The Secret to

Managing Risk
During a Recession
3 Little-Known Stocks to Help Protect Your Portfolio
Contents

Introduction 3

The Only Investment Indicator You’ll Need 4

How to update the NBER’s way : Building a U.S. recession outlook 8

Innovative “Under-the-Radar” Tech Picks 10

Conclusion 17

Disclaimer 18
Introduction
Over the years, I have written and spoken a great deal about the best means to
manage US recession risk. Why?

First, because this topic never fails to pique interest.

Second, and possibly more important, because the best insurance against a U.S.
recession (and an inevitable -30% decline in your stock portfolio) is to stay up-to-
date on key macro data.

In this special report, I am going to present my classic narratives.

I will also provide three tantalizing, less real GDP growth dependent, tech growth
stocks. They hail from a hidden sweet spot -- the mid cap style -- in today’s U.S.
stock index marketplace.

- John Blank
Zacks Chief Equity Strategist and Economist

The Secret to Managing Risk During a Recession

3
3 Little-Known Stocks to Help Protect Your Portfolio
The Only Investment Indicator
You’ll Need
Every investor understands the intimate relationship between the economy and
stock market.

Healthy Economy Ahead = Rising Stock Prices

Faltering Economy Ahead = Look Out Below!

Unfortunately, every month there are countless economic reports to sort

through. Often, they have conflicting information about the trend in place. To
make matters worse, my fellow economists never seem to be in agreement.

So, what’s an investor to do?

As an investor, you must learn to pass judgment on the U.S. economy yourself.
Fortunately, there’s a simple system I use that does very well in this regard.
Continue reading to learn how you can employ this system in the future.
Additionally, I’ll share my current outlook for the economy and stock market
given this information.

The Only Indicator You Need Is… U.S. Non-Farm Payroll Data!

The Federal Government publishes this information on the first Friday of each
month. This first dose of preliminary payroll data uses 200,000 firms. A later
round of revised payroll data uses a fuller 400,000 firms.

There’s no second place here even though it seems like there is - especially if you
watch all of the business news shows day after day.

The Secret to Managing Risk During a Recession

4
3 Little-Known Stocks to Help Protect Your Portfolio
Why? Monthly payroll data is a comprehensive “co-incident” indicator in
economist-speak. This means it accurately takes the current pulse of the entire
U.S. Economy, without any help.

One thing you should also understand: Governments create this number for
their own consumption. Our President and the National Security Council, among
others, get the monthly payroll number a day or two before stock markets do.
That is how important it is. States also have similar statewide payroll numbers
collected.

For an investor in stocks, the national payroll number is the best insight you have
into how ALL companies, large and small, are performing. When companies
collectively prosper in our economy, making more profit and acquiring more
revenue, they must add to the total payroll of the nation.

The Good, the Bad and the Ugly

The Ugly comes first.

In May, my friends in the economist profession thought the payroll number would
be +325,000. The preliminary number came out and it was +390,000. This shows
you the first problem with economists who forecast: they look two months back
and not two months ahead. Like sheep, we economists like to gather together
into flocks and look at our tails.

Then comes the Bad.

What’s our second problem? When the stock market surges ahead, up go
economist payroll forecasts. When the stock market tanks, ditto for economist
payroll forecasts.

Finally, comes the Good…

The Secret to Managing Risk During a Recession

5
3 Little-Known Stocks to Help Protect Your Portfolio
One of the biggest problems investors have been plagued with is the sheer
number of ‘catastrophic’ big picture problems thrown at them. You’ve heard
about these problems I’m sure. The Euro or Yen could implode, Europe can have
a recession, one that may get worse, the U.S. fiscal deficits grow, the threat of a
possible global easy money banking panic, a historic U.S. drought strengthens,
this list goes on and on.

What may not be appreciated is that the national non-farm payroll numbers
tell you whether any ‘big’ problem really had or has a meaningful effect on the
firms you own stock in. You don’t need to know anything about any of these
problems. That is of course until they start to noticeably trim non-farm payrolls.

