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Shrug Off Market Gyrations With These Top 5 Value Picks


After an exponential rise throughout 2017, the U.S. stock markets entered into a correction mode early in February. However, markets have returned to their winning ways despite the fact that stock indices are yet to completely recover from last month’s turmoil. As of now, there is no clear cut opinion about recent market volatility. It could only be a healthy correction or the beginning of what could become a full-fledged bear market.

The strong economic fundamentals of the United States have raised the possibility that recent stock market volatility may be a transitory phase and markets will continue their long-term uptrends. However, investors should be prepared to minimize fluctuations in their portfolio and consequently should rebalance it with suitable financial assets to maintain stability. At this stage, it makes sense to pick up great value stocks to cushion the portfolio.

Trump’s Tariff and Prospect of Trade War

On Mar 9, President Donald Trump imposed 25% tariff on steel and another 10% tariff on aluminium on all countries except Canada and Mexico. Trump argued that the “unfair” foreign trade practices were both “economic disaster” and “security disaster”. Imposition of tariff will not only help U.S. steel and aluminium industries but also protect national security.

The planned U.S. trade actions are likely to trigger retaliation measures from affected countries and major foreign trade partners, consequently hurting the U.S. economy. In fact, the announced actions have prompted fiery responses from major U.S. allies like the European Union, Brazil, South Korea to name a few.

The likelihood of a trade war has negative impact on domestic industries. Investors remain sceptical about imposition on tariff on imported steel and aluminium. For example, yesterday, stock prices of United Technologies Corp., The Boeing Co. and Caterpillar Inc. declined 1.92%, 2.90% and 2.34%, respectively.

Inflationary Pressure Still Lingers

Market watchers are divided about the prospects of U.S. inflation in 2018. Nevertheless, the general market sentiment is that inflation will be a factor to deal with in current year. Increase in commodity prices and an uptick in the global economy may result in inflationary tendency.

The U.S. labor market is at near full employment level. Significant reduction in tax rate will enable firms to offer higher wages resulting in a rise in disposable income. Consequently price levels may go up. Though U.S. job data for February indicates that wage rate has dipped, a strong economy will always be conducive to a prospective rise in prices.

Possibility of Interest Rate Hike

The Fed is likely to hike interest rates several times in 2018. The Fed had hiked rates by a quarter percentage point last December. Nevertheless, Fed policymakers reckon three rate hikes this year, setting the stage for an imminent increase in March under Jerome Powell. A March rate hike has been on the cards as the Fed believes economic growth has been solid and inflation will increase more than anticipated. (Read: Fed Clears Way for March Rate Hike: Top 5 Gainers)

Higher interest will increase the attractiveness of bonds over stocks. This in turn will have a negative effect on stock prices. The U.S. bull market is celebrating its ninth birthday in March, and if it remains intact into August, it will officially become the longest in history. Consequently, the long-term bull market may take a break due to interest rate hike.

Our Top Picks

Despite a recovery from recent correction, several concerns plague the investors. A global trade war, hike in interest rate and an inflationary tendency in the U.S. economy are major near-term concerns. According to Strategas chairman Jason DeSena Trennert, "There is a decent chance that, due to inflationary pressures and higher interest rates, the market will be up somewhat less than earnings”. This in turn will force investors to invest their money in safe assets.

In anticipation, it makes good sense to buy value stocks on the dip that could prove to be valuable finds once the rally resumes. Our selection is also backed by a good Zacks Value Score and a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the value-investing space.

AMC Networks Inc. AMCX is engaged in producing programming and movie content. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.60, lower than the industry average of 10.65. It has a PEG ratio of 0.90, lower than the industry average of 1.80. It has a Value Style Score of A.

Macy’s Inc. M is one of the premier retailers of United States, operating about 885 stores in 45 states, the District of Columbia, Guam and Puerto Rico. The stock has a P/E (F1) of 7.96, lower than the industry average of 13.34. It has a PEG ratio of 0.94, lower than the industry average of 1.25. It has a Value Style Score of A.

Centene Corp. CNC is a diversified, multi-national healthcare enterprise that provides a portfolio of services to government sponsored and commercial healthcare programs. The stock has a P/E (F1) of 14.26, lower than the industry average of 17.58. It has a PEG ratio of 0.99, lower than the industry average of 1.33. It has a Value Style Score of A.

Cosan Ltd. CZZ is the leading global ethanol and sugar company in terms of production with low-cost, large-scale and integrated operations in Brazil. The stock has a P/E (F1) of 5.36, lower than the industry average of 20.53. It has a PEG ratio of 0.21, lower than the industry average of 1.60. It has a Value Style Score of A.

MCBC Holdings Inc. MCFT is a designer, manufacturer and marketer of MasterCraft brand premium performance sport boats. The stock has a P/E (F1) of 14.74, lower than the industry average of 15.87. It has a PEG ratio of 0.98, lower than the industry average of 1.20. It has a Value Style Score of B.

Zacks Top 10 Stocks for 2018

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2018?

Last year's 2017 Zacks Top 10 Stocks portfolio produced double-digit winners, including FMC Corp. and VMware which racked up stellar gains of +67.9% and +61%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.

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