U.S. Markets open in 4 hrs 19 mins

5 Stocks to Buy in the Middle of a Bull & Bear Tug of War

Tirthankar Chakraborty
Investors could be well served by ETFs and stocks from sectors that house top-ranked industries.

Wall Street has seen increased volatility this week, after a rebound in U.S. stocks on May 14 followed the worst single-day drop in months on May 13. While bearish investors are skeptical about any trade deal, bullish investors believe in President Trump’s claim that he will reach a settlement with China. The bulls also believe that the U.S. economy is in good shape. Lest we forget, corporate earnings, rather surprisingly, continue to beat estimates.

Given the widespread uncertainty over the future course of the equity market, investing in stocks unperturbed by market gyrations isn’t a bad proposition. These stocks will surely capitalize on any upward journey, and provide cushion during times of downturn.

Topsy-Turvy Ride for Wall Street

The U.S. stock market finished a solid day of trading on May 14 with the Dow jumping 207.06 points, or 0.8%, to 25,532.05. The blue-chip index registered its best one-day gain since April 12. This followed May 13’s brutal trading session, with the blue-chip index registering its worst day since Jan 3.

The broader S&P 500 bounced back to close at 2,834.41, up 22.54 points, or 0.8%. However, the benchmark is still down nearly 4% so far this month. Battered tech giants, in fact, rebounded in the last trading session from their worst one-day declines on May 13 since January. Some heavyweight exporters like Caterpillar Inc. CAT and The Boeing Company BA also reversed a portion of Monday’s huge losses.

This shows that the market is unpredictable and often erratic in the short term. After all, the Cboe Volatility Index (VIX), Wall Street’s so-called fear gauge, had touched an intraday high on May 7, only to end at 18.06 on May 14. Thus, currently the index of expected volatility for the S&P 500 over the coming 30-day period indicates calmness in the equity markets. Needless to say, any reading above the 20 mark indicates volatility in the equity market.

Bulls and Bears Locked in Slugfest

The wild swings over the past two days are mostly due to the escalating U.S.-China trade tussle. President Trump recently called the trade tensions with China a “little squabble,” and reassured Americans that a trade settlement could still be in the cards. His comments soothed investors’ nerves. But, it’s still not clear whether this is a “dead cat bounce,” or a temporary rebound for stocks in the midst of a steep market downturn.

Trump’s unwavering resolve to levy hefty import duties on Chinese goods, despite China’s announcement of new tariffs on nearly $60 billion of U.S. exports, did no good to the stock market in recent times.

Bearish investors are worried that the trade war might destabilize an already-slowing global economy. Thanks to higher tariffs, Chinese goods will surely become more costly compared to U.S. products. And if consumers start buying U.S. products, eventually prices will move north. So, in both cases, U.S. consumers will bear the cost.

China won’t be spared either. The country uses the dollars it earns from exports to buy goods across the globe. But, due to trade tensions, China won’t have many dollars to pay for its imports.

However, bullish investors argue that trade-related headlines can’t dominate market sentiments forever. Stocks simply can’t fall at all times, especially, when you have a strong economy and corporate earnings are too strong.

Talking about the U.S. economy, GDP for the January-March period expanded at a 3.2% annual pace, the best first-quarter growth since 2015. The gain was well above analysts’ expectations of a 2.3% increase.

To top it, Americans are now feeling more optimistic about their conditions. The key economic indicator that measures attitudes on future economic prospects came in at 129.2 in April and exceeded analysts’ expectations of a 126.9 reading.

Some other recent reports also point to signs of strength. March retail sales’ surprise jump of 1.6% does indicate that consumer spending will eventually improve and that a proxy for business investment has risen sharply. Headline durable goods orders expanded 2.7% in March, easily surpassing estimates. In fact, durable goods orders grew at the fastest pace in seven months.

And when it comes to first-quarter corporate results, the 450 S&P 500 members that have reported so far have seen earnings go up 0.6% on 5% higher revenues, with 77.1% beating EPS estimates and 59.3% surpassing the revenue mark. The proportion of these 450 companies beating both EPS and revenue estimates is 51.3% (read more: Making Sense of the Earnings Picture).

The Winning Strategy

As the broader market struggles for direction, smart investors should simply look for stocks that provide superb risk-adjusted returns. The best way to go about doing this is by creating a portfolio of low-beta stocks, which are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1.

But even though low-beta stocks pose less risk, they provide lower returns. So, in order to boost your returns, we have zeroed in on stocks that have seen positive earnings estimate revision, usually in the past two-month period. Rising earnings estimates generally indicate that the stock will outperform the market in the near future. After all, earnings estimates are one of the most powerful metric that measures the fundamental strength of the company. To top it, these stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Argo Group International Holdings, Ltd. ARGO underwrites specialty insurance and reinsurance products in the property and casualty markets. The company has a beta of 0.57. The Zacks Consensus Estimate for its current-year earnings has climbed almost 6% in the last 60 days. The company’s expected earnings growth rate for the current year is 32.6%, higher than the Insurance - Property and Casualty industry’s projected rally of 17.5%.

eGain Corporation EGAN operates as a software-as-a service provider of customer engagement solutions. The company has a beta of 0.46. The Zacks Consensus Estimate for its current-year earnings has risen 15.8% in the last 60 days. The company’s expected earnings growth rate for the current year is 266.7%, way higher than the Internet - Software industry’s estimated rally of 13.2%.

G-III Apparel Group, Ltd. GIII designs, sources, and markets women's and men's apparel in the United States. The company has a beta of 1. The Zacks Consensus Estimate for its current-year earnings has moved 6.5% higher in the last 60 days. The company’s expected earnings growth rate for the current year is 15.4%, higher than the Textile - Apparel industry’s projected rise of 12.2%.

Westlake Chemical Partners LP WLKP acquires, develops, and operates ethylene production facilities and related assets in the United States. The company has a beta of 0.6. The Zacks Consensus Estimate for its current-year earnings has increased 2.4% in the last 60 days. The company’s expected earnings growth rate for the current year is 39.7%, way higher than the Chemical - Specialty industry’s projected growth of 1.1%.

OP Bancorp OPBK provides banking products and services in California. The company has a beta of 0.78. The Zacks Consensus Estimate for its current-year earnings has increased 22.4% in the last 60 days. The company’s expected earnings growth rate for the current year is 16.9%, higher than the Banks - Southwest industry’s projected rally of 10.3%.

Will you retire a millionaire?

One out of every six people retires a multimillionaire. Get smart tips you can do today to become one of them in a new Special Report, “7 Things You Can Do Now to Retire a Multimillionaire.”

Click to get it free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
eGain Corporation (EGAN) : Free Stock Analysis Report
 
The Boeing Company (BA) : Free Stock Analysis Report
 
Westlake Chemical Partners LP (WLKP) : Free Stock Analysis Report
 
Caterpillar Inc. (CAT) : Free Stock Analysis Report
 
G-III Apparel Group, LTD. (GIII) : Free Stock Analysis Report
 
OP Bancorp (OPBK) : Free Stock Analysis Report
 
Argo Group International Holdings, Ltd. (ARGO) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research