By Kevin Matras
December 22, 2009

With the market seemingly stuck in a relatively tight trading range for the last few weeks, and the Dow confined to between 10,200 on the low side and 10, 500 on the high side, I thought I’d go over a strategy to position yourself for what could be an impending breakout in either direction. And that strategy is called a Strangle.

If you expect nothing to happen or expect it to stay within a range for a while, you can write a strangle and collect the premium on both sides. Today, we’re going to talk about buying a strangle with the idea that the market will breakout of its range. Which way it breaks out doesn’t matter. Just as long as it does.

First off, a strangle is when you have both a call and a put option with different strike prices (both out-of-the-money) and with the same expiration dates. In this example, let’s focus in on the ProShares Ultra Dow ETF (DDM). The Dow itself is trading at around 10,400, with upside resistance at 10,500 and downside support at 10,200. The ETF is trading at $43.78, with upside resistance at around $45 and downside support at $42. So…if you expect a breakout to happen pretty soon, let’s say you opt for the February options with 60 days worth of time until expiration.

As of Monday’s close (12/21/09), the $45 call was at $1.80. And the $42 put was at $1.90. That means the trade costs $3.70 (or $370) to put on.

The way you win on this is if DDM is above $45 or below $42 at expiration. But, don’t forget, you’ve paid a premium on both sides. So the stock must have moved enough to offset this premium to make money.

On the upside, it needs to be above $48.70. Why? Because you paid 3.70 or $370. So you’ll need to see the call be $3.70 in-the-money to offset the paid premium on the call and the worthless put to get in the black. Sans commissions, everything above that is profit. On the downside, it needs to be below $38.30. Everything below that is profit.

If it breaks out by less in either direction, you’ll recoup some of what you paid. But that means you’ll still have a partial loss. If it trades between those strikes, you’ll lose all of what you paid. But for every $1 above or below those thresholds, that’s $100 profit for each strangle you put on. If you had 5 strangles at $370 per, that’s a cost of $1,850. If the DDR hit $50, that’s a $650 profit or a 35% return.

This strategy is pretty straightforward. That’s the beauty. Define a range. Buy options on either side if you expect a breakout. And then sit back and don’t stress about the direction. (But as time passes, you may find yourself stressing if nothing is happening.) Of course, you can always get out ahead of time if the trade is not working. Or you can leg out of the other side once the breakout begins. This will increase your profit potential because you’ll have a smaller loss on the losing side.

But if you’re looking for a way to catch a breakout from a trading range, but you’re not sure which way it’ll be, you can use a strangle and position yourself for either direction.

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.

By Dirk Van Dijk
December 18, 2009

Earnings Preview 12/18/09

Next week will be a light one on the earnings front, with a total of only 13 companies reporting, including 6 S&P 500 firms. The third quarter earnings season is over, and these are the early vanguard of the fourth quarter earnings as all are reporting quarters that ended in November. Among the more noteworthy names that are going to report are; ConAgra (CAG), Walgreen Co. (WAG) and Micron Technology (MU). There will be several potentially market moving economic reports.

Monday
* Nothing of significance.

Tuesday
* The final look at 3Q GDP comes out. In the first go around, growth was estimated at 3.5%, but that was cut to 2.8% growth in the second look. The consensus is for a slight further downgrading to 2.7% growth.

* Existing home sales are expected to rise to a seasonally adjusted annual rate of 6.30 million for November, up from 6.10 million in October. Of particular interest will be the level of inventories relative to the sales rate (months supply), as that will give an indication if prices are going to continue to stabilize or start a second down-leg. Existing home sales, while accounting for the vast majority of total home sales in the country, have only an indirect effect on the economy.

Wednesday
* Personal Income is expected to increase by 0.5% for November, on top of a 0.2% increase in October. Personal Spending is expected to increase by 0.7% in November, on top of a 0.7% increase in October. If, as expected, personal spending increases more than personal income, then the savings rate will fall from its 4.4% level in October. In the short run, a falling savings rate is good for economic growth, but over the long term, a very low savings rate is a recipe for disaster. The 4.4% rate is already dangerously low.

* The University of Michigan Consumer Sentiment numbers are expected to come in at 73.9, up from 73.4. Generally this has proved to be more of a coincident indicator than a lagging one, but it might give some insight into people’s intentions for holiday shopping.

