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A Howling Good Time: 2 Stocks Sweeter Than Candy Corn
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“Spooky, scary skeletons send shivers down your spine.” – Andrew Gold
Spend a long period of time in the stock market and I guarantee one thing – there will be some skeletons in the closet. Whether it be missed opportunities or selling quality stocks too soon, we’ve all been embarrassed at least a time or two.
There’s no shame in the occasional failure as it’s how we learn. Particularly in an environment such as the stock market, it’s simply impossible to be right all of the time. Even professionals get it wrong a fair chunk; it’s the nature of the beast. Famously dubbed the “Great Humiliator”, the stock market attempts to fool the masses as often as possible.
This recent downturn certainly has investors spooked, with the major U.S. indexes undercutting key support and technical levels. Markets remain in the midst of a multi-month correction; selling pressure accelerated last week, with the Nasdaq and S&P 500 making new closing lows for the move. The Dow also fell back into negative territory on the year. Any rallies over the past few months have been short-lived and met by swift selling pressure.
Still, a host of sectors are extremely oversold and ripe for a turnaround. And when we factor in that third-quarter earnings have come in above expectations, a potential setup for a year-end rally is in play.
Q3 Earnings Surprise to the Upside
Despite the recent volatility, the Q3 earnings season results have been better than expected. Including the companies that reported through the end of last week, we now have results from 246 S&P 500 members (or 49.2% of the total membership). Earnings for these companies are up 6% from the same period last year on 2.1% higher revenues.
More than 1,100 companies are set to report this week, including 159 S&P 500 members. Expectations for the third quarter have evolved in a bullish manner, with earnings now projected to grow 1.2% from the year-ago period on 1.2% higher revenues. This would mark the first quarter that earnings growth has turned positive after contracting during the last three consecutive quarters, potentially putting an end to the corporate earnings recession.
Image Source: Zacks Investment Research
The major indices are clearly oversold and a snap-back rally could happen at any time. Markets have also entered a positive seasonal period with bullish historical statistics on their side. Dating back to 1950, the average year for the S&P 500 tends to see a seasonal (Fall) pullback bottom out on October 27th.
In terms of tech strength, dating back to 1971 the Nasdaq has rallied in Q4 from its October low into year-end in 46 of 52 years (88.5%), with an average gain of 9.5%. Of the six losses, only one year (2007) was a pre-election year. Those are pretty favorable odds to say the least.
If stocks are in for a fourth-quarter surge, where should we look?
Key Stocks to Watch
Not many stocks have held up well through the recent correction. Even fewer have hit new 52-week highs in October, but that’s exactly what we have in two well-known retail names.
Both companies are part of the Zacks Retail – Apparel and Shoes industry group, which currently ranks in the top 33% out of more than 250 Zacks Ranked Industries. Because this group is ranked in the top half of all industries, we expect it to outperform the market over the next 3 to 6 months. Also note the favorable valuation metrics for this industry group below:
Image Source: Zacks Investment Research
Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
American Eagle Outfitters (AEO - Free Report) stock has begun to show signs of outperformance in the second half of the year. The company has benefitted from a boost in its Aerie and American Eagle brands, driven by solid demand and profit improvement initiatives. A Zacks Rank #1 (Strong Buy) stock, AEO has rallied more than 27% this year:
Image Source: StockCharts
The established retailer has delivered a trailing four-quarter average earnings surprise of 43.15%. Analysts covering AEO have increased third-quarter earnings estimates by 17.95% in the past 60 days. The Q3 Zacks Consensus EPS Estimate now stands at $0.46/share, a 9.52% upgrade versus the same quarter last year.
Image Source: Zacks Investment Research
Another leading stock in Abercrombie & Fitch (ANF - Free Report) , a Zacks Rank #2 (Buy), has exploded higher this year on continued momentum in the Abercrombie brand along with sequential improvement in the Hollister brand. ANF shares have surged nearly 157% this year:
Image Source: StockCharts
The modern-day fashion retailer has exceeded earnings estimates in each of the past four quarters, with an average earnings surprise of 725%. Analysts covering ANF are in agreement and have been raising earnings estimates across the board. For the third quarter, estimates have been raised by 10.31% in the past 60 days. The Q3 Zacks Consensus EPS Estimate now stands at $1.07/share, a whopping 10,600% improvement versus the same quarter last year.
Image Source: Zacks Investment Research
What the Zacks Model Reveals
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently witnessed positive earnings estimate revision activity. This more recent information can be a better predictor for future earnings and can give investors a leg up during earnings season. The technique has proven to be quite useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.
ANF is a Zacks Rank #2 (Buy) and boasts a +1.87% Earnings ESP. Another beat may be in the cards when the company reports Q3 results on November 21st. ANF is ranked favorably by our Zacks Style Scores, with best-possible marks in our Value, Growth and Momentum categories.
We’re now in the thick of the third-quarter earnings season. Remember, the stocks that hold up best through pullbacks and corrections typically lead the next leg up. Make sure you’re taking advantage of all that Zacks has to offer to uncover leading stocks like AEO and ANF.
