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Investor sentiments have been on a roller coaster ride this week as talks of a recession ebbed and flowed first, because of the “narrow” recovery in big tech, then because of the encouraging inflation numbers and third, because there’s a disagreement about whether Fed actions so far have already reflected on the economy or whether there will be further softening as we move through the year.
In between, some have pointed out that inflation in the core basket being well above the Fed’s goals as well as the labor market resilience would encourage the Fed to bring further rate hikes. Finally, certain Fed Governors are simply more hawkish than others.
Because of the evolving situation, there is a lot of uncertainty in the market. The truth is, we simply don’t know for sure what’s going to happen. Except the fact that the Fed’s now in dangerous territory. While we seem to be gliding towards a soft landing, we could very easily slip into a recession. And if the Fed does announce further hikes as it seems poised to do, the likelihood of the latter seems greater. That’s according to some experts.
The best course of action, therefore, is to get more expert opinion and try to gauge the consensus view on the situation. The earnings season will certainly help with that. Management commentary on individual company outlooks as well as analysts weighing in on the situation will tell us a lot. And then there will be more numbers every month giving us the facts from which we may be able to plot the path this economy is likely to take.
However the whole story unfolds, it may still be profitable to buy stocks, especially if you’re playing it safe. Again, "safe" can mean different things to different people. For the more risk averse, it can mean a stock with a steady growth profile and stable dividends. For others, it can mean a stock that generates some income at a relatively low price. Still others could be looking for attractive industries or favorable analyst ratings. Additionally, those concerned about the economy would be looking to preserve their capital.
Therefore, the following criteria could be useful for stock selection:
First, a reasonable chance of beating estimates (since we are in earnings season).
Second, a good earnings track record (since this reduces the risk of share price declines).
Third, an attractive long-term earnings growth outlook (if analysts expect the company to generate strong earnings growth in the long term, it would be justify holding on to the shares).
Fourth, a dividend would be a good thing (since income is a sort of hedge against losses).
Fifth, a reasonable valuation (it’s good idea not to overpay for stocks right now).
Sixth, a Zacks Buy Rank (since it greatly increases your odds of success).
The following stocks satisfy these criteria and are therefore good examples:
The Zacks Rank #2 (Buy) stock operates in the Retail – Restaurants industry (top 10% of 250+ Zacks-classified industries).
It has grown its earnings 9.32% in the last five years. Therefore, it has a solid track record.
The average broker rating on the stock is 1.6 (equivalent to Buy), which makes sense given that the company’s estimated long-term growth rate is 10.4%. Estimates for the fiscal years 2024 and 2025 ending in May are up 10 cents and 11 cents, respectively in the last 60 days. The company is expected to grow its earnings in both years.
Darden’s dividend yields 3.11%.
It is not expected to report until Sep 28, but going by the current earnings ESP (expected surprise prediction) of 0.00% and the Zacks rank, it should beat estimates.
Additionally, the shares are trading at a 25.5% discount to the industry and a 5.2% discount to the S&P 500. Therefore, they are cheap.
Bath & Body shares carry a Zacks Rank #2. Also, brokers have an average rating of 1.91 on the shares, which translates to a Buy rating.
The company has grown 15.45% in the last five years. The Zacks Consensus Estimates for fiscal years 2024 and 2025 ending in January have increased 3 cents and 2 cents, respectively in the last 60 days. While analysts expect a 12.1% decline in earnings in the current year, they expect a strong comeback with 23.7% growth in the following year. What’s more, the long-term (3-5-year) growth is expected to be 12.9%.
Bath & Body’s dividend yields 2.24%
Given its Buy rating and earnings ESP 8.62%, there’s a good chance that it will beat estimates when it reports on August 16.
The shares are also worth buying because they currently trade at a 19.2% discount to the industry and a 45.9% discount to the S&P 500.
The Interpublic Group of Companies, Inc. (IPG - Free Report)
Interpublic has a Zacks Rank #2 and average broker rating of 2.00.
The company has grown 11.7% in the last five years. Its estimates for 2023 and 2024 have increased a respective 5 cents and 2 cents in the last 60 days. Currently analysts expect the company to grow7.6% this year, 6.8% in the next and 8.1% in the long term.
Interpublic’s dividend yields 3.15%.
Given the Buy rank and ESP of 0.00%, there is an above average chance of the company beating estimates when it reports on Jul 21.
IPG shares trade at a 23.2% premium to its industry but a 35.5% discount to the S&P 500. Another reason for buying is that they are trading relatively close to their median value over the past year and are still at a 9.7% discount to their 52-week high.
Tapestry shares carry a Zacks rank #2 and average broker rating of 1.47 (Strong Buy).
In the last five years, the company has grown its earnings 9.5%. Analysts expect the company to grow 11.8% in 2023 (ending June), 7.1% in 2024 and 12.5% in the long term.
Its dividend yields 2.70%.
With a buy rank and ESP of 0.00%, Tapestry is also expected to beat earnings when it reports on Aug 17.
TPR shares are currently trading at a 28.4% discount to the industry and a 46.5% discount to the S&P 500. Therefore, they are certainly worth considering.
