We made it. The third quarter of 2018 is coming to a close, and the bull market remains intact. Year-to-date, the S&P 500 is up nearly 10% with many S&P 500 stocks crackling near all-time highs. Most signs point to the bull market maintaining strong momentum into the close of the year. Economic growth and activity are at a multi-year high. Consumer confidence and spending are at decade highs. Corporate sales growth is at multi-year highs. So is corporate earnings growth.
Meanwhile, the S&P 500 is positioned to squeak out of Scary September with a gain. September is usually the worst month for the markets, while November and December are historically strong for markets. Valuations are reasonable with the forward earnings multiple in line with historical averages, the forward earnings yield still far above the 10-Year Treasury Yield, and the market’s PEG (price-to-earnings/growth) ratio at 1, which is commonly perceived as “fairly valued.”
Overall, fundamentals, technicals and sentiment all point to a strong end-of-year rally for the S&P 500. Which stocks should you buy to optimize returns during that rally? Naturally, you want to stick with your winners, which have been growth stocks. These growth stocks will continue to out-perform so long as the economy remains healthy and the bull market remains intact.
Investors should also seek exposure to retail, which is due for a big end-of-year bounce thanks to what projects to be a record holiday shopping season. Bank stocks should also outperform thanks to the economic strength and rising interest rates. Oil stocks should also do well with rising oil prices.
What are the best-in-class names to buy in each of those sectors? Let’s take a deeper look at the best S&P 500 stocks to buy for the rest of the year.
When you talk about “sticking with your winners,” that phrase probably rings most true with e-commerce and cloud behemoth Amazon (NASDAQ:AMZN). Not only are Jeff Bezos & Co. huge, Amazon stock has soared to a trillion-dollar valuation rather quickly. AMZN stock has more than doubled over the past year and is among the best of the S&P 500 stocks.
Amazon is without argument one of the market’s biggest winners. Consequently, this is a name you want to stick with so long as the U.S. economy remains healthy and the bull market lives on.
Moreover, this holiday shopping season projects to be huge thanks to decade high consumer strength and confidence. Because Amazon owns 50% of the U.S. e-commerce market, a big holiday shopping season means a huge sales boost for Amazon to end the year. That will naturally push up holiday quarter numbers and provide a strong tailwind for this stock to finish 2018.
FANG hasn’t been its usual strong self recently, and Netflix (NASDAQ:NFLX) has been one of FANG’s two big anchors. Recent weakness in Netflix stock is nothing more than a natural valuation reset. During this time, the fundamentals have caught up to the valuation, and now, Netflix stock looks ready to resume its long-term uptrend.
The catalyst for recent weakness in Netflix stock was a subscriber miss in last quarter’s earnings report. That won’t happen again. Netflix’s original content lineup has been hugely impressive over the past several months, and that should lead to a sizable subscriber beat in the next earnings report.
If that happens, that will be the exact catalyst this stock needs to get back to its winning ways. As such, I think strong Q3 earnings will propel strong upward momentum in Netflix stock over the next several months.
Regulation and data-privacy concerns have weighed on Alphabet (NASDAQ:GOOG) stock over the past several months. But, much like Netflix, recent weakness is simply a natural and healthy pause in a still strong long-term uptrend.
Fundamentally speaking, Google still owns the secular growth digital advertising market. Its search platform remains the backbone of the internet. The cloud business is still a top 3 player in the secular growth cloud market.
And, the self-driving unit is still considered the world’s leading autonomous driving project. All together, everything is well at Alphabet, and the long-term drivers are as healthy as they’ve ever been. It is only a matter of time before Mr. Market realizes this, and buys up GOOG stock for long-term gains.
The biggest loser in FANG has been Facebook (NASDAQ:FB), and in many ways, FB stock has become an eyesore for the whole growth sector. Despite 40%-plus revenue growth, Facebook stock trades at the same forward multiple (22) as Coca-Cola (NYSE:KO), the beverage giant who reported organic sales growth of 5% last quarter.
That makes no sense. Facebook’s revenue growth isn’t going to slow to 5%. At worst, it slows to 30%, which still makes the 22X forward multiple look anemic. But Facebook stock has become a “show me” situation with the market. The market won’t buy this stock up until Facebook shows investors that things really aren’t that bad.