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A Howling Good Time: 2 Stocks Sweeter Than Candy Corn
“Spooky, scary skeletons send shivers down your spine.” – Andrew Gold
Spend a long period of time in the stock market and I guarantee one thing – there will be some skeletons in the closet. Whether it be missed opportunities or selling quality stocks too soon, we’ve all been embarrassed at least a time or two.
There’s no shame in the occasional failure as it’s how we learn. Particularly in an environment such as the stock market, it’s simply impossible to be right all of the time. Even professionals get it wrong a fair chunk; it’s the nature of the beast. Famously dubbed the “Great Humiliator”, the stock market attempts to fool the masses as often as possible.
This recent downturn certainly has investors spooked, with the major U.S. indexes undercutting key support and technical levels. Markets remain in the midst of a multi-month correction; selling pressure accelerated last week, with the Nasdaq and S&P 500 making new closing lows for the move. The Dow also fell back into negative territory on the year. Any rallies over the past few months have been short-lived and met by swift selling pressure.
Still, a host of sectors are extremely oversold and ripe for a turnaround. And when we factor in that third-quarter earnings have come in above expectations, a potential setup for a year-end rally is in play.
Q3 Earnings Surprise to the Upside
Despite the recent volatility, the Q3 earnings season results have been better than expected. Including the companies that reported through the end of last week, we now have results from 246 S&P 500 members (or 49.2% of the total membership). Earnings for these companies are up 6% from the same period last year on 2.1% higher revenues.
More than 1,100 companies are set to report this week, including 159 S&P 500 members. Expectations for the third quarter have evolved in a bullish manner, with earnings now projected to grow 1.2% from the year-ago period on 1.2% higher revenues. This would mark the first quarter that earnings growth has turned positive after contracting during the last three consecutive quarters, potentially putting an end to the corporate earnings recession.
Image Source: Zacks Investment Research
The major indices are clearly oversold and a snap-back rally could happen at any time. Markets have also entered a positive seasonal period with bullish historical statistics on their side. Dating back to 1950, the average year for the S&P 500 tends to see a seasonal (Fall) pullback bottom out on October 27th.
In terms of tech strength, dating back to 1971 the Nasdaq has rallied in Q4 from its October low into year-end in 46 of 52 years (88.5%), with an average gain of 9.5%. Of the six losses, only one year (2007) was a pre-election year. Those are pretty favorable odds to say the least.
If stocks are in for a fourth-quarter surge, where should we look?
Key Stocks to Watch
Not many stocks have held up well through the recent correction. Even fewer have hit new 52-week highs in October, but that’s exactly what we have in two well-known retail names.
Both companies are part of the Zacks Retail – Apparel and Shoes industry group, which currently ranks in the top 33% out of more than 250 Zacks Ranked Industries. Because this group is ranked in the top half of all industries, we expect it to outperform the market over the next 3 to 6 months. Also note the favorable valuation metrics for this industry group below:
Image Source: Zacks Investment Research
Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
American Eagle Outfitters (AEO - Free Report) stock has begun to show signs of outperformance in the second half of the year. The company has benefitted from a boost in its Aerie and American Eagle brands, driven by solid demand and profit improvement initiatives. A Zacks Rank #1 (Strong Buy) stock, AEO has rallied more than 27% this year:
Image Source: StockCharts
The established retailer has delivered a trailing four-quarter average earnings surprise of 43.15%. Analysts covering AEO have increased third-quarter earnings estimates by 17.95% in the past 60 days. The Q3 Zacks Consensus EPS Estimate now stands at $0.46/share, a 9.52% upgrade versus the same quarter last year.
Image Source: Zacks Investment Research
Another leading stock in Abercrombie & Fitch (ANF - Free Report) , a Zacks Rank #2 (Buy), has exploded higher this year on continued momentum in the Abercrombie brand along with sequential improvement in the Hollister brand. ANF shares have surged nearly 157% this year:
Image Source: StockCharts
The modern-day fashion retailer has exceeded earnings estimates in each of the past four quarters, with an average earnings surprise of 725%. Analysts covering ANF are in agreement and have been raising earnings estimates across the board. For the third quarter, estimates have been raised by 10.31% in the past 60 days. The Q3 Zacks Consensus EPS Estimate now stands at $1.07/share, a whopping 10,600% improvement versus the same quarter last year.
Image Source: Zacks Investment Research
What the Zacks Model Reveals
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently witnessed positive earnings estimate revision activity. This more recent information can be a better predictor for future earnings and can give investors a leg up during earnings season. The technique has proven to be quite useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.
ANF is a Zacks Rank #2 (Buy) and boasts a +1.87% Earnings ESP. Another beat may be in the cards when the company reports Q3 results on November 21st. ANF is ranked favorably by our Zacks Style Scores, with best-possible marks in our Value, Growth and Momentum categories.
We’re now in the thick of the third-quarter earnings season. Remember, the stocks that hold up best through pullbacks and corrections typically lead the next leg up. Make sure you’re taking advantage of all that Zacks has to offer to uncover leading stocks like AEO and ANF.