3 Best Performing Stocks in October - Analyst Blog

Halloween failed to spook investors as the Dow and S&P 500 ended October on record highs. Among the negatives, Ebola scare and a slump in oil prices that dragged energy stocks caused troubles for the benchmarks til mid-October. On Oct 15, S&P 500 was inches away from entering a correction.

However, the bulls took hold of the market thereafter, negating talks of correction banking on strong third quarter earnings numbers. Economic reports were largely positive, particularly housing and GDP data. Meanwhile, the Fed ended its asset repurchase program, while continuing with low interest rates.

October's Performance

For the month, Dow, S&P 500 and Nasdaq gained 2%, 2.3% and 3.1%, respectively.

While markets failed to close with weekly gains in the first three weeks, benchmarks made a turnaround in the week ending Oct 25. The S&P 500 ended a four-week losing streak and posted its largest weekly gain since Jan 2013. The Nasdaq too recorded its biggest weekly percentage gain since Dec 2011.

Impressive earnings results and upbeat economic data helped markets offset some of the losses registered in the first half of the month to end in the green in October. Encouraging economic news from the Eurozone and China which include October's positive Chinese flash HSBC /Markit manufacturing purchasing managers' index (PMI) and factory output data lifted benchmarks in the latter half of the month.

However, concerns about global growth particularly that of the Eurozone and concerns over outbreak of Ebola virus dented investor sentiment. Moreover, declining oil prices also had a negative impact on markets over the month.

Domestic Economic Data

Better-than-expected jobs data along with impressive trade data in the first week of the month failed to restrict benchmarks from closing with weekly losses. Domestic reports including consumer confidence, construction spending, ISM manufacturing numbers and factory orders were disappointing.

The ISM Manufacturing Index dropped 2.4 percentage points from August's reading of 59% to 56.6% for September. Construction spending came in at $961 billion in August, down 0.8% from revised July estimate of $968.8 billion.

However, among the positives, the economy added 248,000 new jobs in September, stronger than the consensus estimate of 215,000. Additionally, the unemployment rate declined 0.2% to 5.9% in September, hitting the lowest level since 2008. Additionally, trade deficit declined in August to $40.1 billion from $40.3 billion in July. This was the lowest level recorded since January.

While construction spending numbers reported earlier in the month were disappointing, data on construction of privately-owned housing reflected a significant improvement. Housing starts jumped 6.3% in September. Additionally, building permits in September rose 1.5% from August to 1,018,000.

In fact, most housing data was positive in nature. Existing home sales rose at a pace of 2.4% in September, the highest rate recorded so far this year. New home sales increased 0.2% in September to 467,000. Pending Home Sales Index touched the second highest level since Sep 2013.

Consumer confidence touched a seven-year peak in October. Third quarter GDP data was also encouraging. According to the “advance” estimate by the Bureau of Economic Analysis, third quarter GDP increased at an annual rate of 3.5%, more than the consensus estimate of an increase by 3%.

On the final trading session of the month, the University of Michigan/Thomson Reuters consumer-sentiment index increased to 86.9 in October, beating the consensus estimate of 86.2. This was the highest reading for the index since Jul 2007. However, the U.S. Department of Commerce reported that consumer spending declined 0.2% in September.

Earnings Results Help Markets Recover

So far, 360 of the S&P 500 members have reported earnings. Total earnings for these 360 companies are up 7.2% year on year, with 72.3% beating earnings estimates. Revenues are up 4.8%, with 52.9% beating top-line estimates.

Major companies such as Caterpillar Inc. (CAT) and Microsoft Corp. (MSFT) reported positive quarterly results. Financial behemoths such as The Goldman Sachs Group, Inc. (GS) and Citigroup Inc. (C) also posted upbeat results.

Fed Announces End of Asset Repurchase Plan

According to the latest Federal Open Market Committee (FOMC) policy statement, the central bank has decided to end its bond-buying stimulus program in October after purchasing the final $15 billion worth of bonds.

The Fed also pledged to keep federal funds rate low for a “considerable time” after the end of the asset-purchase program. However, the central bank mentioned the rate hike may come sooner than expected if the economy grows faster than anticipated.

Ebola Scares

The first Ebola case detected in the U.S. in October raised fears of an outbreak of the virus. It negatively affected markets earlier in the month as airline stocks nosedived. The Centers for Disease Control (CDC) and Prevention confirmed that a resident of Liberia who had flown to Texas had been detected with the deadly virus. The name of the airline on which the infected individual was travelling was not disclosed. As a result, losses were shared by the top companies in the sector.

However, weak oil prices negated fears of an Ebola outbreak. The first set of people who came in contact with the Liberian citizen infected with the Ebola virus in Texas was removed from a watch list. This is a significant moment, providing relief to 43 individuals.

