Quarterly Update - July Buy them. Forget them. Beat the market.

Transcription

1 Quarterly Update - July 2010 Buy them. Forget them. Beat the market.

2 Table of Contents Letter from the Editor Page 2 Stock Updates Page 3 Other Zacks Resources... Page 10 Contact Us..... Page 14

3 Letter from the Editor Clearly, 2010 is not Last year benefited from one of the greatest rallies in stock market history, but that has given way to much more difficult trading conditions this year. We initially saw a correction in January, but the bigger pullback, which many had been expecting, didn t come until May. We are still in the throes of that correction as we end the second quarter. While not yet in official bear territory at a loss of 20%, it certainly feels pretty close for most stock investors. All of our Top Ten stocks are struggling. We had big winners earlier in the year with Big Lots and DeVry, but both have given back most of their gains. Only Big Lots remains in the green, though it has retreated by over 30% from earlier in the year and is basically the poster child of what is happening in retail right now. The big retail rally we saw in 2009 and the beginning of 2010 has ended and investors with gains in these stocks are now cashing in. But even if growth is going to slow, we still want to be in a retailer like Big Lots. Its value pricing makes it attractive to consumers. It s not an inherently expensive stock either. It was rather cheap when we added in it January and continues to trade with attractive valuations. When the bears come out to play, however, there are few places to hide. Our international stocks are among the hardest hit in the portfolio. While we believed Chinese and Brazilian stocks had attractive valuations in January, investors have not agreed with us and continue to punish most Chinese and Brazilian shares. This, of course, makes them even more attractive than six months ago for value hunters, but that does little good for us given our entry point in January. In markets where the bears are roaring, it s difficult to be a buy and hold investor. We have always run this portfolio with the intention to hold every single position for the year, come what may, unless there was a company-changing event (i.e. merger or bankruptcy). So far in 2010, there hasn t been an event of that magnitude with our holdings. Because we re going to hold all the positions, we have no stop losses in place for the portfolio. But, as we have said before, you should be consulting with your financial professional to determine what strategies work best for you. Believe it or not, we are still optimistic about There is another 6 months to go and, as we ve already seen, a lot can happen in that time. We still believe in the global growth story, especially among the BRIC countries of Brazil and China. It s been a rough road so far. We would be lying if we said otherwise. But we re not throwing in the towel quite yet. Regards, Tracey Ryniec Editor Top Ten Stocks for 2010 Quarterly Update - July

4 Stock Updates Big Lots (BIG) Big Lots operates over 1,300 closeout retail stores in the U.S. It sells products such as food, health and beauty, home décor, mattresses and electronics. In May, the closeout retailer reported fiscal first-quarter sales of $1.2 billion, an increase of 8.1% from the year-ago quarter. Big Lots earned $0.68 per share, a year-over-year increase of 54.6% and 1 cent above the Zacks Consensus Estimate. For the last five quarters, Big Lots has beaten the Zacks Consensus Estimate by an average of 15.3%. Additionally, management increased its guidance for fiscal year 2011 (which ends Jan 2011). Big Lots expects to earn $2.75-$2.85, up from its previous guidance of $2.65- $2.75. For the second quarter, the retailer guided to same-store sales growth of 4.0%- 5.0% and EPS of $0.44-$0.49. Analyst estimates are moving higher. In the last 30 days, the Zacks Consensus Estimate for 2011 is up 6 cents, and the 2012 Zacks Consensus Estimate is up 7 cents. Estimates have been trending higher since the beginning of The stock endured some selling pressure in late June because of a brokerage downgrade and reports of the CEO selling shares. While we can t speak to the brokerage downgrade, we think that selling because of the CEO s stock sales would be a mistake. One, CEO Steve Fishman s stock sales were planned (made known to the market ahead of time) and began in March Two, the bulk of his sales were made immediately after exercising stock options, which is where he gets most of his compensation. Last, Fishman still owns about 1.5 million shares of stock and options, which is a substantial position, suggesting he still believes in the stock. BIG shares are trading around 11x fiscal 2011 EPS estimates and 10x 2012 EPS estimates. The stock is trading at an attractive valuation given the retailer s strong growth and track record of beating estimates and raising guidance. China Green Agriculture (CGA) The Chinese economy quickly and sharply fell out of favor with investors this year, leaving us with a sizable loss in CGA. While this is a tough pill to swallow, it is hard not to like China Green s potential looking forward. I am not going to sugar coat the loss, but the stock is trading at only 11 times forward earnings. The PEG ratio is showing a great bargain at 0.4. On top of that, the estimate picture is starting to rebound after a hiccup in the previous quarter. The Zacks Consensus Estimate for full-year fiscal 2010 regained the 3 cents it dropped and is back to 91 cents per share. Additionally those revisions came months before China Green reaffirmed their guidance on June 15th. Quarterly Update - July

