Wednesday, July 31, 2013

Steel Sector Stocks Under Pressure

The X-factor Weighs On The Steel Sector by Market Authority

This morning, leading steel stock United States Steel Corporation (NYSE:X) is trading sharply lower after reporting quarterly results. The stock is trading down by $1.23 to $17.75 a share. The daily chart (for swing trades) is signaling support around the $17.00, and $16.30 levels, so further downside is likely in the near term. X stock will have intra-day support around the $17.35, and $16.90 levels where the day traders can take a quick scalp.

Some of the other leading steel stocks that are declining lower in sympathy to United States Steel Corp include AK Steel Holding Corporation (NYSE:AKS), Steel Dynamics, Inc. (NASDAQ:STLD), and Nucor Corporation (NYSE:NUE). It should be noted that a weak Chinese economy is certainly one of the reasons for a weaker steel sector. Traders that want to track and trade the action in the entire industry group can follow the Market Vectors Steel (ETF) (NYSEARCA:SLX).



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Monday, July 29, 2013

Investing in Electric Automobiles



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2013 has been an incredible year for the automotive industry, but it has been particularly outstanding for newcomer Tesla Motors (TSLA) according to Zacks Investment Research. The electric car manufacturer has made a name for itself thanks to solid sales and earnings that crushed estimates, while the cool factor of its vehicles have also helped the firm to gain some recognition.

These factors have allowed TSLA’s stock price to surge this year, as strong results and optimism over electric car demand in the future pushed the stock up to new heights. In fact, TSLA shares have added about 250% since the start of the year, and over 340% in the trailing one year period, making the company one of the hottest stocks in the market, and a favorite pick among growth investors.

Given this incredible surge, many are likely wondering if the run can continue for TSLA heading into the end of the year. If you look at analyst expectations for the company though, there is plenty of reason to believe that TSLA can keep this streak alive and put up some more solid gains.

TSLA Estimates in Focus

Analysts remain extremely bullish on the company and we have seen some estimate revisions higher in the past few weeks. This has helped to push the current year consensus from a loss of 77 cents a share 30 days ago, to its current level of a loss of 60 cents a share today.

Current quarter and next quarter estimates have also risen over the past thirty days too, suggesting that analysts like the firm’s prospects in the short term as well.

This move higher in the estimates picture also helps to push the Earnings ESP for the current quarter up to 16.67%. So, the firm could be poised to beat estimates this quarter, at least when looking at this metric.



Growth Rates Still Incredible

Beyond this favorable estimate picture, it is also worth noting that growth levels for TSLA are still quite impressive. The company is expected to see growth of 81% for the current year, and an astounding 173% for the next year period.

This is especially incredible when you consider where the company was, and where the firm is expected to go in the future. The year ago EPS for the company was $-.68/share and current projections for the 2014 year call for earnings of $0.50/share. Clearly, the firm is on the right track and is well on its way to becoming a formidable player in the automotive market.

Bottom Line

This soaring estimate picture and strong growth outlook has helped TSLA to earn a Zacks Rank #1 (Strong Buy), suggesting that the company will outperform other stocks in the near future. If that wasn’t enough, the stock also has a Zacks Recommendation of ‘Outperform’, meaning that the long-term future for TSLA is quite bright as well.

It is also worth noting that the firm is in great company, as the broad automotive industry is coming back strong. In fact, the automotive-domestic Zacks Industry is currently Ranked in the top 10%, so there are definitely some industry tailwinds too.

Given these factors, it looks like Tesla, even at its current levels, may still be a great candidate for a portfolio. There are not only positive industry trends behind the firm, but a variety of company specific points—such as strong growth rates and increased optimism from analysts—which suggest that there is still time to get in on this amazing growth story.

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Friday, July 26, 2013

IMF Warns ECB Must Cut Interest Rates Again

ZuluTrade reports that the dollar falls to one-month lows vs. Euro, Pound. Investors turned cautious ahead of next week's Federal Reserve policy meeting.

Asian shares: Japan's Nikkei -2.97%, Hong Kong's Hang Seng 0.19%(07:00 GMT), Korea's Kospi 0.06%, Australia's ASX 200 0.11% and China's Shanghai -0.49%.

IMF warns European Central Bank must cut interest rates again to kickstart the eurozone out of recession.

