Top Performing Stocks for the Week Ended Sep 5
The five best performing stocks on the Zacks #1 Rank List last week were: Hanger Orthopedic Group, Inc. (HGR), The9 Limited (NCTY), Big Lots, Inc. (BIG), Knoll, Inc. (KNL) and Urban Outfitters, Inc. (URBN).
Hanger Orthopedic Group, Inc. (HGR) was a Zacks #1 Rank Top Performer for the week ended Sep 5 as shares gained 6.3%. Earnings estimates for this year and next are up 6.5% and 6.8%, respectively, over the past 2 months.
Furthermore, analysts currently expect next year’s earnings to improve approximately 14.6% from this year, which is an encouraging sign for the future.
HGR, which provides orthotic and prosthetic patient care services, has a habit of meeting or beating Wall Street’s quarterly earnings expectations. Over the past 4 quarters, the company has put together an average surprise of 15%.
Most recently, HGR reported an earnings surprise of 25% in its second quarter, as EPS of 25 cents topped the consensus by a nickel. The result also eclipsed the year-ago result of 17 cents. Net sales increased 13% year over year to $181.2 million from $160.4 million.
Shares of The9 Limited (NCTY), an online game operator and developer in China, gained 5.9% last week. Earnings estimates for this top-performing Zacks #1 Rank company have been trending higher for a while, gaining 10.9% in 2 months and 4.3% in 30 days for this year. Next year’s expectations are also on the rise and have increased 2.6% and 7% for this year and next, respectively.
NCTY has now beaten Wall Street’s quarterly earnings estimates for 3 consecutive quarters. In early August, the company announced that it surprised by more than 27% in the second quarter as EPS reached 61 cents. Meanwhile, net revenues soared 69% year over year to US$66.3 million. Its revenues and net income were both records. NCTY attributed its results to the continuing growth of Blizzard Entertainment®’s World of Warcraft® and Soul of The Ultimate Nation.
Big Lots, Inc. (BIG) reported solid fiscal second-quarter numbers in late August. The closeout retailer also raised its EPS guidance for the full year. Earnings per share from continuing operations reached 32 cents, exceeding the consensus by a little more than 18.5%. BIG has now amassed an average surprise of 17.5%. Net sales advanced 1.9% to approximately $1.1 billion.
Thanks to its solid fiscal second-quarter numbers, BIG raised its 2008 earnings guidance to between $1.90 and $2. Over the past month, earnings estimates are up 5.3% for this fiscal year and 6.5% for next fiscal year. Analysts also expect an EPS improvement of about 8.1% next year over this year. Shares improved by 4.5% last week, which was enough to make the Zacks #1 Rank Top Performers List.
Earnings estimates for Knoll, Inc. (KNL) remain above levels from 2 months ago by 10.5% for this year and 5.6% for next year. The furniture maker made the Zacks #1 Rank Top Performers List last week as shares improved 3.7%. The company has a good record of meeting or beating analysts’ earnings expectations, and has marked a surprise of 11.2% over the past 4 quarters.
The company’s second-quarter report from July included adjusted earnings per share of 49 cents on net sales of $292.5 million. The earnings result topped the consensus by 22.5% while easily improving upon the year-earlier result of 37 cents. Net sales moved higher by 7.5%. KNL attributed results to its diversification strategy that focused on high design content businesses and away from dependence on North American systems sales.
Urban Outfitters, Inc. (URBN) is a Zacks #1 Rank Top Performer as shares gained 2.6% last week. Over the past month, earnings estimates for the fiscal years ending January 2009 and January 2010 are up 8% and 5.9%, respectively. In addition, analysts currently expect next fiscal year’s profit to advance by more than 20% over this fiscal year.
URBN is performing better than most retailers, and enjoyed a boost last week after an analyst offered a favorable view of the fiscal third quarter. The company has put together a solid streak of better-than-expected earnings, and enjoys an average surprise of 12.6% over the past 4 quarters. In its second quarter, URBN reported earnings of 33 cents per share, which topped the consensus by almost 14%. It also marked a solid year-over-year advance from 19 cents.