5 Stock Updates continued... In its mid-june release, the company said it reached its sales volume target on June 10th, 20 days before the end of the period. Given the results, sales volume growth should exceed 40% for the year, a growth rate that management expects to see in each of the next 2 years. All of this is coming on the heels of the May earnings surprise, when CGA surpassed expectations by a penny, making it the sixth consecutive beat. For the third quarter of fiscal 2010, China Green saw a 52% jump in sales, a 60% rise in gross profit and a 37% improvement in net income. Next year s estimates are tapering slightly, but are still showing an expected growth rate of 25%. I won t say the market is wrong, but how can a stock with that kind of growth be trading at such a low multiple? We have weathered the storm, so it is important to keep looking forward now and not at the P/L. Everything looks good so keep holding CGA with confidence. DeVry (DV) DeVry is a for-profit education firm, serving over 110,000 undergrad and graduate students. It runs DeVry University, Advanced Academics, Ross University, Chamberlain College of Nursing, and Becker Professional Review, as well as the Keller Graduate School of Management. It has 94 locations and an online platform. This Zacks #3 Rank ( hold ) stock was up by more than 30% in late April. However, it has given up all those gains and is down more than 10%. DeVry reported fiscal third-quarter results on April 22. Revenues grew 29% to $504.4 million and diluted EPS jumped 60% to $1.12, beating the Zacks Consensus by 8 cents, or 7.7%. In the last five quarters, DeVry has topped the Zacks Consensus Estimate by an average of 11.5%. The company continues to demonstrate impressive operating leverage, which is growing sales faster than expenses. In the third quarter, DeVry s operating profit margin expanded by 5.9% from 18.3% to 24.2%. After the company s third-quarter report, analysts increased their EPS estimates for fiscal 2010 and The Zacks Consensus Estimate for fiscal 2010 and fiscal 2011 are each up 9 cents in the last 60 days. Those estimates reflect EPS growth of 59% and 22%, respectively. Despite continuing to beat expectations and strong growth estimates, the stock has dropped significantly below its 52-week high from April. The sell-off is largely due to the federal government s increased scrutiny of postsecondary schools. Quarterly Update - July

6 Stock Updates continued... DV shares are trading at 15x fiscal 2010 estimates and 13x fiscal 2011 EPS estimates. Those P/E multiples reflect the market s fear that the Department of Education is going to come down hard on the for-profit education companies. Euronet Worldwide Inc. (EEFT) Euronet Worldwide Inc. provides electronic payment services and operates a network of ATMs worldwide. Although shares struggled during the quarter, the company s business showed some nice signs of growth from last year s recessionary environment. Its first-quarter results from late April included 7% revenue growth and close to 100% growth in operating income to $18.2 million. But as a company operating in a very competitive and innovative segment of the market, expectations were high, and Euronet s earnings of 28 cents per share fell one penny short of the consensus estimate. The company s largest segment, epay (formerly PrePaid), posted a respectable 1.5% gain in revenue from last year, but Euronet noted that its overall performance was impacted by the economic uncertainty in the Euro zone, where it derives a large portion of its business. The earnings miss put some pressure on estimates, with the current year falling 16 cents to $1.19 per share. Therefore, shares are currently trading deep in value territory with a forward P/E of just 11X, which should provide additional support to shares. The next-year estimate projecting a healthy 14% earnings growth should do the same. Euronet will also continue to enjoy the benefits of a stellar balance sheet, with unrestricted cash of $189 million against total debt of $289 million, down $39 million from last year. Another factor working in Euronet s favor is some of the recent stability in the Euro zone on the back of the EU s $1 trillion rescue package for its members. With less economic uncertainty affecting confidence, increased consumer spending and transactions should have a positive impact on revenue. Eaton Corp. (ETN) Eaton Corp. operates as a power management company in the United States and internationally, providing electrical components and systems for power control and distribution. Eaton Corp. was a bit mixed during the quarter, falling with the market in April and May before recovering very nicely with the market in June. Although the company s share price didn t immediately respond in the weak market, its first-quarter results from late April were excellent. Quarterly Update - July

