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Wall Street Spooked by Healthcare Vote: 5 Safe Value Picks

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Wall Street’s bonhomie with President Trump took a beating after the Republicans failed to secure enough votes for the much talked about healthcare bill. Investors fear that Trump’s failure to repeal and replace Obamacare could delay or even derail his promises of “massive” tax cuts and uptick in infrastructure outlays. 

Traders had expected policies through a Republican-dominated Congress to boost growth and corporate profits. However, the healthcare debacle shed the illusions surrounding Trump’s ability as a politician, with the stock market hitting the choppiest paths and measures of risk inching up again. The stock valuations, in the meantime, are so lofty that the slightest dent in sentiment has spurred widespread sell-offs.

Since stock prices have been treading lower, it will be wise to invest in value stocks. Value investors look for volatile times to scoop up stocks at a discount, which are fundamentally strong enough to withstand economic downturns and gain when the broader markets bounce back.

Steepest Drop in Months

The stock market rally that lifted major indices to new highs this year fizzed out, with the S&P 500 falling 1.4% last week. The benchmark index registered its maximum weekly loss since the week ended Nov 4, 2016. The Dow Jones Industrial Average also lost 1.5% over the week, the steepest since last September. The tech-laden Nasdaq also logged a 1.2% weekly loss, the highest since December.

Investors, in fact, have already pulled $8.9 billion from U.S. stock funds last week, with the hardest hit stocks being the ones that had gained after the election. Favorite sectors like banks, manufacturers and small-cap stocks have abruptly ended in the red. Industrial stocks suffered their highest outflows since mid-January, while the Russell 2000 Index lost 2% of its value last week as investors pulled $1.1 billion from small-cap stocks.

Volatility Heats Up

As the days of a stable market near its end, the measures of risks are scaling higher. The CBOE Volatility Index (VIX) closed at its highest level of the year on Mar 23 and climbed above the 200-day moving average for the first time since last December. The VIX tiptoeing toward its long-term target indicates that it could attempt a stronger breakout.

Last week, the VIX jumped about 15%, its sharpest weekly rise since the 22.7% climb during the week ended Dec 30. And there is more reason for the markets to be choppy, particularly after both the S&P 500 and the Dow broke a 109-day streak by losing more than 1%.  

Healthcare Bill Fizzles

U.S. stocks registered the steepest weekly fall in months after the euphoria over Trump’s agenda to “make American great again” failed a critical test on colliding with the realities of U.S. politics. Trump suffered a major blow after the Republicans withdrew the American Health Care Act. The Republican bill would have offered refundable tax credits to Americans to acquire health insurance. Further, it would have eliminated Obamacare’s penalty for those who don’t have coverage. The bill was also supposed be a big tax cut, to the tune of almost $1 trillion over the next decade.

The withdrawal is not only a setback for the President who has promised to come up with a superior plan, it has also casted doubts on how efficiently his administration will be able to deliver on the other pledges such as tax reforms and fiscal stimulus. It has become clear that Trump’s lack of political experience and bully-boy tactics haven’t been able to work magic at Capitol Hill.  Lest we forget, Trump lashed out at his Republican leaders for the bill defeat.

Stretched Valuations

Amid all these, stock valuations are lofty, thanks to the nearly uninterrupted eight-year bull run. According to the latest portfolio-manger survey by the Bank of America Merrill Lynch, 34% of respondents say equities are “overvalued”, the highest proportion since the survey began in 2000.

The S&P 500’s forward price/earnings ratio is near its highest level since 2014, while the same measure using trailing earnings is the highest in 13 years. High valuations may not be a harbinger of market tumble, but, it just takes a small disappointment in an overvalued market to spur a wave of selling. And that’s exactly what happened after Wall Street lost faith in Trump’s agenda.

As Wall Street Turns Defensive, Buy These 5 Value Stocks

Rising uncertainty over Trump’s pro-business legislative agenda and stock’s vulnerability to bad news at times of extended valuations, calls for investing in value stocks. Such stocks are perceived to be “bargains” or are undervalued. In value investing, investors will hold a stock until it meets its target price and sometimes even longer, provided the company demonstrates continued profitability.

Meanwhile, large-cap value stocks are more attractive in times of volatility since they are established industry leaders and can bear market setbacks better than their small-cap cousins. Thanks to our new style score system, we have been able to identify five value stocks with market cap of over $10 billion. Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value investing space.

UnitedHealth Group Incorporated (UNH - Free Report) operates as a diversified health and well-being company in the U.S. The company has a Zacks Rank #2 and a Value Style Score of ‘A’. Its price-to-earnings (PE) ratio of 17.35 is below the industry’s 29.90, implying that the stock is quite a bargain.

UnitedHealth Group’s expected growth rate for the current year is 18.20%, way higher than the Medical - HMOs industry’s estimated increase of 4.5%.

Tyson Foods, Inc. (TSN - Free Report) operates as a food company worldwide, including the U.S. It operates through four segments: Chicken, Beef, Pork, and Prepared Foods. The company has a Zacks Rank #2 and a Value Style Score of ‘A’. It has a price-to-earnings (PE) ratio of 12.57, lower than the industry’s 14.30.

Tyson Foods’ expected growth rate for the current year is 13.40%, more than the Food - Meat Products industry’s estimated increase of 6.70%.

Seagate Technology plc (STX - Free Report) designs, produces, and distributes electronic data storage technology and solutions internationally, including the U.S.  The company has a Zacks Rank #1 and a Value Style Score of ‘A’. Seagate Technology’s price-to-earnings (PE) ratio is 10.06, less than the industry’s 10.30.

The company’s expected growth rate for the current year is 99.10%, way higher than the Computer- Storage Devices industry’s estimated increase of 18.40%. You can see the complete list of today’s Zacks #1 Rank stocks here.

CGI Group Inc. (GIB - Free Report) provides information technology and business process services. It is a Canada-based company, which also has operations in the U.S. CGI Group has a Zacks Rank #2 and a Value Style Score of ‘A’. The company’s price-to-earnings (PE) ratio is 16.32, lower than the industry’s 28.50.

CGI Group’s expected growth rate for the current year is 9.90%, higher than the Computer - Services industry’s estimated increase of 2.70%.

First Data Corp is a provider of commerce-enabling technology and solutions for merchants, financial institutions and card issuers worldwide, including the U.S. The company has a Zacks Rank #1 and a Value Style Score of ‘B’. Its price-to-earnings (PE) ratio is 11.58, lower than the industry’s 19.

First Data’s expected growth rate for the current year is 23.30%. In contrast, the Business - Services industry is projected to decline 1%.

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