IMF: Euro Zone Recovery Remains ‘Elusive’. “Substantial collective actions have addressed important tail risks, and extreme market stresses have subsided,” noted an IMF press release. There are numerous problems. “Financial markets are still fragmented along national borders, and the cost of borrowing for the private sector is high in the periphery, particularly for smaller enterprises,” the release explained. “Ailing banks continue to hold back the flow of credit. In the face of high private debt and continued uncertainty, households and firms are postponing spending. Needed fiscal consolidation is also weighing on growth.”

The dollar index .DXY stood at 81.791, having slid more than 0.6 percent on Thursday to a low of 81.624, a level not seen since June 21. Renewed pressure on the dollar saw the euro jump as far as $1.3296, a high last seen on June 20. Against the yen, the greenback was down at 98.85 having touched a two-week low of 98.62.

Setting the greenback on a slippery slope was a Wall Street report that the Fed may debate changing its forward guidance to help hammer home its message that it will keep rates low for a long time to come. The report helped knock the benchmark Treasury yield off a near two-week high of 2.634 percent, a move that also undermined the greenback.

The Federal Reserve is on track to keep its $85 billion-a-month bond-buying program in place at its policy meeting next week, but officials likely will debate changes to the way the central bank describes its plans for the program and for short-term interest rates.

Japan's core consumer prices turned positive and rose 0.4 percent in June from a year earlier, marking the fastest pace of increase in nearly five years, data showed on Friday, suggesting the government's efforts to eradicate years of deflation are bearing fruit.

Australia's domestic outlook has deteriorated throughout the year, and in addition, global data has softened over recent months, particularly from China, notes Goldman Sachs. In response to these deteriorating conditions, GS believes that the Reserve Bank of Australia (RBA) will have a further 50bp of cuts till year-end starting with a cut of 25bp in August.

The AUD/USD has recovered some of the lost ground from the previous day, as it has made another push above 0.92 towards the well established resistance level at 0.93.

The New Zealand currency was a standout performer overnight, jumping 1.1 percent on the greenback to $0.8105, its highest in six weeks.

Watch today: Yellen-Summers race, US sentiment.

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Monday, July 22, 2013

Investing in Airplanes




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Boeing (BA) has been in the news a lot lately, and for all the wrong reasons. The company has seen several issues with its high-tech 787 Dreamliner aircraft which many believe is the future for the company Zacks Investment Research reports.

These concerns have led to brief sell-offs for BA, pushing shares sharply lower in some sessions and causing many investors to think twice about investing in the company. However, the company has powered through this weakness and is back at all-time highs, suggesting that these recent problems shouldn’t be much of a concern to investors.

Outlook

After all, many analysts remain extremely bullish on Boeing and their prospects for the near term. Growth is expected to be in the double digits for both this quarter and the next, while the current year and next year growth rates are also impressive, coming in at 30% and 10.8%, respectively.

This growth rate also represents some acceleration from previous years, suggesting that Boeing is on the right track. Growth for the past five years was at just 1.3%, while for the next five it is moving into double digit range at 10.3%, meaning that this large cap stock isn’t done growing yet.

If that wasn’t enough, estimates have also been surging for both the current year and next year periods, while the Earnings ESP is positive for all four periods studied. The full year consensus has actually slowly risen from $6.39/share 90 days ago to $6.51/share today, suggesting that analysts are increasingly bullish about the company’s near term prospects.

Investors should also note that BA has a pretty stellar record when it comes to beating earnings, with the company crushing estimates in all four of the previous four quarters. Plus, the average beat in this time period has been in the double digits, while the company hasn’t missed earnings at all since early 2011.



Due to this solid earnings history, as well as the company’s robust outlook, Boeing has earned itself a Zacks Rank #1 (Strong Buy). Plus, the company is also in a top industry—roughly the top quintile—so the firm is in great company.

Bottom Line

With earnings fast approaching, BA could be a compelling pick for investors. The company has fought through recent troubles with ease and analysts still like the growth story for the firm.

BA also has an amazing track record at earnings season, and with a positive Earnings ESP, there is no reason to believe that we won’t see a similar result this time around as well.

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Friday, July 19, 2013

Trader’s Approach to Residential Real Estate Investing



Trader’s Approach to Residential Real Estate Investing

By Dr Van Tharp Trading Education Institute

Just as traders don’t trade the markets, real estate investors don’t invest in real estate, we invest in our beliefs about investing and real estate. My experiences as a real estate lender, homebuilder, developer, contractor, landlord and consultant have helped me develop methods that work. In addition, working through Van Tharp’s Ultimate Trader program some years ago and trading stocks, options and futures since then have given me new perspective on real estate investing. As many readers understand the principles of Tharp Think, this article is about my beliefs; perhaps you may find them as useful as I find them.

