We like to think that the markets behave rationally. And they perhaps do, over the longer term. But there are many small things that happen day to day, that have an outsized impact on investor confidence.
A case in point is the probable fall of Evergrande, the big Chinese real estate company that got ahead of itself with $300 billion in debt as it sought to expand to around 1,300 projects across 280 Chinese cities, as well as wealth management, electric cars, and food and drink manufacturing. The company is set to make interest payments of $84 million on Thursday, but there are real concerns that it won’t be able to pay, since a severe cash crunch already has it paying its wealth management customers with property.
Okay, now why should that scare investors in the U.S. you might ask. The answer could be in the same supply chains that we have been talking about the past few months, as well as increases/decreases in demand and supply and the related impact on prices that inevitably follow when any big event that disrupts the equilibrium. Credit and financial markets are also somewhat interlinked, so there could be some concerns related to that.
And then of course, there are the Chinese stocks, the largest of which appear to have been impacted by the news. Investors able to handle more risk may consider Chinese stocks, although the SEC continues to discourage these investments, not least because they’re not really holdings in the companies themselves, but really a share in their holding companies under a VIE arrangement, which further adds to risk.
But honestly, Evergrande is a Chinese internal matter, and it does not appear at the moment to be impacting the U.S. in any material way.
The FOMC meeting could also be weighing on sentiments, especially as regards the tapering of the $120 billion-a-month pace of asset purchases and subsequent interest rate hikes. The tapering will precede any interest rate hike but could be delayed given the rate at which delta is spreading.
And going by past indications, we are probably looking at a couple of 25 basis point hikes by the end of 2023, not before. So the upcoming meeting is very likely to be uneventful, or at the most a confirmation of already-known facts. But we’ll have to see if there’s any change of tone.
In the meantime, we can make the most of this volatility by buying some good shares cheap-
Korn Ferry International KFY
Korn Ferry International is one of the world’s largest recruitment firms filling positions in the middle to executive management levels of public and private companies, middle-market and emerging growth companies as well as governmental and not-for-profit organizations. It operates on a retainer basis.
The stock is clearly poised for near-term appreciation given its Zacks #1 (Strong Buy) rank and Momentum Score of A. The fact that it belongs to the Staffing Firms industry (top 19%), is a supportive factor. As economies open up around the world, staffing demand is picking up. This along with the labor crunch in the U.S. makes this segment a great reopening bet.
So the 3.4% price decline in the past week is nothing but an opportunity to grab some shares cheap. And considering the fact that they’re trading at a 14.22X P/E multiple, which is below the S&P’s 20.94X and their own median over the past year of 19.78X, the shares are certainly cheap.
What’s more, the 2021 earnings estimate for KFY moved up from $4.12 to $5.10, an increase of 23.8% in the last 30 days. The 2022 estimate went from $4.60 to $4.89 (up 6.3%) while the current quarter estimate increased 38 cents (38.4%) in the last 30 days. That’s more reason to buy KFY at $71.28 a share.
Nikon Corp. NINOY
Nikon manufactures and sells a broad range of products including imaging products (33% revenue share), precision lithography equipment for front-end semiconductor manufacturing for FPD, LCD and LOLED applications (41% share), medical instruments (14%) and other industrial metrology (12%).
The Zacks Rank #2 (Buy) stock has a Momentum Score of A, indicating near-term upside potential. It also belongs to the Electronics – Manufacturing Machinery industry, which is currently placed in the top 28% of Zacks-classified industries. The U.S. manufacturing segment is extremely strong at the moment, as seen from recent government-released data, which is positive for all players.
Nikon’s numbers further bear out this thesis: the 2021 estimate is up 12 cents (24.0%) in the last 30 days while the 2022 estimate is up 6 cents (9.5%). The current quarter estimate is up 4 cents (40%).
Despite these strengths, the shares lost 4.3% of their value in past week and now trade at a 0.95X P/S, which is between the median value of 0.77X and the high of 0.97X. The S&P is way above at 4.80X.
So at $12.07, they are really worth buying.
Peabody Energy Corp. BTU
Peabody Energy serves metallurgical and thermal coal customers primarily in Arizona, Colorado, New Mexico, Wyoming, Illinois, Indiana and Australia. It has an eye on sustainable mining and clean coal technologies.
The Zacks Rank #2 stock has a Momentum Score of A. It belongs to the Coal industry (top 48% of Zacks-ranked industries). The ongoing strength in the steel industry is also driving demand for and prices of metallurgical coal, which is required to make coking coal used in the blast furnaces of steel producers.
The company’s shares sank 19.0% over the past week and currently trade at a P/S ratio of 0.51X, which is between the median of 0.13X and high of 0.70X over the past year and well below the S&P 500’s 4.80X.
So this looks like a very good time to capture the growth these shares represent: its 2021 estimate went from a loss of -$0.55 a share to a profit of $0.77 a share within the last 30 days. What’s more, the estimate for 2022 also moved from -$0.16 to $0.72 while the current-quarter estimate went from 45 cents to 72 cents.
The shares cost just $13.98 each.
Citi Trends, Inc. CTRN
Citi Trends is a leading value-priced retailer of urban fashion apparel and accessories, as well as a limited assortment of home décor items targeted at fashion conscious African-American men, women and children.
It belongs to the Retail – Apparel and Shoes industry, which is in the top 18% of Zacks-classified industries. The industry is about to enter what promises to be a very strong selling season, although the delta variant could push back some of the reopening spend.
But analysts appear highly optimistic about the company’s growth: its 2021 estimate is up from $5.00 to $6.50 (a 30% increase) in the last 30 days. The 2022 estimate is up $1.35 (23.5%). The estimate for the current quarter is up 10 cents (45.5%).
The Zacks Rank #1 stock has a Momentum Score of A. After the 5.2% price slide over the past week, it is trading at $72.09, or a 10.48X P/E multiple, below the 17.20X median level since it started trading in January.
Tillys, Inc. TLYS
Tilly's is a web-based specialty retailer in the action sports category selling clothing, shoes and accessories for men, women and children. It belongs, like CTRN, to the Retail – Apparel and Shoes industry.
Its #1 rank and Momentum Score of A are indicative of upside in the near term. But despite the 39-cent (29.8%) increase in its 2021 estimate, 21-cent (17.4%) increase in its 2022 estimate and 10 cent (43.5%) increase in the current-quarter estimate in the last 30 days, the shares actually dropped 3.2% in the past week.
TLYS shares currently trade at a P/S of 0.58X, which is close to their median value of 0.57X over the past year. So, at $14.20 a piece, they’re definitely worth buying.
One-Month Price Performance
Image Source: Zacks Investment Research
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