Friday - April 7, 2006

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With European markets outperforming their U.S. counterparts recently, we thought it would be a good time to check in with our senior analyst covering the U.K. and other regions of Europe, Duong Vuong, CFA. He was able to go into a little detail for us how well Europe is currently performing.

A decent portion of your coverage trades on the London Exchange. How has the market there been performing lately?

As it had been trending the last time we talked, the market there has been performing very well –- up 7% in the last three months and up 20% in one year. This is double the 3.5% and 10%, respectively, for the S&P 500.

More. . .

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Zacks Equity Research continued...

In the U.S., insurance companies have begun a cyclical market decline. Do you see the same thing for the European insurance companies you cover?

No, in fact I do not. European insurers are very strong as a sector, with many companies posting positive results and with good price performances to match. This group also currently has M&A plans in focus. Obviously, this can be traced to my initial point, which was that the European stock markets have performed better than U.S. markets in the last year.

Your coverage is quite vast -- from retail to public utilities. Which groups do you see performing strongest in 2006? Which do you feel will perform weakest?

I think Financials will be strong this year. Markets are now all at multi-year highs, and M&A activity is starting to heat up. Financials, at this time, are more geared up to be stronger plays than other sectors.

In my opinion, Retail will be the weakest European sector in my coverage. Fundamentally, Retail is a low growth sector; it has GDP growth in Europe not being very strong at the present time. Also consider the fact that there is high unemployment in the region, which affects consumer spending, especially in countries such as Germany.

What would you consider to be your top Buy recommendation at this time?

I have a Buy on Aegon (AEG), which is turning around its U.S. business with a 7% increase in new life sales, as well as a 17% increase in operating earnings for 2005. In the Netherlands, the improved organization reported a 64% increase in operating earnings in 2005. We view this as a positive restructuring of the European business to form a solid platform.

Finally, for investors looking to diversify into European markets, particularly the U.K., what advice would you give them? What developments might be expected?

I think the currency effect from 2005 won’t be repeated this year, as the U.S. dollar has gained ground versus the British pound. Therefore, any added performance one might expect due to currency this year can be forgotten. The U.K. is fundamentally sound in terms of its economy, and the stock market, while it performed quite well in 2005, is still not too relatively expensive. As such, I still expect it to do well again this year, perhaps with gains around the 10% mark.

Duong Vuong, CFA is a Zacks senior analyst covering a variety of sectors in the U.K. and elsewhere in Europe.

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MORE FROM ZACKS EQUITY RESEARCH...
 

Analyst Blog - NEW!

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

 
BULL OF THE DAY

Huaneng Power (HNP) - A Play on Chinese Energy. For full Zacks research report, click here.

 
BEAR OF THE DAY

Kimberly-Clark (KMB) - Costs and Myriad Pressures. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Spending Growth Helping Business Services

Outsourcing to experience strong growth over the next three-to-five years. More...

 
EARNINGS TRENDS

Materials Makes its Move

Driven by record prices for metals, Director of Research Dirk Van Dijk says estimates are being revised sharply higher in the Materials sector. 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: Recent Price Strength

This screen looks for stocks trading in the upper range of their 52-week highs along with attractive Zacks Rank and Broker Ratings. This strategy proves that the "trend is your friend" with a +35.5% return versus +4.9% for the S&P 500 in 2005.

Here are four stocks that make the grade for the Recent Price Strength Profit Track:

Andersons Inc. (ANDE) posted fourth-quarter earnings of $1.98 per share in early February. The result was ahead of the consensus estimate by about 29% and topped last year’s $1.09. The a Zacks #1 Rank (Strong Buy) company recently saw its share price reach a new 52-week high. The shares have increased in price by almost 62% over the past four weeks. Continue your research on ANDE at: http://at.zacks.com/?id=2290.

Eagle Materials Inc. (EXP) recently established a new 52-week high and has advanced in price by nearly 43% over the past four weeks. The company produces and distributes Gypsum Wallboard, Cement, Recycled Paperboard and Concrete and Aggregates. EXP will announce financial results for its fiscal fourth-quarter on May 2, 2006. In late January, EXP released its third-quarter report, stating that it remains well positioned to continue to achieve outstanding financial results given its low cost operations, which supply building materials to a strong construction industry. The company also raised its earnings guidance for fiscal 2006. Continue your research on EXP at: http://at.zacks.com/?id=2291.

Zoltek Companies, Inc. (ZOLT), an applied technology and advanced materials company, reported fiscal first-quarter earnings per share in early February. The result was above the year-prior levels and outpaced analysts’ expectations by almost 117%. Zoltek Companies meets the criteria of this Profit Track with a share price that has experienced nearly 35% growth over the past four weeks and is currently very close to its 52-week high. Continue your research on ZOLT 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.

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SCREEN OF THE WEEK

Increasing P/Es for Stocks on the Move

Kevin Matras looks at increasing P/E Ratios for spotting potential price and earnings trends: http://at.zacks.com/?id=2289.
 

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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 – Psychiatric Solutions (PSYS)

Psychiatric Solutions (PSYS), the leading provider of inpatient behavioral health care services, has been benefiting from favorable industry trends. Over the past five years, PSYS has enjoyed annualized earnings growth of 49.6%. Looking forward, analysts have raised their forecasts for both 2006 and 2007. Read the full analysis on PSYS at : http://at.zacks.com/?id=2505.
 

Growth & Income – Golden West Financial Corporation (GDW)

Golden West Financial Corporation (GDW) generated record earnings, deposits and loan originations in 2005. In doing so, GDW achieved its 9th consecutive year of profit growth. The company also has an impressive streak of earnings surprises, having topped analysts’ expectations for eight consecutive quarters. Read the full analysis on GDW at: http://at.zacks.com/?id=2506.

