Tuesday - June 6, 2006

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Earnings estimates are not budging. Analysts came back from the Memorial Day weekend and essentially kept their forecasts the same. The forecast for the average company within the Zacks Rank universe calls for better than 20% growth this year.

So why are stock prices being so volatile? The Iranian situation is certainly a concern. Weakness in emerging markets such as India is also not helping. But the most important reason can be summed up in four words: Federal Open Market Committee.

The U.S. equity markets have become obsessed with the late June meeting. Will the FOMC raise rates? Will the rate hike be 25 or 50 basis points? If rates are raised, will that hurt the economy? If rates are not raised, will inflation grow out of control? Is the economy headed for stagflation?

More. . .

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Zacks Equity Research continued...

Here is a reality check. The economy is expanding. Zacks Equity Research projects 3.6% GDP growth this year and 3.3% next year. Core inflation, though at the high end of some Fed governors’ comfort zones, is not out of control. Ancedotal evidence points to pricing power for many corporations, which is good for investors. The FOMC is being direct by saying it wants to see more data. And, most importantly, stock prices never rise in a straight line.

Of course, such logic seems to be lost when it comes to metal stocks. Aluminum, copper, gold, silver, platinum and palladium prices have dropped notably since early May. Some of the drop reflects concerns about a potential economic slowdown, but speculation is also playing a big role. The combination of ETFs, hedge funds and willingness by institutional investors to chase after the “hot investment” helped drive metal prices higher. Unfortunately, sharp, upward price movements are often characterized by greater downside volatility.

Curiously, however, the drop in metal prices is not being reflected in earnings estimates. Rather, forecasts for metal-related companies remain strong. This implies that analysts believe demand for metals is not weakening. (It also reflects, though likely to a lesser extent, acknowledgement of cost-control measures taken by many metal companies.) Five of the seven stocks in Metal Non-Mining Ferrous are on the Zacks #1 Rank list. Steel-Producers contains six Zacks #1 Rank stocks. Metal Processor & Fabrication has four Zacks #1 Rank stocks.

A good example of the disconnect between futures prices and how analysts perceive end demand, as evidenced by the trend in estimate revisions, is Alcan (AL). Just within the past week, the full-year estimate was revised upwards by two cents to $4.95 per share. Granted, this is a miniscule increase, but the revision adds to a positive trend. Over the past 60 days, full-year estimates have been revised upward by 33% - and that is bullish.

Speaking of bullish earnings estimate revisions, three of the major investment banking firms will report earnings next week: Lehman Brothers (LEH), Goldman Sachs (GS) and Bear Stearns (BSC). Ahead of the reports, analysts have been adjusting their profit projections higher. Lehman, which will lead the trio by reporting on Monday, Jun 12, is expected to have earned $1.60 during the fiscal second-quarter. Full-year estimates have been increased by 10 cents over the two past months to $6.42 per share. Goldman Sachs will follow the next day with projected profits of $4.09 per share. GS has been the beneficiary of a one-month, 76-cent increase in analysts’ full-year forecasts. The firm is expected to generate full-year profits of $16.28 per share. Bear Stearns will report on Thursday, Jun 15. Analysts anticipate that BSC will have generated fiscal second-quarter earnings of $3.10 per share. The full-year consensus forecast calls for profits of $12.34 per share and has been revised upwards by 21 cents over the past 30 days.

As I have previously stated, market conditions have been favorable to the investment banking firms. Three large IPOs were recently completed, the bond market remains receptive to corporate debt offerings and multiple mergers have been announced this year. Whether the volatility in emerging markets and commodities has any impact remains to be seen, but judging by the trend in estimate revisions, analysts appear to be bullish on the prospects for LEH, GS and BSC.

Read the complete INDUSTRY OUTLOOK at: http://at.zacks.com/?id=2379.

Charles Rotblut, CFA is a senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com

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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

Dr. Reddy's (RDY) - Healthy Generic Pipeline. For full Zacks research report, click here.

 
BEAR OF THE DAY

Saks, Inc. (SKS) - Struggles Continue. For full Zacks research report, click here.

 
ZACKS ANALYST INTERVIEW

U.S. Automakers Continue Trending Downward

Overall, U.S. sales declined 0.7% in May and are down 0.4% YTD, due to the negative effect of higher interest rates. More...

 
ZACKS EARNINGS TRENDS

Earnings Still Strong

With all the recent volatility in the market, Director of Research Dirk Van Dijk says keep in mind that earnings are still looking very healthy for both this year and next. 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:

Anthracite Capital, Inc. (AHR) declared a second quarter dividend of 29 cents per share in mid-May, an increase over the previous dividend of 28 cents. Prior to the dividend declaration, AHR reported first-quarter operating earnings of 32 cents per share, which was ahead of last year’s result. The company noted that each of the components of its commercial real estate strategy came together, resulting in strong earnings growth over the previous quarter. Anthracite Capital offers current dividend yield of 9.68%. Continue your research on AHR at : http://at.zacks.com/?id=2389.