Slump in Oil Prices Drags Energy Stocks Lower

Oil prices fell to their lowest level in October since Jun 2012 on plentiful supplies and lackluster demand expectations. Moreover, a stronger dollar has made the greenback-priced crude dearer for investors holding foreign currency. Natural gas also fared badly, slumping to an 11-month low, having to deal with another above-average supply increase.

Energy sector was the biggest loser among the S&P 500 industry groups for October. The Energy Select Sector SPDR ETF (XLE) dropped 3.5% in October. However, that is a major improvement from the 11.1% beating the energy sector suffered till Oct 15.

Goldman Sachs slashed its oil price projections for first-quarter 2015. Goldman Sachs reduced its target price for WTI crude oil to $75 per barrel from $90 per barrel. The banking giant cited abundant supply and lack in demand for oil to be the reasons for curtailing the target price. U.S. oil production level hit the highest level since 1980s in October.

External Economic Factors

Encouraging economic news from the Eurozone and China also lifted the markets. The Chinese flash HSBC /Markit manufacturing purchasing managers' index (PMI) increased to 50.4 in October from 50.2 in September. Additionally, factory output in China increased at a rate of 8% in September. China's GDP growth came in better than expected, increasing 7.3% in the third quarter, ahead of the consensus estimate of 7.2%. However, the growth rate was the slowest since early 2009.

The prospect of the European Central Bank buying corporate bonds also boosted markets. Separately, the Markit Flash Eurozone Manufacturing PMI rose to 50.7 in October from 50.3 in September.

On the final trading day of the month, benchmarks hit record highs boosted by Bank of Japan's announcement of expansion in monetary stimulus. BOJ decided to increase its bond purchasing volume to around 80 trillion yen ($727 billion), from 60-70 trillion yen, in a year.

3 Star Performers for October

I ran a screen on Research Wizard for companies with the following parameters:

(Click here to sign up for a free trial to the Research Wizard today):

1. Percentage price change over the last 4 weeks greater than or equal to 20%
2. Forward price-to-earnings Ratio (P/E) for the current financial year (F1) less than or equal to 20. This picks out stocks that are good value choices
3. Expected earnings growth for the current financial year greater than or equal to 20%
4. Zacks Rank less than or equal to #2: This ascertains stocks that have shown above-average returns.

(See the performance of Zacks' portfolios and strategies here: About Zacks Performance).

Here are the top 3 stocks among the 6 that made it through this screen:

Hawaiian Holdings Inc. (HA) is a holding company and the sole owner of Hawaiian Airlines, Inc. Hawaiian transports passengers and cargo via air between the Hawaiian Islands themselves as well as with certain US cities. The company also operates flights on international routes originating from the Hawaiian Islands.

Percentage price gain over the last 4 weeks = 27.2%
Expected earnings growth for FY2014 = 71%

Hawaiian Holdings holds a Zacks Rank #1 (Strong Buy). The stock's forward price-to-earnings ratio (P/E) for the current financial year (F1) is 11.39.

STRATTEC Security Corp. (STRT) is a manufacturer of locks and keys for automobiles. The company designs and manufactures both mechanical and electronically improved locks and keys. STRATTEC also produces ignition lock housings and access control products.

Percentage price gain over the last 4 weeks = 27%
Expected earnings growth for FY2014 = 47.7%

The company has significant expected earnings growth for FY2014 and holds a Zacks Rank #1 (Strong Buy). STRATTEC Security has a P/E (F1) of 15.19.

United Insurance Holdings Corp. (UIHC) together with its subsidiaries operates as a property and casualty insurance company. The company's four subsidiary companies are United Property and Casualty Insurance Company (UPC), Skyway Claims Services, LLC (SCS), UPC Re and United Insurance Management, L.C. (UIM).

Percentage price change over the last 4 weeks = 22.1%
Expected earnings growth for FY2014 = 49.8%

Apart from a Zacks Rank #2 (Buy), United Insurance has a P/E (F1) of 9.83.

Earnings May Continue to Boost Markets, Holiday Sales Ahead

Unlike last month, all three benchmarks have closed in the green. Geopolitical tensions took a back seat in October, helping benchmarks focus on positive domestic events. Benchmarks made a strong comeback starting mid-October as major companies posted positive earnings results. Housing data and GDP numbers also helped stocks notch up gains.

Going forward, the earnings season will spill over into November and further encouraging numbers are likely in the offing. Also, Bank of Japan's recent announcement of expanding the monetary stimulus measure may lead to other central banks following suit.

More particularly, the ECB has resisted the need to undertake quantitative easing and is still mulling over such a response. However, the BoJ's action may put additional pressure on the ECB to act on similar lines. Later in the month, retailers should witness an uptrend provided holiday sales commence on a positive note.