* New Home Sales are expected to have risen to an seasonally adjusted annual rate of 440,000 from 430,000 in October. While just a small fraction of used home sales, new home sales are vital to the economy as they lead directly into Residential Investment, which is the part of GDP that tends to lead the economy both into and out of recessions. Normally the ratio of used home sales to new home sales is about 6:1, but if both the new and used home sales expectations are on the mark, the ratio will be over 14:1. This is probably the most important report of the week (unless there is a huge surprise on the Final GDP numbers).

Thursday
* Weekly initial claims for unemployment insurance come out. The have risen slightly in each of the last two weeks, but before that were in a very steep downtrend. Last week there were 480,000 initial claims. Look for the decline to resume. Continuing claims have also been in a steep downtrend of late, even if one factors in the extended claims paid by the Federal government as part of the Stimulus Program, but that also reversed last week. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. Last week, regular continuing claims were 5.186 million, while extended claims (paid from Federal ARRA funds) were 4.729 million. Make sure to look at both sets of numbers!

* The Index of Leading Economic Indicators is expected to post a gain of 0.7% following a 0.3% gain last month.

* Massive logistical efforts underway involving transport of billions of packages from the Arctic. Low levels of polar ice cap considered unlikely to impede operations, in part due to Rudolf Technologies guidance systems.

Friday
* Merry Christmas

Potential Positive Surprises
Historically the best indicators of firms likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. Some of the companies that have these characteristics include:

Micron Technology (MU) is expected to report earnings of $0.07 vs. a loss of $0.72 last year. Last time out, they posted a slight positive surprise and the analysts have more than tripled the estimates for this quarter over the last month (OK, to keep it in perspective, they only increased it by $0.05 — fun with percentages near zero). MU is a Zacks Rank #3 stock.

Walgreen’s (WAG) is expected to report earnings of $0.48, up from 0.41 a year ago. Last time out, they beat by 12.8%, and over the last month analysts have raised their estimates for the about-to-be-reported quarter by 1.28%. The stock holds a Zacks Rank #2.

Potential Negative Surprises
In keeping with the overall very positive tone of this earnings season, the potential negative firms are less clear cut. However:

Commercial Metals (CMC) is expected to post a loss of $0.03 a share, versus earnings of $0.49 a share a year ago. However, last time they did post a positive surprise, beating by 6.0%. The mean estimate for the quarter is down 3.33% over the last month and the stock has a weak Zacks Rank #5.

Finish Line (FINL) is expected to lose $0.10 a share this year versus a loss of $0.16 last year. They reported in-line last time out, but analysts have cut the estimate for this quarter by 9.19% over the last month. The stock holds a Zacks Rank #4.

By Kevin Matras
December 15, 2009

After a fantastic 9 months, I thought now would be a good time to talk about paying attention to your portfolio – keeping an eye on your holdings, monitoring your watchlists, pulling profits and getting rid of losers or underperformers. It’s ironic but during great times like these, when it seems like all of your stocks are going up, investors can form bad habits or get lazy. Even bad decisions can sometimes get rewarded in a bull market.

But when the market stops going straight up, that’s when you can really get into trouble. So you need to keep paying attention and exercise common sense over your portfolio. And as the title suggests, there’s no particular magic in making money (or keeping it), just good old-fashioned common sense. The trick is exercising it! Deciding on what stocks to get into is, of course, important. But once you’re in, it doesn’t mean your work is over. Whatever your stocks are, whether they be actual holdings or stocks you’re considering, don’t stop monitoring the fundamentals of those stocks.

What I mean is: If one of the criteria for getting into a stock in the first place was that it had a low Debt-to-Equity ratio, but you then saw that ratio change to an unacceptable level (a level that would not have put it on your radar screen in the first place), then you should consider getting out of that stock and looking for a new stock to replace it. One that currently does meet your criteria.

For instance, let’s say that you use the Zacks Rank as a timing indicator and you look at the Zacks #1 Rank List for immediate movers. If in a few weeks, earnings estimates are moving down and Zacks Ranks it a Zacks #4 (’sell’) Rank, take note and consider dumping it. Sure it was a Zacks #1 (’strong buy’) Rank, but it’s not a Zacks #1 Rank (or Zacks #2 (‘buy’) Rank) anymore. Think about it, if you never would have gotten into a Zacks #4 Rank in the first place, why would you now want to hold onto one? That’s using your common sense.

