Under the Trump administration, one thing that has been constant in the U.S. markets so far is uncertainty. From policy reforms affecting corporate taxes and infrastructure spending to the abolishment of Affordable Care Act to the Mexican wall, investors have always been on guard. Apart from domestic events, issues like escalating North Korea-Japan tension and terror attacks in Spain also raised concerns.
However, beating the odds on the back of a rising rate environment, progress on tax reforms and improving economic backdrop, the S&P 500 and Dow Jones Industrial Average have soared 19.9% and 25.3%, respectively, so far this year.
Interestingly, the Bull Run is expected to continue into next year with markets reaching new highs.
Key Catalysts for 2018
Many analysts seem to harbor a bullish sentiment for 2018. Not one, but many factors are expected to support the current momentum in the markets. Let’s take a sneak peek into what’s driving the optimism.
Improving U.S. Job Market
Trump’s efforts to improve the country’s job scenario are remarkable. Per reports, the U.S. unemployment rate was pegged at 4.1% in November, the lowest since February 2001. Notably, the unemployment rate is projected to be 3.9% for 2018 and 2019 (per an article published on FOCUSECONOMICS).
Fed Rate Hike in the Cards
The central bank plans three more rate hikes in 2018 after it recently hiked interest rates for the fifth time since the 2008 financial crisis. Moreover, it expects inflation rate to remain below the Fed’s 2% goal in the near term but “stabilize” around the target in the medium term in 2018.
Notably, at the end of its latest Federal Reserve Open Market Committee (FOMC) meeting, the Fed projected economic growth of 2.5% for 2018 (up from the prior guidance of 2.1%). Thus, continued strengthening of the labor market, rise in household spending, reduced unemployment rate and increase in business activities are expected to drive growth in 2018. This will automatically pull the market further up.
U.S. Tax Reform
Overwhelmed by the victory, after the House of Representatives approved the biggest overhaul of the U.S. tax code since the 1980s, President Trump commented, “' We are making America great again!.”
On Dec 22, President Trump signed the $1.5-trillion tax bill into law and described it as, “a bill for the middle class and a bill for jobs."
It slashes the corporate tax rate from 35% to 21% and will be implemented next year, instead of being delayed until 2019. The Republicans propagated the tax reform on the grounds that not only it will cut corporate taxes but also provide temporary tax relief to both wealthy and middle-class Americans.
Thus, the implementation of tax legislation is expected to kindle the market with increased job creation and rise in inflation rate.
President Trump’s Focus on Emerging Markets – Icing on the Cake
The United States' trade plans with emerging countries are likely to favor domestic companies. In this regard, investors may find President Trump’s 12-day Asia trip last month interesting. The visit was aimed at boosting inter-country trade relations, particularly with the emerging nations.
Trump’s promise to augment bilateral trade agreements with Indo-Pacific nations instills confidence in his APAC policies. He also emphasized “free and open Indo-Pacific trade” with a focus on the nations of Japan, Australia and India.
The Winning Strategy
At this point in time when the economy is on a rebound, it seems prudent to invest in stocks that are currently trading cheap. Such stocks may not make it to the list of bigwigs
In light of this, value stocks are expected to hold enough potential to rake in more returns, unlike expensive growth stocks.
Our Screening Parameters
In order to help investors identify the ideal investment choices, we have used the Zacks Stock Screener.
First, we have shortlisted stocks with a Value Score of A. Second, we have picked stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
(Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)
Next, we looked for stocks with Price/Earnings (P/E) for current year, Price/Book (P/B) and Price/Sales (P/S) ratios that beat their respective broader industry and have Price/Earnings to Growth (PEG) ratio less than 1.
Finally, we look for stocks with favorable earnings estimate revisions for 2018 over the last 12 weeks, greater than 5%.
5 Stocks to Scoop Up
Here are the stocks that met the criteria:
American Axle & Manufacturing Holdings, Inc. AXL: Headquartered in Detroit, MI, American Axle & Manufacturing along with its subsidiaries, designs, engineers, validates, and manufactures driveline and drivetrain systems, and related components and chassis modules for the automotive industry in the United States, Canada, Mexico, South America, Asia, Europe, and globally. The company sports a Zacks Rank #1 and has a Value Score of A.
