ULTIMATE FOURMay 2017

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Welcome to your quarterly Ultimate Four report!Included in this report are the four stocks our experts believe have the greatest upside potential over the next quarter. It is just one of your exclu-sive benefits as a member of our Zacks Ultimate program, and it is ONLY available to subscribers like you.

It features the single favorite pick for the quarter ahead by four Zacks experts. This edition features selections from:

<Eric Dutram, Editor of ETF Investor and Surprise Trader.

<Kevin Cook, Editor of TAZR.

<Neena Mishra, CFA, FRM, Editor of Income Investor.

<David Bartosiak, Editor of Home Run Investor and Momentum Trader.

Simply read on to learn our Ultimate Four stocks for the coming quarter.

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Eric DutramKB Home (KBH) Don’t look now but the housing industry is making a comeback.

While many investors were concerned about the market thanks to a rising rate environment, action from the Fed could actually be helping to drive the home market even higher instead. That is because, after nearly a decade of ultra-low rates, investors are finally thinking that the low rate party is about to end.

This may lead to a bit of a scramble among potential buyers looking to lock-in now with low rates before things get back to normal on the rate front. But rates aren’t the only key to watch in this market, as a strong jobs market—plus rising earnings—as well as ultra-high consumer confi-dence are pumping up the market too. Add in some first-time buyer demand from millennials (better late than never), and we have a potent situation for the housing market in 2017.

This confluence of factors is great news for the homebuilders, as this in-dustry looks to be a prime beneficiary of the trend. The industry has seen its rank recently surge into the top half—and industries in the top half outperform those in the bottom half by a two-to-one factor historically—and many companies in the group have ‘buy’ ranks right now as well. And while there are numerous ways to play this trend, one of the best could be KB Home (KBH).

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Why KBH?

KBH is a builder of homes in several markets around the country. Its focus is on some of the hottest ones in the nation too, including California and Florida, but also more up-and-coming spots like Colorado, North Carolina, and Nevada too.

So, KBH is definitely in some of the top markets, which bodes well for both its near-term outlook, and the longer-term picture as well. This strength is also reflected in KB Home’s impressive fundamentals, which make it a great stock regardless of its location focus.

Fundamentals

One of the key things to note for KBH is its outstanding growth prospects. The company receives a grade of ‘A’ on this front, and when you delve into the underlying fundamentals, it is pretty obvious. KBH has a really impressive growth rate of 42% in terms of projected EPS growth, a level that is nearly three times the industry average. Sales growth comes in at a robust 18% for this year, while current cash flow growth is even higher, and beats the industry once again.

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And despite this growth potential, KBH is still trading as a great value. In fact, its forward PE is below the market average and comes in at a shock-ingly-low 12.5. Additionally, its PEG ratio easily beats out the industry average, coming in at just 0.8, while the price-to-sales ratio is a low 0.4, which is also better than the industry average of 0.64. No wonder KBH has earned itself an ‘A’ grade for Value too.

And though KBH is a little lacking in terms of momentum, it still has an overall fundamental grade of ‘A’, making it a very impressive company nonetheless. This is especially true if you also consider KB Home’s recent earnings estimates as well.

Earnings Picture

KBH shines when it comes to its recent earnings estimates from covering analysts. At time of writing, we saw universal agreement among ana-lysts—over the past sixty days—for the full year and next year-- that KBH’s prospects are improving. We also saw a decent magnitude increase for these revisions, including a 3% bump in the current year, and a 7% in-crease for the following year.

These changes suggest that analysts are becom-ing increasingly bullish on KB Home’s earnings prospects for not just this year, but future time periods as well. Addi-tionally, the most recent estimates for KBH have been even higher than

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the consensus, something that is another great signal for this stock in the near term.

KBH also is riding a really nice streak of beating estimates in earnings season. This includes five straight beats, and only two misses overall since the start of 2015. With these kinds of figures, it shouldn’t be surprising to note that KB Home has earned itself a Zacks Rank #2 (Buy) rating as well.

Bottom Line

The housing market is heating up, and this could be a great situation for homebuilders. The economy is humming, demand is there, and prices are on the rise. The only thing that is missing from the equation is supply, and homebuilders are going to be more than happy to fill that void.

And while a number of homebuilders look to profit from this environ-ment, KB Home appears to be very well-positioned to take advantage. Its focus on hot markets—which are seeing some of the best growth in terms of prices and also demand—and its strong underlying stock fundamen-tals, make it difficult to beat. So, if you are looking for a top homebuilder to ride this bullish wave in the industry, definitely give KBH a closer look for your portfolio.

