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Market Likely to be on Northward Journey From Here: 5 Picks

Nalak Das

On Apr 12, Wall Street closed sharply higher primarily attributed to strong first quarter earnings reports by major banks. The S&P 500 Index –- better known as the market’s benchmark index –- closed above a key technical barrier of 2,900 and is just 0.8% below the all-time closing high of 2,930.75 that it set on Sep 20, 2018. Several positive catalysts are pointing toward an upward journey by Wall Street from here.

First-Quarter Earnings May Surprise

Total earnings for the S&P 500 Index are expected to be down 4% from the same period last year on 4.5% higher revenues. However, we now have first-quarter results from 29 S&P 500 companies. Total earnings for these companies are down 3.5% from the same period last year on 3.8% higher revenues. (Read More: Earnings Optimism Following Bank Results).

It is too early to comment that earnings reports will remain robust for rest of the period. However, if we have to believe the adage “morning shows the day”, as strong earnings results from JPMorgan Chase & Co. JPM, Wells Fargo & Co. WFC, PNC Financial Services Group Inc. PNC and Delta Air Lines Inc. DAL indicate that this reporting cycle may not be as disappointing as expected earlier.

Optimistic Outlook, Surge in GDP Estimate and Robust Oil Price

It is not that initial bank earnings are strong. However, the comments made by some CEOs are important. James Dimon, CEO of JPMorgan Chase said, “The U.S. economy continues to grow as employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong.”

On Mar 6, the CEOs of the two largest freight railroads --- Lance Fritz of Union Pacific and Jim Foote  of CSX –- have expressed that the U.S. economy still looks pretty good, despite some concerns on the part of consumers or customers.  According to them, the U.S. industrial economy, in particular, still looks pretty healthy.

Meanwhile, crude oil price, which plunged to nearly $40 a barrel in the fourth quarter of 2018 on fear of a global economic slowdown, has rebounded in 2019 and is currently hovering around $65 a barrel. Moreover, robust manufacturing, labor market and trade data have encouraged several economists to raise the first-quarter 2019 GDP forecast. At present, the consensus estimate is around 2%, a massive jump from 0.4% estimated in January.

VIX Plunges to 6-Month Low

Volatility in U.S. stock markets is fading out gradually. The CBOE VIX, which is derived from the prices of S&P 500 options and represents the market’s expectations of volatility over the coming 30 days, is currently at its lowest level in nearly six months. Moreover, the index declined almost 67% in the last three and half months.

Since stock market performance and volatility index move in opposite directions, this is an extremely positive sign for U.S. stocks. On Apr 12, VIX ended the day at 12.01 after touching 11.95, its lowest since Oct 3, 2018. The volatility gauge is currently below both its 200-day and 50-day moving averages of 16.67 and 14.73, respectively.

The 200-day moving average is popularly regarded as a long-term support level for stock market momentum while the 50-day moving average indicates a short-term support level. With VIX lying below these psychological thresholds, it means that stock market fluctuations are likely to become less frequent in the near future. All these reflect significant upside for the equities.

Our Top Picks

At this stage, investment in stocks with a positive Earnings ESP and a Zacks Rank #3 (Hold) or better should prove to be lucrative should prove to be lucrative. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

We narrowed down our search to five stocks with a Zacks Rank #1 (Strong Buy), a positive ESP and further a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

Legg Mason Inc. LM is engaged in providing asset management, securities brokerage, investment banking and related financial services to individuals, institutions, corporations and municipalities. It has an Earnings ESP of +4.33% for the current quarter. The Zacks Consensus Estimate for the current quarter and year has improved 2% and 4.2%, respectively, over the last 30 days.

ConocoPhillips COP produces transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids worldwide. It has an Earnings ESP of +2.26% for the current quarter. The Zacks Consensus Estimate for the current quarter and year has improved 8.1% and 11.3%, respectively, over the last 30 days.

CommScope Holding Co. Inc. COMM provides infrastructure solutions for communication networks worldwide. It has an Earnings ESP of +1.89% for the current quarter. The Zacks Consensus Estimate for the current quarter and year has improved 2.3% and 36.1%, respectively, over the last 30 days.

The Estée Lauder Companies Inc. EL manufactures and markets skin care, makeup, fragrance and hair care products. It has an Earnings ESP of +1.39% for the current quarter. The Zacks Consensus Estimate for the current quarter and year has improved 0.8% and 0.6%, respectively, over the last 30 days.

Colliers International Group Inc. CIGI provides commercial real estate services to corporate and institutional clients in the Americas, Europe, the Middle East, Africa, Asia, Australasia, and internationally.  It has an Earnings ESP of +2.36% for the current quarter. The Zacks Consensus Estimate for the current quarter and year has improved 3.2% and 1.7%, respectively, over the last 30 days.

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Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
 
JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report
 
Wells Fargo & Company (WFC) : Free Stock Analysis Report
 
CommScope Holding Company, Inc. (COMM) : Free Stock Analysis Report
 
The Estee Lauder Companies Inc. (EL) : Free Stock Analysis Report
 
Legg Mason, Inc. (LM) : Free Stock Analysis Report
 
ConocoPhillips (COP) : Free Stock Analysis Report
 
Colliers International Group Inc. (CIGI) : Free Stock Analysis Report
 
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