Thursday - May 4, 2006

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As Medicare Part D gets its first real test during this Q1 earnings season, we were curious how it was expected to fare. Thus, we sat down with senior healthcare analyst Chris Kallos for his viewpoint and opinion on how this measure is likely to be performing.

How are Q1 earnings expected to perform for the healthcare industry, in general?

This reporting season is the first since the launch of Medicare Part D, and therefore it will be the first opportunity we have to see how related marketing initiatives are affecting membership growth in the managed care sector. That said, we are expecting brand recognition to be a key driver of growth, and in that regard, Blue Cross Blue Shield-affiliated companies are expected to be among the better performers in this regard. In this, the first quarterly earnings season for the year, we will be focusing on the medical cost management (medical loss ratio) and pricing power given industry consolidation and increasing competition.

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Zacks Equity Research continued...

What are the main catalysts for this group at the present time?

As mentioned above, a key driver of membership growth overall at the current time is the implementation of Medicare Part D. Valuations in part have been buoyed by speculation of its introduction, so this reporting season will provide some clarity as to its impact. Another important catalyst for the managed care group is pricing power and management's ability to diversify both a company's client mix and revenue source.

One might imagine plays on healthcare might be good for long-term investments, with the coming retirement of Baby Boomers. Are valuations reasonable these days? Valuations overall appear reasonable. Balance sheets last quarter were relatively solid, with most companies reporting substantial cash cushions. So in the absence of any major surprises or mergers, we believe the sector as a whole is trading at fair value.

What are your top Buys and Sells right now?

At this time we believe both the disease management provider Matria Healthcare (MATR), given recent weakness in the stock, and <>, given the strength of the Blue Cross Blue Shield brand and capacity to exploit economies of scale and scope, represent good value.

For investors looking to diversify into more healthcare stocks, what would you advise them to keep in mind?

Surging demand for healthcare will be increasingly driven by the aging Baby Boomer population, so the prospects for healthcare in general remain positive over a long-term basis. Investors, however, should remember that the healthcare sector is diverse, subject to regulatory scrutiny, and in some cases reimbursement risk.

The strong performance of the managed care group since the re-election of the Bush administration reflects both investor speculation and real growth, through product innovation and rise of consumer-driven health plans. That said, and given individual time horizons, new investors in the healthcare sector should remain mindful of the dynamics of the various and important roles of government in determining the competitive landscape.

Chris Kallos is a senior Zacks analyst covering the healthcare and managed care sectors.

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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

Coca Cola FEMSA (KOF) - Playing a Stronger Brazil. For full Zacks research report, click here.

 
BEAR OF THE DAY

Stoneridge, Inc. (SRI) - Operational Inefficiencies. For full Zacks research report, click here.

 
EARNINGS TRENDS

S&P Earnings Season: Still Strong

Director of Research Dirk Van Dijk says numbers continue to impress with nearly three-quarters of the S&P 500 having reported earnings. More...

 
ZACKS INDUSTRY OUTLOOK

Zacks Industry Rank for the Week of May 1

Bullish results from electrical companies are notable in what is shaping up to be a stock picker’s earnings season. 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.

 
watchlist james

This week Zacks is proud to introduce James M. Iocca (aka: watchlist james), who is another one of the top players in the Second Quarter Zacks Stock Challenge. James has put together a solid Simulator portfolio that is currently enjoying a fifth place ranking and boasts an overall return of about 36% since Apr 3.

Some of these player’s holdings include PW Eagle, Inc. (PWEI), DXP Enterprises, Inc. (DXPE), Elan (ELN), Massey Energy Company (MEE), and Noble Energy (NBL). Details on these and several other names can be found in the trade history of James portfolio at: http://at.zacks.com/?id=2515.

This market watcher has an interesting approach to picking stocks. Watchlist James maintains 15 different “watch lists,” each comprised of 50 companies. As he monitors this universe of 750 stocks, James makes buy and sell decisions based on what his research reveals. The watch lists allow this savvy investor to look at each position objectively, paying special attention to price changes and volume trends. By doing this, James explains that he is not inclined to hold onto a stock that is not performing well, or not reluctant to sell a stock after it reaches his target sell price. James noted, “By using this technique, I have managed to evade precipitous drops that had produced large gains before the stock price declined.”

