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Beware of the Dead Cat Bounce: 5 Safe Stocks for Now

Tirthankar Chakraborty
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Beware of the Dead Cat Bounce: 5 Safe Stocks for Now

Headwinds ranging from the recent rise in benchmark bond yield, US-China trade tensions to uncertainty surrounding midterm elections have resulted in neck-snapping stock market volatility in October.

The stock market’s comeback last week was a short one. After all, headwinds ranging from the recent rise in benchmark bond yield, US-China trade tensions to uncertainty surrounding midterm elections have resulted in neck-snapping volatility this month.

With markets experiencing a pullback, investing in stocks that provide brilliant risk-adjusted returns seems well thought-out.

Is it a Rebound or a Dead Cat Bounce?

October is living up to its notorious reputation of being a volatile month for the equity market. Last week’s rebound is surely a dead cat bounce — a period of temporary recovery from a prolonged decline. The S&P 500 has declined around 5% so far this month, with the broader index trading below its 200-day moving average as stocks continue to struggle. Needless to say market analysts consider moving averages as a dividing line of bullish and bearish momentum of an asset.

 

 

Chief market technician at MKM Partners, JC O’Hara added that “while the S&P 500 index is just minus 5.5% off the Sept. 20 high, the average S&P 500 stocks is off minus 17% from its 52-week high, and this shows just how much selling has already occurred.” At the same time, market volatility continues to remain elevated, with the Cboe Volatility Index (VIX) near the 20 mark. Market pundits view VIX below 12 as low and near 20 as high.

What’s Affecting the Markets?

Minutes from the Federal Reserve’s September meeting confirmed that the central bank is most likely to continue hiking benchmark lending rates at a gradual pace this year and beyond, which sent bond yields rising. This, in turn, rattled the equity market. After all, rapidly rising bond yields will result in steeper borrowing costs, which in turn will squeeze the profit margins of U.S. corporates.

Fed officials confirmed that a promising economic outlook backed their decision to raise rates. The labor market is in excellent shape, with unemployment rate at a 49-year low, while the economy is widely expected to grow around 3% in the final two quarters of the year.

Strained relationship between the United States and China has also spooked investors. U.S. tariffs on $200 billion worth of Chinese products applied last month at a rate of 10% are expected to increase to 25% by the end of this year. Tariffs are widely expected to have an adverse effect on corporate profits, with about 30 companies already mentioning its negative impact during earnings call so far, per Bank of America’s Savita Subramanian.

At the same time, killing of a Saudi journalist, Italian budget fears and Trump’s unpredictable actions ahead of midterm elections are not going down well with investors. Talking about elections, investors should brace for more volatility. In the last 11 midterm election years since 1974, the S&P 500 traded flat only to rally once political uncertainty waned, per The Goldman Sachs Group, Inc. GS. In fact, in those years, stock market volatility averaged 15% compared with the median of 12% in all years.

5 of the Best Safe Stocks to Buy

Given the near-term bearishness, investors should build a strategy on low-risk assets and a combination of parameters that leads to better 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.

These stocks are also dividend payers. Dividend paying stocks boast immense financial strength and are immune to market vagaries. Such stocks reflect solid financial structure, healthy underlying fundamentals and better quality business.

We have, thus, selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Target Corporation TGT operates as a general merchandise retailer in the United States. The company has a Zacks Rank #2 and a beta of 0.7. The company has a dividend yield of 3.1%, while its five-year average dividend yield is 8.8%. The Zacks Consensus Estimate for its current-year earnings rose 0.2% in the last 60 days.

 

The company’s expected earnings growth for the current quarter and year are 20.9% and 14.2%, respectively.

Fastenal Company FAST engages in the wholesale distribution of industrial and construction supplies in the United States and internationally. The company has a Zacks Rank #2 and a beta of 0.92. The company has a dividend yield of 3.1%, while its five-year average dividend yield is 9.5%. The Zacks Consensus Estimate for its current-year earnings rose 0.8% in the last 60 days.

 

 

The company’s expected earnings growth for the current quarter and year are 33.3% and 33.2%, respectively.

DSW Inc. DSW operates as a branded footwear and accessories retailer in the United States. The company has a Zacks Rank #1 and a beta of 0.88. The company has a dividend yield of 3.9%, while its five-year average dividend yield is 8.8%. The Zacks Consensus Estimate for its current-year earnings rose 6.8% in the last 60 days.

 

The company’s expected earnings growth for the current quarter and year are 13.3% and 13.8%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Broadcom Inc. AVGO designs, develops, and supplies a range of semiconductor devices. The company has a Zacks Rank #2 and a beta of 0.9. The company has a dividend yield of 3.1%, while its five-year average dividend yield is 55.7%. The Zacks Consensus Estimate for its current-year earnings rose 2.6% in the last 60 days.

 

The company’s expected earnings growth for the current quarter and year are 22% and 28.3%, respectively.

Community Trust Bancorp, Inc. CTBI provides commercial and personal banking services. The company has a Zacks Rank #2 and a beta of 0.54. The company has a dividend yield of 3.2%, while its five-year average dividend yield is 3.6%. The Zacks Consensus Estimate for its current-year earnings rose 1.6% in the last 60 days.

 

The company’s expected earnings growth for the current quarter and year are 19.4% and 16.8%, respectively.

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Community Trust Bancorp, Inc. (CTBI) : Free Stock Analysis Report
 
Fastenal Company (FAST) : Free Stock Analysis Report
 
Broadcom Limited (AVGO) : Free Stock Analysis Report
 
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
 
DSW Inc. (DSW) : Free Stock Analysis Report
 
Target Corporation (TGT) : Free Stock Analysis Report
 
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