5 Value Picks To Smartly Play A Recovering U.S.
The broader markets were off to a brutal start in 2016. All the major benchmarks slipped into correction mode due to the oil price rout and global growth fears. The minutes of the Federal Reserve’s January two-day policy meeting also saw ’downside risks’. However, unlike the markets, the U.S. economy isn’t tanking.
The struggling manufacturing sector received a much needed boost after industrial production climbed north. Moreover, consumers are willing to go out and make sizeable purchases. This is heartening news since growth in industrial output and rise in consumer spending levels constitute almost more than two-thirds of U.S. economic growth.
Hence, chances are that these underlying strengths will give the U.S. economy a push despite risks lurking around. Also, the Atlanta Fed and major financial behemoths expect the country’s first quarter GDP growth rate to escalate. Investors should cash in on this by buying stocks that are not only fundamentally strong but also are poised for growth in the near term.
Let us now take a look at the underlying strengths in some details:
Industrial Output Bolsters Growth Picture
The manufacturing sector was feared to have slunk into recession due to a stronger dollar, weak global economy and a continuous slump in oil prices. However, thanks to an increase in production in utilities and manufacturing, industrial output gained 0.9% in January, the largest gain since Nov 2014, according to the Federal Reserve. Moreover, industrial production increased for the first time since July.
Manufacturing production rose 0.5% last month, its biggest gain since July. A solid gain of 2.8% in the output of motor vehicles and parts was cited to be the major reason behind this uptick in manufacturing production. According to Steve Murphy, economist at Capital Economics, the gain may not look much, but “it is a lot better than the ‘collapse’ it is often characterized to be.” Utility output also increased 5.4% in January, while overall capacity utilization by the industrial sector gained 0.7 percentage point to 77.1%.
Consumer Spending Ignores Recession Fears
Along with the lift in industrial output in January, retail sales were off to a good start this year, indicating strength in consumer spending. Moreover, contrary to most analysts’ expectations, retail sales had ended 2015 on a strong note. The Commerce Department said that sales at retail stores rose 0.2% in January, banking on increased sales of new cars as well as groceries and home supplies.
The so-called core retail sales figure that excludes automobiles, gasoline, building materials and food services also increased 0.6% in January following a decline of 0.3% in December. The core retail sales tally corresponds closely with GDP’s consumer spending component.
January registered the fourth consecutive month of increasing retail sales as the unemployment rate improved and wages rose. Retail sales rose in January in spite of the turmoil in the global financial markets and snowstorms paralyzing the Northeast last month.
Additionally, Americans are spending a lot on big ticket items like cars. Sale of cars at a seasonally adjusted annualized rate (“SAAR”) increased to 17.55 million units in Jan 2016 from 17.32 million units in Dec 2015, the highest SAAR for any January since 2006. Moreover, Americans sold about 5.3 million existing homes in 2015, the best year since 2006, according to the National Association of Realtors.
Disposable Personal Income Increases
Consumer spending is expected to grow in the coming months since 2015 saw the best income picture in the last four years. The real disposable personal income grew 3.6% in 2015, almost a percentage more than what it had gained in 2014. Moreover, household savings of 5.2% of personal disposable income is currently at the highest level since 2012. Further, low gasoline prices are anticipated to increase the personal savings rate.
Until recently, gasoline prices had hit a 12-year low across the Midwest. The Federal government had lowered its national average gasoline price forecast for this year by 5 cents to $1.98 a gallon. More savings generally translate into more expenditure.
5 Value Picks on Rising Q1 GDP Projections
These strong underlying trends are expected to help the U.S. economy to expand in the near term and weather the volatile broader markets. The Atlanta Fed has already forecast the first quarter GDP growth at 2.7%, much higher than 2015’s fourth quarter advance estimate growth of 0.7%. Top financial firms including Barclays PLC, The Goldman Sachs Group, Inc. (GS - Analyst Report) and Morgan Stanley (MS - Analyst Report) also expect the U.S. economy to expand at a rate of 2.5%, 2.1% and 1.5%, respectively, during the first quarter.
Moreover, if compared to its peers, the U.S. economy is already at an advantageous position. According to the World Bank, the U.S. economy was valued at $17.5 trillion in 2015, while countries like China and Russia were valued much less at $10.3 trillion and $1.8 trillion, respectively.
Hence, in a scenario of a strengthening U.S. economy, it will be prudent to add stocks from the country with strong fundamentals to your portfolio. Our selection is also backed by a good Zacks Value Score and Zacks Rank.
We narrowed down our choices with the help of our new style score system.
Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.
Belden Inc. (BDC - Snapshot Report) designs, manufactures and markets signal transmission solutions for use in broadcast, enterprise and industrial applications worldwide. The company is part of the industrial goods sector.
BDC holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ It has a P/E (F1) of 9.85 compared to the industry average of 11.5. The company has expected earnings growth of 6.1% for the current year.
Johnson Outdoors Inc. (JOUT - Snapshot Report) designs, manufactures and markets outdoor equipment, diving, watercraft and marine electronics products worldwide. The company is part of the consumer goods sector.
JOUT holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ It has a P/E (F1) of 13.32 compared to the industry average of 16. The company has expected earnings growth of 60.4% for the current year.
Dean Foods Company (DF - Analyst Report) is a food and beverage company that processes and distributes milk and other dairy products in the U.S. The company is part of the consumer goods sector.
DF sports a Zacks Rank #1 and has a Value Style Score of ‘B.’ It has a P/E (F1) of 16.56 compared to the industry average of 49.4. The company has expected earnings growth of more than 100% for the current year.
The Goodyear Tire & Rubber Company (GT - Analyst Report) develops, manufactures, markets and distributes tires, and related products and services. The company is part of the consumer goods sector.
GT holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ It has a P/E (F1) of 8.01 compared to the industry average of 9.1. The company has expected earnings growth of 13.6% for the current year.
HD Supply Holdings, Inc. (HDS - Snapshot Report) operates as an industrial distributor in North America. The company is part of the industrial equipment wholesale industry.
HDS holds a Zacks Rank #2 and has a Value Style Score of ‘B.’ It has a P/E (F1) of 10.61 compared to the industry average of 10.2. The company has expected earnings growth of 40.8% for the current year.
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