Thursday - October 18, 2007
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Yesterday, the Fed cut both the federal funds rate and the discount rate by 25 basis points - a move that was expected.
What was not expected was the hawkish stance taken in the accompanying statement, as well as the dissenting vote by one committee member. You can read my analysis of the Fed's decision on our Analyst Blog.
Regardless of what the Fed does in the future, our Surprise Trader service can help you make money. This is a unique service that identifies those few stocks most likely to rise in the weeks following a positive earnings surprise. For example, we recently added Dryships (DRYS) after the company reported stellar earnings and generated a 19% gain in just two weeks time.
I want to let you know that our special offer on the highly profitable Surprise Trader service is ending very soon. Until midnight Saturday, you can receive alerts on the best stocks to buy following an earnings surprise for 50% off the regular price.
If this is the type of trading service that interests you, I suggest you learn more before the special offer ends Saturday.
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 - Dynamic Materials Corporation (BOOM)
Dynamic Materials Corporation (BOOM) lowered the BOOM on its third-quarter earnings report, beating by 13.7%. The company has comfortably exceeded estimates in four straight quarters. Over the past week, this year's estimates have risen a nickel to $1.95 per share. Analysts expect earnings to grow another 20.4% next year. The stock has an awesome 36% ROE with no debt. Read the full analysis on BOOM now!
Harris Corporation (HRS), which is trading near its 52-week high, will announce fiscal first-quarter results on November 1, 2007. The company recently announced contract wins from the U.S. Marine Corps as well as the U.S. Air Force. HRS also recently declared a quarterly cash dividend of 15 cents per share. Harris offers a current dividend yield of 1.0%. HRS is projected to grow by 15% over the next 3 - 5 years. Harris' return on equity (ROE) of 21% comfortably exceeds the industry's average of 6%. Read the full analysis on HRS now!
Momentum - Matrix Service Co. (MTRX)
Matrix Service Co. (MTRX) has had a very nice move in its stock price over the past two months as analysts began to revise their full-year estimates for the company. On Oct 4, the company beat its earnings estimates and logged a new 52- week high. Prices now look positioned to head higher as they have consolidated and created a nice base above this area. Read the full analysis on MTRX now!
The Andersons, Inc. (ANDE) is harvesting profits for its shareholders. The company has wisely invested heavily in ethanol and is now reaping the rewards. ANDE has blown away estimates in each of the past four quarters. Over the past 90 days, this year's estimates have increased 42 cents to $3.35 per share. The stock has a low price/sales ratio of 0.5, with an ROE of 20%. Read the full analysis on ANDE now!
2. 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:
FED DECISION WILL BRING ON A HOT MARKET
Lilnev2000 (Rank #63 with $178,698)
A FED RATE CUT - WILL IT KILL CONSUMER SPENDING?
Studious of up-trends in stocks with the potential to keep going higher, Don Dreyer (DreyerD) looks for breakout momentum plays with high profitability. As a technical analyst, he considers fundamentals before making a trade, and avoids the volatility of breakout plays thusly: "When the best stocks of the past month take a breather and the volatility dies down, I look to enter. This allows me to select a stop price that isn't going to be violated by any excessive volatility."
DreyerD's current portfolio includes names like General Moly (GMO), Cardica, Inc. (CRDC) and Uranerz Energy (URZ). Take a look at his entire trading history by clicking here.
What specifically do you look for in a stock before purchasing it?
I have mentioned in a previous interview that I am a technical analyst when it comes to assessing stocks. If great chart patterns abound, I lean heavily toward the ones that have better fundamentals.
There are a number of things that finally get me to take the plunge on an individual stock. To begin with, I want stocks that set up with what Van Tharp calls a "high-profitability" set up. The stock has to have dramatically outsized potential relative to risk. I am willing to get stopped out of trades frequently if I have regular huge winners. It is an added bonus if the stock also sets up with a high probability to work in my favor.
To find stocks that have high profitability, I look at those with the highest relative strength compared to the market for the past month. After rocketing into solid up-trends, these stocks have great potential to consolidate briefly and keep on going. My philosophy is to "buy it when it's quiet." When the best stocks of the past month take a breather and the volatility dies down, I look to enter. This allows me to select a stop price that isn't going to be violated by any excessive volatility.