My rule of thumb: Get out of all your stocks if the non-farm payroll number is
fully negative, after revisions, for two or three months in a row.

When do you get back in? When an obvious trend of improvement in national
payroll numbers materializes. Getting back in when the numbers are positive again
is too late Therefore, once the turn towards better payroll numbers happens, and
it has three trending months in the same direction, it’s time to get back in.

Getting a Jump on Monthly Employment Data

To check up on this monthly number before it is released look at the weekly

unemployment benefits claims. The simple rule to follow is four weeks of
unemployment claims numbers make up a payroll month.

Think of it as the Chinese Abacus of investing.

For example, in the week ending June 4th, 2022, the U.S. Dept of Labor’s advance
figure for seasonally adjusted initial U.S. unemployment claims was 229,000, an
increase of +27,000 from the previous week’s revised level.

The Secret to Managing Risk During a Recession

6
3 Little-Known Stocks to Help Protect Your Portfolio
The four-week moving average claim number was 215,000. On April 30th, the
four-week moving average was 188,500. On March 26th, the four-week moving
average was 171,000.

Hence, the May monthly nonfarm payroll number should be somewhat weaker
than the solid March and April job adds.

At this point, it is unnecessary to go any further than that.

If you have the discipline of believing in your investing abacus, counting up

claims week-by-week, you have a homegrown and easy tool to develop your own
monthly payroll forecasts.

This is the only essential macro forecast you must make for yourself.

What is this Indicator Telling Me Now?

The first week in June saw claims rise +27,000 to 229,000. The previous week’s
level was revised up by +2,000 from 202,000.

If the U.S. labor markets average 230,000 in initial unemployment claims each
week in June, expect to see roughly a -20% decline or +320,000 for June payroll
additions.

If that comes to pass, that means the end of the world is not here and stock traders
will be able to breathe a sigh of relief.

It’s that easy.

The Secret to Managing Risk During a Recession

7
3 Little-Known Stocks to Help Protect Your Portfolio
How to update the NBER’s way :
Building a U.S. recession outlook.
One chart (shown below) contains the four leading economic indicators used by
the National Bureau of Economic Research (NBER) to date U.S. business cycle
peaks and troughs.

Source: U.S. Federal Reserve FRED database, to June 1st, 2022

If an investor wants to verify the status of the U.S. economy in one chart, this
would be the one.

Of the four indicators, only one, Real Business Sales (the light green line), has
peaked and turned. It has declined in the last two months and is off from last year.

• Industrial Production (the red line) and

• Non-farm Payrolls (the purple line) continue their upward advance, and
• Real Personal Income Less Transfer Payments (the topmost blue line), a
core measure of income earned from actual economic activity, is trending
upwards as well.

The Secret to Managing Risk During a Recession

8
3 Little-Known Stocks to Help Protect Your Portfolio
I would add this: There was obvious flattening, across multiple months, of
those four key U.S. macro variables as the U.S. economy entered the prior 2008
recession.

My other insight?

Three out of four of the macro variables are now notably and surely trending
upwards.

This tells us that right now, momentum in the U.S. economy is quite strong.

The Secret to Managing Risk During a Recession

9
3 Little-Known Stocks to Help Protect Your Portfolio
Innovative “Under-the-Radar”
Tech Picks
If you want to pick up untapped exposure in innovative information technology,
you will need to look harder, beyond the major mega-cap names.

Next are three top Zacks Rank stocks. They were pulled from very highly
regarded tech industries, and they are strong Zacks Growth players.

I use the Zacks Heat Map to find these middle-sized companies where the
earnings and revenue growth action is, currently.

This Zacks Heat Map shows me the industry that is not only hot currently, but
has stayed hot for the last eight weeks.

My three fresh (to early June 2022) tech picks are:

• Top-down screened for annual earnings growth in Tech,

• Not overvalued,
• Offer above market beta performance,
• Come from the top 1/5 of Zacks Industry Ranks, and
• Show us four serial EPS surprises.