So where does the Zacks Challenge contender turn to for research?

James reads the Wall Street Journal daily, and he looks at BusinessWeek as well as Barron’s on a weekly basis. Beyond periodicals, this market enthusiast watches CNBC, subscribes to Briefing.com, and follows news on Yahoo, Google and CBS MarketWatch.

He is also big a fan of Zacks.com and uses multiple research tools. Specifically, James regularly checks recommendations and rankings and reads the Profit From the Pros newsletter. He described the research available on Zacks.com as “outstanding”.

What does he look for in a stock?

“I pay close attention to both international and domestic economies and to those business sectors where demand and associated prices are increasing. I research the companies in each of these sectors to determine which stocks to purchase,” said James. He used commodity producing companies as an example. The successful investor explained that when international demand for commodities such as petroleum, sugar, ethanol, and metal are high and prices skyrocket, the result is significant appreciation in the stock prices of the producers over a relatively short period of time.

When is it time to part with a holding?

James listed a few factors that help him determine when to sell a security. He sets a target price and holds to it. A change in the company’s competitive advantage will set off a red flag, particularly if a company is losing market share or if a competitor has developed new, better product. James constantly monitor earnings and sales trends and will pull the trigger if the fundamentals worsen. Finally, he will sell the stock if news of a potential scandal emerges.

Any favorites and was there a big winner?

James, who holds a B.S. in Engineering, an M.B.A and is working on a PhD in Business Administration, has many interests. His interest include biotech and pharmaceutical stocks because of the research that is done in developing drugs that address the needs serious illnesses. He also has an interest in energy because he sees demand increasing worldwide for commodities such as petroleum, natural gas, gasoline, coal and uranium.

Some of the James’ biggest winners were companies that are producing ethanol. He also referenced Elan (ELN) as a winner because he believes that the FDA is going to approve the re-entry of Elan’s drug, Tysabri, James sees as being the top drug for treating Multiple Sclerosis. The informed investor added that Elan is doing pioneering research in the development of a drug to combat Alzheimer disease.

What about the future and any advice?

James is on the bullish side, predicting a 12,500 for the Dow at year-end.

Like may other Simulator players, this competitor suggest reading as the advice a market novice could take. He pointed out that the local libraries contain many resources including Moody’s Industrial, Standard and Poor’s, New York Times, Wall Street Journal and Investor’s Business Daily.

James also touted the use of virtual trading games such as Zacks’ Simulator as a great way to get your feet wet.

 
Stock Challenge from Zacks- Do You Have What it Takes?

Sign up now for the new Zacks Stock Challenge. New game starting April 2006.

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 at: http://at.zacks.com/?id=2671.

Trade Options? Then sign up for the Zacks Options Challenge at: http://at.zacks.com/?id=2672.

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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: Discounted Fundamental Strength

Fundamental strength is often a key criterion for many investors. A strong balance sheet and a history of profitability indicate that a company has the ability to meet its obligations and the flexibility to pursue opportunities for growth. Therefore, such stocks are often perceived as having a lower level of risk.

The lower level of risk often results in higher valuations. Occasionally, however, the markets undervalue a stock relative to its company's fundamental strength. When this occurs, opportunities for profits are created. This Profit Track identifies such opportunities.

Backtesting results show just how successful this Profit Track has been. Double-digit returns have been achieved during each of the past four years. In 2005, this strategy continued to handedly beat the S&P 500.

Here are four stocks that make the grade for the Discounted Fundamental Strength Profit Track:

Applied Industrial Technologies, Inc. (AIT) a global shipping transportation company specializing in dry bulk cargoes, has a current dividend yield of 13.73%. In mid-February, DSX declared a dividend of 40 cents per share and reported its financial results for the fourth quarter. The company noted that for the fourth quarter of 2005, voyage and time charter revenues increased by $5.5 million to $24.0 million compared to $18.5 million reported in the year-ago quarter. Continue your research on DSX at: http://at.zacks.com/?id=2354.

