Wednesday - August 22, 2007
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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 - Central European Distribution Corporation (CEDC)
Central European Distribution Corporation (CEDC) is benefiting from a strong Polish economy as well as recent distribution agreements. CEDC posted a 17% positive surprise in its second quarter and earnings estimates are trending higher. Over the past month, this year's numbers have jumped 16 cents to $1.73 per share. Only one analyst is covering the stock for this year and next, so the company could benefit from more analysts picking up coverage. Analysts are projecting 25% earnings growth over the long-term for the company. Read the analysis of CEDC now!
Growth & Income - Sotheby's (BID)
Sotheby's (BID), a Zacks #1 Rank stock, exceeded analysts'
earnings expectations in nine out of the past 10 quarters. On Aug 8, the company reported record second-quarter and year-to- date revenues. Consensus earnings estimates for both this year and next year are up over the past 30 days. Earnings per share are projected to grow 20% over the next 3-5 years. On Aug 8, the Board of Directors boosted its quarterly cash dividend by 50% to 15 cents per share. Read the full analysis on BID now!
Momentum - Fossil (FOSL)
Fossil (FOSL) has weathered the market correction very well and is trading at new highs. Its latest quarter registered 31% earnings growth over last year. Analysts proceeded to raise their estimates a dime to $1.58 per share over the past week as a result. Technically, the stock is trading at new highs and broke through its recent resistance level on strong volume. There is no overhead resistance at these levels. Read the analysis of FOSL now!
Value - KMG Chemicals, Inc. (KMGB)
KMG Chemicals, Inc. (KMGB) reported strong third-quarter fiscal 2007 results in early June. Consensus earnings estimates for both this year and next year have risen over the past 30 days. This Zacks #1 Rank stock has a current dividend yield of 0.44%. The company has a price-to-book ratio of 3.4, compared to 4.6 for the market. Its return on equity tops that of the industry average-18% compared to 11%. Read the full analysis on KMGB 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. Learn more about the Research Wizard.
"New Analyst Coverage"
I'm not a big fan of Broker Recommendations. This is largely because of their overwhelmingly bullish bias.
But Broker Recommendations have their place. From small individual investors to large institutional portfolio mangers, people do pay attention to them when making their investment decisions. (Although I should note that, in general, the changes in the average broker recommendation is a better indicator than the actual recommendation itself.)
Today I want to talk about companies that receive new analyst coverage.
One thing that generates analyst coverage is investor interest. How else can you explain the increased analyst coverage for Google - which hasn't even been public for three full years - compared to a company like GE, which has been public for approximately 40 years.
As new coverage is initiated, it becomes more visible, which in turn means potentially more demand (read higher prices).
This is often the case because analysts usually initiate coverage with a positive recommendation. (Why write a research report on a company not widely followed only to say it stinks?)
When it comes to companies with little to no analyst coverage, that one new recommendation can sometimes give portfolio managers the validation they need to build a position. (And the more money they can invest, the more they can potentially influence prices.)The best way to use this information is to look for companies whose analyst coverage has increased over the last four weeks.
Simply look at the number of analyst recommendations at present, compared to the number of analyst recommendations four weeks ago. An increase in coverage is bullish whereas a decrease in coverage is bearish.
It's typically more bullish if the increase went from none to one or if the coverage was minimal to begin with. (Going from 25 to 26 isn't going to have the same impact because that 26th analyst isn't discovering something `new'.) But increased coverage is better than decreased coverage -- assuming the coverage is positive of course.
Here's a screen to try:
And for good measure ...
Here are three stocks from this week's screen (8/21/07):
Get the rest of the stocks on this list and see what new stocks the analysts are talking about. And don't stop there. Try finding companies with no coverage four weeks ago that are finally being looked at today.
Most screeners won't let you search for the number of analysts covering a stock, let alone comparing the amount of coverage they had weeks or even months ago. The same goes for changes in the Average Broker Rating and Estimate Revisions. But you can with the Research Wizard. You can also backtest it all. Find out how to pick the right stocks right now by learning more about our free trial to the Research Wizard stock picking and backtesting program.
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 the start of hurricane season ushered in this week with Hurricane Dean, we were interested in how insurance companies were prepared for a possible heavier-than-usual hurricane season, especially after the reasonably light season last summer. Zacks senior insurance analyst Eric Rothmann was on hand for his perspective.
As we head into another hurricane season, are insurance companies in your coverage relatively well-prepared?
The quick answer would be that the industry is in relatively good shape. However, the severity of this hurricane season will be the ultimate determiner.
More. . .
Last year's hurricane season was lighter than expected. Was this helpful with regard to companies building up capital?
While capital levels have been increasing, if you get three or four [hurricanes] at half the power of Katrina's making landfall, to not expect capital levels to be impacted would be erroneous.
Are you expecting some price softening in the near future? What levels are you currently anticipating?
