Thursday, July 03, 2014

USA Fourth of July Independence Day Investing

The U.S. is about to celebrate its biggest secular holiday on the Fourth of July with much fanfare. Investors’ cheers will be louder since the markets have made remarkable turnaround since the country was troubled by the recession half a decade back. Countless citizens will join to celebrate the 239th birthday of the country and pay tribute to the indomitable American spirit.

That the equity market is trading at all-time highs speaks volumes about this ‘never say die’ attitude. Add to it the improvement in the labor market, rise in Consumer Confidence Index, recovery in the housing sector and continued tapering of the bond buyback plan – the pointers are clear and definite.

At this juncture, buying American stocks will offer one more opportunity to the investors to contribute handsomely to the economy. But before we guide you on which stocks to buy at this opportune moment, let us have a peek into how patriotic spending benefits economic growth.

Why Buy American Goods?

Despite arguments and counter-arguments, various studies have revealed that when American-made products are bought, it directly or indirectly creates new jobs and benefits the overall economy. According to the Boston Consulting Group, “If every builder in America used just 5% more Made-In-America products, it would create 220,000 American jobs.” Purchase of domestically manufactured products also minimizes imports, improves balance of trade and leads to trade surplus.

The Federal Transportation Administration (FTA) has utilized the “Buy America” Act to boost the job-creation potential of public funds. The Act ensures that all final assembly of the railway vehicles and buses purchased with FTA funding occurs within the U.S., while all components and sub-components have over 60% domestic content.

A research study by the University of Massachusetts indicate that on an average, at least 26% more jobs are created when manufacturers fully source the components and subcomponents of their vehicles domestically compared to manufacturers that only meet the 60% “Buy America” requirement.

Feel-Good Factors

According to private payroll processor ADP, 281,000 new jobs were created in June, which was far higher than the consensus expectations of 208,000. When the Bureau of Labor Statistics releases the data for non-farm payroll numbers, it is expected to show 213,000 job additions. Total non-farm payroll accounts for approximately 80% of the workers who produce the entire GDP of the U.S. The unemployment rate for June is also expected to be close to 6.3% recorded in May 2014 – the lowest since Sep 2008.

Higher employment opportunities will lead to improved consumer confidence, which is a key determinant for the economy’s health. A recent Conference Board data suggests that Consumer Confidence Index increased to 85.2 in June 2014 from 82.2 in May 2014. This further leads to higher consumer spending, which accounts for over two-third of the U.S. economic activity.

Despite inclement weather conditions and higher-than-expected healthcare spending, U.S. consumer spending increased 1% in the first quarter of 2014. The June PMI was recorded at 55.3% – the 13th consecutive monthly increase. A reading of above 50% generally indicates that the manufacturing economy is expanding.

The economic uptrend is more evident from the Bull Run in the equity market, which has charted new highs on many occasions since last year. The Dow Jones Industrial Average, S&P 500 and NASDAQ Composite indices gained 1.5%, 6.1% and 5.5%, respectively, in the first half of 2014. The S&P 500 has hit record highs on 23 occasions so far this year and secured the best lead over the Dow since 2009. With five consecutive monthly gains, the S&P 500 is surely on a roll.

3 American Stocks to Buy

Amid such bright macroeconomic fundamentals, there are a handful of domestic stocks with attractive valuation metrics backed by a favorable Zacks Rank. The names of these companies start with “American,” so investing in them could help you to cash in on the strong patriotic sentiments. Let’s take a closer look at these companies that appear to be well positioned to benefit from the solid sector dynamics as well.

American Airlines Group Inc. (AAL)

This Zacks Rank #2 (Buy) stock operates an average of nearly 6,700 flights per day to 339 destinations in 54 countries from its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. The earnings estimate revision for American Airlines for both the current quarter and year has moved up in the last 7 days, implying bullish long-term growth sentiments.

With a forward P/E of 8.3x and long-term earnings growth expectations of 31.4%, American Airlines is a solid pick. In addition, American Airlines belongs to the Transportation-Airline Industry that carries a Zacks Industry Rank #51. As a guideline, the outlook for industries with Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

American Campus Communities, Inc. (ACC)

Based in Austin, TX, this company operates as an independent equity real estate investment trust (REIT). It is the largest owner, manager and developer of high-quality student housing properties in the U.S. Including its owned and third-party managed properties, the total managed portfolio of this Zacks Rank #2 (Buy) stock comprise 200 properties with approximately 128,100 beds.

American Campus has long-term earnings growth expectation of 4.9% and is currently trading at a forward PE of 16.7x. Furthermore, earnings estimate revisions for the current quarter and year have been moving up, implying bullish sentiments for the long-term growth of the company.

American Express Company (AXP)

Headquartered in New York, NY, this company offers charge and credit payment card products and travel-related services to consumers and businesses worldwide. Its products and services include charge and credit cards, business credit cards, travel services, gift cards, prepaid cards, merchant services, business travel, and corporate cards.

The earnings estimate revision for this Zacks Rank #2 (Buy) stock for the soon-to-be-reported quarter and full-year 2014 have moved up in the last month, implying bullish sentiments for the long-term growth of the company.

With a forward PE of 17.5x and long-term earnings growth expectations of 10.6%, American Express is likely to outperform the broader equity market. In addition, the company belongs to the Financial Industry that carries a Zacks Industry Rank #14.

Moving Forward

The ex-Vice President of the U.S. Hubert H. Humphrey once observed, “What we need are critical lovers of America -- patriots who express their faith in their country by working to improve it.” Perhaps the Fourth of July is the most opportune time to showcase this patriotic feeling by owning these “American” stocks.

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