Back to top

Image: Shutterstock

How to Find Winning Stocks in This Upbeat Market

Read MoreHide Full Article

It’s no secret that November has been one the hottest months for the equity market. All the major indexes have moved up in response to continued good news.

More and more companies reported encouraging numbers, making it abundantly clear that the recovery is broad-based. Tech may have buoyed the markets during the first few months of the pandemic and the first stimulus package may have helped consumers spend, but broader indicators are looking up.

For instance, the manufacturing PMI for November was 56.7 according to IHS Markit, which means there was an expansion in the manufacturing sector. Also, demand in the housing market has been unprecedented because the new work-at-home normal is facilitating sales in new, less populated regions, the need to create a home office is driving demand for larger accommodations and millennials are setting up their first homes.

This year was so good for housing that the summer rush went well into October, with record inventory depletion and strong pricing. It wasn’t until November in fact that the market began to slow down. Still, the spring buying season is not too far out, so demand for new home construction remains robust.

The only area that appears to be lagging the others is employment because many of the jobs lost during the shutdown didn’t come back. And it’s not just in things like restaurants and services, but across sectors, reflecting the hesitation to increase the cost base when uncertainties remain. The focus is currently on increasing the efficiency of operations to make up for the fewer hands available.

However, this too is likely to change very soon because the vaccines from Pfizer and Moderna were found to be highly effective and emergency approval looks very likely. Healthcare and at-risk populations are likely to get the first dozes before a broader rollout next year.

A new stimulus may also be in the works.

So when everything is going so well, the question naturally arises about whether all the good news is factored into share prices.

The answer is both yes and no. Obviously, when the markets continue to go up, it’s harder to find cheap or fairly valued stocks. Or stocks that are worth buying because of their earnings growth potential, even if they don’t look very cheap.    

So you can take some specific steps to find the best stocks.

The first of these is to select stocks ranked #1 (Strong Buy) or #2 (Buy) by Zacks because our historical data shows that they have a much better chance of appreciating.

Second, select industries that have a high Zacks rank. Zacks classifies companies into 250+ groups, allotting a rank to each. It has been seen historically that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of 2 to 1. Moreover, about 50% of a stock’s appreciation comes from the industry in which it’s placed. So it makes very good sense to pick stocks from winning industries, the higher-ranked the better.

Next, take a look at the VGM Score. This is basically an acronym for Value-Growth-Momentum. Zacks considers criteria for each category that is condensed into scores for quick appraisal. So each stock has a Value Score, Growth Score and Momentum Score, that are averaged into the VGM Score. So a high VGM Score (A being the best and F the worst) is an indicator that there are many reasons to invest in the shares.

The following chart depicts the buy-ranked stocks with VGM Score A from the top 25 industries. You can see how Retail is the best sector to invest in right now, followed by Construction, Transportation, Consumer Discretionary, Auto and so on.

 

But it’s still a very long list of 37 stocks, so we must narrow down further.

We could go by recent estimate revisions. But since estimate revisions are still very significant, it’s clear that analysts continue to be surprised by the pace of recovery. So I think it’s a better idea to focus on the long term growth outlook, because it could be a better gauge of the growth profile. On this basis, narrowing the list to companies that are currently estimated to grow at least 15%, I’m getting eight stocks-

Asbury Automotive Group, Inc. (ABG - Free Report) : Zacks Rank #2, Zacks Industry Rank #5, VGM Score A, LTG 18.52%.

AGCO Corp. (AGCO - Free Report) : Zacks Rank #1, Zacks Industry Rank #6, VGM Score A, LTG 16.39%.

Bassett Furniture Industries, Inc. (BSET - Free Report) : Zacks Rank #1, Zacks Industry Rank #19, VGM Score A, LTG 16.00%.

Carriage Services, Inc. (CSV - Free Report) : Zacks Rank #2, Zacks Industry Rank #2, VGM Score A, LTG 15.00%.

KnightSwift Transportation Holdings Inc. (KNX - Free Report) : Zacks Rank #1, Zacks Industry Rank #17, VGM Score A, LTG 15.00%.

Rush Enterprises, Inc. (RUSHA - Free Report) : Zacks Rank #1, Zacks Industry Rank #5, VGM Score A, LTG 15.00%.

Saia, Inc. (SAIA - Free Report) : Zacks Rank #2, Zacks Industry Rank #17, VGM Score A, LTG 18.19%.

Tempur Sealy International, Inc. (TPX - Free Report) : Zacks Rank #2, Zacks Industry Rank #21, VGM Score A, LTG 23.41%.

These Stocks Are Poised to Soar Past the Pandemic

The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.

Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.

See the 5 high-tech stocks now>>