Monday - March 27, 2006

Want to view the archive of past issues? Go to: http://at.zacks.com/?id=2314.

Manage Profit from the Pros subscription:
* Free Subscription: http://at.zacks.com/?id=2311
* Change of address: http://at.zacks.com/?id=2315
* Unsubscribe: http://at.zacks.com/?id=2313
 

Back to top

While the technology industry in the U.S. has slowly rebounded from recent-year lows, we were interested in finding out if similar patterns were emerging overseas, particularly Europe. We spoke with senior Eurotech analyst Rob Perri, CFA for his views on this.

What do you see as the main difference between Eurotech and U.S. tech companies these days?

The primary difference between U.S. and European tech companies is that in Europe there is very little flexibility for employers to manage their workforce effectively. As many European countries have very stringent work-related regulations in regards to hiring and firing, coupled with heavy penalties for layoffs, Eurotech firms tend to be slower to hire needed personnel in boom times, and slower to commit to layoffs in slow periods.

Recently, many of the larger Eurotech firms have begun moving many jobs to Asia, particularly India, to alleviate some of the problems, but Eurotech firms tend to have lower margins when compared to their U.S. counterparts because of this. On the positive side, this has caused Eurotech firms to spend more heavily on research and development (R&D) in order to stay ahead of the curve with more innovative products, where they can charge higher prices.

More. . .

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

Back to top

 
Zacks Equity Research continued...

Should investors consider overweighting, underweighting or market-weighting Eurotech stocks at this time?

We believe that investors should consider being overweight in Eurotech at this time. While the U.S. market is at the height of a Fed tightening cycle, Europe is just starting to recover. Growth in the European markets has started to pick up, and many of the different governments across Europe are implementing more business-friendly policies, which is allowing these companies to cut-costs and move workers to lower-cost areas, such as Eastern Europe or India. There is also the added bonus of gaining exposure to the Euro, which we expect to strengthen slightly against the U.S. Dollar in 2006.

What are some of the trends you are noticing in Europe that investors should keep an eye on?

Recently, there has been a wave of cross-border takeover announcements in Europe, which is causing some local governments to take a more protectionist stance. Spain, France and Poland are all fighting potential takeover of some of their larger companies by rivals in other countries. The larger of these deals, German E.On’s (EON) unsolicited bid for Endesa (ELE), one of the largest Spanish power companies, has caused the Spanish Government to take defensive measures to try and thwart the deal. While the European Union (EU) has the ability to overturn these types of “local” protectionist measures; just the thought of having to go through this type of process has caused many European companies to avoid these larger mergers. In order for the EU to become the “single market” it is thriving for, national governments need to back off and allow market forces to work undeterred. In the next year we will see which vision of Europe prevails, as these clashes between the EU and local nations unfold. If the more protectionist views prevail, it will set the EU back several years and has the potential to quell growth in the future, while if the “single market” view wins out, the EU will be in a much better position to improve its competitiveness on a global scale.

What are your top Buy recommendations these days? Any Sell recommendations you'd care to mention?

One stock I like is the NDS Group (NNDS), which creates smart cards, middleware, and other software solutions for set-top boxes that enable broadcast or broadband platform operators and content providers to deliver content securely to subscribers for digital satellite, pay-television, and Internet services. The company is 78% owned by News Corp. (NWS), which means that it has consistent clients in DirecTV in the U.S., BskyB in the U.K., and many other television operators around the globe. NDS has over 61 million smart cards in use right now, and receives a monthly royalty from each user.

Another area of growth is interactive gaming, which allows users to interact with their TVs, and NDS is a leader in this space as well. The company is also expanding into the IPTV, or TV over the Internet, and the Digital-Video Recorder (DVR) spaces, which should help boost revenues this year. Starting late in 2005, DirecTV started offering new set-top boxes that include NDS's DVR solution, which will add another license stream. Finally, the company has a solid position in growth markets, such as India and China, where the pay-TV model is only starting to catch on. We believe that the company should be trading at 30x our recently raised fiscal 2007 EPS estimate of $1.81 a share, or close to $54.50 over the next six months.

One stock that has continually disappointed investors is Infineon (IFX), the German semiconductor company. The company specializes in Memory products, such as DRAM, and semiconductors for the Automotive and Industrial, and Communications markets. It has consistently lost money, and has undergone a long restructuring effort that doesn't look to be completed now until mid-2007. The company's Communications business has been under severe pressure, and reported its seventh consecutive loss in the most-recent quarter. DRAM prices have continually been under pressure, and the company cost structure isn't well-positioned to compete on price against its Asian competitors. Additionally, the company is in the middle of creating a separate independent unit for its Memory business, in order to pursue strategic alternatives, such as an IPO. An IPO appears to be the most reasonable alternative, as there has been very little interest from anyone in buying this unit from Infineon. We rate these shares a sell, and expect the company to trade at 25x our fiscal 2007 estimate or $9.00 a share over the next six months, compared to its recent share price of $9.97.

