September is historically known as the toughest month on Wall Street. This year, the performances of U.S. stock markets are more disappointing courtesy of an ultra-hawkish Fed. The central bank has raised the benchmark lending rate by 3% year to date.
However, the Fed has failed to cool 40-year high inflation. This is because aggregate demand has remained strong owing to astonishing savings that Americans generated in the last two pandemic-ridden years with unprecedented fiscal and monetary stimuli.
As the Fed has given a clear indication of the continuation of a rigorous interest rate hike and tighter monetary control, a global financial crisis looms larger. Market participants are pricing the cost of an imminent recession in stock’s valuation.
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 Quick Quote CAR - Free Report) , Marathon Petroleum Corp. ( MPC Quick Quote MPC - Free Report) , Dillard's Inc. ( DDS Quick Quote DDS - Free Report) , United Rentals Inc. ( URI Quick Quote URI - Free Report) and Unum Group ( UNM Quick Quote UNM - Free Report) . A Global Financial Crisis Looms Large
The Fed has raised the median of the Fed Fund rate to 4.4% in September from 3.4% in June. This means that the range of the benchmark lending rate at the end of 2022 will be 4.25-4.5%, indicating a 75 basis-point and 50 basis-point interest rate hike in November and December, respectively.
Investors were expecting a rate cut in 2023, which is out of the question now as the central bank has projected that the median benchmark interest rate will reach 4.6% in 2023. This means another 50 basis-point rate hike throughout 2023. The first rate cut is not expected before 2024 as the Fed is expecting inflation to come down to its target rate of 2% in 2025.
As the interest rate is surging in the United States, global investors are trying to hold U.S.-dollar denominated assets to get higher returns. Consequently, the ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, has skyrocketed to a 20-year high in 2022.
With respect to the U.S. dollar – the British pound plunged to an all-time low, the Japanese yen is at a 20-year low and the euro is at a 20-year low. Currencies of several major emerging economies have fallen to their historic-low levels against the U.S. dollar.
Threat of a Recession
Economists and financial researchers are concerned that a rising dollar will hurt the sales of U.S. multinational companies as their products will be more expensive in the international markets. Further, the volume of international trade is likely to be impacted as most of these trades are settled in U.S. dollar terms.
The yields of U.S. government bonds have soared. On Sep 26, the yield on the benchmark 10-Year U.S. Treasury Note touched 3.9%, its highest since 2010. The yield on the short-term 2-year U.S. Treasury Note climbed 4.3%, its highest since 2007. The yield on the long-term 30-Year U.S. Treasury Note closed at 3.703%.
The yields of 2-year and 10-Year Notes have inverted for the last two months. After the last round of rate hike in September, the yields on 10-Year and 30-Year Notes have also inverted. Economists generally consider this situation as a sign of an imminent recession.
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 in the past three months.
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 to 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 3.4X, lower than the industry average of 14.8X. CAR has a PEG ratio of 0.2, lower than the industry average of 1.3. Avis Budget Group has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
Marathon Petroleum is poised for further price gains based on a slew of positives. MPC’s $21 billion sales of its Speedway retail business provided it with a much-needed cash infusion. The deal also comes with a 15-year fuel supply agreement under which Marathon Petroleum will supply 7.7 billion gallons of gasoline per year to 7-Eleven, thus ensuring a steady revenue stream.
MPC’s exposure to more stable cash flows from the logistics segment diversifies the earnings stream and offers a buffer against the volatile refining business. Consequently, Marathon Petroleum is primed for significant capital appreciation and is viewed as a preferred downstream operator to own now.
The forward P/E of Marathon Petroleum for the current financial year is 4.7X, lower than the industry average of 6.2X. MPC has a PEG ratio of 0.3, lower than the industry average of 0.5. Marathon Petroleum has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.9% over the last 7 days.
United Rentals is benefiting from the U.S. administration’s increased focus on infrastructural improvement. URI has been gaining from better fleet productivity on broad-based rental demand in construction and industrial verticals.
Better fleet productivity on broad-based rental demand in non-residential construction and industrial verticals, higher total and rental revenues and stronger pricing aided United Rentals’ second-quarter 2022 results. During the period, rental revenues grew 26.2% from a year ago. Adjusted gross margin expanded 360 basis points.
The forward P/E of United Rentals for the current financial year is 9.2X, lower than the industry average of 12X. URI has a PEG ratio of 0.5, lower than the industry average of 1.0. United Rentals has an expected earnings growth rate of 43.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 6.8% over the last 60 days.
Unum Group’s conservative pricing and reservation practices have contributed to overall profitability. The sustained increase in premiums is being fueled by high persistency levels in core business lines and strong sales volume along with solid benefits experience.
Continued rollout of dental products and geographic expansion have been paying off for UNM as its acquired dental insurance businesses are growing in the United States and the U.K. UNM has continually enhanced shareholders’ value. Unum Group expects 2022 premiums to grow about 2%. Adjusted operating EPS is expected to grow 15-20%.
The forward P/E of Unum Group for the current financial year is 6.3X, lower than the industry average of 14.5X. UNM has a PEG ratio of 0.8 lower than the industry average of 1.4. Unum Group has an expected earnings growth rate of 40.7% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.2% over the last 7 days.
Dillard's operates retail department stores in the southeast, southwest and Midwest areas of the United States. Its stores offer merchandise, including fashion apparel for women, men, and children as well as accessories, cosmetics, home furnishings, and other consumer goods.
Dillard’s has been keen on inventory management since the start of the pandemic, through measures like cancellation, suspension and delaying of shipments as well as merchandise purchase reduction. These aggressive measures to lower excess inventory owing to the pandemic-led decline in demand have proven beneficial to the company’s margins.
The forward P/E of Dillard's for the current financial year is 7.4X, lower than the industry average of 7.7X. DDS has a PEG ratio of 0.5, lower than the industry average of 0.7. The Zacks Consensus Estimate for current-year earnings improved 38.3% over the last 60 days.