Friday - July 27, 2007
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Yesterday's 311-point drop reflects a further reversal from the complacency that has characterized market activity for an extended period of time. While nobody likes big daily declines, the action of the past few days is pretty normal from a historical standpoint.
The recent drop in the major indexes and the recent rise in oil prices are both being driven more by emotion than a change in fundamentals. The deterioration in the housing market has been ongoing. The aversion to risky debt (e.g. Chrysler) represents a rational action by investors. Crude's rise to the upper $70s has been caused by fears of what could happen with geopolitics (e.g. Iran) and the weather (e.g. hurricanes).
The good news is that companies, on average, are exceeding earnings expectations. The economy is growing. Those who are financially stable (both consumers and companies) still have easy access to credit. The Dow is at 13,473. And for those of you following the Focus List, Crocs (CROX) beat estimates and raised guidance yesterday afternoon. In other words, the sun is still shinning.
Wishing you prosperity,
Charles Rotblut, CFA
1. ZACKS RANK BUY STOCKS
Zacks #1 Rank stocks average a 32.2% 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 - VistaPrint Ltd. (VPRT)
VistaPrint Ltd. (VPRT) has exceeded earnings estimates in each of the past six quarters, with five of them posting double- digit surprises. One analyst raised his forecast for this year. Earnings estimates for next year have risen five cents to 93 cents per share over the past month. Analysts forecast robust earnings growth of 33.67% over the long term. VPRT also has an above-industry average ROE of 20%. Read the full analysis on VPRT now!
Schering-Plough Corporation (SGP) exceeded analysts' earnings expectations in five out of the past six quarters by an average margin of 35.2%. The company recently reported strong second-quarter results, with seven out of its 10 largest- selling products posting double-digit sales growth. Analysts have upped their profit forecasts for this year and next over the past week. This Zacks #1 Rank stock has a current dividend yield of 0.84%. Read the full analysis on SGP now!
Key Technology Inc. (KTEC) is trading at 52-week highs on stronger-than-average volume. With no significant resistance to impede the underlying uptrend, look for the stock to add to its stellar year-to-date return. Read the full analysis on KTEC now!
ALLETE, Inc. (ALE) exceeded analysts' earnings expectations for the past three quarters, most recently by 16.3% in the first quarter. Consensus earnings estimates for this quarter and for the full year have risen over the past seven days. On Jul 19, the Board of Directors declared a quarterly cash dividend of 41 cents per common share of stock. This Zacks #1 Rank stock has a price-to-book ratio of 2.1, compared to 4.6 for the market and 2.9 for the industry. Read the full analysis on ALE now!
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 we highlight...
Profit Tracks: High Rank Value
Two of the most commonly accepted measures of a value stock are a price-to-earnings (P/E) multiple of 15.0 and a price-to- book (P/B) multiple of 3.0. Although many studies have shown performance advantages to investing in value stocks, not all value stocks are actually bargains. A value a stock is only a good buy if earnings are expected to improve in the future. High Rank Value is a strategy designed to find the true bargains among value stocks. By requiring a Zacks Rank of #1 ("Strong Buy") or #2 ("Buy"), this strategy restricts the pool of value stocks to only those with positive revisions in earnings estimates. In other words, profits are expected to improve in the future at a faster pace than originally anticipated.
Here are four stocks that make the grade for the Discounted Fundamental Strength Profit Track:
The Chubb Corporation (CB) recently reported second-quarter results, which included record operating income of $1.60 per share, compared to last year's $1.35. The result was 16% above analysts' expectations. The company increased its operating income guidance for the full-year 2007 to a range of $5.70 to $6.10. The company's previous range was $5.00 to $5.40. Wall Street is in agreement as evidenced by current 2007 estimates of $5.71 per share, up from last week's $5.63. CB offers a price-to-book (P/B) multiple of 1.55 and a price-to-earnings (P/E) multiple of 8.83. Continue your research on CB now!
