Wednesday - July 11, 2007
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1. ZACKS RANK BUY STOCKS
Zacks #1 Rank stocks average a 31.9% 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 – Sun Hydraulics Corp. (SNHY)
Sun Hydraulics Corp. (SNHY) reported a 20.4% earnings surprise
for the first quarter and earnings estimates for this year and
next have been revised upward. Also, the company’s expected
earnings growth over the next five years is well above the
forecasted industry average. Read the analysis of SNHY now!
Growth & Income – Greif, Inc. (GEF)
Greif, Inc. (GEF) recently raised its full-year profit
guidance after reporting solid second-quarter fiscal 2007
results. Consensus earnings estimates are up over the past 30
days for both this quarter and for the full year. Earnings per
share are projected to grow 27% over the next 3-5 years, while
the industry is expected to grow by only 9%. This Zacks #1
Rank stock has a current dividend yield of 1.8%. Read the full analysis on GEF now!
Momentum – Amerisafe Inc. (AMSF)
Amerisafe Inc. (AMSF) is up almost 26% for the year after
reporting a positive earnings surprise for the first quarter. The Zacks #1 Rank stock is trading at 52-week highs and is poised for further momentum. Read the analysis of AMSF now!
Value – Commercial Metals Company (CMC)
Commercial Metals Company (CMC), a Zacks #1 Rank stock, recently reported strong third-quarter and year-to-date fiscal 2007 results. Consensus earnings estimates for this quarter and for the full year have risen over the past 30 days. On Jun 18, the Board of Directors declared a quarterly cash dividend of nine cents per common share of stock. CMC has a price-to- book ratio of 3.0 compared to 4.6 for the market. Read the full analysis on CMC 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.
”Magic Numbers and Relative Valuations”
Many people seem to believe there are some ‘magic numbers’ out there that equate to stock-picking success.
Two things in particular that I hear over and over again relates to P/E Ratios and Price/Book Values.
For some reason, many people believe that P/E Ratios of 20 or less and Price/Book Values of 1 or less are these so-called ‘magic numbers’.
Unfortunately, statistics prove otherwise.
Looking at the best-performing stocks of 2006 -- as qualified by stocks that were trading at $5 or higher at the beginning of the year, traded on average of 50,000 shares a day and that have increased in price by 50% or greater by the end of the year -- only 41% started with P/Es (using 12-month EPS Actuals) of under 20 while the other 59% were over 20.
This may or may not sound like a big deal. But the point is, if you limited yourself to only those stocks with P/Es under 20, your screen would have kept nearly 60% of the best- performing stocks off of your radar screen. And that IS a big deal.
True, there were/are stocks in there with P/Es under 20, but you would’ve missed a lot of fantastic winners if you excluded those over 20.
As for the Price/Book Value, the median P/B was 2.9 at the beginning of the period and nearly 4 (that’s right, 4!) by the end. Percentage wise, only 2% of the stocks had P/Bs of less than 1 at the start. Which means, using the ‘magic number’ of 1 for a P/B value, would have excluded nearly every top performer of 2006.
So if you’re determined to look for stocks with ‘low’ valuations (P/E, P/B), try looking for ‘low’ valuations as compared to their Industries.
Why? Because 68% of the stocks on that list of winners had P/Es under the average for their Industry and over 62% had P/Bs under the average for their Industry –- meaning the majority of the best companies would have made it through a relative valuation screen, giving you a chance to buy them.
So instead of thinking about ‘low’ valuations as an absolute number, try thinking about them as a relative measure.
And I’ve found that companies that are outperforming their Industries on earnings but are ‘undervalued’ to their group in terms of valuations are great candidates.
So in this week’s screen, I’m looking for companies with upward price momentum that are trading over $5, have a minimum average trading volume of 50,000 shares a day, have shown positive EPS growth over the last two quarters that’s greater than their Industry’s average and have lower P/E’s and Price/Book Values than their Industry’s average.
There are 30 companies that passed this screen for Tuesday, 7/10/07. Here are three of them:
Try incorporating some of these ideas into your own stock- picking strategies. And while relative valuations aren’t available in most screeners, they are available in the Research Wizard. (Not to mention 650 other items, along with the ability of creating your own.)
Click here to learn more about the Research Wizard stock picking and backtesting software and to sign up for a free trial.
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
Ahead of second quarter 2007 earnings reports for most Chinese companies trading in the U.S. stock markets, we had a conversation with senior analyst Paul Cheung, CFA regarding how he sees this region performing overall.
