Getting Defensive in an Offensive Market

In tough markets there are three types of investors; Bulls that remain in denial, those who sit in cash, and savvy investors who shift toward defensive stocks. Bulls are hard to find these days, sitting on the sidelines isn’t rocket science, so lets take a few minutes to talk about developing a good defense.

First things first, what is a defensive stock? These companies do not manufacture weapons or design body armor, they are stocks that provide a constant performance in bull and bear markets. A low P/E ratio, steady dividend, and low beta are the hallmarks of defensive opportunities.

A Quick Lesson on Beta
While stocks with low betas will, by definition, miss out on some upside when the markets rise, but they avoid the dips that hit most others. Beta is calculated by comparing percentage changes in a company compared to percentage changes in the market for a given period of time.

For example, a stock with a beta of 0.5 has experienced swings half as much as the market, on average. If the market climbs 10%, the stock only gained 5%, but it works coming down as well. When the market dropped 10%, shares only lost 5%. This is seen in non-cyclical stocks with steady performance.

Non-cyclical stocks often offer goods and services that are always in demand. If the economy is slowing down people are still eating dinner when they get hungry and, despite energy prices, probably haven’t switched to candle light just yet. As one can imagine food and utility companies weather economic storms better than most other industries.

Selecting Defensive Stocks
The logic makes sense, but selecting the individual investments is where most run into trouble, making stock screeners an invaluable tool. Below are a few companies in historically defensive industries, with low betas, low P/E ratios, and currently hold a Zacks Rank of #3 or better.

Four Defensive Stocks
AstraZeneca PLC (AZN) has a beta of .36 and a P/E just under 9x. The stock is up about 5% on the year compared to the markets, well we all know how that is going. AstraZeneca develops and sells pharmaceuticals and vaccines. Patients don’t stop taking medicine in tough times, in fact for prescriptions like Nexium, which treats gastrointestinal conditions, sales may even spike.

Elizabeth Arden, Inc. (RDEN) is a cosmetics company that is about flat for the year. Make up is another defensive industry as The stock has a P/E under 11x and a beta of .61. Earnings estimates have been climbing and the consensus is now a 50% year-over-year increase for the current quarter.

Universal Corp (UVV) is trading at under 10 times earnings, and has a beta of .6. The international tobacco processing company has the luxury of very consistent demand in all economic conditions.

Overhill Farms, Inc. (OFI) has more than doubled in value this year. The frozen food supplier for prominent chain restaurants, like Panda Express and Carl’s Jr, in addition to retail and food services. Overhill’s beta is just under 0.5 and the P/E is 7.2x.

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Bill Wilton is an Editor at Zacks Investment Research for more information please visit www.zacks.com.

bear markets, defensive stocks, stock screeners

Top Performing Stocks for the Week Ended Sep 19

The five best performing stocks on the Zacks #1 Rank List last week were: Collective Brands (PSS), Buffalo Wild Wings, Inc. (BWLD), Life Partners Holdings, Inc. (LPHI), Flir Systems Inc. (FLIR) and Shanda Interactive Entertainment Ltd. (SNDA).

Collective Brands (PSS) got some good news last week as Standard & Poor’s revised its outlook on the footwear and accessories retailer to “stable” from “negative.” Its credit ratings were also affirmed. The revision came after a judge significantly reduced a monetary award against PSS to $65.3 million from $305 million in a trademark infringement case with Adidas.

Shares of Collective Brands advanced 23.2% last week, making it a top-performing Zacks #1 Rank. Earnings estimates for this fiscal year, ending January 2009, are up 17.7% in the past month. In addition, expectations for next fiscal year, ending January 2010, are up 16.3% in that timeframe. At the moment, analysts are expecting profit for next fiscal year to advance approximately 18% from this fiscal year. For its fiscal second quarter, PSS reported an earnings surprise of more than 86% above the consensus while sales jumped 30%.

Buffalo Wild Wings, Inc. (BWLD) was featured as an Aggressive Growth Stock of the Day at Zacks.com on Sep 17, as it “has been climbing steadily following a strong earnings report and lower costs.” Last week, shares advanced 18.7%. Over the past 2 months, earnings estimates for this year and next are up 4.5% and 3.7%, respectively. Analysts expect next year’s profit to advance almost 21% from this year.

In late July, Buffalo Wild Wings announced solid second-quarter results, which included earnings per share of 31 cents that beat the consensus by almost 15%. In the year-ago quarter, BWLD earned 22 cents. Total revenue jumped almost 29% to $97.9 million. Other highlights in the quarter included a 29.5% gain in company-owned restaurant sales, as well as a same-store sales increase of 8.3% at company-owed restaurants and 4.5% at franchises. BWLD is confident that it can achieve its 2008 targets of 15% unit growth, 20% revenue growth and 25% net earnings growth.

