Thursday - August 24, 2006
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1. ZACKS RANK BUY STOCKS
Zacks #1 Ranked stocks average a 32.4% annual return. Every day on Zacks.com we highlight four new 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 – NATCO Group (NTG)
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Momentum – Nu Horizons Electronics (NUHC)
Nu Horizons Electronics (NUHC) delivered its fourth consecutive positive earnings surprise on Jul 6 when it reported fiscal first quarter EPS of 17 cents, up from last year’s three cents and marking a positive 31% surprise. Sales grew strongly at $188 million, up 46% while income rose 297% to $3.18 million. Read the analysis of NUHC at: http://at.zacks.com/?id=3109.
On Aug 9, K-Swiss, Inc. (KSWS), a Zacks #1 Rank stock, topped the Street’s earnings estimate for 10 consecutive quarters, most recently by 28.9%. The company increased revenues, expanded gross margins and grew profits for the past five years. KSWS has a price-to-book ratio of 3.0, compared to 5.1 for the market. Read the full analysis on KSWS at: http://at.zacks.com/?id=3110.
2. ZACKS CHALLENGE: TOP PLAYER INTERVIEW
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.
Zacks recently caught up with David Charette (aka: DavidC), who is among the leaders of the Zacks Third Quarter Stock Challenge. This player’s Simulator portfolio has racked up an overall return of about 13% thanks to some successful momentum plays.
“I am a momentum and a bottom fishing investor. I either try to invest in stocks or sectors with strong momentum and relative strength or try to invest in stocks that have been way too much oversold usually because of a bad news. For shorts ideas, it's the same thing but the other way around, like flipping a chart,“ said David.
Currently, the Simulator competitor has positions in Biovail Corporation International (BVF), Northern Dynasty (NAK), Valero Energy Corporation (VLO), Chesapeake Energy Corp. (CHK) and a short on eBay (EBAY). Click here to check out this player’s current portfolio: http://at.zacks.com/?id=2515.
How does he do it?
“I read a lot and try to get a big picture of the market, the economy and the sentiments and then use a combination of fundamental analysis, relative value and technical analysis to generate ideas,” the savvy investor replied.
Many of David’s investment ideas are influenced by the information gleaned from resources such as Yahoo Finance, Google, CBS Marketwatch, Zacks, Bloomberg, Barrons, The Kirk Report and Stockcharts. When using Zacks.com, this successful investor expressed how fond he was of the website’s screening tools.
Which companies does he like?
A huge proponent of alternative energy, the astute stock picker stated, “the stock that performed the best for me as of today is Suntech Power (STP), up 21% from my price of purchase. It's a Chinese manufacturer of solar cells which lost half of its value during the correction of the past few months. I found it interesting that the whole alternative energy sector has been hammered while the energy sector and oil were still strong. I taught that the fundamental of high oil prices was still extremely bullish for alternative companies on the short-term and that it might be one of the strongest sector during the rebound that we just experienced.”
David added that, as a general rule, he looks for a lot of momentum. He will also consider buying on overreaction to bad news. Other alerts on his stock-picking radar include strong breakouts or small pullbacks after less vigorous breakouts.
How about selling?
If a momentum play lost its steam, this market watcher will sell. Similarly, if David sees extreme panic buying with a major surge in volume for taking profits, he may get out of a position. The momentum player mentioned, “For stop-loss, I use recent price supports and adjust the size of my trade accordingly.”
This market enthusiast thinks that we are heading into a major recession next year. He believes the recession will be sparked by a major slowdown in housing due to excess speculation. In fact, David would not at all be surprised to see the Dow dip below 10,000 by year end. Longer-term, however, this Simulator contender is a little less bearish. He noted, “the money printing Fed and the huge budget deficit will make sure that all assets inflate, including the stock market. The Dow will be at 20,000 one day but an apple will cost $3 and gold will be at $2,000.”
Any advice for those to who are new to the market?