How successful do you think the Chinese government has been in containing the country’s economic growth so far?
The Chinese government has taken many measures to contain growth. However, those measures that have been taken are not quite effective because the cost of capital is much lower than the return of capital. Also, non-state-owned sectors contributed about 50% of Chinese output, which are less affected by government measures.
More. . .
Do you feel the government may tighten its restrictions? If so, where?
The government will continue to tighten its restrictions if the growth rate of the Chinese economy is too high, in the government’s view. The central bank may raise interest rates, as well as raise reserve rates. The Chinese government may raise technology and environment standards for new projects, delay new projects, and cancel or reduce export subsidy taxes for certain industries.
Are there industries in the Chinese market that are getting expensive? Where do you see valuations rising the most?
In the Chinese market, most industries seem expensive compared with international standards. However, Chinese companies listed on the U.S. stock markets are much cheaper compared with those listed on the Chinese stock market. The valuation of Chinese petrochemical companies has risen significantly in the past three months. However, they still have upside potential because of the strong demand of their products in China.
Which companies do you consider your top Buy recommendations at this time?
SINA (SINA) is still my favorite Buy recommendation currently. The reason is that the company is well positioned to leverage the great potential in the online advertising field in China. Online advertising in China will grow at a 35% pace in the next five years. SINA is the leading Internet portal in China, and its main users are middle-class Chinese people. Moreover, the Beijing Olympic Games will be held in 2008, and Google just partnered with SINA in China. So SINA can expect to increase its online advertising revenue greatly in the next several quarters.
What are your overall expectations for the second half of 2007?
I believe the Chinese economy will grow at above 10.5% for the second half of 2007. So the earnings of Chinese companies will continue to grow at a rapid pace. My overall return expectations for the Chinese companies listed on the U.S. markets are 5%.
Paul Cheung, CFA is a senior analyst covering the Chinese markets for Zacks Equity Research.
Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Comstock Resources (CRK), Home Depot (HD), Anglo American (AAUK) and RightNow Technologies (RNOW). To see their latest posts, click here.
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4. ZACKS WEALTH MANAGEMENT
Every week, Zacks Wealth Management provides informative articles on how to build and protect wealth. Today’s topic is:
It is best to consult with all beneficiaries and become educated about their financial situation in order to determine their need for the assets.
In the last article we discussed the advantages of having both a primary and a contingent beneficiary. Additionally the primary beneficiary, who has a significant estate, has the option of disclaiming all or part of the assets to avoid being taxed on them at distribution and potentially at death. So what do you do if you did not disclaim your inherited assets and you now have a large IRA that is exposed to both income and estate taxes or in a situation with an ever-increasing IRA?
Unfortunately, there are not many options after you have inherited an IRA and started making distributions. Some of your options with a large IRA in the estate are:
In most cases, the ordinary income tax rates will be lower than the estate tax. In this case you are better off maximizing distributions now and giving gifts if you are willing to give up control of these assets in the IRA. Many people would reason that since the beneficiaries will benefit from these assets, they should be responsible for the burden of paying the estate taxes. This is of course with the understanding that there will be significant amount of wealth lost. Again, taxation is just one variable to deal with in terms of optimal distribution of IRA assets. It is best to consult with all beneficiaries and become educated about their financial situation in order to determine their need for the assets.
The other option which will become available in 2010 is to convert these assets into a Roth IRA. This only makes sense if the IRA owner is currently in a lower tax bracket and anticipates being in a higher tax bracket in the future, or if the beneficiaries are in a higher tax bracket. I refer to this strategy as tax bracket optimization – channel the assets thru the lowest possible tax brackets.
In a situation such as this, you need to establish who is best suited to service the tax burden either at the income level or at death. If you have any questions regarding these issues, contact me at firstname.lastname@example.org.
Fritz Fiebig a Certified Financial Planner™ professional
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:
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MackTheKnife (Rank #27 with $156,348)
BIO BANG FAB FIVE: NO. 4 – EMERGENT BIOSOLUTIONS (EBS)
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Zacks Rank performance is the total return (price changes + dividends) of equal weighted portfolios, consisting of those stocks with the indicated Zacks Rank, assuming zero transaction costs. These returns are not the result of a backtest; these are actual returns since 1988. The stocks in the Zacks Rank portfolios were available to Zacks clients before the beginning of each month (monthly rebalancing). Performance results from 1988 through September 2006 are based on a subset of all Zacks Rank stocks that excludes stocks covered by only one analyst and ADR’s.
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