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Don't Shun Equities on Rising Bond Yields: Buy 5 Value Stocks

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Prospects of U.S. economic recovery in the near term have raised concerns about inflation, eventually compelling investors to sell off bonds. Then again, bond yields remain elevated as of now. In any case, yields do rise when prices decline. Notably, the 10-year Treasury Yield has breezed past the coveted 1.3% mark and is now spooking the stock market. This is because the relentless rise in Treasury yields could easily diminish the lure of riskier investments like equities, especially growth stocks.

Prominent among growth stocks are mostly tech-oriented companies which for quite some time now have been witnessing a downward trend. On Feb 23, the Nasdaq 100 that mostly comprised large-cap tech stocks dropped 0.2%. Similarly, the Russell 2000 Growth index slipped 1.2%. The index, by the way, mostly consists of small-cap growth stocks. Talking about individual tech behemoths, Tesla and Zscaler saw their shares decline more than 2% each yesterday.

But investors shouldn’t steer clear of equities completely at the moment. Let’s admit, bond yields need to rise a lot more to pose any kind of a threat to the long-run upward trajectory of stocks. Most importantly, as quoted in a Barron’s article, the real 10-year Treasury Yield, or the bond yield minus the anticipated inflation rate, is still a negative 0.8%, which undoubtedly makes investment in stocks a compelling choice. To top it, citing from a MarketWatch article, RBC’s Lori Calvasina pointed out that U.S. equities, in particular, tend to only struggle when the 10-year Treasury Yield surpasses the 2.75% mark, and we all know that’s a long way to go.

But then again which stocks to buy as of now? Growth stocks have already lost their sheen! Of course, value stocks are now the right choice. This is because they are widely expected to shine, especially during a recovery phase of an economic cycle. In fact, astute investors have already started to pour money into value shares. Notably, the Vanguard S&P 500 Value ETF rose 0.5% in the last trading session.

Nonetheless, talking about an uptick in economic activity, the U.S. Leading Economic Index came in at 110.3 in January, up 0.5% from December, per the Conference Board, as quoted in a PRNewswire article. What’s more, the U.S. economy is expected to grow “rapidly” this year, with GDP likely to come in at 3.7%, according to the Congressional Budget Office, as mentioned in a CNBC article. Such numbers are quite encouraging, especially after the drubbing the economy had to put up with last year due to the coronavirus outbreak.

5 Stocks to Make the Most of the Value Investing Trend

Thanks to rising bond yields, rotation from growth to value stocks is pretty much underway, which calls for investing in such stocks right away. Thanks to our style score system, we have been able to identify five value stocks. Our research shows that stocks with a Value Score of A or B when combined a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value investing space.

Atlantic Capital Bancshares, Inc. (ACBI - Free Report) is a bank holding company. The company currently has a Zacks Rank #2 and a Value Score of B. The Zacks Consensus Estimate for its current-year earnings has moved up 18.9% over the past 60 days. Atlantic Capital Bancshares has a price-to-earnings ratio (P/E) of 12.27 compared with 12.8 for the industry. The company’s expected earnings growth rate for the current year is 49.5%.

CAI International, Inc. (CAI - Free Report) is one of the world’s leading intermodal freight container leasing and management companies. The company currently has a Zacks Rank #1 and a Value Score of A. The Zacks Consensus Estimate for its current-year earnings has risen 41.1% over the past 60 days. CAI International has a price-to-earnings ratio (P/E) of 6.42 compared with 47.8 for the industry. The company’s expected earnings growth rate for the current year is 38.5%.

Danaos Corporation (DAC - Free Report) is a leading international owner of containerships and chartering vessels to many of the world's largest liner companies. The company currently has a Zacks Rank #1 and a Value Score of A. The Zacks Consensus Estimate for its current-year earnings has moved30.2% north over the past 60 days. Danaos has a price-to-earnings ratio (P/E) of 2.83 versus 8.3 for the industry. The company’s expected earnings growth rate for the current year is 92.2%.You can see the complete list of today’s Zacks #1 Rank stocks here.

D.R. Horton, Inc. (DHI - Free Report) is one of the leading national homebuilders. The company currently has a Zacks Rank #2 and a Value Score of B. The Zacks Consensus Estimate for its current-year earnings has advanced14.1% over the past 60 days. D.R. Horton has a price-to-earnings ratio (P/E) of 8.76 compared with 12.3 for the industry. The company’s expected earnings growth rate for the current year is 41%.

Home Bancorp, Inc. (HBCP - Free Report) is a holding company for Home Bank. It is a federally chartered mutual savings bank. The company currently has a Zacks Rank #1 and a Value Score of B. The Zacks Consensus Estimate for its current-year earnings has risen15.3% over the past 60 days. Home Bancorp has a price-to-earnings ratio (P/E) of 9.81 compared with 13.2 for the industry. The company’s expected earnings growth rate for the current year is 15.3%.

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