After Donald Trump’s victory in the Presidential election, the focus is now on the Federal Reserve raised benchmark interest rates today -- only its second rate hike since 2006. The first was in Dec 2015, when the Federal Reserve raised interest rates to a range of 0.25%−0.50%. Currently, the market now absorbs another quarter-point increase.
The rate hike does not come as a surprise as it indicates that the U.S. economy is improving. We note that the economy is gaining momentum with inflation gradually edging toward the desired 2% target, and the job market showing strength.
Factors Driving a Rate Hike
Consumer confidence – a key determinant of the economy’s health – rebounded strongly during the month of November to hit a nine-year high, after a dismal show in October. This indicates that the economy is on the road to recovery and the results of the presidential election have not dampened consumer spending.
This was also supported by a significant upward revision by the Commerce Department in consumer spending during the third quarter, which played a major role in better-than-expected third-quarter GDP growth. The second estimate for GDP shows that the U.S. economy grew 3.2% in the third quarter, faring better than the first estimate of 2.9% growth and the second-quarter anemic increase of 1.4%.
Per the Labor Department, the economy added 178,000 jobs in November, up from 142,000 in October. Moreover, unemployment rate was down to 4.6% last month from 4.9% in October, marking the lowest level in nine years. Given an improving labor market and the gradual rise in wages, we expect consumer spending to improve.
The optimism over the health of the economy got a further boost from recent U.S. factory activity data. The Institute for Supply Management (ISM) stated that the index of national factory rose to 53.2 in November from 51.9 in October. Non-manufacturing activity index jumped to 57.2 in November from October’s reading of 54.8 and reached the highest level since of 58.3 recorded in Oct 2015.
Undoubtedly, the economy is in good shape, given an improving labor market and the gradual rise in wages. Economic data suggests that the environment is much more conducive now and Fed officials may look for a rate hike after due consideration of the global as well as domestic economic climate.
However, there are still concerns over how the domestic and global stock markets will react to the rate hike. Generally, stock markets crash with the mere hint of a Fed rate hike. When the Fed raises rates, it increases borrowing costs for companies, strengthens the dollar and can limit spending plans, which in turn pinch profits.
In such a scenario, it will be better to focus on sectors that are likely to benefit from the move and pick some value-intrinsic stocks. Investing in consumer staples stocks is safer because of their defensive nature. Surging consumer confidence and indications of a stronger economy ahead make the consumer staples sector attractive. In fact, consumer staples stocks have the potential to counter these macro-economic headwinds.
However, selecting winning stocks may prove to be difficult.
The Right Strategy
In value investing, investors select stocks that are trading lower than their fair value or intrinsic value and thus offer a significant upside potential. However, not all cheap stocks can ensure high returns over the long haul.
With the market at the crossroads, it is essential for investors to be watchful of what they are getting into. Hence, investing in low price/earnings (“P/E”) stocks can prove to be good bargains as the P/E ratio is an indicator of a firm's earnings strength. A low P/E indicates that either a stock’s price has declined or that its earnings performance has been improving.
We have taken the help of our new style score system to easily pick the winning stocks. In order to screen out potential value stocks, we have considered only those that have a Zacks Rank #1 (Strong Buy) or #2 (Buy) and a value score of ‘A’ or ‘B.’ You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that stocks with a Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential. These stocks also have a lower forward P/E ratio and favorable growth potential. Moreover, as they currently trade at a Price/Earnings (F1) ratio of less than 20, there is further room for an upside.
Dean Foods Company
Dallas-based Dean Foods Company processes and distributes milk, and other dairy and dairy case products in the U.S. This Zacks Rank #1 stock has performed impressively, with its shares improving 21.6% on a year-to-date basis and crushing the Zacks categorized Consumer Staples sector’s growth of 1.5%.
With a Value Score of “A,” the company trades at a forward P/E (price-to-earnings) of 13.32x, which is favorable compared with the S&P average of 19.20x and industry average of 24.30x. It has a long-term earnings growth rate of 12.00% and a low beta of 0.25.