I like stocks that break above the 50-day moving average and slide above it like Edac Technologies (EDAC) recently did. When the moving average is tested from above and holds firm, it is a "tell" that this trade is going to resolve higher. I also like stocks that form pennant or flag consolidations after a big move, like FalconStor (FALC), Chindex International (CHDX) or Methanex Corp. (MEOH).
Stocks that repeatedly find lateral support at a certain price level, like Validus (VR), also appeal to me as well. One of my favorite high profitability set-ups is a stock that breaks above resistance to multi-year or all-time highs. Once in clear blue sky, these stocks can really fly. I like to enter these stocks on a successful test of support at the former high pivot point.
3. ZACKS EQUITY RESEARCH
One of the sectors I expected to deliver good third-quarter earnings was Aerospace, and based on the reports published so far, the companies within the sector are surpassing expectations. Per share earnings growth for Aerospace companies within the S&P 1500 Composite (S&P 500, S&P MidCap 400 and S&P SmallCap 600) is running at 27.4%. (The median company within the S&P 1500 Composite is reporting median per share earnings growth of 10.2%.)
There are two primary reasons for the performance. The first is worldwide economic growth. Third-quarter GDP rose 3.9% in the third quarter, according to initial estimates. Growth in Asia and Europe remains stronger than here in the states. As a result, aviation traffic is up, both for commercial airlines and for corporate jets. The second is sustained defense spending, including homeland security. This not only impacts military jets, but weapons, ammunition and surveillance systems - much of which is made by companies within the aerospace sector.
More. . .
Often, we talk about an industry facing a headwind or benefiting from a tailwind. Given the large number of companies benefiting from the prevailing trends, the aerospace tailwind might be better described as a gust, bordering on a front. Among companies that brokerage analysts have raised 2007 and 2008 profit forecasts on following positive third- quarter earnings surprises are Flir Systems (FLIR), General Dynamics (GD), Goodrich (GR), Lockheed Martin (LMT), L-3 Communications (LLL), Northrop Grumman (NOC) and Precision Castparts (PCP). FLIR is a Zacks #1 Rank ("strong buy") stock, the others are Zacks #2 Rank ("buy") stocks.
The one notable name missing from this group is Boeing (BA). The reason for the company's absence from the group is its new jet, the 787 (aka the Dreamliner). BA pushed back the schedule for delivering the new jet because of delays in obtaining parts in addition to flight control software and systems integrations issues. Although this delay will not impact 2007 profits, it does adversely impact 2008 profits by postponing the timing of when revenues from the new jet will be recognized. More than half of the covering brokerage analysts recently cut their 2008 forecasts, causing a 21-cent drop in the consensus estimate to $5.98 per share.
Given the proximity of 2008, the Zacks Rank is factoring in estimate revisions for both this year and next year. In the specific case of BA, estimates are up for 2007 and down for 2008, both of which contribute to the stock's Zacks #3 Rank ("hold") rating.
BA, GD, LMT and NOC are classified in the Aerospace/Defense industry group. GR and PCP are classified in Aerospace/Defense Equipment. FLIR and LLL are classified in Electronics-Military System
To read the complete Industry Rank Analysis, click here.
Charles Rotblut, CFA is the senior market analyst for Zacks Equity Research.
Real-time market insights from Zacks Equity Research Analysts. Stocks featured recently include VeriSign (VRSN), Qualcomm (QCOM), Sanmina-SCI (SANM) and Priceline.com (PCLN). To see their latest posts, click here.
4. 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: Recent Price Strength
This screen looks for stocks trading in the upper range of their 52-week highs along with attractive Zacks Rank and Broker Ratings. This strategy proves that the "trend is your friend" with a +35.5% return versus +4.9% for the S&P 500 in 2005.
GigaMedia Ltd. (GIGM) , a major provider of online entertainment software and services, is a stone's throw from its 52-week high. The Zacks #2 Rank company has also surged by almost 32% over the past four weeks. Such factors easily pass the parameters of the Recent Price Strength profit track, suggesting strong momentum for GIGM. The company recently got a boost after a major brokerage firm initiated coverage with an "outperform" rating. Previously, GigaMedia announced solid second-quarter results, including revenue growth of 88%, and stated that it expects stronger growth in the second half with excellent momentum into 2008. Continue your research on GIGM now!
