A series of positive economic reports over the month helped negate concerns from GDP and personal consumption data. Comments from the Federal Reserve and positive economic developments also gave benchmarks a boost. All the indices gained over the month, indicating that the second half of the year may be a good one for the markets.
May’s Performance
The S&P 500, the Dow and the Nasdaq gained 2.1%, 0.8% and 3.1%, respectively. May’s gains helped the Nasdaq and the blue-chip index turn positive for the year.
Gains in small-cap and high-growth stocks drove benchmarks higher for the month. Additionally, gains in consumer discretionary and energy stocks helped benchmarks finish in the green. The Nasdaq was boosted primarily by gains in bio-tech stocks. Deals between Keurig Green Mountain, Inc. (GMCR) and The Coca-Cola Co. (KO), and Hillshire Brands Co. (HSH) and Pilgrim's Pride Corp. (PPC) also added to optimism.
The Federal Open Market Committee's indication that the central bank will remain flexible when it comes to raising short term interest rates also boosted investor sentiment. Federal Reserve Chairwoman Janet Yellen indicated key lending rates would remain low. Russian President Vladimir Putin’s willingness to discuss measures to ease the Ukrainian crisis and dovish comments from ECB President Mario Draghi were some of the other positives for the month.
Most economic indicators were on the positive side during May. This includes small-business sentiment, ISM Services Index and initial claims numbers. March’s retail sales data was revised upward, adding to the optimism.
GDP Data and Other Economic Reports
First quarter GDP growth was lower than expected. According to the “second estimate” by the Bureau of Economic Analysis, the first quarter output of goods and services produced by labor and property located in the United States decreased at an annual rate of 1.0%, more than the consensus estimate of a decrease by 0.5%.
This decline in first quarter GDP was in sharp contrast to the “advance” estimate that predicted an increase of 0.1%. The US economy shrank in the first quarter for the first time in three years. Harsh winter weather was cited for hampering business operations and slowing down construction. In the fourth quarter, the US economy had expanded 2.6%.
However, investors have chosen to focus on the fact that most economic reports released last month were on the positive side. This includes data on consumer confidence, durable orders, and the housing sector. Last week’s decline in initial claims was another significant boost for the markets. The number of people applying for unemployment benefits last week touched the second-lowest level since the end of recession in mid-2009.
3 Star Performers for May
I ran a screen on Research Wizard for companies with the following parameters:
(Click here to sign up for a free trial to the Research Wizard today):
- Percentage price change over the last 4 weeks greater than or equal to 20
- Forward price-to-earnings Ratios (P/E) for the current financial year (F1) less than or equal to 25%. This picks out stocks that are good value choices
- Expected earnings growth for the current financial year greater than or equal to 20
- Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years.
(See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).
Here are the top 3 stocks among the 5 that made it through this screen:
Summer Infant, Inc.
Summer Infant, Inc. (SUMR) designs, markets and distributes branded durable juvenile health, safety and wellness products which are sold principally to large U.S. retailers. The company currently sells proprietary products in a number of different categories. These products include nursery audio/video monitors, safety gates, durable bath products, bed rails, infant thermometers and related nursery, health and safety products.
Percentage price gain over the last 4 weeks = 53.76%
Summer Infant, Inc. holds a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 19.95.
Willdan Group, Inc.
Willdan Group, Inc. (WLDN) offers consulting and technical services to utilities, government agencies and industrial and commercial companies. The company provides services in four different segments. These are: Homeland Security, Energy Efficiency, Engineering and Public Finance. Wildan has several offices, primarily in New York and California.
Percentage price change over the last 4 weeks = 34.41%
Expected earnings growth for FY2014 = 82.86%
Currently, the company holds a Zacks Rank #1 (Strong Buy) and has a P/E (F1) of 9.77.
NN Inc.
NN Inc. (NNBR) is an independent manufacturer and supplier of high quality, precision steel balls and rollers to both domestic and international anti-friction bearing manufacturers. NN also manufacturers a full line of precision injection molded components serving the bearing, automotive, instrumentation, fiber optic and consumer hardware markets.
Percentage price change over the last 4 weeks = 27.69%
Expected earnings growth for FY2014 = 35.92%
Apart from a Zacks Rank #1 (Strong Buy), NN Inc. has a P/E (F1) of 17.52.
The Momentum for These Stocks Remain
Most reports released last month indicate that growth will soon pick up, reversing this month’s decline. According to some estimates, GDP growth in the second quarter could be at 4% or even higher. However, consensus estimates indicate growth of at least 3% or more. The pace of growth is expected to accelerate over the second half of the year and this trend is expected to continue.
Benchmarks’ progress into record territory reflects this inherent optimism of the U.S. economic outlook. Despite some residual weakness, technology stocks have also recovered and are expected to move upward. Going forward, the reasonably low price to earnings ratios and top Zacks Rank make these stocks good additions to your portfolios.
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