. On the other hand, agricultural equipment manufacturers are suffering from a downturn in the South American market. In Brazil and Argentina, farmers are carrying higher-than-previously-forecasted debt levels. With many farmers losing their crop last year, incomes fell sharply. As a result, higher incomes from a better crop this year should lead to debt reduction and savings accumulation rather than capital spending. Farmers are not in a position to make investments in agricultural machinery. In Brazil, AGCO (AG) anticipates very significant declines in tractors and combines. The Argentine combine market is softening as well. To meet softening demand, AGCO and CNH Global (CNH) will cut capacity further to put supply inline with demand. For the agricultural equipment group, first-quarter industry sales are expected to decline on a global basis. An earnings recovery is unlikely until the second half of 2006. What is your top Buy recommendation, and why? Terex (TEX) is our favorite stock in the machinery universe. It is exposed to all the major growth markets, such as mining machinery and road building. The stock is extremely cheap at 12 times earnings. The company does not have the supply chain issues that its peers do, and its 2006 EPS growth of 33% stands near the top of the industry. Any stocks you'd advise investors to keep away from? We would avoid shares of AGCO (AG). Global agricultural equipment sales remain uninspiring. Inventories are rising on the back of weak demand. More production cuts are in the pipeline. As AG reduces inventory and its customers rebuild financially, we expect first quarter profits to remain below year-ago levels. Finally, what developments should investors be looking for in 2006 that might most strongly affect this industry? Investors should be looking for the direction of Federal Reserve (FED) monetary policy. The market concern is that the FED may overdo the monetary policy tightening and causes an economic recession. We are monitoring the monthly industrial equipment orders for signs of weakness. As for positive developments, investors should be aware of the 9% GDP growth expected in China. Given its stature as a global manufacturing powerhouse, China imports an increasing amount of commodities to produce finished goods. As the price of these commodities continue to rise in price, the demand catalyst for energy equipment remains intact. Essentially, investors must have the global economic picture in mind when trying to fully access the earnings potential of companies in this space. Mario Ricchio is a senior analyst covering the machinery and homebuilding industries for Zacks Equity Research. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Analyst Blog - NEW! Get real-time market insights from Zacks Equity Research Analysts. To see their latest posts, click here. First Data Corp. (FDC) - Positive on Western Union Spinoff. For full Zacks research report, click here. Overstock.com (OSTK) - Poor Expected Sales Growth. For full Zacks research report, click here. Zacks Industry Rank for the Week of Feb 13 Energy Expected to Post the Highest Growth of Any Sector in 2006
2. SCREEN OF THE WEEK 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. “Creating a Custom Consensus of your Winningest Screens” Every week in this article, I either go over a unique way to screen for stocks or publish a proven profitable screening strategy. If you’re a regular reader of this feature, you know that most of our strategies have done fantastic. The only real decision is in choosing which one(s) you want to start using. Well instead of choosing just one, why not look at them all and create a Custom Consensus of some of our winningest strategies. This too is a great strategy for picking winning stocks from many diversified approaches. Because aside from using the Zacks Rank for many of the screens, there are many other filters layered on top of it to find the best stocks from different styles. The screens I’m currently using in my Custom Consensus strategy come loaded with the Research Wizard program.
(I should probably add that they are all my ‘favorite’ strategies, which is why they’re included in the program.) Anyway, simply run each screen, generate a list of qualified tickers for each one and then count how many times a stock appears in all of those screens. If they appear in two or more screens, they qualify for the Consensus portfolio. Here are four stocks from this week’s (2/13/06) Consensus list.
Sign up now for your two-week free trial to the Research Wizard and get this Custom Consensus list week after week along with all of the individual strategies as well. And learn how easy it is to build and test your own winning strategies. Click here and see how. 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. 3. ZACKS RANK BUY STOCKS 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 – Aetna, Inc. (AET) Aetna, Inc. (AET) has completed several initiatives aimed at improving its bottom line. The company raised its full-year 2006 operating earnings outlook to a range of $5.57 to $5.63 per share, from prior guidance of $5.45 to $5.50 per share. Including stock option expensing, it expects operating earnings of $5.42 to $5.48 per share. Read the full analysis on AET at: http://at.zacks.com/?id=2498. Growth & Income – Emerson Electric Co. (EMR) Emerson Electric Co. (EMR), a Zacks #1 Rank stock, has topped the consensus earnings estimate for 10 quarters running. The company recently issued fiscal 2006 EPS guidance above analysts’ estimates. EMR has a ROE of 21% compared to 10% for the industry. Strong operating cash flows have led to a current dividend yield of 2.2%. Read the full analysis on EMR at : http://at.zacks.com/?id=2499. More...