StealthGas, Inc. (GASS) has price-to-earnings (P/E) multiple of 13.2 and a price-to-book (P/B) multiple that stands at 1.55. The company is trading close to its 52-week high. In late May, the company reported first-quarter earnings of 46 cents per share, surpassing the consensus estimate by 12%. GASS noted that it continued to operate with a well-structured balance sheet and with a relatively modest level of leverage considering the ongoing expansion of the company. Continue your research on GASS now!
Park National Corp. (PRK) recently posted second-quarter earnings of $1.62 per share, outpacing the consensus estimate 11%. The company also declared a regular cash dividend of 93 cents per share, which will be paid on September 7, 2007 to shareholders of record on August 21, 2007. PRK satisfies the criteria for this Profit Track as evidenced by its price-to-earnings (P/E) multiple of 12.28 and a price-to-book (P/B) multiple of 1.87. Continue your research on PRK now!
Timberland Bancorp Inc. (TSBK) recently announced record earnings for the fiscal third quarter of 31 cents per share. The result eclipsed the year-ago total of 28 cents and beat the consensus estimate by 11%. The company noted that its solid performance was led by strong loan growth, ongoing share repurchases and excellent asset quality. TSBK's price-to-earnings (P/E) multiple stands at 13.98 and its price-to-book (P/B) multiple is 1.51. Continue your research on TSBK now!
To see the full list of stocks that currently pass this winning screen, click here.
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”.
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Kevin Matras looks at how to find winning stocks in the winningest sectors: More...
3. ZACKS EQUITY RESEARCH
Perhaps one can kindly say that recent reports on both existing home sales and new home sales have been less than favorable. To get his perspective on what these news items mean, we are joined by Director of Zacks Equity Research Dirk van Dijk, CFA.
Let's start with Wednesday's report on existing home sales. What's the big story here?
Existing [home sales] were not all that good. We were down 3.8% from May to an annual rate of 5.75 million, down from 5.98 [million], which is actually revised down from their original May report. On a year-over-year basis, we're down 11.4%.
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Every region of the country was down on the month. Worst-hit was the Northeast, which was down 7.3%. The South held up relatively better at -1.7%. Now, the South is the most important region in the country in terms of home building.
If one was really stretching to try and find some good news in the report - clutching at a couple of straws as you're about to go over the cliff - inventories did decline in absolute numbers, at least according to the NAR report. I've seen other tracking data that flatly contradicts it, but they show inventories were down 4.2% to basically 4.2 million houses.
But with the decline in the sales rate, we're still left at an 8.8 month supply, which is where we were in May. That's up from 6.9 months' supply a year ago. And if you really want some perspective, during the '03-'05 period and into early '06, it was pretty normal to see months' supply in the 4-4.5 level. So we basically doubled from what was sort of the norm for several years.
So this is pretty significant. What you're seeing is that sellers are still emotionally attached to their houses, and what their neighbors had gotten in previous years and what they may have paid for their houses, they're not willing to drop the price of the house - partly because, in many cases, it would mean they'd have to come up with a big wad of cash to actually sell their house to pay off the mortgage, and bring their checkbook to the closing. And we actually saw the median price rise 0.3% year over year. They're just not cutting their prices.
Meanwhile, buyers have figured out that a.) it's a lot harder to get a mortgage, and you're not going to get that low monthly rate; you're going to have to go for an old fashioned, fully amortizing loan, you're going to have to have a lot better credit, and b.) they've also realized that housing is, quite frankly, way overpriced in most areas of the country. So they're not stepping up to the plate, so the market isn't clearing and volume is falling.
I expect this trend to continue for a considerable period of time. Actually, I thought the existing home sales numbers were ugly, but then I got the new home sales, and they made the existing home sales look like a beautiful, manicured suburban lawn.
Aside from a big drop in trading early Thursday, how should we be seeing these new home sales? I take it not very favorably.
No. I mean, look, I have not exactly been a roaring bull on the housing market, and I had expected things to deteriorate. But this shocked me!
The consensus expectation was that we were going to be going at about a 900,000 rate for new home sales - the seasonally adjusted annual rate [SAAR] - down from the originally reported 915k in May. Now I had thought those numbers were a little bit high, [but] we got a seasonally adjusted annual rate of 834,000, and the main numbers were revised down to 893k. So we got a massive revision down from the main numbers, and the June numbers were down 6.6% below that massively revised-down June number. Year over year, we're down 22.3%. And then you dig deeper, and the 6.6% was in the face of by far the largest and most important region in the country actually up 7.6%!