Dean Foods has been riding on its brand strength, strategic growth plans and decent earnings. Dean Foods’ bottom line has outperformed estimates by an average of 5.4% in the trailing four quarters.The company also issued a robust fourth-quarter earnings view, which in turn has lifted the Zacks Consensus Estimate. Earnings for the fourth quarter of 2016 and the full year are expected to rise 15.3% to 42 cents and 31.3% to $1.62, respectively, on a year-over-year basis.
Ingredion Inc. INGR
We recommend investing in Ingredion, which manufactures and sells starches and sweeteners to various industries. This Westchester, IL-based company has delivered an average positive surprise of 10.47% in the trailing four quarters. It is expected to witness earnings growth of 20.07% in 2017 and 8.50% in 2018.
This Zacks Rank #2 stock has surged 30.9% on a year-to-date basis. Additionally, it has outperformed the Zacks Categorized Food-Miscellaneous/Diversified Market industry’s 6.5% gain. Estimates have also been rising for the stock over the past 60 days.
With a Value Score of “B,” the company trades at a forward P/E (price-to-earnings) of 17.75x, which is favorable compared with the S&P average of 19.20x and industry average of 18.50x. It has a long-term earnings growth rate of 11.00% and a low beta of 0.73, which also makes it attractive.
Sanderson Farms, Inc. SAFM
Headquartered in Laurel, MS, Sanderson Farms is one of the largest poultry producers in the U.S. It is engaged in the production, processing, marketing and distribution of fresh and frozen chicken products.
With a Value Score “A,” the company trades at a forward P/E (price-to-earnings) of 11.11x, which is favorable compared with the S&P average of 19.20x and industry average of 13.90x. It has a long-term earnings growth rate of 5.00% and a low beta of 0.32.
This Zacks Rank #2 stock is up 16.1% on a year-to-date basis. Additionally, it has outperformed the Zacks Categorized Food-Meat Products industry’s 0.1% gain. It delivered an average positive earnings surprise of 25.01% over the trailing four quarters.
US Foods Holding Corp. USFD
You can also add Rosemont, IL-based US Foods to your portfolio. This Zacks Rank #2 company markets and distributes fresh, frozen, and dry food and non-food products to foodservice customers in the United States.
US Foods currently possesses a Value score of "B," a long-term earnings growth rate of 17.06% and is witnessing positive estimate revisions for 2016 and 2017 over the past two months, which make it an attractive pick.
The company trades at a forward P/E (price-to-earnings) of 17.90x, which is favorable compared with the S&P average of 19.20x and industry average of 18.50x.
This stock is up 5.8% over the past six months, outperforming the Zacks Categorized Consumer Staples Sector, which slipped 4%.
Helen of Troy Limited HELE
Headquartered in El Paso, TX, Helen of Troy Limited designs, develops, imports, markets, and distributes a portfolio of consumer products worldwide.
With a Value Score “A,” the company trades at a forward P/E (price-to-earnings) of 14.43x, which is favorable compared with the S&P average of 19.20x and industry average of 34.10x. It has a long-term earnings growth rate of 10.8% and a beta of 0.97.
This Zacks Rank #2 stock has surged 36.0% over the past two years. Additionally, it has outperformed the Zacks Categorized Cosmetics & Toiletries Market industry’s 1.9% gain. It has also delivered an average positive earnings surprise of 18.63% over the trailing four quarters.
An intelligent selection of stocks greatly benefits investors. The abovementioned stocks can prove to be valuable additions to your portfolio.
You can also use the Zacks Stock Screener to find other stocks with this winning combination. Your search ends at stocks with a favorable Zacks Rank of either #1 or #2, which encompasses its strong fundamentals, promises price movement and highlights analysts’ constructive view on the same via positive estimate revisions. As we know, a sturdy portfolio always gives favorable returns.
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