Finally, what are the main issues tech companies in your coverage are expected to face this year?

Recently, Philips (PHG) announced that it was planning to create a separate entity for its Semiconductor business and explore alternatives for the group. Infineon has also started the process of creating a separate entity for its memory business, and is also exploring alternatives for that business. When these transformations finish towards the second-half of 2006, we may start to see a consolidation trend in the Semiconductor market. There has been much speculation as to who would be interested in these stand-alone companies, but it is too early to start guessing. We do feel that the semiconductor industry will enter into a consolidation phase eventually, and it is something to keep an eye on in 2006.

Robert Perri, CFA is a senior analyst covering the technology industry in Europe for Zacks Equity Research.

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

Back to top

 
MORE FROM ZACKS EQUITY RESEARCH…

Analyst Blog - NEW!

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

 
BULL OF THE DAY

Schering-Plough (SGP) -Turnaround Underway. For full Zacks research report, click here.

 
BEAR OF THE DAY

Affordable Residential (ARC) - Another Weak Quarter. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Built to Last

The building products industry is still strong in 2006. More...

 
EARNINGS TRENDS

Estimate Revisions Positive for both 2006 and 2007

Director of Research Dirk Van Dijk says analysts have been raising more earnings estimates for both 2006 and 2007 than they have been cutting. 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: High Rank Value

Two of the most commonly accepted measures of a value stock are a price-to-earnings (P/E) multiple of 15.0 and a price-to- book (P/B) multiple of 3.0. Although many studies have shown performance advantages to investing in value stocks, not all value stocks are actually bargains. A value stock is only a good buy if earnings are expected to improve in the future.

High Rank Value is a strategy designed to find the true bargains among value stocks. By requiring a Zacks Rank of #1 ("Strong Buy") or #2 ("Buy"), this strategy restricts the pool of value stocks to only those with positive revisions in earnings estimates. In other words, profits are expected to improve in the future at a faster pace than originally anticipated.

The combination of a low valuation and a high Zacks Rank is very profitable. This Profit Track has consistently topped the S&P 500 during the past five years. In 2005, this strategy generated a return of +13.7%.

 
Here are four stocks that make the grade for the High Rank Value Profit Track:

Camco Financial Corp. (CAFI) announced fourth quarter earnings 32 cents per share in mid-January. The result outperformed last year’s 24 cents and exceed the consensus estimate by almost 19%. The company noted that 2005 was a good year, during which it increased operating earnings, strengthened its balance sheet, invested in its banking franchise, and continued to make progress on all aspects of its long term strategic plan. The savings and loan holding company has a price-to-earnings (P/E) multiple of 12.13 and price-to-book (P/B) multiple of 1.17. Continue your research on CAFI at: http://at.zacks.com/?id=2254.

EMC Insurance Group Inc. (EMCI) reported fourth-quarter earnings of $1.34 per share in late February, which topped the consensus estimate by nearly 5% and was ahead of the year-ago total. EMCI stated that it credits its success to strategic planning and strong relationships with its agency partners. The company’s shares offer a price-to-earnings (P/E) multiple of 13.66 and a price-to-book (P/B) multiple of 1.34. Continue your research on EMCI at: http://at.zacks.com/?id=2255.

First United Corporation (FUNC), a Zacks #1 Rank (Strong Buy) name, is a one-bank holding company with two non-bank subsidiaries. In late February, the company posted fourth-quarter earnings of 69 cents per share, which was ahead of the year-prior performance. FUNC satisfies the criteria for this Profit Track with a price-to-earnings (P/E) multiple of 11.02 and price-to-book (P/B) multiple of 1.48. Continue your research on FUNC at: http://at.zacks.com/?id=2256.

Timberland Bancorp, Inc (TSBK) released fiscal first-quarter financial results in late January. Earnings per share of 55 cents topped the consensus estimate by 10% and improved on last year’s 40 cents. TSBK noted that the increased earnings per share was primarily a result of increased net interest income and decreased non-interest expenses. The company offers a price-to-earnings (P/E) multiple of 13.75 and a price-to-book (P/B) multiple of 1.34. Continue your research on TSBK at: http://at.zacks.com/?id=2257.

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2258.

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=2307

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

 
SCREEN OF THE WEEK

A Strategy for a Return on Your Investment

Kevin Matras goes over his 'Return on Equity' strategy that's handily beaten the market for five consecutive years: http://at.zacks.com/?id=2259.
 

