We’ve officially passed the halfway mark of the year—and the market now faces a critical juncture. How stocks and bonds react to economic data, rising interest rates and inflation will likely determine the market’s overall direction in the latter half of the year.

The good news is that the U.S. economy is stronger than many analysts’ thought. There was a lot of fear that a recession was just around the corner, especially after all the uncertainty in the banking industry this past spring. However, the U.S. economy has remained resilient, as employment remains strong.

We’re also entering earnings season without many significant earnings warnings from major companies, which is a positive sign that we could see a lot of better-than-expected reports. This has been good news for value stocks, especially our Value Authority stocks, as they have done well recently after underperforming in the first half of the year.

The bad news is that interest rates continue to rise. The 10-year Treasury yield rose above 4% last week for the first time since March 3, right before the banking concerns started. The 10-year Treasury remains at about 4.0% this week. And that has many wondering, can yields rise even further? The simple answer is that it’s certainly possible.

If a recession really is nowhere in sight, and if the Federal Reserve continues to unwind its balance sheet, even higher long-term yields seem likely. The 10-year Treasury yield could even challenge last year’s high of 4.4% in October 2022. At that time, the S&P 500 was roughly 18% lower than where it is now. Given an overall lack of earnings growth since then, stocks would appear to be vulnerable if long-term rates continue to rise, even if the Fed is nearly done raising short-term rates.

Inflation also remains a factor, as it has moved lower but is still close to 4% on a core basis. So, tomorrow’s Consumer Price Index (CPI) report will be critical, if it’s to keep the recent decline in bonds contained. While expectations are for a 0.3% gain in inflation on a core basis, I believe it is more important to look at the bond market’s reaction to the number. Since real long-term rates (actual rates minus inflation) are so low, a decline in inflation may not necessarily drive a better bond market. If the 10-year Treasury yield is still above 4% following the inflation report, the recent selling in the market probably has more to go.

Overall, I am a little cautious here, which is why I went with a somewhat conservative new pick for July. It’s a stock that can withstand some rises in interest rates and the potential for the economy and earnings to weaken at some point due to the Fed tightening.

But despite my overall caution, I remain quite enthusiastic about the Buy List, with most of our stocks already discounting a lot of bad news. Valuations are more than reasonable, as many offer an attractive dividend that will support the stocks during difficult periods for the market. I will have more on that later, but first, let’s take a closer look at the new pick for July.

A Second Shot at WEC

If you’ve been a Value Authority member for the better part of this year, then this month’s new recommendation was likely a familiar name to you. We actually bought WEC Energy Group, Inc. (WEC) previously, back on February 28, and it proved to be a very well-timed trade.

You may recall that the banking crisis began in March, and that uncertainty helped drive a strong performance for WEC and other utility stocks, which were considered havens in a volatile time. However, we ended up selling the stock for about a 10% gain in less than two months, as I felt this trading phenomenon did not have a lot of sustainability given that we were not headed into an all-out banking crisis. So, we sold the stock in early April when it approached our target price.

Since then, the banking situation has calmed, and most stocks have done very well. Utilities, though, have lagged, and WEC’s share price sunk back near the level where I originally recommended it in late February. I believe utilities have already discounted the recent rise in long-term interest rates, which have largely been ignored by most stocks that constitute a large percentage of the S&P 500 and NASDAQ indexes. Keep in mind that utilities outperformed in the rising rate markets in 2018 and 2022. So, I think utilities are in a good position to outperform again, especially with the challenging valuations that exist in other segments. And that’s why a re-recommended WEC on July 5.

WEC should be one of the leading utility stocks as the segment outperforms. Consider this: the company has enjoyed a long period of strong earnings and dividend growth, with EPS increasing 9% a year since 2004. This growth should continue as the company adds renewable energy assets to its rate base.

Approximately 50% of the company’s rate base is in Wisconsin, where the company is granted a generous 9.8% return on assets. The combination of this solid return along with an expected 7.7% increase in the rate base through 2027, as renewables take on greater performance, will allow WEC to grow into the future. Importantly, the company expects to fund this growth in assets without the issuance of additional stock that would dilute shareholders.

Since I recommended the sale of the stock in April, the company reported first-quarter EPS of $1.61, which compared to $1.79 in the same quarter last year. These weak results reflected the unusually warm winter in the Upper Midwest and did not come as a surprise. The company retained EPS guidance for the year of $4.58 to $4.62 a share, assuming normal weather, which is better than the $4.45 a share the company earned last year. Given the unseasonably hot weather in the Upper Midwest this summer, earnings could end up a little above the company’s guidance.

I believe my $100 target is reasonable base on EPS of close to $5.00 a share next year, with more normal winter weather helping results. Add in a 3.5% dividend yield, and the stock offers solid lower return with below average risk. Keep in mind the shares traded as high as $108 last year. WEC is a buy below $93.

Position Review: Ready for Earnings Season

There has been slight downward pressure on Brady Corporation (BRC) shares over the past month. However, the company raised the low-end of its earnings guidance for the year in May, and the company has historically been a high-return-on-capital business, with results that hold up well even when global economies weaken. So, I remain confident in the position. BRC remains a buy below $50. My target is $62.

Dollar General (DG) rallied strongly after rival Dollar Tree (DLTR) posted better-than-expected earnings. This recent action helps demonstrate that the sharp fall in DG after the company reported disappointing first-quarter earnings was a big overreaction. I believe that DG will prove in subsequent quarters that they remain a powerful retail entity. Any easing in inflation will also be a big plus. DG is a buy below $170. My target is $200.

