5 Best Performing Stocks Of October

Markets suffered a decline over last month due to uncertainty related to the upcoming presidential election, volatile oil prices and dismal job data. By the end of the month, doubts over the likelihood of crude production controls heightened. On the positive side, third quarter earnings witnessed a significant improvement which provided some impetus for stocks. Domestic economic data was largely encouraging in nature.

October’s Performance

For the month, the Dow, S&P 500 and Nasdaq fell 0.9%, 1.9% and 2.3%, respectively. Election related uncertainty, oil price volatility and disappointing September jobs data weighed on broader markets.

However, investors digested a largely positive bunch of earnings results in October. Further, the Fed’s Beige Book stated that the overall U.S. economy is expanding at a moderate pace, while a pick-up in inflation raised December rate hike chances.

Encouraging Domestic Data

Most of the economic reports released during the month showed a clear improvement. Both the ISM manufacturing and services indexes for the month of August increased. Retail sales jumped 0.6%in September following a revised 0.2% decline in August. Industrial production rose 0.1%, rebounding from 0.5% decline in August. The Leading Indicators Index also rebounded, gaining 0.2% after a 0.2% in decline September.

CPI moved up 0.3% in September. This was the highest advance recorded over the last five months. Also, PPI rose 0.3% in September. Core PPI increased 1.5% year-on-year, registering its highest 12-month rise in two years.

Most significantly, the “advance” estimate for third quarter GDP increased at an annual rate of 2.9%, registering its best percentage increase in two years. Consumer spending rose at a pace of 2.1%, while exports jumped 10%, posting its best percentage gain in three years.

However, a few key reports were negative in nature. Construction spending slumped declined 0.7% while durable orders fell by 0.1%. Consumer confidence dropped to 98.6, a three-month low.

Housing Sector Steadies

Housing seems to have recovered somewhat after traversing a difficult period. Housing starts fell 9% in September, reaching its lowest level in last one and a half year. However, building permits went up 6.3% from August.

Additionally, the Pending Home Sales Index gained 1.5% from August to 110.0 in September. Sales of existing homes rose 3.2% in September from August to a seasonally adjusted rate of 5.47 million. Meanwhile, sales of newly built homes increased 3.1% in September from the prior month to a seasonally adjusted annual rate of 593,000.

The National Association of Home Builders/Wells Fargo builder sentiment index stood at 63 in October. Despite a marginal decline, the index remains at an encouraging level, signifying that homebuilders think sales conditions remain promising. 

Job Additions Slump, Hourly Earnings Rise

Jobs data for September came in well below expectations. The economy added 156,000 jobs, less than the consensus expectations of 173,000. Monthly job additions averaged 192,000 in the past three months, weaker than last year’s robust additions of 229,000.

With the rise in job seekers, the unemployment rate ticked up to 5%. About 444,000 people entered the labor force last month and 3 million over the past year. Meantime, the labor force participation rate added half a percentage point over the past year to 62.9% last month. Hourly pay rose 0.2% to $25.79 an hour in September. The average work week also inched up 0.1 hour to 34.4 hours.

Oil Prices Remain Volatile

Oil prices suffered another month of volatility, marked by speculation over OPEC led production controls. Production and inventories data also had a significant impact on price movement. During the first week, the EIA reported that U.S. commercial crude oil inventories had suffered their fifth straight weekly drop. As a result, crude prices and sector stocks experienced gains.

During the second week, oil prices moved north on Oct 10 after Saudi Arabia’s energy minister Khalid al-Falih said he was hopeful that major oil producing nations will agree to trim production level before the year-end. Vladimir Putin also supported curbs on petroleum output. The very next day, prices retreated after the IEA said oil production by OPEC rose to record highs in September. A stronger dollar too had a negative impact on oil prices.

On Oct 19, the EIA reported that crude inventories had declined for the week ended Oct 14, in contrast to analysts’ projections of an increase. Additionally, Saudi Arabia's oil minister Khalid Al-Falih said non-OPEC nations were also “showing willingness to join” the effort to freeze production. WTI crude rose to settle at its best level since July 14, 2015. Prices declined again the next day.

Oil prices fell on Oct 31 following doubts over a possible crude production cuts by major oil producing nations. During a meeting in Vienna, non-OPEC countries like Russia, Brazil, Mexico and others did not commit to freeze or cut their crude output until the OPEC members agree to do the same. WTI and Brent crude declined to their worst settlement since Sep 27.

Election Induced Uncertainty

Ahead of this year’s presidential election, Democratic nominee Hillary Clinton has held the edge for much of the campaign. Clinton has dominated the presidential debates and seems the clear favorite at this stage. The outcomes of these debates, including the issues discussed, have dominated headlines and guided markets on several occasions. However, uncertainty over the ultimate result of this election has also unnerved investors.

In the latest development on this front, an FBI probe into Clinton’s emails rattled investors. Clinton is being investigated on her use of a private server and handling of classified information while she was the Secretary of State.