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 – Atheros Communications (ATHR)

Atheros Communications (ATHR) is well positioned in the fast growing WLAN market. The company has met or exceeded analyst estimates for five consecutive quarters. In the most recent quarter, ATHR surprised by 57%, which caused a huge spike in the stock. Eight different analysts raised their numbers for 2006. Over the past 60 days, 2006 estimates have increased 44.4% to 52 cents per share. Read the full analysis on ATHR at: http://at.zacks.com/?id=2510.
 

Growth & Income – Nordson Corporation (NDSN)

Nordson Corporation (NDSN), a Zacks #1 Rank stock, recently announced record revenues, profits and earnings per share in the first quarter of fiscal 2006. Backlog at the end of the first quarter stood at approximately $100 million. The company has met or exceeded the Street’s estimate in nine of the past 10 quarters. Earnings per share grew 16.5% over the past five years and are forecasted to grow 12.0% over the next 3-5 years. The company is currently yielding 1.4% and has a five-year average dividend yield of 2.0%. Read the full analysis on NDSN at: http://at.zacks.com/?id=2511.

More...

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

Back to top

 
Zacks Rank continued...

Momentum – Analogic (ALOG)

Analogic (ALOG) breaking out of a six year trading range. ALOG delivered a surprisingly robust earnings report on Mar 9, 2006, reporting EPS for the first quarter of 2006 at 66 cents per share, a 128% positive earnings surprise. The result was a 267% improvement from the previous quarter. The company lost 27 cents in the prior year. All analysts reporting after the Mar 9 report have raised their 2006 FY estimates for the company. Read the full analysis on ALOG at: http://at.zacks.com/?id=2512.
 

Value – Commercial Metals Company (CMC)

Commercial Metals Company (CMC) recently reported its strongest second quarter ever. Furthermore, it served as the second best quarter in the history of the firm. The company remains very optimistic for the third quarter and second half of fiscal 2006. Analysts’ earnings estimates for fiscal 2006 and fiscal 2007 have been on the rise. CMC recently boosted it quarterly dividend by 66.7%. This Zacks #1 Rank stock has a price-to-book (P/B) multiple of 2.7. Read the full analysis on CMC at: http://at.zacks.com/?id=2513.
 

Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2266.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide: http://at.zacks.com/?id=2267.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2538.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2539.

Back to top

Here we cast the spotlight on a timely Featured Expert commentary that recently appeared on Zacks.com.

 
Gregory Spear, Editor of The Spear Report

Last week Gregory Spear and his team discussed a growing mood of pessimism, despite the fact that the major averages were still in technical uptrends. It had to do with corrections in many of the leadership sectors. Spear and his team also spoke about how negativity is usually a catalyst for a rally, and said “This is what any correction feels like just before it reverses to the upside!” Well, sometimes Spear and his team’s timing is just about perfect.

In the last week we have seen the NYSE and the S&P Smallcap 600 hit an all time high, and the Dow and the S&P 500 post multi-year closing highs. The market is being led by some of the more conservative names, such as brokers and railroads, while many former momentum leadership tech names like Apple (AAPL) and Advanced Microdevices (AMD) can’t get much respect. With crude oil rallying more than 6% this week, pushing $64 on an intraday basis on Thursday (3/16), we also saw a turnaround in the energy patch, which tends to boost the major averages, as well.

What was the catalyst? Like a guest that is perennially early to the party, the market is once again celebrating the end of the Federal Reserve rate hike scenario. We have had anticipatory rallies about this before…last spring if you remember…but six rate hikes later the rally is perhaps a bit more realistic. For now, bad news on the data front is good news for Wall Street, as signs of economic sluggishness are being celebrated. Wall Street is quite confident that America’s largest corporations can do well enough in an economy growing 2-3% a year and they have good reason to be optimistic. Goldman Sachs (GS) reported blow out numbers this past week for a quarter in which GDP growth was less than 2%.

Contrary to the headline news about the burgeoning trade deficit, the latest monthly data from the second busiest port in the U.S. indicates that U.S. exports are rather robust, with the number of outbound containers increasing 21% year-over-year, while the number of inbound containers advanced just 0.9%. Corroborating conditions were reported last Wednesday in New York, where hours worked set a record, employment set multi-year highs, order backlogs are swelling and delivery times are stretched, while inventories post record low levels relative to sales. Get the picture? The Goldilocks Economy is humming along quite nicely in the background.

Consequently, after a period of apparent politically motivated disinterest, data from the Treasury Department shows that OPEC nations were buying U.S. Treasuries (bonds) hand over fist in January. As Saudi Arabia's stock market has dropped about 25% since its top in late February, it is also likely that OPEC nations are buying U.S. equities, as well.

