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Bull & Bear Tug O' War Lingers On: Here's How to Play It

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Wall Street is bracing for higher bouts of volatility after markets bounced back in the last two trading sessions followed by a prolonged sell-off. While bullish investors express a lot of optimism on former Vice President Joe Biden emerging as the frontrunner of the Democratic Party’s presidential race, those with a bearish view say that the coronavirus outbreak will dampen economic growth worldwide. It’s worth pointing out here that the Fed’s emergency rate cut to counter the coronavirus pandemic has failed to instill confidence among investors.

Given the widespread concern over the future course of the equity market, investing in stocks unperturbed by market gyrations doesn’t seem like a bad proposition.

Roller-Coaster Ride for Investors

It’s been a topsy-turvy week for stocks on Wall Street. Major bourses jumped two times within three trading days this week, and following yesterday’s surge, the Dow, the S&P 500 and the Nasdaq moved out of the correction territory. In other words, the indexes are now down less than 10% from their recent peaks.

Needless to say, the indexes closed in the correction territory last week. On Feb 27, the Dow lost nearly 1,200 points and suffered its biggest one-day point drop ever. On that very day, the broader S&P 500 saw its fastest 10% decline from an all-time high. The Nasdaq also joined the major benchmarks in the correction territory.

But it’s expected that such wild intraday swings are here to stay. In fact, the Cboe Volatility Index (VIX), which mostly tracks implied volatility in the coming 30-day trading sessions, continues to be at 31.99, way more than its average around 19. The VIX by the way tends to rise when stocks decline and vice versa.

Nonetheless, such dramatic intersession moves are particularly because of the constant tussle between bulls and bears. Bullish investors argue that Joe Biden’s wins during the Democratic primary contests on Super Tuesday bodes well for the markets. After all, Biden is known for his moderate views, unlike the self-described democratic socialist Sanders.

Sanders’ policies haven’t been positive for stocks. He has favored Medicare for all, and wanted to abolish private insurance as well as regulations in the field of environment and banking. Needless to say, these policies are particularly negative for sectors, including healthcare, energy and financials.

Bulls also argue that fundamentally, the domestic economy is in sound shape. U.S. consumers are pretty satisfied with their finances, thanks to healthy labor market conditions. To top it, both domestic manufacturing and service activities picked up recently, which is undoubtedly a tell-tale sign that the economy is doing well.

But bearish investors, in the meantime, believe that the market is over-stretched and its weakness started after the coronavirus outbreak and its subsequent impact on corporate profit margins and the global economy. The virus has infected at least 92,000 people and has claimed more than 3,100 lives.

What’s more, the Fed rather surprisingly trimmed rates by a sharp 50 basis points to infuse confidence among investors. But it will do little to improve sentiments! After all, Fed’s emergency rate cut suggested that the impact of the coronavirus outbreak on the economy is much worse than what was estimated earlier by market pundits. Moreover, a rate cut lowers borrowing costs. But in the case of the coronavirus outbreak, the bigger problem lies with demand contraction due to travel restrictions as well as supply disruptions. Now, such issues can’t be tackled just by rate cuts.

The Winning Strategy

As the broader market struggles for direction, investors should simply look for stocks that provide superb risk-adjusted returns. The best way to go about doing this is by creating a portfolio of low-beta stocks, which are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1.

But even though low beta stocks pose less risk, they provide lower returns. So, in order to boost your returns, we have zeroed in on stocks that have seen positive earnings estimate revision.

Rising earnings estimates generally indicate that the stock will outperform the market in the near future. After all, earnings estimates are one of the most powerful metrics that measures the fundamental strength of the company. To top it, these stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

5 Solid Bets

AAON, Inc. (AAON - Free Report) is known for manufacturing and selling air conditioning and heating equipment. The company has a beta of 0.80. The Zacks Consensus Estimate for its current-year earnings has moved up 13.2% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 66.7% and 43.1%, respectively.

Business First Bancshares, Inc. (BFST - Free Report) provides various banking products and services. The company has a beta of 0.24. The Zacks Consensus Estimate for its current-year earnings has risen 5.7% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 7.3% and 13.3%, respectively.

Fabless semiconductor company, Himax Technologies, Inc. (HIMX - Free Report) has a beta of 0.30. The Zacks Consensus Estimate for its current-year earnings has moved more than 100% north over the past 60 days. The company’s expected earnings growth rate for the current and next quarter is 300% and 233.3%, respectively.

Medical device outsource manufacturer Integer Holdings Corporation (ITGR - Free Report) has a beta of 0.83. The Zacks Consensus Estimate for its current-year earnings has climbed 4.8% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 18% and 11.1%, respectively.

The Simply Good Foods Company (SMPL - Free Report) develops, markets and sells branded nutritional foods. It has a beta of 0.81. The Zacks Consensus Estimate for its current-year earnings has advanced 17.9% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 26.7% and 64.3%, respectively.

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