Sales advanced approximately 30% to $454.3 million. Same-store sales were up 13%.
James Giaquinto is an Editor at Zacks Investment Research for more information please visit http://www.zacks.com
Do Value Plays Still Exist in the Hot Alternative Energy Sector?
Alternative energy, which is defined as solar, wind, biofuels and other energy that is not fossil fuels, is hot right. But now that alternative energy has become a glamour sector, and investors have piled in, many of the companies have seen their shares rise sharply.
Some of the solar stocks, for instance, as the stocks have moved higher, are now trading with sky high price-to-earnings ratios.
First Solar Inc. (FSLR), for example, is a fast growing solar company, where analysts expect year-over-year earnings growth of 138.90%. It’s also a Zacks #1 Rank (Strong Buy) stock. But the stock is far from a value pick, as it trades at a whopping 47.9x forward earnings.
Are there any alternative energy companies with the same strong fundamentals as First Solar, but that are trading at a discount to the sector?
Believe it or not, value does exist. Even with the big run-up in the sector, I still found three alternative energy companies with value fundamentals which are also Zacks Rank #1 or #2 stocks.
Three Stocks with Strong Value Fundamentals
ReneSola, Ltd (SOL) is a Chinese solar wafer manufacturer. It is a Zacks #1 Rank (Strong Buy) stock. The company has beaten Wall Street estimates 2 out of the last 4 quarters by an average of 19.63%.
It also has strong value fundamentals. Its forward P/E is 9.62 and its price-to-book (P/B) is 2.32. Read the June 28 Zacks Analyst Research Report on ReneSola.
Gushan Environmental Energy Ltd. (GU) is a Chinese producer of biodiesel and related products. It is also a Zacks #1 Rank (Strong Buy) stock. The company has surprised on estimates the last 2 quarters by an average of 5.28%.
GU has solid value characteristics. It trades at 9.4x forward earnings and has a P/B of 2.57. Read the July 7 Zacks Analyst Research Report on Gushan Environmental Energy.
Aventine Renewable Energy, Inc. (AVR) is an Illinois-based producer of ethanol and related by-products. It is a Zacks #2 Rank (Buy) stock. It has beaten Wall Street estimates 3 out of the last 4 quarters by 288.89%.
AVR, like the other two companies, also has solid value fundamentals. It trades at 13.4x forward earnings and its P/B is only 0.79. Read the Aug 11 Zacks Analyst Research Report on Aventine Renewable Energy.
It Pays To Look Around
You may have to dig a little deeper to find value stocks in the alternative energy sector. A good resource to begin your search, which I used to find some of the companies in this article, is the Zacks #1 Rank list which will give you ideas in the sector and then you can expand your search from there.
Value exists even in the glamour investing sectors like alternative energy. It’s just not always staring you right in the face.
Tracey Ryniec is an Editor at Zacks Investment Research for more information please visit http://www.zacks.com
Healthy Profits From Healthcare Stocks
Elasticity of demand is a concept that resides at the core of economic fundamentals. Simply stated, elasticity demand measures customer sensitivity to fluctuations in price. If price adjustments lead to a change in purchasing behavior, demand is considered to be elastic.
Demand sensitivity is a critical factor when evaluating a companies ability to navigate economic volatility, a dynamic that has become particularly relevant within the last year as our economy has muddled through a number of challenging circumstances.
Automobile makers are a good example of an industry that has been stung by demand issues. General Motors has been suffering huge losses due to higher energy prices, as its customers have shifted away from expensive, gas-guzzling SUV’s. Many retailers have also been suffering as cash and credit strapped consumers look for methods to cut costs and save money.
Elasticity and Healthcare
But in spite of the challenging environment, certain segments of the market have held up quite well and continue to grow profits. One of the best has been the healthcare sector, which has a number of factors working in its favor.
There is very little elasticity in this market. Wether oil prices are high and food costs are up, human beings will always need healthcare services. Demographics are also working in this industries favor, with a large portion of the domestic population, baby boomers, heading into retirement and stimulating demand for healthcare services.