7 Stock Updates continued... Revenue for the period was up 10% from last year to $3.1 billion, with half of that gain coming on organic growth and the other half related to currency fluctuations. Earnings looked great too, coming in at 95 cents per share, 14% ahead of the Zacks Consensus Estimate. Eaton s average earnings surprise over the last four quarters now stands at 32%. The company s Truck segment was its biggest gainer, up 55% from last year to $453 million. The Auto Segment was close behind with a 39% increase to $374 million. The outlook for these segments is positive too, with the company saying it expects global automotive markets to grow by 15% on the year. Another positive take away from the quarter was the company s announcement that it had signed a 5-year contract with the U.S Air Force valued at $569 million that will be split with one other partner contractor. Analysts were quick to raise guidance on the news, with the current year up a substantial 63 cents in the last two months to $4.68. The next-year estimate is pegged at $5.85, a bullish 25% growth projection. Petroleo Brasileiro (PBR) Commonly known as Petrobras, a state-run oil company from Brazil. Petrobras is fully integrated and operates in all phases: beginning with exploration, production and refining all the way to transportation and retailing. We initially added PBR because of its exposure to Brazil, a solid emerging market, as well as its energy exposure. However, the global recovery has not taken hold as quickly as we anticipated. As a result analysts have slowly been lowering their earnings estimates. Despite the lack of enthusiasm, there are still very good reasons to be bullish on Petrobras. The company continues to develop deep water projects, which could see an improving cost structure. Due to the ongoing disaster in the Gulf of Mexico, and the ensuing restrictions by the U.S. government, more deep sea rigs are willing to move to Brazil and could be cheaper for companies like Petrobras. Rig operators can not afford to keep their units idle for too long and if the moratorium on deep-sea drilling in the U.S. looks to continue for an extended period of time, many will need to move elsewhere. As for the company s upcoming financing issues, we feel that while it may be a shortterm drag, the long-term outlook is positive. Petrobras will be selling $25 billion in shares next month. While this will dilute earnings initially, the funds will allow them to develop its presalt fields. Quarterly Update - July

8 Stock Updates continued... The valuations for PBR also remain attractive, despite the slipping consensus estimate. Shares are trading at less than 10 times forward earnings, and earnings are expected to climb 18% this year and another 16% in Praxair (PX) Praxair produces and distributes industrial gases such as oxygen, nitrogen, carbon dioxide, hydrogen and acetylene. It is the largest industrial gas supplier in North America, where the company derives nearly 60% of its revenue. Praxair reported first-quarter results on April 28. The company had sales of $2.43 billion, an increase of 14.4% from last year. The company reported earnings per share of $1.09, matching the Zacks Consensus Estimate. Management s guidance for the second quarter was earnings of $1.10-$1.15 per share. For 2010, the company expects EPS of $4.50-$4.65, up from its previous guidance of $4.43-$4.63. The company s guidance was in-line with the Zacks Consensus Estimates for Q2 and As such, the Zacks Consensus Estimates for 2010 and 2011 have remained essentially unchanged for the first six months of While Praxair hasn t delivered blow-out earnings or issued higher guidance, there are still reasons to remain bullish on the stock. One, Praxair is focused on growth areas, including hydrogen for higher fuel standards, processing heavy sour crude oil, coal gasification and water treatment, as well as international expansion. Second, Praxair s cost controls are improving its profit margins. In the first quarter, Praxair s operating expense as a percentage of sales was 12.1%. That was 40 basis points lower than 12.5% in the first quarter of The company should be able to maintain its cost savings even after its revenue growth resumes, leading to faster earnings growth. Third, the company stacks up well against its industry peers. Praxair s trailing twelvemonth return on equity is 23.9%, above the industry average of 12.1%. Its net profit margin is 13.8%, well above the industry s 4.2% average. Lastly, PX shares are trading at about 18x 2010 consensus estimates and 15x 2011 consensus estimates. Those are reasonable P/E multiples in light of where we are at in the business cycle. Quarterly Update - July

