Back to top

Image: Shutterstock

September's Weakness Provides Good Entry Point: Top 6 Picks

Read MoreHide Full Article

Wall Street is offering a good entry point to investors as the typical September syndrome has already set the trading pattern. Historically, September is the worst-performing month on Wall Street. We are in the middle of this month, and the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Campsite — are down 2.2%, 2% and 1.4%, respectively, month to date.

On the contrary, U.S. stock markets have saw an impressive rally in the first eight months of this year. The tech-heavy Nasdaq Composite ended in red only in May. The blue-chip index Dow dropped in January and fell marginally in June.
The S&P 500 ended the first eight months of 2021 with its strongest year-to-date gain since 1997. The broad-market index also ended in the positive zone for seven months in a row, since a 10-month winning run ended in December 2017.

Nevertheless, the recent weakness in U.S. stock markets provides a good entry point to those market participants who were skeptical about the high valuation in markets without a meaningful correction for nearly a year.

At this stage, investors should eye a handful of U.S. corporate behemoths (market capital > $100 billion) with a favorable Zacks Rank that have seen a noticeable decline in their stock prices in September.

These companies have a very strong business model, globally acclaimed brand value and a robust financial position supported by their sheer size and scale of operations across the world. Investment in these stocks should be prudent going forward.

U.S. Economy on Solid Recovery Path

First, the economic effect of the Delta variant of coronavirus may not be as severe as last year when there was no vaccine. The nationwide deployment of vaccines on an emergency basis boosted the confidence of both consumers and businesses.

Second, notwithstanding disappointing job additions in August, weekly jobless claims data for the last two and a half months are clearly indicating that the struggling labor market is recovering gradually. Despite a little increase in initial claims in the last report of the week ended Sep 11, in absolute terms, the number stayed at the pandemic-era low.

Third, some recently released economic data have shown early indications that U.S. inflation may have picked up though it is likely to remain elevated for the rest of 2021.

The consumer price index (CPI) and core CPI for August and July, the producer price index (PPI) and core PPI for August and July, the price index reported in the ISM manufacturing PMI of August and July and the core PCE inflation of July have shown that inflation seems to be dwindling.

Fourth, U.S. retail sales rebounded in August after a sharp decline in July. Solid consumer spending defying the spread of the Delta variant of coronavirus has surprised many financial experts. The positive momentum is likely to continue as several market researchers have predicted strong holiday retail sales this year.

Fifth, retail sales consist of a major part of U.S. consumer spending. Importantly, consumer spending is the largest driver of the U.S. economy comprising nearly 2/3rd of the GDP. Personal savings of Americans are around an astonishing $2 trillion. The sky-high savings are allowing people to indulge in their demands that were pent up during lockdowns and are in turn compelling businesses to expand their scale of operations.

Sixth, the U.S. GDP growth rate in 2021 is expected to be the highest in 37 years. Moreover, our current estimate has shown that total earnings of the S&P 500 index will climb 26.1% year over year on 13.7% higher revenues.

Seventh, a growing U.S. economy, nationwide COVID-19 vaccination, a higher wage rate, robust job openings, record personal savings, an extremely low interest rate regime and an impressive stock market (despite September’s volatility) are likely to act as the drivers for Wall Street.

Our Top Picks

We have narrowed down our search to six U.S. corporate bigwigs that have strong growth potential for the rest of 2021 and have seen positive earnings estimate revision in the last 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our six picks in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research

The Goldman Sachs Group Inc. (GS - Free Report) has an impressive earnings surprise history, having outpaced the Zacks Consensus Estimate in the trailing four quarters. A solid position in announced or completed mergers & acquisitions globally is likely to drive its investment banking revenues in the near term.

Business diversification moves, including digital platforms and fee-based revenue sources, will offer earnings stability. Steady capital deployment activities are tailwinds. Backed by a solid capital position, Goldman has consistently enhanced shareholders’ wealth.

The Zacks Rank #2 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.2% over the last 7 days. The stock price has slid 5.3% month to date.

Deere & Co. (DE - Free Report) is likely to benefit from growth in non-residential investment and strong order activity from independent rental companies. Focus on investing in new products equipped with the latest technology and features to help make farming automated and to expand in precision agriculture should drive growth in the long haul.

The Zacks rank #2 company has an expected earnings growth rate of 17.4% for next year (ending October 2022). The Zacks Consensus Estimate for next-year earnings improved 5.8% over the last 30 days. The stock has slipped 7.7% month to date.

Apple Inc.'s (AAPL - Free Report) Services and Wearables businesses are expected to drive top-line growth in fiscal 2021 and beyond. Although Apple’s business primarily runs around its flagship iPhone, the Services portfolio has emerged as the company’s new cash cow. Its focus on autonomous vehicles and augmented reality/virtual reality technologies presents growth opportunities in the long haul.

The Zacks Rank #1 company has an expected earnings growth rate of 2.2% for next year (ending September 2022) after estimated 70.4% growth in the current year (ending September 2021). The Zacks Consensus Estimate for next year improved 0.2% over the last 30 days. The stock price has fallen 3.8% month to date.

Advanced Micro Devices Inc. (AMD - Free Report) is riding on robust performance from the Computing and Graphics, and Enterprise Embedded and Semi-Custom segments. It is benefiting from strong sales of its Ryzen and EPYC server processors, owing to the increasing proliferation of AI and Machine Learning in industries like cloud gaming and the supercomputing domain.

Moreover, the growing clout of 7-nanometer products in the data center vertical, driven by work-from-home and online learning trends, is a key catalyst. Management raised its 2021 guidance for revenues and gross margin on the back of strong growth across all businesses.

The Zacks Rank #2 company has an expected earnings growth rate of 93.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 15.2% over the last 60 days. The stock price has dropped 6.6% month to date.

Qualcomm Inc. (QCOM - Free Report) ) is well-positioned to benefit from a solid 5G traction with greater visibility to meet its long-term revenue targets. For calendar-year 2021, 5G handsets are expected to witness 150% year-over-year growth at the midpoint to about 450-550 units.

Qualcomm has raised the bar for driverless cars with the launch of the first-of-its-kind automotive platform — Snapdragon Ride — which enables automakers to transform their vehicles into self-driving cars using AI.

The Zacks Rank #2 company has an expected earnings growth rate of 10.7% for next year (ending September 2022). The Zacks Consensus Estimate for earnings next year improved 0.1% over the last 30 days. The stock price has declined 8.5% month to date.

NIKE Inc. (NKE - Free Report) provided strong guidance for fiscal 2022 and set long-term targets for fiscal 2025, driven by the momentum in its business as it comes out of the pandemic. For fiscal 2022, the company anticipates revenue growth in the low double digits, surpassing $50 billion, driven by strong customer demand across its operating segments. It expects to benefit from robust digital growth, scaling NIKE-owned physical retail concepts and growing with partners.

This Zacks Rank #2 company has an expected earnings growth rate of 20.8% for the current year (ending May 2022). The Zacks Consensus Estimate for current-year earnings improved 1.2% over the last 60 days. The stock has fallen 5.1% month to date.