An odd couple has been leading the U.S. stock market in August – technology and utilities. But, why are they odd? While technology stocks always promise outsized gains, utilities are better known for low but steady returns.
Being non-cyclical, technology remained unperturbed to market gyrations in the month. Less vulnerability to tax cuts and fluctuations in interest rates also helped them gain traction. Utilities, on the other hand, are mostly known for offering hefty yields. This time around, they are giving better yields than their bond counterparts.
With North Korea lobbing missiles over Japan, hurricane Harvey wreaking chaos and political climate in the United States losing stability, possibilities of a market correction haunted investors. This also compelled them to bet on areas perceived as less risky, like utilities. Given such promising trends, investing in sound stocks from these two sectors seems prudent for now.
What’s Driving Tech Stocks?
Tech stocks are not cyclical and offer growth irrespective of economic conditions. This has helped the sector lead the market this month, while Apple Inc. (AAPL - Free Report) touched a record high on Aug 29 as optimism builds over iPhone 8. Apple’s shares ended 0.9% higher at $162.91 a share after research firm IDC said that it expects iPhone shipments to rise 9.1% next year once the new iPhone 8, 7S and 7S Plus models are released. This will be the highest growth in iPhone shipment since 2015. Apple’s shares have, in fact, outperformed at least two-thirds of businesses in the S&P 500 over the last three years. Apple’s CEO Tim Cook recently received $89 million stock payout after the iPhone maker hit key performance target.
Investors are also pouring money into Internet and tech companies since they are less susceptible to tax cuts and changes in interest rates. Tech companies already pay lower taxes compared to other companies due to a bigger share of overseas revenues. The effective tax rate of around 27% for tech companies trails only healthcare and real estate firms in the S&P 500 cohort. Tech firms were also hardly affected by changes in 10-year Treasury yields over the past three years as they haven’t whipsawed over speculation about the Fed’s pace of tightening.
Many tech companies have, in fact, boosted earnings without the help of government policies. Notably, Microsoft Corporation (MSFT - Free Report) is riding high on growing demand for smartphones and web-based services. Total earnings in the second quarter for the tech companies in the S&P 500 cohort are up 17.6% from the same period last year on 9.1% higher revenues, with 81.4% beating EPS estimates and 86.4% surpassing revenue estimates (read more: Plenty of Small-Cap Earnings Still to come).
How is Utility Leading the Way?
Utility, in the meanwhile, is on track to be the top monthly performer in the S&P 500 space for the first time since Sep 2015. Better known as bond proxies, utilities offer high dividends. In fact, dividend yield in the sector is 3.3%, higher than the 10-year Treasury yield of 2.12%. While a higher dividend yield is attracting income seeking investors, a slew of nerve wrecking events are also boosting safe and sound utility stocks.
North Korea’s ballistic missile launch over Japanese airspace reignited tensions. This has resumed the logjam between Pyongyang and President Trump that unnerved markets earlier this month. The South Korea military that was conducting a war game with the United States has been put on alert, while Japanese Prime Minister Shinzo Abe called the missile test an “unprecedented, grave and serious threat that seriously damages peace and security in the region.”
On the domestic front, Harvey, the first major hurricane to hit the U.S. mainland in almost 12 years, has put vast areas under water. The rainstorm originated from a tropical depression which rapidly ballooned from a Category 1 hurricane to Category 4. It worsened due to a lethal confluence of meteorological events. While it is too early to gauge the financial impact of the hurricane, some experts are calling for losses in the double-digit billions. The hurricane disrupted oil refineries and led to a decline in shares of insurance companies (read more: 4 Home-Improvement Stocks to Buy Post Harvey Mayhem).
If all that wasn’t enough, there’s anxiety on the Wall Street that the debate to raise the federal government’s debt ceiling has frayed relations between President Trump and the Republican leadership. Such disputes, may, further delay the implementation of the promised pro-business policies. In fact, with the disconnect growing, the chances that the government will shut down is 50/50, says Goldman Sachs Group Inc (GS - Free Report) .
5 Winning Stocks from the Leading Sectors
Technology and utilities – the odd couple – have been leading the U.S. stock market in August. We have, thus, selected five stocks from both the sectors that are fundamentally sound and are poised to give stellar returns in the near future. These stocks not only flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) but also have a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Magic Software Enterprises Ltd (MGIC - Free Report) is a provider of application development, business process integration platforms, vertical software solutions and related professional services. The company is part of the Computer - Software industry. Magic Software Enterprises has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current year earnings increased 5.6% over the last 60 days. The company’s estimated growth rate for the current and next quarters are 25% and 40%, respectively.
Extreme Networks, Inc (EXTR - Free Report) is a provider of network infrastructure equipment. The company is part of the Computer - Networking industry. Extreme Networks has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current year earnings increased 3.2% over the last 60 days. The company’s estimated growth rate for the current and next quarters are 100% and 33.3%, respectively.
Entegris Inc (ENTG - Free Report) is a global developer, manufacturer and supplier of micro contamination control products, specialty chemicals and materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries. The company is part of the Electronics - Manufacturing Machinery industry. Entegris has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for its current year earnings rose 11.4% over the last 60 days. The company’s estimated growth rate for the current and next quarters are 39.1% and 29.1%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Just Energy Group Inc (JE - Free Report) is an energy management solutions provider engaged in electricity, natural gas, solar and green energy. The company is part of the Utility - Gas Distribution industry. Just Energy Group has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current year earnings soared 65.6% over the last 60 days. The company’s estimated growth rate for the current quarter is 93.1%.
TELUS Corporation (TU - Free Report) is a telecommunications company. The company provides a range of telecommunications services and products, including wireless and wireline voice and data. It is part of the Diversified Communication Services industry. TELUS has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current year earnings increased 5.5% over the last 60 days. The company’s estimated growth rate for the current and next quarters are 8.7% and 13.3%, respectively.
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