Tuesday - June 13, 2006

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Ironically, given the inverted yield curve, estimates for brewers and distillers are rising. When the Fed speaks, people listen. This sums up happened last week. Fed Chairman Ben Bernanke and Fed governor Donald Kohn squashed any hopes of a pause at the upcoming meeting. More importantly, given that there will only be two sets of PPI and CPI reports between now and the Aug 8 meeting, the probability of two summertime rate hikes is rather high.

The risk of more rate hikes caused the yield curve to return to its inverted state. When the two-year treasury note trades at a higher yield then the 10-year note (inversion), the implication is that the bond markets anticipate slowing economic growth. An inverted yield curve, however, may also simply mean that short-term bond traders are unsure about how many rate hikes are forthcoming. Such confusion is warranted given that most economic crystal balls are cracked. Personally, I have made a complete reversal on what I think will happen at the June meeting, because of reaction to Big Ben’s comments. Following the May employment numbers, I thought the FOMC might pause its trend of rate hikes at the June meeting. What a difference a week makes…

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Zacks Equity Research continued...

There is always danger that the Fed will tighten too much. The effect of a rate hike is never felt until months afterward; however, current data implies economic stagnation is not a concern. The charts for Dec 2007 copper and aluminum futures show a continuation of strong worldwide demand. Yes, metals prices are off their highs, but they remain well above year-ago levels. More importantly, earnings forecasts for the average company within the Zacks Rank universe are unchanged from a week ago. Despite the turbulent markets, estimates are holding firm for 2006 and this is bullish.

Despite the good underlying conditions, the markets have been volatile enough to drive a man to drinking, which brings us to Beverages-Alcoholic. This group has seven stocks with a Zacks #2 Rank or better. Ironically, the home countries for these seven stocks reads like a World Cup gambling line with Brazil - AmBev (ABV), The Netherlands - Heineken (HINKY), England - Diageo PLC (DEO) and the U.S. - Brown Forman (BF/B) represented.

Behind the numbers is the simple fact that people are apparently drinking more beer. ABV, the sole Zacks #1 Rank stock in the group, said last month that its Brazilian Beer operations generated 8.1% sales volume growth. The company credited the weather, higher disposable income and market share gains. Half of the covering analysts upped their full-year forecasts in response, causing the consensus estimate to rise by 35 cents over the past 30 days to $2.03 per share.

HINKY projects, on its web site, worldwide beer consumption to increase 2-3% annually. The company projects even stronger growth in Central Eastern Europe, Latin America, Asia and Africa because of population growth, higher incomes and a shift from hard liquor to beer. The sole analyst to cover Heineken in the U.S. has more than doubled his forecast for 2006 earnings in response, from $1.09 per share to $2.28 per share.

Fiscal 2007 estimates for Diageo have risen recently. Over the past 30 days, a revision by one of the five covering analysts caused the consensus estimate to rise by four cents to $3.81 per share.

Here in the U.S., Brown-Forman recently delivered fiscal fourth-quarter earnings that were seven cents above expectations. The company generated earnings of 61 cents per share and revenue growth of 16%. Gross margins widened, due in part to pricing power. CEO Paul Varga predicted that fiscal 2007 earnings would be in range of $3.10 to $3.30 per share. Analysts had previously forecast fiscal 2006 profits of $3.16 per share, though one analyst upped his number, causing the consensus estimate to rise by a penny.

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

Ctrip.com (CTRP) - Strong Chinese Growth. For full Zacks research report, click here.

 
BEAR OF THE DAY

H&R Block (HRB) - Deteriorating Fundamentals. For full Zacks research report, click here.

 
ZACKS ANALYST INTERVIEW

European Markets Also Feeling Pressure

Unlike the NASDAQ, however, these indexes are currently showing gains for the year. More...

 
ZACKS EARNINGS TRENDS

Earnings Still Strong

With all the recent volatility in the market, 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 Track: PEG Ratio

This strategy uses the PEG Ratio to find attractively priced stocks poised for price appreciation. The PEG Ratio is simply the P/E (Price divided by Earnings) of a stock divided by its 5-year projected growth rate. Too often investors think of value investing being the antithesis of growth investing. The beauty of using PEG is that you can find value stocks even amongst hot growth stocks. Let's take a closer look.