What if you’re a momentum investor and you generally look for stocks trading within 10% of its 52-week high (a great item by the way) and it suddenly falls below that level? Well, if you’re only interested in focusing on stocks within 10% of its high and it’s now 15% or 20% (or more) off its high … then move on. The momentum has seemingly shifted and so should your focus.

And don’t convince yourself to hang onto your losers either. If a company reported bad earnings and the stock is down –8% to -10% against you, get out. Don’t let your love of a stock (or denial) ruin your portfolio. Almost every big losing trade anybody has ever had in their portfolio (-50%, -60% or even –90% or more) could have been exited when they were just beginning to crumble.

If you get out and it zips back up, you can always get back in if you want. But if it keeps going down, you’re just losing more and more money. And the price you could have gotten out at earlier is now a price you only wish you could get out at now.

So once you’ve found the items that have proven to work well for you in picking profitable stocks, be sure to monitor those values. And if they no longer meet the winning criteria, get rid of them fast and find new ones that do.

Here are 5 new stocks that look great and that are currently coming up on some of our best screening strategies that come loaded with the Research Wizard.
ARD – Arena Resources, Inc.
ATNI – Atlantic Tele-Network, Inc.
GGG – Graco Inc.
NEU – NewMarket Corporation
PRA – ProAssurance Corporation

Once you get into a stock, keep monitoring them. Pay attention to what got you into them in the first place. If your stocks no longer have those values, consider replacing them with new ones that do.

Remember, the key to successful screening is in discovering those screens that have produced profitable results in the past. And that’s exactly what you get with the powerful Screening and Backtesting ability of Research Wizard.

Take note: Backtesting isn’t available in all screeners (in fact it’s rarely available in any screener) but it is available in the Research Wizard.

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.

By Dirk Van Dijk
December 11, 2009

Earnings Preview 12/14 – 12/18

Next week will be a light one on the earnings front, with a total of only 40 companies reporting, including 9 S&P 500 firms. Among the more noteworthy names that are going to report are: Federal Express (FDX), General Mills (GIS) and Nike (NKE). There will also be several potentially market-moving economic reports.

Monday
• Nothing of significance.

Tuesday
• The Producer Price Index (PPI) is released for November. The headline PPI is expected to show an increase of 0.9%, on top of last month’s 0.3% increase. However, most of that is expected to come from food and energy price increases. The core PPI is expected to post an increase of just 0.2% after falling 0.6% in October.
• The Empire State Manufacturing Survey is expected to show that manufacturing activity in the New York area increased at a slightly faster pace in its December survey than it did in its November survey, with a reading or 25.0, up from 23.5.
• Capacity Utilization is expected to have risen to 71.1% overall in November, up from 70.7% in October. This is still an extremely low reading, but has been showing signs of rebounding in recent months. If the consensus expectations are met it will be the 5th straight monthly increase since it bottomed in June at 68.3%, an all-time record low. Total Capacity Utilization normally runs at around 80% in a healthy economy. Manufacturing Capacity utilization was 67.6% in October, up from a low of 65.1% in June. This report is far more important than the amount of attention it usually receives.
• Industrial production is expected to have expanded by 0.6% in November after a 0.1% increase in October.

Wednesday
• Housing Starts are expected to rebound to an annualized rate of 575,000 after a very disappointing level of just 529,000 in October. Recent strength in new home sales have given builders a bit more leeway in starting additional homes.
• Building Permits, the best indicator of future housing starts, are expected to rise to a 570,000 annual rate, up from 552,000 in October.
• The Consumer Price Index (CPI) will probably rise by 0.3% in November on a headline basis after rising 0.2% in October. Core (ex-food and energy) CPI is expected to be up a more tame 0.1% after a 0.3% increase in October. Within the report, pay special attention to how Rent and Owner’s Equivalent Rent are doing. Together they make up almost 30% of the total CPI and almost 40% of the core CPI, and should be keeping overall inflation in check.
• The Federal Reserve finishes up their two-day policy meeting. There is almost no chance that they will raise the Fed Funds rate from its current 0 to 0.25% range. Economists will be reading the tea leaves in the Fed statement closely for any change in tone that might indicate when the Fed will start tightening again.

