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U.S. Markets Close Highest in a Month: 4 Momentum Picks

Nalak Das
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Has Prospect Capital (PSEC) Outpaced Other Finance Stocks This Year?

Is (PSEC) Outperforming Other Finance Stocks This Year?

The U.S. stock markets have remained highly volatile in the first half of April. However, the markets are displaying positive trends supported by robust first quarter earnings and strong economic data.

On Apr 17, each of the three major stock indexes closed at the highest level in about a month. The Dow 30 achieved its previous highest on Mar 20 while both S&P 500 and Nasdaq Composite attained their highest finishes on Mar 21. All three indexes are trading over their 50-day moving average, a psychological barrier for short-term stock momentum and are in positive territory year to date.

Stock market momentum will persist as first-quarter earnings have so far have been better than expected and several big companies are yet to release results. At the same time, United States-China trade conflict has witnessed no further escalation and the geopolitical concern related to U.S. military strike in Syria is gradually fading out. Considering these positives, momentum stocks with favorable Zacks Rank are lucrative investment options.

Robust Earnings Momentum

First quarter earnings results have been exhibiting strong momentum so far. In fact, investors have pinned high hopes on first-quarter 2018 earnings. Total earnings of the S&P 500 index is expected to be up 16.6% from the same period last year backed by 7.5% year-over-year growth in revenues. (Read More: Why is the Market Unimpressed with Bank Earnings?)

A big driver of these positive revisions is obviously the direct impact of the tax cuts. The corporate tax rate was recently lowered from 35% to 21%. Moreover, repatriation of income will be taxed 8% to 15.5%, instead of the current 35%. President Trump has also promised removing 75% of the regulations during his tenure, which is likely to help private employers.

Strong Economic Fundamentals

U.S. economy is on a strong footing as evidenced from several recently released macro-data.

In the first quarter of 2018, the labor market added 202,000 jobs on an average per month, better than the same period of previous two years. The unemployment rate remained at a 17-year low of 4.1% in March, while workers’ hourly wages rose 8 cents, or 0.3%, to $26.82. This indicates that the U.S. labor market is operating nearly at full employment level.

The ISM index for national factory activity was recorded at 59.3 in March. A reading of more than 50 indicates that the sector is expanding. This clearly indicates that the U.S. heavy industrial sector is forging ahead with a strong momentum. 

On Apr 16, the U.S. Commerce Department reported retail sales growth of 0.6% for the month of March reversing the trend of decline in last three consecutive months. The core increased 0.4% in March. This is a major positive since it closely corresponds to the consumer expenditure component of U.S. GDP.

On Apr 17, the U.S. Federal Reserve’s measure for industrial production rose 0.5% in March. A turnaround of utilities sector from February’s weather-related decline and surge in mining were the main drivers. Moreover, industrial capacity in use rose 0.3% in March to reach 78.0. Notably, March reading is the highest level in three years.

Our Top Picks

Solid macro-economic fundamentals, government’s tax reform and deregulation proposals along with sustained strong earnings performance are major tailwinds for the U.S. stock markets. These factors are unlikely to disappear in the near term.

At this stage, investment in stocks with strong earnings momentum will be lucrative. Our selection is backed by a good Zacks Momentum Score and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that stocks with a Momentum Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the Momentum-investing space. We have handpicked four such stocks with Zacks Rank #1 and Momentum Style Score of A.

Chart below shows price performance of our four picks in the past one year.

Cal-Maine Foods Inc. CALM is primarily engaged in the production, grading, packing and sale of fresh shell eggs, including conventional, cage-free, organic and nutritionally-enhanced eggs. Cal-Maine has expected earnings growth of 233.1% for current year. The Zacks Consensus Estimate for the current year has improved by 57.7% over the last 30 days.

Protagonist Therapeutics Inc. PTGX is a clinical-stage biopharmaceutical company with a proprietary technology platform focused on discovering and developing peptide-based new chemical entities to address significant unmet medical needs. Protagonist has expected earnings growth of 68.4% for current year. The Zacks Consensus Estimate for the current year has improved by 49.2% over the last 30 days.

Limbach Holdings Inc. LMB engineers, constructs and services the mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems. Limbach has expected earnings growth of 395.5% for current year. The Zacks Consensus Estimate for the current year has improved by 5.8% over the last 30 days.

TIM Participacoes SA. TSU is a leading integrated telecom service operator in Brazil. TIM Participacoes has expected earnings growth of 27.5% for current year. The Zacks Consensus Estimate for the current year has improved by 4.1% over the last 30 days.

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