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Dow Posts Longest Stretch of Gains in 6 Months: 4 Picks

Zacks

On May 11, the Dow finished in the green for the seventh consecutive session, posting its longest stretch of gains since Nov 8, 2017. In doing so, the blue-chip index shrugged off recent fears about rising inflation and President Trump’s proposal to curb the cost of prescription drugs.

Also providing a much-needed boost to stocks has been a strong first-quarter earnings season. The index’s blue chips have not looked this attractive for some time now. Adding strong performers to your portfolios could help you garner handsome profits in the months ahead.

Inflationary Fears Decline, Fear Gauge Slides

On May 10, soft data on consumer prices inflation led to a decline in the 10-year Treasury yield. The Consumer Price Index (CPI) for April increased by 0.2%, coming in below the estimated level of 0.3%. Further, core CPI increased by only 0.1%, lower than the consensus estimate of 0.2%.


This limited its yearly growth to 2.1%, leading to a reduction in concerns that the pace of inflation was increasing. The 10-year yield increased on May 11 but remained below the 3% mark which it had broken above earlier in the week. This was mostly a reaction to Trump’s decision to exit the Iran deal, which boosted oil prices.

Meanwhile, the market’s fear-gauge, the VIX declined by 4.4% on May 10, closing at 12.65, marking its seventh consecutive daily decline. This was its lowest closing level since Jan 26 and marks the longest stretch of declines in a year.

Exceptional Earnings Performance

Looking at Q1 as a whole, total earnings are expected to be up +23.6% from the same period last year on +8.8% higher revenues, the highest quarterly earnings growth pace in 7 years. Earnings growth is expected to be in double-digit territory from the year-earlier level for 13 of the 16 Zacks sectors. (Read: A Critical Look at the Q1 Earnings Season)

As of May 11, we have received Q1 results from 455 index members. Total earnings for the 455 index members that have reported results already are up 24.4% from the same period last year on 9.4% higher revenues, with 77.6% beating EPS estimates and 75.2% beating revenue estimates. (Read: Can Retail Stocks Maintain Their Momentum?)

Our Choices

The Dow’s recent run of gains is a product of superlative first-quarter earnings performances from most companies. Several of these are blue-chips who would likely also benefit from a strong economy. Additionally, inflationary fears have receded, reducing investor concerns to a great degree.

Investing in select Dow stocks looks like a smart option at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Caterpillar Inc. CAT delivered adjusted earnings per share of $2.82 in first-quarter 2018, surpassing the Zacks Consensus Estimate of $2.11 by a margin of 34%. Revenues improved 32% year over year to $12.9 billion in the quarter, surpassing the Zacks Consensus Estimate of $11.6 billion. (Read: Caterpillar Gains on Q1 Earnings Beat, Hikes '18 View)

Caterpillar has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 55.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 16.6% over the last 30 days.

The Goldman Sachs Group, Inc.’s GS reported earnings per share of $6.95, comfortably beating the Zacks Consensus Estimate of $5.67. Net revenues were up 25% year over year to $10 billion. Moreover, the revenue figure handily outpaced the Zacks Consensus Estimate of $8.9 billion. (Read: Goldman Sachs Q1 Earnings Impress on Improved Trading)

Goldman Sachs has expected earnings growth of 17.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.6% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Boeing Company BA reported adjusted earnings of $3.64 per share for first-quarter 2018, beating the Zacks Consensus Estimate of $2.59 by 40.5%. First-quarter revenues amounted to $23.38 billion in the quarter, beating the Zacks Consensus Estimate of $22.32 billion. (Read: Boeing Beats on Earnings in Q1, Hikes '18 EPS View)

Boeing has a Zacks Rank #2 (Buy). The company has expected earnings growth of 21.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.3% over the last 30 days.

Merck & Co., Inc. MRK reported first-quarter 2018 adjusted earnings of $1.05 per share, which beat the Zacks Consensus Estimate of 99 cents by 6.1%. Revenues for the quarter rose 6% year over year to $10.04 billion.

Merck has a Zacks Rank #2. The company has expected earnings growth of 6.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.6% over the last 30 days.

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