Fidelity National Information Services, Inc. (FIS) shares reacted positively to the news that the company plans to sell a 45% interest in its Worldpay Merchant Solutions Business to private equity group GTCR for $18.5 billion. The transactions values Wordplay at 9.5X Enterprise Value to Earnings Before Interest, Taxes Depreciation and Amortization (EV/EBITDA). FIS stock currently trades at only 8X EV/EBITDA, even though Worldpay was underperforming FIS’s larger banking businesses. This would indicate there is a lot of potential upside in FIS, perhaps even beyond my $72 target.

FIS will report earnings in the first week of August, with expectations for EPS of $1.48, vs. $1.73 last year, on a less than 1% decline in revenues. Cost cuts will help alleviate the pricing pressures the company has experienced, as will debt reduction following the completion of the Worldpay transaction. So, earnings should recover in future quarters. FIS remains a buy below $60. My target is $72.

First Busey (BUSE) will report earnings in the last week of the month, with expectations for flat EPS of $0.56 as interest margin pressure and higher credit costs offset loan growth. While the recent issues with regional banks continue to negatively impact BUSE stock, the worst may be over, with the shares finding support near $20. I am confident results will show that BUSE remains on solid footing with a strong deposit base, and that will help send the stock higher. BUSE is a buy below $19. My target is $24.

Newell Brands (NWL) will report earnings in the second week of July, with expectations for EPS of $0.13, vs. $0.56 last year, on a 14.8% decline in revenue. This will hopefully be the last quarter for a sharp decline in results for Newell. Retailer inventories are returning to normal, and that should set the company up for a much better second half. Still, there is a lot of skepticism towards company guidance for EPS of $0.95 to $1.08 for the entire fiscal year, and this is reflected in the company’s depressed stock price. However, I do not believe results for the year will end significantly lower than the low end of the range, and the company reallocated resources to its best-positioned brands, which will pay off in the long run. NWL is a buy under $10. My target is $16.

Occidental Petroleum (OXY) will report second-quarter results on August 2, with expectations for EPS of $0.94, vs. $3.16 last year, on a 35.7% decline in revenue. The weaker results are due primarily to a sharp decline in oil prices from a year ago when they were inflated by the conflict between Russia and the Ukraine. Oil prices and the company’s stock price have stabilized since early May, and the company’s low-cost reserves in the Permian Basin will pay off for OXY in the long-term. Berkshire Hathaway also continues to support the stock price, buying another $122.1 million shares in the company to raise its stake above 25%. OXY is poised to do well in the next jump in oil prices. Buy OXY under $65. My target is $75.

Old Republic (ORI) will report second-quarter results in the last week of July or the first week of August. Expectations call for EPS of $0.56, vs. $0.69 last year, on a 9.2% decline in revenues. The company has been impacted by continued weakness in title insurance with existing home sales falling, though its results should be partially offset by solid results in general insurance. I would also look for the company to declare a special $1.00 a share dividend, like that did last year. Old Republic is a solid company, and the stock remains a good choice in this uncertain environment. Buy ORI under $24. My target is $27.

Patterson Companies (PDCO) has traded steadily since jumping ahead on positive fourth-quarter earnings and strong guidance for fiscal 2024. I am very confident the strong momentum will continue to payoff, as the company is now realizing the benefits of investments made in recent years. My $35.75 target could be achieved before year end. PDCO is a buy on any correction below $30.

Phibro Animal Health (PAHC) has traded well in recent days. While the company’s recent earnings have not been strong, they have not been that bad. So, the decline in the share price that has occurred since my December 2021 recommendation has not been justified. I believe that when the company reports fourth-quarter earnings and gives fiscal 2024 guidance in late August, the stock should continue to rise, given a very inexpensive valuation of 11X earnings and underlying businesses that have limited cyclicality. PAHC is a buy below $16. My target is $20.

Sonoco Products (SON) will report second-quarter earnings sometime in late July or early August. Expectations call for EPS of $1.49, vs. $1.76 last year, on a 2% decline in revenues, as the company faces a very difficult comparison to last year’s strong numbers. SON remains a very frustrating stock, as the company has posted very consistent numbers, offers a nice dividend yield of 3.5%, and sells for just 10X this year’s EPS estimates, but it cannot sustain any rallies due to concerns of an eventual recession.

However, SON is a quality company with high returns on capital and strong free cash flow generation. So, I believe shares can go meaningfully higher, perhaps when it is clear that any recession will not last long and/or the Fed is done raising short-term rates. Buy SON below $65. My target is $75.

Sysco Corporation (SYY) will likely report second-quarter earnings sometime before our next issue. Expectations call for EPS of $1.33, vs. $1.15 last year, on a 5.4% increase in revenues. SYY will enjoy its typical solid quarter, with results enhanced by new product introductions and recent efforts to control costs. SYY shares have been doing a little better recently, and with the stock selling well below its 52-week high of $89 a share, I still think there is room to the upside. Buy SYY under $80. My target is $92.

U.S. Bancorp (USB) will report second-quarter earnings on July 19, with expectations for EPS of $1.12, vs. $1.09 last year. Estimates are down approximately $0.10 a share over the past three months, as the bank was forced to pay higher rates to depositors. Previous rates were not sustainable considering persistent Fed rate increases.

While further cuts to estimates from the current $4.54 a share for 2023 are possible, this is more than reflected in USB’s current stock price. Barring a serious recession, USB should build its capital ratios closer to historical levels over the next 12 months, after they fell following a somewhat ill-timed acquisition of Mitsubishi’s Union Bancorp last year.  This will, in turn, return USB’s PE ratio to historical levels of close to 11X earnings, and the stock will do very well. USB is a buy below $37. My target is $42.