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Dow Posts Robust Daily Gains: 3 Top-Ranked Picks

Zacks Equity Research logoZacks Equity Research 5/7/2018 Nalak Das

On May 4, one of the equity markets’ most closely watched indexes, the Dow, posted its biggest daily gain since Apr10. This robust daily gain can primarily be attributed to strong performance of tech sector led by Apple Inc. AAPL and the easing of investors’ concern regarding an impending trade war.

U.S. stock markets have remained mostly volatile in 2018 so far. Strong first-quarter earnings results failed to uplift investor sentiment due to several reasons which includes trade conflict and inflationary expectations. Consequently, major indexes like Dow 30 and S&P 500 are in the negative territory so far in 2018.

Despite an overall decline, a strong bunch of 11 out of the total portfolio of 30 stocks in the Dow has provided positive returns so far this year. Investment in some of these stocks with favourable Zacks Rank will bode well for investors.

Volatility Marks Dow’s Performance in 2018

On May 4, the Dow 30 closed at 24,262.51 after gaining 332.36 points or 1.4% in one trading session. This was the blue-chip index’s biggest daily gain since Apr 10. The rise was mainly due to a report stating that legendary investor Warren Buffet was buying 75 million shares of tech behemoth Apple in the first quarter of 2018.

After an exponential rise throughout 2017, the U.S. stock markets continued their momentum in January. However, meltdown commenced in February and persisted for the next two months resulting in extreme market volatility. However, all three major stock market indexes witnessed marginal gains in the month of April reversing the overall negative trend of the last two months.

Strong First Quarter Earnings

Earnings momentum remains robust in the first quarter of 2018 buoyed by the Trump administration’s massive tax cut. Total earnings for the 409 S&P 500 members that have already reported results are up +24% from the same period last year on +9.3% higher revenues.

Moreover, expectations for full-year 2018 are for an impressive showing, with total earnings for the S&P 500 index expected to be up by 19.1% from the year-earlier level driven by 5.6% higher revenues. (Read More: Is the Earnings Picture Really That Strong?)

Strong U.S. Economy

Per the Bureau of Economic Analysis, the U.S. GDP expanded at 2.3% in first-quarter 2018, better-than the consensus estimate of 2%. The first quarter GDP estimate generally remains weak due to seasonality.

Also, on May 3, the Commerce Department reported that the U.S. factory orders for the month of March grew at 1.6%. This indicates that the U.S. manufacturing sector, which constitutes around 12% of its GDP, is increasing capital spending on the back of massive tax overhaul, deregulatory measures and strong domestic & global economy.

Meanwhile, personal consumption expenditure grew $67.1 billion or 0.4% in March, the first advance since the end of 2017. Notably, personal consumption constitutes 70% of the U.S. GDP.

Our Picks

Stock markets momentum remained largely unhindered despite recent volatility. Steady economic activities and business-friendly policies adopted by the government will pave the way for further stock market growth.

Chart below shows price performance of our three picks year to date.

a close up of a map© Provided by Zacks-FinanceENUS

At this stage, we narrowed down our search to three stocks within the Dow Jones Industrial Average, each of which carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Each of these stocks has strong growth potential and provided strong returns so far this year.

The Boeing Co. BA: The company generated positive earnings surprise of 40.5% and positive revenue surprise of 4.8% in the first quarter of 2018. Boeing has expected earnings growth of 20.8% for current year. The Zacks Consensus Estimate for the current year has improved by 3.6% over the last 60 days.

Cisco Systems Inc. CSCO: The company generated positive earnings surprise of 6.8% and positive revenue surprise of 0.6% in the second quarter of fiscal 2018. Cisco has expected earnings growth of 7.5% for current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 60 days.

Merck & Co. Inc. MRK: The company generated positive earnings surprise of 6.1% and positive revenue surprise of negative 0.8% in the fourth quarter of fiscal 2017. Merck has expected earnings growth of 6% for current year. The Zacks Consensus Estimate for the current year has improved by 1.2% over the last 60 days.

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