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Top 5 Value Picks to Stay Safe From 3 Risk Factors in July

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Wall Street has been reeling under volatility since mid-June, following the second wave of coronavirus in more than 20 U.S. states. New cases of COVID-19 jumped as all 50 states started reopening after nearly two months of lockdowns. The resurgence of the deadly virus has raised several questions about the much-hyped V-shaped recovery of the U.S. economy.

Major stock indexes like the Dow and the S&P 500 remained range bound between 25,500-26,500 and 3,000-3,200, respectively, in the past three weeks. Although, the Nasdaq Composite had a steady rally buoyed by the impressive performance of the tech sector, its pace was lesser in the past three weeks than the previous 10 weeks.  

The market is likely to remain volatile in the near term until concerns about the resurgence of coronavirus infections pass and the economy regains momentum systematically. Three risk factors, all related to coronavirus, may flare up volatility even further.

However, a series of recently released economic data clearly point out that pandemic-led devastations were not as severe as feared earlier. Additionally, there are possibilities of more fiscal and monetary stimulus to be injected. This will limit the stock market's downside potential.

At this juncture, it makes good sense to buy those stocks on the dip that could prove to be valuable once the rally resumes.

Three Risk Factors

First, the second-quarter 2020 earnings session will be in full motion from next week. Several economists and financial experts have predicted that this earnings session will be the worst one since the great recession of 2008-2009. At present, the consensus estimate is that total earnings of the S&P 500 stocks in the second quarter will plunge 44.3% and total revenues will decline 10.9%, year over year.   

Although, this data is already priced in market valuations, volatility will increase if actual data comes in even worse than already pathetic projections. Moreover, market participants will closely monitor the future guidance given by these companies to take investment decisions. In the first quarter, most of the companies failed to provide a definite outlook due to uncertainty related to the pandemic.

Second, the first estimate of second quarter U.S. GDP will be released in the last week of July. At present, the Atlanta Fed has predicted that GDP will tumble 35.2% while the Conference Board has estimated that Q2 GDP will plunge 40% year over year. Notably, first-quarter GDP was down 5%.

Meanwhile, the resurgence of coronavirus has jeopardize expectations of several economists, who projected a short recession and estimated that the third-quarter GDP may jump more than 30% thereby facilitating a V-shaped recovery in the second half of 2020.

Third, the present market fluctuations is not the result of any economic, financial or geopolitical factors but due to a biological hazard in the form of coronavirus. As of now, lack of vaccine or a proper line of treatment for COVID-19 is the most serious problem. In the absence of this, social distancing and lockdowns are the only option to curb the spread of the pandemic.

Although, a second round of lockdown is a remote possibility, some states were forced to close some parts of the economy that they reopened in less than a month as new cases of coronavirus spiked in this areas. This will create a major hurdle in sustaining economic recovery.

Our Top Picks

At this stage, investors should be prepared to minimize fluctuations in their portfolio and consequently rebalance it with suitable financial assets to maintain stability. Thus, it would be prudent to pick up value stocks with a favorable Zacks Rank.

We have narrowed down our search to five stocks. Each of them carries a Zacks Rank #1 (Strong Buy) and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

 

The Kroger Co. (KR - Free Report) operates as a retailer in the United States. It operates supermarkets, multi-department stores, marketplace stores and price impact warehouse stores.

The forward P/E ratio for the current financial year is 11.9X, lower than the industry average of 18.6X. It has a PEG ratio of 1.6, lower than the industry average of 2.5. The company has expected earnings growth of 28.6% for the current year (ending January 2021). The Zacks Consensus Estimate for current-year earnings has improved by 1.8% over the last 30 days.

United Natural Foods Inc. (UNFI - Free Report) distributes natural, organic, specialty, produce, and conventional grocery and non-food products in the United States and Canada. It operates through Wholesale and Other segments.

The forward P/E ratio for the current financial year is 8.3X, lower than the industry average of 18.3X. It has a PEG ratio of 0.9, lower than the industry average of 3.8. The company has expected earnings growth of 15.4% for the current year (ending July 2020). The Zacks Consensus Estimate for current-year earnings has improved by 23.1% over the last 30 days.

Sprouts Farmers Market Inc. (SFM - Free Report) is a healthy grocery store that provides fresh, natural and organic food products in the United States. It has a unique model that features fresh produce at the center of the store, an expansive bulk food section and a vitamin department focused on overall wellness.

The forward P/E ratio for the current financial year is 15.3X, lower than the industry average of 15.5X. It has a PEG ratio of 1.6, lower than the industry average of 4.0. The company has expected earnings growth of 35.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 1.2% over the last 30 days.

Pilgrim's Pride Corp. (PPC - Free Report) is engaged in the production, processing, marketing and distribution of fresh, frozen, and value-added chicken products in the United States, the United Kingdom, Europe, and Mexico.

The forward P/E ratio for the current financial year is 9X, lower than the industry average of 13.5X. It has a PEG ratio of 0.5, lower than the industry average of 2.5. The company has expected earnings growth of 12.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 56.9% over the last 60 days.

Office Depot Inc. (ODP - Free Report) provides business services and supplies, products, and technology solutions. It operates in three divisions: Business Solutions, Retail, and CompuCom.

The forward P/E ratio for the current financial year is 4.6X, lower than the industry average of 16.4X. It has a PEG ratio of 0.4, lower than the industry average of 3.4. The company has an expected earnings growth rate of 9% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 7 days.

5 Stocks to Soar Past the Pandemic: In addition to the companies you learned about above, we invite you to learn about 5 cutting-edge stocks that could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of the decade.

See the 5 high-tech stocks now>>