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Dow Suffers Record Slump: 5 Value Picks to Buy on the Dip

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U.S. markets experienced another worrying decline on Monday with the Dow suffering its worst ever point-wise fall on record. The loss was so severe that it threatened to derail a global stock rally, which has thrived over an extended period. Benchmark indexes across Europe, Asia and the United States lost out on their gains for the year. These losses came on the heels of last Friday’s reverses, prompting several investors to think that the party may be over for the markets.

However, strong economic fundamentals and another robust earnings season indicate that this is may just be a passing phase. Though investors could be in for a rocky ride over the next few weeks, markets will soon return to their winning ways, which is why it makes sense to pick up great value stocks on the dip.

VIX Spikes, Blue-Chips Suffer Record Losses

Fear returned to the bourses with near panic-like selling witnessed at one point. The market’s fear gauge, the VIX, shot up 117% to 37, a level way above its long-term average of 19.5. Since the beginning of 2018, the VIX has gained nearly 238%. In fact, Monday’s increase was the largest one-day rise on record.

This was particularly evident the moment when the Dow plunged nearly 1,600 points. Subsequently, the blue-chip index recovered to close 4.6% or 1,175.21 points lower at 24345.75. This was not only the largest-ever, point-wise decline, but was also the scariest loss in percentage terms for a single trading day since August 2011.

Taken together with the reverses suffered on Friday, the Dow has declined 7% over two trading days. This brings to an end the periods of calm, range-bound increases which markets experienced over the past two years. Investor sentiment also underwent a radical change, with traders instinctively rushing to seek safety in U.S. Treasuries.

Spike in Bond Yields Causes Global Slide

Market reverses were not limited to the United States with the Nikkei, Kospi and Hang Seng down 6.7%, 2.6% and 4.9%, respectively. The STOXX 600 also closed 1.5% lower with all sectors finishing in the red. And the explanation for these continent-spanning losses is not hard at all. These reverses originate from worldwide speculation that inflation levels in developed economies are about to hit their targeted levels of 2-3%.

This would be a desirable outcome for central banks that have been worried about sluggish inflation levels for some time now. Official data from the United States converted all the speculation into a real selloff last Friday, one that seems to have spilled over to Monday. The immediate trigger was a spike in the U.S. yearly average wage to 2.9%, which led to concerns that retail prices would increase soon.

This in turn could lead to a faster increase in key rates across the board and especially in the United States. Investors have panicked at the prospect of an end to an era of soft interest rates, the sort of monetary stimulus that encourages spending over saving. Further, several members of the Federal Reserve stated during January that the three rate hikes scheduled for 2018 could be increased to four or five!

Markets Losses Likely a Brief Slide

The immediate trigger for U.S. market losses on Monday is being traced to algorithm-based trading. The speed at which selling spread, only to slow down in the last half hour of trading, bears evidence that computer models were responsible for the selloff. Analysts believe that this came about from an urgent need for these models to balance risk.

Other market watchers think that a category-spanning selloff of ETFs led to Monday’s reverses. According to analysts at Deutsche Bank (DB - Free Report) , trading in ETFs listed in the United States increased exponentially during the afternoon session.

However, a substantial section of market watchers, traders and analysts believe that this is only a brief pause for a rally, which is unprecedented in scale and pace. They believe that recent losses will only serve to extend the duration of this market rally.

Further, there is still little evidence of a substantial uptick in inflation, which could lead to faster rate increases. Until then, markets are likely to enjoy substantial gains, riding on a strong economy, a booming job market and bullish earnings releases.    

Our Choices

Despite substantial losses experienced over the last two days, strong fundamentals that powered the prolonged markets’ rally remain firmly in place. This is likely only a brief pause, one which could end up extending the duration of an unprecedented stretch of gains.

In anticipation, it makes good sense to buy value stocks on the dip that could prove to be valuable finds once the rally resumes. Our selection is also backed by a good Zacks Value Score and a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value-investing space.

Group 1 Automotive, Inc. (GPI - Free Report) is one of the leading automotive retailers in the world, with a Value Style Score of A. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.84, lower than the industry average of 12.45. It has a PEG ratio of 1.26, lower than the industry average of 1.42.

Seagate Technology Plc (STX - Free Report) is the second-largest manufacturer of hard disk drives (HDDs) in the United States. It holds a Value Style Score of A and has a P/E (F1) of 10.64x compared to the industry average of 18.43. Seagate has a PEG ratio of 0.68, lower than the industry average of 1.54.

Cosan Limited (CZZ - Free Report) is the leading global ethanol and sugar company in terms of production with low-cost, large-scale and integrated operations in Brazil, with a Value Style Score of A. The stock has a P/E (F1) of 5.33x, lower than the industry average of 20.46. It’s PEG ratio of 0.21 is also lower than the industry average of 1.45.

Steel Dynamics, Inc. (STLD - Free Report) is a steel products manufacturer and also involved in the metal recycling business. Steel Dynamics has a Value Style Score of B and a P/E (F1) of 11.40x, lower than the industry average of 12.09. It has a PEG ratio of 0.95, lower than the industry average of 1.53.

Veritiv Corporation (VRTV - Free Report) engages in offering North American business-to-business distribution solutions. It has a Value Style Score of B and a P/E (F1) of 10.70x, lower than the industry average of 15.24. Veritiv’s PEG ratio of 1.00 is lower than the industry average of 2.11.

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