As the 10-year yield fell to 4.64%, homebuilders found a second wind this week. With brokers, transports, energy and homebuilders in an upswing, the market can certainly do well, despite weakness in technology.

 
A sampling of profiled stocks:

Myriad Genetics (MYGN) is a biotech company that is developing Flurizan, a therapeutic drug for the treatment of Alzheimer's disease. Flurizan is the first in a new class of drug candidates known as Selective Amyloid beta-42 Lowering Agents (SALAs). Abbreviated “Abeta42,” this compound is the primary constituent of senile plaque that accumulates in the brain of patients with Alzheimer's disease. Most genetic mutations that cause early-onset Alzheimer's disease appear to do so by increasing production of Abeta42, which then causes neuronal damage.

Myriad is completing a Phase II human clinical trial of Flurizan in patients with mild to moderate Alzheimer’s disease. The stock rallied nicely this week after data showed that after 21 months participants on 800 mg/ day of Flurizan continued to demonstrate increasing benefits in the area of cognition and memory loss. Moreover, they maintained more of their global function and activities of daily living than those on a lesser dosage, and the benefit of Flurizan on the measures of Alzheimer's disease increases the longer patients remain on Flurizan. Based on the positive Phase 2 results, Myriad is now enrolling patients with mild Alzheimer's disease for a 12-month Phase 3 trial, at 130 centers across the United States.

Myriad also develops and markets predictive and personalized genetic products. The company discovered the BRCA1 and BRCA2 genes that cause hereditary breast and ovarian cancer, and now offers genetic tests for these two conditions as well as hereditary melanoma and two tests for hereditary colorectal cancer and polyps. Genetic testing has passed an inflection point and is now utilized much more frequently by doctors in guiding cancer treatment, not just prevention. Myriad also offers forensic DNA services.

MYGN grew revenues 65% in 2005 to $80 million, posting a net loss of about $40 million. Cash on hand totals over $200 million, which is plenty to survive. Technically, a monthly chart of the stock shows a solid basing pattern and a new uptrend in progress.

Dynamic Materials (BOOM) began over 30 years ago as an explosive metal forming business for the aerospace industry. Subsequently, the company licensed metal cladding technology from Dupont and eventually acquired Dupont’s metal cladding business, as well as several other competitors in the U.S. and eventually in Europe. Explosion- welded clad metal is primarily used in the construction of large industrial equipment involving high pressures and temperatures, along with a requirement for corrosion-resistance. The company has operations in Pennsylvania, France and Sweden, and is 55% owned by SNPE, a French government-owned defense contractor. BOOM is the dominant player in this niche market for explosion- clad corrosion resistant metals. These high-tech sandwiches are typically made from titanium, aluminum or stainless that is welded onto a cheaper metal substrate. Titanium is a highly corrosion resistant metal but it is not weldable by ordinary means. It takes a special explosive environment to force the inert titanium molecules to bond with anything. Explosion-welded products retain the properties of the original metals before they were bonded, such as corrosion resistance and mechanical properties, unlike materials produced by hot rolling or conventional welding. When fabricated properly, the two metals will not come apart, even under the most extreme circumstances. These exotic hybrid materials are used in the petrochemical industry, oil extraction and refining, mining, nuclear power generation, aluminum production and shipbuilding. An upgrade and expansion cycle in the refining industry should prove to be an important catalyst for BOOM’s continued growth.

BOOM owns the North American explosive metal-clad market but the company has a worldwide sales force and is likely to be a bidder on any serious metal-clad project that is planned anywhere in the world. Although the patents for the explosion-cladding process have expired, BOOM has proprietary knowledge that distinguishes it from its competitors. The company also provides advanced welding services, primarily to the power turbine and aircraft engine manufacturing industries, which accounts for about 5% of revenue.

BOOM showed up on the radar of stock traders and investors in early 2005. Sales for that year grew 46% to $79 million and the company’s EPS spiked 120% to $0.86 per share with improved margins, as well. The price of titanium and other metals has been skyrocketing, but BOOM has pricing power and has been able to pass along costs.

 
About Gregory Spear’s The Spear Report newsletter

Who Can You Trust? Would you rather follow a system that’s gained 400% in the last 5 years or one that’s lost 90%? The Spear Report monitors over 150 newsletters, analysts and screens, ranks them all by performance in bull and bear markets, then produces a consensus of their stock recommendations that is weighted by the performance of the recommenders! Get the top stock picks from the top stock pickers now with a free trial to The Spear Report. http://at.zacks.com/?id=2413.

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:

• +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, 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=2309.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2266.

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=2310

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.

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.