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Momentum – Ohio Casualty (OCAS) Ohio Casualty (OCAS), a Zacks #1 Rank stock, delivered a powerful earnings report while the market was clearly expecting something less robust. Strong earnings, strong income growth and a market that was leaning the other way, make OCAS our Momentum stock of the day. Read the full analysis on OCAS at: http://at.zacks.com/?id=2500. Value – Oil States International, Inc. (OIS) Oil States International, Inc. (OIS) recently issued first-quarter 2006 EPS guidance slightly above analysts’ estimates. This Zacks #1 Rank stock has beaten the consensus earnings estimate in the past four quarters and in seven of the last eight. Analysts’ estimates have been on the rise for the next two quarters as well as for the full-year 2006. OIS has a price-to-book ratio of 3.0. Read the full analysis on OIS at: http://at.zacks.com/?id=2501.
4. FEATURED EXPERTS 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.
The early Roman historian Cornelius Tacitus, in the first century, noted that in all things there is a law of cycles. In that regard, not much has changed in the last 2000 years. Not only is the market still cyclical, but subsectors of the market are themselves also cyclical. Over the 1926-2004 period, small-company stocks have outperformed large company stocks by a little more than 2% per year, on average (Source: Ibbotson & Associates). However, along the way there have been multi-year cyclical periods favoring small company stocks over large. From Dec 1973- July 1983, the stars were aligned for small-company stock investors. On average, small-stocks beat large-caps by 10.9% annually except for 1980, when both small-caps and large caps performed approximately equally well (both indices gained a little more than 30% that year). Jim Oberweis and his team would be remiss if they didn’t mention those multi-year cycles favoring big caps. Consider the period of Jan 1994-Dec 1999. All segments of equities performed well, but the largest, safest companies delivered exceptional returns. Large company stocks delivered 24.5% average annual gains versus 14.6% for small caps. Although we know that the deck is stacked in favor of small-caps over the very long term, the intermittent cycles can be painfully long. What is it that drives these cycles? Are they possible to predict? Where are we now? Satya Pradhuman, Director of Small-Cap Research for Merrill Lynch, in his book Small-Cap Dynamics, points to long-term factors and short-term factors that drive relative small-cap performance. Perhaps the single biggest long-term factor is economic growth. According to Pradhuman, smaller firms have greater economic sensitivity than large-caps and thus tend to outperform large-caps when the economy experiences periods of rapid growth. To find a strong economy, look for sharply increasing industrial production. An appreciating currency is also likely to be a sign that the local economy is strong. An appreciating dollar has historically correlated well with small-cap outperformance. Additionally, watch inflation. Inflation, per say, is not good for equities. However, on a relative basis, rising prices appear to be correlated with small-cap outperformance. Note that inflation which is attributable to a exchange rate/ interest rate imbalance, as opposed to strong economic growth, may prove to be a misleading indicator. Lastly, in the long term, valuations will also play an important role. A high-growth economy does not imply favorable stock market returns if everyone knows it and stock prices already reflect such growth. In the short term, Pradhuman asserts that changes in market volatility should be closely observed. Periods of declining market volatility tend to favor small-cap stocks. Changes in market volatility affects the willingness of investors to assume risk; hence, when investor appetite for risk increases, small-caps tend to outperform. Historically, there has been an inverse correlation between market volatility and investor appetite for risk. One way to measure market volatility is the CBOE Market Volatility Index, known as the VIX. The index is available under the ticket VXO. During the last three years, market volatility as measured by the VIX has steadily declined, and consistent with Oberweis and his team’s theory, small-cap stocks have performed quite well. In the very short term, exogenous shocks (i.e. Sept. 11th, Asian flu, etc) are bad for small-caps, as such events tend to drive investors to safe havens of stability and liquidity, such as cash and large-company stocks. However, shocks are by definition unpredictable and thus there are very limited actions we can take on this variable. Where are we now? According to Ibbotson and Associates, small-caps have outperformed every year since 1999. On a valuation basis, small-caps as a whole may not appear cheap. However, the outsized valuations are almost entirely among the value segment of the small-cap indices. High growth small-cap stocks appear to still be trading at slightly above-average valuations, but still within a normal range. Market volatility has been on a downward trend. Furthermore, the year has started out with a bang. The Model Portfolio appreciated 9.3% in the first month. All else equal, in the short run, these type of returns will likely ATTRACT investor interest, not deter. In the short run, times look pretty good for small-cap growth investors. The momentum is clearly in our favor. However, there are still some clouds on the horizon. Think about the long term variables discussed above. Industrial production? Yes, we’ve seen decent growth lately, but what do you expect over the next five years? U.S. currency? Recent trends notwithstanding, Oberweis and his team continue to expect that the dollar will decline against Asian currencies over the next five