Such apprehensions dragged down stocks, while driving up the CBOE Volatility Index to a near two-week high. Foreign fund managers exited U.S. stocks for seven out of the last eight weeks, opting to stay away till the election concludes. 

Deutsche Bank, Wells Fargo Dampen Sentiment

Recent developments at Deutsche Bank AG (DB - Free Report) and Wells Fargo & Co (WFC - Free Report) led to significant distrust for financials, especially bank stocks. Deutsche Bank endured questions about whether it will be able to withstand the cost of a settlement with the U.S. Department of Justice. The bank needs to settle civil claims, which are related to the sale of structured mortgage bonds during the 2008-09 financial crisis.

Meanwhile, Wells Fargo added to the atmosphere of mistrust after it was accused of creating fake accounts, which ultimately led to CEO John Stumpf’s resignation. The bank was accused of fraudulent cross-selling, for which it created around 2 million unauthorized customer accounts to achieve sales goals.

Earnings Growth in the Black for Third Quarter

Third quarter earnings growth is on track to be in positive territory for the first time in six quarters. Banks led from the forefront as earnings results improved radically in the third quarter. JPMorgan Chase (JPM - Free Report) , Goldman Sachs GS Wells Fargo (WFC - Free Report) and Citigroup (C - Free Report) all posted encouraging results.Bank of America’s (BAC - Free Report) earnings numbers also exceeded expectations. Better-than-expected earnings results from UnitedHealth UNH, Netflix (NFLX - Free Report) , Morgan Stanley MS, Microsoft (MSFT - Free Report) and Johnson & Johnson (JNJ - Free Report) also had a positive impact on investor sentiment.

Results from GE GE, Caterpillar CAT, General Motors GM and 3M (MMM - Free Report) failed to live up to expectations. Earnings numbers from Apple (AAPL - Free Report) and particularly Amazon.com (AMZN - Free Report) were disappointing. However, total third-quarter earnings from 332 S&P 500 members reported so far are up 1.9% from the same period last year on 1.3% higher revenues, with 72.9% beating EPS estimates and 55.4% coming ahead of revenue estimates

FOMC Minutes

Minutes from the Fed’s September meeting showed that policy makers were divided over the timing of a rate hike. Policy makers had kept a rate hike on hold last month despite a “reasonable argument” for an increase. While some officials called for a rate hike “relatively soon,” others wanted to see further progress towards full employment and faster inflation.

Ahead of the release of the minutes, New York Fed President Bill Dudley had said that “slack” in the labor market was a reason the central bank hasn’t been more aggressive in hiking rates. Even though it is widely expected that the Fed will hike rates after the U.S. presidential election, traders have think there is a mere 9% chance of a rate hike in the month of November.

5 Star Performers for October

I ran a screen on Research Wizard for companies with the following parameters:

  1. Percentage price change over the last 4 weeks greater than or equal to 15% (As of Oct 31, 2016)
  2. Forward price-to-earnings ratio (P/E) for the current financial year (F1) less than or equal to 20. This picks out stocks that are good value choices
  3. Expected earnings growth for the current financial year greater than or equal to 15%
  4. Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years.

Here are the top 5 stocks that made it through this screen:

VOXX International Corporation VOXX is engaged in marketing automobile sound, vehicle security, mobile video systems, and consumer electronics products.

Price gain over the last 4 weeks = 34%

VOXX International has a Zacks Rank #1 (Strong Buy) and its expected earnings growth for the current year is more than 100%. The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 14.66x.

Ocean Rig UDW LLC ORIG is engaged in providing offshore drilling services to oil and gas exploration, development and production drilling industry.

Price gain over the last 4 weeks = 22.5%
Expected earnings growth for current year = 96.4%

Ocean Rig has a P/E (F1) of 0.24x.The stock holds a Zacks Rank #1.

Vale S.A. VALE is one of the world's largest producers and exporters of iron ore and pellets.

Price gain over the last 4 weeks = 22.3%

Vale has a P/E (F1) of 10.62x and its expected earnings growth for the current year is more than 100%. The stock has a Zacks Rank #2 (Buy).

Meta Financial Group, Inc. CASH is the holding company for federally chartered savings bank MetaBank.

Price gain over the last 4 weeks = 16%
Expected earnings growth for current year = 27%

Meta Financial holds a Zacks Rank #1. The stock has a P/E (F1) of 12.13x.

CONE Midstream Partners LP (CNNX - Free Report) is an owner, operator and developer of natural gas gathering and other midstream energy assets.

Price gain over the last 4 weeks = 15.4%
Expected earnings growth for current year = 29%

CONE Midstream Partners holds a Zacks Rank #2 and it has a P/E (F1) of 13.52x.

Can Stocks Recover in November?

Stocks have suffered a second successive month of declines, weighed down by multiple concerns. Jobs data is likely to improve next month due to the temporary job additions generated by the holiday sales season. However, oil price volatility is likely to continue given the uncertainty over a production agreement.

At the same time, markets are likely to receive a breather after the conclusion of the presidential election. A relief rally which is expected to follow the results may yet return stocks to their winning ways.

Disclosure: None.

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