Markets

4 Bruised Stocks at Bargain Prices Set to Recover in 2019

While 2017 had been one of the most tranquil years in the market history owing to low volatility, the U.S. stock market faced a bumpy ride in 2018. To say that the markets have been volatile this year is an understatement. Since the beginning of the year, Dow Jones Industrial Average (DJI) gained almost 9% to reach a high of 26,951.81 on Oct 3. However, the upside was checked when the index lost momentum, thanks to domestic and global issues that plagued the market. Similarly, the S&P 500 index also tumbled into correction in October after hitting a lifetime high of 2,930.75 on Sep 20.

On an encouraging note, Trump's tax reform policies have been boosting corporate spending, raising productivity for several industries along with fueling earnings growth and share buybacks. Moreover, low unemployment levels, job growth and rising wages have uplifted consumers' sentiment. Notably, consumer spending continues to be strong, having increased almost 4% in the third quarter of 2018.

However, these positive developments seem to be overshadowed by broader macroeconomic factors, straining the stock markets. Trade tussle, rate hikes, sluggish economic growth in China and Japan, declining oil, uncertainty over Brexit and slowdown in the Euro zone induced volatility in the markets. Hit by such odds, the DJI and the S&P 500 have lost 4.7% and 5.6%, respectively, so far this year.

Delving Deeper Into Stock Market Volatility in 2018

Below we provide an insight into the macroeconomic factors that weighed on the U.S. stock market this year. The year 2018 has been fettered by various issues, with majority of the bruises being caused by rate hikes, U.S.-China trade disputes, along with a slowdown in China and Japan's growth.

Fed Rate Hike Rocks the Market: Notably, the market has witnessed three interest rate hikes so far this year, chiefly on the back of strong economic growth. While the rising rates have no direct impacts on the stock market, it does have a ripple effect that can eventually rock the market. A rise in interest rate raises consumers' borrowing costs, making loans and mortgages expensive, as well as leaving the households with less disposable income, which eventually impacts profits and revenues of businesses. The rising rate also impacts other capital-intensive businesses that had cut down on their spending levels, resulting in the slowing down of the growth of such firms, with their stock prices taking a hit. There are speculations that another hike is imminent, which might further tighten financial conditions.

U.S.-Sino Trade Tussle: Intensifying trade tensions between China and the United States have weighed on the growth prospects of some major companies. With both the parties refusing to back down on the tit-for-tat tariff war since July, the trade tussle between the world's two biggest economies has been ratcheting up. The Trump administration, in July, had imposed tariffs on $34 billion in Chinese goods that led China to retaliate with tariffs on American products of equal value. Again in August, the United States and China levied a tariff on $16 billion worth of each other's products. In September, Trump slapped a fresh tariff on $200 billion worth of Chinese imports, with Beijing announcing retaliatory tariffs on $60 billion of U.S. goods.

China and Japan Economy at Crossroads: The Chinese economy is steeply declining of late, with trade war hurting both the country's business and consumer confidence. Notably, China's industrial production has slowed down and retail sales growth has recently hit a 15-year low. Importantly, Japan has also been witnessing sluggish economic growth amid weakening exports and declining consumers' willingness to spend, as the wages have not managed to keep pace with the rising prices.

Chink in the Armor in 2019

It seems that tax cuts, infrastructural spending and other favorable reforms by Trump will have a fleeting effect on the overall economy, as the growth prospects for 2019 are weakening. Key economic readings related to employment data and GDP have also started softening. It is much likely that the economy will slow down in 2019 and 2020 as well. Bloomberg forecasts United States' net contribution to global GDP to drop from the current 12.3% to 8.5% in 2022.

However, with mounting risks to the U.S. economy, it is expected that the Fed may slow down the pace of interest rate hikes next year, providing some breather for equity and bond markets in the United States and across the globe. Nonetheless, these are only predictions. One thing which is certain is that the level of interest rates will have a huge impact on the markets.

While the United States and China have temporarily put their trade war on hold, the uncertainty definitely lingers. The trade tensions have raised a red flag about increasing slowdown in the Chinese economy, which is a concern.

Moreover, the British Prime Minister Theresa May's tentative "withdrawal agreement" with the European Union (EU) failed to get an approval from her own party, thereby increasing uncertainty surrounding Brexit. The United Kingdom is scheduled to leave the EU on Mar 29, 2019 - deal or no deal. While the U.K. leaving the European Union will certainly have global economic consequences, the severity and timeline of the consequences is a wait and watch story.

Concerns over inverted yield curve are further adding to the jitters. While the five-year treasury rate has lately dipped below the two-year yield, we are not very sure if it is a precursor of a recession down the road, as it was in the past. Markedly, the latest inversion of the Treasury Yield Curve is certainly not a good sign.