So on that note, lets shift gears and look at some healthcare companies that have been scoring big gains and posting impressive results in this tough market.
Excellent Healthcare Stocks
ICON Plc (ICLR) operates as a contract research organization to pharmaceutical companies in the United States and Europe. The company’s July 22 second-quarter results were awesome, including 49% growth in revenue and earnings of 62 cents per share, ahead of analyst estimates of 59 cents per share. The next-year estimate is pegged at $1.61 per share, a 27% earnings growth projection.
Healthspring Inc. (HS) operates as a managed care organization in the United States. The company’s share price has had a great run in 2008, climbing from a low just over $13 to a recent high over $20. Analyst estimates have risen with the stock, with the current-year estimate advancing to $2.12 per share from $1.90 per share 60 days ago.
Almost Family, Inc. (AFAM) has also had a great year, posting impressive gains and driving its share price higher. The home healthcare services company reported awesome second-quarter results on Aug 6 that included a 95% jump in income, to $3.9 million from $2 million in the same period last year. The current-year estimate is up to $1.89 per share from $1.51 30 days ago.
Kendle International, Inc. (KNDL) is a clinical research company providing services to pharmaceutical companies worldwide. This is another company that has done well in 2008, as its stock price has advanced in tandem with higher earnings estimates. The current-year estimate stands to $2.04 per share, up from $1.89 per share 30 days ago. The next-year estimate is pegged at $2.51 per share, a 23% earnings growth projection.
Conclusion
Different industries will fall in and out of favor as economies rotate through their normal cycles. That is what it pays to be sector-centric and focus your attention on the segments of the market that have the ability to stay healthy and grow profits when other companies will struggle.
Michael Vodicka is an Editor at Zacks Investment Research for more information please visit http://www.zacks.com
New Top 5 Sectors
It’s been said that roughly half of a stock’s price move can be directly attributed to its group.
A strong Sector or strong Industry will have more of its companies moving higher than a weak Sector or weak Industry, because, by definition, a Sector or Industry is simply a group of like-minded stocks.
If the majority of stocks are going down in an industry, it can’t be a strong industry. But if more stocks are going up, it is a strong industry.
I’ve done some testing and found that, oftentimes, just getting into an average stock in a strong group will often outperform the best stocks in a troubled group.
This doesn’t mean you can just pick anything and you’ll make money. Far from it. But it illustrates how powerful the underlying group is to the success of your stock picking.
Defining the Top Sectors
There are several ways you can define the best Sectors or Industries.
One of my favorite ways is to look at the percentage of stocks trading within 10% of their 52-week highs.
A lot of people like looking at the percentage price change over the last 12 or 24 weeks. And that’s fine – but I don’t think its sensitive enough.
Take the Oil and Energy sector for instance. If you look at it based on its 24-week or 12-week price performance – its one of the top sectors. But it’s actually one of the worst price performing groups over the last 4 weeks.
The reason why the 12- and 24-week don’t reflect this is because if the gains were so large early on, then even a large pullback will be lost within the larger run-up that preceded it.
But by checking their position in comparison to their 52-week highs, a simple 10% pullback from their 52-week highs will show up. And if more and more companies within that group are pulling back from their highs by more than 10%,
it’ll be reflected in that Sector’s rating and alert the investor that something systemic might be happening to that group as a whole rather than something that’s just stock specific.
And like I said at the beginning, since roughly half of a stock’s price performance can be directly attributed to the group that it’s in, it’s important to be able to identify the best Sectors quickly and accurately.
So what are the New Top 5 Sectors?
The top five Sectors based on the percentage of stocks at or within 10% of their 52 week highs are:
1. 1 Finance 21%
2. 2 Aerospace 19%
3. 3 Retail-Wholesale 17%
4. 4 tie between:
Consumer Staples 16%
Construction 16%
I should note that the percentages are awfully small. Prior to this year, a Sector would typically need more than 50% of its stocks trading within 10% of their 52-week high to get into one of the top spots. These lower numbers are just a reflection of the kind of market we’re in.
By the way: the Oil and Energy sector – dead last.