“Trade small until you're profitable on a constant basis and eventually you'll find your style and get the experience,” replied David. He explained at least a year of trading while experiencing different types of market environments should be enough of a spring board for one to make the leap into more “big ticket” trades.
It’s 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.
3. ZACKS EQUITY RESEARCH
As the one-year anniversary of Hurricane Katrina approaches, we spoke with senior insurance analyst Ann Northrop, CFA about how insurance and reinsurance companies are gearing up for another hurricane season. We also spoke a bit about other segments in the insurance industry, as well.
Now that we’re approaching the heart of hurricane season in the U.S., can you give us some insight on the insurance industry these days?
Well, investors have been cautious about investing in insurance companies ahead of hurricane season. And as no major hurricanes have hit yet this year, not much has really changed in the industry so far. Risk modelers have adjusted their models to account for higher frequency and severity of events, and the ratings agencies have increased their capital requirements for certain lines of business, like those in the hurricane zones.
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Would you expect to see prices come down if this turns out to be a rather weak hurricane season?
That’s pretty hard to predict. This is essentially a supply and demand issue. Bottom line, I don’t think catastrophe [cat] rates will necessarily be falling anytime soon. What we’ve seen thus far over the past year is that large losses in the cat-related lines have resulted in large price increases.
How are the reinsurers faring in this environment?
Well, as I mentioned, they’re facing more stringent capital requirements in underwriting catastrophe lines from the ratings agencies. And the reinsurers need to diversify and write other lines of business, but prices are firming only in these certain lines. Only those companies with sufficient capital will be able to take advantage of this price firming, which is the main reason we still like Partner Re (PRE).
Benefits for many of the other reinsurers will be somewhat limited. Although, to be honest, some companies have seen vigorous premium growth – they have to; their balance sheets were wiped out. But ultimately, the benefits from the price firming will be limited to just a few companies.
Aside from hurricane-related issues, what’s going on in the industry?
One thing we see is the P&C [property and casualty] cycle softening. Premium growth is decelerating. And as we see prices softening in many lines, we think ROEs have peaked. However, many companies with strong investment income growth will actually see a very gradual decline in their ROEs. On this score, we like companies such as W.R. Berkley (BER), which has a strong underwriting track record. Their investment income growth is also very strong, and should cushion the impact of decelerating premium growth. We also see management’s goal of achieving ROE above 20% are very possible.
What about the life insurance segment?
Life stocks had a huge run-up in price in 2005, many of which increased over 30%. Right now, credit spreads remain tight as the yield curve remains inverted. See, the short-term rates – and therefore the crediting rates – have been rising, while the long-term rates have not risen in sync. This has caused a squeeze in credit spreads. So as credit spreads remain tight, we’re looking for companies with catalysts to outperformance like share buybacks, diversified product portfolios and international growth opportunities. But overall, we’re very cautious on the life industry right now.
Ann Northrop, CFA is a senior analyst covering the insurance industry for Zacks Equity Research.
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Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Myriad Genetics (MYGN), Alexza Pharmaceuticals (ALXA), Prudential Financial (PRU) and National-Oilwell Varco (NOV). To see their latest posts, click here.
BULL OF THE DAY
4. 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: Return on Equity
This Profit Track strategy uses Return on Equity (ROE) to discover solid stocks. ROE is one of the quickest ways to gauge whether a company is creating assets or gobbling up investors' cash. This fast moving Profit Track returned an impressive +19.1% in 2005.
General Cable Corp. (BGC), which has a ROE of 39.99 and a price to sales ratio of 0.63, recently announced second-quarter financial results. Earnings per share showed strong improvement year-over-year and surpassed the consensus estimate by almost 87%. The company noted that it expects earnings per share of 50 to 55 cents for the third quarter. The forecast is in line with analysts’ expectations of 55 cents, which advanced from one month-ago estimates of 46 cents. Continue your research on BGC at: http://at.zacks.com/?id=2354.