As such, concerns surrounding U.S.-Sino trade dispute, inverted yield curve, sluggish economic growth and uncertainty over Fed rates do not provide much rays of hope. Market volatility is likely to persist in 2019 as well, with earnings growth expected to decelerate in 2019 amid various concerns. In fact, per Zacks Earnings Trends report, earnings growth for the S&P 500 companies is likely to decline to around 8% in 2019 from a multi-year high of 21% in 2018.

Value Investing is the Right Way

Making money in stock markets is certainly not a cakewalk. Especially, at a time when the market is facing a thicket of risks, one must don a protective armor to come out unscathed. If investors are eager to lap up opportunities in this market, a prudent move would be to buy the beaten-down stocks with encouraging fundamentals.

In fact, when the market is weak and uncertain, value investment is the way to go as most of the fundamentally good stocks fall within the discounted range. We suggest the investors to take help of our screening criteria and access the key metrics to select stocks that are currently trading cheap and have huge future prospects.

We have used the Zacks Stock Screener t o identify stocks that possess a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have a Value Score of B or better. Further, the stocks, which we shall cherry-pick, currently come at a bargain price after declining more than 20% so far this year. However, these have the potential to turn around in 2019. Finally, since value investors typically look for stocks with low P/E ratios, we have chosen companies that trade at a discount to their respective industry averages. You can see the complete list of today's Zacks #1 Rank stocks here.

Our Picks

Synchrony FinancialSYF : Stamford, U.S.-based Synchrony Financial, one of the nation's premier consumer financial services companies, carries a Zacks Rank #2 and a Value Score of A. Notably, the stock has declined around 39% year to date. Uncertainty related to trade war and Brexit has made investors wary of the performance of the overall economy, thereby indirectly impacting the finance companies as the performance of the finance sector is linked to the nation's health. Evidently, the finance sector has declined more than 12% year to date, underperforming the S&P 500.

Synchrony Financial is currently undervalued and is trading at a trailing 12-month price-to-earnings (P/E) ratio of 6.99 compared with the sector's 12.56. The stock displays a forward P/E of 6.63, below the industry's 9.29.

Solid organic and inorganic growth, rising revenues, strategic alliance and technological moves pave the way for its long-term growth. Notably, the firm expects earnings growth of 20.9% for 2019. Its long-term projected EPS growth rate is 10.5%.

Honda Motor Co., Ltd.HMC : This Japanese auto manufacturer currently carries a Zacks Rank #2 and a VGM Score of A. Notably, the stock has declined 22.1% on a year-to-date basis. The tit-for-tat tariffs slapped by the United States and China have partially slowed revenue growth of auto companies. This is evident from the fact that the auto industry has declined around 22% over this period, lagging the Zacks S&P 500.

Honda is undervalued right now and is currently trading at a trailing 12 months P/E ratio of 6.77 compared with the sector's 8.49. The stock displays a forward P/E of 7.14, below the industry's 8.12.

Honda is expected to benefit from its Vision 2030 plan, which aims to cut development costs and focus more on electric vehicles. Alliances to develop technology will also expand business. The company expects earnings growth of 2.4% for 2019. Its long-term projected EPS growth rate is pegged at 2.9%.

American Airlines Group IncAAL : The Texas-based airline company currently carries a Zacks Rank #2 and a Value Score of A. The company has lost 38.4% of its value on a year-to-date basis. The transportation sector has not performed well this year, owing to multiple factors like high fuel and labor costs, technical glitches, as well as labor unrest. Negative sentiments surrounding the space can be gauged from the fact that the sector has shed 23% of its value, handily underperforming the S&P.

American Airlines is currently undervalued and is trading at a trailing 12 months P/E ratio of 7.18 compared with the sector's 12.07. The stock displays a forward P/E of 7.01, below the industry's 11.73.

The stock is likely to be aided by strong demand for air travel, as a result of which passenger revenues are expected to boost its top and bottom lines. The company's 2019 earnings growth is expected at 21.54%. Its long-term projected EPS growth rate is 7.6%.

Silver Bow Resources Inc.SBOW : The Texas-based oil and gas explorer sports a Zacks Rank #1and has a Value Score of A. Shares of the company have declined 27% on a year-to-date basis. Notably, the energy sector has lost more than 13% of its value, underperforming the S&P 500 amid declining oil prices , supply glut and geo-political tensions.

Silver Bow is currently undervalued and is trading at a trailing 12-month P/E ratio of 6.19 versus the sector's 14.28. The stock displays a forward P/E of 3.89, below the industry's 13.22.

The pure-play Eagle Ford company, which recorded a 20% sequential increase in third-quarter production, expects to drill 34-35 net wells for the full year. This should allow Silver Bow to maintain its production growth trajectory in the fourth quarter and 2019 as well. The company's 2019 earnings growth is expected at 67.32%.

In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?

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American Airlines Group Inc. (AAL): Free Stock Analysis Report

Honda Motor Co., Ltd. (HMC): Free Stock Analysis Report

Synchrony Financial (SYF): Free Stock Analysis Report

SilverBow Resources Inc. (SBOW): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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