A company with a P/E Ratio of 20 and a Growth Rate of 10% will have a PEG Ratio of 2.0 (20 / 10 = 2.0).

While a company with a P/E Ratio of 40 and a Growth Rate of 50% will have a PEG Ratio of only 0.8 ( 40 / 50 = 0.8)

The stock with the P/E of 40 is actually the better bargain since its PEG Ratio is lower (0.8) implying it's undervalued with more upside potential. In general, a PEG value of less than 1 is considered undervalued while greater than 1 is thought to be fully valued to overvalued. The lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth.

Using this indicator in a stock screening strategy can produce stellar profits, such as a +38.9% return in 2004 and 16.3% in 2005.

 
Here are four stocks that make the grade for the PEG Ratio Profit Track:

Aspreva Pharmaceuticals Corporation (ASPV), an emerging pharmaceutical company focused on increasing the pool of evidence-based medicines for patients with less common diseases, announced its first-quarter earnings of $1.25 per share in late April. The result surpassed the consensus estimate of 59 cents and reversed last year’s loss of 46 cents. ASPV offers a PEG ratio of 0.52. Continue your research on ASPV at: http://at.zacks.com/?id=2389.

Eagle Materials, Inc. (EXP) reported fiscal fourth-quarter earnings of 86 cents per share in early May. The result outpaced the previous year’s 49 cents and eclipsed the consensus estimate by nearly 18%. The company noted 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. EXP boasts a PEG ratio of 0.26. Continue your research on EXP at : http://at.zacks.com/?id=2390.

Grey Wolf, Inc. (GW), which has a PEG ratio of 0.36, is a leading provider of contract oil and gas land drilling services in the United States serving both major and independent oil and gas companies with a premium fleet of 117 rigs. In early May, the company released its first-quarter report, stating that on the heels of the best year in the its history, Grey Wolf produced record quarterly results for revenue, net income, and EBITDA, spurred by both daywork and turnkey operations. Continue your research on GW at: http://at.zacks.com/?id=2391.

H&E Equipment Services, Inc. (HEES) satisfies the criteria of this Profit Track with a PEG ratio of 0.32. In early May, the company posted first-quarter earnings of 29 cents per share, which exceeded analysts’ expectations by almost 53%. HEES mentioned that every segment of its business performed strongly during the first quarter. Continue your research on HEES 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

Pulling Profits and Cutting Losses

Kevin Matras looks at how to use Price and Volume for locking in profits, cutting losses and spotting potential trend changes: 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.

The market put together a pretty impressive bounce on Thursday, so the question now is will we start a meaningful rally? On Thursday, we set some records for volume on the major ETFs – suggesting a potential washout bottom. But one thing causing concern is that there was more down volume than up volume - a bearish signal. Still, the odds definitely favor some type of move higher over the near-term.

With that said, today we want to take a look at the High Open Interest Put Filter.

Before we can 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 analyst ratings.

So, what exactly is the High Open Interest Put filter? First, let's look at what defines a put option. Puts are simply a bet that the underlying stock is going to move lower. From our contrarian point of view, a large number of puts accumulated at a certain strike just below the stock's current level is a sign of potential options-related support. I won't get into too much detail on this, but the reasoning is based on how the market makers are hedged. The bottom line is this: a large number of puts at a certain strike has the potential to serve as a solid level of support.

One more very important item we must touch upon regarding this filter is that the majority of the stocks it suggests are likely to be the big names that have lots of activity, such as the Nasdaq 100-Trust (QQQQ) , the Spyders (SPY) , or Microsoft (MSFT). These big names don't take away from the importance of this filter; they are just something to keep in mind.

Looking at the list on Friday, it is totally dominated by the ETFs, such as the QQQQ’s and SPY’s. In fact, we’ve never seen it this full of ETFs. But with record ETF volume, this isn’t a huge surprise.

One name on the list that struck us as tempting was none other than General Motors (GM), as it made the list for a large buildup of puts. All these open puts should provide support going forward. Looking at the July series, you can see there’s a huge buildup of puts at the 25 strike. With the shares currently trading just above that level, there’s a good chance it’ll bounce from here.