Thursday
• Weekly initial claims for unemployment insurance come out. These have been in a steep downward trend of late, although still at historically high levels. Last week there were 474,000 initial claims — the first increase in five weeks. Look for the decline to resume. Continuing claims have also been in a steep downtrend of late, even if one factors in the extended claims paid by the Federal government as part of the Stimulus Program. Look for a further decline in regular continuing claims from the current level of 5.157 million, offset by a smaller rise in the extended claims which now total 4.586 million.
• The Index of Leading Economic Indicators is expected to post a gain of 0.7% following a 0.3% gain last month.

Friday
• No reports of any significance.

Potential Positive Surprises
Historically, the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. Some of the companies that have these characteristics include:

Federal Express (FDX) is expected to post EPS of $1.06, down from $1.58 last year. That low expectation sets it up for a positive surprise. Last time out they just met expectations, but the stock holds a coveted Zacks Rank #1 and over the last month the expectations for the about-to-be-reported quarter have jumped by 25.7%.

General Mills (GIS) is expected to report EPS of $1.45 vs. $1.36 a year ago. The mean estimate for the quarter has edged up by 0.8% over the last month and last time out the company posted a positive surprise of 24.3%. The stock holds a Zacks Rank of 2.

Joy Global (JOYG), the maker of mining machines, is expected to see EPS drop to $1.01 from $1.23 last year. However, last time out it posted a 26% positive surprise and the estimates for this quarter have edged up by 0.8% over the last month. The stock holds a Zacks Rank of 2.

Potential Negative Surprises
In keeping with the overall very positive tone of this earnings season, the potential negative firms are less clear cut. However:

Applied Signal (APSG) is expected to post EPS of $0.24 a share, up from $0.20 a year ago. Last time they disappointed by 3.85%. The mean estimate for the quarter is down 0.9% over the last month and the stock has a weak Zacks Rank of 4.

By Kevin Matras
December 08, 2009

It’s that time again. Every few months, I like running this screen to find the new Top Sectors. And since roughly half of a stock’s price move can be directly attributed to the group, it’s important to stay on top of this. By definition, a strong Sector or strong Industry will have more of its companies moving higher than a weak Sector or weak Industry. If the majority of stocks are going down in an industry, it can’t be a strong industry. If more stocks are going up, it is a strong industry.

I’ve done some testing over the past and, interestingly, found that often times just getting into an average stock in a strong group will 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.

One of my favorite ways to find the top Sectors 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. That’s fine – but I don’t think its sensitive enough.

Take the Oil and Energy sector last year for example. Based on its 24-week or 12-week price performance – it was continuously ranked one of the top Sectors even while it was collapsing. That was because the gains were so large in the first part of the 12- or 24-week period – even a large pullback over a span of many weeks can 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, therefore, alert the investor that something systemic might be happening to that group as a whole rather than something that’s just stock specific.

As 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 current top Sectors? Glad you asked. The top five Sectors based on the percentage of stocks at or within 10% of their 52-week highs are:
1. Utilities – 58.7%
2. Conglomerates – 58.5%
3. Auto-Tires-Trucks – 50.0%
4. Consumer Staples – 44.8%
5. Aerospace – 41.2%

To put this into perspective, this is what they were in September:
1. Retail-Wholesale – 32.2%
2. Utilities – 30.3%
3. Consumer Staples – 29.5%
4. Basic Materials – 29.3%
5. Finance – 28.6%

Retail-Wholesale, which was number one in September, is now number 9. The number of companies trading within 10% of their 52-week highs in this group has increased (now 36% vs. the previous 32%), but it has been surpassed by other groups.

Consumer Staples also dropped a notch to the fourth spot. While Utilities on the other hand jumped to number one. There are also some new sectors that appear on this list, such as Conglomerates, Auto-Tires-Trucks and Aerospace. I especially like to look at the new groups that pop up.

Here are a few stocks from each of those current top sectors (for Tues., 12/8/09):
ENI – Enersis S.A. – Utilities
CR – Crane Co. – Conglomerates
GPC – Genuine Parts Co. – Auto-Tires-Trucks
SCI – Service Corp. International – Consumer Staples
GD – General Dynamics Corp. – Aerospace

All of these stocks are in the top Sectors as we’ve defined them and they are all on the move.

Start picking stocks in the best Sectors and Industries on your own today. It’s easy to do with the Research Wizard. Start putting the odds of success in your favor. You can do it. Learn how today.

