We are nearly halfway through 2015, and so far the stock market returns haven’t been very impressive. The Dow Jones Industrial Average (DIA) is slightly negative for the year while the S&P 500 (SPY) is barely in the green.
Why have equity returns been so lackluster this year?
There are a number of factors, but the biggest two reasons, in my opinion, are (1) the lack of earnings growth, and (2) lofty valuations.
With profit margins already at record highs, it’s difficult for many companies to grow their bottom lines without revenue growth. And revenue growth has been non-existent this year. This is due in part to a strong dollar, as a large portion of sales for the S&P comes from outside of the United States. But domestic revenue growth has not been very strong either.
Secondly, stocks are not cheap. The S&P is trading at more than 17x forward earnings, which is above its long-term average. And the cyclically-adjusted P/E ratio is even higher at 27x, placing it among the top 10% most expensive markets by this metric.
Because of these factors – and the increased likelihood of a rate hike from the Fed in the second half of the year – investors do not seem too eager to jump into the market at these levels.
What to Look For
However, that doesn’t mean that all stocks will trade sideways for the foreseeable future. To generate strong total returns in this market, I recommend that investors look for companies where:
- earnings and revenue are growing at a healthy clip
- earnings estimates aren’t declining
- valuations are reasonable
- a strong dollar, low oil prices and rising rates are not headwinds, and
- the dividend yield is above 2%.
I ran a screen in Research Wizard given these criteria. Here are three stocks from the list:
The Hanover Insurance Group (THG - Snapshot Report)
The Hanover Insurance Group provides a wide range of property and casualty insurance to businesses and individuals through independent agents. It is the holding company for The Hanover Insurance Company and Citizens Insurance Company of America.
