What the Market Wants: Tepid Market Slides a Bit Lower

Today, the tepid market had virtually no new data from corporate earnings or the economy, and slid lower throughout the day, especially near the closing. But the 10-year bond yield hit a two-year high at 2.9% and closed at 2.88%.

The increase in bond rates should have been expected with the Fed minutes due Wednesday. The market hates uncertainty. However, it is very certain that the longer-term rates will go higher. The Fed’s annual conference with economists begins Thursday in Jackson Hole, Wyoming, without Chairman Bernanke’s presence. Very few new “certainties” are likely to come out of the symposium. The bottom line: It is a bad time for bonds but should be a good time for stocks.  

You wouldn’t think that was true, given last week’s market during which, despite rising bond rates, all style/caps fell in a very narrow range of -2.07 % to -2.56%.  Large cap value was the best of the bad performers, while mid-cap growth was the worst, but with such a small range there is little to learn.

Here are the market stats.

 In similar fashion, sectors were all down last week, with Basic Materials falling the least, -0.1%, and the  last-place Utility Sector dropping a woeful -3.59%. Rising interest rates are always bad for utilities, which trade much like bonds due to investors’ reliance on their dividends. Today, all sectors were down except Healthcare, which eked out a tiny gain of +0.17%. Energy and Financials were off the most, at around -1.5%. 

Other than the Fed minutes scheduled for Wednesday, there is very little economic news expected this week. Initial jobless claims can probably bolster the sliding market regardless of whether the report is good or bad. A lower jobless claims number would be good news for the economy, but a higher number would cause a little less concern about the immediacy of QE3 easing. 

The only other economic news of import is Leading Indicators on Thursday, and that index is rarely a surprise since we already know most of its components. (It will probably be better than last month.) New home sales on Friday could reignite interest in home builders, which seem to be faring poorly from rising mortgage rates. In our opinion, valuations among home building stocks are attractive after their recent sharp sell-off.

Sorry to sound like a “broken record” (if anyone remembers what that sounds like), but we continue to favor searching for undervalued growth stocks. They are indeed out there, as you can see from our four stock ideas below. Volatility derivatives such as VXX represent attractive hedges, since volatility is still low in this low-volume market.

4 Stock Ideas for This Market

Our stock picks for this market include are all mid-cap GARP stocks. All have excellent growth expectations and reasonable forward P/Es.

Meritage Homes Corporation (MTH) – Consumer Cyclicals Sector, Mid-cap
Meritage Homes Corporation designs and builds single-family detached homes under the names of Meritage Homes and Monterey Homes. The stock is rated a Strong Buy in our system and for good reason. It has had positive earnings surprises for the past 3 quarters (+60.90%, 33.30%, and 50%) and three-quarters or more of its analysts have raised estimates in the past 30 days. Expected earnings growth is outstanding: +321.10% current quarter; +47.60% next quarter; +237.80% this year; and +44.80% next year, with an annual growth rate of +57.20% expected over the next five years. All this earnings can be had for only 9.93x earnings.  Website: http://www.meritagehomes.com   Price when selected (8-19-13):  $39.01.

Santarus, Inc. (SNTS) -- Healthcare Sector - Mid-cap
Santarus is a specialty biopharmaceutical company engaged in acquiring, developing, and commercializing proprietary products that address the needs of patients treated by physician specialists. Brand name products include Uceris, Zegerid, and Fenoglide. SNTS has had positive earnings surprises four out of the last four quarters, from +30% to +700%, and most of the analysts have raised estimates in last 30 days. Triple-digit earnings growth is projected for this quarter, next quarter, and for the year, with +26% expected per year for the next five years. The forward P/E of 15.51 is reasonable for this kind of growth. Website: http://www.santarus.com  Price when selected (8-19-13): $24.64.

Swift Transportation Company (SWFT) -- Industrials Sector -- Mid-cap
Swift Transportation Company operates as a multi-faceted transportation services company and truckload carrier in North America. The company has had positive earnings surprises for the past three quarters, from +10.30 to 46.20%, and 100 percent of the analysts have raised estimates in past 30 days. Earnings are expected to increase 47.60% for this quarter, +23% for the year, and +16.50% per year for the next 5 years. The forward P/E is reasonable at 12.12. Website: http://www.swifttrans.com   Price when selected (8-19-13): $17.63.

Myriad Genetics Inc. (MYGN) -- Healthcare Sector - Mid-cap
Myriad Genetics is a molecular diagnostic company that focuses on the development and marketing of predictive medicine, personalized medicine, and prognostic medicine tests primarily in the United States. The company has had positive earnings surprises four of the past four quarters, from +10.50% to +20.50%. All the analysts that follow the company have raised estimates for this year. Earnings growth is expected to be +27.80% for the current quarter, +8.50% this year, and +15.80% per year for the next five years. The forward P/E is 12.71. Website: http://www.myriad.com   Price when selected (8-19-13): $27.01.