Rely On The Revisions

Zacks Investment Research's Trevon Hunt says revised earnings estimates may spell a rally

Does a 22% surge in the Standard & Poor’s 500 during the first part of 2003 signal that all is clear and stocks are ready to roll? Or is the recent climb only a false alarm?

Trevon Hunt, an advisor at Zacks Investment Research, a Chicago stock market firm, says the answer lies in being patient. Indications are that stocks, after a rough three years, have now established surer footing and could be on their way to sustainable returns. But Hunt offers one caveat: While stocks posted impressive gains between March and May of 2003, summer is typically a slow season when the market makes little movement up or down. Such news shouldn’t discourage long-term investors who want to seize upon an opportunity to pick up shares with good valuations and good growth prospects.

In his capacity at Zacks, Hunt works as a liaison between the firm’s research department and institutional and retail clients who rely on the company’s number crunching and financial projections to choose stocks. With Wall Street’s big brokerages coming under scrutiny for recommending stocks of companies that were also banking clients, Zacks and a handful of other independent stock research houses are now in higher demand. In fact, much of Zacks’ database is available to individual investors on the company’s Website, www.zacks.com, where tabulations of earnings estimates, analysts’ ratings, and other key statistics are free to the public.

Hunt says the Zacks research team is keen on earnings estimate revisions, an indicator gathered by monitoring what both Wall Street and independent analysts believe a company can earn in profits during the months ahead. When business is good, those estimates are likely to rise, possibly several times in succession.

Once Zacks has homed in on rising revisions, analysts look to increases in company sales or revenues when selecting stocks. The Zacks crew also focuses on margins as a guide to a company’ efficiency at reaping profits. The wider the margins, the better management has reined in costs and kept business humming along.

The first pick in Hunt’s portfolio is RenaissanceRe Holdings (NYSE: RNR), an insurer. Demand for coverage is up, and Renaissance experienced a 92% increase in net income for the first quarter of 2003. He also picks health insurer Aetna Inc. (NYSE: AET), which reaches 332,000 primary care physicians and specialists and some 3,373 hospitals. Fierce competition among HMOs has prompted Aetna to focus on consumer satisfaction; a move, Hunt says, which is helping the company’s cash flow.

Career Education Corp. (Nasdaq: CECO) operates post-secondary and college campuses across the nation, including the Katherine Gibbs Schools chain. Company revenues have grown at a 40% annual clip, and a tight job market continues to spur enrollment at its campuses nationwide. Hunt says the clothing chain Gap Inc. (NYSE: GPS) has seized upon high-end fashion trends as a way to expand margins and increase sales. Meanwhile, the company’s Old Navy division has continued an aggressive expansion.

Finally, International Rectifier (NYSE: IRF) makes a variety of semiconductor chips that guide and manage the flow of

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