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Top 5 Value Picks Amid Concerns of Slowing U.S. Economy

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Wall Street has been suffering from severe volatility since the beginning of 2022 with no sign of a near-term trend reversal. Market participants remain highly concerned that an extremely hawkish Fed trying to reduce record-high inflation to near its targeted rate will ultimately result in economic stagflation or a possible recession.

At this stage, it would be prudent to pick value stocks with a favorable Zacks Rank to cushion the portfolio as well as make some gains from the upside potential. These stocks could prove to be valuable once the rally resumes. Five of them are Avis Budget Group Inc. (CAR - Free Report) , Group 1 Automotive Inc. (GPI - Free Report) , Greif Inc. (GEF - Free Report) , G-III Apparel Group Ltd. (GIII - Free Report) and Phillips 66 (PSX - Free Report) .

Slowing Economic Growth and Other Concerns

Investors remained highly skeptical regarding the U.S. economic growth as an important section of the U.S. government bond yield curve inverted for a brief period in mid-day session on Jul 5.

Theoretically, yield to maturity is higher for bonds with longer time to maturity. However, on Jul 5, the yield on the 2-Year U.S. Treasury Note was 2.792% while the yield on the 10-Year U.S. Treasury Note was 2.789%.

The yield inversion between 2-year and 10-Year Treasury Notes is generally considered a signal of slowing economic growth and a possible recession. This is the third time this year that investors have seen an inverted yield curve. The first happened in March and the second in June.

U.S. GDP growth contracted by 1.6% in first-quarter 2022. On Jul 1, the latest data from Atlanta Fed show that GDP growth is estimated to decline 2.1% in second-quarter 2022. Theoretically, an economy is said to be in recession when the GDP growth rate contracts for two consecutive quarters.

Concerns regarding slowing economic growth were also visible in the energy sector as market participants are expecting a fall in demand for crude oil. The price of WTI crude was down 8.24% to settle at $99.5 per barrel. The WTI crude price fell below $100 per barrel for the first time since May 11. The price of the Brent crude was down 9.5% to settle at $102.77 per barrel.

The Fed terminated the monthly $120 billion bond-buy program in March and has started shrinking the size of its $9 trillion balance sheet since June. The central bank has raised the benchmark interest rate from 0-0.25% in March to 1.50-1.75% in June. Another 75 basis point hike in the benchmark lending rate in July is almost certain as indicated by Fed Chair Jerome Powell.

As a result of the higher interest rate policies, the ICE U.S Dollar Index, which measures the price of U.S. currency against six major global currencies, has climbed 11% year to date. On Jul 5, the U.S. Dollar index rose 1.4% to 106.64, its highest level in 20 years. The last time the greenback traded above 106 was in December 2002. A higher currency exchange rate may become detrimental to U.S. exports.

Our Top Picks

At this juncture, investors should be prepared to minimize fluctuations in their portfolio and consequently rebalance it with suitable financial assets to maintain stability. We have narrowed our search to five value stocks. Each of our picks carries a Zacks Rank #1 (Strong Buy) and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Avis Budget Group provides car and truck rentals, car sharing, and ancillary services to businesses and consumers. The ability of CAR to cater to a wide range of mobility demands helps it expand and strengthen its global foothold through organic growth.

Avis Budget Group operates through distinct global brands that focus on different market segments and complement other brands in their respective regional markets. Fleet expansion and technology enhancement efforts by CAR are likely to enhance its offerings.  

The forward P/E of Avis Budget Group for the current financial year is 3.9X, lower than the industry average of 12.4X. CAR has a PEG ratio of 0.2, lower than the industry average of 0.8. Avis Budget Group has expected earnings growth of 74.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 9.3% over the last 30 days.  

Phillips 66 is a leading player in each of its operations like refining, chemicals and midstream in terms of size, efficiency and strength. PSX is a leader in the midstream business, which generates stable fee-based revenues. Phillips 66, is well-positioned to make massive profits from higher demand for distillate fuels.

Contributions from the olefins and polyolefins business, backed by high demand, continue to drive PSX’s chemicals segment. Phillips 66’s moves of expanding its footprint in the battery supply chain through its NOVONIX investment is praiseworthy.

The forward P/E of Phillips 66 for the current financial year is 6.2X, lower than the industry average of 8.3X. PSX has a PEG ratio of 0.3, lower than the industry average of 0.6. Phillips 66 has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 27.8% over the last 30 days.  

Group 1 Automotive has expanded to become the third-largest dealership group in the United States. GPI’s diversified product mix along with omnichannel efforts bode well. Acquisitions of dealerships and franchises to expand and optimize its portfolio are major tailwinds.

The buyouts of Prime Automotive and Robinsons Group have bolstered the prospects of Group 1 Automotive. The AcceleRide platform, its online retailing initiative, is also likely to aid GPI’s long-term prospects. Further, Group 1 Automotive’s continued cost discipline is driving margins. Solid cash flow generation and dividend hikes boost shareholders’ confidence.

The forward P/E of GPI for the current financial year is 4X, lower than the industry average of 5.9X. Group 1 Automotive has a PEG ratio of 0.3, lower than the industry average of 0.4. GPI has expected earnings growth of 23% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.8% over the last 60 days.  

G-III Apparel is a manufacturer, designer and distributor of apparel and accessories under licensed, owned and private label brands. Solid gains from GIII’s brands and digital business have been driving performance. Higher sales at the Wholesale division aided the overall sales of G-III Apparel.

GIII is focused on improving the websites of DKNY and Karl Lagerfeld Paris. For fiscal 2023, net sales are projected to be $3.24 billion, up from the prior view of $3 billion and also implying growth from $2.06 billion recorded last fiscal year. For the fiscal second quarter, GIII Apparel expects net sales of $600 million, higher than $483.1 million seen in the same period of the prior year.

The forward P/E of GIII for the current financial year is 4.5X, lower than the industry average of 9.8X. GIII Apparel has a PEG ratio of 0.3, lower than the industry average of 1.2. GIII has expected earnings growth of 10.4% for the current year (ending January 2023). The Zacks Consensus Estimate for current-year earnings has improved 4.7% over the last 30 days.

Greif is engaged in the production and sale of industrial packaging products and services worldwide. GEF anticipates adjusted earnings per share between $7.45 and $7.75 for fiscal 2022, indicating 36% year-over-year growth at the midpoint. Greif has been witnessing strong demand in key end markets across its business.

GEF has been implementing price increases in response to robust demand and combat cost inflation, which is likely to aid earnings. Greif’s restructuring activities, which comprise optimizing and integrating operations in the Paper Packaging & Services segment, and rationalizing operations and closing underperforming assets in the Global Industrial Packaging segment, will drive savings. Its efforts to lower debt levels are commendable.

The forward P/E of Greif for the current financial year is 8.1X, lower than the industry average of 11.5X. GEF has a PEG ratio of 0.8, lower than the industry average of 1.4. Greif has expected earnings growth of 36.3% for the current year (ending October 2022). The Zacks Consensus Estimate for current-year earnings has improved 17.4% over the last 30 days.