Click here to begin a 2-week free trial to the Research Wizard.

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.

By Alex Kolb
December 07, 2009

Everyday readers of Zacks.com are offered four new stocks that fit each of the four main styles of investing: Aggressive Growth, Growth & Income, Momentum and Value. The Education section of Zacks.com offers a plethora of detailed articles and helpful information on each style of investing. Extremely helpful are the guides for each style.

Because I write about Growth and Income stocks and in light the Fed’s near-zero rate policy, I want to focus on growth stocks that also reward shareholders with dividends that are well above current interest rate levels. However, links are provided to guides for all four investment styles at the end of the article.

What to Expect with Growth and Income
Generally, a Growth and Income play will have healthy balance sheets, consistent dividend payments, quality products and services and experienced management teams. Usually Growth and Income companies are industry leaders, displaying steady earnings growth.

Companies that continually exhibit stable earnings growth, more than anything else, are ones that should hit the radar screens of Growth & Income investors. After all, companies exhibiting all of the characteristics mentioned earlier should have no problem producing a steady stream of profit growth. Analysts will subsequently grow more optimistic about the future earnings potential of the company and adjust their estimates up accordingly.

Growth & income investors get a dual benefit from following earnings estimate revisions. First, positive estimate revisions help investors buy shares in the companies with the best chances to outperform the market. Second, positive estimate revisions provide the easiest means to monitor the health of companies, providing a rather clear signal when the time has come to abandon ship. Companies experiencing upward estimate revisions will generally enjoy positive momentum going forward. Rarely will a stock suffer a significant price decline in the face of improving fundamentals. Add it all up and it’s clear that Growth and Income investors should only buy shares in companies enjoying upward earnings estimate revisions. The best way to harness this phenomenon is through the Zacks Rank.

Solid Growth and Income picks should carry a Zacks Rank of #1 (Strong Buy) or #2 (Buy). Check out the Guide to Growth and Income investing for more detailed information on this style of investing and the important role that the Zacks Rank plays in screening for Growth and Income stocks.

I did a little screening of my own using the Research Wizard and discovered several stocks that offer a dividend yield of more than 2%. I didn’t stop there. I also made sure that the fundamentals were sold and signaling growth. The Research Wizard helped me find nearly 30 companies that posses the following attributes:
*A Zacks Rank #2 or better
*A return on equity (ROE) of better than 10%
*The company’s earnings per share expected to grow by more than 10% over the next 3 – 5 years.

3 Solid Growth and Income Picks
I highlighted 3 of the stocks to give you an idea of the kind of fundamentals these Growth and Income plays offer. Try the Research Wizard for yourself and discover many more winning stocks.

Avon Products (AVP), the world’s largest direct seller, markets to women in more than 100 countries through 5.8 million independent Avon Sales Representatives. Avon’s product line includes beauty products as well as fashion and home products. The company recently declared a quarterly dividend of 21 cents per share, which translates into an industry-leading yield of 2.4%. The dividend is payable December 1 to shareholders of record November 20. In late October, Avon reported third-quarter earnings of 42 cents per share, exceeding the Zacks Consensus Estimate by 8%. Revenue slipped 4% year-over-year but was up 7% on a local-currency basis. The company is seeing bullish earnings estimates. The full-year Zacks Consensus Estimate of $1.72 per share is up 6 cents over the past 60 days. For 2010, analysts polled by Zacks are projecting earnings of $2.20 per share, versus the 2 months-ago level of $2.10.

Polaris Industries, Inc. (PII) designs, engineers, manufactures and markets off-road vehicles (ORVs), including all-terrain vehicles (ATVs) and the Polaris RANGER™, snowmobiles and Victory motorcycles for recreational and utility use and has recently introduced a new on-road electric powered neighborhood vehicle. The company recently declared a quarterly dividend of 39 cents per share, which translates into an industry-leading yield of 3.5%. The dividend was paid out on November 16. In mid-October, the company announced third-quarter earnings of 94 cents per share, which was below the previous year’s $1.13 but 12% ahead of the Zacks Consensus Estimate. Polaris upped its full-year earnings guidance to a range of $2.92 to $2.98 per share, versus the previous range of $2.70 to $2.90 per share. Analysts polled by Zacks hiked 2009 earnings estimates to $2.96 per share from the 2 months-ago level of $2.78. For 2010, the Zacks Consensus Estimate of $3.22 was increased from $3.05 over the past 60 days.