Business Owners and Investors

Successful real estate investing works best within the context of being an Investor to or with a Business Owner (I use those two terms specifically as defined by Robert Kiyosaki in his CASHFLOW Quadrant® model). Many busniess owners in real estate appear to be Business Owners. Many investors appear to be Investors. Almost none of the “professionals” in real estate, however…

Really know how to be a true Business Owner or deal with other true Business Owners.

Understand the typical risk and reward profiles for their method.

Make plans to manage a change in market conditions—even while it’s very easy to know if they are in an up or down market.

Act fast enough or act at all when market conditions do change.

Think they have much new to learn as they believe they already know it and have done it all.

I can say all of that because I myself have made each of those mistakes.

Over time, I have learned to simplify and focus. Just as when a trader focuses on one market or one trading method to improve their performance, simplifying real estate investing across one or two property types, in one or two market areas or using one or two methods will also help your performance. It’s also important to work with a few, systematic professionals. I have become most comfortable as an Investor to and with a few Business Owners who develop land and build homes.

Risk

Life is much more pleasant when we recognize and manage risk in any kind of venture. Van’s concept of R multiples helps traders better understand, quantify and manage risk but the concept also works in real estate.1 “R” equals the initial amount we plan to risk; what we might reasonably expect to lose if things don’t go favorably. An “R multiple” is the amount we actually make or lose on the deal divided by R, the initial risk. A profitable trade or deal yields a positive R multiple, a loss yields a negative R.

Real estate tends to have a high win rate or rather a high probability of profitable transactions, typically 90%-99% — though these figures are skewed toward favorable market conditions and competent people. This high level of success tends to breed complacency, even overconfidence to the point that a loss can seem a virtual impossibility because “This deal is so good” or “I am so good” or both.

More realistically, banks and larger institutions consider 0.25%-20.0% of the investment (usually a loan) as their initial risk or R.2 Smaller institutions, businesses and individuals typically think in terms of initial risk being 5%-100% of the cost of a property.3

However, most of the people and businesses who invest in real estate don’t truly recognize, plan for, or even seriously consider risk. In other cases, risk may equal “all the cash I want to (or can) use and all the cash I want to (or can) borrow to get into this deal.” In these cases, R can equal all of their net worth.

The second most common way that real estate investors deal with risk is to underestimate the average or range of losses. This is especially true for those with supposedly sophisticated risk models because they tend to use too little historical data (say 10 years) which causes them to underestimate or ignore the frequency of large losses. This is like a trader trying to use only a handful of trades (without having seen the -5R loss yet) to extrapolate a forty-five degree upward sloping equity curve over many years. Real estate investors also tend to ignore the possibility that future losses may be larger than past losses even though the disclosure documents say something like that everywhere. Perhaps this behavior exhibits judgmental biases at work?

Reward

Conceptually, real estate reward comes in two forms: periodic net income (usually monthly or annually) and the net gains from a terminal exit or sale. All of this is before tax effects.

If you held a stock over a long period, you would add the accumulated dividends received to the capital gain on the sale of the stock to calculate your R multiple. For real estate, you would add the net periodic income to the net gains from the sale to calculate your R multiple — if your holding period is a few years or less. On the other hand, if your holding period spans one or more market cycles, it may be more useful to break the R multiple calculation down into multiple segments.

All of this is fairly easy to calculate, but real estate investors usually forget or simply don’t track many of the annual items to really understand their true risk adjusted reward.

Some R-Multiple Examples

Say you bought a house for $150,000 in 2010, with $30,000 down. You rented it out for three years, netting $15,000 in rental income and then sold it for $165,000, netting $26,500 (a bit less than your down payment) after paying transaction costs and the mortgage balance. Your total profit was $41,500. Your initial risk, or R, was $30,000 so your R multiple on this transaction was $41,500/$30,000 = 1.38.

As another example, say I bought a piece of land in 2007 for $1,000,000, with $400,000 down and a mortgage for $600,000 (seller carryback, non-recourse). I have paid $10,000 per year for property taxes and maintenance and $36,000 a year for interest. I still own the land. My R-multiple at this point, six years later, is -.69, assuming R = my down payment of $400,000 (-276,000/400,000 = -.69).

But -.69R doesn’t take into account the value of the land that I’m still holding. Well, let’s say that land dropped in value to $300,000 in 2009, so then my R multiple was -1.98, (-$92,000 for interest, taxes and maintenance, -$700,000 capital loss for -792,000/400,000).

