The 3 Best Performing Stocks In November

Markets registered significant gains over last month, riding on positive earnings results and a Republican victory during the midterm elections. However, the slump in oil prices and foreign economic data remained a cause for concern. Ultimately, domestic factors outweighed such headwinds and indices ended in the green.

November's Performance

For the month, the Dow and S&P 500 both rose 2.5% and the Nasdaq gained 3.5%.

Benchmarks finished in positive territory in November as upbeat earnings results from retailers and US midterm election results improved investor confidence. Moreover, encouraging deal news and easing global growth worries also boosted benchmarks. However, decline in oil prices throughout the month affected energy shares.

The Republicans notched a strong win in the midterm elections, securing a majority in both chambers of Congress for the first time since 2006. Investors cheered the results as they expect that Republicans winning both chambers should help clear many pro-market, pro-business bills. 

Moreover, encouraging confidence data from Germany and positive news from Japan reduced worries about global growth to some extent. However, reignited tensions in Ukraine, soft data from Europe and China offset some of the gains.

Slump in Oil Prices Continues

Oil prices continued to move lower, guiding markets and economic indicators on several occasions. The price of U.S. crude oil declined to its lowest level in almost three years earlier in the month.

The decline in oil prices was a result of Saudi Arabia's decision to cut its supply price to U.S. customers in the face of abundant North American output. Experts believe that this move is aimed at Saudi Arabia trying to keep its market share in the U.S. while cutting down competitive pressure.

Amid the soft oil pricing scenario, most investors were expecting an output cut from OPEC as the move could have arrested declining crude prices. However, in a meeting at the Austrian capital of Vienna, the OPEC members formed a consensus to keep their production target at 30 million barrels per day, as decided in Dec 2011. This eventually dragged oil prices further resulting in WTI crude falling more than 10% to settle at $66.15 per barrel on Nov 28.

GDP Rises Significantly

According to the “second” estimate by the Bureau of Economic Analysis, GDP increased at an annual rate of 3.9%, more than the consensus estimate of an increase by 3.3%.

Meanwhile, durable orders increased 0.4% in October. Separately, the ISM Manufacturing Index improved to 59 in October. Retail sales rose 0.3% in October. Decline in oil prices seems to be the main reason behind this increase.

However, several economic reports were dismal in nature. The ISM Services Index decreased to 57.1 in October. Separately, industrial production declined 0.1% in October. This data signaled that decline in oil prices had negatively impacted the production of energy sector.  Consumer Price Index remained flat in October mainly due to decline in oil prices. Consumer confidence declined to a five-month low

Labor Market Improves

Data on the labor market was largely positive in nature. Automatic Data Processing, Inc. ADP reported that the economy has added 230,000 private jobs in October, the seventh straight month of job gains in excess of 200,000.

Total nonfarm payroll employment increased 214,000 in October. Moreover, the economy added in excess of 200,000 workers for nine successive months, a figure last achieved in 1994. The unemployment rate edged down to 5.8% in October from September's 5.9%. This is the lowest figure recorded since Jul 2008.

Housing Sector Data Mixed

Data on the housing sector came in mixed. Construction spending dropped 0.4%, while privately-owned housing starts declined by 2.8%. However, single-family housing starts gained 4.2% in October, the highest rate of increase in this category since Nov 2013. Additionally, building permits also increased at a rate of 4.8% in October.

Meanwhile, existing home sales gained 1.5%. In contrast, the US home prices growth slowed down, according to the S&P/Case-Shiller's Composite Index. Again, sales of new homes increased at the fastest pace in five months in October. However, pending home sales declined 1.1%.

External Factors Cause for Worry

At the beginning of the month, the European Commission's downgrade of the Eurozone's growth outlook dented investor confidence. The region is expected to grow at 0.8% this year and 1.1% next year, down from its previous estimates of 1.2% and 1.7%, respectively.

The European Union's statistics service Eurostat reported that the Eurozone's GDP grew at a sluggish rate of 0.2% in the third quarter. Two of the region's powerhouses, Germany and France, grew at 0.1% and 0.3% respectively. Moreover, Italy witnessed a contraction of 0.1% in the quarter. However, Greece and Spain displayed a lot more economic vigor, with GDP growth of 0.7% and 0.5%.

ECB President Mario Draghi provided reassurances regarding the economic situation on different occasions. Draghi indicated that the ECB may boost its balance sheet to Mar 2012 level by pumping in additional 1 trillion euros. However, the interest rate was maintained at record low level of 0.05%.

European Central Bank President Mario Draghi's possible expansion of monetary stimulus has met resistance from German Chancellor Angela Merkel. Investors also remained anxious on the latest developments in Ukraine. There has been news that Russian troops have entered Ukraine.

Ultimately, ECB declared that it has started purchasing asset-backed securities in order to revive the economy. This announcement came after economic data out of Europe had a negative impact on investors. Markit's flash PMI in Eurozone had decreased to 51.4 from October's final reading of 52.1.