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Kevin Cook

Juno Therapeutics (JUNO) Juno Therapeutics (JUNO) is a $2.5 billion emerging biotechnology company that develops cellular immunotherapies at its research facilities in Seattle. Their brand of “immuno-oncology” science is based on two platforms - Chimeric Antigen Receptors (CARs) and T Cell Receptors (TCRs) technologies.

Juno has focused on products to treat a form of adult leukemia known as relapsed/refractory B cell acute lymphoblastic leukemia, or r/r ALL for short. This program was known as JCAR015 but has since been discontin-ued. More on that in moment.

Juno has 2 other pipeline candidates in clinical trials: JCAR017, which is in Phase I/II trials for pediatric patients with r/r ALL whose cancer has re-curred after a bone marrow transplant; and JCAR014 that is in Phase I/II trials to treat various B cell malignancies in patients relapsed or refractory to standard therapies.

I was a JUNO investor in 2015 and 2016 but after some setbacks in clini-cal trials, the company received a “clinical hold” order from the FDA to stop the trials for potential safety concerns. I had to sell the stock as it kept falling from the mid-$40s until a likely bottom last December near $18.

Many investment banks were wrong about JUNO’s fortunes, even after the clinical hold. But things are starting to look up with loss estimates for 2018 dropping from -$3.48 to -$2.56, pushing shares to a Zacks #2 Rank. Here’s how the company describes their breakthrough science...

Juno is focused on revolutionizing medicine by re-engaging the body’s immune system to treat cancer. Founded on the vision that the use of human T cells as therapeutics will drive one of the next important phases in medicine, we are developing cell-based cancer immunotherapies

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based on our chimeric antigen receptor (CAR) and high-affinity T cell re-ceptor (TCR) technologies to genetically engineer T cells to recognize and kill cancer cells. We have shown compelling evidence of tumor shrinkage in clinical trials using multiple cell-based product candidates to address refractory B-cell lymphomas and leukemias. Longer term, Juno aims to develop our cell-based platform to include additional product candidates to address a broad range of cancers and human diseases.

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You can go to Juno’s website to learn more and see many graphical pre-sentations of this truly revolutionary science...

The Potential of T Cell Immunotherapy to Eradicate Cancer

Rebuilding After the Fire

In early March Juno discontinued the development of the struggling program, known as JCAR015. This was not surprising given the clinical hold on the ROCKET trial, the safety issues associated with this CAR T product, and the loss of a first-to-market advantage. The company now plans to initiate a trial with a new defined cell product candidate for adult ALL sometime next year.

Juno also revealed in March that multiple data readouts from multiple studies (e.g., BCMA CAR T and solid tumor trials) are expected throughout 2017, which most analysts believe could make for a volatile year. Although the company is making solid progress with its pipeline of nine clinical products, JCAR017 is viewed as the main value driver for the company.

Given that JCAR017 is likely to be the third CAR T product on the market for Diffuse Large B-Cell Lymphoma (DLBCL) and that new data readouts from several novel constructs are expected later this year, many analysts have recently lowered their expectations and outlook. And that’s why the stock is probably finding it’s footing above $20 as all the bad news is finally getting priced-in.

To learn more about the most common forms of blood cancers, called lymphomas, check out resources from the Lymphoma Research Founda-tion.

In March, Cowen analysts lowered their price target on Juno Therapeutics to $36 from $41 while maintaining a Outperform rating. Analyst Chris Shibutani updated their model to reflect the discontinuation of JCAR015 in adult ALL.

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Shibutani believes initial data from the Phase I TRANSCEND study indicate that JCAR017 is clearly viable in R/R NHL(DLBCL) with important data update expected at ASCO 2017, marking the next meaningful catalyst for JUNO.

Also, in the first week of April, Citigroup analysts lowered their price target on JUNO from $34 to $30.

The M&A Driver

Long time followers of my views and moves in BioPharma know that I hold M&A in my top 3 drivers of the industry. Over $500 billion in deals have been done as conventional, big-cap pharma companies compete with each other to scoop up promising new science and re-fill their drug pipelines as old cash-cows fall of patent cliffs.

Here was an update from FBR Capital in March...