Cleveland-Cliffs Inc. (CLF), the largest producer of iron ore pellets in North America, satisfies the criteria for this Profit Tracks with a ROE of 41.34 and a price to sales ratio of 0.92. The company recently reported second-quarter earnings of $1.53 per share, which jumped ahead of the consensus estimate by approximately 39%. The company mentioned that it is pleased with how 2006 is developing and added that its results will be more heavily weighted toward the second half of the year, as it expects to ship over 60 percent of its 2006 total North American and Australian sales volume in the third and fourth quarters. Continue your research on CLF at: http://at.zacks.com/?id=2355.
Holly Corp. (HOC) also meets the requirements of this Profit Tracks with a ROE of 56.11 and a price to sales ratio of 0.76. In early August, the company released its results for the second quarter. Not only did the earnings per share total increase year-over-year but it also outpaced analysts’ estimates by 18%. Holly Corp. mentioned that it is pleased with the second quarter, as it realized solid refined product margins and completed significant capital projects. Continue your research on HOC at: http://at.zacks.com/?id=2356.
Encore Wire Corp. (WIRE) posted second-quarter earnings of $2.41 per share in late July. The result soared past last year’s 10 cents per share and exceeded Wall Street forecasts by 168%. The company said that sales and earnings in both the quarter and six-month periods were new records. WIRE’s ROE is 58.65 and its price to sales ratio stands at 0.78. Continue your research on WIRE 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.
Kevin Matras shows how to create your own price targets and how to estimate your stocks' future earnings multiple: http://at.zacks.com/?id=2360.
5. ZacksAdvisor.com TIMELY BUY of the WEEK
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...
Ralcorp Holdings, Inc. (RAH) engages in the manufacture, distribution, and marketing of store brand food products in the United States and Canada. It operates in four business segments: Cereals, Crackers, and Cookies; Dressings, Syrups, Jellies, and Sauces; Snack Nuts and Candy; and Frozen Bakery Products. In addition, Ralcorp holds an interest of approximately 20 percent in Vail Resorts, Inc., the leading mountain resort operator in the United States.
The company’s products include ready-to-eat and hot cereal products; snack mixes and corn-based snacks; crackers and cookies; snack nuts and chocolate candy; wet-filled products, such as salad dressings, mayonnaise, peanut butter, syrups, jams and jellies, and sauces; frozen griddle products, such as pancakes, waffles, French toast, griddle products, and biscuits; and breads, rolls, and muffins. It serves retail chains, mass merchandisers, grocery wholesalers, warehouse club stores, drug stores, restaurant chains, and foodservice distributors.
RAH reported strong third-quarter earnings which rose 25.8 percent compared to last year's quarter. Earnings per share of $1.03 soundly beat the consensus estimate of 80 cents by almost 29%. Net sales for the quarter increased 14%, primarily as a result of business acquisitions, as well as improved pricing, favorable mix, and a slight volume increase.
Total segment profit contribution was up 14% as a result of higher net sales, cost reduction efforts, and acquisitions, net of the effects of higher costs of raw materials, freight, and energy.
Elevated energy prices are affecting the company, but management is clearly dealing with the situation in an efficient manner judging by the results. Ralcorp said higher freight rates inflated the cost of its products sold by about $1.8 million, due to the sharp rise in fuel prices. The company said it has made an effort to raise prices and cut costs elsewhere to offset those increased expenses. The price increases and increased margins were most evident in the Carriage House division, which includes the syrups and dressings.
RAH has exceeded earnings estimates by an average of 19% over the past two quarters. Two analysts have raised their estimates for this year, while three have done so for next year. Over the past month, this year's estimates have risen almost 13% to $2.45 per share, while next year's numbers have gone up over 16% to $2.95 per share.
The stock is currently trading at 16.6x next year's estimate of $2.95 per share. This is definitely not unreasonable for a company whose fundamentals are strong and improving. If RAH's recent pricing power continues, these estimates could prove to be conservative.
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 Rank (Strong Buy) List has produced the following results for investors:
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.
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Regards and Happy Investing,
Charles Rotblut, CFA
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