Facebook will show that next quarter, and that will cause a huge sentiment turnaround in the stock. Facebook stock should quickly rebound and finish 2018 with healthy upward momentum.
There are two things you want to do to end 2018. One, you want to stick with your winners. Two, you want exposure to what projects to be a record holiday season. With PayPal (NASDAQ:PYPL), investors kill two birds with one stone.
PayPal stock has been a big winner in this bull market. It is up 40% over the past year, and 170% over the past three years. This upward momentum won’t slow so long as the bull market persists. Moreover, PayPal is an e-commerce pure-play. The more e-commerce transactions there are, the more dollars flow through PayPal’s ecosystem.
The more dollars flow through PayPal’s ecosystem, the better the revenue and profit numbers are, and the higher PayPal stock goes. Thus, PayPal’s tailwinds start with robust e-commerce growth, and that is exactly what will happen this holiday season when record online shopping converges on decade-high consumer confidence.
Activision Blizzard (ATVI)
The end-of-year retail rally could be especially big for video game stocks like Activision Blizzard (NASDAQ:ATVI). For most of 2018, Activision stock has been range-bound, bouncing between the mid-$60’s and the mid-$70’s.
But Activision stock is breaking out now to new all-time highs after the company added eight new franchises to Overwatch League and launched Call of Duty: Black Ops 4 beta to massively positive early reception.
This rally in ATVI stock should persist into year-end. Call of Duty: Black Ops 4 will likely deliver blowout holiday numbers, and those holiday numbers could provide a nice lift to a stock that is acting like it wants to break out even further.
Plus, OWL growth is getting bulls excited about the eSports catalyst being bigger than imagined, and you could those bulls buy in bulk as the year winds down.
Take-Two Interactive (TTWO)
The best video game stock to own for the next three months is Take-Two Interactive (NASDAQ:TTWO). Take-Two stock is a solid long-term holding owing to its robust portfolio of video games, almost all of which seem to have enduring demand. But TTWO stock looks especially good here and now with Red Dead Redemption 2 set to release in October.
For all intents and purposes, the Take-Two narrative has been building to the Red Dead Redemption 2 launch for well over a year now. That catalyst is finally arriving next month.
Some will say this is a “buy the rumor, sell the news” event. But, I don’t think so. Early reviews are quite strong, and consumer interest is building at the right time. Plus, the consumer is strong. Overall, I think Red Dead Redemption 2 numbers will impress, and impressive numbers should drive TTWO stock higher into the end of 2018.
A big part of the end-of-year retail rally will be Apple’s (NASDAQ:AAPL) new slate of iPhones. These are the second generation of edge-to-edge smartphones, the prices are largely more reasonable than last year (a $1,000 price point has become the norm, so consumers aren’t shocked, and the XR is priced below $1,000), and the consumer has more confidence and firepower than they did last year to pull the trigger on a new iPhone.
Overall, Apple will likely benefit from what projects to be a strong iPhone upgrade cycle. Meanwhile, the stock’s secular growth narrative surrounding a shift from exclusively hardware to hardware and software remains on track, and the stock remains reasonably valued relative to big-tech peers.
Consequently, all things line up for Apple stock to head higher into the end of the year
JPMorgan Chase (JPM)
Rates are going higher, with the 10-Year Treasury yield now trading solidly above 3%. Also, the economy is healthy and consumers are spending a bunch. Altogether, the operating environment is quite favorable for bank stocks to finish the year on a strong note.
My favorite name in this group is JPMorgan Chase (NYSE:JPM). JPM seems to be on the cutting edge of fintech and innovation, as the company has partnerships lined up with Amazon and recently stole an AI executive from Google. Plus, the company is viewed favorably by millennials, and that is a big win for any bank.
All this is reflected in the stock price (JPM stock has handily outperformed its peers over the past year), and this out-performance should persist as rates rise for the foreseeable future.
Exxon Mobil (XOM)
Rates aren’t the only thing going higher. Oil prices are breaking out, too, after a multi-year slump that kept oil stocks depressed. Thanks to strengthening global demand and coordinated supply cuts from the world’s largest producers, oil prices and oil stocks are back.
Oil prices look like they will stay higher for longer, given global economic strength and a steadfast commitment to supply cuts from the world’s largest producers. As such, oil stocks look like a good trade for the foreseeable future.
The top pick on my list is Exxon Mobil (NYSE:XOM). Exxon tends to rise with oil prices, but big falls are mitigated by a stable business, a huge moat, and a healthy dividend yield.
