With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is:

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Mid Cap Watch List (Track at Marketocracy).

As with the Small Cap Watch List (Track at Marketocracy), we were surprised at the amount of turnover in our screens. Only 7 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Part of the reason for the turnover was to reduce the overlap between the Small Cap and Mid Cap Watch List (Track at Marketocracy)s. Now there is only one-third overlapping names rather than two thirds. Furthermore, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.

So without further ado, the names on the chopping block from the previous list are:

Silgan Holdings (SLGN - Annual Report); Middleby (MIDD); Olin (OLN); Vector Group (VGR); Sanderson Farms (SAFM); Tesoro (TSO); Downey Financial (DSL); Waddell & Reed (WDR); Gamco (GBL); Apria Healthcare (AHG); Quest Diagnostics (DGX); ITT Educational Services (ESI); Equifax (EFX); Delhaize Group (DEG); Papa John’s (PZZA); Rent-a-Center (RCII); Cato Corp (CTR); Dassault Systemes (DASTY); Ingram Micro (IM); Energy East (EAS); South Jersey Industries (SJI - Annual Report); and American States Water (AWR).

The new list is:

Stock Market Beat Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Equifax (EFX) - whose business is likely well known in our credit-driven society - has agreed to buy Talx Corp. (TALX), which offers HR and payroll-related outsourced services including employment verification, unemployment cost and tax management, and associated paperless solutions.
According to Yahoo! Finance:

The companies expect the deal to be completed late in the second quarter or early third quarter, subject to regulatory approvals, approval by Talx shareholders and customary closing conditions.
Under the terms of the agreement, Talx shareholders can elect to receive, for each Talx share, either 0.861 shares of Equifax stock, $35.50 in cash, or a combination of stock and cash of equivalent value, subject to pro-ration, so that the total consideration consists of 75 percent Equifax stock and 25 percent cash. The stock portion of the purchase price will be tax-free to selling shareholders, according to the companies. All told, Equifax said it will issue about 22 million shares of Equifax stock and pay about $300 million in cash.

While TALX shareholders appear to have the choice whether to accept cash or stock, Equifax has secured an important limit with its pro-ration clause, which prevents its own stock from being stuck in purgatory while the deal waits for approval. Consider the following scenarios:

1. Equifax shares decline: If for whatever reason Equifax shares were to decline before the deal was completed, TALX shareholders would clearly prefer the cash. Without pro-ration Equifax would be asked to fork over the entire $1.4 billion in cash (an amount they don’t have.) They would have to either issue a load of debt or sell shares more cheaply (thus giving up more than the 22 million planned) in order to pay the TALX shareholders. With the pro-ration, if all the TALX shareholders ask for cash they will all get a 75/25 stock/cash mix.
2. Equifax shares rise: On the other hand, if Equifax shares go up a bunch then TALX shareholders would all ask for the shares - and the value of the acquisition would be much more than the $1.4 billion it is now. Although clearly less of a concern for both parties (the 22 million shares will be equally dilutive regardless of their value) Equifax limits the total size of the deal by keeping a $300 million cash component that doesn’t rise with the stock price.

When all is said and done, if 25% of TALX shareholders happen to ask for cash and the rest for shares, they will all get exactly what they want. But if what they want drifts very far from that magic balance, the choice really belongs to Equifax.

Yes, we know it has only been two days since the Watch Lists were priced, but they were a nice two days. In fact, despite our complaints that some stocks were going up dramatically between the time we announced the watch list and the time we priced it, several names had nice earnings reports Wednesday night and got an immediate boost to their at-the-close official pricing.

The small cap watch list was up 1.31%, significantly better than the 0.50% and 0.58% posted by the Russell 2000 and S&P small cap indices over the two day period. The performance was driven by particularly strong results from Silgan (SLGN - Annual Report), Landstar (LSTR - Annual Report), Rent-a-Center (RCII) and NVR (NVR - Annual report). The worst performers were Vaalco Energy (EGY) and Apria Healthcare (AHG).

The mid-cap watch list turned in 1.58%, compared with just 0.46% for the S&P mid-cap. Due to significant overlap, the same names accounted for the gain. However, Vaalco is not in the mid-cap watch list so the second-worst performance came from Equifax (EFX).

The 0.49% return for the large cap watch list was also sufficient to beat the S&P 500’s 0.28%. Positive stocks were fairly evenly dispersed, but the performance was held back by poor returns from Freeport McMoRan (FCX - Annual Report), TJ Maxx (TJX) and Ricoh (RICOY.OB).

We’ll also continue to track the original all-cap watch list against the S&P 500 and our own portfolio. Embarrassingly, the only negative performance this week was our own portfolio.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.

Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Mid Cap Watch List (Track at Marketocracy) (to be measured against the S&P 400) follows.

