What is the best strategy to play the markets right now? How should we invest today so we can gain from the vaccine euphoria as well as in the longer term? What is the risk we’d have to stomach? These are some of the questions we’re asking ourselves as we head into the heaviest part of the earnings season.
And there is no easy answer.
Because the markets are irrational. And there is always going to be a certain amount of risk, no matter what we do. And this market has been on a strong bull run the last few months. So it isn’t unreasonable to assume that there will be a correction sometime soon.
One way of offsetting risk is by choosing names that offer income. Of course, you’d have to wait around to actually earn that income, which could become difficult if the company reverses course.
So I find that there’s no short cut. You really do need to research a company before investing in it. If it looks like a stable company with a decent growth engine and either near-term prospects or at least a strategy/technology/product/platform with the potential to generate strong and sustained growth in the future, that is likely to be a good investment.
But of course companies that are young and aggressively pursuing growth are unlikely to pay any dividend. So what we’re really looking for in the current situation are stocks that can help us find balance between growth and income.
And since we’re in the earnings season, it may also help to leverage the earnings expected surprise prediction (ESP), a Zacks tool that quantifies the difference between the most recent estimate and the Zacks Consensus. So if the latest estimates are higher than the Zacks Consensus, it stands to reason that there’s some good news in the stock that hasn’t been updated by all the analysts. Thus, there’s a good chance of a positive surprise when the company reports. And positive surprises create buoyancy in share prices, either immediately or over a period of time. That’s what the ESP captures.
Now let’s take a look at some examples.
Zacks #1 (Strong Buy) Ranked D.R. Horton, Inc. DHI is one of the leading national homebuilders, focused on construction and sale of entry-level and move-up single-family homes.
It belongs in the extremely attractive Building Products - Home Builders industry (top 18% of 250+ Zacks-classified industries). A buy-rated stock in a top-rated industry is likely to outperform others.
Additionally, its earnings ESP of 8.91% indicates upward revision in earnings estimates, which means there are positive catalysts for a better-than-expected report his quarter.
The fiscal 2021 (ending September) revenue and earnings estimates currently represent growth of 26.26% and 25.12%, respectively.
It also pays a dividend that yields 1.17%.
DHI trades at a price-to-earnings growth (PEG) ratio of 0.67, so it does look like the market is undervaluing its potential.
Zacks #2 (Buy) ranked M.D.C. Holdings (NYSE:MDC), Inc. MDC is another home builder focused on the construction and sale of residential property and the acquisition, development and sale of land. Its rank and industry indicate upside potential.
But it doesn’t end there. The company has an earnings ESP of 2.22 for the current quarter, indicating the possibility of a positive surprise and subsequent share price appreciation in response.
In 2021, the company is expected to grow revenue and earnings by 27.03% and 27.11%, respectively.
That’s despite paying out dividend that yields 3.37%.
And the best part is, the valuation is still attractive at a PEG of .49, so this is an important stock to consider.
Artisan Partners (NYSE:APAM) Asset Management Inc. APAM as the name indicates, is an investment management firm focused on providing high-value added, active investment strategies that are diversified by asset class, market cap and investment style. While focused on the U.S. market, the company has been expanding across the world. As of Sep 30, 2020, its assets under management totaled $134.3 billion.
APAM has a Zacks Rank #2. It belongs to the Financial - Investment Management industry, which is in the top 23% of Zacks-ranked industries. These two factors alone are positive indicators of share price appreciation.
In addition, the earnings ESP for Q4 is +3.09%, so there’s a good chance that it will beat estimates this quarter. Historically, the shares have tended to react positively to a positive surprise.
Its 2021 estimates currently call for revenue and earnings growth of 21.09% and 22.22%, respectively.
And its dividend yields 6.39%.
The valuation also looks decent with its PEG ratio at just 0.68.
Next we have Virtus Investment Partners (NASDAQ:VRTS), Inc. VRTS within the Financial - Investment Management industry.
The shares carry a Zacks Rank #2.
At 1.88%, its earnings ESP is pointing toward a positive surprise when the company reports on Jan 29.
All of these factors point to upside in share prices. And since the 2021 revenue and earnings estimates represent growth of 42.69% and 59.79%, there’s also an attractive growth outlook for the year.
Additionally, it pays a dividend that yields 1.40%.
The PEG of 0.42 is a clear sign that the market is undervaluing its growth potential.
And finally, we have Zacks #1 ranked Diamondback (NASDAQ:FANG) Energy, Inc. FANG, is an independent oil and gas exploration & production company, with its primary focus on the Permian Basin, where it has around 394,000 net acres.
Energy stocks aren’t so hot right now, so I’ve kept this at the bottom of the list. And sure enough, the Oil and Gas - Exploration and Production - United States industry to which the company belongs, is in the bottom 49% of Zacks-classified industries.
But there are positive elements here that could be worth investing in.
For starters, the earnings ESP is positive at 21.86%, so there’s a positive estimate revision trend there.
Second, it is currently expected to grow revenue and earnings by a whopping 43.86% and 50.84% this year.
Third it pays a dividend that yields 2.39%
And if those aren’t enough, it has a PEG ratio of 0.62 that make the shares look undervalued.
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Virtus Investment Partners, Inc. (VRTS): Free Stock Analysis Report
D.R. Horton, Inc. (DHI): Free Stock Analysis Report
M.D.C. Holdings, Inc. (MDC): Free Stock Analysis Report
Diamondback Energy, Inc. (FANG): Free Stock Analysis Report
Artisan Partners Asset Management Inc. (APAM): Free Stock Analysis Report
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