Wall Street is having a dream run for the last 20 weeks defying coronavirus-induced economic devastations. Although, the pandemic is not behind us, the bull market is marching northward steadily on expectations of a systematic economic recovery.
The stock market's impressive performance is primarily being driven by the astonishing growth of the technology sector, which compelled several economists and financial experts to call it the new safe haven. However, the situation has changed in the past month. Cyclical sectors, including consumer discretionary, industrials, basic materials and financials, have overtaken the technology sector.
Cyclical Sectors Outperform
A closer look at past month's performance of the S&P 500 Index — popularly known as the market's benchmark — reveals some interesting facts. Cyclical sectors like Industrials Select Sector SPDR (XLI), Materials Select Sector SPDR (XLB), Financials Select Sector SPDR (XLF) and Consumer Discretionary Select Sector SPDR (XLY) rallied 13.2%, 7.5%, 6.7% and 6.6%, respectively, in the period.
In contrast, the Technology Select Sector SPDR (XLK) and the Communication Services Select Sector SPDR (XLC) have gained 4.9% and 3.2%, respectively, underperforming the benchmark itself, which has advanced 5.5% in the past month. Moreover, defensive sectors like utilities, consumer staples and health care have also lagged cyclical sectors in the past month.
Why Cyclical Stocks Gathered Pace
The astonishing performance of Wall Street in the last 20 weeks can primarily be traced back to the fact that negative estimates are already factored in market price while the stock markets always look for future expectations.
Meanwhile, despite the second wave of COVID-19 since mid-June, a few important economic data for July that were released, namely, the jobs data, unemployment rate, manufacturing, services and vehicle sales are encouraging. This indicates that the U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen.
Although second-quarter 2020 earnings results are disappointing compared with the same period last year, so far the overall results are better than expectations. Finally, although corporate earnings estimates are still negative for the rest of this year, the earnings growth picture is steadily improving since the start of July for third-quarter, fourth-quarter and full-year 2020. In fact, there has been a notable improvement since the outbreak.
We believe these positives have set gains in motion for stocks from cyclical sectors such as industrials, financials, materials and consumer discretionary. This does not however mean that technology stocks will lag other cyclical stocks from now onward. Rather, along with the other cyclical sectors, technology will also hold its ground thanks to its inherent strength and growth potential.
Our Top Picks
At this stage, it will be prudent to invest in cyclical stocks with strong growth potential and robust earnings estimate revisions in the past 7 to 30 days that have also popped more than 15% in the past month. We have narrowed down our search to five such cyclical stocks each having a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past month.
Coeur Mining Inc. (CDE - Free Report) operates as a primary silver and gold producer with precious metals mines in the Americas especially in the United States, Mexico, Bolivia and Argentina. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for its current-year earnings has increased 42.9% over the past 7 days. The stock price has soared 57.7% in the past month.
Chart Industries Inc. (GTLS - Free Report) manufactures and sells engineered equipment and packaged solutions and provides value-added services for the energy and industrial gas industries worldwide. It operates through three segments: Energy & Chemicals, Distribution & Storage Western Hemisphere, and Distribution & Storage Eastern Hemisphere.
The company has expected earnings growth of 25% for the current year. The Zacks Consensus Estimate for its current-year earnings has moved 22.1% upwards over the past 30 days. The stock price has jumped 52.8% in the past month.
Spectrum Brands Holdings Inc. (SPB - Free Report) is a global consumer products company. It offers a portfolio of leading brands in several product categories for residential use. The company has expected earnings growth of 25.5% for the current year (ending September 2020). The Zacks Consensus Estimate for its current-year earnings has moved 16.9% north over the past 7 days. The stock price has climbed 30.9% in the past month.
Central Garden & Pet Co. (CENT - Free Report) is one of the leading companies in the U.S. pet supplies and lawn and garden supplies space. Unique packaging, point-of-sale displays, logistic capabilities and a high level of customer service are some of its key attributes.
The company has expected earnings growth of 21.9% for the current year (ending September 2020). The Zacks Consensus Estimate for its current-year earnings has increased 21.2% over the past 7 days. The stock price has surged 20.1% in the past month.
Artisan Partners Asset Management Inc. (APAM - Free Report) provides services to pension and profit sharing plans, trusts, endowments, foundations, charitable organizations, government entities, private funds and non-U.S. funds, as well as mutual funds, non-U.S. funds and collective trusts.
The company has an expected earnings growth rate of 12% for the current year. The Zacks Consensus Estimate for the current year has improved 21.1% over the last 30 days. The stock price has advanced 18.7% in the past month.
Zacks’ Single Best Pick to Double
From thousands of stocks, 5 Zacks experts each picked their favorite to gain +100% or more in months to come. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
With users in 180 countries and soaring revenues, it’s set to thrive on remote working long after the pandemic ends. No wonder it recently offered a stunning $600 million stock buy-back plan.
The sky’s the limit for this emerging tech giant. And the earlier you get in, the greater your potential gain.
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