Now let’s say I get an offer to buy the land today for $850,000 (net $780,000 on the sale transaction). Rather than calculate one R multiple figure for the entire holding period (which spans a market cycle), I prefer to calculate R-multiples by market trend. I’d keep the 2009 R multiple at -1.98 to measure performance in a down market and now I’ll calculate my R multiple since 2009, an up market, at +.74 (-$184,000 for interest, taxes and maintenance, + $480,000 net capital appreciation = 296,000/400,000).

By the way, those examples are actual transactions (though they were not mine) with rounded numbers for simplicity.

R-Multiple History

In general, residential real estate investing seems to have the following R multiple distribution pattern:

many transactions with a low average reward, and

many transactions with a low average loss, and

a few transactions with a high average reward,

then, (for most with leverage)

very few transactions (maybe only one) with an asteroid size loss.

Over time, this distribution sucks some people in (who haven’t experienced the losses) and it keeps other people out (who have experienced the losses). Some of the data I have gathered (see below) might be helpful to both groups.

I have 33 years of R-multiple data (though I didn’t think in terms of R for the first 23 years). While incomplete and approximate, this residential land, for-rent residential property and for-sale residential property data is still very useful. Depending on how one classifies market conditions, the data includes 2-5 market cycles. I gathered it from a few banks, several builders, developers and my own firms. The timeframe for each R-multiple is one year or less.4

Assuming R = 20% of initial value, here are the percent of transactions and the correlating R multiples -



Interestingly, during the last down market of 2007-2011, land didn’t do as poorly on a historical basis, but for-sale houses did worse.

I reference these figures as a base case5 for evaluating investment opportunities. Can you see the dramatic differences that the market type makes in the R multiple distributions? Traders who understand Tharp Think will realize that the different market types require different strategies and different position sizing rules (or “policies” for institutions) to reach the same objectives. However, few real estate investors apply this kind of thinking to their business.

Conclusion

Taking a trading approach to residential real estate will provide an investor with a number of edges. Understanding some relatively simple principles like risk, risk adjusted returns and market types can be a huge advantage for the small minority of people who apply them to their investing.

In the second part of this article, which will appear in next week’s newsletter, we’ll continue exploring a trading approach to real estate investing by focusing on: how to adjust to changing market conditions, some typical real estate investing methods, the method I have used successfully for years and how you might find similar opportunities.

Footnotes:

It is also probably much more useful than more “sophisticated” measures of risk. But that is a discussion for another day.

They didn’t call it R, but they used the concept. They often use a term called “reserve”, short for a loan loss reserve, based on the idea that various asset classes have had quantifiable histories of loan losses.

Only the most experienced or conservative consider recourse loans in their risk calculations. Most others simply don’t think about it much. A recourse loan is typical: it means the borrower, and often guarantors, are liable to repay the loan, whether the income and sale of the property does so or not.

If anyone has any other R-multiple experience with real estate, or something similar, I’d love to hear from you.

My own performance has been much better for land, much worse on rental properties, and better on for sale homes.

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Wednesday, July 17, 2013

Some US Homebuilder Stocks on Sale

It has been a roller coaster ride for homebuilders the last several years according to Zacks Investment Research. A spectacular boom in the housing market was followed by a tragic collapse. Not only did prices plummet, but the number of new homes being built plunged to levels around half of what they were in the 1960's - back when the United States had more than 100,000,000 fewer people living in it.

After some very dark days, homebuilders finally started to see some signs of life in 2012. You can see a solid rebound in the number of new housing starts recently:



In May 2013, new housing starts ran at an annualized rate of around 900,000. But many experts believe that in order to simply keep up with population growth, around 1,500,000 new housing units are needed annually. This means that the rebound in new home construction could very well be in its early stages.

But someone forgot to tell that to Mr. Market.

Rates Rise, Housing Stocks Fall

Homebuilding stocks had been among the best performing group of stocks since early 2012. But when the Federal Reserve mentioned publicly that it could start tapering the amount of mortgage backed securities and Treasury notes it has been buying later this year, long-term interest rates rose in a hurry - and homebuilders took a big hit.



This rise in the 10-year T-note yield has led to higher mortgage rates - and a big drop in mortgage applications. In the latest survey from the Mortgage Bankers Association, the Market Composite Index, which is a measure of mortgage loan application volume, fell 23% year-over-year. Ouch.