Tupperware Brands Corporation (TUP) sell design-centric preparation, storage and serving solutions for the kitchen and home through the Tupperware brand as well as beauty and personal care products through its Avroy Shlain, BeautiControl, Fulller, NaturCare, Nutrimetrics, and Nuvo brands. Analysts polled by Zacks are upbeat on TUP’s earnings. The full-year Zacks Consensus Estimate of $2.90 per share is up from $2.66 over the past 60 days. For 2010, analysts are calling for earnings of $3.44, versus the 2 months-ago level of $3.05. The company reported third-quarter earnings of 54 cents per share, topping the Zacks Consensus Estimate by 29% and surpassing the previous year’s 47 cents. Sales were up 9% in local currency. Tupperware declared a dividend of 25 cents, representing a 14% hike. Tupperware stated that the dividend is payable on January 4 to shareholders of record on December 4. The company pays an industry-leading dividend yield of 2%.

By Dirk Van Dijk
December 04, 2009

Earnings Preview 12/7 – 12/11
Next week will be a light one on the earnings front, with a total of only 61 companies reporting, including 8 S&P 500 firms. Among the more noteworthy names reporting will be: Costco (COST), National Semiconductor (NSM) and Kroger’s (KR). It will also be a relatively light week as far as economic data is concerned.

Monday
• Consumer Credit is expected to have declined by $9.3 billion following a $14.8 billion decline last month. Declining consumer credit is unusual, but has been the norm so far this year as banks try to pull back on lending.

Tuesday
• Nothing worth talking about.

Wednesday
• Wholesale inventories are expected to have declined by 0.6% last month following a 0.9% decline in September. Eventually inventories will stop going down since they are already pretty lean and will start going back up. When that happens it will provide a powerful, though short-term, boost to the economy.

Thursday
• Weekly initial claims for unemployment insurance come out. These have been in a steep downward trend of late, although still at historically high levels. Last week there were 457,000 initial claims. Look for the decline to continue.
• The highlight of the week will be the Trade Deficit numbers. They are expected to rise to 37.1 billion in October from $36.5 billion in September. The trade deficit has been trending higher in recent months after a very steep drop last winter. That decline happened because imports fell off a cliff faster than exports declined. The more recent increase has happened as imports rise faster than exports.
• The fiscal budget deficit for November is expected to be $135.0 billion, down from $176.5 billion in October. However, that number is highly seasonal, so the month-to-month difference is not all that meaningful. A year ago, the deficit was $237.2 billion in October and $164.4 billion in November. Thus, if the consensus projections come true, the federal deficit is actually coming down sharply (funny what happens when you look at actual data rather than listening to TV pundits).

Friday
• Total Retail Sales for November are expected to have increased by 0.5% following a 1.4% increase in October (seasonally adjusted).
• Excluding Autos, retail sales are expected to have risen by 0.5% in November following a 0.2% increase in October.

Potential Positive Surprises
Historically, the best indicators of firms likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. Some of the companies that have these characteristics include:

National Semiconductor (NSM) – National Semi is expected to post EPS of $0.14, unchanged from last year. That low expectation sets it up for a positive surprise. Last time out they beat by 100%. The mean estimate of those earnings has increased by 2.01% over the last month over the last month and the stock has a neutral Zacks Rank of 3.

Costco (COST) – While the warehouse club chain is expected to post earnings of $0.59, down from $0.65 a year ago, it did post a positive surprise of 7.79% last time out, and the mean estimate for the quarter is up 0.81% over the last month. The stock holds a Zacks Rank of 2.

Potential Negative Surprises
In keeping with the overall very positive tone of this earnings season, the potential negative firms are less clear cut. However:

H&R Block (HRB) is expected to post a loss of $0.40 a share, even with its loss a year ago (not a lot of people do their taxes in the fall). Last time they disappointed by 5.41%. The mean estimate for the quarter is unchanged over the last month and the stock has a neutral Zacks Rank of 3.

Pall Corp (PLL) is expected to report EPS of $0.40, even with a year ago. While the company did post a positive surprise of 9.62% last quarter, the mean estimate has been cut by 6.08% over the last month and the stock has a negative Zacks Rank of 4.