Dirk van Dijk, CFA is the Director of Zacks Equity Research
Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Sara Lee (SLE), eBay (EBAY), Peabody Energy (BTU) and CSX Corporation (CSX). To see their latest posts, click here.
Listen to the audio podcast of the Industry Rank Analysis through Zacks' NEW Audio Feature.
4. INVESTMENT IDEAS
The editors at Zacks.com constantly analyze the universe of stocks to find the best investment ideas. Today, learn how you can profit from privately-managed prisons:
On Jun 3, 2007, the world watched with fascination as a young woman checked into the Century Regional Detention Facility in Lynwood, California. Paris Hilton was beginning a 45 day jail sentence as a result of a probation violation stemming from a driving on a suspended license charge. That evening it was the lead story on every cable and network news channel. I won't even begin to comment on our, or for that matter, the world's, fascination with the ubiquitous heiress. However, the story did draw attention to the United States penal system, the world's largest.
Despite overall declines in violent crime, the total number of persons incarcerated by federal or state authorities as of Jun, 2006 was approximately 1.6 million, up 2.8% from the prior year. If you include local jails, that number jumps to over 2.2 million, according to the Justice Department's Bureau of Justice Statistics. The report marked the largest increase in prison and jail inmate populations since mid-year 2000. The rising numbers are not geographically isolated either, as 42 states reported increases in their prison populations. Also, in mid-2006, local jail facilities were operating at roughly 94% capacity, while state and federal prisons were operating at 1% below and 14% above capacity, and 34% above capacity, respectively.
Prison overcrowding is hardly a recent phenomenon. In fact, it is widely expected to worsen. According to a report by the Pew Charitable Trusts, a nonprofit research institution, inmate populations are expected to increase 13% by 2011, resulting in roughly $27.5 billion in additional funding over the next five years. This burden presents a unique opportunity for privately-managed prisons. The following companies are leaders in this booming industry.
GEO Group Inc. (GEO)
The GEO Group provides government-outsourced services in the management of correctional, detention and mental health facilities in the U.S., Australia, South Africa, the UK, and Canada. It offers industry related services including: security, administrative, rehabilitation, education, and health and food services. The company's operations include 69 correctional and residential treatment facilities, with a design capacity of roughly 59,000 beds.
During the first quarter, new contracts fueled a 28% increase in revenues to $237 million. Earnings-per-share of 22 cents exceeded expectations by two cents and increased over 40% year- over-year. After the latest earnings surprise, analysts increased their full-year 2007 and 2008 estimates by one penny to $1.06 and $1.32, respectively, continuing a trend of upward revisions.
Cornell Companies Inc. (CRN)
Cornell Companies Inc. provides correction, detention, education, rehabilitation and treatment services to adults and juveniles in federal, state and government agencies in the U.S. The company has three main business lines: adult secure, community-based corrections, and youth and families (including alternative education). The Company has 77 facilities in 16 states and the District of Columbia with a total service capacity of 18,209.
The most recent first-quarter release was uninspiring, as the company reported earnings of five cents per share, matching expectations. Revenues rose 6.9% to $89.6 million due to new programs opened during 2006, but were offset by lower revenues from the Great Plains Correctional Facility, whose population fell in anticipation of its closure in April. In contrast to GEO and Corrections Corp., CRN has seen downward revisions to both full-year 2007 and 2008 estimates, which strongly contributed to its current Zacks Rank of 5 (Strong Sell). On a positive note, Standard & Poor's Ratings Services placed the company on positive CreditWatch due to sustained improvement in operating performance and stronger financial risk profile. Upon further reviews, Cornell could see its "highly speculative" or "B-" credit rating improved.
5. FEATURED EXPERTS
Here we cast the spotlight on timely Featured Expert commentaries that recently appeared on Zacks.com.
OTHER TOOLS FROM ZACKS
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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.
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Regards and Happy Investing,
Charles Rotblut, CFA
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