Finding the Best Stocks in the Best Groups
Most great stocks come from great groups. And they often have some great peers as well.
If you find yourself in a killer trade, take a look at the characteristics of THAT STOCK and then hunt within its group to find OTHER STOCKS that share the same characteristics.
Does a certain outstanding stock exhibit great sales growth? I’m sure there are at least a few within its group that are also showing similar numbers.
What about increasing margins? If the stock is doing well, it’s likely that the industry itself is experiencing meaningful increases in margins too.
This type of screening is often called ‘modeling’. Figure out the components of what makes something successful and concentrate on that.
If you see great stocks in great groups while you’re bemoaning your misfortune in laggards or non-movers, find what stocks are successful and model them.
Here are a few stocks from each of those current top sectors (for Tues, 9/9/08):
HCBK Hudson City Bancorp, Inc. - Finance
COL Rockwell Collins, Inc. - Aerospace
FRED Fred’s Inc. - Retail-Wholesale
PEET Peet’s Coffee & Tea, Inc. - Consumer Staples
DHI D R Horton, Inc. - Construction
Kevin Matras is the Research Wizard Product Manager and weekly contributing Editor at Zacks Investment Research who creates and writes the Zacks Commentary Screen of the Week. For more information, visit http://www.zacks.com
Screen of the Week: Cash is King
Earlier this year, I read a news story about how Bernanke and Greenspan were both saying that many companies had lots of cash on the books. They also said that businesses were in better shape now than they were during the last two economic contractions.
The article was quick to point out that they were excluding Financial Companies. But they also made it a point to say that many companies across the rest of the industries (from Cisco (CSCO) to Coca-Cola Co. (KO) to use their example) have ’socked away’ cash, reduced their debt and cut inventories.
Granted, a lot has changed since the beginning of the year – but we got a chance to see just how much money some companies have on hand this week when Microsoft (MSFT) announced a $40 billion stock buy-back plan. Nike (NKE) followed suit and announced a $5 billion repurchase program. And then Hewlett-Packard (HPQ) did the same with their own $8 billion dollar buy-back program. (This is HPQs third buy-back program in two years.)
So all that being said, I decided to put together a screen that looks for companies with solid cash positions.
Let me note that I’m not doing this in hopes that these companies initiate repurchase programs of their own, even though that could be a benefit. I’m doing this because, as the credit market tightens, the companies with the strongest cash positions, coupled with low debt, reduced inventories and the like, will be in the best position to weather a financial crisis.
And today’s eye-popping numbers made me think that in spite of all the turmoil we’ve seen in the stock market, some companies should do just fine due to their healthy balance sheets.
So here we go:
• I first looked for companies with Cash and Marketable Securities that are higher now than they were last year at this time. Having a strong Cash position means companies will not have to depend on banks to finance their operations, especially in this tight credit market.
• I also want the Debt to Total Capital to be less than the 5 Year Average Debt to Total Capital. Companies able to reduce their debt positions from their historical ratios is a sign of strength and a healthy balance sheet.
• I want the Cash Flow to be greater than the Cash Flow from Last year. This too is a sign of financial health.
• I also want to see Inventories below last year’s levels. Turnover of inventory (raw materials, unfinished goods and finished goods) is a primary way a company makes money. High levels of inventory for long periods of time is usually not good sign.
• I also want the stocks to show Annual EPS Growth Rates that are greater than the Median for their respective Industries. This lets us focus on the top half of the companies in their peer group.
• Lastly, I want Next Year’s EPS Growth Rate to be better than last year. Companies expecting growth in this current economy are the ones to favor.
And all of the above criteria are applied to stocks trading at or above $5 and have an average daily trade volume of at least 50,000 shares or more.
Here are a few stocks from that list for Tuesday, 9/23/08:
AYI Acuity Brands, Inc.
DMND Diamond Foods, Inc.
DV DeVry, Inc.
LVB Steinway Musical Instruments, Inc.
SEAC SeaChange International, Inc.
