Tuesday - August 1, 2006
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1. ZACKS EQUITY RESEARCH
Although the advance GDP number caused some concern about the pace of growth, the aggregate lack of revisions to full-year earnings estimates suggests these fears are overblown. As I stated in our blog on Friday morning, analysts are not changing their forecasts for profit growth following the release of the second-quarter earnings reports.
Here’s why this matters. GDP is a backward looking number. Earnings estimates are forward-looking. If the slower second-quarter economic growth affected the profit outlook for the second half, we would be seeing a downward trend of estimate revisions. However, profit forecasts, in aggregate, are holding steady. And for some industries, profit forecasts are rising.
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One such industry is Cable and Wireless. Last week, both Belden CDT (KO) and CommScope (CTV) both delivered bullish earnings reports. BDC topped estimates by six cents with earnings per share of 51 cents. The company raised its guidance to $1.75 to $1.85 per share. Analysts had been projecting profits of $1.74 per share prior to the release of earnings. CTV topped expectations by 10 cents with profits of 43 cents per share. The company raised its full-year projections for revenues and for operating margins. Both Belden and CommScope credited strong demand (more spending on communication networks) and pricing power (the ability to pass along higher metal costs) for their results and expect conditions to remain favorable. Similar sentiment was echoed by General Cable (BGC) and Encore Wire (>WIRE).
Last week, there was also positive news flow from two companies within the Medical-HMO Group: Magellan Health Services (MGLN) and WellPoint (WLP). MGLN reported earnings of 52 cents versus the consensus estimate of 40 cents. Citing the positive impact of acquisitions and cost controls, the company guided for full year profits of $1.81 to $2.18 per share, up from previous guidance of $1.53 to $1.94. WLP delivered earnings of $1.17 per share, three cents above expectations. Membership growth, a sequential quarterly decline in the company’s medical expense ratio and new products all contributed favorably. Looking forward, WLP upped its full-year guidance by 12 cents to $4.74 per share. The positive news flow could continue on August 8 when Caremark (CMX) reports. Full-year estimates for CMX have been rising over the last 60 days.
In the Steel-Producers group, U.S. Steel (X) forged profits of $3.10 per share – 71 cents above expectations! The company said demand remained strong and it expects prices for flat-rolled steel to increase. Eight of the 13 covering analysts raised their projections in response, pushing the full-year consensus estimate up by $1.15 cents to $10.19 per share. Good numbers were also seen from IPSCO (IPS) and AK Steel (AKS).
Finally, I want to point out two strong reports from Oil-Field Services, a group that has continuously appeared near the top of the Zacks Industry Rank List. Baker Hughes (BHI) said on Friday morning that it earned $1.07 per share in the second quarter; analysts had been expecting 97 cents per share. Revenues rose 25%, thanks in part to strong demand within North America, and margins improved. BHI expects to earn between $4.00 and $4.20 this year, which is inline with the consensus estimate, but slightly more bullish than the company’s previous guidance. W-H Energy Services (WHQ) topped expectations by 15 cents with profits of 89 cents per share. Both the drilling and completion and workover segments continued to achieve strong growth rates. The company’s third-quarter earnings forecast of 87-92 cents per share is well above the pre-report consensus estimate. Oceaneering (OII) will report this week and Helix Energy Solutions (HLX) will report next week.
Read the complete INDUSTRY RANK at: http://at.zacks.com/?id=2379.
Charles Rotblut, CFA is a senior market analyst for Zacks.com. He can be reached at firstname.lastname@example.org.
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Real-time market insights from Zacks Equity Research Analysts Stocks featured recently include Kraft Foods (KFT), InterDigital Communications (IDCC), Priceline.com (PCLN) and Sycamore Networks (SCMR). To smee their latest posts, click here.
Analysts Raising Earnings Forecasts for 2006 and 2007
2. PROFIT TRACKS
Zacks.com is proud to share with you some of the best trading
strategies that truly allow you to Profit from the Pros. Today
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.
Cooperative Bankshares Inc. (COOP), a Zacks #1 Rank (Strong Buy) company, has break out potential as it is currently trading near its 52-week high. Earnings estimates have been trending higher. Over the past week, this year’s estimates increased 7.8% to $1.10 per share, while next year’s estimates are up 5% to $1.25 per share. Third-quarter estimates have jumped over 10% to 30 cents per share over the past week. The stock has increased 2.4% over the past four weeks. Continue your research on COOP at: http://at.zacks.com/?id=2389.
Delta & Pine Land Co. (DLP), a Zacks #1 Rank (Strong Buy) company, has seen its shares hit a new 52-week high of $34 per share. The share price has increased by almost 16% over the past four weeks. Next year’s earnings estimates increased 5.3% to $1.58 per share over the past 30 days. This positive price movement is proving that the “trend is your friend.” Continue your research on DLP at: http://at.zacks.com/?id=2390.
LHC Group LLC (LHCG) is trading just shy of its 52-week high. The company, a Zacks #1 Rank (Strong Buy), has seen its shares rally over 7% in the past four weeks, and next year’s earnings estimates have jumped 7.1% to $1.21 per share over the past 90 days. The company will release second-quarter earnings on August 8. Continue your research on LHCG at: http://at.zacks.com/?id=2391.