As such, from a risk-reward standpoint, Exxon stock is the best way to play the oil rally for the rest of 2018.
The big-box store ready to benefit the most from a strong consumer at the end of 2018 is Walmart (NYSE:WMT). Thanks in part to the company’s own omnichannel commerce initiatives and in part to macroeconomic strength, Walmart just reported its best quarter in a decade.
That means this company has a ton of operational momentum ahead of what promises to be a record holiday season in the U.S.
Over the next several months, positive data-points will trickle in that speak favorably to 2018 holiday shopping trends. As those data-points trickle in, Walmart stock will inevitably trade higher because the company is an obvious winner when holiday shopping is strong.
Thus, so long as consumer strength and confidence persists over the next three months, Walmart stock should head way higher into the end of 2018.
Foot Locker (FL)
We just heard quarterly earnings from Nike (NYSE:NKE), and they were really good. It appears young consumers are connecting with the new Kaepernick advertisement, and that this connection is driving record-high engagement. That is a great thing for Nike, especially ahead of the holiday season.
But, Nike stock dropped despite reporting great numbers because, quite simply, the valuation is full. So how do you play the Nike 2018 holiday boom? Foot Locker (NYSE:FL). This company has a deep connection with Nike, and most of their sales come from the Nike brand.
Plus, the core consumer skews young, so most of Foot Locker’s customers are the ones who are going to be buying a bunch of Nike gear over the next several months. Meanwhile, FL stock is pretty cheap at just 11X forward earnings, so any positive holiday catalyst through Nike could send FL stock soaring.
Ulta Beauty (ULTA)
Although many retailers will likely report strong numbers this holiday season, few will be able to compete with Ulta Beauty (NASDAQ:ULTA). Why?
Not only is Ulta set to benefit from a strong consumer, but the company also has a unique and huge holiday catalyst through Kylie Jenner, the widely followed celebrity and cosmetics guru who is launching her cosmetics products in store for the first time this holiday season exclusively through Ulta.
This is a huge deal. Kylie Jenner isn’t just another social media influencer. She is one of the most followed people on social media in the world. More importantly, her products are the craze in the cosmetics space right now.
ULTA stock has already rallied in anticipation of this catalyst. But, the numbers will likely be better than expected, and this stock will likely break through $300 by the end of the year.
L Brands (LB)
It has been a tough go for retailer L Brands (NYSE:LB), the parent company of Bath & Body Works and Victoria’s Secret.
While Bath & Body Works has performed exceptionally well for a long period of time, Victoria’s Secret popularity has faded over the past several years thanks to a secular shift towards natural beauty. With one of its segments in free-fall, LB stock has been in free-fall, too, dropping 70% over the past three years.
But, this holiday season could be the big bounce-back that LB investors have been waiting for. The consumer backdrop is as healthy as ever, so Victoria’s Secret is naturally set to benefit from that. More importantly, search interest trends related to Victoria’s Secret appear to be stabilizing.
All this company needs is stable sales trends in order for LB stock to shoot higher (the forward multiple stands at just 11). As such, risk-reward on LB stock ahead of the holiday season looks favorable, and I wouldn’t be surprised to see this stock make a comeback by the end of the year.
Department stalwart Macy’s (NYSE:M) was one of the big winners in the 2018 retail resurgence. In November of last year, this was a $17 stock. In August of this year, Macy’s had rallied all the way to over $40. That big rally took a breather recently after subpar second quarter numbers. But those numbers were still good, and Macy’s stock looks due for a rebound before the year is out.
Second-quarter numbers weren’t great. But, they checked off the “positive comparable sales growth, improving gross margins, and improving operating margins” checklist. So, they were still good and indicative of a broader rebound in retail. The post-earnings sell-off had more to do with Macy’s stock needing to cool off than anything being wrong with the narrative.
Now, Macy’s stock has cooled off, and it is closing in on its 200-day moving average for the first time during this uptrend. I expect the stock to find some technical support there, and then bounce higher as holiday numbers come in better than expected. Altogether, I think this stock can get back to $40 by the end of the year.
As of this writing, Luke Lango was long AMZN, NFLX, GOOG, FB, PYPL, ATVI, TTWO, AAPL, JPM, XOM, WMT, FL, ULTA and M.