The U.S. stock market has been doing pretty good lately, having only climbed north so far this fall. The rally helped the broader S&P 500 rise more than 9% between Oct 2 and the end of November. The index touched 11 record highs last month, with rare sell offs.
But this uptick isn’t built on fundamentals, which makes the stock market more susceptible to sudden pullbacks. After all, the broader market is gaining on hopes that there will be a preliminary trade agreement between the United States and China in the coming two-week period. And market pundits are hopeful that the worst is over. Needless to say, any change in macro factors will disrupt the market’s upward journey.
That’s exactly what happened during last day’s trading session. Almost all major bourses witnessed their steepest one-day fall in almost eight weeks on Dec 2. A comeback of trade fears and weak domestic manufacturing numbers dented investors’ sentiments.
Commerce Secretary Wilbur Ross recently said that the Trump administration is prepared to impose more duties on Chinese commodities in the absence of any trade deal. Ross said that the imposition of the 15% tariff on consumer goods from China is drawing nearer.
Ross also reminded that Dec 15 is the “logical deadline” for a phase-one deal. Lest we forget, disputes related to intellectual-property theft had earlier affected trade deals between China and the United States as they scramble to reach a deal.
To top it, U.S. manufacturing isn’t in good shape either. American factory activity contracted for the fourth straight month in November, according to the Institute for Supply Management. The purchasing managers’ index came in at 48.1, lower than economists’ expectations of 49.2. By the way, any reading under 50 implies contraction.
From the new orders index, inventories index to employment index, all took a hit. It’s widely expected that the confusion over trade is hampering the overall U.S. manufacturing sector. To make matters worse, October construction outlays underperformed, down 0.8% against expectations of a 0.4% uptick.
However, bullish investors argue that trade-related headlines can’t dominate market sentiments forever. December has traditionally been the best for S&P 500 investors. From 1950, the S&P 500 Index has been up in 50 Decembers and down just 18 times, per Stock Trader’s Almanac.
This is entirely because of the Santa Claus Rally or the rise in prices in the final six days of the year. This term was first coined by market analyst Yale Hirsch in 1972 in The Stock Trader’s Almanac. And this time around, consumers have shown confidence in their financial future and are prepared to spend more. This is usually what triggers a Santa Claus rally.
The Winning Strategy
As the broader market struggles for direction, smart 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, usually in the past two-month period. 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).
Cable One, Inc. CABO owns and operates cable systems that provide data, video, and voice services. The company has a beta of 0.4. The Zacks Consensus Estimate for its current-year earnings has risen 4.6% in the last 60 days. The company’s expected earnings growth rate for the next year is 25% compared with the Cable Television industry’s projected growth of 18.9%.
Cincinnati Financial Corporation CINF provides property casualty insurance products in the United States. The company has a beta of 0.61. The Zacks Consensus Estimate for its current-year earnings has moved up 7.7% in the last 60 days. The company’s expected earnings growth rate for the current year is 20.6% compared with the Insurance - Property and Casualty industry’s estimated rise of 13.9%.
Cohen & Steers, Inc. CNS is an asset management holding company. The company has a beta of 0.9. The Zacks Consensus Estimate for its current-year earnings has moved 3.7% north in the last 60 days. The company’s expected earnings growth rate for the next year is 13.9% compared with the Financial - Investment Management industry’s projected increase of 10.7%.
DICK'S Sporting Goods, Inc. DKS operates as a sporting goods retailer, primarily in the eastern United States. The company has a beta of 0.58. The Zacks Consensus Estimate for its current-year earnings has climbed 6.2% in the last 60 days. The company’s expected earnings growth rate for the current year is 10.8%, in contrast to the Retail - Miscellaneous industry’s projected decline of 0.5%.
Hilltop Holdings Inc. HTH provides banking and financial products and services. The company has a beta of 0.82. The Zacks Consensus Estimate for its current-year earnings has risen 13.5% in the last 60 days. The company’s expected earnings growth rate for the current year is 70.3% compared with the Banks - Southeast industry’s estimated rise of 6.4%.
Shares of Cable One, Cincinnati Financial, Cohen & Steers, DICK’S Sporting Goods and Hilltop Holdings have gained 86.2%, 36.4%, 90.8%, 47.8% and 36.2%, respectively, so far this year. Take a look —