Deerfield Triarc Capital Corp. (DFR) invests in real estate related securities and various alternative investments. The company recently announced first-quarter earnings of 37 cents per share, surpassing the consensus estimate by almost 9%. DFR stated that the success of its diversified strategy is exemplified by the growth of assets in the portfolio and the recent dividend increase. The company raised its dividend from 35 cents per share for the fourth quarter to 36 cents for the first quarter. DFR boasts a current yield of 11.08%. Continue your research on DFR at: http://at.zacks.com/?id=2390.

Iowa Telecommunications Services, Inc. (IWA) posted first-quarter earnings of 38 cents per share in early May. The result topped analysts’ expectations by nearly 3%. The telecommunications service provider mentioned that its performance for the first quarter was strong from every perspective. In mid-March, the company declared a quarterly dividend of $0.405 per share. IWA meets the criteria of this Profit Track with a current dividend yield of 9.06%. Continue your research on IWA at: http://at.zacks.com/?id=2391.

Seaspan Corp. (SSW) owns containerships and charters them pursuant to long-term fixed-rate charters. The company, which currently yields 8.10%, released its first-quarter report in mid-April. SSW said it began to execute on its growth strategy by expanding its fleet further through acquisition. Seaspan Corp. added that the acquisitions it announced this quarter diversify its customer base and the vessel size it can offer to customers, and the company anticipates they will add incremental cash flows for distribution to its shareholders once the new ships are delivered and operating. The first-quarter report included a dividend declaration of $0.425 per share. Continue your research on SSW at: http://at.zacks.com/?id=2392.

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2393.

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=2394

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SCREEN OF THE WEEK

Using Common Sense to Manage your Portfolio

Kevin Matras explains why monitoring your stocks is as important as picking them: http://at.zacks.com/?id=2395.
 

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Zacks has partnered with the leading options experts, Schaeffer's Investment Research, to provide you the best options commentary, research, and trading tools on the market today.

Free Online Options Research at: http://at.zacks.com/?id=2664.

Zacks/Schaeffer’s Options Trading service at: http://at.zacks.com/?id=2665.

 
Here is this week’s article on how Schaeffer’s Tools can help you Profit with Options.

It’s been some tough trading the past two weeks, as bulls and bears continue to fight with neither taking the upper hand. Until we either break up or down from this recent consolidation, things will continue to be tough.

For the past two weeks, we’ve looked at bullish filters. Two weeks ago it was the Put/Call Ratio over 1.0 filter and last week it was the Schaeffer’s Equity Scorecard. Our two bullish picks have been Plexus (PLXS) and Wyatt Worldwide (WW). Right now both look technically nice and, should the overall market cooperate, we expect them to outperform. We especially like the way that WW is shaping up.

But as we said, the market right now isn’t easy to trade – so let’s find a bearish play to hedge ourselves. To do this we want to take another look at the Schaeffer’s Equity Score Card (the Scorecard can be found at SchaeffersResearch.com), but for lower rated stocks. This is a combination of sentiment and technicals with the scores ranging from 10 to zero. On this scale, 10 is the best rating and thus the "most bullish” and zero is the worst rated and thus the “most bearish”.

Before we go any further, we want to talk briefly about our Expectational Analysis® methodology here at Schaeffer's. We are contrarian-based investors, meaning that we seek skepticism toward an outperformer as a sign that money is still on the sidelines. Conversely, we want to see optimism toward an underperformer. We view too much optimism as a potential sign that nearly everyone who wants to invest in a particular stock has done so already. Now, just because a stock sees substantial optimism doesn't mean that we will blindly short a particular security; we need to see some negative price action or a major catalyst for a downside move in order to pull the trigger in most cases. Other indicators that we tend to utilize in measuring overall sentiment include put/call ratios, short interest, magazine cover stories, media comments, and analysts' ratings.

Looking at the SPX, we took all 500 names and filtered for only Scorecard ratings of 1.0 or less. Additionally, we filtered down to stocks trading in the bottom 20% of their daily trading ranges. This way we knew we had true market laggards.

We were left with 21 names. After looking at the charts of all 21, we think that Internet giant Yahoo! (YHOO) looks like a nice bearish play. We’ll get into all reasons that we like this stock bearishly, but one of our main reasons is that it’s a weak performer in a very weak sector. Internet has been a definite poor performer this year and just last week the Internet HOLDRs Trust (HHH) ran into resistance from its downward sloping 50-day moving average – suggesting the ultimate bottom hasn’t happened yet for this group.

Looking at the recent price action of YHOO, we don’t see much to get excited about as the $33.50 level has held the shares in check since early February. In fact, year-to-date the shares have sank about 19% – significantly underperforming the broader markets.

So we have a technically weak stock. Now let’s look at the sentiment. Remember we want to see optimism as a sign that most investors who want to own this one already do - reducing a rush of money from the sidelines.

