Market Weekly Review: Lower Yields Spark Stock Selloff

U.S. markets were closed on Monday for the Memorial Day holiday, but the selling pressure on stocks did not slow down this week.

There was little progress in trade talks between the U.S. and China this week. In fact, President Trump declared trade war on a new front Thursday, proposing a 5% tariff on all goods imported from Mexico, beginning June 10. In lieu of agreement between the U.S. and its neighbor to the south, the tariff would gradually increase to 25% by October.

This continued global economic uncertainty sent investors looking for security in bonds. Short-term rates moved so low on Wednesday that the yield on 3-month bills T-bills was 14 basis points below 10-year notes, which is a level of inversion that hasn’t been experienced since the Financial Crisis.

As a reminder, bond investors are not always right, but an inverted yield curve is generally viewed as a signal that a recession could materialize in the next year or so.

Even so, there are plenty of reasons to remain upbeat on select investment areas. For example, dividend stocks become more attractive as Treasury yields move back down. In addition, the first-quarter GDP report was revised lower to still-impressive 3.1% growth on Thursday.

Plus, there’s always the notion that investors have an FOMC put option in their back pocket. Fed funds futures are pricing in a 74% possibility of an interest rate cut by September, compared with a 48% chance a week ago.

Happily Looking to Next Week and a New Month

Looking ahead to next week, all eyes will be on the May jobs report next Friday. The consensus analyst estimate calls for the addition of 190,000 non-farm payrolls. A good number could go a long way to dispel the rumors of pending doom-and-gloom that have been hanging over stocks the past couple of weeks.

This year, some investors certainly followed the old Wall Street adage, to “sell in May and go away”. The S&P 500 fell 6.5% last month, giving back a large chunk of the hard-fought gains realized in the first four months of 2019.

However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.

One such FinTech name that’s worth a closer look is our Stock of the Week below…

Stock of the Week: Fidelity National (FIS)

Admittedly, the winners were few and far between in a week where the S&P 500 fell 2.7% in just four days of trading.

That said, we recently added Fidelity National to our Smart Investor portfolio and are pleased to see that shares were up 1.3% this week. The stock also gained 3.8% in the month of May, exceeding the return of the S&P 500 by more than 10 percentage points.

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

You may not be familiar with the name, but there’s a good chance that Fidelity National touches your money on a daily basis. The company is the leading processor of payments and other transactions for banks and various financial institutions.

After being in business for over 50 years, Fidelity National counts more than 20,000 customers across 130 countries. The company processes billions of transactions annually that helps move $9 trillion around the globe.

Analysts Increasingly Bullish

On Thursday, top-rated analyst, James Friedman of Susquehanna, started coverage of the stock with a Buy rating and $140 price target.

Friedman is rated #207 of the over 5,000 analyst tracked by TipRanks, which adds weight to the call. His target suggests 16.4% upside potential for Fidelity National and Friedman is not alone in his bullishness. 13 of 14 active analysts covering the company rate it a Buy (1 Hold).

Merger Boosts Growth Potential

A significant portion of Fidelity National’s expected future growth is a result of a massive merger that management announced earlier this year.

Back in March, the company said that it would acquire competitor, UK-based Worldpay, assigning an enterprise value of $43 billion to the deal. Fidelity National is paying a mixture of cash and stock for the deal and will control 53% of the combined company.

The merger is expected to close in the third quarter and help boost Fidelity National’s organic revenue growth to 6% to 9% through 2021, up from 5% reported in the most recent quarter. In addition, management sees $400 million of annual cost synergies by combining the two businesses. Fidelity National has identified another potential $500 million of annual cross-selling opportunities from combining the two customer bases.

Aided by the merger, consensus analyst estimates call for the company to average 20% earnings growth over the next three years. The stock is currently valued at 14.7x expected 2020 earnings of $8.19 a share, which is a discount to the industry average of 19x, the broader market and Fidelity National’s expected growth rate.

Finally, I’m encouraged to note the stock sports a Smart Score of 10/10 on TipRanks, co-signing the potential for continued price momentum. This new proprietary metric utilizes Big Data to rank stocks based on 8 key factors that have historically been a precursor of future outperformance.

In addition to the catalysts mentioned above, Smart Score notes the company has positive sentiment from hedge funds and investment bloggers.

Discover more stocks with a 'perfect' 10/10 Smart Score here<<