After registering the best August in more than a decade, Wall Street is caught in a web of woes, with the three major U.S. indices slumping to a four-week low. Notably, the Nasdaq Composite Index entered into a correction territory (down 10% from the peak) in just three days, representing its quickest plunge ever from a record close.
Most of the decline can be attributed to a sharp sell-off in technology stocks as investors worried about their lofty valuations after an astounding surge over the past few months. Per the Bloomberg report, valuation has emerged as a concern for bulls. At about 26 times annual profits for the S&P 500 and 37 times for the Nasdaq 100, American shares are still trading at the highest multiples in more than a decade despite last week’s selloff.
A deadlock in another financial-aid package, budget negotiations and election uncertainty added to the chaos. Further, geopolitics continued to be an overhang on the stocks. In the latest development, President Donald Trump is seeking to curb the U.S. relationship with China, threatening to punish any American company that creates jobs overseas and forbid those that do business in China from winning federal contracts. The Trump administration is also considering another ban on China’s cotton. Moreover, the delay in the late-stage trial of one of the leading COVID-19 vaccine candidates from AstraZeneca Plc AZN also took toll on the stocks.
If history is any guide, September is considered as weak as the S&P 500 has fallen about 1% on average in the month since 1950, per the LPL Financial data. The index also has shed 0.2% on average in the election year. Since World War II, the S&P 500 has seen an average decline of 0.5%, according to CFRA.
Coupled with the tightening presidential race, the volatility is expected to continue for the rest of the year. Per the latest data from RealClearPolitics, Democratic nominee Joe Biden’s lead over President Donald Trump has significantly narrowed.
Bulls Remain Intact
Despite the latest spate of news and historical stock underperformance, the euphoria surrounding COVID-19 vaccine and continued support from the Fed should offer some upside to the stocks. In the latest news conference, President Donald Trump said he believed a COVID-19 vaccine could be approved as soon as October. Further, encouraging data indicating that the American economy is gradually returning to the pre-pandemic level and that COVID-19 cases are moderating will add to the strength. The latest jobs data, which showed that the economy added 1.4 million jobs in August and unemployment rate dropped to 8.4% from 10.2%, is a clear sign of an improving economy.
Against such a backdrop, we have highlighted some stock-picking ideas from the top-ranked cohort that could prove extremely beneficial for investors in the current market environment, reducing the risk of a downside:
Low-beta stocks exhibit greater levels of stability and usually lose less when the market is crumbling. Though these have lesser risks and lower returns, the stocks are considered safe and resilient amid market turbulence.
Sprouts Farmers Market Inc. SFM having beta of 0.06 seems a good bet in this category. Based in Phoenix, AZ, a healthy grocery store provides fresh, natural and organic food products in the United States. It has an expected earnings growth of 69.6% for this year. The stock carries a Zacks Rank #2 (Buy) and has a VGM Score of A.
Value stocks have proven to be outperformers over the long term and are less susceptible to trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.
Based in Denver, CO, DaVita Inc. DVA is a leading provider of dialysis services in the United States to patients suffering from chronic kidney failure, also known as end-stage renal disease (ESRD). It has a Value Score of A and an estimated earnings growth of 25% for this year. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Quality investing also seeks safety and protection against volatility. Quality stocks tend to outperform as these are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins and a track of stable or rising sales and earnings growth.
Based in Columbus, OH, Big Lots Inc. BIG is a broad-line closeout retailer in the United States. It offers products under various merchandising categories, which include Food, Consumables, Furniture, Seasonal, Soft Home, Hard Home, Electronics and Toys & Accessories. It has a low debt/equity ratio of 0.03, 5-year historical EPS growth of 8.54%, an estimated growth rate of 13.72% for sales and 85.56% for earnings this year, and a dividend yield of 2.70%. The stock further belongs to a top-ranked Zacks industry (top 26%), and has a Zacks Rank #2 and VGM Score of A.
The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay out dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
While there are several top-ranked options available in the space, Texas-based RentACenter Inc. RCII having a strong history of dividend growth seems to be a good pick. The company is the largest rent-to-own operator in the United States, offering durable goods such as consumer electronics, appliances, computers, furniture and accessories. The stock has 5-year historical dividend growth of 19.13% and estimated earnings growth of 22.14%. RentACenter has 3.94% annually in dividend yield and carries a Zacks Rank #2. It sports a VGM Score of A.
Zacks’ Single Best Pick to Double
From thousands of stocks, 5 Zacks experts each picked their favorite to gain +100% or more in months to come. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
With users in 180 countries and soaring revenues, it’s set to thrive on remote working long after the pandemic ends. No wonder it recently offered a stunning $600 million stock buy-back plan.
The sky’s the limit for this emerging tech giant. And the earlier you get in, the greater your potential gain.
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RentACenter, Inc. (RCII): 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.