Kevin Matras is the Research Wizard Product Manager and weekly contributing Editor at Zacks Investment Research who creates and writes the Zacks Commentary Screen of the Week. For more information, visit http://www.zacks.com.
Indiscriminate Selling in Commodities
I’m surprised by the indiscriminate selling in commodities and commodity-related stocks.
Were there bubbles? Yes, but demand remains high and product shortages continue to exist.
For example, erratic deliveries of steel have caused an acquaintance of mine to put his employees on flexible work schedules. According to him, steel mills are not sticking to regular production schedules of the type of metal used for the packaging products that his company manufactures.
Not surprisingly, his customers are unhappy. But, because they lack a cost-effective alternative, they have no choice but to accept the higher prices and irregular production schedules.
Then there is fertilizer. Employees of fertilizer company Potash (POT) are on strike at a time when there continues to be a shortage of potash - a key ingredient for fertilizer. The company told Standard & Poor’s that the strike should only affect non-agricultural customers. That may not sound like a big deal, until one considers that there is no room for supply disruptions across the entire industry.
Still, shares of CF Industries (CF) and other fertilizer stocks are getting knocked around because of the overall weakness in commodity stocks. For demand destruction to occur, one would have to assume that people are going to stop eating, ethanol is no longer going to be subsidized or a replacement for fertilizer has been found. I just don’t see this happening.
Another example is natural gas. Natural gas prices have plunged by nearly 50% since early July. Yet, worldwide energy usage is growing. Plus, the Farmer’s Almanac is predicting a “numbing” winter.
Perhaps traders think that the NOAA’s forecast for above normal temperatures will be the correct one. My best guess is that those of us living in the northern states will be bundling up and complaining about our heating bills.
Of course, it is important to realize that even with the pullback, just about all commodities are still expensive. Here in the Chicago area, gas stations charge around $4 for a gallon of unleaded. Lake County, where I live, is coping with a dramatic increase in the price of road salt. Local officials say that this problem affecting many municipalities across the country.
Given the slowing economies of the Western World, some weakness in the commodity prices is logical, but we are a long way from the perceived demand destruction that seems be influencing some traders. This is why I am looking for the opportunity to add more commodity stocks to the Focus List.
The Financial Crisis
On Wednesday, I discussed the ongoing financial crisis in my Industry Rank column. In the second half of a podcast published on Thursday, I further discussed the banking industry’s problems with Chuck Jaffe of Marketwatch.
In summary, I believe the financial crisis, and the housing slump, will continue into next year. Here are some reasons why:
• The FDIC’s insurance fund’s reserve ratio dropped so low, 1.01%, that it is being forced to develop a plan for replenishing the safety net for depositors.
• Banks will likely have to pay higher fees to the FDIC, at the same time they are coping with tighter net interest margins.
• Nearly 1 million petitions for bankruptcy have been filed during the past 12 months; personal bankruptcies are up 28%.
• Net charge-off rates for Capital One (COF), and probably many other credit issuers, have been rising for several quarters.
Staying on the subject of banks, I want to mention the creativity shown by National City (NCC).
NCC is offering customers $200 to close their home-equity lines of credit.The bank is also waiving the $350 early termination fee. It is an interesting attempt to avoid further charge-offs, but my guess is that it won’t have any positive impact. Those who have the cash to pay off their home equity loans are not likely to default. And those who are at a risk of default probably don’t have the cash to pay off their loans.
The more likely scenario is that NCC is trying to engage in a game of hot potato, by which its borrowers move their home equity lines to another lender. For someone who is cash strapped, $200 helps, but not enough to keep them from falling behind on their payments.
The Markets
Volume picked up this week, as was expected.
Rather than focusing on weakening inflationary pressures, traders instead viewed the falling commodity prices as another sign that the economy is having problems.
The Fed’s observation that “economic activity has been slow” didn’t help matters. Selling intensified on Thursday in response to lousy retail sales numbers and fears about Friday’s employment numbers.
Last week, I called for choppy markets and this is what we are seeing.
My expectation is that the economic news won’t be very good, on balance, for a while. But, also I think we are closer to a recovery than many other developed nations. It’s a good market for long-term investors.
