Will Omicron Stop the Market In Its Tracks?

Investors are understandably rattled by the new strain of the coronavirus that has landed on U.S. soil, especially considering the fact that this mutation is way more contagious than Delta, the most contagious so far.

Purchase Managers Index (PMI), ADP National Employment Report, Click to get this free report, Zacks Investment Research

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While it’s too soon to say what the next couple of months hold for us, whether this develops into a full-blown third wave with travel restrictions, lockdowns and the works, or there’s minimal impact on our lives and the economy, initial reports from South Africa and other places indicate that a fully vaccinated person notices only mild symptoms with Omicron.

The next couple of weeks will tell us much more about the virus and its health impact, but in the meantime, it makes sense to take a look at what the numbers say about manufacturing, jobs, consumer confidence and so on.

And so we see that the Purchase Managers Index (PMI), an indication of the economic trends in the manufacturing sector, is sitting quite pretty. For November the number is at 61.1% with new orders, production, employment and manufacturing inventories all growing even as supplier deliveries decline at a slower rate, all of which are indicative of an improving economy. Additionally, the still-low customer inventories are leading to further increase in the backlog and supporting strong pricing.

The ADP National Employment Report on the private sector shows net additions of 534,000, the bulk of which (over 79%) is in the services sector and with larger businesses adding more people: small (21%), medium (27%) and large (52%).

One could say that the obvious signs of reopening could reverse in December, and at the moment there’s a fair chance that such pessimism may play out if the severity of Omicron is worse than what appears to be at this stage.

The Consumer Confidence Index as measured by the Conference Board moderated in November to 109.5 after ticking up in October to 111.6. Lynn Franco, Senior Director of Economic Indicators at The Conference Board had this to say about the number:

“Expectations about short-term growth prospects ticked up, but job and income prospects ticked down. Concerns about rising prices—and, to a lesser degree, the Delta variant—were the primary drivers of the slight decline in confidence. Meanwhile, the proportion of consumers planning to purchase homes, automobiles, and major appliances over the next six months decreased.

“The Conference Board expects this to be a good holiday season for retailers and confidence levels suggest the economic expansion will continue into early 2022. However, both confidence and spending will likely face headwinds from rising prices and a potential resurgence of COVID-19 in the coming months.”

So for all intents and purposes, the growth economy is continuing unabated with inflation being primary on people’s minds. And obviously, when prices are going up, people would want to defer spending on things like homes, automobiles and big-ticket appliances. Important to note however that demand for these things generally doesn’t melt away, but they’re put off until they’re considered more affordable.

Which brings us to the question of inflation. The Fed has signaled that it is finally setting aside the notion of temporary inflation, as the market conditions driving the phenomenon don’t appear to be disappearing quickly. This means that the 2022-end timeline for rate hikes could come forward, and so, stocks and other risky assets could come in for some punishment.

It isn’t all doom and gloom, however. Nor are 10-year treasuries the best way to go always. Stocks include a ton of safe havens that investors may want to consider, and the above conditions indicate the best course of action-

Financials (interest rate hikes are positive)

Transportation stocks (the supply chain remains tight and these are key players to capitalize on the situation)

Large cap tech (always tend to move up over time, provided they are ahead of their game)

Dividend stocks (they lace your income, reduce risk and increase real income when inflation drops)

Some stocks that may satisfy the above criteria include First Guaranty Bancshares FGBI, Capital Product Partners CPLP, MaxLinear MXL, ON Semiconductor ON and Kohl’s KSS.

First Guaranty Bancshares, which offers personalized commercial banking services to businesses, professionals and individuals, carries a Zacks Rank #1 (Strong Buy). The company belongs to the Banks – Southeast industry, which is at the top 17% of Zacks-classified industries. The combination of the Zacks #1 rank and industry rank are indicative of upside potential in First Guaranty Bancshares stock.

And the numbers bear this out. Analysts currently expect First Guaranty Bancshares revenue and earnings to grow 11.5% and 5.3%, respectively in 2022. And the estimate for that year is up 17 cents (6.9%) in the last 30 days.

Zacks #1 ranked Capital Product Partners is a leader in the seaborne transportation of refined oil products and chemicals with a fully chartered fleet of product tankers under medium- to long-term time and bareboat charters.

Capital Product Partners belongs to the Transportation – Shipping industry, which is in the top 19% of Zacks-ranked industries. So, like First Guaranty Bancshares, it also has upside potential.

Add to that the fact that its revenue and earnings are expected to grow a respective 67.0% and 88.3% in 2022. And the fact that Capital Product Partners’ earnings estimates for that year are up $1.46 (48.0%) in the last 30 days.

All of these go to show that Capital Product Partners are a solid bet right now.

Next up is MaxLinear, which like the other two, carry a Zacks Rank #1 and appear high on the list of Zacks-ranked industries (Semiconductor – Analog and Mixed industry – top 7%). So there is upside potential.

Analysts currently expect MaxLinear to grow its revenue and earnings by 13.4% and 17.5%, respectively, in 2022. The Zacks Consensus Estimate for MaxLinear’s 2022 earnings is up 39 cents (14.1%).

MaxLinear offers radio-frequency analog and mixed signal semiconductor SoC solutions for broadband communication applications.

Zacks #1 ranked ON Semiconductor offers a broad range of discrete and embedded semiconductor components. Like MaxLinear, it belongs to the Semiconductor – Analog and Mixed industry, so its upside potential is similar as well.

ON Semiconductor’s revenue and earnings are currently expected to grow 5.8% and 16.7%, respectively in 2022. Its earnings estimate for the year is up 48 cents (17.3%) in the last 60 days.

The above numbers are good indications that ON Semiconductor will be one of the stronger or at least more stable performers if and when the virus of the Fed happen to hurt sentiments.

The last company on this list is Kohl’s. This U.S. based department store chain offers moderately-priced apparel, footwear and accessories for men, women and children; as well as beauty and home products. Kohl’s belongs to the Zacks-classified Retail – Regional Department Stores industry (top 2%), which along with its #1 rank is a good indicator of its upside potential.

But if you are concerned about its prospects in the face of increased uncertainties, Kohl’s also pays a dividend that yields 2.07%.

Analysts are also taking a cautious stand. Coming off the 24.1% and 703.3% revenue and earnings growth in 2022 (ending January), they’ve pinned their revenue and earnings growth expectations for 2023 at 2.2% and -5.6%, respectively.

But the earnings estimate revisions trajectory indicates that Kohl’s will do much better. The 2023 estimate is up 89 cents (14.8%) in the last 30 days.

Or, you may want to sit it out until the whole thing blows over. Because it does look like markets will be volatile in the next few weeks or months.


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Kohl’s Corporation (KSS): Free Stock Analysis Report

 

MaxLinear, Inc (MXL): Free Stock Analysis Report

 

ON Semiconductor Corporation (ON): Free Stock Analysis Report

 

Capital Product Partners L.P. (CPLP): Free Stock Analysis Report

 

First Guaranty Bancshares, Inc. (FGBI): Free Stock Analysis Report

 

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