Wednesday - September 19, 2007
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The Fed cut both the federal funds rate and the discount rate by 50 basis points on Tuesday in an attempt to curtail what it sees as a worsening credit crunch. In justifying the move, the Fed explained: "Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets".
Although the cut was larger than I had anticipated, the Federal Open Market Committee is clearly casting an eye back at history. There have been numerous occurrences of a liquidity bubble being followed by credit crunch being followed by a recession (and, in some instances, a depression). Today's action is clearly a preemptive move designed to prevent the current credit crunch from worsening.
I posted a more complete analysis of the rate cut on the Zacks.com Analyst Blog.
A podcast of my analysis is also available in the Fed Watch section of the Zacks.com Audio home page.
Wishing you prosperity,
Charles Rotblut, CFA
1. ZACKS RANK BUY STOCKS
Zacks #1 Rank stocks average a 32% 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 - Schering-Plough Corporation (SGP)
Schering-Plough Corporation (SGP) posted second-quarter earnings of 41 cents per share, excluding charges. The result eclipsed last year's 25 cents and exceeded the consensus estimate by 21%. The company has now recorded its 11th consecutive quarter of double-digit adjusted sales growth. SGP's current ROE is 27%. Read the analysis of SGP now!
Growth & Income - FPL Group, Inc. (FPL)
FPL Group, Inc. (FPL) exceeded analysts' earnings expectations in seven out of the past eight quarters. In addition to posting solid results for the second quarter, the company boosted its fiscal 2008 guidance and now forecasts profits between $3.70 and $3.90 per share. Earnings per share are projected to grow 10% over the next 3-5 years. On Aug 3, the Board of Directors declared a quarterly cash dividend of 41 cents per common share of stock. FPL has a current dividend yield of 2.7%. Read the full analysis on FPL now!
Momentum - Tempur-Pedic (TPX)
Shares of Tempur-Pedic (TPX) have broken out to record highs following its analyst day event. The company's CEO said that third-quarter demand has been running above expectations. Read the analysis of TPX now!
Value - Assurant, Inc. (AIZ)
Assurant, Inc. (AIZ) exceeded analysts' earnings expectations in 13 out of the past 14 quarters. Consensus earnings estimates for both this year and next year are up over the past week. Earnings per share are projected to grow 11% over the next 3-5 years for this Zacks #1 Rank stock. On Aug 14, AIZ declared a quarterly cash dividend of 12 cents per common share of stock. The company is currently trading at a valuation of 9.5x current fiscal-year estimated earnings and at 8.9x next fiscal-year estimated earnings. Read the full analysis on AIZ 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.
"The Importance of Screening and Backtesting"
For this week's article, I'm starting at square one and going over the importance of screening in your investment decisions.
But even more essential, I'm going to explain why backtesting is the most important step of all.
Why Should I Use a Stock Screener?
The short answer is:
"Because there's over 10,000 stocks out there and you need a way to find the good ones".
The longer answer is:
Other than buying the stocks that are talked about in the media or among friends, how else are you going to find stocks that meet certain fundamental characteristics?
Most people do their own `screening' one way or another. They may hear that a stock has a certain Growth Rate, or a certain P/E Ratio or Sales Surprise, for example. They then research stocks that meet this criteria.
Well if you want to find stocks that meet certain criteria, you can find them quickly and easily with a stock screener.
But, just because you narrow down 10,000 stocks to only a handful, doesn't necessarily mean that you've picked the best stocks on the planet.
In fact, you might have picked the worst ones.
But how will you know?
Once you've created a screen, you can backtest and see how the screening strategy performed.
In other words, does your screen generally find stocks that go up once they've been identified? Or does your screen generally find stocks that get buried?
This is good stuff to know.
With backtesting, you can see how successful your stock- picking strategy has performed in the past, so you'll have a better idea as to what your probability of success will be now and in the future.
Of course, past performance is no guarantee of future results, but what else do you have to go by?
Think about it; if you saw that a stock-picking strategy did nothing but lose money, year after year, there's NO WAY you'd want to trade that strategy or use that screen.
Because it's `proven' that it picks bad stocks.
Sure, it may turn around and start picking winners, but it may also continue to pick losers as it always has.
On the other hand;
... what if you saw a strategy that did great year after year? You'd of course want to trade that strategy because it's proven to be profitable.
And while it may start picking losers all of a sudden, it may also continue to pick winning stocks, just like it had been doing over and over before.
Keep in mind, a screening and backtesting program isn't a `box of magic'.
But it's a great way to see what works and what doesn't BEFORE you put your money at risk!
Don't get me wrong, just because you have a great strategy for picking winning stocks, it isn't going to preclude you from ever having another loser. On the contrary, even some of the best strategies `only' have win ratios of 70% or 80%. (NOT 100%.)
But if your strategy picks winners far more often than losers, you can feel confident that your next pick will have a high probability of success.
And don't be the guy who `accidentally' gets into one or two good stocks and thinks he's the next Warren Buffett. If your stock account is important to you, test your stock-picking strategies out to see if your method for finding winners is a repeatable one.
And that's why someone should use a Screener and a Backtester.
As usual, I'll close with a few new picks from some of my favorite backtested screening strategies for the week of 9/18/07:
CCC Calgon Carbon Corp.
