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Is the Recovery Priced In?

By Zacks Investment ResearchStock MarketsJun 07, 2021 03:17AM ET
Is the Recovery Priced In?
By Zacks Investment Research   |  Jun 07, 2021 03:17AM ET
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Much has been said about the recovery/rebound in the economy over the past few months. Nearly everyone is seeing good news as essentially the entire population is expected to be vaccinated before long. So it shouldn’t be long before people get back to a normal life, with the usual work, travel and entertainment.

Only, that doesn’t seem to be happening as smoothly as hoped. It’s hard to tell the whole story when there are so many moving parts that are all contributing to the situation, but I’ll give it a shot.

Starting with the transportation sector, trucking has had a busy few months with capacity constraints driving rates. With more business getting back online, volumes are rising. This may be good for transporters, but not nearly as good for the businesses depending on them, whether they are the retailers, construction companies or manufacturers.

Supply chain issues are in general impacting a number of industries, including technology. The tech sector often employs a just-in-time model, which results in limited inventory. So if anything as catastrophic as a pandemic hits, with a sudden surge in demand (for chips, for example), there’s no way it can handle it. So the chip shortage remains a big issue for many technology companies, as well as many adjacent industries that chips increasingly find themselves in.

Which leads us to the automotive story. Chip shortages may not really hurt the computing segment (per IDC forecast), but it’s having a devastating effect on other segments within technology. So if consumers want to buy a new refrigerator, or game console or some other electronic item, they could be in for a wait. For both chips and shipping.

The chip shortage is also spilling over into other sectors like auto, where an estimated $110 billion will be lost this year. The inability to produce the required volumes will block capital and raise costs for auto makers. And while everyone won’t be affected similarly, and chip makers are racing to add capacity, these things usually take time.

Again, construction companies may not use chips but they need their materials shipped. And given the shortage in key components like wood (that may not alleviate until the end of the year), here too, costs are on their way up. Cost of other materials are also escalating. Additionally, these companies are short on labor and lots.

And, of course, the labor shortage isn’t just impacting construction companies. Even with rising wage rates, many workers are still staying away either because they are still in receipt of government bail-out money, or other issues like child care that are yet to be ironed out. Retailers and restaurants are also getting hit with this.

Oils-energy is one of the stronger sectors this year because of expected pricing strength through the end of the year.

A quick look at the valuation across sectors shows that relative to their performance over the past year, six (Consumer Staples, Medical, Aerospace, Finance, Utilities, Business Services) of the sixteen Zacks-classified sectors are overvalued on the basis of earnings. On the basis of sales, 15 are overvalued, with only Medical being undervalued. And on the basis of earnings growth, only Utilities is overvalued and Tech fairly valued with the rest being undervalued.

The sectors that look most attractive based on valuation as well as growth in revenue and earnings are Basic Materials, Oils-Energy, Industrial Products, Construction and Auto. Finance and Technology look good in terms of growth, but valuation is something to watch.

In conclusion, it’s worth noting that valuations don’t look very rich, and definitely not across the board. Also, while there’s some optimism about a rebound, there’s also caution related to shortages and constraints. And it is these uncertainties that create opportunities for the watchful.

Strong Buy Stocks to Pick Up Today

Some attractive stocks worth investing in today are ArcelorMittal (NYSE:MT) MT, National Steel Company SID, Alcoa (NYSE:AA) Corp. AA, Boise Cascade (NYSE:BCC), L.L.C. BCC, LouisianaPacific Corporation LPX, Beazer Homes (NYSE:BZH) USA, Inc. BZH, CF Industries Holdings (NYSE:CF), Inc. CF and Covenant Logistics Group, Inc. CVLG.

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To read this article on click here.

Zacks Investment Research
Is the Recovery Priced In?

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