FBR & Co sees strong appeal for the following potential primary targets for others firms that may be looking to make acquisitions: Tesaro (TSRO), Agile Therapeutics (AGRX), Kite Pharma (KITE), Juno Therapeutics (JUNO), Acceleron Pharma (XLRN), Aurinia Pharmaceuticals (AUPH), Geron Corp. (GERN), Genocea (GNCA).

Analyst Chris Meekins noted “The potential for tax reform and policy changes relative to the FDA could prime the pump for acquisitions of clinical-stage biotech companies by Big Pharma. With a likely increase in mergers, we believe certain companies in our coverage universe are prime targets. We expect M&A to be made in multiple therapeutic areas, particularly rare orphan diseases, further demonstrated by three acquisi-tion moves made since mid January by Eli Lilly, Johnson & Johnson, and Allergan.”

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It Always Pays to Have a Big Brother in BioPharma

The hundreds of millions of dollars required for drug testing R&D could not be done without the help of other war chests of cash to lean on. The good news is that Juno has a cash position of $922 million as of 4Q16. The better news is that their “big brother” is Celgene.

So while this big brother may or may not buy Juno, at least they are there with the important partnership and funding. Here was part of the press release from the summer of 2015...

Celgene and Juno Announce Ten-Year Collaboration to Advance Poten-tially Groundbreaking Immunotherapies for Patients with Cancer and Autoimmune Diseases

�<Broad strategic collaboration leveraging combined immunolo-gy expertise and assets to develop and commercialize novel immunotherapies for the treatment of cancer and autoimmune diseases

�<Celgene gains option to commercialize Juno programs outside North America and co-promote certain programs globally

�< Juno gains option to co-develop and co-promote select Celgene programs

�<Celgene to make initial payment of approximately $1 billion which includes the purchase of ~9.1 million shares of Juno stock at $93.00 per share, with potential to increase its stake over time

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SUMMIT, N.J. & SEATTLE--(BUSINESS WIRE)-- Celgene Corporation (Nasdaq:CELG) and Juno Therapeutics, Inc. (Nasdaq:JUNO) announced today a global collaboration for the development and commercialization of immunotherapies. The two companies will leverage T cell therapeutic strategies to develop treatments for patients with cancer and autoim-mune diseases with an initial focus on Chimeric Antigen Receptor Tech-nology (CAR-T) and T Cell Receptor (TCR) technologies.

With Celgene behind them, Juno is likely to succeed in at least one of its immunotherapy initiatives. You can see the full pipeline here.

Bottom line: Accumulate shares of JUNO near $20.

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Neena Mishra, CFA, FRMAnalog Devices (ADI)Founded in 1965 and headquartered in Norwood, MA, Analog Devices (ADI) is an original equipment manufacturer of semiconductor devices, specifically, analog, mixed signal and digital signal processing (DSP) inte-grated circuits. The have industry leading positions in converter and am-plifier markets.

According to the company, they are experts in electronics “that bridge the physical world and the digital world.” Their revenues are derived from four end markets—Industrial (44% of 2016 revenue), Communications (20%), Consumer (20%) and Automotive (16%).

They are the second largest producer of analog chips after Texas Instru-ments. Analog chips are also used in smartphones for managing radio signals and other purposes. These chips convert real world signals into digital signals. Apple is one of their biggest customers.

Solid Quarterly Results and Upgraded Guidance

The chip maker reported excellent results for Q4, beating both the Zacks Consensus Estimates and their own guidance. Adjusted earnings of 94 cents per share were significantly ahead of the Zacks Consensus Estimate of 73 cents.

Revenues were up 27.9% year over year and also beat the estimates. Free cash flow margins to were up 520 basis points year-over-year to 33.7%.

Improved performance across all the markets—industrial, automotive, consumer and communications—drove the results.

For the current quarter, management expects earnings per share in a range of 68–78 cents. Shares rose almost 5% after the results, after strong results.

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Rising Estimates

Analysts have raised their estimates for the company after strong earn-ings and raised guidance. Zacks Consensus Estimates for the current and next year are now $4.04 per share and $4.67 per share, up from $3.39 and $3.69, 30 days ago.

The company has a pretty good record at beating estimates. They have missed only once in the past five years. The average quarterly beat for the last four quarters was 14.14%.

Returning Cash to Shareholders

The chip maker has an attractive dividend yield of 2.25% currently. Over the past 12 months, they returned approximately $1 billion to sharehold-ers via dividends and buybacks and since 2007, they gave returned ap-proximately $7 billion.

The company has been raising their dividend consistently and their plan is to grow the dividend by 5% to 10%. And, as they continue to generate strong cash flows, we expect the growth in dividends to continue.

