June typically marks the beginning of weak summer trade. Be it Lehman Bros’ collapse or the Fed’s stimulus scale back or Greece’s running out of money or the more recent “Brexit” — investors have had to absorb all these shocks in the month of June.
But, rather than markets dealing with such big setbacks, the most likely outcome this time around will be a gradual uptick since economic and earnings scenarios are reassuring.
Investors have also chosen to ignore stalled out congressional effort on tax reform and controversies swirling around President Donald Trump’s campaign and Russia.
Lest we forget, the S&P 500 is up more than 7.5% this year and one of the “FANG” stocks, Amazon.com, Inc. (NASDAQ:AMZN) touched the psychological $1,000 mile mark.
Banking on such positives, investing in some solid stocks that can make the most of a lazy June will be prudent.
June On Average is Flattish
Will stocks take a pause and move sideways this summer? The equity market in June has mostly traded lower, while it is also the fourth worst month in terms of the S&P 500’s performance. While September is historically the worst month, August has been the second followed by February. But, losses in June have been miniscule, averaging a meagre 0.005% decline in the S&P 500 all the way back to World War II, according to Sam Stovall, chief investment strategist at CFRA.
The broader market has had bad summers, such as the 7.8% drop in 2008 when investors sensed trouble at Lehman Bros before its bankruptcy. In fact, the markets witnessed a 10% decrease when the U.S. budget woes gripped investors’ sentiments or the 12% drop in 2015 when Greece’s debt crisis sent jitters across the global stock market. All these incidents posed significant threat to the U.S. economy and its financial stability.
This June, China’s debt bubble could pose a legitimate threat, while the markets might be adversely affected if Congress looks unlikely to pass tax reforms this year. Political turmoil affecting President Trump and North Korea’s nuclear missile threat could add to the woes. But, investors have chosen to look past these concerns as economic conditions are expected to improve, while corporate profits should continue to be strong. Earnings were not only very strong in the first quarter; companies also did a commendable job to improve the overall outlook for this year.
Catalysts Behind Stock Market’s Move
Second-quarter U.S. growth is expected to bounce back after a weak start to the year. According to the Atlanta Federal Reserve’s GDP Now forecast model, the U.S. economy is expected to grow at a 3.8% annualized pace in the second quarter. This is based on a report that showed consumer spending, which accounts for more than two-thirds of U.S. economic activity recorded its biggest increase in four months in April. Consumer outlays advanced 0.4% last month after an upwardly revised 0.3% gain in March as households spent more on both goods and services, as per the Commerce Department. This also clears the path for a Fed rate hike this June as the economy remains on track for stronger growth this quarter.
On the earnings front, growth scaled the highest level in over five years during the first quarter. It was also driven across various sectors and not concentrated in one area. We have Q1 results from 489 S&P 500 members that have reported an earnings rise of 13.5% from the same period last year on 7.2% higher revenues, with 72.4% beating EPS estimates and 65% surpassing the revenue mark. The proportion of companies beating both EPS and revenue estimates is 51.5%. This has followed a strong showing in the preceding reporting cycle. Not only did Q4 growth in 2016 reach the highest in two years, but total earnings for the quarter also reached a new quarterly record (read more: Why Are Large-Cap Stocks Beating Small Caps?).
The 5 Best Stocks to Buy in June
While economic and earnings fundamentals will be the bigger catalysts behind the stock market’s move in June, we shouldn’t forget that the S&P 500 is already on pace for its sixth positive month out of seven in May and its best performing month since February. The S&P 500 is also near its all-time high in May, which has often ushered in weakness, and is known for the old adage “sell in May and go away”.
Thanks to such positive developments, investors should focus on fundamentally sound companies that can make the most of the current scenario. We have, thus, selected five such stocks that not only possess a Zacks Rank #1 (Strong Buy) but also are poised to gain significantly in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.
Such stocks also flaunt a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Applied Optoelectronics Inc (NASDAQ:AAOI) is a vertically integrated provider of fiber-optic networking products. The company has a VGM score of ‘B’. The Zacks Consensus Estimate for its current year earnings soared 37.6% over the last 60 days.
The company is likely to yield a return of 269.4% this year, higher than the Electronics – Semiconductors industry’s gain of 10.1%. The company outperformed the broader industry on a year-to-date basis (+200.6% vs +23.7%).
Applied Materials, Inc. (NASDAQ:AMAT) provides manufacturing equipment, services and software to the global semiconductor, display and related industries. The company has a VGM score of ‘B’. The Zacks Consensus Estimate for its current year earnings increased 13.2% over the last 60 days.
The company is likely to yield a return of 71.4% this year, higher than the Semiconductor Equipment – Wafer Fabrication industry’s gain of 39.5%. The company has outshined the broader industry on a year-to-date basis (+41.2% vs +32.7%).
CAI International Inc (NYSE:CAI) is a transportation finance and logistics company. The company has a VGM score of ‘B’. The Zacks Consensus Estimate for its current year earnings surged 57.1% over the last 60 days.
The company is likely to yield a return of 306.5% this year, in contrast to the Semiconductor Equipment – Wafer Fabrication industry’s projected negative return of 19.7%. The company has also outperformed the broader industry on a year-to-date basis (+122.5% vs +1.3%).
JD.Com Inc (ADR) (NYSE:JD) is an online direct sales company. The company has a VGM score of ‘B’. The Zacks Consensus Estimate for its current year earnings soared more than 100% over the last 60 days.
The company is likely to yield a return of 120% this year, higher than the Internet – Commerce industry’s gain of 14.5%. The company outperformed the broader industry on a year-to-date basis (+60.3% vs +36%).
Sodastream International Ltd (NASDAQ:SODA) is a sparkling water company. The company has a VGM score of ‘A’. The Zacks Consensus Estimate for its current year earnings improved 3.7% over the last 60 days.
The company is likely to yield a return of 21% this year, higher than the Consumer Products – Discretionary industry’s gain of 12.1%. The company outperformed the broader industry on a year-to-date basis (+34.3% vs -8.5%).
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