But this could just be a temporary reaction to rising rates. If interest rates at least level off here for a while - which I believe they will considering that the Fed may hold off on tapering QE - then my guess is that mortgage loan application volume will pick back up as buyers come off the sidelines. It's worth noting that the yield on the 10-year T-note has already pulled back 17 basis points from its recent high amid talks of postponing "tapering".

Strong Earnings Momentum

From an earnings momentum perspective, homebuilders are among the best. The 'Building - Residential / Commercial' industry currently ranks 8th out of the 265 industries that Zacks ranks. That puts it in the top 3%. The overall increase in demand for new homes has meant that many homebuilders have been able to reduce incentives and even raise prices while leveraging their fixed expenses. This has led to significant earnings growth in the industry and significantly higher earnings estimates from analysts.

Nonetheless, many homebuilders are still trading well below their "pre-taper" highs, despite the recent pullback in interest rates. If you believe that the long-term trend in new housing starts remains in tact, then this could be a wonderful long-term buying opportunity.

4 Homebuilders on Sale

So which homebuilders look the most attractive following their recent selloff? Here are 4:

MDC Holdings (MDC)

MDC Holdings is a homebuilder that has been building under the name "Richmond American Homes" for 40 years. It primarily operates in the Western and Mountain regions of the United States with some exposure in the Eastern United States. Over the last 4 quarters, MDC has delivered an average earnings beat of 74%. It is currently a Zacks Rank #1 (Strong Buy) stock.

Despite the strong earnings momentum, shares of MDC are down more nearly 20% since Bernanke first hinted at tapering on May 22. This has driven valuations to very attractive levels. Shares of MDC are trading at just 13x 12-month forward earnings, a discount to the industry median of 16x. While shares may remain volatile over the coming months, the recent pullback could prove to be a great opportunity for long-term investors.

D.R. Horton (DHI)

D.R. Horton is the largest homebuilder in the United States with operations in 78 markets in 27 states. The company has delivered 6 consecutive positive earnings surprises, prompting analysts to revise their estimates significantly higher for D.R. Horton over the last several months. It is a Zacks Rank #1 (Strong Buy) stock.

Shares of DHI are also down about 20% since May 22, which has led to attractive valuations. The stock currently trades around 14x forward earnings, which is less than the industry median of 16x. Given the favorable long-term industry trends here, this could be a good time to get in.

Ryland Group (RYL)

Ryland Group is a homebuilder headquartered in southern California with a market cap of $1.9 billion. Consensus earnings estimates have risen significantly higher over the last several months as it has delivered 3 consecutive positive earnings surprises. It is currently a Zacks Rank #2 (Buy) stock.

Despite strong earnings momentum and growth prospects, shares of RYL are down almost 20% since May 22. But the stock is now trading at just 12x forward earnings. Investors willing to live with some volatility in hopes of strong capital gains should consider RYL.

PulteGroup (PHM)

PulteGroup is headquartered in Bloomfield Hills, Michigan and operates in 60 markets across the United States. This homebuilder has been crushing earnings estimates too with an average earnings beat of 59% over the last 4 quarters. Consensus estimates have risen sharply over that stretch, sending the stock to a Zacks Rank #1 (Strong Buy).

Shares of PHM currently trade at 14x forward earnings as the stock has fallen more than -17% since May 22. But given the strong fundamentals here, this seems like an overreaction.

The Bottom Line

Rising rates may have put a damper on the housing market. But this is likely to be just a temporary slowdown, especially when you consider that the Fed has been discussing holding off on tapering for a while. For the long-term investor, the recent selloff in homebuilders could present a great buying opportunity.

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Monday, July 15, 2013

Investing in Aerospace Defense




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Remember when the Fiscal Cliff was going to destroy defense-related stocks? That was so 40% ago, as my chart below shows comparing the iShares Dow Jones Aerospace & Defense index ETF (ITA) vs. the S&P 500 for the past year.

One year ago, Lockheed Martin CEO Robert Stevens told a House committee that deep Pentagon cuts slated to kick in January 2, 2012 would force his firm and others to fire employees and close factories. It was expected that those moves would hinder U.S. national security, erode defense firms' bench of highly skilled workers, and, of course, cut into weapons-makers' bottom lines.

But the blows never came. In fact, with big guns like Boeing (BA), Lockheed Martin (LMT), and Northrop Grumman (NOC), the ITA really took off in the past 5 weeks.



