Wednesday - May 2, 2007
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1. ZACKS RANK BUY STOCKS
Zacks #1 Ranked stocks average a 31.8% 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 – eBay Inc. (EBAY)
eBay Inc. (EBAY) has engineered an excellent turnaround that shows no signs of abating. The company crushed estimates by almost 45% in its most recent quarter and raised guidance. Over the past month, this year's estimates have increased seven cents to $1.16 per share. The stock is still attractive at about 22x next year's earnings, below its long-term growth rate of 26.56%. Read the analysis of EBAY now!
Growth & Income – American Standard Companies, Inc. (ASD)
American Standard Companies, Inc. (ASD), a Zacks #1 Rank stock, recently reported solid first-quarter results. As a result, the company raised its full-year profit guidance. Analysts responded to ASD’s bullish outlook by upping their earnings forecasts. On Feb 2, the company announced that it will split its three businesses, enabling it to focus on its biggest business—air-conditioning systems and services. ASD is currently yielding 1.3%, with a five-year average dividend yield of 0.59%. Read the full analysis on ASD now!
Momentum – Monsanto Company (MON)
Monsanto Company (MON) should continue to benefit from the boom in ethanol production and increased demand for herbicides. With MON up over 14% for 2007, the company’s earnings momentum and revised guidance should support the underlying trend. Read the analysis of MON now!
Value – Whirlpool Corporation (WHR)
Whirlpool Corporation (WHR) exceeded analysts’ earnings expectations for 10 consecutive quarters and in 14 out of the past 16. Consensus earnings estimates for this year and next have risen over the past week. The Board of Directors recently declared a 43-cent quarterly dividend and announced that it will resume its previously authorized $500 million share repurchase program. This Zacks #1 Rank stock has a price-to-book ratio of 2.4, compared to 4.6 for the market. It has a PEG ratio of 0.86. Read the full analysis on WHR now!
2. SCREEN OF THE WEEK
Zacks.com offers three unique weekly commentaries that all
further our mission to help you Profit from the Pros. Today is
the latest installment of Screen of the Week from Kevin Matras.
Each week, Kevin shares with you another winning screen he has
discovered using the Research Wizard software from Zacks
Investment Research. Click here to learn more about the Research Wizard.
”Filtering the Zacks Rank”
The Zacks Rank is probably the most effective rating system out there. In good markets or bad, stocks with a Zacks #1 Rank continue to outperform.
In fact, since 1988, the average annual return of Zacks #1 Rank stocks is up 31.8% a year.
Today I want to focus on recreating those returns in a practical trading account.
Since there are typically over 200+ Zacks #1 Rank stocks at any time, it’s important to know what other filters to apply to the Zacks Rank to generate a smaller (more tradable) watchlist.
Two filters in particular, when added to the Zacks Rank of #1, not only narrows down the number of qualified stocks to a practical portfolio size (approximately 10-12 stocks), it often times increases its performance as well.
The two filters I’m talking about are:
These two items added to the Zacks #1 Rank produce powerful results!
I ran a series of separate tests on the Filtered Zacks Rank strategy over each of the last five years (2002 through 2006). I rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four-week periods. (This is done to eliminate coincidence and verify robustness.)
In 2002, the Zacks #1 Rank stocks returned just over 1%, with an average portfolio size of approximately 200 stocks. An impressive return when compared to the S&P 500’s 22% loss. But holding onto 200 or so stocks isn’t doable for most investors. But when adding the two aforementioned filters, the portfolio size shrinks to a tradable 10 stocks (on average), and a phenomenal 18.1% average annualized return.
In 2003, the Zacks #1 Rank list (approximately 200 stocks) did nearly 75% in comparison to the S&P 500’s almost 29%. But the filtered Zacks Rank narrowed that list down to only 10 stocks (on average) with a return of over 66%. (And while it’s true the filtered Zacks Rank produced a smaller return than the full Zacks Rank (66% vs. 75%), rebalancing only 10 stocks a month is far more manageable than 200.)
