U.S. stocks closed higher on Friday, ending the best June for the S&P 500 in more than 60 years. Financial and Materials stocks were the winners this week, while Real Estate and Utility names lagged.
Most banks are not enjoying the current inversion of the yield curve, but the 18 largest financial institutions in the U.S. all passed the annual CCAR stress test this week. As a result, several firms increased dividends and announced stock buybacks on Friday.
There were just a few headlines coming out of trade talks between China and the U.S. at the G20 Summit, but President Trump tweeted on Saturday that no new tariffs will be enacted for the time being.
The Week Ahead
Barring any significant headlines emanating from the G20 Summit in Japan, trading volume will like be quiet next week. U.S. markets will close early on Wednesday and remain closed on Thursday for the July 4 holiday.
Despite the holiday, traders will be watching Friday’s June employment report closely. Consensus expectations call for the addition of 160,000 non-farm payrolls, up from just 75,000 in May.
A hot jobs number could dampen expectations for rate cuts in the second half of 2019. Fed funds futures are currently factoring in a 100% probability of a rate cut at the FOMC meeting on July 31 and a 60% chance that we’ll see three rate cuts by the end of the year.
Second Half Expectations
As we set to enter the second half of 2019, the following sample of equity strategy calls from Wall Street’s top shops shows the wide variety of potential outcomes for the next few months.
Barclays: “With U.S. equities at all-time highs, the key question is whether they can rally substantially further this year. We think this scenario is indeed possible, but would require a confluence of several outcomes: 1) Trade tensions decrease substantially; 2) The Fed eases aggressively; 3) The current industrial slowdown remains a soft patch and does not morph into a full recession.”
Canaccord Genuity: “An intermediate-term equity market rally is taking hold that has upside, by time, into late August/early September. We are seeing early signs of weakness in the more “defensive” areas of the market, namely Staples and Utilities. This suggests Portfolio Managers are utilizing these sectors as a source of funds for more cyclical areas of the market.”
Credit Suisse: “We are reducing our 2019 and 2020 EPS estimates to $166.50 from $170, and $176 from $180. This brings our 2019 and 2020 forecasted growth to 2.2% and 5.7% (previously 4.4% and 5.9%). We anticipate top-line growth of 3.0% and 3.7%. On a positive note, margin headwinds (oil, tech, U.S. dollar) should abate in 2020, and buybacks should remain stable at 1.5-2.0%.”
Morgan Stanley: “Fed is supportive, but we’re watching the data. Timing is tricky though and this week and next are going to be particularly difficult for investors to manage as the lingering halo of a more dovish Fed meets with incremental news on USChina trade relations and meaningful economic data points. The market, and our economists, increasingly expect a 50 bps cut from the Fed in July.”
In short, knowing what and when to buy can be challenging for any investor. However, the fact remains that potentially rewarding investments are out there, if you’re willing to dig a little deeper.
One such Materials name that’s worth a closer look is our Stock of the Week below…
Stock of the Week: Cleveland-Cliffs (CLF)
The company mines iron ore that goes into the production of steel and the latest quarterly results suggest that the 170-year old business is in the early stages of a significant turnaround.
We recently added Cleveland-Cliffs to our Smart Investor portfolio and are pleased to see that shares were up 6% this week. That brings the company’s year-to-date gain to an impressive 39%.
Looking ahead, the signs are positive that this is a stock that will continue to deliver for investors. Here’s why:
For one thing, the analyst community has a favorable outlook on the company. Three active analysts all rate the shares a Buy and the average price target of $14.42 suggests 35% upside potential for Cleveland-Cliffs.
Back in April, management delivered quarterly results that exceeded expectations. The company lost $0.08 a share in the first quarter, as revenue fell 13% from the previous year, to $157 million. In what’s typically the slowest quarter for the industry, Cleveland-Cliffs benefited from higher realized commodity prices and customer demand.
At the end of May, management rewarded investors with a 20% dividend increase, to $0.06 a share (2.25% yield). Increasing a dividend is one of the most bullish signs that a company can offer, especially when the payout can be covered seven times over with expected annual earnings of $1.82 a share.
Another vote of confidence came in early June, when chief executive officer (CEO) Lourenco Goncalves bought 10,000 shares of Cleveland-Cliffs on the open market. There is arguably no one that knows more about a firm’s near-term prospects than the CEO, which makes their trading activity such an important indicator.
The company also recently announced the early retirement of its bonds coming due in April 2021. As a result, Cleveland-Cliffs doesn’t have any outstanding debt to be repaid until 2024.
Finally, the stock has a Smart Score of 10/10 on TipRanks. This powerful proprietary metric utilizes Big Data to rank stocks based on 8 key factors that have historically been a precursor of future outperformance.
In addition to the positive aspects mentioned already, Smart Score reveals that the company has improving sentiment from hedge fund investors and financial bloggers. Hedge fund guru Ken Fisher, for example, of Fisher Asset Management has a $100 million position in Cleveland- while both Kenneth Tropin and Joel Greenblatt recently initiated positions.
FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks. You may also want to learn more about how we use TipRanks indicators to find stocks that are primed to outperform. Discover the Smart Investor portfolio here >>
Wishing you a world of investment success!