American Axle & Manufacturing has a favorable PEG ratio of 0.59 compared with the broader industry’s 1.48. The company’s P/E ratio of 4.78 also stands strong when compared to the industry’s 13.9.
The company has a favorable P/B ratio of 1.3 compared with the industry’s 3.1. Moreover, the company’s P/S ratio of 0.4 is also favorable compared to the industry’s 0.9.
Finally, American Axle & Manufacturing’s favorable magnitude of estimate revisions of 8.1% for 2018 earnings per share over the last 12 weeks is also encouraging.
Norbord Inc. OSB: Headquartered in Toronto, Canada, Norbord manufactures and markets wood-based panels for retail chains, contractor supply yards, and industrial customers majorly in North America and Europe. The company sports a Zacks Rank #1 and has a Value Score of A.
Norbord has a favorable PEG ratio of 0.81 compared with the broader industry’s 2.53. The company’s P/E ratio of 7.6 also stands strong when compared to the industry’s 24.7.
Norbord is a favorable value stock for some other reasons as well. The company has a favorable P/B ratio of 3.3 compared to the S&P 500’s 3.8. Moreover, the company’s P/S ratio of 1.4 is also favorable compared to the industry’s 3.4.
Finally, Norbord‘s favorable magnitude of estimate revisions of 11.1% for 2018 earnings per share over the last 12 weeks is also encouraging.
Hitachi, Ltd. HTHIY: Headquartered in Tokyo, Japan, Hitachi, manufactures, sells, and services information and telecommunication systems, social infrastructure and industrial systems, electronic systems and equipment, construction machinery, high functional materials and components and others worldwide. The company sports a Zacks Rank #1 and has a Value Score of A.
Hitachi has a favorable PEG ratio of 0.96 compared with the broader industry’s 1.93. The company’s P/E ratio of 12.5 also stands strong when compared to the industry’s 20.5.
Moreover, the company has a favorable P/B ratio of 1.0 compared to the industry’s 4.3. Moreover, the company’s P/S ratio is 0.5 compared with the industry’s 3.2.
Finally, Hitachi ‘s favorable magnitude of estimate revisions of 7.3% for 2018 earnings per share over the last 12 weeks is also encouraging.
Lam Research Corporation LRCX: Headquartered in Fremont, CA, Lam Research designs, manufactures, distributes, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits worldwide. The company carries a Zacks Rank #2 and has a Value Score of A.
Lam Research has a favorable PEG ratio of 0.85 compared with the broader industry’s 1.2. The company’s P/E ratio of 12.7 also stands strong when compared to the industry’s 20.1.
Additionally, the company has a favorable P/B ratio of 4.1 compared with the industry’s 8.4. Moreover, the company’s P/S ratio of 3.9 is also favorable compared to the industry’s 6.5.
Finally, Lam Research‘s favorable magnitude of estimate revisions of 11.9% for 2018 earnings per share over the last 12 weeks is also encouraging.
Ultra Clean Holdings, Inc. UCTT: Headquartered in Hayward, CA, Ultra Clean Holdings designs, develops, prototypes, engineers, manufactures, and tests production tools, modules, and subsystems for the semiconductor capital equipment and equipment industry segments majorly in North America, Asia, and Europe. The company carries a Zacks Rank #2 and has a Value Score of A.
Ultra Clean Holdings has a favorable PEG ratio of 0.62 compared with the broader industry’s 1.2. The company’s P/E ratio of 9.4 also stands strong when compared to the industry’s 11.5.
The company has a solid P/B ratio of 2.7 compared with the industry’s 4.5. Moreover, the company’s P/S ratio of 0.9 is better than the industry’s 4.0.
Finally, Ultra Clean Holdings’ favorable magnitude of estimate revisions of 6.8% for 2018 earnings per share over the last 12 weeks is also encouraging.
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