years. Those are disturbing trends that Oberweis and his team think require careful consideration and present a strong case for international diversification. Think about China. Oberweis and his team foresee very strong gains in Chinese economic growth as measured by industrial production, gains which are not currently reflected in Chinese stock market valuations. Predicting changes in the large-cap/small-cap cycle is challenging. There are two reasonable approaches. First, one might assess the risk of a change using the criteria above. If you are right 6 out of 10 times, you’ve done a great job. The other strategy is to simply remaining fully invested, pick good stocks, and accept the volatility of the cycles. Many, if not most, people try to emotionally guess (rather than fact analyze) the cycle and blow it. Many extrapolate the recent past and assume it will persist. Confidence tends to be highest when we approach the inflection point. When it seems like that either small-caps or large-caps will NEVER come back into favor, it probably won’t be long before they do. Oberweis’ favorite example is an article written by value-manager Bill Fouse in 1989 called “The Small-Cap Hoax,” which questioned whether small-cap stocks really would outperform over long periods. It was 6-years into a large-cap cycle, a point at which it was easy to agree with him. Of course, it was wrong. The article was published shortly before small-caps regained leadership and charged forward to beat large caps by an average of 13% annually over the next four years. Based in Irvine, Calif., Comarco (CMRO) is a leading provider of wireless test solutions for field test applications, ChargeSource(R) universal mobile power products and wireless emergency call box systems. Comarco’s industry-leading Seven.Five(TM) wireless test system for field test applications allows cellular telephone system operators to improve the quality of their cellular phone service through voice, video and data benchmarking and system optimization using advanced QoS algorithms and a unique multi-technology RF scanner. Seven.Five’s (TM) open architecture supports both current cellular operating system technologies and the new 3G systems being implemented all over the world. In the company’s latest reported third quarter, sales increased approximately 103% to $13.6 million versus $6.7 million in 3Q04. Hoku Scientific (HOKU) engages in the design, research, and production of membrane electrode assemblies (MEA’s) and non-fluorinated membranes for proton exchange membrane (PEM) fuel cells. Hoku’s MEA’s and membranes are used in the automotive and stationary markets. The company has significant relationships with Nissan Motor Co. and Sanyo Electric and has begun manufacturing 11 fuel cell systems (in conjunction with IdaTech LLC) for the U.S. Navy. The company recently completed all technical milestones in its contract with Nissan and recently announced a new material transfer and collaborative testing agreement with Sanyo. In December 2005, Hoku completed the installation and testing of its new manufacturing facility, which will allow the company to fill higher volume orders for its MEA’s. In the company’s latest reported third quarter (fiscal 2006), sales increased to $1.7 million versus a negligible amount of sales third quarter of fiscal 2005. Hoku reported earnings per share of $.03 in the latest reported third quarter versus a loss of $.03 in the same quarter of last year. The Oberweis Report is a proprietary investment advisory letter specializing in stocks of extraordinarily rapidly growing companies. Each issue contains new stock recommendations along with a review of those previously recommended stocks that have yet to be sold. http://at.zacks.com/?id=2449 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - b) Money Continues to Pour into the Stock Market Donald Rowe says consider any pullback as a buying opportunity. Check out some of his recommendations. More... c) Chicago Fed President Comments on the Economy Richard Rhodes found nothing new in Moskow’s recent remarks but his input is important. Read a recap of the comments. More... OTHER TOOLS FROM ZACKS 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:
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 Do you believe that these events affect stock prices?
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 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 To unsubscribe from receiving "Profit from the Pros" e-mail newsletter, click here. | |||||||||||||||||||||||||
- Latest News
- Most Popular
- How to Invest in QE's Twilight
- RTI: Fed Keeps QE Pace Unchanged
- ETFs on the Move After Bernanke's Press Conference
- Roundtable Top Picks of the Week
- FED Front & Center Again
- RTI: Sector Strength Charts - Where's the Opportunity Now?
- Surging Financial ETFs Beating the Market
- Utility Industry Stock Outlook - June 2013
- Your Next Stock Should Be Making New Highs
- AWS 6/19: Will Bernanke Clarify Matters Today?
- PFP 6/19: Investors Bold in Wake of the Fed
Recent Quotes
| No Recent Quote currently available |
My Portfolio
|
My Portfolio Tracker One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts. Set yours up today. |
Zacks #1 Stocks on the Move 06/19/2013
| Company Name | Symbol | %Change |
|---|---|---|
| SONIC FOUNDR | SOFO | 4.40% |
| SUPPORTCOM I | SPRT | 3.75% |
| UNISYS CORP | UIS | 3.31% |
| SHORETEL INC | SHOR | 3.22% |
| GREEN MOUNTA | GMCR | 3.13% |
Quick Links
Resources
Client Support
Zacks Research is Reported On:
Zacks Investment Research
is an A+ Rated BBB
Accredited Business.
Copyright 2013 Zacks Investment Research
At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm.
Visit performance for information about the performance numbers displayed above.
NYSE and AMEX data is at least 20 minutes delayed. NASDAQ data is at least 15 minutes delayed.