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Weekly Market Review: Rally Meets Some Resistance

U.S. stocks fell fractionally this week giving up earlier gains by Friday’s close. Technology names led the way lower, while Energy stocks rallied.

Investors took some risk off the table and pushed U.S. treasury yields lower. Elsewhere, gold and silver prices rallied to multi-year highs.

The market was spooked by the fact that relations between China and the U.S. soured this week. Each nation forced the other to close a satellite consulate office, although recent trade deals remain intact.

Earnings were mixed this week. Intel (INTC) was a standout to the downside, falling 16% a day after disappointing the market with quarterly results.

Even so, 80% of the 128 companies in the S&P 500 that have posted results so far this quarter have surpassed profit expectations. This is ahead of the historical average of 65%.

On the economic front, weekly initial jobless claims came in at 1.42 million, marking the first increase in nearly four months.

Coronavirus Update

While it may no longer be the top news story in the financial press, the coronavirus pandemic is still with us. As testing increases, nearly 250,000 new daily cases are being recorded globally, including about 70,000 in the U.S. alone.

If the pandemic continues to spread, it will likely hamper the positive trajectory of economic recovery reported in recent months.

What to Expect Next Week

The pace of earnings reports continues to accelerate next week, with around 190 S&P 500 companies on the calendar. Here are some of the names we’ll be watching:

Tuesday: 3M (MMM), Amgen (AMGN), eBay (EBAY), McDonald’s (MCD), Pfizer (PFE) and Starbucks (SBUX)

Wednesday: Boeing (BA), Facebook (FB), General Motors (GM) and Qualcomm (QCOM)

Thursday: Apple (AAPL), Comcast (CMCSA), Alphabet (GOOGL) and UPS (UPS)

Friday: Caterpillar (CAT), Exxon Mobil (XOM) and Merck (MRK)

Next week will be equally busy for economic reports. The action kicks off Monday with Durable Goods Orders, followed by the next FOMC interest rate decision on Wednesday. We do not expect any change to interest rate policy but will still be listening closely for any commentary from Chairman Jerome Powell.

Thursday offers the initial reading of second-quarter GDP, which is expected to decline 35% (!) from the previous year.

With numbers like that, following the snap-back recovery in stocks the past few months, we believe that investment gains will be harder to come by in the second half of the year.

As a result, deciding what and when to buy can be challenging for any investor.

However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.

One such Industrial name is worth a closer look and is our Stock of the Week.

Stock of the Week: Stepan (SCL)

The company is a chemicals producer that sells into a wide range of end-markets.

The stock gained more than 8% this week and we believe this positive momentum can continue into the second half of the year. Here’s why:

Management delivered quarterly results on Wednesday that exceeded consensus analyst estimates. Stepan earned $1.65 a share in the second quarter, as revenue fell 2% from the previous year, to $460.6 million. Upside in the period was driven by demand for chemicals that go into cleaning products.

The company also has something rare in the industrial space, a clean balance sheet. Stepan ended the latest quarter with $75 million of net cash and has just $9 million of bonds coming due this year.

Shares are currently trading at 17.5x expected 2021 earnings of $6.19 a share, which is a discount to the average industry valuation of 20.5x.

In an uncertain environment, we believe the market is willing to pay a premium for a company with a clean balance sheet that is also leveraged to a gradual recovery of global economic growth.

It’s additionally worth noting that the stock carries a Smart Score of 8/10 on TipRanks. This proprietary score utilizes Big Data to rank stocks based on 8 key factors that have historically been a precursor of future outperformance.

On top of the positive aspects mentioned already, the Smart Score indicates that the company has seen improving sentiment from analysts and financial bloggers.

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.

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