It makes sense that the suppliers of equipment to large Aerospace & Defense (A&D) companies would be doing well. I looked at these 3 Zacks #1 Rank stocks in the group:

Orbital Sciences (ORB) is a leading space technology systems company that designs, manufactures, operates and markets a broad range of space-related products and services.

Astronics Corporation (ATRO) is a manufacturer of specialized lighting and electronics for the cockpit, cabin and exteriors of military, commercial transport and private business jet aircraft.

HEICO Corporation (HEI) is engaged primarily in certain niche segments of the aviation, defense, space and electronics industries. HEICO's customers include a majority of the world's airlines and airmotives as well as numerous defense and space contractors and military agencies worldwide in addition to telecommunications, electronics and medical equipment manufacturers.

Zacks Investment Research picked HEICO for "Bull of the Day" for two reasons. First, their projected earnings and sales growth of 19% and 13% respectively.

Secondly, the fact they have a diverse mix of products, target markets, and customers, beyond A&D. In other words, commercial and general aviation, not just the space program or the military. They even serve computer, electronics, and healthcare markets.

On May 22, the $2.9 billion company reported strong quarterly results and raised guidance. In the chart below, you can see the resulting breakout above $47 on strong volume.



On May 24, upward EPS estimate revisions from analysts caused HEI to become a Zacks #2 Rank (Buy). On June 27, when HEI was still trading below $51, it became a Zacks #1 Rank (Strong Buy).

Head-to-Head on All the Metrics

One great resource in the Zacks Premium tools is the ability to compare industry peers on dozens of fundamental metrics. Here's a snapshot of these 3 companies from the Earnings view.



What stands out is that HEICO is more expensive on a valuation basis. But if the global trends of commercial aviation expansion continue to favor the fortunes of companies like Boeing, HEICO should be along for the flight.

But, what about that Boeing 787 fire at Heathrow on Friday? We'll get to that in a moment.

Here is how HEICO structures itself in two primary business segments...

The Flight Support group designs, engineers, manufactures, repairs, distributes and overhauls FAA-approved parts that extend over the entire aircraft, from the engines all the way to hydraulic, pneumatic, electromechanical, avionic, structures, wheels and brakes and even interiors.

The Electronic Technologies group produces electrical and electro-optical systems and components serving niche segments of the aerospace, defense, communications, and computer industries.

Boeing 787 Woes: Where There's Smoke...

This week should be an interesting one for many of these A&D stocks after the damage to Boeing shares on Friday. A 787 runway fire at London's Heathrow airport sent the stock down over $8 (7.5%) in less than 20 minutes on the news.

But BA shares bounced off of $99 to close just below $102, down only $5 (4.7%). Not terrible considering it just made new all-time highs Friday above $108, eclipsing the record highs set in July 2007 above that mark.

The good news for HEI shares is that they only fell 1% and are still within 1% of their closing all-time high just below $55. Going forward, I would trade any of these A&D equipment makers in tandem with their large-cap A&D customers.

In other words, as the big guns of the sector go, so go the suppliers. Right now, I like HEI the best for its sold growth, diverse products and customers, and a strong price chart.

If Boeing can put out their fires, HEICO should be a good wing man.

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Monday, July 08, 2013

Investing in TV Broadcasting



This Monday free weekly stock pick is Belo Corp.

Zacks Investment Research reports Belo might seem like an odd Bull of the Day bull of the day being that it has agreed to be acquired by (merge with) Gannet Inc (GCI), Zacks Rank #3. Even so, I thought it was important to dig a little deeper into this deal and determine if Belo (BLC) (soon Gannet) can remain a strong force in our world’s changing media landscape and if Belo or GCI is worth your time.

I also consider it vital to clarify the deal and perhaps explain why Belo is trading above its purchase price of $13.75 as many retail investors may be piling into a stock that has a firm ceiling that it would be able to climb above.

Belo Meet Gannet

BELO Corporation was, essentially the largest pure-play publicly-traded television station company in the nation. The Company owns and operates twenty major television stations, including ABC, CBS, NBC, FOX, CW and MyNetwork TV affiliates reaching over14 percent of U.S. television households, and their associated Web sites, in 15 highly-attractive markets across the United States. Belo stations rank first or second in nearly all of their local markets.

Gannett Co., Inc. operates 22 television stations in the United States and is an international news and information company that publishes daily including USA TODAY, the nation's largest-selling daily newspaper. The company also owns in excess of 400 non-daily publications in the USA and USA WEEKEND, a weekly newspaper magazine. Gannett’s subsidiary Newsquest is the United Kingdom's second largest regional newspaper company.

