U.S. stocks added about 3% to recent gains this week, buoyed by the Federal Reserve’s pledge to keep interest rates “lower for longer”. The broader market averages are now riding a five-week winning streak. Cyclical groups like Technology and Financials led the way higher.
At a virtual edition of the annual Jackson Hole conference on Thursday, Chairman Jerome Powell said that the Fed will tolerate a near-term increase in inflation, so long as annual rates average no more than 2% over time.
The net effect of this would allow the FOMC to keep short-term rates down, but also potentially weakens the U.S. Dollar.
Dow Reshuffle
Elsewhere, major changes to the Dow Jones Industrial Average were announced on Monday. Amgen (AMGN), Honeywell (HON), and Salesforce.com (CRM) are being added next week. They replace Exxon Mobil (XOM), Pfizer (PFE), and Raytheon (RTX).
Salesforce did not fail to impress investors, adding 26% on Wednesday, after delivering blowout quarterly results.
Coronavirus Update
While it may no longer be the top news story in the financial press, the coronavirus pandemic is still with us.
On Sunday, the FDA granted “emergency use” status for a convalescent plasma treatment. Initial studies suggest the antibody treatment improved mortality rates, although the announcement was made before full clinical results were available.
Abbott Laboratories (ABT) also received emergency use permission on Thursday, for a 15-minute antigen test that will cost just $5.
Despite this forward progress, this week we still crossed the tragic milestone of 25 million coronavirus cases recorded worldwide, including 6 million in the U.S. alone. If the pandemic continues to spread, it could hamper the positive trajectory of economic recovery reported in recent months.
What to Expect Next Week
The final week of August is typically one of the slowest for trading activity all year, but it seems like nothing about 2020 has been typical.
Technology stocks will likely be active, as acquisition bids are expected to be announced for China-based social media firm TikTok. In addition, Apple (AAPL) and Tesla (TSLA) will enact stock splits on Monday.
On the economic front, we’ll get the August jobs report Friday. The consensus estimates call for the creation of 1.4 million non-farm payrolls and the headline unemployment rate to fall below 10%.
Following the snap-back recovery in stocks the past few months, we believe that investment gains will be harder to come by in the second half of the year.
As a result, deciding what and when to buy can be challenging for any investor.
However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.
One such Cloud Computing name is worth a closer look and is our Stock of the Week.
Stock of the Week: Calix (CALX)
The company makes cloud software that helps customers optimize networks.
The stock gained 11% this week and we believe this positive momentum can continue throughout the second half of 2020. Here’s why:
Calix counts companies like Verizon (VZ), who are always looking to improve network performance, as customers. Given how much work and schooling is being done remotely these days, the need for this service has grown exponentially.
Back in July, the company posted quarterly results that surpassed management’s guidance for a second straight quarter. Calix earned $0.14 a share in the second quarter, as revenue increased 19% from a year ago, to $119 million.
Upside in the period was driven by adding 18 new customers and keeping a tight lid on costs. Looking ahead to the third quarter, management expects sequential gains in both sales and profit.
The company is currently valued at 34.8x expected 2021 earnings of $0.63 a share. This is not a bargain relative to the broader market, but still represents a discount to Calix’s 40.7% expected average profit growth over the next two years.
Insiders also agree the stock has value. Donald Listwin of the Board of Directors bought $1 million worth of company shares over the past week, on the open market.
An executive buying stock with their own money is generally noteworthy, but this insider stands a cut above the rest. Listwin is rated in the top 2% of the 78,000 company insiders tracked by TipRanks.
It’s also worth noting that the stock carries a Smart Score of 10/10 on TipRanks. This proprietary score utilizes Big Data to rank stocks based on 8 key factors that have historically been a precursor of future outperformance.
On top of the positive aspects mentioned already, the Smart Score indicates that the company has seen improving sentiment from analysts and financial bloggers.
FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks.
