June's 5 Best-Performing Stocks - Analyst Blog
Markets performed poorly in June, despite indications that the economy was recovering. Most domestic reports were on the positive side and GDP numbers were not as bad as earlier estimated. However, the crisis in Greece negated all other positives and was primarily responsible for all benchmarks ending the month in the red.
Despite fresh proposals from Greece’s government, negotiations ended in a deadlock. Ultimately, Greece became the first developed nation to default on a debt payment to the IMF after its lenders turned down its request to buy more time.
June’s Performance
For the month the S&P 500, the Dow and the Nasdaq declined 2.1%, 2.2% and 1.6%, respectively. Benchmarks ended in the red for the month as uncertainty over Greece’s bailout program weighed on investor sentiment.
Additionally, weakness in energy and transportation stocks also had a negative impact on benchmarks. However, a new ruling by the Supreme Court on the Affordable Care Act helped healthcare stocks buck the broader declining trend.
Meanwhile, the Federal Reserve signaled it will hike interest rates at a slower than expected pace. Encouraging data bolstered the view that the economy is recovering after a weak first quarter economic growth.
GDP Data Improves
The U.S. economy shrank less in the first quarter than previously estimated. According to the “third estimate” by the Bureau of Economic Analysis, the first quarter output of goods and services decreased at an annual rate of 0.2%. This was in line with the consensus estimate. The “second estimate” had forecasted GDP to have declined 0.7%.
Growth was hampered by harsh winter weather, cheaper oil prices, stronger dollar and disruptions in Western Coast ports. Meanwhile, real personal consumption expenditure, which accounts for almost two-third of the U.S. economy, was upwardly revised to 2.1% in the first quarter. This however was significantly less than the 4.4% increase in the fourth quarter. Additionally, U.S. exports fell 5.9% in the first quarter, while imports rose 7.1%.
Record Job Additions
The U.S. economy created a total of 280,000 jobs in May, well above the consensus estimate of 222,000. The increase in hiring was widespread in May. Professional and business services, leisure and hospitality, and healthcare added the most number of jobs.
The unemployment rate came in at 5.5% in May, up from 5.4% in April. Large inflow of people in the labor force was cited to be reason behind this slight uptick in unemployment rate. The U-6 unemployment rate came in at 10.8% in May, which remained unchanged from April but dropped 12.1% from a year earlier.
Additionally, average hourly earnings gained 0.3% in May from previous month’s figure to $24.96 per hour, higher than the consensus estimate of a 0.2% rise. The average hourly earnings witnessed a 2.3% rise from the year-ago figure, the highest rate since Aug 2013.
Bullish Domestic Data
Economic data was bullish in nature. Construction spending touched its highest level in more than six years in April. The ISM Manufacturing Index increased in May. Sales of domestic-made vehicle sales increased in May. Retail sales increased in May, led by increase in demand for automobiles.
CPI registered the biggest gain in May since Feb 2013, while PPI also increased. Durable goods orders excluding defense and aircraft orders, a proxy for business investment, increased in May. Consumer Confidence also increased in June.
Some reports were on the negative side. Factory orders declined in April while the ISM Services Index declined in May. Industrial production fell in May, following a decline in April. Automatic Data Processing, Inc.’s ADP data on private sector hiring came in a tad below estimates, but confirmed the economy is recovering.
Resurgence in Housing
Data on housing was also mostly positive. Housing starts declined in May, but figures for April were revised upward. The annual pace of permits for new construction hit the fastest pace since Aug 2007. U.S. homebuilder sentiment increased to a nine-month high in June.
U.S. construction spending touched its highest level in more than six years in April. Spending on private construction touched its highest level since Oct 2008. Sales of existing homes increased at the fastest pace in May since Nov 2009. New home sales increased at the fastest pace since Feb 2008. Pending home sales also increased, exceeding expectations.
Greece Crisis Looms
Lingering uncertainty over striking a deal between Greece and its creditors dampened sentiment during the first week of June. Gains for stocks were limited during the second week due to the IMF halting negotiations with Greece. Eurozone finance ministers failed to strike a deal with Greece over the country’s bailout program during the third week as well.
Uncertainty over Greece’s bailout program led to daily deposit outflow of around one billion euros, which eventually led to the ECB approving an emergency loan to Greece’s banking system. Concerns about Greek debt crisis led to investors taking money out of equities and parking them in safe haven assets like Treasury bonds.
Breakdown in Talks
Breakdown in cash-for-reform talks between Greece and its lenders over the weekend left the country teetering on the brink of a default and a subsequent exit from the euro currency bloc. Eurozone finance ministers rejected Greece’s proposal for a one-month bailout extension.
Meanwhile, the Greek government called for a referendum on whether to accept the cash-for-reform measures as demanded by its creditors. The country’s parliament approved Greece Prime Minister Alexis Tsipras’ call for a referendum to be held on Jul 5.
The Greek government ordered its banks to stay shut through Jul 6 in order to prevent the country’s financial system from collapsing. The country’s central bank imposed capital controls to curb the flow of money exiting the country. On the final day of the month, Greece defaulted on IMF repayments, despite submitting a fresh two-year aid proposal to its creditors.
