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Top 6 Blue-Chip Picks to Tap Dow's Comeback Rally

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·6 min read
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Wall Street rebounded impressively on Jun 21 from last week's Fed-induced meltdown due to concerns of an impending inflation. The Dow — popularly known as the blue-chip index — jumped 1.8% or 586.89 points, marking its best daily performance since Mar 5. At its intraday high, the 30-stock index rose 618.01 points. Notably, the index ended a five-day losing streak, its longest since January 2021.

Last week, the Dow tumbled 3.5%, posting its worst weekly performance since October 2020. The Fed acknowledged that the U.S. economy is suffering from inflationary pressure and a rate hike may come sooner than expected. This had an immediate effect on markets as the yield curve of government bonds flattened, mortgage rates climbed and the ICE U.S. Dollar Index jumped.

Wall Street Returns to Normalcy

Markets settled down with the beginning of the new week as market participants fully digested Fed Chairman Jerome Powell's post FOMC statement delivered on Jun 16.

Despite raising the core PCE price index — Fed's favorite inflation gauge — to 3% year over year for the fourth quarter of 2021 from 2.2% forecast in March, the central bank is still expecting the recent augmentation in the general price level to be transitory and hover around 2% or a little over 2% through 2022-2023.

The latest "dot plot" — a quarterly map of each Federal Open Market Committee member’s expectations for rates over the coming years — showed 1 or 2 rate hikes in the second half of 2023 instead of 2024 predicted earlier.

However, Powell commented that dot plots are “not a great forecaster of future rate moves." Fed's policy will be guided by the actual outcome of economic variables and not by its officials' expectations about the future.

Moreover, the Fed did not provide any guideline on when it will start tapering its $120 billion per month bond-buying program. The Fed Chair reiterated that the central bank will give enough signals in advance before it actually starts tapering.

Finally, supported by the nationwide COVID-19 vaccination drive, a sharp reduction in new coronavirus cases, and a faster-than-expected reopening of the U.S. economy, the Fed raised the U.S. GDP growth rate for 2021 to 7% from 6.5% in March. The central bank reaffirmed that the unemployment rate will come down to 4.5% at the end of 2021.

A Stunning Rebound by The Dow

Last week, the Dow lost 3.5% while the S&P 500 and the Nasdaq Composite fell 1.9% and 0.3%, respectively. As markets rebounded on Monday, just the opposite happened. The Dow rallied 1.8% while the S&P 500 and the Nasdaq Composite were up 1.4% and 0.8%, respectively.

The major sufferers of last week's market meltdown were the reopening sectors. Both financials and materials slid 6%, the energy sector tanked more than 5% while the industrial sector fell more than 3%. Notably, 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. That is why the index suffered the most last week.

Moreover, President Joe Biden's proposed multi-trillion dollar investment plan for infrastructure development, education and health care, should give a major boost to the Dow stocks. The plan will include transport, drinking-water, broadband, manufacturing and construction infrastructure developments. Reopening segments like basic materials, industrials, financials and utilities will benefit immensely along with more job creation for the economy.

Our Top Picks

We have narrowed down our search to six Dow stocks that have strong growth potential for 2021 and solid long-term (3-5 years) growth. These stocks have seen robust earnings estimate revisions within the last 60 days.

Moreover, these companies are regular dividend payers providing an important income stream during a market downturn. Finally, each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our six picks in the past three months.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Apple Inc. AAPL has an expected earnings growth rate of 57.6% for the current year (ending September 2021). The company has a long-term growth rate of 12.5%. The Zacks Consensus Estimate for the current year has improved 1.4% over the last 30 days. The stock has a current dividend yield of 0.7%.

Caterpillar Inc. CAT has an expected earnings growth rate of 46.3% for the current year. The company has a long-term growth rate of 12%. The Zacks Consensus Estimate for the current year has improved 0.6% over the last 30 days. It has a current dividend yield of 2%.

The Home Depot Inc. HD has an expected earnings growth rate of 15.5% for the current year (ending January 2022). The company has a long-term growth rate of 11.4%. The Zacks Consensus Estimate for the current year has improved 10% over the last 60 days. It has a current dividend yield of 2.2%.

Walmart Inc. WMT has an expected earnings growth rate of 7.9% for the current year (ending January 2022). The company has a long-term growth rate of 5.5%. The Zacks Consensus Estimate for the current year has improved 1.4% over the last 30 days. It has a current dividend yield of 1.6%.

Dow Inc. DOW has an expected earnings growth rate of more than 100% for the current year. The company has a long-term growth rate of 27.6%. The Zacks Consensus Estimate for its current-year earnings has improved 11.7% over the last 30 days. The stock has a current dividend yield of 4.5%.

UnitedHealth Group Inc. UNH has an expected earnings growth rate of 10.3% for the current year. The company has a long-term growth rate of 13.2%. The Zacks Consensus Estimate for its current-year earnings has improved 0.1% over the last 30 days. It has a current dividend yield of 1.5%.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>


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

Apple Inc. (AAPL) : Free Stock Analysis Report

Caterpillar Inc. (CAT) : Free Stock Analysis Report

UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report

Walmart Inc. (WMT) : Free Stock Analysis Report

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

Dow Inc. (DOW) : Free Stock Analysis Report

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