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The Proper Approach to Volatile Markets

“Be fearful when others are greedy, and be greedy when others are fearful.” – Warren Buffett

– Zacks

The stock market has a way of making investors feel safe when they should be concerned, and feel afraid when they should be optimistic.

Stock selection is important in all market environments, but it really comes to the forefront when stocks are falling. During swift corrections and painful bear markets, all investors would happily choose a stock that is rising over a stock that is drastically falling.

The question on investors’ minds now is – are we entering a prolonged bear market or is this a normal correction within a secular bull market?

While it may be difficult to hear, the truth is no one knows for sure what markets will do as there are circumstances and potential events outside of our control. Anyone that tells you they can accurately predict the future over an extended period of time is not to be trusted. We don’t know when this downside move will end. What we do know is that sentiment is reaching historical levels that have coincided with previous market bottoms and that many individual stocks are oversold. Again, that doesn’t mean this move will morph into a new leg up.

We don’t want to try and predict what will happen. That way of thinking can get investors into a whole world of trouble. Instead, we aim to quickly and accurately depict the current market situation and decipher how to best take advantage of it. We want to react to what is happening instead of trying to predict what will occur.

As an investor, think of yourself as a captain of your own ship. Your aim is to navigate the murky and unpredictable waters as optimally as possible. You know there will be unforeseen obstacles ahead, but you are prepared and have a set of solutions at your disposal.

That’s exactly where we find ourselves at the current moment. In this type of volatile market environment, new long trade initiations should be kept to a minimum and targeted only toward the top-performing industry groups and individual stocks. If the market turns back up, we can become more aggressive and the names that are leading will naturally change which may alter our stock selection.

On that note, let’s take a look at two stocks that are outperforming to kick off the new year. Both stocks are components of the Zacks Automotive – Retail and Whole Sales industry group, which ranks in the top 3% of all Zacks Ranked Industries. Because it is ranked in the top half of all industry groups, we expect this group to outperform over the next 3 to 6 months.

Quantitative research studies have shown that approximately half of a stock’s future price appreciation is due to its industry grouping. In fact, stocks in the top 50% of all Zacks Ranked Industries have outperformed the bottom half by a factor of more than 2 to 1. Our selected industry group also boasts some favorable valuation characteristics as shown below:

Zacks Investment Research
Image Source: Zacks Investment Research

Sonic Automotive, Inc. (SAH)

Sonic Automotive is one of the largest domestic automotive retailers. The company is involved in the sale of new and used cars and light trucks, replacement parts, paint and collision repair services, as well as vehicle maintenance. SAH also arranges financing and insurance in pre-owned vehicle specialty retail locations. Sonic Automotive was founded in 1997 and is headquartered in Charlotte, NC.

A Zacks Rank #1 (Strong Buy), SAH reported Q4 results last week that beat analyst expectations. Fourth-quarter EPS came in at $2.66, a 45.36% surprise over the $1.83 Zacks Consensus Estimate. This marked an improvement of 77.3% relative to the same quarter in the prior year. SAH has beaten earnings estimates in each quarter for the past four years running. Shares have advanced nearly 4% this year while the market has been in correction mode.

Sonic Automotive, Inc. Price and EPS Surprise

Sonic Automotive, Inc. Price and EPS Surprise

Sonic Automotive trades relatively undervalued at a 5.29 forward P/E when compared to its industry group (6.66). As investors focus on the current year, the trends in revenues and earnings look favorable. Sales are expected to climb 37.43% compared to last year to $17.04 billion. Earnings are expected to rise 12.53% to $9.52 per share.

Zacks Investment Research
Image Source: Zacks Investment Research

Lithia Motors, Inc. (LAD)

Lithia Motors operates as an automotive retailer in the United States. LAD offers new and used vehicles, financing services, insurance contracts, theft protection services, and repair and maintenance services. The company functions through over 200 stores and markets its products via hundreds of websites. Lithia Motors was founded in 1946 and is based in Medford, OR.

A Zacks Rank #2 (Buy) stock, LAD recently reported Q4 results that surpassed estimates. The automotive retailer posted fourth-quarter EPS of $11.39, a 14.01% surprise over the $9.99 consensus. Lithia Motors has steadily exceeded earnings expectations in each of the past eight quarters. The company has delivered an average earnings beat of 30.55% over the past year. LAD stock has risen over 6% to start 2022 off on a high note.

Lithia Motors, Inc. Price and EPS Surprise

Lithia Motors, Inc. Price and EPS Surprise

Analysts covering LAD have recently upped their EPS estimates by +10.61% for the current quarter. The Zacks Consensus Estimate for Q1 EPS now stands at $10.22, representing a 73.51% growth rate versus the same quarter in 2021. Sales are expected to rise 47.04% to $6.39 billion.

While the market has begun the year on a sour note, these automotive retailers are bucking the trend and are outperforming.

Just Released: Zacks’ 7 Best Stocks for Today

Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +25.4% per year.

These 7 were selected because of their superior potential for immediate breakout. 

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Sonic Automotive, Inc. (SAH): Free Stock Analysis Report
 
Lithia Motors, Inc. (LAD): Free Stock Analysis Report
 
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