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What September Lull? Buy Laggards Instead of Tech Leaders

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U.S. stocks were super steady in August as investors rotated into the beaten-down segments of the year — cyclicals. The Nasdaq 100 rose nearly 11% in August compared to a gain of about 7% for the S&P 500, 6.6% for the Dow Jones and 5.5% for the Russell 2000. The S&P 500, in fact, enjoyed the best August in 34 years.

The better-than-expected second-quarter earnings results, and positive updates on vaccine and treatment for the virus led investors to shift focus to the reopening of trade. Recent data points show that the outbreak is gradually coming under control, even in the hardest-hit states. Economic datapoints are coming in decent, if not great.

However, things took a sharp turn on Sep 3 after the S&P 500 posted its worst single-session drop in nearly three months. Some subdued economic datapoints and a monstrous rally in the high-profile tech names (that caused overvaluation concerns) caused the correction on Sep 3.

The S&P 500, the Dow Jones, the Nasdaq and the Russell 2000 were off 3.5%, 2.8%, 5% and 3%, respectively, on Sep 3. However, we don’t see the selloff as a signal of rising market fear. In fact, the selling trend indicates that winners are emerging as the key losers now and vice versa.

Selloffs were exacerbated in tech stocks. Amazon (down 4.6% on Sep 3), Apple (down 8%), Microsoft (down 6.2%), Tesla (down 9%), Zoom (down about 10%) – strongest performers in past months – were hurt heavily.

Against this backdrop, below we highlight a few investing areas where money could be parked in for safety as these are emerging as new leaders.

Picks in Focus

Banks – JPMorgan Chase Co. (JPM - Free Report)

Banking stocks have been rather beaten down in the past few months as fears of higher defaults at the household and corporate levels hit the space hard. The banking ETF KBE has lost 20.3% in the past six months but gained 0.03% on Sep 3 (despite a decline in long-term bond yields). Banking stocks offer value now. So, one can bet on Zacks Rank #3 (Hold) banking giant JPMorgan. The stock was off only 0.3% on Sep 3.

Value Stocks – DaVita Inc. (DVA - Free Report)

Value stocks are safer bets in an edgy environment. Moreover, the value investing segment has so far been a laggard and thus has more compelling valuation than growth stocks. On Sep 3, value stocks clearly breezed past the growth names. The Fed’s pledges for higher inflation should also work favorably for value names. Against this backdrop, leading provider of dialysis services in the America – DaVita – should gain ahead. The Zacks Rank #1 (Strong Buy) stock has a Value Score of A and Momentum Score of B.

Airlines – United Airlines Holdings Inc (UAL - Free Report)

Airline stocks (one of the main victims of the coronavirus crisis) bounced back strongly past month (as it jumped 16.6%) on a rebound in travel demand.  This is especially true as the number of people going through airport security screening checkpoints hit a five-month high in mid-August. Better consumer confidence and some federal aid have been aiding airlines ETF. Selloffs on Sep 3 could not hurt the space much. The Zacks Rank #3 stock UAL in fact gained about 1.4% on Sep 3.

Auto – Group 1 Automotive Inc. (GPI - Free Report)

This is yet another beaten-down area amid the virus crisis. Global auto sales were hugely hurt. However, the fund has started to gain investors’ attention now. One of the leading automotive retailers of the world Group 1 Automotive (Zacks Rank #1) has a Value and Growth score of A. The stock has gained 8.1% past month but lost only 3% on Sep 3, making way better performance than the high-growth tech names.

Industrial Products – Graphic Packaging Holding Company (GPK - Free Report)

The industrials sector has suffered massively amid the pandemic. With millions of Americans still unemployed, creation of blue-collar jobs would be of high priority. Moreover, The Institute for Supply Management (ISM) said on Sep 1 that its index of national factory activity rose to a reading of 56.0 last month from 54.2 in July. That marked the highest level since November 2018 and three successive months of growth.

So, one can play Zacks Rank #2 provider of paperboard packaging solutions for a wide variety of products Graphic Packaging. The stock has a Value and Growth score of A.

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