A sales tax hike from 5 to 8% earlier this year by the Shinzo Abe-led Japanese government pushed GDP growth into negative territory in the second quarter. However, markets rallied after Japan's prime minister Shinzo Abe announced delaying the second round of sales tax increases by 18 months. Abe also announced snap elections to get a fresh mandate for continuing with his Abenomics policies.

China's Industrial Production growth increased at 7.7%, the second weakest pace since 2009. Moreover, European Central Bank's Survey of Professional Forecasters reduced China's inflation outlook to 0.5% from 0.7% for this year and to 1% from 1.2% for 2015. Moreover, China's flash PMI released by HSBC declined to 50.0 in November, reaching a 6-month low. This reading indicated that China's manufacturing sector struggled to expand in November.

As a result, China's central bank lowered its one-year deposit rate by 40 basis points to 5.60%. The central bank also trimmed its deposit rates by 25 basis points to 2.75%. People's Bank of China and European Central Bank's efforts to boost their economies were welcomed by investors.

Republicans Win

As widely expected, the Republicans notched a strong win in the midterm elections over the Democrats to take control of the U.S. Senate. Republicans have won a majority in both chambers of Congress for the first time since 2006. Investors cheered the results as they expect that Republicans winning both chambers now should help clear many of the bills.

These include possible reversal of medical device taxes which have been a very unpopular part of President Obama's Affordable Care Act and expansion of the pipeline connecting Canadian oil sands and Gulf of Mexico. The Republicans, along with a cross section of Democrats, had been pushing for approval of the pipeline which they feel would pump the U.S. economy with multi-millions in revenues.

Earnings Results, Mergers & Acquisitions

Encouraging earnings results include Wal-Mart Stores Inc. WMT, Cisco Systems, Inc. CSCO, Macy's M, Best Buy BBY, Dollar Tree, Inc. DLTR and Target TGT.

Moreover, merger and acquisition news between Hasbro Inc. HAS and DreamWorks Animation SKG Inc. DWA, Actavis ACT and Allergan Inc. AGN, and Berkshire Hathaway Inc. (BRK.A) and The Procter & Gamble Company PG also boosted markets.

Fed Minutes

The Federal Open Market Committee's (FOMC) minutes for Oct 28-29 meeting mentioned that some Federal Reserve officials had doubts about whether the 2% inflation rate target could be achieved.

Fed officials also debated over the issue of hiking interest rate. Though the FOMC reaffirmed that it would maintain interest rate near zero level for “a considerable time,” they also said it may hike the same earlier if the economy strengthens. Policymakers voted 9:1 in favor of terminating the bond purchasing program. Lack of enough clues regarding hiking interest rates dented investor sentiment on Wednesday.

3 Star Performers for November

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 over the last 26 years.

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

Here are the top 3 stocks among the 12 that made it through this screen:

RF Micro Devices Inc. RFMD designs and manufactures radio frequency solutions. The company has a wide range of products including single function components, integrated circuits and multi-chip modules. Among RF Micro Devices' prominent operating segments are the cellular products group and the multi-market products group.

Percentage price gain over the last 4 weeks = 32.2%

RF Micro Devices holds a Zacks Rank #1 (Strong Buy) and has significant expected earnings growth for FY2014. The stock's forward price-to-earnings ratio (P/E) for the current financial year (F1) is 14.18.

Tessera Technologies Inc. TSRA licenses its proprietary advanced integrated circuit (IC) packaging technology to semiconductor manufacturers, assemblers and material suppliers. In 2013, the company generated revenues from two segments: Intellectual Property (89% revenue share) and Digital Optics (the remaining 11%).

Percentage price gain over the last 4 weeks = 26.4%

The company has significant expected earnings growth for FY2014 and holds a Zacks Rank #1 (Strong Buy). Tessera Technologies has a P/E (F1) of 17.65.

Meritor, Inc. MTOR is a global automotive parts manufacturer and supplier to various customers in North America, Europe and other parts of the world. Meritor is a worldwide supplier of a broad range of integrated systems, modules and components for commercial, specialty and light vehicles worldwide with leading positions in most of its markets.

Percentage price change over the last 4 weeks = 25.6%
Expected earnings growth for FY2014 = 32.9%

Apart from a Zacks Rank #2 (Buy), Meritor has a P/E (F1) of 10.13.

Santa Claus Rally Ahead?

Despite several international headwinds, all three benchmarks have closed in the green. This is the second such month when this has occurred, raising hopes of a Santa Claus rally. Historically, December is considered to be beneficial for investors. This is because it is the second month of what is considered to be the best period for investors. The period begins in November and ends in April.

There are already several encouraging signs. A strong third quarter earnings season and faster-than-expected growth in GDP are the major positives on the domestic front. Meanwhile, stimulus measures in China, Europe and the Eurozone have somewhat replaced the tailwind provided by the Fed's bond repurchase program.

Of course, this depends on several factors. Firstly, oil prices must continue to remain significantly low to encourage customers to spend more during the holiday shopping season. Though this will continue to hurt energy stocks, it could result in overall gains. If consumers are still in a mood to buy, there are strong indications that December will be a good month for stocks.