The growing concern over the health of the Chinese economy continues to unnerve investors and the spillover effect is clearly visible across the borders, be it in the Asian, European or the U.S. markets. The world’s second largest economy took the financial markets and global economy by surprise when it unexpectedly devalued its tightly controlled currency, the yuan, signaling that the economic situation was even worse than originally perceived.
Dwindling Chinese Market
The Chinese stock market tumbled on the first trading day of the week, with the Shanghai Composite Index plunging over 8%, marking its worst performance since 2007 and leading the day to be touted as “Black Monday.” The government did try to pacify panic-stricken investors by allowing a certain percentage of the state pension fund to be invested in the share market for the first time ever. However, this too failed to alleviate the prevailing market sentiment that led to a decline of 7.6% in the index on Tuesday.
To instill confidence in the economy, China's central bank lowered its interest rate for the fifth time in nine months. The benchmark rate for a one-year loan was cut by 25 basis points to 4.6% and the one-year rate for deposits was also slashed by the same margin to 1.75%. To support lending, the central bank lowered the minimum reserves for the Chinese banks by 50 basis points to 18%. Market experts believe that the announcement, which came after the close of the market, is a desperate attempt to stem rout in the domestic and global markets.
This was not the first time that the Chinese Government intervened to put the derailed stock market back on track and curb irrational selling. Earlier, China's Securities Finance Corporation infused more cash into the system to enable big Chinese brokerage firms to buy stocks; market regulators also suspended IPOs, cut interest rates, and asked companies’ major shareholders to refrain from selling shares for six months.
In China, manufacturing activity for the month of August touched the lowest level since the last six and a half years, basically underlining a frail economy. This also implies that if China wants to attain its 7% GDP growth target in 2015 – the lowest in years – the country will have to come up with measures to fuel its economy. In fact, without a step-up, some analysts are apprehensive that China’s economy may crumble. To add to the woes, U.S. and global oil prices plunged on the fear of lower demand from China, the world’s second-largest consumer.
Can the U.S. Economy Withstand the Jolt?
The U.S. market, which to an extent appeared resilient against the global turmoil, also slumped following worries emanating from China and the continual fall in oil prices. The Dow Jones Industrial Average (DJI) slumped 3.6% or 588.4 points to close at 15,871.35, yesterday.
The S&P 500 nosedived 3.9% or 77.68 points to 1,893.21. The tech-laden Nasdaq Composite Index closed at 4,526.25, plunging 3.8% or 179.79 points. Meanwhile, the Fed is yet to decide on a rate hike amid the sinking oil prices and the grim situation in China. However, today’s rate cut by China could be a silver lining for investors.
While the economic turbulence in Europe and the dwindling Chinese stock market are compelling investors to look for a safe haven and consumers to exercise caution, they should not forget that the U.S. economy by itself is actually performing well. A gradual recovery in the housing market and the manufacturing sector, along with an improving labor market and consumer spending, are some of the favorable economic indicators.
Safeguard Your Portfolio
You cannot let your portfolio become a victim of the current economic scenario that is gradually engulfing the global market. Rather, we suggest that you should secure it by focusing on stocks that are trading below their inherent value. These are generally undervalued stocks, in spite of having strong fundamentals. These value stocks are usually unappreciated or trading at a bargain price, and could fetch higher returns on market correction.
Warren Buffet said “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. We have narrowed down our choices with the help of the new Style Score System. Our research shows that stocks with Value Style Scores of “A” or “B” when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.
4 Safe Harbors
We suggest investing in Citi Trends, Inc. CTRN – retailer of urban fashion apparel and accessories – with a Value Score of “A” and a Zacks Rank #2. The company possesses a P/B of 1.98x and P/S of 0.64x. Compared to the industry at large, this is pretty favorable as the overall space has an average P/B and P/S of 2.56x and 0.78x, respectively. The company has also been witnessing solid earnings estimate revisions over the past 7 days.
Target Corp. TGT, which operates as a general merchandise retailer, is another solid bet, with a Value Score of “A” and a Zacks Rank #2. The company has a P/E of 17.12x and P/B of 3.69x, which are trading at a discount to the industry average P/E and P/B of 23.02x and 4.66x, respectively. The stock has also been enjoying positive estimate revisions over the past 7 days.
Another Zacks Rank #2 stock that investors may look forward to is Red Robin Gourmet Burgers Inc. RRGB, with a Value Score of “B.” This casual-dining and fast-casual restaurant operator possesses a P/B of 2.89x and P/S of 0.92x. Compare this to the industry average of 3.93x and 1.36x, respectively, and it will be safe to consider the stock as adequately undervalued versus its peers, at least on the basis of these metrics. The Zacks Consensus Estimate too has trended upward over the past 30 days.
You can also count upon Finish Line Inc. FINL, a specialty retailer of athletic shoes, apparel, and accessories, carrying a Zacks Rank #2 and a Value Score of “A.” The company has a P/E of 15.44x and P/S of 0.66x, which are trading at a discount to the industry average P/E and P/S of 17.17x and 0.78x, respectively. The stock has also been witnessing positive estimate revisions over the past 60 days.
Bottom Line
Investors can confidently end their search at stocks with a better Zacks Rank status of either #1 or #2, which encompasses its strong fundamentals, promises price movement and highlights analysts’ constructive view on the same via positive estimate revisions. A sturdy portfolio always gives favorable returns.
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