Thursday - February 23, 2006

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China, while still the fastest-growing economy on the globe, is proving to have unique characteristics that are likely to continue bedeviling investors. We spoke with senior analyst Paul Cheung, CFA about where in China investors should be focused right now.

What industries are growing the fastest in China at the present time?

The Internet, financial and resource industries are growing the fastest in China at the present time. While China has more people using the Internet than does the U.S. and the U.K. combined, the penetration rate is still very low. The government wants this sector to grow, but is also worried about it since it could undermine their political control, thus the recent flap with Yahoo! (YHOO) where the government is attempting to censor certain topics on the net.

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Zacks Equity Research continued...

The financial system is still quite underdeveloped, and getting loans from the banking system is often more related to political connections than to the soundness of the business plan. A more modern financial sector would lead to better allocation of capital, and thus more sustainable long-term growth. China’s demand for raw materials – as it attempts to bring hundreds of millions from abject poverty to a reasonable standard of living – appears to be almost insatiable.

Is the government taking steps to slow economic growth? How do you forecast the next six months will develop?

The Chinese government won’t take step to slow overall economic growth, but will take measures to slow the growth of some industries including steel, cement and real estate. I forecast the Chinese economy will continue to grow at about 9% over the next six months.

In part, there is a feeling that these industries have been built up to fast in the recent past, due somewhat to the political connections with local governments. The overcapacity could lead to these industries facing severe pricing pressures or the need to export their production, which will just lead to more political problems on the trade imbalance front.

Are any sectors in China slowing down without help of the government?

Agricultural-related sectors in China will slow down without help from the government. Agricultural-related businesses will naturally slow because the agricultural industry is underdeveloped, and the income of rural people is far below that of urban people in China. At this time, the Chinese government is taking measures to stimulate the development of rural economy through tax subsidies and loans.

Assuming China is still a good place for investors to put their money, what issues should investors be paying close attention to?

Investors should pay attention to the Chinese government’s promotion measures and regulations to certain industries. The Chinese government is expected to promote industries including resource conservation, environmental protection and industrial infrastructure upgrading. The means with which it plans to do this are through shortening the approval procedure, tax subsidies and loans.

Industries that the government would regulate are those that waste resources and certain underdeveloped technology initiatives. It would do this by divesting from businesses in areas such as this and closing government-controlled plants and offices. As a result, it would be best to avoid those industries such as steel where the government is trying to discourage investment and to focus on those where the government is trying to increase investment such as oil and other natural resources.

What is your top Buy recommendation at this time, and why?

CNOOC (CEO) is my top Buy recommendation because of the high price of crude oil, high efficiency of CNOOC in China and Chinese government’s support. CNOOC is one of the three largest state-owned petroleum and petrochemical companies in China. The company is China’s largest producer of offshore crude oil and natural gas and one of the largest independent oil and gas exploration and production companies in the world.

CNOOC is the only company permitted to conduct exploration and production activities with international oil and gas companies off China’s shore. The company is also one of the largest offshore crude producers in Indonesia. As of year-end 2004, CNOOC owned net proved reserves of approximately 2.2 billion barrels-of-oil equivalent and its annual average production was 382,513 barrels-of-oil equivalent per day.

Paul Cheung, CFA is a Zacks senior analyst covering a variety of companies in the People’s Republic of China.

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MORE FROM ZACKS EQUITY RESEARCH...
 

Analyst Blog - NEW!

Get real-time market insights from Zacks Equity Research Analysts. See their latest posts, click here.

 
BULL OF THE DAY

Golden West Financial (GDW) - Solid Balance Sheet Growth. For full Zacks research report, click here.

 
BEAR OF THE DAY

Dynegy (DYN) - Continued Generation Weakness. For full Zacks research report, click here.

 
EARNINGS TRENDS

Positive Surprises Still Outnumber Disappointments

With earnings season almost over, Director of Research Dirk Van Dijk says positive surprises still lead disappointments by a margin of over three to one. More...

 
ZACKS INDUSTRY OUTLOOK

Industry Rank for the Week of Feb 20

The earnings reports from the retail sector have been roughly inline with most other sectors. More...
 

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Zacks.com features a free investment simulator where our customers can prove their stock picking skills to the rest of the world. In these articles we will share with you the insights and recommendations from Top Simulator Players. Learn more about the current Zacks Challenge at: http://at.zacks.com/?id=2514.

 
BankOfVolatility_EN

This week, Zacks is excited to present Elias Nechachby’s (aka: BankOfVolatility_EN) thoughts on the investing. Currently in third place among the leaders of the Zacks Challenge Simulator competition, Elias has amassed an overall return of 187% since Jan 3. His style of investing relies exclusively on options. This contestant’s recent trades include option plays on Netease.com (NTES), Broadcom (BRCM), Qwest Communications International (Q), Phelps Dodge (PD) and Apple (AAPL). Click here to check out more of this player’s recent trades.

The successful investor, who hails from France, likes to study market behavior and keeps his finger on the pulse of investor sentiment. This monitoring of investor psychology, in addition to making wise option moves, has helped Elias’ portfolio climb towards the top of the Zacks Challenge ranks.

Influenced by intellectuals and educators from Ivy League institutions, this market watcher seems to take a cerebral approach to investing. His research is gathered from periodicals and the internet, including Wall Street Journal, MarketWatch.com, Briefing.com and Zacks.com.

When asked what he looks for in a stock, Elias stated that he studies the investor sentiment picture and tunes into upcoming events to determine how a company could be impacted. A reversal in market sentiment could be an indicator to sell according to this Simulator player.