As you might have noticed, unless you live under a rock, this stock is continually beat down in the media and financial world as doomed. It isn’t too outrageous to say that a lot of fundamentalists think the company will be bankrupt in a few years or less. We won’t get into it anymore than that, but let’s just say the overall perception on this company is pretty bearish.

In fact, Bernie routed around a poll from the Wall Street Journal Online and the question was ‘Is the Worst Over for General Motors?’ There were 1,760 votes and 19% said “yes” while 81% said “no”. Now we're aware this is just one random poll, but we think it does a pretty good job of displaying the overall sentiment toward GM.

Now remember, as true contrarians we want to see this negativity surrounding the shares, but we also want to see outperformance. This suggests that there could be a good amount of money left on the sidelines just waiting to move in and push the shares higher.

Technically, GM has a very solid bottom around $19 or so. In fact, since April 11 (the last time it was down around $19), the shares have rocketed higher by more than 30%. Now looks like a safe entry as the shares are filling their gap higher from May 24. We love to trade gaps, as we know they should hold, and if they don’t, then the trade isn’t working so get out and find the next trade.

Let's turn to a few sentiment indicators that we like to use. Remember, we're looking for skepticism in the face of outperformance as a sign that there is still money on the sidelines.

One such indicator we like to use is the Schaeffer's put/call open interest ratio (SOIR). This ratio shows how many puts there are compared with calls among near-term options. Currently, GM’s SOIR checks in at 1.75 – suggesting there are a good deal more bearish puts than bullish calls in near options.

Short selling is one stock-trading strategy that basically 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. For a bullish play, we love to see a lot of shorts, as this increases the odds of a short-covering rally on any good news. Turning back to GM, we see that it would take over seven days for all of the shorts to cover their bearish bets and over 14% of the float is sold short. No matter how you slice it, the shorts are all over this one and any good news could lead to a great short covering rally.

Another good way to get a gauge of sentiment is to look at what Wall Street brokerage firms think. Something interesting about GM is that the shares are higher by about 29% the past year, yet the analysts are still very bearish. According to Zacks, there are only four “buys” out of 12 total analysts – leaving lots of room for upgrades down the road.

Add it up and GM looks like a nice long right here. Write this one down and let’s see how it does, but it definitely looks like a nice play.

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. Use the filters found on the Zacks Option Source pages and visit the Schaeffer's Commentaries and more… Good luck in your trading!

To learn more about the High Open Interest filter, click here: http://at.zacks.com/?id=799.

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 – Cutera Inc. (CUTR)

Cutera Inc. (CUTR) said last week that it had settled a patent lawsuit with competitor Palomar Medical Technologies over hair-removal systems. This caused a 30% jump in the stock. The stock is still off about 8% since we profiled it on April 20th, but prospects are looking better with the legal risk behind the company. Read the full analysis on CUTR at: http://at.zacks.com/?id=2494.

 
Growth & Income – Regal-Beloit Corp. (RBC)

Since we featured Regal-Beloit Corp. (RBC) back on Feb 28, 2006, the stock's price is up nearly 10%. The consensus earnings estimates for this quarter and this year jumped 32.4% and 16.2%, respectively, over the past 60 days. Furthermore, the company upped its dividend back in late-April to 14 cents per share. Read the full analysis on RBC at: http://at.zacks.com/?id=2495.

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Zacks Rank continued...

Momentum – MWI Veterinary (MWIV)

MWI Veterinary (MWIV) was highlighted as a Zacks Momentum stock on Dec 30, 2005. Since then the stock has climbed more than 30% propelled in part by a 22% positive earnings surprise for the March 2006 quarter reported on May 3. The stock is currently locked in a fairly tight $35 to $30 trading range, but now looks as if it might be ready to break out to the upside once again. Read the full analysis on MWIV at: http://at.zacks.com/?id=2496.

 
Value – Oceaneering International Inc. (OII)

Since we featured Oceaneering International Inc. (OII) back on Mar 1, 2006, the stock's price is up 37%. On May 4, 2006, the company exceeded analysts' earnings expectations by an impressive 27.4%. Analysts' profit forecasts for the company have been on the rise. The stock has maintained its Zacks #1 Rank status. Read the full analysis on OII 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: 35 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: 34 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

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Regards and Happy Investing,

Charles Rotblut, CFA

Senior Market Analyst
Zacks.com

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*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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