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Market Weekly Review: Earnings Drive Rally Ahead of FOMC

The major U.S. stock market averages added about 1% to recent gains this week, ahead of the Fed’s next interest rate decision. Energy names led the way higher, while the real estate sector lagged.

A raft of positive earnings reports was the primary catalyst behind the move higher this week. Intel (NASDAQ:INTC) gained 8% a day after exceeding analyst expectations, while Twitter (NYSE:TWTR) lost 20% the session following its own disappointing quarterly result.

Of the 199 S&P 500 names that have reported earnings so far, 78% have exceeded expectations. This is considerably ahead of the historical beat rate of 65%, though aggregate profits are expected to decline 2% in the third quarter.

Shifting Focus to Economy

While the pace of quarterly reports accelerates next week, investor attention will be moving back toward the U.S. economy on Thursday and Friday.

First, Chairman Paulson & Co. are scheduled to announce their next interest rate decision on Thursday afternoon. Fed funds futures are pricing in a 94% likelihood of another rate cut, compared with just 49% a month ago.

Morgan Stanley strategists offered the following Fed preview this past Wednesday:

“We expect the FOMC to cut the fed funds rate target range by 25bp, to 1.50-1.75%, with assurances that it will act as appropriate to sustain the expansion…

While we believe post-October is an appropriate time to take a breather, Chair Powell should avoid signaling a pause lest financial conditions tighten materially. The statement and the press conference should maintain the ready-to-act-as-necessary message.”

After the FOMC, traders will quickly be prepping for the October jobs report on Friday. Consensus expectations call for the addition of just 80,000 jobs and for the unemployment rate to remain at 3.6%.

Any employment result coming in materially stronger could pour cold water on the hope of future interest rate cuts this year or in 2020.

Knowing what and when to buy can be challenging for any investor. However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.

One such consumer leisure name that’s leveraged to lower interest rates and is worth a closer look is our Stock of the Week.

Stock of the Week: Winnebago Industries (WGO)

The company is synonymous with the recreational vehicles (namely motorhomes) that it’s produced since the 1950’s. Last year, Winnebago also acquired the Chris-Craft boat brand.

The stock gained more than 23% this week, as management delivered better-than-expected quarterly results this past Wednesday.

Looking ahead, these gains should keep on coming. Here’s why:

The company earned $1.01 a share in the August quarter, as revenue fell 1% from the previous year, to $530.4 million. Upside in the period was driven by higher pricing for Towable products and strong demand for the Grand Design RV brand.

Management also delivered 61% operating cash flow growth in fiscal 2019 (ended August), which gives Winnebago room to increase its quarterly dividend of $0.11 a share (0.9% yield) in the coming quarters.

Following the print, analyst Gerrick Johnson of BMO Capital commented:

“…the underlying business is showing significantly more strength than the modest EPS beat would suggest. The pace of business is good, inventory is healthy, and the normally understated management team appears more upbeat about its outlook than we can ever remember. The company seems positioned to significantly outperform the industry once again in FY2020 and WGO remains one of our top picks in the leisure space.”

All three active analysts tracked by TipRanks rate the stock a Buy. The average price target of $57.33 represents another 12.6% upside potential from current levels. (Sea Winnebago stock analysis on TipRanks)

The potential for lower interest rates is a key component of the investment thesis for the company. Buying an RV is a luxury purchase and a lower financing rate has historically sparked demand across the industry.

Despite the hefty gains this week, Winnebago is valued at just 12.7x expected full-year earnings of $4.01 a share. The stock is trading at a discount to the broader market and the median industry valuation of 14.7x earnings.

FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks. You may also want to learn more about how we use TipRanks indicators to find stocks that are primed to outperform. Discover the Smart Investor portfolio here >>