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Shrug Off Market Volatility With 4 Top-Ranked Value Picks

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Wall Street commenced trading in October on a negative note following a robust third-quarter 2018. Rising yields on government bonds and trade-related conflicts with China are major issues, which in turn are leading to volatility.

However, the recent stock market volatility may be transitory in nature, given the strong economic fundamentals of the United States. Whatever may be the fact, investors should be prepared to minimize fluctuations in their portfolio and rebalance it with suitable financial assets to maintain stability. At this stage, it would be a prudent decision to pick up value stocks with favorable Zacks Rank to cushion the portfolio.

Spike in Government Bond Yield

The yields on 10-year U.S. Treasury Note and 30-year U.S. Treasury Note are currently at their record highs. The 10-year Treasury Note yield scaled 3.232%, its highest level in seven years. Meanwhile, the yield on 30-year Treasury Note yield reached 3.346%, its highest level in four years.

Higher interest rate will raise the cost of funds of investing in risky assets like equities. Instead investors may be better off investing money in risk-free government securities. Additionally, on Oct 3, Jerome Powell, Chairman of Federal Reserve announced that the country has to go a long way for interest rate to hit neutral, a clear indication of further rate hikes.  

US-China Trade Conflicts Persist

Trade-related conflicts between the United States and China is showing no signs of abatement. The U.S. government has already imposed $250 billion of tariffs on Chinese goods while China retaliated with $110 billion tariffs levied on U.S. exports. Notably, President Trump has threatened China with the imposition of another $267 billion of tariffs if situation worsens further.

Moreover, President Trump also warned of the United States pulling out of World Tarde Organization (“WTO”), globally the largest multilateral trade treaty, if the trade body does not give due importance to the U.S. trade concerns.

Strong U.S. Economic Fundamentals

The U.S. GDP grew at 3.2% in the first half of 2018, better than the Trump administration’s target level of 3%. Moreover, the unemployment of 3.7% is at its lowest since December 1969. Despite a noticeable rise in wage rate, inflation remains under control.

Moreover, both manufacturing and services sectors are growing at steady pace and consumer confidence is at its peak. This indicates that the U.S. economy remains strong even though such data is also pushing up bond yields.

Our Top Picks

The U.S. markets remain volatile so far in 2018. Trade-related concerns, geopolitical conflicts and emerging market problems will certainly lead to more fluctuations at least in the short term. This in turn will compel investors to put their money in safe assets.
At this juncture, it will be a prudent decision to buy value on the dip stocks that could prove to be valuable once the rally resumes.

We have selected four stocks with a Value Score of A and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the Value-investing space.

The chart below shows price performance of our four picks in the last three months.

Huntington Ingalls Industries Inc. (HII - Free Report) engages in the designing, building, overhauling, and repairing military ships in the United States. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.2, lower than the industry average of 19. It has a PEG ratio of 1, lower than the industry average of 1.8.

Waddell & Reed Financial Inc. (WDR - Free Report) is the exclusive underwriter and distributor of mutual funds. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 9.6, lower than the industry average of 11.4. It has a PEG ratio of 1.3, lower than the industry average of 1.4.

RenaissanceRe Holdings Ltd. (RNR - Free Report) provides reinsurance and insurance coverages in the United States and internationally. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.3, lower than the industry average of 13.9. It has a PEG ratio of 1.1, lower than the industry average of 1.3.

Spirit Airlines Inc. (SAVE - Free Report) provides low-fare airline services in the United States, the Caribbean and Latin America. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.1, lower than the industry average of 13.2. It has a PEG ratio of 0.6, lower than the industry average of 0.7.

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