The Deal

Gannett will acquire all outstanding shares of Belo for $13.75 per share in cash, or approximately $1.5 billion, plus the assumption of $715 million in existing debt for an enterprise value of approximately $2.2 billion.

According to a recent press release by Gannett, the combination of Belo and Gannet will create a broadcast "Super Group," catapulting Gannett into the nation's fourth-largest owner of major network affiliates reaching nearly a third of all U.S. households.

After the deal is complete, Gannett's broadcast portfolio will almost double from 23 to 43 stations, including stations to be serviced by Gannett through shared services or similar sharing arrangements. Gannett's new broadcast segment will have greater geographic and revenue diversity, with 21 stations in the top 25 markets and will become the #1 CBS affiliate group, the #4 ABC affiliate group, and will expand its already #1 NBC affiliate group position.

The transaction is expected to close by the end of 2013 and will be subject to antitrust approval.

Is it Worth Your Investment?

Belo is already trading above the $13.75 cash acquisition price, after sharply rising after the merger announcement last month. If gannet was utilizing a stock for stock acquisition method, then shares of BLC could continue to rise if GCI stock increases as there would be a quantifiable connection between the two, but with this being an all cash deal, that’s not the case.



Given the premium to offer, you should probably avoid the stock (BLC) here as its upside will be limited unless of course you’re a merger arbitrage specialist. Gannett, on the other hand, stands to gain potential appreciation from here. While it’s only a Zacks Rank #3 now, that could change as the deal comes to an end.

Before the announcement, both companies were on the right earnings trajectory as of late as estimates were on the rise, but both were seeing year over year growth contraction. Both companies were looking for moderate earnings growth in 2013, on a slight decline in revenues.

There is no doubt that investors like the prospects of the combined entity as both stocks rallied sharply on the news.

The company also believes that this is a win-win; they anticipate that the transaction will generate approximately $175 million in annual run-rate synergies within three years after closing. The transaction is additionally expected to generate significant free cash flow and be accretive to non-GAAP earnings per share by approximately $0.50 within the first 12 months.



The transaction valuation implies a 9.4x average 2011/2012 EBITDA multiple prior to synergies, and a 5.4x multiple assuming expected synergies (according to Belo).

Mark Fratrik, a vice president and chief economist for BIA/Kelsey believes that this deal could propel Gannett into becoming the number 3 local station owner in the United States, by revenue. News Corporation ranks first with 27 stations and CBS Corporation, which owns 29 stations, is currently number 2.

This deal goes beyond the local news. Gannett is invested heavily in advertizing signage and perhaps most importantly, internet properties (websites). The acquisition of Belo will continue to add pricing and a competitive edge to Gannett’s franchise.

While you might not get your local newspaper delivered by the paperboy anymore, trusted information and quality journalism will never go the way of the Dodo.

If you are going to buy either company, look to GCI for the longer term play despite the Zacks Rank of 3 as shares of Belo shouldn’t be going much higher from here. You might also wait for a move back into the $24.00 range for GCI as shares are slightly overbought here.

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Friday, July 05, 2013

The US Unemployment Report and Successful Forex Futures Scalping

Today's US Non-Farm Payroll Report and Unemployment Rate Data Report

Its the day after July 4th USA Independence day and the markets largest economic data report in the financial universe . . . the US Non-Farm Payroll report.

The non-farm payroll report is the monthly change in employment excluding the farming sector. Non-farm payrolls is the most closely watched indicator in the Employment Situation, considered the most comprehensive measure of job creation in the US. Such a distinction makes the NFP figure highly significant, given the importance of labor to the US economy. Specifically, political pressures come into play, as the Fed is responsible for keeping employment in a healthy range and utilizes interest rate changes to do so. A surge in new Non-farm Payrolls suggests rising employment and potential inflation pressures, which the Fed often counters with rate increases. On the other hand, a consistent decline in Non-farm Employment suggests a slowing economy, which makes a decline in rates more likely.

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Wednesday, July 03, 2013

Apple Files for iWatch Trademark in Japan



Happy July 4th Independence Day USA!

Zacks Investment Research reports, Apple Inc. (AAPL) recently filed for a trademark for “iWatch” in Japan. According to Bloomberg, Apple has sought protection for the name, which represents a new product category of either a handheld computer or a watch.

The trademark filing further corroborates earlier rumors of Apple working on a wearable computing device. The device is similar to a wrist-watch and can handle some of the functions performed by an iPhone or iPad.

