Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis includes Apache (NYSE: APA), Devon Energy (NYSE: DVN), Kinross Gold (NYSE: KGC), Newmont Mining (NYSE: NEM) and Superior Energy (NYSE: SPN). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
As gold continues its ascent, brokerage analysts are raising their earnings projections on multiple companies within Mining-Gold. As is the case with oil, gold is reaching and staying at higher price levels than analysts had previously calculated in their models.
The glimmering metal is up by more than 10% since late December. Fears about the U.S. economy and speculation by traders are primarily responsible for the rise in gold prices. It should be noted that many people in emerging economies view gold as a sign of wealth. Plus, there is the greater willingness of investors (both retail and institutional) to trade commodities.
Is it too late to get in on the gold rush? Judging by the recent estimate revisions, the answer is that there is still time. Brokerage analysts have underestimated what several mining companies could potentially earn this year, and as a result, forward-looking valuations are being adjusted accordingly.
The power of earnings estimates lies in the perception of valuation. As estimates are revised higher, stock becomes cheaper relative to projected profits. This process leads to further buying pressure and hence higher stock prices.
Like any commodity, gold can be volatile. Therefore, investors should keep an eye on both earnings estimates and the price of the metal itself. Current forecasts likely factor in some pullback in futures prices, but a significant pullback in gold futures could cause the estimate revisions to come down. Of course, if gold breaks through the $1,000 mark, 2008 profit projections could be revised even higher.
As I mentioned in the opening paragraph, higher oil prices are causing brokerage analysts to reassess their projections. Regular readers will recall me mentioning this in late December.
The reassessment is continuing as oil appears to have found support at the $86-$87 dollar range and has yet to trade below $90 per barrel this year. Simply put, oil is staying at higher prices longer than anybody expected.
Along with oil prices, natural gas prices are also rising. Futures contracts for February delivery are up sharply since the start of year.
The combination of high crude oil prices and rebounding natural gas prices has caused several brokerage analysts to raise their earnings forecasts on multiple domestic exploration and production (E&P) companies. Among the beneficiaries are Apache (NYSE: APA) and Devon Energy (NYSE: DVN).
Again, investors should keep an eye on commodity prices. Sentiment towards E&P companies can be affected by swings in natural gas prices.
Conversely, oil-service companies are less commodity price sensitive because, even with a significant pullback in crude, it still makes sense for oil companies to invest in capital improvement and maintenance projects. Oil service companies with rising estimates include: Zacks Rank #1 Rank (“strong buy”) stock Superior Energy (NYSE: SPN).
The interactive Zacks Industry Rank List allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. See the list at http://at.zacks.com/?id=3208.
About Zacks Industry Rank and the Zacks Rank
Zacks Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry. The Zacks Rank is assigned to approximately 4400 stocks and ranges from #1 (“Strong Buy”) to #5 (“Strong Sell”). Both the Zacks Industry Rank and the Zacks Rank are quantitative indicators designed to cover periods of 1-3 months.
Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +32%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 129% annually (+5 % vs. +12%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
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