Astute observers will notice a significant overlap between the names in the Small Cap Watch List and this one. In fact, of the 29 names on the Small Cap Watch List (Track at Marketocracy), 19 are included among the 29 names in the Mid Cap Watch List (Track at Marketocracy). The main reason is that we ran our screens against the criteria in the relevant indices rather than the names in the indices. Since the largest market cap in the S&P Small Cap is $3.5 billion and the smallest market cap in the S&P Mid Cap is $600 million, there is room for a good deal of overlap if one is willing to accept it.

In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.

Today our Watch List names sent a message: nobody is willing to take a gamble.

Shuffle Master (SHFL) was among the day’s top losers, as the company lowered its EPS guidance for the year. Shuffle Master sells chip sorting and card-shuffling machines to casinos, which apparently need to shuffle things less than they were expected to.

Also unwilling to take a gamble are banks. Perhaps concerned over the increasing consumer debt burden they may be taking a more cautious approach to lending. At any rate, credit reporting agency Equifax (EFX) raised its guidance, and the shares were among the big winners today.

With this lack of appetite for risk, companies are rightly concerned about share price. There, too, some are taking no chances. Since a big buyer is needed to get shares moving up, Metal Management (MTLM) found one - itself. That turned out to be a sure bet.

Watch List news:

NTT DoCoMo’s net profit sagged 21% in the April-June quarter, dented by increased costs of promoting its 3G service and enhancing its network facilities.

Equifax Shares Rise on 2Q Profit

ITT Educational Services (ESI) announced earnings and a 10.4% increase in enrollment. Barrington Research maintained their outperform rating but tweaked the price target from $70 to $73.

D&B Announces Second Quarter 2006 Results, Raises EPS Guidance, Announces New Share Repurchase Program. Somebody may have figured this one out ahead of time, as the shares rose the day of the announcement (which was made after the market closed.)

Advo 3Q Profit Falls on Charges

Valassis 2Q Profit Drops

Fidelity National Information Services, Inc. Reports Second Quarter 2006 Financial Results Increases Full Year Guidance

Monarch profits hurtUTStarcom Shares Slapped by Downgrade

Summary: Services are holding up fairly well in the current market.
PPI data for telecom shows that recent mergers have resulted in a less hostile pricing environment:

Watch List News

National Geospatial-Intelligence Agency Awards $69 Million Contract over five years to Accenture for Human Capital Management.

Leading customer care and billing solutions provider CSG Systems (CSGS) reported an upside earnings surprise and promoted Mike Scott to executive vice president and chief operating officer.

Credit reporting agency Equifax (EFX) earned $69.6 million, or 53 cents per share, up 11 percent from $62.6 million, or 47 cents per share, during the same period a year ago. Excluding certain items, the company earned 51 cents per share. Sales rose 7 percent to $387.7 million from last year’s $363.4 million. Analysts were looking for earnings of 50 cents per share on sales of $388.4 million. Shares fell on concerns of slowing growth in the face of declining mortgage applications.
Fidelity National Information Services, Inc. (FIS), a leading global provider of technology services to financial institutions, announced financial results for the second quarter of 2006. Consolidated revenue increased to $1.02 billion, Net earnings increased to $66.0 million and Net earnings per diluted share was $0.34. “FIS generated another quarter of solid operating performance. Year-to- date pro forma revenue growth of 6.2% and EBITDA growth of 10.4% are in line with our original full year expectations,” stated FIS Chairman William P. Foley, II. “With strong sales growth in the first half of the year and the recent launch of our new item processing and BPO operation in Brazil, we are increasing our full year outlook to reflect pro forma revenue growth of 5% to 7% percent, EBITDA growth of 10% to 12% and cash earnings per diluted share of $2.06 to $2.12.”

Rent-A-Center, Inc. (RCII), the nation’s largest rent-to-own operator, announced a messy quarter but the stock rallied sharply on an increase to guidance. The Company reported total revenues for the quarter ended June 30, 2006 of $583.6 million, a $3.0 million increase from $580.6 million for the same period in the prior year. Reported net earnings for the quarter ended June 30, 2006 were $39.8 million, or $0.56 per diluted share, representing an increase of 7.7% from the $0.52 per diluted share, or net earnings of $39.6 million for the same period in the prior year, when excluding the benefit of the 2005 tax audit reserve credit. “Our second quarter same store sales continued a positive trend in 2006,” commented Mark E. Speese, the Company’s Chairman and Chief Executive Officer. “Our same store sales increased 1.1% for the quarter, which is primarily related to changes in our promotional activities as well as an increase in the number of units on rent,” Speese continued. “In addition, we believe our customer has adjusted to the current level of fuel costs. As a result of these factors, we are raising our fiscal 2006 guidance to $2.08 to $2.15 diluted earnings per share from $2.00 to $2.10,” Speese stated.

Other News

Standard & Poors downgraded Convergys (CVG) on fears that it will lose major customers.