The following is an excerpt from Zacks Chief Strategist John Blank’s full Apr Market Strategy report To access the full PDF, click here.
First and foremost, bulls celebrate a very possible miraculous improvement in testing, treatment and a cure for the novel virus.
Second, expert-led Public Health shutdowns work and get lifted properly.
Now a distant third, we have a very dovish Fed. After that, we have dovish central banks actions outside the USA.
Fourth, we have the U.S. CARES fiscal and financial support packages.
Fifth, 2021 has a positive look with better earnings and revenue growth fundamentals. On April 3rd, the latest estimates show 2020 offers us S&P500 earnings growth of +15.4% and revenue growth of +6.6%.
Sixth, broad large-cap and small-cap valuations dialed back to historically respectable levels.
In hindsight, look at the last 2 years:
In 2018, The S&P500’s +20% earnings growth and roughly +9% revenue growth were a struggle for risk takers. They spooked about overheating and the U.S. China trade war.
In 2019, shares were pumped up by Fed rate cuts and repo buying.
Momentum stock buying, also in hindsight, didn’t help investors who stayed the course. Now, much cheaper share price valuations can bring back returns to their portfolios.
Seventh, recognize: Entering this crisis, U.S. corporates did maintain stronger revenue growth and higher profit margins vis-à-vis the rest of the developed world. Tax cut funded stock buybacks supported EPS, heedless of U.S. or global macro fundamentals.
Eighth, there are U.S. sector fundamentals that benefit from ongoing secular catalysts --
- Aging demographics builds Medical Care demand. Ditto health-exchange growth.
- Business equipment & structures investment can come off the shelves. We didn’t see any rise in U.S. capital expenditures last year. CEOs are in a decent place.
- Semiconductor IoT (Internet of Things) developments still hold attractive secular implications. Chip stocks had a bull run in 2019 – based mostly on those hopes. A remote working world is only going to accelerate demand for chips, certain software, and cloud-based, or in-situ, computer storage support.
What to make of poor (-7.3%) U.S. earnings growth in Q1-20 and beyond?
The forward 12-month P/E is now back to 14.7. The P/E is much better than the 5-year average at 16.7, but only in line with the 10-year average at 15.0.
Given the many panic stories we read about, there is a big surprise!
Finally, and perhaps most important — U.S. and global market valuations returned to rationality. But stocks didn’t pull back, as much as one would have thought, reading headlines.
Next, let’s look into the top sectors to go stock fishing.
Zacks April Sector/Industry/Company Telescope
The Zacks Industry Rank pattern, across the board, transformed overnight. We now have a classic, very defensive ranking.
The best are Utilities and Communication Services. These two very defensive sectors haven’t made it to the top spots in as long as I have written this (8 years).
Info Tech and Health Care retain some status, but fall to Market Weight rankings. Drugs are better now. Looking for a cure, stable payments, hospitalizations up.
Financials fell to Very Unattractive, under the stress of future dividend cuts, loan losses, etc. The worst are Industrials and Energy (WTI oil at $20 a barrel? Ouch).
(1) Utilities fell to Attractive from Very Attractive. Utilities-Electric Power and Gas Distribution are looking good.
NorthWestern Energy (NWE - Free Report) is a growing, financially sound, investor-owned energy company. It has provided reliable and affordable energy to customers in Montana, South Dakota and Nebraska. The company got its start in small communities, providing essential service that allowed them to grow and prosper.
Shares trade at $58 now. They were at $80 before the virus event. That still gives the stock a market cap of $3.0 billion. There is a 4.1% annual dividend.
(2) Communications Services rose to Attractive from Unattractive. Telco Equipment led the way. Telco Services got upgraded. Utility-Telephone still looks poor.
EchoStar (SATS - Free Report) is a global provider of satellite service operations, video delivery services, broadband satellite technologies and broadband internet services for home and small office customers. They also deliver innovative network technologies, managed services, and various communications solutions for aeronautical, enterprise and government customers.
Shares trade at $32 now. They were $44 before the virus event. That still gives the stock a market cap $3.0 billion. There is no dividend.
(3) Info Tech fell to Market Weight from Very, Very Attractive. Computer-Office Equipment held up, strong. Remote offices got set up. Telco Equip is solid too.
Dropbox (DBX - Free Report) is an Internet services company. It offers a platform which enables users to store and share files, photos, videos, songs and spreadsheets. Dropbox, Inc. is headquartered in San Francisco, California.
Shares trade at $18 now. They were $18 to $22 before the virus event. That still gives the stock a market cap $7.6 billion. There is no dividend.
(4) Health Care fell to Market Weight from Very Attractive. Drugs lead now.
(5) Consumer Discretionary fell to Unattractive from Market Weight. Two contrary strong spots are Other Cons. Discretionary and Media (staying home a binge watching).
(6) Financials fell to Very Unattractive from Market Weight. Consumer Finance is best.
(7) Consumer Staples fell to Very Unattractive from Unattractive. Cons. Products Misc. Staples is the sole strong spot.
(8) Materials rose to Unattractive from Very Unattractive. What helped? Metals Non-ferrous (gold) and Containers & Glass (packaged goods in grocery stores).
(9) Industrials are at the back of the pack at Very Unattractive. CEOs are pessimistic. Machinery-Electrical is the best you can do here.
(10) Energy is at the back of the pack at Very Unattractive. The sole solid player is Energy-Alternates.
I will close up this executive summary for Zacks April Market Strategy report with some concise advice.
There is not going to be a perfect time to buy stocks. Just get in there. Now. Buy quality names with a future dominant role in their markets.
Then, keep your helmet on. Ride this out for 12 to 15 months. Don’t look back.
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