Five S&P 500 Stocks Likely To Turn Around In 2016
When 2015 ended, everyone said that the Dow (DIA) and S&P 500 (SPY) had seen their worst yearly finishes since 2008. Nobody, however, thought that 2016 would cook up an even more dismal beginning, with the blue-chip index tumbling over 1000 points in the first week – which represents the worst first five days of any year.
During the week, China halted trading twice, after the circuit breaker mechanism came into effect. Growth concerns in China that were at the root of the global market rout in 2015 are touted to have caused the early 2016 upheaval too.
In such a backdrop, it is not wrong for US markets to look for domestic benefits. The pace of the Fed rate hike is crucial this year. A gradual rate hike should attract more cash into the US markets. The labor market is showing strength, and the retail sector’s improving trends speak volumes on consumer confidence.
While we cannot run down the chances of the market moving sideways and seeing high volatility, many analysts are not too bearish about 2016. In fact, many Wall Street analysts are of the view that 2016 is not the year of the bear market. They are trimming down the severity of financial turmoil, and some even predict the S&P 500 scoring as high as over 2300.
If investors are eager to lap up opportunities, a prudent move would be to buy the beaten-down stocks with encouraging fundamentals. The stocks, which we shall cherry-pick currently come at a bargain price after declining at least 10% in 2015, but have the potential to turn around in 2016.
Where Is the S&P 500 Headed?
Reportedly, Wall Street stock strategists do not expect 2016 to see a bear market, or stocks dropping 20%. But, there are concerns that markets may trade sideways, providing breakeven returns.
The optimistic calls see the S&P 500 soaring as high as 2360. That would be a significant jump from Friday’s close of 1922. Strategists believe that the gradual rate hike will not have any detrimental effect. Some also say that the concerns about credit markets are overblown, with no possibility of a recession. UBS Group AG’s (UBS - Analyst Report) year-end price target for the S&P 500 is 2,275. And the S&P 500 will have to drop to 1,750 to end the Bull Run – something that UBS finds “quite improbable”.
Meanwhile, the chief investment strategist at BMO Capital Markets sounds somewhat skeptical and believes that S&P may see a “cycle high” and endure a “corrective phase.” Nonetheless, even in this case, the S&P 500 is pegged to grow to 2100, in spite of warnings of a “bumpy” year.
The average price target for the S&P 500 in 2016 is 2215. Ironically, the average 2015 price target was 2225, but the Greek debt negotiation drama, oil price slump, the record surge in US dollar, currency devaluation in China and the China-led global market rout, the plunge in biotech stocks following price gouging concerns, and finally the first rate hike in a decade dragged the S&P 500 down in 2015.
The predictions are not entirely rational, and the accuracy is indeed questionable. However, if markets learn to tackle the China concerns and the energy slump, 2016 may turn out profitable. If we go back to 2014, the markets witnessed the initiation of the slump in crude prices along with geopolitical troubles.
However, that did not restrict the S&P 500 from hitting multiple highs. Thus, 2016 should also include strong domestic data. The energy price slump in that case is a blessing. Lower crude prices will eventually boost purchasing power and disposable income; helping consumer confidence to soar. Notably, consumer spending accounts for 70% of the GDP.
Is It All Rosy?
To be honest, we cannot be overly optimistic about the S&P 500 running higher. UBS finds the S&P 500 dropping to 1,750 improbable, but in the near term at least, the US markets are in dire need of growth catalysts.
As many strategists run down the bearish views, we should also look into the possible concerns to be safe. China has been causing too much trouble for the global markets, and the tenth straight month of weak manufacturing data in China does not paint a rosy picture for the near future.
A stronger dollar had also impacted the US economy as it weakened the exports business, curbing the purchasing power of consumers in the foreign countries, as US manufactured goods turned more expensive. The rate hikes will only heighten the dollar issue.
While the slump in oil prices helps economic activity by improving consumers’ disposable income, it also leads to job losses in the sector and lower profits for oil producers. In addition, the rate hikes will make the case worse for oil firms that have high debt.
