For Immediate Release
Chicago, IL- May 22, 2015 – Today, Zacks Investment Ideas feature highlights Features: Standard Pacific () and Heritage Insurance ( (HRTG - Free Report) ).
3 Days to Circle on Your Calendar
Yesterday the FMOC released the minutes from its most recent meeting. As per usual, stocks spiked up and then quickly moved back down but the upward trend was put in place.
The minutes gave us some clues as to what might happen on at the next meeting on June 16-17. How you interpret those clues is crucial to how you think the markets will behave over the next four to six weeks.
The first headline I saw was that many officials saw a June rate hike unlikely, and that was more or less an obvious one. The Fed has told us in the past that any rate hike would be telegraphed, meaning that we would know well in advance of an move in interest rates.
The likely scenario has been that the data will warrant a hike, but they will delay a move to make sure things don't blow up. This means that a September rate hike would be signaled in the June meeting.
The Next Headline
The next headline to cross the wires after the minutes were released was that the Fed saw an increase in international risks. Greece is still having issues and could eventually exit the Euro which could destabilize all of Europe as other laggards would consider leaving as well. China is also a concern to the Fed due to the slowdown in growth rates there.
The last point I am going to make from the minutes is that the Fed minutes mentioned the strength of the US dollar. This is important as it continues to be a restraining factor for US net exporters. The Fed pointed to negative interest rates on sovereign debt in some key European economies as the reason for continued dollar strength.
Coming Up Next
On Friday, May 29 we get prelim GDP numbers. The current consensus is calling for 0.2%, a significant drop from the 2.2% reading in February and 3.9% number we saw in November. That said, the drop is part of normal cyclicality.
Recall that last year the May reading was a contraction of 1%, a little worse than the -0.6% that was expected.
The next important date on the calendar after the GDP numbers is June 5. That is the first Friday in June and the day we get Non-Farm Payrolls and learn if the unemployment rate has risen or fallen.
A strong gain in jobs, anything over the 223K we posted in April, would almost certainly give the Fed the data it needs to raise interest rates. A weaker number below the 200K level is probably the out that the Fed needs to pass on a rate increase in the September time frame.
Job growth should slow as we get closer to 5% unemployment as baby boomers leave the workforce faster than they can be replaced by either returning workers or new entrants.
The FOMC statement will let us know if rates are going to increase or stay the same. There is almost no chance of a decrease in rates. The market will react positively to no hike and no definitive plan on raising interest rates in September.
At the same time, if the Fed signals that interest rates are going to start moving higher, a clear path and goal will likely accompany the statement. The equity markets will face stiffer competition from other asset classes and this will like lead to money moving from stocks to other vehicles.
Stocks have been the asset class of choice over the last several years. The idea of a steady and consistent increase in interest rates is going to remove some of the appeal of stocks, but probably not until interest rates increase 0.75% to 1.0%. That 75-100 basis point move is likely to take the Fed three to four more meetings and that will take us into 2016.
The market often works in a counter-intuitive manner so what you might think we be hurt by rising interest rates may not end up getting hurt. Home builders are a great example of this idea as both starts and permits saw very strong numbers last week.
Standard Pacific () is a home builder than carries a strong Zacks Rank and could see continued support by investors even as the Fed is set to embark on a series of interest rate hikes.
As a Zacks Rank #2 (Buy) the company has seen an increase in the Zacks 2016 earnings estimate despite reporting an earnings miss at the end of April. It is a rare thing to see a company miss an earnings report but then see estimates move higher, so that alone should get you digging deeper into this stock.
A forward earnings multiple of only 13.6x make the stock very attractive from a valuation perspective, as the industry average forward multiple is closer to 14.5x. The other major metrics investors tend to look at show SPF trading in line with industry averages. The key for this stock is the expected revenue and earnings growth in 2016. It is currently tracking well ahead of the industry and could provide the boost this stock needs to get back into the land of double digits.
Another idea comes from the insurance space. Heritage Insurance ( (HRTG - Free Report) ) is a property and casualty insurance company that is focused in the southeast. That area has seen a limited number of storm lately, so there have been fewer insurance claims. The company is coming off a tremendous earnings report as the topped the Zacks Consensus Estimate of $0.80 by $0.20 in reporting $1.00 in EPS. That translates into a positive earnings surprise of 25%.
The valuation on this stock might be the only reason you need to buy it as the stock trades at just 7x forward earnings. This is a huge discount to the 17x industry average. The price to book and price to sales multiples show the stock trading mostly in line with their respective industry averages. HRTG is a Zacks Rank #1 (Strong Buy).