The Federal Reserve has raised its benchmark interest rate to 0.25-0.50%, the first since Dec 2008. The Fed had cut the rate at a time when the economy had slipped into recession, and a hike now indicates that the economy is largely healed to shoulder the same.
Of course, the economy is not in bad shape. The employment picture is good enough to clear the way and inflation is crawling toward the desired level. Moreover, a 0.2% increase in November retail sales suggests enough momentum. However, plunging oil prices, a stronger dollar, and their impact need some serious consideration.
Market experts pointed that the Fed will be cautious while raising the rate and anticipate an increase by a meager 25 basis points this year, with one or more hikes in 2016. This will mark an end to an expansionary monetary policy in the U.S., in contrast to China and Europe, where central banks have cut rates to acknowledge economic weakness. In the U.S. economy, however, a rise in rate may create short-term turbulence with a spillover effect in the global stock market.
Concerns over how the market will react to a rate hike or debates on whether the Fed will again keep the benchmark interest rate unchanged are not entirely baseless. But if the Fed decides to go for a raise, will it arrest the bullish run in equities? Nothing concrete can be said on this. Instead of finding an answer to this, it will be better to focus on sectors that are likely to benefit from the move and pick some value-intrinsic stocks.
Here we have highlighted four value stocks from the financial, technology and consumer discretionary sectors that have a favorable combination of a solid Zacks Rank and a sound Value Score. Our research shows that stocks with a Style Score of “A” or “B” when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best upside potential. These are generally undervalued stocks, in spite of having strong fundamentals, and could fetch higher returns on market correction.
4 Value Picks
We suggest investing in Abercrombie & Fitch Co. ANF, a specialty apparel retailer, with a Value Score of “A” and a Zacks Rank #1. The company possesses a P/B of 1.39x and P/S of 0.49x. Compared to the industry at large, this is pretty favorable as the overall space has an average P/B and P/S of 1.86x and 0.57x, respectively. The company has also been witnessing solid earnings estimate revisions over the past 30 days.
Cracker Barrel Old Country Store, Inc. CBRL, which is engaged in the operation and development of the Cracker Barrel Old Country Store restaurant and retail concept, is another solid bet, with a Value Score of “A” and a Zacks Rank #2. The company has a P/E of 17.54x and P/S of 1.07x, which are trading at a discount to the industry average P/E and P/S of 24.65x and 1.34x, respectively.
Another Zacks Rank #2 stock that investors may look forward to is Cash America International, Inc. CSH with a Value Score of “A.” This provider of specialty financial services to individuals through retail services locations possesses a P/B of 0.74x and P/S of 0.73x. Compare this to the industry average of 1.01x and 1.08x, respectively, and it will be safe to consider the stock as adequately undervalued than its peers, at least on these metrics. The Zacks Consensus Estimate too has trended upward over the past 60 days.
You can also count on DST Systems Inc. DST, the provider of technology-based information processing and servicing solutions, carrying a Zacks Rank #2 and a Value Score of “B.” The company has a P/E of 19.16x and P/S of 1.40x, which are trading at a discount to the industry average P/E and P/S of 26.63x and 3.09x, respectively. The stock has also been witnessing positive estimate revisions over the past 60 days.
Final Verdict
Several factors, whether domestic or overseas, directly or indirectly impacted the Fed’s decision in the past, and led to the derailment of the bold step of a rate hike time and again. However, over this period of time, things have improved and now seem under control, thus providing enough capacity for a rate hike.
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