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Growing Organically and Through Acquisitions

The company continues to grow at an impressive pace, organically as well as through acquisitions. Since the great recession, they have invested $4 billion in research and development alone, mainly in the B2B markets of industrial, automotive and communications infrastructure.

Last month, the company completed the acquisition of another analog chipmaker Linear Technology for about $14.8 billion. The merger is ex-pected to reduce Analog’s reliance on Apple while adding products in other fast growing categories.

“The combination of Analog Devices and Linear Technology creates an analog industry powerhouse,” said the CEO. “Together, we are capable of solving more of our customers’ biggest and most complex challenges at the intersection of the physical and digital domains. We expect that this combination will create tremendous value for our customers, our em-ployees, and our shareholders for many years to come.”

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Additionally, they acquired some early stage technologies, which will help them move up the value stack, over time. They aim to grow 2x to 3x real GDP.

Positive Industry Outlook

“Semiconductor-Analog” industry is currently ranked 22 out of 265 Zacks industries (top 8%). The chip maker has increased focus on high growth areas within the industry including, smartphones, self-driving vehicles and the Internet of Things (IoT), which are likely to drive growth going forward.

Disclosure: I own shares of ADI in the Income Investor portfolio.

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David BartosiakKMG Chemicals (KMG)One of the main beneficiaries of the Trump trade was domestic chemical companies. That may sound very strange at the surface but the more you dig in to the subject, the more sense it makes. At the center of the MAGA trade was all things domestic and industrial. Companies that produce chemicals used for industrial purposes benefited greatly. That was the case with today’s Ultimate 4 choice KMG Chemicals (KMG).

Who is KMG?

KMG Chemicals through its subsidiaries, manufactures, formulates, and distributes specialty chemicals worldwide. The company operates in a few different segments. The company’s Electronic Chemicals segment is involved in the sale of high and ultra purity wet process chemicals primar-ily to clean and etch silicon wafers in the production of semiconductors. This segment’s products include sulfuric, phosphoric, and nitric and hy-drofluoric acids; ammonium hydroxide; hydrogen peroxide; isopropyl alcohol; other specialty organic solvents; and various blends of chemicals. This gives the company exposure to another hot segment of the market, semiconductors.

Its “Other Chemicals” segment engages in the supply of penta products consisting of solid blocks and concentrated solutions to industrial cus-tomers who use these preservatives to pressure treat wood products, primarily for utility poles and cross-arms, to extend their life by protecting against insect damage and decay, as well as sale of hydrochloric acid, which is a byproduct of penta production for use in the steel and oil well service industries.

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Strong Earnings History

Shares of KMG have been a Zacks Rank #2 (Buy) or a Zacks Rank #1 (Strong Buy) since mid-December of last year when the stock was trading under $38. Since flipping to a buy, shares have rallied all the way up to $44.82. A big reason for the Zacks Rank #1 (Strong Buy) the stock now enjoys is the recent estimate revisions coming from analysts. Two analysts have increased their earnings estimate for the current year and next year. The bullish sentiment has pushed up our Zacks Consensus Estimate from $1.82 to $2.03 for the current year while moving next year’s number up from $1.98 to $2.22.

You can see the strong earnings history for KMG here in the Price, Con-sensus and EPS Surprise Chart. Since bottoming out in 2014 the consen-sus EPS estimates have headed up consistently. Not only have the con-sensus numbers improved each year but there is healthy year-over-year growth as well. Looking at 2017 you can see the huge jump in consensus estimates since the start of the year.

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Stock Performance

The last earnings report for KMG was huge and the market responded in a big way. After surprising the market with EPS coming in at 57 cents versus consensus estimates calling for 42 cents, the stock rallied more than 17%. The company also surprised to the upside on revenues in the same report, coming in at $79 million versus $74 million for the quarter.

When compared to the rest of the specialty chemicals industry, shares of KMG have outperformed this year. The industry is up 6.5% YTD while shares of KMG have risen 12.4%. The industry currently ranks in the Bottom 34% of our Zacks Industry Rank.

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KMG has been on a run since leapfrogging the 50-day moving average on Election Day. A drawn-out February consolidation put the stock on ice just above $36. Following its last earnings report the stock has been on another exciting run, pushing up to new highs. With the commodity channel index coming down from highly oversold territory above 200 down near the zero line it’s presenting a great buying opportunity right now. The 50-day moving average is providing some downside support at $39.88.