World Acceptance Corp. (WRLD), a Zacks #1 Rank (Strong Buy) company is trading at its 52-week high. The company has seen share price appreciation of over 16% over the past four weeks. Over the past seven days, this year’s earnings estimates increased 5.2% to $2.42 per share, while next year’s numbers jumped 7.8% to $2.78 per share. Continue your research on WRLD 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
Kevin Matras explains why a good stock screener can be your best tool for picking options: http://at.zacks.com/?id=2395.
3. ZACKS RANK BUY STOCKS
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)
Momentum – Archer Daniels Midland (ADM)
Archer Daniels Midland (ADM) was a featured Momentum stock of the day back on Feb 3, 2006. Since that time the stock has gained more than 45%. Earnings for the Jun quarter are due to be released tomorrow and analysts’ consensus estimates are for an EPS of 53 cents versus 30 cents last year. Technically ADM continues to look strong and a close above $45 would signal a new move to the upside. Read the full analysis on ADM at: http://at.zacks.com/?id=2496.
Norsk Hydro (NHY) reported second-quarter profits of 68 cents--exceeding analysts' expectations by 11.5%. Consensus estimates for this year and next have been trending higher. NHY is a Zacks #1 Rank stock (strong buy). Read the full analysis on NHY at: http://at.zacks.com/?id=2497.
4. OPTIONS CENTER
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.
Things have turned very ugly over the past week in the market as we’re seeing numerous stocks and indexes completely breakdown thanks to continued unrest in the Middle East and North Korea. What also has us very concerned is that fact that this fall marks the bottom of the four year cycle. Look back at history, we made major bottoms in the fall of 1990, 1994, 1998, and 2002 – now here comes 2006 and do you want to take a chance that this time will be different? Let’s just say the odds favor lower prices over the coming months.
With that said, today we want to look at one of our favorite bearish filters – the Schaeffer’s Equity Scorecard. You might remember a few weeks ago we used this filter to find a bullish play, well today we're going to use it to find a bearish play.
What exactly is the Schaeffer's Equity Scorecard, you ask? It's 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." Below is a little more on our methodology and how we find winning trades. The Scorecard, its now easier than ever for you to find the top- and bottom-rated stocks based on the Scorecard as our premium tools are now available to everyone. Along with that, our free premium commentary is also available to anyone. Here you'll find our best content and some great trading ideas as well. Schaeffer's Equity Scorecard data was once a premium product, but not anymore. You will be able to quickly and easily find all the stocks in our database with a Schaeffer's Equity Scorecard ranking of 8.0 or greater or 3.0 or less. In other words, it will capture all of the best bullish and bearish looking trades according to our methodology.
We call our methodology Expectational Analysis®, 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.
Looking at the Scorecard list on Friday afternoon, there are only three zeros out of our entire database. Looking at the three charts, one looks a little better than the others and that is Motorola (MOT) – the chip and wireless giant. MOT shares are trapped in a vicious downtrend with no end in sight. In fact, they’ve lost over 20 percent since mid-April – not a pretty picture.
Now let’s take a look at the sentiment. Remember, we want to see price action that is poor amid optimism as a sign more weakness will come. As you might have expected, MOT has a lot of fans out there – suggesting its no where near a major bottom.
One such indicator we like to use to determine the sentiment is the Schaeffer's put/call open interest ratio (SOIR). This ratio shows how many bearish puts there are compared with the number of bullish calls among near-term options. If the short-term crowd remains bullish despite weak price action, that shows us the bottom hasn't happened yet and more gains will hopefully come. Turns out MOT’s SOIR is 0.27, lower than 93 percent of all readings taken over the past year. The bottom line is that this crowd is about as bullish as they've been in a long time - exactly what we wanted to see from our contrarian way of thinking.
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 bearish play, we love to see a lack of shorts betting against the shares, reducing the odds of a short covering rally should there be any good news. Turning to MOT, it would take less than a day for all of the shorts to cover their bearish bets, greatly reducing the odds of a bounce at any time.
The final indicator that we like to use is the attention being paid to a security on Wall Street. If analysts are bullish on a stock that is tanking, this only increases the odds of some downgrades. Looking at MOT, there are some signs of optimism from this area, as there are currently 21 "buys" and three "holds." Given the weak price action, we could see an influx of downgrades on any continued weakness.
With all of that said, we like MOT short and would recommend playing an intermediate-term put on it. Write this one down and let's see how it does. But to us, this one looks like a nice play.
Please continue to use all of the filters on Zacks.com/Options for more money-making ideas. Also, be sure to visit SchaeffersResearch.com for even more option takes. Remember; practice makes perfect, so make a few paper trades and discover what strategy works best for you. Like we always say, these are options, and it only takes a few winners out of every 10 trades to make you a very happy investor. Good luck!
To learn more about the High Open Interest filter, click here.
Discover all the tools and commentary available from the Zacks.com Options Center at: http://at.zacks.com/?id=2382.
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.
5. FEATURED EXPERTS
Here we cast the spotlight on a timely Featured Expert commentaries that recently appeared on Zacks.com.
OTHER TOOLS FROM ZACKS
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:
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
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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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Regards and Happy Investing,
Charles Rotblut, CFA
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