Wrist-wearable computing devices are looked upon as the next step of innovation in the high-end consumer electronics market. At All Things D’s D11 conference in May, Apple’s CEO Tim Cook said that these products could be an interesting market going forward.

Apple’s closest competitors in the smartphone hardware and software market, Samsung and Google (GOOG), are keen on developing a similar kind of device. In March this year, Samsung confirmed that it is developing a wristwatch, which will have the capabilities of a smartphone.

Another major consumer electronics manufacturer, Sony (SNE) launched its much anticipated SmartWatch in 2012. The wristwatch wirelessly connects with Google’s Android-based smartphones. Sony recently unveiled SmartWatch 2, which supports near filed communication (NFC) technology.

Apple has not launched a new product since Oct 2012, while its last innovation dates back to Apr 2010 (iPad). On the other hand, Samsung continues to frequently update its entire product portfolio, which has increased its penetration across all segments of buyers (both high income and low income level) over the last one year.

In such a scenario, we believe that Apple really needs to produce something innovative such as an iWatch that could support its share price (down 25.5% year-to-date).

Although Apple revealed limited details about the product (including product specifications and probable launch date), Apple’s move to trademark the name confirms its participation in the race against Samsung. This may provide some upside to the share price in the near term.

Additionally, Apple’s recently announced entry into the Internet-radio market is worth mentioning. Although the company faces significant competition from Pandora (P), Apple’s loyal customer base and licensing deals with leading music labels give it a significant competitive edge in our view.

Currently, Apple has a Zacks Rank #3 (Hold).

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Monday, July 01, 2013

Investing in Guns and Firearms




Smith & Wesson (SWHC) pre- announced a strong quarter back on June 13, and then beat higher guidance on June 24. It is a Zacks Rank #1 (Strong Buy). It is the Bull of the Day.

Fully Loaded

Over the last several months, there has been a lot of talk about banning certain types of guns. That raised to a fever pitch after the tragic events of Sandyhook in December of 2012. The following months saw a social outcry to limit gun sales and it also saw people that were on the fence about buying a gun do out a make a purchase.

It seems as though the growth in purchases of new guns is continuing as the company continues to see higher revenue numbers.

Company Description

SWHC makes and sell guns. From handguns to sporting rifles to handcuffs, Smith & Wesson was founded in 1852 and is based in Springfield MA.

Good Earnings History

Looking to the earnings history, I see a stock that has beaten the number in each of the last 7 reports. The most recent quarter was a beat of $0.01, which translated into a positive earnings surprise of 2.3%. That was a decrease from the $0.05 beat reported for the January 2013 quarter, a 23.8% positive earnings surprise and a 55% positive earnings surprise posted in the July 2012 quarter.

Pre Announcement and Subsequent Move

On the evening of June 13, the company issued upside guidance of $0.44 compared to the Wall Street consensus estimate of $0.40, so a 10% surprise can be built into the most recent number. The other more surprising was the revenue guidance of $179M compared to the then consensus of $170M.

Prior to the announcement the stock closed at $9.30, but after the announcement the price was higher by 5.5%. Since the open on June 14, the stock has moved higher by about 8%. The combined move computes to more than 13% and the stringing along of the good news helped insulate shares from the recent downturn in the broader market.

Earnings Estimates Tick Higher

Estimates for FY2014 have been doing nothing but firing higher throughout the year. In January the Zacks Consensus Estimate was $0.93 where it stood for two months. An increase to $0.97 came in March, and that was followed by another big move to $1.04 in April. Following the most recent beat, estimates have jumped to $1.33 - and that is just what investors want to see.

Valuation

The valuation picture for SWHC is a great one. It is not that often you find a company that consistently beats the earnings number and sees good growth AND trades at a discount to the industry average. The 8.3x trailing PE is almost half of the 16.4x industry average. The forward PE of 7.6x is less than half the industry average of 15.6x, so on both PE measures the company is trading at a significant discount to the industry average. The price to sales metric also shows a significant discount, but the price to book is the lone measure that has the company trading at a premium to the industry average.

The Chart

The price and consensus chart the power of an improved outlook on a stock price. Starting at the end of 2011, the stock jolted higher as expectations for stronger earnings started to show up on analyst reports. The ride since has been volatile, but mostly up, with the stock moving from low single digits to double digits. With earnings expectations continuing to rise, the stock seems to be headed for new highs in the coming quarters.

By Zacks Investment Research