5 Buy-Ranked Blue-Chip Stocks to Gain in a Capricious Market
Just a day of trading is left in September and the myth about the month’s volatility is about to repeat this year. This time, history is being repeated and a storm is blowing too, making investment decisions extremely hard for market participants.
Volatility inflicted September from several corners. The rapid spread of the Delta variant of coronavirus has compelled a section of economists and financial experts to curtail their forecast for third-quarter U.S. economic growth.
Higher inflationary pressure is likely to persist next year owing to prolonged supply-chain disruptions.
Fed Chairman Jerome Powell has signalled that the central bank will start tapering its $120 billion per month bond-buy program possibly this year and the first hike in interest rate may happen in the second half of 2022. Consequently, yields on government bonds spiked significantly.
To add to the wound was the Congressional dilemma to find a permanent solution to raise the debt ceiling of the U.S. government to avert a government shutdown. In fact, the $1 trillion infrastructure plan of the Biden administration is also in limbo.
Finally, investors were concerned about overvaluation in U.S. stocks and sought reasons for a market correction.
The stock-market volatility is likely to continue in the days to come. Despite an unpredictable market, five Dow (popularly known as the blue-chip index) stocks with a favorable Zacks Rank are likely to provide good returns in the near term. These stocks are currently available at attractive valuations. Investment in these stocks at this juncture should be fruitful.
Dow Suffers the Least This Month
Month to date, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — dropped 2.7%, 3.6% and 4.9%, respectively. This week’s market meltdown was primarily technology-led due to the recent spike in government bond yields.
Higher market risk-free returns mean a higher discount rate for future cash flows from stock investing. This will affect the growth-oriented stocks — especially the technology stocks — as these generally provide higher returns over the long term.
Moreover, these companies depend on easy access to cheap credit to expand their businesses. The Fed Chairman also indicated that the first hike of the lending rate from the current level of 0-0.25% may come in the second half of 2022 instead of 2023 expected in June.
Unlike the market's benchmark S&P 500 or the teach-heavy Nasdaq Composite, the composition of the Dow is mostly inclined toward cyclical stocks. Therefore, the blue-chip index suffered less compared to its peers.
How Wall Street Might Behave in October
Volatility is likely to continue in October, at least in the first half. The above-mentioned market disturbing elements are persisting. At their current level, the three major stock indexes are well below their 50-day moving averages.
On the other hand, the CBOE VIX — popularly known as the market’s fear gauge — is well above its 50-day moving average. In financial literature, the 50-day moving average line is generally recognized as the short-term trend setter.
Nevertheless, a major driver for stock markets in October could be the third-quarter 2021 earnings results. Corporate profits are likely to remain elevated after an impressive performance in the first two quarters of this year. Rising cost pressures amid supply-chain disruptions along with labor and material shortages will keep the spotlight on margins, which are expected to be up year over year as well as sequentially.
Our current projection shows that total third-quarter earnings for the S&P 500 Index are expected to be up 26.1% from the same period last year on 13.8% higher revenues. Moreover, total earnings of the S&P 500 Index are projected to climb 42.7% on 13.6% higher revenues in 2021 and increase 9.6% on 6.6% higher revenues in 2022. (Read More: Previewing the Q3 Earnings Season)
Our Top Picks
We have narrowed down our search to five Dow stocks that have strong growth potential for the rest of 2021 and the long-term (3-5 years). These stocks have seen positive earnings estimate revisions in the last 90 days. Finally, each of our picks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance our five picks in the past three months.
Image Source: Zacks Investment Research
salesforce.com.inc. CRM is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions is driving demand for its products. Salesforce’s sustained focus on introducing more aligned products as per customer needs is driving its top-line.
Continued deal wins in the international market are the other growth drivers. Furthermore, the recent acquisition of Slack would position the company as a leader in the enterprise team collaboration solution space and better compete with Microsoft’s Teams product.
Although this Zacks Rank #1 company has a negative earnings growth rate for the current year (ending January 2022), it has a solid long-term growth rate of 16.8%. The Zacks Consensus Estimate for current-year earnings improved 0.5% over the last 7 days.
JPMorgan Chase & Co. JPM is expanding its footprint in new regions by opening branches. Aside from this, strategic buyouts, global expansion and digitization initiatives, and decent mortgage banking business are expected to continue aiding the company’s financials.
JPMorgan's impressive capital deployments reflect earnings strength and a solid balance sheet will enhance shareholder value. Fed Chairman Jerome Powell’s signal of a possible tapering of the quantitative easing program this year and a likely rate hike in the second half of 2022 bode well for the financial sector.
This Zacks Rank#2 company has an expected earnings growth rate of 58.8% for the current year. It has a long-term growth rate of 5%. The Zacks Consensus Estimate for current-year earnings improved 0.4% over the last 7 days.
Walmart Inc. WMT has been gaining from its sturdy comparable store sales record, which in turn is being driven by its constant expansion efforts and splendid e-commerce performance. Walmart has been undertaking several efforts to enhance merchandise assortments.
The company stays focused on store remodeling stores, in an attempt to upgrade them with advanced in-store and digital innovations. Walmart’s e-commerce business and omni-channel penetration have been increasing, all the more amid pandemic-led social distancing. The company is taking several e-commerce initiatives, including buyouts, alliances, improved delivery and payment systems.
This Zacks Rank#2 company has an expected earnings growth rate of 15.5% for the current year (ending January 2022). It has a long-term growth rate of 5.5%. The Zacks Consensus Estimate for current-year earnings improved 0.3% over the last 30 days.
UnitedHealth Group Inc. UNH has a strong market position and an attractive core business that continues to be driven by new deals, renewed agreements and expansion of service offerings. Its solid health services segment provides significant diversification benefits.
Its health service business, branded as Optum, is becoming increasingly valuable. The primary growth drivers for Optum are pharmacy care services, care delivery, technology, government services, and international. A sturdy balance sheet and a consistent cash flow generation enables investments in business and secures dividend to shareholders.
This Zacks Rank#2 company has an expected earnings growth rate of 11% for the current year. It has a long-term growth rate of 13.3%. The Zacks Consensus Estimate for current-year earnings improved 0.8% over the last 90 days.
Microsoft Corp. MSFT is introducing new and improved Surface devices that could encourage enterprises to stick with Windows as they move toward BYOD and cloud computing. Microsoft’s advantages in this respect are two-fold.
First, the company has a very large installed base of Office users. Most legacy data are based on Office, so enterprises are usually reluctant to use other productivity solutions. Second, the BYOD model is dependent on security and cloud integration, both of which are Microsoft’s strengths.
This Zacks Rank#2 company has an expected earnings growth rate of 8.4% for the current year (ending June 2022). It has a long-term growth rate of 11.1%. The Zacks Consensus Estimate for current-year earnings improved 3.8% over the last 90 days.
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
JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
salesforce.com, inc. (CRM) : Free Stock Analysis Report
UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
Walmart Inc. (WMT) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