9 Stock Updates continued... RehabCare Group, Inc. (RHB) RehabCare Group Inc. provides rehabilitation management services in hospitals, nursing facilities and other long-term care facilities in the United States. The company was able to recover nicely from a tough first quarter on the back of its better-than-expected second-quarter results from early May. Revenue for the period was up 62% from last year, with a large portion of that gain related to Rehabcare s acquisition of Triumph Healthcare. Earnings also looked great, coming in at 61 cents per share, 22% ahead of the Zacks Consensus Estimate. The solid outperformance pushed the company s average earnings surprise to 9% over the last four quarters. CEO John Short noted that Rehabcare saw some nice momentum in its business after a tough start to the quarter. He also touched on how healthcare reform is affecting its business, saying that while the full effect of healthcare reform legislation remains to be seen, we are pleased with its short-term benefits and we are well positioned for many of its long-term initiatives. The optimism set the stage for analysts to raise estimates. The current-year estimate added 10 cents on the news to $2.60 per share, while the next-year estimate added 2 cents, climbing to $2.97, a solid 14% growth projection. Rising estimates and a steady share price have sweetened the valuation picture, where shares trade with a forward P/E of 10.7X, a nice discount to its peers 12.67X. Synaptics (SYNA) Synaptics develops and supplies custom-designed human interface solutions that enable people to interact with various mobile computing, communications, entertainment and other electronic devices. On April 22, Synaptics reported fiscal third-quarter net revenue of $116.2 million, up 15.5% from Q309. The company also reported EPS of $0.28, beating the Zacks Consensus Estimate by 4 cents. Management s guidance was also better than expected. For the fiscal fourth quarter, SYNA guided to sales of $136 million to $146 million and pro forma EPS of $0.57- $0.67. After the company s better-than-expected fiscal Q3 results and guidance, analysts following SYNA shares upped their estimates for fiscal 2010 and fiscal The fiscal Q3 consensus estimate climbed 8 cents. The Zacks Consensus Estimate for fiscal 2010 Quarterly Update - July

10 Stock Updates continued... increased 8 cents, while the Zacks Consensus Estimate for fiscal 2011 increased 14 cents. SYNA is trading at 21x fiscal 2010 consensus EPS estimates and 18x fiscal 2011 consensus EPS estimates. Trina Solar (TSL) This Chinese solar company continues to trade at mind-boggling valuations after selling off through the first half of Analysts have been split on their revisions over the past month, but the average estimates are stabilizing and showing solid growth rates. Analysts are expecting earnings growth of 22% this year and another 5% in Additionally, the projected growth rate is coming at a deep discount as the PEG ratio is only 0.4 times. The forward P/E ratio is coming in just under 9 times. While much of this value is coming at our expense, given this year s selling, we still like the long-term outlook for the company. If estimates at least trend sideways, investors can not ignore the valuations for long. Brokers are still in love with TSL as well. Of the 16 analysts that submit recommendations to Zacks, 13 have a Strong Buy and just 1 has a rating lower than Hold. On June 9th, Trina announced a deal to Southern California Edison to provide 45 megawatts of PV modules. Shares have been rising steadily on the news. Adding to the recent bounce is the strengthening euro. Much of Trina s sales are to Europe. As a result the regional financial woes spilled over to TSL as the continent s outlook became less and less clear. As the conditions in Europe solidify, shares of TSL should see some benefit. Despite the excellent earnings outlook and optimism from analysts, TSL remains among the biggest losers in the portfolio. The stock is a Zacks #3 Rank ( hold ); and holding is exactly what we are doing. There is no sense in selling at the bottom, especially when the estimates continue to point higher and the stock has surged into the end of the quarter. Quarterly Update - July

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15 Contact Us If you have any questions about Zacks Top 10 Stocks, please contact customer support at: Phone: , ext Outside the U.S.? Call , ext You can also reach us by mail at: Zacks Investment Research Attn: Zacks Top 10 Stocks 111 N. Canal St., Suite 1101 Chicago, Illinois Quarterly Update - July