Markets have been choppy this month in the wake of rate hike anxieties, Brexit woes and doubts over Deutsche Bank AG (USA) (DB) liquidity. With U.S. presidential elections fast approaching, an increase in volatility is highly anticipated. Lest we forget, stock market valuations are at elevated levels, which make the market more susceptible to a volatile sell-off.
Given this uncertainty, it will be wise to invest in value stocks. Value investors stay on the lookout for volatile times to pick stocks at a discount, which are at the same time fundamentally strong to brave economic downturns.
Rate Hike Jitters
The European Central Bank (ECB) might wind down its bond purchases of 80 billion euros ($89.7 billion) a month before the program’s scheduled March 2017 conclusion. The ECB might do so by tapering as much as 10 billion euros ($11.2 billion) a month, according to euro-zone central-bank officials. The ECB’s decision to not extend the program beyond March has compelled investors to get ready for a rate hike.
Several Fed officials in the U.S. also advocated an imminent rate hike. Prominent among them is Richmond Fed President Jeffrey Lacker who stated that the Fed should come up with a strategy of hiking rates before inflation moves up, like the way it did in 1994.
Mounting expectations of a rate hike weighed on investors sentiment. Ultra-low interest rates had aided economic recovery for a considerable period of time, leading to a bull run in the markets.
Brexit Woes Reappear
Prime Minister Theresa May has set the country on course to leave the EU by 2019. She said that Britain will not be part of a “political union with supranational institutions that can override national parliaments and courts”. Instead the country will be an independent and sovereign nation.
However, many feared that such an outcome will weaken the region’s economy, decelerate global growth and create fresh spells of gyration in the financial markets across the world (read more: Brexit Panic: 7 Ways to Trade the Vote).
Deutsche Bank Concerns
More uncertainty looms large this month as Deutsche Bank’s woes continue to spook investors. A research firm warned that the bank may tap shareholders for more cash in the wake of the $14 billion fine. The bank needs to settle civil claims, which is related to the sale of structured mortgage bonds during the 2008-2009 financial crisis. A handful of hedge funds that clear derivatives through the bank had already withdrew excess cash and positions.
Shares of the lender plunged more than 50% this year as investors remain worried about the institution’s thin capital cushion. The German lender has, in fact, witnessed the Zacks Consensus Estimate for its current year earnings plunging 71% over the last 90 days (read more: Forget Deutsche Bank, Buy These 3 Foreign Banks Instead).
DEUTSCHE BK AG Price and Consensus
Volatility to Spike
The month of October has always been volatile, even more when the presidential election is just around the corner. The CBOE Volatility Index, a gauge of near-term investor anxiety, has always risen significantly in the past six presidential elections this month, except for 1996, when Bill Clinton handily won the re-elections.
Imminent strategists had already expressed their concerns. Strategists from JPMorgan Chase & Co. (JPM) led by Dubravko Lakos-Bujas said that “2016 election will likely be a source of heightened volatility in the weeks ahead of November 8th.” David Kostin and his colleagues at Goldman Sachs Group, Inc. (GS) also said that “equity market uncertainty typically rises in the month immediately ahead of presidential elections” (read more: 5 Low Beta Stocks to Buy for a Capricious October Market).
Value Stocks to Rescue: 5 Solid Choices
Investors continue to fret over the possibilities of a rate hike in the coming months, Britain’s exit from the EU and Deutsche Bank’s inadequate capital cushion. Investors are also bracing themselves for greater bursts of volatility, mostly due to the upcoming presidential elections. Amid this volatility, it will be prudent to invest in value stocks that are perceived to be “bargains” or are undervalued.
Investing in value stocks is even more essential nowadays, when stocks market valuations are already at elevated levels. Total earnings for the S&P 500 index are expected to be down 2.8% in Q3 from the same quarter last year (read more: Q3 Earnings Season Preview).
In value investing, investors will hold a stock until it meets its target price and sometimes even longer provided the company demonstrates continued profitability.
Thanks to our new style score system, we have been able to identify five solid value stocks to buy. Such stocks boost a Value Style Score of ‘A’ and a Zacks Rank #1 (Strong Buy), which offers the best opportunities in the value investing space.
US Foods Holding Corp (USFD) markets and distributes fresh, frozen, and dry food and non-food products to foodservice customers in the U.S. The company has a price-earnings ratio (P/E) of 16.6, less than the industry’s P/E of 24.1.
Sanderson Farms, Inc. (SAFM) produces, processes, markets, and distributes fresh, frozen, and prepared chicken products in the U.S. The company has a P/E of 13.41, less than the industry’s P/E of 16.2.
Jabil Circuit, Inc. (JBL) provides electronic manufacturing services and solutions worldwide including the U.S. The company has a P/E of 12.75, less than the industry’s P/E of 14.
CONE Midstream Partners LP (CNNX) develops and acquires natural gas gathering and other midstream energy assets in the Marcellus Shale in Pennsylvania and West Virginia. The company has a P/E of 11.82, less than the industry’s P/E of 15.5.
Goodyear Tire & Rubber Company (GT) develops, manufactures, markets, and distributes tires, and related products and services. The company does business in both North America and Latin America. The company has a P/E of 8.06, less than the industry’s P/E of 8.5.
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