The labor market has shown an uptrend. But what worries us is that the labor participation rate is at an almost 40-year low. Also, the surge in job creation should also come with the increase in wages.
5 Stocks That May Rebound
Amid all contradictions, investors should play safe for profitable returns. To guide investors to the right picks, we highlight 5 stocks that carry a favorable Zacks Rank.
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These stocks are also bargain buys now, as at least 10% drop in their share prices in 2015 make them come at great discounts. In addition, these stocks have other encouraging fundamentals.
Harman International Industries, Inc. (HAR - Analyst Report) is engaged in the development and marketing of audio products, lighting solutions, electronic systems & digitally integrated audio and infotainment systems. Harman is expected to benefit from growing automotive production globally. Its diversified product portfolio is also an advantage. The company’s strong patent portfolio (approximately 5,300) helps it to launch products frequently across all its segments.
Harman currently carries a Zacks Rank #2 (Buy). It has a current year growth estimate of 14.9%. Harman has ample liquidity to pursue growth opportunities, going forward. It has a current cash flow growth of 30.25% in contrast to the industry average of negative 15.47%. The sales/asset ratio of 1.23 also outperforms the industry’s 1.11. In 2015, Harman lost 12.5%.
QUALCOMM Inc. (QCOM - Analyst Report) is the undisputed leader in the global wireless baseband chipset market. Qualcomm currently has more than 255 royalty bearing licensees worldwide. The opportunities in the smartphone arena are strong positives for Qualcomm as the company forecasts continued healthy global demand in the near term and over the next several years.
Qualcomm currently carries a Zacks Rank #2. Qualcomm has a favorable price to earnings ratio (P/E) of 12.98, lower than industry average of 17.14. The PEG ratio of 1.18 also compares favorably with industry’s 1.49. Qualcomm is also seeing an improving earnings estimate trend. Estimates for the current quarter and year have improved 4% and 2.9%, respectively. In 2015, Qualcomm lost 33.9%.
United Continental Holdings, Inc. (UAL - Analyst Report) is a provider of air transportation services. The drop in oil prices has reduced airline companies’ operating expenses significantly, thereby boosting the bottom line. Weak oil prices resulted in tremendous savings and improved bottom lines for carriers in the past quarters. Meanwhile, the International Air Transport Association expects profits in the aviation industry to touch $36.3 billion in 2016 with a net profit margin of 5.1%.
United Continental Holdings currently carries a Zacks Rank #2. United Continental enjoys favorable valuations as it has a P/E of 6.23, a PEG ratio of 0.34 and Price/Sales of 0.51x. Current quarter and current year estimates moved up 14.6% and 4.3%, respectively, over the last month. In 2015, it lost 12.2%.
Endo International plc (ENDP - Analyst Report) is a global specialty healthcare company. Endo’s growth-by-acquisition strategy is encouraging. Endo acquired privately held Par Pharmaceutical for $8.05 billion. The acquisition boosted Endo’s generics portfolio and pipeline. The deal is expected to be earnings accretive in the first year of completion and result in double-digit accretion in 2016. Also, the Generic Pharmaceuticals (U.S.) segment at Endo has been performing well on the back of increased demand.
Endo International currently sports a Zacks Rank #1 (Strong Buy). The projected EPS growth is 29.5%, outperforming the industry estimate of 7.2%. The projected sales growth is also an impressive 42.5%, higher than the industry average of 13.9%. Endo International’s P/E of 9.54x compares favorably with the industry’s average of 19.6x. In 2015, Endo International lost 16.3%.
Discover Financial Services (DFS - Analyst Report) extensive student loan portfolio, global expansions, prudent capital management and increased card sales remain long-term growth drivers. The insurer’s inorganic growth remains strong and its solid cash position enables efficient capital deployment. Also remember that 2016 will see gradual rate hikes, which is highly beneficial for the financial sector.
Discover Financial Services currently carries a Zacks Rank #2. It has a P/E of 8.86x and PEG ratio is favorably placed below 1 at 0.96x. In 2015, Discover Financial Services had lost 19.1%.
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