Stocks fell Tuesday after they surged on the first day of March trading. The pullback seemed likely as the S&P posted its best day since June and the Nasdaq climbed 3% during regular hours, as buyers stepped in following a week-plus rout that saw the tech-heavy index fall nearly 8% off its February 12 records.
The tech selling occurred alongside a rapid rise in U.S. Treasury yields as Wall Street begins to increase its inflationary bet. The logic stems from more government spending and the possibility of a huge economic comeback once the coronavirus vaccine is widely distributed. Plus, many U.S. households are sitting on elevated savings and could pour back into the hardest-hit areas such as travel and leisure.
The inflation concerns help spotlight elevated valuations for tech companies and higher Treasury yields make the S&P 500’s dividend less appealing. That said, the Fed is firmly committed to its easy money policies and the earnings picture has continued to improve for 2021.
This means the recent pullback might be nothing more than a healthy recalibration for a market that is up 75% since its March 2020 lows. The nearby chart showcases that the S&P 500 has found support at its 50-day moving average recently.
Long-term, technology is likely to continue to drive market growth. Yet, there will likely be some rotation out of tech into underperforming or cyclical areas of the market as a way to play the possible economic boom.
Caterpillar ( CAT Quick Quote CAT - Free Report)
Caterpillar began to break away from the market in the fall, with its shares up nearly 50% in the last six months vs. the S&P 500’s 14%. The climb comes as investors bet on an economic comeback and the possibility of infrastructure spending under the Biden administration.
The huge run saw CAT climb above its 2018 records around the November election and continue to hit new highs in 2021. The stock has slipped 5% below its late February records to sit at $216 a share.
CAT could face some more near-term selling pressure, with its recent downturn coming after it jumped above overbought territory in terms of RSI—it has fallen below the 70 threshold at 66.
Caterpillar’s valuation has also grown a tad stretched recently, but it still trades nearly in line with its industry’s average. And CAT is a dividend aristocrat with a 1.9% dividend yield that tops the recently-climbing 10-year U.S. Treasury’s 1.4%.
The Illinois-based company’s machines help pave highways and excavate building sites. The industrial giant also makes marine diesel engines, gas generators, and much more, and its IoT-focused services segment helps smooth out the cyclical nature of its business. CAT topped our Q4 estimates on January 29 and its outlook has improved, with it set to return to growth in 2021.
Zacks estimates call for CAT’s revenue to climb 10% in 2021 and another 11% in FY22. Meanwhile, its adjusted earnings are projected to surge 22% and 30%, respectively. The firm’s earnings revisions have improved since its late-January release and in the last seven days to help it grab a Zacks #2 (Buy). The stock is also part of the Manufacturing - Construction and Mining space that sits in the top 30% of our over 250 Zacks industries.
FedEx ( FDX Quick Quote FDX - Free Report)
The global shipping powerhouse used the last year to push deeper into e-commerce. The booming industry, which is only going to grow since it accounts for roughly 15% of total U.S. retail sales, is set to play a larger role at FDX for years to come. FedEx cut ties with Amazon (
AMZN Quick Quote AMZN - Free Report) in the summer of 2019. Since then, it has focused on doing business with AMZN’s rivals and fellow retail giants like Target ( TGT Quick Quote TGT - Free Report) and Walmart ( WMT Quick Quote WMT - Free Report) .
The company is expanding its digital commerce and business-to-consumer segments, while also remaining focused on its core business-to-business unit. The Tennessee-based firm has beefed up its automation efforts and is modernizing its Express air fleet. It also completed in late December its purchase of e-commerce platform ShopRunner that aims to directly connect brands and merchants with online shoppers.
FDX beat our Q2 FY21 estimates in December, with revenue up 19%—its strongest growth since FY17—to build upon its strong first quarter. Estimates call for its sales to climb roughly 13% in both Q3 and Q4 to help lifts its full-year revenue by over 14% to $79 billion.
Better yet, its adjusted earnings are projected to skyrocket 130% in the third quarter and 81% this year to $17.24 a share. FedEx is then expected to follow up this growth with another 5% sales expansion in FY22 and 9% EPS growth.
FedEx’s positive bottom-line revisions help it grab a Zacks Rank #2 (Buy) right now, alongside “A” grades for Growth and Value in our Style Scores system. FDX has crushed its industry and the market in the past year, up 85%. Luckily for investors who missed out on the action, the stock has cooled off and is down 10% in the last three months.
At $260 a share, FDX shares sit about 14% below its early December highs. And the stock is heading back in the right direction, up 9% in the past month.
FDX’s dividend is yielding 1% at the moment and 14 of the 20 broker recommendations Zacks has come in at “Strong Buys,” with none below a "Hold." Long-term investors should know that last year FedEx executives slashed their timeline of broader industry expansion. They projected the overall U.S. market will reach 100 million packages per day by calendar year 2023, down from its pre-Covid projection of 2026.
KB Home ( KBH Quick Quote KBH - Free Report)
KB Home operates in 45 markets in eight different states, mostly in highly desirable areas such as Colorado, Arizona, Texas, California, Nevada, and Washington. The homebuilder allows buyers to customize many aspects of their homes. The Los Angeles-based firm has also rolled out more energy-efficient offerings recently and is ready to benefit from the booming housing market. KBH topped our Q4 earnings and revenue estimates in mid-January, with net orders up 42%.
The company’s overall 2020 revenue for the period ended on Nov. 30 still slipped 8%, driven by coronavirus-based setbacks. Luckily, its backlog value jumped 63% to $3.0 billion. Zacks estimates project that its revenue will soar 40% this year to reach $5.91 billion, with FY22 projected to climb another 7%. The homebuilder’s adjusted EPS figures are projected to climb by 63% and 9%, respectively over this same stretch.
A majority of its clients are first-time buyers, but it also sold roughly 40% of its homes in the fourth quarter to move-up buyers and active adults. More importantly, home sales hit the highest levels since 2006 last year and the market is finally being driven by millennials, which gives the market more runway. And homebuilders will benefit as U.S. existing home inventory shrinks.
KBH has climbed 20% in the last year to outpace its industry, but lag the S&P 500’s 29% climb. This story has reversed in 2021, with the stock up 23% vs. the benchmark index’s 4%. KBH shares popped on Tuesday, as the market dipped to close regular hours at $41.16 a share. This puts it about 9% off its February records. The stock also sits at neutral levels of 50 in terms of RSI. And at 7.7X forward 12-month earnings, it trades at a discount to its industry’s 8.7X average and its own year-long median.
KB Home’s earnings revisions have jumped recently to help it grab a Zacks Rank #2 (Buy). The stock also earns an “A” grade for Value and a “B” for Momentum, and it is part of our Building Products - Home Builders industry that sits in the top 15% of our over 250 Zacks industries.
KBH’s 1.45% dividend yield roughly matches the 10-Year U.S. Treasury. It is also worth stressing that even though interest rates have climbed recently, the average 30-year fixed mortgage is ultra-low by historical standards. At 2.9% it sits where it was in July 2020 and well below the 3.7% levels in Dec. 2019.
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