Remember, those who try to time the markets are often the ones who take large losses and miss out on the big gains. Conversely, the most successful investors never stop researching stocks.
Focus List Updates
We removed Central European Distributors (CEDC) from the portfolio. The fundamentals continue to look fantastic, but the selling pressure on the stock has been relentless.
The stock has been adversely affected by the Russian invasion of Georgia. Although CEDC is based in Pennsylvania and does a large amount of its business in Poland, it’s still being adversely affected by the rotation away from Russian stocks.
Charles Rotblut is the Vice President of Web Content for Zacks Investment Research and the Senior Market Analyst for Zacks.com. He oversees the editorial staff, manages the market-beating Focus List, Timely Buys and Top 10 portfolios, and plays an instrumental role in the development of new products. For more information, visit http://www.zacks.com
Swing Month
The Stock Trader’s Almanac calls it the worst performing month of the year, but that is not always the case. During the late 1990s, September was great for stocks. The past couple of Septembers have also yielded positive returns.
The month corresponds with the peak of hurricane season, however. Though oil prices have pulled back from their record highs, any disruption to supplies could send crude prices gushing. Let’s hope the damage from Gustav is minimal.
Regarding the current economic environment, the general expectation is that data will not be very good over the next several months. But, relative to other periods of weakness, the economy is in pretty decent shape. Hidden behind the headlines is the simple fact that unemployment remains at favorable levels. Plus, most homeowners are current on their mortgages.
On a technical basis, we are entering September in a low-volume trading range. Therefore the charts aren’t telling us very much.
My best guess is that we will probably see more choppy markets in September and throughout the fall. Nonetheless, the U.S. markets appear to be the best game in town. Therefore, keep money allocated to U.S. stocks. Long-term investors will be rewarded for doing so.
The Markets
Since I’ve been talking about the late-summer trading environment during the past couple of weeks, I thought it might be more useful to show a chart of SPDRs (SPY), the ETF that tracks the S&P 500, rather than the index itself. Doing so will allow you to view the volume trends that I have been noticing.
Recent Additions to the Focus List
On Thursday, we added four stocks to the Focus List - the most we have added on a single day in quite some time.
There were two primary reasons for this. The first was that the current market environment has discounted companies with positive business momentum and rising earnings estimates. The second was that we saw the opportunity to improve the diversification of the Focus List.
The new additions are Edison International (EIX)- an electric utility, Kansas City Southern (KSU) - a railroad, Fluor (FLR) - a construction and engineering firm, and Metalico (MEA) - a scrap metal processor.
At 29 stocks, the portfolio is still a little smaller than I would prefer. My preference not to overweight basic materials and energy is keeping us out of several Zacks #1 Rank (”strong buy”) and Zacks #2 Rank (”buy”) stocks. There are others, like Visa (V), that we want to look at closer before making a final decision.
My intention is to use any additional market weakness as a buying opportunity. Of course, we will execute stop losses when necessary.
Priceline.com
We sold Priceline.com (PCLN), a stock that was added to the Focus List in Nov 2005. Our concern was that the weakening global economic environment has increased the downside risk for the stock. Given this scenario, we saw little reason not to lock in a nearly 300% return.
Charles Rotblut is the Vice President of Web Content for Zacks Investment Research and the Senior Market Analyst for Zacks.com. He oversees the editorial staff, manages the market-beating Focus List, Timely Buys and Top 10 portfolios, and plays an instrumental role in the development of new products. For more information, visit http://www.zacks.com
Welcome To The Trade Natural Gas With The UNG
We have decided to relaunch our Trade Natural Gas with Stock and Options using the UNG ETF. We have relaunched our natural gas trading website with WordPress instead of a normal html site or forum. This will allow us to update the information faster and keep our natural gas traders up to date with the latest information.
The UNG allows traders to trade the price of natural gas with stock and options instead trading commodity futures. The UNG ETF is an Exchange Traded Fund that trades like a stock but tracks the price of natural gas in the commodities market. This allows the normal investor to make money trading natural gas prices.
