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5 Must-Buy Blue-Chip Stocks in a Capricious Market

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Wall Street is witnessing a spike in volatile trading this month due to market participants' concern of an impending inflation that may compel the Fed to change its ongoing easy-money stance. Moreover, a section of financial experts already raised concerns regarding an asset price bubble in the equity markets that they think are overvalued.

The stock-market volatility is likely to continue in the days to come. Despite an unpredictable market, five Dow stocks with a favorable Zacks Rank are likely to provide solid returns in the near term. Investment in these stocks at this stage is likely to be prudent.

Volatile Trading in May

Volatility has set in Wall Street in May with growing expectations of near-term inflation. The Dow — popularly known as the Blue-Chip index — registered loses in four of the past five weeks. The 30-stock index reached all-time high of 35,091.56 on May 10 and thereafter slid 2% till May 24.

The market's benchmark S&P 500 Index recorded two back-to-back weekly losses last week. This happened for the first time since February. The broad-market index reached an all-time high of 4,238.04 on May 7 and thereafter dropped 1% till May 24.

The teach-heavy Nasdaq Composite suffered the most as inflation is likely to affect the growth-oriented sectors like the technology the most. Month to date, the index is down 2.2% while both the Dow and the S&P 500 have managed to gain marginally. The tech-laden index reached an all-time high of 14,211.57 on Apr 29 and thereafter tumbled 3.9% till May 24.

Transitory Inflation May Turn Good

The U.S. economy is on a recovery path in 2021 after suffering the largest yearly decline in 2020 since World War II owing to the coronavirus pandemic. However, the possibility of a faster-than-expected recovery, buoyed by a ramp up in COVID-19 vaccinations and massive fiscal and monetary stimulus, have triggered expectations of higher inflation this year.

The Fed has so far reiterated that any inflation in 2021 will be temporary and will not call for adjusting its ongoing easy-money monetary stance. However, in its latest minute, the central bank has signaled that if the recovery remains very strong and price level continues to rise systematically, it may consider readjusting its policy variables.

Meanwhile, a transitory inflation may be good for the U.S. economy. Higher inflation means higher aggregate demand, which will enable businesses to deploy higher capital spending and recruit more manpower. The U.S. economy is operating at a sub-optimal level since March 2020 owing to either full or partial lockdowns.

The labor market, which was the best-performing segment of the economy before the pandemic, is still far below its pre-pandemic level. Higher recruitment by businesses will help the struggling labor market to stabilize faster.

Moreover, businesses can generate higher profits despite raising the wage rate. The spread between higher inflation and higher wage will increase their profit and induce them to increase the scale of operation and lead to higher job creation.

Impact on the Dow

The U.S. economy is witnessing an impressive recovery since the beginning of 2021. Weekly jobless claims have fallen significantly in the past six reported weeks, while manufacturing and services' activities picked up. Robust pent-up demand supported by an astonishing $2.3 trillion personal savings and expectations of record-high corporate profits and GDP growth in 2021 are all indicating that the U.S. economy is rock solid.

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, reopening of the economy is likely to benefit the blue-chip index the most. This is evident from the fact that the Dow has rallied 12.4% year to date while the S&P 500 and the Nasdaq Composite have climbed 11.8% and 6%, respectively.

Our Top Picks

We have narrowed down our search to five blue-chip stocks that have strong growth potential for 2021 and solid long-term (3-5 years) growth. These stocks have seen robust earnings estimate revisions in the last 7 to 30 days.

Moreover, these companies are regular dividend payers providing an important income stream during a market downturn. Finally, each of our picks carries either 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 of our five picks in the past three months.

Dow Inc. DOW has an expected earnings growth rate of more than 100% for the current year. The Zacks Rank #1 company has a long-term growth rate of 27.7%. The Zacks Consensus Estimate for its current-year earnings has improved 31.9% over the last 30 days. It has a current dividend yield of 4.07%.

Caterpillar Inc. CAT has an expected earnings growth rate of 47.3% for the current year. The Zacks Rank #2 company has a long-term growth rate of 12%. The Zacks Consensus Estimate for the current year has improved 17.1% over the last 30 days. It has a current dividend yield of 1.74%.

The Home Depot Inc. HD has an expected earnings growth rate of 15.2% for the current year (ending January 2022). The Zacks Rank #2 company has a long-term growth rate of 11.4%. The Zacks Consensus Estimate for the current year has improved 7.7% over the last 7 days. It has a current dividend yield of 2.09%.

Walmart Inc. WMT has an expected earnings growth rate of 6.8% for the current year (ending January 2022). The Zacks Rank #2 company has a long-term growth rate of 5.5%. The Zacks Consensus Estimate for the current year has improved 7.3% over the last 7 days. It has a current dividend yield of 1.55%.

Apple Inc. AAPL has an expected earnings growth rate of 55.5% for the current year. The Zacks Rank #2 company has a long-term growth rate of 12.5%. The Zacks Consensus Estimate for the current year has improved 13.3% over the last 30 days. It has a current dividend yield of 0.70%.

Bitcoin, Like the Internet Itself, Could Change Everything

Blockchain and cryptocurrency have sparked one of the most exciting discussion topics of a generation. Some call it the “Internet of Money” and predict it could change the way money works forever. If true, it could do to banks what Netflix did to Blockbuster and Amazon did to Sears. Experts agree we’re still in the early stages of this technology, and as it grows, it will create several investing opportunities.

Zacks has just revealed 3 companies that can help investors capitalize on the explosive profit potential of Bitcoin and the other cryptocurrencies with significantly less volatility than buying them directly.

See 3 crypto-related stocks now >>


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

The Home Depot, Inc. (HD) : Free Stock Analysis Report

Apple Inc. (AAPL) : Free Stock Analysis Report

Caterpillar Inc. (CAT) : Free Stock Analysis Report

Walmart Inc. (WMT) : Free Stock Analysis Report

Dow Inc. (DOW) : Free Stock Analysis Report

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