Earlier this week, ICON (ICLR) reported third-quarter revenue growth of 38.3% to $166.9 million from $120.7 million year over year. The company also announced that earnings per share improved from the previous year while also eclipsing the consensus. Given the strong results, ICON raised its revenue and EPS guidance for 2007. The performance helped this Zacks #1 Rank company surpass its 52-week high and validate its position in this profit track. With its share price rising over the past 12- and four-week periods, the company appears to have a solid and upward trend in place. ICON provides outsourced development services to the pharmaceutical, biotechnology and medical device industries. Continue your research on ICLR now!
Mettler-Toledo International, Inc. (MTD) is a leading global supplier of precision instruments and services. This Zacks #2 Rank company fulfills this profit track with a current price that hovers around its 52-week high. A price change of more than 7.5% in the past four weeks further supports its encouraging trend. MTD will report its third-quarter results on Nov 1. For its second quarter, the company announced earnings per share of $1.07, which beat the consensus by almost 5% while easily surpassing the year-ago result. Sales advanced to $430.5 million from $389.2 million. Mettler-Toledo is confident in its growth prospects moving forward and raised its 2007 EPS outlook. Continue your research on MTD now!
Navios Maritime Holdings Inc. (NM) is a seaborne shipping company that transports a wide range of drybulk commodities, including iron ore, coal and grain. This puts the company in one of the market's hottest industries, as underscored by its membership in the Recent Price Strength profit track. Navios' share price is a short jump from its 52-week high. Furthermore, over the past four weeks, this Zacks #2 Rank's share price has gained more than 24%, which is evidence of a favorable price trend. Given such factors, Navios Maritime appears to enjoy solid momentum moving forward as it capitalizes on strong industry momentum. Continue your research on NM 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 shows how to create your own price targets and how to estimate a stock's future earnings multiples. Click here.
5. ZacksElite.com TIMELY BUY of the WEEK
Here you'll discover a Zacks #1 Rank stock hand selected by Ben Zacks to outperform the market over the next 30 to 90 days. This week's Timely Buy is...
AU Optronics Corp. (AUO) engages in the design, development, manufacture, assembly, and marketing of thin film transistor liquid crystal display (TFT-LCD) panels and other flat panel displays.
The company's TFT-LCD panels are used in computer products, such as notebook computers and desktop monitors; consumer electronics products comprising mobile devices, digital cameras, digital camcorder, car television, car navigation systems, portable televisions, multiple function machines, printer displays, portable game consoles, and portable digital versatile disk players; and LCD televisions.
In early-October, the company came out and said that it achieved record revenue for the fifth straight month. Sales of NT$53,729 million rose 21.8% sequentially from the previous month. On a year-over- year comparison, consolidated and unconsolidated September 2007 revenues increased significantly by 92.6% and 92.4% correspondingly.
Shipments of large-sized panels(a) used in desktop monitor, notebook PC, LCD TV and other applications for September also set a new record of 8.18 million units, a 13% increase from August 2007 and also a new record-high shipment for seven consecutive months. Shipments of small-and-medium-sized panels presented a 3% decline from the previous month, to 14.16 million units.
Based on the September results, the company estimates that third-quarter revenues have totaled NT$137.96 billion - an increase of 93.5% over year ago levels. Two of the three covering brokerage analysts raised both their 2007 and 2008 profit forecasts in response. The current consensus earnings estimate for 2007 is $1.45 per share, 21 cents above the forecast of just a month ago. The current consensus estimate for 2008 is $2.07 per share, 37 cents above the forecast of a month ago.
From a valuation standpoint, the stock is extremely attractive. AUO is trading at 10.2x next year's estimates of $2.07 per share. Given its 10% long-term growth rate, the stock has a PEG ratio of 1. Despite the stock's runup, there seems to be more upside in the shares.
OTHER TOOLS FROM ZACKS
At the heart of Zacks Investment Research is the Zacks Rank investment philosophy that continues to vastly outperform the market. Our Zacks #1 Rank (Strong Buy) List has produced the following results for investors:
And just as importantly, our #5 Ranked stocks (Strong Sells) have 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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