More...

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Zacks Rank continued...

Momentum – Olympic Steel (ZEUS)

Olympic Steel (ZEUS) expects to report earnings for the quarter ended Mar 2006 on Apr 27, but traders and analysts aren’t waiting. Ahead of the earnings report, one analyst has already upped his FY 2006 estimate to $2.50 per share from $2.40. And traders are bidding up the stock into new high ground. The consensus among analysts is that ZEUS will report earnings of 63 cents per share for the quarter. Important for Zacks Rank investors to note, ZEUS has not had a negative earnings surprise since the Dec 1999 quarter, and has delivered a positive earnings surprise the last three quarters. Read the full analysis on ZEUS at: http://at.zacks.com/?id=2507.
 

Value - Marinemax, Inc. (HZO)

Marinemax, Inc. (HZO), a Zacks #1 Rank stock, raised its fiscal 2006 earnings per share guidance back in mid-January. The company’s revised outlook was fueled by its completed acquisition of the Port Arrowhead Group. Furthermore, HZO announced the increase of its credit capacity. Analysts’ earnings estimates have been trending higher for both fiscal 2006 and fiscal 2007. The company has a price-to-book (P/B) multiple of 2.1. Read the full analysis on HZO 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.

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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) Dennis Slothower, Editor of Stealth Stocks
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They say bull markets climb a wall of worry. For the past two years that is exactly what the stock market did as it charged ahead to five–year highs. It amazes Dennis Slothower that the stock market was able to scale those cliffs while at the same time the Fed was raising rates. Although they recently raised rates for the fifteenth time, which is the longest stretch in 25 years, there are still more hikes to come. And that is the good news.

Why? Simple—it’s all in the way you view interest—rate hikes. Slothower’s research is telling him that higher rates will be good for stocks. Before you have Slothower committed to the nearest padded cell, please hear him out. For the past six years anyone with bricks and mortar that could be called a house, office building or simply real estate has seen his or her assets soar. The real estate game became the latest bubble to capture the hearts and minds of investors. Money was flowing into anything real estate while stocks took a backseat. However, the winds of change are blowing.

Allow Slothower to share with you the facts the way he sees them. The NAHB Housing Market Index was at 68 last October, and the latest reading last month was 55. In February, new home sales plunged further than expected with a 10% month–to–month decline to 1.08 million units. On a year–to–year basis, sales are down by 13%. New home sales have declined for four consecutive months. It is clear that sales are trending downward, while builders continue to build new homes. This is creating more inventories that are now being reported at their highest point in more than nine years. It will only get worse if rates continue to climb.

Rising mortgage interest rates and rising housing prices are constraining the demand for homes. Affordability has declined to a near 15–year low, according to the National Association of Realtors. It follows, then, that speculators are growing more and more worried about tying up capital in a growing illiquid market. As more and more people back away from real estate, more capital flows into the money supply and liquidity grows, freeing up more money to invest in the stock market. In the third quarter of last year, Alan Greenspan warned about rampant speculation in real estate. He cautioned financial institutions about the dangers of getting too creative with mortgages. (Slothower recently saw a 50–year mortgage being offered!) The Fed wants to see more liquidity in the banking system.

Slothower remembers back in 1999 the Fed warned that the stock market was sucking out too much money from the banking system, making it difficult for banks to have the money to lend. That was forcing the Fed to provide more capital than they felt comfortable with providing. Fast forward seven years later and we have the opposite extreme. The low interest rates of 2000—2004 pushed capital into real estate and out of the stock market. As rates rise it appears capital is about to flow in the opposite direction, which of course benefits the stock market.

That is why Slothower reasons that the stock market is actually welcoming the news from the Fed that higher interest rates are coming. With more capital now being freed out of real estate, the next “home” it will find will be the stock market. Currently Slothower has on his avoid list mortgage service companies such as Fannie Mae (FNM), Freddie Mac Corp. (FRE) and Accredited Home Lenders Holdings (LEND).As housing inventories grow, earnings are likely to slow for the home builders as well. It might be sooner rather than later that Slothower may start shorting these stocks. However, he wants to keep his powder dry and not get into a guessing game as to when the real estate market will crater.

Stocks that could double in a year include:

Technology Research Corporation (TRCI) engages in the design, manufacture and marketing of electronic control and measurement devices for the distribution of electric power. Its products are used for protection from electrical shock and prevention of electrical fires in the home and workplace.

HMS Holdings Corp. (HMSY), through its subsidiaries, provides various cost containment and payment accuracy services relating to government health care programs in the United States. HMS Holdings, through Reimbursement Services Group, Inc., works on behalf of public and voluntary as well as for–profit hospitals to document services that qualify for reimbursement through Medicare cost reports and other government payment mechanisms. The company was founded in 1974 and is headquartered in New York City.

About Dennis Slothower’s Stealth Stocks newsletter:

During my 25-year career as a money manager, I’ve tested hundreds of market indicators. I’ve fine-tuned my strategy using specific indicators that work together to predict the market with incredible accuracy and find stocks flying under the radar screen. Indicators are pointing to a strong bull market in 2005. I don’t want you to miss a single day of what I’m convinced will be a spectacular bull market. http://at.zacks.com/?id=2366

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MORE FEATURED EXPERTS...

b) HealthExtras Making Waves

Charles Norton and Allen Gillespie say companies that serve to lower the costs of health care will likely do well. More...
 

c) Continued Strength is Expected

Don Dion says energy, health care, industrials and technology are expected to show strength. Discover other promising sectors and check out a mutual fund. More...
 

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:

• +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=2296.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2297.

FREE PORTFOLIO TRACKER

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• Broker Recommendation changes
• Earning Estimate revisions
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• 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.

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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 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.

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