Life Partners Holdings, Inc. (LPHI) expects record earnings for its fiscal second quarter. The company, a leader in the secondary market for life insurance, sees a 56% jump in net earnings during the quarter, as well as a 47% surge in revenues. LPHI stated that its business model deals exclusively with assets that have inherent value, and are not reliant on market performance. The company also said that its does not rely on credit to grow its business, so the tight credit market has had no negative impact.

LPHI made the Zacks #1 Rank Top Performers List for last week as shares advanced 12.9%. The one analyst covering this company has raised the estimate for this fiscal year, ending February 2009, by 5% over the past 2 months. Furthermore, next fiscal year’s profit is expected to advance by 15.7% year over year.

With shares that gained 10.4%, Flir Systems Inc. (FLIR) made the Zacks #1 Rank Top Performers List for last week. Earnings estimates for this year are up 5% over the past 3 months, including a gain of 2.4% in the last 2 months. Expectations for next year are up 9% and 4% in those timeframes, respectively. Next year’s estimates are currently 24% better than this year’s, which is an encouraging sign for the future.
One of FLIR’s most recent contracts includes a $96.6 million order for stabilized multi-sensor systems from the U.S. Army. The company, which makes thermal imaging and stabilized camera systems, has a good record of meeting or beating Wall Street’s quarterly earnings expectations. The past 4 quarters have amassed an average surprise of 7.1%. For its second quarter, FLIR announced earnings per share of 29 cents, which inched past the consensus by almost 3.6% while also topping the year-ago result. The company also increased its revenue and earnings guidance for 2008.

Shanda Interactive Entertainment Ltd. (SNDA) was a top performer last week as shares gained 9.5%. The company has enjoyed rising earnings estimates for a while, including gains for this year of 4.7% in 2 months and 3.8% in 30 days. Analysts have also boosted expectations for next year in those timeframes, and currently expect profit growth of more than 18% over this year.

Earlier this month, SNDA, which is a leading interactive entertainment media company in China, reported solid second-quarter results. Consolidated net revenues in the quarter advanced to US$122.1 million, while earnings per ADS of 56 cents easily topped the consensus.

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James Giaquinto is an Editor at Zacks Investment Research for more information please visit www.zacks.com.

stocks

Screen of the Week: Cash is King

Earlier this year, I read a news story about how Bernanke and Greenspan were both saying that many companies had lots of cash on the books. They also said that businesses were in better shape now than they were during the last two economic contractions.

The article was quick to point out that they were excluding Financial Companies. But they also made it a point to say that many companies across the rest of the industries, from Cisco (CSCO) to Coca-Cola Co. (KO) to use their example, have ’socked away’ cash, reduced their debt and cut inventories.

Granted, a lot has changed since the beginning of the year – but we got a chance to see just how much money some companies have on hand this week when Microsoft (MSFT) announced a $40 billion stock buy-back plan. Nike (NKE) followed suit and announced a $5 billion repurchase program. And then Hewlett-Packard (HPQ) did the same with their own $8 billion dollar buy-back program. (This is HPQs third buy-back program in two years.)

So all that being said, I decided to put together a screen that looks for companies with solid cash positions.
Let me note that I’m not doing this in hopes that these companies initiate repurchase programs of their own, even though that could be a benefit. I’m doing this because, as the credit market tightens, the companies with the strongest cash positions, coupled with low debt, reduced inventories and the like, will be in the best position to weather a financial crisis.

And today’s eye-popping numbers made me think that in spite of all the turmoil we’ve seen in the stock market, some companies should do just fine due to their healthy balance sheets.

So here we go:
• I first looked for companies with Cash and Marketable Securities that are higher now than they were last year at this time. Having a strong Cash position means companies will not have to depend on banks to finance their operations, especially in this tight credit market.
• I also want the Debt to Total Capital to be less than the 5 Year Average Debt to Total Capital. Companies able to reduce their debt positions from their historical ratios is a sign of strength and a healthy balance sheet.
• I want the Cash Flow to be greater than the Cash Flow from Last year. This too is a sign of financial health.
• I also want to see Inventories below last year’s levels. Turnover of inventory (raw materials, unfinished goods and finished goods) is a primary way a company makes money. High levels of inventory for long periods of time is usually not good sign.
• I also want the stocks to show Annual EPS Growth Rates that are greater than the Median for their respective Industries. This lets us focus on the top half of the companies in their peer group.
• Lastly, I want Next Year’s EPS Growth Rate to be better than last year. Companies expecting growth in this current economy are the ones to favor.

And all of the above criteria are applied to stocks trading at or above $5 and have an average daily trade volume of at least 50,000 shares or more.

Here are a few stocks from that list for Tuesday, 9/23/08:
AYI Acuity Brands, Inc.
DMND Diamond Foods, Inc.
DV DeVry, Inc.
LVB Steinway Musical Instruments, Inc.
SEAC SeaChange International, Inc.

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Kevin Matras is the Research Wizard Product Manager and weekly contributing Editor at Zacks Investment Research who creates and writes the Zacks Commentary Screen of the Week. For more information, visit www.zacks.com.

analysis, cash, stocks