In 2004, the returns for the Zacks #1 Rank stocks were up 28.8% with an average portfolio size of 202 stocks. (The S&P was up only 10.9%.) But the filtered Zacks #1 Rank’s annualized returns were up 30.3%, with again only 10 stocks to hold on average.
In 2005, the complete list of the Zacks #1 Rank stocks showed an average annualized gross return of 31.7% with an average portfolio size of 208 stocks. The Filtered Zacks Rank was up 42.4%, but with an average portfolio size of only 10-12 stocks. (And while both of these numbers are impressive, 10-12 stocks is way easier to trade than 208!)
In 2006, the average annualized return for the Filtered Zacks Rank was up 34.3%, holding on average of only eight stocks in your portfolio.
And so far in 2007, (YTD through 4/20/07), the Filtered Zacks Rank’s average compounded gross return is already up 21% with an average of only 6-7 stocks held at a time.
I also ran these strategies using a one-week holding period with very impressive results. In fact, the Filtered Zacks Rank’s compounded gross return is up 35.3% so far this year with an average portfolio size of only six stocks.
Here’s a few of the stocks that qualified the Filtered Zacks Rank for 5/1/07:
Get the rest of the stocks on this list and start trading the filtered Zacks Rank (or any of our other strategies) in your own account. Remember, the key to successful screening is in discovering those screens that have produced profitable results in the past. And that’s exactly what you get with the Research Wizard stock picking and backtesting program. Click here to learn more.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
3. ZACKS EQUITY RESEARCH
With strong earnings having been released recently by some of the major U.S. players in the aerospace and defense sector, we wanted to get Zacks senior defense industry analyst Jon Kolb’s perspective on how this group appears to be doing.
First quarter earnings for some aerospace/defense plays have come out lately. How have the results been?
Well, Lockheed Martin appears well positioned to continue benefiting from strong defense outlays in 2007. Solid operating results, via existing and new contracts, delivered strong earnings and cash flow growth, the trend is expected to continue through 2007-08.
More. . .
Northrop Grumman offers a strong program portfolio positioned to take advantage of high growth areas in the defense budget, strong cash-flow generation, an improving balance sheet, and an ongoing share repurchase program. Favorable projected revenue and earnings comparisons with strong growth and discount relative valuation metrics support our bullish outlook for NOC common stock.
Sounds like you have a bullish outlook on both companies.
Yes, I rate both LMT and NOC as Buys, currently. In Northrop Grumman’s case, sales increased 4% in 1st quarter 2007 to $7.3 billion. Net income increased 8% during the recent 1st quarter. Total operating margin increased 13% over the prior year period during the quarter with higher margins witnessed in all the segments of the company. In January, NOC completed the acquisition of Essex Corporation, having acquired 100% of the shares of Essex common stock. Also, the U.S. Postal Service awarded NOC an $874.6 million contract to provide 100 Flats Sequencing Systems, and the German Ministry of Defense awarded a $559 million contract to EuroHawk GmbH in the recent 1st quarter.
With regard to Lockheed Martin, cash flow from operations during the quarter totaled $1.5 billion. LMT is the largest defense contractor in the world. The company’s management increased its outlook for 2007 earnings per share and cash flow from operations.
The current U.S. fiscal year 2007 defense budget was enacted at $435 billion, with investment accounts funded at $157 billion. Additionally, supplemental appropriations of $70 billion have been approved, with the prospect of another $100 billion or more under discussion and review.
What is the outlook for defense spending beyond the current fiscal year at this point?
The 2008 President’s defense budget is expected to be in the range of $460 to $480 billion, with the investment accounts at about $170 to $180 billion. Northrop Grumman recently joined forces with Lockheed Martin to pursue upcoming opportunities for Distributed Common Ground Systems (DCGS). Northrop is expected to take the lead in pursuing near-term Army and Navy business, while Lockheed Martin will lead the pursuit of near-term Air Force Block 20 business. This partnership opens up exciting opportunities for the government and both companies.
Jon Kolb is a senior analyst covering the aerospace and defense industries for Zacks Equity Research.
Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Select Comfort (SCSS), Anaren (ANEN), Hilton Hotels (HLT) and BioMarin Pharmaceuticals (BMRN). To see their latest posts, click here.
Median S&P 500 Earnings Growth Now in Double Digits
4. ZACKS WEALTH MANAGEMENT
Every week, Zacks Wealth Management provides informative articles on how to build and protect wealth. Today’s topic is:
If you have highly appreciated assets such as real estate or a business, it is important to understand your options when liquidating these assets. There are several ways in which you can create a stream of income while at the same time defer your tax burden. Two ways to accomplish this is through an installment sale or a self-canceling installment note (SCIN).
In an installment sale, you can sell the asset and enter into an arrangement to have the proceeds paid out over two or more taxable years. The payments will be taxed as they are received rather than in one lump sum. This defers the payment of taxes over a period of time. The payments are treated in part as ordinary income, capital gain and return of capital. Generally, the term of payments are established to cover your years in retirement. It is also a good deal for the buyer of your asset since they do not have to front a lot of capital for the purchase of the asset. The installment sale provides no estate tax relief since the present value of the notes will be included in your estate.
Keep in mind there are a few caveats for what qualifies for this treatment. Any depreciation will be recaptured at sale and cause an additional tax burden. The tax treatment will also take into consideration gains on the asset. Furthermore the law requires a minimal rate of interest for seller-financed sales. These are all issues you want to consult with an accountant before entering into these arrangements.
Self-Canceling Installment Note (SCIN)
The other option is the self-canceling installment note (SCIN). This vehicle is appropriate in the situation where the buyer will eventually inherit the asset – generally a family member. The advantage to the buyer is that payment of installments ends at the death of the seller. Unlike the installment sale, in the case of a SCIN your estate is reduced to the extent of the present value of the notes canceled at death. The note cannot be established with the knowledge that death will occur before the end of the contract with the intention of avoiding estate taxes. Keep in mind transactions that involve family members are generally more often scrutinized by the IRS especially if it involves tax savings. An attorney familiar with this arrangement needs to be involved in the process.
To compensate you for the possibility of death before the completion of the contract, the buyer generally pays a premium in exchange for the self-canceling provision. This can come in the form of a higher sales price or a higher interest rate.
These are methods to spread out a taxable event, generate cash flow, and potentially lower one’s estate tax exposure.
Fritz Fiebig a Certified Financial Planner™ professional. He can be reached at email@example.com.
This article is provided for informational purposes only and does not constitute legal or tax advice. Zacks Investment Management, Inc. is not engaged in rendering legal, tax, accounting or other professional services. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.
CFP Board, a nonprofit regulatory organization, fosters professional standards in personal financial planning so that the public values, has access to and benefits from competent and ethical financial planning. CFP Board owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements. CFP Board currently authorizes more than 50,000 individuals to use these marks in the United States. For more about CFP Board, visit www.CFP.net.
5. Best of the Zacks $100,000 Challenge
Zacks is conducting a nationwide talent search to find the very best stock pickers. The winner gets a $100,000 dream job with Zacks! . Sign up for free to join the competition, or just read what stocks the leading players are trading on the Zacks Challenge Player Blogs.
Here's what the leading players are saying lately:
Dreyerd (Rank #330 with $113,998)
ETF EXPERIMENT (QID, TWM, SDS, DXD, MZZ)
Java J (Rank #27 with $138,740
>> JAVA’S MARKET MUSINGS #42 <<
WHAT DOES DIGGING A HOLE TO REPAIR A WATER MAIN HAVE TO DO WITH TRADING?
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 (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.
Or view the full list of Zacks #1 Ranked stocks.
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Regards and Happy Investing,
Charles Rotblut, CFA
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The Zacks Performance Rank performance is the total return of equal weighted simulated portfolios consisting of those stocks with the indicated Zacks Rank net of fees. Results reflect the reinvestment of dividends and other earnings. Simulated results do not represent actual trading and may not reflect the impact that economic and market factors might have had on decision-making if an adviser were actually managing a client's money.
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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