Monday - October 22, 2007
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The fact that Friday's market tumble occurred on the 20th anniversary of the 1987 crash was merely coincidental. The fact that it occurred following a string of weak earnings reports (e.g. Allstate (ALL), Caterpillar (CAT), etc.) was not.
Bluntly put, third-quarter earnings season is not living up to earlier expectations. Year-over-year earnings growth for the median company in the S&P 500 company is on track currently to come in below 8%. A month ago, expectations called for growth to be closer to 9%.
On the flip side, corporate profits are continuing to expand and even slower growth is still growth. Furthermore, for every company that has disappointed investors, roughly two companies have topped expectations.
For example, Intel (INTC) came in at a penny above the average forecast. Coca-Cola (KO) delivered results that were three cents above projections. Multiple brokerage analysts raised their 2007 and 2008 earnings estimates on both companies, a bullish sign.
October has traditionally been a volatile month for the markets and this year is holding true to form. October has also provided good buying opportunities. Prudence is required, but there are still plenty of stocks that remain attractive for those investors willing to look for them.
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 - Cogent, Inc. (COGT)
Cogent, Inc. (COGT) is on the right side of the law. Strong demand from law enforcement agencies sent revenues soaring.
Over the past 90 days, this year's earnings estimates have increased almost 10% to 37 cents per share. Analysts are pegging earnings to jump 32% next year. The stock has an amazing net profit margin of 28.5%, with no debt on the balance sheet. Read the full analysis on COGT now!
Growth & Income - Potash Corporation of Saskatchewan, Inc. (POT)
Potash Corporation of Saskatchewan, Inc. (POT) recently declared a quarterly dividend of 10 cents per share. POT's dividend yield stands at 0.4%, topping the industry's average of 0.1%. Potash's return on equity of 22% exceeds the industry's average of 14%. In late July, Potash announced second-quarter results, delivering the best quarterly earnings in the history of the company. Current Wall Street 2007 earnings forecasts of $3.27 per share were upped by two cents over the past seven trading days. POT is scheduled to report third-quarter results on Oct 25, 2007%. Read the full analysis on POT now!
Momentum - AK Steel Holding Corporation (AKS)
AK Steel Holding Corporation (AKS) is benefiting from record trading volume, even when the market went in the tank in August. Over the past 60 days, this year's earnings estimates have increased nine cents to $1.38 per share. Analysts expect earnings to jump another 43.6% next year. The company has exceeded estimates by an average of 20% over the past two quarters. Read the full analysis on AKS now!
Value - Vishay Intertechnology, Inc. (VSH)
Vishay Intertechnology, Inc. (VSH)is a cheap stock with improving fundamentals. With the notebook and mobile phone markets doing well, the company is reaping the benefits. The stock is currently trading at 11.3x next year's estimates, which is quite attractive. With demand for its products stabilizing, investors should be able to award a higher multiple for its earnings. Read the full analysis on VSH now!
Zacks Rank Resources
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
Profit Tracks: Return on Equity
One of the quickest ways to gauge whether a company is creating assets or gobbling up investor's cash is to look at their Return On Equity (ROE). The fast moving ROE Profit Track screening strategy from Zacks.com has generated an impressive return of +21.4% in 2005. In 2006, it continued to outperform the S&P 500, returning +27.0% versus the S&P 500 rise of +16.7%.
Here are four stocks that make the grade for the Growth and Income Profit Track:
The Andersons, Inc. (ANDE) is involved in the grain, ethanol and plant nutrient sectors of U.S. agriculture. Earlier this month, the company raised its full-year guidance to between $3.15 and $3.35 per share, versus its previous outlook of $2.90 to $3.15. The increase was attributed to positive market factors in the agriculture industry. The Andersons appears to have momentum moving forward and is creating assets, as underscored by its ROE of 20.35. In addition, its price-to- sales ratio of 0.48 suggests it is a good value. The company is scheduled to report its third-quarter results on Oct 31 Continue your research on ANDE now!
Bunge Ltd. (BG), a leading global agribusiness and food company, will report its third quarter results this week. The company is in one of the market's hottest sectors, benefiting from strong demand and solid industry fundamentals. In addition, with an ROE of approximately 12.3%, Bunge is creating assets and taking advantage of the industry's opportunities. It expects solid market conditions in agribusiness and fertilizer for the rest of 2007. Earnings estimates for the third quarter and full year are both up from three months ago, increasing about 3.6% and 9.6%, respectively. Continue your research on BG now!
Fluor Corporation (FLR) qualifies for this profit track with an ROE of approximately 16%. (This screen demands an ROE of greater than or equal to 10%.) Furthermore, the company enjoys a price to sales ratio of 0.98, suggesting that it's still a good value at a price of more than $160 a share. Fluor is scheduled to report its third-quarter results in early November. During its second quarter report, the company raised its full-year earnings per share guidance to between $4 and $4.20, compared to the prior outlook of between $3.50 and $3.80. Two highlights of the quarter included new project awards of $5.8 billion and consolidated backlog of $25.7 billion, up 43% year over year. Continue your research on FLR now!
