For the full August Market Strategy PDF, click here.
Another month has come and gone. It is time once again to update our subscribers on the markets, the economy and stock strategy.
Zacks Editors' Fresh Year-End Call
The S&P 500 index traded above the 1700 level on August 1.
Zacks editors are collectedly forecasting a 2013 target of 1770 for the year-end S&P 500. That would be a forward earnings yield of 6.5%. If we get towards the end of 2013 with U.S. GDP in healthy shape and no U.S. recession on the horizon, a nice stretch well above 1700 can feed on itself. Our collective low is just under 1600. Pessimists will point to a dead-cat bounce in Europe, a hard landing in China, or to a U.S. housing/mortgage slowdown in 2H.
Fundamentals on the Sidelines as Valuations Rise
The jobs picture continued to brighten to the end of July, though not strong enough to rid the markets, and the Fed, of all fears. In the first half of 2013, in response, U.S. stock markets rallied to levels not seen in six years. Global markets have stagnated in the first half. Europe is looking up in the second half.
Q2 GDP growth came in at a preliminary +1.7%, well above a +1.0% consensus. The consumer added a +1.8% stock-stimulated response to the Q2 story, but trade growth was also strong, business fixed investment was strong, and state & local government spending turned up slightly. All aggregate demand cylinders hitting is bullish.
Q2 earnings for S&P 500 companies added up better than pessimists had us thinking. Nonetheless, tepid U.S. large cap earnings and revenue growth remains the worry. Look for Q3 earnings to modestly beat most estimates again. Q4 estimates are going to come down.
Zacks Sector/Industry/Company Telescope for August
(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. Consumer Staples industries are all in the tank now.
Stay away from the Packaged Food, Tobacco and Beverage industries.
Our Pick: Volkswagen (VLKAY), a Zacks Rank #1.
This Germany-based global maker of autos can access the strength of the U.S. market and stands to benefit from a rebound in the second half in Europe.
(2) The Financial sector has three strong industries: Banks & Thrifts, Finance and Insurance lead, in that order. The broad-based strength across a diverse set of finance activities speaks well of a modest U.S. growth story remaining in place in the second half of 2013.
Our Pick: PNC Financial Services Group (PNC - Analyst Report), a Zacks Rank #2.
PNC is one of the nation's largest diversified financial services organizations, providing regional banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services.
(3) In the Health Care sector, Medical Care is now very attractive. Drugs and Medical Products are attractive. This is an upgrade on Obamacare’s coming expansion of individual coverage.
Our Pick: Centene Corporation (CNC - Snapshot Report), a Zacks Rank #2.
CNC provides managed care programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income and the State Children's Health Insurance Program.
(4) The IT sector has strength in Semi-conductors. This speaks to a growing use of small niche devices and components. Hardware and Software companies are lagging and are now unattractive or very unattractive.
In the Telco sector, Telco Services is at market. The small device world is not supporting an improved outlook anymore.
(6) The Industrials sector has pockets of strength, Aerospace & Defense, Business Services and Conglomerates are the highest ranked, in that order.
However, six industries are showing weakness. The home construction boom is keeping parts of the sector aloft. Industrial industries exposed to global growth conditions are lagging. Caterpillar is a good example.
Our Pick: iRobot Corp. (IRBT - Analyst Report), a Zacks Rank #1.
iRobot Corp. designs robots that perform dull, dirty or dangerous missions in a better way. The company's proprietary technology, iRobot AWARE, Robot Intelligence Systems, incorporates advanced concepts in navigation, mobility, manipulation and artificial intelligence. This proprietary system enables iRobot to build behavior-based robots, including its family of consumer and military robots.
(5) In the Energy sector, Oil Drilling now looks attractive. Focus on domestic production in the Bakken and Marcellus shale. They are worth further investigation.
The Alternate Energy and Coal industries turned up a bit. Now at market.
(7) Utilities overall are poor. Nat Gas Distribution Utilities are at Market.
(8) 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 did not happen this month.
For the full August Market Strategy Report, click here.