What are some of Elias’ favorite names?

Based on what he refers to as sentiment reversal, the market player has been following Intuitive Surgical (ISRG), Broadcom Corporation, Rambus (RMBS), Google (GOOG) and Apple. His big winner was a put option on Intuitive Surgical. Elias attributed this pick to “predictable investor reaction to news that was interpreted as bad.”

So what is this Simulator competitor’s advice to those who are ready to get their feet wet in the market?

Elias said learn as much as you can and test your strategy thoroughly before investing real money. One might wonder what this student of investor emotion sees going forward. While it is not his practice to form market outlooks, Elias did note that he believes the market will slowly rise with long neutral reverting periods.

The Challenge is On!
Do You Have What it Takes?

Sign up now for the Zacks Investment Challenge. Its free. Its fun. It’s the place to show your investing prowess. The best stock pickers will be rewarded with thousands of dollars in prizes. Learn 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.

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

Nordic American Tanker Shipping Ltd. (NAT) boasts a dividend yield of 22.91%, which is currently the highest yield listed under this Profit Track. The company recently announced fourth-quarter earnings of $1.51 per share, outpacing the consensus estimate by about 4% and exceeding the year-ago quarter. NAT also declared a dividend of $1.88 per share for the fourth quarter. The dividend for the third quarter was 60 cents and last year’s fourth-quarter dividend was $1.62. Continue your research on NAT at: http://at.zacks.com/?id=2354.

Southern Copper Corporation (PCU), a Zacks #1 Rank (Strong Buy) company, released fourth-quarter earnings of $2.86 per share in late January, outperforming analysts' expectations by almost 9%. Net sales increased 14.1% year-over-year. The company also declared a dividend of $2.75 per share. PCU satisfies the criteria for this Profit Track with a dividend yield of 13.67%. Continue your research on PCU at: http://at.zacks.com/?id=2355.

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TIMELY BUY of the WEEK continued...

Saxon Capital Inc. (SAX), a residential mortgage lending and servicing real estate investment trust (REIT), will report its 2005 fourth quarter and year end operating results after the market closes on February 28, 2006. The company paid a fourth-quarter dividend of 50 cents per share plus a special dividend of 14 cents in early January. The special dividend was declared in order to reduce the potential for any excise tax that might be incurred by the Company under REIT tax rules. SAX currently offers a dividend yield of 19.61%. Continue your research on SAX at: http://at.zacks.com/?id=2356.

Suburban Propane Partners LP (SPH), a marketer of propane gas, fuel oil and related products and services nationwide, recently paid a dividend of $0.6125 for the fiscal first quarter. The company also posted first-quarter earnings of $1.14 per share in early February. The result was ahead of the consensus estimate by nearly 30% and improved on the previous year’s 77 cents. SPH, which currently yields 8.58%, stated that it is well positioned for significant earnings growth in fiscal 2006. Continue your research on SPH at: http://at.zacks.com/?id=2357.

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2358.

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=2359.

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SCREEN OF THE WEEK

Using Common Sense to Manage your Portfolio

Kevin Matras shows why monitoring stocks is as important as picking them. It’s simple common sense but it can make all the difference: http://at.zacks.com/?id=2360.
 

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Here you'll discover a Zacks #1 Rank stock hand selected by Ben Zacks to outperform the market over the next 30 to 90 days. This week's Timely Buy is...

 
AT&T Inc. (T)
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AT&T, Inc., (T) through its subsidiaries, provides telecommunication services in the United States and internationally. It provides Internet protocol (IP)-based communications services for businesses, including a portfolio of virtual private network, voice over IP, and other offerings. The company also provides hosting solutions and supporting services for small, medium, and enterprise businesses, including shared, managed and server collocation, and enhanced services. Its services also include Web services, Web site acceleration, caching, content distribution, streaming, enterprise messaging, and uninterrupted access to critical data and applications.

Cingular Wireless is the company's growth engine that has the most potential going forward. It is the largest U.S. wireless carrier, with the deepest-spectrum portfolio of any carrier in the country's largest markets, giving it the resources to roll out new services quickly. Cingular should be able to strengthen its market position as it integrates the recent merger with AT&T Wireless. Cingular has the financial muscle to survive and thrive in the wireless industry, and recent consolidation should improve profitability in the industry.

A big part of AT&T's strategy centers around the business services market, in which it hopes the integration of SBC's local networks and the old AT&T will differentiate it against its competitors. T is upgrading the local phone network and offer new services to consumers to combat competition from cable companies. Cost-cutting is also important as competition pressures prices and revenue declines.

One advantage that T has is a rock-solid balance sheet. The combined firms collectively have generated $6.3 billion in free cash flow, excluding a $2.6 billion dividend from Cingular, and the firms repaid more than $5 billion of debt last year. This financial strength will allow T to withstand the turbulence of their market.

Over the past 60 days, earnings estimates for 2006 have increased 11.2% to $1.98 per share, with nine different analysts raising their numbers. The company has met or exceeded earnings estimates in each of the past nine quarters.

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 Rank (Strong Buy) List has produced the following results for investors:

• +32.5% average annual return since 1988 versus +11.8% for S&P 500
• Outperformed S&P 500 in 17 of the last 18 years
• +43.8% total return from 2000 to 2002 - the worst bear market in over 60 years.
• +18% in 2005

And just as importantly, our #5 Ranked stocks (Strong Sells) have 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=2350.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2351.

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 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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