The Pepsi Bottling Group, Inc. (PBG) announced a strong third- quarter performance earlier this month, including earnings per share, excluding items, of 99 cents, which bettered the consensus by more than 11%. The result also advanced from the previous year. Revenue gained 8% to $3.7 billion. Due to the strong performance, Pepsi Bottling Group raised its earnings outlook for the year. The Zacks #1 Rank stock watched its earnings estimates for this year appreciate by 4.3% over the past month. PBG makes the grade for this profit track with a ROE of approximately 23% and a price-to-sales ratio of 0.70. Continue your research on PBG 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”.
Kevin Matras outlines a strategy for how to trade the Zacks Rank in a very practical manner for almost anyone's portfolio. Read more...
3. ZACKS EQUITY RESEARCH
Heading into the final full week of October, the equity markets are holding up fairly well considering the current backdrop: oil has hit $90 per barrel, the problem with bad debt is worsening, third-quarter earnings have not been impressive (though still decent), it is uncertain whether the Fed will cut rates at its upcoming meeting and economic growth is slowing. Such events would normally be associated with a market correction; instead the Dow and the S&P 500 remain relatively close to record highs.
Oil is clearly weighing stocks down. What Turkey does or does not do over the next several days will be important. To be clear, speculative trading has also played a role, both in terms of traders going long and being forced to cover short positions.
Bad debt will not occupy headlines as much simply because so many banks have already reported. There may be some discussion of what is now being called "the entity". This is a proposed financial structure designed to purchase the bad debt for which financial firms can no longer find buyers. From all appearances, the entity is a black hole because it is gaining mass by pulling in an ever larger amount of bad debt, and yet we only have theories to support its existence.
More. . .
Even though the number of reports from the financial firms will decrease, the total number of third-quarter earnings will soar. We have confirmed reports from 758 companies, including more than 150 S&P 500 members. Included in this large group are Dow components American Express (AXP), AT&T (T), Boeing (BA), DuPont (DD) and Microsoft (MSFT).
The economic calendar will be pretty light. The first report of note, September existing home sales, will be published on Wednesday. Thursday will feature September durable goods orders and new home sales. The revised University of Michigan consumer sentiment survey for October will be published on Friday.
The Fed will meet on Oct 30 and 31. Bonds have been rallying and the dollar has fallen further on the expectation of a rate cut. I think the Fed will cut by 25 basis points, but it is possible that the committee will leave rates unchanged.
Third-Quarter Earnings Performance
Although good earnings reports were not expected from the banks, the results from the likes of Bank of America (BAC) and Wachovia (WB) were worse than the lowered expectations. Allstate (ALL) was another notable company to have missed earnings, particularly since forecasts had been rising. (Higher costs for catastrophic reinsurance played a role in the miss).
Overall, third-quarter earnings have not been impressive, though still decent. Median earnings growth for companies within the S&P Composite is running at 7%. Positive surprises are outnumbering negative surprises by a margin of 1.8:1. (The numbers do not materially change when calculated solely for the S&P 500.) Simply put, there have been more negative surprises than expected and earnings estimates have been lowered. Nonetheless, corporate profits overall are still growing.
Companies That Could Issue Positive Earnings Surprises during the Week of Oct 22 - 26
Half of the 16 covering brokerage analysts have raised their forecasts on ACE Limited (ACE) over the past few weeks. The consensus estimate now calls for earnings of $1.82 per share versus $1.68 per share, 30 days ago. There have been numerous revisions on insurance companies, reflecting both higher premiums and the lack of severe hurricanes hitting North America this year. ACE has topped expectations during each of the past four quarters by an average margin of 23 cents per share. ACE Limited is scheduled to report on Wednesday, Oct 24, before the start of trading.
The ongoing success of the iPhone and the new iPod touch have helped fueled ongoing optimism about Apple (AAPL). Over the past week, three brokerage analysts raised their fiscal fourth- quarter projections, bumping the consensus earnings estimate up by a penny to 84 cents per share. Cumulatively, fiscal fourth-quarter expectations for the technology company have risen by three cents over the past 30 days. The most accurate consensus is more bullish at 85 cents per share. AAPL has a history of beating expectations, with an average margin of surprise of 23 cents per share over the past four quarters.
Apple is scheduled to report on Monday, Oct 22, after the close of trading.
Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at email@example.com.
Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include Avici Systems (AVCI), Amylin Pharmaceuticals (AMLN), Gilead Sciences (GILD) and Omnicell (OMCL). To see their latest posts, click here.
4. FEATURED EXPERTS
Here we cast the spotlight on timely Featured Expert commentaries that recently appeared on Zacks.com.
Bearish on Banks
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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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.
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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