1. MaxLinear Inc. (MXL)

MaxLinear, based in Carlsbad, California, is a provider of radio-frequency analog

and mixed signal semiconductor SoC solutions for broadband communication
applications offering small, die-size, silicon, and low power consumption.

The company’s RF receiver products capture and process digital and analog
broadband signals to be decoded for various applications.

The Secret to Managing Risk During a Recession

10
3 Little-Known Stocks to Help Protect Your Portfolio
These products include both RF receivers and RF receiver systems-on-chip (SoCs),
which incorporate the company’s integrated radio system architecture and the
functionality necessary to demodulate broadband signals.

MaxLinear’s current products enable the display of broadband video in a wide

range of electronic devices including cable and terrestrial set-top boxes, digital
televisions, mobile handsets, personal computers, netbooks, and in-vehicle
entertainment devices.

Similar companies are ON, MCHP, and ADI.

MaxLinear’s Price, Consensus & Surprise Chart

Source: Zacks.com

The Secret to Managing Risk During a Recession

11
3 Little-Known Stocks to Help Protect Your Portfolio
Zacks #2 Rank (BUY).

Market Cap: $3.1B

Market Beta 2.0

Zacks Value score: B

Zacks Growth score: A

Zacks Momentum score: F

Analog Semiconductor Industry Rank (#20 out of 252), Top 8%

Forward P/E = 9.8

PEG ratio = 0.5

Last EPS surprise? +9.9%

Average of last 4 surprises? +7.1%

2. Super Micro Computer, Inc. (SMCI)

Super Micro Computer, Inc., headquartered in San Jose, California, designs,

develops, manufactures, and sells energy-efficient, application-optimized
server solutions based on the x86 architecture.

The company’s solutions include a range of rack mount and blade server
systems, as well as components.

Supermicro emphasizes superior product design and uncompromising

quality control to produce industry-leading server boards, chassis, and
server systems.

The Secret to Managing Risk During a Recession

12
3 Little-Known Stocks to Help Protect Your Portfolio
These Server Building Block Solutions provide benefits across many environments,
including data center deployment, high-performance computing, high-end
workstations, storage networks and standalone server installations.

Super Micro Computer sells its server systems and components primarily through
distributors, which include value-added resellers and system integrators, and to a
lesser extent, to original equipment manufacturers (OEMs).

Super Micro Computer Price, Consensus & Surprise Chart

Source: Zacks.com

The Secret to Managing Risk During a Recession

13
3 Little-Known Stocks to Help Protect Your Portfolio
Zacks #1 Rank (BUY)

Market Cap: $2.85B

Market Beta 1.2

Zacks Value score: F

Zacks Growth score: B

Zacks Momentum score: B

Computer Storage Devices Zacks Industry Rank (#83 out of 252) or Top 33%

Forward P/E = 12.06

PEG ratio = NA

Last EPS surprise? +6.9%

Average of last 4 surprises? +17.7%

3. Onto Innovation (ONTO)

Onto Innovation operates as the leading global manufacturer of avant-garde

process control tools that perform macro defect inspections and metrology, and
lithography systems.

Its products are used in several high technology industries like silicon wafer
substrates, power devices and data storage.

The Secret to Managing Risk During a Recession

14
3 Little-Known Stocks to Help Protect Your Portfolio
It plays a significant role in the design, manufacture and marketing of process
control systems for 2D/ 3D macro inspection, optical critical dimension metrology
and wafer inspection.

It boasts a broad portfolio of leading-edge technologies: metal interconnect

composition, factory analytics and lithography for advanced semiconductor
packaging as well as develops innovative analytical software for certain industrial
applications.

Through its management efficiency, customers get first-hand access to premium

products at premium prices.

It provides best-in-class direct sales & application support through its offices
in the U.S., Japan, Taiwan, South Korea, China, Singapore and Europe. It has 1
business segment.