FOMC Policy Statement
An overwhelming majority of Federal Reserve officials believe that the improving U.S. economy is strong enough to withstand one or two rate hikes this year. The “dot plot” of Fed officials’ rate projections showed rates increasing to a median level of 0.625% by the end of 2015, indicating two rate hikes this year. However, 7 Fed officials took a dovish stance, expecting only one rate hike in 2015.
Officials at the Federal Open Market Committee policy meeting kept short term interest rates unchanged. The Fed has kept its benchmark interest rates at a near zero level since 2008. The central bank wants to see continued improvement in the labor market and inflation rate moving closer to its target rate of 2% before hiking rates.
Fed Chair Emphasizes Trajectory Over Timing
Fed Chairwoman Janet Yellen said that “some progress” has been made on these two criteria but “room for further improvement remains”. Yellen added that Fed members haven’t yet decided to raise rates this year as the decision will depend on how the economy evolves. Yellen noted that the economy has “expanded moderately”.
Yellen did mention the economy managed to recover from the “soft patch” of the first quarter. Harsh winter weather, strikes at Western Coast ports, stronger dollar hampering exports and decline in business investment adversely affected economic growth in the first quarter. The central bank reduced its growth projections for this year due to the meltdown in the first quarter. Fed officials now see the economy expanding by 1.8% to 2%, down from an earlier projection of 2.3% to 2.7%.
Meanwhile, Yellen emphasized that the central bank’s policy will remain accommodative even after the first rate hike. She said: “Market participants should not focus on the timing of the first rate hike. What’s more important is the entire trajectory of interest rates.”
5 Star Performers for June
I ran a screen on Research Wizard for companies with the following parameters:
(Click here to sign up for a free trial to the Research Wizard today):
Percentage price change over the last 4 weeks greater than or equal to 10%
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
Expected earnings growth for the current financial year greater than or equal to 20%
Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years.
(See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).
Here are the top 5 stocks that made it through this screen:
Green Dot Corporation GDOT is the largest provider of prepaid debit card products and prepaid card reloading services in the US, as well as a leader in mobile banking with its GoBank mobile bank account offering.
Price gain over the last 4 weeks = 29.6%
Expected earnings growth for current year = 25.7%
Green Dot holds a Zacks Rank #2 (Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.85.
Isle of Capri Casinos, Inc. ISLE is a developer, owner and operator of branded gaming and related lodging and entertainment facilities in growing markets in the US.
Price gain over the last 4 weeks = 23.5 %
Expected earnings growth for current year = 43.9%
Isle of Capri Casinos holds a Zacks Rank #1(Strong Buy) and it has a P/E (F1) of 16.60x.
Alps Electric Co. Ltd. APELY is a Japan-based company mainly engaged in the manufacture and sale of electronic components and audio equipment.
Price gain over the last 4 weeks = 19.2%
Expected earnings growth for current year = 26.4%
Apart from a Zacks Rank #1 (Strong Buy), Alps Electric has a P/E (F1) of 16.01x.
LegacyTexas Financial Group Inc. LTXB is a bank holding company. The company's holdings include LegacyTexas Bank. The bank offers commercial, small business, and consumer deposit and lending products, title and insurance services through its bank subsidiaries.
Price gain over the last 4 weeks = 16.9%
Expected earnings growth for current year = 59.3%
LegacyTexas holds a Zacks Rank #2 (Buy) and it has a P/E (F1) of 18.58x.
Commercial Vehicle Group Inc. CVGI supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market.
Price gain over the last 4 weeks = 13.8 %
Expected earnings growth for current year = 96.6%
Apart from a Zacks Rank #2 (Buy), Commercial Vehicle Group has a P/E (F1) of 12.65x.
Can Stocks Recover in July?
Greece has dominated headlines and guided markets for most of June. The country has defaulted on an IMF payment despite submitting a fresh proposal to its creditors. Ultimately, the standoff over the country’s debts will be decided by the results of a referendum to be held later this weekend.
Meanwhile, GDP is expected to rebound in the second quarter. This view is supported by the recent flurry of bullish economic reports. Data on housing and hiring were particularly strong. This is expected to boost stocks in the days ahead.
Additionally, in case “Grexit” does come to pass, the effects may only last over the short term. A contagion effect is unlikely as Greece accounts for less than 2% of the Eurozone’s GDP. Even if such a scenario occurs, the ECB is equipped to take necessary measures. Ultimately, the direction of stocks in July will be determined by whether investors choose to focus on the fate of Greece or strong economic indicators.
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AUTOMATIC DATA (ADP): Free Stock Analysis Report
GREEN DOT CP-A (GDOT): Free Stock Analysis Report
COMML VEHICLE (CVGI): Free Stock Analysis Report
ALPS ELECTRIC (APELY): Free Stock Analysis Report
ISLE OF CAPRI (ISLE): Free Stock Analysis Report
LEGACY TX FINL (LTXB): Free Stock Analysis Report
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