The Nasdaq jumped through afternoon trading Tuesday, as it tries to fight its way back after it tumbled 10% in just three sessions. Many of the tech names that helped drive the Nasdaq to new records appeared ready for a breather, from Tesla TSLA to Apple AAPL, and the ultra-fast selloff could help things look less volatile as we head into election uncertainty.
The pullback wasn’t a total move out of tech. Instead, the institutions took home some profits on positions. Meanwhile, valuation worries and speculation about a bubble popping carry less weight when taking into account the current interest rate environment.
Don’t fight the Fed might come off as cliché. But it’s one of the primary reasons that the market has soared from its coronavirus lows in March. The Fed lowered its target rate to between 0 and 25 basis points in March, with Fed data putting the rate at 9 basis points right now, down from 160 bps or 1.60% in February and 2.3% in September 2019. And the Fed’s recent policy shift has effectively pinned the Fed Funds rate near zero for the foreseeable future.
Yields are historically low, even though they are up off their recent lows. The yield on the 10-year U.S. Treasury sits at 0.67%, down from 1.90% a year ago and 1.50% in February. This has real consequences for investors and helps magnify the TINA effect—there is no alternative—as the impact of inflation pushes real yields into negative territory.
Two things, all else being equal, move stocks: earnings and interest rates. And with rates at these levels, stock prices are likely to continue to go up, as will valuations, because future earnings are worth more given the lower discount rate. It is also worth noting that the S&P 500’s earnings outlook is heading in the right direction (also read: Q3 Earnings Season Gets Underway).
On top of that, pressure continues to mount on Congress to pass another stimulus bill ahead of the election. With all of this in mind, investors might want to consider buying stocks that also provide income via dividends.
Home Depot HD
Home Depot has thrived during the coronavirus economy alongside rival Lowe’s LOW and others like Walmart WMT, as consumers spend on home improvement and DIY projects. HD is also benefitting from a rebound in home buying, which has been spurred by low interest rates and a desire for more space. And the housing market is expected to continue to climb, driven by millennials. The firm’s Q1 revenue popped 7.1%, with its Q2 sales up 23.4% and adjusted earnings up 27%.
Zacks estimates call for HD’s adjusted Q3 earnings to pop 16.2% on 14.2% higher revenue. This top and bottom line growth is expected to continue in the fourth quarter, and Home Depot’s consensus earnings estimates have turned far more positive since its Q2 release, with its FY20 outlook up 14% and FY21 8% stronger. HD is currently a Zacks Rank #3 (Hold) that sports an “A” grade for Growth and a “B” for Momentum in our Style Scores system.
HD is also part of our Building Products – Retail industry that sits in the top 13% of our more than 250 Zacks industries. The firm has now paid a dividend for 134 straight quarters and its 2.14% yield easily tops LOW’s 1.44% and the S&P 500’s 1.68% average. This is solid considering that its stock has outpaced the market during the last six months, up 75% vs. 41%, and over the past five years (143% vs. 73%). Home Depot has also consistently outclimbed its industry and trades at only a slight premium.
AbbVie is a pharmaceutical powerhouse that completed its $63 billion acquisition of Allergan earlier this year. The deal adds Botox and other popular beauty-focused drugs to its expanding roster of therapeutics that span a wide variety of illnesses. ABBV’s R&D pipeline is also strong. All of this should help it overcome the fact that its patent protections for one of the world’s top-selling drugs, Humira, are running out.
ABBV beat our Q2 estimates and its shares have topped its large-cap pharma industry in 2020, as Wall Street showcased its approval of the deal. ABBV has lost some momentum, with the stock down 5% in the past month. This puts it 10% off its 52-week highs and gives its 20% more run to run before it touches in 2018 records, which might set up a better buying opportunity for those high on the firm.
AbbVie has outpaced its industry over the last five years, up 53% against 30%, and yet it trades at a big discount against this group. Perhaps more importantly, ABBV’s 5.22% dividend yield crushes its industry’s average and tops Pfizer’s PFE 4.11%, with its next dividend payable on November 16 to stockholders of record as of October 15. AbbVie is a Zacks Rank #3 (Hold) right now that is projected to see its sales jump 37% in FY20 and 18% in FY21. Meanwhile, its adjusted EPS is projected to climb 17% both this year and next.
Qualcomm announced at the end of July that it finally resolved its licensing battle with Huawei, despite growing tension between the U.S. and China, that sent the stock soaring. The smartphone chip making titan said that it would receive a $1.8 billion payment from the Chinese telecom firm for outstanding fees. QCOM also landed a new long-term agreement to license its patented technologies for Huawei use.
Last year, Qualcomm and Apple resolved their legal battle, and an appeals court in August overturned the FTC’s 2019 antitrust victory against QCOM. This recent string of positive news helped push Qualcomm shares 30% higher since its July release. The stock is now up 33% in 2020 to outclimb its industry’s 16% and the tech sector’s 22%. This run looks even better over the past three years, with the stock up 125% vs. our Computer and Technology Market’s 60% climb.
Despite easily topping the broader tech space recently, Qualcomm trades at a big discount at 17.3X forward earnings vs. 26.1X—this also comes in below its own one-year median. And its shares have already started to bounce back from the recent tech-driven selloff, down roughly 5% off their early Sept. highs.
QCOM is Zacks Rank #2 (Buy) right now that is projected to see its Q4 FY20 and fiscal 2021 sales and earnings soar. Plus, the firm 2.29% dividend yield tops the S&P 500’s 1.68% average, Microsoft’s MSFT 0.98%, and many other big tech names. And Qualcomm has established itself as one of the early 5G standouts, as its modem processors are being used by the likes of Samsung and Apple.
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Microsoft Corporation (MSFT) : Free Stock Analysis Report
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Pfizer Inc. (PFE) : Free Stock Analysis Report
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