Gehl Co. (GEHL) recently released first-quarter earnings of 51 cents per share, improving on last year’s 47 cents and matching the consensus estimate. The company commented that record first quarter sales and income, as well as improved margins, reflect the successful execution of its compact equipment focused strategy, continued strength in its construction markets and its ongoing efforts to drive cost out of its business. GEHL offers a PEG ratio of 0.81 and a price/sales multiple of 0.88. Continue your research on GEHL at: http://at.zacks.com/?id=2355.

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TIMELY BUY of the WEEK continued...

ICT Group, Inc. (ICTG) has a current ratio of 2.28 and a debt/equity level of 0.41. The company recently announced first-quarter earnings of 21 cents per share, topping the consensus estimate by 5% and exceeding the previous year’s result. The company noted that it is off to a strong start in 2006, driven by demand for its expanding suite of service offerings and global capabilities. Continue your research on ICTG at: http://at.zacks.com/?id=2356.

La-Z-Boy Inc. (LZB) sports a current ratio of 2.67 and a debt/equity level of 0.38. In mid-February, the company posted fiscal third-quarter earnings per share from continuing operations of 20 cents, which includes an after-tax restructuring charge of once cent per share. The result eclipsed the consensus estimate by 40%. LZB stated that overall, it is encouraged with its results for the quarter as these results indicate that the execution of the company’s strategy in its two largest business segments, upholstery and casegoods, is progressing with the acceleration and speed LZB expected. Results for the fourth quarter will available on June 6, 2006. Continue your research on LZB 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

Diversification and Portfolio Weighting

Kevin Matras talks about diversification and the importance of an equally dollar weighted portfolio: 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...

 
Knight Capital Trading Group (NITE)
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Knight Capital, together with its subsidiaries, provides trade execution and asset management services in the United States. It operates in two segments, Asset Management and Global Markets.

The Asset Management segment operates as an investment manager, as well as sponsors hedge funds. This segment primarily serves institutions, funds-of-funds, pension plan sponsors, trusts, endowments, and private clients. The Global Markets segment provides a range of customized trade execution products and services across various asset classes for broker-dealers, institutions, and issuer companies.

The company reported a spectacular first-quarter. Earnings came in at 52 cents per share, easily exceeding the 27-cent consensus. Total revenues of $276.5 million were double the revenues generated in first quarter of 2005. Asset Management pre-tax operating earnings of $26.8 million in the first quarter of 2006 equaled the segment's pre-tax operating earnings for the full year of 2005.

Understandably, the C.E.O. was quite pleased with the results: "Knight employees' intense and concerted efforts over the last year implementing the strategic changes to our business model made our outstanding performance in the first quarter of 2006 possible," said Thomas M. Joyce, Chairman and Chief Executive Officer of Knight Capital Group. "Increasing automation in our broker-dealer operations since mid-2005 led directly to consistent, solid results for three consecutive quarters. However, it was in the market environment of the first quarter of 2006 where we saw the real success and potential of our efforts. By establishing greater operating efficiencies, we have addressed the issues that affect us in the down markets and are prepared to weather downturns and capitalize on the upside."

NITE has exceeded earnings estimates in four consecutive quarters, by an average margin of over 80%. Accordingly, analysts have ratcheted up their forecasts significantly going forward. Over the past 30 days, second-quarter estimates have increased 50% to 21 cents per share, while the full year's numbers have increased 54% to 97 cents per share over the same time period. Clearly, NITE is experiencing superb earnings momentum that doesn't look to slow anytime soon.

The stock is currently trading at 16.5x this year's estimate of 97 cents per share, above the company's long-term growth rate of 12.71%, giving the stock a PEG ratio of 1.30. Given the huge quarter, it is likely that estimates will continue to march higher.

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.

 
ZACKS RANK RESOURCES

• View All Zacks #1 Rank stocks: Go to http://at.zacks.com/?id=2351.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide: http://at.zacks.com/?id=2549.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2550.
   
• Zacks Options Trader: Combine the timeliness of Zacks #1 Rank stocks with the explosive profit potential of options. Learn more at: http://at.zacks.com/?id=2689.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2551.
   

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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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Charles Rotblut, CFA

Senior Market Analyst
Zacks.com

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