One indicator that we use to measure sentiment is the Schaeffer's put/call open interest ratio (SOIR). This filter is available to use at Zacks.com. This ratio shows how many puts there are compared to calls for the front three months of options. Currently, YHOO’s SOIR checks in at 0.59. When compared with other readings over the past year we find that this is lower than 71% of the readings over the past year, suggesting short-term option players remain bullish.

Short selling is one stock-trading strategy that involves selling a stock with the intention of buying it back later at a lower cost. In other words, you are betting that the shares will go down. We view a lot of short interest as bullish, as it increases the odds of a short-covering rally on any good news. The flipside of this is a lack of shorts, reducing the odds of a sudden short covering rally. For a potential short position, we like to see a lack of investors betting against the shares. Looking at YHOO, it would take three and a half days for investors to cover their bearish bets. This isn't a huge number, but at the same time I don't think it’s small. So all in all, this is a rather neutral reading in our opinion.

Finally, according to Zacks, analysts are pretty bullish. Currently, there are 21 "buys," four "holds," and no "sells”. We view a lot of optimism among weakening price action as a chance for an influx of analyst downgrades. Or if nothing else, reducing the chances of upgrades.

So, we have a potentially weakening stock with lingering optimistic sentiment. Add it up, and this one looks like a nice bearish play to go with our recent bullish picks. With that said, we'd recommend playing an intermediate- to long-term, slightly in-the-money put. Write it down and see how it does, but it looks like it could be a potential winner.

Please continue to use all of the filters on these pages for more money-making ideas, and don't be afraid to make a few paper trades to see what strategy works best for you. But please remember that when it comes to options, the majority of your trades are going to be losers. Don't get discouraged, because that's the beauty of the leverage that options provide. It takes only a few winners out of every 10 trades to make you a very happy investor. Good luck!

Discover all the tools and commentary available from the Zacks.com Options Center at: http://at.zacks.com/?id=2382.

 
Zacks Rank + Options = Trading Success!

Leverage the timeliness of Zacks #1 Ranked stocks with options trades that maximize profits and minimize risks. Learn more about our new Options Trading service at: http://at.zacks.com/?id=2666.

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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 – J.C. Penney (JCP)

J.C. Penney (JCP) said last week its May same-store sales jumped 11.2%. "All merchandise divisions had at least high-single digit sales gains for the period with particularly strong results surrounding Mother's Day," Penney said. Among the best performers were fine jewelry, women's accessories, children's apparel and family shoes. And all regions of the country generated double-digit sales gains. We see no reason to jump ship now. Read the full analysis on JCP at: http://at.zacks.com/?id=2494.

 
Growth & Income – Baker Hughes Inc. (BHI)

Since we featured Baker Hughes Inc. (BHI) back on Mar 15, 2006, the stock's price is up 30%. On Apr 26, 2006, the company beat the Street's earnings estimate by 17.7%. On Apr 27, 2006, the Board of Directors declared a quarterly cash dividend of 13 cents per common share of stock. Analysts' earnings estimates for the company have been on the rise. The stock has maintained its Zacks #1 Rank status. Read the full analysis on BHI at: http://at.zacks.com/?id=2495.

More...

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Zacks Rank continued...

Momentum – Garmin LTD (GRMN)

Garmin LTD (GRMN) is one of those dangerous stocks that you fall in love with. First, it's a Zacks #1 rank stock, meaning that earnings surprises are positive, timely and that analysts following the stock are revising upward their estimates. Second, you look at the high percentage of insider ownership of the stock. Finally, you look at the chart, and see a stock in a long term uptrend poised to challenge the all time high at 101.88 set on May 11th. Then you realize that it's up 21.9% since we featured the stock back in Mar. What's not to like about this Momentum stock? Read the full analysis on GRMN at: http://at.zacks.com/?id=2496.

 
Value – The GEO Group, Inc. (GGI)

Since we featured The GEO Group, Inc. (GGI) back on Apr 19, 2006, the stock's price is up 17%. On May 4, 2006, the company beat the Street's earnings estimate by an impressive 31.4%. Analysts' profit forecasts for the company have been trending higher. The stock has maintained its Zacks #1 Rank status. Read the full analysis on GGI at: http://at.zacks.com/?id=2497.

 
Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2383.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide: http://at.zacks.com/?id=2558.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2559.
   
• 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=2707.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2560.

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Zacks Rank #1 and #5 Additions

Zacks #1 Rank List: 24 New Additions (alpha by ticker)

To see the full list of Zacks #1 Ranked stocks (approximately 220 stocks), then click here.

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Zacks #5 Rank List: 25 New Additions (alpha by ticker)

To see the full list of Zacks #5 Ranked stocks (approximately 220 stocks), then click here.

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:

• +33% average annual return since 1988 versus +11.9% 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=2385.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2383.

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=2386.

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.

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