By Kevin Matras
December 01, 2009

I’m sure a lot of you have experienced the pleasure of waking up and seeing that a covering broker upgraded their rating on one of your stocks. I’m also guessing that you probably experienced the opposite, and saw one of the brokers downgrade your stock as well.

While nobody can perfectly guard against downgrades (or forecast all upgrades), it’s important to know how the market reacts so you can stay in your upgraded winners (or buy if you’re on the fence). It’s also important so you can consider getting out if a downgrade comes your way.

When I’m screening for new stocks, I like to look for companies that have recently seen a broker rating upgrade. Tests have proven that stocks with broker rating upgrades outperform those that don’t get upgraded, and outperform even more dramatically those stocks that get downgraded.

By how much? I created three screens and ran some tests. Each screen used a price and volume qualifier of >= $5 and >= 50,000 shares traded daily (avg. 20 day volume). I then added the Average Broker Rating Change over the last 4 weeks filter.

Screen 1: had no upgrades or downgrades –- the ABR remained the same, i.e., no change.
Screen 2: looked for only those companies that received upgrades (positive changes in their average broker rating).
Screen 3: screened for only those stocks that have been downgraded, i.e., negative change in their average broker rating.

The tests confirmed what I had already suspected, though the magnitude was a lot larger. With the Research Wizard’s Advanced Backtester, I ran 3 separate tests on each of the 3 different test screens using a 1-week rebalancing period over the last (nearly) 10 years (2000 thru Oct. 2009) to see just how different the results would be with these different filters.

Results
The screen with no upgrades or downgrades (their rating, whatever it was, stayed the same) produced an average compounded annual growth rate of 4.7%. The screen with only positive broker rating upgrades produced a compounded annual growth rate of 9.3%. The screen with only downgrades, however, performed significantly worse, with an average annual return of -1.3%.

For the sake of illustration: using a hypothetical $100,000 investment, the screen with the positive broker rating changes would have gained an average of $9,300 a year, while the screen with the downgrades would have lost over -$1,300. That’s more than a $10,000 annual difference in fortune, and literally the difference between a gain and a loss. After running the upgrades screen, I added the Zacks #1 Rank (“strong buy”) and it increased the returns by more than 2½ times, taking it from a 9.3% average annual return to an 23.6% average annual return.

Here are 5 stocks from that list for this week (12/1/09):
CAT – Caterpillar Inc.
EMN – Eastman Chemical Company
MBT – Mobile TeleSystems OJSC
SAM – The Boston Beer Company, Inc.
SEE – Sealed Air Corporation

All of these companies have a Zacks #1 Rank and have seen their average broker ratings upgraded within the last 4 weeks.

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.

By Dirk Van Dijk
November 27, 2009

Commercial real estate is in big trouble, with rising vacancy rates leading to lower effective rents. On top of that, the Cap rate, which is sort of like the P/E ratio for stocks (or to be more precise, like the E/P or earnings yield for stocks), has been rising, meaning that investors are willing to pay less for each dollar of operating earnings.

Moody’s recently estimated that commercial real estate values are now 43% below peak levels. This has weighed heavily on the real estate-related industries, and the Zacks Industry Ranks reflect those troubles.

Out of 206 industries that we follow, Real Estate Operations now rank 180, with an average Zacks Rank of its constituents of 3.31. The ranks range from 1-5; Zacks #1 Rank stocks indicate a strong buy, which is assigned to the 5% of stocks which are most timely. Stocks which are in the 6th through 20th percentile earn a 2, with similar rules for the 5’s and 4’s.

Almost as badly viewed by the industry rank are the mortgage REITs, which are in 178th place with an average rank of 3.30. Equity REITs fare better, but not by much, sitting in 165th place with an average rank of 3.27. Individual stocks with the dreaded #5 scores in those three related industries include: Capital Trust (CT), Investco Mortgage (IVR), Ramco-Gershensn Properties (RPT) and Glincher Realty (GRT).

Generally, commercial mortgages are for much shorter terms than the 30 years associated with most residential mortgages. Five years is the standard. That means that the owners of the properties are going to have to go to the banks and try to roll over the mortgage. For the banks, this presents a problem, since they do not want to lend out more than the collateral is worth.

