The following is a short excerpt from John Blank's Zacks Market Strategy for January. To read the entire article, click here.
Rushing in with a blast of cold air, we have arrived in 2014. January Zacks Ranks say a snowmobile firm, a company that makes corrugated boxes sitting at your frozen doorstep and a small regional bank in a turnaround in the Northwest are wintry stocks to investigate.
Fed Says USA Growth is Improving...
According to the San Fran Fed, “Recent data suggest the recovery is gaining traction. Top-line GDP growth is likely to dip a bit in the fourth quarter, largely reflecting reduced accumulation of inventories by firms after a sizable increase in the third quarter. Importantly, indicators of consumer and business spending show signs of strength, and suggest solid economic growth in 2014.”
Valuations Lead Stocks Forward - But Tipping Point Not Far Out
Historically, a stock earnings yield is +3% higher than a 10-year U.S. Treasury rate. Meaning stocks should offer investors a 6.0% likely annual return. A stock’s earnings yield is nothing more than turning the P/E ratio on its head. Divide a $122 projected earnings index consensus for the next 12 months by an S&P 500 around 1830. That begets a 6.7% earnings yield. Despite the huge +29% rally in 2013, evidence exists on undervaluation -- as long as fresh 2014 earnings forecasts hold up.
Get the 10-year above a 3.5% rate and the relative asset valuation gap gets tight. That’s the line to draw.
Zacks January Sector/Industry/Company Telescope
The Cycle Bid is alive and well. Leaders are Consumer Discretionary, the Materials and Financials. Sector leadership looks driven by a mix of better stock prices, more jobs, higher interest rates, and stronger global demand.
Consumer Discretionary remains a leading sector at Very Attractive. Build positions in Leisure Services, Consumer Electronics, Media and Auto/Tires/Trucks. The booming stock market, more jobs and the mobile Internet keep the show on the road.
Company to Look at: Arctic Cat
Materials are an Attractive sector now. The leaders are Containers & Glass, Paper and Steel. The Metals Non-Ferrous is a loser, with its Gold and Silver miners.
Company to Look at: Packaging Corp of America (PKG - Free Report)
Financials have a broad spread. Some industries are very appealing (Investment funds, Consumer Finance, and Investment Banking & Brokering). But the Major Banks struggle under the weight of reforms and settlements. Real Estate is an Underperformer at the moment, with the rise in the 10-year.
Company to Look at: Banner Corp. (BANR - Free Report)
Industrials have two spots worth looking at: Pollution Control and Business Services. The latter is a "more jobs lead to more business" story. Airlines and Railroads are solid, as is Aerospace & Defense. The weak spots are Business products, Electrical Machinery and Metal Fabricating.
Info Tech has two spots worth looking at: Telco Equipment and Computer Software & Services. The rest of the industries are underperforming.
Health Care is Market Perform, straight in the middle of the pack now. The Obamacare upside is priced in now.
Energy is mostly an Underperforming sector. The exception is Alternative Sources. The Solar industry is a hot spot. In Oil & Gas, the Drillers look best.
Consumers Staples get a downgrade to Underperform from Market Perform. Beverages and Tobacco are the biggest losers.
Utilities are Very Unattractive. If you want a play here, go with Utilities-Electric Power.
Telco is Very Unattractive.
To read the entire Zacks Market Strategy for January, click here.