What the Market Wants: 4 Goldilocks Stocks Worth Looking At In This Environment

Courtesy of David Brown, Sabrient Systems and Gradient Analytics

We finally had another down week, albeit by the slimmest of margins. This next week promises to be the most important week of the month and, in all likelihood, next month as well. We get the ADP employment report, the FOMC meeting announcement, the first look at Q2 GDP, the Chicago PMI, the consumer confidence report, and more (see schedule below).  Undoubtedly, today’s weakness was based on investor apprehension about this week’s news and continued corporate reports.

Last week’s economic reports were mixed, and the style/caps were simply “mixed up.”  Our style/cap scorecard was turned on its head last week with year-long loser Large-Cap Growth up +0.26% to become the week’s leader and the last year leader (and still leader for the year) Small-Cap Value, bringing up the rear for the week at -0.15%. 

Say what? 

Not sure we can explain that one.  Frankly, the scores were close enough anybody could have had first place with a great Friday. (You can see the market caps tables here.)

Corporate reports were mixed as well. A majority of companies continue to produce another quarter of earnings beats, but more companies this quarter are missing on the top line. So the bevy of economic reports this week, along with the FOMC report and early GDP numbers, could determine which direction this market will go for at least the rest of the summer.

Our feeling is that if there are no negative shockers in the week, the continued flow of funds from fixed income to equities will drive the market higher by summer end.  Nevertheless, continued global economic concerns, albeit abating somewhat in Europe, signal CAUTION. 

So this week we found a few Goldilocks stocks that weren’t too big or too small, that weren’t too expensive or too cheap (signaling something wrong), and that were in different sectors. In the current market environment, these stocks look “just right.”  They haven’t jumped right out at us in the past few months, but nonetheless they’ve avoided negative earnings surprises and seem likely to continue their well-priced growth.  Take a look.

4 Stock Ideas for this Market

Here are our stock picks for this market—two large-caps and two mid-caps, just in case last week’s small-cap dive was the beginning of a new trend (which we doubt).

Ameriprise Financial, Inc. (AMP) — Financial Sector – Large-cap
AMP is a diversified financial services holding company providing, through its subsidiaries, a range of financial products and services in the United States and internationally. Double-digit growth expected short-term, with an expected annual growth rate of 19.30% over the next 5 years. AMP has had positive earnings surprises for the past 4 quarters, and 11 of 13 analysts have raised current year estimates within past 30 days. Al for a forward P/E of 11.48. AMP has a dividend yield of 2.40%.  Website: www.ameriprise.com    Price (close) on 7-29-13: $87.61

iGATE Corporation (IGTE)  — Technology Sector – Mid-cap
iGATE delivers a range of IT services through globally integrated onsite and offshore delivery locations, primarily in India. The company has double-digit earnings growth expectations for this year and next, with an expected annual growth rate of 16.67% over the next 5 years. It has had positive earnings surprises for past 4 quarters, ranging from 20% to 29%, and 8 of 9 analysts have raised estimates for the current year. iGATE’s forward P/E is just 11.44 for all this projected growth.   Website: www.igate.com     Price (close) on 7-29-13: $22.75

Lennox International Inc. (LII) — Industrials Sector – Mid-cap
Lennox designs, manufactures, and markets climate control products for the heating, ventilation, air conditioning, and refrigeration markets. LII’s forward P/E is 16.36, which is reasonable for the projected earnings growth of 35.20% for this year, 20.30% next year, and 20.30% per year for next 5 years. All 11 analysts have raised their estimates for this year and next year. LII pays a 1.30 % dividend.  Website: www.lennoxinternational.com  Price (close) on 7-29-13: $71.88

Rock-Tenn Company (RKT) —  Basic Materials Sector — Large-cap
Rock-Tenn manufactures and sells corrugated and consumer packaging products in the United States, Canada, Mexico, Chile, Argentina, Puerto Rico, and China. The company has had positive earnings surprises in 4 of last 4 quarters, with a 30% surprise in the most recent quarter, and 13 of 16 analysts have raised estimates for the current year. Projected earnings growth rates are high double-digits for this quarter (78.40%) and next (63.70%), with expected growth of 55.10% for this year, 35.40% for next year. RCT has a forward P/E of 11.93, and it pays a dividend of 1.10%.   Website: www.rocktenn.com   Price (close) on 7-29-13: $112.36

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems
Leaders in Investment Research
 

http://www.sabrientsystems.com

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Full disclosure:  The author does not hold positions in any of the stocks mentioned in this article.

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