Competition has definitely become more pronounced, which we do not see moderating any time soon.
What would be your top property/casualty Buy recommendations at this time? The usual suspects, or any newcomers?
Given the benign hurricane season so far, and with 2Q07 results starting to be released in less than three weeks, at this point in time, we're keeping our list short. We still like names like ACE Ltd (ACE), W.R. Berkley (BER).
For investors who may be looking to diversify into insurance stocks, what advice would you give them going forward?
We continue to think that we are close to experiencing price- to-perfection levels for the majority of the industry. Part of the reason for the continuation is lack of catastrophic events. In addition, while it many not appear to be a straight-line connection, we think the U.S. housing market also continues to aid in higher stock prices.
Eric Rothmann is a senior analyst covering the insurance industry for Zacks Equity Research.
Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Freddie Mac (FRE), Avnet (AVT), Myriad Genetics (MYGN) and Akamai Technologies (AKAM). To see their latest posts, click here.
With earnings season winding down, 57% of companies are posting double digit year-over-year EPS gains. More...
4. ZACKS WEALTH MANAGEMENT
Every week, Zacks Wealth Management provides informative articles on how to build and protect wealth. Todayís topic is:
On July 19, the S&P 500 hit an all-time high, and in less than a month the market has fallen roughly 10%. The culprit is the drying up of liquidity in the fixed income markets outside of treasuries and agencies. Particularly hard hit have been structured credit products such as collateralized mortgage backed securities and collateralized debt obligations.
Basically what happened was the structured credit products were rated by various rating agencies as being investment grade or better. However due to the opaqueness of what they contained, and an increase in the default of certain mortgages included in the structured products, the investment grade rating was not appropriate.
Now, there are many investors who want to sell these structured fixed income products but very few investors who want to buy them. As a result, investors do not want to buy any other risky fixed income securities. Think of it this way. A typical fixed income buyer usually has some degree of leverage, and currently they are stuck holding some structured credit products they can't sell. The last thing they now want to do is go out into the market and buy more fixed income instruments, even if those instruments are considered safer as in the case of corporate paper.
With investors looking to sell fixed income positions, fixed income portfolio managers have been forced to either sell structured product holdings at fire sale prices, or sell other fixed income paper to raise cash. Investors have been using that cash to buy Treasuries and Agency Paper and staying away from the corporate sector.
The net result is that the liquidity in the fixed income market is drying up. This in turn is affecting the stock market because the economy needs a functioning credit market in order to grow. Stock prices are down on fears that the credit markets will continue to dry up causing the economy and corporate earnings to slow. Simply put, fear is gripping the fixed income market, and that fear is spilling over into the equity markets. As the old Wall Street adage goes, the key to making money in the market is to be greedy while others are fearful.
So at the end of the day, there is a bit of fear in the market due to the growing credit liquidity problems. This has led to a stock market correction, an event that historically occurs every few years, but has not been felt by current equity investors for quite some time. Market corrections, such as the one we are currently experiencing, are in fact healthy for the market, and this one is no exception. The correction wrings out some of the excesses in the market, increases risk aversion and provides a lower entry point for new capital.
The U.S. economy is growing and the Global economy is even stronger. The underlying global economic strength helps explain why the market was hitting new highs in July. I expect domestic GDP growth to remain modestly below trend in the second half of this year and return to its trend rate in early 2008. Equity valuations are in line with where they have been historically. A reading of the macro-economic data, as well as the upward sloping yield curve, shows that a recession is not likely. As a result, the sell-off in equities represents an opportunity to put more capital to work.
This current liquidity problem is creating a similar situation to what happened in 1989 during the Savings & Loan crisis, and in 1998 with the Asian financial crisis. Just like the episodes before, the liquidity issues will cause some short- term pains, but investors who stay the course will be nicely rewarded for bearing the risk. Investors who panic and sell into the market correction never wind up making any money in the long run, since their timing is always off.
While it is possible that the credit market liquidity will continue to dry up, it is much more likely that the credit market will be significantly more liquid and stable several months from now. The Fed and the other central banks in the world are in a better position than ever before to provide liquidity to the credit markets both through open market operations and lowering interest rates.
Just on Friday, Aug 17, the Fed stepped up to the plate and cut its discount rate, the rate at which banks borrow directly from the Fed, by 50 basis points. The fed funds rate, the rate at which banks lend money to each other, was left at 5.25%. Now the Fed is communicating that they realize acquiring short term funding is a problem, and they are now inviting banks to come to them for funding. This reduction in the discount rate is providing liquidity directly where it is needed and alleviating the current stress.
With this news, the market is traded up on Friday. When the credit issues in the market are finally resolved, this market will head higher.
Mitch Zacks is a member of Zacks Wealth Management's Investment Committee. He is the portfolio manager for the Quantitative Strategy and co-manages the Dividend Strategy with Ben Zacks.
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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