Owners of commercial properties are far more likely to ruthlessly default than are homeowners — after all, it’s not like their kids are going to hate them for forcing them to move away from all their friends if they just let the banks take over the property. Most banks, particularly small to mid-sized banks are far more exposed to commercial real estate than they are to residential real estate and mortgages. Even if they make a residential mortgage, they are likely to package it up and sell it off to Fannie (FNM) or Freddie (FRE ) rather than hold it in their portfolio.

As a result, the Zacks Ranks for the regional banks look even worse than the ranks for the real estate companies themselves. The 206 total industries have seven related to the regional banks, with five regional industries plus one for the major regional banks that cover several different regions. With the exception of the major regionals and the banks in the Northeast — both of which are neutral and tied for 104th place with average scores of 3.00 — the banks all look downright ugly.

The worst of the bunch, by a hair, are the Western Regional banks in 198th place with an average score of 3.64, followed by the Midwest in 197th place and a score of 3.51, the Southeast (180th place, 3.31) and the Southwest (177th, 3.29). I don’t think the differences between them are all that significant — just stay away from them all. Some of the larger names among the banks with Zacks Rank #5 scores include: Private Bancorp (PVTB), Sterling Bancshares TX (SBIB) and Peoples Bancorp of Ohio (PEBO). None of them will be mistaken for J.P Morgan (JPM) or Bank of America (BAC).

If you need to have a bank in your portfolio, it would be a good idea to look overseas. In very distinct contrast to their domestic cousins, the Foreign Bank industry is in 15th place, with an average score of 2.27. Some of the banks showing up with coveted 1 scores include major institutions like Credit Suisse (CS) and Deutsche Bank (DB). If you want a more Latin, emerging market flavor for your bank investments, consider Banco Santander (SAN) of Chile or Banco Bradesco (BBD) of Brazil.

By Kevin Matras
November 25, 2009

Over the last few weeks, I have found myself screening for stocks with the best Relative Price Changes in an effort to determine whether a stock is good or not. Of course earnings growth and valuations are important. But if a stock is simply not responding, or worse, going down (worse than the market), something’s wrong. Or at the very least, it’s just simply not ready to move higher.

I’ve talked about this kind of stuff in the past. An investor’s best stocks are the ones that are performing the best; in other words, the ones that are moving higher. And it’s the same here. Stocks moving higher have a tendency of moving even higher. And the stocks I’ve been looking at recently are indeed the ones moving higher, especially on good volume since the overall market volume has been kind of weak. And if they are moving higher, it’s likely because there’s a good reason for them to be moving higher, or else they probably wouldn’t be.

Of course, this doesn’t mean you should only look at price change. But, by including those kinds of things in your screening, some very interesting stocks will come up. Some might have just missed your normal fundamental screening. But when put on your radar screen thru other measures (its price performance for example), you might find that these are just the kinds of companies you’ve been looking for.

Once again, you’ll also notice I said relative price strength. There are periods, of course, where virtually everything is going down. So screening for absolute positive price changes will often times come up with zero results in these periods, just when you need them the most. But also, when the market is doing nothing but going up, you want to get into the pacesetters and outperformers, not the laggards that are going up only because the rising tide is raising all the ships. So using the relative price strength will always put the outperformers on your list in both good times and bad.

In this week’s screen, I’m looking for relative price change winners that also have the fundamentals to potentially make these gains last and continue into the future.

The screen starts off with:
* Relative % Price change – 12 weeks > 0
* Relative % Price change – 4 weeks > 0
* Relative % Price change – 1 week > 0
(I’m looking for stocks that are outperforming the S&P 500 over the last 12 weeks, 4 weeks and 1 week.)
* Projected Growth Rate (F1/F0) > the S&P 500’s Median Growth Rate
(Not only do I want the price to be responding better than the market, I also want the growth rate to be better than the market as well.)
* Zacks Rank = 1
(Only Zacks Strong Buys)
* Current Price >= 5
(They all have to be trading at a minimum of $5 or higher.)
* Average 20-Day Volume >= 100,000 shares
(And have enough volume to allow easy trading in and out.)

Here are 5 stocks that made it thru this week’s screen:
NNI – Nelnet, Inc.
NUS – Nu Skin Enterprises, Inc.
PRGO – Perrigo Company
TECD – Tech Data Corp.
WPZ – Williams Partners L.P.

These are all fundamentally strong stocks that are on the move and outperforming the market.
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.