Onto Innovation Price, Consensus & Surprise Chart

Source: Zacks.com

The Secret to Managing Risk During a Recession

15
3 Little-Known Stocks to Help Protect Your Portfolio
Zacks #2 Rank (BUY)

Market Cap: $4.0B

Market Beta 4.0

Zacks Value score: C

Zacks Growth score: A

Zacks Momentum score: C

Nanotechnology Industry Rank (#4 out of 252) or Top 2%

Forward P/E = 15.7

PEG ratio = NA

Last EPS surprise? +12.9%

Average of last 4 surprises? +11.3%

The Secret to Managing Risk During a Recession

16
3 Little-Known Stocks to Help Protect Your Portfolio
Conclusion

These three mid-cap info tech stocks are well-regarded players in:

• Analog Semiconductors,
• Computer Storage Devices
• Nanotechnology

This set of picks shares durable stock-screen criteria:

• Zacks Rank of #1 or #2
• Top-ranked Zacks industries, (in the top 20% or better)
• In the under-appreciated mid-cap market cap range, around $3B to $4B.

Lastly, I want to highlight a stock-screen element:

• The latest report, and the average of the last four EPS surprises, are
solidly positive.

A solid current beat, added to a sequence of four earnings beats in a row means
this business and industry is performing consistently, in terms of underlying
fundamentals.

This is durable evidence that the recent Zacks Rank should have staying power.

You can learn more about each stock online, via Zacks.com.

John Blank Ph.D. is Chief Equity Strategist and Economist at Zacks. His daily comments
and top recommendations are available via Zacks Large Cap Trader.

The Secret to Managing Risk During a Recession

17
3 Little-Known Stocks to Help Protect Your Portfolio
Disclaimer
©Copyright 2022 Zacks Investment Research

This Special Report has not been authorized, sponsored, or otherwise approved or endorsed
by the companies represented herein. Each of the company names represented herein are
trademarks of MaxLinear, Inc.; Super Micro Computer, Inc.; Onto Innovation Inc. Front cover,
source: Shutterstock.

Zacks.com provides investment resources and informs you of these resources, which you
may choose to use in making your own investment decisions. Zacks is providing information
on this resource to you subject to the Zacks “Terms of Service” - www.zacks.com/terms_of_
service.

*Past performance is no guarantee of future results. Inherent in any investment is the poten-
tial for loss. This material is being provided for informational purposes only and nothing
herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy,
sell or hold a security. No recommendation or advice is being given as to whether any invest-
ment is suitable for a particular investor. It should not be assumed that any investments in
securities, companies, sectors or markets identified and described were or will be profitable.
All information is current as of the date of herein and is subject to change without notice. Any
views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment
Research is not a licensed securities dealer, broker or US investment adviser or investment
bank. The Zacks #1 Rank Performance covers a period beginning on January 1, 1988 to
June 6, 2022. These returns are from hypothetical portfolios consisting of stocks with Zacks
Rank # 1 that were rebalanced monthly (see additional details regarding rebalancing below)
with zero transaction costs. These are not the returns of actual portfolios of stocks. Zacks Rank
#1 stock-rating system returns are computed monthly based on the beginning of the month
and end of the month Zacks Rank #1 stock prices plus any dividends received during that partic-
ular month. A simple, equally-weighted average return of all Zacks Rank #1 stocks is calculated
to determine the monthly return. The monthly returns are then compounded to arrive at the
annual return. Only Zacks Rank #1 stocks included in Zacks hypothetical portfolios at the
beginning of each month are included in the return calculations. Zack Rank #1 stocks can, and
often do, change throughout the month. Certain Zacks Rank #1 stocks for which no month-
end price was available, pricing information was not collected, or for certain other reasons
have been excluded from these return calculations. The S&P 500 is an unmanaged index.
Visit www.zacks.com/performance_disclosure for information about the performance
numbers displayed above.

The Secret to Managing Risk During a Recession

18
3 Little-Known Stocks to Help Protect Your Portfolio