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(Note: to read the entire Zacks Market Strategy for July, click here: What We Should Expect from Q2 Earnings)

The Big Picture

The jobs picture continued to brighten to the end of June. In the first half of 2013, in response, U.S. stock markets rallied to levels not seen in six years.  Global markets stagnated.  The S&P 500 index traded above the 1670 level in early June. Then, it settled down.  

Strong evidence showed capital leaving bonds funds after Fed taper talk picked up. A rising 10-year U.S. risk-free rate is the major issue now.  

Fed and Japanese BoJ bond buying is at work, month-to-month. With more job additions, most U.S. stimulus timelines move into this year.

Is it time to buy in early July?  

We’re onboard for a further rise in U.S. stocks under global QE. If a Fed taper hits this fall, look for a sell-off.  This fall downside risk puts a range-bound market into play for the summer.  Markets don’t like uncertainty.

Fair Value Shapes the Summer Range

At 15.4 times this year’s conservative earning estimate, stocks look fairly valued.  Consider the average stock market P/E is 15. Apply that to $111.5 per share optimists expect for the S&P 500 in 2H-13 and 1H-14. That computes to fair value at 1672!  If you say those earnings projections are high, trim it to a conservative $105 per share.  That gives the S&P 500 a fair value of 1575, a nice low in a summer range.

Total S&P 500 earnings in Q2 are now expected to be down -0.3% on -0.5% lower growth in revenues; a drop from the +3.9% total earnings growth expected in Q2 on +0.5% higher revenue growth in early April. Total earnings were up +2.8% in Q1 on barely positive growth in S&P 500 revenues.  

Zacks Sector, Industry, Company Telescope

(1) In the Consumer world, investor focus should be on Autos, Tires, Trucks and the Home Furnishing-Appliance industries within Discretionary spending.  Buying a new car, or fresh parts for an old one, and refurbishing a home remain attractive.  Other Consumer Discretionary industries, notably the Consumer Electronics one, have also seen a large upgrade from the last report.  Soaps & Cosmetics is the leading Staples industry.

Stay away from the Packaged Food and Beverage industries now.

Company to look at: Standard Motor Products, Inc. (SMP - Analyst Report)

SMP has three primary operating segments: Engine Management (70% of sales), Temperature Control (28%), and All Other (2%). Engine Management manufactures ignition and emission parts, on-board computers, ignition wires, battery cables, and fuel system parts. Temperature Control manufactures and remanufactures air conditioning and heater parts.

The company sells its products primarily to warehouse distributors such as CARQUEST and NAPA Auto Parts; large retail chains such as Advance Auto Parts, AutoZone, CSK Auto, O Reilly Automotive, and Pep Boys; and original equipment manufacturers (OEMs).

(2) The Financial sector has three industries that are strong:  Insurance leads, with Banks & Thrifts and Real Estate not far behind.  This is broad based strength across a diverse set of activities speaks well of a modest U.S. growth story remaining in place in the second half of 2013.
    
Company to look at: Amtrust Financial Services (AFSI - Snapshot Report)

AMTRUST is a multinational property and casualty insurer specializing in coverage for small businesses. They offer workers' compensation insurance, extended warranty coverage, specialty middle market property and casualty insurance, and a host of related products and services.
 
(3) The IT sector has strength in Semi-conductors and Misc. Tech, and Computer-Office Equipment.  This speaks to a growing use of small devices and components.   Hardware and Software companies are lagging.

In the Telco sector, Telco Services is Very Attractive.  The small device world is supporting growth here too.

Company to look at: Vipshop Holdings, Ltd. (VIPS - Snapshot Report)

Vipshop Holdings Ltd. is an online discount retailer for brands. The Company offers branded products to consumers in China through flash sales on its vipshop.com website. It offers a wide selection of various famous branded discount products including apparel for women, men and children, fashion goods, cosmetics, home goods and other lifestyle products, through its website. Vipshop Holdings Ltd. is headquartered in Guangzhou.

(4) In the Health Care sector. Medical Care is now attractive.  Drugs and Medical Products are Unattractive.  This is a reversal.

Company to look at: Aetna (AET - Analyst Report)

Aetna Inc. is one of the nation's largest health benefits companies and one of the nation's largest insurance and financial services organizations.

(5) In the Energy sector, Oil Exploration & Production now looks Attractive.  Plays that focus on domestic production in the Bakken and Marcellus shale are worth a comment and further investigation.  

Coal and the Oil & Gas Integrated companies are to be avoided.

(6) The Industrials sector has pockets of strength, Construction-Building Services and Industrial Products-Services and Aerospace & Defense.  However, eight industries are showing weakness.  It looks like the home construction boom is keeping parts of the sector aloft.  Industrial industries exposed to global growth conditions are lagging.

(7) No Materials sector industry is above a Market Perform.  Global growth worries really hits this sector hard.  It is to be avoided until a turn is noted, and that turn is not happening this month.

(8) No Utilities sector is Attractive.

(Note: to read the entire Zacks Market Strategy for July, click here: What We Should Expect from Q2 Earnings)

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