Wall Street is bracing for higher bouts of volatility, after a rebound in U.S. stocks on Feb 6 followed the largest sell-off in more than six years. While bullish investors show a lot of optimism on corporate earnings and prospects of tax cut, those with a bearish view fear that the Fed’s embarking on a quicker route to interest rate hikes might derail the record bull run.
Given such widespread concern over the future course of the equity market, investing in stocks unperturbed by market gyrations won’t be a bad proposition.
Greater Uncertainty in Equity Market
The U.S. stock market finished a wild day of trading on Feb 6 with the Dow jumping 567.02 points, or 2.3%, to 24,912.77, after losing 567 points at the open. This followed Feb 5’s brutal trading session, with the Dow nosediving around 1,600 points as investors pulled money out of stocks.
The S&P 500 bounced back to close at 2,695.14, up 46.20 points, or 1.7%. But, the broader index is now down more than 5% from its all-time intra-day high of 2,872.87 on Jan 26. And it’s all because of the healthy pullback on Feb 5. Before that day, the index had enjoyed the longest stretch without a 5% pullback in 20 years.
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, at one point of time climbed as high as 49 on Feb 6, topping 40 for the first time since 2015, only to end at 31.3. Any reading above the 20 mark indicates volatility in the equity market. This is in sharp contrast to the fear gauge’s reading in 2017. Last year, VIX fell as low as 9.14.
Roller-Coaster Ride for Investors
The wild swings over the past two days are due to the constant tussle between bulls and bears. Bullish investors argue that at the end of the day, upbeat corporate earnings and the Republican tax cut policy will support market valuations.
Total Q4 earnings for the 251 S&P 500 members that have reported results so far are up 16% from the same period last year on 10.5% higher revenues, with 80.5% beating EPS estimates and 78.1% surpassing revenue estimates. Overall, Q4 earnings are expected to be up 13% from the same period last year on 7.7% higher revenues (read more: Earnings Estimates Going Higher).
Corporate America has also received a massive permanent tax break, which will further boost their profit margin. The House of Representatives approved the biggest overhaul of the U.S. tax code in 30 years. In a headline-grabbing move, the corporate tax rate was lowered from 35% to 21% and will be implemented this year, instead of being delayed until 2019 (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks).
Bearish investors, in the meantime, believe that the market is over-stretched and its weakness has already started last week when a pickup in wage growth sparked fears of inflation and bolstered expectations that the Fed could take a more aggressive stance in hiking rates than previously expected. Needless to say, the Fed’s easy monetary policy contributed significantly toward the ageing bull market, which will turn nine on Mar 9.
Americans are now getting fatter paychecks, with wages growing at the quickest pace since the end of the last decade. Average hourly wages increased by 9 cents, or 0.3%, to $26.74. This helped the average year-on-year hourly earnings to rise to 2.9%, the highest since June 2009. Even though the Federal Reserve would like wages to grow 3% or more, the Feb 2 report was, nevertheless, a welcome sign for workers following years of stagnant pay (read more: Wages See Fastest Growth Since 2009: Top 5 Gainers).
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 further zeroed in on stocks that have seen positive earnings estimate revision, usually on a quarterly basis. Rising earnings estimates generally indicate 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).
5 Solid Bets
Capital City Bank Group, Inc. CCBG operates as the bank holding company for Capital City Bank that provides a range of banking and banking-related services to individual and corporate clients in Florida, Georgia, and Alabama. The company has a beta of 0.74. The Zacks Consensus Estimate for its current-year earnings climbed 24.8% in the last 90 days. The company is expected to return 60.2% this year, higher than the industry’s estimated return of 27.1%.
HCA Healthcare, Inc. HCA, through its subsidiaries, provides health care services in the United States. The company has a beta of 0.48. The Zacks Consensus Estimate for its current-year earnings jumped 21.6% in the last 90 days. The company is expected to return 32.2% this year, in contrast to the industry’s projected decline of 4.7%.
MSCI Inc. MSCI provides products and services to support the needs of institutional investors throughout their investment processes worldwide. MSCI has a beta of 0.9. The Zacks Consensus Estimate for its current-year earnings rose 15.8% in the last 90 days. The company is expected to return 32.4% this year, more than the industry’s estimated return of 19.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
PetMed Express, Inc. PETS and its subsidiaries, doing business as 1-800-PetMeds, operates as a pet pharmacy in the United States. The company has a beta of 0.95. The Zacks Consensus Estimate for its current-year earnings increased 5.6% in the last 90 days. The company is expected to return 45.3% this year, higher than the industry’s estimated return of 6.4%.
Saia, Inc. SAIA through its wholly-owned subsidiaries operates as a transportation company in the United States. The company has a beta of 0.85. The Zacks Consensus Estimate for its current-year earnings jumped 18.9% in the last 90 days. The company is expected to return 55.7% this year, more than the industry’s estimated return of 33.1%.
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