One-Month Price Performance
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Investor sentiments have been on a roller coaster ride this week as talks of a recession ebbed and flowed first, because of the “narrow” recovery in big tech, then because of the encouraging inflation numbers and third, because there’s a disagreement about whether Fed actions so far have already reflected on the economy or whether there will be further softening as we move through the year.
In between, some have pointed out that inflation in the core basket being well above the Fed’s goals as well as the labor market resilience would encourage the Fed to bring further rate hikes. Finally, certain Fed Governors are simply more hawkish than others.
Because of the evolving situation, there is a lot of uncertainty in the market. The truth is, we simply don’t know for sure what’s going to happen. Except the fact that the Fed’s now in dangerous territory. While we seem to be gliding towards a soft landing, we could very easily slip into a recession. And if the Fed does announce further hikes as it seems poised to do, the likelihood of the latter seems greater. That’s according to some experts.
The best course of action, therefore, is to get more expert opinion and try to gauge the consensus view on the situation. The earnings season will certainly help with that. Management commentary on individual company outlooks as well as analysts weighing in on the situation will tell us a lot. And then there will be more numbers every month giving us the facts from which we may be able to plot the path this economy is likely to take.
However the whole story unfolds, it may still be profitable to buy stocks, especially if you’re playing it safe. Again, "safe" can mean different things to different people. For the more risk averse, it can mean a stock with a steady growth profile and stable dividends. For others, it can mean a stock that generates some income at a relatively low price. Still others could be looking for attractive industries or favorable analyst ratings. Additionally, those concerned about the economy would be looking to preserve their capital.
Therefore, the following criteria could be useful for stock selection:
First, a reasonable chance of beating estimates (since we are in earnings season).
Second, a good earnings track record (since this reduces the risk of share price declines).
Third, an attractive long-term earnings growth outlook (if analysts expect the company to generate strong earnings growth in the long term, it would be justify holding on to the shares).
Fourth, a dividend would be a good thing (since income is a sort of hedge against losses).
Fifth, a reasonable valuation (it’s good idea not to overpay for stocks right now).
Sixth, a Zacks Buy Rank (since it greatly increases your odds of success).
The following stocks satisfy these criteria and are therefore good examples:
Darden Restaurants (DRI - Free Report)
The Zacks Rank #2 (Buy) stock operates in the Retail – Restaurants industry (top 10% of 250+ Zacks-classified industries).
It has grown its earnings 9.32% in the last five years. Therefore, it has a solid track record.
The average broker rating on the stock is 1.6 (equivalent to Buy), which makes sense given that the company’s estimated long-term growth rate is 10.4%. Estimates for the fiscal years 2024 and 2025 ending in May are up 10 cents and 11 cents, respectively in the last 60 days. The company is expected to grow its earnings in both years.
Darden’s dividend yields 3.11%.
It is not expected to report until Sep 28, but going by the current earnings ESP (expected surprise prediction) of 0.00% and the Zacks rank, it should beat estimates.
Additionally, the shares are trading at a 25.5% discount to the industry and a 5.2% discount to the S&P 500. Therefore, they are cheap.
Bath & Body Works, Inc. (BBWI - Free Report)
Bath & Body shares carry a Zacks Rank #2. Also, brokers have an average rating of 1.91 on the shares, which translates to a Buy rating.
The company has grown 15.45% in the last five years. The Zacks Consensus Estimates for fiscal years 2024 and 2025 ending in January have increased 3 cents and 2 cents, respectively in the last 60 days. While analysts expect a 12.1% decline in earnings in the current year, they expect a strong comeback with 23.7% growth in the following year. What’s more, the long-term (3-5-year) growth is expected to be 12.9%.
Bath & Body’s dividend yields 2.24%
Given its Buy rating and earnings ESP 8.62%, there’s a good chance that it will beat estimates when it reports on August 16.
The shares are also worth buying because they currently trade at a 19.2% discount to the industry and a 45.9% discount to the S&P 500.
The Interpublic Group of Companies, Inc. (IPG - Free Report)
Interpublic has a Zacks Rank #2 and average broker rating of 2.00.
The company has grown 11.7% in the last five years. Its estimates for 2023 and 2024 have increased a respective 5 cents and 2 cents in the last 60 days. Currently analysts expect the company to grow7.6% this year, 6.8% in the next and 8.1% in the long term.
Interpublic’s dividend yields 3.15%.
Given the Buy rank and ESP of 0.00%, there is an above average chance of the company beating estimates when it reports on Jul 21.
IPG shares trade at a 23.2% premium to its industry but a 35.5% discount to the S&P 500. Another reason for buying is that they are trading relatively close to their median value over the past year and are still at a 9.7% discount to their 52-week high.
Tapestry, Inc. (TPR - Free Report)
Tapestry shares carry a Zacks rank #2 and average broker rating of 1.47 (Strong Buy).
In the last five years, the company has grown its earnings 9.5%. Analysts expect the company to grow 11.8% in 2023 (ending June), 7.1% in 2024 and 12.5% in the long term.
Its dividend yields 2.70%.
With a buy rank and ESP of 0.00%, Tapestry is also expected to beat earnings when it reports on Aug 17.
TPR shares are currently trading at a 28.4% discount to the industry and a 46.5% discount to the S&P 500. Therefore, they are certainly worth considering.
One-Month Price Performance
Image Source: Zacks Investment Research