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Top 5 Blue-Chip Picks to Gain From Dow's Strong Rally

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Wall Street has maintained its northward journey so far in August after rallying solidly in the first seven months of this year. On Aug 10, the Dow — popularly known as the blue-chip index — recorded fresh all-time and closing highs. The 30-stock index is likely to continue its rally for the rest of 2021.

Strong Performance of the Dow

Year to date, Dow's performance is far better than last year. In the pandemic-ridden 2020, the Dow gained 7.3%, while the S&P 500 and the Nasdaq Composite have rallied 16.3% and 43.6%, respectively. However, year to date, the Dow, the S&P 500 and the Nasdaq Composite rallied 15.2%, 18.1% and 14.7%, respectively.

The U.S. economy witnessed a robust recovery from the pandemic-led devastations in the second quarter. Nationwide deployment of COVID-19 vaccines on a priority basis, massive fiscal stimulus and the continuation of easy money policies by the Fed resulted in a faster-than-expected reopening of the economy.

The reopening of the economy has shifted market participants' interest toward cyclical stocks that were most affected in 2020 due to lockdowns. These stocks with high business potential were cheaply available in 2021. The composition of the Dow is mostly inclined toward cyclical stocks. Consequently, the index performed fairly well.

On Aug 10, the Dow recorded a fresh all-time high of 35,285.16 and a new closing high of 35,264.67. At its current level, the Dow is well above its 50-day and 200-day moving averages of 34,610.79 and 32,296.57, respectively.

In financial literature, the 50-day moving average line is generally recognized as the short-term trend setter, while the 200-day moving average is considered a long-term trend setter. It is also recognized in the technical analysis space that whenever the 50-day moving average line surges ahead of the 200-day moving average line, a long-term uptrend for the index becomes a strong possibility.

Two Major Catalysts

On Aug 10, the U.S. Senate, in a majority vote of 69-30, passed a bipartisan infrastructure bill of $550 billion in addition to the previously approved funds of $450 billion for five years. Total spending may go up to $1.2 trillion if the plan is extended to eight years. The bill is now headed for the House of Representatives for discussions and vote.

The proposed bill will provide federal money into physical infrastructure projects such as roads, bridges, passenger rails, airports, drinking water and waste-water systems, high-speed Internet and climate-related infrastructure.

As the infrastructure bill has passed Senate, the Democrats will now focus to pass a budget measure allowing them to approve a separate $3.5 trillion spending package. The bill includes $726 billion for providing universal pre-school for 3-year and 4-year old kids, $198 billion for clean energy development, $332 billion to be provided to the Banking Committee for investment in public housing, housing affordability, and so on. Also, $135 billion is allotted to the Committee on Agriculture Nutrition and Forestry, and would include instructions for addressing forest fires, carbon emission reduction and ways to address drought-related concerns.

Our Top Picks

We have narrowed down our search to five Dow stocks that have strong growth potential for 2021. These stocks saw robust earnings estimate revisions in the last 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 six months.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Apple Inc.'s AAPL Services and Wearables businesses are expected to drive top-line growth in fiscal 2021 and beyond. Although Apple’s business primarily runs around its flagship iPhone, the Services portfolio has emerged as the company’s new cash cow. Its focus on autonomous vehicles and augmented reality/virtual reality technologies presents growth opportunities in the long haul.

This Zacks Rank #1 company has an expected earnings growth rate of 2% for next year (ending September 2022) after estimated 70.4% growth in the current year (ending September 2021). The Zacks Consensus Estimate for earnings next year improved 7.9% over the last 30 days. The stock has a current dividend yield of 0.6%.

Chevron Corp.'s CVX existing project pipeline is among the best in the industry, thanks to its premier position in the lucrative Permian Basin. Chevron’s Noble Energy takeover has expanded its footprint in the region and the DJ Basin along with the addition of cash-generating offshore assets in Israel. Chevron seems one of the best-placed global integrated oil companies to achieve a sustainable production ramp-up.

This Zacks Rank #1 company has an expected earnings growth rate of more than 100% in the current year. The Zacks Consensus Estimate for earnings next year improved 0.5% over the last 7 days. The stock has a current dividend yield of 5.4%.

Dow Inc. DOW should gain from cost synergy savings and productivity initiatives. It focuses on maintaining cost and operational discipline through cost synergy and stranded cost-removal initiatives. Its actions to reduce operating costs are expected to lend support to its earnings in 2021.

Dow’s restructuring program is also expected to deliver margin benefits. Investment in high-return projects should also be accretive to its earnings. It is investing in a number of high-return growth projects including the expansion of downstream silicones capacity.

This Zacks Rank #2 company has an expected earnings growth rate of more than 100% in the current year. The Zacks Consensus Estimate for earnings next year improved 15.3% over the last 30 days. The stock has a current dividend yield of 4.5%.

Microsoft Corp. MSFT has a dominant position in the desktop PC market, with its operating systems being used in the majority of PCs worldwide. This is particularly true for the enterprise where the company generates much of its revenues and profits.

The ongoing expansion in Microsoft Teams subscriber base is aiding the company in strengthening its position in the enterprise communication market. Azure’s increased availability in more than 60 announced regions globally, is expected to have strengthened Microsoft's competitive position in the cloud computing market, dominated by Amazon’s Amazon Web Services.

This Zacks Rank #2 company has an expected earnings growth rate of 8% in the current year (ending June 2022). The Zacks Consensus Estimate for earnings next year improved 3.6% over the last 30 days. The stock has a current dividend yield of 0.8%.

NIKE Inc. NKE provided a strong guidance for fiscal 2022 and set long-term targets for fiscal 2025, driven by the momentum in its business as it comes out of the pandemic. For fiscal 2022, the company anticipates revenue growth in the low double digits, surpassing $50 billion, driven by strong customer demand across its operating segments. It expects to benefit from robust digital growth, scaling NIKE-owned physical retail concepts and growing with partners.

This Zacks Rank #2 company has an expected earnings growth rate of 20.8% for the current year (ending May 2022). The Zacks Consensus Estimate for current-year earnings improved 1.9% over the last 30 days. The stock has a current dividend yield of 0.6%.


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Apple Inc. (AAPL) : Free Stock Analysis Report

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