DWA Dreamworks Animation
NSIT Insight Express, Inc.
Sign up now for your two-week free trial to the Research Wizard and take your stock screening to another level. And when you're done, backtest it to see if it works! And don't forget to check out the winning trading strategies that come loaded with the program. Know when to buy and when sell. It's all there.
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
The Fed funds rate has been lowered 50 basis points in the first downward move from the Fed in four years. We're here with Director of Zacks Equity Research Dirk van Dijk, CFA for his perspective on this occurrence.
Were you surprised by the 50 basis point lowering?
Yeah, I kind of was. I mean, the market had kind of been betting on it, if you watch the Fed funds futures, but the language that the Fed governors had been giving - sort of the body language in their various speeches - really indicated that they had been reluctant to do this. I thought there was an outside shot that we'd get 25 on the Fed funds and 50 on the discount rate rather than a 50/50 decision.
More. . .
I'm not really happy with this. This looks like a total capitulation by the Fed to what the Street had been whining for and what Capitol Hill had been whining for, and politically it's always popular to have lower interest rates.
That eventually leads to inflation, but that's sort of down the road and it's creeping and sort of hidden.
There are a lot of indications not only that they cut, but that their policy statement was also pretty much on the dovish side. They had no mention of the high levels of capacity utilization, although there hasn't been a lot of spare capacity that's been built up in the last six weeks since they made that statement. They really barely mentioned inflation at all in the statement.
And as a result, they were doing this when the dollar was hitting multi-decade lows, when gold was at the highest point since back in the late 70's when the Hunt brothers were trying to corner silver and we had that big bubble in gold. You have oil well above $80 - it just hit a new high at $81.50 - not because of increased demand or decreased supply, but simply because we are debasing the currency in which you are denominating it. Oil is always going to cost more if you denominate it in yen than if you denominate it in dollars.
To what extent does inflation become an actual legitimate fear?
Oh, I think this really is a fear, because it may unhinge the inflation expectations that people have - that the Fed was going to try and be a bulwark against inflation. I mean, that's a really big part of what the job of a Central Banker is, is to fight against inflation. And I think they've lost a lot of credibility.
But the market loved it! I mean, you look on the screen and it's all green. Everywhere in the market is going up. The market definitely got what it wanted, but be careful about what you wish for.
Dirk van Dijk, CFA is the Director of Zacks Equity Research.
Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include LifeCell (LIFC), CREE (CREE), Lehman Brothers (LEH) and Best Buy (BBY). To see their latest posts, click here.
Listen to the audio podcast for the Earnings Preview through Zacks' NEW Audio Feature
Listen to the audio podcast for the Earnings Trends through Zacks' NEW Audio Feature.
Analysts have been busy cutting their estimates for firms in the Financial sector. More...
4. ZACKS WEALTH MANAGEMENT
Every week, Zacks Wealth Management provides informative articles on how to build and protect wealth. Todayís topic is:
Tax provisions change rather frequently. The changes created by the accountants and lawyers in Congress always have a way of confusing individual investors.
Although tax time is still months away, we need to be aware of some provisions that are expiring this year and take advantage of them before they are eliminated. Some of these include:
This is also a good time to look at your portfolio and see what losses exist to offset gains in the portfolio. If losses exceed gains, you can deduct as much as $3,000 from ordinary income and wages. Be aware of the wash sales rule that disqualifies you from deducting your loss.
Fortunately or unfortunately, the tax code will evolve as the government balances its books and continues to fund (or not fund) entitlement programs. The political party in control will also want to have its say in the evolving tax code law. It may be that the best we can hope for is political gridlock so less damage is done. It is clear that anyone under 55 needs to take steps to take care of their own retirement and not rely either on Uncle Sam or their employer. Our best hope is to see the tax code become friendlier to individuals saving for their own retirements.
Any questions on the items above or any other tax planning concern, please contact me at firstname.lastname@example.org.
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:
Beris (Rank #36 with $150,536)
ECONOMY TO CONTINUE GROWING, BUT AT A MORE MODERATE PACE Whatever the situation, many are wondering whether these cuts come a bit late. Inflation (that they say we should not fear) is still in the full upswing; job numbers were bad for August, and significantly revised downward for previous months; growth is subsiding; and the credit crunch is in a full upswing, spilling across the world. Personally, I believe we'll be...
Lilnev2000 (Rank #75 with $140,996)
EURO GOING TO 1.40+ VERSUS THE DOLLAR The Federal Reserve proved by cutting the discount and fed funds rates by a half percent, they have not intent of keeping a strong dollar. Look for the dollar index to make new lows in the hours and days ahead and look for the Euro to plow through the 1.40 level versus the dollar. So while the Federal Reserve made the stock markets happy, they have essentially killed the value of the US dollar...
NOVASTAR (NFI) Struggling NovaStar... Is it a burning star, falling into a black hole, or a renewed `Star is Born"?... Will any Fed action today on the prime help the subprime mortgage market? Has this sector bottomed out? Will there be more bad news for NFI? Will NFI find a `white knight' suitor. It came close to this two weeks ago. Will someone see value in going into NFI? Any good news, even rumors, will...
OTHER TOOLS FROM ZACKS
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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.
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Regards and Happy Investing,
Charles Rotblut, CFA
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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 ADRís.
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